Head to Head by Oliver Hill

Author:Oliver Hill
Language: eng
Format: epub
ISBN: 9781909204454
Publisher: Dolman Scott Ltd
Published: 2014-04-15T00:00:00+00:00

THE RESERVE BANK

No autobiography of mine would be complete without a chapter on the South African Reserve Bank. When the subject comes to mind, I am always reminded of the great English diarist Samuel Johnson, who defined patriotism as “the last refuge of a scoundrel”.

Central banks generally fulfil a pivotal role in a nation’s economic affairs. One only has to look at the record of the Bundesbank in Germany which, by following sound financial policies, created the conditions necessary for Germany’s wirtschaftwunder. In the early years of my life, the South African Reserve Bank was an almost invisible hand, keeping a low profile as it steered economic policy.

Our early dealings with the bank generally involved a Mr van der Westhuizen and were concluded in a gentlemanly fashion. However, as global pressure tightened on the Nationalist Government, things changed. Mr van der Westhuizen passed on and the hardliners emerged. Up until the early eighties, the Bank’s primary role had been to determine the money supply and protect the rand. But an old threat to all economies – inflation – began to manifest itself.

The oil crisis of 1974 is an appropriate point at which to start. Before then, inflation in SA had remained in low single-digit figures. However, the crisis caused by the soaring price of crude oil could only be solved in economic terms by allowing inflation to balance out the cost of industrial exports from the developed countries to oil imports by allowing the price of industrial exports to compensate by rising. This process took a number of years. When it was achieved, in crude terms (no pun intended), industrial countries came out on top, oil-rich countries found their place in the sun – and Third World countries such as South Africa were saddled with a crippling debt of recycled oil money.

No central bank during this turbulence could do anything but accommodate the violent adjustment process; thus, money creation was the order of the day. The resulting inflationary fires had largely died down by the time of the second shock of 1979. Most countries were better equipped to cope. Nevertheless, this triggered another inflationary round.

How, specifically, did South Africa fare? Initially, due to price controls on many commodities, and State control of many of the factors of production, inflation did not take off quite so violently as it did with many of SA’s trading partners. All these conditions achieved was to flatten the peak rate of inflation, but spread it over time.

The performance of the Reserve Bank in coping with these inflationary pressures is reflected in the exchange rate. Until 1982/83 the rand held its own, but the continual creation of new money, vastly in excess of economic growth and the rising rate of inflation – coupled with deficit financing by the government – led to a collapse of the currency in 1984/85.

Sadly, the respected Governor of the Bank, Dr Gerald de Kock, was in ill health during much of this critical period. Nevertheless, monetary policy was responsible for the greatest collapse of our currency in modern times.

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