Academic journal article The Reserve Bank of New Zealand Bulletin

The New Zealand Debt Conversion Act 1933: A Case Study in Coercive Domestic Public Debt Restructuring

Academic journal article The Reserve Bank of New Zealand Bulletin

The New Zealand Debt Conversion Act 1933: A Case Study in Coercive Domestic Public Debt Restructuring

Article excerpt

1 Introduction

Current sovereign debt troubles, particularly in Europe, command international news headlines and drive financial markets. But sovereign debt stresses are not new, even in advanced economies, and various authors, led by Carmen Reinhart and Ken Rogoff, have done painstaking work in documenting defaults and coercive restructurings of public debt, domestic and foreign, in a range of countries going back centuries. The New Zealand Debt Conversion Act 1933 is one of the domestic debt restructuring episodes they report. (1) This article, drawing largely on secondary sources, tells the story of that episode in its historical and international context.

2 Context

After a decade of little growth in per capita incomes, the sharp fall in the terms of trade (around 40 percent) helped to trigger a substantial fall in New Zealand's real and nominal GDP in the early 1930s. All estimates of GDP for this period are approximate, (2) but only a handful of advanced countries, including the US, Australia, and Canada, are estimated to have experienced a sharper fall in the level of real GDP than New Zealand did. (3)

New Zealand entered the Depression highly indebted. More than half the public debt had been raised in London and that share had steadily increased during the 1920s. (4) Central government debt as a share of GDP is estimated to have been just over 150 percent of GDP in 1929, (5) while general government debt (including local government borrowing) was around 190 percent of GDP. Both central and local government debt had increased substantially during the 1920s. In respect of private debts, the Government Statistician provided a one-off estimate (6) of total mortgage debt (urban and rural) for 1931, equivalent to 140 percent of pre-Depression GDP. Much of the private debt in New Zealand was farm mortgage debt, vulnerable if the commodity prices fell sharply.

Other governments were also highly indebted. The positions of Britain--our principal trading partner and prime source of international borrowing--and the other Dominions (Australia, Canada, Newfoundland, South Africa) were of particular relevance to New Zealand. (7). World War 1 spending had pushed up public debt levels in many countries including Australasia, but the effect had been particularly significant in the UK, which had had a relatively small public debt prior to the war. Public debt in the UK was around 175 percent of GDP in 1929.

The public debt ratio in Australia (combining federal and state debt) appears to have been very similar to that in New Zealand, (8) and Australia was also heavily dependent on access to the London credit markets (and the largest single and international borrower in the 1920s). Much of the Australian debt was quite short term, and offshore lenders had become concerned about the Australian debt position, jeopardising the ability of Australian governments to go on borrowing and putting early pressure on the Australian exchange rate.

3 Responding to the Depression

The depth and duration of New Zealand's economic downturn became clear only gradually. Writing in 1932, the prominent economist Douglas Copland (1932) could note of New Zealand that "by the middle of 1930 the fall in export prices had been only 20 percent in gold [i.e., the foreign currency price], and overseas borrowing had not been interrupted. There was consequently little disturbance to national income", presumably beyond what might have been expected in a typical business cycle. Copland also quotes a League of Nations report noting that New Zealand had been in a relatively favoured position, unlike Australia, for example, at least until early 1931. The Niemeyer Report (Niemeyer 1931), commissioned by the New Zealand government to provide advice on exchange rate issues, was tabled in February 1931 and contains no reference, or sense, of anything out of the ordinary occurring in the economy.

In any event, the New Zealand government had quite limited conventional policy options to respond to downturns, and especially to one of the severity of the Great Depression. …

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