His first New Zealand governorship (1845–53) was his greatest success. Reinforced by troops and money from England and aided by loyal Maoris, he suppressed the northern rebellion of Kawiti and Hone Heke by capturing Ruapekapeka pa (1846). A desultory campaign in the Wellington region ended with the arrest of Te Rauparaha (1846), and there was some indecisive fighting at Wanganui in 1847. Thereafter Grey kept the peace by establishing friendly relations with the leading chiefs and by scrupulously respecting their land rights. His cautious land-purchase operations opened up ample areas for colonisation in the South Island and in the Wellington and Hawke's Bay districts, but the needs of Auckland and Taranaki were less well satisfied. He dealt harshly with some of the pre-1840 land claimants, particularly James Busby and the missionaries Henry Williams, George Clarke, and James Kemp, and his animus and unscrupulousness marked him as a petty tyrant.

His wilfulness was again evident in 1846 when Earl Grey proposed to introduce representative Government. Grey warned him that this would precipitate a general Maori war as the colonists were still only a minority and unfit to be trusted with powers of self-government. The British Government drew back in alarm, awarded him a knighthood, and left him in unfettered control for another five years. By then, he had drafted his own proposals for a quasi-federal constitution with elected parliaments both at provincial and at colonial levels, and these ideas were substantially embodied in the 1852 Constitution Act. He brought the provincial institutions into existence, but left New Zealand in December 1853 without having convened the first General Assembly.

Grey's reputation in London rested chiefly on his apparent success with the Maoris. Many colonists, especially in the Cook Strait and Canterbury settlements, alleged that his philanthropy was all humbug and that Maori advancement was a myth created by clever dispatch writing. But in this respect his critics did him less than justice. Grey had, after all, won the confidence of most of the principal chiefs of New Zealand. His benevolence was genuine and practical, and his contribution to the progress of the native race was real. The peace he established and maintained was a valuable breathing space in which Maoris and Pakehas could take stock of one another, and think and act in terms of mutual welfare. Grey encouraged and subsidised mission schools in town and country. He set up Magistrates' Courts in native districts and persuaded the Maoris to resort to them for remedy instead of taking the law into their own hands. He encouraged them to grow corn, mill flour, and engage in peaceful trades.

In favoured areas like the Waikato, Otaki, and Nelson, their progress and prosperity proved beyond doubt the capacity of the Maoris to adapt themselves to western ways. The transformation, of course, was very far from complete. The means at Grey's disposal were woefully scanty, many Maori tribes remained untouched by the new developments, and the colonists were for the most part ominously hostile to his benevolent plans, especially when it came to paying for them. Grey was unduly optimistic and did not sufficiently realise either the limits of his achievement or the danger of a relapse. A little self-praise might be forgiven, though it was in bad taste; but his task had only just begun and there was no room for complacency.