Month: March 2015

A forgotten result of World War One

Michael Reddell New Zealand economic history

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.

Good institutions – and the lack of them

Michael Reddell Institutions

I’ve read two very different books lately about societies in which the powerful plunder, while the legal systems offers few reliable protections against such abuse.

The British novelist Rana Dasgupta now lives in Delhi and has written Capital.  The title of this series of vignettes is a play on words –  Delhi is both the political capital of modern India, and it is a city in which moneymaking and trading on the power of political and bureaucratic connections is rampant.   India isn’t a country I know that much about, and the book was both fascinating and disconcerting. India has had democratically elected governments since Independence – in contrast, say, to  Burma, Bangladesh, and Pakistan – but it is scarcely a credit to democracy.

Written in a very different style, US academic Karen Dawisha’s Putin’s Kleptocracy is a relentless detailed account of the way Vladimir Putin has played the Russian system, to enrich himself and his cronies, as part of the complex mesh of, sometimes extremely brutal ways, he has established pretty pervasive control.  At best, Russian can now be described as an authoritarian quasi-democracy. Dawisha’s UK publisher refused to publish the book, apparently in fear of the weight of the onerous UK libel laws falling on them, but Simon and Schuster in the US have published it.

Both books are recommended, but they are very different.  Dasgupta is an easy read –  a sometimes dizzying series of pictures of people, his own Indian family included, that illustrates what modern Delhi has come to represent.  For 450 pages of text it has 4 pages of footnotes.  Dawisha, by contrast, has 350 pages of text and almost 70 pages of bibliography and notes –  the detail is what makes the case against Putin so strong.

Dasgupta himself draws some parallels:

“Earlier in this book we saw how fondly and often India was likened to America.  But for the most part, this was pure ideology. India has much more obvious similarities to America’s alter ego: Russia.  India and Russia had both had systems of state-run capitalism that had foundered by the 1980s, generating a new class of clever, underground entrepreneurs who came into their own after the old systems – almost simultaneously – collapsed.  Both countries developed systems, after that point, in which the existence of electoral democracy did not prevent the emergence of a class of oligarchs who used the political system to take control of their countries’ essential resources.  Both of them had capital cities, Moscow and Delhi, where the people watched with resentment as a small number of people used the immense power of large-country politics to their immense advantage.”

A year on from his book, with all the subsequent adventurism in Ukraine, this may be a little unfair to India.  But I was struck more by the contrast between these two countries, and the advanced Northern European tradition of which New Zealand is part.  No country has been totally free of corruption, and constant vigilance is required against, for example, sweetheart deals with those who cosy up to the powerful.  But it is difficult to see how India or Russia could reach even New Zealand’s (barely) First World living standards without far-reaching changes in the political and legal systems.  And, as always, entrenched interests, that don’t arise from nowhere, are a powerful obstacle.  And perhaps that is why, with few exceptions, the countries that were rich 100 years ago are still the rich countries today, as Ed Glaeser illustrated a few years ago.