Case Study

Central bank public works investment in New Zealand, 1935-1939

Extract from the paper, Bringing the helicopter to ground: A historical review of fiscal-monetary coordination to support economic growth in the 20th century. Josh Ryan-Collins and Frank van Lerven, August 2018, pp 22–23.


In 1934 New Zealand (still a British colony at the time) established its own (partially privately owned) central bank, the Reserve Bank of New Zealand (RBNZ), with the blessing of the Bank of England. The main objective of the Conservative government of the time was to stabilise the national currency and help reflate the economy following the Great Depression.

In 1935 the incoming Labour government made a number of changes to the form of functioning of the RBNZ in its 1936 Reserve Bank Amendment Act. The Act nationalised the organisation completely, with the state buying out the bank’s private shareholders, providing more scope for the bank to extend credit to the government and its agencies, and also adding a power that allowed the Reserve Bank to vary the reserve requirements on trading banks (Wright 2006).

By the late 1930s the powers exercised by the government through the RBNZ, were ‘the most comprehensive wielded by any monetary authority within the Commonwealth except for Britain’ (Singleton 1998: 139).  The incoming finance minister, John Nash, was determined to use the RBNZ as a tool to support the massive fiscal expansion the Labour party thought necessary to shift the economy out of recession and tackle the country’s widespread unemployment.

This broad remit, going well beyond price stability, saw the Reserve Bank being used to support government spending in the form of direct credit creation as well as bond financing of government deficits (Plumptre 1940).

The two most notable uses of this policy were RBNZ being used to guarantee farm prices, with shortfalls between market and guaranteed prices met by its advances, and central bank credit for housing finance.

Nash ordered the Reserve Bank to make advances available as a deliberate test of the effect of ‘a limited amount of credit expansion’ for the building of state housing (Wright 2009:57). The sum involved was significant at NZ£5 million, around 2% of GDP. The new homes built were mainly for poorer households and targeted New Zealand’s most serious slums.

Aside from housing, the Reserve Bank supported a range of other infrastructure and public works activities and supported farmers by guaranteeing their exports. In total, in the period from 1936 to 1939, the RBNZ created NZ£30 million of credit to support the government. In the latter two years this was 5% and 7% of GDP and 13% and 17% of commercial bank assets. 19

Econometric analysis by Greasley and Oxley (2002) finds that the RBNZ’s expansionary credit policy was a key feature in reflating the domestic economy and enabling the country to grow more rapidly out of the 1930s depression than many other countries.

Over the four-year period from when the bank commenced its credit creation policies, real GDP increased by 30%, with 15% growth in 1936 and 1937 alone (Rankin 1992). The study carries out a counterfactual exercise and estimates that had the old, sterling-backed regime survived, New Zealand’s GDP per capita in 1938 would have been around one third lower (ibid: 718).


19 Source: New Zealand Long Term Data Series, Series E.1.1 Nominal Gross Domestic Product, table G.2.1 (consolidated accounts from a range of sources). Retrieved from:

Assets and liabilities of the Reserve Bank of New Zealand, 1934-1939, New Zealand yearbook 1940, p68. Retrieved from:

Sign Up to Our Newsletter

Subscribe and stay up to date with our campaign to reform the money system. Positive Money NZ is an independent, non-profit group advocating for monetary reform in New Zealand. We are part of a global movement of organisations campaigning to change the way money is created so that money serves society.

You have Successfully Subscribed!