AT THE END of the First World War, South Africa’s financial position was characterised by a number of unsatisfactory features. Some of the contributory factors had existed for many years, but others, in turn, originated during the war and had been sharply intensified by the stresses and strains of that difficult period.

From 1914, when the sterling-dollar rate was pegged at 4.76 dollars to the pound, the Bank of England purchased the entire output of the South African gold mines at the fixed price of 85s. an ounce. However, early in 1919 sterling again became freely convertible whereupon the pound immediately began to depreciate in relation to the dollar, with the result that the agreement with the Bank of England for the sale of South African gold was terminated in July of that year. By the end of the year the rate of exchange stood at approximately 3.85 dollars to the pound. This meant an appreciation in the price of gold in terms of sterling. From 85s. an ounce the price rose to 105s. and then to 127s. in February, 1920.

Gold Flowed Out
In those days there was no central bank in South Africa. The commercial banks issued their own notes which they were obliged to redeem in gold on demand. Since the fiction officially persisted that South Africa was still ‘on gold’, the banks themselves had to quote the South African- London exchange rate on the basis of parity with sterling. Thus, to meet their commitments relative to their note issues, the banks were forced to buy gold coin in London at a rising premium, for although an embargo had been placed on the export of gold coin from South Africa, the temptation offered by a premium of almost ten shillings on every sovereign that could be sent out of the country was too great to be resisted. There was smuggling on a large scale.

In these circumstances the banks appealed to the Government to suspend the relevant section of the Banking Act which made their notes convertible into gold. That meant, of course, that they were asking for the suspension of the gold standard itself.

The Government, for its part, was acutely conscious of the position and the added danger existing in the lack of uniformity where the issue of banknotes was concerned whereby there was a possibility of an over-issue of notes under the ordinances of certain Provinces. This situation gave rise to fears, based on experience, that the inflation which had resulted from the war would be followed by an undue restriction of credit once the cyclical movement turned downwards. These and other considerations all pointed to the need for a central bank which could stabilise and safeguard the country’s financial reserves by assuming responsibility and leadership in the currency and banking field.

The Establishment of the Reserve Bank
In 1919 the Government responded to the entreaties of the commercial banks by calling a conference at which the then Minister of Finance, Mr. Henry Burton, presided, its purpose being to decide ‘. . . by a free exchange of views the best ways of safeguarding the interests of South Africa and placing its currency on a natural basis’.

The general managers of the various banks and representatives of the gold mining industry attended the conference which resolved, but not by a very large majority, ‘. . . that the establishment of natural exchanges and a free market for gold in the Union is desirable and that to this end a mint and a refinery be set up’.

The Government then decided to invite Mr. Henry Strakosch (afterwards Sir Henry), the managing director of The Union Corporation Limited in London and a world authority on foreign exchanges, to visit the country and act as an adviser. There is no doubt that Mr. Strakosch’s views had a profound influence on subsequent legislation in connection with the establishment of a central bank in South Africa.

It was his opinion that it would be impossible to remove the embargo on the export of gold without wrecking the country’s economy. He suggested an ingenious alternative whereby the Union was able temporarily to slide off the gold standard without openly acknowledging that it had done so. His proposal was that gold coins should be taken out of circulation and replaced by inconvertible ‘gold certificates’. It was an accepted feature of the scheme that these certificates would be issued with the object of preserving the country’s gold reserve and that their inconvertibility was temporary. In other words, they would be redeemed in gold once circumstances permitted the restoration of the gold standard itself.

Above all, Henry Strakosch insisted on the amendment and consolidation of the South African Banking laws, and the establishment of a central reserve bank charged with the task of setting the discount rate.

The Government accepted these recommendations and drafted three Bills to give them effect. One of these was a measure to establish the South African Reserve Bank.

All aspects of the problem, and the Government’s proposals for dealing with it, were then referred to a Select Committee. Finally, the proposals for issuing gold certificates and for the establishment of the Reserve Bank were presented to Parliament as one consolidated measure. Though there were dissentients on both sides of the House the Bill, now known as The Currency and Banking Act of 1920, was passed on the 10th of August of that year.

In July, 1921, the South African Reserve Bank opened its doors. At about the same time the mining companies established the Rand Refinery at Germiston and in 1923. A branch of the Royal Mint began operations in Pretoria.

The Statutes
The Currency and Banking Act laid down the statutes under which the bank was to operate. It was to be a privately-owned institution with an initial capital of £1,000,000 to which the commercial banks were obliged to subscribe in proportion to their own paid-up capital and reserve funds, though they were debarred from holding more than half of the total between them. Stock to the value of £700,000 was made available to the public at par, but no stockholder, other than the Treasury or a subscribing bank, could acquire holdings in excess of £10,000, it having been laid down that the Treasury itself should take over at par any stock which was not taken up. Initially, public participation amounted to only £379,200, but the Treasury kept the lists open and the full sum of £700,000 was finally subscribed by individuals.

The commercial banks were also required to maintain reserve balances with the Reserve Bank equal to at least ten per cent of their demand liabilities in South Africa and three per cent of their time liabilities to the public.

The Reserve Bank was granted the sole right to issue banknotes in South Africa. This note issue was to be secured by a gold reserve of not less than forty per cent, the balance to be accounted for by trade bills and other securities.

It was charged with the duty of fixing the rate at which it would discount various types of bills, thus establishing a South African Bank Rate as a yardstick for the commercial banks and other financial institutes.

Among a great many other provisions that define the functions of the bank the Act specifically debars it from taking part in transactions which are the normal business of commercial banks.

There were to be eleven directors on the Board of the Reserve Bank of whom six were to be nominated by the stockholders. The other five, including the Governor and Deputy Governor, were to be Government nominees. It thus was provided that the institution’s affairs should not necessarily be controlled by the government of the day.

Mr. W. H. Clegg, Chief Accountant of the Bank of England, accepted the appointment as first Governor of the South African Reserve Bank. He was succeeded by Mr. J. Postmus, who in turn was succeeded by Dr. NI. H. de Kock in 1945 who guided the affairs of the bank for seventeen years. On his retirement as Governor in 1961 the present Governor, Mr. Gerard Rissik, was appointed. Dr. de Kock, however, remains the Chairman of the Board which now consists of twelve directors, half of whom, including the Governor and two Deputy Governors, are appointed by the Government, the remaining six being men who are representative of finance, commerce, industry and agriculture. All directors must be resident in South Africa.

The Advantages of a Central Reserve
In practice the bank’s constitution has enabled a successful combination to be effected between State control of monetary policy on the one hand and the advantages of a privately owned central bank on the other.

The bank’s sole right of note issue has ensured uniformity in the circulation. The commercial banks, which are today required to maintain reserve balances with the bank equivalent to ten per cent of their demand and three per cent of their time liabilities to the public, soon discovered the advantages of maintaining their free cash balances with the central bank as well. Not only did this procedure facilitate the settlement of inter-bank clearing balances, but it also enabled the commercial banks to make more efficient use of their resources as a result of the re-discount and advance facilities which could be obtained from the central bank itself.

At an early stage of its career, therefore, the bank had assumed the recognised central banking functions of responsibility for the note issue, as custodian of the cash reserves of the commercial banking system and central clearing institution, and, of course, from the start it was prepared to act as lender of last resort by way of loan facilities against commercial, agricultural, and Treasury bills and Government stocks.

Purchase of Gold
The assumption of these functions contributed to the Reserve Bank becoming the custodian of South Africa’s gold reserves, a position which was strengthened by arrangements concluded in 1925 whereby it purchased the gold output and attended to its disposal. As gold occupied the predominant place among exports, this arrangement also enabled the bank to assume the leading role in the country’s exchange market.

From an early stage the bank has determined the exchange rates for sterling. The control of these rates, in turn, has enabled it to influence the rates quoted by the commercial banks for other currencies. With the development of trade and financial relationships with the United States, Canada, Switzerland, Italy and Germany, the bank has come to quote directly for the currencies of these countries as well, thus ensuring the public of fine rates in prevailing circumstances. When the need arose the bank also entered the forward exchange market in these currencies.

Another recognised central banking function was assumed in 1927 when the bank took over the Government accounts from the commercial banks and thus became its banker. Subsequently, the accounts of the provincial administrations and those of certain statutory organisations were also transferred to the bank.

Forty-Two Years of Growth
Today the bank operates nine branches. These are situated in Pretoria, where the head office is also located, Bloemfontein, Cape Town, Durban, East London, Johannesburg, Pietermaritzburg, Port Elizabeth and Windhoek.

In the conduct of its varied activities it naturally has become very thoroughly acquainted with economic conditions within the Republic and overseas and has developed close contacts with a number of the leading foreign countries. Automatically, therefore, it also has functioned as the Government’s consultant and agent in a large number of appropriate matters such as the repatriation of Government stocks from overseas during the war years. It administers the exchange control system in the Republic on behalf of the Treasury and acts as agent for the Government in its operations with the International Monetary Fund and in connection with loans granted to South Africa by banks in the United States, Switzerland, Italy and Germany.

The Reserve Bank’s first weekly statement, issued on the 2nd July, 1921, reflected assets equivalent to R11,876,305. At the end of December, 1962, assets stood at R568,600,275 and advances, investments and discounts totalled R113,751,736. Liabilities in respect of notes in circulation amounted to R275,491,305 and deposits to R249,192,017.

The statutes of the Bank have been amended in several important respects since it was founded. These amendments have been effected so as to give it more scope and flexibility in meeting the needs a of developing country under changing world economic conditions. In 1944 the laws governing its operation were consolidated in the South African Reserve Bank Act of that year. However, there have been no fundamental changes of a constitutional nature.

Today, the bank is still a privately owned institution with nearly a thousand individual stockholders, some half of whom hold less than R1,000 of stock each. Annual dividends are restricted to ten per cent, the balance of the net profits being allocated in a small part to the general reserve fund and in the main to the Government and so, indirectly, to the people of South Africa.