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Establishment of the SA Reserve Bank
The earliest proposals for the establishment of a central bank in South Africa were made as far back as 1879 by the Afrikaner Bond, a political party in the then Cape Colony (D’Assonville, 1999: 203; De Kock, 1954: 3; SA Reserve Bank, 1971: 9)55. Financial and economic turmoil in the period after the Great War (later known World War I) accelerated the establishment of the SA Reserve Bank.
Before the establishment of the central bank, commercial banks in South Africa printed their own banknotes for issue (SA Reserve Bank, [S.a.]: 1). These notes were backed fully by gold in terms of a gold standard, i.e. the notes could be exchanged for gold. At the time of the establishment of the SA Reserve Bank, the power of commercial banks to issue banknotes was internationally a long-established practice, albeit under “review”, as banks of issue (as central banks were initially known) were established in various countries, particularly in Europe, in the nineteenth century (SA Reserve Bank, [S.a.]: 1).
During the Great War the South African currency remained on a gold standard and commercial banks were obliged to redeem their notes for gold (De Kock, 1954: 11) in terms of an arrangement where the domestic currency was pegged to the British currency (pound sterling), which in turn was pegged to the US dollar and, therefore, the gold price, in each instance at a fixed exchange rate. This arrangement ended in March 1919 when the peg of pound sterling to the US dollar came to an end, with pound sterling depreciating against the US dollar and gold (Gelb, 1989: 54). As a result, gold obtained in South Africa through the conversion of banknotes at commercial banks could be sold at a premium in London (SA Reserve Bank, 1971: 10). At the same time, domestic commercial banks had to buy gold at the same premium in London to provide the necessary backing for their banknotes in issue in terms of the gold standard applied in South Africa. In reaction to the call on government by the commercial banks to be released of this obligation to “trade at a loss”, a Gold Conference was convened in Pretoria in October 1919 (De Kock, 1954: 11).
One of the resolutions of the Gold Conference was to request government to introduce one uniform Bank Act for the country (De Kock, 1954: 13), as no such legislation had been introduced since the unification of the country in 1910. Following on this proposal, the Government engaged the services of Strakosch (later Sir Henry), a British banker, who was instrumental in a proposal that a domestic central bank should be established (De Kock, 1954: 14; see also Gelb, 1989: 48). This culminated in the Currency and Banking Act, No 31 of 1920, which provided, inter alia, for the establishment of a central bank with the power to issue domestic banknotes56 (De Kock, 1954: 23; Engelbrecht, 1987: 95 and 96; Mboweni, 2000b: 1; SA Reserve Bank, 1971: 11 and 12). The SA Reserve Bank opened on 30 June 1921 (SA Reserve Bank, 1971: 12) and issued its first banknotes to the public on 19 April 1922 (SA Reserve Bank, 1971: 22). Commercial banks were accordingly instructed to cease issuing or reissuing their own banknotes with effect from 30 June 1922.
The name chosen for the central bank of South Africa, the SA Reserve Bank, reflects reference to the Federal Reserve System. De Kock states that “[t]he features which the South African Reserve Bank had in common with the Federal Reserve Banks at that time were … [t]he designation of Reserve Bank, which had previously been adopted only in the United States …” (1954: 38).
Subsequently, the word Reserve has been used in the names of the central banks of Peru (albeit in Spanish, Reserva), established in 1922; New Zealand, established in 1933; El Salvador (albeit in Spanish, Reserva), established in 1934; India (1935); Australia (1945); Malawi (1964); Zimbabwe (originally the central bank of Rhodesia) (1964); Fiji (1973); Vanuatu (1980); and Tonga (1989).
Gold standard: 1921 to 1931
The SA Reserve Bank’s approach to monetary policy after its inception in 1921 was the application of credit and interest rate policies aimed, in orthodox gold standard fashion, at bringing about the necessary conditions for an eventual return to such a standard. At the time non-convertibility (in the true sense of the word, i.e. into gold specie or coin) was seen as merely a temporary measure, and policy debates focused on the embargo on gold exports and the acceptability of not linking the South African pound to the British pound sterling. South Africa reintroduced the gold standard at the pre-war conversion rate on 18 May 1925. This put the South African pound on par value with the UK pound sterling, as the UK returned to a gold standard on 25 April 1925, also at the pre-war conversion rate (Sloman, 1994: 607)59.
For purposes of analysing the SA Reserve Bank’s credit policy during 1921 to 1931, the period could be split into two sub-periods. During the first sub-period, the SA Reserve Bank applied its credit policy with the restoration of the gold standard in mind. During the second sub-period, the aim of the SA Reserve Bank’s credit policy was to maintain the gold standard. The aim of its policy was therefore to maintain stability between the exchange rate of the domestic currency and those of other countries on a gold standard, rather than to stabilise the general price level. The SA Reserve Bank not only successfully restored the gold standard and currency convertibility, but also succeeded in establishing a reasonably close relationship between Bank rate, used for discounting purposes, and the lending rates of commercial banks, which ensured that the SA Reserve Bank had an influence over domestic interest rates and credit conditions, necessary to apply effective monetary policy. The use of a gold standard domestically and internationally was underscored at the time, by “ … the general belief and conviction … that exchange rate stability was of paramount importance for the maintenance of international confidence and the conduct of international trade … ” (De Kock, 1956: 123).
As is evident in tables A1 to C1 in Appendices A to C, South Africa experienced deflation from 1921 to 1931, with prices declining on average by some 3,2 per cent per annum. However, when analysing the movement in prices, it is interesting to note the level of and changes in domestic interest rates over the same period (Republic of South Africa, 1985). The prime overdraft rate of commercial banks fluctuated around 7 per cent (Republic of South Africa, 1985: 106).
Moreover, “[f]rom 1922 to 1932 the margin between Bank rate … [i.e. the rediscount rate for commercial banks at the SA Reserve Bank] … and the commercial banks’ minimum overdraft rate ranged from 0,75 to 1,6 per cent … ” (Republic of South Africa, 1985: 106). As the rate of inflation over the period 1921 to 1931 declined by an average of some 3,2 per cent per annum, it implies that the real average minimum overdraft rate was slightly above 10 per cent per annum.
Low inflation or relative price stability were not achieved, but rather moderate deflation – which was the objective of the policy, i.e. to restore price levels to those prevailing before the Great War.
1.Introduction
2. Literature review
3. Measurement of inflation
4. Theoretical and conceptual framework: using anchors for monetary policy
5. South Africa’s experience with inflation: a central bank perspective
6. South African price and salary changes measured against inflation since 1921
7. Measuring inflation credibility
8.Conclusions
9.References
10.Appendices
