Constitutional monarchs of economic policy

I don’t subscribe to the NBR but in their newsletter this morning I noticed one of the odder description of the role of Governor of the Reserve Bank I’ve ever seen.

 Paid content  •  Rob Hosking
RBNZ: Wheeler to cut, to advise, to encourage, and to warn
Mon 07 Sep

Central bank governors are kind of the constitutional monarchs of economic policy.

No monarch in New Zealand’s history has had anything like the power that Graeme Wheeler has (or that his two predecessors  had).  And unlike the powers and responsibilities of the monarch (or Governor General) the powers of the Governor have been increasing not diminishing.

The monarch has a handful of reserve powers, and other than that has only the responsibility to do good, to be seen, and to do as her ministers tell her.    As Bagehot put it 150 years ago, she has a right to advise, encourage, and warn ministers, but in private. It is not clear that there are any material cases in New Zealand’s history in which the monarch, or Governor General, has had any material influence on the choices made by governments and ministers.  And that is probably as it should be (he says as an instinctive monarchist).

Compare that to the position of the Governor of the Reserve Bank.  Like the Queen (or Governor General) he also holds a position established by Parliament, and is an unelected holder of that office.  He is not required to act on advice, and in fact the main argument for our current governance structure was to focus accountability –  the Governor, ultimately, can blame no one but himself for any mistakes that he makes.  We don’t hold the monarch, or the Governor General, responsible for whatever bad bits of legislation they sign over the years.

And what does the Governor get to decide:

  • He sets the short-term interest rate for New Zealand, and can do so in ways where, if he makes mistakes, we end up with inappropriately large booms or persistently high unemployment and recessions.
  • He gets to decide who can and can’t borrow money from our banks
  • He gets to decide the designs of the only lawful bank notes in the country
  • He has (legally unfettered) capacity to commit taxpayers’ money to speculate in foreign exchange or other financial markets.
  • He gets to decide who can operate as a bank, or non-bank deposit-taker, or insurer, in New Zealand.
  • And so on.

Oh, and he has some statutory duties that might be compared to “advise, encourage, warn”

Section 10 of the Reserve Bank Act says

10 Formulation and implementation of monetary policy

  • In formulating and implementing monetary policy the Bank shall—
    • (a) have regard to the efficiency and soundness of the financial system:
    • (b) consult with, and give advice to, the Government and such persons or organisations as the Bank considers can assist it to achieve and maintain the economic objective of monetary policy.

And section 33 says

33 Policy advice
• (1) On request by the Minister, the Bank must provide advice to the Minister on any matter specified in the request that is connected with the functions of the Bank.
(2) A request may not be made under subsection (1) that may limit the Bank in exercising its primary function in section 8.
(3) The Bank may also provide advice to the Minister, at any time, on any matters or subjects within the responsibility of the Bank.

Central bank Governors also prone to lecturing the public on how we should behave. Such advice is mostly harmless – since we can ignore it – and ineffective, although if done badly (as it often is, here and abroad – by Graeme Wheeler, Don Brash, or Alan Greenspan) it risks damaging the standing of the institution.

Some people will be quite happy with the powers the Governor of the Reserve Bank. But don’t pretend his powers are remotely comparable to those of the modern monarch.

Both the monarch and Governor of the Reserve Bank are unelected creatures of Parliament. One now has almost no power, and one has huge powers. It is the Governor’s powers that look anomalous in modern times. Reforms are needed, to markedly reduce the powers of the Reserve Bank as a whole, and to largely eliminate the ability of the Governor to make key policy decisions on his own. Few Governors in other countries have ever had as much power as Graeme Wheeler does.  No modern monarchs do.

2 thoughts on “Constitutional monarchs of economic policy

  1. Interesting article, and I agree that the governor has far too much power, and has often used it unwisely.

    In a Sovereign Money (see and and banking and financial system, the governor’s powers would be greatly reduced.

    For starters, he would no longer get to decide “the short-term interest rate for New Zealand” and even better, would have absolutely no right to decide ANY interest rate — all interest rates would be decided by the markets.

    Also, the governor would not get “to decide who can and can’t borrow money from our banks”.

    Also, the governor would not get to decide “who can operate as a bank, or non-bank deposit-taker, or insurer, in New Zealand” — that would be a function of the Commerce Commission or some such similar body.

    He would have absolutely NO power to speculate in foreign exchange

    All he would have to do would be monitor the growth of the economy and create new money ex nihilo at a matching rate so as to keep inflation as close to zero as possible, and gift it to the government for spending into permanent circulation according to its democratic mandate. he would have no more power than you and me to determine how government spends its money — and we get a tiny bit of power at an election approximately every three years!

    What’s not to like?


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