THE South African Reserve Bank was formed in 1921 as a privately owned institution.

The history of the Reserve Bank is an interesting one.

The trigger to its formation was the imminent failure of commercial banks to redeem their notes in gold.

During the First World War the price of gold in London was higher than in SA.

Holders of banknotes demanded their gold from local commercial banks to sell it in London.

As a result, commercial banks faced imminent collapse as they had issued more banknotes than could be redeemed by the gold in their vaults.

They asked the government to release them from their obligation to convert their banknotes into gold on demand.

This is how the Reserve Bank came about and at the core of its functions is its monopoly over the issuance of banknotes, that is paper money.

But the private ownership of the Reserve Bank is not justified.

Firstly, private commercial banks faced a problem of their own making for having over-issued banknotes relative to gold.

Secondly, the Reserve Bank's monopoly over the printing of banknotes that were not convertible to gold was the function of state sanction; it was "legal capital".

Thirdly, the gold held by the private commercial banks was transferred to the Reserve Bank, but it was payment for the trouble the banks were in. Therefore it cannot be regarded as "private capital".

For the nationalisation of the Reserve Bank not to be symbolic, it is important to nationalise the entire process of credit and money creation.

Currently, the banking system operates on the basis of the extreme form of fractional reserve banking.

Once a banknote is issued by the Reserve Bank, it enters a commercial bank. It then multiplies through a process called "the money multiplier".

A fraction of the banknote printed by the Reserve Bank is lent out by a commercial bank, returns to the commercial bank as a deposit, a fraction of this deposit is further loaned out, and the fraction comes back as a deposit, and the process continues.

This is how fictional money is created by banks. In this way, banks create assets on the narrow money base issued by the Reserve Bank.

This banking system is therefore another way of over-issuance of banknotes, except that now these notes are not convertible into gold on demand.

Would it not be proper that the assets accumulated in this way by private banks, under the auspices of the Reserve Bank, which are mainly loans to households, firms and government be accumulated by the democratic government itself?

The benefit of transferring ownership of commercial banks to the people as a whole is that, firstly, most public debt will be abolished overnight because government cannot owe itself.

This will free us up to pursue developmental imperatives. Secondly, the democratic government will have control over where credit is allocated.

The Reserve Bank claims its operations are informed by what is best for South Africans, but which institution can claim this if it is not based on the people's will?

The Reserve Bank originated out of a need to bail out commercial banks from imminent collapse.

The Reserve Bank can only operate to the best interest of our country when commercial banks do. If commercial banks find it profitable to loan money to build luxury hotels rather than financing job creation, how is the Reserve Bank pursuing South Africans' best interests?

Nationalising the Reserve Bank without the entire system of national credit will be similar to nationalising coal mines and simultaneously allowing Eskom to use the coal as it pleases.

It is therefore not the profit that is made from owning the Reserve Bank that is the object of private ownership of the Reserve Bank, rather it is the profits that are made under the auspices of the Reserve Bank, by commercial banks, when they loan out the money and buy goods and services using paper money that is privately printed by the Reserve Bank.

Nationalising the Reserve Bank is therefore just the first step in the direction of development.

The democratic government must not pay as high an interest rate as it does to finance development.

By nationalising the banking system, at the apex of which is the Reserve Bank, we will be cutting out the middleman, who adds a mark-up, making credit for developmental projects and industrial initiatives more expensive.

l The writer is an associate professor of economics at the University of the Witwatersrand and head of policy in Cosatu.