By Michael Reddell 25/04/2018


Earlier this week, in the lead up to ANZAC Day today, The Treasury drew attention to an interesting conference paper written a few years ago by Brian Easton on “The impact of the Great War on the New Zealand economy”.   From the opposite end of the political spectrum, Eric Crampton described it as “really great”.  I’m not sure I’d go that far, but for anyone interested in aspects of New Zealand’s economic history –  especially bits on which there are few systematic treatments (and often only patchy data) – it is certainly worth reading.

Easton’s focus is less on the details of how the economy did during the war as in supporting

my contention that the war experience fundamentally affected the way we governed New Zealand.  I shan’t be surprised if economic historians from other countries come to similar conclusions about their economies.

As Easton notes, the war itself took up a lot of resource.

How much diversion of resources? We dont know with any precision. During the war the troops overseas at any time, plus those in domestic training – amounting to at least 65,000 and even 100,000 men, over a fifth of the labour force – were not available for civilian production, but they were still consuming. Similarly there were workers diverted to producing war goods. There are no annual labour force figures at this time, so we don’t know the precise impact of having so many workers unavailable for domestic production. Some of the labour deficit would have been made up by running down the unemployed (although that was not a huge reserve), by drawing women into the labour force (although we dont know how many) and by working longer hours.

Other authors note that the number of women drawn into the labour force actually wasn’t that large.   In the 1916 Census, for example, there were 100000 women in paid employment, up from 90000 in the 1911 Census –  an increase as a proportion of the total female population, but not much of one (given the underlying rate of population growth). But it does appear that those people (male and female) in employment were  working a lot of overtime –  although data was only collected on female and youth overtime.

Easton surmises that resources equal to perhaps a third of GDP were diverted to the war –  similar to estimates of the resources devoted to World War Two.   Rich countries –  and New Zealand was then one of the very richest –  could afford to devote a large share to the war (since pre-war living standards were so much further above subsistence than in poorer countries).   One thing that made the New Zealand experience of World War One very different from that of World War Two, is that in the first war we had nothing like the massive influx of American troops seen after 1941 (our war as entirely overseas).

The war was financed by a mix of taxes and debt.

One of the most radical changes in our tax system occurred over the six years to 1919/20. Income tax made up just 9 percent of total tax receipts in 1913/14, behind customs duties (58%), land tax (13%) and death duties (10%). Six years later income tax was the single largest source of tax revenue at 39%, with the other three behind: customs 30%, land tax 9% and death duties 6%.

As for debt, here is a chart of the estimated public debt as a share of GDP.

The level of debt – mostly domestic debt – roughly doubled, but there was so much inflation (despite, as Easton notes, resort to price controls) that the debt ratios themselves didn’t increase that much (nothing like the extent experienced in, say, the UK).  That didn’t stop our government claiming –  and securing –  a small portion of German reparation obligations after the war.

And that the demand impetus was led from the public sector rather than the private sector is evident in the ratio of trading bank advances to deposits.  There was plenty of deposit growth but pretty subdued growth in private credit.

adv to dep ratio

One aspect not touched on by Easton is that such rapid inflation was made possible by one of the very first New Zealand policy initiatives  –  the suspension of the Gold Standard.  In a very early post I wrote about that here, including the fact that gold convertibility was never resumed in New Zealand, and for the next 20 years (until the Reserve Bank was established) our monetary arrangements were idiosyncratic, and not really anchored at all.

But as I noted, Easton’s main concern in his paper is with the legacy of World War One for our economic management.    He argues, of the rehabilitation polices for returned servicemen

There is rarely a single event which initiates what proves to be a major policy, although there can be steps which accelerate its development. The rehab policies after the Great War might be thought of as starting the practice of widespread home ownership. Similarly the war’s broadening of the role of income tax was on the way to today’s dominant role of income tax in the revenue system. It seems likely that the administration of veterans’ pensions was part of the basis for the social security one set up in 1939.

And of the state control of exports during the war

….. by 1917 New Zealand had an agreement with the British Government that all the supplies available for exports would be requisitioned for the British market.

At the end of the war there was a considerable quantity of meat and wool in store. As shipping became available it, plus the normal annual production, was unloaded on the British market, as were South American supplies. Prices collapsed. Private enterprise seemed to have fail again, and the farmers turned to the public sector. In February 1922 the government, with dirigiste (‘Farmer Bill’) Massey at the forefront, passed legislation which established the Meat Producers Board with very wide powers. Although interrupted by the 1922 election, the Dairy Board was created almost as quickly.

We may ponder whether these producer boards would have been established as early – or at all – had there been no commandeer, had there been no Great War.

Perhaps more dubiously Easton argues for other longlasting legacies

This was most evident in the draconian wage and price freeze which the government of Robert Muldoon introduced in May 1982. The earlier war administrations would have been admiring. Of course, in ways that Muldoon never fully appreciated, New Zealand had moved on. The unwinding of centralised economic control that the successor government – the Rogernomes – undertook might be said to represent the end of the centralised Second World War approach to economic management of forty years earlier, itself a response to the Great War approach to economic management a further twenty-five years back.

Frankly, all of that seems a stretch in a New Zealand specific sense.   As he notes “I’m not sure that New Zealand was particularly more centralised than many of the other war economies”, and cross-country comparisons are often enlightening.  Ireland, for example, was long even more inward-looking than New Zealand.

Which isn’t to suggest that wars don’t have longlasting consequences –  economic, as well as political, social and personal.  Many scholars would ascribe the severity of the Great Depression in significant part to the conduct of policy (perhaps inevitable –  inflation, build-up of debt etc) around World War One.  Perhaps more locally, we wouldn’t have had a central bank as early as 1934 without the earlier war, and then the Depression.  Taxes and government spending seem permanently higher –  but who is say that that wasn’t an almost inescapable outcome of the worldwide lift in prosperity (and there is little sign that taxes are lower, or regulation less pervasive, in countries that stayed out of both wars).

On which note, perhaps I can end with the famous quote from John Maynard Keynes from The Economic Consequences of the Peace about the way in which global markets worked in the years prior to World War One.

The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or he could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend.

He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighbouring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference.

But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable.

And not a preferential trade agreement, attempting to reach behind borders and control this, that or the other aspects of other countries’ policies, in sight.

If anyone is interested, here is an early (surprisingly frequently read) post on New Zealand’s economy in World War Two.    There certainly seems to be a gap in the market for a good modern treatment of New Zealand economic history, and the history of economic policy, from say 1914 to 1945, encompassing the two wars.

For various other countries’ economic experience in World War One, I recommend Broadberry and Harrison’s The Economics of World War 1.