When “liberal and progressive” was OK, Simon Upton

Coates of Kaipara
Michael Bassett
Auckland University Press, $39.95,
ISBN 1 869401174

For over a decade now public policy in New Zealand has been heavily infused with theory. Politicians have embraced expert advisers and internalised the “science” of economics with almost indecent relish. It must reflect, at least in part, a subconscious desire to throw off the ridicule and contempt into which Muldoonism had brought political decision making. To be able to demonstrate a “rational” grasp of economics became a test of political correctness.

Sir Robert Muldoon was perfectly familiar with the intellectual battlefield on which he was operating, at the very end, like Napoleon, retreating from Moscow. But his public refusal to engage his critics in their own language and his persistent cultivation of the view that acadernics were an effete irrelevance alongside fiscal commonsense led to a strange and equally warped view of normality: that Muldoonist populism was an aberration from an established tradition of political action rooted in identifiable ideological and philosophical premises.

It is a measure of how far the neoclassical reaction against the managed (and then wilfully mismanaged) economy of the postwar years in New Zealand has gone that the stewardship of Gordon Coates should appear so malleable and pragmatic. Yet that is the overwhelming conclusion of Michael Bassett’s new study of Coates, MP for Kaipara 1911 to 1943, Prime Minister 1925 to 1928 and, most memorably, Minister of Finance in the coalition government during the darkest days of the 1930s depression.

From the vantage point of 1995, fully 60 years after the despised coalition government of George Forbes yielded to our first Labour government, Coates’ economics seem a strange mixture of prudent housekeeping and modest tinkering. There isn’t an ideological undercurrent in sight. Commonsense and well‑intentioned activism ruled the day. Coates’ attitude to telephone charges as Postmaster‑General typifies the approach: he supported cross‑subsidies to assist remote subscribers by increasing dry connection charges to lower rural ones, but refused to eliminate toll charges and promoted party lines as a way of keeping users’ costs down. As Bassett notes, Coates saw the state as “a listener, a planner, a builder and an agency to eliminate waste and promote fairness but never as a redistributor. Within limits, never clearly defined, users should pay.”

It is that lack of clearly defined limits that contemporary policy advisers would find so irritating ‑ and dangerous. We live on the other side of the meddling, interventionist, redistributive state that burgeoned after World War II; Coates preceded it. Where Coates would have seen modest, sensible concessions that would advance development, modern advisers would see the thin end of a wedge leading to inefficiency and pork-barrel politics. After a decade of upheaval, Coates of Kaipara is a salutary reminder of how today’s orthodoxy is tomorrow’s dross. Schemes which seemed innocent then would be decreed dangerous today.

There are parallels, though inexact ones, between New Zealand in the late 1920s and early 1930s and the events of the last decade. Both have been times of upheaval: the fracturing and realignment of political parties is an obvious feature. So, too, is the breaking of moulds ‑ old institutions discarded, new methods of management adopted. The forces that plunged New Zealand into depression were largely external to New Zealand. So they were, though much more incrementally, in the 1970s as New Zealand failed to make the adjustments necessary to cope with the loss of guaranteed markets in Britain and the oil shocks. Domestic policy innovation in each case was, driven by the realisation that the country was living beyond its means.

The essential difference was the reach of government as understood by the key protagonists of the day. Before Coates, the government had been a sporadic intervener. That should not be mistaken for a minimal role. Contrary to the fondly cherished myth in some quarters that big government only got going with the election of the first Labour government in 1935, there was a chequered history of active government involvement in the development of the social and economic fabric: the various Land Acts of the Liberal administrations and Sir Joseph Ward’s Advances to Settlers Act saw the government heavily involved on behalf of small settlers seeking land. Richard Seddon’s old age pension legislation and William Pember Reeves’ Industrial Conciliation and Arbitration Act were landmarks in the social and industrial development of a country that attracted the attentions of commentators from the old world fascinated by this flowering of “socialism without doctrine”.

The lack of doctrine meant that while the government was a powerful agent that could be mobilised, it was never conceived as standing ready to take over the management of the economy in a bureaucratic sense. It was a pump primer, a fire extinguisher and a rescue vehicle, not a controller/ administrator. This same lack of doctrine allowed a man like Coates, the defender of freehold title and a sturdy, self‑reliant specimen from the backblocks of Kaipara, to enter politics in the first instance as an “independent Liberal”. The busy, undogmatic use of state agencies to pursue the interests of farmers in small communities continued unabated during the rule of the Reform Party with whom Coates threw in his lot (if not, as Bassett reveals, his soul).

In contrast, the state’s reach by the early 1980s was understood (and increasingly resented) as being almost unlimited. The web of controls and protective devices that had been spun during the first two decades following World War II had sought to insulate completely even the trading sectors of the economy from external ills. Muldoon’s national superannuation carried social largesse to its zenith. And the government borrowed heavily, both at home and abroad, to finance large industrial projects and all manner of business developments.

Public choice analysts would say that the Muldoon administration’s final siege was the logical end‑point of policies that handed unrestrained levers of power to politicians. That is probably too deterministic a conclusion. But the possibilities of overweening government involvement in the economic life of the nation stem, unquestionably, from Coates’ time (as they do throughout the English-speaking world). Coates, one suspects, would have been uneasy with the extent to which the managed and bureaucratised economy was taken by Labour and accommodated by National. But the seeds of the world we have been dismantling these last 10 years were laid during the years of his greatest influence. Coates presided over the government’s transition from colonial development agent to modern bureaucratic administrator.

Coates’ first experience of public life was the Otamatea County and his first ministerial post Public Works (to which he subsequently added Railways and the Post Office). His whole experience of politics was rooted in the provision and development of infrastructure and services. To him we owe the large, centrally run electricity generation system that is only now starting to be challenged. At a time when local authorities were investigating all sorts of small schemes Coates was declaring that “the government’s margin of credit and security is immeasurably greater than that of any local effort.”

Bassett locates repeated references by Coates to the government as an agent for securing “value for money” for the people. This claim was most curiously raised by Coates in justification of his decision to license the broadcasting industry. While such a step had no ideological motivation, it was, as Bassett notes, a link in the chain that joins the Liberal and Labour administrations that straddle the early and middle years of this century respectively. As Prime Minister Coates presided over a welter of legislation that introduced town planning, transport regulation and film censorship, not to mention rafts of occupational licensing.

From these years, too, come the producer board debates with which we are still familiar. Coates’ dealings with the Dairy Board’s first abortive foray into marketing and price control displayed an ambivalence that, under pressure, left the impression of a fumbler. As Bassett puts it: “Dairy farming radicals saw him as a traitor; conservatives saw him as a politically dangerous socialist.”

Managing to alienate everybody (the fate of Coates’ premiership from 1925‑28) is a trick that can be pulled off through lack of political cunning and through an ability always to see both sides of the question. Bassett says he lacked guile and strategic follow‑through. The lack of partisan cunning that made such a strongly positive personal impression left him open to sectional attack and the appearance of drift and inaction. But the same reasonable open-mindedness that proved such an unexpected handicap to Coates’ leadership equipped him uniquely to tackle the daunting problems that the slump generated from 1930 on.

Coates’ role in the coalition government of 1931‑35 was decisive in laying the foundations for a new relationship between the state and economic forces. The key year is 1933, starting with devaluation and ending with the Reserve Bank Act and encompassing along the way a Small Farms (Relief of Unemployment) Act, further relief for mortgagors and tenants, the statutory conversion of domestically held public debt to lower interest rates and a matching measure to reduce local government debt servicing costs. All this was done against a backdrop of strict fiscal discipline, with Coates resolutely declining to spend money on relief measures in advance of securing budget balance.

This is the part of the story that, given New Zealand’s recent experience of severe recessions and economic dislocation, could benefit from an extended and more economically focused account. In common with his study of Ward, Bassett never strays far from a strictly biographical account that supplies neat summaries of the key arguments at stake but little in the way of discursive analysis of the issues in isolation from the personalities. The debate over devaluation was the defining issue of the coalition government ‑ those who backed devaluation were the activists, the people who argued something could and should be done. Those who opposed it resisted the call to action and by implication the idea that the government could lead the way out of problems that were complex and international in origin.

The predicament was simple and stark: between 1929 and 1932 the value of the country’s exports fell by 40% despite substantial increases in the volume of farm production. A one‑third fall in domestic living standards was required to bring the costs of export production into line with market returns. Not surprisingly, there was no orderly, mechanical reduction in domestic wages and prices across the board to accommodate such a collapse. While national income fell by a third (as did farming incomes), retail prices declined by less than 20%. Farmers and businesses churned through their capital to stay afloat and then faced bankruptcy. Unemployment ballooned.

The question economists (such as there were) debated was how to get the cost structure of the economy down in line with greatly reduced national income so as to restore profitability and employment. A committee of three professors summarised the situation and options in early January 1933. Sixty years on, the trade‑offs and adjustment strategies remain as painful and problematic. The committee hoped adjustment measures would be temporary but acknowledged that if there were no recovery in world prices they might have to be permanent. And they warned a readjustment of burdens would occur whatever the path chosen “whether readjustment occurs by leaving conditions to right themselves or by positive governmental action of one sort or another.”

The committee accepted the basic wisdom of the classic conservative position that players in the marketplace had the best incentives and information. But, it asserted, “It is an important function of government to ensure such general conditions as will permit production and trade to function satisfactorily. Over a large part of the field of business these conditions do not at present exist.” What such “general conditions” entailed was not spelt out but the committee was clearly mindful that the scale of the adjustment required to bring incomes into line with export prices was such that unmanaged inflation alone would be intolerable: “Serious social friction would be engendered, more especially as wages, salaries, interest, capital indebtedness and taxation would not fall in harmony.” It was, albeit in the midst of an unparalleled slump, a conclusion that would be drawn repeatedly through the following decades as a political justification for smoothing the path.

So the committee turned to positive remedies. It canvassed the various costs and how each, in turn, might be lowered. The committee recommended extending the existing mortgage relief facilities through parking debt in suspensory accounts to leave open the possibility of complete debt write‑offs. Further statutory reductions of interest and rent were not countenanced for fear of causing a failure of investor confidence. Voluntary reductions were encouraged instead. The possibility of narrowing the margin between deposit and lending rates was also canvassed to bring down overdraft rates and encourage more active use of funds through making fixed deposits less attractive. The case for further cuts in wages was spelt out bluntly: wages (16% lower) had fallen less than prices (16%) and the national income (33%).

On the other side of the equation ‑ increasing farming (ie export) incomes ‑ the committee considered direct credit expansion, devaluation and a grant or bonus to private producers but devoted the weight of its attention to devaluation. Simple inflation through credit expansion was dismissed as providing no guarantee that the additional purchasing power could be retained in the hands of farmers. No such problem was envisaged with devaluation (10% being the suggested level). “A rise in the exchange rate gives no reason for a rise in fixed charges nor for any increase in wages. It is, in fact, a means of preventing heavy reductions in both these items.”

It was acknowledged that ‘raising the exchange” would involve a transfer of real wealth from wage earners to farmers but that, it was argued, was taking place anyway as deflation proceeded. “The point of equilibrium can be reached more readily and with less dislocation under a higher (ie lower, in our terms) exchange rate.” Or as they put it, under a heading “Associated Problems”: “The inflation involved in a rise of exchange is a partial set‑off to the deflation that is inevitable and the proposal aims only to avoid the worst effects of deflation.”

The idea that one should even get into a deflationary position today is hard to comprehend in a world of floating exchange rates and highly responsive monetary policy. But in the 1930s the straitjacket of fixed exchange rates, coupled with only the most rudimentary understanding of how monetary flows affect expectations, meant that the authorities had the most limited means. It was noted, however, that if there was a time when confidence wouldn’t be unduly dented by devaluation it was the present, particularly in view of Britain’s own departure from the gold standard. The key was to improve farming incomes and thereby restore confidence to the heartland of the economy.

Coates, along with many farmers, became a convert to devaluation as the gloom deepened through 1932. The key forces in opposition to devaluation besides the banks were the Treasury and its finance minister, W Downie Stewart. Coates’ memo to the cabinet of 9 January is a distillation of the case brought together by the three professors. But there was a subtle difference. Where the economists had argued for a temporary adjustment which might have to become permanent without speculating on which outcome was most likely, Coates the advocate pushed the optimistic line: “I cannot get my mind away from the feeling that prices will now improve more rapidly than previously … Generally, I am convinced that we are justified in anticipating a recovery of prices above the present level in the comparatively early future.” From our vantage point, devaluation appears a sectional response ‑ helping farmers at the expense of the internal economy. But in Coates’ time fanners were the nation’s income‑earners. So began nearly half a century’s macroeconomic management designed to secure the externally exposed sector of the economy from internal maladjustments.

In the same memorandum Coates urged the enactment of the Reserve Bank Bill which had been making slow progress through the House. The case for a Reserve Bank had arisen from the need to regularise wartime regulations governing the issuance of currency and a desire to separate the conduct of New Zealand’s monetary policy for a banking system heavily dominated by Australian banking interests whose preoccupations were necessarily influenced by the particular problems of the Australian economy. Coates’ support for the measure made no reference to these concerns, returning, instead, to the same sort of justification he urged for state electricity generation: a strong institution capable of negotiating with the financial world was needed if ample and cheap credit were to be made available. This was no social credit fantasy but the notion that private competitive forces might dissipate opportunities where a strong, coordinating body acting in the wider public interest would maximise them. Coates lived before anyone had developed a serious critique of the incentives that lead to bureaucratic inertia and political vote buying. Coates was forging new tools that, used for the first time and with honourable intentions, seemed to point the way forward.

Coates’ push in early January 1933 saw his programme adopted and with it the resignation of Downie Stewart. As the only real activist in the cabinet, Coates was the obvious candidate to take over the finance portfolio. Hence the key decisions of the coalition government from 1933 onwards were his. Bassett fixes his attention firmly on the man who, as he observes, never lost his nerve. Bassett does not dwell on the detailed impact of his measures or whether alternative policies would have delivered better adjustment. Again, a modern economist’s analysis of the situation would provide a useful companion to the study. But on the political outcome there was no doubt: this was a fatally unpopular government and it went to the wall in 1935. Bassett does not speculate on whether it could have been otherwise and one suspects alternative policies would have made little difference. There weren’t popular decisions available at the height of the depression.

Bassett’s portrait of the man is as sympathetic as his assessment of his lack of political skills is frank. It will do much to restore a reputation that suffered at the hands of policies and circumstances far wider than the governments of which he was part. Peter Fraser’s invitation to him to join the war cabinet suggests that his political opponents had a better appreciation of his place in history than the commentary of subsequent decades might suggest. The absence of partisan rancour at key moments in his career is the most appealing trait to emerge from Bassett’s study. Sir Sidney Holland, National’s first Prime Minister, emerges in a particularly poor light by contrast.

Yet Coates’ lack of partisan sinews leaves a question mark over how we should judge him. Bassett’s view is that he was “a heroic conservative, not a provident radical”. And there is no question that the height of his activism never saw a departure from what would these days be regarded as model fiscal rectitude. The Reform Party he led to a landslide victory in 1925 explicitly borrowed from Coolidge’s famous axiom of political somnolence: “More business in government, less government in business.” But whether this makes Coates a conservative is another matter.

There are conservatives of interest and conservatives of instinct. Coates was the former. The small farmer from Kaipara was throughout his career a hard‑wired advocate for and ‑defender of the freehold. It was a specifically rural attachment. Abstract notions of property rights made little impression on him as the debate with the banks over the value at which the gold holdings were transferred to the government in 1933 shows. In that case Coates was adamant that the increase in value of gold reserves as a consequence of the devaluation should accrue to the people, not the banks. The only reason the banks held gold was to meet statutory requirements that accompanied their right to issue notes. The gold, he asserted, was not held as an investment. Since the government was permanently relieving the banks of any obligation to meet the demands of depositors in gold instead of notes, it followed that the government should take any profit. As Coates put it to the House: “This depreciation [of the exchange rate] has been at the expense of the people and not at the expense of the banks. It follows that any profit … on gold reserves arising out of government action should accrue to the state, representing the people as a whole.”

His attachment to the freehold title to land was, instead, motivated by the practical desire to give people a permanent stake in the country they were building. Similarly, workers should be encouraged to make homes for themselves ‑ this would, he said, “do something to create permanent content among our people”. It is as though the freehold exerted a moral beneficence on those who acquired it. It is an unspoken sentiment that lives on today in the Reform Party’s successor, the National Party. Significantly, one of his pet projects to relieve unemployment was the small farms scheme which sought to acquire land on which to settle unemployed men. Allowing the unemployed to practise subsistence farming or orcharding on their own plot was, for Coates, an instinctive response. Property was a source of social stability and personal dignity. He warmly approved the use of land taxes to break up large holdings and free land for settlement. Property rights were valuable only if they were accessible.

If Coates was a conservatively interest, in the sense I have described it; he was not a conservative by instinct. The defining feature of the conservative mind is a reluctance to venture outside the domain of accumulated experience. New knowledge is to be treated with scepticism; the inadequacy of our knowledge is ground enough for extreme caution; theory and system are anathema. Though Coates had little truck with theory, he was open to new ideas and new ways as long as they contributed to broadly understood goals of progress and the greater good. He described his policies as “liberal and progressive” and, by the lights of many of his contemporaries, they were. The introduction in 1926 of the forerunner of the universal child benefit (abolished only in 1991), was scarcely the hallmark of a reactionary. Coates was never fiscally profligate, but neither did he shy away from expenditure to alleviate distress or promote the advancement of the general population if funds were available. He was never personally wealthy so was never far from the sentiments and experience of people with only modest resources.

The closest he came to acknowledging the sea‑change in economic thinking that swept the world during the 1930s is found in a speech Bassett cites from 1935, in the closing days of the coalition government. “Whether we like it or not,” he said, “this is an age of large-scale organisation and of collective effort. Just as in the prevention of war the collective system suggests a way out, so in economic life collective organisation is displacing individualism.” It was a prophetic utterance but, as in everything Coates did and said, it issued from practical observation, not ideological conviction.

This capacity to follow the tide of affairs and remain open to new approaches is not the attribute of a conservative. It is the strength ‑ and the weakness ‑ of the prudent, progressive liberal. Coates’ description of his own policies is the correct one. And it is this aspect of Coates’ contribution that emerges so impressively from Bassett’s account ‑ “the only tireless trier in that baffled and casual ministry” in the words of a former aide.

It is almost impossible to find a contemporary equivalent. Everyone is infected, to a greater or lesser extent, by theory. Today’s politicians are either educated to apply abstract reason to the task in hand or persuaded to rely on others formulas as a way of making sense of overwhelming complexity. Coates lived in much simpler times.

If he can fairly be held responsible for helping to lay the foundations for the modern bureaucratic state, he could not possibly have imagined the technologies or circumstances that would allow it to grow. What shines through this biography is honesty, forthrightness, generosity and a well-motivated nature. Both in terms of a pioneering upbringing and war service (for which he absented himself from Parliament), he had lived in a way that very few, if any, contemporary parliamentarians have. If the consequences of his indifference to philosophical principles should raise a warning about where political activism may lead, his humanity and generosity of spirit should serve as an example and as an antidote to the and intellectualism that so often invades contemporary policy debate.

Michael Bassett’s excellent study is required reading for a generation of politicians who stand, as Coates did, at a turning point in the country’s history. There is much here in the way of inspiration.

Simon Upton is Minister for the Environment and Member of Parliament for Raglan.

Also recently published on Coates, but not included in this review, is Coates’ Tale, by Bruce Farland, selfpublished, $29.95, ISBN 0 473 031825. This provides an interesting counterpoint to Bassett’s account ‑ Editor

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