Immediately after the First World War New Zealand suffered a deep but short depression when import prices lifted rather sharply, signalling the end of the Liberal boom. The 1920s were a period of slow growth propped up by offshore borrowing.
The great depression began internationally with the Wall Street sharemarket collapse of October 1929, although the subsequent downturn was complicated by poor monetary and economic policies in the major financial centres.
As in the long depression of the 1870s to 1890s, New Zealand was hit by being unable to borrow offshore, and by a collapse in the price for its exports. Economic activity declined – gross domestic product (GDP) is thought to have been only 75% of capacity in the 1932/33 year and the unemployment rate may have been over 20%. Again there was much hardship.
Despite the suffering of the depression, there were some who enjoyed new ‘mod cons’ during these years. Electrical water-heating and stoves spread among the houses of the wealthy in the early 1930s. Those who had jobs or savings benefited from lower prices and new technologies.
Depression economic policy
During the depression there was much criticism of economic policy, which restricted government spending, devalued the currency, cut nominal wages and reduced interest rates and the value of mortgages. Subsequent assessments view these measures as broadly necessary, but suggest that the burden of adjustment could have been more fairly shared. The government was unable to prime the economy through deficit financing because monetary conditions were determined offshore. The Reserve Bank of New Zealand was established in 1934 in order to make a more independent monetary policy possible.
Just as Harry Atkinson had laid the foundations for the boom after the long depression, Gordon Coates, the minister of finance in 1933–35, laid the foundations for a later boom. While the Labour government elected in 1935 was thought to have saved New Zealand from the great depression, the domestic and world recovery was under way before it took office. The new government built on the foundations laid by Coates. It introduced new policies to strengthen economic growth, reduced (but did not eliminate) the vulnerability of New Zealand to external economic events, and increased the social security of New Zealanders.