The Economists and Monetary Thought in Interwar New Zealand: The Gradual Emergence of Monetary Policy Activism

Abstract

The emergence of monetary thought in New Zealand after 1914 has not been subject to extensive analysis. This paper remedies this deficit for the interwar period. The focus is upon the propagation of monetary ideas in New Zealand and their intellectual sources. We apply a heuristic in which different monetary doctrines are situated along a continuum between extreme monetary policy ‘activism’ and extreme ‘minimalism’. In the 1920s, New Zealand economists betrayed a minimalist bias across several dimensions: money supply regulation, the role of money and the international monetary transmission process in the business cycle, and the operation of bank-credit allocation mechanisms. Incipient activism in the work of Condliffe and Belshaw was countered by Niemeyer's case for a minimalist central bank. Fisher adopted an anti-reflationist, forced savings approach to the 1930s crisis. Copland, Tocker, Belshaw and Hight downplayed these consequences. Extended debate over Reserve Bank legislation generated new meanings for the phrase ‘monetary policy independence’; it also turned most economists against extreme activism that prevailed from 1938. Throughout the interwar period, New Zealand entertained a vigorous contest of monetary ideas inherited from the work of Keynes, Hawtrey, Cannan, Robbins, and Hayek, though adapted to local conditions.

Keywords:

• Monetary policy
• monetary thought
• New Zealand

Notes

Notes

Acknowledgements

We thank two referees and Mark Donoghue for valuable comments, and Riko Stevens for excellent research assistance. We also thank the Business and Labour History Group of the New Zealand Work Research Institute for financial support.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 In Australia there was a similar surge of interest in monetary economics during the interwar period, in part, as we shall have occasion to note below, influenced by research work undertaken by New Zealand economists. Cain (1980) offers an exacting account of Australian monetary thought in this period. See also Millmow (2010, 38–55).

2 Singleton (2007) provides biographical details of Tocker.

3 In terms of the specific insight attributable to Tocker, Neville Cain (1980, 13 n. 49) explains: ‘Only after Tocker’s contribution … did Copland realise that Australia had long been on a form of the gold-exchange standard’.

4 Private banks in NZ always held gold reserves well in excess of legal restrictions on the domestic note issue. This gave them ‘practical freedom of note issue’ in the 1920s (Tocker 1924b, 567). Gold movements depended on banks’ requirements for coin rather than on exchange rates. See Tocker (1924b, 559, 564–5; 1925b, 1) and Quigley (1992, 211).

5 This conclusion is appropriately qualified: ‘deposits in New Zealand may be created not only by an excess of exports over imports, but also by an increase of bank advances. Hence it is the excess of deposits over gross advances, rather than deposits alone, that must be considered’ (p. 52)

6 Tocker’s contributions to the measurement of the NZ business cycle in the 1920s confirm Hawtrey’s (1927, 471) remark that ‘experience first showed periodical fluctuations to occur in the state of trade, and then economists set themselves the task of finding a deductive explanation of the phenomenon’.

7 As well, the tendency for Australian government borrowing to affect bank exchange rate policy reactions in NZ was also important in the 1920s given the trans-Tasman operations of most of those banks. On this matter see Tocker (1924b, 1925b, 3) and Fleming (1997, 5). Here we shall only consider the case of bank responses to NZ government borrowing.

8 This policy reaction followed Tocker’s (1924a, 572) rule: ‘If the internal monetary control be rigid, the necessary elasticity must be found in fluctuating exchanges; if exchange rates are to be kept constant, then elasticity must be provided within the monetary system itself.’

9 As we noted earlier, Tocker (1924b) listed psychological forces as having a major role in cycle amplitude. However, he saw no place for monetary policy in correcting what he calls ‘errors’ of ‘over-optimism and over-pessimism’. He made recommendations for significant changes in official statistics on trade, banking, national income and expenditure. With more reliable statistical data, market participants would more accurately gauge the long-run contours of the economy, adjust their expectations accordingly and reduce such psychological errors (Tocker 1925a, 61–2).

10 Thus the exchange rate was always only ‘approximately fixed’ by the banks. It was temporarily devalued by 3% in 1921 in response to a precipitous decline in London bank reserves (Tocker 1924a, 131–2). We find no evidence that the exchange rate was allowed to ‘float’ in this period; cf. Quigley (1992, 218–19).

11 There was one exception: in 1921 the overdraft rate was increased expeditiously and significantly to 7% in order to dampen a speculative land boom (Tocker 1924a, 132).

12 Here we draw upon earlier work on the ‘Canterbury tradition’ in economics in Endres (1991, 182–6) and unpublished sections of Grant Fleming’s PhD thesis concerning agricultural finance in the NZ economy during the interwar years (Fleming 1993, 90–102).

13 Later Belshaw (1928, 56) complained that during the 1920s the rentier class came to take an increasing share of ‘our basic industries’.

14 These lessons from land price booms fuelled by unchecked bank credit creation had been taught before in NZ, i.e. in the late nineteenth century. However, ‘the public memory is short and the economic history of the Dominion little known’ (p. 346).

15 We are obliged to a referee for noting that there seemed to be little discussion in NZ among the economists and policymakers on the consequences of Britain’s return to gold. Indeed, that return brought down the NZ currency to parity with sterling, and was broadly welcomed in NZ especially by exporters (Hawke 1971, 53). From 1925 to 1930 parity with sterling persisted. The local monetary consequences of Britain’s return to gold were not regarded as significant and not uppermost in the economists’ minds, at least going by the dearth of their public commentary on the matter. There were no special preparations in NZ for this event.

16 By ‘liquidationism’ we mean, following Barry Eichengreen (cited in White 2008, 75), a doctrine ‘according to which business cycle downturns served the Darwinian function of weeding out weak enterprises least well adapted to a dynamic economy’.

17 Here we ignore the ‘outside market’ in foreign exchange (beyond the major banks) that also operated at the time with the involvement of financial intermediaries such as stock and station agents. This market constituted approximately 15% of all foreign exchange dealings; it was closed by the introduction of exchange controls in 1932. This gave the banks a monopoly of exchange dealings thereafter in return for meeting all future central and local government foreign exchange requirements for foreign interest and debt redemption (see Belshaw 1932a, 2; Hawke 1973, 23).

18 There has been extensive commentary on and analysis of this report elsewhere. See Hawke (1985, 144–62) and Endres (1990).

19 The ‘Second Report of the Economic Committee’ dated 11 January 1933 commissioned Belshaw, Hight and Tocker to update the Economic Committee report and recommendations of February 1932. See Economic Committee (1933). It devoted considerable attention to ‘the restoration of the farming industry’. Letter to PM Forbes, 11/01/33, attached to the report. Tocker (1935, 86) refers to the fact that a ‘nucleus of the former economists’ committee was again called together’ but ‘no report … has been published’.

20 As they suggested, it was quite possible that ‘the old parity’ with sterling could eventually be ‘restored’ (Economic Committee 1933, p. 36).

21 He also popularized his ‘middle course’ ideas in NZ with what he called less technical ‘pamphlets’ (Copland 1931, 1932d).

22 In the second economists’ report this matter was put as follows: once the currency was devalued, ‘the banks fear that they would have to buy sterling credits at a high rate, the whole of which they might be unable to sell at that rate’. Nonetheless, the report maintained that it ‘is probable that the emphasis placed on the banks’ risk of loss is much too great’. This report therefore played down the need to offer the banks any form of indemnity (Economic Committee 1933, 34). In their letter to the Prime Minister they gave an assurance that their recommendations were made ‘without respect to mere sectional interests’, doubtless including the banking community.

23 Economic historians have confirmed Tocker’s understanding; they have estimated that the monetary consequences of the Indemnity Act retarded economic recovery from the crisis during 1933–34 by reducing the income effects of the exchange rate depreciation (e.g. Maguire 1988; Greasley and Oxley 2002, 708–10).

24 His popular journalistic work regularly appeared in the NZ Financial Times often under the pseudonym ‘Scrutator’. See especially Murphy (1931a, 1931b, 1934).

25 Fisher (1935a, 49) points to a ‘profound error’ in Keynes’s position that the price index or indices chosen for stabilization ‘do not make a very great deal of practical difference’. If it is the ‘general level of prices’ then monetary policy ‘must inevitably fail’. In a ‘progressive economy’ – one that is experiencing ongoing innovation – prices must be ‘allowed to fall at the same rate as the efficiency of production’. See also Fisher (1935b, 205).

26 A referee asks why Robbins’s book was ‘celebrated’ when many years later in his autobiography Robbins essentially repudiated this study of the Depression. The book was certainly widely and favourably reviewed in the 1930s. Fisher certainly admired Robbins’s assessment of the Depression contained therein. It would be anachronistic to take Robbins’s later repudiation as in any way altering what was thought in the 1930s, including what Fisher thought at the time.

27 Cf. also Haberler (1932, 54): ‘the period preceding the present depression was characterized by the fact that many technological improvements, especially in the production of raw materials and agricultural products, took place on a larger scale’.

28 James P. Belshaw (1934, 159–79) documents in great detail the widespread interest group clamour for and against farm sector assistance in this period. Horace Belshaw (1933, 764) identifies farmer lobby groups pressuring politicians in Wellington in early 1933 as having a pivotal influence on the decision to take control of the monetary transmission process, beginning with exchange rate control and devaluation.

29 The doctrine of forced saving was widely debated in the 1930s partly because Keynes criticized aspects of that doctrine in the Treatise. Notable contributions to the debate included Hayek (1932) and Sraffa (1932). Fisher (1935a) appeared to be well aware of the contours of this debate.

30 By contrast Belshaw (1932b, 11) asserted that ‘the problem at the present time is not to encourage capital accumulation but to encourage the more active use of resources’. Fisher would have taken strong exception to this view because it neglects the consequences of forced saving.

31 In Fisher’s (1935e, 200–2) book-length study The Clash of Progress and Security, he expands on the forced savings doctrine and appeals to the authority of Hayek and Robbins who held similar views.

32 The more familiar case is redistribution of income between debtors and creditors occasioned by following a general price level target for monetary policy, which is fully explained by Robertson (1926). See Fisher (1935a, 54–5).

33 Warburton ([1946] 1951, 308 n. 27) agreed with Fisher that the argument against automatic monetary expansion in the face of ‘improved techniques of production’ was ‘that the benefits of technological progress are more quickly and fairly distributed among the entire population by a falling price level in line with productivity’.

34 We note Hawke’s (1973, 36) focus on the ‘long political debate’ over devaluation in 1932–33 without referring to the debate among the economists. Hawke continues: ‘It would now generally be agreed that Treasury [and presumably the economists opposed to devaluation] was wrong in opposing the alteration of the exchange rate.’ Making counterfactual estimates, Greasley and Oxley (2002) have extolled the virtues of the 25% devaluation in 1933, though again without appreciating the underlying doctrinal debate and without assessing the merits of different positions in that debate.

35 Capie, Goodhart, and Schnadt (1994, 203) incorrectly maintain that the ‘Niemeyer report had emphasised price stability as the Bank’s primary objective’. This was not a minor detail.

36 Cannan (1931) aimed to clarify some semantic confusion that had crept in to the contemporary use of terms such as money, currency and monetary standard. A national ‘currency’ is defined in terms of its relative value in exchange, for example with gold or some other national currency. Later, as Eshag (1963, 132–3) explains, bank deposits were elevated to the status of currency and added to notes and coins and called ‘money’. The ‘classical problem of the control of currency’ was later broadened to regulation of the supply of money and credit (which included banking instruments).

37 The RBNZ Act 1933 provided for seven directors in addition to Governor and Deputy Governor: three appointed by the government and four by private shareholders. The government’s sole representative (the Treasury Secretary) had no voting rights on the governing board. The Act constrained the government’s ‘formal control’ of the Bank (Graham and Smith 2012, 29). However, ‘formal’ monetary control presumably on operational matters may easily be overridden at short notice by the legislative power of government (see Coleman 2001).

38 In the event, the government did not heed Belshaw’s plea; it sought Niemeyer’s comments on various iterations of drafted legislation. Moreover, as Boyce (2005, 84) explains, NZ politicians continued the ‘ritual of seeking imperial approval’, i.e. Bank of England agreement on RBNZ legislation.

39 The Committee was established essentially for political reasons to head-off strong support for the Douglas Credit movement and to stop that movement sullying the Reserve Bank legislation. The Committee’s terms of reference were extremely broad: ‘To inquire into the monetary systems or standards which have been advocated as preferable to our system … with particular reference to their … adoption by other countries, their practicality, and the probability of their adoption promoting the development of industry, and the welfare of the people of New Zealand’ (Monetary Committee 1934b, 5).

40 Fisher too cites the Treatise. It was not until 1936 that such a rule was included in the RBNZ Amendment Act. See Hawke (1973, 153–4).

41 The RBNZ Act 1933 Clause 12 stated that the Bank must control ‘monetary circulation and credit’ in order that ‘the economic welfare of the Dominion may be promoted and maintained’.

42 Writing from his new position at the University of Western Australia, he observed that it ‘has been the most serious error of popular thinking on economic problems in our time to exaggerate the extent to which reforms in the field of banking can remove our economic difficulties’ (Fisher 1937, 167).

43 The nationalization of the RBNZ in 1936 and imposition of exchange controls in 1938 were part of a larger program of increased government control of the economy, initiated by the first Labour government (1935–49). Lloyd Prichard (1970, 390–3, 395, 396) outlines the main contours of the changes.

44 According to Wakatabe (2018, 281), once the gold standard was abandoned and following the 1933 World Economic Conference, Keynes ‘did not advocate further reflation by monetary measures’ (emphasis added).

45 Millmow (2017, 86–91) discusses the intellectual ferment in Australia surrounding the publication of Keynes (1936). We find no references to the General Theory of any significance post-1936 and up to 1940 in the work of NZ economists.

46 Cf. Forder (2003) where two notions of independence are analysed: independence from banking interests (operating in the domestic banking system) and independence from government. Most NZ economists, barring Sutch, accepted either that the RBNZ should be ‘non-political’ (e.g. Williams 1935, 273) or not fully controlled by government (Belshaw 1939, 243).

47 On Sutch’s idea of independence later elaborated though not altered from the 1930s, see his Colony or Nation? (Sutch 1966, 46–50). On the RBNZ he argues that it ‘is a key factor in maintaining the fullest employment of resources consistent with the avoidance of inflation’. As well, the Bank ‘is in charge of New Zealand’s pool of foreign exchange. Without that, New Zealand simply could not operate its present economic and social policy’ (p. 66).

48 When reviewing the Monetary Committee (1934a, 1934b), Keynes (1935, 193) seemed to be aware of the power of the debate among non-economists in NZ on matters of monetary reform; he noted that one of the Committee’s unintended but useful functions was ‘bringing economic education in New Zealand into closer touch with the economic facts of the country’.

Additional information

Notes on contributors

Geoffrey T. F. Brooke

Geoffrey T. F. Brooke is interest in researching New Zealand economic history and the history of economic thought.

Anthony M. Endres

Anthony M. Endres, Professor, Emeritus University of Auckland has a special interest in in the history of economic thought and, specifically in the history of monetary thought, with publications in the Journal of Monetary Economics and Journal of Money Credit and Banking.

Alan J. Rogers

Alan J. Rogers is interest in researching econometric theory, aspects of microeconomic theory including choice under uncertainty, and the history of economic thought, especially Australasian economics.