Alternative monetary systems and the quest for stability : can a free banking system deliver in South Africa?

Abstract

Since the early 1900s central banking has developed into the most widely adopted monetary regime by sovereign states. Yet, there is a broad raft of evidence which shows that central banking systems have been less successful in delivering macroeconomic stability than alternative monetary systems. The argument is pronounced in the case of emerging economies, a set of countries which includes South Africa. Against this backdrop, this paper reviews the case for central banking in South Africa. Our results lead us to explore various alternatives to central banking, including Dollarisation and monetary union. However, because these systems are not without their own vulnerabilities, we consider a third alternative regime, free banking. We argue that, despite being an almost completely forgotten system, free banking has the capacity to improve South Africa's monetary system and enhance the country's macroeconomic stability.