Banking and Business in South Africa

Efficient economic organisation is the key to successful economic growth and in the Western world this occurred in a capitalist framework. It was the development of this capitalist economic organisation in Western Europe that accounts for the rise of the West.¹ This entailed the ‘establishment of institutional arrangements and property rights that create an incentive to channel individual effort into activities that bring the private rate of return close to the social rate of return’.² This had already happened in Western Europe before Van Riebeeck arrived at the Cape in 1652.

The American comedian Bob Hope once defined a bank as ‘a place that will lend you money if you can prove that you don’t need it’.¹ Interpreting his quip, we might say that a bank is a financial institution that conventionally avoided taking significant risk; historians have traced a long succession of ‘lock-ups’ of bank capital that have brought the unwary to their knees and generated the conventional wisdom behind bank policy.² But it is equally clear that for generations this caution left a large gap in national and international money markets, that of supplying capital for investment where there is recognised to be significant risk. This sector of the market is now known as the venture capital market, and it is important to recognise that it has a history of its own.

The recent rekindling of interest in the historiography of early nineteenth-century South Africa has suggested that the development of capitalist economic relations should receive careful scrutiny. Already much pioneering work has been done, particularly with regard to the impact of capitalism on traditional or pre-industrial societies.¹ In many of these studies, however, the internal dynamic of the evolution of capitalist economic relations has been at best only partially explained. It is against this background that attention has shifted to an inquiry of the individual capitalist and his institutions. This chapter attempts to add to this knowledge by using the concept of linkages in economic development to reflect on the periodisation of bank creation and growth within the Eastern Cape, and particularly Grahamstown as the chief town of the region, between 1830 and the 1870s, using the example of the Eastern Province Bank.

In 1888, the Nederlandsche Bank en Credietvereeniging voor Zuid-Afrika was founded in Amsterdam. ‘One of its objectives was to effect banking and credit operations in and with South Africa and for this purpose a Chief Agency was opened in Pretoria which started to operate in August, 1888.’²

The ‘Nederlandsche Bank voor Zuid-Afrika’ (NBvZA) was still a small bank in 1945. The head office was in Amsterdam and had just been revived after the cessation of the German occupation of the Netherlands. The so-called head office of the NBvZA in South Africa was Pretoria, but was called a chief agency and the manager in South Africa was the chief agent. During the Second World War the banking activities of the NBvZA was managed by the South African government appointed controller, Mr J. Dommisse,¹ due to the suspension of the bank’s activities in the Netherlands as a result of the German occupation. The South African branches (agencies) and the bank’s London office formed the core of the bank’s activities. After the war it was clear that the banking activities in South Africa had acheived a certain degree of independence from the mother institution,² but those activities remained limited in accordance with the limited scope of the NBvZA as a commercial bank amongst other commercial banks in South Africa.

The role of the South African Reserve Bank in the country’s economy, past and present, comprises a range of traditional central banking functions performed continuously, but punctuated by decisive intervention at critical junctures. At such times the Bank is most clearly visible as an agent in our economic history. The establishment of the Bank itself in 1920 may be taken as an obvious first example. A clear need had arisen by that time for a central bank to regulate the note issue following the wartime inflation and to conserve the country’s stock of monetary gold. Other examples, from among many, are the momentous decision, urged on the government by the Bank, to maintain the gold standard in South Africa when the United Kingdom suspended it in September 1931; the Bank’s active part in the establishment of the National Finance Corporation in September 1949, which pioneered South Africa’s money market; and the imposition of deposit rate control in March 1965 which, together with attendant control measures, profoundly altered the channels of credit and the methods of financial intermediation during the next fifteen years.

This paper focuses on the relationship between monetary policy, economic and political conditions, and commercial banking functions and practices in South Africa over the period 1965 to 1985. Changes in banking functions have been numerous and have occurred at a rapid rate, but these changes have not been solely the result of market forces. Instead monetary policy distorted market forces significantly because monetary policy over the period considered was not politically neutral. Thus the shape of commercial banking was a response to and a reaction against monetary policy and distortions in market forces. Frequently the consequences of an active interventionist monetary policy have been undesirable and unforeseen. Over the years, the difficulties arising from interference in the market place for money have been perceived by the bankers and monetary authorities and the debate on the role of monetary policy has been vigorous. Discussion has focused on whether the principal target of monetary policy should be the quantity or the cost of money, how the supply of money can be controlled and at an even more basic level, who is responsible for monetary creation. In recent years, official thinking has shown a greater awareness of the importance of the market, and now considers that policy changes are more likely to succeed when attempted through and via the market, if market conditions are normal.

In recent years very considerable progress has been made in the field of business history, which, as Alfred Chandler points out, has moved from the writing of historically specific descriptive history to comparative institutional history that can generate non-historically specific generalisations and concepts.¹ Not surprisingly, Amercian scholars have led the way. Harvard appointed the first professor of business history over half a century before England took up the challenge. Yet though the origins of modern business history go back to the early years of the century, it was in the second half of the century that seminal developments occurred on both sides of the Atlantic with the publication of Gras’s monumental work on Standard Oil and Charles Wilson’s work on Unilever, works that were to be the forerunners of a stream of major publications on the modern business corporation. Significantly most of these works were the product of historians rather than economists. This occurred because of developments within the field of economics, where the school of institutionists was out of favour and Keynesian macroeconomics in favour, supported by a growing interest in econometrics. The former were not interested in micro case studies of historical firms: the latter denied the importance of individuals, whose thoughts and actions simply disappeared from the scene.

Multinational corporations (MTN) have attracted a great deal of attention in recent years. This is due not only to their growing power in world affairs, but also to the special relationship which exists between the MTN and the governments of both home and host countries. In addition, an increasing part of international trade is made up of the marketing activities between subsidiaries of MTN operating in different countries, and this affects the institutional aspects of international economic relations.

The Standard Bank was the brainchild of a group of Port Elizabeth businessmen who wanted to establish their own local bank. They were unable to raise sufficient capital in South Africa and sent a deputation to England to raise the necessary money. The capital was luckily forthcoming and on 13 October 1862 the Standard Bank of British South Africa was born.