A forgotten result of World War One

From 2014 to 2018 countries like ours are marking the centenary of successive phases of World War One.  For New Zealand, next month’s commemorations of the 25 April 1915 Gallipoli landings may well be the high point –  complete, no doubt, with rather saccharine portrayals of the enemy, devoid of any reference to the systematic Turkish massacres of their own Armenian subjects which, rather hauntingly, date from 24 April 1915.

But this is a blog about economic matters.  And for New Zealand, World War One marked the end of the Gold Standard.  Like the other British Dominions, New Zealand did not have a central bank at the time.  Commercial banks took deposits, made loans, and issued paper banknotes.  By law, these had to be convertible into gold, on demand, and banks held substantial gold reserves.  With the UK (and Australia) also on a Gold Standard, this established a very stable series of fixed exchange rates against the currencies of the economies most important to New Zealand.

There had been a departure from the gold convertibility provisions earlier, at the time of the BNZ crisis of 1894 –  convertibility was a double–edged sword, helping to build well-founded confidence in the value of deposits, but potentially exacerbating a crisis if a contagious run on banks looked like taking place. But that suspension was, and was always envisaged as, temporary.

When World War One broke out, New Zealand’s Parliament had already been considering banking legislation which would allow the Government, in an emergency, to suspend the convertibility into gold of notes issued by commercial banks. and declare bank notes themselves legal tender.  We can easily read the contemporary accounts thanks to the National Library’s wonderful Papers Past. The proclamation declaring that New Zealand was at war was not read until 5 August, but on 4 August the banking amendments were passed under urgency in view of the imminence of war.  The legislation also gave the government power to prohibit the export of gold during the period convertibility was suspended.

The next day, as part of New Zealand’s entry into the war, convertibility was suspended and gold exports were prohibited.  The suspension was initially for one month, but it was later extended.   New Zealand bank notes were never again convertible into gold as of right.  LIke many things, it was quite unforeseen in 1914.

What followed was a curious arrangement, which appears to have confused some eminent modern students of historical monetary arrangements (including Barry Eichengreen in his great book Golden Fetters).  Unlike most Gold Standard countries, New Zealand never resumed any sort of gold convertibility requirement after the war was over (unlike, say, the UK which did so in 1925).   Indeed, at least until the negotiated devaluation of January 1933, and perhaps until the opening of the Reserve Bank in 1934, there was no direct or indirect government control over the issuing, or management, of money in New Zealand.  In the jargon, there was no nominal anchor, only customary practice.  In fact, until the onset of the Great Depression, the banks managed their lending policies to ensure that notes were convertible into sterling (but not to gold) at par.

3 thoughts on “A forgotten result of World War One

  1. I happened upon your blog by chance, it randomly appeared on my reader feed by WordPress. I blog anonymously, but published about the interwar period as S A Boyce. Briefly I think you are right and wrong about the gold standard in terms of resumption in 1925. But I still think it would be better to say there was no NZ currency until 1933, and that until then the sterling exchange standard meant the trading banks maintained parity with sterling for trading purposes (until 1931). If you read my A Sterling Effort? you may be enlightened or more confused/disagreable. Some debate would have been nice.


    • Thanks for the comment. The original post was (a) intended mostly about the 1914 suspension (something little known even at the RB), and (b) was done at a time when I was still working for the Reserve Bank (and really just trying out the blog technology, with no readers). I’m not sure I’m persuaded by your description – I’d argue that we had a currency that was inconvertible, the value of which was maintained by convention. But differences might be more semantic than substantive.

      I googled your book, and unfortunately found only one reference (the Wheelers website) and nowhere (eg Abebooks) that had a copy for sale. I would be quite interested in acquiring a copy if possible. (And I noticed your review of the history of Labour Party, touching on monetary issues.)


      • The book is in quite a few public libraries, but I can send it to your address if you can get that to me without making it public. The book grew out of my MA thesis, and there was an article in the NZ Journal of History in 2005, which may be available on-line. I studied at VUW but ended up at Massey. I most recently wrote about the Winebox, there is also an ebook version but I took the link off my blog, so could add the print copy gratis.


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