In “Afloat but not alone in oil maelstrom” (April 12) Sarah Bullen writes “an oil price rise … hits consumers at the pumps and then creeps up everywhere in price rises”, and “a rand slide … plays an inflationary role”. No they don’t!
The rand price of petrol, or of dollars, is just one price, however important. One price rise can’t push up the general level of prices. Bullen’s salary doesn’t rise when the petrol price rises, does it? So she buys less petrol or less of something else. Times 44-million South Africans, demand and prices rise for some goods, while others fall.
So what does raise prices in general? Too many banknotes. If the Reserve Bank issues nine extra rands for every rand already out there, prices will rapidly rise tenfold. Which is just what has happened over the past 15 years. R5-billion of banknotes circulated in 1986, and R50-billion now. Since we’ve produced hardly more goods and services each year, wages and prices have rocketed.
Why has the Reserve Bank printed all those extra notes? Because it prefers setting interest rates instead of controlling its banknote issue and banks and their customers keep wanting to borrow more money. Why? Because interest rates are usually set too low, encouraging borrowing and discouraging saving.
If from tomorrow the bank confined itself only to replacing worn-out banknotes in that R50-billion, the general price level would have to fall gently as we produce more each year. The market would set its own interest rates first high, which would squeeze out unsound borrowing, then low like in other sound-money countries. Sounds good to me. Jim Harris, Honeydew