This is a much longer version of a review published in New Zealand Economic Papers, 37(1), December 2003 295-302.
Keywords: Governance; History of Ideas, Methodology & Philosophy; Political Economy & History;
Treasury Secretary from 1986 to 1993, Graham Scott, got it quite wrong when he said shortly after the 1987 election, ‘I’m interested in getting back to the old money-bags role, what Treasury did in the nineteenth century – the core of the finance ministry is its old functions. That’s our knitting.’ Historian Malcolm McKinnon is too polite to point out this is another example of an ahistorical economist misrepresenting the past. Except by his writing a history of the Treasury.
Only 50 of the 400 plus pages of Treasury are devoted to the nineteenth century, partly because of a lack of material, but also because the agency then is of limited interest. The Treasury is surely the oldest department of state: the contender is the Colonial Office (now the Department of Internal Affairs), also established in 1840, but since when did public bureaucrats work without getting paid? It is certainly the department which has retained its name the longest, although its functions have changed greatly over the years. McKinnon divides the book into three parts: Clerks 1840-1910, Accountants 1910-1961, and Economists 1961-.
The first (and longest) period has Treasury passively carrying out routine financial transactions, apparently giving little advice to its Minister. (Perhaps Robert Muldoon, rather than Scott, would have preferred a nineteenth century Treasury.) Some functions continued well into the twentieth century – the book describes Noel Lough learning to prepare (manually) some of the 200 odd cheques a day when he arrived in 1937 (‘The ledgers were at high desks on stools’) – until they were decentralised to individual government departments. Even so, there is a contemporary ring in the 1880 complaint that ‘serious inconvenience and loss of time is caused to surveyors, engineers, and others, who are imprest officers, by the amount of account-keeping thrust upon them’.
McKinnon argues persuasively that there was barely any ‘official’ advice given through this period. Records are skimpy of course, and there are hints that Jas Heyward, the long serving Secretary from 1890 to 1906, gained his Ministers’ confidence as an adviser. The chief executive’s title of ‘Assistant Treasurer’ (to the Colonial Treasurer) until the 1870s, indicates the low status. Even in the 1920s the Secretary’s career path was often promotion to the more prestigious and better paid Auditor Generalship.
Ironically then, nineteenth century decisions were made in a manner similar to which the populace thinks they are made today – by the politicians (Colonial Treasurer or Minister of Finance) with little input from officials. (How many times one does one tell an uniformed enquirer, that thinking about an issue goes back to officials’ ruminations months or years earlier than the ministerial announcement, and if they really want to pontificate they ought to make an OIA enquiry for the relevant papers?)
Many readers, interested only in contemporary issues, will skip the early chapters. But there is an interest, nicely captured by John Hicks’ thought that there was merit in each term getting the students to write their essays from a different past approach to economics, in turn physiocrat, mercantilist, classical, Marxist, … Hicks was after an ability to use different paradigms and to be robust enough intellectually to be able to see through them to the underlying economic issues, the suppleness of mind that characterised his Oxford graduates, which, alas, is given no great priority in today’s teaching. The history of the Treasury continually faces the reader with policy responses arising from institutional differences such as external monetary and banking arrangements. It would be useful, for instance, if those who would advocate a monetary union with the Australian or US currencies, recognised that New Zealand was in a sterling union for over half its history, and explained why the reasons for abandonment in the 1930s are no longer relevant. (Perhaps the advocates do really want to take New Zealand back to the nineteenth century.)
Readers may be disappointed that McKinnon was not able to uncover any evidence of financial corruption among officials in the nineteenth century or later (politicians were less scrupulous), nor anything as sensational as the British nineteenth (CHX) century Treasury Secretary who threw himself out of an upper story window a week after his appointment. The closest is whether the actions of some officials during the early part of 1984 were constitutionally improper. (See pages 318-319.)
McKinnon identifies from about 1910 a transformation in the function of the Treasury towards accountancy similar to the Gladstonian revolution in the Britain in the 1860s, arguing that the ‘revolution was grounded in a political economy of strict parliamentary control of public spending, with Treasury as a “constable on the block”.’ If McKinnon is correct – a simpler explanation is the British innovation took time to reach these shores – there is much to be explored about the growing power of parliament in this period. Whatever, t a change there was, as holders of diplomas of accountancy began to proliferate. The book identifies this phase as lasting through to 1961 (although of course every historian is always tentative about such clear cut divisions in time), devoting just over a hundred pages to the fifty years.
The Secretaries are becoming persons now. McKinnon instances George Campbell (1913-1922) who was president of the New Zealand Rugby Football Union (a Wellington representative rugby player, he was the Secretary closest to being an All Black, although a later one took ballet lessons); James (called ‘John’ in the illustration on page 75) Esson (1922-25) who became the Grand Master of the Order of Freemasons, retired to become a political power in the land, and died with an estate the equivalent today of $600,000; while Alexander Park (1930-1935) was Esson’s executor. (A nice touch that, what economist would have thought to chase up Secretaries’ wills?)
An entire chapter is devoted to the Great Depression. Here, and elsewhere, McKinnon is ill-served by the economists failure to have a comprehensive and authoritative of New Zealand’s economic history. McKinnon does not get it wrong, but a framework of economic history would have added to his account.
I, like Scott, got a part of the Treasury’s history wrong, or rather I now have a more precise understanding of that history. My first mea culpa is that I have argued that the history of the Treasury is one of fiscal stress, extreme fiscal stress, or intolerable fiscal stress. I now know that for over half its life fiscal stress failed to impinge upon the Treasury because it was not a fiscal manager. It certainly impacted on the Ministers who were responsible so, for instance, the reputation Harry Atkinson has suffered, for he presided during the Long Depression of the 1880s when the primary concern was to restrain government spending as revenue contracted and foreign loan sources dried up. Still the ‘stress, stress, stress’ principle – that there is always fiscal stress and it shapes the modern Treasury – remains valid.
I knew that the vision of the Treasury as eternally the most powerful department of state arising out of its fiscal management was wrong. I had noticed that the 1928 National Industrial Conference called by Prime Minister Gordon Coates – the first of the talkfests that have littered the last 75 years – was attended by politicians, businessmen (yes, no women at all), five professors of economics (more than would today), and the heads of all the relevant government departments (CHX). But there was nary a sign of a Treasury official, inconceivable as that would be today. This led me to formulate the hypothesis that the longest serving Secretary, Bernard Ashwin, founded the modern Treasury. It is now evident that he was a more transitional figure, presaging what would happen, although he remains the most important public servant of the 1939 to 1955 period when he was Secretary (and possibly the seven years earlier). Keith Sinclair, more modestly, describes him as one of the four powers in the land in the 1940s (with Peter Fraser, Walter Nash and Fintan Patrick Walsh).
I should have picked up a clue from the valued memoirs of Geoff Schmitt, who described a typical workday in Ashwin’s life beginning at the office 9am (he may have been talking to Fraser after midnight), ensuring things were going well, and then at about 10am going off to a series of meetings for the rest of the day, presumably leaving the rest of the Treasury sorting their cheques and vouchers. Ashwin’s power came from his talent, rather than from the power of the Treasury per se. The development of economic policy advice and management in New Zealand begins with those professors of economics and a handful of professional advisers (Dick Campbell, Horace Belshaw and Ashwin – Bill Sutch, is there but a decade younger), through the Economic Stabilisation Commission (Ashwin was its first chair) to the Treasury only in the early 1950s (around a group of young men – Noel Lough, Henry Lang, Jim Moriarty and Schmitt who were mentored by Ashwin). Lurking behind this book is an account of the history of New Zealand economics – with the rise of the Victoria University College economics department playing a crucial role.
This takes nothing away from Ashwin’s achievements. Possibly the earliest masters economics graduate of Victoria University College (he missed out on a first by a poor commercial law mark – no great sin for an economist), he was the first economist among the Treasury’s accountants, and the only one for almost two decades. His significant intellectual skills were supplemented by personal charisma and judgement beyond his years. (He is the youngest Secretary of the Treasury, Murray Horne excepted.) However, lest I be accused of the ‘great man in history syndrome’ – a misreading of my The Nationbuilders, which used biography to describe a historical process – he was not irreplaceable. Had his First World I bullet been inches more fatal, my guess is that Dick Campbell or Belshaw (or someone who copped the bullet) would have been an adequate replacement.
McKinnon describes Ashwin as a ‘Keynesian’, by which he means, I think, someone prone to intervention at the macro- and micro-economic levels. I doubt that Ashwin, trained in the 1920s, was Keynesian in the technical sense. Although he would have met Keynes at Bretton Woods, I doubt he ever read The General Theory. (Sutch reviewed it months after it was published.) There is an interesting ‘back-of-the envelope’ calculation by Ashwin in 1939 in which he assesses the available foreign currency and the employment implications, the precursor of the balance-of-payments-constrained economy model which the Treasury – especially Schmidt – developed in the early 1950s. Ashwin was the only economist in the Treasury in 1939, so he probably invented it himself, extending the fiscal calculations, which almost certainly go back to the nineteenth century, of the government revenue and loans available for spending to the economy as a whole. In which case Ashwin is thinking like a Keynesian, albeit an open economy one, who assesses the impact of the government’s accounts on the economy as a whole.
Ashwin’s great love was money and banking – described as the ‘father and mother’ of the Reserve Bank he demurred, but when he retired he left a vacuum in its Board. His micro-economic interests were more limited. I recall my shock at coming across an inter-departmental paper on transport subsidies for fertilizer, signed off by him which had no mention of their efficiency effects, the focus being entirely on the fiscal implications – ‘stress, stress, stress’. It would, however, be ahistorical to expect an economist trained in the 1920s, working near a weak local university economics department, to be familiar with the welfare developments of the 1930s and later.
The point of the theoretical reflections in the last paragraphs is they are not there in the book. McKinnon is a conventional historian, not one of the history of ideas (let alone of economic ideas). On the other hand there is little literature from economists he could have called upon. In the interim until the gap is filled, we need to recognise that Ashwin, a survivor from the Depression, and his colleagues and immediate successors, were thinking about the economy from a quite different perspective from today. Hicks would approve.
Aswhin retired in 1955, the longest serving Secretary but still only 59. I suggested it was exhaustion plus the prospect of a successful private sector career which determined the decision. McKinnon records rumours that he fell out with the Prime Minister Sydney Holland although he recommended Ashwin’s title. Ashwin is unique among Secretaries to be knighted, and only he and Lang are entries in The Dictionary of New Zealand Biography (although at least one of those alive today will appear in a future volume).
There is an interregnum after Ashwin, for his immediate successors were not as outstanding, and McKinnon assigns the rest of the 1950s to the ‘accountants’. His new age dawns in 1961, shortly after Lang returns from a period as London Treasury officer, whose main function was to rise and manage loans. Lang had two advantages over Ashwin. He had Ashwin as a mentor. (Who was Ashwin’s mentor? Possibly Esson.) And in England he observed the British Treasury and, no doubt, came home with some sort of like model in mind. (McKinnon pays much attention to Treasury developments overseas – especially in Australia and Britain.) Like Ashwin there was a period before Lang became Secretary in 1967, when he drove Treasury thinking from a lower level – notably the tea-room chats. The irony is that the man who presided over the first phase of the ‘Economics’ period of the Treasury was a graduate in accounting and philosophy and was always careful to disclaim being an economist. Yet he built up the economics cadre in the Treasury on Ashwin’s foundations, to the point they became dominant. (No Secretary since Lang has lacked a degree in economics, but only two of the six also claimed accounting qualifications.)
The final half of the book is about the Lang and post-Lang treasury. It is a different sort of history now, because the records are richer, the department is in the public eye and hence the journalistic record, and many of those involved are still alive. (There were 55 who recorded oral interviews.) Contemporary history is a difficult exercise if only to distant the writer from the event. McKinnon does it well, although there will be further attempts to write the history of the period. While the future accounts will be welcome, what must be resisted that only insiders really knew what is going on and their esoteric knowledge is all that matters. McKinnon’s account is likely to remain long the framework on which future re-writers will base their works.
To review the period, I make here four general points. The first is that the Lang Treasury was driven by a man – like Ashwin – of great ability and natural charisma. (His ‘children’ remain loyal to him. One chased me down the street to say my portrait in Nationbuilders was faithful.) He left a Treasury in his image, but one which none of his successors could manage. The policy revolution of the early 1980s emanating out of Economics II, the think tank, arose in part because Lang was not there to control it. Perhaps with the growth of staff numbers the task was impossible anyway. New management systems and styles were developed.
Second, the revolution also arose out of evolution in economic theory of the time. We are still too close to it to see it clearly – there may be already another underway led by the role of information in economic decisions if Joseph Stiglitz is right – although surely Treasury grasped an extreme version of the neo-classical/rational expectations synthesis of the time, and one which was already a little out of date. (The next time you are told that Treasury simply took the standard paradigm on the day recall, Keynes’ remark about practical men being dependent on defunct economists.)
Third, we should never under-estimate the degree of fiscal stress in the 1970s. Coupled with inflation, the economy was not functioning well (although it was growing in the late 1970s and earl 1980s faster than the OECD average). Ironically, the inflation funded the deficit by expropriating the real value of the private sector’s holdings of government debt. (Real interest rates were negative and tax was levied on nominal interest rates.) Much of the 1980’s policy was concerned with easing the stress: the tax reforms; the privatisations and other commercialisations; the new modes of controlling government expenditures; even the new accounting systems. But the post-1984 period was also a period of fiscal laxity if the rise in government debt is any indication. Admittedly some of the debt arose from shifting the consequences of the Muldoon administration from below to above the line, but it would have been higher had not there been no sales of government assets. What seems to have happened is that the Treasury (and its political masters?) were willing to incur short-term deficits in belief that they would have long-term benefits – as in the case of the income tax reforms being net fiscal losers to make them palatable (the immediate losses being disguised by phasing effects). Even so, there is the extraordinary sentence in Economic Management invites fiscal irresponsibility, and one cannot help wondering whether the Reagan induced US deficits of the same time generated an unfortunate degree of insobriety. As for the current Bush ones, one is left with the uneasy feeling that right-wing deficits are justified and left-wing ones are not (just as in the hypocrisy of the nuclear standoff, the weapons of mass destruction were justified by the political colour of their possessors). There is much more to be explored here, and no doubt will. My concerns are not merely the impositions on future generations from higher government debt, but the way the internal deficit impacts upon the external deficit, the exchange rate, the tradeable sector and ultimately the growth prospects of the economy.
The fourth point is that the reforms had considerable distributional impacts. (Indeed the fiscal deficit does not get under control until the 1990/1991 packages which were at the expense of the poor, although it took a few years for the control to become apparent because the packages precipitated a macro-economic contraction.) Modern economics is peculiarly inept in dealing with redistributional impacts, even though they tend to be much greater than the efficiency gains. Politicians want to know about both, but advice tends to stress the latter and ignore the former – much to the political costs of the politicians. McKinnon is interested in the social origins of Treasury officials and tells of how earlier ones were of humble origins, but that increasingly their backgrounds have become privileged. Is this a hint that as the department gained power it became disconnected from ordinary New Zealanders?
The last point, like the rest of those in this section, is a meditation arising out of the book. McKinnon will have done economics a service if others are provoked to meditate too, or to add their memoirs and commentaries. (Send a copy to McKinnon, care of the Public History Section of the Ministry of Cultural and Heritage to add to the already substantial raw material he has built up for future scholars.)
This is a handsomely produced book, with detailed references (which I kept referring to) and bibliography. Added to his Independence and Foreign Policy and his editorship of The New Zealand Historical Atlas, it marks McKinnon as one of our major historians. The book itself is a milestone in public history of government departments, rich with many details which commonly got overlooked in the plodders of the past. I liked the attention to the details like where the Treasury was located, its size and composition, and the stories of the humdrum life of clerks.
The disappointments are the pictures, probably because McKinnon was overseas when the selection was made. Some are telling, such as those from the collection of John Anderson capturing the everyday and recreational life of Treasury. Others are irrelevant, missing that the story is about official advisers and not politicians. What is the point of a picture of Muldoon and Margaret Thatcher together?
Some of the classic cartoons of the 1980s and 1990s are there – Tom Scott’s one of the son having ‘absolutely no grasp on reality’ could have a career as a Treasury economist. They remind us of the way Treasury was seem when it became prominent in the public eye. But none captures the genially subversive side of Treasury officials, like having been told by its Minister, David Caygill, that the place was a bit of a monastery, one official promenaded as a monk. I’d have also liked that poster of Muldoon as the ‘Gross National Product’ which appeared around Treasury in the early 1980s, reminding us that while the majority of Treasury officials remained loyal to the principles of a public adviser, they had their own principles too.
The saddest pictorial mistake is the label for the front cover which shows the current Treasury building with part of the Brett Graham sculpture ‘The Navigator’ in front (the waka bit actually, although it is known as the ‘banana’). There is no mention that the sculpture rests in the Henry Lang Memorial Park, the only public recognition of a New Zealand Treasury secretary, perhaps the only one of its kind in the world. (What would be a suitable monument for Ashwin, or McIntosh, or Beeby?)
Normally one completes a biography reflecting on the significance of the life portrayed. But the New Zealand Treasury is still alive, so the relevant reflection may be its prospects. The dominant message is that it has been a living organism adapting to its economic and political environment. Its future will depend upon how that environment changes. That is why Graham Scott’s hope that the Treasury would return to its (mid-twentieth century) knitting of managing the government accounts is misleading.
A Treasury could opt out of all macroeconomic and microeconomic policy issues which do not pertain to the public account. It would forecast the economy for fiscal purposes, but give no advice on macro-economic management, and where microeconomic issues did not impinge directly on the accounts – say in competitions policy – it could avoid comment. It is conceivable, but unlikely, not least because it would be a peculiar minister who was uninterested in such issues. (Historically the Treasury has had an exceptionally strong series of ministers since Gordon Coates, all ranked near the top of cabinet, except Muldoon when he first took over because of his youth, and Harry Lake fresh into cabinet in 1960 was ranked sixth behind already established ministers.)
It is not impossible that a strong non-Treasury minister could build up a countervailing department, although the recent experience of the Ministries of Economic Development and Social Development – both potential challengers to Treasury dominance – shows it is going to take years for them to develop the institutional structures, cadres and morale which Ashwin and Lang evolved (and which the publication of this book reinforces). In any case, as long as it is responsible for the fisc the Treasury remains in the centre of the political and government process. That requires a high quality staff, including economists who are going to have opinions – and give advice – on matters wider than the government accounts.
In the last pages of the book, McKinnon hints of the possibility of a Minister walking away from her or his department, describing in 2000 the ‘relationship between department and government [as] particularly jagged’. There is the Coatesian option, which Paul Keating also took when he became minister for the Australian Treasury headed by John Stone in 1983, of having a thinktank attached to the ministerial office, and leaving the routines to the Treasury. The fear of such a possibility ought to lead to a degree of responsiveness to ministerial sensitivities by a department. Ashwin seems not to have been the only Secretary to move on as a result of tensions with the minister: Lang in 1976; Bernard Galvin in 1986. High quality leaders seem likely to lead to high quality clashes of temperament. (The nightmare Treasury faces would be a Prime Minister and Minister of Finance, neither of whom were fiscal conservatives. The closest since the 1920s was Norman Kirk who was offset by the doughty Bill Rowling.)
The institutional challenge that faces Treasury may come from the academy’s concern with the quality of its work. Just as the plainest princess is said to be pretty and the dullest prince has his commonplace pronouncements raised to profundity and wit, the political power of the Treasury – together with its generous funding – means no one dares challenges their claims to excellence. And yet one is continually struck how pedestrian is much of its policy advice, how backward its ‘research’.
To give but one example. In the late 1980s I connected with the Australian debate about its relative ranking in the OECD production stakes. It was a small step to New Zealand-Australian per capita GDP comparisons and I published about the inferior performance as early as 1993, and in learned articles shortly after. Paul Dalziel repeated the comparisons from 1998, and the NZIER in 2000. In 2002 the Treasury came to the same conclusion, with no reference to any of the earlier studies. There are many other such examples. Were Treasury staffed by physicists they would shortly put in a patent for the wheel.
If its bibliographies are any indication, the Treasury seems to have a rule of scrupulously ignoring any New Zealand research (in exceptional circumstances it may include papers by acolytes). This is a mark of mediocrity rather than excellence, of an inability to take up the challenges posed by quality minds. The impression is reinforced by obsequiousness to foreign research (which is sometimes misinterpreted, and often irrelevant). Admittedly Treasury faces a terrible dilemma explaining the economy’s last two decades because the government followed past advisers, and the outcomes were vastly inferior from the promises. Existing Treasury officials, many of whom were in school when the advice was given, today carry the burden of the failed policies, for the institution lives even if the staff it move on. But if today’s staff do not reflect on the past, and give an account consistent with it, they are likely to repeat its mistakes.
That is the power of this book. Treasury, who sponsored it, acknowledges it has a past and while the study is primarily a political and institutional history, even the Treasury economist as out of touch with reality as the Tom Scott cartoon claims, will recognise there is an economic history and a history of economic ideas lurking below the text. The academy has every incentive to assist them. (It has yet to fully appreciate the power of the Official Information Act as a research tool. Galvin was right to fear the act for the way it could allow independent assessment of the quality of Treasury advice.)
McKinnon concludes his magisterial account with ‘[i]n sum, not only Treasury’s professionalism but its politics survived: the three legs of the [nineteenth century British Treasury] tripod, the Reserve Bank Act (the ‘gold standard’), the Fiscal Responsibility Act (‘the balanced Budget’) and microeconomic reform (‘Free trade’) all remained more, or less, intact.’ Narrow economists will ponder on the notion of progress in the profession: the wider public will note there is no reference to the welfare of the nation, the economic analysis of which developed from the 1920s, unemployment (the 1930s) or economic growth (the 1950s).
Brian Easton was one of the many consulted in Malcolm McKinnon’s preparation of the text.