Expanding the mandate to a fool’s errand

Dr Richard J Grant is Professor of Finance & Economics at Cumberland University, Tennessee & Free Market Foundation Senior Consultant. 

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This article was first published by Business Day on 24 February 2023

Expanding the mandate to a fool’s errand

The ANC’s party chair, Gwede Mantashe, was recently quoted as saying that “The mandate of the Reserve Bank has to be expanded to meet the needs of the economy.” Although there is no firm proposal as to how the mandate should be expanded, it is commonly asserted that the Bank should shift its policy toward stimulating economic growth and employment. But to achieve that would require changes to the Constitution of South Africa, which states that “The primary object of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic.”
“To protect the value of the currency” is generally understood to require a low and stable rate of price inflation. A dependably stable currency, with only mild natural fluctuations, is essential for balanced and sustainable economic growth. That is why the framers of the Constitution were wise to give the Reserve Bank this one task that is within its competency, and to assert the central bank’s independence from political influence.
In truth, it is not obvious that the Reserve Bank has succeeded consistently in protecting the value of the currency or in avoiding consideration of wider goals and political pressures. With a long-standing inflation target range between 3 and 6 percent, the Bank has not set itself a strong standard for price stability. Even if the inflation rate were steady between 3 and 4 percent, each generation would inherit a rand that has lost half of its purchasing power. That the December 2022 headline inflation rate is above 7 percent, a rate widely believed to be a severe underestimate, cannot but weaken confidence in the currency.
But it is worse than that. High rates of inflation, especially with their increased tendency to fluctuate, degrade the currency’s function as a unit of account. Not only does this hamper daily commerce and business planning, it also disrupts capital markets and increases the likelihood of investment errors and the inability to refinance projects.
Reserve Bank Governor Lesetja Kganyago is correct to remind everyone, and especially politicians, that a central bank does not have the tools to create sustainable economic growth or even to create real employment. The Bank can create currency, and thereby create inflation, but it cannot create wealth. It is the daily trade and production by those who actually use the currency that improves lives and builds the capital necessary to finance future growth.
High inflation makes it difficult to invest and to maintain capital. Injections of new currency into the banking system can produce a temporary illusion of capital expansion, but the most it can achieve is a redistribution of capital, usually away from those who produced it and are best able to manage it. The long-term effect is a growth rate that is lower and less stable than it would have been.
When a society exhibits high unemployment, civil disorder, and chronic economic stagnation, no amount of currency creation by a central bank can solve those problems. When a third of the labor force is officially unemployed, and almost as many have left the labor force through discouragement, that is not a currency problem. It is a problem caused by the very people who now insist on expanding the mandate of the Reserve Bank and would thereby make the problem worse.
A government that interferes with people’s everyday commerce, that imposes rules to create conflict rather than cooperation in the workplace, and that redistributes capital from those who are productive to those who are not – and into more than a few politician’s hands along the way – is a government that destroys the hopes and dreams of its people.
The solution is not to expand government mandates but to shrink them. The Reserve Bank should be asked to produce less currency and not to react to other people’s problems and imagined crises. The national and provincial governments should be asked to spend less of their people’s money and to direct more of what they do spend toward the protection of their people’s lives and property.
No amount of currency creation can improve the schools, bring competence to the police services, remove the regulatory obstacles to employment, and build a culture of trust, respect, and cooperation. But a Reserve Bank that already faces difficulty in its sole task of keeping inflation low and steady would surely buckle under the burden of the fool’s errand in a newly mandated effort to create employment and economic growth with nothing but monetary tokens of shrinking value.

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