Harry White, and reconstructing the international financial system

Harry White and the American Creed: How a Federal Bureaucrat Created the Modern Global Economy (and Failed to Get the Credit), a new book by James Boughton, was my weekend reading.

Boughton, now retired, was formerly the official in-house historian of the International Monetary Fund (IMF). White was a fairly senior official in the US Treasury, a key adviser to Secretary Henry Morgenthau, from the late 1930s to 1945, and has a fair claim to have been the technocratic father of the IMF (and was then for a short time the first US Executive Director of the IMF). It was a short official career and he died quite young, but has an interesting – and contested – story nonetheless.

What of the book? Well, ignore most of the title. I’m still not at all sure what the “American Creed” is supposed to mean in this context, and the bit about “created the modern global economy” is simply laughably wrong (and seriously misleading to the casual bookshop browser). It is a full biography, but two-thirds of the book is about the last 7 years of White’s life (1941-48), including extensive discussion of the allegations which have dogged his reputation ever since that White may have been a Soviet spy.

By the time White became even moderately senior in the US Treasury, pretty much every country had moved off the Gold Standard (the European “gold bloc” countries not until 1936) and most major exchange rates floated. In the diminishing number of democratic countries, private capital movements were mostly still free (although in the US for example private holdings of gold were simply outlawed). Views differed on whether the new exchange rate regimes were a “good thing” or otherwise (in another book on my shelves there is a record of White on an official trip to London in the mid 1930s talking to prominent business figures who had embraced an era of floating exchange rates, but officialdom was often less enthusiastic). In some circles then – and still today (Boughton seems guided by this story) – there was a narrative that non-fixed exchange rates were a material element causing a backing away from globalisation and multilateral trade in the 1930s (a story that I don’t think stands much scrutiny). It is certainly true that floating exchange rates in peace time were something of a novelty.

Then came the war (the US eventually joining in late 1941) with the attendant debt, disruption, and extensive controls over all manner of aspects in life in pretty every combatant country (and even many neutrals).

White wasn’t heavily involved in the creation of lend-lease, that innovative form of cross-country support initiated by the US (although they too were recipients of lend-lease assistance, New Zealand (for example) being a net provider of assistance to the US) but eventually had oversight responsibility for the administration of the scheme. The real focus of his efforts as described in the book was on post-war planning, which absorbed a huge amount of resource among (in particular) US and UK officials even as the physical conflict raged.

As is fairly well known, there were rival conceptions of the details of what the post-war international monetary order should look like, exemplified by the ideas of White (for the US) and Keynes (a key adviser to the British). But what no one seems to have been in much doubt about was that a regime of fixed (but adjustable) exchange rates should be established, and that if current account convertibility (ability to buy, sell and pay for goods and services freely from abroad) was over time to be a goal for many/most, private capital mobility was (at best) looked on with considerable suspicion (neither White nor Keynes were keen). If you weren’t going to allow private capital mobility, not only were fixed exchange rates were more or less unavoidable but governments had to be sure of their own access to foreign reserves to manage fluctuations in the demand for their respective currencies. There was no appetite for a return to a classical Gold Standard, but also a surprising attachment to the idea that gold should still have a place in the international monetary system (one presumption being that countries would be reluctant to accumulate substantial foreign reserves simply in the currency of another country without the ability to convert to gold).

If there were different conceptions there were also different interests and contexts. The US, for example, had been a net provider of assistance to the rest of the world during the war, and so although it would emerge from the war with large domestic debts it had not accumulated an adverse international position. The US under Roosevelt also came and went a bit on to what extent they sought to undermine the future of the British Empire and British Commonwealth relationships (notably the imperial preference trade arrangements, and the “sterling area” which had developed after Britain went off gold in 1931). The UK, by contrast, had suffered a real large deterioration in its external financial position (as well as having lots of domestic debt) as a result of the war, and had accumulated huge volumes of blocked sterling liabilities to Commonwealth and Empire countries (goods had been sold to Britain, sellers had been paid in sterling, and the resulting central bank balances were not readily convertible into other currencies – notably dollars). New Zealand was among the countries that had accumulated such large claims on the UK. The overhang of sterling liabilities was to be an issue for decades. The US was keen on a fairly early move to convertibility, while the UK was wary, to say the least. (There were, of course, many other countries, including the exiled governments of occupied countries like the Netherlands and Norway, but the bulk of the discussion and negotiation was between US and UK officials – often led by White and Keynes (both of whom seem to have been awkward characters in different ways).

In institutional terms the US conception won the day. It was almost always going to. The US was by the biggest economy, was not itself dependent on external finance (although had a clear interest in a general post-war economic revival), and of course whatever was agreed between governments had to get through a US Congress that – as ever – was not generally under the control of the executive. And, in truth, the basic IMF structure (my focus here although the World Bank – International Bank for Reconstruction and Development – also emerged, less controversially from this process) was an elegant one. Countries would fix an exchange rate to the USD, while the USD itself would be convertible (for governments/central banks) into gold at a fixed rate. Each member country would deposit some portion of their gold or USD reserves with the Fund, which in turn would establish rights for countries to “borrow” from the Fund in times of temporary balance of payments pressures. Countries could make modest exchange rate adjustments themselves, but larger adjustments – to address structural imbalances – would require the approval of the Fund, itself governed by Executive Directors appointed or elected according to the quotas negotiated for each country. I put “borrow” in quote marks, as formally the IMF did not do loans, but things that were more like currency swaps – and obscure currency swaps (partly modelled on what had been done with the US’s own Exchange Stabilisation Fund in the 1930s) were thought easier to get through Congress than loans. In economic substance there was no difference.

Boughton was, as I noted earlier, the official in-house historian of the IMF. Since the IMF still exists today, it is a perspective that leans him to seeing what was created in 1944/45 as an unquestionably good thing. I’m much more sceptical. One could wind up the IMF today and the world would not be worse off. And one could mount an argument that if negotiated arrangements were almost inevitable in 1945, there is still little reason to suppose that the creation of the Fund was a net positive even then.

It didn’t – couldn’t – deal with the really big overhanging issues (including, but not limited to, those blocked sterling balances) and was part of state-led arrangements that enabled for a time some deeply unrealistic post-war exchange rates. Britain, for example, went through a period of seeking further US financial assistance, was then forced by the US in exchange to allow early convertibility which went badly wrong very quickly, and only finally took the deep exchange rate depreciation that was always needed under pressure in 1949. It is not hard to think that restoring floating exchange rates pretty much as soon as the war ended might have been a better way (also reducing the pressure later for the Marshall Plan – a point some US sceptics made even at the time).

But whether or not the creation was a good thing, there is little doubt that White was the technocratic father of the Fund – which exists today even if the world it was created for almost wholly doesn’t – and Boughton has written a useful and interesting account of aspects of that period, complementing the range of other books (many on the Bretton Woods conference in 1944 where the final details were negotiated with 40+ allied countries in attendance).

There is lots of other interesting detail in the book (occasionally too much – even as a former Washington resident I did not need every single street address White lived at), including White’s involvement in helping flesh out the madcap Morgenthau Plan that envisaged turning post-war Germany into primarily an agricultural economy. White owed his position to Morgenthau who in in turn owed his position and influence to his friend and neighbour Roosevelt. Once Roosevelt died, White’s hour in the US government system had passed,

One is left with the impression of an influential, extremely hardworking, smart individual, but also an abrasive and not altogether pleasant one. In an age of great figures – good and evil – my sense is that no one would today be writing biographies of him if (a) the IMF no longer existed, and (b) it were not for the espionage allegations (the two aren’t unrelated since it was uncomfortable for the Fund to have such allegations about one of its “founders”).

The espionage allegations were not my main interest in buying the book. Not being American I’m probably less interested in any case against White than in, say, the truth about Bill Sutch. Boughton goes to great lengths to review and rebut in detail many of the claims that have been made ever since the 1940s. In some cases, he seems very persuasive, and in others a bit less so. What is now unquestionable is that some of White’s good friends and colleagues were Soviet agents in one form or another (in some cases very active), and even Boughton concedes that at times White may have been indiscreet in his ties with people who, while Soviet officials, were still wartime allies and official interlocutors. But if Boughton’s is the pro-White case, other serious people (without IMF ties) still seem equally certain of White’s guilt. Perhaps we will never really know.

New Zealand participated in the Bretton Woods conference where the new international monetary arrangements were settled. Our key delegate was Walter Nash then (simultaneously) Deputy Prime Minister, Minister of Finance, and resident NZ Ambassador to the United States. His small delegation including the Secretary to the Treasury, Ashwin, the then Deputy Governor (later Governor) of the Reserve Bank, Fussell, and the highly regarded economist AGB Fisher. There were two main working groups at the conference – one on the Fund chaired by White, and another on the World Bank chaired by Keynes. Nash chaired a less important working group.

Bretton Woods was, in many respects, not a matter of great moment in New Zealand (and it is interesting that neither the war economy nor political and external affairs volumes of the NZ official history of World War Two seem to have any mention of the conference or the issue). New Zealand was firmly in the sterling area – our pound pegged to sterling – and Nash had a strong aversion to overseas debt. But there was still an important defensive interest, since Labour has put in place pre-war extensive exchange controls and import licensing restrictions and had no intention of removing those restrictions in peacetime.

Digging around various other books on my shelves, it seems clear that Nash and the NZ delegation did not make a great impression. Ed Conway’s book, The Summit, has a few comments. Introducing Marriner Eccles, the then chair of the Fed, he suggests that Eccles’ oratory “would give New Zealand’s dreary Walter Nash a run for his money as the most self-important and tedious delegate”. The relative size of each country’s quota in the Fund was then, as now, a matter of politicking dressed up behind an apparent technical façade. New Zealand was among those objecting to the US proposal (not helped by the fact that Nash apparently confused sterling and dollar amounts) “in a ten-minute sermon from the country’s dreary lead negotiator, the Hon Walter Nash”. Conway quotes from the contemporary diary of UK delegate/economist Lionel Robbins “throughout the conference {Nash] has shown a tendency to be about three bars behind the band”.

A more recent history of New Zealand diplomacy during the war, by Gerald Hensley, has a more substantive discussion. He notes that the delegation had a good grasp of the basic New Zealand needs “But not one had been able to do any deeper thinking about the implications of the Fund and on this occasion it showed”. He goes to quote from a contemporary British delegation report back home which concluded that Nash was simply out of his depth (“He understood comparatively little of the technicalities, but could not restrain himself from intervening in an embarrassing manner on many complicated points which were, moreover, not the least concern to his country”). The Australian delegation also recorded complaints.

As Hensley notes, however, the government’s (and Nash’s) main focus was on ensuring that nothing in the agreement would interfere with the government’s ability to maintain exchange and import restrictions. Nash’s official biographer, Keith Sinclair records that “according to the notes he made at this time, he asked the chairman Harry D White whether exchange controls were permissible, provided that exchange was used to pay for all current transactions. White replied that this was his understanding, and he asked the meeting if there was any dissent. There was none.”

(Which is all very well but it was not be until the early 1980s that New Zealand finally removed all restrictions on even current account transactions)

If Nash himself was content with the final form of the agreement, there was still a significant amount of angst back home. Instructions came from the Prime Minister that New Zealand was not to sign adhesion to the Final Act from the conference, and in the end the two most junior officials in our delegation were allowed merely to sign a document that certified that it was a true record of the conference proceedings. That Nash himself was persuaded is reflected in a letter to Harry White that was read to the conference by a senior US delegate as the conference was winding up (Nash had had to leave early)

“Owing to the urgency to make a train last night it was not possible to say goodbye before leaving for New Zealand. In congratulating you and those working with you on the foundation work in connection with the Fund and the Bank I affirm that it can easily be the greatest step in world history with possibilities of removing one of the major causes of war, if not the major cause.”

Talk about overblown political rhetoric.

New Zealand was one of a very small handful of countries that participated in Bretton Woods that did not join the Fund early on (the most prominent of course was the Soviet Union, but even Australia did not join until 1947). There is an entire article to be written on this strange history one day (I have a big folder of papers I collected a few years ago but cannot immediately find it). There was significant unease on both sides of parliamentary politics with talk of free votes. It seems to have been one of those issues that few cared much about (either way) but a minority (against) felt very strongly about. The Labour government failed to take any lead (there was significant dissent in their own caucus), and by the 1946 election campaign the leader of the National Party was openly opposed to joining. There seem to have been a range of concerns, some reasonable, some not, and it is not as if there was no sensible dissent in other places either (I read one speech from a senior former UK minister in the House of Commons ratification debate expressing concern that the IMF would allow the UK less exchange rate flexibility than the UK had needed in 1931). Between close ties to the UK, some unease about an emerging US-led system, a commitment to the sterling area and UK trade preferences, all combined with on the one hand the NZ regime of controls and, in the late 40s, New Zealand’s strong external position (we revalued our currency in 1948) there wasn’t much momentum, before the undertones of Social Credit type concerns were mentioned. When New Zealand did finally sign up in 1961, Hansard still records unease from Labour members that IMF membership might threaten New Zealand’s full employment record.

New Zealand did join. New Zealand has borrowed from the IMF on a few occasions ( a former colleague recently described to me the gaming of the rules of one particular facility in the 1970s). It isn’t clear that joining or not really made very much difference then or now – these days we get only not-very-useful advice and a few job opportunities for officials – although it would these days look odd not to be a member.

(Personally I’m quite glad NZ finally did join as four years on the IMF payroll – two resident in Zambia, two as Alternative Executive Director in Washington – were by far the highest paid of my career, and the only technical assistance mission I ever did for them, in China, was conveniently timed to pay the bills for our wedding.)

UPDATE: Someone inquired about my observation that NZ was a net provider of lend-lease assistance to the US. On checking, I’m reminded that in accounting terms the two sets of flows were roughly even (we received about as much as we provided), however Hensley’s book (p250) notes that this somewhat misrepresented the flow of real value, since much of what New Zealand provided was valued at pre-war prices, while material received from the US was typically accounted for in contemporary price terms. To the extent this was so, NZ was a net provider to the US.

Reading Michael Cullen

August 30, 2021August 31, 2021 Michael Reddell Monetary policy, New Zealand economic history

There aren’t many New Zealand political memoirs/autobiographies – and even fewer diaries (although I was recently reading John A Lee’s for 1936-40) – and most of them aren’t that good. Voracious book buyer that I am, I usually don’t buy them until they turn up very cheap in a charity shop or community book sale. After all, sometimes there are interesting snippets and you never know when some angle on some event might prove at least somewhat enlightening.

But I thought I’d make an exception for Michael Cullen. He had, after all, been an academic historian in an earlier life, and was unquestionably smart and funny, and had been Labour’s finance/economics spokesman for 17 years and Minister of Finance for nine years (terms really only rivalled in modern New Zealand by Walter Nash and Rob Muldoon). I’d probably have been better off waiting for the charity shop copies to turn up.

There were interesting bits and pieces. Early chapters of autobiographies are often complained about but I almost always like them. There was, for example, the ancestor who was the last person burned at the stake in England for heresy (twice actually). Or the snippet of Cullen and his first wife buying their first house in Dunedin in 1971 for $10500 – “only twice my annual gross salary” as a new lecturer (lecturers at Otago now seem to start at about $82000). Or the prize he won at about the same time for the best University of Edinburgh PhD history thesis that year – enough to pay off in full the 30 per cent deposit they’d borrowed from his wife’s parents. Or the picture of the Dunedin Labour Party in the 70s – including the raffle organiser (“Labour used to be a raffle-funded party”) who “made a Ponzi scheme look positively generous” by offering a first prize in one raffle a full book of tickets in the next raffle.

And there were the national politics snippets, including the observation/claim that David Lange had persuaded Roger Douglas to stay in politics in 1981 by promising that if/when Lange became leader Douglas would be his Minister of Finance. As Cullen notes, some things might have been quite different…..although it is interesting to wonder just how much. Cullen’s perspectives – as senior whip and then junior Cabinet minister (often written in counterpoint to Michael Bassett’s book on the period) – on the Lange/Douglas tensions over 1978/88 were worth having, including his suggestion that (given the tensions, that only built further) perhaps Lange should have sacked Douglas in April 1987.

But it tended to go downhill from there, dramatically so for his treatment of the nine years of the 5th Labour government, which takes up almost half the book. Much of it has about it the character of a family Christmas letter from proud parents who just don’t know when to stop. If you want a canter through the things the government did during those nine years, trivial and not, I guess this is the book for you. Almost everyone did everything ably. But to anyone who was around New Zealand at the time, you simply aren’t going to learn very much (although I was surprised to read that Jim Anderton had been – so Cullen claims – one of the ministers most keen on lower company taxes late in the government’s term).

Two things in particular struck me. The first was that while Cullen was a Labour Party MP and minister, clearly he was not a Labour Party person (consistent with this in the early days his then wife had been more active than he was), and there is very little on the internal ructions that convulsed the party a few decades ago. More generally, there is little insight anywhere in the book on the many really significant political figures Cullen worked with over the years, none at all on Helen Clark (or Heather Simpson for that matter). There was almost no insight on some of the key public servants, or anything on the tensions. interactions etc. And this 12 years after he left office. Cullen seems to have reasonably kind words for most people – exceptions I think being Richard Prebble, Don Brash and (mixed with some admiration/envy at his success) John Key – but no insights. And if he ever worked with Grant Robertson, Jacinda Ardern or Chris Hipkins when he was Deputy Prime Minister and they were in Clark’s office, you wouldn’t know it from the book.

Presumably Cullen kept no diaries, and he notes somewhere in the book that he hadn’t been very good at answering questions from researchers over the years about past events because his mental approach was to compartmentalise and then move on (and of course he carried a formidably huge load during those Clark years). And writing the book can’t have been helped by the knowledge that his time might be very short (as it turned out to be) and that between illness and Covid he was only able to make a single trip to Dunedin to consult his papers in the Hocken Library. In a bigger country, he’d almost certainly have had a research assistant he could have drawn on. As it was, he tells us he drew heavily on what happened to be available on the web.

But there is also a sense of someone who – despite the training as an historian (which he often reminds us of) – just wasn’t that reflective. 50 years on from that house purchase he told readers about, house prices are appallingly high – and these developments were going on on his watch too – but there is nothing on how, technocratically and politically, his generation bequeathed that disaster. He was Labour’s finance spokesman for 17 years, beginning as the reforms (which he mostly supported) were supposed to be starting to pay off in reductions in the productivity gaps between us and the rest of the advanced world. Under his watch there were various bows in the direction of aspiring to make a difference. And yet here we are, with the gaps wider than ever. There is no sign anywhere in the book of any reflection, self-questioning, or even curiosity about the failure. Perhaps the only note of regret about policy I recall is a regret that the government had not been more active in determining the strategy of Fonterra, the behemoth they enabled but which also failed to deliver.

Perhaps it would have been different if he’d had more time. Even on the text he did write it is not hard to see where a good editor could have insisted on cutting out at least 50 pages (of a 400 page book) – perhaps including the line that knighthoods were a good thing because they gave a lot of pleasure to the recipients.

Of course, part of my interest in the book was in its treatment of Reserve Bank issues, he having been the Minister responsible for the Bank through nine sometimes difficult years, and Opposition spokesman beginning little more than a year after the 1989 Reserve Bank Act had come into effect. The Reserve Bank monetary policy framework has not, shall we say, been without its controversies over those 30 years – including the often very antagonistic approach taken by Jim Anderton whose party at times rivalled Labour on the left in the 1990s.

But again, it was curiously bloodless. You’d not have known, for example, that in his early days (perhaps as late as the 1996 election, as I recall us debating it at the Bank at one election and I was working overseas in 1993)), he (as Labour’s spokesman) championed a change to the inflation target (then 0-2 per cent annual inflation, with caveats). But Labour’s proposal – they needed product differentiation from National, the Alliance, and New Zealand First – was to adopt a target range of -1 to 3 per cent inflation. As I recall it, part of the aim was to capture more of the headline inflation shocks (oil prices, tax changes etc etc), but it could have led to the curious world in which the Bank was supposed to be more or less indifferent to inflation going negative, which didn’t seem as though it would prove very robust at first confrontation with experience.

Perhaps charitably, Cullen does not mention the (frankly fairly incompetent) way we ran monetary policy over 1997 and 1998 (the infamous monetary conditions index) but nor does he mention his oft-expressed (and somewhat valid) concerns about the volatility of both the exchange rate and interest rates, or his calls for changes to the Policy Targets Agreement and/or for an independent inquiry into the conduct of monetary policy. As it happened, the PTA was changed when Cullen took office, to add a new form of words that was supposed to appear substantive but which, to this day, no one really knew what the words actually meant for policy (I’ve long argued “precisely nothing”). At the Bank we were sufficiently uneasy that in the first few weeks of the new government I was sent on a whistle-stop 10 day tour of the RBA, the Monetary Authority of Singapore, the Bank of Japan, the Bank of England, the Bank of Canada, the Federal Reserve and the US Treasury to brush up our knowledge of, and perspectives on, operationalising foreign exchange intervention.

Out of office Cullen had called for an independent inquiry – which went over well with the left of his own party, and with the Alliance, with which Labour was mending fences. In office, he commissioned an inquiry, but consciously and deliberately chose as his reviewer someone who could be counted on not to make trouble – a leading academic author on inflation targeting, Lars Svensson (he could quite readily have chosen as reviewer any number of other quite reputable people – just one example being Bernie Fraser the former Governor of the RBA (and known as somewhat left-leaning). As it was, Svensson predictably made no difficulties and at times we (I was one of the small secretariat) had to talk him into revising down his effusive praise of Don Brash. He did propose adopting an MPC – but made up solely of executive staff of the Bank – a proposal that Cullen rejected, and what came out of the review were very minor changes indeed (the Governor to no longer chair the Bank’s Board, the Board to write an Annual Report). But he’d been seen to have had a review.

If there were ongoing government niggles re the Bank’s monetary policy they must have been quite limited for a while. In 2001 we’d been quite pro-active in easing monetary policy (somewhat burned by 1997/98) both in response to the global tech slowdown and after 9/11 (decisions I still think were warranted, but which some more hawkish people differ on). But Don Brash was still a bit of an issue. He’d made a high profile controversial speech to the government’s Knowledge Wave conference in 2001, stepping well outside areas he had any policy responsibility for (and, not surprisingly, championing policy approaches that weren’t really to Labour’s liking). Powers that be in the Beehive were understood to be not best pleased.

Nothing of all this in in the book.

Don Brash resigned as Governor on 26 April 2002 to seek selection as a National Party candidate at the forthcoming election (having been pro-actively recruited and given to understand he’d get a high list place, and perhaps a reasonable chance of being Minister of Finance – in the unlikely event National was to win). Cullen writes about this resignation, but comments only that he was “flabbergasted”, proceeding to write some generalised negative comments about Brash and his self-belief. As Don records in his own autobiography of his conversation with Cullen “I don’t think he was pleased but he was polite”, but he goes on to note “much more polite than Helen Clark was later in the day”. As I understood it, the PM had been (understandably in my view) outraged, felt it was something of a betrayal (to step straight out of high public office onto the campaign trail) and was specifically very aggrieved at the Bank’s Board (and specifically the then chair of the non-executive directors) – responsible to Cullen – for having written an employment contract that did not enforce a decent stand-down period. All of which might have been useful points for Cullen to have included, rather than just glib remarks (true or not) about Brash’s “extraordinary sense of self-belief”.

Appointing a new permanent Governor was a challenge. Under the law, the Governor had to be someone the Board nominated, but the Minister could reject a nomination and ask (endlessly, in principle) for another. Brash’s deputy, Rod Carr, filled in as (statutory) acting Governor including through the election campaign period, and assiduously sought to get the permanent role. Cullen records – and this I did not know – that the Board had formally recommended that Carr be made Governor.

I had nothing personal against Rod, but he was so dry that he made even Brash look slightly moist. I was not in the least convinced that he could adopt the somewhat more flexible approach I was looking for. I rejected the recommendation….Finding a replacement posed a problem, especially if my action was interpreted to mean a lack of commitment to the basic principles of the Reserve Bank Act. I was saved by Alan Bollard. He offered to put his name forward.

Of course, it would not have been hard to have found someone else, except that the understanding was that the word had gone out that no one associated with the Brash Reserve Bank was to be appointed. Thus, Murray Sherwin – until recently Deputy Governor, then Director General of Agriculture – would have made a good Governor, but he’d been of the Brash era. Less plausibly – though probably with politics more akin to Labour’s – another former Brash Deputy Governor Peter Nicholl (then Governor of the central bank of Bosnia) might have been keen (although I know the Bank’s Board wasn’t).

Again, what Cullen doesn’t record was the fascination with the RBA in the Beehive (including the 9th floor at the time). In some ways it was understandable – the RBA was run by a succession of competent people, the Australian economy was generally doing better than New Zealand’s, real interest rates were generally a bit lower (visiting RBA people would even encourage us to be more like them and we might get our interest rates down to “world” levels) and had been less volatile. My diary records a conversation with someone who had been to visit Peter Harris – now an MPC member, then Cullen’s main economic advisor – during this period, and Harris had apparently even toyed (perhaps not fully seriously) with the idea that they could get Glenn Stevens (then Deputy Governor of the RBA) as Reserve Bank Governor. The Prime Minister was known to want a policy target mirroring the Australian one (centred on 2.5 per cent inflation), something that Alan Bollard successfully resisted).

(Cullen goes on to record that he also knocked back SSC’s recommendation of Mark Prebble to be Secretary to the Treasury, primarily on ideological grounds. That was interesting but he never tells his readers that at the time – when Cullen was deputy PM – Prebble was chief executive of DPMC, that Clark had attacked that appointment in 1998 (again on ideological grounds) but had acquiesced in Prebble’s reappointment in 2000). It might have been interesting to have read some reflection on what changed.)

The period from late 2003 to the end of Labour’s term was a difficult one for monetary policy. Cullen does a little bit of sniping in the book – mainly at the idea that the Bank was engaged in targeting inflation forecasts (he words it a little differently but it is the implication of his repeated comments about an output gap focus) – but he displays almost no awareness of what was going on (including the sustained and significant rise in actual core inflation, the demand effects of rapid growth in population, the demand effects of the housing market (prices and volumes), the strong growth in the terms of trade, or the implications of fiscal policy. And I don’t think he once mentions the exchange rate, which became an increasing bugbear through this period, both for him and for his handpicked Governor. The best evidence for the proposition that throughout those years we did not tighten aggressively enough early enough is that core inflation moved to and beyond the top of the inflation target range (as benchmark, in the subsequent decade core inflation undershot, but never quite fell outside the bottom of the band).

There was an increasing search for some sort of circuit-breaker, with a particular focus then on things that might help dampen housing market pressures without necessitating further OCR increases and further rises in the real exchange rate. This culminated first in the Supplementary Stabilisation Instruments project, which Cullen claims to have known almost nothing of. This is the relevant extract from his book.

Both the Reserve Bank and the Treasury realised that in that situation [economic imbalances] the use of the official cash rate as almost the only means of dealing with such imbalances was far from satisfactory. It was rather like many anti-cancer drugs in causing significant collateral damage, so they had decided to work on what they called a Supplementary Stabilisation Instruments Project. This was their initiative, not mine, but it got John Key excited and he managed to invent all kinds of malign intentions the government had. I have no idea where the project went since it did not seem to produce any results.

Which simply wasn’t true. House prices became such a political problem there was a special unit set up in DPMC to look at what might be done, and John Whitehead and Alan Bollard agreed with Cullen to commission the SSI work. In a release at the time, Cullen claims that

He expressed concern at the impact of the high dollar on the export sector but said the Supplementary Stabilisation Instrument Project, the terms of which were drawn up by the Treasury and the Reserve Bank and released without reference to the government, would explore options to reduce pressure on the exchange rate by reducing monetary policy reliance on the OCR.

I can’t remember if the precise Terms of Reference were cleared by his office, but it was made very clear (from the Beehive) that difficult political options (capital gains taxes, public sector savings programmes, anything around the welfare system) were out of scope. These specific exclusions are mentioned in the published Terms of Reference (page 39 here). Cullen’s hands were all over this commission (my diary records a week or two prior an observation that Cullen, Bollard, and Whitehead had all apparently been keen on some particular tweaky tool I’d devised – I can’t recall what it was but am embarrassed that it seems to have been an LVR-based control).

The Minister goes on to claim that “I have no idea where the project went since it did not seem to produce any results”. Except that, readily available on the web, is our report to him on the analysis and possible tools, from March 2006.

And did it go no further then? Well hardly. Instead there was some considerable interest in the idea of a Mortgage Interest Levy – a scheme under which we might raise the cost of mortgages without raising the OCR – and I and a Treasury counterpart spent (what seems like) months devising something that might be workable, exploring fishhooks etc etc. That paper is here, as is the report to Dr Cullen.

And was this simply a bureaucratic conceit, or no interest to a busy Minister of Finance? Well, no. Actually, Cullen tried to persuade the National Party to go along. I knew this was so, but looking through some old papers found a press release from Michael Cullen, as Minister of Finance (9 February 2007), saying so and attacking Bill English (new National finance spokesperson) for not being willing to go along.

National leader John Key and finance spokesman Bill English are clearly at odds over the concept of a mortgage levy, which could potentially ease pressure on exporters, Finance Minister Michael Cullen said today.

…I can now reveal that Mr Key and Mr English were invited to a meeting in my office before Christmas to discuss alternatives to existing monetary policy instruments to tackle inflation.

…At that meeting Mr Key took a balanced and serious approach. Mr English though largely remained silent and his body language spoke volumes about his willingness to embrace new measures that may have a chance to help the New Zealand economy

And so on.

And at that Cullen requested that further work be discontinued.

Cullen was a busy man, but it wasn’t as if this was an isolated project. The Minister continued to express concerns – quite serious ones. Not six years after his Svensson review had reported, Labour initiated a full-scale Finance and Expenditure Committee review of monetary policy (quite possibly intended more for shown than substance). More than once Cullen opened mused about the powers open to him under the Reserve Bank Act (but never used) to direct the Bank to pursue a different target (I wrote the internal paper musing on how we should respond, what options the Minister had, what constraints there were on him) and he also became increasingly critical of our public line that fiscal policy was adding to demand and inflation pressures, all else equal putting the real exchange rate and the OCR higher than they otherwise would be. Labour was on its late-term fiscal splurge (helped by Treasury advice that concluded the boom-time revenues were mostly permanent) and although the budget was still in surplus, running down that surplus actively added to the imbalances in the rest of the economy. For Cullen no doubt it was politically awkward – Labour was well behind and the polls, and the money was there. We were reduced to (among other things) writing boxes in the Monetary Policy Statement to explain our (entirely conventional view).

My point here is not that Cullen would necessarily have remembered all of this – busy man etc – but there is not even a hint of any of it. The book would have been much better with at least some of it, rather than the Christmas letter type of account.

Out of curiosity, I also looked for Cullen’s account of the genesis of deposit guarantee scheme. It is a somewhat self-serving account, including his attempt to blame the entire South Canterbury Finance situation on the National government that took office the following month. I wrote my own account of those few days here (I was very closely involved), and included this paragraph.

The main, and important, area in which Dr Cullen departed from official advice was around the matter of fees. We’d recommended that the risk-based fees would apply from the first dollar of covered deposits (as in any other sort of insurance). The Minister’s approach was transparently political – he was happy to charge fees to big Australian banks (who represented the lowest risks) but not to New Zealand institutions (including Kiwibank). And so an arbitrary line was drawn that fees would be charged only on deposits in excess of $5 billion. Apart from any other considerations, that gave up a lot of the potential revenue that would have partly offset expected losses. The initial decision was insane, and a few days later we got him to agree to a regime where really lowly-rated (or unrated) institutions would have to pay a (too low) fee on any material increases in their deposits. A few days later again an attenuated pricing schedule was applied to deposit-growth in all covered entities. But the seeds of the subsequent problems were sown in that initial set of decisions.

They were his calls to make, and it was an election campaign, but perhaps a political memoir would be more helpful in revealing some of the tradeoffs, tensions, risks etc (or even the fact that – especially with Parliament dissolved – a Minister of Finance could issue such blanket guarantees with few/no checks and balances.

These were just the areas that I know something about in depth. So I’m left wondering what weight I should put on any of the rest, other than as chronology (which I too could get from the web).

On the front cover of the book, Helen Clark describes Cullen as “one of our greatest finance ministers”. There aren’t that many (relatively long-serving ones) to choose from but I’d hesitate to endorse the accolade. Running down the public debt was an achievement but (a) demographics, (b) a prolonged, but productivity-lite, boom, and (c) the terms of trade ran strongly in his favour, and the dam burst in the final three years of his term. I guess he has monuments to his name – Kiwisaver and the NZSF (“Cullen fund”) – but then so does Bill Birch from his time as Minister of Energy, and the best evidence to date is that Kiwisaver has not changed national savings rates, and it isn’t clear what useful function the big taxpayer-owned hedge fund has accomplished. Meanwhile Cullen – and Clark herself of course – bequeathed to the next government (who in turn bequeathed it to this one), the twin economic failures: house prices and productivity (the latter shorthand for all the opportunities foregone, especially for those nearer the bottom of the income distribution).

In that sense, what marks him out from a generation or two of New Zealand politicians, who have spent careers in office, and presided over the continuing decline?

Thinking Big still

July 20, 2020 Michael Reddell Auckland, National Party, New Zealand economic history, Uncategorized

Just before I went on holiday I wrote sceptically about the “five point economic plan” speech given by the then National leader Todd Muller.

We were promised then a series of major speeches fleshing out the framework Muller enunciated. Among the five points was this

Delivering infrastructure had this promise

Before the end of this month, I will announce the biggest infrastructure package in this country’s history. It will include roads, rail, public transport, hospitals, schools and water.

My heart sank somewhat. A new and different Think Big? But lets see the specifics.

Of the five points Muller had outlined, this seemed to be one where they were investing any hopes they might have of lifting New Zealand’s medium-term economic performance.

New leader Judith Collins started on the details with a speech given on Friday and some supporting documents. This announcement had (a) some big headline numbers for spending over the next decade, (b) the “roads, rail, public transport” components for the North Island north of Tauranga, several of which are mainly about periods well beyond the next decade, and (c) some material on how they propose to replace the RMA, and to fast-track some of these projects in the meantime. I think there had already also been a promise to build an expressway between Christchurch and Ashburton.

I don’t have any particular problem with building more and better roads where they make sense. Same goes for rail within cities, again where such proposals make robust economic sense. (I’m much more sceptical of things like cycleways, whether across the Waitemata Harbour or locally.) And clearly congestion is a major issue in Auckland and – for what is really a pretty-tiny city by international standards – to some extent in Wellington too. Congestion has real economic and welfare costs. National’s leader referred to one estimate of those costs in Auckland (presumably this one) at around $1 billion a year – and since the study was done a few years ago, perhaps it would be reasonable to use a higher estimate now.

But we have tools that can deal with congestion. Pricing. It is a tool that seem to work when tried in other countries/cities. Of course, simply pricing congestion doesn’t mean building no more roads ever, but it (among other things) helps give a better steer as to what the real price of congestion – and the value people put on avoiding it – and it deals with the congestion directly in the meantime. Even the current government’s Minister of Transport has been on record suggesting that congestion pricing is “inevitable” at some point, just not now.

And what is National’s stance, to address what Collins calls a “congestion crisis”?

Looking further ahead, if we and Auckland Council ever look at congestion charges in the future, my Government will insist they are only ever revenue neutral, with other fuel taxes reduced to compensate.

“If we ever”….Not exactly a ringing endorsement, looking to shift the ground in the debate. Perhaps congestion pricing isn’t easy electoral politics, but it is the direction we need to be heading. It might actually make a material difference within five years, unlike (as far as I can see) most other things in the National plan.

Instead the focus seems to be a flinging around some big numbers, not being too bothered about how robust any analysis supporting the mooted projects is, and all with little or no sense of decent mental model of what has gone wrong with New Zealand’s economic performance, And yet it is, supposedly, “the Plan that New Zealanders – including Aucklanders – have been waiting for, for generations”.

Pretty sure that last sentence isn’t true. Collins, for example, talks up the “if onlys”, in her case around Sir Dove-Myer Robinson’s “rapid rail” proposal, that got lots of attention in Auckland in the early 70s. We moved to Auckland about that time, but I was 10 and can’t claim to have given it huge attention. But here’s the thing: the population of the Auckland urban area then was about 650000, the birth rate had been dropping for a decade, and the new government was just about to markedly tighten up on immigration access, a policy that carried through for the following 15+ years. And even with all the New Zealand tendencies to boosterism, neither central nor local government was persuaded that Robinson’s scheme made economic sense. Nor, most likely, did it. Collins also talks up the City Rail Link project, the costs of which have escalated greatly since the government she was a part of first signed off on the project, which didn’t look very economic even then.

The promise seems to that this big infrastructure spend-up is going be pretty transformative in economic terms. There are these quotes

This city is broken by congestion. Every Aucklander and every visitor to Auckland knows it. Congestion costs Aucklanders over $1 billion per year. That’s the strict economic loss. It represents lost production, lost productivity, lost opportunity.

But congestion is far worse than that. Congestion means unreliable journey times. It means frustration at sitting idle on the motorway. It means goods being delivered late to our ports. It means Mum being late to pick up the kids from rugby practice. It means a tradie only doing two, rather than four, cross-town trips per day. That’s fewer jobs for him; less income, and less economic activity.

I guess $1 billion per annum is supposed to sound like a big number. In fact, it is about 1 per cent of Auckland’s GDP. Fixing the problems is probably worth doing, but 1 per cent of GDP is tiny in the context of either Auckland’s gaping economic underperformance, let alone that of New Zealand as a whole (recall that the productivity leaders are more than 60 per cent ahead of us).

And yet, according to Collins, there are really huge gains on offer.

National’s approach to infrastructure is simple: Make decisions, get projects funded and commissioned, and then get them delivered, at least a couple of years before they are expected to be needed. That is the approach that transformed the economies of Asia from the 1960s.

Quite possibly, some east Asian cities/countries did infrastructure better than New Zealand has, but I’d be surprised if National can cite any authoritative development studies suggesting that the catch-up of that handful of successful east Asian economies was primarily about moving things/people more easily around their own countries. They are typically regarded as outward-oriented, tradables-sector led, growth stories, perhaps with improving infrastructure going hand in glove with those flourishing outward-oriented opportunities.

But, as least as far as we can tell from this speech, or the framework one Muller gave, National’s policy approach is now primarily inward-looking? That has long been the practical effect of the policy approach they (and Labour) have adopted over 25+ years, but it isn’t usually so blatantly put.

Collins went on. Build these roads, rail etc and

Half of New Zealand lives in the Upper North Island region. We want a genuinely integrated region of 2.5 million New Zealanders. Our vision is to transform the four cities to be one economic powerhouse. We will unlock their potential so that the upper North Island becomes Australasia’s most dynamic region.

Recall that the expressway to Whangarei, complete with possible tunnel under the Brynderwyns, is – even on this plan – well over a decade away. And recall that in the regional GDP per capita data, Northland has the lowest per capita GDP in the entire country, suggesting that if Whangarei has any part in some future “Australasia’s most dynamic region” it has a very very long way to come. But even forget about the Whangarei bit of the fairytale for now, do the National caucus have any serious idea how far behind key bits of Australia productivity levels in New Zealand actually are (and Australia is no great OECD productivity success story)? As a hint, that 1 per cent of GDP Collins talked about fixing won’t even begin to make a visible dent in the productivity gap – a gap only likely to continue to widen for the next few years, even if Collins plan did eventually make some small helpful difference.

National – like Labour really – seems to have no idea at all what has gone wrong with the New Zealand economy, what has taken us from among the very richest and most productive countries on earth to be some slightly embarrassing laggard, increasingly unable to offer the best to our own people. But they’ll just fling some more cash at things – as Labour does, just a slightly different make-up – in the hope of getting elected, and the vague sense then the something must be done, and anything is something.

Here is the Collins approach to project evaluation

The economists will tell you we should build projects only when they’re needed. My sense from my time in politics is that you just want the government to get infrastructure projects built. You just want them done. And you want them done ahead of time.

My Government will be informed by processes like NZTA’s Benefit-Cost Ratio analysis, and by advice from the Infrastructure Commission. But we will not consider that analysis or that advice to be holy writ when making decisions about major transformational projects. Think about all of the Roads of National Significance the National Government built.

I don’t think Transmission Gully passed a decent cost-benefit test, even when it was going to be operational by now.

Now I’m not about to suggest that officials and appointees to government boards should be making the decisions, but any well-done cost-benefit analysis should be a key hurdle in any proposed commitment of large amounts of public money. Perhaps there are reasonable arguments about methodology or about specific assumptions used in the calculations. All that can and should be debated, but a project that cannot return a decently positive benefit-cost ratio is one the public should be very sceptical of. Simply waving your hands and talking about “major transformational projects” should be no more acceptable now than ever. And having projects in place “ahead of time” – when few projections about the future, including about population, are that robust – also has significant economic costs, even at today’s lower public sector discount rates.

One other questionable aspect of National’s plan is what they call “intergenerational funding”. This is fancy language for borrowing, in this case off the core Crown accounts and having NZTA borrow instead. As far as I can see there is almost nothing going for this particular approach – one already indulged in by Labour, with Housing New Zealand now borrowing on-market. It will be a (a bit) more costly than the central government borrowing itself, with no more likelihood the debt will be defaulted on, it is less transparent, and unless the government is proposing to delegate all final decisions on projects to officials (which they – rightly in my view – show no sign of) there is no reason to think it will either tap new sources of capital (the NZ government not being debt-constrained) or introduce new disciplines on Crown capital spending. There is, or can be, a place for government borrowing, but decisions on that are better taken, and managed, centrally.

So there were big numbers in the announcement, some big projects (which may or not be economic, may or may not ever happen even if National winds), but little or no sense of a credible economic model lying behind it, grounded in the specifics of New Zealand’s underperformance. And if there is such a model at all, it just seems to be more of the same – rapidly growing, but quite volatile, population – the strategy that has so comprehensively failed for the last few decades. More and better roads aren’t going to materially change that. Nor – although it should be done as a matter of priority – are the sorts of land use reforms that might make house prices more affordable. The new Leader of Opposition suggests a National government might do something there. But we’ve heard that story before – whether from National in Opposition in 2008 or from Phil Twyford in Opposition in 2017. Perhaps this time really would be different, but I’m certainly not counting on it.

Me too

June 16, 2020June 16, 2020 Michael Reddell National Party, New Zealand economic history

No, not that one. This one is the apparent desperate desire of the new leader of the National Party to align himself with the aims and ambitions of the current government. It was all there in his speech on Sunday (complete with his desire to suggest that he had really become what they call in the US a “cafeteria Catholic”, and that his faith would make no difference to any government he led).

I saw a National-aligned commentator this morning commenting sceptically

The new National Party strategy of trying to minimise points of distinction with Jacinda Ardern would be a really good strategy if she was a third term PM with fast fading popularity.

— Liam Hehir (@PronouncedHare) June 15, 2020

Perhaps, but I don’t think that even in those sorts of circumstances opposition parties used that sort of approach in New Zealand towards the end of three term governments. I was never a John Key fan, and there were a few issues where he actively chose to adopt questionable policies adopted under the Clark government, but even Key promised more (even if he never delivered) than just to be a more competent executor of Labour’s agenda. I went back yesterday and read a few of those 2008 speeches just to check. (And the 2008 campaign took place amid a severe recession and global financial crisis, both deepening by the day.)

Who knows, perhaps it will win a few votes. Perhaps, but if you believe the stuff Labour, New Zealand First, and the Greens say they want to do, why not vote for them? After all, if execution has not exactly been a hallmark of the government – and Muller, of course, makes some entirely fair points there – why not vote for people who really believe it, rather than the pale imitations who just want office (or, in some cases, may just be in the wrong party). After all, there is such a thing as learning-by-doing and some ministers at least are likely to improve with time. Muller himself has no ministerial experience (as a reminder, a country is not a company), and his deputy was a fairly junior minister at the end of the previous National government where she was not regarded well by officials and as Minister of Education managed to deliver a speech as wordy and hard to read as a piece of legislation.

Setting aside the heartwarming biographical bits, the speech seemed to be a mix of spin, historical errors, and an utter lack of any ambition or promise.

There was, for example, the laughable description of the wage subsidy scheme as “bipartisan”. I guess New Zealand First and Labour make up the coalition Cabinet, so perhaps that really is bipartisan, but just because you supported an initiative the government took doesn’t make it a “bipartisan” one. It is doubly strange because a few lines later he notes that we can’t “freeze-frame our economy, with never-ending and unaffordable wage subsidy schemes”. Were they “unaffordable” or bipartisan” or both?

Muller is clearly keen on selling the merits of the Key-English government, and I know it is a commonplace to say they “got us through” the “global financial crisis” as if (a) there was much specific to get through (the crisis itself was mostly other countries’ problems, and (b) it had not taken 10 years – 10 years – for the unemployment rate to get back to pre-recession full employment levels. Might not be a very promising line for suggesting National is well-placed to handle this recession/recovery better.

There was the strange claim too that the previous National government did not raise taxes. Even if you allow for the GST/income tax switch as roughly neutral, this was the government that raised effective corporate tax rates, imposed a brightline test (and thus tax) on housing, dramatically increased tobacco taxes, increased the taxation of Kiwisaver, and so on. And and there was fiscal drag too. The emphasis of the fiscal adjustment might have been on the spending side, but there were increased taxes.

There was also the weird claim that “Bill English developed the Living Standards Framework”, except….he didn’t, Treasury did. And all while not offering the sort of analysis and advice that the Minister and his office often claimed to really want. Pledging to use it in future National Budgets is just another example of the me-too ism and the same avoidance of the hard issues – productivity failure – that seemed to drive The Treasury in the first place.

As a young man Muller worked for Jim Bolger when the latter was Prime Minister…..but only after the reform era had already ended. Now he is desperate to distance himself and National from the reform era – sounding a lot like Grant Robertson used to sound re the Reserve Bank Act, even as his actual reforms made next to no difference. Thus we read

I was in for a bit of a shock when my own party took over in 1990 and moved even faster, allowing unemployment to reach 11 per cent in 1992 – the worst since the Great Depression, but a record that will probably be broken over the next year.

I think both Labour and National could have done those economic reforms more gently, more caringly and with a greater sense of love for our fellow Kiwis.

If we look across the Tasman to our sibling rivals in Australia, it pains me to say that Bob Hawke, Paul Keating and John Howard managed the reform process better than David Lange, or my friend and mentor Jim Bolger.

I believe the speed and sequencing of the economic reforms did terrible harm to the institutions of our communities, and to far too many of our families.

The same Australia whose unemployment rate in the 1991/92 period peaked at almost exactly the same (11.1 vs 11.2 per cent) as New Zealand’s, and whose unemployment rate has been higher than New Zealand’s for most of the subsequent 30 years. Quite what does Todd Muller think – specifically – should have been done differently? This cartoon is from the late 80s.

douglas

And yet despite disowning his own party from its second to last term in government, Muller expects us to believe that we can count on them to handle the recovery better because “economic management is in our National DNA”. The same party that (a) was happy for the unemployment rate to stay unnecessarily high for 10 years, and (b) which made no progress at all (rather the contrary) in closing the glaring productivity gaps, reversing the decades of underperformance. Oh, and which promised to fix the housing market and did almost nothing. Why would we?

It was sad and sobering to get through Muller’s speech, reread it again slowly and carefully, and find not a hint of any concern about productivity (however expressed) or housing. It isn’t that long ago since National put out a discussion document on the economy which did actually seem to recognise the productivity failings, and that those failings mattered for whatever else individuals or governments might want to do. No more apparently, even though the failure hasn’t just been magic-ed away with the virus. And if house prices may fall back a bit during the current recession – as they did (15 per cent or so in real terms) in the last recession – that isn’t fixing the underlying problems is it? No ambition, no promise, not even any mention.

All we seem to get is the promise of a bigger welfare state. But again, if that is what you want why vote National?

If you were really erring on the generous side, determined to find a silver lining, there was this line near the end of the speech.

I’m proud of what National and New Zealand has achieved since then [when he joined National in 1988], but I do not yet see an economy that is truly internationally competitive or agile enough to maintain and improve our standard of living.

And yet there is not even a hint of what he means, or what he or his party proposes might be done. You wouldn’t know, for example, that the productivity gaps are larger than they were, that foreign trade as a share of GDP is smaller than it was. And with no serious policy, it looks as feels just as empty as when current government ministers, then in Opposition, suggested things could be better – but offered no serious clue as to how that might happen. They are as vacuous as each other.

Oh, and then there was the truly weird attempt to appropriate the legacy of Michael Joseph Savage

We would not use this term in today’s more secular and diverse age, but, in the 1930s, Michael Joseph Savage spoke of “applied Christianity”. As I’ve said, something like that will guide my Government.

Savage faced the last economic crisis of the magnitude of what is ahead of us, and was forced to borrow. He launched a major public works programme. At the end of it, New Zealand had the first of many state houses for low income workers, and significant infrastructure to power an improving economy – including large-scale hydroelectric schemes on South Island rivers and lakes.

It sort of makes some sense when Labour does it. Whether or not there is much truth to what they (Ardern, Robertson) say, at least he was the first Labour Prime Minister – some Labour figures still like to display his photo in their offices and homes. It is pretty weird when National does it, and even worse when their “facts” are so misleadingly bad.

Thus, the Great Depression – New Zealand style, where it was bad – was largely over the time Labour took office in December 1935 (as it was in Australia and in the UK – the latter overwhelmingly our major market). Real GDP had recovered to pre-Depression levels and the unemployment rate was falling. Through the Depression, governments had not been “forced” to borrow, they had largely been unable to borrow – as National’s finance spokesman knows well – and had actually defaulted on some of their debt. And although Muller swears by his macroeconomic orthodoxy – and thus professes himself entirely unbothered about a Reserve Bank doing almost nothing to counter this recession – the first significant legislative act of the incoming Savage government was to nationalise the Reserve Bank and give the government progressively more power to use Reserve Bank credit. The Savage government did borrow domestically, it did build state houses (all while doing little to actually prepare for the coming war) but……it also ran New Zealand into crisis in late 1938 and early 1939. Unable to borrow internationally, and yet with a fixed exchange rate, the foreign reserves held by the Reserve Bank and the trading banks fell away very sharply (variety of influences), and government’s response was to slap on exchange controls and import licensing, regimes that didn’t finally disappear until the 1980s.

And then there was that interesting claim about hydroelectric capacity. I hadn’t heard of that before, so I went looking. There was a good reason I hadn’t heard of it before: it just didn’t happen. Muller seems to have simply made it up.

I went to the old yearbooks and found nice detailed tables of (what they called) public works spending (which does not include state houses). Combine that with some historical GDP estimates, and you get something like this chart.

public works

Public works spending was held up in the early stages of the Depression – including, the record shows, the Waitaki hydro scheme, partly to keep people in work – but were cut deeply as the situation worsened and the foreign borrowing constraints became tighter. The trough was the worst year of the Depression for New Zealand – that to March 1933 – and thereafter public works spending increased. It is certainly true that the rate of increase picked up with Labour in office but even at the end of the period was no higher as a share of GDP (about 2 per cent) than it had been a decade ago under Forbes and Coates.

And what of hydro developments. To my pleasant surprise, the data for those were broken out separately. Here is public works spending on “Development of water power” as a share of total public works spending.

public works2

So the hydro share of public spending works spending actually peaked in the year to March 1933, and it was pretty much downhill thereafter. Of course, total spending on hydro also increased but in the last peacetime years (to March 1939 and 1940) it no higher – in real terms, or as a share of GDP – than it had been in 1928 ( and less than it was 1932) – this for a technology where underlying demand was increasing very rapidly, and for which the state had taken effective control of the development of new power generation.

I don’t know where Muller got his story from. But surely they have people who can do the basics like fact-checking an important speech by a new leader? Then again, perhaps it really didn’t matter, because all they wanted to do was to swear allegiance to the Labour legacy, real or imagined, past or present.

Muller suggests that he would be a one-of-a-kind Prime Minister

In my lifetime, New Zealand Prime Ministers have tended to be kind, competent or bold. Some have managed to be two of those things. My background in business and politics, and my grounding here in Te Puna, mean I plan to be all three – kind, competent and bold.

There was no sign of any boldness in the substance of the speech, and not much evidence that he has basic competence nailed either.

Oh, and he’s promoted his Chinese Communist Party member, former part of the PLA military intelligence system, who acknowledges lying about his past to get into New Zealand, further up the caucus rankings. If that qualifies as kind, competent, or bold he must have a different dictionary to mine. Shameful is a better word for it.

Not in narrow seas

May 30, 2020June 3, 2020 Michael Reddell New Zealand economic history, Productivity Commission

That’s the title of a new book, published this month, by veteran economist and commentator Brian Easton. The title is borrowed from a collection of poems, published in 1939, by New Zealand poet Allen Curnow, but presumably also keys off the author’s previous book published in 1997, In Stormy Seas: The Post-War New Zealand Economy.

The full title of the new book, published by Victoria University Press, is Not in Narrow Seas: The Economic History of Aotearoa New Zealand. It is a curious title in a number of respects. First, there is that reference to the place – so beloved of public servants and the Wellington liberals – that is no place: New Zealand is the name of the modern country, and there was – so far as we know – no collective name for what went before. Then there is the definite article “the” – not “a” – suggesting a definitive treatment that just isn’t on offer, even in this big (655 pages of text) book. And then there is the suggestion that it is an “economic history”.

When I saw the title of the finished volume last month I was reminded of hearing Brian telling people – the book has been many years in the making – that it wasn’t going to be a conventional “economic history”, but something different, more of a “history of New Zealand from an economic perspective”. And it is somewhat reassuring that, however the publisher has chosen to present the finished book, the author still seems true to his earlier vision – he begins his final chapter thus “This is a history of Aotearoa New Zealand, centred on the economy”. Six years ago, seeking a new funding grant, he told interested parties

Not in Narrow Seas, as its title, suggests is an ambitious history of New Zealand . It is written from an economic perspective.

In fact, an extract from that document, written when the book was two-thirds done, probably gives you a good flavour of what is covered

As such it covers many issues which are often neglected by most general histories. These include:

– the interactions between the environment and the economy (and society generally); the book starts 600 million years ago at the geological foundation of New Zealand;

– the offshore origins of New Zealand’s peoples and the baggage they brought with them;

– there are seven chapters on the Maori plus further material in numerous other chapters;

– there is a whole chapter on the development of the Pacific Islands (after the proto-Maori left) in preparation for the account of the Pasifika coming to New Zealand;

– there are specific chapters on the non-market (household) economy in preparation for an account of mothers entering the earning labour force (one of the radical changes in the 1970s);

– there are five chapters on the evolution of the welfare state;

– the book pays attention to external events and globalisation;

– it could be argued this is the first ‘MMP history’ of New Zealand because it looks at how people voted as well as electoral seats won. (If this seems odd, it is rarely mentioned that when Coates lost power to Ward in 1928 his party won far more votes but fewer seats);

– this is not yet another history of the ‘long pink cloud’. It takes a critical view of the more extreme versions from this perspective, in part because it puts a lot more weight on the farm sector as a progressive force (albeit with its own kind of progressiveness);

– it synthesises the rise of Rogernomics with the events before, showing both the continuities and the disruptions;

– while not a cultural history, it integrates culture and intellectual activity into the narrative.

And, of course, there is a fair amount of more-conventional “economic” material as well.

Easton was economics columnist for the late lamented Listener for decades (I think I saw a reference to 37 years, a remarkable run) and you don’t hold down a slot like that without being able to write in a clear and accessible way, and make comprehensible what sometimes some economists almost seek to make imcomprehensible. That carries over to this book. If one were looking for straight economic history you might expect lots of tables and charts, but there is only a handful of either (by contrast, around 100 tables and charts in the much shorter In Stormy Seas). And breaking the text into 60 chapters means bite-sized chunks. For a serious work of non-fiction it is a relatively straightforward read (and, for better or worse, there are no footnotes). For those who don’t know much about how the story of New Zealand fits together, especially with an economic tinge, it is a useful introduction – especially when one recalls that the last comprehensive economic history of New Zealand, that by Gary Hawke, was published in 1985 (and had gone off to the publisher before any of the reforms of 1984 and beyond were even initiated).

But talking of “tinges” note that line in the extract above “this is not yet another history of the ‘long pink cloud’ “. He notes

Much of our history has indeed been written from a leftish perspective. However, the pink cloud obscures the total story of New Zealand’s development.

And he has some useful correctives to perspectives offered by other “leftish” authors, but make no mistake this is a book from the liberal-left as well. If he occasionally has positive things to say about National governments, for example, it is largely when they initiated things – ACC as an example – that were radical for their time. His is a “progressive” vision in which, to a first approximation, things have only got better and better as they’ve approached today’s state of affairs – even while there is still some way to go to get to the desired “progressive” end.

I always find it interesting to read the Acknowledgements sections, perhaps especially of New Zealand books. Easton has well over 100 names listed, some of people long dead (such as Bill Sutch). I recognised only half or two-thirds of them but the great bulk were people of the liberal-left (plus Winston Peters). That isn’t a criticism; just an observation about where the author’s central Wellington milieu is. In some respects, the book may be best seen as a distillation of Easton’s decades of thinking and debating about New Zealand (not just its economy).

I’m not going to attempt a full review of the book – I’d say that I’d leave that to the New Zealand Review of Books, except that that publication too has now passed into history – but I wanted to highlight just a few scattered points that struck me as I read.

First, in his earlier history of the post-war economy (mostly up to 1990) there was much to like. One of the key areas I disagreed with him on – I’ve dug out a published review I wrote at the time – was around macroeconomic policy since 1984. He reckoned the conduct of monetary policy, and in particular the handling of the nominal exchange rate, played a big part in explaining New Zealand economic underperformance. Here were my 1998 comments.

easton 1998

In the new book, although less space is devoted to it, this continues to be Easton’s view. I continue to think his case isn’t compellingly made, but then this is one of those issues where I’m closer to the New Zealand conventional wisdom than on most (I reckon macro management – fiscal and monetary policy – has been among the better bits of New Zealand economic policy in recent decades).

Having said that, one line in the new book that got a big tick next to it was his observation that the real exchange rate was probably the most important relative price in New Zealand (arguably the terms of trade). In that regard, I was a little surprised that with the benefit of another 20-25 years, there was nothing in the new book about the extent to which New Zealand’s real exchange rate had – over decades now – moved (risen, stayed high) in ways inconsistent with the productivity performance of the New Zealand economy, even adjusted for the improvement in the terms of trade, and the associated decline in the relative significance of the tradables/exportables sector of the economy. It is the same curious de-emphasis we now see from our officials and ministers faced with a really major adverse economic shock and apparently unbothered that a key stabilising relative price – the real exchange rate – has barely moved at all. Since one of the key elements in Easton’s economic history of New Zealand is the collapse in the wool price in 1966 – at the time wool was a third of our exports – it is all the more surprising.

Relatedly, I was quite surprised by how little mention there is in the book of the continuing relative decline in New Zealand’s productivity and material living standards over many decades, to today. Brian is well-known for asking hard questions about just what official statistics are actually measuring, so perhaps he doesn’t think we’ve continued to drift far behind – but I doubt that is the explanation (he explicitly highlights data for the late 30s that suggests that at that time our material living standards were still among the highest in the world). On the one hand, he seems to work with a model in which government policy doesn’t really make much difference – unless it is messing up “Rogernomics” and associated macro policy – but even if that is his model, he doesn’t make clear what he thinks is driving our relative decline (let alone – and perhaps one can’t ask for this in a history – what might make a difference). I wonder too if there isn’t an element of the point I’ve suggested over the years, that the powers that be in Wellington (political, bureaucratic, and other) finding our structural economic performance too hard to explain prefer no longer to talk about it much?

In passing – which is more or less how he treats it here – it may be worth noting that Easton here (as in the previous book) seems less than persuaded by the notion that large scale immigration to New Zealand since World War Two has done anything beneficial for the productivity or material living standards of New Zealanders. Here, as I’ve noted before, he stands in continuity with earlier authors on New Zealand economic history.

And two final points.

The first relates to the Productivity Commission. Commenting on developments this century, he notes of the Clark government

Curiously the government often reappointed or promoted those closely associated with Rogernomics, and they did little to create institutions to provide alternatives to neo-liberalism. By contrast, the National-ACT Government established the Productivity Commission, one of whose members was not only a “Rogernome” but had stood as an ACT candidate [former Treasury secretary Graham Scott].

and moving a decade on, he notes

…the Key-English Government, nudged by the ACT Party, established a Productivity Commission to help pursue its economic objectives. This agency remained in existence under the Ardern-Peters government. More generally, the Ardern-Peters Government had followed its predecessor’s habit of assuming a milder version of the neoliberal framework. Like the previous Labour Government it gave important jobs to former neoliberal enthusiasts.

I imagine one of the people Easton has in mind here is the current chair of the Productivity Commission, Murray Sherwin, who was head of the International Department of the Reserve Bank back in the days of the float of the exchange rate – an issue Easton has long written about and strenuously challenged how things were done – and, of course, a key figure at the Bank in the years when price stability was becoming established. I guess he must be almost the last of the people who held reasonably significant positions in those reforming days to still be in public office. But his term expires early next year, and it will be interesting who the government (I’m assuming Labour leads the next government too) chooses to replace him, and telling about the interest (if any) the government has in addressing longstanding economic failures, and how. [UPDATE: Brian tells me he didn’t have Sherwin in mind.]

But, to be blunt, if the Productivity Commission is the institution for the propagation of continued “neo-liberal excess” (my words, not Easton’s), those on the left wouldn’t seem to have that much to worry about. In addition, of course, to the fact that the “Key-English Government” seemed to have no serious structural “economic objectives” – do you recall them fixing the urban land market, addressing productivity underperformance etc? – the Commission itself has increasingly tended to reflect the same sort of “smart active government”, technocratic wing of the European social democratic movement, that we see in – notably – the OECD. Since governments appoint the Commissioners, the Commission will over time tend to reflect the preferences of governments of the day – and we’ve seen that already in the rather different tinge of appointments under this government. The Commission is certainly nearer in inclination – if better-resourced – to the old New Zealand Institute (former executive director, David Skilling) than to, say, the Business Roundtable or the New Zealand Initiative. To survive – as always a peripheral player, and rather small – I guess they have to meet the market one way or another.

Economists are renowned – sometimes fairly, sometimes not – for acting as if they believe that economics is some sort of universal discipline without which almost everything and everyone is poorer. But one rarely sees it quite so breathtakingly expressed as on page 75 of the book, discussing 19th century New Zealand, when Easton observes

Perhaps most of the settlers did not have well-formed opinions – economics was then a new discipline, even among the well-educated.

In summary, almost everyone reading the book will learn something, and perhaps on a few points be challenged to think a bit differently. It is fairly easy to read, but it isn’t “the economic history” of New Zealand. Then again, it doesn’t really aim to be. I noticed that back in 2014 Easton talked of wanting to have these appendices available on the publisher’s website (I presume the numbers refer to word count)

APPENDICES

I. The Course of Population                            3850

II. The Course of Prices                                  4200

III. Measuring Economic Activity                  2100

IV. The Course of Output: 1860-1939           3250

V. The Course of Output: 1932-1955 2700

VI. The Course of Output: 1955-                   3400

VII. The Structure of the Economy                4050

VIII. The Course of Productivity                   1450

IX. Patterns of Government Spending           4850

X. Transfers                                                    5650

XI. Debt and Deficits                                     3300

VUP doesn’t seem to have been receptive to that. I hope that in time Easton might be able to make this material available on his own website, and past such notes (including appendices in the 1997 book) were useful and interesting to the geekier of his readers.

Diverted down historical byways

April 29, 2020April 29, 2020 Michael Reddell New Zealand economic history

Get me onto interwar economic history and I can get a little carried away. I don’t like to think quite how many books on the Great Depression – in all manner of countries – and events either side of it I bought when I first got fascinated by it, and my interest continues. New Zealand is a fascinating subset of that history/experience, although it is still the case that there is no single comprehensive economic, and economic policy, history for New Zealand in the interwar period, even though so much of interest/importance was going on.

Anyway, after yesterday’s post a reader kindly sent me a copy of a new NBER working paper by two prominent economic and monetary historians, Michael Bordo and Christopher Meissner. Their topic is “Original Sin and the Great Depression” – no nothing theological, but rather referring to the difficulty most countries long had (many still have) in borrowing externally in their own local currency. It is an interesting paper and they’ve used some fascinating high frequency data (by 1930s standards) in some of their estimates, but the key bit from my perspective was the question of how foreign currency debt might have influenced the willingness, or otherwise, of countries to devalue, or allow their currencies to depreciate, during the Great Depression. This has often been perceived to be an issue in more-recent decades: a currency depreciation greatly increases the local currency value of foreign currency debt, and if much of the debt (public or private) is (a) in foreign currency and (b) not supported by export industries, earning foreign currency, it can act as an obstacle to necessary adjustment. As it was in places in Latin America in the 1980s, so in places in east Asia in the 1990s.

Bordo and Meissner try to unpick whether this was a constraint on countries in the 1930s – a consideration that lead them to delay longer than otherwise the sort of break with gold and the exchange rate adjustment that ultimately looks to have been important in the eventual recovery. They find some suggestive evidence that this was so and that market pricing recognised the issue (thus, a higher risk premium was priced into the yields of countries that depreciated). They line up data, for example, on when countries defaulted (if they did) and when they went off the Gold Standard.

I wouldn’t be surprised if a more detailed examination of the issue proved that there was something to the thesis. But it probably needs a more -in-depth treatment to account for the huge variation in what exposure to exchange rate fluctuations actually meant across a wide range of countries. In some cases it is simple – a country with its own currency, but with much/most of its debt raised on market in foreign currency (whether sterling or USD). In other cases, it isn’t. For example, in the United States much debt – including most government debt – was denominated in USD, but also contained a gold clause – guaranteeing that the lender was protected against any exchange rate change (I only discovered yesterday that much Canadian debt also had such clauses). I wrote here about the recent book on the abrogation of the US gold clauses by Roosevelt. In effect, it was a sovereign default, and is treated as such by Bordo and Meissner). But Canada also overturned its gold clauses, and it isn’t treated as having defaulted. On the US side, public debt going into the Depression was low and I don’t recall ever reading that the gold clause had been a constraint on action prior to 1933.

Also, among advanced countries, war debts and reparations were at the time one of the most important form of inter-country liabilities, and although those obligations generally weren’t expressed in local currency terms, they also were generally not expected to be resolved through market mechanisms (and the debts were not traded, so there is no secondary market pricing). And although the authors claim to have dealt with these debts, almost all of which were eventually defaulted on (Finland was the exception that paid in full), their tables of countries which defaulted don’t line up well at all with what we know of the defaults on war debt. Thus, the UK defaulted on its war debt to the US (denominated in USD) and is (rightly) treated as a defaulter. But neither New Zealand nor Australia is listed as having defaulted, even though neither paid any more on their substantial war debts to the UK. (Both countries also “defaulted” on domestic debt – the New Zealand story is here.)

As a matter of interest, this table is from Eichengreen. The Hoover Moratorium was a standstill on servicing war debts and reparations in 1931, but the table captures annual savings/losses that became permanent over the following few years

hoover

In per capita terms, New Zealand was the second-biggest gainer (after only Germany) – we lost reparation payments due but saved a lot on the war debts we never again serviced (and which the UK never pursued us for).

But to an extent this is by way of rambly preamble to my New Zealand specific bugbear with the paper, which includes this table.

bordomeissner

Not only did we default – domestically, and externally (those war debts) – but we were not on the Gold Standard. This is a not-infrequent mistake made by overseas academic researchers – Eichengreen, for example, has a table in which he has New Zealand leaving gold in 1929.

We did not. We had not been on the Gold Standard since World War One started in 1914 (as I wrote about in an early post here). We did not return to gold in 1925 when the UK returned. From August 1914 onwards, bank notes (issued by the trading banks) were not convertible into gold on demand, and banks were not required to keep any particular level of gold. There was no central bank, buying/selling gold at a fixed parity. We were not on the Gold Standard – even if that state of affairs was maintained by wartime regulations still in effect years later, rather than by a formal new statute.

In the, perhaps vain, hope of making a small contribution to putting a stake through the heart of this particular myth, here is an extract from Sir Otto Niemeyer’s report to the New Zealand government in February 1931. Niemeyer was a senior Bank of England official commissioned by the New Zealand government to visit New Zealand and to report on policy options re banking and currency, including around a proposed new central bank. Here are the opening two paragraphs of his report.

niemeyer

Banks held gold. The fact that they did so may have given some comfort to depositors. A solid loan book would generally do that too. But gold played no continuing part in the New Zealand monetary system after 1914. To repeat, after that date we were not on a Gold Standard.

Of course, quite what standard we were on is another matter. There was no central bank. In practice, as Sir Otto goes on to note – and as everyone recognised at the time – the key constraint on banks’ activities in New Zealand (lending) was the availability of sterling balances in London, combined with the customary practice – and it was no more – that banks managed things to keep New Zealand deposits exchangeable into sterling at very close to parity. In the jargon, there was no nominal anchor in the system – neither metallic, nor a central bank required to keep something akin to price stability. It was a very unusual system, that perhaps should not have worked, but it did more or less. Partly as a result there was little real sense – and I gather this was true in Australia as well – that a New Zealand pound (a pound liability issued by a bank in New Zealand) was in some sense different from an English pound.

But to revert to the question of debt and the Depression, New Zealand’s government was heavily indebted going into the Depression and the debt ratios got much worse at the Depression went on. Here is total New Zealand government debt as a per cent of GDP from the IMF’s Historical Public Debt database.

IMF public debt

and here is a chart from a paper Bryce Wilkinson did for the New Zealand Initiative a few years ago showing both public debt (slightly different series) and external debt as a per cent of GDP.

bryce debt

(Around this period the Australian charts are quite similar)

Bordo and Meissner include a chart suggesting that in 1928 our ratio of foreign public debt to exports – some sense of servicing capacity, and New Zealand was a big exporter at the time – was the fourth largest of the countries they study.

Curiously, and something I learned the other day from another new book, despite these astonishingly high levels of government debt (and heavy external debt) as the Depression began New Zealand had the highest possible credit rating from Moodys.

moodys depn

In a way, it worked out okay. We defaulted on the war debts, but for the sorts of public issues Moodys’ was rating, no foreign holder lost a penny (not even a (new) New Zealand penny let alone the (more valuable after 1933) UK penny). But it need not have been that way: the debt burden was punishingly high, markets were temporarily closed to any new issues, and by the end of the 1930s, New Zealand external finances were even more severely constrained, the possibility of default was in the wind.

To some extent, these public debt series overstated the burden on the taxpayer. Quite a bit of what the Crown borrowed was on-lent, particularly to farmers. On the other hand, farm debt was a pretty major area of difficulty during the Depression, with repeated interventions to ease the burden (on good farmers). New Zealand was heavily indebted – government and private (estimates of total mortgage debt as a per cent of GDP then exceed those now).

But if public debt was high going into the Depression it went higher, in two separate stage. First, the denominator – GDP – fell sharply. Nominal GDP in 1932 is estimated to have been a third lower than in 1929 – the fall split roughly evenly between quantities (real GDP) and prices. And then – and this is the link to Bordo and Meissner – the exchange rate was formally devalued at government initiative (even though there was not yet a government-issued currency) in January 1933. That raised the local currency value of the foreign debt – more so, at least initially, than it contributed to the recovery of nominal GDP. Government debt as a per cent of GDP peaked (on both charts) in 1933.

Devaluation had been an option debated for some considerable time. Most local economists were in favour, as (of course) were the farmers – the prospect of more local currency for each pound sterling earned was attractive to say the least. On the other hand, it was something others were more sceptical of – all such policy choices are distributional in nature. Importers and associated merchants were one group, but the trade unions were also wary – whatever you believed about the responsiveness of the economy over time, tradables prices (including food) seemed likely to rise. Of course, a rise in tradable prices was the whole point.

What is less clear is how much influence the additional debt service costs had on the Cabinet’s thinking. It was a real factor, at least in the short run. On the other hand, ministers will have been conscious that earning the foreign exchange to meet the foreign debt commitments was made a bit easier by the devaluation, and those sterling earnings were also critical influences on local banks’ ability to lend, and thus to support any prospects for recovery. The Bordo and Meissner paper does not seem to take this factor into account.

As I noted earlier, when the New Zealand government coercively restructured domestic debt (in effect, defaulted) they did not attempt the same on the government’s foreign debt. There are likely to have been a variety of factors at work, including a more generalised desire to have continued near-term access to UK markets (and New Zealand and Australia had both developed reputations as rather over-eager borrowers in the 1920s) and the little-known Colonial Stocks Acts (which I thank a commenter the other day for drawing my attention to again) under which the UK government had – with our consent – the authority to disallow specific legislation that disadvantaged holders of New Zealand debt in the UK. Whatever the combination of factors, the focus of the government’s efforts and rhetoric were instead on raising the world price level – lifting commodity prices generally, and those denominators (GDP). That made a lot of sense with so much excess capacity and such a fall in the price level. It was something Britain and the Dominions joined in committing to in the British Empire Currency Declaration of 1933.

As a final observation in this (discursive) post, when people talk at present about the fiscal costs of responding to the Covid-19 slump you sometimes hear talk of debt getting to “wartime levels”. People who used those references typically have places like the US and the UK in mind. As you see from the charts above, public debt kept dropping as a share of GDP through the rest of the 1930s – mostly rising GDP rather than falling debt – and even in 1946 New Zealand’s public debt, while high by today’s standards was about 148 per cent of GDP, lower than it had been in 1929. Between heavy taxes and Lend-Lease obligations the US ran up to us, the war wasn’t one that left us under a heavy burden of debt. At the end of it all, we’d built up enough unsustainable financial claims on Britain that a considerable chunk were, under pressure, written off. The UK, in effect, defaulted on us.

What was and what might have been

October 17, 2019October 17, 2019 Michael Reddell New Zealand economic history, Productivity

Yesterday’s short post – which countries were rich or highly productive in 1900 and which are now – wasn’t really about New Zealand at all (it was an article about the US and Argentina that prompted me to dig out the numbers). But it prompted a question about New Zealand from a reader that sent me off playing around with the relevant spreadsheets again.

The question was along the lines of when were we at our economic peak (relative to other countries) and, given that we no longer are what it might have taken, in terms of different growth rates, for us to match the leading group now.

As a reminder, for historical periods the standard collection of reference data is that by the late Angus Maddison. He collated estimates of real GDP per capita for a wide range of countries. The numbers are only as good as the estimates made by the researchers Maddison drew from. Perhaps they could be improved on – some researchers have tried for individual countries – but for now they are still the standard starting point. For more recent decades, I prefer to use real GDP per hour worked estimates (which will tell more about an economy’s productive performance, the wage rates it will support etc), either from the OECD or the Conference Board (the latter for a much wider range of countries).

My first chart yesterday was the top group as at 1900 – a date chosen just as a nice round number.

1900 GDP pc

The top five countries on this chart were the top five pretty much all the way from about 1890 to just prior to World War Two. Here is how New Zealand did relative to (a) the median of those five countries, and (b) to the country that would emerge after World War Two as the clear leader, the United States.

NZ rel to others pre war.png

There is a bit of noise in the year-to-year estimates (particularly those for New Zealand), so I’m not putting any weight on that 1920 peak, But abstracting from year to year noise the picture is reasonably clear. Relative to this group of countries – highest incomes anywhere at the time – New Zealand did just fine in the quarter-century to the start of World War One. We were, there or thereabouts, right up with the very richest. On these estimates, the number one slot moved around among the UK, the US, New Zealand and Australia.

Wars are dreadful things. But they tend to be relatively less bad for countries producing food and wool, and not facing any physical destruction to their own country. Even better perhaps for distant neutrals, as the US was until mid-1917.

New Zealand’s relative decline in the 1920s is notable (and not inconsistent with a story I’ve run for some years, about the lack of any really favourable idiosyncratic productivity shocks favouring New Zealand based industries, of the sort we’d had in the 30-40 years prior to World War One).

But perhaps what is interesting is the recovery – especially relative to the United States – in the 1930s. In 1939, for example, we were basically level-pegging again with this top group of countries – a touch behind the US (No. 1), a touch ahead of Switzerland (No. 2).

Was everything then fine as late as the start of World War Two? I’d argue not. First, business cycles matters and don’t always run in phase across countries. The United States, in particular, was very slow to recover from the Great Depression. Here is the unemployment rate

fredgraph U 30s

That is an unemployment rate in excess of 15 per cent at the end of the 1930s. In New Zealand, by contrast, the unemployment rate had been under 6 per cent as early as the 1936 census and the numbers registered as unemployed dropped away very sharply in the following few years, especially in 1938.

I was reading the other day an academic volume The Macroeconomics of Populism in Latin America, and was rather struck by the parallels between New Zealand in the late 1930s and some of the Latin American case studies (from the 70s and 80s). Most of those experiences ended very badly. New Zealand authorities were running very expansionary policies in the late 1930s which certainly boosted GDP and employment in the short-run, but culminated in the imposition of extensive foreign exchange controls at the end of 1938 and would almost certainly have ended in a highly public debt default in 1939 or 1940 if we hadn’t been – as it were – “saved by the war” (first, the British desire to avoid serious ructions in the run-up to the war, and then the intensified demand for our primary exports etc once the war began).

Consistent with that story is that after the war, when all three economies were pretty much fully employed – and none had been directly physically affected by the conflict – New Zealand’s GDP per capita was well behind (10-20 per cent depending on the precise year and country) those of Switzerland and the United States. Our heyday really had been the pre World War One period.

The second strand of my reader’s question really related to how far behind we now are.

Here was my second chart from yesterday, showing the top-20 real GDP per hour worked countries (from the Conference Board database) in 2018.

GDP phw 2018

I’m happy to set aside Norway (markedly boosted by oil/gas) and Luxembourg (city state with some material tax distortions) and focus on the next group of countries (Switzerland to Belgium) I’ve highlighted here in various posts. On this measure, the median real GDP per hour worked exceeds that of New Zealand by 68 per cent.

New Zealand implemented a huge range of policy reforms in the late 1980s and early 1990s. The aspiration was to make material inroads on closing the gaps that had opened between New Zealand and the OECD leaders. Sadly, the gap has actually widened. 1990 is a common starting point for comparisons – not only was it well into the reform period, but it was just prior to the New Zealand (and other advanced country) recession of 1991, so comparisons are not messed up but that particular cyclical issue. In 1990, the median of that group of seven leading OECD countries was “only” 56 per cent ahead of New Zealand.

But what if things had been different? How much more rapid productivity growth (than we actually experienced) would we have to have had since 1990 to have caught up with this leading bunch? That is 28 years. We”d have needed productivity growth that was 1.85 percentage points faster on average, each and every year.

Would that have been possible? Who knows. 28 years seems a bit ambitious. But I did have a quick look at the data for some emerging OECD countries. Over the last 20 years or so, these countries have had productivity growth rates (on average over that long period) in excess of 1.85 percentage points above those of the median of that “leading bunch” of OECD countries: South Korea, Lithuania, Poland, and Slovakia.

Would it have been possible for us? Who knows? Would it be possible now, for the next 25 or 30 years? I don’t know. Personally, I’d be a bit surprised if we could close the gap that quickly, or fully. But for now we are still going backwards (relatively)…..as we have, more or less, for 100 years. And there seems no great sense of angst, unease or urgency among any of political parties, or the economic establishment.

What a diminished legacy for the next generation.

Revisiting some RB history

October 5, 2019October 5, 2019 Michael Reddell bank capital requirements, New Zealand economic history, Uncategorized

One of Stuff’s political correspondents, Henry Cooke, had a column in this morning’s Dominion-Post about Adrian Orr and the power he wields, single-handedly, around banking regulation.

The column starts with some comparisons with some other senior public servants

Think Police Commissioner Mike Bush, former Treasury boss Gabriel Makhlouf, or State Services Commissioner Peter Hughes. These three have had more influence over the way this country is run than all but the most powerful MPs.

Yet that trio can technically be called to heel by their ministers, even if doing so will probably result in a serious headache for the minister in question. Not so for Reserve Bank governor Adrian Orr, whose independence is enshrined in law.

Not probably company most would want to be numbered with. A Police Commissioner who gave a eulogy at the funeral of a former policeman widely accepted as having planted evidence in a murder case, who seems to be counted on not to make trouble for whichever party is in power, and who is only too happy for the NZ Police to cosy up to, and assist, the PRC security forces. A now-departed Treasury Secretary who presided over the decline of his own institution, and then flitted the country refusing to accept any serious responsbility for his own conduct over the “budget hack” affair. And so on. Whatever influence these people might have – not much I’d have thought in the case of the Police Commissioner – they have no policymaking powers themselves.

By contrast, when it comes to banking regulation, the Reserve Bank Governor enjoys a great deal of formal power, with little accountability and no rights of appeal against his policy decisions. They are powers which should be reined in, by MPs and ministers, and which while they exist need to be used with the utmost judiciousness and care. Under Orr, it is more like a bull in a china shop, pursuing personal whims, perhaps political agendas, all supported by not very much robust analysis at all. I’ve written about all that previously and am not going to repeat it today.

Cooke notes the suggestion by Paul Goldsmith that the Governor should have fewer policymaking powers, with big policy calls in banking regulation being made by ministers and MPs, as big policy calls in most other areas of public life are. But then follows a strange end to his article, which is the point of this post.

Goldsmith knows all about how the Reserve Bank can set off real political fires. He wrote the book about the last Reserve Bank governor to step so seriously into the fray: Don Brash. Way way back in 1990 the then-Labour government’s election-year Budget was utterly blunted when Brash decided to immediately hike interest rates in response. Brash was drawn into the bitter debate between David Lange and his own finance minister, and the whole thing was extremely public.

We are nowhere near that level of chaos yet. But things sure are starting to get interesting.

I guess it is what comes of middle age, but the events of 1990 still seem to me not much further back than yesterday (not “way way back”), but I suppose the typical journalist is young. Even so, it isn’t hard to have checked that the Prime Minister in question was Geoffrey Palmer (and, unless I’ve missed something, the Goldsmith book doesn’t seem to deal with the episode in question at all).

And there are a few things to bear in mind as institutional context to that episode:

the Reserve Bank had received statutory operational independence only a few months earlier, under legislation initiated by the government in question (4th Labour government,
under that legislation, the Bank was responsible for pursuing an inflation target, primarily set by the government but formalised in a Policy Targets Agreement between the Governor and the Minister. That agreement had been signed as recently as March 1990 and required as to get to price stability (0 to 2 per cent annual inflation) by the end of 1992,
at the time, the Labour government was miles behind in the polls, in an FPP electorial system, and generally expected to be thrashed in the polls later that year (I see in my diary that in the week in question I observed that “the only question seems to be whether Labour will hold St Albans and Christchurch Central”, two of Labour’s safer seats, held by Minister and PM respectively,
while National had supported the Reserve Bank Act (a) it was promising to push the target date further out (to 1993) and (b) that was with the Richardson camp dominant, but there was a fear that a less “hardline” strand within the caucus might prove dominant (eg, as it was thought at the time, the popular Winston Peters and Bill Birch),
the reform programme had already ripped apart Labour, the economy was in the midst of a difficult adjustment, and privately even someone as mainstream as the Minister of Finance was saying privately (in a meeting with officials), “we all know that if we don’t get to 0 to 2 per cent, we’ll just change the target”.

All of which could be summed up in the idea that there was not yet a great deal of credibility attached to the notion that inflation was actually going to be securely lowered into a 0 to 2 per cent range. People, including markets, were searching for signals and signs that might buttress or undermine confidence. And yet it was the Bank’s job – mandated by Parliament and the Minister – to deliver that price stability outcome, and to do so at least transitional economic cost.

So what happened? On 24 July 1990 the government brought down a Budget that was treated by financial markets as something of an election giveaway. Under the rules at the time, they posted a surplus, but only by including what was in effect a large expected asset sale proceeds as revenue, and significant deficits were again forecast in the out-years. It was widely viewed as a reversal of direction after five years of sustained fiscal consolidation. There were a number of measures in the Budget (reductions in government price/fees/excises) which would have the effect of lowering the headline inflation rate for one year, but those weren’t really the focus of either the Reserve Bank or the financial markets.

Bond yields rose in response, and as market participants reflected a bit further the exchange rate fell. It was that move, rather than the Budget itself, that prompted a reaction from the Reserve Bank. Until the exchange rate fell, we had planned only a mild passing comment – about the importance of ongoing fiscal discipline – in the next Monetary Policy Statement.

At that time, we did not set an official interest rate (the OCR wasn’t a thing until 1999). And the conventional view, not just at the Bank, was that exchange rate changes had a big short-term effect on domestic prices (whereas these days the short-term effects are roughly a 1 per cent change in the CPI for a 10 per cent change in the exchange rate, in those days empiricial estimates suggested anything up to a 4.6 per cent change in the CPI for a 10 per cent change in the exchange rate). And so, roughly speaking, we ran policy with (unpublished) ranges in which the TWI could fluctuate, which were reset each quarter in light of the inflation outlook and changes in economic data. If the exchange rate looked to move through the bottom of the range, we made a statement (‘open mouth operations’) and usually the statement itself was sufficient for interest rates and the exchange rate to adjust (the latter back into the range).

On Tuesday 31 July – thus a week after the Budget – the exchange rate had fallen throught the bottom of our indicative range, and the Governor agreed to tighten monetary policy (it was a decision made a bit more easily than usual because all three of the more dovish senior officials were all away that week, but it was entirely in line with our standard operating framework). We knew it wasn’t going to be popular – I noted in my diary that evening the question of whether it would spark a confrontation with the government – but the point of an operationally independent central bank was to be willing to be unpopular, especially in the run-up to elections. There was a bit of a sense that it would not look good for the case for operational autonomy if we did nothing when first market doubts arose. (Some years later David Caygill confirmed to me that the government had not expected any adverse reaction.)

We made an initial statement the following morning, which pushed interest rates up but didn’t do much to the exchange rate. The statement was well-received by market economists (“who seemed surprised that we had the backbone – an NBR article this morning openly suggested that we want to back away”) and the Opposition finance people “who are impressed with the explicitness and clarity of the statement” (they had been criticising us for oblique communications), and even the media coverage wasn’t bad. The Minister of Finance was not terribly supportive, but the Prime Minister was overseas.

On the following day, we were pondering whether we needed to make another statement – to get the exchange rate back within the range. Those with a particularly good memory may recall that this was also the day (2 August) Iraq invaded Kuwait, which pushed oil prices sharply upwards. At the time – although we weren’t knee-jerk reacting to oil prices – our stance would have been that first round oil price effects were to be looked through, but that much higher oil prices would create risks of higher inflation expectations and a spillover into holding underlying or core inflation above target.

And so we made another statement the following morning. For a time that day we thought we’d completely botched things because there were wire service reports that Iraq had gone on to invade Saudi Arabia too, but of course that was soon proved false. Interest rates rose quite a bit, and the exchange rate also edged higher. Banks began raising mortgage rates prompting the Minister of Finance to come out with rather silly comments (“presumably under Palmer’s orders”) about the banks being mean and out to get the government. With the Prime Minister’s return both he and the Minister were out with further critical comments – recall that they were less than three months out from an election thrashing . The comments were aimed especially at the banks, while noting that there was nothing the government could do (monetary policy operational decisions having been handed to the Bank).

It wasn’t as if the Bank itself was totally blinkered and doctrinaire during this period. In the days following this episode we discussed ourselves at senior levels whether we should consider recommending pushing back the target date (to, say, 1993) but on balance decided not to do so just yet.

That specific controversy died down pretty quickly, and to my mind remains an example of the system working as it was supposed to. We were doing our job, and the government was doing its (setting fiscal policy, having initially set the inflation target itself). I haven’t checked with Don Brash but I’ve never heard a suggestion that the framework, the target, or Don’s position was then in jeopardy. In fact, a month or so later, Don was upsetting the Opposition by making himself somewhat party to the “Growth Agreement” the government and the unions reached – in our terms, what that amount to was simply restating that if inflation pressures (this time wages) were lower then all else equal monetary policy would be able to be easier and interest rates (and the exchange rate) lower.

With the benefit of hindsight one can argue about whether the Bank’s monetary policy tightening was really necessary. In some respects, the market reaction post-Budget was a confidence shock and demand might have been expected to weaken anyway. Moreover, actual exchange rate passthroughs were to prove weaker in future than had been the case in the past. With better analysis might we have realised that sooner? Perhaps. But as I noted, the Bank’s reaction was wholly consistent with the Policy Targets Agreement, signed only a few months earlier, and with our best understanding then of how the economy worked, in the midst of a highly contentious and uncertain disinflation, and was supported by the bulk of private market economists.

I’m not sure where Henry Cooke got his story, but it just wasn’t “chaos” then, and to the extent there was any, it wasn’t Bank-initiated.

In fact, that episode wasn’t even close to the toughest political challenges for the Bank. Only a few months later, National was in power and Jim Bolger in particular was very unhappy with some of the choices the Bank was making. Goldsmith records Ruth Richardson warning Brash, as she was about to leave for an overseas trip, not to “make waves” as his “best friend at court” wouldn’t be around to provide cover. That angst went on for months, and even culminated in pressure on the Bank from senior Treasury officials to ease monetary policy specifically to assist Richardson’s own political position. (I am less confident that we handled 1991 that well, even on the sort of information we should have used at the time).

And then, of course, a decade later there was Don Brash’s infamous Knowledge Wave conference speech – given rather against the advice of various of his closer advisers – which, whatever its substantive merits, did involve stepping well outside his statutory role, and greatly irritated the then Prime Minister, in turn poisoning the prospects for any internal candidate succeeding Brash when he left for politics in 2002.

The point of this post is really twofold. I quite like delving into the monetary policy history, much of which isn’t that well or readily accessibly documented. But I was also keen to differentiate that episode from the current controversy around Orr. In 1990 the government set the mandate – and was free to change it at any time – and we were simply doing our best to implement that mandate, in a climate of huge political and economic uncertainty.

By contrast, when Adrian Orr is proposing banning people from serving on the boards of bank parents and subs or – much more radically – proposes that he should more or less double how much capital locally-incorporated banks would need, he isn’t following some clear and specific mandate set by Parliament or the Minister, against which he can readily be held to account. He is pursuing a personal whim. His stated goal – reducing the risks to the soundness of the financial system – is certainly an authorised statutory goal, but there is no professional consensus on what level of risk is appropriate, or what policy steps might deliver that level of risks, or what costs might be imposed in the transition or the steady-state. And there are no effective rights of appeal, no override powers, to his one-man exercise of his personal preferences. That simply isn’t appropriate. With superlative supporting analysis, and a long and open period of real consultation – before the Governor nailed his colours to the mast, as prosecutor in the case he himself will judge – it might be one thing (still not ideal). What we’ve actually had in the past year falls far short of that sort of standard. It is a much more serious situation – including because there are no self-correcting mechanisms (eg inflation falling below target, telling the Bank it has things a bit tight – than a one-week flurry around a modest monetary policy adjustment implemented in pursuit of a goal the government itself had explicitly set.

The Minister of Finance and the Board do not have formal override powers. But they could, and should, be using the leverage they have to insist on a much more compelling case being made for any actual policy adjustment (and not for that case to be published only after the decision itself has been made). Cooke’s article quoted a submission suggesting annual GDP costs of up to $1.8 billion a year, but the Governor’s own deputy has quite openly suggested that the policy will cost the economy $750 million a year. For gains – in a sound and well-managed banking system – that are far from evident, in an economy where tightening credit conditions, even just in a transition, are about the last thing that is needed.

80 years today since we entered World War Two

September 3, 2019 Michael Reddell New Zealand economic history, Productivity

It is eighty years today since New Zealand declared war on Germany, joining the United Kingdom in responding to the unprovoked aggression of the German invasion of Poland. Until just now, glancing at one of the government historical websites, this statistic hadn’t occurred to me

New Zealand was involved for all but three of the 2179 days of the war — a commitment on a par only with Britain and Australia.

It is estimated that 11928 New Zealanders died in the course of that conflict, a death rate (per million population) higher than in any other Commonwealth country. Dreadful as the war was, it still strikes me as something closer to a just war (for our side) than most other conflicts in modern history – although, of course, the counterfactual is unknowable.

Back in the very early days of this blog, I wrote a short post on some aspects of the New Zealand economy in and around World War Two (while lamenting the absence of a modern analytical book-length treatment). Here is the gist of a few of the paragraphs from that post

Two things from the period did stand out.

The first is that, while New Zealand devoted almost as much of its GDP to the war effort as any of the major combatants (at peak similar to that in the UK, although the UK held the peak for longer), material living standards for the civilian population seemed to remain relatively high – notably the quality of the diet, access to petrol etc. Perhaps that partly reflects just what a rich country New Zealand then was. Using Angus Maddison’s data:

1939 GDP pc

New Zealand’s GDP per capita in 1939 was second highest of those countries shown (a year earlier – the US in recession – we’d been top of the table). It may have been easier to devote a larger share of GDP to the war in a rich country like New Zealand than in a relatively poor one like the USSR, where a larger share of resources would have to have been devoted to subsistence.

And the second point is the dramatic transition: New Zealand went from being on the brink of default in 1939 to being, in effect, defaulted on just after the war. In 1939, in the wake of the imposition of exchange controls, Walter Nash emerged from a humiliating mission to London, with a very onerous schedule of overseas debt repayments. If the war had not been looming – which made the British government keen on maintaining good relations with the Dominions – it is quite possible that New Zealand would have been unable to rollover maturing debt at all, probably ending in a default to external creditors. By just after the war, New Zealand – having markedly reduced its external debt ratios during the war – made a substantial gift to the UK (as did Australia): in reality, Britain was quite unable to meet all its obligations and needed some of them written down.

In a paper a couple of years ago, some IMF economists looked at examples of countries that had markedly reduced their overseas debt. The New Zealand experience during WWII was as stark as any of those reversals, but is too little studied. It seems to have mainly resulted from a determination to pay for as much of the war as possible from taxation, together with the controls and rationing that limited private sector consumption and investment. But it was not because of any strength in New Zealand’s terms of trade:

WW2 TOT.png

New Zealand’s terms of trade fell during the war years – our import costs rose as global inflation increased, but there was little adjustment in the prices of the agricultural/pastoral products New Zealand sold to Britain.

Notwithstanding the lives lost (and the constraints on consumption, free speech etc) New Zealand’s experience of World War Two was pretty mild. No combat occurred on our shores – nor was it ever credibly likely to – and we didn’t even have anything akin to the bombing of Darwin or of Pearl Harbor.

Of all the countries involved, perhaps Poland’s experience was worst. I wrote a post here late last year, at the time of the 100th anniversary of the end of World War One (in turn leading to the re-establishment of an independent Poland), in which I noted that

My own reflection on Poland is that it is hard to think of a place in the western world (say, present day EU, other bits of western Europe, and western European offshoots – eg New Zealand, Australia, Canada, US, Argentina, Chile, Uruguay) that wouldn’t have been preferable to live in over the last 100 years or so, at least as judged by material criteria. Perhaps if you were German, you have to live with the guilt of World War Two, but most of Germany was free again pretty quickly. Romanians and Bulgarians might have been poorer on average, but they largely escaped the worst horrors of the German occupation. To its credit, Bulgaria managed to largely save its Jewish population, while the Polish record was patchy at best. With borders pushed hither and yon, and not a few abuses of other peoples (notably ethnic German) post-war, sanctioned by the state, the place then settled into 40 years of Communist rule. There is a lot to admire about Poland, but I wouldn’t have wanted to live there any time in the 20th century.

And never more so than during and just after World War Two.

But against that backdrop it leaves the story of the Poland in the last 30 years or so all the more impressive. Some will be critical of various aspects of Polish governance etc, but they are now bringing up 30 years of democratic government – and changes of government – something that would have been hard to imagine when I was young, or – in the late 30s – when my parents were young.

And then there is the economic performance. In 1938, it is estimated that Poland’s average real GDP per capita was just a third of New Zealand’s. The most recent IMF estimates suggest that this year, Poland’s GDP per capita will be 82 per cent of New Zealand. New Zealand has, of course, been a poor performer, but relative to Germany over the period Poland’s GDP per capita has improved from 40 per cent to 60 per cent.

And then, of course, there is productivity: real GDP per hour worked. We don’t have very long runs of data for this variable, but here is the ratio of Poland to New Zealand for the 25 years for which there are data for both countries.

poland real GDP phw

Them doing better doesn’t make us worse off (of course). Their success is great for them and their people.

But, as we ponder the deeper issues of loss, sacrifice, freedom, the threat of tyranny etc – all exemplified in the story of World War Two – it might still be worth reflecting on how extraordinary New Zealand’s relative economic decline (relative to every single country on that first chart above) would have seemed to our leaders in 1939 if someone could have told them then how poorly New Zealand itself would do over the next 80 years.

A run on the bank (well, building society)

June 22, 2019March 16, 2023 Michael Reddell Financial stabilty, New Zealand economic history

Being a bit early for an appointment yesterday, I ducked into a secondhand bookshop and emerged with a history of Countrywide Bank (by Tony Farrington, published in 1997), to add to my pile of histories of New Zealand financial institutions and major corporates. For younger readers, perhaps unfamiliar with the name, Countrywide grew up from the building society movement, became a bank in the late 1980s after deregulation, and was taken over by the National Bank (itself later taken over by ANZ) in the late 1990s.

As I idly flicked through the book, I came across the account of one of those little episodes in financial history that (as far as I know) are not that well documented: the run on the building society, in April 1985. Literal physical retail bank runs – people queuing in bank branches and out onto the street – just aren’t that common. When there was a run on Northern Rock in the UK at the start of what become the widespread financial crisis of 2008/09, the story was told that it was the first retail run in the UK for 140 years. I am not sure if that is strictly true, but (fortunately) such runs are rare. Deposit insurance supposedly contributes to that, but so do well-managed banks.

In April 1985, it was still the very early days of the comprehensive new wave of financial liberalisation that had begun when the Labour Party had taken office the previous July. And it was only six weeks since the exchange rate had been floated, and five weeks or so since the extreme pressure on liquidity had seen overnight interest rates trade up towards 1000 per cent. One-month bank bill rates peaked at about 70 per cent, and three-month rates peaked at around 35 per cent before the Reserve Bank intervened to stabilise the situation. The overall level of interest rates had risen enormously (even post liquidity stabilisation) and anyone left sitting on (say) long-term government bonds faced very substantial mark-to-market losses. There was a great deal of uncertainty about who might flourish, and who not, in the new environment. And the newly-floated exchange rate was not exactly stable.

According to the Countrywide history’s account, in early April there had been rumours circulating for several days about the viability of Countrywide, which crystallised on Wednesday 10 April when an Auckland radio station ran a comment from one of their journalists that “there is no truth in the rumour that Countrywide is in financial difficulty”, which seems to have made the rumour much more widely known than it had been.

Countrywide protested to the radio station (perhaps reasonably so, but inevitably it was futile – what was done was done), and they prepared a media release supposed to highlight their strength, but it took several days to get this in daily newspapers. Reading the release now, with 34 years hindsight, I’m not sure that as a nervous depositor I’d have been reassured by it – indeed when financial institutions boast about how rapidly they had been growing (in a climate of big changes in relative prices, and a great deal of uncertainty) it is probably reason for increased unease.

By this time, deposit withdrawals were already increasing significantly, and management was at pains to ensure that no branch was in danger of running out of cash even briefly. And by this time, management had tracked down how the rumours seem to have started – in the failure of a totally unrelated trucking company Countrywide Transport Systems Limited. By then, the knowledge wasn’t much use to them. They’d planned a press release explaining where the rumour had come from, but before it could run they had to deal with a development completely from left field: a Social Credit (monetary reformers) MP had issued a press statement referring to “widespread rumours about the impending collapse of a major building society” (by this time there were only two majors).

Countrywide called in the Reserve Bank and the then Governor, Spencer Russell, managed to get hold of the MP concerned – at Wellington airport – within 45 minutes of the statement being issued. Morrison retracted the statement, but it was too late. As the history records “hundreds of depositors demanded their money”.

The run seems to have been focused in Wellington (and Hamilton), with queues outside several branches – 50 metres down the street outside the main Lambton Quay branch. By the end of the day, customers had pulled out $10 million of deposits (Countrywide’s total assets then were about $445 million). The next day, Thursday, they lost another $9 milliom in deposits (not just “mums and dads”, with withdrawals by solicitors being particularly evident.

The powers that be engaged in a significant (and successful) effort to staunch the run, with statements from the Associate Minister of Finance, the Governor of the Reserve Bank and the chief executive of the National Bank all reassured the public that Countrywide was sound. By the Friday, it was estimated only $1 million of panic withdrawals occurred.

(These numbers don’t fully add up but) the history records that total deposit losses over the period of the run were around $30 million – a far from insignificant share of total deposits. Countrywide estimated that the run had involved a direct P&L hit of around $1m, arising from the need to liquidate assets (government stock) in a rush, and additional staff, advertising, and communications costs.

And then the money flooded back – it is recorded at times there were long queues to deposit the funds that had been withdrawn just a few days previously. And the history mentions – without comment – that people were often depositing the same cheque they had taken from Countrywide only a few days previously. I don’t really remember the run – I was a junior Reserve Bank economist doing monetary policy stuff, and yet there is no mention of the run in my diary at all – but that factoid was grist to the mill in debates about financial stability for years to come. If you were so concerned about the health of your bank (building society) as to run on the bank, spend an hour in a queue, forfeit your place in the queue for mortgage eligibility (this was a thing still in 1985), why would you (a) take a cheque from the very bank you were concerned about (the danger of mugged on Lambton Quay had to be small, for example), and (b) why would you then not bank it straight away and pay for expedited clearing? I still don’t claim to fully understand the answer to either question.

Eligibility for mortgage lending was still an issue in early-mid 1985. Banks and building societies had been liability-constrained, and thus the practice grew up of having to have a suitable “savings record” with a specific lender to get a (first) mortgage (at least if you didn’t work for a bank, an insurance company, or the Reserve Bank). The lender was doing you a favour not (as now to a great extent) the other way around. Pulling your money out of the financial institution you might want to borrow from really was a big issue. Of course, better to lose your place in the mortgage queue than to lose your deposit (had it come to that), but it was a hurdle many depositors faced then that they would not face now.

As it happened, times were a changing, and the history records that Countrywide eventually “relented” (their words) and restored to their place in the mortgage queue those who had pulled their money out in the run. Before very long, those depositors would have found other lenders competing to lend to them.

There are quite a number of unanswered questions in the Countrywide history (unsurprisingly – geeky monetary economists weren’t the target market for the book), and I had a look at various other books on my shelves to see if I could find any other angles. There was nothing in Roger Douglas’s book or in the biography of (then Deputy Governor) Roderick Deane, but there was a brief mention in the history of the Reserve Bank published in 2006. Here is the relevant text.

But, of course, that passage only raises further questions, including ones about how the Governor (or the Associate Minister) could be confident in their assertions about the soundness of Countrywide. Whatever the substantive health of the institutions, were their statements well-founded in verified and verifiable data, or were the statements to some extent a confidence-trick: well-motivated, but actually based on little or no more information than the public had? (There are readers of this blog who would pose similar questions about the style of bank supervision adopted by the Reserve Bank to this day.) The Bank’s files may offer some answers (or maybe not). And was the statement of support from the National Bank chief executive supported by offers on unsecured liquidity assistance (that would be a clear signal of confidence that might have encouraged the Reserve Bank).

Perhaps the authorities made a relatively safe call – after all, resurgent inflation meant that the value of Countrywide’s loan collateral was rising. On the other hand, like all regulated entities in those days, Countrywide had had to hold significant amounts of government securities, and government security interest rates had risen sharply. Many institutions – notably the trustee savings banks – had taken big mark to market losses, and there was a strong sense that the viability of some of them would have been in jeopardy, especially if there had been timely and clear mark-to-market reporting. Add in the high and very variable wholesale funding costs (probably only a small proportion of Countrywide’s funding) and one is left wondering how robust an analysis lay behind the official statements of support. There was another building society run – on competitor United – a few years later, and the Reserve Bank history records that that time United took the view that official statements of support (Governor and Prime Minister) were tardy. What sort of rethinking went on internally after the Countrywide episode?

I’m not playing any sort of gotcha here. If anything, it is more a plaintive appeal for some economic and financial historian to undertake a systematic treatment of the New Zealand banking and financial sector through the liberalisation period. There were all manner of small crises and near-crises during this period (PSIS, the devaluation “crisis”, Countrywide, United, RSL, the DFC, NZI Bank, the BNZ (twice) and probably others that don’t spring immediately to mind. There are serious scholarly treatments of the experience in the Nordic countries with liberalisation at about the same time, but surprisingly little about New Zealand.

Not, I suppose, that historians will be able to help answer the question of why panicking depositors took their money in a cheque and then, it appears, in many cases didn’t even rush to get the cheque cleared, or to bank it at all.

I’m sure there are readers who were involved to some extent in these matters, whether at the Reserve Bank or elsewhere. I’d welcome any perspectives or insights in comments.

UPDATE: See the comment below from Andrew Coleman about the United run.

croaking cassandra

Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

New Zealand economic history