Pre-war Economic Crisis?
Pre-war Economic Crisis?
In forming judgments about the pre-war situation, proper weight must be given to the fall in export earnings in 1938, which was one of the causes leading to import restrictions. It is equally important not to overweight this influence. Export earnings averaged £57 million a year for the years 1935 to 1939 as compared with £41 million a year in the preceding five years, 1930 to 1934. This is hardly a fair comparison, as the latter five years included the depression. However, in the pre-depression years 1925 to 1929, export earnings had averaged £52 million. The average for the immediate pre-war period 1935 to 1939 was 10 per cent above this level and, in the conditions of the time, this cannot be regarded as an unsatisfactory result.
The year 1937, when export earnings reached nearly £67 million, was in fact an all-time record up to that point, and the year 1938, to whose waywardness the imposition of import controls has been attributed, was then the highest year of any on record, except 1937. Looking back, therefore, it is difficult to see how New Zealand could have got herself into such financial difficulty externally, unless she was pushing her internal resources too hard or building up an excessive money demand which was spilling over into importing.
The internal economy was not under extreme upward pressure. Numbers unemployed and in assisted employment were still as high as 19,000 at the outbreak of war. Although some economists at the time referred to this as full employment, war and post-war experience was to show quite clearly that full employment in New Zealand could bring the unemployment level down to hundreds rather than thousands.1
With bank credit being extensively used internally, those who believed in more orthodox financial methods not unnaturally lost confidence in New Zealand's ability to remain solvent. This was brought sharply home to the Government by the flight of capital from New Zealand, and later by the difficulties Mr Nash had in 1939 in finding suitable funds in London to repay a maturing loan. So stringent were the repayment conditions Mr Nash was forced to accept that there was some doubt whether New Zealand would be able to meet them. A Round Table article said:1
‘The Minister of Finance (Mr Nash) during his recent visit to London, arranged that the £17,000,000 which falls due on January 1, 1940, would be reduced to £16,000,000 on due date, and the balance repaid in half-yearly sums amounting to £2,000,000 in 1940–41 and £3,500,000 in each of the four succeeding years, less any amounts the bond holders elect to convert. He also arranged a loan of £5,000,000 from the United Kingdom Government for defence and other public purposes; also an export credit of £4,000,000.
‘Although expressions of gratitude for the assistance given by the United Kingdom Government have been made in many quarters, serious doubts have been raised as to whether the temporary relief afforded will enable New Zealand to weather the financial storm into which she has sailed.
‘It is generally recognised that unless there is a sharp rise in the price of primary products, New Zealand will have to make a stern effort of national self-denial in order to meet the capital repayments and also find the £12,000,000 annually required to pay overseas interest, freights and other obligations….’
This chastening experience stiffened Labour's determination not to become further dependent on overseas capital and may have been in large measure responsible for the almost complete reliance on internal sources to finance New Zealand's war effort.
In its domestic policy the Labour Government had drawn extensively on bank credit, but, in terms of welfare provisions, new public works, extra housing and increases in production and employment, a very great deal had been done. These achievements justified, indeed required, some expansion in the monetary base of the economy, but the expansion seems to have been overdone. Even so, it is possible that New Zealand could have weathered the resulting financial storm. This was never really put to the test. War was declared the day before Mr Nash returned from his mission.
1 Round Table, Vol. 117, December 1939, p. 226.