Doris Munche asked two questions: Who exactly owns the Reserve Bank of New Zealand, and who exactly owns the New Zealand currency?
Both questions have straightforward answers, but perhaps a bit of elaboration would be helpful.
First, it is unambiguously clear that the Reserve Bank of New Zealand is owned by the Crown – in other words, it is owned by the New Zealand people. When it was first created in 1934, there was some private ownership of the Bank, but in 1935 the first Labour Government nationalised it, and it has been completely owned and controlled by the government ever since.
The Minister of Finance appoints the directors on the board of the Reserve Bank, and the Minister of Finance appoints the Governor of the Bank. The Minister can only appoint somebody as Governor who has been nominated for that role by the board of the Bank, but the Minister can reject any number of people nominated by the board and request another nominee.
The functions of the Reserve Bank are specified in legislation, and are primarily about keeping inflation under tight control and promoting the stability of the financial system (banks, non-bank deposit takers, and insurance companies).
When the Governor is appointed, he (or she) is required by law to sign an agreement with the Minister specifying what inflation rate he must try to deliver during his term of office, and of course he only gets appointed as Governor if he is willing to target an inflation rate acceptable to the Government. Currently, the target, spelt out in a so-called Policy Targets Agreement, is an inflation rate in the Consumer Price Index of between 1 and 3% annually. There are some qualifications to that target, and some acceptable reasons to be outside the target, such as a very sharp fall in international oil prices; but in principle the Governor can be dismissed for failing to deliver inflation within the publically agreed target without justifiable excuse.
Day to day decisions about monetary policy (which is what affects the inflation rate) are made by the Governor without reference to the Minister of Finance but the inflation rate which the Governor is required to target is, as noted, effectively the target chosen by the Minister.
The amount of money which the Governor can spend on running the Bank has to be agreed with the Minister of Finance every five years, and all the considerable revenue generated by the Bank in excess of that operational budget is returned to the government as a dividend annually.
So there is not the slightest doubt that the Reserve Bank of New Zealand is owned by the government on behalf of all New Zealanders, and is effectively controlled by the Government of the day. Legislation even makes it clear that, should the Minister of Finance decide to amend the Policy Targets Agreement unilaterally, he (or she) can do that provided any amendment is made public. To date, no Minister has used that so-called “over-ride provision” since the current legislation was put in place in 1989.
But isn’t it true that the Reserve Bank is effectively controlled by the Bank for International Settlements in Basel, Switzerland? And isn’t the Bank for International Settlements effectively controlled by the U.S. Federal Reserve Board in Washington? No, that is not true. The Federal Reserve Board is a shareholder of the BIS, but does not control the BIS. More pertinent, the BIS does not control the Reserve Bank. The BIS is effectively a talk shop for the world’s central banks. Central bank governors from all over the world meet at the BIS from time to time to discuss matters of common concern – how best to regulate and supervise commercial banks, how much equity capital commercial banks should have to reduce the risk of bank failure, and similar issues. I myself attended meetings of central bank governors in Basel about once a year while I was Governor. The Reserve Bank of New Zealand has certainly adopted many of the commonly used international norms when regulating and supervising banks, but is under no legal obligation to do so.
There are a handful of central banks around the world which are partly owned by private shareholders, but they are in a very small minority and in all the cases I am aware of, the private shareholders have their rights strictly limited by legislation.
The Federal Reserve System in the US is made up of 12 regional Federal Reserve Banks and the Board of Governors of the Federal Reserve System, based in Washington. The regional Federal Reserve Banks are largely owned by the hundreds of banks operating in each region, but by statute the Board of Governors in Washington has a majority of voting members on the Federal Open Market Committee, which decides US monetary policy. All seven Governors on the Board of Governors are appointed by the US President, subject to Senate ratification, with the President also appointing the Chairman of the Board (currently Janet Yellen).
The Swiss National Bank also has some private ownership but the largest single private shareholder in the Swiss National Bank holds just 6.5% of that bank’s shares, the dividend on which is limited by law to 6% of the nominal value of 250 Swiss francs.
But what about the New Zealand currency? Who owns that? All New Zealand currency is issued by the Reserve Bank. Legally, a New Zealand dollar bank note is a claim on the Reserve Bank for the face value of the note. From the Reserve Bank’s point of view, the currency held by the public (and by the banks) appears on the Reserve Bank’s balance sheet as a liability because, as I’ve mentioned, the currency held by the public (and by the banks) represents a claim on the Reserve Bank. It is a non-interest-bearing liability (in other words, bank notes and coins don’t earn their holder any interest), and the Reserve Bank takes the value it gets from issuing currency (selling it to the banks which in turn sell it to their customers) and invests that in New Zealand government bonds. The bonds pay interest to the Reserve Bank of course, and the Bank can spend the amount agreed with the Minister on operating the Bank, with the balance reverting to the Treasury. Income generated from investing the proceeds of the currency issue is called seigniorage income.
Compared with many other countries, New Zealand has a very small amount of currency in circulation because, relative to the size of our economy, we don’t use much cash in New Zealand, being instead big users of internet banking, debit cards, and credit cards.
Copyright © 2024 Don Brash.