Most of the world’s central banks are behaving like lemmings, all attempting to outdo each other in the bizarre race to the bottom of the monetary cliff. The irrational currency-debasement in which these central banks are engaged is remarkably lemming-like, all following the US Federal Reserve towards the abyss. South Africa should stop following the quantitative-easing-lemmings towards economic ruin.
Legend has it that lemmings purposely commit mass suicide. According to Alaskan wildlife experts the truth is that every few years these small arctic rodents for some unknown reason set off together in large numbers for supposedly greener pastures and many die as a result of the hazards they encounter, such as lakes and cliffs. Humans also, like lemmings, often follow their leaders on a destructive path.
Debasement of currencies, when carried out in many countries simultaneously for a lengthy period, eventually causes global depressions and economic decline. The word “debase” harks back to the days when base metals were mixed with silver or gold in an attempt to fool the general populace into accepting debased coins at their full precious-metal value. Of course the people were not fooled for long. One of the tests was to bite a supposed “soft” gold coin to see if it left teeth marks. If no mark was left and you were about to break a tooth, the coin was not gold.
Base metals are lighter than gold or silver, so weighing the coins was a dead give-away, something which infuriated Roman emperors when merchants demanded to be paid the correct precious-metal value for their merchandise. The Roman response was to institute price controls on the sale of goods and apply harsh punishments, including the death penalty, to merchants who insisted on being paid the equivalent in debased currency of the precious-metal value they placed on their goods. Merchants generally withdraw when governments attempt to abuse them and the threats to their property and their lives caused them to disappear into the countryside along with their goods, leaving Roman consumers with no goods to buy.
General price increases resulting from currency debasement is today called “inflation”. Originally, the word “inflation” was used to describe an untoward increase in the money supply, a process known to lead to general price increases. Calling the cause (currency debasement) and the consequence (general price increases) by the same name is confusing, but perhaps it is a confusion deliberately employed by the perpetrators of currency debasement to hide their activities.
Today currency debasement is much easier to carry out. Issuers of currency now provide pieces of paper instead of precious metals. When trade was facilitated by exchanging a small volume of precious metals, readily accepted if coined by a trusted issuer, for goods and services of all kinds, coin debasement was readily detectable. Debasement of paper money is not. Governments and their central banks took over the currency issue process, supposedly to protect citizens from currency debasement, a development that has proved to be disastrous. Instead of protecting citizens from banking fraud, central banks have coined terms such as “quantitative easing” to fool people into believing that large-scale currency debasement is something noble. Any private currency issuer who attempted to do the same thing would have been found guilty of fraud.
An examination of the SA Reserve Bank’s management of the rand reveals that there has been a rapid increase in the quantity of money in circulation over the past two decades. As this has not been matched by an increase in the production of goods and services, it has led to an inexorable general increase in prices, or as otherwise stated, a decline in the purchasing power of the rand. The figures are:
Source of M0 and M3 monetary aggregates (million rand): SA Reserve Bank
The table shows that people on fixed incomes, such as pensioners, can buy a great deal less with their debased rands. Excessive increases in the money supply continually erode the purchasing power of the rand, disrupt business calculations and plans, cause prices to rise, erode savings and make the average household poorer. Travel overseas is also hugely more expensive for South Africans.
When the rand was introduced on 14 February 1961, R2 equalled £1 and R0.714 equalled US$1. Today, we exchange about R17.75 for £1 and R12.00 for US$1. This means that since 1961, the rand has lost 88.7% and 94.1% respectively of its purchasing power by comparison with the pound and the dollar.
On 29 November 2001, Reserve Bank Governor, Tito Mboweni, pointed out that prices in South Africa were approximately 70 times higher than in 1921 while, over the same period, prices in the United States had increased only tenfold. The United States had periods of its most rapid growth when prices were relatively stable or gently declining, such as in the last decade of the 19th century. Continuing along the lemming path will lead to destruction. Debasement of the rand can and should be stopped.
Zimbabwe provided a perfect example of what hyperinflation does to a country. Surprisingly, Zimbabwe also provided a solution to the so-called “strong currency problem”. The answer is to remove the legal tender law that locks citizens into a single currency. This would make it possible for businesses, as Zimbabweans did when they ignored the law, to conduct their operations in any currency of their choice, including if they are exporters, the currencies of the countries with which they do most business.
When the Zimbabwe dollar became worthless people turned mainly to the US dollar, but the euro, rand and pula were also used in transactions. Utilising a variety of foreign currencies for local business transactions brought Zimbabwe back from the brink of economic destruction.
South Africa should establish a strong rand and allow consumers, savers, investors and businesses to use whatever currency they prefer and to maintain accounts at local banks in those currencies. Most people would probably continue to use rands for their daily business but might prefer using other currencies for specific purposes. Exporters and importers, for instance, may wish to do so to reduce the problems in their selling and purchasing activities caused by currency fluctuations.
South Africa should opt for sound money, which would make investments in South Africa more attractive. With interest rates determined by the market, rates on rand-denominated investments and loans would tend to be low and stable, which would provide a good monetary environment for the high economic growth this country so desperately needs.
Author: 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 FMF.