Address by Dr Chris Stals, Governor of the South African Reserve Bank, at a Breakfast Meeting of the Institute of Credit Management, Johannesburg, 1998-10-29  1. A "credit" economyModern economies are often described as "credit-based" economies. This is a true reflection of the functioning of modern, sophisticated economies in which money plays the important part as a means of exchange, as an instrument of payments and as a store of value.The availability and the use of credit facilitates the exchange of goods and services, the production processes and the growing importance in all modern economies of financial services. One can hardly visualize a modern economy that works without credit.The normal characteristic of credit is that one participant in the economy, be it an individual, a corporate body or a governmental institution, denies himself the immediate use of purchasing power already in his possession, and makes this purchasing power on a temporary basis available to another participant in the economy who has an immediate need for the use of the purchasing power. This kind of transfer of purchasing power from savers (the lenders) to users (borrowers) will never create macroeconomic distortions in the economy. On the contrary, as already mentioned, it supports maximum economic growth and development in the country.This basic form of credit extension encouraged the development over many years of financial savings institutions, financial intermediaries, institutional investors, fund managers, etc. that serve as useful conduits for transferring purchasing power from savers to users, either for consumption or for real or financial investment purposes. The financial authorities in all countries have a responsibility to oversee these financial institutions, mainly with the intention of protecting the general public, be they lenders or borrowers, against exploitation that may lead to an unreasonably low remuneration for savers, exorbitantly high costs for borrowers and/or financial losses for both.Together with the development of these specialised financial intermediaries financial markets emerged where the transfer of savings from lenders to borrowers can take place in a more competitive environment with greater transparency and more general participation. These markets, such as the stock exchanges, bond markets, markets for derivatives and short-term money markets play a very important part in the optimum allocation of scarce resources in modern economies. Financial authorities also have a vested interest in overseeing these financial markets to ensure orderly conditions, the effective and efficient transfer of funds from borrowers to lenders and the maintenance of orderly and stable conditions in the markets.A further development in this process of the transfer of purchasing power from savers to users of funds, took place with the development of cross-border or international transfers of purchasing power. Savers in the more mature economies of the world where the demand for purchasing power is relatively low, found it increasingly attractive to make loans to the less-developed economies where they could earn much higher interest rates. These cross-border movement of funds introduced a new dimension in the credit extension process, in the form of exchange rates for foreign currency transfers. The financial authorities of individual countries now obtained more than just an overseeing function in the credit extension process. Rightly or wrongly, governments were in the past seen to be responsible for the fixing of the exchange rate, and for ensuring that convertibility of national currencies into other currencies will at all times be possible.There is one further form of credit extension that has become of vital importance for macroeconomic financial management, and that is the extension of bank credit that simultaneously also creates money. Banks are not normal financial intermediaries that accept funds from savers and then make loans out of these funds to borrowers. Banks can create money to make loans, and in the proces