Opinion: Depression 1930s style

Depressions foster unemployment. In the winters of normal years like 1924 and 1925, about 500 kiwis registered unemployed. Then catastrophe struck; in 1930 registered unemployment was 5,500. By 1931 it was 44,500 and two years later it reached 79,000. Registering was difficult for a man and almost impossible for women and Maori. A huge proportion of the population was near destitute. The cause was a massive shock, mostly caused by a collapse of external demand. Such a shock may occur here soon. In the depression, misery was exacerbated by poor policy and a high level of public indebtedness.

Government policy Many commentators lamblast the government in the 1930's depression for not applying a strong stimulus to the economy. This is anachronistic because governments of that era did not regard themselves involved in managing demand. They believed business should flourish without their help. They had few civil servants, and no policy analysts. Government was quite flexible and it actually invited academic economists for the first time to advise. Government then believed it should help fix problems through a little well-directed trouble shooting, and it could help steer the ship, but it would be horrified at a suggestion that it could work the sails and control everything. Government tried to balance budgets because that was the dominant philosophy, rooted in contemporary morality and theory: economists insisted on drastic action to reduce any budget deficit. Taxes were raised to meet declining revenue. This had some justification in the burden of debt servicing. Government debt was ₤300 million in 1934 (more than 100% of national income) and it actually paid off ₤20 million in that year. This was the first time since 1922 when debt was reduced; it was not repeated for generations. Much of the government's "stinginess" is explained by its concern that interest payments consumed the equivalent of 26% export receipts. The NZ Government had to please its London creditors. Government also decided that export prices must be driven down to become competitive. That was the nail in the coffin of stimulating the economy: wages and prices had to come down. Government did not believe in the "dole" so it put people to work on highways and rural improvements. Some useful work was done, more was wasted time and with under-utilized skills. Men had to move to camps to get work, splitting families. Many women and children depended on soup kitchens. In April 1932 many unemployed marched down Queen Street and began looting. John Mulgan's Man Alone covers the riot. Public servant's wages were reduced by 10%, and the Arbitration Court later extended this to all wages. Taxes on wages increased. The National Expenditure Committee in 1932 tried to balance the budget by axing welfare. Its actions reduced benefits, like widow's pensions, old age pensions and the family allowance, by 10%. Government bowed to popular demand by banning immigration in 1931. The number of arrivals collapsed but departures were relatively high. Government was compassionate about mortgages however, reducing the interest paid, and rents were cut by 20% to get prices down. Social Marriage rates are a good historical index of prosperity. Many couples customarily waited until the male had a steady job and somewhere to live. Accordingly, marriages fell 14% between 1930 and 1932. Live births fell from a rate of about 20 per 1000 to 16 in the early "˜thirties, a fifth lower. They recovered to 25 per thousand in 1946. It is hard to detect the misery endured by many in the depression from Year-Book statistics. But life must have been tough when the number of children in primary state schools fell from 219,000 in 1929 to 197,000 in 1935 (about 10% less). The Post Office took a terrible clobbering: the number of letters posted fell by about 15%, and people travelled less- there were 9.2 million train travelers in 1929 but only 6.5 million in 1932 ( a third fewer). The statistics give the lie to poverty as the cause of crime. Poverty increased in the depression but crime actually fell. For example convictions in the magistrates' court fell from a rate of 30 per 1000 of population 1927-1930 to 23 for 1933-35, that is by about a quarter! The same fall was seen in superior courts. Prison? The rate of persons in prison fell by half!  (1/1000 to 0.48/1000). I suspect many sociologists will cavil with this finding. Macro The macro effect of depression is terrible: unemployment rockets, business decreases, bankruptcy increases sharply but then fades, economic growth falters, and trade shrivels. But it was a time of change: new interest rates, new exchange rates, and new technologies drive change. The value of production fell from ₤86 to ₤55 per capita 1929-33. Factory production increased however, as did the use of machinery. Trade dipped sharply 1929 to 1933 but recovered by 1936 partly because the government got advice from the four professors of economics in the country who formed an Economic Committee in February 1932. The Committee recommended devaluation. Eventually the NZ pound was allowed to devalue from parity with sterling to 1.00/1.25. The government also established the Reserve Bank in 1934 to replace a system where "New Zealand has six note-issuing banks, five of which have head offices outside of New Zealand. The Reserve Bank will bring the control of credit and currency into New Zealand hands" for the first time. The government was very pro-active in reducing the interest rate on its debt but debt grew because of the devaluation. The share market sharply decline from an index of 1163 in 1929 to 769 in 1932. It took 2-3 years to reach the low. Financials were the hardest hit falling from 1330 to 852. The All-Groups index and financials did not recover until 1944-45, but Industrials had fully recovered by 1934. Conclusion The depression had some common features with today. There was a massive external shock, a marked fall in the currency, and indebtedness reduced options, even for well intentioned governments. The views of foreign capital are compelling. Then, as now, deflation was powerful in reducing domestic prices, and little could be done until external demand recovered.