Stabilisation policy required a compromise between the impossibility of complete rigidity and the ineffectiveness of measures which merely restrained price increases to what was justified by cost increases.
The first three and a quarter years of war, when retail prices rose 14 per cent, showed the inadequacy of a policy aimed at restricting cost and price increases to what was due to war conditions. A much more stringent policy was called for. Costs, prices and wages had to be held close to a basic level in spite of wartime changes. This required more extensive use of subsidies, where elements of cost could not be prevented from rising. It needed to be supported by an intensive government financial policy to draw off excessive purchasing power at a time when the supply of goods and services was below normal, and when the Government's own high wartime spending was tending to aggravate the unbalance.
A further essential was the stabilisation of rates of payment for farm produce, both in the interests of equity and to reduce spending pressure on the internal economy. Holding farm costs was both a part of the general policy of cost stability, and one of the essentials for stabilising farm produce payouts.
Equally important, external influences in the form of rising import prices had to be offset, if prices and costs were to remain stable. The cost of this in subsidies was reduced by the fact that imports were not freely available, but this influence in its turn added to the difficulty of keeping a reasonable internal supply of goods and services to match the rising money demand for them.
No matter how effective government policy might have been in holding stabilised prices, stabilised wages and other stabilised costs, the fact remained that insufficient goods and services were available to meet normal civilian requirements, and that, even allowing for page 338 the effects of taxation, there was an increasing excess of disposable private income over goods available. The very moderate changes in the Wartime Prices Index and the Nominal Wage Rates Index indicate the effectiveness of price and wage pegging for the items covered by these indices, but the use which was made of the growing surplus of disposable income would be the real test of the success of the comprehensive stabilisation scheme.
If one assumes a reasonable balance between goods available and disposable incomes in 1938–39, there was an annual surplus of incomes of £46 million by 1942–43 and of £67 million by 1944–45, after allowing for the effects of extra taxation. These surpluses, in the hands of people who were short of goods and services, could have led to fierce competition for the comparatively few remaining unstabilised items and to determined attempts to divert resources to the production of those items. As a less troublesome alternative, considerable portions of the surplus income could have been saved.
Both these effects occurred, but, with pressure of demand reduced by war taxation, control over the non-essential use of resources proved strong enough to restrict severely the available range of unstabilised items. Though prices for some items soared, the number of transactions in these items was not large enough to be a serious threat to the stabilisation scheme.
The situation for the consumer was that a good supply of most essentials was available at stabilised prices, and a very restricted range of luxuries at high prices. Some luxuries and consumer durables were not available at all. The consumer tended to postpone his spending, in the hope that these extras would become available later at reasonable prices. In other words, he saved his money. For this the Government provided ample opportunities and encouragement. Private saving left more resources available to be diverted to war purposes.
Small savings balances, after decreasing in each of the years 1938–39 and 1939–40, increased by £7 million in 1940–41, by £18 million in each of the next two years, by £29 million in 1943–44 and by £26 million in 1944–45.1
1 Small savings taken to include Post Office Savings Bank, Trustee Savings Bank and National Savings Accounts, together with National Savings Bonds. National Savings Accounts and Bonds were first used in 1940–41.
In Chart 64 the results of the study of wartime changes in private income and goods available, which were emerging in Charts 62 and 63, are summed up. The difference between the figures after allowing for taxation and subsidies is shown as a gap which grew larger until 1944–45, and thereafter started to contract.
The wartime build-up in saving and lending by the private sector of the economy is also apparent in Chart 64. While not too much accuracy can be attached to the figures, it is apparent that savings accounted for much of the surplus of disposable income over goods available.
1 Most of the increase in small savings became available to the Government and was embodied in the public debt, along with sums subscribed directly to loans. The internally held public debt increased by £257 million between March 1939 and March 1945, but of this sum £40 million was borrowed from the banking system. Changes in holdings of securities by Government Departments have been ignored, and may affect the above assessment a little.
The fact that these savings occurred, while people went without a portion of their normal supply of goods and services, and while prices remained pegged for a very wide range of items, is an outstanding tribute to the success of the stabilisation scheme.
New Zealand was not the only allied country to achieve substantial stability in prices in the later war years. The United Kingdom and Australia, for example, did so; however, stabilisation was achieved at a relatively lower price level in New Zealand. Over the whole of the war period price rises in some allied countries were:
|As shown by the Wartime Prices Index linked to the Retail Prices Index||14|
|As shown by using the Retail Prices Index throughout||18|
|Index of Living Costs in eight Cities||19|
|Retail Price Index (C Series)||23|
|Working Class Cost of Living Index||31|
|United States of America|
|Consumers' Price Index for Moderate Income Families in Large Cities||28|