On the financial side, one of the outstanding influences of the pre-war period was the very sharp lesson which had been given during the depression on the pitfalls of allowing overseas indebtedness to rise too high. Falling export earnings in the depression years had resulted in overseas debt servicing absorbing well over a quarter of all export earnings. What remained was quite inadequate to pay for imports. Relief came in due course with rising export prices, assisted perhaps by depreciation of the currency in 1933. Borrowing continued on a reduced scale until 1933 and, in 1934, there were some repayments of overseas debt.page 21
The lesson was that it was obviously bad policy for any Minister of Finance to allow overseas debt servicing to loom relatively so large again. This made a profound impression on the Labour Party, which was to show a marked reluctance to borrow overseas, even under stress of war conditions. Some economists and others have not taken the same lesson from the depression and there has been pressure for renewed overseas borrowing and quite sharp criticism, on occasions, when overseas indebtedness has been reduced.1
In accordance with its declared policy, the Labour Government nationalised the Reserve Bank in 1936, but there was not very much use of Reserve Bank credit until June 1938. Government net indebtedness to the banking system as a whole increased by less than £4 million between March 1935 and March 1938. However, in 1938–39, advances to the Government began to rise and Government indebtedness increased by nearly £18 million between March 1938 and March 1939.2
Chart 8 shows Reserve Bank advances to the State and emphasises the rapid upsurge after the second quarter of 1938. Government securities held by trading banks were also increasing.
1 NZPD, Vol. 273, p. 337. Also Vol. 282, p. 1686, and Vol. 292, p. 2108. As time passed and export prices rose, repetition of depression difficulties would naturally seem much more remote.
As might have been expected, there was very considerable public criticism at the increasing use of bank credit by the Government.1 All sorts of national disasters were foretold. Some loss of public confidence certainly resulted, aided no doubt by the evidence of overseas difficulties offered by falling overseas reserves. There was some flight of capital from New Zealand, aggravating the overseas reserve situation. To bring the results nearer home, Post Office Savings Bank deposits fell sharply, cutting at an alternative source of government funds. In the two years from March 1938 to March 1940, withdrawals exceeded deposits by £8 million.
In 1939–40 Government indebtedness to the banking system increased by a further £12 million, but part of this sum was required for war purposes.