Abstract
The object of this chapter is to examine monetary policy in South Africa from the early 1970s onwards, and to assess critically the efficacy of that policy. The two decades that constitute the span of our enquiry have been associated with important changes, not least in the economic sphere, where the ‘monetary environment’, embracing financial institutions as well as the instruments of monetary policy,1 has been transformed during this period.
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Notes
See RP 70/1984 Commission of Inquiry into the Monetary System and Monetary Policy in South Africa (1985), Final Report of the De Kock Commission, The Monetary System and Monetary Policy in South Africa (Pretoria: Government Printer), p. A3. This, however, is a rather modern conception which is perhaps more appropriately applied to central banking practice in the latter half of the period under review.
Issues related to the ‘mechanics’ of financial and banking institutions and their instruments, are examined in Falkena, H.B., et. al. (1986), The Mechanics of the South African Financial System: Financial Institutions, Instruments and Markets (Johannesburg, Macmillan S. A. Publishers (Pty) Ltd).
On the management of the activities of these institutions see Falkena H. B., et. al., (1987) The Dynamics of the South African Financial System: Financial Risk Management (Johannesburg, Macmillan S.A. Publishers (Pty) Ltd).
See Courtney, M.M. (1983/84) ‘South African Exchange Rate Under Managed Floating’, Finance and Trade Review, 15, 3, pp. 112–44. He draws attention to the question of an association between the rate and the variability of that rate and cites papers (p. 113) which offer empirical support for such an association.
Friedman, M. (1977), ‘Inflation and Unemployment: The New Dimension of Politics’ (1976 Alfred Noble Memorial Lecture), Occasional Paper No. 51 (London, Institute of Economic Affairs) explains such an association, which he postulates as an underlying cause of ‘slumpflation’, in terms of the needs of politicians to do what is politically expedient.
Friedman, M. (1975), ‘Unemployment versus Inflation: An Evaluation of the Phillips Curve’, IEA Lecture No. 2, Occasional Paper No. 44 (London, Institute of Economic Affairs).
Hicks, Sir John (1975), ‘The Quest for Monetary Stability’, South African Journal of Economics, 43, 4, Dec., p . 405.
The important distinction between ‘fixprice’ and ‘flexprice’ markets owes its origins to Hicks, J. (1965), Capital and Growth (Oxford, Oxford University Press).
See Emmninger, O. (1979), ‘The Exchange Rate as an Instrument of Policy’, Lloyds Bank Review, July, pp. 1–22.
De Kock, G. (1978), ‘Central Banking and Financial Markets in South Africa’, South African Journal of Economics, 46, 3, Sept., pp. 197–212.
The Banks Act was based on the Report of the Technical Committee on Banking and Building Society Legislation (1964) which adopted a view on what constituted money and, therefore, on the nature of Reserve Bank activities which was narrower than views that were being disseminated abroad through the work of Gurley and Shaw. See Gurley, J.G. and Shaw, E.S. (1956), ‘Financial Intermediaries and the Saving-Investment Process’, Journal of Finance, 11, May, pp. 257–66.
In Goedhuys, D.W. (1980), ‘Monetary Policy for the 1980s’, South African Journal of Economics, 48, 3, Sept., his statement about the ‘new found strength’ (p. 235) reflects something of the optimistic outlook which the buoyancy of the economy, by 1980, engendered. Goedhuys, however, did not underestimate that in the course of the decade ‘extremely variable demands’ (p. 236) would be placed on economic management.
See the definition of monetarism provided by Nobay, R.A. and Johnson, H.G. (1977), ‘Monetarism: A Historic-Theoretic Perspective’, Journal of Economic Literature, 15, 2, June, p. 480.
In his presidential address to the American Economic Association, Friedman emphasised the importance of maintaining a stable rate of growth of the money supply. See Friedman M. (1968), ‘The Role of Monetary Policy’, American Economic Review, 58, 1, March, pp. 1–17. Now that much of the fuss about monetarism has died down, it is surprising to realise that Friedman’s claims about the role of monetary policy were really very modest and amounted to little more than that of attempting to create a more stable and, therefore, less uncertain economic environment.
Friedman himself, in expounding the merits of monetarism, constantly emphasised the difference between (his) monetarist thinking and the Keynesian policies of the day. See Friedman, M. (1970), ‘The Counter-Revolution in Monetary Theory’, Occasional Paper No. 33 (London, Institute of Economic Affairs).
The criticisms from economists were of two types: those that objected to the ideological underpinnings of the new policies and those that criticised their theoretical basis. With regard to the latter, see for example, Kaldor, N. and Trevithick, J. (1981), ‘A Keynesian Perspective on Money’, Lloyds Bank Review, January, pp. 1–19.
See Lachmann, L.M. (1977), ‘The Dilemma of Economic Policy’, in M.L. Truu (ed.), Public Policy and the South African Economy: Essays in Memory of D. Hobart Houghton, Cape Town, Oxford University Press. Lachmann emphasises the contradiction between the modern meaning of the word, as used by politicians, and the idea of a ‘settled or definite course of action’.
See RP 112/1978 Commission of Inquiry into the Monetary System and Monetary Policy in South Africa (1978), First Interim Report of the De Kock Commission, Exchange Rates in South Africa (Pretoria, Government Printer) and
RP 93/1982 Commission of Inquiry into the Monetary System and Monetary Policy in South Africa (1982), Second Interim Report of the De Kock Commission, The Building Societies, the Financial Markets and Monetary Policy (Pretoria, Government Printer). Both these are included in the Final Report RP 70/1984 (submitted in May 1985).
See Burton, J. (1982), ‘The Varieties of Monetarism and their Policy Implications’, Three Banks Review, No. 134, June, pp. 14–31, for an examination of the varieties of economic thought that are associated with monetarism.
Kantor, B.S. (1986), ‘The De Kock Commission Report: A Monetarist Perspective’, South African Journal of Economics, 54, 1, p. 94 holds that ‘there are fundamental differences between a monetarist’s prescription for . . . monetary policy and the solutions proposed by the De Kock Commission’.
Faure, A.P. (1986), ‘The “Money Market Shortage” and its Causes’, The Securities Markets, 1, 3rd Quarter, pp. 15–27, contrasts the ‘American’ cash reserve system with the ‘classical’ system which is applied in South Africa.
De Kock, G.P.C. (1986), ‘Money Supply Targets and Exchange Rate Policy in South Africa’, The Securities Markets, 1, 3rd Quarter, p. 5.
The hazards of trying to forecast the value of economic variables, particularly ones which depend so much on sentiment, are illustrated by Brock, H.W. (1981), ‘The Future Price of Gold’, Supplement to Optima, 30, 2. Despite an apparently sophisticated set of forecasting methods, the forecasts naturally failed to recognise the impact on gold of the fundamental changes in economic policy that occurred in the eighties.
Armstrong, I.H. (1981), An Investigation of the Financial Rand and the Implications of its Merging, with Particular Reference to Foreign Investment, Unpublished MBA Research Report, Graduate School of Business Administration, University of the Witwatersrand, Johannesburg.
See Addleson, M.S. (1989), ‘A Decade of Floating the Rand: An Assessment’, Mimeo., Business Alert No. 108, Centre for Business Studies, Graduate School of Business Administration, University of the Witwatersrand, Johannesburg.
See Simpson, D. (1988), ‘What Economists Need to Know’, The Royal Bank of Scotland Review, No. 160, Dec, pp. 3–11.
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© 1992 Stuart Jones
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Addleson, M. (1992). Monetary Policy in the 1970s and 1980s. In: Jones, S. (eds) Financial Enterprise in South Africa since 1950. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-11536-5_3
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