Three New Zealand Depressions

New Zealand and the World: Essays in Honour of Wolf Rosenberg ed W.E. Wilmott, (1980) p.72-87.

Keywords: Macroeconomics & Money; Political Economy & History;

The graphs which illustrated the tables are not included

By 1979 it was evident to even the conventional wisdom that New Zealand was in its greatest economic crisis since the 1930s. It is natural to ask whether there are similarities between this crisis and the earlier ones in the 1880s and the 19305, and if so, whether we can learn from our history.

In fact, the late 1960s and the 1970s are more comparable to the late 1860s and the 1870s, and to the 1920s. The previous two Great Depressions were each marked by two phases, a. recession phase and a depression phase, separated by an external event that tipped New Zealand from the milder but nonetheless economically difficult recession phase into the deep depression phase with severe social and economic hardship. In that recession phases are associated with the ability to borrow overseas, New Zealand could be said to be in the recession phase of its Third Great Depression, at least to 1979.

There is some controversy over what constitutes a depression in terms of events and what were the appropriate periods for the New Zealand depressions (Hawke 1974, 1975). While these issues are not insubstantial, we propose to avoid them by concentrating on a specific depression process in which land prices, the profitability of farming, and the state of overseas’ borrowing act together to create a pattern of first false prosperity and subsequently economic dislocation. While the recession phase could be treated as distinct from the recession phase (Hawke 1975), in terms of the economic processes that are being analysed here the two phases are integrally associated

Perhaps the. most important conclusion of this study is that the previous two Great Depressions have not been an external world depression imposing itself on New Zealand. The evidence of the recession phase preceding the world depression suggests that part of the depression phase is of our own making. Whether we can unmake the depression phase of the Third Great Depression remains to be seen.

The Long Depression

The broad outlines of the long Depression are reasonably well recorded (Sutch, 1966 p.3-37; Simkin, 1951; Ch. X, Sinclair and Mandel 1961 IV, V, VI; Hawke.1975). Following the peaking of the gold production in 1866, and the proclamation of peace ending the Anglo-Native land Wars in 1865, the New Zealand economy slumped into a long period of depressed conditions, which ended in the mid-1890s with world Inflation and the growing significance of the exports of refrigerated meat and dairy products.

In the thirty-year depressed period there were minor fluctuations (Simkin, 1951) .and occasional short bouts of prosperity, the most noteworthy being associated .with Vogel’s public-works programme financed from public foreign borrowing in the 1870s.

As a result, the Long Depression appears as two distinct phases of about equal length, of which the second phase was more severe. The break between the phases occurs around 1880 and was Initiated by the City of Glasgow Bank Crash in October 1878, in Britain, which caused the withdrawal of bank credit from New Zealand in the following years.

There are little comprehensive data for the period, which limits the possibility of detailed economic analysis. Fortunately, we do have a set of price indexes constructed by J. McIlraith ( 1911) for the period from 1860 to 1911, and these, supplemented by less complete data series and historical records, enable us to provide some account of the economic mechanisms.

McIlraith’s price series for farm products and non-farm products are shown in Table I. The second half of the 19th century..was a period of falling world prices, so we have also shown the ratio of farm-product prices to non-farm-product prices, which might be treated as a measure of the farm terms of trade. Simkin’s terms of trade includes gold as an export commodity (1951, p.35). This is relevant for his purposes, but not when we are primarily concerned with behaviour in the farm sector. We shall be using a similar concept in the next two sections

Table 1: Prices Indexes for the Long Depression


Year Farm
1861 194 181 107
1862 186 186 100
1863 220 183 120
1864 217 188 115
1865 202 185 109
1866 224 191 117
1867 186 187 100
1868 193 181 107
1869 149 169 88
1870 131 163 80
1871 122 160 76
1872 126 164 77
1873 156 167 93
1874 164 160 103
1875 148 148 100
1876 140 140 100
1877 152 142 107
1878 145 131 111
1879 141 121 117
1880 126 131 96
1881 122 127 96
1882 129 120 108
1883 121 117 103
1884 112 116 97
1885 107 112 96
1886 108 108 100
1887 100 104 96
1888 96 106 91
1889 118 109 108
1890 100 110 91
1891 101 111 91
1892 103 104 99
1893 100 100 100
1894 98 98 100
1895 91 94 97
1896 98 95 103
1897 100 96 104
1898 103 95 108
1899 102 96 106
1900 102 100 102

Source: McIlraith (1911) Table 4A, pg 68.

In nominal terms, both farm-product and domestic prices were high in the first half of the 1860s, and indeed relatively higher than British levels compared to a few decades later, perhaps reflecting short-term scarcities caused by gold rush and war, and high transport costs.

From the mid-1860s farm-product prices fell sharply. In 1871 they were 60 percent of the 1861 average level. Non-farm-product prices fell more slowly, so that the farm terms of trade suffered a sharp deterioration. However, in the early 1870s farm products prices recovered while non-farm-product prices continued to fall, so that from 1873 to 1901 the farm terms of trade remained in a relatively narrow band rarely deviating more than 10 percent from the average in any one year.

Both price patterns are similar to that of the English Price Index (McIlraith, Graph 1), except that a slightly sharper fall may reflect the falling costs of ocean transport. Evidently prices were flexible downwards in late nineteenth-century New Zealand, and a there is no statistical series, we may assume that wages were also flexible downwards, or lower-paid women and children were substituted for men.

However one price, crucial in a capitalist economy, was not flexible downwards – the price of debt. The contractual relationships we call credit and debt are written in nominal terms, so that if prices fall, the real value of. debt rises. Or, as the farmer with a mortgage would see it, farm mortgage outgoings would rise relative to farm-income and other costs. We do not have the data for farming for the period before 1922. Nevertheless we can make some assessment of what happened.

In the 1870s land prices seem to have rise dramatically. H. Rodwell calculated Canterbury land prices rose fivefold between 1870 and 1880 (Condliffe, 1959 p.297-8), and the price for sold Crown land rose by 60 percent between 1870 and 1870 (Sutch, 1966, p.16). The discrepancy between these two figures is disappointing but in either case they show a substantial rise in land-prices while farm product prices fell four percent.

Land-price increases such as these could be economically justified by a compensating increase in output or expected output, but the value of total exports of wool and grain rose by 123 percent in the decade to 1890 (Condliffe, 1915, p. 901), but much of this increase came from increases in land use. Prices and productivity in the subsequent decade did not justify the increase either .

Justified asset prices in a market economy means that in the long run the income accruing from the asset will reflect the going rate of return. If it does not, then at some point the value of the asset will have to be scaled down. In the interim, a speculative boom can, and in the case of New Zealand land in the 1870s .did, occur.

In this speculative phase, individuals are making capital gains by selling the land at a higher price than it was purchased. This means that there must be money flowing into the boom, to compensate for the money the speculators were taking out. Characteristically, much of this money came from fixed-interest loans.

The introduction of this mortgage-debt into the economy means that no longer can land prices be simply flexible downwards. Certainly, the owner can write down the value of his land to the extent of his equity. Any further writing down involves reneging on his debt. Where a land company is involved, whose legal owners of the equity are the shareholders, the initial writing down is even more disruptive. H. J. Hanham (1963) and R. J. C. Stone (1973) describe a number of instances.

We can see now why, despite a reasonable balance in the price-structure of products throughout most of the long Depression, there were nonetheless two distinct phases. The first was when British credit flowing through the financial institutions created or supported a land-boom, When the credit ceased from 1879, the process did not simply reverse itself, but instead created bankruptcies and near bankruptcies, and the social hardships we associate with the 1880s.

By concentrating on this economic mechanism, we have neglected many other of its economic and social features. Perhaps two further points which have later parallels should be mentioned.

First, towards the depression’s end in 1891 there was elected a mildly radical (or liberal-progressive) government under Ballance and later Seddon. The economy was now swinging out of the deep depression phase, and it was not particularly the actions of the new government which created the subsequent economic prosperity .Perhaps this is part of the explanation of why the government lost its radicalism so quickly.

Second, between 1865 and 1895 the New Zealand economy went through a major structural change. In 1865 New Zealand exported quarry products such as gold, timber, and kauri gum, plus wool and tallow from land-extensive sheep. By 1895 the depletables were becoming exhausted, making up only 20 percent of exports, while wool and tallow added 46 percent. The growth industries were the export of refrigerated meat and dairy produce, by now contributing 19 percent and growing rapidly. It seems doubtful that the population envisaged by Vogel could have been sustained by a wool and tallow economy. Refrigeration, which he could not have foreseen, and the basis for twenty-five years of prosperity from the end of the Long Depression in 1895 to the beginning of the Interwar Depression in 1920.

The Interwar Depression 1920-1940

The National Myth is that New Zealand experienced a great depression in the 1930s. However, New Zealand was basically depressed throughout the entire period between the First and Second World Wars (Sutch 1966, p. 37-46).

After the First World War, there was a sharp slump in export prices, 25 percent down between 1920 and 1922; bankruptcies rose and remained high throughout the 19205, and farmers, particularly servicemen, were walking off farms, (Burdon, 1965, Ch. 1-4). Overall, the volume of production in most industries seems to have grown during the 1920s (NZOYB, 1930, p. 927) but there were falls in 1919-20, 1921-22, 1923-24 and 1925-26. We shall show evidence that farming was not basically profitable. Overseas borrowing was continued. (The Vogel-like borrowing programme initiated by Ward in 1928 is the most renowned instance, but borrowing of almost comparable magnitude had occurred in 1925-26 and 1927-28).

However, as in the case of the Long Depression, the first phase collapsed into a second phase. The 1929 Wall Street crash rippled round the world, New Zealand borrowing became limited, and bank credit was withdrawn. Meanwhile, export prices fell, and the period from 1931 to 1933 was one of the most acute periods of depression that New Zealand has ever experienced. Export prices began to increase from 1934, and the New Zealand economy began to expand again, although there were still 32,000 males unemployed or in receipt of relief from the Employment Promotion Fund in March 1939 (compared to the peak of almost 80,000 in 1933). (All data can be found in various New Zealand Official Year Books).

While there are much more data on the interwar period, it is often very fragmentary and incomplete. A useful set for analytic purposes is the Farm Income and Productivity data from 1921-2. (Philpott et. al, 1967) which we have summarized in Table 2. While it omits the early few years of the period, it gives a good coverage across the break point of 1929-30. Unfortunately, there is not a Farm Land Value series, so a guestimate was made (Appendix).

The Farm Terms of Trade Series, that is the ratio of farm-output prices to farm-input prices, suggests a relatively high level in the 1920s followed by a sharp drop in the early 1930s, and from 1935 returning to a level about 20 percent below the 1920s average. The series follows quite closely the external terms of trade, the ratio of export prices to import prices. Because New Zealand is small, we may take the external terms of trade as exogenously determined in the world (or British) markets. In that the farm terms of trade appear to follow the external terms, this suggests that on the whole internal prices were ex post flexible downwards. In fact, a number of measures were taken to scale down prices, including cutting civil-service salaries in 1931 and 1932, the Arbitration Court taking similar action in the private sector in 1931; in 1933 mortgage rates were cut by a fifth by the National expenditure Adjustment Act, and from 1933 the Mortgagors and Tenants Relief Act, and successor legislation, scaled down mortgage-debt. Moreover, the price of sterling (and hence farm-export prices in New Zealand currency) was raised in January 1933.

Table 2: Data for the Interwar Depression

Year (1) (2) (3) (4) (5) (6) (7)
1922 51.9 67.3 77.1 4.4 196 2.2
1923 54.8 59.3 91.9 8.8 205 4.3
1924 53.5 55.8 95.7 7.3 212 3.6
1925 62.8 56.5 111.2 17.0 229 7.4
1926 54.9 56.0 98.0 7.2 220 3.3
1927 51.7 54.7 94.5 80.3 6.3 220 2.9
1928 53.7 55.2 97.2 88.9 11.9 229 5.2
1929 56.9 55.6 105.9 94.9 17.2 243 7.1
1930 49.9 55.6 89.7 84.0 8.1 237 3.4
1931 35.2 55.2 63.8 67.9 -8.5
1932 30.6 52.4 58.3 60.0 -9.1
1933 26.9 48.4 55.6 58.1 -3.1
1934 34.0 47.7 71.2 64.9 11.4
1935 32.9 47.8 68.8 71.6 8.0
1936 39.5 48.4 81.6 76.5 18.1
1937 48.5 53.1 91.3 85.9 24.9
1938 46.2 59.1 78.1 86.6 13.2
1939 47.5 60.9 77.9 82.5 10.3
1940 48.9 62.0 78.8 81.4 10.8

Year (March year ended)
(1) Farm Output Prices : Philpott et al (1967) p.27 (1949/50 = 100)
(2) Farm Input Prices : Philpott et al (1967) p.27 (1949/50 = 100)
(3) Farm Terms of Trade: (1)/(2)
(4) External Terms of Trade: NZOYB 1976; (Average 1927-1940 same as (3))
(5) £m : Philpott et al (1967) Table 1 – adjusted, see appendix.
(6) £m : Appendix
(7) % p.a.: (5)/(6)

Nonetheless, the farm terms of trade fell in line with the external terms, an effect visible in the income by Farmer Equity series, where Philpott’s Net Farm Income Series has an allowance deducted for the farmer’s labour earnings. (Appendix) Throughout the 1920s the profits ran between £6.3m and £17.0m. (We shall see how high this return was shortly). However, in the three years 1930-1, 1931-2, and 1932-3, profits were actually negative. Indeed, Net Farm Incomes including farmer’s imputed earnings were negative in 1931-3. After 1932-3 profits returned to levels similar to the 1920s.

In order to calculate profit rates, we need a series of the capital values of farms. Unfortunately, there is no series for unimproved land values, but we have been able to construct something like one up to 1930. This suggests that a rate of return ignoring the capital gain on the farmers’ wealth averaged 4.4 percent p.a. over the nine years to 1929-30. The return must be compared with the 6.5 percent p.a. that he was paying on his mortgage (Philpott et al 1967, p.42).

The question arises why the farmer would accept a lower return on his farm wealth than that he could get by investing in someone else’s farm. The gap between the two rates is too large explain by data quality, or by farmers’ willingness to pay a premium in order to farm. In balance we would expect farmers to require a premium above the mortgage interest rate interest rate because of the greater risks they face.

There are two related possibilities. Firstly, the farmers may have been over-optimistic, expecting the future to give them higher returns to compensate for the current poor returns. Secondly, the farmer may have been receiving an additional capital gain from the land.

The lack of land-value series restricts us from pursuing this last possibility .The one available series suggests that land-prices rose rapidly in the 1916 to 1925 period, but it ends in 1925 (Condliffe and Rodwell, 1927). It does not seem likely that land prices continued to rise substantially in the latter half of the decade if only from the mortgage evidence (Appendix).

Whatever the reason for the low return, arithmetically it is attributable to overvaluation of land. It seems likely that this over-valuation occurred in the 1910-20 period, reflecting rises in export prices during the First World War. Some indication of the level of over-valuation can be gained from noting that unimproved land values and debt would have to be scaled down 30 percent in order for farmers to have averaged 7 percent p.a. on their wealth.

We are now in a position to examine two effects to explain the low farm income in the three years from 1930-31, 1931-32. 1932-33: the farm terms of trade, and the over-valuation of land.

Farm Terms of Trade In the five years from 1925-26 to 1929-30, the farm terms of trade averaged 97.1 (1949/501= 100), while In the five years from 1933-34 to 1937-38 it averaged 78.2. Between these periods they averaged 59.2 or a third below the 87 .7 average of the preceding and succeeding periods. If we assume that prices had been more flexible downward, so that the 87 .7 figure was attained, we can calculate that net farm Incomes would have been £24m higher over the three years. We have had to make all sorts of implicit assumptions in order to get this figure, including a partial equilibrium frame and that falls in farm costs were not reflected in consumer and other prices. But the result is an order of magnitude, which suggests the loss due to the unusual fall in the farm terms of trade was about a year and a half’s income.

Land Over-valuation. If we assume that farm land was over-valued by 30 percent in the 19205, that correspondingly it was carrying 30 percent too much debt, and that the savings in interest payments were used to reduce farm-debt further , farmers would have begun 1930-31 with only half the debt they did. In addition, rental payments would also have been down by a similar proportion. This reduction in costs of interest and rent would have equalled £18m over the next three years. Again, this is an order of magnitude, but it is over a year’s usual farm net income, and only a bit below the farm terms of trade effect.

The sum of the two explains £42m over three years. Such an additional amount, would have brought farm incomes up to the levels of the poor years 1922-23, 1923-24, 1925-6, 1926-7, 1933-4 and 1934-5. Thus, the industry could have coped. Indeed, the industry may have coped if it had only to face the terms of trade or over-valuation effect by itself.

It is tempting to attribute 24/42nds of the industry’s problems on the terms of trade effect and 18/42nds on the over-valuation. This would be misleading, since the two are closely connected. Our over-valuation calculation assumed the farm terms of trade of the 19205. Given that the terms of trade deteriorated in the 1930s, we have underestimated the over-valuation of the land, and hence its effect.

On the other hand, it was the fall in the terms of trade which precipitated the realization that the land was over-valued. This was reinforced by a withdrawal of credit, which made it more difficult to tide the industry over in the expectation of better future times.

New Zealand came out of the Interwar Depression as the world inflated through an arms race and towards the Second World War. The new terms of trade were lower than the 1920s, which had the important consequence that either farming would have to improve its productivity relative to domestic industry by roughly twenty percent, or there would be a shift in industrial structure in favour of domestic production and import substitution. The end of the 1930s saw the development of new manufacturing industries, the first major shift since the 1880s.

Another form of structural change was the introduction of new forms of economic and social management and related institutions such as Marketing Authorities, the Reserve Bank, Social Security, the State Advances Corporation, and Keynesian economic management. Some of these introductions are associated in the national mythology with the first labour Government elected in 1935, yet precursors can be observed before 1935.

Like its Liberal predecessor, Labour had been elected on the end of the depression upswing. Much of the economic prosperity associated with the period was thus not of Labour’s making. And like its predecessor, the first Labour was unable to sustain its radical thrust.

The Third Great Depression

At the time of writing, the conventional wisdom points to the dramatic fall in New Zealand’s external terms of trade (i.e., export prices relative to import prices) after the October 1973 Oil Crisis as the commencement of the current economic crisis.

However, an examination of a variety of economic indicators suggests that a significant break in New Zealand’s economic performance took place in the mid.1960s. (Easton 1979, 1980).

The external terms of trade were 12 percent lower after 1967 .Increasing around 2.8 percent p.a. until 1967 , consumer prices start increasing more rapidly after that time. Farm profitability (excluding the capital gain) drops from 6.3 percent p.a. before 1967 to 4.4 percent p.a. after, or by 30 percent . The return on personal wealth (again excluding capital gains) falls from 4.5 percent p.a. to 3.5 percent, or by 23 percent. Instead of growing at 3.5 percent p.a., as it did to 1968, farm output stops growing after this date. The growth of real GNP falls from 4.3 percent to 2.5 percent p.a., or over 40 percent, after 1966. Net immigration is halved after 1966, while registered unemployment leaps from virtually nothing to an average of 4000 from the same date. One series which does not show the break in the mid-1960s is that for the balance of payments. We shall return to this. (Easton, 1979)

We have interpreted the post-1966 change as a step downward. It is not difficult to see in many of the series a declining trend, particularly if 1972/73 with its very favourable terms of trade (or in some cases 1973/74) is neglected. It is also noteworthy that the post-1966 period is much more erratic.

What is clear from the above is the foolishness of seeing New Zealand’s economic problems in 1979 as originating in 1972/73. The year 1966/67 looks a much better candidate for the crucial year. Moreover, on the basis of the previous two Great Depressions, it would appear that this post-1966 period has been that first recession phase of the Third Great Depression. We can see this further by once more examining farm performance.

Before doing this, we might mention why New Zealand farming did not enter a recession phase in the early 1950s. Farm prices had risen sharply in the late 1940s, partly as a result of the removal of land-price controls. Fortunately, the farm terms of trade improved at the same time, justifying the higher land-prices. Throughout the 1950s and 1960s the price of farms relative to the consumer price index slowly decreased, by around a fifth, suggesting that farms may have been slightly overpriced in the early 1950s (Easton, 1978). Note how this over-valuation was removed by rising general prices rather than by falls in the nominal value of land.

Nonetheless, throughout the period, farmers were enjoying the real capital gains of the late 1940s and the subsequent nominal capital gains. The new purchasers, buying the capital gains, raised mortgages to do so, and the rates of farm-debt to equity rose from around a quarter in the early 19505 to over 60 percent in 1970.

The terms of trade which had risen to record heights in 1950 as a result of the Korean War boom remained prosperous but variable through to the mid-19008 and began to decline, except for the 1972/3 boom. The impact of this decline on the farm sector was manifold, first cutting into the underlying rate of return, and then as the investment programme slowed down through lack of re-investable income, farm output stopped increasing. Instead, investing in land to return untaxed capital gains became popular.

Table III: The Data for the Third Great Depression


Year (1) (2) (3) (4)
1955 118 112 5.8 3.7
1956 111 109 5.0 8.4
1957 120 105 6.3 1.2
1958 104 93 6.8 3.4
1959 94 88 5.7 2.6
1960 102 102 7.0 7.4
1961 93 94 7.0 5.8
1962 87 90 5.6 4.6
1963 90 96 6.1 7.3
1964 101 106 7.2 6.7
1965 101 109 6.6 7.7
1966 99 106 6.1 3.4
1967 90 103 4.9 2.4
1968 86 91 4.9 6.8
1969 87 87 4.8 2.2
1970 86 83 4.8 0.1
1971 84 83 3.9
1972 91 89 4.9
1973 119 105 7.6 15.7
1974 120 5.4 12.8/TD>
1975 83 0.6 7.8
1976 71 2.1
1977 76
1978 75


Year (March ended)

(1) Farm Terms of Trade: 1955-1967 Philpott et al (1967); 1968-1973 Johnson (1976); 1956-67 = 100 (June Year)

(2) External Terms of Trade: Official Series; 1956-67 = 100

(3) Return on Farm Equity without capital gains (% p.a.): Easton (1978)

(4) Return on Farm Equity with capital gains (% p.a.): Easton (1978)

Initially, real farm-land prices continued to fall after 1966, but from 1972 as a result of inflation, the prosperous 1972-73 period, and (probably) over-optimism, farm prices began increasing again to a level comparable to the early 1950s in real terms. There is no evidence that the new levels will be matched by future farm incomes, and a cautious estimate suggests that by 1975 farms were over-valued by around a quarter. Since this includes the value of stock, plant and improvement, land by itself would be over-valued even more.

The effect of this inflation in land-values, and of the general inflation, has been to decrease the rates of farm-debt to equity in 1975 to a level similar to the 19505. We see that one of the functions of inflation is to reduce the real value of debt, although we shall suggest that the debt-to-equity ratio may rise again in the next decade.

Up to 1966 the farm terms of trade was falling relative to the external terms of trade. The decline seems to be about 17 percent a decade, which could be explained either by the greater rise in productivity in farming or by farmers having their output prices set in more competitive markets than their input prices.

However, after 1967 the farm terms of trade fall a little less slowly than the external terms, and they rise more quickly in the 1972-73 upswing. It would appear that the stabilization measures developed in the post-war economy have some effect. The most likely factor for the period 1967 to 1970 was wool-purchase by the Wool Board. On the whole, then, it is difficult to argue that commodity-price flexibility has been a problem in New Zealand.

Nevertheless, this flexibility was gained not so much by a downward flexibility as by an inflationary process in which some prices inflated more slowly than others. Mortgages remained fixed in nominal terms, and for a variety of reasons, including government intervention, nominal interest rates responded sluggishly to the increasing inflation so that real rates went negative (which again encouraged land speculation for capital gain).

In post-war New Zealand, farming was still sufficiently important for its performance to have a major impact on the economy. The falling terms of trade led to low farm profitability and to the fall in the return on personal wealth. The lower farm profitability, perhaps coupled with lack of new technological innovations, resulted in poor output performance by the farming sector; and the resulting lack of imports weakened the growth of national output. Apparently, the necessary price flexibility was generated by inflation.

The balance of payments did not deteriorate promptly after 1966 because the Government found that by managing the economy with a lower usage of capacity , indicated by the slightly higher rate of unemployment, the external account could be balanced. There was also a temporary burst in exports from higher slaughter rates as farmers cut back on livestock accumulation (Buckle, 1970). However, the price for this was that the growth of output was cut back and no effective measures were taken to deal with the basic problem of the fall in terms of trade. New Zealand should have been industrializing, in part substituting, and reorienting its farm industries.

Because of the poor growth performance and the lack of effective remedies, the lower capacity strategy was a temporary expedient. By the mid-1970s sharp rises in unemployment (and falls in capacity) left New Zealand with an external deficit of around a billion dollars a year for six successive years.

Without a borrowing programme, New Zealand would have had either a major restructuring of its dependence upon imports or massive unemployment. Without it, the substantial government subsidies to production enterprises could not have been maintained, or the welfare system would have had to be reduced. In farming alone, estimates of these subsidies range from a conservative $300m (Maugham and Ward, 1978) to up to $500m (Easton, 1978) for the year 1978-9. Without the overseas borrowing, the substantial government lending to farming, mainly through the Rural Bank, could not be sustained. The 1978 budget voted $163m at low interest rates to farmers.

It is pertinent to note how, analogous to previous recession phases, the overseas borrowing programme is being used to support the over-valued farm land, this time by subsidies to production costs as well as direct lending. Even so, it seems likely that the effective debt-to-equity ratio will be increased. First, the high rates of inflation which have been devaluing the real level of debt have also pushed up nominal interest rates in compensation. Thus, debt’s share of the farmers’ income is larger than the debt-to-equity ratio alone suggests. Second, if farmers attempt to capitalize their capital gains by selling their farms, the new owners will have to borrow in order to purchase. Thus, while inflation as a means of attaining price flexibility may have short-term advantages, it poses long-term problems, particularly if land speculation is further encouraged as a means of avoiding income tax.

The last two paragraphs include the implicit assumption that the overseas borrowing programme will be maintained indefinitely. The experience of the previous two recession phases suggests that such an assumption cannot go unchallenged. Indeed, the issue may .not be “if” foreign borrowing becomes restricted so much as “when” foreign borrowing becomes restricted. It is because New Zealand has been able to borrow that we consider the post-oil-crisis period as a continuation of a recession phase, rather than arguing that New Zealand entered the deep-depression phase then.

In a sense, such a conclusion is optimistic, for if New Zealand restructured its economy to become less dependent upon the borrowing (including sensible asset prices and debt-to-equity ratios), then at the point in the future when international borrowing ceases, we may well be able to cope without a depression phase.

However, experience over the last decade suggests that political pressure may be too entrenched and political leadership too weak to take the decisive actions which are necessary. Moreover, given that such measures may involve significant modification to the private right to purchase or own land, and to take out mortgages on such land, New Zealand may well get into a Catch-22 situation, where the most viable strategy to reduce her long-run dependency on overseas borrowing could cause a loss of private foreign confidence in the economy and the short-term withdrawal of the overseas loans, which would precipitate the deep depression phase.

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Simkin, C. G. F . (1951) The Instability of a Dependent Economy: Economic Fluctuation in New Zealand 1840-1914, London: OUP.

Sinclair, K. & W. F. Mandle (1961) Open Account, Wellington: Whitcombe and Tombs.

Stone, R. J. C. (1973) Makers of Fortune, Auckland: AUP/OUP.

Sutch, W. B. (1966) Colony or Nation? Sydney University Press.

Thankyou to Bob Buckle, Gary Hawke, Brent Layton, Wolf Rosenberg, Suzanne Snively and Bill Willmott who helped improve this paper.

Appendix I: The Interwar Depression Data

The basic data source is Philpott et al. (1967), but two developments were necessary. First, the published series combines in its net farm income series both the return to self-employed farmer and the return to the farm-equity. The earnings of self-employed farmers was calculated as 125 percent of the rate for paid , farm labour .

Second, there is no available series for the value of unimproved land. However, for the 1928-29 and 1920-30 years, the Government Statistician used the land-tax returns to calculate the unimproved value of country and farming lands; the figures were £164.5m and £166.9m (New Zealand Official Year Book, 1937, p.633). For the years before 1928-29 the figures were estimated by maintaining a constant debt-to-unimproved-land value. A sensitivity analysis suggested that other plausible assumptions would not materially affect the conclusion about the rate of return. Given the economic events after 1939, the constant proportion assumption would obviously not be valid then.

The rate of return figures are thus calculated from the following table.

Appendix Table: Farm Values in the 1920s (£m)

Year (1) (2) (3) (4) (5) (6) (7)
1922 56.7 6.1 114.8 130.7 229.4 4.4 2.2
1923 59.7 6.8 118.9 138.3 119.2 230.7 8.8 4.3
1924 60.1 7.2 124.4 143.7 123.9 323.3 7.7 3.6
1925 71.2 8.3 128.3 149.9 129.2 243.1 17.0 7.4
1926 62.9 8.7 126.7 155.2 133.8 229.0 7.2 3.3
1927 58.3 11.0 129.5 156.5 134.9 228.4 6.3 2.9
1928 61.7 12.0 133.6 156.6 135.0 232.8 11.9 5.2
1929 71.3 11.9 136.6 164.5 141.8 242.4 17.2 7.1
1930 65.2 11.9 139.4 166.9 147.7 235.7 8.1 3.4

This table has been corrected from the version in the original production
Year: June year ended.
(1) Livestock: Philpott et al (1967)
(2) Machinery: Philpott et al (1967)
(3) Improvements: Philpott et al (1967)
(4) Unimproved Land Value: See text
(5) Debt: Philpott et al (1967)
(6) Net Equity: (1)+(2)+(3)+(4)-(5
(7) Income: See text
(8) Return (% p.a.) (7)/(6)

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