Page 52 - SARB: 100-Year Journey

42
South Africa and the SARB
Credit crunches, liquidity squeezes, wavering confidence in the gold standard, currency shortages, boom and bust economic cycles, bank failures, and a crisis of confidence converged as factors for the formation of central banks in the modern era and periods prior. That pertains to Europe, where the first central bank in the world was founded, and the US, whose Federal Reserve model inspired the institutional architecture of the SARB.
The former undertook what monetary theorists refer to as a traditional genesis of central banking, while the latter followed a trajectory that constitutes the modern means of central banking. The point of distinction is in the deployment of instruments at a central bank’s disposal, both during the good times and economic downturns.
Domestically, South Africa was booming in the latter part of the 19th century following the discovery of diamond and gold deposits on its shores. Prospectors soon made their way to the southern tip of Africa in search of riches. The attendant economic expansion came with the sort of economic structural complications and imbalances that could only be remedied by the establishment or existence of a central bank.
But “[it] is true ... the Reserve Bank ... was established under unfavourable conditions, namely, those prevailing shortly after the height of post-war inflation had been reached, and ... it had to commence operations and formulate its policy in a time of severe deflation and depression,” writes Dr De Kock, a former SARB Deputy Governor who later became the third Governor of the institution (1929, p 39).
During the 1919 Gold Conference in Pretoria, one of the recommendations was that, since South Africa had assumed Union status, the country needed a single banking legislation. Also revived was a long-standing proposal, dating back to the 1800s, for the establishment of a central bank.
In March 1920, a Select Committee of Parliament comprising 10 members was appointed by the Union government to investigate what it would take to establish a central bank in South Africa. This committee recommended that a privately owned central bank be established. The Union Parliament accepted the proposal. The private shareholders would include existing commercial banks in lieu of giving up their ability to print their own banknotes. The Currency and Banking Act was adopted in 1920, giving the SARB the sole right to print local banknotes for a period of 25 years.
The SARB was founded in the aftermath of World War I at a time when the South African currency, which was pegged to the British pound sterling, was still on the gold standard. In turn, the British pound sterling was pegged to the US dollar. However, this pegging arrangement came to an end in 1919. This meant the pound-dollar exchange rate could float according to demand and supply, creating problems for South Africa’s commercial banks. This was not only untenable, but also provided further impetus for the formation of a domestic central bank.
During a meeting in July – on 21 July 1921 to be precise – the SARB adopted a resolution to confirm Clegg’s appointment as Governor. Clegg had been recommended as the preferred candidate in December 1920 by a selection committee that included influential British economist John Maynard Keynes.
As William H Clegg, the founding Governor of the institution, observed during the inaugural ordinary meeting of stockholders in July 1921: “The ... Reserve Bank is the outcome of a conviction that has grown ... in the Union .... that the increasing importance of South Africa in the world of commerce called for some elaboration in her banking machinery. It was felt that, however well the existing Commercial Banks had served her in the past, there was