independent central bank in a modern economy. this role is the key issue i want to address today. and since i am a european central banker, i will discuss it from that particular perspective. 2 what monetary policy can do and what it cannot do 2. 1 lessons from history ladies and gentlemen, 1 / 8 bis central bankers'speeches in the 16th century, when conquerors robbed the gold and silver treasures of the americas and brought them to europe, they also paved the way for inflation. early economists ( such as jean bodin and david hume ) learned that the supply of money has an impact on the price level. as long as an economy operates below capacity limits, a larger money supply can result in a higher output of goods and services. but once full employment is reached, more money will ultimately lead to higher prices. with the adoption of fiat currency, it was possible simply to print legal tender. this posed a permanent temptation to governments, as they could use the printing press to finance their spending. giving in to this temptation led to some of the most terrible episodes of hyperinflation, such as in venezuela today, in zimbabwe a decade ago, but also in germany in the distant past. in my country, the enormous government spending during the great war and in the following years eventually brought about hyperinflation. inflation peaked in 1923, when prices doubled in less than 4 days. 2 such astronomically high price increases deeply interfered with people ’ s everyday lives. this was expressed in john maynard keynes ’ quip that people got used to ordering two beers at a time, because the price would rise faster than the beer became warm. 3 extreme cases illustrate one aspect of the costs of inflation. indeed, many people lost their financial wealth in these times. on the other hand, the burden of debtors – the government, in particular – was easily wiped out. it is the weakest groups of society who typically suffer most from inflation. wage earners and transfer recipients like pensioners have only limited possibilities to hedge against it. governor kganyago explained it in a recent speech when he said : “ where monetary policy tolerates higher inflation, this tends to reduce spending power, especially for the poor. ” 4 distributional shifts and the overall economic damage of elevated inflation often create social unrest and political instability. however, history has taught us that deflation, a general, sustained and self - reinforcing decline in the price level, can also be devastating for the economy, as

tend to be “ cheque countries ”. a survey on the clearing and settlement systems for retail payments is planned as a follow - up. both analyses are ultimately to form the basis for a debate on possible policy objectives of the g10 central banks in retail payment systems. potential forms of participation by the central banks as already mentioned, the described activities concern the central banks ’ role in their oversight of private systems in which they exert an influence on an efficient and secure design of retail payments. this function is normally exercised either in cooperation with the banking industry or as a sovereign function based on a legal mandate. the fundamental issues which are examined by the g10 central banks include, first and foremost, the degree of the central banks ’ participation in retail payment systems. this currently varies very widely among the central banks of the individual countries. all central banks perform the oversight function, but, beyond this, a number of other, more active forms of participation, are theoretically feasible. for example, central banks can influence the standardisation of retail payments processing at the national or international level by actively participating in the banking industry ’ s standardisation committees, without setting unilateral standards on their part. the analysis of the situation in europe shows that in the long run, competition with differing standards is detrimental to all the parties involved, since the interoperability and straight - through processing are impeded, thus giving rise to high and avoidable costs. here, central banks regard themselves as mediators promoting and accelerating the process of standardisation. the eurosystem ’ s central banks have positioned themselves precisely in this way. they wish to be seen, above all, as a catalyst for improvements in cross - border retail payments ; it is only if the market participants were not to perform their role that they would have to think about a broader operational involvement. a major contribution which the central banks are already making is that of taking on settlement for private clearing facilities of the banking industry. at the g10 level, all central banks provide such settlement facilities ; in other words, the balances derived from the interbank settlement of retail payments are offset via the respective rtgs systems and / or accounts with the central banks. this helps to minimise risks, since private settlement agents always bear a default risk. nevertheless, this only requires a low degree of operational commitment on the part of the central banks, since the settlement of files containing retail payments may be executed as a sum total in large - value payment transactions. necessity of