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War Economy

Sources of Internal Borrowing1

Sources of Internal Borrowing1

Government borrowing in New Zealand, like taxation, can be more than a means to raise money for the Government to spend.2 It can be used as an economic policy measure to take money out of the private sector of the economy, so that high priority national undertakings can have command over sufficient resources without undue competition from private spending. This is particularly important where private incomes are rising and parts of the national productive resources are already fully employed, a combination of circumstances usually found when the country is engaged in a major war.

When government borrowing in New Zealand is regarded in this light, it is apparent that some types of borrowing will be less effective than others in reducing the spending power of the private sector. In particular, borrowing from the Reserve Bank does not take money away from the private sector. Nor does borrowing from the trading banks, unless trading banks which lend to the Government find themselves, as a result, restricted in their normal lending. Usually, lending by banks to the Government does not seriously affect their ability to lend to the public. During the war the trading banks generally had ample funds available and there was little of this countering effect. In short, government borrowing from the banking system during the war tended to be an inflationary influence. Compared with other allied countries, New Zealand relied comparatively little on this source of war finance.3

In the three years up to 1939, the Government's net indebtedness to the banking system had increased by £21 million: from £3 million in March 1936 to £24 million in March 1939.4 Part of this increase

1 Care is necessary to distinguish between figures for gross borrowing and those for net borrowing, after there have been repayments. Figures used under this heading are net.

2 This is not to suggest that taxation and borrowing are identical in their effects. A taxation increase, for example, can be much more depressive than the borrowing of an identical sum from the public.

3 Speaking on war finance in the Budget debate in 1950, Mr Nash said, ‘We raised less money proportionately from the banking system than any other English speaking country.’—NZPD, Vol. 290, p. 1912. An attempt was also made through the Reserve Bank to secure the co-operation of the trading banks in restricting bank advances for purposes inconsistent with the war effort.

4 The figures used here and in the next few paragraphs were published in The Reserve Bank of New Zealand Bulletin, November 1955.

page 269 was associated with the financing of the state housing programme and other development projects. Unused labour and other economic resources were at this stage being absorbed into production, and to this extent borrowing from the banks was less inflationary than it would otherwise have been. Nevertheless, it was severely criticised at the time.1

Between March 1939 and March 1944, borrowing from the banks increased by nearly £52 million, to reach £75·5 million in 1944, a peak figure not to be reached again until 1958. Of the extra £52 million, half was borrowed from the Reserve Bank, the other half from the trading banks. From 1943 there was a change in policy; the Government then decided not to permit trading banks to subscribe to government loans, and to repay their existing securities as they matured.2 By March 1946 government indebtedness to the banking system had fallen to £66 million, most of the reduction being in trading bank investments in government securities.

The net effect was that between March 1939 and March 1946 the Government had borrowed an extra £26 million from the Reserve Bank and £16 million from the trading banks, a total of £42 million of money for government spending, which was not matched by withdrawals of money from the private sector.

In the broader context of the public debt, this means that of the increase of £327 million in the internally held public debt between March 1939 and March 1946, some £42 million was not represented by withdrawal of spending power from the private sector and therefore, to the extent that it gave rise to extra Government expenditure, it tended to be inflationary in its effects.3

There were some other sources of government borrowing which did not take money away from the private sector, though they may have reduced government spending in the private sector. Substantial subscriptions to government loans came from government departments, such as the Government Life Insurance Office, the State Fire Insurance Office and the Public Trustee, who held funds for investment.

No attempt has been made to analyse departmental investments in detail. Lists of investments held by various Departments are available, but other transfers of capital funds often lie hidden behind the published records. Until the Department of Statistics first published its Accounts of the Government Sector in 1960, there was no detailed study of capital movements between government depart-

1 See also pp. 9 and pp. 22.

2 Report of the Royal Commission on Monetary Banking and Credit Systems, 1956, p. 52.

3 Some of the borrowing from the Reserve Bank was for the express purpose of paying off overseas loans, so cannot strictly be called inflationary. However, it still differed in its effects from borrowing for the same purpose from the people.

page 270 ments
and agencies. In any case, the fact that government securities are taken up by a government department does not always mean there is no transfer of funds from the private sector. The largest purchaser of government securities is the Post Office. The funds used are mainly savings by private individuals. Campaigns to increase private savings stepped up balances in ordinary Post Office Savings Bank Accounts, as well as in National Savings and, even where the investor retained the immediate right to withdraw his savings, facilitated the transfer of funds to Government use.