In The Dominion of April 29 (p.18) there is an article about the Reserve Bank's latest public relations effort. It is a pamphlet called The Impact of Monetary Policy on the Economy. In it, Don Brash, Governor of the Reserve Bank, claims that (in the words of the NZPA journalist) "the recovery from the Great Depression of the 1930s would have been faster if the present approach to monetary policy had been applied".

There is confusion about two issues, because the tone of the argument seems to be that Brash is talking about the Great Depression itself and not the recovery. He may be right in one respect; a commitment to keep inflation between zero and two percent would have been interpreted in the late 1920s as an inflationary policy, whereas it is understood in a late twentieth century context as a disinflationary policy. (Disinflation means cutting the rate of inflation, whereas deflation means falling prices and wages, or the creation of an environment that is likely to lead to falling prices and wages.)

The main goal of mid-Depression monetary policy in most economically developed countries was to raise prices. Some found it more difficult than others to reflate their national economies. A return to tariff protection as orthodoxy in the 1930s helped. It meant that national policies only had to deal with the national economy.

The countries which had comparatively small "Great Depressions", were those which eschewed deflationary policies in the 1920s, or those which devalued their currencies on or before 1931. Sweden, which Dr Brash cites, did both. New Zealand did not devalue until 1933, and suffered the consequence of two years extended pain (mid-1931 to mid-1933).

The most clear truth of the interwar years was that those countries with overvalued exchange rates paid dearly. Dr Brash's name is associated more than anything else, in the public mind, with the strategy of overvaluing the exchange rate as a means of fighting inflation. (Germany clung to the overvalued gold standard from 1930 until Hitler's election early in 1933; inflation remained public enemy number one despite mass unemployment.) I could not easily imagine a Brash-equivalent advocating devaluation and inflation in 1931.

New Zealand's recovery from the depths of depression was dramatic. Policies the very opposite of those we would naturally associate with Dr Brash were adopted, starting with the accession of Gordon Coates in 1933 as Minister of Finance, replacing the intransigent William Downie Stewart. Per capita GNP doubled from 1932 to 1942 (see my 1992 article "New Zealand's Gross National Product: 1859-1939", Review of Income and Wealth, 38:49-69), meaning that this 10 year period was easily the most sustained period of economic growth in our nation's history.

The most spectacular period of growth was the two years to March 1938, unlike the USA which didn't really recover until after 1939. Australia recovered before New Zealand but its recovery was choked by conservative policies in the late 1930s. In 1938 and 1939, many skilled Australian workers were seeking employment in New Zealand.

It is not credible that Brash could have conjured an even greater miracle than the one we had in the ten years after the depths of Depression. Yet, if we are to interpret his recipe as an advocacy of inflation rather than deflation - politically incorrect left-wing radicalism in the 1920s - then his policies might have enabled the New Zealand economy to perform much better than it did in the years from 1926 to 1932.

Milton Friedman believes that excessively tight monetary policy in the USA was the cause of the Great Depression, worldwide. If Donald Brash believes like his monetarist mentor that unintentionally tight monetary policy is the most potent cause of economic depressions, then he should say so openly. Brash's actions (unlike those of the USA's Dr. Greenspan) tend to suggest that he prefers to err on the side of monetary tightness than on anything that might be interpreted by the markets as "inflationary".

It does make some historical sense to link Brash (and Birch) with Downie Stewart's deflationist approach, while comparing the enigmatic Winston Peters with the equally enigmatic Gordon Coates. (Coates, leader of the minority coalition partner, was Treasurer for three years - 1933 to 1935 - in which he was rubbished from both the left and the right. It is only in recent years that he has been given his due by historians for successfully steering the middle ground.)

© 1998

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