Pre-war Price Control

ONE of the very first economic measures of the war was a price regulation designed to prevent profiteering;¹ and extensive controls over prices were to remain a feature of the war economy. However, price control was certainly not new. Price rises had been causing concern before the war, and the Government had found it necessary to take restraining action.

Retail prices had recovered steadily after 1933, when they had reached their lowest point in the depression. In 1936 a Prevention of Profiteering Act had been passed, but at this stage prices, though rising, were still 14 per cent below pre-depression levels. The Act was in the main a party policy measure of the new Labour Government. Wise wrote,² ‘In 1936, following upon the implementing of its policy of raising wages, the Government considered it necessary to strengthen the existing price control legislation so as to ensure, as far as possible, that benefit of higher wages was not offset by rises in prices. Accordingly the Prevention of Profiteering Act was passed in that year.’ This Act made it an offence to sell goods at a price which exceeded a defined basic price by an unreasonable amount. The Act was not fully effective. In specific cases it was difficult to prove that prices had increased by an unreasonable amount.

These regulations did not apply to all goods, but to a fairly comprehensive schedule which included any article of food for human consumption and quite a wide range of other goods and services.

The Tribunal in practice accepted increases in costs of materials from overseas, increased wage rates, and so on, as reasons for increasing prices, but there were occasions when it considered the margin of profit already being obtained was sufficient to allow such increases to be absorbed. The general effect of these regulations was that, for a wide range of goods and services, rises in prices had to be justified if challenged.

By this time the Government already had power under various Acts to fix the prices of a number of items, including rail and road transport, wheat, flour, bread, butter, cheese, tropical fruits and motor spirits.¹

Initial Wartime Steps to Stabilise Prices

At the outbreak of war, an attempt was made to stabilise prices of all goods and services. Regulations made on 1 September 1939 provided that prices then ruling were not to be exceeded without a specific authorisation from the Minister of Industries and Commerce.² These new and more comprehensive price stabilisation regulations also made provisions against hoarding.

The necessity for exceptions to be authorised by the Minister of Industries and Commerce soon made administration of the regulations too cumbersome. In December 1939 the Minister's powers were delegated to the Price Tribunal,³ with a stipulation that applications to increase prices should be dealt with in accordance with government policy, which was:

The effect of the second stipulation was to allow increased costs to be added to prices, but not any profit margin on the increased costs. Actually a provision was soon made to allow for exceptions in cases of hardship, but this new provision was used only sparingly. The rule against replacement costs was also modified in some cases, usually by taking an average of costs of old and new stocks.

As well as considering applications to increase prices, the Price Tribunal was required to survey prices being charged for goods and services, to issue Price Orders, and to consider complaints from the public and reports from its inspectors. In appropriate cases it could initiate proceedings in the courts.

In spite of the apparent rigidity of this attempt at stabilisation, prices continued to rise. By the March quarter of 1940 they were nearly 2 per cent above September 1939 and still rising. A contributing influence was the rapid upward movement in the cost of imported goods.¹

The First General Wage Order, August 1940

With as yet no really effective restraint on rises in the cost of living, it was to be expected that wage earners would want their real rates of earnings to be maintained. Following precedent established in World War I, and again in the depression of the 1930s, emergency regulations had been prepared to give the Court of Arbitration power to amend award wage rates by general orders at intervals of not less than six months. The Regulations² were approved in Cabinet in May 1940. They required the Court to take into account trading conditions, the cost of living, and all other conditions deemed to be relevant.

In the June quarter of 1940, retail prices rose a further 1 1/3 per cent and were then 3 1/3 per cent above September 1939 and over 5 per cent above March 1939.

The first General Order of the Court of Arbitration was made and took effect in August 1940. It granted to all workers who were subject to the Court's jurisdiction an increase of 5 per cent on their wage rates.

While the 5 per cent wage increase was justified by past price increases, it was unlikely to end the upward movement, and in fact it became another influence tending, by pushing up costs and prices, to defeat the stabilisation attempt.

Despite all attempts to hold prices, they continued to rise. Pressure came from a variety of directions. An interesting illustration is found in the experiences of the Director of Housing. In a minute of 26 August 1940¹ he reported to his Minister that rises in the cost of state houses were becoming more evident, due to (a) increased costs of materials on account of war conditions, scarcity of stocks, extra freight charges, and insurances, (b) an additional 5 per cent sales tax imposed in June 1940, and (c) mounting costs resulting from a 5 per cent wage increase effective from August 1940. The Director stated that the cost of a house unit of 1000 square feet had gone up by £97 since March 1940, representing an increase of from 21s. to 22s. 11d. per square foot, or over 9 per cent.

In varying degrees, costs of consumer goods and services were affected by similar upward influences. Even with the Price Tribunal keeping control over some profit margins, cost changes made further price increases inevitable.

The Economic Stabilisation Conference, September 1940

The substantial initial rises in retail prices, and the resulting general order increasing wages by 5 per cent, gave wartime stabilisation a very poor start. Moreover, import prices were still rising fast, and it was becoming increasingly apparent that restraint on profit margins would not prevent prices from pushing up wages, and wages from pushing up prices. This sort of spiralling now seemed inevitable, even had it not been boosted by the rising cost of imports and by increasing shortages of materials and services.

The tendency for prices and wages to move upwards was raising the cost of war to the Government and was emphasising the risk that its increasing war expenditures might disrupt the economy by creating runaway inflation. With war taking an increasing share, the supply of goods and services was not sufficient to meet everyone's demands. Unless urgent steps were taken, competition for scarce resources would certainly accelerate cost and price rises.

In September 1940 the Government convened the Economic Stabilisation Conference to consider the possibility of stabilising costs, wages and prices.

The Conference, which was widely representative of various economic groups, was given comprehensive instructions. It was ‘To survey the general economic position of the country under war conditions in order to consider the possibility of stabilising costs, prices, and wages, and to discuss expanding production so that the page 282 strain of war expenditure may be successfully borne and the standard of living be maintained as far as possible.’

At its first meeting, the Conference set up a working committee of seven employers' representatives and seven employees' representatives which, under the chairmanship of Mr A. T. Donnelly,¹ received statements and examined twenty-three witnesses. A considerable volume of evidence was studied. The committee's findings were accepted unanimously by the Conference and embodied in a report, made in October 1940, containing a series of recommendations to the Government.² Of these, the most important was Recommendation No. 6, which stated:

‘The Conference is agreed that it is not possible to stabilise money wages unless essential commodities are available at prices fixed for the same period as money wages. It therefore recommends that, in addition to wages, salaries, and rents, the prices of the following categories of essential commodities and services be stabilised:—

• Essential foodstuffs.

• Essential standard articles of clothing, footwear and household necessities.

• Public services, fuel and light.

In making this recommendation the members of the Conference are fully aware that it is not practicable to stabilise the prices of commodities or raw materials imported from overseas. The Conference, moreover, agrees that in certain circumstances, such as short supply or increased prices, the consumption of some imported goods may have to be reduced by all, or other commodities used instead.

‘The Conference strongly recommends that every effort be made to ensure that the goods value of the pound will remain constant, as otherwise all attempts at stabilisation must fail.’

In summing up the Conference said:

‘The recommendations of the Conference are designed to achieve two main results:—

The first is to stabilise prices, wages and costs so that the cost of the war is not thrown unfairly on one group to the benefit of another. The second is to increase all kinds of production and the efficiency of every type of service which will help, however indirectly, the national drive.’

Meantime retail prices were still rising. By the June quarter of 1941 they had climbed to just over 4 per cent above June 1940, which had been the latest available figure when the August 1940 general wage order was made.

Government Action in August and September 1941

The futility of any attempt at stabilisation which was not fully comprehensive was becoming increasingly obvious. But the carefully reasoned and deliberately emphasised statement by the Economic Stabilisation Conference, in October 1940, that the first objective was to stabilise ‘prices, wages and costs’, did not yet result in really comprehensive government action.

In August 1941 part of the recommendations of the Conference were put into effect, when the prices of 38 essential items were stabilised as from 1 September 1941. They comprised 17 foodstuffs, 16 items of New Zealand made clothing and footwear, tram fares, electric light, gas, coal, and coke.¹ The price of each individual item was to be held, first through ordinary price control methods, including downward pressure on costs and squeezing of margins, and then, if necessary, by the use of subsidies. On 1 September 1941 prices of a number of the food items were still at their pre-war level, where they had been held by government controls, assisted in some cases by subsidies, such as those on sugar and wheat.

This new government action was much too narrow in its scope to provide a firm basis for stabilisation, a fact which the Government recognised by setting up an Economic Stabilisation Committee, in September 1941, to work out details of a comprehensive plan.

To give the Economic Stabilisation Conference its proper place in the struggle for stability, it should be recalled that this Conference unanimously urged the Government to stabilise ‘prices, wages and costs so that the cost of the war is not thrown unfairly on one group to the benefit of another.’ It was in furtherance of this aim that the Government set up the Economic Stabilisation Committee, from whose deliberations was to emerge ultimately a successful stabilisation scheme.

The Economic Stabilisation Committee, September 1941

The Economic Stabilisation Committee, set up in September 1941, consisted of the Minister of Finance, the Minister of Industries and Commerce, the acting Chairman of the Economic Stabilisation Conference, and five representatives of employers and employees. The page 284 Committee was to advise the Government on matters relating to prices and incomes, and to work out details of a comprehensive plan for promoting the economic stability of the country.

To have any hope of success, the plan had to be comprehensive and had to be worked out in detail before any attempt was made to put it into operation. It was no use trying to hold prices stable if wages were not held, nor wages stable if prices were not held. Neither prices nor wages could be kept stable if other costs continued to rise. Moreover, with reduced importing, the gap between money incomes and the flow of goods available for civilian consumption was steadily increasing, making price control difficult and giving an impetus to black marketing.

The problem was to plan a stabilisation framework which would be workable in detail, and acceptable, both in principle and in its application, by the various sections of the community. The task was bristling with difficulties. The Committee settled down to a long, hard job.

By the beginning of 1942 some of the requirements were beginning to emerge and, in preparation for the more comprehensive stabilisation scheme, an Index Committee was set up in January to prepare a new price index suitable for war conditions.

Meantime, in November a workers' application had been taken to the Arbitration Court for a further General Order increasing wages.¹ To the workers, the apparently inexorable rise quarter by quarter in the Retail Prices Index threatened a substantial loss in purchasing power if they did not take steps to have their pay rates increased. But the Arbitration Court, in December 1941, took the unusual step of rejecting the workers' application.

The Court must have been considerably influenced by the risks of inflation under war conditions, for it had before it price and wage index numbers which showed that the effects of its August 1940 general order in restoring the purchasing power of wage rates had already been almost cancelled out by subsequent price increases. This evidence showed that, by the September quarter of 1941, nominal wages had risen on average only ½ per cent above the new rates fixed by the 1940 order, but prices had risen almost 5 per cent.² The page 285 Court referred in its pronouncement to the possibility of further reductions in ‘the volume of goods available and able to be consumed in New Zealand.’ It may well have felt the need to allow a little extra time to see what results were likely to follow from the Government's measures in August and September 1941, and from the efforts of the Economic Stabilisation Committee.

The Second General Wage Order, April 1942

However, between the September and December quarters of 1941, prices rose a further 1 ½ per cent while nominal wages were unchanged. The workers were now worse off than they had been before the 1940 order, and the Court granted a further 5 per cent increase. This order took effect from April 1942, with the then novel provision that it was not to apply to any portion of the workers' remuneration above the limits of £5 a week for adult males, £2 10s. a week for females, and £1 10s. a week for workers under 21 and for apprentices.¹

The Court, in its pronouncement, noted that there had been a definite acceleration in retail prices since the increase granted in 1940, that the entry of Japan into the war in December 1941 had affected the trade and industry of New Zealand ‘to an almost unbelievably small extent', and that in England the actual threat of invasion and the cutting of overseas communications did not appear to have prevented wage increases, but had had rather the opposite effect.

These Arbitration Court increases tended to be passed on to salary and wage earners generally, in spite of the fact that many were not subject to the Court's jurisdiction.

Needless to say, the general orders did nothing to stop further price and wage rises. In the year ending in the December quarter of 1942, prices rose a further 4 per cent and wages rose by over 2 per cent more than was granted by the Court's order.

In the 3 1/4 years between the outbreak of war and the introduction of a comprehensive stabilisation plan in December 1942, prices and award wages had both risen by 14 per cent.

Chart 58 shows price and wage changes in the first 3 1/4 years of war.

Chart 58
PRICE AND WAGE CHANGES BEFORE ECONOMIC STABILISATION
INDEX NUMBERS: BASE SEPTEMBER 1939 (= 1000)

A Comprehensive Stabilisation Scheme—December 1942

The continued upward movement of prices in each quarter of 1942, and the threat of a still wider gap between incomes and available goods and services, gave added urgency to the work of the Economic Stabilisation Committee. It had to evolve a stabilisation scheme which would embrace wages, costs and prices; a scheme which would stand firm in spite of inflationary influences, but which would remove many of those influences; and above all, a scheme which would help to ensure equity in the sacrifices which must necessarily be made by all sections of the community.

The scheme could not hope to be successful unless it was acceptable to workers, manufacturers, farmers, traders, and other major economic groups. The comprehensiveness of the plan not only made this wide acceptance vital, but was also a pre-requisite for it. No group of people would willingly accept stabilisation of its income if the prices it had to pay were not stabilised, or if the incomes of other groups were free to move upwards.

On 15 December 1942 the Prime Minister was able to announce the Government's decision to introduce a comprehensive plan of stabilisation, based on the recommendations of the Economic Stabilisation Committee.

The essential features of the plan were:¹

Most of the provisions of the stabilisation plan were brought into effect by the Economic Stabilisation Emergency Regulations in December 1942. These regulations provided also for a Director of Stabilisation and a Stabilisation Commission.

Stabilised Wages

The wages provisions in the new regulations superseded the 1940 wage regulations¹ and provided for the stabilisation of rates of wages and remuneration at November 1942 levels. Only if prices moved 2 ½ per cent above their December 1942 level would this stabilisation of wages be varied. The keystone of the whole scheme was the special Wartime Prices Index which was to record price changes. It had been a masterpiece of compromise, narrow enough in its coverage of goods and services to make it capable of being kept steady by price control, subsidies and resistance to cost increases, but at the same time covering a sufficient range of consumer goods and services to be acceptable to the workers² as a measure of their cost of living, and hence of the level at which it was equitable to stabilise the economy.

Under the new regulations, control over actual or ruling wage and salary rates was intended to be just as rigid as the control over award rates. The regulations even went so far as to provide that ‘In any case where the basic rate of remuneration exceeds the rate of remuneration that was actually paid as on the 15th day of November 1942, the Court of Arbitration, on application made by or on behalf of the Director, may in its discretion, having regard to the general purpose of these regulations, make an order reducing the basic rate of remuneration to a rate not less than the rate so paid as on the said 15th day of November, 1942.’¹

Thus the rates of remuneration in November 1942 became the stabilised wage and salary rates, and were referred to as the basic rates. These basic rates were not to be exceeded without approval, and for this purpose Wages Commissioners were appointed. The Commissioners could approve increases only where there were additional duties or risks, where there were anomalies at the base date, or as a result of a subsequent decision of the Court.²

The Wartime Prices Index

It has been observed that the Wartime Prices Index was the key to the new comprehensive stabilisation scheme. It fixed the level at which the economy was to be stabilised, and facilitated widespread agreement to the whole scheme, by providing a yardstick to determine the equity of the sacrifices to be made by various sections of the community. Without an acceptable index of consumer prices, with which the whole scheme could be interlocked, the plan could not have been operated successfully, even as an emergency measure in time of war.

In a Parliamentary paper dealing with the Wartime Prices Index,³ the following statement appears:

‘On 15th December, 1942, the Government announced its intention to stabilise the domestic economy of New Zealand by means of a comprehensive plan involving the stabilisation of the prices of a wide range of essential commodities and services, of all rates of remuneration, and of rents and transport charges at the levels then ruling. Fundamental to the plan was the decision that wages and other forms of remuneration should be linked to the prices of essential commodities and services (including rents) page 290 entering into the cost of living of the average New Zealand family. This was to be achieved by the preparation of a special wartime price index which would function as a reliable indicator of any variations in the retail prices of such commodities and services taken as a group. Increases or decreases in the general level of prices as measured by the index, when reaching certain stated percentages, would automatically lead to corresponding adjustments in the rates of remuneration.’

As was to be expected, much of the administrative work in operating the new stabilisation scheme would be concentrated on the Wartime Prices Index. The objective would be to use price control, subsidies, and resistance to cost increases to keep price rises, as measured by the Wartime Prices Index, below the 2 ½ per cent increase which would trigger off increases in wages and farm payouts. All cost changes would tend to be assessed in terms of their effects on the Wartime Prices Index.

For this reason, a fuller study of the content of the index is deferred to Chapter 12, which deals with the administration of the comprehensive economic stabilisation scheme.

Assessment of the Early Attempts at Stabilisation

The brief discussion in this chapter of the safeguards in the new comprehensive stabilisation scheme has pinpointed some of the reasons why the more piecemeal attempts up to the end of 1942 were unsuccessful. However, one should not underestimate the strong inflationary influences with which stabilisation attempts had to contend in those years.

In the first 3 1/4 years of war the financial strain on the economy was building up rapidly, as distinct from the last 2 3/4 years, to be dealt with in the next chapter, when the strain, though quantitatively much greater, was more constant.¹ Moreover, the structural changes necessary to switch the economy over to a maximum war effort tended to be concentrated into the earlier period. Both these influences would have made a rigid stabilisation scheme difficult to administer, and perhaps a little out of keeping with the need for rapid economic adjustment.

A significant reference to the problem of readjustment in the early war years is contained in the following extract from Prime Minister Peter Fraser's December 1942 statement introducing the scheme of complete stabilisation:²

‘Our people are working hard and earning more money, but the supply of things they can buy has not increased. It is growing less page 291 because of the inexorable needs of war. Since 1939 the national income has increased by about £50 million, but the supply of goods people can buy has decreased by more than £40 million, that is the gap between the supply of goods and purchasing power is of the order of £100 million. This excess of purchasing power has begun to swamp our price control….’

Put this into perspective by remembering that in these years national income was under £300 million, and it is not surprising that the stabilisation measures of the early war years were only partially successful. Only a fully comprehensive scheme, such as that introduced at the end of 1942, could have hoped to succeed. Even that might have failed to cope with the situation in the earlier years, when massive portions of New Zealand's productive resources were being diverted to war work and the financial strain of war was doubling and trebling from year to year.

Chart 59 gives an impression of the widening gap between incomes and goods available. The income figures used are not adjusted for taxation. The effect of taxation, loans, and saving in reducing private expenditure is discussed in Chapter 12.

Chart 59
AGGREGATE PRIVATE INCOME AND GOODS AVAILABLE

In the context of this ever-widening gap, an economy under rapid structural change, and import prices which rose about 50 per cent between September 1939 and December 1942, the recorded increase of 14 per cent in prices and wages up to December 1942 takes on a new significance. It indicates, in fact, a considerable measure of success in coping with exceptional difficulties.