A tale half-told, Brian Easton

Innovation and Independence: The Reserve Bank of New Zealand 1973-2002 
John Singleton (with Arthur Grimes, Gary Hawke and Frank Holmes)
Auckland University Press (in association with the Ministry of Culture and Heritage), $49.99,
ISBN 1869403649

This history of the Reserve Bank is not a conventional institutional history, like Gary Hawke’s earlier history of the Bank which it revises. It is more like Roberto Rabel’s New Zealand and the Vietnam War, concerned with the development of a policy.

Yet their approaches are quite different. Rabel is a professional historian who distances himself from those involved, while remaining sympathetic to the difficulties the officials faced, covering as many viewpoints as possible. The Reserve Bank history, however, was written with a commitment to the actual policy development. Alternatives are given short shrift. Writing in the Independent, Alan Catt points out that Bryan Philpott, Merv Pope, David Sheppard and Jan Whitwell are all misrepresented. Alas, they are dead and cannot defend themselves. Paul Dalziel may think he is treated equally cavalierly, while I know the book misrepresents my argument that the Rogernomes were extremist. Other critics are ignored, like Peter Harris who argued that once the unemployment rate neared five per cent the bank tightened its monetary stance. One former director of the Reserve Bank grumbles that some of the book’s descriptions of what happened are wrong. Only one director was consulted, other than one who was an author. (Unlike Hawke’s book it has no list of directors, officers or ministers. The appendices consist only of a list of governors and some unintelligible graphs.)

Very few of those directly involved were consulted. This even includes David Caygill, Associate Minister of Finance responsible for the Bank or Minister of Finance during many of the major policy changes. And consider this: “Jim Bolger [then Leader of the Opposition] and his closest ally, Bill Birch, accepted the [1989 Reserve Bank] Act in a general sense, but did not share [Ruth] Richardson’s zeal.” None of the three were interviewed. How did the authors know?

The book’s third sentence highlights the authors’ “independence”: “[t]he History Group of the Ministry of Culture and Heritage oversaw the project and ensured the independence of the authors.” The principal author, John Singleton, is a reader in economic history at Victoria University. There are three subsidiary authors although the book says “the authors take collective responsibility for the interpretations and conclusions arrived at in each chapter.” One of the three is Hawke who wrote the earlier history. Frank Holmes is strangely distanced in comments such as “according to Frank Holmes, he [Ray White] was ‘one of nature’s gentleman’”. I take it the concern is Arthur Grimes’s.

Grimes was an employee of the Reserve Bank between 1979 and 1993 (the period to which the book devotes most space) and he currently chairs the Reserve Bank’s board of directors. The authorial collective claims its views “are not necessarily shared by the management or Board”, but it is unclear what that means when one of the writers holds such a senior position in the bank. Apparently Grimes was commissioned to write the book before he joined the Bank’s board. The History Group should have insisted he discontinue his authorship at that point. Perceptions of independence are important.

The reader will be struck by an occasional tone of deference. Consider:

[O]n several occasions [Governor] Brash had sought [Finance Minister’s] Richardson’s views on the interpretation of the [Policy Targets] Agreement. If these meetings had become public knowledge, observers might have concluded that Brash was seeking instructions, although that was not the case.


Those final six words sound more like the bank’s official position than the judgement of scholars.

One is left with the uneasy feeling that the story of the bank is only half told. Curiously little attention is paid to the Reserve Bank Act of 1964, although it was the statutory basis for over half the period the book covers. That Act required the bank to be concerned with “the maintenance and promotion of economic and social welfare in New Zealand having regard to the desirability of promoting the highest degree of production, trade and employment and of maintaining a stable internal price level.” Most economists argue that the bank did not have enough policy instruments to pursue such multiple objectives. How did the bank deal with this paradox, especially in an era of faltering production, high unemployment and higher inflation? The book implies it ignored its legislation.

While such questions may seem of merely historical interest, suppose the current legislation proves unworkable. Would the bank ignore it also? The book describes the conflict between a central bank’s eternal role of ensuring the integrity of the monetary system and its statutory role of targeting inflation. Suppose an even greater financial crash than occurred in 1987, when despite its 1964 statute, the bank ignored rising unemployment, and continued with its exclusive pursuit of price stability. Suppose the bank had to choose between maintaining price stability and injecting liquidity to preserve the financial sector, which might encourage inflation. Which would it do?

Ignoring the share-market crash, the book focuses on the politics of the period: “Labour was returned to power in August 1987 with an increased majority [of seats – its vote margin was halved] which suggests that many voters, including traditional Labour supporters, were prepared to give Douglas and his supporters more time.” The book’s willingness to indulge in casual political analysis not only involves naivety, but errors, such as making Jim Anderton a cabinet minister in 1989. To which the almost 100,000 traditional Labour voters who failed to turn up to the polls in 1987 might wish “if only”, as might the many other Labour supporters who voted on Lange’s promise that Labour would behave differently.

Errors are not confined to politics: “New Zealand’s economy entered the 1970s in reasonable shape … the prices of primary exports were high.” In fact, export prices relative to import prices were the lowest they had been since 1947. Chapter two on the economy in the 1970s is trite and unrevealing. But the chapter dealing with failing financial institutions is gripping.

There is a tendency to rewrite history: “[T]he Bank was impressed by the potency of the exchange rate channel [in 1987].” There is no footnote, so the reader cannot confirm the claim. But an interchange between myself and Governor Brash in the New Zealand Listener in 1994 left the impression that the bank gave little weight to the damage that this channel’s misuse could do to exporters and hence to the economy’s growth prospects.

There is much ignoring of the record. The book describes how, after the Muldoon era, the bank initially pursued the targeting of monetary aggregates, a purist monetarist approach. Moderate critics advised against it. As expected, such pure monetary control proved unworkable, and was abandoned, but that story is not related.

Instead we have a triumphalist account, so there is no discussion on the bank’s possible culpability in the long recession of 1986 to 1993. The truer story is of a bunch of officials in an unfamiliar environment, desperately struggling to make sense of what was going on, making mistakes, learning from them, and on the whole doing reasonably well.

The focus of the book is on the development and enactment of the 1989 Reserve Bank Act, based on an internationally innovative constitutional framework for monetary policy which has been successful – so far. The “independence” of the title is narrowly confined to the operation of monetary policy. Keynes famously remarked that he hoped that one day economists would be like dentists. As with your dentist, the government says what is wanted and leaves the dentist to make the technical decisions. Brash did not have an ambition to retire to a less powerful position when he left the bank for parliament.

Rather than exploring how robust this new framework is, the book is dominated by an admiration for the more extreme versions of market liberalisation policies with little self-awareness of how policy has had to change because of its limitations. Will the approach work under less benign circumstances – such as those which precipitated the Great Depression, or the 1966 terms of trade shock, or …? The book’s underlying story is that the bank has had to keep changing as circumstances change, or current theory has been found wanting. The critics were not always wrong.

One hopes today’s Reserve Bankers are more subtle, and more respectful of the critics. Rabel in his book points out that in the Vietnam debate:

[t]he anti-war movement may well have lost almost all the battles in its struggles with the government during the Vietnam conflict, but there are strong grounds for concluding that it ultimately won the all-important local struggle for “hearts and minds”.


This history of the Reserve Bank provides four economists’ perspective of events, but lacks Rabel’s magisterial overview. Such an overview might have concluded that, while the bank officials were deaf to their critics, the force of events meant that the policies and theories had to be adapted, often in the direction their critics had argued.


Brian Easton’s The Globalisation of Nations will be out in 2007.


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