Page 2 – Treasury and the welfare state, 1935–1980
A new government
The election of a Labour government in 1935 transformed the political and human landscape in which Treasury operated. Not one member of the new government had held office before and some of them had been imprisoned for sedition in the First World War. They were committed to socialism – albeit undecided about the exact form that should take.
However, through the 14 years of Labour government, the relationship between department and government was cordial. In the person of Bernard Ashwin (assistant secretary then secretary), Treasury had a chief determined to get on with the government. Ashwin recognised that if the government lacked confidence in him, he would only forfeit influence.
It suited the Labour government to maintain ‘Treasury control’ – the role the Treasury had acquired in 1930 of reporting on all new policies.
Snooker and cabbages
Bernard Ashwin was known for his skill in negotiation. He once allowed a decision on an extra quarter-penny in the price of wartime butter for the UK to be settled by a snooker game. When negotiating wartime financial terms with the United States, Ashwin talked about cabbages on the family farm for supply to US armed forces. The vegetables were a metaphor for New Zealand’s contribution to the war effort. ‘If ever a New Zealander starts talking about cabbages’, one US negotiator was heard to say, ‘you might as well give him what he wants and save your time.’1
Ashwin and the government did not always agree. Ashwin vigorously opposed Labour’s proposed health scheme, which he felt would be unsustainable. He probably did not approve of Finance Minister Walter Nash’s decision to revalue the New Zealand pound to parity with British sterling in 1948 – a decision Nash made entirely on his own.
Ashwin was most influential between 1942 and 1945 (the second half of the Second World War), when he, along with William Marshall (representing employer interests) and Federation of Labour president F. P. Walsh, ran the economic stabilisation commission and effectively the entire economy. With the return to peace this economic co-ordination waned. It was revived in the 1950s in the form of an officials’ committee on economic policy reporting to a cabinet committee on economic policy. Both were serviced by Treasury.
Fictionalising Henry Lang
One-time Treasury employee William Maughan wrote a novel about the department, featuring a thinly disguised portrait of Secretary to the Treasury Henry Lang: ‘Carter wondered about [him] as he made the tea. Benjamin Kohl was all right once you really got to know him but did anyone know him? After all you could hardly say you knew a person if you didn’t know what school he went to. Come to think of it, no one even knew where he came from. Some said he was the son of a Lebanese scrap merchant, others a Peruvian … there was no doubt the man was a foreigner. He was olive-coloured, tricky and wore rings. What’s more he played the fiddle and listened to the National Orchestra. No good ever came from people like that.’2
Henry Lang, secretary to the Treasury from 1969 to 1976, took the process further, making Treasury not just one of a number of agencies contributing to economic policy advice but the lead one in what was known commonly as ‘economic management’.
Lang’s most important relationship was with National Party politician Robert Muldoon, who was minister of finance from 1967 to 1972 and from the end of 1975 (when he was also prime minister). Lang also worked closely with the Reserve Bank and with the semi-official Monetary and Economic Council (chaired by close friend and Victoria University professor of money and banking Frank Holmes).
Economic management in action
Economic management was a complex task. Growth strategies which might allow the economy to escape its ‘balance of payments constraint’ collided with policies designed to deal with that constraint in the short term but liable to trigger unemployment or inflation. ‘The price-wage spiral is rapidly reaching the point where our competitive position in export markets will be undermined,’ argued a 1970 Treasury report. ‘Demand for imports will rise to unmanageable proportions … fiscal policy now needs to be tough.’3
The most severe test of economic management came about as a result of external circumstances – the dramatic fivefold increase in the oil price in late 1973, which plunged New Zealand’s balance of payments into massive deficit. The Labour government opted for borrowing rather than deflation or devaluation, but the need to address domestic economic management brought Treasury and the government into alignment.
National was elected in 1975 and embarked on a deflationary policy which Treasury broadly supported. This was coupled with an incomes policy seeking to relate incomes to movements in wages and prices, which was more or less personally negotiated by Muldoon with Tom Skinner, president of the Federation of Labour.
Liberalisation or ‘Think Big’?
Under Noel Lough, secretary from 1976 to 1980, Treasury advocated liberalisation as the best way of surmounting economic difficulties. In the wake of the 1978 election the government implemented a number of Treasury-supported measures including a flexible (but not floating) exchange rate, fewer controls on overseas investment, deregulation of the meat-freezing industry and liberalisation of restrictions on shop trading hours from 1980.
Treasury also advised on the major investment projects, collectively called ‘Think Big’, that were designed to make New Zealand more self-reliant in energy and less reliant on petroleum from the unstable Middle East. Treasury cautioned against commitment to projects where long-term profitability was debatable, but its opinions made little headway given the support from Prime Minister Muldoon (also Treasury’s own minister), and the newly formed Ministry of Energy and its minister, Bill Birch.