The Treasury and the Nationbuilding State

Revised Paper for the 2001 Conference of the New Zealand Historical Association, December [1]

Keywords: Governance; Political Economy & History

My just published The Nationbuilders is an account of the creation and implementation of the idea of using the state to develop a nation, especially the national economy, but also in a number of other areas such as cultural policy and the environment. The story is told through a series of biographies of New Zealanders who were closely involved in nationbuilding. While I hope the book is a contribution to New Zealand biography, the book’s structure was the best way I could think of presenting the idea of nationbuilding for a general New Zealand audience. Among the alternative approaches would have been a rather dreary academic account of the origins and development of the idea, which would however have had the merit of being able to draw more directly on parallel developments in other countries. Another approach would have been to tell the story through institutions rather than people. Today’s paper is an example of this approach, for it looks at the central role of the Treasury in nationbuilding period, taking material from the book and presenting it a different way. In doing so it sharpens some of the themes, and allows the relating of the Treasury story to some the issues it faces today, reminding us that an understanding of the past can help understand the future.

The Treasury’s original function was to look after the royal treasure, taking in the revenue from taxes and estates and disbursing the monies for expenditure. Because kings had a tendency to spend more than they received – ‘on their wars and whores’ – the Treasury was also the manager of the royal debt. Over time the royal finances became separated from the national ones – a central issue in the development of the history of modern economy – and so the Treasury came in charge of the government finances. It is no surprise that the Treasury was therefore one of the earliest departments of state for the nascent New Zealand government. (Michel Bassett says the Colonial Office was the first, but one doubts that it would have done anything without first being paid.)

For most of its history the primary function of the New Zealand Treasury has been the management of the government’s finances – today sometimes called ‘the fisc’. Fiscal management remains a central role today. However, about seventy years ago the Treasury developed a second major role of economic management, when its policy advice moved from just the fisc to the economy as a whole. That economic management role in Treasury is now so publicly dominant that we tend to forget the larger part of its activities is still essentially concerned with fiscal management – after all, its statutory authority comes from the 1989 Public Finance Act.

Not surprisingly then, today the Treasury is one of the premier government departments, and its Minister is usually second only to the Prime Minister in power – on occasions he or she has seemed more powerful. That was not always so. In 1928 the activist prime minister, Gordon Coates, held a National Industrial Conference, which was attended by over 70 delegates from the private and public sectors, including five university economists and nine heads of government departments. Unthinkably today, there was no Treasury representation. In 1940, Hunter Wade began work at the Treasury as their first graduate recruit, and left shortly after when he did not see much prospect in a career there. For many of today’s senior public servants, working at the Treasury through to mid-career was not only rewarding, but was the platform from which they were eagerly recruited for top jobs elsewhere.

This initial transformation from a department of state looking after the fisc to THE department of state looking after the economy – and much besides – is associated with a single person, Bernard Ashwin, one of those with a biography in The Nationbuilders. He was the only Treasury economic adviser in the early 1930s, and was the longest serving Secretary of the Treasury – from 1939 to 1955. So he was involved in every important economic decision (and most non-economic decisions) the government made for almost a quarter of a century. At the same time he created the modern Treasury.

Methodologically, ‘great men’ theories of history leave me deeply worried, and I have reflected on the course of the Treasury, and the New Zealand economy, had the bullet which struck him in Flanders been a little higher. In fact there were other factors increasing the importance of economic advice from the 1930s. One was the rising authority of economics as an intellectual discipline. This is often associated with the rise of Keynesian macroeconomics, but economics also penetrated other vital policy areas as microeconomic tools were also fashioned. A second factor was the establishment of a department of economics at Victoria University College in 1921. Other colleges of the University of New Zealand had earlier economics departments, with graduates who made careers throughout the world. But all four economists profiled in The Nationbuilders – Ashwin himself, Bill Sutch, Bryan Philpott, and Henry Lang – were graduates of Victoria University College.

However, need the economic advice agency be based in The Treasury? Originally it was not. The advice task begins with the attachment of Dick Campbell, another Victoria economic graduate, to Coates’s prime-ministerial office in 1927, and it evolved to the so called ‘Brains Trust’ who advised Coates when he became Minister of Finance in 1932. The group included formally Campbell, Sutch, and Horace Belshaw who was on leave from his chair of economics at Auckland University College. But Ashwin, as a Treasury officer, and Paul Verschaffelt, chairman of the Public Service Commission, were also closely involved. Sometimes other professors of economics were active in policy making in a way inconceivable today.

We do not know why the brains trust approach was not carried over when Walter Nash became Minister of Finance. Perhaps it was because Campbell and Belshaw had moved on, and so Sutch was carried forward as his private secretary. Moreover, Ashwin was increasingly dominating the Treasury, and while as far a I can gather from the official papers I have seen, he was the only official giving economic advice – one could think of him as a Brains Trust in his own right.

Even then Treasury did not seize the economic policy advice initiative, other than that by Ashwin in a personal capacity. For much of the 1940s it remained dominated by fiscal management, and in any case there were no other economists in it. (There were some potential ones. Noel Lough who was to become Secretary of the Treasury was recruited from school in 1939, and studied university economics part time.) This impression of the irrelevance of Treasury and the relevance of Ashwin is reinforced by the memoirs of Geoff Schmitt, personal assistant to Ashwin in the mid 1940s, and the son of the Secretary of Industries and Commerce. He recalls Ashwin not spending a lot of time in The Treasury, but coming in each morning, checking that things were going smoothly and then going out on the business of the day.

Instructively, Ashwin was deeply involved in the creation of the powerful Economic Stabilisation Commission in 1942 (he was deputy chair) which initially was outside Treasury. That is how Lang began his career in the public service. While the Commission was subsequently absorbed into The Treasury, it is conceivable that with a weaker Secretary than Ashwin it could have had a longer independent existence as an economic adviser and policy manager.[2]

And yet, even had the Treasury a weaker secretary than Ashwin, there is a practical reason it would have been the core economic advice agency. Fiscal management is intimately related to economic management. It is not so much that the level of government spending and taxation affects the demand of the economy (although that is true). Rather, the difference between them determines the level of borrowing, and that has implications for monetary policy, inflation, the balance of payments and economic growth. Moreover, and despite a rather simple theory promulgated in the 1970s by monetarists and adopted by the Rogernomes, fiscal management provides an effective policy instrument (or set of instruments) for economic management.

A central element of the Treasury authority comes from a cabinet minute the effect of which is that all matters which become before Cabinet which have fiscal implications require a Treasury report. Since it is hard to think of a policy which has no fiscal implications, the Treasury has to report on everything, and also to maintain a competence to report on anything the government could possibly contemplate doing. The origin of the minute is not without its interest. The belief in the Treasury in the late 1970s was introduced by Secretary Lang and his Minister Rob Muldoon in about 1967. But Lang, when I asked him, said it was much older and Malcolm McKinnon has found various forms of the direction going back to the 1920s. I suspect that the modern significance of the direction begins when the Cabinet Manual was created in about 1949. If so, it has the hand of Ashwin behind it.

If he spent little time in the office, Ashwin built an effective agency. Writing in 1949, Leslie Lipson commented ‘In recent years, however, the powers and influence of Treasury have been considerably strengthened by a vigorous secretary. Originally an agency which did little else than prescribe departmental accounting systems, it has acquired a stricter control over departmental appropriations since the depression.’ Lipson does not mention that Ashwin also created a professional career structure. He was their first graduate, doing his degree part-time, and one of only two graduates when he became secretary. (In those days the standard qualification was accountancy professional.) By the time Ashwin left Treasury there were 31 graduates in the main division alone.

This paper has focussed on Ashwin for four contemporary reasons. First it is challenging a common historical perspective that politicians make policy and officials merely implement it. For instance Keith Sinclair’s biography of Nash hardly refers to Ashwin, although they were close associates for ten years. He is not alone. My impression is that Campbell had an enormous impact on Coates’ thinking, but he is barely mentioned in the biographies. I am also rejecting the tendency to present pious histories of government departments, ignoring that often those departments had active policy stances. The picture of the shadowy passive public official behind the politician distorts the historical record of the policy process, and gives the wrong impression in contemporary accounts of what actually goes on. If I have made Ashwin a ‘great man’ it is because I have diminished the politicians he served a little.[3]

Second, and a counter to the great men approach, suppose there had been no Ashwin.[4] There was a major structural reason why the Treasury became the principal economic adviser to the government. Fiscal management gives the Treasury a particular authority, a power reinforced by the knowledge derived from them being the only department who have access to the workings of all public agencies.[5] This is of very contemporary relevance. There are a number of proposals to balance the Treasury’s economic advice, including the just established Ministry of Economic Development, and the suggested Social Responsibility Act. But the proponents do not look at the structural issues from when Treasury derives its power.

That leads to my third point. In the Ashwin Treasury economic management grew out of fiscal management, but there is a severe tension between the two, illustrated by the image of the Treasury official as the ‘abominable noman’ who turns down every expenditure proposal. Spending departments offer alternative advice, but in practice they make their case in terms of their concerns and not the society and economy as a whole, so their advice is rarely comprehensive either – for instance they will not give consideration to the fiscal consequences. Thus each adviser comes from its bias own interest – in the case of the Treasury it being the protection of the fisc – and the cabinet has to make the judgement on advice which is incomplete and not comprehensive.

There is another reason for the ‘abominable noman’. The Ashwin Treasury was led by a man of great ability and charisma who personally coordinated the Treasury policy advice. Ashwin’s immediate successors were not as outstanding as he was, but from the late 1950s, Lang, initially as chief economist, took on this coordinating role. Again a man of great ability and charisma, he seems to have maintain this personal control, which he probably learned from Ashwin his mentor, until he retired in 1977. Even so, Lang’s management style was more collegial, probably in part because he had colleagues of comparable training and seniority but complementary expertise. Lough, his successor, played an especially important role in this respect. If Ashwin is associated with the increasing power of the Treasury, it is Lang who creates the modern institution. The probable explanation is that Ashwin had no relevant model of what a Treasury could be like, Lang saw the British one when he was in the High Commission in London.

Since then the Treasury was increasingly complex, staffed by more graduates, and involved in a wider range of policy areas. Today the coordination can no longer be undertaken by a single person as it was in Lang’s day. This issue of policy coordination which can no longer be done by a single person, even in a Treasury led by an Ashwin or Lang, has bedeviled it since the late 1970s. One solution is simplistic policy, be it the abominable noman rule of never supporting a public expenditure increase, or the rogernomics rule of commercialising everything. Of particular interest to historians is that today’s policy development is done in an almost entirely ahistorical framework, with no sense at all of what has gone before, and little use of the past to assess the potential effectiveness of policies. The public, and more recently the politicians, do not want such simplistic responses to oversimplified accounts of their concerns. But how is a Treasury to get the creation and coordination of a sophisticated policy when the pressure is for a sort of Gresham’s law of simple policy driving out complex ones?

That leads to the fourth point of the institutional structure. Under Ashwin it was possible for policy to be embedded in a single person. Henry Lang did much of his development and coordination at the morning teas of the 1960s. Today the Treasury is a major bureaucracy, with the heads of policy divisions sometimes called ‘barons’ with the implication of a tension between them and the king-secretary. In the 1980s the king lost control for a period.

An historical account of the modern Treasury will not resolve these problems, but it sheds light, just as The Nationbuilders does not tell us what sort of nation we might want to or are able to build. But it provides some guidance if we wish to pursue the question. By setting out the history of an institution or idea we have a foundation for a discussion on contemporary and future issues.

1. I am grateful to comments by Malcolm McKinnon (who is writing a history of the Treasury) and John Martin, and to those acknowledged in The Nationbuilders.
2. Although perhaps not, given that there was a notable lack of talent among the Labour ministers, and despite Nash being way, there is no other candidate (other than Fraser) who could have been the independent agency’s effective minister. I take it that Nordmeyer would have been too junior.
3. Although in the case of Peter Fraser, I came to admire his greatness when I realised the importance of his ability to harness talented men and women for a common cause.
4. I am guessing Dick Campbell would have been the alternative secretary of the Treasury, although his heart was in Britain. He was Chairman of the Public Service Commission from 1946 to 1951.
5. Before 1988 it could be argued that the Public Service Commission/State Service Commission also had much of this knowledge.