the future of WARTIME CONTROLS

Korero (AEWS), Volume 3, Issue 1, 12 February 1945, Page 26

the future of WARTIME CONTROLS

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From the Journal of Public Administration

As the end of the war draws near, the question of what part of the elaborate system of wartime economic controls is going to be carried over into the peace becomes of first importance to public servants. For upon the answer to that question will largely depend the nature and the functions of the post-war Civil Service. We can, of course, only guess at the answer, because there is everywhere uncertainty as to the sort of economic system that is likely to emerge from the war and also because, in war, there is little time for research and for unhurried and objective thinking. But it is necessary that we should begin to guess on the basis of such imperfect knowledge as is available to us, for anything is better than that we

should enter the post-war period with no clear idea of the scope and the objective of public administration. Public Opinions and Controls It is already obvious in this country (and also in Australia and in Great Britain) that public opinion is going to make itself felt on this question of controls. By this I do not mean merely the pronouncements of bodies like the chambers of commerce, which are traditionally the defenders of unfettered private enterprise. There are signs that the public generally, irrespective of their economic interests or political opinions, have grown very weary of coupons, forms, and regulations. There are signs, too, of a deep-seated uneasiness over the

implications of some of the wartime •controls. The system of controls which is referred to compendiously as “ manpower ” is particularly suspect; . and to the fear of “ man-power ” can be attributed the widespread and significant protests against the school vocational guidance cards. Promises of an immediate relaxation of controls are, I think, likely to figure largely in the first post-war election. Nevertheless, irrespective of what ■Governments may desire to do, there are many reasons why it will be impossible to celebrate the peace by packing the controllers off home and repealing the War Emergency Regulations. Money and Stabilization In order of immediacy, the first of these reasons is the monetary situation. In the Reserve Bank statistical summary for March-April you will find a .survey of recent changes in the volume of money in circulation in New Zealand which considerably illuminates our economic future. Between the end of 1938 and the end of .last year the volume of money in circulation in New Zealand in the form of coin, notes, and bank demand deposits increased from £sl-7 millions to ;£i37-i millions. The reason why this accumulation of money has not sent prices rocketing is stabilization, or the system of controls comprehended by that name. Whether the ending of the war will appreciably diminish the volume of money in circulation in New Zealand may be doubted. Soldiers will be receiving deferred pay and demobilization grants in various forms ; there will be extensive rehabilitation schemes to be financed ; and, unfortunately, there will be repayment of war savings and war loans, most of which are relatively short term. Since no one will want to see rehabilitation handicapped at the outset by inflated and unsteady prices, it is a safe guess that controls designed to preserve price stability will continue after the war. Deterioration of Capital Equipment There is, however, . another aspect of the monetary situation which is equally important. For five years now New

Zealand has been allowing her stocks of most consumable commodities to diminish and her capital equipment to deteriorate. She has had no option but to do so, because before the war imports bulked more largely in her economy than in any other economy in the world. When the war ends, New Zealand’s demands for imports to replenish her depleted stocks and bring her capital equipment back to full efficiency will be enormous. Moreover, the rehabilitation schemes will create a demand for new capital equipment. A demand for imports is a demand for London fundsand at present these amount to about £4O millions. There was a time when /qo millions in London seemed a lot. Balanced against our need for commodities and equipment at the war’s end, it is seriously inadequate —and that inadequacy means a continuance of exchange rationing and import control. You can, if you like, reach the same conclusion- by a different road. After the war the demand for capital goods is certain to exceed the available supply. For a few years, at any rate. New Zealand will not be able to buy overseas all she needs. It is hardly likely that what New Zealand does buy will be decided in a free-for-all scramble. If our post-war development is to be orderly and rational, urgent needs will have to be satisfied —and that means import control. War Economy and Peace Economy There are, however, more fundamental reasons why some of our wartime controls are likely to carry over into the peace. One is that we are no longer conscious, as we were in the last war, of a sharp difference between the principles of a war economy and the principles of a peace economy. The war economy is governed by the simple device of requisition. What the State needs it requires producers to produce. In the free capitalist economy, producers produce what will return them a profit in the open market. He would be a bold man who would predict what sort of modification of the free capitalist economy will emerge from this war.

But it can, I think, be said with some certainty that after the war social needs rather than profit margins will determine the production of a much wider range of commodities than was the case before the war. Housing is a case in point. In a passage in his “ World Crisis,” Mr. Winston Churchill has recorded how the transition from war to peace in 1919 affected the national approach to the housing problem in Great Britain : “A requisition for half a million houses would not have seemed more difficult to comply with than those we were already in the process of executing for a hundred thousand guns. But a new set of conditions began to rule from eleven o’clock onwards. The moneycost, which had never been considered by us to be a factor capable of limiting the supply of the armies, asserted a claim to priority from the moment the fighting stopped.” Neither in Great Britain nor in New Zealand will such a transition occur after this war. The Government will requisition for the houses the country needs. That means control of private buildings, control of building materials, and perhaps some control of labour. Nor is it inconceivable that, in some countries at any rate, the supply of essential food commodities will be dealt with by the method of requisition and not left to the hazards of private enterprise. Economic Difficulties, 1937 I have said that we are no longer as conscious as we were of a sharp difference between the principles of a war economy and the principles of a peace economy. A consideration which is closely related to this, and which is too often lost to view in popular discussion, is that many of the controls which we have come to regard as wartime controls in fact have their origin in the monetary difficulties which became acute towards the end of 1937. These difficulties involved us first in exchange and import control, and then, by a natural sequence, in controls designed to regulate the cost of living. Two views are possible of the origin of these difficulties. One view is that they originated simply in an unbalanced fiscal policy. The other view is that the

monetary crisis of- 1937, while it was hastened by an unbalanced monetary policy, had its fundamental causes in certain changes in the world monetary situation and in the monetary relationship between New Zealand and Great Britain. New Zealand’s balance of payments (on this view) had always been balanced before the depression, by borrowing on the British market. This process could continue only as long as it could be assumed that New Zealand’s export trade could continue to expand and that the British capital market was readily accessible. During the depression both of these assumptions became invalid, with the result that New Zealand was certain to be faced, sooner or later, with difficulties of external payments. If you take this second view of the nature of the monetary crisis which faced New Zealand in 1937 ( a view which' may or may not be sound), then you must accept a conclusion of some importance, which is that our wartime import and exchange controls and also those controls designed to regulate the cost of living are not an innovation, but represent merely the speeding-up of economic trends which began before the war. The Future of Trade At this point I may well be accused of basing sweeping conclusions on the somewhat inadequate basis of events in New Zealand over a decade or so. It could be pointed out that for more than a. year the monetary experts, and latterly the Governments of the United Nations, have been drawing up plans which have as their object the elimination of quotas, exchange controls, excessive tariffs, and all the administrative devices which have broken down the relatively free system of international trade which existed before the depression. If these plansare completed and put into operation, is it likely that New Zealand will obstinately exclude herself from their scope ? Probably not. But will these plans come to anything ? At the moment the situation is fluid and there isno evidence on which a reasoned judgment can be based. An opinion expressed now cannot be more than a.

hunch. My hunch, for what it is worth, is that the world's trade will not again flow to any great extent in the intricate channels worn by private commerce. It will flow mainly in channels deliberately excavated by administrative action. Control Breeds Monopoly A further and final reason for w doubting whether controls will be easy to remove after the war could be summed up in the general statement that the child of control is monopoly. Whenever the State sets out to control an industry or service it sooner. or later finds that the existence of many small units (unless the industry in question is already monopolistic or quasi-monopolistic in structure) is an obstacle to efficiency and that the easy way out of the difficulty is to encourage monopoly. Examples of this are the small litter of monopolies to which the Ministry of Supply has given birth, the organization known as Distributors Limited, which the- Internal Marketing Division has created to handle the distribution of dairy-produce in the Wellington area, and the centralized egg-marketing arrangements made necessary to ensure a more equitable distribution of eggs to domestic consumers. Now, once an industry has been encouraged to develop monopolistic organization it is most difficult, even impossible, to separate it back into its original units. As an American economist has said, You can’t unscramble eggs.” In many cases, therefore, the relevant choice will not be between private enterprise and State-controlled enterprise, but between uncontrolled monopoly and State-regulated monopoly. Indeed, I suspect that around this choice are likely to be fought the crucial political battles of our —battles which will obscure the division between left and right (that is, between the employing class and the working class) which has been fundamental to our politics for half a century or more. And it seems to me that when this choice comes to be made a voice will be heard which hitherto has been only a dim, confused murmur—l mean the voice of the consumers.

Producer and Consumer Before the war New Zealand was a. producer-dominated economy, < in thesense that producer groups were much more influential politically, by virtue of their greater compactness and clarity of purpose, than the unorganized and incoherent consumer interest. \ Why this was so, and why it is ceasing to be so, are questions too large to be examined here. What is indisputable is that the consumer interest has in the last five years become a force which Governments and administrators can no longer ignore. The present position of that muchbelaboured institution, the Internal Marketing Division, is an interesting example of this change. The needs which gave rise to the Internal Marketing Division were producer needs. When the marketing of New Zealand’s primaryexports was brought under centralized control and producers of export commodities given a uniform and assured return, it was inevitable that producers for the domestic market should demand a similar organization of their affairs. Therefore the Internal Marketing Division was created to devise a system whereby producers of butter and cheese for the home market should be assured of the same return as producers for the export market. When other producer groups saw the success of this system they sought similar benefits, with the result that soon Internal Marketing was involved in rationalizing the affairs of producers of honey, apples, and citrus fruits. In the beginning Internal Marketing was oriented towards the producer interest ; its function was to. restore order and profit margins in the chaotic business of producing and selling for the local market. This task it was able to carry out competently and in decent obscurity as long as it was answerable mainly to the producers. That it is now a sort of whipping-boy among Departments is due mainly to the growth over the last five years or so of a consumer consciousness. Internal Marketing is now obliged to regard its main task not as the protection of producers for the local market, but as the distribution to consumers of adequate supplies at reasonable prices.

Consumer Consciousness To regard this rise of a consumer consciousness, with its accompanying emphasis on the problem of distribution, as the transient outcome of war shortages is to miss the significance of much that is happening in economic thinking and economic practice. The proceedings of the United Nations Conference on Food and Agriculture at Hot Springs show that the great majority of Governments are now prepared to think of the world’s economic problems in terms of the consumer rather than of the producer. It would, of course, be extravagant optimism to suppose that the Hot Springs plan of a world economy geared to the needs of consumers and not, as in the past, held down to restrictive practices by the fears of producers will come immediately into being. Here, and in other countries, the fear of “ over-production ” is still very much in the minds of producers in spite of five years of shortages. But it would be safe to assume that the new consumer consciousness will at least be strong enough to compel Governments to give some attention to the problem of,regulating in the consumer interest the crop of monopolies which has grown up under the shelter of wartime controls. Distribution : Two Examples The point can be made clearer by descending from high generalities to eggs. To enable the New Zealand Government to meet the needs of our own and Allied forces, and also to make possible a more equitable distribution of supplies for the domestic market, the wholesale handling of eggs has been centralized in what are known as “ egg floors.” In effect, these egg floors are regional wholesale monopolies. It is significant that already some egg-producers are convinced that this form of control should be made permanent because it offers a means of combating the gluts which, in time of peace, periodically disturbed the egg market and depressed prices. Eggproducers are already being warned that “ over-production ” is just round the corner and that they have in the device of the egg floor a means whereby their

profit margins can be stabilized. It is thus a safe guess that after the war the egg industry will elect to retain the monopolistic organization imposed on it by wartime controls. It is also a safe guess that no Government will find it safe to allow such a monopoly, with its inherently restrictive tendencies, complete freedom of action. Another example of how wartime controls breed monopolies which tend to entrench themselves can be found in the baking industry. The system of bread zoning now in force in most New Zealand towns has the effect of making every baking business into a monopoly with a defined market. Its purpose was to save petrol, tires, ■ and labour, and it has succeeded so well that few bakers will be anxious to go back to competitive distribution. If they do elect to retain their monopolies, continued regulation of prices and standards of bread will be essential in the interests of consumers. War Intensifies Pre-war Tendencies Indeed, the more this subject is pursued the more apparent it becomes that, while it may be easy enough to state in general terms a case for getting rid of wartime controls or a large part of them, it is very difficult to particularize. In many instances what looks like a wartime control turns out to be merely a further and logical development of a form of control which had started before the war. In other instances —-housing is one-the need for a particular commodity is so great that its production cannot be left entirely to private enterprise. Tn still other instances, wartime controls have created producer monopolies which producers themselves are likely to cling to. And, finally, New Zealand’s monetary situation dictates a continuance of a whole complex of controls designed to keep our external payments in equilibrium. Two Public Services To any one who has been closely concerned with the business ' of public administration and to any one who has thought at all carefully about the trend of New Zealand’s economy over the last decade or so, all this is sufficiently

obvious. But there is a widespread reluctance to face the facts, and, unfortunately, that reluctance extends to the Public Service. It is scarcely an exaggeration to say that there are two Public Services in New Zealand to-day. One consists of the old-established Departments which have carried on through the war with depleted staffs and with some addition of special war functions. The other consists of new agencies which have sprung up to carry out special war tasks and which are staffed in a large measure by men and women without public-service training. They are all children of the War Expenses Account, and it seems to be generally assumed that when the War Expenses Account is wound up they will disappear overnight. The pleasant anticipation with which most properly trained public servants look forward to this day is understandable. The ideas and the methods of this temporary wartime Public Service have been a sad trial to them, and they can be excused for storing up a vision of a time when public administration will return to its old traditions and its old simplicities. Public and Private Business There is a strange notion that public servants are naturally grasping for power and that every new regulation, every new extension of the powers of the Stdte, is a keen source of pleasure to them. The truth, in my experience is rather the reverse. Judged by its methods of recruitment and training, the Public Service has been markedly reluctant to prepare itself for the work of regulating or actively directing economic enterprises ; in these respects it is still very much the product of the reforms of 1912 — reforms conceived by men whose instincts were to set the narrowest possible limits to State activity. One result of this is that, for the new tasks of economic regulation, the State is beginning to recruit its administrators from the ranks of business managers. Further than that, it has in at least two important instances converted, or partially converted, a private business into

an administrative agency. This blurring; of the distinction between private and public business is one of the most significant developments of our time ; and we are bound to recognize thqt, whatever advantages it may have, it has also some ominous possibilities. Safeguard of Democracy One of the surest though one of the least advertised safeguards of democracy in this as in other British countries has been the discharge of the day-to-day work of Government by men and women recruited in open competition from all classes and trained in a tradition of service to the community. The possibility, which is perhaps more than a possibility, of a gradual shift, of administrative power and responsibility from the “ regulars ” of the Public Service to a new class of administratorswhose background, training, and connections have been acquired in the market place is one which may justifiably cause uneasiness. Nothing ismore certain, however, than that this, shift of power will occuror should I say “ will continue ” ?—if the “ regulars ” take the comfortable view that this vast and tangled apparatus of wartime controls is an abnormality which will disappear after the war. There may be good reasons for believing that after the war there will be some popular reaction against the controls and some abatement of them. But the reaction will not go far enough to alter the general picture. Whether they like it or not, public servants must see in wartime controls the shape of things to come and prepare themselves accordingly.. And preparing themselves means nothing short of a top-to-bottom overhaul of recruitment, training, and promotion in the light of the fundamental changes in the scope of State activity which have taken place in the last twenty years r and particularly in the last decade. The alternative is for the Public Service to become a sort of State clerical service under the direction of a new type of administrator-manager drawn from industry.