“If you want to stop inflation immediately, you install a currency board.” - Steve Hanke
For most of my professional career, I’ve watched emerging governments and central bankers repeat the same tragic cycle of discretionary monetary policy, political interference, inflation, and the eventual collapse. The reality is that they rarely confront the root cause of hyperinflation - a central bank with discretionary power and no rules to dictate policy.
This disaster of philosophy propagated by the IMF has motivated much of my life work; designing, implementing, and defending currency boards. They are the most reliable monetary institutions ever invented - simple, transparent, rule‑bound, and immune to political manipulation.
We need a return to rules-based monetary systems.
What a Currency Board Is — and What It Is Not
A currency board is a monetary machine, not a political instrument.
What are the main tenets I stick to when tasked with designing a currency board?
A TRUE currency board:
- Issues domestic currency only when fully backed by foreign reserves
- Maintains a fixed exchange rate, set in law
- Has no discretionary monetary policy
- Cannot lend to governments or cronies
- Operates automatically, without committees or forecasts
A currency board is not:
- A central bank with a new mandate
- A “managed peg”
- A tool for political tinkering
Why Currency Boards Work
The power of a currency board comes from its constraints. Politicians cannot print money to finance deficits. Central bankers cannot manipulate interest rates. Markets cannot be spooked by the whims of a monetary committee.
The results are consistent:
- Inflation collapses to the anchor currency’s level
- Interest rates fall
- Confidence returns
- Growth resumes
- Capital flight reverses
These are not theoretical claims. They are empirical facts I have observed firsthand in Estonia, Lithuania, Bulgaria, Bosnia and Herzegovina, and Hong Kong.