The fuel of unparalleled recovery: Monetary policy in South Africa between 1925 and 1936

Abstract

The newly established South African Reserve Bank (SARB) was tasked to protect the currency by navigating the interwar gold standard, and, from March 1933, maintaining parity with the Pound Sterling. We find that South Africa's exit from gold secured an unparalleled and rapid recovery from the Great Depression. South Africa's exit was accompanied by an inextricable link of the SARB's policy rate to the interest rate set by the Bank of England (BoE). This sacrifice of independent monetary policy allowed the SARB to fix the country's exchange rate without impeding the flow of gold to London. The SARB fuelled the economy by reducing its policy rates and accumulating gold. Had South Africa not devalued, the country would have suffered a severe depression and persistent deflation. An alternative to the devaluation was for the SARB to pursue a cheap money strategy. By setting interest rates historically low, we find that South Africa could have achieved higher levels of economic growth, at the cost of higher inflation. Ultimately, South Africa's unparalleled recovery can be ascribed to the devaluation; however the change in the SARB monetary policy and the bank's control over the gold markets were of paramount importance.

Short-run dynamics and long-run effects of monetary policy on residential property prices in South Africa

“…Before the inflation targeting was implemented, tracing back to when the South African Reserve Bank was established on December 17, 1920, the value of its currency was based on the gold standard (Feingold et al , 2021). In 1932, South Africa decided to end the use of the gold standard and replace it with a monetary policy that tied the value of its currency to the British pound (Swanepoel and Fliers, 2021). In 1944, the Currency and Banking Act of 1920 was replaced with the South African Reserve Act 29 of 1944.…”

Going Dutch: monetary policy in the Netherlands during the interwar gold standard, 1925–1936

“…The third, interrelated, concern was a perceived global shortage of gold and a ‘hot money problem’, where foreign-owned funds moved erratically from one financial centre to another in response to changing interest rates (James 1992; Graff et al 2014). On the eve of the interwar standard, South Africa produced more than half of the global gold supply (Swanepoel and Fliers 2021). This supply was then traded in London, effectively making the UK host to the financial centre of the interwar standard.…”

“…He was called to China in 1911 to advise on Chinese monetary policy (Vissering 1914; Matsuoka 1936). And in 1925, he was instrumental in providing the South African government with monetary policy advice, jointly with economists Edwin Walter Kemmerer and John Maynard Keynes (Richards 1925; Swanepoel and Fliers 2021).…”

Going Dutch: How the Netherlands Escaped its Golden Fetters, 1925–1936

“…The third, interrelated, concern was a perceived global shortage of gold and a "hot money problem", where foreign-owned funds moved erratically from one financial centre to another in response to changing interest rates (James, 1992;Graff et al, 2014). On the eve of the interwar standard, South Africa produced more than half of the global gold supply (Swanepoel and Fliers, 2021). This supply was then traded in London, effectively making the UK host to the financial centre of the interwar standard.…”

“…He was called to China in 1911 to advise on Chinese monetary policy (Vissering, 1914;Matsuoka, 1936). And in 1925, he was instrumental in providing the South African government with monetary policy advice, jointly with economists Edwin Walter Kemmerer and John Maynard Keynes (Richards, 1925;Swanepoel and Fliers, 2021).…”