1. Prelude to the establishment of the Reserve Bank

The first proposal for the establishment of a "national bank" was already made in 1879 in the old Cape Colony. The proposal emanated from a political group and was motivated more by a desire to have a domestically-controlled commercial banking institution, and not so much by the needs for a central bank with the specialised functions of a central monetary authority.

The need for a central bank became more realistic when in 1890/91 all the local banks in the Cape Colony, with the exception of one, either failed or were absorbed by overseas banks. South Africa therefore experienced a systemic banking crisis already in the last decade of the previous century. A series of articles appeared at that time in a local newspaper, De Paarl, in support of the establishment of a "Central Bank of South Africa". In this series, Reverend S.J. du Toit claimed that in times of financial crises only a central bank could serve the state and the public, and that a central bank would ensure a safe note circulation, that interest rates would be kept more stable, and that trade would be fostered by such a bank. However, at that time the international gold standard served the world well in maintaining financial stability, and with the imminent threat of war between England and the States north of the Cape Colony on the horison, the proposal for the establishment of a central bank was shelved.

The idea revived again when a French Group became involved in the electrification of the Witwatersrand in 1908. This Group proposed that a central bank should be established in South Africa, with a number of French banks as the major shareholders. The French banks would then provide finance for the electrification project, presumably with support from the new central bank. The South African Treasury fortunately rejected the proposal as "premature".

In 1912, Mr Johannes Postmus, Inspector of the Netherlands Bank of South Africa, published an article in The Journal of the Institute of Bankers in South Africa in support of the establishment of a central bank. He referred to the "stimulus and encouragement afforded to commerce and industry by these institutions through the medium of cheap money and fixity of rates". Incidentally, Mr Postmus was appointed Deputy Governor of the South African Reserve Bank in 1927, to become the Bank's second Governor in 1932.

The need for a central bank became more urgent after the First World War, when the international gold market was disrupted and suspended in most countries, and global inflation increased to a higher level. In South Africa, the average annual rate of inflation from 1914 to 1920 was 10,2 per cent. At a Gold Conference held in 1919 (to address the problems encountered with the marketing of South Africa's gold production), a decision was taken to recommend to Government to introduce a uniform Bank Act that should provide, inter alia, "stringent provisions against the inflation of the currency".

Mr Henry Strakosch, a London expert on foreign exchange, was invited by the South African Government to advise it on a revision of the gold and banking arrangements in the country. Mr Strakosch provided Government with a draft Bill "for the establishment of a Central Reserve Bank for the Union". His proposals were submitted to an Advisory Committee, consisting of representatives of the Treasury, the banks and agricultural, mining, commercial and industrial interests.

In the subsequent debate there were many opponents to the idea of establishing a central bank. The heads of the then existing commercial banks, for example, were either opposed to the entire plan, or favoured its postponement until conditions were more normal. Mr Gibson, General Manager of the Standard Bank, said: "Its establishment at the present difficult time is more likely to cause dislocation". A Mr Jagger said: "The idea of a central bank was about the most absurd proposition that I heard of".

In the subsequent Parliamentary Debate, there was also strong opposition to the proposed Bill for the establishment of a central bank. A member of Parliament, Mr Merriman, said the Bill was introduced without any inquiry other than that of "a twopenny-halfpenny commission".

The Bill was nevertheless passed by the Senate on 1920-08-10, and the Act for the establishment of the South African Reserve Bank was finally promulgated in December 1920. On 1921-06-30, the Bank opened for business for the first time.

2. The 1920's: Establishment and commencement of operations

The establishment of the South African Reserve Bank had no great appeal with the general public at that time. Of the original capital of the Bank of 1 million (still the same today at R2 million), £ 300 000 was allotted to the private banks in South Africa, and £ 700 000 was offered to the public for subscription at par. The banks took up only £ 280 000 of the shares allocated to them, and the public subscribed for only £ 380 000. The remaining £ 340 000 was retained by the Treasury with the intention of selling it gradually as new takers would appear. It was not until March 1922 that the capital of 1 million was fully subscribed.

During the decade of the 1920's the Reserve Bank established itself as the central bank of South Africa. It assumed all the normal functions expected of a central bank at that time -- not very different from what they are today.

The Reserve Bank assumed the function of lender of last resort practically on the day of its inception. In its first weekly statement the Bank indicated bills discounted for £ 250 000, and loans and advances made for £ 500 000. These amounts represented assistance the Reserve Bank had to give to one of the existing private banks, the National Bank, later taken over by Barclays Bank, to enable it to comply with the requirements of the new Currency and Exchanges Act.

The Bank's accommodation policy at the discount window was formalised in December 1922, when it announced a formal discount rate for commercial and agricultural bills. For paper of not more than 90 days' currency, the discount rate was fixed at 6 per cent, and for acceptable bills with a maturity exceeding 90 days, but not exceeding 6 months, at 6½ per cent.

In addition to the accommodation facilities, the Bank held just over £ 5 million in gold certificates, representing the transfer of gold to the Reserve Bank by banking institutions to generate the minimum cash reserves the banks were required to hold with the central bank. Thus the Reserve Bank immediately provided services as banker to the banks, and started functioning as custodian of the gold and foreign exchange reserves of the country.

The provision of clearing and settlement facilities for interbank financial transactions was initiated on 1921-09-05 when the National Bank, Netherlands Bank, and Standard Bank also opened current accounts, in addition to their minimum cash reserve accounts, with the Reserve Bank.

On 1922-04-19, the Reserve Bank issued its first £ 1 notes, and on 1922-06-30, all other banks issuing notes in the Union were to cease issuing their own notes.

Other early operations included investments in Treasury bills and temporary advances to the Government. Special bills were also discounted for the Provincial Administrations. The Bank therefore commenced with its function as banker for the Government.

Governor Clegg was of the opinion that the Currency and Banking Act of 1920 endowed the Reserve Bank with an unduly restrictive constitution. An Amendment Act was passed by Parliament in May 1923 to give the Bank greater independence, and to extend its powers.

On the policy front, the Reserve Bank was very much involved in the restoration of the gold standard -- South Africa eventually restored gold convertibility of its currency on 1925-07-01 -- and in establishing local money market assets, such as trade and commercial bills, to enable South African mining houses and banking institutions to invest their surplus funds in South Africa, and not in London, as the custom was before the Reserve Bank was established.

3. The 1930's: End of the gold bullion standard

The second decade in the Reserve Bank's existence started off with the World Depression from which South Africa did not emerge unscathed. Early in the decade, a second Amendment to the Currency and Banking Act of 1920 was introduced to enlarge the Reserve Bank's statutory powers.

The Reserve Bank was severely tested during the period 1930 to 1932 in the environment of a worldwide demise of the gold bullion standard. South Africa, as the major gold producer in the world, tenaciously stuck to the gold standard, with the South African currency linked to the pre-war fixed gold price of 85 shillings per fine ounce. After the United Kingdom left the gold standard in September 1931, and sterling was placed on a floating exchange rate basis, the South African pound became grossly overvalued, a fact that contributed to the woes of the gold mining industry and the total South African economy.

After a hefty political debate, and after the resignation of Mr Tielman Roos, a former leader of the National Party in the Transvaal, from his position as a member of the Supreme Court with the intention to form a political group to ensure the "abandonment of the gold standard", a massive outflow of gold took place from the Reserve Bank and the Government had no choice but to suspend the convertibility of the South African currency into gold on 1932-12-28. This led to the introduction of the Currency and Exchange Act of 1933 that enabled the Bank to intervene more actively in the gold and foreign exchange markets "in the manner and to the extent which it considers best calculated to prevent undue fluctuations in the exchange value of Union currency in relation to sterling".

4. The 1940's: World War II and Exchange Controls

The outbreak of World War II in September 1939 brought to a close the period of a free-floating managed currency in South Africa, and initiated the Union into the rapidly growing society of countries with comprehensive exchange and import controls. As a member of the Sterling Area, South Africa kept its currency in a fixed relationship with the pound sterling and, in terms of the Emergency Finance Regulations of 1939-09-09, introduced free payments to other parts of the Sterling Area, but not to the outside world.

The war years brought wartime prosperity to the South African economy, but also an accumulation of liquidity and rising inflation.

One major further event during the forties was the passing of a new South African Reserve Bank Act in 1944, necessitated by the fact that the Bank's sole right to issue notes was originally conferred upon it for a maximum period of 25 years. In terms of the 1944 Act, the maximum shareholding in the Bank by any individual shareholder was restricted to £ 5 000, a restriction that still applies today.

The independence of the Reserve Bank was again raised at that stage. The Minister of Finance, Mr Jan Hofmeyr, said at the time: "The Government preferred a Board with at any rate theoretical independence, because it means that such a Board will be able to advise us better than a Board which is purely a Government body".

In the post-war period, the Bank's immediate task was "gradually and progressively" to relax wartime import and exchange controls.

5. The 1950's: Relative stability and good economic growth

The fifties saw relative economic stability in South Africa, with sound growth and some inflationary pressures. The development of the Western Transvaal and Orange Free State gold fields supported the balance of payments, and the development of the manufacturing sector provided the necessary stimulus for growth.

The Reserve Bank lived through a quiet time. The gold price remained fixed in terms of the Bretton Woods Agreement; exchange rate parities, fixed through the International Monetary Fund, changed very seldom. During the period 1949 to 1955, the Bank rate was changed only once, in March 1952, when it was raised from 3½ to 4 per cent.

The second half of the fifties saw only one short period of excitement, being the Suez Canal incident of 1956. Furthermore, the South African Bank Note Company was established in 1958 as a joint venture with the United Kingdom printers of Bradbury Wilkinson. The first Managing Director of the SA Bank Note Company was a Mr Crooke, supplied by Bradbury's.

6. The 1960's: Political, social and international turmoil create financial instability

In contrast to the serenity of the fifties, the sixties started in a different mood. Firstly, the Deputy Governor of the Reserve Bank, Dr E.H.D. Arndt, headed the task force to convert the South African currency and payments arrangements to a decimal system. The work of "Daan Desimaal" culminated in the issue of token quantities of new bank notes in Rand currency by the Reserve Bank on "D-Day", 1961-02-14.

A deteriorating internal political and social situation stimulated a large outflow of capital from South Africa, and the Bank rate was raised twice during the course of 1960 and 1961. South Africa's membership of the British Commonwealth and of the Sterling Area was terminated, and the Union of South Africa became a Republic outside of the Commonwealth.

Severe pressure on the balance of payments forced the introduction of new exchange controls in June 1961, on this occasion intended to protect the South African balance of payments and foreign reserves from the non-economically motivated capital outflows.

In the second half of the 1960's, the gradual erosion of the Bretton Woods System of fixed par values based on gold set in, and forced the Reserve Bank to adapt itself to a completely new environment. The introduction of the two-tier market for gold in March 1968 provided new and exciting challenges for South Africa.

During this time, the Reserve Bank also reverted to more direct controls over the domestic banking system when ceilings were placed on credit extension by banking institutions and maximum deposit and lending interest rates were prescribed for financial institutions.

7. The 1970's: Years of frustration

The situation that emerged in the previous decade was carried into the 1970's. Inflation established itself firmly between the levels of 10 and 20 percent, and the natural development of financial markets was suppressed by the need for direct controls over banks and other financial institutions. The Reserve Bank had to face a challenging task to market South Africa's gold production during this period in a widely changing global environment.

An interesting development took place in September 1973, when the Reserve Bank started rediscounting Treasury bills at a rate of ½ per cent above the most recent Treasury bill tender rate, instead of at Bank rate. This was done to evade rather rigid interest rate arrangements, inter alia linking the prime overdraft rate of banking institutions to the Bank rate (not more than 2½ per cent above Bank rate). Because of this arrangement, and because of reluctance to change the Bank rate, Treasury bills could no longer be auctioned. The commercial banks introduced a so-called "best rate" for their lending operations, and both the Bank rate and the prime rate became non-operative. The system did not last long and was drastically changed again in July 1975, still retaining a market-determined floating rediscount rate.

8. The 1980's: Despite increasing pressure for political and social changes, Reserve Bank gradually moves back to a market-oriented monetary policy

In the 1980's, the Reserve Bank showed a keen desire to revert back to more market-oriented economic policies.

The decade started off with a major gold bonanza when the price of gold in January 1980 reached a record of $850 per fine ounce. It did not stay at this level for long, although the average price of gold in 1980 still amounted to over $600 per ounce. By June 1982, however, the price had declined again to below $300 per ounce.

Up to the middle of 1985, South Africa's balance of payments situation deteriorated progressively. Large outflows of capital in the middle of 1985 forced the Debt Standstill arrangements of September 1985, and introduced one of the most humiliating periods in the history of the Bank.

Despite these adverse developments, steady progress was made with the reintroduction of market-oriented monetary policies. Credit ceilings and interest rate controls were abolished early in the eighties, and steps were taken on a continuous basis to encourage the development of the money, capital and foreign exchange markets. The remaining "semi-formal" link between Bank rate and the prime rate of banks was abolished in 1982. Money supply targeting was introduced in the mid-eighties as a new anchor for monetary policy. In 1985, the Bank rate once again became the Bank's basic rate for rediscounting Treasury bills.

The 1980's came to a tragic end when the previous Governor of the Reserve Bank, Dr Gerhard de Kock, died prematurely on 1989-08-07.

9. The 1990's

History will still determine the importance of this decade for the Reserve Bank.

10. Concluding remarks

The Reserve Bank has a proud history of 75 years behind it. There is much to be learned from its experiences of the past.

Already during the first week of its existence did it become involved in the ever controversial issue of lender of last resort and of central bank assistance to a private bank in distress.

The issue of the independence of the central bank is an ever recurring subject that was raised in 1923, in 1930, in 1944, and again in the early 1990's.

Managing the exchange rate of the rand remains an issue that will never be finally resolved. The painful effects of efforts to maintain a fixed exchange rate (and a fixed gold price) during the early thirties provide a lesson that should be remembered.

The interest rate policy of the Reserve Bank will always remain a target for public criticism. Over 75 years, the Bank has tried every possible alternative, but always came back to the conclusion that there is no escape from realistic interest rates that truly reflect underlying market conditions, how painful this policy may sometimes be for all borrowers of funds.

Overall, the Reserve Bank has been relatively successful in reaching the goal set for it by its original founders, that is, to protect the value of the South African currency. In the words of an old Chinese saying:

"A country that is not prepared to learn from the experiences of the past will be punished to make the same mistakes in the future".

I have full confidence that the South African Reserve Bank will continue to serve all the people of South Africa as it did over the past 75 years, and that it will succeed in its efforts to maintain relative financial stability in the South African economy.

Appendix -- Final Remarks

On an occasion such as this, I cannot but pay homage to the six Governors who served before me as head of the South African Reserve Bank. Let me mention them by name:

1.             Mr W.H. Clegg - December 1920 to December 1931;

2.             Dr J. Postmus - January 1932 to June 1945;

3.             Dr M.H. de Kock - July 1945 to June 1962;

4.             Dr G. Rissik - July 1962 to June 1967;

5.             Dr T.W. de Jongh - July 1967 to December 1980; and

6.             Dr G.P.C. de Kock - January 1981 to 1989-08-07.

During this long period of 75 years, fourteen people served as Deputy Governors, without becoming Governors. They were the following:

1.             Mr H.C. Jorissen - January 1921 to December 1926;

2.             Mr J.T. Jurgens - July 1945 to June 1951;

3.             Dr E.H.D. Arndt - July 1951 to June 1961;

4.             Dr D.G. Franzsen - July 1961 to June 1971;

5.             Dr J.B. de K. Wilmot - July 1962 to December 1969;

6.             Mr H.O. de Villiers - January 1970 to March 1976;

7.             Dr J.C. du Plessis - July 1976 to July 1981;

8.             Dr B. van Staden - January 1981 to December 1985;

9.             Dr A.S. Jacobs - January 1981 to January 1990;

10.           Dr B.P. Groenewald - January 1986 to July 1995;

11.           Dr J.A. Lombard - September 1985 to April 1991;

12.           Dr C.J. de Swardt - Since March 1990;

13.           Dr J.H. Meijer - May 1991 to April 1996; and

14.           Mr T.T. Thahane - Since April 1996

I must also thank the more than 80 people who served as non-executive directors on the Board of the Bank. They all made their contributions to the work of this fine institution. They deserve our appreciation.

I cannot conclude without referring to the staff of the Bank, at all levels. Many people worked for the Reserve Bank for a lifetime, many stayed for a short period of time only. Some of our many staff members of the past now form part of our pensioners' corps, many have parted from this world for a better place. We honour all of them on this occasion.

And finally, our staff of today: the people who make this organisation run, and work, and operate. Thank you to the people who worked so hard to make this evening a success. I think in particular of our Communications Department, of our Security Officials, and of the Catering Staff.

I have confidence in the future of the Reserve Bank, because I have confidence in the staff of the Bank