South Africa has joined Brazil, Russia, India and China in the BRICS co-operative alliance. It now has a chance to play a big role in the worlds markets. If it has the courage to adopt one strategic policy, it could become a world leader.
On 17 February 2009, I wrote that South Africa could lead the world out of the financial crisis if it established a 100% gold-backed rand. My proposal was not to return to the generally understood gold standard which requires that the central bank should, on demand, exchange paper currency for gold at a fixed exchange rate. The mechanism that I did propose was for the establishment of a currency board, which would have full responsibility for managing the rand and be required to back it fully with physical gold holdings at a specified rate per rand.
My original proposal read as follows: Currency boards prevent governments and central banks from manipulating their currencies. They function even better if they are independent, separate from central banks, and have the sole purpose of providing the countrys citizens with a sound currency. SA should consider establishing an independent Currency Board that to back the rand utilises gold rather than a foreign currency.
According to the 31 January 2009 statement of assets and liabilities published by the SA Reserve Bank, the liabilities reflected Notes and Coins in Circulation amounting to R68.4bn, and the assets included R37.7bn (4,011,417 ounces) of gold holdings valued at R9398.79 per ounce. At the same price, to fully back the notes and coins in circulation with gold, a purchase of a further R30.7bn of gold would have been necessary.
If an independent Currency Board had been established on 31 January 2009 to manage the rand, it would have taken over the Reserve Banks R68.4bn liability in respect of notes and coins in circulation, its gold assets of R37.7bn and, theoretically, forward cover provided by the Reserve Bank for another R30.7bn of gold at R9398.79 per ounce to settle the balance of its liability to the Currency Board.
On that date, 31 January 2009, one rand would have been declared to be equivalent to 1/9398.79th of an ounce of gold, fixed for all time. While the Currency Board would be compelled to maintain precisely correct gold holdings at the fixed weight of gold per rand to cover notes and coins in issue, it would not undertake to part with any of its gold in exchange for notes and coins. The reason is that the gold holdings of the Currency Board would represent a control mechanism to prevent excessive printing of money, not a return to gold as money, which would be something vastly different and more difficult to implement. For all new rand notes or coins issued, other than for replacing damaged notes, the Currency Board would have to purchase gold so it would have no incentive to unnecessarily increase the quantity of rands in circulation.
Now, to bring these figures up to date, according to the 31 March 2011 statement of assets and liabilities published by the SA Reserve Bank, we find that the liabilities reflected Notes and Coins in Circulation amounting to R78.3bn, and the assets included R39.1bn (4,017,530 ounces) of gold holdings valued at R9731.88 per ounce. At the same price, to fully back the notes and coins in circulation with gold, a purchase of a further R39.2bn of gold would have been necessary.
If an independent Currency Board had been established on 31 March 2011 to manage the rand, it would have taken over the Reserve Banks R78.3bn liability in respect of notes and coins in circulation, its gold assets of R39.1bn and, theoretically, forward cover provided by the Reserve Bank for another R39.2bn of gold at R9731.88 per ounce to settle the balance of its liability to the Currency Board. On 31 March 2011, one rand would have been declared to be equivalent to 1/9731.88th of an ounce of gold, fixed for all time.
In the twenty six months since the previous calculation was done, the Reserve Bank has increased the quantity of rands in circulation by R9,9bn, its gold holdings have increased in value by R1.4bn and an additional R8.5bn would have become necessary to fully back the rand with gold.
The previous article explained the necessity for independent action by South Africa as follows: The main reason for the absolute terror gripping the world is that the worlds reserve currency, the once-mighty dollar, has been debased and manipulated to the point where it no longer serves its former purpose. Even more frightening is the fact that the US government and Federal Reserve Board are in the process of compounding past errors by debasing the currency even further.
The world needs an alternative reserve and the only feasible option is gold. There are numerous problems related to a return to a fully convertible currency based on gold, not least of which is the large quantity of paper money in issue.
Since the article was written, SA has joined Brazil, Russia, India and China in the BRICS co-operative alliance. If all these countries were to adopt my proposal, they would establish a viable reserve currency pool. With all their currencies linked to gold at fixed rates, the exchange rates between their currencies would tend to remain relatively stable, inflation rates would be low, and trade between them would increase substantially. And, SA would be part of a formidable trading block and become a preferred destination for direct foreign investment.
The argument put forward in the previous article suggested that: Recent events have demonstrated the disastrous consequences of currency manipulation. Under current conditions, any nation with the will to produce and implement a practical means of providing a stable currency free of political manipulation would attract not only investment but also highly talented people capable of creating wealth and jobs. It would also attract emulation. SA has for long had a gold-based economy. It should now demonstrate to the world its confidence in its product and a better way out of the global financial crisis.
To now extend that argument. By becoming a member of BRICS, SA is attempting to play in the big league and in order to do so successfully the government has to start thinking like a big league player. It is time to discard all petty policies, including baggage from the unhappy past, and to turn this country into an open, thriving economic powerhouse that welcomes innovation, investment and talented people who can create firms that will help double and re-double the GDP every ten years. These are difficult times and at times like these, it is time to think big.
Eustace Davie is a director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.
Note: The full text of the previous article can be found at http://www.freemarketfoundation.com/ShowArticle.asp?ArticleType=Publication&ArticleID=1571
FMF Feature Article / 10 May 2011