It is a matter of opinion, and of definition, at what date a “New Zealand economy” can fairly be said to have emerged. Production for the market had reached a considerable level, in comparison with the total European population, before the country became a British colony in 1840; on the other hand the European population was scattered along the extended coastline in a number of tiny settlements more closely linked with the outside world than they were with each other. The provincialism which gives the political historian one of his chief themes during the first half century or so of the colony's history reflects not only the differing origins of the various provinces, but also the inadequacy of internal communications between many of them and the fact that for many years their economic destiny and interests were not obviously identical.
Prior to 1840, Europeans and Americans (other than the missionaries) had come to New Zealand primarily to exploit resources which promised quick profits without the necessity for permanent settlement. “Exploit” is the significant word; for this early period saw a repetition of the short-sighted plunder of limited resources which has occurred again and again in the history of European expansion. The seals were the first to be indiscriminately slaughtered; most of the mainland herds were virtually exterminated by the end of the first decade of the century. In the north, particularly from bases at the Bay of Islands – the most populous European settlement in the early years – whalers were active; and those who settled in the locality, including the missionaries, as well as the local Maoris, produced food for victualling these whaling ships. A not inconsiderable quantity was exported, too, to Australia. The Maoris soon learnt European methods of agriculture, and before long were prominent in this early production of agricultural exports. Flax was another commodity which proved attractive to early traders, the Maoris providing the dressed fibre in exchange for guns and other goods. This trade declined in the 1830s as the market weakened, but timber, especially that of the kauri, remained one of New Zealand's staple exports as long as accessible trees remained to be felled. These activities, however, were for the most part essentially of a predatory character, and they could not provide an assured living for the settlers whom the New Zealand Company brought out in the early years of British annexation. For some years, indeed, the prospects for these men and women appeared far less favourable than they had been led to expect; Wakefield's plan for a community of self-sufficient farmers, cultivating mixed farms with the help of hired labour, was uncongenial not only to the temper of a majority of the settlers, but also to the climate and the terrain. Difficulties and uncertainties over the title to land were an added source of embarrassment in the early years, though these were somewhat alleviated after Sir George Grey assumed his first period of office as Governor in 1845. Grey was able to win the confidence of many Maoris, and to buy from them considerable areas of the North Island, and almost all the South (where, owing to the colder climate, there had never been a substantial number of Maoris). With access to land assured at least for the time being, and currency stabilised and law and order restored, the colony in the later 1840s gradually became more prosperous. A more positive impulse to prosperity – the first perhaps, other than migration, to reach the country from the outside world – came when gold was discovered in Victoria shortly after the mid-century. The rise of prices and inadequacy of Australian production of foodstuffs as men rushed to the diggings gave an opportunity to the New Zealand farmers which they did not miss. By the middle of the 1850s thriving exports of foodstuffs had grown up, and vegetables and grain ranked with wool as the three chief exports of the day. Even when these agricultural exports tapered off in the later 1850s with the decline of the Australian gold rushes, wool from the rapidly growing flocks of Merinos, which had been imported in quantity from Australia as early as the late 1840s and put to pasture on the native grasses of the eastern South Island, was rising quickly enough to take its place and ensure the economy against any major downturn.
New Zealand experienced the stimulus of gold first hand in the early 1860s, when alluvial deposits were discovered first in Central Otago and later on the West Coast of what was then the Province of Canterbury. The fields were not large ones, by world standards, but in relation to the resources of the country at that time they were of major importance. It was in this period that New Zealand experienced her most rapid population growth; men swarmed in, many of them from the now languishing Victorian fields, bringing with them capital, energy, and new social and economic outlooks – and incidentally raising the ratios of males to females, and of working population to total population, to very high levels. The total population (exclusive of Maoris) rose from some 98,000 in 1861 to 172,000 in 1864, and exports from £589,000 in 1860 to 3,500,000 in 1863, when gold constituted 70 per cent of the total. In all respects the gold rushes rank as one of the most powerful stimuli the New Zealand economy has ever received; but it was the South Island which reaped nearly all the benefit. The North Island lagged behind, not only because of its lack of rich gold deposits but also because of disputes with the Maoris, which retarded the progress of farming there. The South Island thus achieved during the gold boom a lead in population, in revenue, and in production, which it maintained for about 40 years. Though the more easily won gold was soon exhausted, gold continued to be a staple export until the first decade of the twentieth century, when it constituted 12 per cent of the total. The sharp increase in the revenues of Otago and Canterbury permitted these provinces to undertake the first substantial public works of the country's history, including the founding of the first university and the laying of the first railway lines.
The enhancement of the country's capital assets which gold bequeathed, real though it was, was not adequate to guard against the possibility of falling incomes for the now much larger population, especially when gold production declined and the price of grain and wool fell in the later 1860s. Colonists who had been intoxicated by the stimulus of gold won from the hills and rivers of the South Island, were very ready to believe in the power of credit to solve the country's problems; and in Julius Vogel, Finance Minister in the Fox administration in 1870, and subsequently Prime Minister, they had the man who could show them the way. Vogel announced grandiloquently that “the great wants of the Colony are Public Works in the Form of Roads and Railways, and Immigration”. He proceeded to provide these with the help of massive overseas borrowing, upwards of £21 million being raised on the London market between 1870 and 1881. In the same period population (excluding Maoris) doubled from about a quarter to a little under half a million inhabitants; the railway milage leaped from a nominal figure to over 1,300; and there were comparable improvements in roads. Alongside the massive public borrowing which financed these developments, went a vigorous expansion of private credit which almost transformed the country's banks into mortgage institutions. As always in New Zealand, the course of land prices reflected and magnified this expansive environment, soaring in the later 1870s to levels quite unwarranted by the course of export prices. In Canterbury the index of agricultural land values rose more than four and a half times between 1870 and 1878. There was, it is true, a more local reason also for an exceptional rise of land values in that part of the country, namely the profits which were being made in the late seventies and early eighties from “bonanza” wheat farming in Canterbury and Otago. As the price of wool fell, many of the larger estates were broken up and devoted to wheat cropping with the help of the American reapers and binders which were introduced in the 1870s. At first, the lightest cultivation of soil freshly put to the plough gave good yields for a minimum effort; but as cultivation extended to the less suitable soils, and as fertility declined with overcropping, yields fell. Faced with this trend, and with falling prices as production in North America and in Russia soared, the wheat boom soon played itself out. The peak year was 1883, when nearly 5 million bushels out of an output of 10½ millions were exported, and grain accounted for some 18 per cent of total exports. After that the decline was rapid; from 1893 exports were normally below the 1 million bushel mark, and by the First World War New Zealand found itself with a small wheat deficit. Yields per acre, however, rose again substantially from about the mid-1890s as acreages were restricted, and as a new and less predatory pattern of mixed farming was evolved on the plains and downlands of the eastern South Island. Grain and root crops alternated with several years of sown grasses, which provided lusher feed for the fattening of lambs than could the coarser native pastures. From the 1890s onwards, then, wheat growing in New Zealand has been closely linked with the frozen lamb industry, to be discussed shortly.
The optimism engendered during the Vogel borrowing period ignored, however, the fall in the prices of staple exports, wool and grain, in the later 1870s and the continued decline in gold production. Between 1870 and 1881 the value of exports rose only from a little over £4.5 million to not much over £6 million – a fall, on a per capita basis, of about one-third. During the 1880s such sobering facts could no longer be ignored, especially since the London market began to have its doubts about the ability of the young colony usefully to absorb, or to service, such large quantities of capital. With the continuing fall of export prices, and of total exports on a per capita basis, the bottom dropped out of the land market; mortgagees were unable to foreclose even if they wished – they could no more have sold the land profitably than could the owners – and the banks found themselves with a structure of illiquid assets which precipitated a notable banking crisis in 1894–95. Unemployment reached serious proportions, and the level of wages dropped so low that, for a time in the eighties, some manufactured goods were able to be exported. Many immigrants were disillusioned by such conditions and there was a small net outflow of migrants in the later 1880s. Yet even in this, by far the most gloomy decade the colony had yet experienced, the means of salvation were at hand; for in 1882 the first cargo of refrigerated meat was successfully shipped from Port Chalmers to London, and the prospect of new and valuable exports of frozen meat and dairy produce was translated from the realm of airy visions to that of sober economic possibility. The consequent demand by unemployed townsmen for land was thereby rendered all the more insistent; and this helps to explain the success at the polls in late 1890 of a Liberal Party with radical opinions on land policy and labour legislation.
The end of the long depression dates from about 1895. The year 1 July 1894 – 30 June 1895 marks a cyclical trough for exports; from then on, until the First World War, exports increased sharply and almost continuously, trebling in value in 20 years. This favourable movement has often been linked with the upward trend of world prices which characterised the world economy from the mid-1890s to the early 1920s, and it is true that butter prices reached their lowest level in 1894–95, cheese in 1895–96, and meat in 1897–98. Wool, however, continued to decline fitfully but substantially until 1901–02, and since it was the most important single export, the index of all export prices did not move upwards until wool had passed its nadir. Until about 1902, therefore, the explanation of the recovery of New Zealand's export earnings must be sought in rising volumes of the principal exports; only after about 1902 did rising prices add to their buoyancy.
All major indices of economic activity reflect the growing prosperity of the 20 years before the First World War. The area of occupied land rose only by a quarter, from under 32 million acres in 1891 to 40½ million acres in 1911 but, more significantly, the area of sown grasses, on which the bulk of pastoral production takes place, doubled from less than 7 million acres in 1891 to 14½ million acres in 1911. The number of sheep rose by more than a quarter, that of cattle more than doubled, and the output of coal trebled. Since the overall volume of production rose more rapidly than population, and the level of unemployment declined, there can be little doubt that real incomes also rose substantially. This impression is confirmed by a number of social indicators; for example, marriage and birth rates and the rate of natural increase of the population all turned upwards in the mid or late 1890s, after 20 years of steep decline during the depression.
The relative importance of the many factors which combined to account for this happier turn in the Dominion's fortunes are not completely agreed. Some historians have claimed a substantial part of the credit for the measures of the Liberal Government which assumed office early in 1891. Others are more impressed by the influence of the improving world economic situation, by the shift in the terms of trade in favour of the primary producing countries and, above all, by the unique combination of technical advances (all of them borrowed from abroad) which made it possible for New Zealand to reap full benefit from these more encouraging circumstances. The best known of these advances was the advent of refrigeration on oceangoing ships, which permitted the development of new export industries of frozen meat and dairy produce. Weight must also be attached, however, to the major fall in world shipping freights resulting from the change from sail to steam and from the development of the multiple-expansion marine engine, which alone permitted the antipodean farmer to compete effectively with the produce of his British and Danish counterparts. An index of world ocean freights suggests a decline of fully 75 per cent between 1873 and 1909, and in the case of New Zealand most of the benefit must have accrued after 1883, when the New Zealand Shipping Company initiated its direct and regular steamship connection between the colony and the United Kingdom.
The first cargo of frozen meat reached London (in a sailing ship) in 1882, but for several years failures were common, and costs were only gradually reduced. Moreover, it took time to fit out ships for the new trade, and to build and staff the freezing works. Above all, the flock and system of land utilisation could only gradually be adapted to the new conditions, dual purpose animals coming to replace the Merino which had predominated during the period when the sheep was valued chiefly for its fleece, and smaller farms with lusher exotic grasses were developed for the fattening of lambs.
The full impact of refrigeration on the dairy industry was even longer delayed: here growth was only on a moderate scale until near the end of the nineteenth century. The chief explanation is doubtless that, in the case of frozen meat, refrigeration merely made possible the profitable disposal of a joint product of an existing industry; whereas in the case of dairy produce a largely new industry had to be built from scratch, nearly all butter and cheese having been made on the farm prior to 1882. Moreover, the dairy industry's development has been more dependent than that of the frozen meat trade on technological advances other than refrigeration, and some of these advances occurred only at later dates. The continuous-flow centrifugal separator, which made possible the factory production of butter, had indeed been developed in Denmark as early as 1878, and was first introduced to New Zealand about 1883. But great importance, from the commercial point of view, attached also to the improved test for butterfat content evolved by Babcock in 1890, which made possible the payment for milk on the basis of its butterfat content, thus giving a major stimulus to herd improvement. Of even greater significance for butter production was the development of hand-separators in the later 1890s, which enabled the cream to be separated on the farm, and not, as hitherto, in the factory. Though at first widely opposed because of its adverse effect on quality, this development not only saved the expense of transporting the whole milk to the factory, but, by widening the area from which the raw material could economically be collected, also facilitated the amalgamation of the smaller dairy factories into larger units, thus achieving considerable economies of scale. This effect was the more marked with the improvement in roads after the First World War and the spread of the motor vehicle, permitting daily collection. The feeding of the skim milk to pigs has led to a useful supplementary source of income for dairy farmers. A final major advance has been the widespread availability of electric power in rural areas. In this respect New Zealand, with its abundant and cheap hydro-electric potential, which was rapidly developed in the post-1918 period, has ranked amongst the most advanced countries – hence the early installation of electrically driven milking machines, even on remote farms, again with beneficial effects on cost and output. By the mid-1930s, 83 per cent of cows were machine milked.
In view of the gradual evolution of these techniques, it is understandable that the full benefits of refrigeration should have become apparent rather more slowly in the case of dairy production than in that of meat. Up to 1914–18, the price differential favoured cheese, the production of which grew rapidly enough in the Taranaki area, then more densely settled and better roaded than other climatically suitable areas. The heyday of butter came in the period between the wars, when improved road and rail communication and the motor car opened up the Waikato – Hauraki Plains area of the North Island, which has since been the source of fully half of the country's butter output.
To revert, however, to the period 1895–1914, one may fairly claim that, if the basic forces making for returning prosperity are to be found in trends in the world economy and in techniques borrowed from the outside world, the legislation of the 1890s at least operated in the direction of strengthening those forces, rather than of weakening them. Thus the introduction of a graduated land tax in 1892 has been considered by some historians a powerful influence in breaking up the larger estates and facilitating that closer settlement which was characteristic both of the North Island dairy farm and of the mixed farming of the coastal plains of the South Island. Pember Reeves it is true, gave his opinion that “nothing startling is being done by the land-tax”, and certainly the gradation was exceedingly gentle, yet there was a very substantial reduction in the 20 years before the First World War in the total area of the largest freehold estates, and it is probable that the graduated tax was at least a subsidiary cause of this. It is well known, however, that much land had been locked up in big estates during the long depression, which neither its owners nor its mortgagees could sell save at a grave loss, and it is thus likely that the rapid sale and subdivision of many large freehold estates after about the mid-1890s represented in part the belated accomplishment of intentions which had been thwarted during the long years of depressed prices and land values.
A further measure dating from this period provided for the compulsory purchase by the State of large estates, and their subdivision into small farms to be let on long leases. Probably greater importance should be attached to the Advances to Settlers Act of 1894, which cheapened credit for the smaller farmer and especially for the dairy farmer, for whom working capital is and always has been of crucial importance and who has, therefore, had an especial interest in credit facilities. Finally, a Department of Agriculture was established in 1892 and was soon doing excellent work in the field of agricultural extension, which was also of great benefit, especially to the dairy farmers learning new techniques.
Land measures were by no means the only important aspect of the economic legislation of the Liberal Government. Pember Reeves, the intellectual of the Liberal Ministry, was primarily responsible for a series of Acts prescribing conditions and hours of work, the background to which was the allegations of sweated labour which had been made during the later years of the long depression. As a result of these measures, New Zealand, from being one of the most backward of nations regarding her industrial code, became perhaps the most progressive. Of greater interest, however, was the Industrial Conciliation and Arbitration Act of 1894, which initiated the distinctive New Zealand system of dealing with industrial disputes and helped to earn for New Zealand the reputation of being “the country without strikes”. Since that time, New Zealand has undoubtedly enjoyed a good record as far as losses of working time through disputes are concerned, though whether this is entirely the result of the I.C.A. system might perhaps be disputed.
One important consequence of these developments in farming was to accentuate the slow change in the balance of population, as between the North and South Islands. In the early years of the colony's history, the North Island, with its more thriving trading settlements and with its whaling, timber, and flax resources, had a large majority of the European population. It was the gold rushes of the early 1860s which first put the South Island ahead; and by about 1867 the “Main” Island, as its champions like to call it, had reached its apogee, relatively speaking, with over 63 per cent of the total population. Then, as the gold rushes died down and the end of the Maori troubles permitted development of the North Island, the South's proportion gradually declined. It was between the censuses of 1881 and 1886 that the North Island first registered a bigger absolute gain of population than did the South; but in 1891 the latter still had 55 per cent of the population of about 625,000. In the next 20 years the North Island, with a climate and terrain better suited to dairying, a relatively intensive form of farming, went ahead rapidly; and by 1911 the South Island had only 44 per cent of the total population of upwards of 1 million. (Inclusion of the Maori population – all the above figures are exclusive of Maoris – would increase the North Island percentage in all cases.) Since 1911 the North Island has further increased its lead, though until recent years at a somewhat slower rate, and now (1961) accounts for over 71 per cent of the total population, including Maoris.
Another characteristic feature of the New Zealand economy which became more pronounced during the period just reviewed was the country's high degree of dependence on the British market – particularly as the major recipient of her exports. In the years before British annexation, and for a good many years afterwards, New South Wales was the most obvious trading partner; most of the timber, the agricultural produce, and the gold (on account of the Mint in Sydney) went there, and during the gold rushes (1861–65) Australia took 63 per cent of New Zealand's exports and supplied 54 per cent of her imports. From the later 1860s onwards, however, as wool grew and gold declined in relative importance, the position of the United Kingdom in New Zealand's trade became more marked, and in 1881–90 the mother country took 72 per cent and in 1911–14, 79 per cent of all exports. These figures are in fact somewhat spurious, in that substantial proportions of New Zealand's exports to Britain, particularly of wool, were re-exported, London acting merely as a convenient distributing centre. Nevertheless, the importance of the United Kingdom as a market for New Zealand produce, and particularly for her meat and dairy produce, has been a characteristic and, at times, disturbing feature of the country's trading pattern: between the 1890s, when pastoral products came to account for a very large majority of the country's exports, and the Second World War, the percentage of exports directed to the United Kingdom (ignoring the qualification just mentioned) rarely fell outside the range 75 to 85 per cent.
New Zealand emerged from the war with the pattern of her economy substantially unchanged. Pastoral production was running at only slightly higher levels, though owing to the rise of prices the value of exports had increased very sharply, from £22.8 million in 1913 to £53.9 million in 1919. Local manufacturers had received a considerable stimulus from the wartime shortage of consumer goods, the number of factory workers having risen from 42,000 in 1910–11 to 63,000 in 1920–21. The most substantial economic legacy of the war was the increase in the National Debt, which rose by more than 70 per cent per head between 1914 and 1919. This burden, which was substantially increased by further borrowing during the 1920s, was to press heavily on the springs of New Zealand's economic life during the depression of the early 1930s; most of the money was borrowed abroad and in 1932 the remittance of interest amounted to 26 per cent of the value of exports. In the immediate post-war years, most of the borrowed money was spent on settling returned ex-servicemen on the farms. This policy, combined with the sharp rise of prices in the early post-war years, drove land values up to extreme heights, and it has been estimated that just on half the occupied land changed hands between 1915 and 1924. When the short post-war boom burst in 1921–22, many newly established farmers therefore found themselves with an almost insupportable deadweight of mortgage commitments.
In such circumstances the farming community looked about for a solution for its ills; and some thought to find it in a modification of the traditional free marketing of the pre-1914 period. During the war bulk purchase schemes had been instituted for all major exports, and this experience had convinced many farmers of the advantages of controlled marketing. When the slump came, marketing boards were set up, in 1922 for meat, and in 1923 for dairy produce as well as for some of the minor products. Their experience varied, the Meat Board playing a modest but useful coordinating role, the Dairy Board attempting more ambitiously to institute complete control of marketing, and failing disastrously. Controlled marketing, in fact, did not really come into its own until a somewhat later date.
Meanwhile, despite an overall feeling of pessimism which recalled the temper of the 1880s, and the reappearance of some unemployment, the development of the country continued. Though the number of sheep continued to rise gradually, the most marked progress was in butter production consequent on the rapid development of the area south of Auckland. In 1905 the Auckland province had accounted for only 83,000 cwt, out of a total production of 463,000. By 1919 the figure was 271,000 out of 509,000; and 10 years later it had shot up to 1,219,000 out of a Dominion total of 1,951,000. Nor was this increase solely the result of geographical expansion. Dairy farming became more efficient: butterfat production per cow had risen from 125 Ib per annum in 1906–7 to 152 Ib in 1919–20; by 1928 it was 211 Ib. In 1929, indeed, butter was on the eve of becoming the country's largest earner of foreign exchange. It was suddenly pushed on to that eminence in 1930 by the collapse of wool prices which heralded the onset of the depression.
For New Zealand, as for most of the world outside Russia, the great depression of the early 1930s was the most shattering economic experience ever recorded. Exports fell by 45 per cent in two years, national income by 40 per cent in three. The balance of payments was further weakened by the burden of interest on the overseas debt. At the worst point of the depression, the number of unemployed may have exceeded 70,000 – ambiguities of definition make a precise estimate difficult. The sharpest price fall was that of wool, which declined by 60 per cent from 1929 to 1932; meat fell a good deal less. The dairy price index continued to fall until 1934; dairy farmers tried to make ends meet by increasing production during the depression and in doing so forced the export prices of butter and cheese still lower: butter exported rose from 1,654,000 cwt in 1929 to 2,635,000 in 1933; cheese exports also rose, though much less rapidly.
The depression has rightly been described as a traumatic experience; for the second time at least since the founding of the colony, new New Zealanders found themselves disillusioned by the appearance in their adopted country of conditions they thought they had escaped from. As in the late 1880s, there was some net emigration in the early 1930s; as on the earlier occasion, again, most of the would-be emigrants could not afford the fare to leave. Perhaps as well; for this time, at least, they were not justified in thinking they had made the worst of the bargain. Bad as were conditions in New Zealand, they were perhaps less demoralising than those in Jarrow or on Clydeside, and percentages of the labour force unemployed were a good deal higher in many industrial countries, and in Australia.
The depression was, in fact, aggravated by New Zealand's extreme unpreparedness to meet it. Despite New Zealand's early reputation as a “social laboratory”, her social services had in fact fallen behind those of many other countries in the post-1918 years, and the country entered the depression without even the modest provision for unemployment relief by which the British industrial worker was protected. The policy of the Coalition Government formed in September 1931 was on the whole unenterprising and, perhaps inevitably, unenlightened in the Keynesian sense of the word. As elsewhere, the chief concern was to balance the budget, though overseas borrowing continued until 1933. Some of the public works which formed the main relief measure were, however, useful. Especially notable were the schemes for the development of Maori land (conceived before the depression but speeded up essentially as relief work), which accorded well with the marked resurgence of the Maori people since the late nineteenth century, and the planting of exotic trees in the centre of the North Island, which was to lead to a thriving development of forest products.
Most of the positive measures were conceived to help the farm community whose net income, according to one expert calculation, was zero in 1930–31 and a negative quantity in 1931–32. From 1931 the Government adopted a scheme first tried privately on the initiative of the Canterbury Chamber of Commerce, whereby mortgage commitments were scaled down by agreement between the farmer and his mortgagee. In 1933 the New Zealand pound, which had already slipped to a discount of about 10 per cent, was devalued, £125 equalling 100 sterling at the new rate of exchange. The year before, the Imperial Conference at Ottawa had set up the structure of Imperial preference which has since remained the basis of New Zealand's trade with the United Kingdom, though the importance of the concessions, particularly as regards New Zealand exports to Britain, has been somewhat eroded with the passage of time. However, a British proposal to impose quota restrictions on butter imports and an unsuccessful experiment in placing such quotas on meat, shocked New Zealand opinion into its first acquaintance with an idea which has since become only too familiar – that the British market is not a bottomless pit into which anything New Zealand can produce may be profitably poured. Belief that Coates, Minister of Finance in the Coalition Government, had aided and abetted the British government's plan for a butter quota, was one reason for the loss of confidence in the Administration on the part of the dairy farmers, and their readiness to vote for a Labour Party which promised a guaranteed price for their products.
Labour swept to power in 1935 on a mixture of urban and small farmer vote similar to that which had brought the Liberals into office in 1890. The new Government sought to promote economic stability and security. In regard to stability, the aim was to avert the large fluctuations in prices, incomes, and employment, largely originating outside New Zealand, which had caused so much hardship in the years since the First World War. New Zealand has been successful in this objective, in the sense that for nearly a quarter of a century the country has experienced full employment and a continued high level of domestic economic activity. To achieve this has involved, however, throwing the burden of fluctuations on the external aspects of the economy – hence the recurrent balance of payments crises which have caused so much perplexity, especially in the 1950s. Moreover, to protect the country's overseas reserves and contain inflation within tolerable limits has necessitated a structure of controls which, in the opinion of many observers, has entailed some distortion of the country's economy, and has proved inimical to rapid economic growth.
In regard to security, success has perhaps been less ambiguous. The system of social services which the Labour Government and its successors have erected and maintained has, together with the absence of unemployment, substantially removed the fear of destitution from the people, and the vitality and health of the New Zealand population of today are plain for all to see. Critics have maintained that this success, too, has been bought at a price: that the incentive to save, for example, has been weakened by a “cradle to grave” system of State Security, and that the high level of taxation needed to finance these benefits has had an adverse effect on economic initiative. There may well be some force in these arguments; but it is incorrect to suppose that the proportion of the national income taken by taxes in present-day New Zealand is materially higher than in other countries with similar levels of per capita income.
To return, however, to the mid-1930s, the new Government proceeded to tackle the economic problems of the country in a far more imaginative way than its predecessors had done. It must be acknowledged, however, that Labour was fortunate in the timing of its electoral victory; for by late 1935 the worst of the depression was over – export prices, except those of dairy produce, had passed their trough two or three years earlier, and the relatively healthy state of overseas reserves enabled the Government to take measures to stimulate the economy without undue fear of immediately precipitating a balance of payments crisis.
The 1936 Budget restored the Coalition Government's cuts in public service salaries and brought wages back to their level preceding the general order of May 1931 which had initiated the sharp decline of wage rates during the depression period. A vigorous State housing programme was begun, public works expenditure was stepped up, and unemployment and other social benefits were increased. The dairy farmers got their promised “guaranteed price”, though the principles underlying it were ambiguous from the start, and a major collision over its interpretation was postponed only by the war. In 1937 a Marketing Department was established, monopolising the export of dairy produce. A programme of stimulating the development of manufacturing industry was started, and the 40-hour week was introduced. All these measures without doubt helped greatly to stimulate the economy. Nevertheless the revival of imports induced by a rising national income, combined with the minor recession overseas of 1937–38, did in fact run reserves down to a dangerously low level in 1938, and shortly after its second period of office began, the Labour Government began to erect the system of exchange and import controls which developed, after the war, into a major instrument of national policy.
For New Zealand, as for many countries, the Second World War involved a larger economic effort than did the First. Yet being directed by a Government whose philosophy favoured controls, some of which were already in operation, the economy was mobilised to wartime needs with remarkably little disruption. New Zealand was able, for example, to hold the rise of retail prices during the war to only 18 per cent – much less than in many other belligerent countries. The Marketing Department, again, was well placed to mobilise exports of primary produce, which, as in the First World War, but more promptly, were “commandeered” by the United Kingdom government. Farmers benefited from assured prices, though in fact, perhaps because of unwillingness to press Britain too hard, New Zealand received for her exports prices substantially below the world level – a comment which would equally apply, in the case of meat and dairy produce, to the post-war years also.
New Zealand put into its armed forces a higher proportion of its able-bodied men than did any other allied country save Russia, yet the volume of production generally expanded, though in the later years of the war a shortage of fertiliser somewhat impeded farm production. Secondary industry received a marked stimulus from the shortage of imported consumer goods; the number of factory workers rose, despite conscription, by some 20,000.
The holding of the price level and the comprehensiveness of controls, together no doubt with the better understanding of national income economics which New Zealand, in common with other countries, now enjoyed, smoothed the difficulties of war finance. The National Debt, in the eight years prior to March 1947, increased by some £290 million but liabilities in London and in Australia were reduced by £36 million. This, following on a conversion operation to take advantage of low interest rates in 1933–34 and together with further debt repayment in the later 1940s, greatly reduced the burden of interest payments on the balance of payments, particularly in view of the post-war rise of prices and incomes. During the 1950s, interest payments abroad on the public debt did not exceed 2 per cent of the value of exports. Yet the very excellence of the machinery of controls meant that, in some ways, the real burden of the war was postponed rather than lightened. In the post-war years the very high level of liquidity, the barely suppressed demand for imports, and the housing shortage constituted major problems, and perhaps justified retaining key controls until the end of Labour's long period of office in 1949.
For some six years after the war these difficulties, however, were rendered tolerable by the very marked rise in export values, which trebled between 1945 and 1951. This rise combined the effects of increasing volumes of exports and of a sharp rise of export prices, especially of wool; meat and dairy produce prices would have risen more but for the continuance of the bulk purchase schemes until rationing ended in the United Kingdom in 1954. The former trend has continued after 1951, thanks in part to the spectacular post-war innovation of aerial top-dressing, which has worked wonders for the productivity of the more rugged country since the first experiments in 1948. In the years 1948–58, the total sheep population increased from 32½ to over 46 millions – an increase of nearly 42 per cent. This expansion, combined with difficult trading conditions for dairy produce in the late 1950s, has resulted in the sheep becoming once again by far the greatest export earner. The opportunity was taken, during the pre-Korean war years of favourable balance of payments, to reduce further New Zealand's balance of international indebtedness, and to revalue the currency to parity with sterling in 1948 – a move to which Labour had been committed since taking office in 1935, and which helped, though temporarily, to restrain inflationary tendencies.
The 1950s have seen a more anxious time for New Zealand. Since the Korean boom of 1950–51, the terms of trade have fluctuated considerably, but on the whole have moved unfavourably for New Zealand – as for many other primary producing countries. A specific cause of concern has been the continued protection of agricultural produce by most industrial nations. Pastoral production has continued to increase, somewhat irregularly, but by the early 1960s there were signs that the expansion induced by aerial topdressing had perhaps nearly run its course. Whether a further technical advance of comparable significance may be in the offing can scarcely be predicted, though the work of New Zealand's agricultural research workers suggests that there are, in fact, still considerable gains to be made even within the traditional pattern of grassland farming: the more systematic use of artificial insemination, and the more widespread inclusion of trace elements in the fertilising programme, are two of the more obvious possibilities.
Meanwhile, the expansion of manufacturing industry has proceeded apace, stimulated by the continued inflation which has been one of the chief causes of concern in recent years, and by conscious manipulation of the machinery of import controls which also serves, though not without many fits and starts, to restrain the demand for imports within limits which the balance of payments can tolerate. Over the period 1938–39 to 1956–57, the volume of manufacturing production expanded by 153 per cent and the number of factory employees now substantially exceeds the number engaged in farming.
These developments have served to intensify the trend, which has been apparent for at least 90 years, for the composition of imports to change: producers' equipment and raw materials and semi-processed goods for working up in New Zealand's own factories are more and more replacing finished consumer goods. Nor has this manufacturing development been confined to the light consumer industries, of which, save for the processing of her primary products, New Zealand manufacturing had previously chiefly consisted. At the beginning of the 1960s construction had started, or plans had been agreed upon, for a scrap steel mill which it is hoped will be the precursor of later development of New Zealand's ironsands; for an oil refinery; and for a £200 million installation using part of the South Island's great reserves of hydro-electric power to smelt Australian bauxite for aluminium production. One major success of the past decade has been the expansion of forestry products, based on the huge plantations of exotic trees in the North Island, which has added a modest but welcome diversification to the pattern of New Zealand's exports – the more so since these products are largely exported to Australia, thus helping to reduce the percentage of exports going to Britain. In 1959, exports of forest products accounted for 2.8 per cent of all exports.
Notes:
(1) Census figures for all years except 1931 and 1941 (figures up to 1921 slightly revised from originals to conform with modern census definition of Maori). For 1931 and 1941, estimated population at end of year.
(2) F.o.b.
(3) C.d.v. + 10 per cent.
(4) Year 1900–01, etc.
(5) Enumeration taken September 1857 to September 1858.
(6) 1903.
(7) 1936.
(8) Excludes armed forces overseas.
Despite such developments, the rate of growth of real income per head during the 1950s has been substantially lower than that of most Western economies, and this notwithstanding the investment of something between 20 and 23 per cent of the national income in capital formation. It seems evident that in the future the performance of the economy will be much more closely bound up than it was in the past with the productivity of manufacturing industry; and in this respect New Zealand's relative paucity of mineral resources, the small size of the local market and of the average plant, and a structure of taxation, controls, and social services which, at best, does not seem particularly congenial to the determined pursuit of high productivity, have all caused much heart searching in recent years. Yet the New Zealand community undoubtedly enjoys one of the highest standards of living in the world, and the continued flow of immigration and high rate of natural increase of population which have been features of the post-war years, suggest that there are many people both within and without the country who have faith in the future viability of the New Zealand economy.
by John Dennis Gould, B.A.(LOND.), M.A.(BRISTOL), Professor of Economic History, Victoria University of Wellington.