The constitutional duty of the central bank

South Africans have internalised the idea that the Rands they have in their pocket now will not fetch the same amount of goods as they do currently, next year. Yet, the Constitution of the Republic of South Africa, 1996 in s224(1) tasks the South African Reserve Bank (SARB) with preventing this phenomenon of the erosion of the purchasing power of our Rands from happening.

Inflation is usually described as a general increase in the prices of goods and services, measured through the Consumer Price Index (CPI), or other Indexes. As of the time of writing (late November) in South Africa the annual CPI rate for October, which is the latest month where statistics were released, sits at 7.6%. This means the prices of the goods included in the ‘basket’ of the Consumer Price Index have seen a 7.6% increase since October 2021.

Inflation being measured in a price index like the CPI is deceptive because it eliminates the phenomenon from its true source (monetary/fiscal policy), which the Constitution points us to. Most importantly though, it is theoretically unsound to seek a general aggregated price for different goods and services since their prices are independent of one another.

For instance, suppose the basket of CPI goods has only just two items, bread, and chicken. If bread costs R15.00 and a 2kg of Chicken portions costs R90.00. The Consumer Price Index seeks to calculate the average price of goods and services. Therefore, the price of the bread and that of the chicken will be added and then the total divided by two, creating an average price. This is scientifically illegitimate if one considers that every good is valued differently of any other, a tenet of subjective valuation and the ordinal nature of expressed preferences in economics.

In actuality, inflation is the expansion of the monetary supply. The supply of money being increased by a central bank, is inflation! When the supply of money in an economy increases, usually measured in M2, chasing the same amount of goods which existed prior to the expansion, then prices will increase to reflect this new money.

The connection of currency value with the institution responsible for the supply of money in South Africa in the Constitution explains the relationship between inflation and the South African Reserve Bank. The Bank is required by law to protect the value of the South African Rand. As such, every time it expands the money supply of the country, it betrays the primary objective of its existence constitutionally.

According to a paper by Prof? Jannie Rossouw and Vishnu Padayachee, “Reflecting on Ninety Years of Intermittent Success: The experience of the South African Reserve Bank with Inflation since 1921” in terms of an index with 1922 = 100, the index value for 2006 is 9 083,5, or an increase of 5,51 per cent per annum on average. Put differently, the implication is that the purchasing power of R1,00 in 1922 was only some 1,1 cents in 2006. At the same time, an average basket of goods and services that sold for the equivalent of R1,00 in 1922, will cost about R90,84 in 2006.

The index method is problematic for the reasons stated above but as a tool that is easily understandable to the reader, it should help shed light on the constant erosion of the value of the South African currency. Money supply, which is a much sounder indicator of inflation, also increased during this period measured in the cited paper.

The paper cited herein, went on to conclude that the SARB had been successful in its tirade against inflation over the course of the timespan measured. The currency was devalued yet they ‘succeeded’! This is because, the SARB has given itself a new mandate known as inflation targeting, not mentioned anywhere in the Constitution. Therefore, even though the currency gets eroded and loses its value thanks to the actions of the SARB, if the devaluation stays between 3-6% which is the current inflation target, then the Bank was successful!

It should be made clear that the Constitution is the supreme law of the country, and no law or directive overrides its provisions. The SARB should take its marching orders directly from the Constitution and nowhere else. This means if policy of the Bank contradicts the Constitution, then said policy should be scrapped.

Given the history of the erosion of the South African Rand since the Constitution came into force, we cannot say with any modicum of honesty that the central bank is meeting its constitutional duty. If we are to be serious about arresting our march down the road to serfdom as a society, then the central bank must desist from its inflationary actions. Wealth creation and accumulation will constantly be frustrated until the problem of inflation is solved.

Zakhele Mthembu

BA Law (Wits) LLB (Wits) is a legal researcher at the Free Market Foundation.

Publish date: 20 January 2023
Views: 25 583

Zakhele Mthembu, Constitution, Inflation, money, Economic freedom / Growth

The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation. This article may be republished without prior consent but with acknowledgement to the author.

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