The Journey of Te Pūtea Matua: our Tāne Mahuta
We have adopted the legend of Tāne Mahuta to explain the interconnected parts of the financial system and our role as kaitiaki. Maori oral traditions tell us that Tāne Mahuta dug his shoulders into Papatuanuku ‘Earth Mother’ and used his legs to push against Ranginui ‘Sky Father’ separating them and letting the light into the world. With that light, Tāne Mahuta guardian of the forest and birds, enabled life to thrive.
This illustration shows the elements of Tāne Mahuta and how we can use them to help understand the different parts of the financial system.
- Ngā Pūtake/roots represent our legislation and balance sheet
- Te Tariwai/vascular system represents the payment and settlement systems
- Te Toto/sap represents money, cash and foreign reserves
- Te Pekenga/branches and leaves represent the regulated entities – banks, insurers and non-bank deposit takers
- Kaitiakitanga/guardianship reflects our role as guardians of New Zealand’s financial system.
We thank the northern hapu Te Roroa, who act as kaitiaki to Tāne Mahuta, for their support in our use of this narrative.
We published the Journey of Te Pūtea Matua: Our Tāne Mahuta in September 2018 to help broaden the understanding of the Reserve Bank’s heritage, role, and interdependencies during constant change.
Indigenous flora and fauna on our currency
Early Māori trading systems
The economic impact of the Treaty of Waitangi and Kīngitanga
Māori designs on New Zealand’s currency
Currency in New Zealand before 1934
Once upon a time... Aotearoa’s financial system
This is a story that started at an uncertain time in the uncharted South Pacific. Many estimates exist, such as some time in the thirteenth and fourteenth centuries. Polynesians, who became collectively known as Māori, began to settle in Aotearoa (New Zealand). These people were driven by need and led by their navigators.
Economic, social, and cultural sustainability took hold, as did trade and exchange. By the 15th century the growing Māori population were settled in Kainga (villages) close to economic resources provided at the coast and sources of freshwater. These villages were populated by Whanau (close-family) and Hapū (wider-family). The grouping of Hapū formed larger Iwi (tribes) over time.
Protein was initially available with seals and the giant Moa in vast quantities. As these resources declined, smaller birds and fish became Māori kai (food). Many of these birds feature on the NZ dollar money including the kereru, kaka, and kiwi – core to our belief system and survival.
Crops of imported Kūmara (sweet potato), Taro, and Hue (bottle-gourd) spread. Sustenance was also gained from the native flora and fauna, such as Karaka fruit (wild berries) and Aruhe (fernroots). Over time, food preservation became common, storing birds in their own fat or wrapping them in kelp. The tools of the trades included cutting objects such as obsidian, argillite, basalt, and pounamu (greenstone) – which were also precious tools for exchange. These products were sourced from the three Islands and traded widely.
Many stories of how the world was created evolved from the Polynesian voyagers and growing number of Māori settlers. The history, beliefs, and stories of the evolution of people, flora, fauna, and all things natural were brought across the ocean and made local.
A core pillar of the evolving Māori belief system is a tale of the earth mother (Papatūānuku) and the sky father (Ranginui) who needed separating to allow the sun to shine in. Tāne Mahuta – the god of the forest and birds – managed this task after some false starts and help from his family. The sunlight allowed life to flourish in Tāne Mahuta’s garden.
Given the geographical dispersion of Iwi, trade and exchange became necessary and treasured. Kaimoana (seafood) and wildlife were traded, as were minerals such as the obsidian, and argillite. Gifts were made between villages and between the North and South Islands, and across the Foveaux Strait. Knowledge was also shared for activities like hunting, building, preserving, and growing – enabling knowledge to grow as well as food and security.
"Oral tradition speaks of seven waka: Aotea, Te Arawa, Kurahaupō, Mātaatua, Tainui, Tākitimu, and Tokomaru, being involved in the migrations."
New Zealand/Aotearoa was first permanently settled by Polynesians, many from East Polynesia, who arrived at the turn of the fourteenth century. This date has been correlated with a range of evidence, including the Kaharoa (Tarawera) eruption of c1310-1315; no evidence of human occupation has been found beneath the ash layer. It has been speculated that this eruption plume, which lasted up to five years, was visible from a substantial distance out to sea, spreading into a long white cloud and aiding navigation to New Zealand. The period of settlement, from about 1325 to about 1400, correlates with oral tradition which identifies the number of generations since. Although over-ocean voyaging was not lost, it is thought that a period of persistent poor weather, correlating with a climatic downturn, effectively isolated New Zealand from Polynesia.
Oral tradition speaks of seven waka: Aotea, Te Arawa, Kurahaupō, Mātaatua, Tainui, Tākitimu, and Tokomaru, being involved in the migrations.
For more, see:
- Canoe traditions
- A paper by Justice Joe Williams
- When was New Zealand first settled
- The role of the Kaharoa eruption in the early Polynesian perception of Aotearoa
Many stories of how the world was created evolved from the Polynesian voyagers.
"The sunlight allowed life to flourish in Tāne Mahuta’s garden."
The history, beliefs, and stories of the evolution of people, flora, fauna, and all things natural were brought across the ocean and made local. A core pillar of the evolving Māori belief system is a tale of the earth mother (Papatūānuku) and the sky father (Ranginui) who needed separating to let the sun shine. Tāne Mahuta – the god of the forest managed this task after some false starts and help from his family. The sunlight allowed life to flourish in Tāne Mahuta’s garden.
For more, see:
New Zealand currency has traditionally featured indigenous birds and plants. All reflect the fact that New Zealand was, originally, part of dinosaur-age Gondwanaland. There were no indigenous mammals apart from bats; and the country became a paradise for birds, some of which lost the power of flight. This heritage remains virtually unique in a world sense.
The first Reserve Bank note issue of 1934 featured the Kiwi on all denominations. Today, this iconic bird appears on the dollar coin. Other birds featuring on banknotes have included the Tui, Piwakawaka (fantail), Tītipounamu (Rifleman), Kereru and Takahe. The current circulating notes feature the same selection of birds: the Hoiho (Yellow-Eyed Penguin), Whio (Blue Duck), Kārearea (New Zealand falcon), Kōkako (Blue Wattled Crow) and Mōhua (Yellowhead).
Although New Zealand’s indigenous fauna was largely avian, a living fossil – the Tuatara, which looks like, but is not, a lizard – was selected in the early 1960s to feature on the five cent coin. A wide range of indigenous plants have appeared on New Zealand’s currency over the years. This includes the Tawhairaunui (Red Beech) of the Eglinton Valley; Ross lily and Campbell Island daisy of the wind-swept Campbell island; Kiokio and Pineapple scrub; the White camellia (Camellia japonica alba plena); Marlborough rock daisy; and Sky-blue mushroom. The mushroom is unique to New Zealand and believed to be the only fungi shown on a banknote, worldwide.
Fast forward in time and the next wave of migrant began passing and sometimes settling on the shores of Aotearoa. Initial contact with European (Pākehā) migrants was fleeting – excuse the pun. A Dutchman by the name of Abel Tasman is credited as the first European explorer to reach New Zealand in 1642. It would be another 127 years before the next recorded European encounter with Māori. The British explorer James Cook arrived in 1769, with the French only 40 kilometres behind. Suffice to say, the isolation was over and contact grew rapidly over the next 60 years.
Many sailors visited, mostly chasing the plentiful whale and seal products and, naturally, mingling and trading with the Tangata Whenua (the Māori locals). Trade flourished, including with Australia, and over time a variety of means of exchange were used. Gifts and barter increasingly occurred between Māori and the visiting Europeans. The sailors wanted food and water, Māori wanted food and tools.
"The British were tentative at first with regard to colonising New Zealand – it was perceived initially as unnecessary, expensive, and their Empire was stretched."
Food production and trading began to grow rapidly. By the early 1800s Māori were proficient potato growers and were trading them throughout New Zealand. Pigs, thought to have been introduced to New Zealand by James Cook in 1769, allowed Māori to become successful farmers, trading pork and potato with the Europeans. Flax to make rope was also a sought after commodity and exported to Australia. Wheat was also grown, and Māori invested in flour milling.
In one sense, the period of the 1840s-60s was an age of economic good fortune for Māori, supplying the villages being built and the coastal ships that were passing in growing numbers. Major towns were being developed by the newly arrived Europeans, including Auckland, Wellington, Whanganui, New Plymouth and Nelson. Māori prospered by trading in these growing markets.
However, all was not straight forward. The British were tentative at first with regard to colonising New Zealand – it was perceived initially as unnecessary, expensive, and their Empire was stretched. James Busby was appointed as Britain’s first official Resident in New Zealand in 1833. He was poorly supported by the British, but he did manage to convince some Northern Māori Chiefs to choose a flag, and sign a Declaration of Independence, calling on King William IV of England to be their ‘father and protector’.
The Treaty of Waitangi was signed in 1840 between the British government and about 540 Māori tribal leaders. While the Treaty is seen as the founding document, it has been a controversial one. Māori and English language differences, and dispute over whether Māori did, or did not, cede sovereignty led to many decades of debate, dispute, and outright war.
Māori became increasingly reluctant to sell their land as the Pākehā population grew, and British and colonial forces eventually fought with Māori to gain access to land in the North Island.
A new constitution was established in 1852 and a general assembly was established nationally. This included a House of Representatives, elected every five years by men over the age of 21 who owned, leased, or rented property over a certain value. As Māori possessed land communally, almost all were excluded from participating. New Zealand’s first Parliament sat in 1854. Four Māori seats were eventually created in 1867, and elections for them held in 1868, in a Parliament of 74 members. Women got to vote from 1893, making New Zealand the first country to establish universal suffrage, with Kate Sheppard taking the lead role in this crusade.
"Māori became increasingly reluctant to sell their land as the Pākehā population grew."
Pākehā efforts to buy land gained pace during the 1850s, and one response from Māori suggested placing their land under the protection of a single figure – a Māori King. Te Wherowhero of Waikato, who had not signed the Treaty of Waitangi, became the first Māori King in 1858. The Kīngitanga movement attempted to unite tribes under the one banner. Their efforts were partially successful, but many Iwi did not want to place their mana with another person. War in 1863-64 led to Kīngitanga being pushed back from the northern Waikato, and to Māori land confiscations (Raupatu), which are still to this day being returned and/or settled in a variety of forms. The second Māori King, Tawhiao, made formal peace with the British in 1881.European land demand was in full swing by the time of the Native Lands
Acts of 1862 and 1865. These made private land ownership possible, greatly complicating the management of communal (Iwi-owned) land. It was not long before Māori ended up with less, and poorer quality, land. There was also no ability for Māori to raise capital over their collective holdings, complicating land development and economic development.
Between the first European landings and the First World War, New Zealand was transformed from an exclusively Māori world to a Pākehā one. The Māori population declined in numbers up until the early 20th century, particularly impacted by new diseases such as influenza and measles.
It was only in the 1920s that the first Māori Minister of the Crown, Sir Apirana Ngata, secured some financing from his Government to develop the dwindling Māori land. However, ongoing urban development and infrastructure projects, and the passing of two World Wars, prompted Māori to become increasingly urbanised and part of the wider community and labour force.
New Zealand’s economic development was rapid, particularly in the South Island, with farming and gold mining thriving. The European population and domestic infrastructure also grew rapidly, especially under the expansionary plans of the Colonial Treasurer Julius Vogel. Modernisation and urbanisation has continued ever since – as has Aotearoa’s reliance on imported capital.
Māori economic systems were closely integrated into Māoritanga and tikanga, where value produced by labour was exchanged through goods, through actions, and where exchange systems were often mediated by social structures.
Transport was limited to what could be carried on foot or with waka (canoes). So although hapū and iwi often traded with each other, and although some of those trading links were very long-range, traded goods were frequently limited to relatively high-value items such as pounamu (greenstone), which was sourced primarily from the west coast of the South Island, Te Wai Pounamu (‘the waters of greenstone’).
Māori trading systems changed with the contact period, although it took time. Early trade with Pākehā from the turn of the nineteenth century, and for a considerable time after the Treaty of Waitangi was signed in 1840, was by barter.
"New Zealand became the first country in the world where all adults could vote in general elections."
Kate Sheppard was a prominent leader of the campaign to give women the vote in New Zealand. She worked tirelessly to organise and promote this cause. A long campaign culminated in 1893 when New Zealand became the first country in the world where all adults could vote in general elections.
The Treaty of Waitangi established Crown government in New Zealand, bringing colonisation on a substantial scale and, with it, a British-style economy. However, it was initially difficult for Māori to fully engage with that economy. British authorities expected that Māori would simply pick up British values and ideals. The issue was also associated with the asserted power of the colony, in which Māori were actively sidelined.
The main problem was that British industrial-age goods had been integrated into Māori life-ways, and had to be paid for, but the only reliable source of income was through selling land. This carried a cultural impact because of the integration between Māoritanga and people. One outcome, by the late 1850s, was Kīngitanga: a unified movement, originating with Waikato, which was intended to maintain and rebuild Māori place in New Zealand.
It was largely as a result of the rise of Kīngitanga that Governor George Grey engineered the Waikato war of 1863-64, designed to militarily crush the movement. The more crucial pivot of colonial power, however, remained its economy, as revealed by the fact that although the Waikato war drove Kīngitanga from the northern Waikato, the movement itself remained intact. However, it was then effectively broken as a separate political force by a deliberate assertion of the colonial economy through the King Country, including, eventually, the Main Trunk Line.
The net outcome of the whole colonial process was that by the 1890s, Māori had been marginalised and played little part in the economy. This situation, however, changed significantly from the mid-late twentieth century, in part on the back of a population revival and through changed attitudes by former colonising powers towards indigenous people. By the early twenty-first century, Māori economic activity had achieved a significant revival.
Māori motifs have played a significant part in New Zealand’s currency design, although the context has changed over the decades.
From the late nineteenth century and into the early twentieth, the prevailing attitude was that Māori had become ‘integrated’ into the colony, but were dwindling. From this emerged an effort to ‘rescue’ knowledge about Māori. Meanwhile, Pākehā New Zealand styled itself ‘Maoriland’, and many elements of Māori art, including design and motif, were incorporated into Pākehā design and usage.
This gave a significant ‘Māori’ flavour to many designs of the period, including some of the banknotes which at the time were printed by the trading banks. Classic period motifs of this style also featured in the first series of Reserve Bank notes, issued in 1934, which were broadly based on the preceding Bank of New Zealand design. Coins of the period, then administered by The Treasury, also included Māori features such as crossed patu (clubs) on the 1933 three-pence piece; and a crouching toa (warrior) with taiha (staff) on the shilling.
Values and attitudes changed during the mid-to-late twentieth century, leading to a significant cultural and economic revival for Māori, and giving a very different context for the way in which Māori motifs and designs were subsequently used. These reflected an understanding of Māoritanga in its own terms and were designed to embrace the richness and nature of New Zealand’s broad human and cultural heritage. Today, New Zealand’s currency includes prominent Māori motifs and features, notably a representation of Pukaki, a prominent chief of Ngāti Whakaue. Te Reo Māori also features on the banknotes.
The first Pākehā in New Zealand, arriving to trade from the end of the eighteenth century, used a range of currencies, broadly whatever they had with them on arrival.
The local economy, at the time, was primarily based around barter and the range of currency, at first, was not a significant problem. As the colony was established and grew from 1840, British currency then circulating in Australia became more common. An effort was made in the 1850s to establish a bank to issue currency for New Zealand, but it failed after a short time.
Māori did not attempt to issue currency of their own, with the exception of the one pound notes produced by the Bank of Aotearoa, at the instigation of Tāwhiao Tukaroto Matutaera Potatau Te Wherowhero, second Māori King. However, these were not circulated and today just seven examples are known to exist.
By the late nineteenth century, most of the trading banks in New Zealand were issuing notes of their own, frequently of distinct and colourful design. Coins remained primarily British in origin, and at times were in short supply, with the result that some traders issued tokens on their own account. Although not money, they could be exchanged for value with the issuing company.
Timeline of currency pre-1934
It was the early 1930s before centralised currency was issued in New Zealand. This shift came about for two independent reasons. British coinage was still widely circulating in New Zealand, and the devaluation of the New Zealand pound versus the pound Sterling made it possible for any individual to profit simply by sending coins to England. The Coinage Act 1933 therefore authorised New Zealand’s first local coinage. Meanwhile, long-standing efforts to create a Reserve Bank came to fruition, and the following year the first centrally-issued notes were authorised by the Reserve Bank Act 1934.
1830s-1840s - No legal currency in NZ. Money being used were foreign coins brought in by whalers and traders and value was based on their gold and silver content.
1840 - First bank established in NZ - Union Bank of Australia, which began issuing notes from a shed in Petone, Wellington in March 1840. Notes were redeemable in specie (gold/silver).
1844-1845 - First NZ paper currency in circulation that was not backed by specie but by legal authority. These ‘promissory notes’ were removed from circulation in 1845 after being deemed illegal by British authorities.
1852-56 - A Government institution, Colonial Bank of Issue (CBI) established and given a monopoly to issue notes backed by specie. CBI was wound up in 1856 due to lack of confidence in the colonial government.
1856-1933 - Currency is issued by private banks, including: Bank of New Zealand, Bank of New South Wales, National Bank of New Zealand, Colonial Bank of New Zealand, Commercial Bank of Australia, Bank of Aotearoa, Bank of Otago, Commercial Bank of New Zealand, Bank of Auckland.
1914 - Due to WW1, the requirement to convert notes to gold suspended and never reinstated. All privately issued bank notes in circulation declared legal tender.
1920s - 6 private banks issued notes, 4 of them were Australian owned. Banks rationed credit to keep exchange rate at 1 NZ pound = 1 British pound.
1933 - Government instructs banks to depreciate NZ pound by 25% against sterling to relieve pressure on exporters.
1934 - RBNZ formed with sole right to issue notes and coins. NZ currency maintained legal convertibility to sterling.
Our Tāne Mahuta: Te Pūtea Matua, the Reserve Bank
New Zealand’s money evolved to its current form - the free-floating New Zealand dollar solely issued by the Reserve Bank of New Zealand. The evolution was far from smooth, with the use of foreign currencies at first, then domestic ‘legal tender’ issued from private banks, briefly interrupted in the 1850s with central currency issuance by the short-lived Colonial Bank of Issue.
The growing population and urbanisation in New Zealand over the second half of the 1800s and early 1900s meant investment capital was in demand. New Zealand was a large importer of this capital, as domestic savings were limited as was the tax system. Trade levies, land sales, licensing, and some gold revenues were the central government’s revenue providers.
The infrastructure funding was further hindered by the banks being foreign-owned (British and Australian) and issuing private currency. Credit growth in New Zealand was driven by the economic performance of these foreign economies, unrelated to the demands of New Zealand. Subsequent recessions in Britain and Australia slowed lending in New Zealand when it was most needed.
The private banks’ issue of notes and coins in New Zealand was backed by their holdings of gold and silver specie. This backing was removed at the commencement of World War I in order to boost spending and never reintroduced. The 1929-31 global economic recession finally brought the official end to the specie currency backing and reinforced the drive to establish a central bank.
A New Zealand government official currency began life with the establishment of The Reserve Bank of New Zealand in 1934. It rose through necessity. The people and government of New Zealand needed to better manage the economy independent of foreign banks’ credit cycles. The Reserve Bank was initially a private venture but was nationalised in 1936.
The Reserve Bank became the Tāne Mahuta of New Zealand’s financial system, allowing the sun to shine in on the economy.
Tāne Mahuta’s roots were planted with the legislated monopoly issuance of a local currency, the holding of trading banks’ reserves, and managing domestic money and credit conditions. Initially the New Zealand currency had legal convertibility to sterling, but a growing sense of nationhood and economic independence led to the distinctive New Zealand currency of today.
Over the first few decades, the Reserve Bank was explicitly under instruction from the Minister of Finance with an active role in the economic programme of the day. At the forefront was currency issuance, managing the money and credit supply, and managing capital controls.
"The Reserve Bank became the Tāne Mahuta of New Zealand’s financial system, allowing the sun to shine in on the economy."
The nation experienced many economic highs and lows. For example, World War II and the Korean War saw New Zealand’s exports boom. By contrast, New Zealand also suffered a post Korean-war commodity price collapse, trade collapses when Britain joined the European Union, and ‘stagflation’ (low growth and high inflation) in the aftermath of the Vietnam war.
By the late 1970s, it was clear that New Zealand could no longer operate in an increasingly controlled environment, attempting to micromanage the economy through capital controls, trade price and volume controls, a fixed exchange, and interventionist fiscal policy.
These controls were mirrored by financial sector regulation. Financial institutions were confined to narrow lines of business, and reserve requirements, mandated interest rates, and regulation of their asset portfolios was business as usual. Credit rationing was extensive and economic and institutional liberalisation was knocking on the door.
1933 - Coinage Act. This provided for a distinctive New Zealand coinage and the removal of legal tender status for British coins.
1933 - Reserve Bank of New Zealand Act. This established the RBNZ with monopoly powers of note and coin issue – notes and coins to be legal tender, redeemable (in legal tender coin) and convertible (into Sterling).
1938 - Sterling Exchange Suspension Notice. This was a regulation issued under the RBNZ Amendment Act 1936. The convertibility requirement was dropped.
1964 - Reserve Bank of New Zealand Act. Legal tender notes to be issued solely by the Reserve Bank.
1964 - Decimal Currency Act. This provided for decimal currency as legal tender and for the removal of redeemability of bank notes – coins to be issued by the Minister of Finance with notes continuing to be issued by the Reserve Bank. It came into force in 1967.
1989 - Reserve Bank of New Zealand Act. This provided for legal tender notes and coins to be issued solely by the Reserve Bank.
See Ken Matthew’s Bulletin article: The legal history of money in New Zealand for a more complete summary of the legal history of money in New Zealand.
Source: Statistics New Zealand
Source: Statistics New Zealand
Note: Quarterly totals in 2009-2010 prices.
1929-1933 - Wall Street crash sparks the Great Depression. Export values and the general level of prices fall sharply, the NZ pound is formally devalued, unemployment rises to unprecedented levels.
1935-1939 - Labour Government initiates state house-building programme and large-scale spending on public works.
1936 - Labour Government nationalises RBNZ and establishes greater government authority over the RBNZ.
1938-1939 - Balance of payment crisis: system of import licensing and capital controls introduced. Increased development of a “sheltered” domestic manufacturing base.
1939-1945 - World War II: extensive government economic controls due to war emergency.
1944 - Bretton Woods agreement establishes the International Monetary Fund and World Bank.
1946-1965 - Steady economic growth, supported by strong population growth and commodity prices. By 1950, population hits 2 million. Per-capita GDP of $15,000 (at 1996 prices) places NZ amongst the richest in the world. Trade is mostly with Britain, heavily concentrated in wool, dairy and meat products.
1950-1953 - Korean War.
1957 - European Economic Community (common market) formed.
1961 - NZ joins the International Monetary Fund.
1961-1975 - Vietnam War: NZ forces serve alongside US (1965-1971).
1965 - NZ enters restricted free trade agreement with Australia. Reliance on Britain as a trading partner begins to decline and services exports (tourism) begin to increase.
1966-1973 - NZ faces large external shocks: wool prices collapse, first OPEC oil price shock, Britain joins the European Economic Community, meat and dairy exports to this trading bloc become subject to quotas. NZ dollar devalued by 20% but re-valued in early 1970s. A reserve assets ratio system of control over trading bank operations in NZ is introduced.
1974 - NZ faces balance of payments crisis and draws $45 million from the International Monetary Fund. NZ dollar devalued 9% against all currencies except the Australian dollar.
1976 - Removal of interest rate controls.
1978 - Second OPEC oil price shock. High and volatile inflation become entrenched.
1979 - NZ adopts ‘crawling peg’ exchange rate regime. Interest rate controls re-imposed. ‘Think Big’ aims to reduce NZ’s reliance on energy imports.
1982 - Price, wage and rent freeze. Suspension of ‘crawling peg’. Restrictions lifted on buying goods and services in foreign currency.
1983 - Closer Economic Relations (CER) signed with Australia. NZ dollar devalued 6%. Government attempts to restrict credit growth and interest rates.
1984 - Fourth Labour Government initiates extensive economic liberalisation programme, including the removal of interest rate controls. NZ dollar devalued 20%.
1985 - NZ dollar floated against all currencies. Reserve asset ratios and import licenses abolished. Credit growth and non-residential building activity increases dramatically.
1986 - Fiscal deficit fully funded through private sector for the first time.
1987 - Global sharemarket crash. End of construction boom in NZ.
1989 - Reserve Bank of New Zealand Act 1989: Rebirth of Tāne Mahuta as RBNZ pioneers inflation targeting approach to running monetary policy.
1989-1992 - Economic recession: unemployment reaches around 11%.
The Reserve Bank Act 1989 heralded the birth of the modern day inflation targeting central bank.
The origins of the 1989 Act lay primarily with the then Finance Minister Roger Douglas, who reformed the monetary policy framework aiming to reduce inflation and reduce the scope for political influence that had seen past attempts to control inflation fail so badly.
The key characteristics of the 1989 Act for monetary policy were: a singular price stability objective; operational independence; transparency; and a single decision maker. The price stability target is set by the Minister of Finance in the Policy Targets Agreement (PTA). In the first few PTAs, the inflation target was set as a range between 0 and 2 percent per annum. The target range has been changed twice; to 0-3 percent in 1996, and to 1-3 percent in 2002. Later PTAs also emphasised a medium-term inflation focus, recognising that monetary policy actions can do little to influence short-term inflation outcomes without causing significant volatility in financial markets and economic activity.
While each of these changes was initiated by the government of the day, the trend reflected the Bank’s evolution towards being an increasingly flexible inflation targeter. The latest PTA (2018) is another step in the same direction. The dual mandate, with the Bank responsible for maintaining price stability and contributing to maximum sustainable employment, recognises the importance of monetary policy contributing to the economic well-being of New Zealanders. The single decision maker model is also being replaced with a formal Monetary Policy Committee, which will add members from outside the Bank to the committee (see McDermott and Williams (2018) speech – Inflation targeting in NZ: an experience in evolution).
"The Reserve Bank Act 1989 heralded the birth of the modern day inflation targeting central bank."
The Coming of Age of our Tāne Mahuta - Te Pūtea Matua
A new government elected in 1984 provided the impetus for major economic policy change. Interest rate and credit controls were removed, and foreign exchange and borrowing restrictions lifted. The New Zealand dollar exchange rate was subsequently floated in 1985.
In the midst of the ‘stagflation’ of the 1980s, reducing inflation became the Reserve Bank’s central focus. The Reserve Bank Act 1989 made price stability the sole monetary policy objective, and gave the Bank the operational independence necessary to succeed in this task.
Tāne Mahuta’s roots were its legislation, including the new operational independence to pursue price stability. The Reserve Bank’s issue of notes and coins must be trusted as a means of exchange, store of value, and unit of account. Low and stable inflation was necessary to ensure this outcome, as well as robust notes and coins processing and distribution technology.
Since the early 1990s, the Minister of Finance has set the price stability target and the Reserve Bank has been legislated to operate independently in pursuit of price stability.
The Bank’s tasks of supplying notes and coins, and being ‘banker to the banks’, always brought other responsibilities. Price stability and financial system soundness may sound distinct, but they have the same origin – the issuance of currency.
Tāne Mahuta’s activities encompass maintaining price stability, and the stability of the institutions, markets and systems through which money exchange occurs. The Bank’s activities include prudential regulatory responsibility for banks, non-bank deposit takers, insurance companies, and payment and settlement systems – the latter, some of which, we operate ourselves.
The Bank is also the natural ‘lender of last resort’ for large New Zealand registered banks that are systemically important. And, we hold a portfolio of foreign exchange reserves, to both intervene in the foreign exchange market for policy purposes, and provide foreign exchange liquidity if needed.
The Bank’s payment and settlement system functions are Tāne Mahuta’s trunk, allowing the money, the sap, to flow throughout the system. The branches are the regulated financial institutions grafted onto Tāne Mahuta, for their legitimacy and lifeblood – access to the money.
"Our regulatory tools aim to ensure financial institutions have sufficient capital and capability to run soundly, in good times and bad."
Our prudential regulatory focus is to harness and promote self, market, and regulatory disciplines to keep the financial system sound and efficient. Our tools include director and management attestations as to their firms’ soundness; disclosure of key information so that people can assess the risk; and our own regulatory tools that aim to keep Tāne Mahuta’s branches strong.
Our regulatory tools aim to ensure financial institutions have sufficient capital and capability to run soundly, in good times and bad. We also monitor the connection between the business cycle, capital markets, and financial institution soundness. And, we use ‘macro-prudential’ tools to restrain credit growth if necessary.
The Reserve Bank has developed and maintained strong working links with the main ‘home regulator’ of the Australian banks that do business in New Zealand – the Australian Prudential Regulatory Authority. Some 95 percent of New Zealand’s banking assets are foreign owned, with 85 percent held by four large Australian banks. All four Australian banks are systemically important and locally incorporated in New Zealand. These are the biggest branches grafted onto the trunk of Tāne Mahuta.
The Reserve Bank is highly incentivised to ‘get it right’ when it comes to prudential regulation. We have a lot at risk, and many synergies and economies of scale, across our roles.
Our prudential supervision abilities benefit greatly from the information flows of our daily activities. These activities include our ‘open market operations’ where we provide liquidity to the banks and bank the Government. They also include our interaction with the global financial market as we manage the foreign reserves. And we can observe signs of bank stress if they emerge in the interbank settlement system (the Exchange Settlement Accounts System ESAS) that we operate.
Our prudential work with large banks also positions us well as a lender of last resort. There are timecritical decisions necessary to be made – often within a single banking day. Is the troubled bank illiquid or insolvent, is it to be trusted, and did it get into this position on its own, or is the problem system-wide?
Our choice of ‘macro-prudential’ tools and their settings also benefit from our day to day work. We need to know a financial institution well to decide what constitutes adequate capital, or sufficient core liquidity, and/or whether further constraint is needed on specific credit or other activities.
Operating as a central bank also provides synergies for supervising insurance firms and non-bank deposit-takers. These include our banking skills, supervisory approach, and our ability to employ a critical mass of people with relevant skills. Insurance provision is critical to a wellfunctioning financial system. A sound and efficient insurance sector is an important enabler of efficient pricing and allocation of risk, as well as promoting risk diversification.
There are also strong synergies between our deposit-taking supervision role and ensuring robust Anti-Money Laundering (AML) capability. While the task is not directly related to financial stability, at the extreme we could be isolated from international financial markets if we are not meeting global expectations.
Communication and crisis management capabilities are also greatly enhanced by us operating in the same ‘ecosystem’ of Tāne Mahuta. Our recent experience during the Global Financial Crisis was that local bank treasurers came first to our liquidity window to flag their funding problems. We communicate closely throughout the Bank to identify these stresses. Signals such as missed payments, a lack of liquidity, or the poor distribution of liquidity, can all be early warnings.
Tāne Mahuta is an ecosystem that benefits greatly from people working together. Currency design, production and distribution, analysing, modelling, stress testing, data gathering, trading in the markets, setting the Official Cash Rate, and running payment and settlement systems are all integral to getting it right.
Significant efficiencies are gained from combining the Reserve Bank’s monetary and financial stability tasks. We avoid duplication of core functions such as premises, data and information, and systems and capabilities. We also work to avoid unnecessary overlap, when different teams are looking at virtually the same issue, such as measuring financial stability and stress.
Our activity of ‘banker to the banks’ and our management of foreign reserves means we have a balance sheet to manage which generates market interaction and information, as well as revenue gains and losses. The foreign reserves enable the Bank to intervene in the foreign exchange market to influence the value of the New Zealand dollar exchange rate for monetary policy purposes. They also provide the liquidity to support the domestic financial system in the event of a financial crisis.
However, it is our role as the sole supplier of New Zealand notes and coins that creates a strong revenue stream for the Government and our operations. The public purchases this currency, and we invest the sales revenue in government bonds to earn interest. Our interest earnings from this activity is called seignorage. The Reserve Bank retains a portion of these profits to fund all of our activities, as agreed to by the Minister of Finance in successive five-year funding agreements.
It is the issuance of our notes and coins, and our balance sheet management, that enables our Tāne Mahuta to generate revenue for the Government.
The Tāne Mahuta of New Zealand’s financial system is standing in good stead for the future, but not without its challenges and pending changes. These are driven by technology, economic development, global connectedness, and broader government, public, and employee expectations. It is an exciting and challenging time for the team.
Our current priorities outline the scope of change under way for our Tāne Mahuta – Te Pūtea Matua:
Our legislation (roots) is under review, with the idea of modernising and refreshing our scope and capabilities, including broader decision making committees:
- the production and movement of our money (sap) is under review, with new storage and distribution models, and the role of digital currency, being considered
- our payment and settlement systems and digital capability (our vascular system) are being renewed, with a view to ongoing reliability, security from cyber-risks, and a move to the ‘cloud‘;
- our regulated financial institutions (our grafted branches) are under review, including our relationship management with them, and our expectations of their business conduct, capital needs, failure management capabilities, and efficiency metrics; and
- our people (the caretakers or kaitiaki) are being reinvigorated, with a focus on developing A Great Team, Best Central Bank vision.
Our new monetary policy objective has widened our goals to include both maintaining price stability and contributing to supporting maximum sustainable employment. The legislation currently before Parliament also proposes to give monetary policy decision-making to a group that will include Reserve Bank staff and external expert members. Work is well advanced to make this transition smooth.
These changes highlight that low inflation is a means to an end – improving economic wellbeing – not an end in itself. The aim of the proposed decisionmaking structure is to embed diversity of thinking and transparency into the Bank, while retaining our Tāne Mahuta’s operational independence.
The review of the Reserve Bank Act is ongoing with regard to our role in promoting financial stability and efficiency. Underlying the review is our desire to see a broad-based understanding of the benefits our policies deliver, and ensuring legitimacy around our choice of policy tools and their use.
When it comes to refreshing our prudential regulation of banks there are key issues that will always raise their head, and hence need firm relationship management. We are committed to improving our side of the relationship management process – providing clarity of our needs, timeliness in decision making, and clarity of purpose.
There will remain perennial issues however, even with the best relationship – or account – management. First, banks operating in New Zealand must abide by our laws. We need systemically important banks to be locally incorporated and to have local directors, who are bound by domestic laws and must attest to their banks being sound. Second, for foreign-owned banks, the risks in New Zealand are different from those in their home countries. Our banks must be appropriately capitalised to meet unexpected New Zealand outcomes. Third, we must respect and work with home regulators and global guidelines, but there will be specific New Zealand requirements.
Finally, no matter how good the cooperation is, a significant fissure is likely between home and host regulators if/when a systemically important bank fails. Foreign governments can never commit their current or future taxpayers to bail out New Zealand. This is why we insist on being pre-positioned to manage a financial market crisis.
Also see the Strategic Priorities in the Statement of Intent 2018-2021.
Opportunities ahead – growing Tāne Mahuta’s garden
Tāne Mahuta has grown and remains strong and adaptive. We understand the importance of our monetary policy, financial stability, and currency issue roles. We understand we need to prudentially regulate in a manner that is both sound and efficient in all its forms – cost, allocative, and dynamic efficiency.
We are also aware that all of our stakeholders are demanding more from us, and we are responding. As a result, we have developed a new vision for the Bank, we want to be A Great Team, Best Central Bank. All of our strategic priorities work towards this goal. We want to be an institution New Zealanders are proud of and trust.
Amongst our team, we have agreed on key features that make a ‘great team’. We are committed to creating an environment that promotes diversity of thought – improving our decision-making and our ability to attract and retain the best people for the job. Likewise, we must have the courage to be open to new challenges, and be achievement-focused. Our performance metrics and expectations are designed to match these goals. We have visualised ‘our island’ that we are moving towards on the horizon, one that all New Zealanders can be proud of and that Tāne Mahuta – our Bank – can stand tall on.
A priority we are commencing is our ‘Te Ao Māori’ strategy. Our strategy is aimed to better enable diversity of thought at the Bank, as well as enhance our understanding of the changing New Zealand financial ecosystem. The Bank must better tell the story of Aotearoa, New Zealand, and our role as ‘Te Pūtea Matua’. Our efforts to date are reflected in our notes and coins, as well as our increasing connectedness to specific Iwi that have generously allowed us to use their Taonga (treasure).
We now also want to better understand the growing Māori businesses, which are regenerating rapidly in the emerging, post-settlement, era. Māori business is growing in many ownership forms, belief sets, and long-term investment strategies. We need to incorporate this knowledge into our monetary and financial stability functions to be the Best Central Bank. We are excited and up for this challenge.
On a similar note, we also need to be aware of the long-term forces shaping the global economy, including dramatic changes in climate, demographics (ageing and migration), and technology.
These factors will have a significant impact on the allocation of resources globally, and the future wellbeing and stability of the New Zealand economy. As Tāne Mahuta of the financial ecosystem, we need to be farsighted. Organisation structures, competitiveness, and investing, lending and insurance practices, will change. We need to provide leadership and act as a responsible investor, factoring these issues into our concerns for financial stability and efficiency.
We are committed to working cooperatively on these issues, in particular harnessing the New Zealand Council of Financial Regulators (COFR) to provide longer-term leadership. COFR includes the Bank, the Treasury, the Financial Markets Authority, and the Ministry of Business, Innovation and Employment. We will continue to use our strong international reputation and connectedness to work with other central banks, international financial institutions, and global regulators to further our understanding – and in places leadership.
Collaboration and a long-term vision are critical to growing the wider financial ecosystem that lies beneath the branches of Tāne Mahuta. Consumer, investor, product, and prudential concerns needs must be coordinated to allow the financial system to thrive and be trusted.
At present the systemically-important banks dominate Tāne Mahuta’s garden. A vibrant and healthy financial ecosystem requires deep capital markets, with a long-term horizon, to best allocate capital in Aotearoa so we can all sustainably prosper.
Ka puta kō Rongo
Kō Tāne Mahuta,
Tokona Te Rangi ki runga kō Papa ki raro
Ka puta te ira tangata ki te whai ao
Ki te ao marama
E rongo whakairihia ki runga
Tūturu whakamau kia tina
Tina Hui E Tāiki E
- Savings Working Group final report (2011)
- The process of economic growth in New Zealand (Bulletin 2000)
Money (Tāne’s sap)
- What is Money? (website video)
- Money creation in a modern economy (website video)
- The Reserve Bank, private sector banks and the creation of money and credit (Bulletin, 2008)
- The legal history of money (Bulletin, 2003)
- Banknotes and coins resources (website)
- 40th anniversary of decimalisation (Bulletin, 2017)
- Decimal coins history (Bulletin, 2008)
- The policy origins of the RBNZ (Bulletin, 2006)
- A brief history of monetary policy objectives and independence in NZ (Bulletin, 2012)
- A short history of prudential regulation and supervision at the RBNZ (Bulletin, 2016)
- Origins and early development of the inflation target: (Bulletin, 1999)
- Review of the banking supervision arrangements in NZ: the main elements of the debate (Bulletin, 1995)
- The RBNZ and NZ’s economic history (Factsheet 2007)
- The 1967 2 cent mule (website)
- What we do (website video)
- NZ’s economic and financial chronology (1982-2014)
Crisis management (Tāne’s strength)
- NZ’s emergency liquidity measures during the GFC (Bulletin, 2011)
- Learnings from the global financial crisis (speech 2012)
- Bank failure management: Open Bank Resolution (website)
- Foreign reserves for crisis management (Bulletin, 2005)
- Crisis management (website)
The Reserve Bank would like to thank the Bank’s Tāne Mahuta Working Group: Adrian Orr, Yuong Ha, Ngarangi Haerewa, Chris Humphreys, Chris Miller, Sharon Brooks, Jaimee Taylor-Burt, Jeremy Richardson, Gael Price, Sandeep Parekh, Dean Hill, Chris Bloor, Patrick Hoerler, Andrea Blanchard, Naomi Mitchell, Matthew Wright, and the many bank colleagues who have made such a valuable contribution to the start of our Tāne Mahuta journey.
We’ve also had generous support from many others in Tāne Mahuta’s forest/our financial ecosystem who have shared their valuable knowledge.
The Reserve Bank would also like to thank Northern hapu Te Roroa, who act as kaitiaki (guardian) to Tāne Mahuta, for their support of this narrative.