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FMF legal researcher Zakhele Mthembu has reached a seemingly telling conclusion – the Reserve Bank is acting unconstitutionally by constantly pushing more money into the market, thus devaluing the rand. He argues that our bank of last resort is failing in its constitutional duty to protect the value of the rand ‘in the interest of balanced and sustainable economic growth.’ While I have neither a law degree nor a Phd in economics, there may be a few other factors at play, not least of which are our economic policies. I doubt a Constitutional Court challenge would succeed, though I’d certainly pay it greater attention than even Judge Raymond Zondo’s findings on various economy-crippling Zuptoid larcenies. Mthembu provides fascinating inflation markers. I had no idea the purchasing power of the rand had dropped more than threefold since 1996. It seems like yesterday that we were speeding after Madiba’s convoy from Victor Verster Prison to Bishop’s Court. Today, we couldn’t afford the petrol. – Chris Bateman
Reserve Bank’s inflation of the money supply makes us poorer and is unconstitutional
By Zakhele Mthembu*
The South African Reserve Bank, historically finding its expression in the Currency and Banking Act of 1920, is today premised on section 224(1) of the Constitution. Has the Reserve Bank been acting constitutionally since its legal foundation changed? Has it been protecting the value of the rand in the interest of balanced and sustainable economic growth as required?
How would the Reserve Bank meet its constitutional objective? As a start, the Reserve Bank should steer clear of actions that would lead to the devaluation of the currency. Put in another way, if the rand is devalued as a result of Reserve Bank policy, the SARB would be acting illegally.
What devalues a currency? What caused the situation in neighbouring Zimbabwe, where prices are astronomical relative to the wages? What makes R1 less and less valuable in the sense of what it can buy with every passing year? The answer is simple: the inflation of the money supply by the state, namely, the central or reserve bank.
According to an online inflation calculator, R100 in 1996 (when the Constitution was adopted) is equivalent to R389.56 in 2022. What this means is that the purchasing power of R100 has significantly decreased. The goods that R100 could buy you in 1996 will cost you R389.56 today. Same goods, same money, and yet, they are more expensive. This is the consequence of increasing the supply of money in any given country.
Even prior to 1996, the rand was constantly devalued. Research shows that between 1921 and 2006, a basket of goods that cost R1 in 1921 had increased in cost to R90.84 in 2006. The trend visible from 1996 to the present had been ongoing well before the democratic dispensation.
When money cannot fetch the same amount or quality of goods as it used to, it is safe to say that it has devalued. The Constitution prohibits this devaluation by the Reserve Bank by requiring it to protect the value of the currency.
When the Reserve Bank increases the money supply, that is, increases the notes in circulation in a particular economy, then it is undermining its constitutional duty. The increase of the notes in circulation necessarily leads to a devaluation of the rands already in circulation, as there will be more money chasing fewer goods. If R1 million were to suddenly fall into the laps of every South African, all goods and assets would necessarily become more expensive. If this natural economic response did not occur, the economy would fall victim to severe shortages.
Can it be true to say that the Reserve Bank is meeting its constitutional objective? Ever since it had to conform to the Constitution in 1996, the value of the South African currency has steadily decreased. In Zimbabwe, their hyperinflation was primarily caused by their Central Bank, among other government policies – and so is the case in South Africa. Even though we may not have hyperinflation, the reality of a steadily decreasing currency value seems to be something we have normalised, even though the Constitution tasks the Reserve Bank with preventing it!
The Constitution is clear. Section 224(1) provides that the Reserve Bank must protect the value of the rand. Protecting the value of something cannot be a success when the value of the ‘protected’ item gets eroded over time by the institution tasked with its protection. The South African rand has clearly not had its value protected. The question then becomes: Are the South African Reserve Bank and their allies in the Treasury above the Constitution?
The Constitution gives South Africans the power to fight against the incessant erosion of their hard-earned money. As the value of a rand is being eroded with every passing year, we should remember that this situation is unconstitutional. Beyond the constitutional text itself, the precepts of natural law and natural justice also naturally tells us that purposefully eroding the value of a currency is the height of injustice. It should be fought, tooth and nail, lest we continue our march down the road to serfdom.
- Zakhele Mthembu, BA Law, LLB (Wits) is a legal researcher at the Free Market Foundation. The views expressed in the article are the author’s and not necessarily shared by the members of the Foundation.
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