This is a draft extract from a chapter of “Not in Narrow Seas: A History of New Zealand from an economic perspective”. It has been circulated and hence is put here on the website.

Keywords: Macroeconomics & Money; Political Economy & History;

New Zealand’s greatest banking crisis came at the end of the Long Depression. [1] The National Bank managed to save itself, but the Bank of New Zealand, and the Colonial Bank which merged with it, required a government bailout. The merger was particularly ironic for the Colonial Bank had been established in 1874 as a southern alternative to the other banks, after the Bank of Otago had been taken over by the National Bank.

The demise of the Colonial Bank is tedious in detail, but nevertheless instructive even if, as some judge, it was doomed from its foundation. A central player was Southland politician and entrepreneur Joseph Ward, who had established a freezing works at Ocean Beach in 1892 to use the port of Bluff, which flourished as a result. The works’ balance sheet did not, and soon Colonial Treasurer Ward was hunting for a means of widening his credit base.

The solution involved establishing the J. G. Ward Farmer’s Association of NZ Ltd, a kind of stock and station agent which also killed and exported stock. It contained all the goodwill of Ward’s business, except the Ocean Beach works, for which he received £15,000 and which presumably was used to reduce his overdraft with the Colonial Bank of £81,635, equal to more than $41m in today’s prices, or over 50 years of a cabinet minister’s salary. Ward was soon into debt with his association, which also depended upon the Colonial Bank for finance. So much so that it was said that it was unclear whether the bank was running the association or the association the bank.

Ward was not the bank’s only problem. It was small, and other banks considered many of its creditors unsound and its investments injudicious, perhaps because it was late into the business although most farmers and businessmen were struggling at this time.

Banks in Australia had their crises about this time too, which did not help confidence in New Zealand, although the Australian owned banks did not have evident troubles operating here. The three New Zealand ‘based’ ones did.

The annual general meeting of the National Bank in 1885 was a ‘sensation’, with its shares selling at an 80 percent discount. To avoid liquidation it wrote off a large proportion of its capital in 1885 and 1891, and steadily recovered.

Despite its close ties to the ‘Limited Circle’ – or, more likely, as we have seen, because of them – the Bank of New Zealand got into even more dire trouble. One night in June 1894 – ‘like a thunderclap, without the least warning’ – the Government hurried urgent legislation through parliament  to preserve it, such was the threat to the entire economy and the various government accounts held with it. Measures included giving  the Colonial Treasurer considerable powers over the bank and moving the head office from London to Wellington in order to increase state supervision. At the heart of the reconstruction was the issuing of £2m of shares (about $340m in today’s prices) guaranteed by the taxpayer, which ultimately led to partial ownership of the Bank by the state.

Again the story is a complex one, and perhaps not adequately told. The government seems to have been first advised on the Monday June 25 and the legislation was passed that Friday. Malcolm McKinnon says it ‘was the Agent-General’s office [in London, the equivalent of today’s High Commissioner], not even the Colonial Treasure, which directed the process.’ [2] The Treasury seems to have been hardly involved despite the State being committed to a substantial contingent liability. [3] The best way to think about this, is that London financial system was effectively New Zealand’s central bank, and the Agent-General negotiated with it on New Zealand’s behalf.

In October 1895, following an amendment to the act, the Colonial Bank merged into the Bank of New Zealand, after being turned down over the years by various Australian banks. The assets were classified by the quality of the debt; when it proved that the items in a mysterious C list of poor quality investment, were mainly of the J. G. Ward Farmer’s Association, Ward, who as Colonial Treasurer had been closely involved dealing with the bailing out of both banks, resigned from cabinet in mid-1896. In 1897 he was found formally bankrupt, resigned from parliament, won his seat in the by-election, and returned to cabinet at the end of 1899 as Colonial Secretary; the resurrection was completed in 1906 when he became Prime Minister and Minister of Finance. Ward may be the last central government ‘business politician’ to get his personal finances thoroughly mixed up with his political activities.

In an obvious way, the partial ownership of the BNZ increased the scope of the state. More fundamentally, the episode indicated that the public sector rather than the domestic private sector held the greater power over the financial system. But the London Financial System had the greatest.

The failure of the private sector gave a further impetus to strengthen the central government. The Bank of New Zealand crisis ended any possibility that the private sector could be relied upon to provide the finance farmers needed for the Liberals’ farm settlement ambitions. The government began borrowing, under the Advances to Settlers Act, directly on the London market (at 3.5 percent p.a.) which it advanced to settlers (at 5 percent p.a.). And so the state became directly involved in the funding of private enterprise.

[1] Sources for this section include M. E. R. Bassett (1993) Joseph Ward: a Political Biography; N. M. Chappell (1961) New Zealand Banker’s Hundred; F. W. Holmes & G. R. Hawke (1997) The Thoroughbred Among Banks in New Zealand; K. Sinclair & W. F. Mandle (1961) Open Account; R.J. Familton (1966) ‘Colonial Bank’ in Encyclopaedia of New Zealand, p.476-8.

[2] M. McKinnon (2003) Treasury, p.66.

[3] In contrast in 2008-2009 during the Global Financial Crisis, the Treasury and the Reserve Bank were ‘joined at the hip’. See A. Bollard with S. Gaitanos (2010) Crisis.