The ReseRve Bank and new Zealand’ s economic hisToRy and n ew Z ealand ’ s economic hisToRy T he R eseRve B ank Introduction 3 Maori economy pre–1840 4 Colonial economy 1840–1890 5 The ‘long depression’ The settler economy by numbers Britain’s farm 1890–1932 8 The trading banks and the economy The early twentieth century by numbers National development 1933–1973 12 Planned recovery Pastoral prosperity End of pastoral prosperity The mid-twentieth century by numbers Turbulent transition 1973–1993 19 New Zealand’s problems Inflation busting The late twentieth century by numbers Open economy 1993– 25 Renewed growth Glossary 27 conTenTs
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The ReseRve Bank and new Zealand’s economic hisToRy �
� The ReseRve Bank and new Zealand’s economic hisToRy
Front cover images, clockwise from left top: Reserve Bank dealing room, early 1990s (RBNZ); Reserve Bank building (right), (RBNZ, photography Stephen A’Court); One pound note issued by the Otago Banking Com-pany, circa 1860s (RBNZ); underlay, Wellington buildings (RBNZ); “Economy House”, token issued by a Dunedin merchant, circa 1860s (RBNZ). Back cover: Reserve Bank of New Zealand building (RBNZ, photography by Stephen A’Court).
� The ReseRve Bank and new Zealand’s economic hisToRy
Polynesiansestablishedpermanent
settlementsinNewZealand,andinitial
exploitationofnaturalresourcesgaveway,
probablyduringthefifteenthcentury,
toamoresettledworldofgardening
andresourcemanagement.TheMaori
economyproducedenoughsurplusto
supportasignificantcycleofpabuilding
fromthemid-fifteenthcenturyonwards.
WhenEuropeansfirstarrivedin
numbersintheearlynineteenthcentury,
Maoriwereeagertotrade.Potatoes,corn
andflaxgrownbyMaoriwereusually
barteredforweapons,rum,tobacco,
blanketsandEuropeantoolsandproducts.
Bythelate1830s,settlersandMaoriwere
usingmoneyinever-increasingquantities.
maoRi economy
pRe-1840
Top right: A lithograph by George Angas showing everyday items from the Maori domestic economy, around 1847.
Right: John Williams is usually credited with this ink-and-wash sketch of Maori bargaining with pakeha, mid-1840s. Pigs, potatoes and flax were usually exchanged for tobacco, blankets, tools, guns and powder.
John Williams, ATL, A-079-017.
George French Angas, ATL,PUBL-0014-55
The ReseRve Bank and new Zealand’s economic hisToRy �
colonial economy
1840-1890
Banksmadeanearlyappearance.
TheUnionBankofAustraliaopeneda
branchinBritannia(Petone)in1840,but
atfirsttherewasnocentralauthorityto
issueoradministercurrency.In1851the
governmentopenedtheColonialBankof
Issue,withauthoritytoissuebanknotes.
However,thisexperimentdidnotlast
long,andthebankclosedin1856.
Theinfantcolonyhadagreatneed
forinfrastructure.Everythingrequired
tosupportsocietyandeconomyhadto
bebuiltfromscratch–includingroads,
railways,schools,hospitals,sewerage
systems,ports,andfactories–and
somebodyhadtopayforit.Private
enterpriseplayedaroleinbuilding
businesses,butthemainweightof
responsibilityforfinancinginfrastructure
fellonthegovernment.
Aneconomyinthewestern
senseemergedacrossNew
Zealandinthe1840s.
Onehistorianhascalledthis
earlyphaseour‘quarrying’
period.Exportswerebasedon
exploitationofexistingresources,
notablyflax,timber,gum,gold,
andtheavailablefertilityofthe
soil.
Photographer unidentified, ATL,F-594-1/1
Top right: Bank of New Zealand branch at either Arthur’s Point or Maori Point, Otago, opened by George Ross in 1863.
Above: Dunedin, 1870s.
Photographer unidentified, ATL, F-48814-1/2
� The ReseRve Bank and new Zealand’s economic hisToRy
Thisposedotherproblems.Atthetime
therewasnoincometax,andthemain
governmentincomewastradelevies.
OthersourcesofCrownrevenueincluded
thesaleofCrownlands–whichwere
purchasedwholesalefromMaoriduring
theperiod–andlicensingfees.
Earlygrowthfocussedonthepastoral
sector,butthemainenginebehindNew
Zealand’seconomybytheearly1860s
wasgold.Dunedininparticularboomed
onthebackofthepreciousmetal.Many
tradingbankswereestablishedorset
upbranchesaroundthegoldfields,and
between1861and1870goldmade
upmorethanhalfNewZealand’stotal
exports.In1863,thepeakyear,it
comprised70percent.Woolandtimber
tookdistantsecondandthirdplaces.
The ‘long depRession’Manysettlersenvisagedacolonythat
wouldbecomeabiggerandbetter
Britain.Infact,oncegoldhadrundown,
thedevelopingNewZealandeconomy
hadlittletosellbeyondwool.Gum,
flax,timber,grainandtallowmadeup
lessthantenpercentoftotalexports.
Evengolddidnotpreventmassivetrade
deficits.Typicallytheeconomyimported
twicewhatitexportedbyvalueduring
Left: Gold digging in Otago, probably on the Clutha, early 1860s.
Below: Panning for gold, probably during the 1880s.
Artist unidentified, ATL, A-253-035
Photographer unidentified, ATL, F-3053-1/2
The ReseRve Bank and new Zealand’s economic hisToRy �
The seTTleR economy By
numBeRs
Settler-erastatisticsarepatchy.However,
wecangetageneralpictureofwhatwas
happeningfromexportfiguresandprice
changes.
thisperiod,andthedifferencewas
madeupbyimportedcapital,someofit
accompanyingthemigrantsthemselves.
Tradedeficitsofthissort,financedby
capitalinflowstosupportdevelopment,
weretypicalfeaturesofcolonialsettler
societiesofthetime.
Withoutgoodinternalcommunications,
theNewZealandeconomywasacluster
ofseparateregionaleconomies.Colonial
TreasurerJuliusVogelinitiatedaloan-
fundedpublicspendingprogrammeto
rectifythisintheearly1870s,intending
tobuildinternalinfrastructureandbring
newsettlerstoopenupthehinterlandof
theNorthIsland.
Forafewyearseverythingboomed,
butfrom1879arecessioninBritain
flowedintothecolonies.Estimatesshow
thatNewZealand’slevelofrealGDPwas
flatduringthe1880s,andforthefirst
timetherewasanetflowofmigrants
outofthecolony.However,industrial
andrailwaydevelopmentwassignificant
andithasbeenarguedthatalthough
pricesfellandthebankingsectorwas
understrain,theeconomywasgenerally
goingthroughaperiodofdevelopment,
includinggrowthoflocalsmallindustries,
madepossiblebyVogel’sinfrastructure
whichhelpedspuranationaleconomy.
Theadventofrefrigeratedmeatexports
fromtheearly1880screateda£1million
exportindustryby1890,bywhichtime
thetradebalancewasshowingamodest
regularsurplus.
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
1860 1865 1870 1875 1880 1885 1890 1895
%
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10%
‘Vog
el’b
oom
Gol
dru
sh
‘Lon
gde
pres
sion
’
Graph 1
Inflation 1860–1900
(estimated)
Source: J. W. McIlraith (1911), Statistics New Zealand.
Source: J. W. McIlraith (1911), Brian Easton (1984), as republished in Phil Briggs (2003).
� The ReseRve Bank and new Zealand’s economic hisToRy
Oneofthemostsignificanteconomic
developmentsoftheperiodwasnew
tradeinmeatanddairyproducts,
supplementingthewoolmarket.This
industrywasdrivenbythedevelopment
ofrefrigeratedshippinginthe1880s.By
theeveoftheFirstWorldWar,meatand
dairyexportsmadeup35percentoftotal
goodsexports.Exportcommodityprices
boomedduringthewar,whenBritainwas
keentobuywhatevercouldbesupplied.
However,althoughtheboomlasted
forafewyearsafterthewar,fromthe
early1920stheNewZealandeconomy
performedquitepoorly,withonlybrief
upturns.
Muchofthedifficultycamefromthe
externalsector.Asaprimaryproducer
sellingprincipallytothe‘homecountry’,
NewZealandwasparticularlyvulnerable
toeconomicfluctuationsinBritain.In
1928,forexample,Britaintook£41
millionofNewZealand’stotalexports,
byvalue,outofatotalof£56million.
However,Britishfortunes,aftertheFirst
WorldWarandintothe1920s,werenot
good,andthiswasreflectedintoNew
Zealand’seconomicsituation.
BRiTain’s FaRm
1890-1932
Thesecondmainphase
ofNewZealand’seconomic
historybeganinthe1890s
andlastedintotheearly
1930s.Duringthistime
NewZealandbecamea
primaryproducerforBritain,
exportinglargelypastoral
productsintothissingle
market.
Edward Thomas Robson, ATL, F-1541-1/2-MNZ.
The ReseRve Bank and new Zealand’s economic hisToRy �
The TRading Banks and The
economy
Inthe1920s,NewZealandstilllackeda
centralbank,despiteencouragementfrom
Britaintoestablishone.Banknoteswere
issuedbythesixmaintradingbanks.Until
1914theywererequiredtoholdenough
goldandsecuritiestobackthevalueof
thecurrency,butthisrequirementwas
suspendedforthewaremergencyand
neverreinstated.Inpractisethischange
madelittledifference:thekeyquestion
forthebanksremainedtheirability
tomeetcustomerdemandforsterling
balances–thefundsinBritainthatpaid
forimports.Thebanksmanagedtheir
locallendinginordertokeepthevalueof
theNewZealandpoundroughlyequalto
thatoftheBritish.Thisinturninfluenced
Opposite: Meat from the Longburn freezing works being taken aboard ship in Wellington, early 1930s.
Above: Railway construction workers on the Main Trunk Line near Waiouru, Ruapehu and Ngauruhoe in the background, probably between 1901-10. Railway played a key role in New Zealand’s internal communications and economy for many years.
Top: Gear Meat label, circa 1880s.
Frederick Nelson Jones, ATL, F. N. Jones Collection, G-7689-1/1
Colour print label, ATL, Eph-F-MEAT-Gear-002-3
�0 The ReseRve Bank and new Zealand’s economic hisToRy
thelevelofspendingandeconomic
activityinthedomesticeconomy.
Fourofthesixtradingbankswere
Australianowned.Theirsterlingbalances
inLondonactuallyreflectedAustralasian
activity,notjustthatofNewZealand,
withtheresultthatthestateofAustralia’s
foreigntradealsoaffectedtheavailability
ofcreditandforeignexchangeinNew
Zealand.Thisarrangementworkedwell
whentheAustralianandNewZealand
economieswereinmuchthesamestate,
butleftNewZealandexposedwhenever
theAustralianeconomywasweakerthan
ours.
Thegovernmenthadfewtoolsto
addressthisandothereconomicissues
–allthatcouldbedonewastoadjust
governmentrevenueandexpenditure,
throughfiscalpolicy.Governmentsinthe
mid-to-late1920sthereforesoughttouse
Top: Bank of New South Wales, Wanganui branch, 1910.
Above: Bank of New Zealand five pound note, 1920s.
Left: Timber workers in the Kaitaki ranges, log hauler on the left. Although the economy was pastorally dominated, timber was a significant local industry for New Zealand.
Opposite top: Depression relief work on the Akatarawa road, early 1932.
Frank J. Denton, ATL, Tesla Studios Collection, G-17399-1/1
Arthur James Northwood, ATL, Northwood Collection, G-6214-1/1
The ReseRve Bank and new Zealand’s economic hisToRy ��
�� The ReseRve Bank and new Zealand’s economic hisToRy
TheReserveBankwasinitiallysetup
asanindependententity,butthisquickly
changed,andtheLabourgovernmentthat
cametopowerinlate1935broughtthe
Bankundergovernmentcontrol–oneof
itsfirstacts–andgavetheBankcapacity
toactasanagentfortheimplementation
ofitseconomicagenda.
TheReserveBankthusbecamean
integralpartofthewiderinterventionist
regimethatthefirstLabourgovernment
introduced,designedtobetterinsulate
theeconomyandpeoplefromfluctuations
inworldcommodityprices.Thisreflected
naTional developmenT
1932-1973Policy-makersinchedtowards
solutionsfortheproblems
NewZealandfacedduringthe
depression.Theexchangerate
wasdevaluedby25percentin
1933,andin1934theReserve
Bankopenedforbusiness.
Establishingacentralbank,
althoughnotsolelyaresponse
tothedepression,gaveNew
Zealandauthoritiesmoretools
tomanagefuturedownturnsin
theNewZealandeconomy.An
importantaspectoftheReserve
Bank’srole,fromitsfounding,
wasthesolerighttoissue
banknotesinNewZealand.
Leslie Lefeaux, first Governor of the Reserve Bank.
How cartoonist J. C. Hill (d. 1957) saw the arrival of the Reserve Bank.
Auckland Star
The ReseRve Bank and new Zealand’s economic hisToRy ��
–andtosomeextentanticipated
–ageneralinternationaltrendtowards
controlsandinterventionatthattime.
planned RecoveRy
Thenewgovernment’sagendainvolved
significantincreasesinspending,putting
severepressureontheforeignexchange
reservesofthenewcentralbank,and
threateningtheviabilityofthefixed
exchangerate.In1938,comprehensive
foreignexchangecontrolswereputin
place;thesewereadministeredbythe
ReserveBankuntilcontrolsoncapital
flowswerefinallyliftedin1984.Import
licensingbecameadominantfeature
oftheeconomy,withanemphasison
developinglocalmanufacturingand
assemblyindustries.
TheSecondWorldWarwasahuman
tragedy,butitwasalsoeconomically
beneficialforNewZealand–demandfor
ourcommodityexportswasstrong.The
waremergencypromptedgovernmentto
takenear-totalcontroloftheeconomy,
butwartimemadeiteasierforthe
publictoacceptausteritymeasures.The
Government’sexternaldebtwaspaidoff,
andtheeconomywasperformingsowell
post-warthatthegovernmentfeltable
toreversetheexchangeratedevaluation
of1933,puttingtheNewZealandpound
backonparwiththeBritish.
Thepost-warerasawtheworldreturn
tofixedexchangerates,underthenew
InternationalMonetaryFund(IMF),though
Top: J. G. Coates, 1878-1943, Reform party leader and a key mover behind the founding of the Reserve Bank – seen here probably around 1938.
Above: The Reserve Bank Board, Governor Lefeaux sitting centre, 1935. Silver platters in the back-ground were a gift from the Bank of England.
Below: First series ten shilling note issued in 1934.
S. P. Andrew Collection, ATL, F-19049-1/1
�� The ReseRve Bank and new Zealand’s economic hisToRy
NewZealanddidnotfinallyjointhisuntil
1961.However,extensivecontrolson
privatecapitalflowswereinplaceinmost
countriesandprotectivebarrierstotrade
werehigh,inNewZealandandelsewhere.
pasToRal pRospeRiTy
The1950sopenedupaneweconomic
worldforNewZealand.Termsoftrade
soaredduringtheearlypartofthe
decade,andwhileexportvolumesdid
notgrowspectacularly,pricessoared.
Thesehighprices–andthefactthat
NewZealandhadn’tbeenbadlyaffected
bythewar–meantthatNewZealand
rodehighintheinternationalincome
rankingsduringtheseyears.Inthe1950s,
NewZealand’sper-capitaincomewas88
percentthatoftheUnitedStates.
Oneoftheoutcomesofthisgrowth,
duringthe1950sand1960sinparticular,
wasanumberofsignificantgovernment-
fundedpublicworksprojects.Most
nationalroadsweresealedandnew
bridgeswereputin.Amajorhydro-
electricsystemwasbuiltintheSouth
Island,ofsuchscalethatitstoodNew
Zealandingoodsteadtwogenerations
later.Amajorstatehousinginitiativewas
maintainedintothe1960s.
Theeconomywashighlyregulated
throughoutthisperiod,whicharguably
contributedtostallinnovationandthe
developmentofnewinternationally
competitiveindustries,inturn
Top: Wartime poster celebrating New Zealand’s pastoral production.Above: Buyers appraising wool in a Canterbury woolstore, around 1939.
Photolithograph on sheet, ATL, Eph-E-TRADE-1940s-01
Green and Hahn, ATL, Making New Zealand Collection, PAColl-3060-010, F-1651-1/4-MNZ
The ReseRve Bank and new Zealand’s economic hisToRy ��
underminingNewZealand’slonger-term
growthprospects.Thefinancialsector
wasalsoheavilyregulated–bankinterest
ratesweretightlycontrolled.Capital
issuescontrols,administeredbythe
ReserveBank,affectedtheabilityofnon-
bankborrowersandbusinessestoraise
capitaldirectly.Onlyfromaroundthe
Above: Mustering sheep at Oran Gorge Station, Geraldine county, May 1943.
John Dobree Pascoe, ATL, John Pascoe Collection, F-399-1/4
late1960sdidmaterialliberalisationbegin
inthefinancialsector.
TheReserveBank’smainrolethrough
thisperiodinvolvedimplementing
governmentpolicy,andmanaging
theeconomiceffectsofswingsinthe
externaltradepositionandfluctuationsin
governmentspending.Inflationremained
�� The ReseRve Bank and new Zealand’s economic hisToRy
relativelylow,hereandabroad,until
aroundtheendofthe1960s.
end oF pasToRal pRospeRiTy
Althoughthe1950swereprosperousfor
NewZealand,thewritingwasnonetheless
onthewallforthissecondphaseof
NewZealand’s‘Britain’sfarm’era.The
countrywas,asoneeconomistremarked,
effectivelyamonoculture–heclassified
allourexportsas‘processedgrass’,
andmostofitwasgoingtoasingle
market,Britain.Britisheffortstolookto
Europeastradingpartner,ratherthanits
formerempire,meantthatNewZealand
increasinglyhadtofightforaccessto
itstraditionalmarkets,particularlyonce
theUKjoinedtheEuropeanEconomic
Community(EEC)in1973.
Evenbeforethen,however,New
Zealandwasineconomicdifficulties.Wool
pricescollapsedinDecember1966,and
in1967theexchangeratewasdevalued
sharply–thefirstadjustmentsince1948.
Commoditypricesweretemporarily
strongagainintheearly1970s,before
theaftermathofthefirstoilshock,in
Top: Edward C. Fussell, Governor of the Reserve Bank 1948-62.Above: Walter Godfrey Bowen, world champion shearer, February 1953.
Artwork Sir William Dargie, photo Stephen A’Court, RBNZ.
Photographer unidentified, New Zealand Free Lance Collection, ATL, PAColl-6303-05
The ReseRve Bank and new Zealand’s economic hisToRy ��
1973-74,confirmedthesharpturnfor
theworseinNewZealand’sfortunes.New
Zealand’sslidedowntheinternational
OECDrankingsacceleratedfrom1966-67;
andalthoughNewZealandersoftheday
didnotrecogniseit,theywereattheend
ofanera.
Gordon Onslow Hilbury Burt, Gordon Burt Collection, ATL, F-36542-1/2
Top: HRH Prince Philip talks to a freezing worker on the chain at the Gear Meat Works, Petone, Decem-ber 1956.Left: The Waipa Forest Service sawmill near Rotorua, air seasoning yards visible in the background, November 1955.Below: Tomoana freezing works, near Hastings, 1940s.Photographer unidentified, ATL, New Zealand Free Lance
Collection, PAColl-8602-45.
Morris James Hill, ATL, Morrie Hill Collection, F-177219-1/2
�� The ReseRve Bank and new Zealand’s economic hisToRy
The mid-TwenTieTh
cenTuRy By numBeRs
Above: New Zealand changed to decimal currency in 1967, bringing the third series of banknotes into circulation.
Below: Series Three one dollar note.
Graph 6
Real GDP 1940–1973
Source: Brian Easton (1990), Statistics New Zealand, as republished in Phil Briggs (2003).
0
10
20
30
40
50
60
70
1940 1944 1948 1952 1956 1960 1964 1968 19720
10
20
30
40
50
60
70$95/96bill$95/96bill
Kor
ean
war
Seco
ndw
orld
war
Woo
lcris
is
Graph 7
Inflation, 1940–1973
0
2
4
6
8
10
12
14
16
18
20
1940 1950 1960 1970
%
0
2
4
6
8
10
12
14
16
18
20%
Kor
ean
war
Firs
toi
lsho
ck
Seco
ndw
orld
war
Source: Statistics New Zealand
The ReseRve Bank and new Zealand’s economic hisToRy ��
InpartNewZealand’sfortunes
reflectedtheinternationalsituation.
Duringthe1960sand1970s,thecost
oftheVietnamWarandtheoilshocks
helpedcreateconditionsintheUnited
Statesandotherwesterneconomiesthat
combinedweakergrowththanhadbeen
seeninmuchofthepost-warperiod,and
muchhigherinflation.NewZealandwas
noexception–indeed,ourinflationrate
onaveragewasoneofthehighestofany
oftheOECDcountries.Unemployment,
however,remainedverylowinNew
Zealanduntilthemid-late1970s.
TuRBulenT TRansiTion
1973-1993
Thechangesthatmarkedthe
lastquarterofthetwentieth
centuryintheNewZealand
economywerefar-reaching
and,attimes,controversial.
Althoughoftencouchedinpurely
philosophicorpoliticalterms,
thesechangesalsoreflected
long-termeconomicissuesthat
canbetracedbackwellbefore
the‘reformperiod’.
Photographer unidentified, ATL, New Zealand Free Lance Collection, PAColl-5936-55, F-125016-1/2
Above: Benmore hydro-electric scheme under construction on the Waitaki river, central Otago, early 1960s.
Above: Series Three ten dollar note.
�0 The ReseRve Bank and new Zealand’s economic hisToRy
new Zealand’s pRoBlems
NewZealandhadanumberofspecific
localeconomicproblemsbythelate
1970s.Despitegrowingtrendsto
deregulateelsewherearoundthewestern
world,theNewZealandeconomy
remainedquiteheavilyregulated–the
liberalisationprocesslaggedbehind
thatofcountriessuchastheUK,US
andAustralia.Therewassomeprogress
towardseconomicdiversification.State
forests,plantedduringthe1930s
depressionandlater,werecomingto
maturity.Tradeinlogsandassociated
woodproductscontinuedtogrowduring
the1970s.Fisheriesexpanded,andabase
ofmanufacturingexportersdeveloped.
Thegovernmentofthedayundertook
someimportantmeasures,including
theCloserEconomicRelations(CER)
agreementwithAustralia,andextensive
liberalisationofthefinancialsector.
However,politiciansandthepublic
founditdifficulttograpplewithboththe
realityandthelonger-termimplicationsof
NewZealand’srelativeeconomicdecline,
andwerereluctanttotakestepsthat
wouldhavehadsubstantialshort-run
employmentcosts.Oneresponse,partly
promptedbythesecondoilshockin1979,
wasthe‘ThinkBig’economicstrategyof
1981,designedtocreate400,000jobs
andmoveNewZealandtowardsenergy
self-sufficiency.Inpractise,‘ThinkBig’did
notwork–fallingoilpricesundermined
K. E. Niven & Co, ATL, K.E.Niven & Co Collection, F-64235-35mm.
Top: Wellington motorway under construction, August 1969.
Above: Hiller UH-12E of Alexander Helicopters transports building material 1973.
Photographer unidentified, ATL, Dominion Post Collection, EP/1969/3580/33.
The ReseRve Bank and new Zealand’s economic hisToRy ��
theeconomicsoftheenergypolicy,and
thepromisedjobsdidnoteventuate.
Extensiveforeignborrowingtosupport
livingstandardscreatedincreasing
pressureonthegovernment’sfinances.
Inattemptingtocombatinflation
withoutundueshort-termemployment
costs,thegovernmentthenturned
toincreasinglydraconianeconomic
regulation.Thisincludedapriceandwage
freezein1982-84,andextensivecontrols
overinterestrateswerealsoputinplace.
Anewgovernmentthatcameto
powerafterasnapelectioninmid-1984
introducedsweepingreforms,cuttingthe
scaleofbothregulationandgovernment
service,andopeningtheeconomyupto
internationalcompetitionandmarkets.
Thesereformsweredesignedtoliberalise
anddiversifytheNewZealandeconomy,
openingituptoglobalcompetition;
andtostemandeventuallyreverseNew
Zealand’srelativeeconomicdecline.
Toachievethistheexchangeratewas
floated,tradeprotectionwasreduced,
stateenterpriseswereputonamore
commercialfooting,andstepsweretaken
torestoretheCrown’sfiscalposition.The
mainthrustofthesereformscontinued
undertwodifferentgovernmentsuntil
1993,encompassingawiderangeof
economicpoliciesandgovernment
activities,producingsignificant
socialchangeaswellasaneconomic
restructuring.
Ross Giblin, ATL, Dominion Post Collection, EP/1987/5979/26.
Above: Brokers amid the stock market crash on 25 October 1987.
�� The ReseRve Bank and new Zealand’s economic hisToRy
Inthetransitionperiod,thecosts
ofthesechangesprovedquitehigh.
RealGDPgrowthwasflatinthesecond
halfofthe1980s,andrecoverydidnot
beginuntil1992.Unemploymentsoared,
driveninpartbyrestructuringacrossthe
publicsector,andinpartbythesharp
fallintraditionalsectoralemployment,
notablymanufacturing.Liberalised
firmsandfinancialmarketstooktime
tosettledown.The1987sharemarket
crash,whichhitmany‘MumandDad’
investorshard,precipitatedashakeout.
Manycorporatescollapsed,somebanks
werepushedtotheedge,andonemajor
financialinstitution–DFC–collapsed.
Theseexperienceshighlightedanother
aspectoftheReserveBank’srolein
theeconomy.Untilthemid-late1980s,
therehadbeenextensivecontrolof
financialinstitutions,includingbanks,
andthosecontrolswereusedastoolsin
macroeconomicmanagement.Thishad
theeffectofconstrainingtherisksthat
mainstreamfinancialinstitutionscould
take.Oncethetightcontrolshadbeen
removed,aframeworkforprudential
supervisionofbankswasdeveloped
andputinplace.Thissupervision,
designedtoreducerisksandmanage
theconsequencesofanybankfailures,
becameamajorcomponentoftheReserve
Bank’sroleintothetwenty-firstcentury.
Asoundandefficientfinancialsystemisa
vitalcomponentofamarketeconomy.
inFlaTion BusTing
Conqueringinflationbecameaparticular
priorityduringthelate1980s,bywhich
timeNewZealandhadbeensuffering
highanderraticinflation(averaging10-15
percentperannum)forovertwodecades.
Bythelate1980s,theReserveBank
wasactivelyworkingtoquashinflation,
broadlyenvisagingpricestabilitybythe
early1990s.
Theeffortwasformalisedinthe
ReserveBankAct1989.ThisActwas
pioneeringinanumberofways.Itgave
theReserveBanktheindependencetoset
monetarypolicy,butwithinthecontext
ofatransparentagreementbetweenthe
Above: Sixth series five and fifty dollar notes. New-design notes featuring significant New Zealanders were released by the Reserve Bank in 1993, and in 1999 paper was replaced with polymer, introducing new security features such as transparent windows.
The ReseRve Bank and new Zealand’s economic hisToRy ��
GovernoroftheReserveBankandthe
MinisterofFinanceonwhatgoaltheBank
wouldpursue.NewZealandwasthe
firstcountryinthemoderneratoadopt
aformalinflationtarget.Thetargeted
approachtopricestabilitywasalso
pickeduparoundtheworldbyarangeof
significanteconomies.
Gettingontopofinflationproved
neithereasynorcostless;thefloating
exchangeratetendedtobebothhighand
volatile,asdidinterestrates.However,
bytheearly1990slowinflationhad
beenachieved,andhassincebecomea
well-entrenchedfeatureoftheeconomic
landscapehereandabroad.Inmany
othercountries,similareffortsataround
thesametimealsosawinflationlowered.
Lowerinflationprovidesamorestable
climateforfirmsandhouseholds,and
thismorestablebackdropmayhave
contributedtothegenerallymorestable
economy,hereandabroad,ofthelast15
yearsorso.
Above: A Reserve Bank office, 1992.
Below: Operational independence under the Reserve Bank Act 1989 included a requirement for full transparency of monetary policy, implemented through regular Monetary Policy Statements, and by parliamentary review. Here, Reserve Bank Governor Dr Alan Bollard (far end of table, centre) meets the Finance and Expenditure Committee in 2003.
Below left: The Reserve Bank issued one and two dollar coins in 1991.
Stephen A’Court, RBNZ.
�� The ReseRve Bank and new Zealand’s economic hisToRy
The ReseRve Bank and new Zealand’s economic hisToRy ��
ByinternationalstandardsNewZealand’s
exportswerestilldominatedbyprimary
products.Buttherewasagreaterrange
ofsuchproductsandasignificantly
greaterrangeofmarkets;Britain,which
hadtaken90percentormoreofNew
Zealand’sproductioninthemid-twentieth
century,nowtooklessthan6percent.
Tourismbecamethelargestsingle
exportindustry.High-techindustriesand
manufacturingwerealsoprominent.
Renewed gRowTh
In1998theNewZealandeconomy
enteredaperiodofsignificantgrowth,
whichby2006hadbecomeoneofthe
longestandstrongestgrowthperiods
thecountryhadseen.Italsooccurredin
thecontextofasignificantlydiversified
andderegulatedlow-inflationeconomy.
Unemploymentfelltorecordlowlevels,
andNewZealandbecamethefirstcountry
intheOECDtorunlong-termfiscal
surpluses.
However,althoughNewZealand’s
relativedeclinewashalted,therewas
open economy
1993-
Bythelate1990sthedifficult
periodoftransitionfroma
regulated,inflationaryand
largelyundiversifiedeconomy
toamoreliberalanddiversified
environmentwaslargely
achieved.TheNewZealand
economyoftheearly21st
centurywasverydifferentfrom
thatofagenerationearlier.
Openandcompetitivemarkets
scoredhighlyininternational
comparisonsoftheeaseofdoing
business.
In 2006 the Reserve Bank introduced plated-steel ten, twenty and fifty cent coins; this is the twenty, featuring the ‘Pukaki’ design and ‘spanish flower’ edging.
�� The ReseRve Bank and new Zealand’s economic hisToRy
littleprogressinmovingbackupthe
internationalincomerankings.Ahigh
appetitefordebtandareluctanceto
savemeantthatinterestratesinNew
Zealandstayedpersistentlyhigherthan
thoseincomparablecountries,holding
backinvestment.Andalthoughthe
government’sownexternalposition
wasstrong,theprivatesectorhad
becomehighlyindebtedandrelianton
thecontinuingflowofforeigndebtand
equityfinance.
Theseissues,whichunfoldedduring
thefirstyearsofthetwenty-firstcentury,
highlightedthepointthattheNew
Zealandeconomyremainedadynamic
productofpeople,placeandtime,each
newgenerationofferingasuccessionof
freshchallengesforpolicy-makers,people
andgovernmentstomeet.
Stephen A’Court, RBNZ.
The Reserve Bank building, right; The Treasury and other government buildings on the left.