A brief but long history of currency in South Africa

Can we we pick the Rand up if it falls?

‘British pound since 1880 should have been rechristened the Rand, Britains prosperity and its currency stability depended on South Africa’s mines.’ Richard Drayton

Even today South Africa is the world’s largest producer of chrome, manganese, platinum, vanadium and vermiculite. South Africa is the second largest producer of ilmenite, palladium, rutile, zirconium and the world’s third largest coal exporter. It makes you wonder then why the Rand is so volatile.

In 1782, the Dutch Governor Van Plettenberg was obliged to introduce, for the first time in the history of the Cape, paper money, owing to his inability to procure from the Netherlands a sufficient quantity of coinage for the requirements of the settlement. The earliest paper money to that was issued in rixdollar and stiver denominations, the currency of the Cape at that time. The first bank to be established in the Cape was the Lombaard Bank. It was a State bank and opened its doors at Cape Town in 1793, with the view to bringing additional money into circulation, and thus assisting those who suffered from lack of currency. The pound sterling became the standard currency of the Cape of Good Hope colony in 1825 following an imperial order-in-council that was issued for the purpose of introducing the sterling coinage into all the British colonies. British coins then replaced the Dutch currency.

Before a unified South Africa, many authorities issued coins and banknotes in their own pound, equivalent to sterling. This bank was entrusted with the issuing of the Government notes. It closed in 1883, being forced out of business by the private banks.

The first private bank in South Africa was the Cape of Good Hope Bank which opened in 1837. As trade expanded, more private banks came into existence. Altogether approximately 30 of these sprang up between 1837 and 1882. Most of them issued their own paper money, some only in one, others in more than one denomination. Three large trading houses as well as one mining firm issued their own paper money between 1850 and 1860. In 1877 an imperial bank, the Standard Bank of British South Africa Ltd., opened its doors in Cape Town. Two other imperial banks entered the Cape subsequently. All these new banks issued their own paper money. With large capital behind them they made it their business to open up branches throughout the Colony, and to take over as many of the remaining private banks as was possible. By 1892, they had absorbed all but one of these, namely the Stellenbosch District Bank. Established in 1882, the Bank merged with Boland Bank and only ceased to operate in the early 1990’s.

South Africa in the 19th century, when no central bank existed, gold was actually money. During the period of the Classical Gold Standard from 1814 to 1914, the pound sterling was by definition, a certain quantity of gold. Gold wasn’t the only money. Silver also found expression as a monetary medium. The monetary system was actually based on a bimetallic standard.

There was no price inflation during the 1800s & in fact, prices fell in the late 1800s, at a time when international trade was booming & the industrial revolution was taking off. It lifted millions of white people out of poverty and a middle class was born. This system absent of central banking & dominated by private banks did not result in runaway inflation. The reason for this is simple. One South African pound in 1820 could buy you the same amount of gold or silver as it did in 1914.

From 31 May 1910 to late December 1920, South Africa had “free banking”, as there was no monetary authority in South Africa. There were “multiple note-issuing banks” which means there were competing notes in circulation unlike today’s literal ‘monopoly’ money where only one is currency allowed. The South African Reserve Bank was established in 1921 & also issued bank notes that were a claim on the pound sterling. The South African Reserve Bank in 1929 “promises to pay the bearer on demand at Pretoria, Five Pounds”.

The South African pound was for over a century, from 1825 to 1961, linked to the value of the pound sterling. The pound sterling, in turn, was for most of this time linked to a certain weight of gold or silver. The South Africa pound was through the link to the British pound, not only as good as gold, it was gold.

From 30 June 1921 to present, the only legal issuing authority of money in South Africa has been the Reserve Bank of South Africa. The control of money had been centralized, and the value of the money we use was no longer fixed to something substantive that was worth its weight in gold or silver, but could be manipulated & changed by ‘markets’ at a whim. Following WWII, and the introduction of the Bretton Woods system (The World Bank and International Monetary Fund) in 1945, global central banks linked the value of their currencies to the US dollar, which in turn was supposedly pegged to gold.

Global currencies were now fixed to the US dollar, and the US dollar was ‘fixed’ to gold. The dollar supposed to be as good as gold, during this period. The key difference now, however, was that only governments/central banks could exchange their dollars for gold. The public was cut out of the gold loop. From 1945 to 1968, the American government proceeded to create more paper dollars relative to the gold available. Money supply was no longer linked to the gold standard.

USA President Richard Nixon announced that the U.S. would be abandoning the gold standard in 1971. The USA & Saudi’s Arabia struck a deal. The essence of the deal was that the U.S. would agree to military sales and defense of Saudi Arabia in return for all oil trade being denominated in U.S. dollars. This system became known as the Petrodollar Recycling system because countries like Saudi Arabia would have to invest excess profits back into the U.S.

It didn’t take long for every single member of OPEC to start trading oil in U.S. dollars. The truth is Washington’s stranglehold over financial markets can explained by the fact that all oil exports are conducted in transactions involving the U.S. dollar. This relationship between oil and currency arguably gives the dollar its value, as this paradigm requires all exporting and importing countries to maintain a certain stock of U.S. dollars, adding to the dollar’s value.

In Libya, Muammar Gaddafi was punished for a similar proposal that would have created a unified African currency backed by gold, which would have been used to buy and sell African oil. Hillary Clinton’s leaked emails confirmed this was the main reason Gaddafi was overthrown, though commentators continue to ignore and reject the theory. Despite these denials, Clinton’s leaked emails made it clear that Gaddafi’s plan for the future of African oil exports was a priority for the U.S. and its NATO cohorts, more so than Gaddafi’s alleged human rights abuses.

Pick up a Rand bank note today, and you will find no reference to what it actually is. There are no promises to pay the bearer anything. Its value is not tied to anything but seemingly the emotions of racists somewhere we don’t know, and there are no restrictions as to how many Rands the Reserve Bank may create. In the past, this was restricted to the amount of gold used as money. Today, there are no such restrictions. The shackles on money creation have been removed, and the Reserve Bank can now create as much money as it wants. So why doesn’t it?

South African rand. The South African rand (sign: R; code: ZAR) is the currency of South Africa. The rand is subdivided into 100 cents (sign: “c”). The ISO 4217 code is ZAR, from Dutch Zuid-Afrikaanse Rand (South African Rand)

The rand takes its name from the WitwatersRand the ridge upon which Johannesburg is built and where most of South Africa’s gold deposits were found

A Decimal Coinage Commission had been set up in 1956 to consider a move away from the denominations of pounds, shillings, and pence, submitting its recommendation on 8 August 1958. The rand was established as the official South African currency on 14 February 1961 in the Union of South Africa 3 months before South Africa became a republic — and has since developed into a liquid emerging market currency, most commonly traded against the US dollar.

The financial Rand, used as a parallel currency to the commercial Rand, was abolished on 10 March 1995. The currency was introduced in the 1960’s and only widely used in the 1980’s and 1990’. The Financial Rand was an accounting currency used in South Africa between 1985 and 1995. Under this system, the South African rand continued to circulate but investments made by non-South Africans could be sold only for the financial rand, which had strict conditions placed on its convertibility

The financial rand was introduced in order to prevent massive outflows of capital that began in response to South Africa’s apartheid policy. It was abolished after apartheid was ended.

In April, 2001, the average trade in Rands was $11 billion per day. At the time, this was equal to about R70 billion per day. To put this into perspective, in a week currency traders exchange more Rands than the South Africa government spends in its entire national budget for a year!

A bigger surprise was that most of the trade in the currency markets is not done by foreigners. South African companies and financial institutions were involved in about $8 billion of that $11 billion. This money comes from workers — either from their Pension and Provident Funds or the profits made from their labour. And many of the companies involved are major employers: Standard Bank, BHP Billiton, Anglo Gold, DeBeers, and Absa Bank, Sasol etc.

SASOL was accused of having a deal with Deutsche Bank. The commission found the deal occurred in February, 2001, several months before the Rand began to decline. The deal resulted in R2,5 billion being taken out of the country by SASOL.

At least a dozen local and international banks were identified by the Commission in February 2017, after an investigation from mid-2015 found that traders had colluded in fixing the price of the rand. It was alleged that currency traders had been buying and selling US dollars in exchange for the rand at fixed prices. This was accomplished by making false sales to drive up demand, or colluding to agree not to trade for specified periods of time.

In 2017 South Africans watched the rand rise and dip, wax and wane against the dollar, at mind blowing speeds. It then emerged that more than a dozen banks were allegedly illegally profiting from the volatility. The Competition Commission says it found evidence 17 banks were colluding on the rand to dollar exchange rate. That’s what happens when your currency is not linked to anything of any real value. Manipulation.

The value of a nation’s currency is strongly tied to the value of its imports and exports. When a country imports more than it exports, the value of its currency will decline. On the other hand, the value of its currency will increase when a country is a net exporter. Thus, a country that exports gold or has access to gold reserves will see an increase in the strength of its currency when gold prices increase, since this increases the value of the country’s total exports. This makes what’s happening to our currency even more alarming.