Experience has taught us, however, that bold visions hardly ever have a chance of being realised. It seems to make more sense to implement what has been recognised as appropriate in small, purposeful steps. Reform of the monetary constitution A monetary constitution comprises all regulations concerning the currency on a constitutional and statutory level. Our present monetary constitution still dates largely from the time of the establishment of the Swiss National Bank almost a hundred years ago. We are currently in the process of adapting it to modern requirements. These endeavours bear a direct relation to the reform of our fundamental law, the Federal Constitution, which was recently brought to an end. A central issue of these reform efforts, to which I shall restrict myself in the following remarks, concerns the severance of the Swiss franc’s link to gold. In actual practice, this link has been outdated for decades. It is, moreover, in direct contradiction to our commitments as a member of the International Monetary Fund. With the severance of the gold link, we will be free to act according to our own discretion with respect to the evaluation and utilisation of our gold holdings. The question therefore arises how to use this freedom of action. In attempting to answer this question, one must bear in mind that monetary reserves are of course indispensable for a central bank in fulfilling its tasks. This is particularly true in the case of a small, open economy with a significant financial sector.

So to address that topic tonight, I would like to first set out some principles, as I see them, behind the actions of central banks in so called “credit-easing” operations. 1  The announcement is at http://www.hm-treasury.gov.uk/press_05_09.htm. Subsequent letters exchanged between the Governor and Chancellor were published on 29th January and can be found at http://www.bankofengland.co.uk/publications/news/2009/005 and those published on 5th March can be found via http://www.bankofengland.co.uk/publications/news/2009/019.htm. The letters published on 5th March were dated 17th February, from the Governor, and 3rd March from the Chancellor. BIS Review 23/2010  1  Intervention by the authorities The Bank of England intervenes routinely in financial markets so as to implement monetary policy and provide liquidity insurance to the banking system. These operations, normally restricted to banks and building society counterparties, stem directly from the Bank’s core responsibilities of maintaining monetary and financial stability. But these responsibilities do not give the Bank a mandate or the ability to provide a source of long-term funding for the commercial banking system 2 , nor is it for the Bank to take material risks with public money. In the case of monetary policy, the central bank expands and contracts its balance sheet to meet its objectives. Typically that involves injecting and/or draining cash (central bank money) in order to set interest rates or, as with quantitative easing programmes, changing the money supply directly. The Bank also provides liquidity support to commercial banks in times of stress (for example through its Discount Window Facility).