New Technologies in Payments: A Challenge to Monetary Policy - Otmar Issing
Central bank: ecb | Type: speech | Date: 2000-06-28

New Technologies in Payments: A Challenge to Monetary Policy

Professor Otmar IssingLecture to be delivered at the Center for Financial Studies Frankfurt am Main 28 June 2000

1.

Introduction

A wide range of innovations has taken place over the last years in the field of banking and payment systems.

These have had, or are likely to have, significant consequences for payment habits and for the structure and functioning of markets.

Moreover, they will influence the way monetary policy is conducted.

In this paper, I will discuss the potential effects of these innovations for monetary policy in the euro area, and to which extent central banks and financial regulators should react to these challenges.

These are very topical issues, and of great interest to central bankers.

Of course, it is extremely difficult to predict in which direction and to what extent further innovations in these areas might evolve.

Some think it might be conceivable that in some remote future, monetary policy might be meaningless, or that central banks will no longer play an important role in economic policy making.

However, predictions in this direction would amount to pure speculation.

Today, I do not want to enter the hypothetical world of Fama and Hall[1], in which central banks play no role in monetary policy and money loses its role as a unit of account.

I will be less farsighted, but more concrete.

I want to focus on foreseeable developments in payments technologies and possible effects of monetary policy.

My line of argument is as follows.

I will first outline developments in the field of large value payments, these being mainly interbank payments.

Here, I am going to discuss consequences both for systemic stability as well as for the demand for central bank reserves.

The second area that I will speak about today is electronic money.

I shall discuss how this new phenomenon might pose a threat to the conduct of monetary policy and what should be the response of regulatory authorities to that.

In summary, it is my opinion that the challenges that arise from the new forms of payment for banks and for financial systems in general are serious, but can be managed.

As long as the central bank revises the formulation of monetary policy as a response to these changes, and its regulatory framework is adapted accordingly, the technological developments will pose no threat to the ability of the central bank to conduct monetary policy.

2.

Overview over New Technologies

A first area in which information and communication technologies have significantly affected the payment and monetary system is the field of electronic interbank payments.

Since long ago, the ability to use electronic networks to store and handle funds instead of having to rely on physical transfer has dramatically changed the financial system.

As a result, the transfer of funds has become much faster and safer.

Similarly, the transfer and safekeeping of securities has become significantly cheaper since the advent of book-entry systems.

The traditional safekeeping of paper-based securities in vaults has widely been replaced by such electronic book-entry.

But, more recently, a new "quantum leap" was made possible by the exponential increase in computer power.

Traditionally, the most common way to handle large value payments between banks was to accumulate outstanding payments during a certain period of time, often a business day, and to transfer them in one batch at the end of the day.

Usually, this was done in the form of "netting", where payments between two counterparties were matched and only the net obligation was transferred.

Netting had some advantages compared to the transfer of the gross amounts.

First, because a lower amount of reserves was transferred, the transaction involved both lower costs and a higher degree of safety.

Second, fewer central bank reserves were needed in a netting system, and this was again cheaper for the participating banks.

By reducing transaction costs and enhancing safety of the transactions, the new information and communication technologies have reduced the advantages of net vis-a-vis gross settlement.

Moreover, they have made settlement in real time possible, i.e. the immediate execution of a transfer once a payment order has been issued.

Through these two developments, the electronic systems dramatically tilted the balance of costs and benefits in favour of gross settlement systems.

Indeed, today in many countries, including the member states of the European Union, Real Time Gross Settlement (RTGS) Systems have replaced some of the net systems.

The immediacy of settlement in real time systems has one important advantage: the outstanding obligations between parties are reduced to zero immediately after the payment order has been issued.

This has the advantage that credit risk is reduced.

Credit risk is the risk that the debtor bank may be unable to settle his obligations vis-a-vis the creditor bank.

In a netting system, credit risk is much higher.

Here, the outstanding obligations can accumulate over the day because of the time lag between payment order and settlement makes it possible that the debtor bank can fail prior to settlement.

The receiving bank might then not receive the expected payments.

Generally, credit risk in net settlement systems has increased because the value of transactions made via payments systems has risen significantly.

Indeed, in the large value payment systems in the European Union, an amount equalling annual GDP is turned over every six to seven days. [2] As a consequence, the daily liabilities of banks versus each other have increased dramatically and often exceed the banks' capital.

As a result, the banking sector has become more exposed to systemic risk.

Suppose that a bank that is a net debtor to the banking community is unable to honour its claims. [3] Its failure might lead to the failure of several of its trading counterparties, and, by a domino effect, potentially also induce losses for other banks.

A well-known example for such an event was the failure of the Bankhaus Herstatt in 1974.

Herstatt was heavily engaged in foreign exchange transactions.

It was closed down by the German authorities after the European markets had closed for the day, but while New York was still open.

At the time of its bankruptcy, it had received transfers in Deutsche Mark from its US trading partners but had not delivered the corresponding amounts of US Dollars to them.

As a consequence, its American counterparties experienced significant liquidity problems, and the payment system handling foreign exchange transactions in the US, CHIPS, was disrupted so severely that it led to a collapse in the US dollar/Deutsche Mark trading.

A financial crisis can be very damaging for the economy because they disrupt the monetary system and the execution of monetary policy.

Indeed, because the payment system is one of the major channels through which a crisis could propagate, systemic risk considerations were central to two important recent initiatives in the field of payment systems taken by international regulators.

First, the Bank for International Settlement (BIS) issued a report [4] which set out minimum standards for netting systems that should limit the risk exposure of the systems to individual banking failures.

Second, the EU central banks decided to promote Real Time Gross Settlement (RTGS) systems. [5] Since the beginning of Stage Three of the Economic and Monetary Union, all monetary policy operations are processed through the TARGET system, which links the RTGS systems of all EU countries.

It is not the only payments systems that operates on a cross-border basis in the euro area (another one is Euro 1, organised by the European Banking Association), but it currently processes the largest bulk of payments, both in terms of value and volume.

TARGET therefore amounts to an important step in reducing settlement risk for the European banking sector.

A second and more recent innovation I would like to focus on concerns retail payment structures, and specifically, electronic money.

The term Electronic Money can be broadly defined as electronic storage of monetary value on a technical device, which may be used to make payments not only to the issuer but also to other agents.

Note that cards that are accepted as a mean of payments only by the issuer itself (for instance, telephone cards), so called single-purpose cards, are not considered electronic money.

Only multi-purpose cards, that is, cards that can be used with a multiplicity of merchants, should properly be considered as electronic money.

We can distinguish two main forms of e-money.

Stored-value cards (SVC) are plastic cards that contain purchasing power, which has been transferred to the card by a pre-payment.

Network money is monetary value stored in computer memory, and can be transferred over a communications network such as the Internet.

Both of them entail several advantages compared to both cash and to traditional debit or credit cards.

First, SVCs facilitate small value payments that could have been done with cash, but in a more cumbersome way.

Thus, fewer banknotes and coins would be needed.

Similarly, network money can simplify payments made for purchases on the Internet.

By using network money, the amount that can potentially be lost due to misuse of transmitted information is limited to the nominal value of money stored in the memory.

Therefore, possibilities for abuse seem to be smaller than with credit card payments.

Finally, a further advantage of electronic money over cash would arise if interest were to be paid on the outstanding balances.

Second, merchants can profit from accepting electronic money.

As far as SVCs replace payments in cash, they will face lower costs of handling notes and coins.

To the extent that electronic money substitutes for debit or credit card payments, the processing costs of payments are reduced.

A payment with a debit card usually involves the electronic verification of sufficient account balances.

To achieve this, the system relies on some communication network.

In case of electronic money, any expenses are debited to the balance available on the device itself.

Thus, no such communication network is needed as all the relevant information is contained on the card or in the computer memory.

3.

Monetary Policy Implications

Having described some forms in which new technologies influence our ways of making payments let me now turn to the impact of these developments on monetary policy.

I will first discuss large value payment systems, and then turn to electronic money.

3.1.

Implications of Electronic Interbank Payments

Smoothly operating financial markets are essential to the functioning of monetary policy.

A financial crisis might have very destabilising effects, such as rapid price changes, a high level of uncertainty, or a general liquidity shortage in the markets.

Should such a crisis happen, the rapid transmission of monetary impulses throughout the currency area might be hampered or even prevented.

Moreover, the ECB, like most other central banks, has statutory responsibility over the well-functioning of payments systems.

Hence, the central bank has an interest in ensuring that certain safety standards are in place that limit the impact of a systemic crisis and therefore reduce the possibility of a disruption of the financial system.

With TARGET, the Eurosystem has successfully implemented real time gross settlement and thereby contributed to an environment of financial stability.

Let me turn to a second area in which payment arrangements have an impact on monetary policy: they influence the demand for central bank reserves.

In real-time gross settlement systems, the demand for reserves is proportional to the volume of transfers made, but these reserves can be used for several transactions on a given day.

On the other hand, in a net settlement system, the netting-out of outstanding obligations between several banks reduces the reserves that the banks need for settlement.

Also, the relationship between money demand and transfer volume is more complex in a net system.

It depends on the number of participants in a netting system as well as on the duration of the settlement cycle.

The effect on the demand for reserves of a switch from gross to net settlement is therefore ambiguous.

In Europe , the adoption of RTGS systems in preparation for Stage Three of the Monetary Union led to a small increase in reserve holdings.

Additionally, a recent trend in private netting systems is to replace the traditional net settlement systems by hybrid settlement systems.

These systems [6] combine features of RTGS and net systems, essentially by providing net settlement with very short settlement lags.

This means that fewer payments will accumulate during this shorter cycle.

Again, this trend influences the demand for central bank reserves.

The transfer volume processed through large value systems is substantial.

Therefore, the organisation of these systems is a significant determinant for the size of the demand for central bank money.

A central bank should be concerned with effects on the demand for central bank money since this demand and also its interest rate elasticity are key variables for the transmission process of monetary policy.

I will elaborate on this relationship in the following section.

3.2 Implications of Electronic Money

3.2.a Free banking

Electronic money is private money that competes against central bank money as a medium of exchange.

This phenomenon immediately calls to mind the historical experience of free banking where private banks were allowed to issue private currencies.

One of the strongest advocates of abolishing the central bank's monopoly in the creation of money was von Hayek [7] .

He proposed to enable private banks to issue their own currency, thereby creating competition.

Banks could issue non-interest-bearing certificates and open cheque accounts on the basis of their own distinct registered trademark.

Different banks would issue different certificates.

These currencies would then trade at variable exchange rates.

Von Hayek believed competition between different currencies to be particularly conducive to price stability.

This would be achieved via a discovery process.

Only those currencies that built up a reputation for providing stable purchasing power could survive competition.

On the other hand, banks that failed to build up such a reputation would lose consumers and be driven out of business.

Consequently, such a system would eventually only leave room for stable currencies, and lead to a non-inflationary outcome.

Electronic money bears some similarities to this vision.

Issuers of different types of electronic money may indeed compete against each other to attract customers, and could do so in a way closely resembling the one envisaged by von Hayek.

Nevertheless, there are arguments opposing this view.

Let me mention a few.

First, in the discovery process envisaged by von Hayek, bad issuers are driven out by the fact that they have recourse to inflationary issuance.

This suggests that the discovery process itself could be characterised by inflation.

Second, if the discovery process was successful such that a single stable currency did emerge, there is no guarantee that the new monopolist would not engage in inflationary over-issue, with the aim of maximising seigniorage.

Last, but certainly not least, the role of the currency as a unit of account would be undermined: there would be not just one price for each given good, but n prices, where n is the number of existing monies.

This would unduly complicate the price system, whereas one of the principal benefits of monetary economies is that of making prices transparent, thereby facilitating exchanges.

Money should be the numeraire, that is the unit for quoting prices, for negotiating contracts, and for performing any economic calculations.

A unique numeraire is the most efficient solution to this co-ordination problem.

The loss of a unique unit of account could therefore induce significant efficiency losses for the economy.

I conclude that, while Hayek's ideas are stimulating, the merits of unregulated competition of electronic monies are, to say the least, ambiguous.

3.2.b Will the increase in electronic money become significant?

As many as 19 electronic money schemes were operating in the euro area in 1999.

Most of them were launched between 1995 and 1997, and their use is still very limited.

Daily turnover in electronic money was only about EUR 800,000 for the entire euro area.

Neither seems electronic money a preferred form of payment for consumers, nor do many merchants accept it widely at the present time.

In most countries, the use of stored value cards is still at a relatively experimental stage.

For network money, usage is much scarcer still.

Such slow progress may seem surprising considering that successful IT related applications usually have a very fast development.

The reluctance by merchants can be explained by the technical adaptations that need to be made to offer this service.

These require initial investments into new equipment that is able to read the devices on which money is stored, and to transfer the funds to an own electronic storage facility.

Also, personnel need to be trained to use the new money.

While marginal costs from processing electronic payments are rather low, these initial investments might be substantial.

On the other hand, returns from the investment arise proportionally to its usage.

Consequently, if the expected number of customers wishing to pay with electronic money is low, the benefits from e-money are unlikely to outweigh the initial investment cost.

Only once a critical mass of usage has been reached might electronic money become profitable for merchants.

Similar economies of scale exist on the customer side.

Consumers might be unwilling to adapt stored value cards while the number of vendors accepting these cards remains small.

Concerning network money, related considerations apply.

Additionally, consumers might be reluctant to purchase electronic money because they are unfamiliar with it, and uncertain about the risks and benefits it brings along.

Confidence in the technology and the issuing institution are essential for the acceptance.

This argument might be particularly strong for the case of network money, where the degree of anonymity of issuers or merchants is higher.

These network effects both on the demand and the supply side suggest that electronic money might become widespread only when the network of buyers and sellers that are willing to accept this form of payment has become large enough.

Rapid growth of this payment form is therefore expected to take place once a critical mass of acceptance and dissemination has been reached.

In summary, the fact that the use of electronic money is not widespread up to this date does not imply that a rapid growth of this payment medium might not take place at some stage.

The question of whether e-money will become, in the not too distant future, the dominant (or finally the only) used form of payment, is however still open.

I do not want to speculate too much on this here.

I am concerned, however, that monetary policy makers must be ready to face all conceivable scenarios.

Therefore, in the following I will comment on the implications that such a development could have for monetary policy.

3.2.c Consequences for the formulation of monetary policy

The primary objective of the European Central Bank (ECB) is to maintain price stability in the euro area over the medium term.

The price level is, as we all know, the inverse of the price of money in terms of goods.

Therefore, developments that affect the money supply mechanism, such as electronic money, are very relevant from the viewpoint of the ECB's primary goal.

A central bank, however, cannot directly control the price level.

Monetary policy operates through a complex transmission process that involves the financial system and the real economy, and in which substantial time lags exist.

A forward-looking monetary policy must therefore be based on some indicators in order to achieve its goal of price stability.

Money is an important variable in this process.

For this reason, the Governing Council of the ECB has given monetary aggregates a prominent role in its monetary policy strategy.

As you all know, the monetary aggregate chosen by the ECB within its strategy is M3. [8] This is a broad aggregate that includes a wide range of relatively liquid assets.

Among other reasons, it was chosen because it is least affected by substitution between various liquid assets, and because of its empirically stable relationship with the price level. [9]

The advent and spread of electronic money may affect the properties of monetary aggregates.

Specifically, since stored value cards are likely to substitute largely for cash payments, the effect of their spread will be largest on the narrower aggregates such as base money and M1.

On the other hand, cash constitutes only a small fraction of the broader aggregates.

Therefore, in relative terms the spread of e-money will have a less pronounced effect on these variables. [10] Nevertheless, with the further development of new payment technologies, I cannot exclude the possibility that M3, as presently defined, may also be influenced to a relevant degree.

Network money is likely to substitute mostly for credit card payments, which are at present the most common forms of payment for Internet transactions.

It will probably - at least for some time to come - not affect the use of cash to a great extent, and is thus not likely to have a major primary impact on the aggregates.

However, it remains to be seen for which market segments and to which extent e-business will replace traditional merchandising and the corresponding payment habits.

Another potential reduction in the information content of M3 could result if the new technologies are bringing about efficiency gains in the usage of payments instruments.

The experience with credit cards was that households were able to economise on their money holdings through more efficient payment handling.

Similarly, one could expect that also electronic money could contribute to a more efficient payment structure.

If this were the case, then even the augmented monetary aggregates that include electronic money would be subject to a decrease that reflects the efficiency gain and the resulting increase in velocity of money.

This development can also be interpreted as an increase in the money multiplier, as it amounts to a higher level of money creation for a given level of base money.

Again, the effect is likely to be stronger for the narrower aggregates than for the broader ones.

The effect on M3 for the foreseeable future might therefore be rather small.

For the monetary aggregates to maintain their function in monetary policy, the aggregates should be defined appropriately to include all means of payments and their close substitutes, including electronic money.

For the appropriate calculation of these aggregates, it is therefore essential that data on the amount of outstanding balances are available to the central bank.

Issuers of e-money must be required to provide the necessary statistics to the central bank or another authority in charge of supervision.

3.2.d Consequences for the effectiveness of monetary policy

Reduction of the central bank's balance sheet

To the extent that electronic money reduces the demand for cash, it will affect the central bank's balance sheet.

However, cash is a substantial component of a central bank's liabilities.

Currency in circulation now constitutes more than one third of the Eurosystem's liabilities.

Consequently, a significant reduction of its balance sheet could result once the use of electronic money becomes widespread.[11]

Changes in asset holdings are the principal means by which central banks adjust the supply of reserves.

Depending on the extent to which electronic money leads to a reduction in the size of the balance sheet takes place, the central bank's capacity to control short-term interest rates via monetary intervention operations could potentially be limited.

Under normal circumstances, a relatively small balance sheet will be sufficient to carry out open market operations.

However, should special circumstances arise in which the central bank needs to intervene on a larger scale, then a small balance sheet might constitute a problem.

Reduction in the demand for central bank money

The central bank's ability to influence money market rates rests on its monopoly in the creation of base money.

This monopoly matters because banks need to hold central bank money to undertake economic transactions with their customers.

If the central bank reduces the supply of reserves, short-term interest rates are affected.

Banks would tend to lower the amount of credit given to customers, which in turn indirectly affects economic activity.

The advent of electronic money or any other new payment form will not change this monopoly position, because central banks will continue to be the unique providers of central bank money to the banking sector.

Electronic money poses no threat to this position.

The question is, however, whether new payment technologies will reduce the necessity for banks to hold central bank reserves, and in the extreme reduce the demand for base money to zero. [12] In the latter scenario, the central bank would maintain its monopoly, but it would be useless.

The ability to steer the price level in the economy through the supply of central bank money would be lost.

But how do new developments in the area of retail payments affect the demand for money?

To take an example, consider the use of credit cards.

Any credit card payment involves the transfer of funds from the consumers to the issuer of the credit card and further to the merchant who accepted the card.

Usually, the settlement of this transaction requires the corresponding movements on the involved parties' checking accounts.

But this implies that the bank needs to hold central bank reserves as a means of settling this transaction.

Any transaction made must correspond to a movement in central bank reserves.

Credit cards therefore pose no threat to the efficacy of the central bank's monopoly.

Other schemes, such as debit cards and electronic money in its present form, share these properties.

However, it is conceivable that at some point in the future the settlement might take place without regular recourse to central bank reserves.

To see this, consider a situation in which a certain stored value card is widely accepted as payment form among merchants other than the issuer.

Suppose that instead of transferring bank balances, the merchants could reduce their outstanding claims vis-a-vis each other by swapping their claims on the books of the card issuer.

If this was possible, payments could be made without involving any bank transfers.

Consequently, the new means of payment would be independent of any central bank reserve holdings of the credit institutions. [13]

This scenario mirrors the net settlement procedures that I have described for electronic interbank payments.

To the extent that private obligations are "swapped" or "netted" against each other, demand for central bank money will be reduced. [14]

Can such a development pose a threat to the conduct of monetary policy?

How likely is such a scenario?

I believe: not very much, as both private agents and public authorities are likely to have an interest in maintaining to some extent more traditional forms of payment.

First, consumers might want to maintain some degree of anonymity when making payments.

Complete anonymity, however, can only be guaranteed when paying with cash.

Consumers might thus rather hold a combination of both cash and other types of payment devices.

Second, settlement in central bank money has an advantage over settlement on an issuer's books in both its safety and finality.

True finality can only be achieved when settlement occurs in central bank money.

Security is a key feature of any payment system.

Especially for payments of larger value, I believe that the uniqueness of central bank money in providing immediate finality will remain an important advantage over the new forms of payment.

Nevertheless, I believe that central banks should have the adequate tools to meet any challenges that arise from the new technologies, even if today they seem remote.

I will now present the regulatory tools that the ECB considers adequate to meet these challenges.

4 Regulatory Responses

Preserving the essential role of money in the economy requires a minimal, but effective, regulatory framework.

Above all, it must be ensured that price stability and the unit of account function of money are not endangered.

The ECB's position in the field of regulation of electronic money can be summarised in five points: [15]

A.

Prudential Supervision

Issuers of electronic money must be subject to prudential supervision.

In order to preserve the stability of and to maintain confidence in the financial system, the ECB requires an adequate level of financial soundness, sound risk management, and ongoing supervision by respective authorities.

B.

Solid and transparent legal arrangements; technical security; protection against criminal abuse

The issuance must be subject to solid and transparent legal arrangements.

The rights and obligations of the respective participants, including issuers, merchants, and customers, must be clearly defined and be enforceable.

The need for well-defined legal structure is especially evident when a scheme operates on a cross-border basis.

Adequate technical and organisational safeguards should be maintained to prevent threats to the security of the scheme such as counterfeit.

Similarly, protection against criminal abuse should be taken into account in the design and implementation of the scheme.

C.

Monetary statistics reporting

Information about the amount of money available in the economy is indispensable for the conduct of monetary policy.

Electronic money schemes should therefore supply the central bank with adequate statistical information.

D.

Redeem ability

Issuers of electronic money must be legally obliged, at request of the holders, to redeem electronic money against central bank money at par.

This requirement ensures that the unit- of-account function of money is maintained.

Furthermore, without a close link to central bank money, there could potentially be an unlimited creation of electronic money, which could, in turn, lead to inflationary pressure.

E.

Reserve Requirements

The possibility must exist for central banks to impose reserve requirements on all issuers of electronic money, in particular in order to be prepared for a substantial growth of electronic money with a material impact on monetary policy.

Such a reserve requirement could limit the risk of unrestricted growth in electronic money and help to maintain price stability.

Furthermore, it ensures equal treatment in comparison with issuers of other forms of money.

5.

Conclusion

To sum up, recent technological developments have changed and continue to change payments habits.

These developments have the potential to improve the efficiency of the financial system.

However, they pose challenges to central banks in their conduct of monetary policy.

Some of these challenges are not new.

Central banks have before experienced competition from private issuers of money, for instance in the free-banking episode.

Thus, the spread of electronic money poses an old problem, but in a different form.

New developments in electronic interbank payments have paved the way for a change from net to real time gross settlement.

By this, the payment mechanism has become more reliable for users, and at the same time much safer in terms of systemic risk.

Electronic money is being considered by some the main future challenge to central banking.

I believe this is only partly true.

There will always be a need for the element of security, confidence, and information that central bank money contains.

Unregulated electronic money cannot provide such a fundamental precondition, which is, I believe, at the heart of the well functioning of a market economy.

Therefore, I do not believe that electronic money will become a threat to monetary policy in the near future.

Nevertheless, in order to ensure that under no circumstance the central bank loses its ability to preserve price stability and to maintain the unit of account function of money, a certain degree of regulation is indispensable.

With the regulatory requirements that I have outlined, the ECB will continue to provide a monetary framework in which the goal of maintaining price stability can be achieved.

6.

References

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European Central Bank (1999a): "Opinion of the European Central Bank on Electronic Money and

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European Central Bank (1999b): "The Stability-oriented monetary policy strategy of the

Eurosystem", in ECB Monthly Bulletin January 1999, 39-50.

European Central Bank (1999c): "Euro area monetary aggregates and their role in the Eurosystem's

monetary policy strategy", in ECB Monthly Bulletin February 1999,29-40.

European Monetary Institute (1993): "Minimum Common Features for Domestic Payment Systems".

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[1]

See Fama (1980) and Hall (1983).

[2] The average daily value of payments processed via the largest five payments systems in the EU-15 countries in 1999 was 1.3 trillion euro.

In comparison, yearly GDP in the same area was roughly 8 trillion euro.

[3] It does not matter for this example whether the bank cannot meet its obligations due to insolvency or illiquidity.

[4] "Report on Interbank Netting Schemes", also called "Lamfalussy Report", BIS (1990).

[5] >European Monetary Institute (1993).

[6] These are EAF in Germany and PNS in France .

[7] von Hayek (1976).

See also Issing (1999).

[8] For a general description of the monetary policy strategy of the ECB, see ECB (1999b)

[9] See ECB (1999c).

[10] See Freedman (2000).

[11] See BIS (1996).

[12] Significant changes in the demand for central bank money have also taken place in the past.

In Germany , for instance, a reduction in reserve holdings in the early 1970s was a consequence of intensified interbank relations.

This development has later forced the Bundesbank to give up its concept of "free liquidity reserves" (see Issing, 1977).

[13] This argument is based on Friedman (1999).

[14] King (1999) discusses the possibility of a "cashless society" in which the central bank monopoly over base money loses its efficacy.

[15] European Central Bank, (1998) and (1999a).