John Singleton - Innovation and Independence: The Reserve Bank of New Zealand, 1973 -2002

In the 1980s New Zealanders changed the way they thought about the economy. Reacting against Robert Muldoons faltering siege economy, with its wage/price freeze and its regulations, a new generation of policy-makers in Parliament and in the Treasury opened the economy up to international competition.

The Reserve Bank of New Zealand was at the forefront of economic thinking and reacted positively to this political sea-change. In the 1980s and the 1990s the Bank was a pioneer that won the respect and attention of far larger central banks. In this fascinating book, leading economists John Singleton, Arthur Grimes, Gary Hawke and Frank Holmes show how the relationship between the Reserve Bank of New Zealand and government was remodelled after extensive debate among parliamentarians, central bankers and Treasury officials. They discuss the origins of inflation targeting, the adoption of a light-handed oversight of the financial system, and the modernisation of the management of the Bank itself. The 1989 Reserve Bank Act made the New Zealand Reserve Bank, in some respects, one of the most independent in the world.

Innovation and Independence, which takes up the story from Gary Hawkes 1973 book Between Governments and Banks, is essential reading for anyone interested in New Zealands recent history.

INNOVATION AND INDEPENDENCE

THE RESERVE BANK OF NEW ZEALAND 1973-2002

JOHN SINGLETON
WITH ARTHUR GRIMES, GARY HAWKE AND FRANK HOLMES

First published 2006
This ebook edition 2013

Auckland University Press
University of Auckland
Private Bag 92019
Auckland 1142
New Zealand
www.press.auckland.ac.nz

Crown Copyright, 2006

eISBN 978 1 86940 701 8

This book is copyright. Apart from fair dealing for the purpose of private study, research, criticism or review, as permitted under the Copyright Act, no part may be reproduced by any process without prior permission of the publisher.

Cover design: Base Two
Front cover photographs: Stephen ACourt and Matthew Wright
Back cover photograph: Stephen ACourt

This book revises and, more importantly, continues Gary Hawkes history of the Reserve Bank of New Zealand, published in 1973. The impetus for a new official history of the Bank came from Murray Sherwin, who was a Deputy Governor between 1995 and 2001. Research began in 2001 and was completed in 2005. The History Group of the Ministry for Culture and Heritage oversaw the project and ensured the independence of the authors. The Bank had no direct or indirect control over the books content and the views in it are not necessarily shared by its management or Board.

All four authors are associated with Victoria University of Wellington. The Bank gave them unrestricted access to its archives, including recent material. The authors take collective responsibility for the interpretations and conclusions arrived at in each chapter.

They wish to thank the staff of the Reserve Bank, especially Alan Boaden and Liz Castle and the members of the Knowledge Centre, for providing a congenial and constructive research environment. They also appreciate the contributions and advice of Bronwyn Dalley, Gavin McLean, and Megan Hutching of the MCH History Group, and Alison Carew and David Green, for their editing. Kynan Gentry from the Ministry selected the photographs and wrote the captions.

Don Brash, Roderick Deane, the late Lindsay Knight, Peter Ledingham, Michael Reddell, Graham Scott, and Murray Sherwin consented to provide taped interviews for the project. Copies of the tapes are deposited at the Turnbull Library in Wellington (access restrictions apply in some cases.) The authors are grateful to these interviewees.

They express their gratitude to the following people (in addition to those named above) for contributing in various ways: Don Abel, Louise Abolins, Yogesh Anand, Steve Anderson, David Archer, Alan Bollard, Roger Bowden, Steve Dawe, Paul Dickie, Leonie Fraser, Darren Gibbs, Margaret Griffin, Kevin Haines, Viv Hall, Lisa Hampl, Deirdre Hanlon, Tanya Harris, Neil Humphries, Leni Hunter, Peter Katz, George Kaufman, Mervyn King, Rita Klus, Brian Lang, Dick Lang, Ashley Lienert, Neha Malhotra, John Martin, Judith Maxim, David Mayes, Kieran McCloat, Malcolm McKinnon, John Mendzela, Geof Mortlock, Francisco Nadal de Simone, Peter Neilson, Barry Norton, Jock Phillips, Weshah Razzak, Peter Redward, Iain Rennie, Scott Roger, Jo Rush, Ulf Schoefisch, Richard Shallcrass, Pierre Siklos, Brian Silverstone, Grant Spencer, Kenneth Sullivan, Mary Swainson, Mark Swinburne, Wesley Thompson, Justine Tomkies, Bruce White, Matthew Wright.

Elements of the RBNZ history were presented at conferences and seminars at the Universities of Auckland, Birmingham, Newcastle (NSW), and Wollongong.

Accrual accounting: Accounting that deals with all resources and matches the timing of receipts and expenditure. This is the standard approach used in private business.

Appreciation: A rise in the external value of the national currency.

Balance of payments: The record of a countrys external transactions over a given period. The main components are the current account (which includes payments for trade in goods and services and other current transactions) and the capital account (which measures capital flows). If the exchange rate is allowed to float freely, the balances on the current and capital accounts add up to zero. If the exchange rate is controlled in some way, any overall surplus or deficit will require a change in official foreign exchange reserves.

Balance of payments (or foreign exchange) constraint: The belief that economic growth is held back by a weak balance of payments caused by rigidities that hinder export revenue from rising as fast as expenditure on imports. This belief was popular between World War Two and the 1970s. One of the solutions proposed was to develop new export industries.

Bretton Woods: An international conference during the Second World War at which the Americans and the British were the main players. This meeting led to the formation of the International Monetary Fund and the World Bank. The fixed exchange rate system overseen by the IMF between the end of the war and 1971 was known as the Bretton Woods system.

Capital account (see Balance of payments).

Capital adequacy: Whether or not a bank has enough capital invested by shareholders to provide an adequate cushion against insolvency should the bank run into difficulties.

Certificate of deposit: A certificate for money deposited in a trading bank for a specified period and earning a specified rate of return.

Clearing: The system whereby banks exchange cheques that have been drawn on each other, and then settle any net amount owing.

Commercial bill (or bill of exchange): An order, written by one person to another, and signed by the writer, requiring the person to whom it is addressed to pay on demand, or at a stated date, a certain sum of money to the writer, or to his order, or, in some cases, to the bearer.

Continuous linked settlement: A mechanism through which both legs of foreign exchange transactions can be settled simultaneously, thus minimising risk to the parties involved and their banks.

Crawling peg: A fixed exchange rate that is adjusted frequently, usually in response to changes in inflation at home relative to inflation abroad.