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The role of banking development South African economic development during the period of functional stability 1850s-1970s

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Stuart Jones (2009). The role of banking development South African economic development during the period of functional stability 1850s-1970s. South African Journal of Economic History, 24(1). Economic History Society of Southern Africa.
Type journal article
Scope Economics and economic history of apartheid
Method synthesis review
Period studied 1850–1970
Regions South Africa, Cape Colony, Transvaal/Witwatersrand
Themes business and state, macro fiscal finance debt, politics ideology elections, manufacturing industrial policy, origins segregation
Citation key jones2009

Argument

Jones argues that South African commercial banking kept the same classic functions (discounting, overdrafts, remittance and deposit-taking) from the 1850s to the 1970s, a period of 'functional stability'. Banks followed economic growth rather than leading it. Conservative London-based imperial banks, with branch networks and larger capital, displaced the fragile local unitary banks and dominated from the 1860s. Stability rested on the gold standard, low inflation, moderate growth and an apprenticeship culture. Apartheid-era politics pressed on bank ownership (Afrikaner embourgeoisement, Volkskas, local listing) but not on bank functions. The article is a market-friendly, normative account that contrasts this era with later political direction of banks.

Evidence and method

Secondary literature (Solomon, Webb, Verhoef, Cain & Hopkins) and the author's own earlier work on the imperial banks and amalgamation; bank statistics on deposits, discounts, capital and market shares; Standard Bank accounts; GDP figures from Jones & Müller (1992). Footnote-referenced, with no new archival work shown in this text.

Place in the debates

Findings

  • Banks followed rather than led economic change; economic development facilitated, not caused, by banking. (p. 94)

    Economic developed followed closely upon the heels of the banks, not because they caused development, but because they facilitated the process.

  • Standard Bank earnings structure was unchanged between 1860 and 1960. (p. 100)

    Their sources of earning in 1960 were virtually the same as those in the 1860s, which were probably not so very different from those of seventeenth century England.

  • Imperial banks survived while local Cape banks were wiped out, leaving Standard Bank dominant. (p. 105)

  • Amalgamation produced a banking cartel fixing interest rates and commissions from the pre-war years to the 1970s. (p. 108)
  • Concentration reduced productivity within the banks, suggesting oligopoly and cartels dull innovation. (p. 109)
  • Bank demand deposits fell as a share of national income in the interwar period as gold mining expanded, which the author reads as evidence that banks follow rather than lead. (p. 110)
  • Post-1948 political pressure concerned bank ownership, not banking functions. (p. 110)
  • Strong 1950s-60s growth, driven by gold and import substitution, undermined the basis of apartheid by exhausting white labour. (p. 113)
  • Volkskas rapidly gained share of bank assets and deposits in the 1950s as Afrikaner banking challenged the imperial banks. (p. 112-113)
  • Trust Bank's American-style credit expansion collapsed, which Jones takes as proof of the value of conservative practice. (p. 114)

Evidence ledger

Sources used

Source Kind Period How used
Standard Bank accounts (sources of earnings, 1860s-1960), as reported in Jones (1996), The great Imperial Banks in South Africa, 1861-1961 company records or reports 1860s-1960 Shows that the composition of bank earnings (about two thirds from interest on discounts or overdrafts, one third from commissions and fees) was unchanged from the 1860s to 1960.
Jones (1994), 'Origins, growth and concentration of bank capital in South Africa, 1860-92', Business History 36(3) secondary literature compilation 1838-1892 Supplies the dates of the clusters of bank formation in South Africa and Australia, and underlies the 1860 count of Cape banks and capital.
Bank capital and number of Cape banks in 1860 (23 banks, £945 186 capital), with Australian comparison secondary literature compilation 1860 Establishes that the Cape had more, but smaller and weaker, banks than Australia by 1860.
Jones (1999), 'The amalgamation movement in banking in South Africa 1863-1920', South African Journal of Economics 67(1) secondary literature compilation 1863-1920 Supports the narrative of the disappearance of local Cape banks and the Standard Bank's branch-expansion and acquisition strategy, including its 18 branches and agencies by December 1863.
Jones (1996), The great Imperial Banks in South Africa, chapter 5 and pp 180, 188 (deposits, discounts, demand deposits as share of national income) secondary literature compilation 1919-1939 Provides price-adjusted growth of commercial bank deposits and discounts in 1919-29 and 1929-39, and Standard and National Bank demand deposits as a share of national income.
Standard Bank productivity series, 1885-1939 company records or reports 1885-1939 Supports the claim that bank productivity declined after concentration and the growth of oligopoly.
Jones & Müller (1992), The South African economy 1910-1990 (GDP and population growth statistics, pp 129, 131, 231; banking developments pp 62-63) secondary literature compilation 1951-1970 Gives the national GDP growth figures for 1951-60 and 1961-70 and the per capita adjustment, and the 1953 Netherlands Bank breaking ranks from the cartel.
Verhoef (1992), 'Afrikaner nationalism in South African banking: The case of Volkskas and Trust Bank' secondary literature compilation 1947-1957 Provides Volkskas's shares of total bank assets, advances and deposits to show its growing competitive threat to the imperial banks.
Solomon, 'Money and banking', in Coleman (ed), Economic history of South Africa (1983) secondary literature compilation 1795-1983 Supplies the discouragement of local banks by Cape authorities and the division of banking functions into intermediaries and money creators.
Webb (1992), The roots of the tree (Standard Bank history) secondary literature compilation 1838 Supports the founding date of the Eastern Province Bank in Port Elizabeth in 1838.

Inference

Quantification: Illustrative figures.

Long-run interpretive narrative and institutional history drawing on the author's earlier archival work on the imperial banks. Claims are supported by selective figures and by comparison across countries (Australia, Canada, the US, Argentina, India) and across time. The argument rests on theory about market-driven functions, with no systematic testing.

Key claims

Claim Basis Strength
Banking functions in South Africa remained essentially unchanged from the 1850s/1860s to 1970, since earnings sources in 1960 were virtually the same as in the 1860s. (p. 100) Standard Bank accounts as reported in Jones (1996), pp 111 & 257. Partial data
Banks followed rather than led economic change: the demand deposits of the two large banks fell as a share of national income between 1919 and 1939 while gold mining expanded. (p. 109-110) Deposit and national income figures from Jones (1996), pp 180 and 188. Partial data
Imperial (London-based) banks survived the crises that destroyed local Cape banks and unitary banks elsewhere, because of branch networks, larger capital bases and cautious management. (p. 99) Jones (1999) amalgamation article and narrative history; comparison with Australia, America and Argentina. Illustrative or anecdotal
Bank amalgamation produced a cartel, a nation-wide clerks' union, too-big-to-fail banks and declining internal productivity. (p. 108-109) Author's earlier archival work on the Standard and National Banks; the productivity series is not shown. Asserted
Postwar growth (GDP up 80.6% in 1951-60 and 123.1% in 1961-70) and manufacturing expansion put pressure on, but did not change, banking functions before 1970. (p. 111-112) GDP and population statistics via Jones & Müller (1992). Partial data
Political pressure on the imperial banks after 1948 concerned ownership, not functions, and Volkskas gained market share as an Afrikaner challenger. (p. 112-113) Verhoef (1992) on Volkskas shares of assets, advances and deposits; Jones & Müller (1992). Partial data
Market-friendly and constitutional political environments, not politics or interference, produced sound banking; American bank failures in the 1930s were caused by politics rather than the market. (p. 96-97) Comparative references to Canada, the US, Argentina, India and Hong Kong, with no data presented. Asserted

The author's caveats

The author hedges only on the population statistics behind the 1961-70 growth figure ('if the population statistics are correct') and says it is 'difficult to say' whether gentlemanly competition weakened the banks' entrepreneurial drive.

Gaps in the evidence

The argument of functional stability would be better tested with systematic bank balance-sheet and income-statement series, and with fee schedules, across banks (imperial, local, Volkskas, Trust) from the 1860s to 1970, which exist in bank archives and Reserve Bank and Registrar of Banks returns. The claims that banks only followed growth, and that politics rather than markets drive bank soundness, need causal tests such as lead-lag analysis of credit and output, or cross-colony comparisons, and none are offered. The productivity and cartel claims need staffing and rate-agreement records, which are probably in company archives. Branch-location data would test the claim that banks followed development into new regions.

Replicability: Data poorly documented.