Mon­e­tary pol­icy must serve so­ci­ety

The Star Early Edition - - INSIDE -

DE­BATES on mon­e­tary pol­icy in South Africa over the last cou­ple of decades seem to have come from a mad­house. In the 1990s the coun­try had old dis­cred­ited Washington con­sen­sus poli­cies rammed down its throat, with scant re­gard for al­ter­na­tive pro­gres­sive ideas and lit­tle or no demo­cratic de­bate or pub­lic par­tic­i­pa­tion.

Re­cently the pub­lic pro­tec­tor, Bu­sisiwe Mkhwe­bane re­leased a re­port that made sweep­ing pop­ulist rec­om­men­da­tions about the South African Re­serve Bank (Sarb). The re­port favoured re­vis­ing the con­sti­tu­tion and a bind­ing rec­om­men­da­tion for a mon­e­tary pol­icy regime that ex­cludes any ref­er­ence to price sta­bil­ity. A man­date like this doesn’t ex­ist in any com­pa­ra­ble coun­try with a well-de­vel­oped pri­vate bank­ing sys­tem.

To put the re­port in con­text, we want to fo­cus on ba­sic mon­e­tary pol­icy prin­ci­ples that have been de­bated for cen­turies by se­ri­ous thinkers and schol­ars. We also ex­plore how South Africa can move the de­bate for­ward.

Broadly, thinkers on mon­e­tary pol­icy range from “sound money” ad­vo­cates to those con­cerned that money and bank­ing must serve the pro­duc­tive econ­omy – let’s call them “serve-so­ci­ety” ad­vo­cates.

We lo­cate our­selves on the “serve-so­ci­ety” side of the de­bate. We agree with Wil­liam Lown­des who served in the Bri­tish Trea­sury in 1695, who said that money sup­ply must serve so­ci­ety. Thomas Attwood in the 19th Cen­tury, John May­nard Keynes, the trade union leader Ernest Bevin and Hy­man P Min­sky in 20th Cen­tury, con­curred.

Un­like Mkhwe­bane’s re­port, th­ese economists, par­tic­u­larly Keynes and Min­sky, un­der­stood that cur­rency and money mar­kets un­der cap­i­tal­ism have a nasty ten­dency to be un­sta­ble. That’s why the reg­u­la­tory and lender of last re­sort func­tion of the Re­serve Bank is so vi­tal. (When the op­er­a­tions of the in­ter-bank­ing lend­ing mar­ket cease to op­er­ate, the lender of last re­sort is the en­tity – usu­ally a cen­tral bank – that has suf­fi­cient liq­uid­ity to lend to banks.)

The Sarb has per­formed th­ese roles for al­most a cen­tury. There hasn‘t been a sys­temic bank­ing crises since the for­ma­tion of the Re­serve Bank in 1921. Ex­perts in the field, Calomiris and Haber, 2004, find that South Africa is among the most sta­ble top 13 bank­ing sys­tems in the world. The Re­serve Bank should take credit for much of that.

That doesn’t mean that it’s be­yond crit­i­cism which is why a se­ri­ous de­bate is needed. The de­bate doesn’t need to rely on the ideas of fringe ad­ven­tur­ers and crack­pots. There is a wealth of in­tel­lec­tual tal­ent on mon­e­tary and cen­tral bank­ing pol­icy in­side and out­side its uni­ver­si­ties. The pub­lic in­tel­lec­tu­als in the unions and in civil so­ci­ety or­gan­i­sa­tions have ex­cel­lent ideas. Or­di­nary cit­i­zens should be drawn in too.

Things can­not re­main as they are; so much is chang­ing in the world of cen­tral bank­ing and in eco­nomic life.

Sound money thinkers tend to view bank­ing as an­other busi­ness, best left to the free mar­ket. His­tor­i­cally they have pre­ferred dereg­u­la­tion of the bank­ing sys­tem. But since the spec­tac­u­lar col­lapse of thou­sands of banks in many parts of the world in the 1930s, and the bank­ing and fi­nan­cial crises af­ter 2008, few pro­pose abol­ish­ing the lender of last re­sort func­tion of cen­tral banks.

Sound money economists now want cen­tral bankers bound by rules, rather than al­low­ing for dis­cre­tion. But they fo­cus on the virtues of trade and pri­vate fi­nance. They say “serve-so­ci­ety” ad­vo­cates worry about pro­duc­tion, em­ploy­ment and growth.

Keynes was in favour of ad­just­ing mon­e­tary and fis­cal pol­icy where nec­es­sary. He was a pas­sion­ate ad­vo­cate of sound bank­ing and fi­nan­cial reg­u­la­tion as he un­der­stood the in­her­ent in­sta­bil­ity of cap­i­tal­ism. He warned that get­ting it wrong could mas­sively in­crease poverty and un­em­ploy­ment.

In 1933 he pro­posed three safe­guards when shift­ing eco­nomic pol­icy pri­or­i­ties: Firstly, don’t be doc­tri­naire. Se­condly, he main­tained that “the eco­nomic tran­si­tion of a so­ci­ety is a thing to be ac­com­plished slowly”. And thirdly, don’t al­low “in­tol­er­ance and the sti­fling of in­structed crit­i­cism”. For those not in pub­lic of­fice he of­fered this fi­nal piece of ad­vice:

Words ought to be a lit­tle wild – for they are the as­sault of thought on the un­think­ing.

Con­ven­tional no­tions of what cen­tral banks are, and of what they should do, face a num­ber of chal­lenges. For ex­am­ple, the pro­cesses of tech­no­log­i­cal in­no­va­tion, in­clud­ing the growth of crypto cur­ren­cies like Bit­coin, are rapidly re­shap­ing some of the core func­tions of cen­tral banks.

And over the last three decades a num­ber of eco­nomic fac­tors have forced cen­tral banks to re­view their roles. The events of 2008 also shook con­fi­dence in the abil­ity of cen­tral banks to use their re­put­edly vast ca­pac­ity and skills to pre­dict and head off the cri­sis.

Af­ter the re­lease of the pub­lic pro­tec­tor’s re­port the gover­nor of the Sarb, Le­setja Kganyago, of­fered the po­ten­tial space for de­bate about mon­e­tary pol­icy aimed at cre­at­ing a more in­clu­sive and pros­per­ous so­ci­ety and econ­omy.

In our view, ideas must come from across the ide­o­log­i­cal spec­trum. And they must be de­bated in le­git­i­mate and prop­erly struc­tured fo­rums. One place to be­gin the dis­cus­sion would be Par­lia­ment’s port­fo­lio com­mit­tee on fi­nance.

Other struc­tures – such as the Re­serve Bank’s Mon­e­tary Pol­icy Fo­rums (as pro­posed by the gover­nor) and fo­rums led by busi­ness, labour and civil so­ci­ety or­gan­i­sa­tions as well as uni­ver­si­ties – need to keep up the mo­men­tum.

The de­bate must be guided by one ob­jec­tive: to im­prove the qual­ity of life of the many South Africans for whom the end of apartheid has brought no real ma­te­rial change. It must con­sider the im­pact of change on em­ploy­ment, in­vest­ment and growth. – The Con­ver­sa­tion

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