New Zealand's recovery from the Great Depression was unusually fast, and was associated with a fundamental shift in monetary regime. The new regime ended the conventional sterling standard, and diminished the influence of the trading banks on monetary conditions in New Zealand. Since the trading banks' operations spanned to Australia, the new monetary regime also decoupled the Dominion's monetary conditions from those across the Tasman. Devaluation and the formation of a reserve bank underpinned the new regime. This article shows that monetary growth in New Zealand was dramatically faster in the 1930s than it would have been had the old regime survived the Great Depression. New Zealand's nominal money stock, measured by M1, fell during the years 1923-9, but almost doubled between 1929 and 1939. The new monetary regime stimulated a recovery from New Zealand's long depression of the 1920s, as well as from the Great Depression. Had the old regime survived, New Zealand's GDP per caput in 1938 would have been around one-third lower.So again fiscal policy was not the driver of recovery from the Great Depression.
New Zealand's recovery experience in the 1930s differed sharply from that of other export economies of the periphery, and was based on a new monetary regime that took effect in two stages. In contrast to what happened in Brazil, Mexico, and Australia, devaluation was chosen rather than forced, and eventually associated with a new inflationary regime. Initially, though, devaluation in New Zealand promoted recovery, in 1933, by redistributing income to the hard-pressed farm sector (the 'Copland effect'). Subsequently, during 1934-5, New Zealand's record to some extent mirrors that of the Argentine where the destruction of deflationary sentiments also ameliorated the depression (the 'Mundell effect'). However, New Zealand went much further, by more than doubling money supply between 1932 and 1937, which led to lower real interest rates (the 'Keynes effect').
New Zealand's experience also differed from that of the US, where monetary growth woe initially rapid but was curtailed in 1936 by the Federal Reserve increasing reserve requirements to counter possible inflation. Moreover, the strategy for redistributing income towards farmers in New Zealand did not rest, as it did in the US, on output restrictions, but on monetary manipulation. In concert, the three mutually reinforcing
monetary transmission mechanisms, the 'Copland', 'Keynes', and 'Mundell' effects, stimulated powerfully real economic recovery. The growth potential of New Zealand's economy was strong in the 1920s but constrained by a deflationary regime. The Great Depression destroyed the Dominion's old monetary regime, and the new regime promoted a remarkable recovery.
- David Greasley and Les Oxley, "Regime shift and fast recovery on the periphery: New Zealand in the 1930s", Economic History Review, LV, 4 (2002), pp. 697-720.