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upon war as a military war in the narrower sense of the word.” But Englishmen, perhaps because we tend to think of war more in terms of fleets than of armies, have always more or less instinctively recognised the influence of economic pressure in war; for a fleet wages "economic war” far more obviously and directly than does an army. Rousseau's shallow view that war is only a relation between States by which individuals ought not to be affected has never had many converts in England; whereas on the Continent it is, or at any rate before 1914 it was, the prevailing view. And no doubt to any mind that has accepted this theory, the late War must indeed appear to have wrought a veritable revolution. Perhaps the truth is, not that war has changed its character, but that it is better understood; for no purely“ military war" ever has been fought.



THE EFFECTS OF THE TRADE CYCLE IN NEW ZEALAND ANALYSIS of the War and post-war cycle in New Zealand shows the Dominion to be dependent to a remarkable extent upon conditions obtaining in Great Britain, and discloses the two main aspects of this dependence in the closeness of the Dominion's trade and monetary relationships with London.

In the main New Zealand is an outlying farm, exporting pastoral produce which in 1921 constituted 93 per cent. of her total exports, supplying her own wheat and animal food-stuffs, but importing most of her manufactured goods. Ranking before the War second only to Belgium in the value of her external trade per head of the population, she is dependent in an unusual degree on the sale of her exports. Of these, in 1919–1922 more than 80 per cent. went to the United Kingdom. It follows that prices ruling in Great Britain for her produces are the dominant factor in determining the purchasing power of her farmers, and this in turn governs the general prosperity of the whole community.

The momentary dependence is even more complete. Before the War the Dominion had free circulation, import and export of gold, but no Mint. Gold flowed in and out of this country, in small amounts, not on account of exchange movements, but rather to meet the varying needs of the banks for coin. The rate of exchange on London, through which centre probably 95 per cent. of the trade was financed, together with the discount rate in New Zealand, remained fixed, in accordance with the policy of the Associated Banks, for a decade before the War. Fluctuations in the balance of indebtedness were partly compensated by the rise and fall of the banks' London balances, partly corrected by the effects of expansion and contraction of credit in London in accordance with the movement of London balances. Thus a 1 N.Z. Year Book, 1923, p. 230.

Ibid., p. 236.

remarkable degree of monetary stability was achieved. A fixed exchange became customary at the expense of a price-level tagged to that of Great Britain, but fluctuations of prices in New Zealand tended to be smoothed out by the compensatory effects of changes in the London balances.

On the outbreak of war gold payment was suspended, and the note issue increased immediately to replace the gold abstracted from circulation. Rising prices for exported produce increased the returns to farmers and others, so that by June 1916 bank deposits had increased by nearly eight million pounds (32 per cent.), which advances had increased by less than one million (5 per cent.). So far, six-sevenths of the increase in purchasing power, reflected in rising prices, was due to the rise of prices in Britain, and only one-seventh to internal inflation of credit. This dependence upon British prices continues. It was a chief factor in the development of the boom that followed the War, and was the direct occasion for the subsequent crisis and depression.

But internal inflation of notes and credit followed, the note issues at first limiting, and later following, the credit expansion. A regulation gazetted in August 1916 2 empowered the banks to issue notes against the total amount of “coin, bullion, and public securities held.” A further provision—that the amount of coin held should never be less than one-third of the note issue, which until then had effectively restricted note expansion, and, hence, credit expansion also was at the same time suspended. Banks then were enabled to issue notes against public securities, to make advances to customers for investment in War Loan stock, which was public security against which further notes might be issued, and so on ad lib. The possibilities of such a system were infinite, but the banks proved fairly conservative and discreet, and though between 1914 and 1920 the Government raised internal loans totalling £85,000,000, bank advances during the same period increased only from £22,000,000 to £33,000,000, whilst deposits increased from £25,000,000 to £54,000,000, the growth of deposits being partly accounted for by increased domestic advances, partly by increased London balances. Hence it seems fair to conclude that over the whole period less than half the price rise in New Zealand was due to inflation locally induced, and more than half to the influence of British conditions operating through a fixed exchange. The following table shows the movement of export prices :

i N.Z. Year Book, 1923, p. 529. Notes are legal tender till the end of 1924. 2 N.Z. Gazette, 1916.

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With the return of free marketing after the cessation of hostilities, the price rise in Britain was accelerated, and the effects were, as usual, passed on to New Zealand. Then followed the boom, marked by almost universal expansion and speculation. The scarcity of imports owing to shipping and other immediate post-war difficulties encouraged a short-sighted expansion of local secondary industries, and high trading profits led to a similar unwise expansion among merchants and retailers. But the effects were greatest in land speculation. Land transfer is greatly facilitated by the simple system of land registration in force in the Dominion, and every farmer, it seemed, desired larger and yet larger holdings. For in a country where agricultural rents are but little known and mortgages are almost universal, farmers have a large proportion of their costs fixed in interest on mortgages. Changing produce prices, therefore, react immediately and more than proportionately on the value of the owner's equity. The effect of the almost universal loading of land with transferable mortgages is to make dealing in land largely a matter of speculation on the margin of the owner's equity. In addition to other inducements to speculation, the Government entered the market as a competitor and spent approximately £20,000,000 on soldier settlements. Hence the price of land soared. Good dairying land, worth £40 to £60 per acre before the War, changed hands at £150 to £200 per acre. Farms were known upon occasion to be sold two or three times in one day, and the orgy was aided by the general readiness of sellers to accept mortgages in part payment. To-day mortgages ranking fourth and fifth in order of priority are common, and tenth and twelfth mortgages are not unknown. Between 1918 and 1922 the aggregate of mortgages outstanding increased from £138,000 to £231,000, and much of the increase represents nothing more substantial than the sellers' expected profits recorded as debts due from the buyers. 1 N.Z. Year Book, 1923, p. 252.

2 Ibid., p. 506.

For this period of speculation the banks were in no way responsible. Their credit policy was commendably conservative. Drastic changes in the exchange rate might have checked the boom by reducing the amount received in New Zealand for a given credit in London, but an approximately fixed exchange had become a tradition hard to uproot, and in any case the bankers were somewhat bewildered and preferred to play safe. There were other firms, however, mostly stock and station agents, and some farmers' co-operative concerns, taking money on deposit, lending on credit, buying and selling farms, live-stock, and farmers' produce and requisites, that acted much less discreetly. After the slump began one of these firms published a balance-sheet showing for their banking department Fixed Deposits, £300,000; Current Deposits, £500,000, and cash in hand and bank over-draft, £12,000 !! The remaining assets, as time has shown, were far from liquid.

The fall in British prices began about March 1920, and was particularly heavy in the case of crossbred wools, which are of great importance to New Zealand. But the reaction in the Dominion did not set in till some months later. Mortgages registered, perhaps the best indication of land speculation that is available, reached their peak in August, wholesale prices turned downward from October, and retail prices from December, 1920. Meanwhile importers, unable to get orders filled abroad, had duplicated and re-duplicated their demands, and during 1920 overseas merchants, filling these orders, were enabled to sell from a falling market to one still rising.

It is at this stage that the banks were called upon. Many of the importers traded under arrangement with the banks to meet their bills at sight of London, the disbursements being charged to the importers' account in New Zealand. From March 1920 to March 1921 imports exceeded exports by £19,000,000; the adverse balance of indebtedness was probably over £25,000,000. Called upon to meet these payments, the banks depleted their London balances, and as the fall in export prices had greatly reduced the purchasing power of the farmers and had been immediately passed on to other sections of the community, goods became difficult to sell, so that banking deposits were reduced and advances greatly increased. The £20,000,000 increase in the debts due to banks between March 1920 and June 1921 represents not so much the considered policy of the banks to aid traders by extending credit, as the demands for credit that were latent in obligations to customers the banks had already undertaken. With the scarcity of funds in London the exchange rates had to

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