Address by Dr Chris Stals, Governor of the South African Reserve Bank, at a luncheon of the Rotary Club of Johannesburg, Johannesburg. 1. The market economyMonetary policy in South Africa is based on the assumption that this country has, wants and will maintain, an economy that is based on the principles of the free market. This does not mean that the South African economy represents the ideal example of the text book definition of a free market. There are many deficiencies in the structure of the economy that deviate from the strict requirements of free competition, restrictions that were created by past socio-economic policies, that reflect the undeveloped stage of major parts of the country, and that form an integral part of the complexity of the composition of the total population. However, the assumption recognises the many tested and proven advantages of the market economy, and the objective is to adhere to the principles of a market economy with the implementation of monetary policy for as far as this is possible and feasible. Deviations will and often do occur from the basic principles of the market economy, but such deviations should in all cases be treated with circumspection, and corrective policy measures should continuously be directed towards the gradual removal of the underlying deficiencies in the structure of the economy. The market economy is based on the principles of private ownership, and on the guidance of macro-economic decisions by private initiatives. This does not rule out a role for government -- even in those countries that are the biggest proponents of the market economy, governments take an active part in major issues such as public administration, security, health care and social services. In most countries, governments also take a more or a less active part in total economic activity. The important issue is, however, that even government economic activity should be guided by the sound principles of a market economy, for only then will the country be able to obtain maximum wealth for all of its people.The market economy also requires well-functioning and efficient markets, for it is only through markets where information can be disseminated, analysed and assessed by the many participants in the economy, each one acting in his own interest. As Adam Smith already argued con-vincingly in the eighteenth century, it is through the "invisible hand" of the market system that optimum economic growth and development will be obtained. Here again there is a role for government to play, namely to encourage the development of the markets, to improve competition and to raise the quality of the decision making process in the market place.Finally, the market economy needs competition. In many countries the size of the economy may often be too small to support effective competition in domestic economic activity, but the opening-up of the economy to international participation can bring even to such countries the advantages of a global free market economy.These then, are the basic principles on which the model for monetary policy in South Africa has been based: private ownership;efficient market systems, andeffective competition by domestic and international participants. 2. The function of monetary policyIn terms of the South African Reserve Bank Act and of the Constitution of the Republic of South Africa, the primary objective of the Reserve Bank must be "to protect the value of the currency of the Republic in the interest of balanced and sustainable economic growth in the Republic".Although the legislation provides for some autonomy for the Reserve Bank to pursue its objective, the Bank has no freedom to set its own goals -- its primary and only goal has been defined for it by Parliament. The Reserve Bank must protect the value of the currency, that is, must work against inflation.In terms of the Reserve Bank Act, the Bank is accountable to Parliament and must, from time to time, report to Parliament on progress made with the achievement of its mandate, namely to protect the value of the currency. The Ban