Mr. Stals looks at the role of central banks in the twenty-first century
Opening address by the Governor of the South African Reserve Bank, Dr. C. Stals, at the
Twentieth Mint Director's Conference in Sun City on 23/3/98.
1. The history of money reflects the history of the world
The history of money by far outdates the history of central banking. The Riksbank
of Sweden and the Bank of England are recognised as the oldest central banks in the world. And
yet, they were only established during the seventeenth century. The use of various instruments as
money dates back at least 5,000 years.
In antiquity, money took the form of ornaments and household utensils and tools.
In Egypt, circa 2000 BC, rings, anklets, necklaces and bracelets were used extensively as
common means of exchange. As you as Mintmasters know very well, the legendary King
Croesus of Lydia in Asia Minor is generally credited with the honour of first introducing a
formal and sovereign coinage system, when official silver and gold coins were struck in his
kingdom between the years 560 to 546 BC. It became common practice to mint sovereign coins
in the subsequent Persian, Greek and Roman empires. Perhaps even before this time, official
coins were also struck in China. Thus, coinage, mintage and the issue of money became part of
the history of the world.
It is recorded in history that the Greeks managed their financial responsibilities
quite well. They consolidated the coin issues of the various city states into the drachma, a unit
for the Greek currency that is still used today. The Romans, however, were more profuse. One of
the first things they did after they conquered Greece in 146 BC was to debase the drachma by
reducing its silver content from 67 to 65 grammes. As a matter of fact, the Romans often wiped
out state obligations by devaluation or coin debasement. In the end, this profligacy contributed to
the downfall of the Roman Empire.
2. The history of coinage in South Africa
In South Africa, likewise, the history of coins was always interwoven with the
history of the country. The Portuguese, with Bartholomew Dias reaching the Cape in 1487, and
Vasco da Gama, who sailed around the Cape in 1497, are credited for discovering the sea route
around Africa to the spices of the East. Later discoveries, however, of Phoenician and Chinese
coins on the east coast of Southern Africa, raised the question of who the first real non-African
explorers of Southern Africa could have been?
With Portuguese, Dutch, British, Spanish, French and even eastern interests in the
sea route around the Cape, many coins of foreign origin came into circulation in Southern Africa.
The Dutch riksdaalder and the British guinea and pound perhaps played the major role for many
years in the early history of South Africa. It was during the time of the second British occupation
of the Cape after 1806 that a British Governor found it necessary to fix "exchange" rates
between the various currencies that circulated in the Cape at that time. It is interesting what
currencies were included in this list: Spanish daalders, Venetian sequins, a ducat, a gold ropy
(rupee), an English shilling, and the Dutch riksdaalder and half-guilder.
During a long period of British rule, British money circulated freely in South
Africa, which included the farthing, ha'penny, thruppence (tickey), sixpence, shilling, florin,
half-crown, and crown (5 shillings). The situation changed again with the establishment of the
independent Republics of the Orange Free State and the Transvaal (ZAR). The Free State
reverted to the riksdaalder (= 1 shilling and sixpence). In the ZAR, riksdaalder notes were also
issued to serve as currency, although the riksdaalder was supplemented by periodic issues of
ZAR pound notes in various denominations.
In 1874, the ZAR issued its first coins, the Burgers pounds. As not many of these
coins were issued, they became very valuable collectors' pieces. It was only in 1890, however,
that final legislation was passed for the establishment of a State Mint, and for the minting of
ZAR coins in pennies, shillings, and pound denominations. These coins, commonly referred to as
Kruger coins, were first minted in 1892 in a building situated on Church Square in Pretoria.
After the Anglo Boer War, British money was again used predominantly in the
new British South Africa (to become the Union of South Africa in 1910). The history of South
African coinage took a last major step when a branch of the British Royal Mint was established
in Pretoria and started to issue South African minted (sterling) coins in 1923. This association
with the Royal Mint came to an end on 1 July 1941, when its Pretoria branch became the South
African Mint.
Today, the South African Mint belongs to the South African Reserve Bank, and is
minting coins of a world standard.
3. The future: Electronic money
The world, including South Africa, is now moving into the future with the gradual
introduction of electronic money. It is still an interesting question to what extent the introduction
of e-money will indeed have an impact on the use of coins and bank notes.
There are big differences in the payments systems of different countries, and in
the habits of people using different means of payment. In South Africa, for example, the total
amount of bank notes and coin in circulation is less than 15 per cent of total demand, or
transferable deposits, compared with most of the countries in Eastern Europe (former Union of
Socialist Soviet Republics), where it exceeds 100 per cent of the short-term bank deposits, or
Greece, where it is equal to 104 per cent. In these latter countries, the introduction of e-money
will most probably have a much bigger effect on the demand for coins and bank notes than in
South Africa.
I believe the subject of electronic money will be discussed in more detail in one of
the sessions of this Conference today and tomorrow. It will also, of course, have important
implications for central banks, and for monetary policy in the next century.
As already said, money, and particularly the use of coins as money, goes much
further back in history than central banks. Most central banks in the world today were only
established during the course of the present twentieth century. But central banks now have the
responsibility to protect the value of money, including, of course, the value of coins and bank
notes. To be able to fulfil this function, central banks must have some power to control the issue
of money, and must have some influence on the total amount of money in circulation in the
economy.
In countries where notes and coin form a substantial part of the total money
supply, and where the central bank has the sole right to issue notes and coin, the task may seem
to be easier. It is, however, also in these countries where it is often easier for governments to
exploit the money-creating powers of the central bank, and where an excessive amount of money
is often created to finance government expenditure. Such policies, of course, invariably lead to
higher inflation.
In the more sophisticated economies, such as we have in South Africa, money is
created by banking institutions through their lending and investment operations. The control over
the money supply therefore becomes more difficult, and the central bank can only indirectly
influence money creation with instruments such as interest rate variations, overall liquidity
management, open market operations, and money market interventions.
With the current liberalisation of financial markets and the tendency for an
integration of financial services in gigantic multi-functional and multi-national financial
conglomerates, the task to protect the value of the currency, that is, to keep inflation low, has
become more difficult.
The debate in the world of central banking about the introduction of e-money at
this stage is therefore not only about the effects it might have on the use of, and the demand for,
bank notes and coin, but also how it will change the role of monetary policy. Will it still be
possible, for example, to maintain control over the creation of money and the total money
supply? How will it affect the spending habits of people? How will it influence cross-border
trade and the balances of payments between countries? How will it change the velocity of
circulation of money, and the savings of the community?
4. Central banking in the 21st century
With changes in the concept of money and the use of coins and bank notes, and
with the introduction of electronic money, satellite communication and financial globalisation,
central banks and the modus operandi of monetary policy will also have to change to adapt to the
new environment. It will no longer be sufficient to define money-creating institutions (banks),
and to manage the defined monetary liabilities of these institutions in our efforts to protect the
value of the currency.
The effective definition of money as a means of payment changed over the
centuries from objects of value (gold and silver), to fiduciary issues (bank notes and coin), and
then to deposit-money created by banking institutions. To this will now be added e-money and
payments made through electronically operated global systems (the Internet). Central banks will
have to adjust their monetary policies to affect, most probably through indirect market-based
measures, these new methods of payment and the creation of additional purchasing power.
Central banks will have to operate more on a universal basis, as the banks and the suppliers of
conventional and new money instruments will operate globally and beyond the borders of any
individual nation-state.
Central bankers of the world will be forced by circumstances to work more
closely together, not only in the control over banking and other financial institutions, but also in
the implementation of monetary policy. Developments now taking place in Europe for the
establishment of a European Central Bank may be followed in other future regional
compilations. Perhaps one day in the next century, the world will have only one central bank!
As central bankers, we share with you, the Mintmasters of the world, in the
excitement of the challenges and the prospects of the 21st century.