Price Fixing in New Zealand 9780231888554

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STUDIES IN HISTORY, ECONOMICS AND PUBLIC LAW Edited by the FACULTY OF POLITICAL SCIENCE OF COLUMBIA UNIVERSITY

NUMBER 371

PRICE FIXING IN NEW ZEALAND BY

W I L L I A M BALL SUTCH

Go MY MOTHER

PREFACE THIS survey covers the history of the war and post-war authoritative price-fixing and commodity control in New Zealand—its effects and effectiveness. The work could never have been accomplished but for the help of the various Government officials who at one time or another were connected with commodity control. I have especially to thank the Secretary of the Department of Industries and Commerce for permission to abstract particulars from the Departmental files and for the loan of several Annual Reports that were out of print. I have also to thank the Secretary of the Meat Producers Board and the Controller-General of Prisons (former members of the Imperial Supplies Department) for information supplied especially in connection with the Butter Equalisation Scheme. (This information was never published and the general public know nothing of the scheme except the fact of its existence.) I am indebted to Miss Margaret Dunne of the Irving Trust Company, New York, for her work in drawing the charts and to Professor J . M. Clark for reading the proofs. In those cases where no specific reference is given for statistics, I have compiled the figures from the Monthly Abstract of Statistics, Board of Trade Reports, or New Zealand Gazette notices. W. B. S. N E W YORK

CITY,

MARCH

1932.

17,

7

CONTENTS rxr.i PREFACE

7

CHAPTER I Introduction

n C H A P T E R II

Principles of Commodity Control

19

CHAPTER III Government Sugar Control

30 CHAPTER IV

Butter Control

48 CHAPTER V

Control of Building Materials

68

CHAPTER VI Wheat Control

95 CHAPTER VII

Other Measures of Control

121

CHAPTER

VIII

Review and Conclusions .

132 APPENDIX A

N. Z. Control Legislation

142 APPENDIX

B

Index Numbers of Prices

150

BIBLIOGRAPHY

157

INDEX

9

163

CHAPTER

I

INTRODUCTION

T H E study of the fixing of " fair " prices in the past has been of great help in attacking the problem of Price Control in N e w Zealand. T h e understanding of the medieval methods of control enables one to see more clearly the problem that confronts the regulating authority in fixing prices which will give the necessary inducement to producers and at the same time keep down the cost of foodstuffs to the consumer. One feels that a history of present-day commodity control would be incomplete without some brief account of commodity control in the past. T H E JUST PRICE

It may be a result of my penchant for things medieval, but I cannot help thinking that the economist may soon find himself confronted in modern life with some of the ideas underlying the old demand for ' just prices ' and ' reasonable wages ' which he has been accustomed to regard as quite out of place in political economy.—Ashley, Surveys, Historic and Economic, (London, 1900) p. 389. " Agitation against speculation and the middlemen is not new, neither is the attempt to prevent the first and to control the latter by means of legislative enactments. A s far back as 301 A . D . Diocletian undertook to fix the price of certain commodities, but his attempt proved a failure." 1 " The earliest form of regulations for the price of bread, which might possibly have affected English ordinances on 1 Litman, Prices and Price States ( O x f o r d , 1920), p. 5.

Control

in Great Britain and the 11

United

12

PRICE

FIXING

IN NEW

ZEALAND

the subject, is to be found in the Frankfort Capitulare of A . D . 794. It aims at limiting the price of corn and of food, no matter what the season might be, and fixes a maximum rate." 2 Cunningham also mentions early London regulations which occurred, he considers, not later than the twelfth century. A s early as 1 1 9 9 the Government had attempted to regulate the price of wine both wholesale and retail, but these regulations were not a success, being evaded or disregarded altogether. Finally in 1 3 3 0 it was enacted " that none be so hardy to sell wines but at a reasonable price, having regard to the price at the ports, and the expenses, such as the carriage from the port to the place of sale." 3 The control of the wine trade by fixation of prices was evidently a failure, but this cannot be said of all early regulative legislation. " In the circumstances of medieval commerce, when there were comparatively slight fluctuations in the conditions for the supply of manufactured goods, and labour was such a very important element in the cost of production, it was almost as easy to frame similar regulations for reasonable transactions in trade of all sorts, as it is to fix rates for cab-hire in the present day:" 4 Corn has been controlled from early times. It is, of course, of prime importance that the " staff of life " should be controlled so that bread would always be within the reach of the masses at moderate prices. In 1202 we get the first proclamation aiming at limiting the price of bread. It was the weight, not the price of the bread that varied so that a farthing loaf would vary in weight according to the price of a quarter of wheat. 2

Cunningham, Growth of English Industry and Commerce (Cambridge, 1912), vol. i, p. 567. 3 Ashley, Economic History (London, 1923), vol. i, pt. 1, p. 191. 4

Cunningham, op. cit., p. 250.

INTRODUCTION

13

A b o u t three-quarters o f a century a f t e r this time w e get a quite marked legislative policy in regard to the regulation of trade.

C u n n i n g h a m considers that the " legislation o f

E d w a r d I m a y be regarded almost as a new departure, a i m i n g as it did, to regulate trade and commerce in the interests o f the subjects." for

trading,

I t w a s concerned w i t h " providing facilities for

more

frequent

intercourse,

for

better

markets and better p r i c e s — i n the hope o f securing a supply of wares in plenty to the consumers."

5

W e should note

here how closely the legislation of the 19th century resembles that of the 13th. In this century and in the century following, the public regulation of trade to secure an open market took the f o r m o f condemning the allied practices of forestalling, engrossing,

and

regrating

monopoly. kind of

because

of

their

tendency

towards

B u t towards the end of the 15th century a n y

regulation became more and more difficult a n d

parliament and the executive l e f t the matter almost entirely in the hands of the local authorities.

A proclamation o f

H e n r y V I I I illustrates the tendency f o r administration of control to pass into the hands of the justices of the peace. A Proclamation . . . concerning Corn and Grain to be Conveyed and Brought into Open Markets to be Sold. Forasmuch as it is come to the knowledge of our Sovereign Lord the King, how that divers persons, as well his own subjects as others, having more respect to their own private lucre and advantage than to the common weal of this his Highness's realm, have by divers and sundry means accumulated and got into their hands and possession a great number and multitude of corn and grain, far above the necessary finding of their households, sowing of their lands, paying their rent-corn and performing of their lawful bargains of corn without fraud and intrigue; and the same of their covetous minds do wilfully detain and keep in their possessions without bringing any part or parcel thereof 5

Ibid., p. 270.

PRICE FIXING

14

IN NEW

ZEALAND

into any market to be sold, intending thereby f o r to cause the prices of corn to rise, so that they may sell their corn and grain at such unreasonable prices as they will themselves; by reason whereof the prices of corn and grains be raised to such excessive and high prices that his M a j e s t y ' s loving subjects cannot gain with their great labours and pains sufficient to pay f o r their convenient victuals and sustenance, and worse are likely to be hereafter unless speedy remedy be provided in that behalf." T h e proclamation g o e s on t o s a y that the j u s t i c e s m u s t discover a n y " abundance or surplus " o f corn a n d compel its o w n e r s to b r i n g it into open market. W e h a v e regulation a g a i n under later m o n a r c h s . Government of

E d w a r d V I , like all T u d o r

made its e x p e r i m e n t s in fixing j u s t prices.

The

Governments,

B u t as e c o n o m i c

l i f e became m o r e complicated, r e g u l a t i o n a n d control came m o r e difficult.

be-

" F r o m at a n y rate the m i d d l e o f the

century the fixing o f prices by municipal authorities a n d b y the G o v e r n m e n t w a s regarded w i t h scepticism by the m o r e a d v a n c e d economic theorists a n d t o w a r d s the end o f

the

century it produced complaints that, since it w e a k e n e d the f a r m e r ' s incentive to g r o w corn, its results w e r e the precise opposition of those intended."

7

W i t h the a d v e n t o f the S t u a r t s w e see a c h a n g e in the minute control and r e g u l a t i o n o f the l i f e o f the people that w a s evident under the p o w e r f u l

Tudor

monarchs.

Men

were b e g i n n i n g to question the r i g h t o f the k i n g to regulate, arbitrarily

or otherwise, the actions

manufacturer.

of

the m e r c h a n t

or

Consequently w e get a r e l a x a t i o n a n d w e a k -

ening o f control. W e are n o w f a c e d w i t h the q u e s t i o n — o n w h a t basis w e r e prices fixed under the medieval s y s t e m o f r e g u l a t i o n ? 6 Bland, Brown and Tawney, English Economic History—Select ments (London, 1914), pp. 267-8. 7

Docu-

Tawney, Religion and the Rise of Capitalism (London, 1926), p. 179.

INTRODUCTION

15

T h e medieval assumption in regard to prices was that it was possible to bring them into an agreement with an objective standard of equity, which did not reflect the mere play of economic forces, but, on the other hand, did not entirely disregard them. T h e idea was that the most desirable course was that they should be fixed by public officials, after making an inquiry into the supplies available and framing an estimate of the requirements of different classes. This idea has much of the modern in it. " T h e just price of things is not absolutely definite, but depends rather upon a kind of estimate; so that a slight increase or decrease does not seem to destroy the equality required by justice." 8 O f course much of the production of commodities in the Middle A g e s was for a small, practically unvarying, number of customers, and so it was easy to say whether a price was fair. Another factor that must be taken into account in considering the question of the just price is that much of the thought of the time was devoted to fairness and equity in all departments of life. Public opinion was strong on this point. " T o supply a bad article was morally wrong, to demand excessive payment for goods or for labour was extortion and the right or wrong of every transaction was easily understood." 9 T h e writings of St. Thomas Aquinas are particularly illuminating in this respect. He seems to base his argument on Holy W r i t and Aristotle's " Politics " and " Ethics " . Like Aristotle, he never discussed economic problems abstractly. He regarded these problems, as did all the early philosophers, as part of the larger problems of ethics or politics. Aquinas, in considering the arguments for and against the conception of a just price, says, " But opposed to this is 8

Monroe, Early

s

Cunningham, op. cit., p. 465.

Economic

Thought

(Harvard, 1924), p. 56.

PRICE

i6

FIXING

IN NEW

ZEALAND

the saying in Matthew V I I , 1 2 : ' All things whatsoever you would that men should do to you, do you also to them.' But no man wishes to have a thing sold to him f o r more than it is worth. Therefore no man should sell a thing to another f o r more than it is worth. . . . It is wholly sinful to practise fraud f o r the express purpose of selling a thing f o r more than its just price, inasmuch as a man deceives his neighbour to his loss." 1 0 A s long as a man was repaid f o r his trouble in producing the article, that was all that was required. The utility of the article was not the main element. Public opinion also frowned on the idea of the scarcity element entering into price. " T h e most fundamental difference between medieval and modern economic thought consists, indeed, in the fact that, whereas the latter normally refers to economic expediency, however it may be interpreted, f o r the justification of any particular action, policy, or system of organisation, the former starts from the position that there is a moral authority to which considerations of economic expediency must be subordinated. T h e practical application of this conception is the attempt to try every transaction by a rule of right, which is largely, though not wholly, independent of the fortuitous combinations of economic circumstances. N o man must ask more than the price fixed, either by public authorities, or failing that, by common estimation." 1 1 It appears, then, that what the economic teaching of the Church and the policy of the State aimed at was a fair price, which it was believed could only be found in a stable regulated price based ultimately on what was considered just and reasonable by common estimation. In forming public opinion the Church was a powerful factor. Luther in 1 5 2 4 put it f o r w a r d as his opinion that 10

Monroe, op. cit., p. 54.

11

Tawney, op. cit., pp. 39-40.

INTRODUCTION

17

" a man should not say, ' I will sell my wares as dear as I can or please,' but ' I will sell my wares as is right and proper.' " A rehearsal of traditional doctrine is also given by Nicholas Heming in 1578 whose treatise on " T h e L a w ful Use of Riches " became something like a standard work. H e expounded the doctrine of the just price and swept impatiently aside the argument which pleaded freedom of contract as an excuse for covetousness: " Cloake the same by what title you liste, your synne is excedyng greate. . . . H e which hurteth but one man is in a damnable case; what shall bee thought of thee, whiche bryngest whole householdes to their graves, or at the least art a meanes of their extreme miserie? Thou maiest finde shiftes to avoide the danger of men, but assuredly thou shalte not escape the judgemente of God." 12 A very extreme example of " justum pretium " is quoted from the writings of St. Augustine who illustrates it thus: " I know a man who, when a manuscript was offered him for purchase, and he saw that the vendor was ignorant of its value, gave the man a just price though he did not expect it." 13 Even in the eighteenth century we have the conception of the just price. Mr. Ashton (Iron and Steel in the Industrial Revolution (Manchester, 1924, p. 2 1 9 ) remarks concerning the business standards of Quakers: " T h e eighteenth-century Friend no less than the medieval Catholic held firmly to some doctrine of Just Price," 14 and quotes examples from the conduct of Quaker ironmasters. The question now arises—is there any conception of a just price in this, our twentieth century? Economists tell us that there is a " normal " price about which market price oscillates, towards which it tends, and which under competi1 2 Nicholas Heming, A Godlie Treatise of Riches, quoted Tawney, op. cit., p. 156. 13

Ashley, op. cit., p. 133.

Concerning 14

the Lawful

Tawney, op. cit., p. 329.

Use

18

PRICE

FIXING

IN NEW

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tive conditions does not long depart from cost of production, including both prime and supplementary costs. T h e only difference between the old conception of a " just price " and the modern conception of a " normal price " seems to be, if we disregard the element of competition, in the factors that g o to make up cost of production. T h e modern idea of a normal price, brought about by competition, includes the cost of capital as well as labour in the cost of production. I am inclined to think that the medieval just price resembles our normal price more than Professor Ashley considers so. H e discusses the part that capital played in production in the Middle A g e s and says: " A n d even if capital had been able to play a larger part in industry, moralists and public opinion denied that it had a right of reward." 15 But surely with the growth of the use of capital in industry we also have concomitantly the growth of an attitude of forbearance towards it. In fact, medieval economic teaching justified profits received by those who were themselves engaged in trade; it was interest paid to moneylenders that was suspect. Even though the school that regards economics primarily as a positive science may lay down that under a system of thoroughgoing competition price is determined by inexorable laws, yet we know that retail prices, at least, are greatly influenced by what is customary—that i s — b y what people have come to accept as just and reasonable. Therefore it would seem that our idea of a normal price tending towards cost o f production and the medieval idea of a just price ultimately depending upon cost of production are not fundamentally dissimilar. T h e truth is that human nature judges by what is fair under the circumstances; although circumstances have materially changed, human nature has not. 15

Ashley, op. cit., p. 139.

CHAPTER

II

P R I N C I P L E S OF COMMODITY CONTROL

THE principles of commodity control are by np means as obvious as the general laws underlying many other economic phenomena—so much depends upon political expediency. It sometimes happens that the procedure economically sound will not be tolerated by the people, or—what is of equal importance in a democratic community—will not be tolerated by the class of people that give the main support to the party in political power. However, from the experience of administrative control in England, U. S. A., Australia and New Zealand certain principles are brought to light which are necessary for successful State supervision of any section of industry or trade. These principles, while having general application, are enunciated to apply particularly to New Zealand conditions. The Right Hon. J . R. Clynes, sometime Food Controller for the British Government, has laid down one general principle of control; that is, it should be thorough. The fixation of retail prices is not a sufficient protection to the public, nor does such a system act fairly towards all concerned with the production and distribution of goods—it leads to abuses. The ideal method of control is that the prices and profits of the producer and of all intermediary dealers should be under regulation and supervision; that is to say, the commodity must be followed through all stages of manufacture and distribution, and the remuneration of all parties regulated in detail. This ideal is clearly expressed in Mr. G. H. D. Cole's famous Memorandum to the British Labour Party. 19

20

PRICE

FIXING

IN NEW

ZEALAND

But it is not enough to control prices at every stage—for the mere fixation of maximum or controlled prices generally means that the prices being fixed so as to afford what is regarded as a fair profit to the least efficient producer, tends to put enormous profits into the pockets of those who for one reason or another are able to produce more cheaply. . . . It is not enough to fix prices; it is necessary for the Government to retain effective control at every stage of production and distribution up to the retail sale of the article, paying at each stage to the producer or distributor a commission based on the services rendered, and placed at such a figure as to allow the payment of a moderate dividend on real paid up capital and no more . . . unnecessary middle-men and with them unnecessary profits must be squeezed out of industry. 1 It will be obvious that such an ideal could not be accomplished in one industry without affecting other branches of production and without leading ultimately to the nationalisation of all industries. T h i s is, however, no objection to the ideal as a basis of State supervision in times of national crisis. The method advocated by Mr. Clynes, that Government control should proceed on the lines of State purchase, control and distribution of supplies, can be illustrated in connection with the wheat control system in N e w Zealand. Early in the war period the fixation of prices was adopted or rather, attempted; this, however, led to abuses and evasion by growers and merchants so that the scheme had to be abandoned. T h e Government later on took over the whole responsibility for the purchase and distribution of wheat, at the same time regulating the prices of wheat products. The system was that the farmer grew wheat for a guaranteed price; the Government paid him at least that guarantee and above if the world's prices so warranted; the Government re-sold to the miller and decided the quantity the miller was to receive, 1

Cole, quoted by J. R. Clynes, Economic Journal, vol. x x x , pp. 151-2.

PRINCIPLES

OF COMMODITY

CONTROL

the price he paid therefor and the prices at which flour, bran and pollard were to be sold; the prices of bread were regulated in detail, base prices being gazetted for each Island and these prices varied in remote localities by arrangement with the Board of Trade. If there was a shortage of New Zealand wheat, the Government bought abroad and distributed its purchase among millers at the prices fixed f o r New Zealand wheat, and in proportions decided by the Wheat Controller. Another principle of commodity control is the necessity f o r adequate powers of investigation and publicity. Unless there is complete knowledge in regard to profits and costs it is impossible to form any judgment either of the reasonableness of prices charged or of the claims to remuneration of the different parties engaged in production. The controlling authority must have the power to inspect all books and documents in possession of traders. This information, however, need not be given to the general public. Fuller publicity should also be given in regard to Regulations. The mere publication in the official gazette is not sufficient. Details should be given to the newspapers and given prominence. A n indirect method of limiting profits is the appointment of price-investigation tribunals to inquire into complaints made by the public. This acts as a deterrent, particularly if the tribunal is authorised to make full use of publicity of profits. The work of the New Zealand tribunals was hampered by lack of adequate publicity, and thus the public and the fair trader did not receive the full benefit from investigations. A striking instance of the efficacy of publicity is given by Professor Taussig. 2 The publication of the investigations of the United States Bureau of Corporations on railway rates in 1906 showed that certain railways had given preferential rates to the Standard Oil Company. 2

Taussig, Principles of Economics (New York, 1918), vol. ii, p. 414.

22

PRICE

FIXING

IN NEW

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Although it was doubtful whether these rates were illegal, they were abolished by the railways themselves immediately on the publication of the Bureau's exposure of them. Then there is the question of profits. T o control these as a percentage on capital is not altogether a successful method. Should it be subscribed capital, or the cost of plant replacement or the market value of shares?" Should the percentage of profit be an average of several years' dividends? It is necessary to go behind declared dividends in order to get a just measure of profits, which should be calculated on the total capital actually paid in by shareholders. This latter sum may or may not be the same as the amount of " paid-up " capital, since subscription may or may not have been at par, and companies may issue their shares at a premium or give bonus stock. The difficulty is to determine this. Furthermore, the proportion of profits to capital outlay can be affected by manipulation from the profits side—by consistently undervaluing stocks, by allowing excessive amounts for depreciation, by paying extravagant salaries to prominent members of the business and so forth. It has been suggested that it would be satisfactory to fix a maximum rate of gross profit in relation to sales. The gross profit is calculated on the following lines: Stock at beginning of period Purchases Gross profit

Stock at end of period Sales

If we take any single year the gross profit can be inflated by over-valuing the stock in hand at the end of the period and reduced by undervaluing them. This course could not be carried out over a series of years, as the stock on hand at the end of one year must be brought into the next year's

PRINCIPLES

OF COMMODITY

CONTROL

trading account as the stock on hand at the beginning. Fixing the maximum rate of gross profit has, however, the advantage of encouraging efficiency and as gross profit includes overhead charges, firms would endeavour to cut down these expenses as much as possible in order to increase the percentage of net profit. A fixed net profit is more difficult and less desirable than the fixation of gross profits. A p a r t from the fact that control of net profits gives no encouragement to efficiency, the arrangement is subject to great administrative obstacles. T h e policy of fixation of profits acts differentially against those industries whose profits fluctuate. They would be deprived in their good years of their profits and would receive no help in their periods of bad fortune. Hence, in the long run, capital and enterprise would tend to desert such industries for industries in which the profits were more nearly the same every year. But there is no reason to suppose that industries in which the profits are fluctuating are socially less desirable than others. Consequently this arbitrary diversion of production from the channels into which economic forces would tend to direct it would involve a misdirection of effort and a real loss to the community. 3 Broadly speaking, a permanent policy of anti-profiteering price-regulation in regard to competitive trade is unnecessary because, for competitive industries as a whole, good times and bad times being taken together, competitive conditions are themselves an adequate preventive of exploitation, while from the standpoint of the public such regulations hamper production. But in a time of crisis such as the Great W a r the occasion for price fixing may arise. Prices should then be fixed according to the following principle. 3 Cf. Pigou, " Government Control in War and Peace," Economic Journal, vol. xxviii, p. 371.

24

PRICE FIXING IN NEW

ZEALAND

In any instance where price-fixing is justified, the price fixed should be high enough to call forth, insofar as the price can affect production, a prompt and adequate supply, but not higher than necessary to accomplish that end. It is not necessary that it should cover the cost of production of those producers who are inefficient or are producing under especially unfavourable conditions, unless a sufficient supply cannot be obtained from other producers at the price fixed. But before fixing a price, the Government should consult representatives of all parties who have a legitimate interest, including purchasers as well as dealers and distributors. Even in time of war price-fixing need not be resorted to unless ( a ) there is such an increase in the demand that for the time being producers cannot meet it even if they be willing and able to start further production at once; ( b ) when the stock is so limited that the demand cannot be met for several months, as is the case when there is a shortage of wheat between harvests and importation is unreliable through interruption in transport. In both these cases temporary price-fixing is justified because high prices will not benefit producers of commodities, but those who, by accident or design, have them in their possession and therefore make a purely speculative middleman's profit. I f prices are fixed, some other agency must usually be provided for controlling distribution—that is, for doing what changes of market price would do automatically. Hence arises the need for rationing. Short of rationing, however, various indirect methods may be used to control consumption. Moral and social pressure may be applied to consumers to restrict consumption. Regulation by Order in Council may be used to repress non-essential industries. The Government may use its control over transport, coal, and basic raw materials to encourage needed industries and restrict those less needed. Banks, under the

PRINCIPLES

OF COMMODITY

CONTROL

direction of the Minister o f Finance, may be instructed to restrict credits to non-essential industries and to extend credits to those most needed. Another principle in price-fixation is to examine the relation of the market for a given commodity to the market for its substitutes. It may be necessary to fix the price o f substitutes in order to maintain the most advantageous relation between the consumption of a given commodity and the consumption of its substitutes. On the production side also this danger would have to be guarded against. For instance, one among many farm products should not be controlled. It is useless fixing a price for, say, wheat, when there is an alternative source of greater profit in the other, uncontrolled, agricultural products. Again, if a commodity has several uses, all these should be controlled. F o r example, if the price of milk is fixed, its use in butter making may be increased; if the price of butter is also regulated, cheese manufacture may be increased; if cheese were added to the list there would be no escape unless the dairy factories made Glaxo (a dried milk product) or the farmers turned their milk cows into beef. This would emphasise the fact that the price fixed must not discourage essential production. Even in a time of crisis, a " cheese-paring " policy in the fixation of the margin of profit is not in the public interest. The manufacturer or trader is entitled to such a living as can be obtained by a reasonable efficiency and diligence. I f margins of profit are too low, trade is likely to suffer by the permanent withdrawal of the more efficient and enterprising men. A general principle of control is that the conditions prevailing at the time of assuming control or relaxing supervision should be specially studied and thoroughly understood. In England, apparently, the cessation of official supervision was attended by violent market fluctuations in some com-

26

PRICE

FIXING

IN NEW

ZEALAND

modities because the cessation of control was regulated entirely by political expediency. Control should be relaxed gradually in order that business can be continued under conditions which are as near as possible normal. During the control itself, ordinary business channels should be used as much as possible. Although permanent price-control of commodities produced under competitive conditions is not desirable, in industries subject to monopoly control the intervention of the State is justifiable. Monopoly prices can be regulated by State action without creating a situation in which the demand at the regulated price will exceed the supply ; * consequently, if prices are fixed for goods under monopoly control, the difficult problem of rationing need not be considered. In regard to the administration of control, there should be some central body to supervise and co-ordinate the work of different departments, authorities or agencies. This centralised controlling body could adopt some fundamental principles, such as the basis for determining profit. This would ensure the unification of control, and the undertaking of each control, not as a separate proposition, but according to the system adopted. In any detailed commodity control efficient administration is a first essential and this can not be secured without the co-operation of manufacturers, merchants, and the public generally. A s soon as the occasion for price-fixing arises, the price-fixing authority, in order to allay popular feeling, should act quickly. A price should be fixed based upon practical experience and general observation. If the crisis is likely to continue, an inquiry should be made in order to ascertain accurate costs ; the fixed price could then be revised if the facts so warranted the change. * Cf. Pigou, Op. cit., p. 372 (footnote).

PRINCIPLES

OF COMMODITY

CONTROL

METHODS OF COMMODITY CONTROL

T h e measures of Government control of industry and trade may be summarised under three headings, ( i ) Administrative control, ( 2 ) rationing, ( 3 ) price regulation. All these features were represented in the State activities in control in New Zealand. ADMINISTRATIVE CONTROL

A l l belligerent countries during the war were driven to some measure of administrative control in order to provide as speedily as possible for the needs of their fighting forces. In Great Britain, the Government established national factories, controlled privately owned works, and made special monetary concessions to enable private factories to extend their operations. T h e justification for this remarkable extension of State activity was the urgent necessity of directing the national energies into the production of those things on which national safety depended and for which the ordinary laws of supply and demand would not have provided with the essential speed. In the case of the N e w Zealand Government, the principal forms of administrative control consisted o f : ( a ) A c t i n g as intermediary for the Imperial Government in the purchase of the main products, such functions being undertaken by the Imperial Supplies Department. (b) Encouragement of wheat production, and control of the sale and distribution of wheat to the local flour mills. ( c ) Certain prohibitions on export with the object of preventing the New Zealand market from being denuded of supplies, as for example, the establishment of the Butter Equalisation Fund, the embargo on hides and potatoes, and the Regulations restricting the export of timber. (d) T h e control of the refining and distribution of sugar.

28

PRICE

FIXING

IN NEW

ZEALAND

RATIONING

T h e term rationing includes all f o r m s o f State interference with the distribution o f

goods, whether between different

industries, different firms in the same industry, or between different consumers, and whether the procedure adopted is an embargo upon certain uses as in the case of petrol and coal in N e w Zealand, or a system of priority permits, as was done in the case o f shipping space. T h e question o f rationing is intimately bound up with the question o f price control.

I f prices are not regulated by

supply and demand, but are limited by a price-fixing authority in such a w a y that at the fixed price the quantity o f the commodity demanded exceeds the quantity offered f o r sale, then rationing is essential.

I f rationing is not introduced,

distribution o f the shortage will be the sport of accident, or the result o f favouritism, or preference through being earliest on the scene; or the price regulation will be evaded by surreptitious means, hard to detect; this, of course, frustrates the object of price

fixing.

T h e rationing of the ultimate consumers need not present insuperable difficulties, provided the necessity f o r rationing is supported by a strong public opinion, as the war experience in Great Britain proved.

T h e problem in N e w Zealand was

not nearly so difficult and was quite successfully met probably o w i n g to the fact that the economic organisation is simple and only a f e w commodities—sugar, petrol, coal, and building materials—needed to be rationed.

T h e rationing to con-

sumers requires an elaborate official organisation unless the services o f

local bodies and voluntary

organisations

are

requisitioned. T h i s latter was the procedure in N e w Zealand and to a less extent in Great Britain. Rationing could not be carried on as a permanent peace policy if the principle usually adopted in N e w Zealand during the war w e r e applied—taking as a basis the comparative

PRINCIPLES

OF COMMODITY

CONTROL

consumption of raw material during a given period; it would mean stagnation in the industry and loss of efficiency, as no firm would be able to increase its output and hence the incentive to increased effort would be lost and the industry frozen into rigid immobility. 5 PRICE REGULATION

This took the form of fixing maximum prices for certain commodities in order to prevent what is popularly known as " exploitation and profiteering." T h e conditions which gave the oppoitunity for exceptional profits were brought about partly by inflation and not by the deliberate design of traders, nor were they the result of special business foresight; traders happened to possess during the war stocks of goods for which there was a sudden demand or a sudden shortage. H a d no restrictive action been taken by the State, these people would have been in the position to make enormous profits. Although most business-men made large profits during the war and the Armistice period, their profits would have been greater but for the intervention of the Government. In N e w Zealand price-regulation took the form of ( i ) " agreed " prices, to be increased only with the sanction of the Board of Trade ( 2 ) fixing maximum prices and leaving distribution to chance ( 3 ) fixing maximum prices and controlling distribution ( 4 ) fixing maximum local prices and subsidising the producers to supply the local market at below world's parity, ( 5 ) investigation of complaints of profiteering and prosecuting for alleged unreasonable profits. The State also affected prices by running State butcher's shops at bedrock prices. T h e State coal-mines had a similar effect, but these existed long before the necessity of controlling prices. 5

Cf. Pigou, op. cit., p. 368.

CHAPTER

III

GOVERNMENT SUGAR CONTROL

THE sugar supply in N e w Zealand is essentially one suited to State control. The Colonial Sugar Refining Company, which has a refinery at Chelsea, Auckland, controls the supply in New Zealand. U p till 1914 it had gradually obtained a greater hold over the market. I have prepared the following table to illustrate this : IMPORTS OF SUGAR INTO NEW ZEALAND, 1908-1913

Year

Raw Sugar (civt)

1

Refined (cwt)

Percentage of raw to total 95.96

1908

879,574

37,O66

1909

999,8IO

29,375

97.15

191 0

1,019,480

11,650

98.87

1911

1,092,108

14,251

98.72

191 2

1,202,062

10,962

99-10

191 3

1,215,477

14,265

98.84

It can thus be seen that the Sugar Company has a monopoly over the New Zealand supply. W h a t is more, some of the monopoly practices of the Company in the pre-war period do not bear close scrutiny. Under the Commercial Trusts Act, 1910, the Sugar Company was held to have been guilty, inter alia, of an offence under Section 5 of the Act. S. 5. " Any person who conspires with any other person to monopolize wholly or partially the demand or supply in New Zealand or any part thereof of any goods, or to control wholly or partially the demand or supply or price in New Zealand or any part thereof of any goods, is guilty of an offence if such 1

New Zealand Official Year Books, 1909-1914.

30

GOVERNMENT

SUGAR

CONTROL

31

monopoly or control is of such a nature as to be contrary to the public interest." 2 In the years 1 9 1 1 and 1 9 1 2 the Colonial Sugar Company by arrangement with the Merchants Association of New Zealand and some individual firms, members of the Association, issued a scale of discounts to be allowed on the purchase of sugar. The scale was framed so as to prevent merchants not belonging to the Association from earning the maximum discount, and had the effect of giving the Association the control of the distribution of sugar within the Dominion, and also had as one of its results the protection of the Company from foreign competition. The Company allowed Levin & Co., a nominee of the Merchants Association, to purchase sugar on their behalf so as to earn the maximum discount, and paid the discount to the nominee. It refused to give the same discount to Fairbairn, Wright & Co., an outside firm which was in competition with the Association. 3 This serves to show that affairs justified Governmental interference to ensure an equitable distribution of supplies. The outbreak of war made the position more unsatisfactory as, during 1 9 1 4 , there were eight revisions in price, and it was felt that it would be of considerable advantage to manufacturers and consumers generally if stability of price and a certain guarantee of supplies could be assured for a definite period. Accordingly, early in 1 9 1 5 , at the instance of the Government, the Cost of Living Commission effected an agreement whereby the Dominion's needs for the year ending June 30th, 1 9 1 6 , were to be supplied at £ 2 1 per ton by the Colonial Sugar Company; this price was well below the prevailing market price. During April and May of 1 9 1 6 complaints were made regarding shortages in the supply of sugar, and it was alleged 2

New Zealand Statutes, 1 Geo. V 32.

* See N. Z. Law Reports, vol. 32, pp. 1233 et seq.

32

PRICE

FIXING

IN NEW

ZEALAND

by the merchants that unequal distribution w a s being made by the S u g a r Company.

T h e B o a r d of T r a d e ( w h i c h had

been constituted under the C o s t o f L i v i n g A c t , 1 9 1 5 , and had begun its duties in M a r c h , 1 9 1 6 ) inquired into these complaints and satisfied itself that the company had done everything in its power to ensure an equal distribution; it had, however, been forced to r e f u s e orders f r o m traders in excess o f their normal requirements.

T h e s e orders

were

probably due to a fear that the arrangements made f o r the supply until June

1 9 1 6 would not be renewed on

advantageous terms as were then ruling.

such

A n increase w a s

anticipated and traders were probably attempting to stock up b e f o r e the rise.

T h e i r fears of a rise were allayed by

negotiations of the B o a r d of T r a d e w i t h the S u g a r C o m p a n y to secure an extension of the arrangements to supply the Dominion's needs. T h e C o m p a n y offered to provide all the requirements o f N e w Zealand until June 30th, 1 9 1 7 , at the price of £21 per ton f.o.b. A u c k l a n d f o r N o . i A . , subject to the condition that nothing happened to prevent the m a n u f a c t u r e of sugar or its transport to the Chelsea Refinery, and subject to the further condition that if additional taxation (other than land or

income t a x )

were imposed, the C o m p a n y

should

be

entitled to revise the selling-price so as to cover the cost o f such extra t a x a t i o n ; but in the event of a n y such revision in price the Company agreed to consult the B o a r d of T r a d e b e f o r e bringing

the revised

price

into

operation.

The

C o m p a n y also stipulated that it should be allowed to export a n y surplus over Dominion requirements. I f we compare prices quoted elsewhere with the C o m pany's offer of £21 per ton, we can understand w h y the Government agreed to the arrangement. E v e n allowing f o r the duty we see that N e w secured cheaper sugar.

Zealand

GOVERNMENT

SUGAR

CONTROL

PRICES OF SUGAR, J U N E AND J U L Y , 1916

Country

Price

33

4

Plus duty

Landed Value

£

s.

d.

i

s.

d.

i

s.

d.

27

12

6

14

0

0

41

12

6

..

25

o

0

6

0

0

31

o

o

S o u t h A u s t r a l i a ..

23

17

6

6

0

0

29

17

6

Great Britain West Australia Victoria

23

7

6

6

0

0

29

7

6

N e w South W a l e s

23

s

0

6

0

0

29

5

o

29

o

29

o

New York N e w Zealand

21

0

0 0

21

0 0 0

Subsequent to the fixation of the price at £21, a considerable increase took place in the charges, not only in connection with the expenses of refining, but also in the export duty from F i j i . Notwithstanding these increases and the position of the world's markets, giving an enhanced market value to the sugar, the Board of Trade effected a further arrangement for the supply of the Dominion's needs for the year ending June 30th, 1918, at £22 per ton f.o.b. Auckland. This, as was also the case with the earlier agreements, provided for a special concession for camp and troopship arrangements. In arranging the supply for the year ending June 30th, 1919, the Company asked in April, 1918, for an increase in price to £22 1 os. od. per ton, basing this on increased costs. The Board investigated the position and found that the Company since the price had been agreed upon in 1915, at £21 per ton, had to meet the following increased charges per ton. 5 s.

d.

E x p o r t duty on r a w material, F i j i ,

5

oo

P r i m a g e duty N . Z

3

i

E x t r a f r e i g h t on r a w s u g a r

8

6

E x t r a expenses in refining

11

H a r b o u r rate, A u c k l a n d Special w a r t a x w o r k i n g out at

... ii

9

6

7

6

16

4

4

Prepared from N. Z. Board of Trade Annual Report, 1917, p. 14.

5

N. Z. Board of Trade Files on Sugar Control, 1918.

34

PRICE

FIXING

IN NEW

ZEALAND

Thereupon the Board of Trade recommended that the Government accept the increase to £22 10s. od. per ton f.o.b. Auckland for the year ending June 30th, 1919, especially in view of the fact that the Sugar Company was conceding a price well below world parity. O n the conclusion of this term, a further arrangement for the nine months ending March 30th, 1920, was entered into at £23 15s. od. a ton. T h e reason for the higher price was that the estimates of the 1919/20 crop showed that no supplies would be available from F i j i for the Dominion's July ( 1 9 1 9 ) requirements. " T o avoid a shortage of sugar during that month the company purchased a further 5,000 tons of Java raw sugar which, when refined, could not be sold without loss under £29 10s. od. per ton as it cost £24 per ton in the ship's slings at Auckland." " T o raise the price of sugar £7 per ton throughout July, even if the price dropped when the F i j i supplies were available would tend seriously to disorganize trade; in order to avoid this the company proposed that a new agreement should be made so that the increased price of approximately £35,000 for July ( 1 9 1 9 ) should be spread over a period of nine months. The additional price for this period would be 17s. 6d. per ton. This would make the price £23 7s. 6d.; but the Company claimed a further 7s. 6d. due to the increased cost of coal and of hessian for bags. T h e Company could not guarantee a period of more than nine months because they feared a shortage in the next crop. The F i j i crops, however, exceeded the estimates and in January, 1920, the Board of Trade secured an extension of the period until June 30th, 1920, without an increase in price. The Sugar Company was under no obligation to continue this agreement, as there was a ready outlet for its sugar in Canada as that country grew at that time only 7 % of its 6

N. Z. Board of Trade Annual Report, 1919, p. 4.

GOVERNMENT SUGAR CONTROL

35

requirements. H a d the N e w Zealand Government, through the B o a r d of Trade, not been able to come to any definite f o r w a r d arrangements with the S u g a r Company, N e w Zealand would have been obliged to purchase sugar on the open market at parity prices. But on the other hand, the Company had a definite contract over a long period. This would ensure a secure market with no price fluctuations. Thus, although the S u g a r Company did not make as much profit as they might have, it was guaranteed a steady profit which is, in many respects, much more desirable. Until December 1 9 1 9 there had been no interference with the system of distribution. In this month, however, the position became so acute that the Board of Trade had to co-operate with the S u g a r Company to ration supplies on the basis of the following order of essentiality: 1. Householders. 2. J a m manufacturers and fruit preservers. 3. Manufacturers other than sugar boilers and confectioners, including vinegar, sauce, and jelly crystals; bakers and manufacturers of essential foodstuffs, including biscuits. 4. Sugar boilers and confectioners including ice-cream manufacturers. 5. Cordial, syrup, and aerated water manufacturers. 6. Brewers. T o avoid disturbing the established channels of trade, the Board appointed as sub-agents wholesale merchants who usually handled sugar; and, in order to ensure an equitable distribution, a limited system of rationing of retailers was inaugurated. Each retailer's supply of sugar was allotted on the basis of his grocery turnover, and, to prevent duplication, each was required to nominate a merchant through whom supplies could be drawn. Distribution was stabilised

36

PRICE

FIXING

IN NEW

ZEALAND

and shipments were arranged ar far as possible at frequent intervals, to obviate the necessity of merchants carrying large stocks. A flat rate of commission for sub-agents was instituted in place of the scale-rate previously in vogue, which had caused so much trouble and which ultimately led to the prosecution under the Commercial Trusts A c t mentioned at the beginning of this chapter. In fixing the retail price consideration was given to the retailer's handling expenses, an adequate margin of profit being allowed. The Government also issued in the Gazette of August 30th, 1921, Board of Trade Regulations, which read as follows: " It shall not be lawful for any person, firm or company to sell or offer for sale sugar refined outside the Dominion of New Zealand unless each separate package in which such sugar is delivered to the purchaser bears the words " sugar " preceded by the name of the country in which the sugar contained in that package was refined." 7 Not until 1920 did the world New Zealand. Although during fall in production (as is shown in Zealand had secured her sugar at of only J^d. on prewar prices.

shortage adversely affect the war there had been a the following table) New 3/4d. per lb., an advance

W O R L D P R O D U C T I O N OF S U G A R FROM

7

1915/16—1920/21

Year

Tons

1915/16 1916/17 1917/18 1918/19 1919/20 1920/21

16,968,000 17,096,000 17,422,000 15,858,000 15,222,000 16,680,000

8

N. Z. Gazette, No. 79, August 31, 1921.

Compiled from figures given in Review of Sugar Supplies (issued by Department of Industries and Commerce) and Report on the Sugar Supply by W. G. McDonald, Chairman of Board of Trade. 8

GOVERNMENT

SUGAR

CONTROL

37

T h i s falling off in production was due to the devastating effects of the war on the beet-sugar industry in Europe. As production was curtailed in the Old World, the sugar of Cuba and Java assumed greater importance in world supply. Consequently, when the N e w Zealand Government came to negotiate for an extension of the previous arrangements, the Sugar Company represented that heavy increases in the cost of production of raw sugar made it impossible for the Company to enter into anything like the old arrangements; but it stated its willingness to sell the whole of the estimated output of the F i j i a n mills at £35 10s. od. per ton f.o.b. F i j i . A t the time these negotiations were in train, quotations for Javan raw ranged up to £80 per ton. T h e Colonial Sugar Refining Company had sold and could sell freely at £42 f.o.b. The British Government had bought 50,0c» tons of Javan raw sugar at £53 12s. 6d. f.o.b. Java, for delivery between July and September 1920, and a month or two prior to this time a N e w Zealand manufacturer was obliged to obtain Javan sugar (refined) to fill his requirements and for a parcel of 300 tons paid £62 per ton f.o.b. Java. 9 A s a result of inquiries by the Board of Trade into the prices of available supplies of Javan, Mauritius and Cuban sugars, it was found that besides the prices being prohibitive, adequate supplies and regular freights could not possibly be obtained. Various conferences between the Board of Trade and the Sugar Company resulted in an entirely new agreement whereby the Government contracted to buy raw sugar at £35 10s. od. per ton f.o.b. F i j i , pay cost of transportation to Auckland and refinery expenses, and control the whole system of distribution. This practically meant that the Government took over the supervision of the Chelsea Refinery. In consequence of this arrangement the wholesale price of 9

Report on the Sugar Supply, p. 3.

3«

PRICE

FIXING

IN NEW

ZEALAND

sugar was doubled (£47 10s. o d ) and the retail price soared to 6}4d. per lb. T h e main provisions of the agreement were announced in the House of Representatives by the Minister of Industries and Commerce, the Hon. E. P. Lee in July 1920. It was provided that the company was " to sell a maximum of 65,OCX) tons of raw sugar, the estimated requirements of N e w Zealand for a year." T h e Company, on behalf of the Government, refined the raw sugar at Auckland " in accordance with the now established practice o f the Company, and with all due care and skill." T h i s meant that the charge to the Government for this process was the actual cost " from the taking of the raw sugar from the raw sugar stack at the refinery, until delivery of such refined sugar, byproducts, or raw sugar to the purchaser or to the Government." 10 T h e Government paid the Company a managing charge of £1 2s. 6d. a ton to cover the cost of labour, interest and depreciation. F o r the distribution of the sugar the Company was paid 7s. per ton. The books and premises of the Company were open for inspection at any time by any officer authorized by the Government for this purpose. The period of the agreement was from July 1st, 1920, to July 21 st, 1921. During the currency of this agreement, the world's prices of sugar continued to be high, but towards the end of the term a decline set in. This downward movement of the London market was due mainly to financial crises in 1921 in Java and Cuba. The failure of a large firm in Java necessitated the realisation of stocks of sugar at a sacrifice. This sugar was quoted on the New Zealand market at £27 per ton c. i. f. Sydney, but owing to lack of demand for Java sugar, financial stringency and shipping difficulties, only two consignments totalling 50 tons reached the Dominion at the law rates quoted. 10

N. Z. Board of Trade Annual Report, 1921, p. 11.

GOVERNMENT

SUGAR

CONTROL

39

New Zealand prices were high when compared with previous prices, but when compared with the prices paid outside New Zealand, this is not so evident. " The landed cost in New Zealand for Fijian raw sugar was £ 3 6 17s. 6d. per ton whereas the average price paid by the British Government during 1920/21 was £67 8s. 6d. and the average price paid by the Australian Government for the same period was £59 19s. 5d." 1 1 When the Government became the actual owner of the sugar the Department of Industries and Commerce (formerly the Board of Trade) built up a reserve stock to meet the special requirements of the jam season, but a strike at the refinery in August, 1920, totally absorbed the reserve stock just prior to the demand for jam sugar. In order to make up the deficiency the Department negotiated for supplementary supplies of 3,000 tons of refined sugar from Australia, but the landing of the sugar was interfered with by the shipping strike; in fact, some shipments were actually brought over to New Zealand twice before being unloaded. It will thus be seen that the Government spared no efforts to ensure a supply conforming to seasonal requirements. A t the conclusion of the 1 9 2 0 / 2 1 contract, the Sugar Company intimated to the Government that until trade conditions reached normal, it could not possibly return to prewar methods of trade, and offered to maintain a supply on the lines of the existing arrangements at £26 per ton, raw, f.o.b. Fiji for the year ending June 30th, 1922. Further negotiations resulted in a price of £22 12s. 6d. per ton being agreed to. This enabled the wholesale price to be fixed at £34 per ton, refined, f.o.b. Auckland and the retail price at 4 ^ d . a pound. The normal requirements of sugar for New Zealand are 11 Typewritten manuscript, Notes on Sugar Control from files of Department of Industries and Commerce, N. Z.

40

PRICE FIXING

IN NEW

ZEALAND

between 60,000 and 65,000 tons per annum. But in view of the financial stringency and the risk of a forward contract when prices were so unstable, the Government contracted for 50,000 tons only. Towards the end of the year, the Sugar Company offered a further 12,000 tons to the Government at the low price of £ 1 6 5s. od. The purchase was ultimately effected at £ 1 5 10s. od. per ton, raw, f.o.b. F i j i . Immediately this contract had been signed the Sugar market began to be firm; this tendency being due to the crop reports indicating a smaller yield than was originally contemplated. In consequence of this opportune purchase the Government averaged the buying price ( £ 1 5 10s. od.) with that agreed for the previous purchase and thus reduced the wholesale price to £26 5s. od. per ton, refined. This enabled the retail pirce to be reduced by id. per lb. The Department of Industries and Commerce claims that its careful study of the statistics of consumption enabled the Government to limit its original purchase and thus be in a position to buy the balance when the market was at its lowest level. A f t e r distributing the sugar purchased under these contracts it was intended that the Government should withdraw from the sugar business, but, before doing so, inquiries were made from the Sugar Company to ascertain whether a supply of sugar for the next jam season could be assured. The Company advised that the world's market conditions were so unsettled that an extension of the arrangement would be more satisfactory. It is generally agreed that a stable price is of advantage to the consumer, and the Company was not prepared to take the risk of holding stocks for sale twelve months ahead, when an immediate market offered in Canada. Therefore the Government agreed to purchase 20,000 tons at £ 1 9 12s. 6d. per ton, raw, f.o.b. Fiji. This quantity was designedly limited as it was not considered prudent to buy

GOVERNMENT

SUGAR

CONTROL

the full quantity forward under the then existing market conditions. Before making other arrangements for the disposal of the balance of the crop the Sugar Company later offered it to the Government which, after carefully considering the position both in regard to the prospective supply and the market conditions, agreed to purchase an additional 20,000 tons at £ 1 7 3s. 8d. This purchase price enabled the retail price of sugar to be kept at 3 } i d . per lb. until the end of the jam season 1923. Owing to the low price and a plentiful supply of cheap fruit a considerable increase in consumption took place in the jam season from November, 1922 to March, 1923. Thus by June, 1923, the supply was exhausted, and as the Fijian crop would not be ready until the next August, the Government, to bridge the gap, purchased 19,000 tons of J a v a sugar and 2,500 tons from the Australian Federal Government. Both these purchases were at a slightly more advanced price than the Fijian purchase; consequently from June to August the retail price was advanced from 3 ^ d . to 4d. per lb. Government control in the sugar industry ceased on August 31st, 1923. In June, 1923, the sugar supply was considered by a special parliamentary committee, when the Sugar Company represented that it would be in the best interests of all concerned for the Government to continue control for another year. This view was widely endorsed by manufacturers and merchants concerned in the distribution of sugar. The Sugar Company asked for either ( a ) continuance of the Government control or (b) the provision of a protective tariff on white sugar to compensate for the disadvantage in the matter of the increased cost of refining in New Zealand and the disability in relation to freights. If neither of these was agreed to, the Company would have to close its works at Chelsea because it could not com-

42

PRICE

FIXING

IN NEW

ZEALAND

pete with the cheaper and inferior Java sugar. A s a result the preferential duty of Y*d. per lb. was converted into a protective tariff of Visd. per lb. against imports of refined sugar from all countries. T h i s duty was agreed upon for one year only until the Government found an alternative method of dealing with the problem. A select committee reported " that it is in the interests of the Dominion that the Chelsea sugar works should remain open and it is agreed that some protection to the Colonial Sugar Refining Company is necessary " . Accordingly in 1924 a protective tariff on refined sugar was fixed by Parliament at J4d. a pound. T h e decision caused much comment in the Press at the time. A n editorial in the Dominion of August 22, 1924, says: The only two alternatives were: ( 1 ) T o re-enact a duty on sugar and so require the people of the Dominion to pay nearly £200,000 a year more than they otherwise need pay for sugar. (2) T o allow a fairly important local industry to close down and throw some 380 men out of work. Although the House was plainly in the position of having to choose between two evils, there does not seem to be much doubt that the temporary re-imposition of the duty on the best terms that can be obtained is for the time being the least of these evils. It seems very doubtful however, whether the retention of the duty for any great length of time can be justified. With the present duty in force, the people of the Dominion are paying about £175,000 more than they would pay on an open market for the amount of sugar that they at present consume annually. If the refining company had 400 employees, this additional outlay on sugar would work out at £437 10s. od. per employee. In other words the people of the Dominion are paying as much extra for their sugar as probably would more than pay the wages of their workers twice over. Since the Sugar Company resumed control no complaints

GOVERNMENT

SUGAR

CONTROL

43

have been received by the Department of Industries and Commerce concerning either prices or distribution. REVIEW

T h e New Zealand consumption of sugar is extremely high, there being only one c o u n t r y — A u s t r a l i a — t h a t approaches it in per capita consumption. I believe the reasons for this remarkable relatively high consumption per person are I. the general prosperity of the country; 2. the manufacture and considerable consumption of confectionery; 3. the importance of the condensed milk, brewing, fruit-preserving and jam-making industries. During the whole period of world scarcity the per capita consumption in N e w Zealand was not contracted. T h e following table shows how liberal the supplies of sugar in N e w Zealand were in comparison with other countries. ANNUAL

CONSUMPTION

Country United Kingdom United States France Germany India Australia N e w Zealand

PER

CAPITA12

1914 (lbs.) ....

95 89 48 49 17 128

1919 (lbs.) 52 73 38 40 17 128 129

T h e Government claims that in the period of control ( 1 9 1 6 - 2 3 ) the sum of over £5,000,000 was saved to the consumer. The official statement is that the difference between the prices arranged with the Sugar Company and those obtained from time to time on the world's markets is over £5,000,000. These figures should not be blindly accepted, as the market price on which the Board of Trade made its calculations is the price in the London market. But as Javan 12

Review of Sugar Supplies, p. 2.

44

PRICE

FIXING

IN NEW

ZEALAND

and F i j i a n sugars are practically the only sugars that reach the Dominion, the N e w Zealand supply would not have been bought at the London prices, but at prices less by the difference between the freight from Java or F i j i to London and the freight from Java or F i j i to N e w Zealand. However, there is no doubt that the Government through its intervention effected an enormous saving. Hereunder are set out, for comparison, the retail prices of sugar in the United Kingdom, Australia, and N e w Zealand from 1 9 1 4 until the relaxation of control in 1 9 2 3 : IS Year

Price in Pence Per Pound V. K.

191 4 191 5 191 6

191 7 191 8 191 9 192 0 1921

192 2 192 3

N. Z.

2

- 3X 3'A~4 4 - S'A

5H-6 6 - 7 7 - 8 10 -14

6'/i

5*4-5 8 - 9

3 3V2 3V2 3 y2

Australia

2^-3 3 3^2

4

3V2

4

3?2

4

3H-6J4

6

6'/i-4H

6

3H

3M-4

6-5 5

In comparing the above prices it must not be overlooked ( 1 ) that the import duty influenced the retail prices in the United Kingdom and to a less degree in Australia, but not to anything like the extent of the foregoing disparity in prices ( 2 ) that the United Kingdom had greater freight and insurance charges ( 3 ) the cost of living is different in England from that in Australia and N e w Zealand. Not only did the Government enable N e w Zealand to enjoy sugar supplies permitting a per capita consumption in excess of that prevailing in any other country during the years of sugar scarcity, but the sugar was also at a price lower than that ruling in all other countries except Australia, where in 13

Prepared from Review of Sugar Supplies and Notes on Sugar Control.

GOVERNMENT

SUGAR

CONTROL

45

1 9 2 0 the price was slightly better. The Government also provided regular supplies to distributors and a stable market which avoided dislocation of trade and financial embarrassment to merchants or other concerned in the distribution and use of sugar. The whole of the sugar control was carried out without any loss to the Government, or charge upon the Consolidated Fund and as the price averaged well below world parity there was no charge on the consuming public. In regard to cost of administration, the distributing organisation of the Sugar Company was utilised so that only Government supervision was necessary, with the minimum of expense, and without appointing special officers. New Zealand is fortunate in that it has one main source of distribution—the Chelsea Refinery —and consequently it was easy f o r the Government to assume control without setting up a special Control Board. It is not too much to say that the sugar control was the most successful of the controls undertaken by the Government through the Board of Trade. While the Government actually controlled the refining of the sugar, they were able to fix a low wholesale price while working on an extremely low margin of profit. Satisfactory results could be secured only by the conduct of operations on a large scale. The Government used, in effect, the combined purchasing power and credit of the community in a manner which would be beyond the financial capacity of any but the largest private institutions; and the benefit which resulted to the people of the Dominion should not be overlooked in any discussion relative to the merits or demerits of State enterprise. But in connection with this, in the Final Report of the (British) Royal Commission on the Sugar Supply issued in June 1 9 2 1 , we must notice the following expression of opinion: The wisdom of the Government in at once taking over in

46

PRICE

FIXING

IN NEW

ZEALAND

1914 responsibility for the sugar supply was in our opinion, fully proved in the sequel. But while we recognize that in the special circumstances State management was a necessity, our experience does not lead us to think that State control is a desirable thing in itself in the region of trade in commodities.14 It is also important to remember that the alternative to Government control in N e w Zealand is not necessarily a free market. It has been well observed by Professor Taussig that " the strictly economic ear-marks for State-managed industries are maturity and monopoly." " A n d these are obviously the distinguishing characteristics of the operations of the Colonial Sugar Refining Company ( F i j i and New Zealand) Limited. FACTORS IN T H E SUGAR S U P P L Y

The essential factors to be taken into account in considering the sugar supply of New Zealand are as follows: 1. The supply must be adequate for the Dominion's needs, assured as far as it is humanly possible to arrange, and sufficiently regular in delivery to avoid the necessity for distributors to carry large stocks. 2. It is desirable to have a stable price, as one subject to frequent fluctuations is usually against the consumer on account of the inertia of retail price movements. 3. The quality must be of a consistently high degree and refined of impurities to be used for all manufacturing purposes. In this connection we should note the difference between Javan and F i j i a n sugars, practically the only sugars to reach the New Zealand market. T h e Javan sugars are sold in the form of " mill whites " which have not gone through the process of clarification, such as is conducted at 14

Final Report of Royal Commission on Sugar Supply, 1921.

15

Taussig, Principles of Economics

(New Y o r k , 1918), vol. ii, p. 407.

GOVERNMENT SUGAR CONTROL

47

the Chelsea Refinery—a process which adds considerably to the cost. In the J a v a n product there is a percentage of fruit or acid sugars, which sets up fermentation in certain manufactured products. It has a particularly deleterious effect on jams, preserves, and condensed milk. Hence f r o m the manufacturing point of view, F i j i a n sugar is essential. The best J a v a n sugars are made up of large rhombic crystals of relatively slow solubility, thus f o r household purposes this sugar is extremely wasteful. In this respect the advantage of the Chelsea refined sugar is considerable. (This is probably the reason why, early in 1 9 2 1 , even though Javan sugars were offered at a price lower than the Government-fixed price, it was found that there was little demand f o r Javan " mill whites.") 4. A s sugar is hygroscopic in nature and frequently becomes sweated, it is desirable to have the source of supply (after refining) in close proximity to the consumer's market. The propinquity of a refinery to its customers enables it to study their particular needs, and to turn out the grades of sugar most suitable to the demands of the market.

C H A P T E R BUTTER

IV

CONTROL

THE New Zealand Government's supervision of the dairy industry has always been important, but in pre-war times these activities were mainly in the direction of assisting producers by instruction in the manufacture of butter and cheese and by grading export products. A s the outcome of war conditions, however, it became necessary for the authorities to exercise some direct control over the industry. This control was confined almost entirely to one product—butter. It did happen that the retail price of cheese was fixed for a short time during the war, but this fixation did not recur, whereas the controlling of butter prices was a regular feature from 1916 to 1921. The fact that the Imperial Government commandeered New Zealand's surplus of butter and cheese on several occasions necessitated some detailed control by the Department of Imperial Supplies and the dairy division of the N e w Zealand Department of Agriculture. In some respects the Dominion Government's interference was the outcome of this commandeering, but, in any case, butter was such an important article of consumption that supervision over the retail prices could hardly have been avoided. In considering the producers' point of v i e w — t h e benefits received and the hardships suffered—it is well to remember that for a long period the Imperial Government took over all the responsibility of shipping, whereas private enterprise would have been quite unable to command the necessary facilities in such a time of crisis. Therefore the producers were rendered 48

BUTTER

CONTROL

49

a considerable service which would, to some extent, set off any disadvantage suffered by supplying the local market at prices fixed by the Government. During 1 9 1 5 and 1 9 1 6 the retail prices of butter were increasing in sympathy with advances on the London market. In the latter part of 1 9 1 6 price offers for New Zealand butter for export were very high and further increases in the local retail prices were proposed. I have prepared the following graph from Wellington monthly retail prices to illustrate this up to the time of control, in October, 1 9 1 6 .

In September, 1 9 1 6 , " a n outcry was raised against the " butter ring " proceeding from the obvious grievance of the consumer who saw the price rising more than the costs of production and naturally felt he was being e x p l o i t e d ; " 1 moreover, in August a deputation of grocers had waited upon the Board of Trade asking for an increase in the margin of 2d. between the wholesale and the retail price per pound if the wholesale price was to be advanced any further. On the other hand the producers contended that the temporary restrictions on export should be removed and prices allowed to rise to export parity. 1

Condliffe, " N. Z. During the War," Economic Journal, vol. xxix, p. 179-

5o

PRICE

FIXING

IN

NEW

ZEALAND

A committee representing all interests went into the question and ascertained ( i ) that the N e w Zealand consumption of butter was 10,000 tons per annum and its production 30,000 tons, leaving an exportable surplus of 20,000 tons, ( 2 ) that factories supplying the local market were receiving less than the export value and they were thus unable to return to their suppliers the same price per lb. of butterfat as cheese factories were paying, ( 3 ) that the factories producing for the local trade were thus at a disadvantage and would be compelled, in justice to themselves, either ( a ) to bring the local price on a parity with the f.o.b. price, ( b ) to enter the export trade, or (c) to go out of business, as their supplies would be diverted to the export trade or the cheese factories. The following table is illustrative of the margin in favour of butter for export. 2 TABLE SHOWING MARGIN IN FAVOUR OF BUTTER FOR EXPORT, SEPT. 1914—AUG. 1916 Net price to Month

Sept. 1914-Mar. 1915

factory

Export

per lb.

value

Margin

Per lb.

s.

d.

s.

1

ofii

1

of

d.

in d. olA

April, 1915

1

¿A

1

3lA

May

"

1

4A

1

51/*

*X

June

"

1

4'A

i

SX

^H

July

1

6%

1

"

1

5%

August "

1

4'/i

Sept.

1

2\i

"

N o exports 1

3 YA

iX

— i 'A

Oct. 1915-Mar. 1916

1

2X

1 3

April, 1916

1

3z/i

1

3X

oH

May

"

1

3}£

1

4

0%

June

"

1

4

1

AlA

July

"

1

4A

1

4X

0M

August "

1

4%

1

S

0%

2

Prepared from tables, N.

pp. 5 and 6.

*A

Z. Board

of

favour

export

oj4

Trade

Annual

Report,

1917,

BUTTER

CONTROL

51

It was considered inequitable to expect factories supplying the local market to bear the difference, which was estimated to aggregate on a season's output approximately £186,000. It was also considered undesirable to allow the local retail price to rise to is. n d . per lb., as the cost of production at that time had not risen proportionately with the rise in the value of the butter on the world's markets—the rise was due to a shortage caused by the dislocation of the war. The Board of Trade contended that the surplus production of cheese and butter was exportable at the high prices then ruling only because of the exceedingly favourable freights and space conditions secured as a result of the Government's representations to the British Board of Trade; and the producers owed in return some consideration to the local consumer. The New Zealand Board of Trade, with a view to regulating the price on the local market and equalising the return for supplying the local market with that from the export market, recommended a scheme whereby the export of butter and cheese was prohibited except under license. Regulations embodying these recommendations were gazetted on October 1 3 , 1 9 1 6 , and provided: (a) The fixation of maximum prices for locally consumed butter. (b) The prohibition of the export of butter and cheese except under license. (c) Export licenses to be granted only on the terms that the license holder undertakes to pay the Crown a butter-fat levy— per lb. on butter-fat—subject to revision by the Board of Trade. (d) All monies collected to be credited to a deposit account by the Licensing Authority appointed under the Regulations and to be expended as follows: ( 1 ) The payment of the expenses of the administration of the fund.

PRICE

52

FIXING

IN NEW

ZEALAND

( 2 ) The payment among the several holders of export licenses such sums as might be deemed payable in order to compensate holders for loss incurred by selling butter of their own manufacture for home consumption. ( 3 ) In refunding to the payers of the levy all sums not expended for the aforesaid purposes. B y Order in Council it was also provided that the determination of the Board of Trade as to the expenditure of such monies for all purposes be final and conclusive. These regulations stirred up bitter feeling among the exporters of butter who considered them " a Government palliative to popular feeling to benefit the consumer at the expense of the producer." T h e validity of the Order in Council prohibiting export except under license was. attacked in the Supreme Court before the Full Bench on the ground that the license fee was, in its essence, a tax and that a tax cannot be imposed without legislative authority. T h e Order in Council had been issued in pursuance of the authority conferred by Section 24 of the Regulation of T r a d e and Commerce Act, 1 9 1 4 . S. 24. " At all times while His Majesty is at war with any foreign prince or state, the powers of the Governor, by Order in Council under section forty-seven of the Customs Act, 1 9 1 3 , to prohibit the exportation of goods shall extend to any goods the prohibition of the exportation of which is, in the opinion of the Governor, necessary in the public interest, and all the provisions of that section of the said Act shall apply accordingly." 3 The following extracts f r o m the L a w R e p o r t 4 on the case are relevant:—Sir John Salmond, K . C . (Solicitor General) : During this national emergency . . . extraordinary powers 3

Regulation of Trade and Commerce Act, 1914, 5 Geo. V No. 6.

*New Zealand Law Reports, 1917, " T h e Taratahi Dairy Co., and Mangorei Dairy Co. v. Attorney General," pp. 9-14.

BUTTER

CONTROL

53

are given to the Executive; the Government could take the butter-fat for nothing. . . . Under the War Regulations act, 1 9 1 4 the Executive can override by way of regulations any Act on the Statute book. ( This is an overstatement; it could not override the Constitution Act.) This is not a tax. The essence of a tax is obligation. This is a condition pure and simple which no-one need conform to unless he chooses. No-one can be sued for this charge or prosecuted for not paying it. It is not a charge on the goods, but the price you pay for a license. This war legislation ought to be judicially construed in a wide and liberal manner conformable to the extraordinary nature of it. Standards of interpretation reasonable in peace are not necessarily applicable to these unprecedented circumstances. S i r Robert Stout, Chief Justice (dissenting) in quoting the Petition of Right (3 Car. I Cap. 1 ) " That no man hereafter be compelled to make or yield any gift, loan, benevolence, tax, or suchlike charge without common consent by Act of Parliament," said that he was not aware of any such warrant or authority of the Parliament delegating its powers to the Governor. He likened the action of the Executive to the imposition of Ship Money without legislative warrant by the Stuart monarchy. The undoubted object of this system is to regulate prices of butter in the interests of the people of the Dominion as a whole, but it provides that the cost of administering the system is to be paid not by the people as a whole, but out of a fund created from contributions charged on export license-holders. In fact, as a part of the scheme to fix the price of butter, a charge or tax. is levied to pay for the scheme. It is ' seething the kid in its mother's milk.' It was held by the Full Court (Edwards and Chapman

54

PRICE

FIXING

IN NEW

ZEALAND

J. J.; Stout C. J. dissenting) that the Order in Council was valid in all respects. N o doubt, in such a national crisis, the Judiciary would tend to uphold the Executive; perhaps some distinction can be drawn between the action of a Monarchy claiming Divine Right and that of an Executive appointed by Parliament and ultimately answerable to the people. OPERATIONS OF E Q U A L I S A T I O N F U N D S

In all, 399 factories applied for licenses and of this number 1 1 4 manufactured butter alone and 285 manufactured butter and cheese. T h e total amount collected by way of levy was £309,198. O n October 13th, 1916, an Order in Council was gazetted fixing the maximum price at which butter could be sold for local consumption, at is. 4d. per lb. delivered at factory door. T h e Board of Trade authorized an interim payment of 2d. per lb, on local sales to all factories that had sold butter on the local market at a price equivalent to is. 4d. per lb. from October, 1916. This was later increased to 3d. per lb., and then from September, 1916 to January, 1917 the amount was brought up to 3 % d . per lb. F o r the months of February to June (inclusive), 1917, an interim payment of id. was made. This was subsequently increased to 2 ^ d . B y Order in Council of the 15th February, 1917, the following wholesale and retail prices were determined: For butter sold for delivery in February, 1917 March " April " May " June " July " August "

Maximum wholesale price per lb. in bulk at factory door

Maximum retail price per lb.

s.

d.

s.

d.

1 i 1 1 1 1 1

4 4 4% 4H 4V2 4*6 4H

1 1

7 7 7 7 8 8 8

1 1 1 1 1

BUTTER

CONTROL

55

The wholesale price for April, 1 9 1 7 , included an allowance of per lb. for storage with thereafter an advance of an additional per lb. per month. The return to factories on butter sold for local consumption was as follows: Period

Maximum wholesale price per lb. s. d.

Sept. 1916-Jan. 1917 Feb./March April May June July August

1 1 1 1 1 1 I

4 4 454 4ti 4/4 4H 4X

From Equalisation Fund per lb. d.

Net price to Producer per lb. s. d.

3% 2lA

1 1 i 1 1 1 1

2/4 3 3

7Ji 6lA t\yA &A 7 7H TYa

The return to factories on butter sold for export was correspondingly as follows: Period

Sept. 1916 to Jan. 1917 Feb. to June 1917 July/August 1917

Return to exporters per lb. s.

d.

1 1 1

VA 6J4 7

The difference in the net returns to producers for the months April to August is represented by the addition of payments for winter storage to suppliers of local requirements. The total compensation paid to butter factories in accordance with the above arrangements amounted to £252,448. A s the Regulations provided for a return of surplus funds not required for compensation purposes, the Board of Trade passed the following resolution on October 4th, 1 9 1 7 . That the Licensing Authority be empowered to make a refund of 3/2od. per lb. of butter-fat consumed to all factories that have contributed to the fund and whose payments of butterfat levy of per lb. are not in arrears.

56

PRICE FIXING

IN NEW

ZEALAND

A circular was issued to all dairy factories embodying this resolution. The Licensing Authority later reported to the Board of Trade that the claims for compensation for July and August had exceeded those anticipated, and that a continuance of the refund of V2od. to contributing factories would leave the fund in deficit. Accordingly in January 1 9 1 8 a circular was sent to those concerned to recover yi of the refund already paid and to pay 'Asd. to those factories who had not then received the refund. The total sum refunded to contributors amounted to £49,452. A f t e r payment of all administrative expenses and writing off amounts that were irrecoverable it was ascertained that there was still available for refund to contributors V»« of the levy contributed and a further refund was accordingly made on February 1 7 , 1919. The total amount so refunded was £3,196. In Appendix A to this chapter is attached a statement of receipts and payments showing the total disposition of the fund. 1917/18

SEASON

The requisition of the exportable surplus on behalf of the Imperial Government commenced on November 20th, 1 9 1 7 the Imperial Government guaranteeing 157s. per cwt. f.o.b. to exporters plus 50% of the profit made on the New Zealand butter sold in England. (This ultimately brought the return per cwt. up to 174s.) The guarantee of 1 5 7 s. per cwt. represents is. 4 1 "/i«d. per lb. Allowing Vied, per lb. to cover cost of delivery from factory to ship, the payment represented a net return to the factory of is. 4¡Hid. per lb. But by an Order in Council dated 16th April, 1 9 1 8 , the maximum wholesale price of butter to suppliers of the local market was is. 5d. per lb. factory door and is. 8d. as the return to the retailer. From the foregoing it can be seen that the local supplier

BUTTER

CONTROL

57

received is. 5d. per lb. while the exporter received less, viz. i s . 4 ^ d . per lb.

B u t the exporter still had the 5 0 % of the

profits of his sale to the Imperial Government due to him. O u t o f this an equalisation fund was established so that the local supplier and the exporter should both g e t an equal return.

T h i s division of profit idea took the place of the

butter-fat levy scheme. T h e return to factories on butter sold f o r local consumption w a s as f o l l o w s : PERIOD.

SEPTEMBER 1 9 1 7 TO J U L Y

1918

Maximum wholesale price per lb From Equalisation Fund per lb

is. sd.

Net price to producer per lb

is. Sj^d.

T h e return to factories on butter sold f o r export

was

correspondingly as f o l l o w s : F. o. b. price per lb Minus freight from factory to ship

is. 4 l s / l a d . 7 / d. 16

Factory door price

is. 4f£d.

T o this amount was added compensation totalling approximately 1 ¡Hid. per lb. which increased the net return to the factory to is. 5 ^ d . The N e w Zealand Government must have been assured o f substantial profits on the Imperial

Supplies purchase

to

have fixed the N e w Zealand factory-door price at i s . 5d.; otherwise, if the profits had been small, the Equalisation Fund would have been used to equalise the exporter's price instead of the local supplier's. 1 9 1 8 - 1 9 1 9 SEASON This season was eminently satisfactory ducer's point of view.

f r o m the pro-

Under the authority of Section 16

of the Appropriation A c t , 1919, the N e w Zealand Govern-

58

PRICE FIXING IN NEW

ZEALAND

ment assumed the liability of equalising the profits on local butter sales, the sum of £ 3 4 0 , 0 0 0 being appropriated for this purpose by Parliament for the 1 9 1 8 / 1 9 and 1 9 1 9 / 2 0 seasons. The fixed price f o r the 1 9 1 8 / 1 9 season was is. sd. per lb. The rate required to be paid to local suppliers amounted to is. 0.955d. per pound, and this was duly distributed on 1 9 1 8 / 1 9 butter sold for local consumption, after the returns of all factories throughout the Dominion had been audited by the Department's travelling auditors. The return to factories on butter sold f o r local consumption was as follows: Export price at 181s. per cwt. f . o. b Less estimated cost of delivery from factory to ship 7 / 1 6 d . per lb

is. 7.393d.

Net price to producer

is. 6.955d.

I919/2O

.43&I.

SEASON

A s the cost of equalisation was encroaching too much on the Consolidated Fund, the maximum price to the local consumer, by Gazette notice of June 17, 1920, was increased to is. d. per lb. and the retail price to is. 9d. per lb. The equalisation was reduced accordingly. A greater saving to the Consolidated Fund could have been effected without much inconvenience to the retailer by making the wholesale price is. 6d. per lb.; the public had to pay is. 9d. in any case. 1920/21

SEASON

The Imperial purchase for this season commenced in October, 1920 and terminated on March 3 1 s t , 1 9 2 1 . The purchase price was 2 8 0 s . per cwt. f.o.b. (nearly 100s. increase on the previous year's purchase price). In view of this high export price, what was the price to the New Zealand consumer to be? T o determine a " f a i r "

BUTTER

CONTROL

59

price for local consumption, the Government appointed a Butter Committee composed almost entirely of representatives of the producers and dairy companies. This committee called a great deal of evidence and incidentally dealt with the cost of production. Many crude and fantastic returns were submitted to show that the cost of production of butter-fat was anything from 2s. to 4s. per lb. As the producers had no uniform costing system (if it could be called a system), these returns were quite unreliable, 'but they served to reassure the Butter Committee and the Minister of Agriculture that " after all the consumers are getting butter at prices below cost of production." The public were confused by the figures and failed to note that, as a pound of butter contains about 1 5 % of water, the cost per pound of butter-fat was not per se a guide to the cost of butter. All returns obtained indicated that a pound of butter-fat sells for less than its cost of production, but this contention has never been reconciled with the obvious prosperity of the majority of the dairy farmers in the Dominion at that time. Thus, because the returns for cost of production submitted to them were so contradictory, the price-fixing authorities thought it preferable to disregard them and take account only of the export price. Accordingly an Order in Council was issued on October 18th, 1920, fixing the maximum price of butter sold in boxes in bulk at is. n ^ d . per lb., ex factory door, the retail price to be 2s. 3d. Equalisation was paid from the Consolidated Fund to the local suppliers at the rate of 6d. per lb. This was authorized by Parliament under Section 12 of the Appropriation Act, 1920. The return to factories supplying the local market was as follows:

6o

PRICE

FIXING

Period

IN NEW

Maximum Wholesale Price

Oct., 1920, Mar., 1921 April ist, April 16th April 17th, Aug. 31st

... ... ...

s.

d.

i i i

uy2 w/i 11%

ZEALAND From Equalisation Fund

Net Price to Producer

6d. 3d. 2d.

s.

d.

2 2 2

5 5i I/a

The return to exporters was as follows : PERIOD.

OCTOBER, 1 9 2 0 TO M A R C H , 1 9 2 1

s. 2

Imperial Purchase (280s. per cwt.) per lb Minus cost of delivery per lb Factory door return PERIOD.

A P R I L TO A U G U S T ,

d. 6 y2

2

5%

1921

s.

d.

Average price of butter (242s. 8d. per cwt.) per lb. . . Minus cost of delivery per lb

2

2 J4

Factory door return

2

A s the Imperial purchase ceased on March 31st, 1921, so the equalisation payment of 6d. ceased. O n April 17, 1921 a circular was sent to local suppliers intimating that the Order in Council of October 18, 1920 (fixing factory door prices at is. i i } 4 d . ) was still in force and that the equalisation from that date would depend on Market parity. In the meantime, for the period of adjustment (April ist to 16th) 3d. per lb. would be paid, and until the Order in Council was revoked there would be paid 2d. per lb. subject to revision if the state of the market warranted it. The Order in Council was revoked on August 31, 1921 and prices ceased to be controlled in N e w Zealand by the Government. In August, 1923, the Dairy Produce E x p o r t Control Act was passed. The operation of the A c t was contingent on a

BUTTER

CONTROL

6i

majority of producers voting in favour of the A c t being brought into force. This was done in 1924 when the Dairy E x p o r t Control Board was set up, t w o members of which are appointed by the Government. The economies of the Board are recognized. A p a r t from improving grading, packing, and handling and the control over marketing, the Board diffuses the latest processes, promotes research, eliminates cross-freights, pools trade secrets, gives valuable statistical services, secures emulation by competitive returns, ensures uniform rates, freights and insurance and cheaper bank accommodation, and utilises to the full the cold storage facilities of the country. It has standardized the brands of butter and secures the value of organised and unified advertisement. It also has the right to buy up patents. F r o m September 1st, 1926, the Board exercised absolute control of sales in all dairy produce exported to Great Britain and North America. It met a bad market owing to economic conditions in Great Britain, and it was also faced with an undisguised boycott by the London merchants. So the Board quickly gave up its attempt to dictate the price and time of sale of N e w Zealand butter. " The most awkward legacy of its experiment is the loss of good will on the part of the traders and to some extent of the consumers in Great Britain. There are some indications that this has taken a permanent form by the diversion of capital into the promotion of alternative sources of supply such as Canada." 5 REVIEW

The operations of the butter-fat levy scheme have been treated in greater detail in order to illustrate the administrative side of the control. The later seasons' control fol5

Condliffe, New Zealand in the Making

(Chicago, 1930), p. 268.

62

PRICE FIXING IN NEW

ZEALAND

lowed practically the same lines except that there was no levy system. The Butter-Fat Levy was an effective means of keeping the local prices low without paying any subsidy from the Consolidated Fund, and it worked well from the administrative point of view. The dairy factories were, however, opposed to the principle of the scheme and agitated for the levy system to be abandoned. There is no doubt that, but for the admixture of political interests in the Coalition Cabinet, such an arrangement as the butter-fat levy would not have been introduced—nor was it surprising that the producers who were the supporters of the strongest political party should eventually have their way. Thus it happened that the system of direct subsidy from the Consolidated Fund was inaugurated. The direct subsidy meant that the farmer received the export parity value for all his butter; the arrangement was much fairer from a commercial standpoint. ( B y export parity I mean the London market price minus freight and other charges necessary to transfer the product from New Zealand ports to London). Nothing can be said against the producer's contention that he is entitled to export parity for butter sold on the local market; that contention is perfectly sound in peace times, and the action of the Government in adopting the subsidy plan cannot be severely criticised. What can be objected to, however, is the differential treatment of industries—the timber and cement industries, for example, were compelled to sell their products at below the export value while the same principle applied to the dairy industry was considered too great a hardship. Probably this was due to the fact that the export trade in the dairy industry is of much greater relative importance than that in the timber and cement industries. The principles adopted in connection with the payment

BUTTER

CONTROL

63

of export values to the dairy industry were sound, but it was urged that the local consumer did not receive as much consideration as could reasonably be expected. This was especially evident when in the 1 9 1 7 / 1 8 season the local price was fixed as is. 5d. per lb. when the factory door export price was is. 4 ^ j d . Nevertheless the payment of export values is justified on economic grounds. In this connection the following extract from a report of the Fair Profits Commission, Melbourne, is of interest. The question whether butter should be sold locally at a price which gives the producer a reasonable profit, even though the price be below the export parity, is a question of public policy at present beyond the sphere of duty of this Commission and no opinion is here offered except to remark that such a policy would seem to imply the corresponding obligation on the local buyer to pay in times of world cheapness a price which gives the producer a reasonable profit even though that price were consequently above the export parity.® One of the tests of Government control is an estimate of what would have happened in a free market. The farmers urge that the local prices would have been higher. Probably this is correct. In my opinion what would have occurred in a market free from State control is that producers would have combined to keep local prices high and that the Government while possessing the power under Section 26 of the Board of Trade Act to restrain monopoly tendencies, would have found difficulty in exercising its authority against its political adherents. It is noteworthy that the New Zealand tariff provides f o r a protective duty of 20% on butter. These circumstances would have strengthened the hands of any combine among the dairy companies. The great weakness in the system of Government control 8

Report No. 28, Victorian Fair Profits Commission, Sept. 7, 1920.

64

PRICE FIXING

IN NEW

ZEALAND

of butter was departmental decentralisation—the Imperial Supplies Department, the Department of Agriculture, and the Board of Trade all dealing with the business at one stage or another. This may account for the differential treatment that butter received in the matter of a basis for fixing price, the avowed policy of the Board of Trade being to fix prices at cost of production. Was the butter control successful? The consumer thought and still thinks that he did not receive due consideration. Yet at one stage he was getting his butter at 6d. per lb. cheaper than the export price. In other seasons the saving to the consumer hardly justified the cost of administration. But in the control itself there appears to have been no weakness. The Government set out to control the price of butter. The administration of this was carried out efficiently. The issue as to whether the changing principles on which control was based were justified is not so clear.

BUTTER

CONTROL

APPENDIX STATEMENT

OF I N C O M E AND

65

A.

EXPENDITURE

IN

CONNECTION

W I T H T H E B U T T E R - F A T L E V Y F U N D ESTABLISHED UNDER T H E PROVISIONS OF T H E ORDER-IN-COUNCIL D A T E D 1 3 T H OCTOBER, EXPENDITURE

1916. INCOME

£

s. d. £ s. d. By Amounts received by levy on Butter-fat . . . . ^ 3 0 9 , 1 9 8 . 1 . 9

To Compensation paid to Dairy Factories supplying Butter to the local market ¿¿252,448.18.0 First refund of Levy to factories at 3/25d. per l b . . . 49,452. 8.2 ADMINISTRATION E X P E N S E S

( T w o Departments) £ Salaries & Wages . . . Postages & Telegrams. Printing & Stationery. Office Expenses.... Legal Expenses

s.d.

1,194.19.0 200. 7.0 102. 3.0 264.10.8 105. 0.0

Expenses Butter Producers' Committee Expenses of Special Auditors Amounts written off as irrecoverable Balance to be applied to second refund to Factories representing l/96th of original levy

1,866.19.8 332.10.0 1,837.2.10 63,16.7

3,196. 6.9 ¿309,198.1.9

¿309,198.1.9

R. TRIGGS, Licensing Authority. I have examined the foregoing account with the books and vouchers of the Licensing Authority and have verified the re-

66

PRICE FIXING IN NEW

ZEALAND

turns furnished by the Factories concerned, and certify that such account correctly shows the position of the Fund. The Balance will be absorbed by a further distribution to Factories of i/96th of the total levy contributed by each. R. J.

COLLINS,

Controller and Auditor General. Department of Imperial Government Supplies Wellington, 29th January, 1 9 1 9 .

APPENDIX

B.

COPY.

N o . 86. T H E NEW

Z E A L A N D G A Z E T T E EXTRAORDINARY. Published by Authority.

WELLINGTON, MONDAY, OCTOBER L8,

I92O.

Fixing the Maximum Price of Butter. JELLICOE, GOVERNOR-GENERAL. ORDER I N C O U N C I L .

At the Government House at Wellington, this eighteenth day of October, 1920. Present: His Excellency the Governor-General in Council. In pursuance and exercise of the powers and authorities conferred on him by the Regulation of Trade and Commerce Act, 1 9 1 4 , His Excellency the Governor-General of the Dominion of New Zealand, acting by and with the advice and consent of the Executive Council of the said Dominion, doth hereby fix

BUTTER

CONTROL

67

and determine the maximum price of butter for consumption in N e w Zealand in accordance with the provisions of the Schedule hereto; and doth hereby declare that this Order in Council shall come into force on the nineteenth day of October, one thousand nine hundred and twenty. S C H E D U L E

I . The maximum price of butter sold in boxes in bulk shall be is. n ^ d . per lb. ex factory door. 2. The maximum price of butter as sold by the retailer shall be 2s. 3d, per lb. f o r cash over the counter, and 2s. 5d. per lb. if booked. 3. The maximum prices herein fixed and determined shall not apply to butter manufactured prior to 1st August 1920. F . D . THOMSON,

Q e r k of the Executive Council.

CHAPTER CONTROL

OF B U I L D I N G

V MATERIALS

TIMBER

ALTHOUGH the Government had previously conducted minute inquiries into the timber resources of the Dominion and the measures necessary to meet the demand for timber of various classes in New Zealand, it was not until August 6th, 1918 that any regulations were issued to deal with the serious shortage. The Gazette notice provided for the control of the export trade for the purpose of conserving certain timbers and supplying the local before the export market. (Compare the N e w Zealand Hide control where the local tanners were given a pre-emptive right over hides in preference to exporters. In English history we have a similar parallel with the Yarmouth fish supply in 1357. " T h e local consumer was outbid by the engrosser who wishes to transport the fish to other markets. . . . T h e resident on the spot felt that he had first claim to the products of the place and that only the surplus should be exported " - 1 ) The Regulations provided for the fixation of a price for timber for local use and for the gradual diminution of export to prevent the depletion of the native forests. T h e administration of the scheme was entrusted to the Board of Trade in conjunction with the Commissioner for State Forests ( S i r Francis Bell). The Board had to ensure that local prices would be reasonable and that restrictions were put on export so that the Dominions' requirements would be supplied first. Both the direct fixation of prices and the reduction of exports acted as checks in the interests of the New Zealand consumer. 1

Cunningham, op. cit., vol. i, p. 321. 68

CONTROL

OF BUILDING

MATERIALS

A word of explanation is necessary concerning the uses of N e w Zealand timbers. Rimu, or red pine, is extensively used in furniture and buildings. White Pine is an odourless s o f t wood used almost exclusively for butter boxes. Kauri is a valuable timber used mainly for office furniture and the beter types of interior finishing. Totara is used for posts, piles, and in the building trade. Matai is used for flooring and lining. The position in regard to White Pine is interesting. With a view to restricting export, the Board made an estimate of the New Zealand requirements for white pine for the year ending July 31st, 1 9 1 9 . This estimate was 36,535,000 ft. which was about 60% of the estimated output. Accordingly the saw-mills were notified that for every 100,000 ft. produced New Zealand orders for 60,000 ft. had to be in sight. Thereupon the Board were advised that it was not the policy of the Government to delay the cutting of white pine from land that was suited for agricultural purposes, " a s it is desired as f a r as possible to assist progressive settlement." In order to meet this position and at the same time to ensure that there would be no shortage of supplies for the New Zealand market, it was decided that the system of fixing the quota of white pine be altered, and that each saw-mill be allotted a definite quantity to be supplied to the New Zealand market out of its production, a permit to export being given for all timbers produced in excess of that quantity. A f t e r the difficulties in securing supplies to users of white pine were attended to, the absolute quantity of Rimu that could be exported was fixed on a decreasing sliding scale aimed at terminating the export of this class of timber in 1 0 years. In regard to Kauri the quantity that could be exported was fixed on a scale aimed at reducing the export to nil in 6l/2 years. In respect of Totara the absolute pro-

70

PRICE

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hibition of export was enforced; and in regard to Matai, at first only the classes not required in the Dominion were allowed to be exported, but from 1920 the export of Matai was totally prohibited. Amending Regulations relating to maximum quantities for the export of timber were published in the N. Z. Gazette August 19th, 1 9 1 9 . The policy of restriction on export was continued by a Gazette notice of April 13, 1922, prescribing maximum quantities for a further period of years. The quantities for the first year were fixed on a basis of the export trade done during the year 1 9 1 8 / 1 9 ; in the succeeding years the quantities fixed showed a yearly percentage reduction from the base quantities. The following table 2 shows the maximum quantity of the timbers which could have been exported from 1 9 1 9 to 1926. RIMU

Year ending March 31st

Quantity (Super ft.)

1920 1921 192 2 1923 1924 1925 1926

22,000,000 27,000,000 24000,000 15,000,000 12,000,000 9,000,000 6,000,000

In view of the decreased home consumption in 1922/23, a special quota of 2,000,000 ft. for the year was fixed for saw-mills not engaged in the export trade prior to December 3 1 , 1918. The prices of timber were fixed considerably below the export value; this intensified the demand for building timber at the prices ruling in New Zealand. Consequently the Government had to collect statistics dealing with the production in the Dominion in order that it might divert to the local 2 Timber Regulations, 13, 1922.

Gazette Notices of August 19, 1919 and April

CONTROL

OF BUILDING

MATERIALS

KAURI

Year ending March 31st

Quantity (Super ft.)

Oct., 1919-March, 1920 1921

5.000,000 8,500,000

1923

7.000,000

192 3

1,500,000

192 4

500,000

1925

500,000

1926

500,000 BEECH

Year ending March 31st

Quantity (Super ft.)

1920 1921 1922 192 3 192 4

2,200,000 Not fixed Not fixed 2,500,000 2,500,000

192 5

2,500,000

192 6

2,500,000

m a r k e t a s m u c h t i m b e r a s it w a s r e a s o n a b l e t o a s k t h e m i l l e r s to supply. of

our

The 1918

timber

figures

supplies;

w e r e t h e first r e l i a b l e s t a t i s t i c s

therefore,

any

p r e - w a r p r o d u c t i o n is o u t o f t h e q u e s t i o n . comparative

table o f

the p r i n c i p a l

comparison

with

F o l l o w i n g is a

classes o f

timber

duced in N e w Zealand d u r i n g the years ended M a r c h 1 9 1 8 a n d 1920.®

(The

figures

f o r production and

T O T A L PRODUCTION or T I M B E R , 1 9 1 8 AND 1920

Class of timber

Year ended March 31,1918 (Super ft.)

Year ended March 31,1910 (Super, ft.)

Rimu White Pine Kauri Totara Matai Beech

HI,3i8,579 63,136,665 21,835,023 13-387,038 11,930,040 4,466,116

145,584,203 »2,419,821 22,598,391 14,414,298 17,820,597 7,169,146

Totals

226,073,461

290,006,456

N. Z. Board of Trade, Report on Timber Supplies, p. 2.

31,

export

in the 1 9 1 8 / 1 9 period h a v e not been collated.)

3

pro-

72

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It will be observed that considerable advances in production took place, as would be expected from the fact that the number of saw-mills increased from 277 to 365 between March 3 1 , 1 9 1 8 and March 3 1 , 1920. With a view to examining the effect of the restriction on exports, the following comparative return is submitted. Table Showing the Quantities of the Principal Classes of Building Timber Exported during years ended March 3 1 , 1918, 1920, 1 9 2 1 . 4 (Quantity stated in Superficial feet.) Timber Rimu Kauri Matai Totara

1917/18 27,583,235 10,454,494 493,964 57,337

1919/20 10,101,000 362,000 Nil Nil

1920/21 12,441,130 1,729.375 104,191 Nil

These figures indicate a greater decline than the Regulations required. During the year ended March 3 1 , 1 9 2 1 , saw-millers could have exported 27,000,000 ft. of Rimu and 7,000,000 ft. of Kauri. This is not because the millers did not want to export, but because the Board of Trade purposely limited licenses to export so that the local market could be adequately supplied. If the New Zealand market could have economically absorbed any surplus, this would have been done. The Government measures of control certainly assisted in meeting the heavy demands for timber in New Zealand; and, be it remembered, during the period under consideration ( 1 9 1 9 / 2 1 ) the demand for timber was well nigh insatiable. Take the case of Rimu, one of New Zealand's most important building timbers. The increase in production between 1 9 1 8 and 1 9 2 0 amounted to 34,265,625 super ft., but the official restrictions on export enabled an increase of 46,607,905 super ft. to be placed on the local market. In 1 9 1 8 * Compiled from figures in N. Z. Board of Trade Annual Report, 1921, P. 5-

CONTROL

OF BUILDING

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73

the proportion of production going to the local market was 77%. In 1920 it was 93.25% and in 1921 it was 88.4%." T h u s it appears that the policy inaugurated by the Govern ment in relation to Ned Zealand building timber for use in the Dominion was entirely successful from the consumer's point of view. In administering the system of control one of the first precautions was to issue permits only to those mills that were in the export trade prior to 1918. A l l new mills commenced operations with full knowledge of the restrictions on export and with the assurance that these restrictions would year by year become more severe. It would have been obviously unfair to allow the new mills to take a share of the export trade in which the older mills' operations were being curtailed. During the shortage, export permits f o r Rimu and Kauri were granted only to the W e s t Coast (South Island) and the North Auckland mills and then only for quantities for which shipping from port to port was not available. The purpose of this arrangement was that those mills so situated geographically as to be unable to place timber on the New Zealand market at payable prices were granted the privilege of export. This left the Southland and Main Trunk mills to supply the local demand for timber. In this respect the following published statement made by the Chairman of the Board of Trade is of special interest: Even if the very limited export of building timber were stopped, the quantity available for use in New Zealand would not be increased. Not sufficient coasting shipping would be available to lift all the timber at some mills for use in the Dominion. If a certain measure of export to Australia did not clear the skids, they would become congested and milling operations would be checked, with the result that a number of men 5

Compiled from Tables of Local Supply and Export, ibid.

74

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would be thrown out of employment. While they lost their wages New Zealand would not have any additional supplies of building timber for use here.' In April and M a y , 1921, o w i n g to a reduction o f credits and a consequent restriction of financial operations, combined with an anticipated lowering o f price levels generally, there was a curtailment of building operations and the demand f o r timber slackened almost immediately. A t the same time, the Australian m a r k e t — t h e principal export m a r k e t — b e g a n to fail owing to the competition of timber f r o m other countries and to amendments in the C o m m o n wealth Customs tariff, which increased the duty appreciably. D u r i n g 1921, there was a shortage of buildings, but the financial stringency did not permit the continued progress of building construction. W i t h the decrease in the demand, competition became sufficiently keen to render it impossible for any producer to demand prices providing more than a small margin of profit on producing costs of competing mills, and the necessity f o r Government control of prices accordingly disappeared. Inefficient saw-mills and those subject to high cost of production were unable to continue operations. In consideration of these circumstances the Government revoked the timber regulations as regards price on M a y 18th, 1922. F r o m this time onwards the export control was the only control exercised by the Government in the timber trade. T h e following figures show the quantity exported f o r the year ended M a r c h 31, 1923. 7 Variety Kauri . White Pine Ritnu Beech

Quantity (Super

••

3,865,533

35,687,358 4.536,253 726,109

8

Quoted in Report on Timber Supplies, op. cit., p. 7.

7

N. Z. Board of Trade Annual Report, 1923, p. 11.

ft.)

CONTROL

OF BUILDING

MATERIALS

In regard to the exportation of kauri we see that the quota for the year (1,500,000 super f t . ) was exceeded. This is due to the fact that all kauri inferior to medium grade was not under control and was therefore freely exportable. In regard to the reduction in the export of high grade kauri from 7,000,000 ft. in 1 9 2 2 to 1,500,000 ft. in 1923, there were many protests from saw millers, but these protests were unavailing. During the year ended March 3 1 , 1923, the export market for rimu was dull; out of the total available quota of 17,000,000 ft. only 4,536,253 ft. was exported. This was apparently due in part to the competition on the Australian market of soft woods from other countries. During the last few months of 1923, however, a remarkable change took place, and the export demand for rimu was so increased that the restriction on export prevented to a material extent the acceptance of orders from abroad. Many requests for increased export allocations were received, but as the permissible export quota was definitely allocated to mills which were in the export trade prior to December, 1918, these requests had to be refused. A s the " new " mills had been given an export privilege of 2,000,000 ft. of rimu for 1922/23, they expected a continuance of it for the next year. A s a result of the refusal some mills were placed in a difficult position. At the same time full advantage was not taken by the old mills of their quota. The following table shows the quantity of timber of the several varieties exported from New Zealand during the year ended March 3 1 , 1924. 8 Variety Kauri White Pine Rimu Beech 8

Quantity (Super ft.) i>9I3.767 31,458,492 7.458.638 1,366,517

A'. Z. Board of Trade Annual Report, 1924, p. 10.

76

PRICE

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Because of the limitations confining the export of Kauri to 500,000 ft., difficulties arose in the North Auckland district. Representations were made to the Government as to the position, and it was ascertained that a very large number of logs lying in creeks and rivers were rapidly deteriorating in condition, and the timber cut from such logs could not be profitably used on the local market in competition with timbers cut on the east coast areas. The Government decided to allow export of timber cut from such logs from this particular area, as follows: Period

Quantity (Super

1924/25 1925/26 1926/27

ft.)

2,500,000 2,000,000 1,000,000

It was also agreed that the position in relation to exports of rimu should be amended by allowing export on the following basis: Year ended March 31st 1924 1925 1926

Mills in export trade prior to 1918 (Super ft.) 14,000,000 11,000,000 9,000,000

Mills not in export trade prior to 1918 (Super ft.) 2,000,000 1,500,000 1,000,000

The export of timber during the years ended March 3 1 , 1925 and 1926 was as follows: 9 Variety Kauri White Pine Rimu Beech

1925 2,598,400 sup. 34,881,143 " 5,171,640 " 1,832,000 "

ft. " " "

3,184,000 sup. f t . 39.018,000 " " 3,639.000 " " Not given

The table shows that the Australian market for Rimu was 9 N. Z. Board of Trade Annual Reports, on Timber Supplies.

1925, p. 1 1 and 1927, section

CONTROL

OF BUILDING

MATERIALS

still weak because of the competition of other soft-woods. T h i s condition has continued, yearly exports being still below those of 1925. T h e position in the saw-milling industry is far from bright. M a n y mills have closed down, some are working part time, a few are working continuously. Timber is being imported at cheaper rates from the Western coast of America and Canada, mainly because 1. T h e yield of sawn timber for the stands on the Western coast of North America is much greater per acre than the yield in N e w Zealand. 2. T h e larger output from individual mills in Canada and the U. S. A . reduces the proportion of overhead costs to prime costs. 3. The American and Canadian timber industries use every possible mechanical device to eliminate waste and secure more efficient methods of handling. 4. The freight rates from the Pacific ports of North America are lower than those ruling between the timber areas in N e w Zealand and the main centres. The following table shows the increase in the importations from Canada and the U . S. A . during the period under review. 10 Since 1926, the increase has continued, especially from U . S. A . But there has been a decrease from other countries. Year

Quantity

10

imported

5,620,000

IQ22 1923

9,614,000

1924 1925 1926

18,644,000 30,180,000 38,031,000

N. Z. Official

Year Book,

1923-27, 1931.

7«

PRICE

FIXING

IN NEW

ZEALAND

CONTROL OF TIMBER PRICES

In August, 1918, the Board of Trade, in addition to enforcing restrictive measures in regard to export, also exercised a control of the price of timber in New Zealand. Before any increase in selling prices was sanctioned, inquiry was made into the reason for such an increase and the Board adopted the practice of refusing its approval to any increase unless such could be substantiated by reliable cost data justifying the same. Notwithstanding this restraining influence prices showed an enormous increase when compared with those prevailing in the pre-war period; but against this it must be borne in mind that prices would have been considerably higher had they been governed by export parity. The guiding factor in price-fixation by the Board of Trade was cost of production—a quite different procedure f r o m that adopted in fixing butter prices, which were regulated by the export parity prices. It must be recognized, however, that cost of production varies from mill to mill according to a wide range of conflicting circumstances, and there is no general or even approximately general cost which may be considered as applying to the whole of the production in the Dominion. It is probable that few commodities produced in N e w Zealand offer more difficult subjects for control. The problem before the Board of Trade during the shortage of timber supplies in controlling prices was: 1. T o determine what price was necessary to prevent the producer from taking advantage of the shortage in supply for the purpose of securing an unreasonably high margin of profit. 2. Conversely to determine what price was necessary to allow such a margin of profit as would induce the marginal producer to place his output on the market, and thus to increase or, at least, to maintain the essential supply.

CONTROL

OF BUILDING

MATERIALS

T h e maximum prices to be charged for the various timbers were at first arrived at by agreements with the saw-millers and timber merchants. Until March, 1 9 2 1 , a few mills charged prices in excess of those arranged by the Board, millers, and merchants; but the whole timber industry was brought under control by a Gazette notice of March 2 1 , 1 9 2 1 , fixing the maximum prices of timber in accordance with certain price lists approved by the Board of Trade. These prices provided for the usual competitive rate of profit. I n controlling timber prices it was necessary to consider the position of the various producing mills in relation to the markets for timber, and the fact that timber is a bulky commodity in respect of which transport charges are an important factor. A system of " price points" was therefore adopted. Under this system the miller adjusted his " on truck " price in such a manner that when railage from his particular loading station was added, the cost to the buyer was the same as it would be on timber loaded and sold from the standard " price point." For example, the price point for the Main Trunk saw-milling district was Ohakune. Millers loading at, say, Taumarunui—which is farther north — f o r delivery to Palmerston North (south of Ohakune) had to sell " on truck " at prices below the Ohakune prices to the extent of the difference between the railage from Ohakune to Palmerston North and Taumarunui to Palmerston North. Conversely, on sales, say, to Auckland, the Taumarunui millers secured an " on truck " price higher by the amount of the difference in railage between Taumarunui and Auckland and Ohakune and Auckland. The system had the advantage of making the cost to the buyer definite and uniform, irrespective of the loading station, and had the further virtue of tending to prevent the miller supplying customers at a great distance from his mill and in respect of whose orders a wasteful and unnecessary

8o

PRICE

FIXING

IN NEW

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amount of railway haulage would be involved. As long as the price point fixed was the pre-control marketing centre, the system tended also to maintain the miller's economic advantages or disadvantages which normally prevailed by reason of his proximity to or distance from markets. In fixing the prices of various timbers it was a somewhat difficult question for the price-fixing authority to decide upon the relative maximum prices of, say, totara and fimu timbers, and of the different grades of each class of timber. The cost of production theory did not cover these cases. The relation between the various prices had previously been adjusted by the marginal utility of the various grades of timbers. On what principle was the Government to fix prices? They were based, somewhat arbitrarily, upon the prices ruling in the pre-control period, but adjustments and alterations had to be made from time to time as supply or demand fluctuated. (Another example of the fixing of the prices of articles subject to joint cost of production was that of flour, bran, and pollard. In this case also, the prices of the subsidiary products, bran, and pollard were fixed arbitrarily.) Another matter in regard to the control of timber prices which must not be overlooked is the serious risk of bushfires under which sawmillers work. This risk is to a very large extent uninsurable—no insurance office will accept the risk, and no definite charge in respect of insurance premiums can be ascertained and debited against the production of timber. But the risk is always present. In fact, few mills in New Zealand (with the exception perhaps of the West Coast mills) have been so fortunate as to produce timber over a long period of years without suffering serious fire losses. Therefore, in the fixation of maximum prices an added margin should reasonably be allowed to cover the possibility of serious loss by fire.

CONTROL

OF BUILDING

MATERIALS

8l

REVIEW

T h e causes of the timber shortage can be traced directly to the Great W a r . 1. T h e call on the man-power of the nation slowed up production. 2. T h e r e was little shipping available f o r of timber.

importations

T h i s shortage was accentuated in the post-war period by the boom in building operations which w a s part of a general period of prosperity. A f t e r the w a r in all branches of industry there was increased activity with a consequent rise in prices. Sawmillers would have received handsome profits if their operations had not been controlled. A s it was, some firms made good profits as the price fixed had to yield a profit to the marginal firm. A p a r t f r o m this, the millers made a greater profit on sales f r o m stocks which had been accumulated when production w a s carried on at a lower price level. A s w e have already noted, the number of sawmills increased f r o m 277 to 365 between M a r c h 3 1 , 1918 and M a r c h 31, 1920. T h e " N e w " mills saw the profits that some mills were making and also that the demand f o r timber w a s nearly insatiable. T h e y failed to see that the high profits were not made f r o m the price fixed by the Board of T r a d e f o r freshly-cut timber, but on account o f sales f r o m stock. Another factor was that some of the older-established mills were cutting timber which was acquired many years a g o at comparatively low prices. In many cases the royalty charge, or " cutting rental " , was adjusted on a basis of values ruling, say, twenty-five years ago. T h e s e mills have a decided advantage over mills that have acquired rights in recent years. In many cases the profits were made, not out of the milling operations, but out of the increment in the

82

PRICE

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" stumpage value " , and almost equally good returns could be obtained by merely selling the standing timber on a revised royalty basis. Although the " New " millers entered the industry with the full knowledge that export permits would not be granted to them, yet they were given a concession in the 1922/23 season when they were allowed permits for export of 2,000,OOO ft. of rimu. Naturally they expected that the next year they would be given a similar concession, but this was not granted even although the export quota was not complete. This was not the only trouble that the new mills had to meet. Along with the older mills they had to face a severe trade depression and competition from American timbers. (In spite of the fact that imported sawn timber other than certain specified hard-woods was subject to a duty of 2/- per 100 ft. in the rough or 4/- per 100 ft. if dressed. Also the railway freight on imported timber is 50% higher than the freight on New Zealand timber.) When the demand fell off, millers, anticipating a revival of the trade in New Zealand timbers, began to cut for stock. This was the other side of the shield. The building-up of depleted stocks could only be done on what was tending to be p falling market. Losses were inevitably made at a later period when the new high-costing accumulations were sold on the lower level of values to which trade moved. Another factor that must be borne in mind is that the timber industry is strongly subject to diminishing return; with each year's working the standing timber becomes more inaccessible and every extension of the tram-lines means an increase in overhead costs. This factor has also contributed to the prevailing distress in the timber industry. This industry since 1918 well illustrates the course of a trade cycle. With the increased demand there was extension of production and an increased demand for capital and

CONTROL

OF BUILDING

MATERIALS

83

credit, and a higher price level, then came higher discount rates with a consequent restriction of credit and limitation of industrial operations preceded by a glut and shrinkage of profit, with the closing down of many firms and a subsequent increase in unemployment. " Thus the state of trade, to use the famous words of Lord Overstone " , revolves apparently in an established cycle. First we find it is a state of quiescence, — next, improvement, — growing confidence, — prosperity, — excitement, — over-trading, — convulsion, — pressure, — stagnation, — distress, — ending again in quiescence. 11 The present world depression is prolonging the " distress " period. It is difficult to imagine what the state of the industry would have been if the Government had not controlled prices. It is certain that there would have been a greater increase in mills and a consequent greater fall when the slump came. Of course, the position now is accentuated by the competition of American softwoods. In August, 1926 and April, 1927 there were deputations to the Ministers concerned that an increased duty be placed on imported timber. The result was an increase in 1927 to 5s. per 100 ft. in the rough, and to 7s. 6d. if dressed. In the New Zealand timber trade 3 0 % of the timber cut is wasted as it cannot compete with the American product. Heart rimu is what is most desired. Some mills are therefore cutting out all the heart timber and leaving the sap and immature trees to rot in the bush. Investigations need to be made as to whether New Zealand is planting much too large a proportion of second- and third-class timber and milling only first class. In other words, is she living on capital or on income, so far as forests are concerned? New Zealand needs more scientific forestry methods, especially in the direction of marketing the mature timber and leaving the 11

Marshall, Economics of Industry (London, 1883), pp. 152-3.

84

PRICE

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balance to provide succeeding crops. The destruction of immature trees without the fullest consideration of the economic aspect of their preservation, is pure folly. CONTROL OF C E M E N T

During September, 1918, an investigation was made by the Board of Trade into the prices ruling for cement, mainly owing to a resolution passed by various City and Borough Councils. That as a matter of the very greatest national importance this Council unanimously urge upon the Government the necessity of closely looking into the manufacture and carriage of cement, as we honestly believe that it can be made available to consumers at a very much lower cost than at present prevailing. 12 Before the war the average price of cement to the consumer was about £3 15s. per ton in Auckland, a price arrived at by acute competition between the several companies manufacturing in New Zealand and the importers of cement. If we look at the financial side of the companies operating at that time we shall see that £3 15s. a ton did not provide an unreasonable amount of profit. A s a matter of fact, the Golden Bay Company paid no dividends and £5 taxes for the year 1913, no dividend and taxes of £70 for 1914, and in 1915 no dividend and taxes of £222, no amounts whatever being placed to reserves in these years. A t that time .cement freights from Europe were exceedingly low, as the cement was largely carried as ballast. A t the date of the inquiry (September, 1 9 1 8 ) the price was £4 16s. per ton. The investigation showed that between July, 1914 and September, 1918 production costs had increased by £1 3s. per ton. Accepting the pre-war price as at least not excessive, the 1918 price of £4 16s. seems quite 12

Evening

Post, Wellington, N . Z., August 29, 1918.

CONTROL

OF BUILDING

MATERIALS

85

reasonable. This price compares favourably with the price of Australian cement at that time—£4 19s. per ton. The Government agreed that no action would be taken in the direction of fixing cement prices by Order in Council as long as any further increases were made with the approval of the Board of Trade. During the war, sales fell off materially. The reasons for this are probably as follows: Government and municipal bodies curtailed public works to a minimum; not many buildings of a residential nature were proceeded with, the principal activity in the building line being new business premises and freezing-works extensions. A s a result the cementmaking plants were not working at full capacity; this in itself increased the per ton cost of production. The price of £4 16s. per ton was maintained in New Zealand until July, 1 9 1 9 , when the companies asked for authority to increase the price by 9s. per ton. The evidence satisfied the Board that the increase in costs (which was 13s. 6d.) warranted their sanction. In December, 1919, a further increase of 9s. per ton was sanctioned on evidence showing that coal had increased greatly in price while its quality was poor. During the year 1920, there were four more increases with the result that the price in Wellington was £7 17s. 6d. per ton in October of that year. Before sanctioning these several increases the Board was satisfied that there had been further increases in costs which justified the increases in price. This is made clear when the financial position of the three companies supplying New Zealand is shown. In the period subject to the Board of Trade authority, 1 9 1 8 / 2 1 , the Milburn Lime and Cement Company paid a dividend of 1 0 % which is considered a fair return on this type of investment. In considering this dividend note must be made of the fact that this company deals largely in lime for agricultural purposes, which they main-

86

PRICE

FIXING

IN NEW

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tain is the most remunerative part of their business. The Golden Bay Company paid for the year ended June 30, 1 9 1 9 , a dividend of 5 % ; but for the next two years no dividend whatsoever was paid. This 5 % was really paid out of capital, for quite inadequate provision had been made for depreciation. The Wilson Portland Cement Company paid a dividend for the year ending 3 1 March, 1 9 2 1 , of 5 % . This was the only dividend it had paid in the whole 3 4 months it had been in operation; the net profit made during that period gives a return of £ 1 16s. 7.2 per cent per annum on its capital of £600,000 which had not been watered in any way. It is clear that Wilson's and Golden Bay obtained .nothing like an adequate remuneration for the capital employed in the business. This shows, I think, that the Board of Trade restrictions in the interests of the consumer were too severe. If affairs had continued as they were, there is no doubt that one or both of the worst situated companies would have had to close down. In this connection I refer to the observations of Lord Parker of Waddington in delivering the opinion of the P r i v y Council in the case of the Attorney-General of the Commonwealth of Australia v. Adelaide Steamship Company where he said that in considering the interests of consumers it was impossible to disregard the interests of those who were engaged in the production and distribution of articles of consumption. It can never be in the interests of the consumers that any articles of consumption should cease to be produced and distributed, as it certainly would be unless those engaged in its production and distribution obtained a fair remuneration for the capital employed and the labour expended.13 13

1913 Appeal Cases, p. 801.

CONTROL

OF BUILDING

MATERIALS

87

During the year 1920 there was an acute shortage of cement in New Zealand owing to an increased demand and a slowing up of production. The halt in production was due to the lack of coal supplies. The trouble in the New Zealand mines occurred just when business was becoming more prosperous. Most manufacturing industries were affected. A s this was the height of the building boom cement was in great demand. S o serious was the shortage that, according to reports obtained by the Board in December, 1920 there were orders for 73,000 tons of cement which could not be supplied. The companies were doing their best to supply the demand, but the shortage of coal made it impossible for any of the works to produce to their full capacity. The Golden Bay Company in November, 1920, represented to the Board that it could not continue to operate unless an advance was made in the Board's fixed price. The works were urgently in need of repairs and if provision was not made for these, the Company would be compelled to shut down. Up till this time the Board of Trade had considered only increases that had taken place in cost of labour, freight, fuel, and raw materials. The fact that during the whole of 1920 the combined New Zealand works were unable under conditions existing throughout that period to supply the local demand for cement, compelled the Board to agree to such prices as would induce the whole of them to continue working. T o do this, supplementary costs had to be considered. Mr. McDonald, Chairman of the Board of Trade, satisfied himself of the reasonableness of the company's demands, and accordingly as from January 1, 1 9 2 1 , an increase of £ 1 16s. od. per ton, ex store, Wellington, was sanctioned. This brought the price to £9 13s. 6d. per ton. The reasonableness of the Board's prices is illustrated by the following, showing the f.o.b. prices per ton, London or

88

PRICE

FIXING

IN NEW

ZEALAND

Liverpool, paid f o r cement o f British manufacture imported into N e w Zealand. 1 4 July, 1920 August, " October, " November, " December, "

£

s.

d.

16 15 10 10

11 0 1 7 11

6 0 2 11 9

T o arrive at the cost in N e w Zealand it is necessary to add to these prices a sum of approximately £3 3s. 4d. per ton to cover f r e i g h t and other charges to place the cement c.i.f. N e w Zealand ports. A s an indication of the Canadian price an offer was made at the time to the N e w Zealand Government through the Canadian T r a d e Commissioner in the f o l l o w i n g w o r d s : 1000 tons shipment December to Wellington, price £12 c. i. f. e. basis 4 dollars; also 4000 tons shipment January, February, March ( 1 9 2 1 ) to two southern ports £12 10s. od. c. i. f. e. basis 4 dollars, or Auckland and Wellington £12 c. i. f. e. basis 4 dollars. 15 A t the date of this quotation the rate of exchange was 3.88 dollars, and therefore, the actual price would be a little higher than that quoted on the 4 dollar basis,

(i.e. £12 8s.

od. and £12 18s. od. respectively.) T h e B o a r d ' s policy in f i x i n g the price of cement below the import price, intensified the demand f o r the locally-produced article.

T h i s forced the B o a r d to allocate supplies.

In

order to do this with any degree of justice, it was necessary to decide between the claims of respective industries, and further, to decide in the industries themselves what buildings or classes of w o r k should have preference.

T h e follow-

ing order o f preference was d r a w n up by the B o a r d of T r a d e , 14

Report of N. Z. Cement Inquiry, p. 5.

15

Cement Files, N. Z. Board of Trade.

CONTROL

OF BUILDING

MATERIALS

89

and the various users of cement were arranged in order of essentiality: 1 4 1. Waterworks, sanitary works, hospitals, urgent Government requirements for public works and railways. 2. Workers' dwellings and dwellings in progress and to be started, not exceeding £2000 in cost. Under this head may be included reasonable supplies to tile, block, and pipe factories. 3. Freezing works and stores for produce, dairy factories, bridges and culverts when for purpose of opening up settlements. 4. Public works, railways, municipal and other bodies, for works absolutely necessary for the community in general. 5. Completion of jobs at present under way, contingent upon four preceding paragraphs having preference. 6. Work in general, including houses over £2000. Distribution committees were set up in Invercargill, Timaru, Christchurch, Wellington, Palmerston North, Wanganui, New Plymouth, Napier and Gisborne. So f a r as the Auckland district was concerned, the Wilson Company undertook to carry out the distribution on the above basis; in Dunedin, the Milburn Company agreed to a similar undertaking. The committees consisted of representatives of the builders, cement companies, and, in certain centres, representatives (Inspectors of Factories) appointed by the Government. In districts outside Wellington the Board's control over the distribution of cement ceased on March 19, 1 9 2 1 , but in Wellington the end did not come till April 2nd. From July 1, 1920 to April 2, 1 9 2 1 the quantity of cement distributed under the Board's control was nearly 63,000 tons. In order to encourage the importation of cement, the Government remitted the duty from August 28, 1920 to 16

N. Z. Board of Trade Annual Report, 1921, p. 6.

PRICE

FIXING

IN NEW

ZEALAND

9° April i , 1921 (if received or shipped between these dates). T h e amount imported during this period was 11,947 tons. T h e following is quoted from a statement by Mr. W . G. McDonald, Chairman of the Board of Trade. Adopting 6,500 tons as the average output each month from the New Zealand works, and calculating this quantity at the monthly c. i. f. cost and the New Zealand distributor's price, I find that the cost at the world's market price as disclosed by imports, would have exceeded the cost at the New Zealand distributor's price over the whole period (January, 1920 to April 1921) by some ¿347,000. From this it is quite apparent that had the companies been allowed a free market, prices very much in excess of those sanctioned by the Board would have been available to them.17 A t the end of March, 1921, owing mainly to the financial crisis which quickly affected the building trade, the cement market suddenly collapsed. In fact, within a week the necessity for rationing absolutely disappeared, the Building Regulations were suspended, and there was a supply of cement on the market greater than the immediate demand. A s the period of acute shortage was past, the Government notified that it was not prepared to remit duty on any further supplies of foreign cement that was not actually shipped by April 1, 1921. A t the same time the output of N e w Zealand cement was increased owing to an improvement in the coal position, while imported cement could be had more cheaply. During the last week in April in the attempt to work up a cement market the price of N e w Zealand cement was lowered to £7 17s. 6d., that is by £ 1 10s. od., the amount of the last increase. B y this time the Government had relaxed all control except that relating to maximum price, the companies being at liberty to compete at any prices less than that fixed by the Board. 17

W . G. McDonald, Evidence given before Cement Inquiry.

CONTROL

OF BUILDING

MATERIALS

The only Company which could really stand the ruinous competition at £ 7 17s. 6d. per ton was the Milburn Lime and Cement Company. A t the end of April Golden B a y suggested that if they agreed to close down temporarily it would be in the interests of the other two companies to take over the Golden Bay trade and pay a royalty of 5s. per ton on their sales. It was ultimately decided to pay Golden B a y 4s. per ton on all cement sold up to 60,000 tons per annum, and 2s. per ton on all cement sold above 60,000 tons. This was embodied in an agreement on May 5, 1 9 2 1 . The Board of Trade had to consider whether the agreement came within the provisions of the Commercial Trusts Act, 1 9 1 0 , or whether it was detrimental to the public welfare, as the Board of Trade Act, 1 9 1 9 threw upon the Board the duty of investigation and of recommending to the Government the making of provisions by Regulations under the Act for the prevention or suppression of methods of competition, trading, or business that are considered to be unfair and prejudicial to the industries of New Zealand or to the public welfare. The Board did not consider this to be so, because the agreement, although it was in restraint of trade, was not detrimental to the public in that it would enable the two companies to produce cement at less cost than if all three companies had been manufacturing especially as the companies were not going to increase prices nor were they trying to stifle competition. Restraint of trade may be valid if it is reasonable in the interests of the contracting parties and if it is at the same time reasonable in the interests of the public. The agreement was not detrimental to the public nor to Golden Bay, as the suggestion came from the directors who are substantially the shareholders of Golden Bay. It was unfortunate that the Golden Bay employees had to be thrown out of work, but, as the company would have had

92

PRICE FIXING

IN NEW

ZEALAND

to close down in any case if the reduced prices were maintained, this unemployment seems to have been inevitable. A s the cement market would be sure to firm later on, the Golden Bay supply would be needed. Therefore it was in the interests of the public that some agreement should be made that, if the Golden Bay had to close down, it would have some opportunity of re-entering the market. Subsequent events have proved that there is enough trade for the three companies. Because of the reduction in the price of cement in April, 1 9 2 1 , a commission was appointed to inquire and report whether the Board of Trade was guilty of an error of judgment in sanctioning the last increase to £9 13s. 6d. per ton and whether being aware of the cement agreement, the Board was justified in taking no action with respect to it. The commission upheld the Board of Trade in all its actions, the increases of 1920 being necessary considering the circumstances under which these increases were sanctioned. Because the companies, after the collapse of the cement market, reduced their price to £7 17s. 6d. the public thought that they had been making a profit by the amount of the reduction. It was simply another case of selling highcosting stocks on a falling market. And the public failed to note that when production costs did improve, the financial depression affected buying power so much that the three companies had to sell at a loss in order to clear out accumulating stocks. The commissioner reported that the action of the Board in December, 1920, should be judged on the facts as they then existed and not by " the easy but fallacious standard of subsequent events." Regarding the agreement between the companies, he reported that there was no action that the Board could properly have taken in connection with the agreement, and that the Board was not lacking in its duty in the matter.

CONTROL

OF BUILDING

MATERIALS

BUILDING RESTRICTIONS

N o control of building materials (i.e. cement, bricks, timber), was made by the Government during the war. The building boom of 1920, however, brought on such an acute position with regard to all classes of building supplies that the Government issued Regulations, by Gazette notice of June 24, 1920, that supplies of cement, bricks, and timber should be available for works that were considered essential. T h e order of essentiality adopted by the Board of Trade in this connection was practically the same as that followed in the distribution of cement. T h e Board of Trade delegated to the local authorities its powers with respect to all applications for permits to build dwelling houses—which were such an urgent necessity that permits were granted almost automatically for their construction. T h e co-operation of these local bodies was of great assistance to the Government, and by means of their operations, 4,151 applications for permits for dwelling and farm buildings were dealt with during the restriction period (June 24, 1920 to March 19, 1 9 2 1 ) . T o assist the Board of Trade to deal with applications for permits for works other than dwellings, Advisory Committees were set u p — a t the request of architects, builders and building employees—in Invercargill, Dunedin, Christchurch, Wellington and Auckland. These committees acted merely in an advisory capacity, and all decisions were made by the Board itself. The work of regulating the use of building materials by compelling the sellers to deal only with the holders of permits was conducted in the most economical way possible. The scheme was by no means perfect. T o carry it out in every detail would have necessitated a large central office and a small army of inspectors, entailing enormous cost to the State. The controlling organisations in England, for example, were particularly elaborate.

94

PRICE FIXING

IN NEW

ZEALAND

The Board of Trade apparently considered that a quite satisfactory result could be achieved by the temporary organisation of a few Advisory Committees and utilising the services of Factory Inspectors. The arrangements made by the Board involved a total cost of only £700. Judging by the comments of architects, builders, and others interested, it is evident that the impartial work in connection with the Building Regulations and the control of essential materials was greatly appreciated. From the date of Gazetting, June 24, 1920, to the suspension of the Regulations, March 19, 1 9 2 1 , the Board dealt with more than 3,000 applications for permits for buildings other than dwelling houses or farm buildings. In some instances permits were granted on condition that imported materials were used. There is no doubt that the temporary restrictions on building operations were of great assistance in meeting the demand for dwellings. It is a pity that after the relaxation of control and with the abundant supplies of material then available building operations could not proceed on account of the want of the necessary capital. Since 1 9 2 1 the Government has had no control over building materials except in the direction of limitation of the export of timber.

CHAPTER WHEAT

VI

CONTROL

IMMEDIATELY a f t e r the outbreak o f the w a r in A u g u s t , 1 9 1 4 , the outlook f o r the w h e a t supplies o f N e w Zealand w a s unpromising.

T h e public were apprehensive of disaster t o

the w o r l d ' s wheat supply o n account o f the w a r .

Moreover

a serious drought in A u s t r a l i a promised to ruin the prospect of a g o o d harvest just at a time w h e n it w a s anticipated that the E u r o p e a n demand f o r w h e a t would be of greater m a g n i tude than previously.

A l t h o u g h the millers and the P r i m e

M i n i s t e r stated that there w e r e sufficient supplies within the c o u n t r y to last till the n e x t harvest, a steadily-rising price soon undermined this optimism.

By

August

26,

1914,

w h e a t w a s selling at 5s. per bushel, and flour w a s £12

per

ton, a rise o f 2 5 % and 2 0 % respectively since the beginning of the month. T h e general public began an outcry against this " exploitation " b y the millers and merchants.

A t the end of A u g u s t

a deputation waited on the P r i m e Minister p r a y i n g that the R e g u l a t i o n of T r a d e and C o m m e r c e A c t , 1 9 1 4 , be applied to w h e a t to control prices. A F o o d C o m m i s s i o n w a s established to inquire and r e p o r t ; the advisability of fixing prices also received consideration.

In a month's time the C o m m i s s i o n

reported and as a result the m a x i m u m price of w h e a t w a s fixed at 4s. 9d. per bushel and flour at £11 10s. od. per ton. T h e result w a s not s a t i s f a c t o r y , f o r prior to this O r d e r in Council fixing prices, w h e a t had been selling at 5s. 3d. to 5s. 6d. per bushel and the price had been high for about t w o months, so that millers in selling flour at i n

10s. od. were

milling at a loss. 95

96

PRICE FIXING

IN NEW

ZEALAND

The Commission again went into the matter, and prices were raised on October 21st, 1 9 1 4 to 5s. 3d. per bushel for wheat and £ 1 3 per ton for flour. The result was that the farmers refused to sell; nor was there any power compelling them to do so. But as the millers were urgently in need of wheat, the proclamation was evaded in this wise; by selling equal quantities of wheat and oats at the same time, it was easy to sell wheat at the regulation price, but by selling the oats at a figure much in excess of their market value, an addition was thus made to the price of wheat. Then again, in selling wheat, exorbitant prices were paid for the sacks. The miller usually paid yd. or 8d. for each sack of which he afterwards had the use for his flour. B y selling the sacks at prices ranging from 2s. to 3s. each the farmer easily evaded the law and added as much as 9d. or iod. per bushel to the regulation price of wheat, for each sack contains only 3 % bushels. A s much as 7s. per bushel was actually paid in this manner and no action was taken by the Government for breach of the proclamation. Meanwhile, during November and December, as some farmers were still holding their wheat, the Government had made purchases of Canadian and Australian wheat at 6s. 3d. per bushel, c.i.f. It was anticipated by those holding wheat in New Zealand that when the first shipments of these purchases reached the Dominion early in January, the Government would then raise the price in self-defence, since they had bought at 6s. 3d. per bushel. This anticipation was realised, for on January 8, 1 9 1 5 , a third proclamation was issued fixing the maximum price of wheat at 5s. 9d. per bushel; at this price the Government were losing 6d. per bushel on the transaction. The public accounts for 1 9 1 4 / 1 5 show the amount for purchase of wheat as £ 2 0 8 , 9 1 1 . 5s. 5d.; the amount received for the sale as £ 1 1 5 , 1 3 9 . 14s. iod. The loss was thus £93,771. 10s. 7d., an amount that had to

WHEAT

CONTROL

97

be borne by the taxpayer. The greater part of this loss, it is understood, was due to the fact that options over wheat futures secured in Canada were not exercised, as the supply already obtained for New Zealand proved sufficient. The position was unsatisfactory to the consumer, for bread had risen from 6d. to 9^2d. per 4.1b. loaf. The merchants and the farming community were also dissatisfied; pressure was brought to bear on Parliament and on February 8, 1 9 1 5 , all restrictions on the sale of wheat and flour were removed. A s a result flour rose to f 1 6 and £ 1 7 per ton in March and April, and sales of wheat at 7s. per bushel on trucks at country stations were not infrequent. The object of the Government had been to protect the consumer at a time when the high prices consequent on an anticipated shortage were being aggravated by the general apprehension which was felt during the initial stages of the War. How f a r such an object was attained is at once obvious. If the Government had been able to maintain the first price fixed (4s. 9d.), the consumer could not have grumbled at the unreasonableness of the price. But we have seen that at the very time the price was fixed, wheat was being sold at 5s. 3d. and in the period of such price fixation, the law was being evaded. The rise of the maximum price limit from 4s. 9d. to 5s. 3d. in October and subsequently to 5s. 9d. in January showed the futility of the Government action. The experiment thus ended in failure, the reasons for which are apparent. It is evident that the indecision of the Government accentuated the difficulty. Instead of bringing in a reasonable temporary measure to fix prices, the Government waited a month for the Commission's decision during which period the price was rapidly rising. The price fixed was less than the market price and when the farmers and millers agitated for a higher scale of prices, the Government agreed to the

98

PRICE FIXING

IN NEW

ZEALAND

maximum of 5s. 3d. This shows clearly that the primary object of keeping prices low was sacrificed to the wishes of one section of the community. Vacillation was again apparent when, in January, 1 9 1 5 , the price of wheat was fixed at 5s. 9d. in order that the Government might dispose of its wheat without too much loss. Finally, just when the new season's supplies were coming in, all attempts at control were abandoned, and the market opened for the harvest at 7s. per bushel. It seems that the Government's action in trying to fix prices merely intensified the existing excitement at the anticipated shortage. Another reason for the rise in the price of wheat was the miscalculation in the estimates by the Government Statistician of the 1 9 1 5 / 1 6 crop when it was predicted that the yield would be less than 5,000,000 bushels. This would not be sufficient for New Zealand requirements. Accordingly export of cereals was prohibited. A s a result of the scare thus created prices of wheat, of course, rose, and some speculators bought in rather heavily in the expectation of making a profit. In September, 1 9 1 5 , the price of wheat was 7s. 6d. per bushel. Later information from the Census and Statistics Office as to area sown and probable yield per acre showed that a mistake had been made and that the harvest would be more than 6,500,000 bushels. The result of this was a big drop in price and a clamour for the removal of the embargo on export. (This shows the importance of statistical estimates and their effect on trade and commerce.) The embargo was removed and prices slowly rose. This shows again how the Government had to give in to the producers instead of giving the benefit of the low prices to the consumers. In October, 1916, a strike occurred in Australia and owing to the threatened disarrangement of shipping and to the prospects of a shortage in New Zealand the price of wheat

WHEAT CONTROL

gg

rose during N o v e m b e r to 6s. 6d. per bushel and flour to £15 per ton f.o.b. Lyttelton. T h e question of controlling prices was again raised, but this time the Government had the Board of Trade, which had been set up in March, 1916, to deal with the position. In devising a method of control, the Board kept in view ( a ) the control and distribution of the season's crop

(b)

the encouragement of the production of sufficient wheat f o r New

Zealand requirements.

A f t e r negotiating with

the

producing and commercial interests f o r some time, the Board recommended the fixation of m a x i m u m prices and the guarantee of a fixed price f o r the next season's crop.

A n Order

in Council was gazetted on F e b r u a r y 6, 1 9 1 7 , guaranteeing 5s. i o d . per bushel f o r the next season's crop.

A s the con-

trol earlier in the w a r , in not distinguishing between the various grades of wheat, had acted differentially against the producers of good milling wheats, the Government

fixed

prices f o r various grades of wheat per bushel as f o l l o w s : 1 W h e a t sold f o r delivery in February, M a r c h , or April, 1 9 1 7 : P e a r l and V e l v e t

s. 5

d. 9

Hunters Tuscan

5 5

8 7

5 5 5

9y 2 8'A 7^

W h e a t sold f o r delivery in M a y , 1 9 1 7 : P e a r l and V e l v e t Hunters Tuscan W h e a t sold f o r delivery in June, 1 9 1 7 : Pearl and V e l v e t Hunters Tuscan

5 5 5

10 9 8

P e a r l and V e l v e t

5

loyi

Hunters Tuscan

5 5

9l/i W2

W h e a t sold f o r delivery in July, 1 9 1 7 :

1

New Zealand

Gazette,

Feb. 16, 1917.

lOO

PRICE

FIXING

IN NEW

ZEALAND

Wheat sold for delivery later than July, igi7 : Pearl and Velvet Hunters Tuscan

5 S

ii io

S

9

The price of flour was also fixed on the basis of £ 1 5 per ton, f .o.b. in 200 lb. sacks. Bran was fixed at £4 and pollard at £6. The regulations also specified the form of all contracts made in connection with wheat. The administration of this scheme under the Board of Trade was much more efficient than that carried out at the beginning of the war. Definite prices were fixed for definite periods. The result was the stabilisation of the trade in wheat and wheat products. The wheat supply for 1 9 1 6 / 1 7 was not sufficient. Accordingly on May 2, 1 9 1 7 , the Board of Trade purchased 1,150,000 bushels of Australian wheat at 5s. 6d. a bushel. The price realised for this purchase was £ 3 5 1 , 3 2 5 7s. 9d. and the total expenditure £356,138 15s. 5d. the loss being £4,813 7s. 8d. The expenses of administration, exchange, etc. were £1,876 9s. 9d. making a total loss of £6,689 17s- 5^. (i-39d. per bushel). 2 This loss, however, was due not to careless handling of the transactions nor to high expenses connected therewith, but rather to the fact that the Government decided to charge to millers such a price as would enable them to conform to the gazetted prices of flour and by-products. No complaints were received either with regard to the quality of the imported wheat or to the action of the Government, which in this case was quite decided. The purchase at 5s. 6d. per bushel compared favourably with the terms secured by other customers of the Australian Wheat Board, viz: South Africa Norway 2

Wheat Files Expenditure.

j.

d.

6 6

4

Peru The East

J.

d.

6 5

3 9

(N. Z. Board of Trade) Statement of Receipts and

WHEAT

CONTROL

IOI

B y the end of 1 9 1 7 the policy of the Government had again altered. Instead of merely fixing prices it was decided to effect a more rigid control over the wheat industry. By an Order in Council of December 22, 1 9 1 7 , private dealings in wheat were forbidden, definitions of good milling wheat and inferior wheat were laid down, and arrangements were made for the Government purchase of the whole crop and for its distribution and re-sale to the millers. The work of purchase and re-sale was entrusted to the following organisations. ( 1 ) The Wheat Controller and his staff with headquarters at Christchurch. ( 2 ) The Government brokers licensed by the Board of Trade and bound to keep faith with the Regulations. ( 3 ) The Wheat Trade Advisory Committee consisting of representatives of wheat growers, flourmillers, and Government brokers to confer with the Wheat Controller as required. The brokers were bound to buy only good milling wheat at the Government prices and under Government Regulations and to sell only to persons possessing wheat purchase warrants issued by the Wheat Controller. The Controller allocated to each flour miller his quantity, and the miller had to take possession of the total quantity as soon as was practicable. The price at which the miller bought was i ^ d . per bushel in advance of the rate at which the farmer sold. The brokers were allotted definite districts; their commission consisted of y^d. per bushel on purchase and yid. for sale. The expenses of distribution were thus cut down to a minimum and in most cases arrangements were made for the wheat to be railed direct from the farmer to the mills. The Regulations also provided that certain returns had to

PRICE

102

FIXING

IN NEW

ZEALAND

be submitted to the W h e a t Controller to keep him au fait with the conditions affecting wheat production, wheat stocks, and flour stocks. The purchase and sale of seed wheat was subject to different arrangements; the brokers were authorised to resell, with the permission of the Wheat Controller, at i l /id. per bushel in advance of the buying prices, with no commission to the brokers. Dealings in seed wheat and fowl wheat, although private dealings were allowed, were so controlled that evasion cf the Regulations for milling wheat was not possible. 1917/18

CROP

Under the control scheme the Government purchased good milling wheat at the following prices: 3 PRICES FOR S O U T H I S L A N D F. 0. B. N E A R E S T PORT

per bushel In In In In In In In

January, February, March, 1918 April 1918 May " June " July " August " or after September, 1918

s.

d.

5 5 5 5 6 6 6

10 ioyi II \i l / 2 o o'/2 1

Prices for North Island f. o. b. Wellington, Wanganui, N e w P l y mouth, Napier, Gisborne, or Auckland the same as the above with the addition of 4d. per bushel.

During a time of crisis, if any kind of control is advisable by the Government, this kind of control is probably the best. The necessity for the distribution of wheat at reasonable prices was the justification for the Government purchase of wheat. Straight-out fixation of prices had led to abuses by traders. Furthermore the guarantee of a certain price to the farmer 3

N. Z. Gazette,

Dec. 22, 1917.

WHEAT

IC>3

CONTROL

made it necessary f o r the Government to take over the matter of purchase.

It is obvious that the State could not

guarantee prices and at the same time allow a free market in wheat.

T h e guarantee has also been justified o n the

grounds that it was inadvisable particularly in a national crisis,

to

be

dependent

on

outside

Dominion's supply of wheat. later.)

resources

for

the

( T h i s point will be discussed

W h e n the guarantee was made f o r the

1917/18

season, there w a s a great shipping difficulty and the local production of wheat was very necessary.

A t the same time

the prices for other f a r m products—meat, butter, cheese and w o o l — w e r e very remunerative, and the indications were that little wheat would have been g r o w n .

In m a k i n g such a

guarantee it is noteworthy that the N e w Zealand Government anticipated the action of

the U n i t e d

States,

Australian,

Canadian, and British Governments. IMPORTATIONS OF W H E A T

D u r i n g the purchase of the 1 9 1 7 / 1 8 crop in N e w Zealand it became evident that there would be a serious shortage if they relied upon the local supply.

T h e B o a r d of

Trade,

therefore, decided to arrange f o r the importation of 2,000,000 bushels.

Negotiations

with

the

Australian

Wheat

Board resulted in the purchase of 2,000,000 bushels at 5s. 7^4d. per bushel (sacks in ) f.o.b. W i l l i a m s t o w n .

In view

of an estimated shortage in the f o l l o w i n g year's crop in N e w Zealand, an option was obtained on a further 2,000,000 bushels on the same terms.

Finally, arrangements

were

made to take the 4,000,000 bushels, the N e w Zealand G o v ernment guaranteeing to l i f t 1,000,000 bushels every months

from

August,

1918.

This

purchase

six

compared

favourably with those secured by other countries. The control and distribution of both Australian and N e w Zealand wheat was handled with no expense whatever to the

104

PRICE FIXING

IN NEW

ZEALAND

Government. In fact, the State operations in this connection yielded a profit which went towards paying flour subsidies. In order to stabilise bread prices an Order in Council was issued in March, 1 9 1 8 , fixing the price of bread throughout the Dominion at the standard prices ruling as at March 4, 1 9 1 8 . In pursuance of this Order in Council, bread prices were adjusted throughout New Zealand to correspond with the fixed price of flour. Even in isolated townships it was not found necessary to advance the price of bread above i id. per 41b. loaf. The prices fixed for bread in the four main centres were: Auckland per 4lb. loaf Wellington " " Christchurch " " Dunedin " "

1918/19

iod. iod. 9j4d. 9/4d. CROP

The purchase and control of the 1 9 1 8 / 1 9 season's crop was on the same lines as that of the previous year except as regards price. The Government had guaranteed a minimum price of 6s. 4d. and this price was to be revised if the world's prices were higher. This was part of the scheme for encouraging the production of an adequate supply for New Zealand. A n Order in Council of February 25, 1 9 1 9 , fixed the price at 6s. 6d. per bushel f.o.b. main ports, allowing the usual increment of J^d. per bushel per month from May to October. 1919/20

CROP

The increase in the price per bushel from 5s. iod. to 6s. 6d. in the 1 9 1 8 / 1 9 season had hit millers hard; they represented to the Government that they could not carry on business unless the price of bread were increased. A s it was politically inexpedient to do thus it was deemed advisable to

WHEAT

CONTROL

give a subsidy per ton of flour to millers. The Government decided to make the price of flour £ 1 5 per ton f.o.b. southern ports and authorised the payment of £213,0c» by way of subsidies to millers on the understanding that flour was not to exceed the price fixed during the year ending February 28, 1920, and that the cash price of bread should not be increased. Although the total that was to be paid in flour subsidies for this period was £213,000, the Board of Trade Report for 1921 shows the amount as £358,305. The following prices were paid to growers with the increment of d. per month from May to October, 1920: Tuscan per bushel Hunters " " Pearl " "

s.

d.

7 7 7

3 6 9

In the meantime the Government continued to receive consignments of the big Australian purchase of 4,000,000 bushels; consequently there was no shortage of flour in the Dominion. 1920/21 CROP The Minister of Agriculture guaranteed that at least the above prices would be paid for the 1920/21 crop. When the time came for the purchase of this crop, the Minister decided to pay the following rates: Tuscan per bushel Hunters " " Pearl " "

i.

d.

7 7 8

6 9 o

These prices were above those guaranteed, but the world's parity was sufficiently high to warrant an upward revision of the guaranteed rates. The Australian fixed price for the local market was then 9s. per bushel, but this was artificially maintained above the world parity price. Nevertheless, those

jo6

PRICE

FIXING

IN NEW

ZEALAND

prices as fixed for the whole season were distinctly advantageous to the New Zealand growers especially as near the end of 1921 the world's prices were falling. The opportunity was taken at this time to reduce the amount of the subsidy to £1 10s. per ton; this reduction, coming at the same time as a slight increase in food prices, made a difference of id. on the 2lb. loaf (the price was raised to 7d.). This increase was announced at a stage when the people were expecting a decline in the cost of food and naturally there was some criticism. A s the flour subsidy was becoming too great, it was probably better to let the taxpayer pay directly for his bread than to let him go on, unconscious of the fact that his taxes were increasing because of the flour subsidy. 1921/22 The guarantee for the 1922 season was probably framed in recognition of the downward tendency of the wheat market. T h e guarantee prices were announced at Tuscan 5s. 6d., Hunters 5s. 9d., and Pearl 6s. 3d. Market prices in January and February, 1922, were such that, in accordance with the terms of the guarantee, the fixed minimum prices became the maximum. It was at these prices that the wheat was taken over by the Government. The harvest was a particularly large one, growers apparently being of the opinion that with depressed markets for other products, an assured price made wheat growing a relatively advantageous undertaking. The total yield amounted to 10,565,275 bushels, but the Government, having bound itself to purchase only " good m i l l i n g " wheat, was rigorous in its grading and classed only 7,853,993 bushels as good milling quality. On account of the anticipated loss on the surplus, which necessarily had to be exported on Government account, the price charged for resale to the local millers

WHEAT

CONTROL

107

was " loaded " to an amount of gd. per bushel; this loading also covering the estimated costs of administration and brokerage charges. N o subsidy was paid from March to October, 1922, the price of flour being £ 1 8 per ton. The loss on export was not as great as was anticipated, and the balance of profit remaining in the hands of the Government was used to reduce from November, 1922 to February, 1923, the price of flour and bread. Flour prices were reduced (by means of a subsidy to millers) by £2 10s. per ton and bread prices were reduced by Y2.d. per 2lb. loaf. The flour subsidies ceased on February 28, 1923, and it was determined that the Government control of wheat and its products should also cease. The Government found, however, that it was much easier to enter the field of control than to withdraw from it. Owing to the low level to which world wheat prices had fallen for the following season, 1923/24, the outlook of the New Zealand wheatgrowers was so unsatisfactory that the Government found it impossible to discontinue its control. A different policy, however, was adopted. Under the new arrangements the Government ceased to control wheat prices, but agreed to such prices being mutually arranged between growers and millers provided that flour, bran and pollard, and bread prices were not increased. In order to enable such an agreement to be put into effect, the Government undertook to continue the existing prohibition on the importation of wheat and flour. The amounts, per ton of flour, paid to millers during the years of subsidy were: Year ending March 31, 1920 1921 1922 November, 1922 to February, 1923

£

s.

d.

2 4 1 2

17 10 10 7

6 0 0 6

108

PRICE

FIXING

IN NEW

ZEALAND

The total amounts paid in subsidy were: £

Year ending March 31, 1920 1921

358,305 489,571

"1922

182,055

Total

¿1,029,931

The subsidy from November, 1922 to February, 1923, was paid from the accumulated profits of the Wheat Control Office, which were: 1918/19 season 1919/20 " 1920/21 " 1921/22 " Total

£

s.

d.

10,672 15,567 125,104 5,272

9

12 10 12

8 5 5 0

¿156,517

4

6

G O V E R N M E N T CONTROL FROM F E B R U A R Y ,

I923

The Government continued the embargo on the importation of wheat and flour and agreed to the prices mutually arranged between growers and millers. The fixed prices for the 1 9 2 2 / 2 3 season had been 5s. 4d. for Tuscan, 5s. 6d. for Hunters, and 5s. 8d. for Pearl. The agreed prices for 1 9 2 3 / 2 4 were id. in advance of these, the usual increments of yid. per bushel per month being made from May to October. The 1 9 2 2 / 2 3 harvest was ample for domestic requirements; but the 1 9 2 3 / 2 4 crop was affected by persistent wet weather, there being a shortage of over 3,000,000 bushels. But if wheat were imported, flour could not be kept at £ 1 5 10s., f.o.b. Southern ports when a high wheat duty had to be paid; if the duty were removed, it was maintained that those millers importing duty-free would make greater profits —particularly in the North Island—than those millers who had bought the high-priced New Zealand wheat. Accord-

WHEAT

CONTROL

ingly the Government made provision for the importation of wheat to meet the Dominion's needs. Early in 1924 the Government made forward arrangements for the purchase of Australian wheat. During 1924 and as late as February, 1925, shipments of this purchase were landed in New Zealand. The total quantity of wheat purchased was 3,887,679 bushels, f o r which the sum of £977,782 was paid. The sales in New Zealand were made on the basis of the prices being paid for locally-grown wheat and aggregated £ 1 , 1 6 1 , 0 0 0 . The Government's forward purchase was an opportune one, for in the latter months of the year ending February, 1925, overseas f.o.b. prices advanced to as much as 7s. 3d. per bushel. B y the Government purchase, the New Zealand consumer was saved the increase in price which must have resulted from private importations in small parcels. In December, 1924, a Gazette notice was issued revoking the embargo on the import of wheat and flour as from March 1, 1925. At the same time the duty on flour was raised to £3 per ton (making it correlative with the duty on wheat, is. 3d. per bushel) as against £2 10s. per ton formerly ruling. In March, 1925, a sudden fall took place in the world prices of wheat and a deadlock arose in the Dominion; the farmers refused to reduce their prices and the millers refused to buy except on terms that would enable them to compete with imported flour. A shortage of bran and pollard arose especially in the dairy and poultry industries. These industries had always fared well in regard to bran and pollard as the fixed price had generally been low when compared with the Australian price. On April 23, 1925, a representative conference met in Wellington, which was attended by wheat-growers, the Executive of the New Zealand Farmers' Union, millers, poultrymen, and grain-merchants. The following resolution was submitted to the Government:

Ilo

PRICE

FIXING

IN NEW

ZEALAND

That, in order to overcome the present deadlock in the wheat situation and secure for the New Zealand wheatgrower a fair price for his produce, and to ensure a continuance of wheatgrowing on a scale sufficient for the Dominion's growing requirements, this conference requests that the Government should either reimpose the embargo on flour or levy a dumping duty on any further importations.4 A s the result of a discussion with the Minister of Agriculture, it was agreed by Cabinet that: 1 . Millers to o f f e r farmers 6/8d. f o r Tuscan, 6 / i o d .

for

Hunters, and 7/— for Pearl, an increase of 5d. on the then existing prices. 2. Millers' prices to be £18 per ton for flour f. o. b. South, a maximum of £8 per ton for bran and £9 for pollard. 3. Duty on bran and pollard from Australia to be reduced from £2 10s. to £1 per ton. 4. Millers to find cash for wheat from Australia to supply the deficiency till next harvest, and Government to purchase, import, and distribute these necessary additional supplies.5 This decision of the Government involved neither reimposition of the embargo on flour, nor any alteration in the duty. The Government had solved the difficulty of an increase in wheat prices without a corresponding increase in the price of flour, by substantial increases in the prices of bran and pollard which, as previously mentioned, had been sold at very low rates. The Government, by recognizing the scarcity theory of value and discarding the cost of production theory which they could not hope to apply to the cost of such by-products (or joint-products) as bran and pollard, deprived dairy and poultry-farmers of much of the " consumer's surplus " that they had hitherto been enjoying in respect of bran and pollard. * Evening Post, May 25, 1925. 5 Ibid.

WHEAT

CONTROL

III

T h e importation of 1 , 7 9 4 , 1 1 9 bushels of wheat from July, 1925 to February, 1926, was effected by the Department of Industries and Commerce, the millers guaranteeing all expenses. I n May, 1925, a conference of millers and growers put forward an arrangement which was ratified by the Government as follows:—That the millers were to pay for all wheat sown in 1925 and harvested in 1 9 2 5 / 2 6 at prices based on 6s. 5d., 6s. yd., and 6s. 9d. for Tuscans, Hunters, and Velvet varieties respectively f.o.b. Southern ports, any| surplus offered over milling requirements to be purchased by the millers at the same price; that flour was to remain at £ 1 8 per ton, bran and pollard to be reduced to £7 and £8 per ton respectively, that wheat growers were to sow an area of wheat calculated to provide for the whole of the Dominion's requirements; that the duty on wheat should remain at the then existing figure and import would not be interfered with; that, if necessary to protect the millers in 1926, an embargo would be placed on the import of flour; that the price of bread should not be increased.6 Although the growers were supposed to sow an area of wheat sufficient for local requirements, this was not done, only a little more than half the area being sown. In 1925 a conference of growers, at which millers were represented, requested the Government to take control of the market for the 1926 season, to purchase wheat from the growers at the prices arranged in May, to re-sell to millers, and to import the necessary additional supplies from overseas. On December 14, 1925, a Gazette notice was issued prohibiting private dealings in wheat. On January 14, 1926, private importation was prohibited. Later in the month, however, with a knowledge of a wheat shortage in Australia and the 6 Summarized, Annual Report Commerce ( N . Z . ) , 1926, p. 12.

of

Department

of

Industries

and

H2

PRICE FIXING

IN NEW

ZEALAND

shortage in New Zealand, the growers and merchants expressed a desire to reconsider the matter and the Government was asked to refrain from adopting control and to allow the market to take its own course behind the protection of the tariff. The Government preparations for institution of control were cancelled; a Gazette notice of February 28, 1926, revoked the Orders in Council prohibiting the import of wheat and wheat products and prohibiting private dealings in wheat. The Government agreed to a " free market with duties " by a Gazette notice of February 23, 1926, confirming the duty of is. per bushel on wheat, £3 per ton on flour and £ 1 per ton on bran and pollard. From this date the Government control of operations in the wheat trade ceased except that psrmits were granted for the importation of fowl wheat free oil duty until the 1927 harvest. In 1927 the duties were somewhat changed; with a view to stabilising the price of bread a sliding scale was adopted whereby the duty on wheat is is. 3d. per bushel when the current domestic value at the port of export is 5s. 6d., the duty falling by for every ^ d . by which the value rises, and vice versa. The standard flour duty is £3 10s. for a £ 1 3 10s. ton, the rate moving up or down by is. inversely to price changes of the same extent. This means that wheat has a minimum price of 6s. 8d. per bushel. In 1 9 3 1 wheat was selling in Australia at 2s. 8d. and 3s. per bushel!

WHEAT

CONTROL

A P P E N D I X

" 3

A

T H E I N C E P T I O N OF D I S T R I B U T O R S L I M I T E D

T H E w h e a t h a r v e s t f o r 1 9 2 2 w a s a particularly g o o d one. W h e n it became k n o w n t h a t G o v e r n m e n t control w a s about to cease, millers b e g a n t o compete f o r f u t u r e business a n d prices inevitably tended t o f a l l w i t h e v e n a semblance o f competition.

The

Trade

Report,

Annual

f o l l o w i n g passage

f r o m the Board

of

1 9 2 2 , p. 6, supports t h i s :

D u r i n g recent months there has been a tendency on the part of flour-millers to cut flour prices below the maximum price fixed in February last. T h e r e is ample evidence that this cutting competition arose in the first place f r o m financial pressure and other factors, and was not warranted or brought into existence by any excessive margin of profit allowed by the maximum price. Fierce competition f o r trade resulted in a reduction by as much as £2 per ton, but production costs speedily forced millers to agree to the maximum price of £18 per ton. T h e " ample evidence " m e n t i o n e d a b o v e w a s t a k e n f r o m statements b y S o u t h e r n is a l e a d i n g light.

flour-millers

o f w h o m M r . Ireland

H e stated that in 1 9 2 2 Ireland & C o . ,

L t d . , lost t h r o u g h price c u t t i n g £603 in O t a g o a n d S o u t h land, a n d £ 1 5 5 7 in flour shipped, while a n o t h e r c o m p a n y o f w h i c h he w a s m a n a g i n g d i r e c t o r — D . D . B r o w n , L t d . , — i n c u r r e d a loss o f £2810. the

flour-milling

T h i s w o u l d seem to indicate that

i n d u s t r y in 1 9 2 2 w a s in d a n g e r o f

being

crippled by o r d i n a r y t r a d e competition a n d that a continuation o f G o v e r n m e n t control w a s t h e r e f o r e needed. B u t M r . Ireland w h e n c r o s s - e x a m i n e d in the witness b o x in the C r o w n M i l l i n g C a s e , 1 9 2 4 s a i d : " T h e losses I m e n -

114

PRICE

FIXING

IN NEW

ZEALAND

tioned before were the losses which we sustained for selling below the gazetted price. I did not mean that we made a trading loss of that or any other figure." 7 Another statement that would tend to prove that the milling industry was not endangered under Government control is that of the Zealandia Milling Co., in their reply to a Board of Trade Circular: " T h e last two years have been particularly profitable for millers." 8 K n o w i n g that the Government was about to cease control, the millers met in May, 1922, when it was pointed out that, unless they combined to keep up the price of flour, they might " lose all the moneys that they have made during the last two or three years." Accordingly the millers prepared a scheme to take the place of Government control. The position of manager was offered (at a higher salary) to the Government W h e a t Controller, Mr. W . G. McDonald, who possessed much invaluable information in connection with flour-milling. T h e scheme was not inaugurated until Septemper, 1922, when Mr. McDonald left the Government service. Until this date the millers decided to revert to the maximum fixed price of £18 per ton. A t this time flour was selling in the Australian market at £10 per ton which would probably be £14 or £15 when landed in N e w Zealand. In June, 1922, Mr. McDonald, who was also Chairman of the Board of Trade, circularised the millers asking them if " as flour had been sold at prices considerably less than the fixed price," would the millers have any " objection to offer against a reduction in the gazetted maximum price of flour." Most of the millers protested against any reduction, but one large firm frankly said: " W e have no reason to advance against the fixation o f a lower maximum price . . . and feel that, owing to the 7

Gazette

8

Wheat

Law Report Files,

( N . Z . ) , 1926, p. 87.

Dept. of Industries and Commerce.

WHEAT

CONTROL

action of many of the millers, your Board would be quite justified in reducing the price of flour."

9

T h e maximum price of £ 1 8 per ton was not reduced. This is not remarkable when we consider the dilemma in which M r . McDonald was placed.

A s a public servant he had to

see that millers gained only reasonable profits; but as prospective manager of the millers' selling agency he could not act contrary to the millers' interests.

H e was attempting

the impossible task of serving two masters. On October I, 1 9 2 2 , it was published in the press that a new company, Distributors, Ltd., had been incorporated for the purpose of acting " as sole selling agent for flour, bran and pollard for all such flour-millers as should enter into agreements with it to that effect."

10

Nearly all the flour-millers entered into separate agreements with the Company by which it was appointed the sole selling agent for the flour, bran and pollard of each mill for a period of six years.

T h e agreements contained the fol-

lowing provisions: Each mill-owner agreed to employ the Company as sole agent to sell and dispose of all flour and by-products which such mill-owner should have available for sale or delivery in N e w Zealand, and agreed not to make any direct sales or to sell otherwise than through the agency of the Company which undertook to sell on behalf of the mill-owner, during each month, such miller's proportionate quantity of flour, which was determined in this w a y : Each agreement fixed the capacity of the mill to which it related as an output of so many tons per annum, and the proportionate quantity of flour for any month meant a quantity which bore the same proportion to the total quantity sold for delivery in N e w Zealand during such month by all mills under agreement as the capacity of each mill bore to the total capacity of all mills under agreement. 9 10

Ibid.

Also quoted G. L. R., 1926, p. 84.

Evening

Post, Oct. 1, 1922.

I

PRICE

FIXING

IN NEW

ZEALAND

T h e mill-owner need not limit his output of flour; but, if the output exceeded the allocation, the mill-owner w a s to ship the excess out of N e w Zealand, or carry it over to he dealt

with

subsequently

under

the agreement.

For

its

services the Company w a s entitled to a commission of 5 % or such lesser rate as the m a n a g i n g director should agree to accept.

T h e agreement contained provisions f o r ascertain-

ing f r o m time to time the current price at which flour w a s to be sold through the agency of the Company, f.o.b. T i m a r u , O a m a r u , and Lyttelton.

E a c h mill w a s guaranteed a price

returning a " fair and reasonable p r o f i t " even to the m a r ginal firms. A g r e e m e n t s were made with the C o m p a n y in connection with all the mills in N e w Zealand except the three mills in the A u c k l a n d district and f o u r small mills in the Island.

South

T h e extent of the C o m p a n y ' s operations m a y be

gathered f r o m the f o l l o w i n g

figures.

T h e total quantity o f

flour sold f r o m all mills in N e w Zealand f o r the year ending F e b r u a r y 28, 1924 w a s

134,067 tons.

Of

this

quantity

96,777 tons came f r o m mills associated with the C o m j . a n y , 35,860 tons f r o m the A u c k l a n d mills, and 1,450 tons f r o m the South Island mills not associated with the C o m p a n y . GOVERNMENT ACTION AGAINST DISTRIBUTORS LTD.

In October, 1924, the C r o w n took proceedings Distributors Ltd. and several associated

flour-millers

against to re-

cover penalties f o r having committed an offence under S . 5 of the Commercial T r u s t s A c t , 1910, which provides t h a t ; A n y person who conspires with any other person to monopolise wholly or partially the demand or supply in N e w Zealand or any part thereof, of any goods, or to control wholly or partially the demand or supply or price in New Zealand or any part thereof, of any goods is guilty of an offence if such monopoly or control is of such a nature as to be contrary to the public interest.

WHEAT

CONTROL

II7

T h e grounds on which the C r o w n found its charge may be summarised as f o l l o w s : 1 1 1. It has destroyed competition among the members of the combination, both in respect of price and in respect of quality. 2. T h e normal incentives to efficiency and economy in production and sale have been removed. 3. B y reason of the commission payable to Distributors Ltd., under the agreements, the cost of marketing has been unnecessarily increased. 4. T h e quality of the flour produced by some members of the combination has been seriously affected, and purchasers have been forced to take inferior flour, instead of a superior article, which they would have been able to procure had no combination existed. 5. A s a result of the combination purchasers of flour have not been able to get the brands they required. 6. Certain mills have been forced to close down. 7. The price of northern flour has been increased by i i per ton, the price of Oamaru flour by 10s. per ton, and certain smaller increases have taken place. 8. A n examination of the constitution of the Combination, and a consideration of its objects and powers prove that in its very essense the monopoly and/or control exercised by it, are of a nature to be contrary to public interest. T h e Defendants claimed that some of the happenings foll o w i n g on the inauguration of Distributors Ltd., were accidental in origin, and others only temporary in their operation.

In each case it w a s insisted that they were not caused

by the monopoly. not propter

(Apparently although post hoc they were

hoc.)

T h e case was dismissed in the Supreme Court on the grounds that the agreement between the millers and Dis11

Gazette Law Reports, 1926, p. 73.

118

PRICE

FIXING

IN NEW

ZEALAND

tributors did not come under the Act. The Crown appealed against the decision and a Court of Appeal (September, 1925) by a majority of three judges to two pronounced in favour of the Crown. So far three Supreme Court judges had decided in favour of the Crown and three against. The milling interests thereupon took the case to the Privy Council which, in December, 1926, pronounced in favour of Distributors ; so that the flour-trade remained " stabilised" with competition eliminated.

WHEAT

CONTROL

APPENDIX

119

B

I s T H E W H E A T T A R I F F IN T H E I N T E R E S T S OF N E W

ZEALAND?

JOHN STUART M I L L w o u l d have

few

followers in

New

Zealand j u d g i n g by their policy of protecting producers at the expense o f consumers; nor have the tenets of the A n t i C o r n - L a w L e a g u e many adherents in the Legislature. New

The

Zealand public is crudely Mercantilist in its views.

T h e y want to export their butter, meat, and wool to other countries

and

be

themselves

independent

of

imported

commodities. It is claimed by advocates of protection that, if

flour

and w h e a t duties are not levied, wheat-production in N e w Zealand will cease and millers will also have to cease operations.

T h i s would not be desirable because o f the resulting

unemployment and loss of invested capital; it is further claimed that N e w Zealand should be self-sufficing because it would be adversely affected by its isolation f r o m world markets.

I n time o f w a r and in the case of a world short-

age its f o o d supplies would also be endangered. But,

if

the

tariff

were

removed,

wheat

although it might shrink, would not cease.

production,

T h e routine o f

mixed f a r m i n g is such that cereals are always included as part of the rotation, and wheat would continue to be g r o w n on land where it paid.

I f it did not pay it would be a

national waste to g r o w it.

T h e tariff has enabled more

wheat to be produced, but at what price to the community? T h e price of wheat has risen to an amount exceeding the world's market price by the cost of transportation plus d u t y ; the cost of living has risen along w i t h the price o f wheat products.

I f N e w Zealand can import wheat at least 2 0 %

more cheaply than they can raise it, w h y not do so?

It is

argued that all millers would have to cease operations if the

120

PRICE FIXING

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ZEALAND

tariff were removed. A s there is too much milling capacity in New Zealand, there is some truth in this contention. We would get the " survival of the fittest." This would be desirable in the public interest. There is no fear that the economically " fittest " would combine to dictate flour prices. The importation of Australian flour would soon rectify this. From the point of view of the economic interests of the community the disadvantages of the tariff are obvious. Nor have the arguments of a non-economic nature any cogency. There is no warrant for the assumption that it is essential for New Zealand to be self-supporting in wheat production. It is extremely improbable that they would be cut off from supplies in time of war. This could happen only if the fleet of the Empire and its allies were badly defeated in the Pacific, and this is not likely. T o close the routes of the Pacific Ocean would require a much larger fleet than any hostile power is likely to possess. In any case New Zealand could always raise enough wheat for the following season provided that sufficient inducement were offered. The isolation argument has also no force. Australia is only 1 3 0 0 miles away. But it is argued that shortages in New Zealand and Australia would coincide. A n examination of the harvests for Australia and New Zealand during the period 1875-1925 shows that only once has a bad season in Australia coincided with a bad one in New Zealand. In addition to this, there is no instance of a wheat famine in modern times among western nations. A shortage shows itself in a higher world price, and the deficit is distributed, like an insurance premium, over world consumers in the form of somewhat higher prices. The New Zealand tariff policy means, in effect, that, in order to guard themselves against possible high prices in the future, they should now make their prices permanently higher by artificial means.

CHAPTER

VII

O T H E R M E A S U R E S OF C O N T R O L HIDES

ONE of the most controversial topics connected with commodity-control in N e w Zealand was the embargo on hides. Some critics were apparently under the impression that the Government voluntarily interfered with the trade in hides, provoked a serious conflict with vested interests, and disorganised the market. T h e important fact is that the interference with the disposal of N e w Zealand hides was a direct consequence of the war, the hides and calf skins being commandeered for Imperial Government supplies. B y an order in Council dated 12th March, 1917, the New Zealand Government on behalf of the Imperial Government, commandeered all hides and calf skins suitable for the requirements of the Government at a valuation to be made by the Government valuer. Tanners could purchase hides if they held a permit; but they could not export such hides. Tanners carrying on business in New Zealand may, on application to the Controller of the Department of Imperial Government Supplies, be granted a permit to purchase . . . hides which are under offer of same to the Government provided satisfactory proof is furnished to the Controller that such hides are necessary to the legitimate purposes of their business. The price to be paid for the hides shall be based on the values determined by the Government valuer in accordance with the scales of values shown in the second schedule.1 1

N. Z. Gazette, No. 46, March 14, 1917. 121

122

PRICE

FIXING

IS

NEW

S C H E D U L E OF P R I C E S AND

ZEALAND DESCRIPTION

HIDES FROM 1 S T M A R C H , I 9 1 7 TO 2 & T H M A R C H ,

Description

1918

Prices in pence per lb. f . o. b.

Ox-hides: First quality Second quality

i2j£ utf

Cow-hides: First quality Second quality

10yZ

Bull-hides: Good quality

9

Yearling-hides: First quality

11

Calf-skins: First quality, under 81b First quality, 81b. to 11 lb First quality, over 11 lb. to i61b

13 12 11

Other grades and qualities, including cut, scored and slippy hides valued at proportionate prices. 2 The arrangements made resulted in the better class of hides being selected by the local tanners, and second quality hides being left for the Imperial Government. These latter hides, owing to delay in shipping, became slippy and weevily and had to be reconditioned and crust-tanned by the Department of Imperial Supplies in order to preserve them. The control was thus quite unsatisfactory from the Imperial Government's point of view. Early in 1 9 1 8 the scheme of purchase by that Government was terminated, but the schedule prices still remained in force, and there continued to be an embargo on the export of hides from New Zealand. Farmers and freezing companies, however, appealed for a 2

Annual Report of Department of Imperial Supplies, 1921, p. 16.

OTHER

MEASURES

OF

CONTROL

123

free market, and on 6th December, 1918, a notice was published removing the embargo on export, and making it permissible to export hides and calf-skins to British possessions. A f t e r a brief relaxation of control, because o f the necessity of having a stable (and if possible—a low) price for leather for the Standardized Boot Scheme, measures were instituted to retain a sufficient supply of hides in the country as hides were being exported to more favourable markets. On March 5, 1919. Regulations were issued providing that, before any export could be made, the hides should be offered to representatives of N e w Zealand tanners and refused by them at prices specified in the Schedule to the Regulations. From time to time, however, there was a serious conflict of the various interests concerned. The farmers and freezing companies declared that they were being exploited for the benefit of the tanners, and they appealed for a free market and world's parity prices; the tanners wished to have local supplies of leather and the general public desired cheap footwear. T o reconcile these divergent interests was a difficult problem. Further Regulations were gazetted (October 2, 1 9 1 9 ) , giving tanners a preemptive right to purchase 50% of each grade of skins offered for sale; this purchase was to be at the official schedule of prices. The gazette notice also provided for the prohibition of the export of hides by tanners. In general, export of hides was permitted only on permit from the Board of Trade. The weakness of these Regulations is indicated in the word italicised—it was not mandatory to offer the hides for sale. Consequently many farmers and freezing companies withheld their hides from the market. A t the same time they continued to agitate for the removal of the embargo in order to obtain world's parity prices. In November, 1919, the Government acceded to the

124

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desires of the farmers and announced that the embargo would be removed. From that time until the actual lifting of the embargo on the 25th February, 1920, the tanners alleged that there was considerable withholding of hides from sale, and in some instances they could not get sufficient hides to keep their plants going — except by entering into an arrangement whereby the price was to be conditional on the price realised after the raising of the embargo. From the point of view of the consumer the time for the removal of restrictions was not very opportune, as the world's markets were high. Another mistake connected with the relaxation of control was that notice had been given and that holders of hides looked primarily to the relaxation to give higher prices. At the first hide sales following the raising of the embargo, phenomenal offerings were made and the prices realised were approximately 50% in advance of the schedule of prices previously in force. These high prices were maintained and increased at subsequent sales until peak prices were reached towards the end of April, 1920, and these were over 100% in advance of the schedule prices. The market then began to fall and prices declined until early in June they were again on a level with the embargo schedules. From July onwards declining prices continued and by November the market had practically collapsed. Official investigations by a Commission of Inquiry in 1925/26 show that, because of the withholding of hides before the raising of the embargo in February, 1920, the tanners' stocks were depleted and they were compelled to buy at the high prices ruling in March and April. The purchase of hides by tanners is a seasonal operation which usually commences shortly after the beginning of the killing season in November, and runs on till March. B y acquiring

OTHER MEASURES

OF CONTROL

125

stocks at this period, the tanners obtained a better article from the point of view of " substance " , as the hide is not loaded with long hair and dirt. When the embargo was raised, the tanners' buying season was already late, and it was not contemplated that the market would collapse with the degree of suddenness that actually occurred. Consequently, the tanners were tempted into the mistake of replenishing stocks at peak prices. When the prices of hides were rising, the replacement value principle entitled tanners and manufacturers of leather goods to raise prices in sympathy. The high price of leather goods in 1920 would indicate that advantage was taken of this principle. Then near the end of, 1920, when hide prices were falling, the same principle necessitated reductions in the prices of leather and leather goods. Despite the lag of prices, tanners suffered great losses during this period. The drop in leather prices rendered useless the Standardized Boot scheme. Leather could be imported more cheaply than it could be produced in New Zealand. This also applied to boots. The embargo on export was instituted to secure cheap footwear. With the raising of the embargo and subsequent fall of price there was no necessity for a cheap boot to be manufactured in New Zealand. One of the big tanning firms of Dominion, Woolston Tanneries Limited, claimed compensation from the Government in respect of losses they had made in supplying cheap leather for the Standard Boot when they had bought hides at high prices. They claimed that the Board of Trade had asked them to do this. An inquiry held in 1921 in regard to the petition of Woolston Tanneries for compensation, found that the Board of Trade had not had anything to do with the fixing of leather prices nor had it asked Woolston Tanneries to supply cheap leather. After the raising of the embargo the initiative in regard to the level of prices was left with the tanners themselves.

I2Ó

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FIXING

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The fact was that Woolston Tanneries, along with other tanners, had bought in heavily at peak prices expecting further increases in price. The expected did not happen and they were caught in the slump. Woolston Tanneries could of course, have closed down; but along with its consideration for its employees, the derangements of the Company's organisation and the injury to its goodwill consequent upon closing down were material factors in influencing the Company to carry on. Four times since 1923 Woolston Tanneries have applied for compensation. In the Hon. Mr. Justice Hosking's Report in 1926 he says, " There is no express allegation nor does one appear to me to be implied, that the company thus elected to carry on at the request, instance, or inducement of the Government or of any Government official for the purpose of stabilizing the price of hides for any given period, or at all." 3 " I find that the Company has not suffered injury or damage which in fairness and good conscience entitles it to compensation from the public funds." 4 The conclusion to the summing up of Sir John Findlay K . C., counsel for the Crown in the inquiry in 1924, fairly represents the feeling of the majority of the New Zealand public on this question: I wish to be temperate in my terms, but does it not appear to you that this petition for huge compensation, based on the outcome of war conditions, is altogether a shabby and contemptible business on the part of a wealthy company. Reflect upon the suffering, loss and disablement the war imposed upon thousands who bore their burdens uncomplainingly, and contrast that silent sacrificial service to the Empire in its extremity with 3

Section IX, Justice Hosking's Report on Woolston Tanneries

1926. 4

Ibid., Section X I I I .

Petition,

OTHER

MEASURES

OF

CONTROL

the blatant querulousness of this petition, and then can you escape the conclusion that those responsible for it were fired by an impudent effrontery that believed that there was still advantage to be got by following the old French maxim of " L'audace, l'audace toujours l'audace." 5 M I S C E L L A N E O U S MEASURES OF CONTROL

Footwear Following on complaints about the high price of footwear in 1918, an investigation was made into the trade. The Board of Trade concluded that any attempt to fix prices for every different type of footwear, imported or locally made, would not be worth the trouble involved. Accordingly the Board drafted Regulations embodying a scheme for the manufacture of standardized footwear and the control of the prices of thirty varieties of boots made in New Zealand from New Zealand leather. The scheme was as follows: The Board would issue to any boot-manufacturer in New Zealand who was willing to comply with the regulations a license to place on the market boots branded " New Zealand Board of Trade." The maximum retail price was to be marked on the sole of each boot, but the retailer could sell at a lower price if he, wished. The maximum retail price covered cost of production plus a " reasonable " profit to the manufacturer and a sufficient sum to cover the costs and profits of distribution. Should a retailer or manufacturer employ a middleman, the retail price could not therefore be increased; the idea being to reduce handling expenses to the lowest possible figure and to bring the retailer into direct touch with the manufacturer. The license contained a clause that all boots were to conform with specifications (according 5 J. G . F i n d l a y , Minutes Tanneries Case, 1924.

of

Evidence,

Court

of

Enquiry,

Woolston

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to type or class) issued by the Department of Industries and Commerce and should correspond in quality with the sample which remained in the possession of the Department. The Board of Trade reserved the right from time to time to alter the retail prices according to fluctuations of the market for material and labour. For a short time after the Regulations were gazetted (October 6, 1 9 1 9 ) a large number of boots were sold to the public under the scheme. But the retailers were against it; they naturally pushed the sale of the goods in which they made the most profit. During the last few years the idea of standardized footwear has lost its hold largely because of the competition of the imported article. The Regulations providing for the issue of licenses are still in force, but no advantage is now being taken of them. Petrol In July, 1918, the Government made Regulations for the fixation of prices, and the rationing of supplies of petrol. These Regulations were relaxed during part of 1 9 1 9 but were again enforced from December, 1 9 1 9 to September, 1920. The supply of benzine appears to have been erratic, serious shortage being followed by temporary over-supply. Thus it was difficult to control distribution. Central and local committees were set up to confer with the Board of Trade in the administration of the Petrol Regulations which took the form of prohibition of sale except to permit holders. Supplies were rationed in order of essentiality, the supply of petrol for less essential uses being sometimes suspended altogether. A t the end of 1920 supplies became ample and the necessity for control disappeared. Potatoes Potatoes in New Zealand and Australia at the beginning of 1 9 1 8 were in short supply. On February 10, 1918, an

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129

Order in Council was gazetted prohibiting export. Statistics supplied by the Department of Agriculture show that, as far as New Zealand consumers were concerned, this action was justified. T h e 1917/18 crop yielded much less than usual; nor were the estimates for the 1918/19 crop promising. In April, 1919, the quotations, wholesale, for potatoes per ton were: Melbourne £13 10s. od.; Sydney £20; Auckland £ 1 1 ; Lyttelton £8. There is no doubt that, if there had been no embargo on exportation, New Zealand prices would have risen in sympathy with those in Australia. If export had been allowed, the producer would have gained, but there would have been an acute shortage in the Dominion. In June, 1919, the embargo was raised., Coal There was a shortage of coal in N e w Zealand during the greater period of the war and up till March, 1921. This was due to the poor shipping service between Newcastle (Australia) and New Zealand. Prices were not controlled but were under the supervision of the Board of Trade which dealt with complaints as to unreasonable rates. The distribution of available supplies was carried out by Coal Boards set up by the Government. These Boards distributed supplies for domestic purposes to localities in proportion to population. Supplies for industrial purposes were rationed according to the discretion of the Board. It was the shortage of coal that was responsible for the shortage of cement. A t the time when industry was slowing down owing to the 1921 depression, supplies of coal became more plentiful and the need for supervised distribution ceased. The Board of Trade Report on the Coal Industry ( 1 9 1 9 ) shows that the rate of profit made in the production of coal, taking the industry as a whole, was abnormally low, in many cases no return being made to capital. The Commission

I30

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came to the conclusion that the only way to ensure cheaper production and distribution was to introduce some form of nationalisation. So far, no step has been taken in this direction. Milk With few exceptions little trouble was experienced in connection with milk prices throughout the Dominion. Changes in price took place in most of the centres in consequence of the high prices ruling for butter-fat supplied to cheese, butter, and dried-milk factories. Prices in Wellington in 1 9 1 6 were higher than in other centres. Accordingly on January 18, 1 9 1 7 , an Order in Council was gazetted fixing the price in Wellington at 10^2 d. per gallon wholesale. In March the winter price was fixed at is. 0^2d. per gallon. In January and March, 1918, the prices were fixed in Wanganui and Wellington at n d . per gallon (winter price is. oy 2 d.). Similarly prices were gazetted for 1919. From the middle of 1 9 1 9 , the Wellington City Council took over the milk supply. Government control thereupon ceased. At the fixed price there were never adequate supplies of fresh milk in Wellington, milk and cream being turned to more profitable uses. It is noteworthy that several Wellington grocers testify that during the latter years of the war the consumption of condensed milk materially increased. Meat In 1 9 1 6 the Board of Trade made investigations into the retail prices of meat and found them not unreasonable. In most cases butchers' associations agreed not to raise prices without consulting the Board. The Auckland master butchers applied in December, 1916, for an increase " as they could not see their way clear to continue selling at the rates now in existence." 6 A s butchers in other parts of the 6

N. Z. Board of Trade, Report No. 6, Meat Trade.

OTHER

MEASURES

OF

CONTROL

Dominion were making a reasonable profit at these prices, the Board decided to run two State meatshops in populous parts of Auckland at bedrock prices. These shops were opened on January 25, 1917, the Auckland master butchers having adopted the scale of prices to which the Board of Trade had refused its sanction. But on March 1st prices were dropped to the previous level on account of State competition. O n January 1, 1918, a further reduction took place. The State meat-shops were then closed, showing a loss on the year's working of £1053. Bacon and Ham In February, 1918, the maximum wholesale prices of bacon and ham were fixed at the prices current on December 1, 1917. Complaints were received that retail prices were too high in comparison with the fixed wholesale price. So in February, 1919, the maximum retail prices were fixed. On February 11, 1920, the control of prices was abandoned. The fixed wholesale prices were probably too low as, during the two years of control, the balance sheets show that some of the producing companies traded at a loss. Groceries From 1917 to 1920 groceries were directly under the control of the Board of Trade. Prices were not fixed by Gazette notice, but no increase in the prices of groceries dealt with could be made by merchants without the consent of the Board of Trade. Advisory committees composed of merchants submitted the reasons for any proposed increases to the Board who considered whether such increases were justified or not. O f the fifty-seven commodities controlled, fortytwo were altered in price—some commodities such as carbonate of soda, cornflour, and tobacco being altered four times.

CHAPTER

Vili

REVIEW AND CONCLUSIONS

IN regard to the wheat trade the problem before the Government in 1914 was to safeguard the bread supply from interruption or interference by circumstances beyond the country's control, at the same time giving the necessary inducement and protection to farmers to grow wheat and adopting measures to prevent the extinction of the flourmilling industry while keeping down the price of bread to the consumer. The prevention of the extinction of the flour-milling industry, which has considerable over-capacity, was the most successful result of Government control. Free from harassing competition and speculative market operations the millers flourished as they had never done before. In order to continue the stability of the control period the millers combined under the direction of the one-time Government Wheat Controller. Although the growers did not prosper as much as the millers, they had their share of profits from increased prices. They were, of course, guaranteed safe minimum prices for following seasons. They had every incentive for improving methods of production with no risk or uncertainty in the price they were to get for the product. The growers' grievance was that wheat did not yield so much profit as other farm products during the war. The benefit to the consuming public is not so apparent. Although bread prices did not rise to such high points as was justified by the world's markets, yet a large section of the people in the Dominion considers that the average fixed 132

REVIEW

AND

CONCLUSIONS

133

price was higher than the average price would have been in a free market. This may be so, but it must be remembered that a stable price level, even if somewhat higher than the average of a fluctuating price level, is of much greater benefit to the community. It is my opinion that the New Zealand Government was justified in taking over the wheat supply because of the dislocation of shipping. It was not necessary, however, to control the production side of the wheat trade. The Government did not succeed in its aim of ensuring a local production sufficient for the needs of the Dominion. This is shown in the following table, prepared from the Y e a r Books of 1917-1926: Year

1916/17 1917/18 1918/19 1919/20 1920/21

Acres sown in wheat (1000)

.. .. .. •• ..

218 281 208 143 220

Year

1921/22 1922/23 1923/24 1924/25 1925/26

Acres sown in wheat (1000)

•• .. .. .. ..

353 276 174 167 158

The annual requirements of the Dominion are about 8 million bushels ( f o r milling, seed, and fowl-wheat) which is the average yield from 260,000 acres. It will be seen that New Zealand produced enough for local needs in three seasons o n l y — 1 9 1 7 / 1 8 , 1921/22, 1922/23. A s the Government, in the control period, had to import in any event, it would have been better if guaranteed prices to encourage local production had been abandoned, as the extra wheat needed was available in Australia (especially to such a reliable buyer as the New Zealand Government, which could purchase forward and also secure adequate shipping). The Government control kept flourishing an industry normally run on an uneconomical basis—the flour-milling industry, which was capable of milling enough to supply

PRICE

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New Zealand's needs three times over. 1 The cost to the consumers was too great. On economic grounds it would have been preferable not to pay a subsidy to millers to keep flour low in price. Most of the subsidies were paid out of the Consolidated Fund, which means out of the proceeds of general taxation. It is impossible to generalise about the incidence of this taxation, but it is safe to say that the larger proportion of the Consolidated Fund comes from the consumers, directly and indirectly. Like most other subsidies designed to keep down prices, the payments resulted in effect in the consumer transferring money from one pocket to the other, and losing some of it in transit in order to pay for departmental supervision. O n political grounds, however, the subsidy was justified, because a popular government's policy must be to the taste of the voters. O n the administrative side, the Government control, after the initial mistakes and difficulties, was excellent. Business channels were disturbed as little as possible, and no new department had to be formed; the Wheat Controller was an official of the Board of Trade and the usual trade brokers were employed. Although in the early part of the war, the Government's dealings in futures were not successful, from the inception of the Board of Trade the transactions were conducted on a sound basis. The profits of the financial dealings of the Wheat Control Office (£156,157) may seem considerable as an absolute amount, but as a percentage on the value of the goods handled the profits were extremely l o w — f a r lower than the rate on which any private enterprise in New Zealand could safely work. The profits consist mainly of the returns from the purchase and sale of Australian wheat; this would indicate the benefit of centralising buying operations. (These facts must be taken into account when considering the merits of State control.) 1 Prof. B. E. Murphy, The Wheat Question College, Wellington, New Zealand.

(Manuscript), Victoria

REVIEW

AND

CONCLUSIONS

135

The New Zealand experience of State control in regard to wheat and wheat products proved the extreme difficulty of fixing prices at all stages of production even in the one group of related products. It is by continuous change and adjustment of these prices that the economic machine responds to the varying circumstances of demand and supply. The stereotyping of relationships that should be elastic inevitably causes dislocation. Whatever may be said for complete Government ownership and administration, it is obvious that departmental control and political interference on the production side of one among many competing rural industries is not successful. This is made clearer when consideration is given to the awkward mal-adjustments that arose when one commodity—wheat—was controlled, while its rivals—other agricultural products—were left to the adjustment of a free market. (See graph in Appendix B.) To protect the Government's purchases of wheat, the private importation of wheat and flour was prohibited. This was necessary to the control in New Zealand, where the protection of local industry as well as the interests of the consumer was considered. If there had not been an embargo on importation, flour and wheat would probably have been imported in some cases at cheaper rates than those fixed by the Government. This, however, would have been detrimental to the producing interests. Under the New Zealand system the marginal miller was assured the normal trade profit; this, of course, gave large profits to efficient mills. This would have been justified if the product of the marginal miller had been needed for essential supplies. But this was not the case. Cheaper supplies of flour could have been secured from Australia; in giving a profit to the marginal firm the Government, although acting in the millers' interests, was not acting in the interests of the community. In considering price-control, a priori reasoning would

136

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lead us to the conclusion that a fixed price that is too high would attract further capital into the industry, and a price fixed too low would lead to the withdrawal of capital. Let us apply this rule to the principal commodities controlled in New Zealand—sugar, timber, cement, butter, wheat, and wheat products. The sugar trade is a monopoly and was under the control of the Government only during the stages of importing and refining. Even without Government control the Colonial Sugar refinery had too great a monopoly to allow of competition. Under control, no sugar of equal quality could compete in price with the Chelsea Refinery product. The sugar control did not entail actual price-fixing. On the wholesale side it consisted of agreements with the Sugar Company. All that was required was the distribution of the product. In the timber trade we find that under the Government fixation of prices, much capital was attracted into the milling industry. Were the prices fixed too high? This has already been considered in the chapter on timber control. During the timber shortage the prices fixed were probably too low for the older mills to make much profit, as they were faced by diminishing return. They managed, however, to make profits by selling from stock. Men with a little capital, seeing that the established mills were working at a profit, naturally considered that they also could do so, as their cost of production would not be so high since they could set up a new mill with easy access to standing timber. There was no fear of there being a glut as the demand at the time was enormous. But when the slump came, the new mills suffered along with the old. The prices agreed to by the Board of Trade did not allow an adequate margin of profit. I f prices had not been controlled, however, the extension of timbermilling and the corresponding collapse would have been much greater.

REVIEW

AND

CONCLUSIONS

137

As regards cement during the control period, there was no new capital invested in the trade. In fact, most of the time, there was an insufficient return to capital. The Government price-fixing in this case was such as to discourage production. However, as the capital was sunk irretrievably in the cement works, it paid to continue production as long as prime costs were covered. Although this might be in the immediate interests of consumers, the fixation of a price yielding a poor return to capital is not in the best interests of the community in the long run. During the war considerable capital was invested in butter factories and in the dairy industry generally. But this was on account of the export trade. The New Zealand Government controlled only the local market—a small part of the total butter trade. Consequently the price fixed had to ensure a return to the local supplier equivalent to the return to the exporter. Otherwise the mere fixing of a price would have diverted production into the export trade or the making of cheese. The price of butter could not be fixed according to ordinary principles, as there was no real shortage. The control was undertaken to appease popular clamour. The best course to follow was either not to undertake control at all or to equalise payments directly from the Consolidated Fund. (This was done towards the end of the control period.) As all producers were getting the export price, the price-fixing system adopted by the Government cannot be said to have affected the amount of capital invested in the dairy industry. The Government's guaranteed prices for wheat did not succeed in keeping production up to normal. Farmers saw the prices of other farm products rising and naturally took up branches of farming that were more remunerative. We may say that the unspecialised capital of the farmer was withdrawn from wheat-growing and used to bring forth a

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better return in other directions. I t would have been better i f the Government had not controlled wheat growing; to have done this effectively, all the other farm products would also have to have been controlled to ensure that a proper balance of production was kept among the various products. T h e fixation of flour prices could not have attracted anymore capital into the milling industry because it had already too much capacity and did not offer a safe investment. Supplies o f wheat had to be portioned out among mills to ensure that they all had a share of the business. Subsidising the industry kept going many inefficient mills at the ultimate expense of the consumer. I f a price had been fixed ensuring the normal return to the more efficient mills, it would have benefitted consumers not only for the time, but also in the long run. T h e loss of the capital sunk in the idle mills would be unfortunate, but it would be more than outweighed by the gain to the community in lower flour prices. What is more, the product of the resulting vigorous flour-milling industry would be able to compete with Australian flour on more equal terms. T h e Government control showed inconsistency in the methods o f fixing prices. T h e price fixed for wheat was guided by market price. Actual cost of production was not considered. A s regards flour, a good return was given to the marginal mill, but the prices fixed for timber were based on bare cost of production. Cement prices bore even harder on the producer, as supplementary costs were not considered until the end of the control. Butter prices followed market prices and were kept low to the consumer by means o f the Equalisation Scheme. Sugar had really a monopoly price. It covered cost of production in the broad sense, but in view o f its monopoly and rising world prices, it could have been much higher. Generally speaking, it may be said that the price fixed depended on the influence the producer had with the Government.

REVIEW

AND

CONCLUSIONS

139

From the foregoing it can be seen that in the Government's control of commodities produced in New Zealand a due balance was not kept between producer and consumer. The fixation of prices did not give an adequate return to capital except in the case of flour and butter which were subsidised to ensure a low price to the public. IS CONTROL J U S T I F I E D A S A P E R M A N E N T P E A C E P O L I C Y ?

The British Royal Commission on Sugar reported in 1921 as follows: Our experience shows that State control of trade is not desirable. For successful trading, constant vigilance, quickness of decision and secrecy are wanted, which it is difficult to secure in a public department. These difficulties do not seem to have loomed so largely in the New Zealand Government's control of trade, probably because of the comparative simplicity of the economic organisation. The efficiency of the State's marketing operations in the sugar and wheat trade would show that on the distributive side, at least, State control was successful. It must be remembered, however, that the State used the ordinary channels of trade and, as has been previously mentioned, worked on a margin of profit lower than would be sufficient for any private concern. It is my opinion that, if the State is permanently going to undertake trading operations, it should not work on a fine margin of profit, but show a normal trade return on all operations. State enterprise may fail in production, but in " that wasteful chaos we call distribution " it can effect some economies especially under New Zealand conditions where already there are too many middlemen. It could not, however, succeed in controlling the marketing of products that have an export market, nor could the State permanently ration

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the supply of a product between firms and industries. In peace time, the supply is directed to satisfy the total demand of the people for necessaries, comforts and luxuries and those things are produced which are most demanded and which will yield the greatest sum of satisfaction. H o w can any Government Department decide what these things are? Even if it could come to a just decision to-day, by to-morrow the demand would probably have changed. A s a price fixed below a competitive market price necessitates rationing, for this reason price-fixing could not be carried on as a permanent peace policy. But monopoly prices can be regulated by State action without creating a situation in which the demand at the regulated price will exceed the supply, and consequently if prices are fixed by regulation for goods under monopoly control the problem of rationing need not be considered. A s monopoly is extending over industry more than it did in the past, the field open for State intervention will be correspondingly increased. The general conclusion is therefore warranted that, while in competitive industries a policy of price control ought not in any circumstances to be continued as a permanent policy, in monopolistic industries, price control may be essential in the public interest. The best course for the Government to pursue to prevent " exploitation" of the consumer is to use its powers of investigation and publicity where unfair business methods are carried on. T o secure efficiency, the need of cost accounting, especially in agriculture, should be stressed. The purpose of a costing system is not only to determine costs, but to indicate waste and inefficiency. The State should adopt, not only in connection with the reconstruction of industry, but also as a permanent section of the trade records of the country, a systematised scheme for the production and publication at regular intervals of costing surveys of the

REVIEW v a r i o u s trades.

AND

CONCLUSIONS

141

T h e a d o p t i o n o f such a course w o u l d be o f

undoubted benefit t o N e w Zealand. I incline t o a g r e e w i t h a criticism made in 1 5 4 9 o f State control o f industry. Documents

T a w n e y a n d P o w e r : Tudor

Economic

( L o n d o n , 1 9 2 4 ) , vol. iii, p. 3 4 0 :

B u t I marvell mouche more at those men which have not only all reddy seene the successe of price settinge, but also the successe of the moste parte of proclamacons and penaull Stattutes, and yet will hold oppinion this present derthe of victuall may be redressid bi setting of prices uppon victuall, but surly it is not the settinge of lowe prices that will aney thinge amende the matter. B u t it must be the takinge awaye of th' occation of the high prices.

APPENDIX

A

N E W Z E A L A N D L E G I S L A T I O N A U T H O R I S I N G CONTROL

COMMODITY control in the first years of the war was based mainly on the Regulation of Trade and Commerce Act, 1914 in which it is provided that the Governor may, when his Majesty is at war, by Order in Council Gazetted, fix the maximum price of any class of goods. Provision is made to allow the maximum prices of the same classes of goods to be differently fixed in different localities and under different conditions of " trade, commerce, sale, or supply ". Section 47 of the Customs act, 1913, under which the exportation of certain goods is prohibited, is extended to apply to " any goods the prohibition of the importation of which is, in the opinion of the Governor, necessary in the public interest." Provision is also made for the appointment of a Commission of Inquiry " to inquire and report on the state of prices, the quantity, situation, demand for and supply of goods; the means or sufficiency or the supply or transport of goods; and the advisability or otherwise of the exercise by the Governor of the Powers conferred by the Act." The authority conferred by the Act was used in the Butter Equalisation Scheme and the first fixation of wheat and flour prices. The Food Commission, upon whose report prices were based, was also appointed under the Act. In 1915 the Government passed the Cost of Living Act. The introduction of this measure was actuated partly by the report of the Commission on the Cost of Living in New Zealand, 1912, and partly by the desire to have a greater measure of control over the country's trade during the 142

NEW ZEALAND critical years of the war.

CONTROL

LEGISLATION

T h e Cost of L i v i n g A c t provided

f o r the establishment of the N e w Zealand B o a r d of Trade. T h e functions of this B o a r d are summarised as f o l l o w s : 1 . T o investigate and report to the Governor upon any case in which it is alleged that there has been an infringement of any of the provisions of the Commercial Trusts Act, 1910. 2. T o inquire into and report on matters affecting the cost of living or upon any other question referred to it by the Governors relating to the supply, demand or price of commodities. 3. T o inquire into and report upon any complaint that the price of any class of goods is unreasonably high. 4. T o consider, inquire into and report upon any matters relating to the trade, commerce or business of New Zealand which may be referred to it by the Governor. 5. T o institute inquiries in reference to the markets for goods produced or manufactured in New Zealand; report the result to the Governor and make recommendations in regard to trade with other countries. 6. T o make recommendations to the Governor f o r legislation in relation to matters referred to him for consideration. 7. Generally to advise the Governor as to how the trade, industries and commerce of New Zealand can be best encouraged, developed, and protected. T h e B o a r d of T r a d e was established in March, 1 9 1 6 , and most o f the commodities controlled were under its authority. T h e weakness o f the scheme w a s that the B o a r d ' s responsibilities ended with reporting to the Government and making recommendations. L i k e the Dominion's B o a r d of A g r i culture, it was devoid of executive power. Both the Government and the general public soon came to the conclusion that such a body w a s almost powerless to deal effectively and quickly with the problems confronting it. T h e powers of the B o a r d of T r a d e were, therefore, made explicit and

144

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IN NEW

ZEALAND

widened by amending legislation in 1916, 1917, and 19x8— all finally revised and amplified in the Board of Trade Act, 1919. The Act was favourably viewed by most business men. Special public attention was of course given to the provisions against profiteering ; it was widely overlooked that the more important part of the measure was designed for the encouragement and development of trade and industry. One newspaper—the Evening Post of November, 4, 1919—ventured the opinion that " If the Department of Industries and Commerce is developed and organised as it should be—which of course means that such salaries must be offered as will attract to its services experts of the highest qualifications— its cost to the Dominion ought within a few years to be returned many times over." The Act defines industry as " any trade, business, profession or undertaking whatsoever carried on for the purpose of profit." Then follow clauses providing for the establishment of a Department of Industries and Commerce and for a Board of Trade which was deemed to be identical with that established under the Cost of Living Act, 1915, the Board to consist of the Minister of Industries and Commerce, who was to be president, and (at the most) four other persons. The functions of the Board were: a. To obtain by means of investigations and judicial inquiries information as to the industries of New Zealand. b. To publish in such manner as the Board thought fit all such information as it deemed of advantage to the public. c. To procure by means of regulations under the Act the due control, maintenance and development of such industries. The procedure for Board of Trade inquiries was laid down and the practical powers and authorities of an inferior Court

NEW ZEALAND

CONTROL

LEGISLATION

of Justice were provided. The Board was empowered to summon witnesses and hear evidence on oath. In effect the Board had the powers of a permanent Royal Commission. Under Section 23, there are provisions for investigations on the lines of scientific economic research. Authority is given to demand and inspect balance sheets, accounts, books, and documents, and to abstract particulars. Considerable use seems to have been made of this provision. For example, reports on productive costs in the timber trade and on the financial operations of the Woollen Manufacturing Companies of the Dominion were published and a summary of assets and profits of the firms was tabulated. Sections 24 and 25 give the Board the right of publication of any information collected. Section 26—one of the most important in the Act—provides the Board with very wide powers. Regulations may be made for the prevention and suppression of methods of competition or of monopoly that are deemed to be unfair or prejudicial to industry or the public welfare; maximum and minimum rates or prices may be fixed; differential treatment where prejudicial to the public interests or to any industry may be prohibited or controlled; and industry may be controlled in any other manner deemed necessary for the welfare of New Zealand. It is noteworthy that a measure in New South Wales—the Profiteering Prevention Act, 1920,—also definitely provides for the suppression of certain specified unfair methods of trading. Section 30 and following Sections deal with offences. The most important part is Section 32, which is a special provision for the prevention of profiteering. It provides: 1. Every person commits an offence who, either as principal or agent, sells or supplies, or offers for sale or supply any goods at a price which is unreasonably high. 2. For the purpose of this section the price of any goods shall be deemed to be unreasonably high, if it produces, or is

146

PRICE FIXING

IN NEW

ZEALAND

calculated to produce, more than a fair and reasonable rate of commercial profit to the person selling or supplying, or offering to sell or supply, those goods or to his principal. The results of inquiries by the Board of Trade have been published in some cases; in other instances they have led to prosecutions. Section 23, providing for inquiries into the financial side of industry, appears to have been quite workable ; there is no instance where the penalty clause for failure to supply information has been used. The Board established local Price Investigation Tribunals in the four principal centres. Their inquiries were undoubtedly productive of good. Most of the complaints received proved to be groundless; where the complaint was justified, refunds were generally agreed to. In some instances legal proceedings were taken against vendors. The tribunals were disbanded in May, 1 9 2 1 , the work being carried on by the officers of the Department of Industries and Commerce. In August, 1920, a deputation waited on the Prime Minister asking for Section 24 (providing for publicity) to be repealed. The reasons adduced were not very definite; nor could it be shown that any injury had been inflicted on New Zealand traders. The Statute provides sufficient protection, for Section 21 requires that every inquiry under the Act must be conducted in private. If the right of publication were taken away and Section 2 1 were allowed to remain in force, a very undesirable situation would be created, as the work of the Department would be done entirely in the dark. Moreover the fear of publicity is an effective deterrent to commercial abuses. This right of publication is given in other parts of the world. For example, the Profiteering Prevention (Amendment) Act, passed by the British Parliament in May, 1920, provides:

NEW ZEALAND

CONTROL

LEGISLATION

6. W h e r e under the principal A c t any investigation has been made, the findings and decisions of the Board of T r a d e or the Committee or Tribunal which held the investigation, and their report or any part thereof shall, if the Board of T r a d e thinks fit in the public interest, be published, notwithstanding anything in the principal A c t or this A c t . Provided that in no case shall a report of the Committee dealing with the business in the United Kingdom carried on by any person, firm or company mentioned in the report, be published unless such person, firm or company or a representative on their behalf has had an opportunity of appearing before the committee and of being heard in connection with the matters, dealt with in the report. S i m i l a r protection is not available in N e w Z e a l a n d but it does not appear to be essential.

I n f a c t , the only complaint

that could be made is that the use o f publicity has been too m u c h restricted. B y the B o a r d o f T r a d e A m e n d m e n t A c t , 1923, the B o a r d of T r a d e w a s abolished and its p o w e r s vested in the M i n ister o f Industries a n d C o m m e r c e .

It is p r o v i d e d that an

A d v i s o r y B o a r d be set up ( n o t to exceed five in n u m b e r ) . T h e M i n i s t e r m a y delegate his p o w e r s o f judicial inquiry and investigation to the B o a r d or t o a n y other person or persons w i t h w h o m the M i n i s t e r

may

associate

himself.

T h i s change, a l t h o u g h h a v i n g legal significance, has

not

hampered the w o r k o f the Department. P R O S E C U T I O N S U N D E R T H E BOARD OF T R A D E A C T ,

1919

F r o m 1 9 1 9 to 1 9 2 1 several prosecutions w e r e conducted t h r o u g h o u t the D o m i n i o n .

A f e w o f these w e r e f o r offences

against B o a r d o f T r a d e R e g u l a t i o n s concerning controlled commodities,

but most

of

the charges

were

for

alleged

profiteering. T h e t w o leading cases in w h i c h proceedings w e r e taken

148

PRICE

FIXING

IN NEW

ZEALAND

under the Act throw considerable light on the interpretation of that question-begging phrase " fair and reasonable profit." It was laid down by the Court that replacement value had to be considered and that the prevailing market price was a satisfactory test of reasonableness. The first case was the " Big Ben Clock " case. The price of the clocks was fixed by the manufacturer through the agent in New Zealand. The defendants (Hastie, Bull, and Pickering, Ltd., and others) were supplied with clocks and guaranteed to sell them at not less than the fixed price. This they did but they also sold at this price clocks that they had in stock and which they had bought more cheaply. The charge was in respect of these clocks in stock, which it was admitted had been bought for u s . iod. and sold at 25s. The Magistrate dismissed the case on the grounds that the fixation of prices for re-sale was legal and that replacement values must be taken into account in arriving at a " reasonable price". On a rising market the replacement value principle seemingly negatived the application of Section 32 of the Act insofar as it refers to imported goods, and, as such goods constitute a large element in New Zealand trade, the Crown appealed against the Magistrate's decision. In the Appeal Court his ruling was upheld. It was held that the Legislature, in passing the Board of Trade Act, 1919, while it intended to prevent the abnormal conditions following the war from being used by traders for taking an excessive profit, did not intend to disturb established customs or usages of trade. The second case was that of a Wellington grocer, B. Smith, who had sold Mellin's Food at 3s. 6d. per bottle when it was established by evidence that the ordinary retail price in Wellington was 2s. 9d. He was fined f 100 and appealed. Although it was admitted that the appellant was getting a profit of only 0.37% on turnover while other grocers aimed

NEW ZEALAND

CONTROL

LEGISLATION

at 5%, the Court held that the selling of Mellin's Food at 39% profit on turnover was unreasonable and laid down the principle that the prevailing market price was a good test of reasonableness. In the Board of Trade's investigations into the Woollen industry, it was discovered that several middlemen were making excessive profits on New Zealand tweeds. Accordingly proceedings were instituted against the wholesalers. In these cases the goods were locally manufactured and in keen demand, and the question of replacement value did not affect the position as seriously as it would have done with imported tweeds. Five maximum fines (three of £1000 each and two of £200 each) were inflicted; and the convicted firms did not proceed with any appeal. This is a case where the regulation of profit has acted differentially against an industry. The clothing trade, owing to the fickleness of fashion, is one in which profits fluctuate. The convicted firms had made their profits after a period of losses. Over a long period they were not making too great a margin of profit although the profits for a single year or a single transaction may have been great. Since this prosecution there have been a few unimportant proceedings in other parts of the Dominion. But it is important to remember that the instances of unreasonable profit form a small percentage of the complaints investigated, indicating that deliberate profiteering was only a minor factor in the high-price level which prevailed. The public failed to recognize that inflation was by far the most important cause.

APPENDIX

B

COMPARISON OF I N D E X N U M B E R S OF CONTROLLED PRODUCTS

I have calculated index numbers in respect of the following: ( 1 ) The wholesale local market price of butter from 1914 to the relaxation of control in 1921. ( 2 ) The return to butter producers during the period. ( 3 ) The wholesale local market price of wheat products from 1914 to the relaxation of control in 1925. ( 4 ) The return to the miller during the period. ( 5 ) The f.o.b. price of wheat (Southern ports) to the grower during the period. ( 6 ) The wholesale local market price of sugar from 1914 to the relaxation of control in 1923. The first three months of the W a r did not affect the suitability of 1914 as a base year except in regard to wheat and wheat products. The increases in price at the end of the year, however, were not, of such importance as to warrant changing the base year to 1913 especially as 1913 was itself an abnormal year in New Zealand. In any case there are no reliable figures in regard to wholesale prices prior to 1914. The primary data of the investigation were taken from the following sources in order of importance: — ( 1 ) Gazette notices and Regulations, ( 2 ) Board of Trade Reports, (3) the published results of official inquiries and Royal Commissions, ( 4 ) official notices in the Press sanctioning certain price lists and agreements (e.g. with the Colonial Sugar Refining Co. or between millers and growers). 150

INDEX NUMBERS

OF

PRICES

151

In all cases the prices ruling for each month were averaged for the year, the average price for 1 9 1 4 being equated to 100. In the case of wheat, butter, and sugar the process was simply one of arithmetical averaging and converting to the same ratio of 100 which the average yearly prices bore to the price in 1 9 1 4 ; but in respect of wheat products weighting was employed. Wheat products comprise flour, bran and pollard; in finding the f.o.b. price per ton of wheat products their respective prices could not be added together to be averaged because the various wheat products are not produced in equal proportions. Wheat, when milled, will produce on the average, 72% of flour, 1 0 % of pollard and 1 8 % of bran. The following is an example of the method employed: £ 7 2 tons of flour at ¿ 1 8 per ton 1 0 tons of pollard at £9 1 8 tons of bran at £8 100 tons of wheat products 1 ton of wheat products

1,296 90 144

£I,S30 £15

6s.

od.

T w o sets of index numbers were calculated in respect of wheat products. One set shows the actual wholesale price in the local market; the other shows for the period of subsidy the return to millers including the Government subsidy per ton of flour. The years 1922 and 1923 include the averages of several months in which no subsidy was paid. This, however, does not upset the calculations, as all that the index numbers purport to show is the average price over twelve months. Two sets of numbers were prepared for butter, one showing actual wholesale local prices and the other the return to the producer, which includes the equalisation payment to bring " local " producers on a parity with exporters. " Factory door " prices were used for butter; in regard to

152

PRICE

FIXING

IN NEW

ZEALAND

sugar, the wholesale price at the Chelsea Refinery was used. The prices for wheat were taken f.o.b. for each month at Southern Ports. In this respect my index number differs from that of the Government Statistician, who, in the 1926 New Zealand Official Year Book, calculates wheat index numbers on prices ruling at the beginning of the harvest with the base as July, 1914. In order to bring the index number for wheat into conformity with the index numbers for the other products, I have not used the Government Statistician's figures, but have calculated my own on the lines stated above. The index number of the 1927 Year Book for wholesale agricultural prices (other than wheat) is, however, constructed on the same lines as my own. I have used this index number for comparison of the wholesale prices of farm products. The index numbers for Cost of Living (based on retail prices, rent, etc.) and Nominal Wages I have also taken from the 1927 Year Book. For stricter accuracy the monthly prices should have been weighted by the amounts bought at these prices. These data, however, were quite fragmentary, any records of quantities bought being kept only by accident. The index numbers used are here tabulated. These numbers are reproduced for illustrative purposes in graphical form. Chart I illustrates the trend of the prices that the New Zealand farmers received for their various products. This chart explains the failure of guaranteed wheat prices. The farmer found that, although wheatgrowing was a paying proposition, the price received for other agricultural products was still more remunerative. Chart II has three comparisons. The price received by the grower for wheat is compared with the price (including subsidy) received by the miller for wheat products during the control period. Note the relative advantage of the miller.

INDEX

NUMBERS

OF

PRICES

153

COMPARATIVE TABLES SHOWING

(a)

NOMINAL WAGES,

1914-1925

( b ) COST OF LIVING, I 9 1 4 - I 9 2 5

(c)

WHOLESALE PRICES OF AGRICULTURAL PRODUCTS,

( d ) WHOLESALE

PRICES OF FOOD PRODUCTS

ERNMENT

CONTROL

WAS

IN

EXERCISED,

I9I4-25

WHICH I914

GOVUNTIL

CESSATION OF CONTROL

AgriYear Nominal Cost of cultural Sugar Wheat Wages Living Products

1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925

100 106 109 114 119 128 146 158 «54 152 »54 •56

100 107 116 129 141 157 178 177 159 '57 «59 162

100 «55 146 149 181 «S3 «95 156 140 149 171 168

100 122 117 119 «23 128 198 226 149 150 ...

100 140 123 121 126 138 161 167 125 117 119 140

Wheat Products

Butter

Local Local Miller Market Producer Market 100 «39 117 129 139 «54 176 191 «63 «4« 142 164

100 «39 117 129 «39 «37 «53 176 158 140 142 164

100 121 «33 142 142 146 165 208

100 121 127 127 «3« «3« «44 181

The second comparison is that between prices received by the miller (including subsidy) for wheat products, and local market prices. The third comparison shows the trend of the prices of wheat products contrasted with the Cost of Living. Chart III shows the difference between the price of butter to the local consumer and return to the producer (including equalisation). Index numbers of the wholesale prices of sugar are included for the sake of completeness; as the retail prices of sugar closely follow the wholesale prices we can compare the sugar prices with Cost of Living. Butter prices can also similarly be compared. The trend of nominal wages illustrates the lag of wages behind prices. Although an endeavour was made to control prices so that effective

I 5 4

PRICE

FIXING

IN NEW

ZEALAND

or real wages should remain the same, this chart shows how this ideal was not attained.

INDEX NUMBERS OF PRICES

155

156

PRICE FIXING

IN NEW

ZEALAND

BIBLIOGRAPHY Aristotle, Ethics, part v, Welldon's Translation (London, 1923). , Politics, part i, ch. x, Welldon's Translation (London, 1912). Ashley, W. J., Economic History (London, 1923). , Surveys, Historic and Economic (London, 1900). Ashton, T. S., Iron and Steel in the Industrial Revolution (Manchester, 1924). Beveridge, W. H., British Food Control (Oxford, 1928). Bland, Brown and Tawney, English Economic History—Select Documents (London, 1914). Bogart, E. L., Direct and Indirect Costs of the Great World War (Oxford, 1919). Brown, W. J., The Prevention and Control of Monopolies (London, 1914). —:—, The Underlying Principles of Modem Legislation (London, 1914). Coller, F. H., A State Trading Adventure (Oxford, 1925). Condliffe, J . B., New Zealand in the Making (Chicago, 1930). Copland, D. B., Wheal Production in New Zealand (Christchurch, N. Z., 1916). Cunningham, W., The Growth of English Industry and Commerce (Cambridge, 1912). Garrett, P. W., Government Control over Prices, Price Bulletin No. 3 (Washington, 1920). Gray, H. L., War Time Control of Industry (New York, 1918). Hollander, J . H., War Borrowing (New York, 1919). Litman, S., Prices and Price Control in Great Britain and the United States During the World War (Oxford, 1920). Lloyd, E. M. H., Experiments in State Control (Oxford, 1924). , Stabilisation (London, 1923). Marshall, A. and M. P., Economics of Industry (London, 1883). Monroe, A. E., Early Economic Thought (Harvard, 1924). Nicholson, J . S., War Finance (London, 1917). O'Brien, G., An Essay on Medieval Economic Teaching (London, 1920). Pigou, A. C., Political Economy of War (London, 1921). Roberts, G. E., The Fallacy of Price Fixing (New York, 1924). Taussig, F. W., Principles of Economics (New York, 1 9 1 1 ) . Tawney, R. H., Religion and the Rise of Capitalism (London, 1926). Tawney and Power, Tudor Economic Documents, vol. iii (London, .1924) Van Hise, C. R., Concentration and Control (New York, 1914). 157

BIBLIOGRAPHY

15«

PERIODICALS

American Economic Review, Anderson, B. M., Jr., " V a l u e and Price Theory in Relation to Price Fixing and W a r Finance," vol. viii (Sup.), pp. 239-256. • , Duffus, W . M., " Government Control of the W h e a t Trade in U. S., 1918," vol. viii, pp. 62-87. American Review of Reviews, Seligman, E . R. A., " Government Price Regulation," vol. 56, pp. 289-292. Atlantic Monthly, Lubin, D., " Food Control and Democracy," vol. 120, pp. 260-269. Ctntury, Creel, G., " Can a Democratic Government Control Prices ? " vol. 93, pp. 605-11. Economic Journal, Bowley, A. L., " The Theoretical Effects of Rationing on Prices," vol. x x x , pp. 340-7. , Clynes, J. R., " Food Control in W a r and Peace," vol. x x x , pp. 147-155. • , Condliffe, J. B., " New Zealand During the W a r , " vol. xxix, pp. 167-185. , Pigou, A. C , " Government Control in W a r and Peace," vol. xxviii, PP. 363-373.

•

, Rowe, J . W., " T h e Artificial Control of Raw Material Supplies," vol. xl, pp. 401-421. • , Stocks, Mary, " Attempts to F i x Maximum Corn Prices in Germany," vol. xxv, pp. 274-280. International Labour Review, Condliffe, J. B., " Experiments in State Control in New Zealand," vol. ix, no. 3. , Findlay, J., " Industrial Peace in New Zealand, vol. iv, no. 1. Political Science Quarterly, Haney, L. H., " Price Fixing in the U. S. during the W a r , " vol. 34, pp. 104-126, 262-289, 434-453Quarterly Journal of Economics, Taussig, F. W., " Price Fixing as seen by a Price Fixer," vol. 33, pp. 205-241. Unpopular Review, Means, D. M., " Price Fixing by Government," vol. ix, pp. 312-327. Encyclopaedia Britannica: New Volumes I I I (13th Edition.) " Prices ", A. L. Bowley. "Rationing", A. C. Mason. Vol. X X X I I (12th Edition.) " Prices ", A. L. Bowley. " Price Control in the United States ", L. H . Haney. " Rationing ", W . H . Beveridge. " Rationing in U. S. A.", W . C. Mullendore. Vol. X X X I (12th Edition.) " Food Supply", W . H . Beveridge and S. S. Long.

BIBLIOGRAPHY

159

British Official Publications: 1913 Appeal Cases, p. 801. Final Report of Royal Commission on the Sugar Supply, 1921. English Law Reports, Chancery Division, 1901, vol. ii, p. 275, Elliman, Sons & Co. v. Carrington & Son, Ltd. New Zealand Official Publications: Statutes: Commercial Trusts Act, 1910. 1 Geo. V 32. Regulation of Trade and Commerce Act, 1914. 5 Geo. V 6. War Regulations Act, 1914. 5 Geo. V 38. Cost of Living Act, 1915. 6 Geo. V 69. War Legislation and Statute Law Amendment Act, 1918. 9 Geo. V 10. Board of Trade Act, 1919. 10 Geo. V 15. Board of Trade Amendment Act, 1923. 14 Geo. V 34. Official Year Books, 1909-1931. Board of Trade (Department of Industries and Commercial) Annual Reports, 1917-1928. Publications of Department of Industries and Commerce (Board of Trade) : Review of Sugar Supplies. Report No. 3 The Sugar Supply. Report No. 4 Sawmillers' Costs and Prices. Report No. 6 Meat Prices. Report No. 7 Sawmilling Industry and Timber Merchanting. Statement by W. G. McDonald, Chairman, Board of Trade, before Commission of Inquiry into Allegations re Cement. Typewritten Report, Notes on Sugar Control. Report of the Board of Trade on the Coal Industry, 1919. Report of Commission Appointed to Inquire into the Production, Distribution, Importation and Prices of Cement. New Zealand Cost of Living Report, 1912. Report of Commission of Inquiry into Food Prices, 1914. Minutes of Evidence, Court of Inquiry, Woolston Tanneries Petition, 1924. Annual Report of Department of Imperial Supplies, 1921. Board of Trade Wheat, Hide and Cement Files. Department of Imperial Supplies Butter Equalisation File. Board of Trade Butter Files 1916-18. New Zealand Law Reports, 1913. " The Merchants' Association of N. Z. (incorporated) and Others v. H. M. the King. , 1917. " The Taratahi Dairy Co. and Mangorei Dairy Co. v. Attorney-General. , 1921. " S m i t h v. Collins", p. 150, and "Christie v. Hastie, Bull, and Pickering, Ltd. and Others ", p. 1. Gasette Law Reports, 1925, pp. 105-11, and 1926, pp. 65-96. " The King v. The Crown Milling Co., Ltd., and Others."

i6o

BIBLIOGRAPHY Evening Post, August 29, 1918. November 4, 1919. October 1, 1922. May 25, 1925. Dominion, August 22, 1924. Butterworths' Fortnightly Notes, March I, 1927, p. 12. March 15, 1927, p. 26. April 12, 1927, p. 50.

The Nezv Zealand Dairy Industry. New Zealand Labour Party Information Bureau. Report on the New Zealand Timber Milling Industry. National Labour Legislative Committee. Profiteering Prevention Act, 1920. (New South Wales.) Report No. 28. Victorian Fair Profit Commission, September, 1920. New Zealand Gazette notices dated: September October January February October January February February February March March December December December February February March April July August December December February February March April June August

29, 21, 8, 8, 13, 8, 6, 15, 16, 12, 14, 1, 10, 22, 10, 14, 4, 16, 8, 6, 6, 8, 5, 25, 5, 16, 21, 19,

1914. 1914. 1915. 1915. 1916. 1917. 1917. 1917. 1917. 1917. 1917. 1917. 1917. 1917. 1918. 1918. 1918. 1918. 1918. 1918. 1918. 1918. 1919. 19191919. 1919. 1919. 1919.

BIBLIOGRAPHY October October November February February February June October November February March March May June August August September February February April May June October October October November March December February October December December JanuaryJanuary September September October

2, 6, 24, 11, 25, 28, 17, 18, 22, 10, 14, 21, 25, 20, 30, 31, 27, 24, 28, 13, 18, 12, 21, 23, 24, I, 6, 3, 26, 1, 14, 23, 14, 28, 20, 23, 23,

1919. 1919. 1919. 1920. 1920. 1920. 1920. 1920. 1920. 1921. 1921. 1921. 1921. 1921. 1921. 1921. 1921. 1922. 1922. 1922. 1922. 1922. 1922. 1923. 1923. 1923. 1924. 1924. 192S. 19251925. 19251926. 1926. 1926. 1926. 1926.

INDEX Administration, 26, 27 Agreed prices, 107, 108, n o Aquinas, 15 Aristotle, 15 Augustine, 17 Australia, 33, 39. Ah 43, 44, 74, 75, 76, 8s, 95, 98, 100, 103, 105, 109, 112, 114, 120, 133, 135 Bacon, 131 Beech, 71 Beet-sugar, 37 " Big Ben Clock " case, 148 Bran, 109, n o Bread, 12; fixed price of, 104, 106 Board of Trade Act, 1919, 144 Board of Trade (N. Z.), 32, Si, 64, 78, 84, 85, 87, 93, 99, 100, 125, 127, 143 Building materials, 68-94 Restrictions, 93, 94 Butter Committee, 59 Control, 48-67, 137 export licenses, 51, 52 -Fat Levy, 62, 65 Canada, 77, 88, 97 Capital, 86, 119, 136, 137, 138, 139 Cement, 84-92, 137 Commission, 92 Charts, 154-6 Church, economic teaching of, 16 Clynes, J. R., 19, 20 Coal, 87, 129 Coalition Cabinet, 62 Cole, G. D. H., 19 Colonial Sugar Refining Co., 30-46 Commercial Trusts Act, 1910, 30, 91, 116 Competition, 23, 140 Consolidated Fund, 58, 59, 62 Control of Profits, 22 Cost accounting, 140 Cost of Living Act, 1915, 142, 143 Commission, 31, 142 Dairy Export Control Board, 61 Produce Export Control Act. 60

Department of Agriculture, 48, 64 Imperial Supplies, 27, 48, 64, 122 Industries and Commerce, 39, 40, i n , 144, 146 Differential treatment of industries, 62 Diocletian, n Distributors Ltd., 113-118 Duty on Timber, 83 Wheat and Flour, 112 Embargo on hides, 122, 123, 124 on importation, 108, »09 Equalisation Fund, 54, 57, 65 Evasion of Fixed Prices, 96 " Evidence " of flour millers, 113, 114 Excessive profits, 149 Export parity, 62 quotas, 69, 70, 71, 75 Factors in the Sugar Supply, 46,47 Fair Profits Commission, 63 " Fair and reasonable," 148 Fiji, 33, 34, 37, 39 Final Report of Royal Commission on Sugar Supply, 45, 46, 139 Findlay, Sir John, 126 Flour-milling, 132 Flour subsidy, 105, 106, 107, 108, 134 Food Commission, 95 Footwear, 127 Gazette (N. Z.), 66 Golden Bay Co., 84, 86, 87, 91 Government, action against Distributors Ltd., 116 control of sugar, 37-41 purchase of wheat, ioq purchasing power, 45 Statistician, 98, 152 Groceries, 131 Guarantee of butter prices, 56 wheat prices, 102, 104, 105, 106, 137 Ham, 131 Hides, 121-127 163

164

INDEX

Imperial Government, 48, 56, 121, 122 Supplies Dept., 27, 48, 64, 122 Importation of wheat, 103 Index Numbers of Controlled Prices, 150-156 Inefficient Producers, 24 Inflation, 149 Investigation, 21 J a v a sugar, 37, 38, 41, 46, 47 Just price, 1 1 , 15-18 " Justum pretium," 17 Kauri, 69, 72, 75, 76 Legislation of Edward I, 13 New Zealand, 142-147 Marginal firm, 135 utility, 80 Matai, 70, 72 Meat, 130 Medieval prices, 15 Mellin's Food, 148 Merchants' Association, 31 Methods of Control, 27, 28, 29 Milburn Lime and Cement Co., 85, 89, 91 Milk, 130 Mill, J . S., 119 Miscalculation of estimates, 98 Monopoly, 136 prices, 26, 140 " N e w " mills, 81, 82 New Zealand, Legislation, 142-147 Official Year Book, 1 5 2 ; tariff policy, 1 1 9 ; timber policy, 83 Operations of Equalisation Funds, 54-57 Overstone, Lord, 83 Petition of Right, 53 Petrol, 128 Pollard, 109, 1 1 0 Potatoes, 128, 129 Price agreements, 31, 32, 33, 34 -fixing, difficulty of, 135; inconsistency of, 138; principles of, 24, 25. 26; of wheat and flour, 95, 99,138 Investigation Tribunals, 146 Points," 79 Regulation, 29 Principles of Commodity Control, 19 Profits, 22; fixed rates, 3 3 ; of wheat control, 134

Proclamation of Henry V I I I , 13 Prosecutions under Board of Trade Act, 147-149 Public opinion, 16, 28 Publicity, 21, 146 Quakers, 17 Rationing, 24, 28; of cement, 89; of sugar, 35 Reasonableness, 149 Regulation of Trade and Commerce Act, 1914, 142 in peace time, 140 Remission of duty, 89 Removal of restrictions on wheat prices, 97 Replacement-value principle, 125,148 Results of sugar control, 44, 45, 46 Retail prices of butter, 49 Rimu, 70, 72 Salmond, Sir John, 52, 53 Saving to consumer, 43 Standard Oil Company, 21 Standardized Boat Scheme, 123, 125, 127 State marketing, 139 meat shops, 131 purchase and control, 20. 21 Stout, Sir Robert, 53 Stuarts, 14, 53 Subsidies, 105, 134 Substitutes, 25 Sugar, 30-47 Tariff on sugar, 41, 42 Taussig, 46 Timber, 68-77 prices, control of, 78-80 Totara, 69, 70, 72 Tudor regulation, 14 United Kingdom, 44 Uses of N. Z. timbers, 69 U. S. A., 77 Validity of license fee, 62 Wheat acreage, 133 Control, 95-112 Controller, 101, 102, 114 Products, 151 Tariff, 119-120 White Pine, 69 Wilson Portland Cement Co., 86,89 Wine, regulation of price of, 12 Woolston Tanneries, 125, 126 Yarmouth fish supply, 68