Opinion: Boom and bust in the 1870s

Opinion: Boom and bust in the 1870s

By Neville Bennett New Zealand's history has a strong theme of boom and bust. Its rhythm is associated with the international economy and export prices. The social impact was usually immediate: booms were associated with greater trade, greater debt, more immigrants, marriages, children, drink and bigger houses. The busts were dramatic with collapsing house and farm prices, emigration, and unemployment. My research into NZ history was initially a study of prices and the effect of changes. I was fascinated by the evidence of cycles and the robustness of French methodology used by the Annales School, especially the insights of Fernand Braudel. A lot of my research is rather technical, relating to Kondratieff's but my purpose here is to illustrate the boom and bust in the Victorian period for general readers. I selected this topic on the urging of Bryan Crump of the Nights programme of Radio NZ where I am a regular contributor as their economics contributor. I will be covering other periods too in print and sound.

The Boom; beginnings New Zealand's prosperity before the 1970's was closely associated with the British market for goods, services and capital. British recessions, as in 1868, 1879, and 1885, brought marked falls in NZ exports. Similarly when export values were high, migrants crowded in: 93,000 arrived 1861-5 but only 29,000 in 1881-85. In recessions, there was net emigration in 1886-1890, and 1931-1935. British interest in New Zealand arose when it could provide a staple product that was non-perishable with a high value/low volume characteristic such as gold. Wool was more important, Britain's demand had outrun the possibility of European supply, and New Zealand had obvious potential; bring successive waves of population to the South Island. Greasy wool fetched 15 pence a pound in the 1860 and early 1870's, an extraordinary figure. For the period 1850-70, NZ's exports grew at a compound rate of 13.3% p.a. which I believe was the world's fastest. But when London sneezed, New Zealand caught a cold. Financial crises were rapidly transmitted through capital and labour flows as well as interest rates and markets. This is well known for the 1930's, 1987 and 2007-9, but crises in 1866, 1873 and 1879 are interesting. The collapse of Overend Gurney, a London bank in 1866 was quickly transmitted to New Zealand through the collapse of some banks (Commercial, Banking Corporation, and Bank of Auckland.) Many wool farmers were embarrassed by a fall in wool prices of 40%, and many who had secured an advance on the wool-clip, had to return substantial amounts. A huge number of bankruptcies followed, with high unemployment and distress. However, a recovery quickly promoted prosperity. 1873-1879: the biggest crash of all The crash of 1873 so jolted Britain that the value of its 1873 exports was not exceeded until 1899. Similarly NZ trade per capita in 1873 was ₤40, a figure not exceeded until 1913. New Zealand's internal prices went from an index of 164 in 1873 to 127 in 1879 and 102 in 1887. Wool fell from 15p in 1873 to 8.75p in 1879. Fine wool was 16p in 1873 and it did not reach that price again until 1944! But NZ retained an air of prosperity. This was helped by a record number of immigrants in 1874 (38,000 net) and a strong stimulus from Vogel-type spending. It also became a preferred market for British capital; Australasia absorbed 40% of British capital exports. Vogel raised massive loans in the UK to develop rail, telegraph, ports and other infrastructure, as well as introducing migrants with cheap passages. His scheme functioned as a Keynsian stimulus that mitigated the shock of 1873. He planned to pay for the loans with land-sales, especially those adjacent to new rail lines. This land did appreciate, often from one pound to 25 in Canterbury. However, the gains were privatised at the cost of rising public debt. The availability of capital and the desire of banks to invest in land led to an incredible boom. Bank advances exceeded deposits by 132%. I calculate that land prices increased by 500% 1874-9. The crash came when the City of Glasgow Bank went bust in 1868. British lenders reviewed New Zealand and re-rated it downwards. It entered a terrible depression that lasted until 1895. Reflections on the boom There is something incredibly exciting about the 1860' and 1870's. It was probably the world's fastest"“growing economy. Its population doubled between 1866 and 1876. Birthrates and immigration were high, increasing the population by 9.59% p.a. If that rate were maintained, there would be 2 billion kiwis today! There have been few booms in world history to match New Zealand in this period, the number of houses increase of 8% p.a., an addition of another twelve for every existing home. Directed by Vogel's capital-raising, railways and ports developed extraordinarily. There is no other boom of this in New Zealand's history. Unfortunately, the debt ran up was a millstone on subsequent generations. The bust in 1879 was terrible for families. Without reliable work people squashed into over-crowded rooms, even though immigration fell to only one twentieth of boom rates. Births fell by 10% and in 1879 34% of babies died in their first year as epidemic raged unchecked. The marriage rate fell by one-third, and salaries were cut by 10%. The Depression 1879-1895 My research shows that in the Great Depression of the 1880's re-orientated society.  New Zealand found itself priced out of many markets. Its exports were sluggish and it began import-substituting activity. The economy could afford fewer imports, which fell 50% in per capita terms by 1895. While exports remained important, much production was internally orientated: construction, foodstuffs, printing as well as export preparation. Deflation depressed prices by 43% in the period 1873-1895, or about 2% p.a. Assets eroded, cash was king allowing some to accumulate, or find profitable outlets in manufacturing and shipping. Much labour was placed on a piecework or casual basis. Many rural households appear to have relied on their land to provided most of their needs, although contract or casual work (e.g. at harvest-time) brought welcome cash. The labour market was very tight, and employers increased the proportion of women and children in their employ. The standard of living declined: between 1878 and 1895 household consumption of imported goods fell by two-thirds. Wealth per capita did not increase during the depression but increased rapidly in the upturn. New Zealand had many youthful dependent children who were generally expected to pull their weight and work hard, often milking in the morning before school and delivering milk, meat papers afterwards. Some school districts opened only 150 days and many of those were half days. Holidays depended on the crops grown. One farmer was typical; he sent his kids to school when there was no work on the farm. I am not sure there were "children" as we use the term today, to some extent people seemed to go from infant to young adult, most of whom had many chores and later started work at an early age. I searched very detailed customs data for "toys" but could not find any. Falling wool prices after 1891 threatened the financial sector in a way reminiscent of the dairy industry today. Banks had foreclosed on collateral and had vast land holdings. The BNZ was the largest land-holder. In June 1893 it warned the government it would have to close its doors unless it received support. It was "too big to fail", and won support. The huge NZ Loan and Mortgage was allowed to fail. There was innovation. Refrigeration appeared in the 1880's but was of no benefit until British prices rose in the 1990' 1890s. In 1887 it cost 2.5p to land meat in London where it retailed for 3.5p. Freezing companies often made losses. Refrigeration was a consequence of prosperity rather than its cause. The meat trade was profitable only when England boomed, in depression New Zealand was an indigent price- taker. The recession underlined its dependence on the international economy for capital and markets. Some brief conclusions: 1. NZ closely linked to UK, shared its prosperity and downturns. 2. Although domestic activity was large, in land development, infrastructure and housing, much of the capital was imported. 3. Debt per capita was 30 pounds in 1970 and 60 pounds in 1896. Debt was a big strain on budgets. 4. The depression was extraordinary long but some industries grew within a stagnating economy. Deflation was about 2% p.a.1879-1895. 5. Society was amazingly responsive to the economy. There were 4 people per household in boom, over 6 in slump, the marriage rate varied similarly. 6. New Zealand was dragged out of the depression by improved British prices after 1895: the turn-around was very abrupt, I will explain why in detail in about 3 weeks. ____________ * Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared. neville@bennetteconomics.com www.bennetteconomics.com

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