The actual contractionary phase of the Great Depression lasted from 1931 to 1933 in New Zealand, and the country experienced a contraction in real GNP of 14.6% from 1929 to 1932 (Rankin 1992: 61). The country left the gold standard in 1931, as the UK did, and its experience of the depression was not as severe as the US, since New Zealand had no collapsing asset bubble in 1931-1933 that had been driven by high levels of private debt. Hence it escaped the severe type of debt deflationary spiral that destroyed the US, though New Zealand’s farmers and mortgage holders did in fact suffer a lesser form of debt deflation. One of the major causes of the collapse was the fall in the prices of export commodities from New Zealand on world markets (a major part of GDP), as this spilled over into falling earnings for the primary commodity sector in dairy products, meat and wool (Hawke 1985: 127-128), and into falls in private consumption and investment spending.
The centre-right United-Reform coalition that ruled New Zealand pursued a severe contractionary policy from 1931, cutting government spending and balancing the budget (Wright 2009: 48–49). The economic contraction worsened and debt deflation affected mortgage holders (Wright 2009: 49–50), and by 1933 around 30% of the labour force was unemployed, representing some 240,000 people completely unemployed or severely underemployed (Rankin 1995: 13; Wright 2009: 43).1
After the actual contraction, unemployment began to fall as a recovery began in 1934 after Joseph Gordon Coates, the Minister of Finance, devalued the currency in January 1933 (promoting some export-led growth), introduced a Reserve Bank for New Zealand (established from 1 August 1934) and a public works program (Wright 2009: 54; Easton 1997: 62; he also restructured some mortgage debt, see Sinclair 1990: 216). The fiscal stimulus was greatly expanded by the new Labour government elected in November 1935 under Prime Minister Michael Joseph Savage (whom you can see in the photo below).
Michael Savage presided over the introduction of the welfare state in New Zealand, and the introduction of a universal health care system. His government also introduced a highly expansionary fiscal policy with public works and social spending in 1936, 1937 and 1938. The state of government expenditure and unemployment can be seen in the table below (the data is from Dimand 2002 [1946]: 198).
One can see above how government spending was cut from 1930 to 1933. Increases in expenditure began in 1934 as the recovery ensued. The government deficits were covered by bond sales but also by direct central bank money creation (or “central bank credit”):
“The extensive use of central bank credit ... [sc. in New Zealand was] extremely unorthodox; and the amount involved was, for such a small country as New Zealand, substantial.” (Plumptre 1940: 289).In fact, the central bank money creation bears obvious similarities to policies advocated by Modern Monetary Theory, and the state credit was used in public works spending and state housing.2
After New Zealand adopted strong fiscal expansion, employment fell very rapidly after the stimulus was introduced in 1936: the number of those on relief programs fell from 38,000 in 1936 to only 8,000 by December 1937 (The New Zealand Official Year-Book, Volume 94, Govt. Printer, 1990). By the estimate of K. Rankin, real GNP soared by about 18% in 1936, 5.4% in 1937, and 7% in 1938 (Rankin 1992: 61), driving real GDP back to its trend growth path by 1937 (Wright 2009: 43; 57).
New Zealand created valuable public infrastructure in government public works programs, and that infrastructure significantly aided the private sector in its creation of wealth in the form of production of goods and services:
“... public works [sc. in New Zealand] may to a large extent be called both an industry in their own right and a powerful aid to industry and commerce in general. Public works have, of course, been used for many different purposes.In addition, the government helped to finance home loans via central bank credit (Wright 2009: 57) which created a large stock of housing.
During the depression they were, among other things, part of an elaborate system of unemployment relief. In the hands of the Labor government in 1936 onward they became an instrument for organizing economic recovery by the injection of purchasing power in the community, while at the same time resuming their basic function of developing the resources of the country. Within a couple of years of Labor’s return to office the Public Works Department had been thoroughly re-equipped and was employing over twenty thousand men, with an annual expenditure in the region of twenty million pounds. The range of work done by the department is very wide, the main items being roads, railways, public buildings, land improvement, and hydro-electric development. This last has been, indeed, one of the state’s main direct contributions to the country’s industrial progress.” (Wood 1944: 121).
All in all, New Zealand’s recovery shows the success of Keynesianism in action.
Footnotes
(1) New Zealand’s population in 1933 was only 1,547,100.
(2) These policies might have inspired the New Zealand Social Credit Party (1953– ), which, however, is probably not very appealing to left-wing people owing to that movement’s association with the right.
Update:
Reading the original post again, I thought I left out some important economic data. So I have updated it.
BIBLIOGRAPHY
Chapple, S. 1994. “How Great was the Depression in New Zealand? A Neglected Estimate of Inter-war GNP,” New Zealand Institute of Economic Research (Inc), Wellington.
Dimand, R. W. 2002 [1946]. Origins of Macroeconomics. Vol. 10, Routledge, London.
Easton, B. 1997. In Stormy Seas: the Post-War New Zealand Economy, University of Otago Press, Dunedin.
Hawke, G. R. 1985. The Making of New Zealand: An Economic History, Cambridge University, Cambridge and New York.
Plumptre, A. F. Wynne. 1940. Central Banking in the British Dominions, University of Toronto Press, Toronto.
Rankin, K. 1992. “New Zealand’s Gross National Product: 1859–1939,” Review of Income and Wealth 38.1 (March): 49–69.
Rankin, K. 1995. “Unemployment in New Zealand at the Peak of the Great Depression,” University of Auckland, Working Papers in Economics No. 144.
Sinclair, K. 1990. The Oxford Illustrated History of New Zealand (new edn), Oxford University Press, Oxford.
Wood, F. L. W. 1944. Understanding New Zealand, Coward-McCann, New York.
Wright, M. 2009. “‘Mordacious Years’: Socio-Economic Aspects and Outcomes of New Zealand’s Experience in the Great Depression,” Reserve Bank of New Zealand: Bulletin 72.3 (September): 43–60.
