By Mr T T Mboweni, Governor of the South African Reserve Bank, at the Reuters Forum Lecture, Johannesburg. "Independence signifies ignoring pressures, whatever its source. The independence of central banks goes, ... beyond independence from political, executive and legislative power. For me it also equates with independence from private or collective economic interests, autonomy versus the short term, frequently imposed by capital markets and, finally, freedom of action vis-à- vis the monetary policy of other central banks". Prime Minister Lionel Jospin. Paris, May 2000. 1. INTRODUCTIONI am extremely pleased at this invitation to present this inaugural address in the Reuters Forum Lecture series. This is an important initiative and I wish you well for the sustained success of this lecture series. We have chosen to discuss the issue of Central Bank Independence since the topic is both current and highly significant. Incidentally when the Banque de France organised their bi-centennial celebrations in May this year, they chose the topic of central bank independence as the theme for the colloquium.At the said Banque de France colloquium, the Prime Minister of the French Republic, Monsieur Lionel Jospin remarked that: " the increased power and influence of central banks, the greater visibility of their role and their leaders, have inevitably focussed attention on their role, their efficiency, the principles underlying their actions and, in some cases, their place in the democratic way of life". Central banking is of cardinal importance in any country because of the legal right normally granted to central banks to create money. This money can serve as a means of payment, a unit of account and a store of value. One of the important issues immediately arising after granting this right to a central bank, is whether this function should fall under the ultimate control of the executive branch of government – the cabinet and its administrative departments – or whether parliament should leave this responsibility to be freely executed by an independent, autonomous powerful institution run by unelected people. 2. ADVANTAGES OF AN INDEPENDENT CENTRAL BANKThe traditional argument in favour of a strong, independent central bank is that the power to spend money should in some way be separated from the power to create money. Numerous episodes in the world’s economic history testify to a government’s potential abuse of its power to create money. Around the third century AD in the Roman Empire, for instance, the silver coins collected by the tax authorities were melted and combined with inferior metals, yielding many more coins to spend on the Caesar’s priorities than the initial tax take. With too much money chasing too few goods, the end result was high inflation. Much the same has happened all too frequently with paper money systems. Many governments have given way to the temptation to reduce interest rates ahead of elections. This may boost spending and employment in the short term, but ultimately it usually also causes higher inflation over the long term, unless the capacity of the economy can meet this higher level of demand. This higher inflation, however, only becomes apparent a couple of years later. An elected government concerned about its immediate popularity might be tempted to go for the short-term gains from lower interest rates, even at the risk of promoting somewhat higher inflation further down the road, because some other political party may then have to pick up the pieces. Central bankers normally operate on a longer-term time scale than politicians and therefore do not face the same temptation to relax policy to achieve short-term objectives. By delegating decisions about interest rates and other monetary matters to such an independent institution, with a clearly defined mandate, society can hope to achieve a better inflation outcome over the longer term. A number of studies have been undertaken to determine whether this argument is valid. These studies all seem to come to the following three conclusions. Firstly, they pr