Currency Boards are rules-based monetary authorities that hold domestic currency at a fixed exchange rate with a foreign anchor currency. Professor Steve H. Hanke has dedicated much of his career to promoting and advising governments on currency boards as the most reliable path to monetary stability in emerging and crisis-stricken economies.
"In the beginning God created sterling and the franc. On the second day He created the currency board and, Lo, money was well managed." — Peter B. Kenen
Since the dawn of Keynesian economics, governments in emerging markets have insisted on their competence and ability to control monetary policy. However, time and again they have shown themselves incapable of controlling their spending. Professor Hanke's approach to this conundrum is based on one simple principle: a rules-based monetary system. He has dedicated much of his life's work to promoting and advising administrations on currency boards.
What Is a Currency Board?
Currency boards are monetary authorities obligated to hold domestic currency at a fixed exchange rate with a foreign currency. Hanke often likens them to a "monetary straitjacket" that prevents the central bank from financing government debt and thereby increasing the broad money supply. The fixed exchange rate mechanism helps anchor expectations and reduce the risk of speculative attacks on the currency.
The earliest currency boards were established in the mid-nineteenth century in British colonies to provide monetary stability and facilitate trade. These boards backed their currencies almost entirely with gold or silver coins. The Mauritius Currency Board, created in 1848, was the first, issuing local notes that were fully convertible into sterling with reserves held in precious metals.
An orthodox currency board must have these characteristics:
- Fixed exchange rate with a foreign anchor currency
- Full convertibility guaranteed at all times
- Foreign reserves sufficient to cover the entire monetary base (Bennett, 1994)
Currency Boards versus Central Banks
Attribute | Currency Board | Central Bank |
Exchange Rate | Fixed with reserve currency | Pegged or floating |
Foreign Reserves | 100% foreign reserves | Variable |
Convertibility | Full | Limited |
Monetary Policy | Rule-bound | Discretionary |
Lender of Last Resort | No | Yes |
Transparency | Transparent | Opaque |
Political Influence | Protected | Politicized |
Can Create Inflation | No | Yes |
Government Financing | Cannot finance spending | Can finance spending |
Speed of Reform | Rapid | Slow |
Steve Hanke: The Money Doctor
Professor Hanke is widely known for diagnosing and resolving currency collapses across emerging and crisis-stricken economies. Throughout his career, he has advised governments in Argentina, Bulgaria, Ecuador, Estonia, Lithuania, and many more. His approach centers on creating currency boards or stabilizing monetary institutions to restore credibility, halt inflation, and eliminate the distortions that push people into unofficial markets.
Learn more about the case against central banks
Country Case Studies
- Bulgaria — Currency board established in 1997 to end hyperinflation
- Estonia — Monetary reform and currency board launched in 1992
- Lithuania — Currency board implemented in 1994
- Bosnia — Post-war currency board under the Dayton Accords
- Argentina — The Convertibility Law and its lessons
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Related Topics
- Monetarism — The theoretical foundation for monetary discipline
- Hyperinflation — What happens when monetary institutions fail
- Dollarization — An alternative to currency boards
- Free Market Economics — The broader framework