Currency Boards: The Evidence

No currency boards have failed. Furthermore, the results from currency boards have always been positive. Economies with currency boards have consistently had lower inflation, lower interest rates, smaller budget deficits, and higher GDP growth than their peers.

Contemporary Empirical Results

1. Inflation Collapses

Currency boards have a perfect track record of crushing inflation when introduced after periods of monetary instability.

• Hong Kong (1983): Inflation dropped from 11% in 1982 to 3.5 % in 1985.
• Estonia (1992): Annual inflation fell from 1,053% in 1992 to 35.6% in 1993.
• Lithuania (1994): Annual inflation fell from 410.7% in 1993 to 24.6% in 1996.
• Bulgaria (1997): Annual inflation fell from 549.2% in 1997 to 1.6% in 1998.
• Bosnia (1997): Annual inflation fell from 95.6% in 1996 to -0.40% in 1998.

2. Interest Rates Come Down

As a result of declining inflation, interest rates decline, too.

• Hong Kong (1983): Inflation dropped from 11% in 1982 to 3.5 % in 1985.
• Estonia (1992): Annual inflation fell from 1,053% in 1992 to 35.6% in 1993.
• Lithuania (1994): Annual inflation fell from 410.7% in 1993 to 24.6% in 1996.
• Bulgaria (1997): The money market rate fell from 117.66% per annum in 1996 to 2.43% per annum in 1998.
• Bosnia (1997): Annual inflation fell from 95.6% in 1996 to -0.40% in 1998.

3. Fiscal Authorities Face A Hard Budget Constraint

Currency boards cannot extend credit to the fiscal authorities therefore, a hard budget constraint in imposed.

• Bulgaria (1997): The fiscal balance went from -8.1 % of GDP in 1996 to 1.1% of GDP in 1998.

4. Deposit Inflows To The Banking System Increase

Arbitrage between the newly issued currency board, domestic money, and the anchor stimulate deposit inflows into the banking system.

• Bulgaria (1997): Schuler Data

5. Capital Inflows To The Currency Board Country Increase

An exchange rate in which the domestic currency is freely convertible and trades at a fixed exchange rate with its anchor currency eliminates exchange rate risk and facilitates both portfolio and foreign direct investment inflows.

• Bulgaria (1997): Foreign Reserves (millions of U.S. dollars) increased from 864 in 1996 to 3,056 in 1998.

6. Economic Growth Accelerates

The installation of a currency board results in a positive confidence shock, and the establishment of stability.

• Bulgaria: Change in Real GDP went from -14.2% in 1997 to 4.3% in 1998
• Estonia:
• Lithuania:

“Stability is not everything, but without stability, everything is nothing.” - Dr. Karl Schiller, West Germany’s Economics Minister between 1966 and 1972

Why Currency Boards Outperform Central Banks

My argument is straightforward: rules beat discretion.

Read up on my work in 🇧🇬 Bulgaria, 🇪🇪 Estonia, and 🇱🇹 Lithuania, three countries where currency boards turned chaos into stability.

The Historical Record: 175 Years of Currency Boards

Key Statistics

• First currency board: Mauritius, 1849
• Total currency boards established: 70
• Successful speculative attacks: 0 (zero)
• Cases of real exchange rate appreciation causing competitiveness loss: 0 (zero)
• Hyperinflations under properly functioning currency boards: 0 (zero)
• Countries with currency boards that had higher inflation than comparable central bank countries: 0 (zero)

Currency Board Successes: Modern Case Studies

Why Currency Boards Are Speculation-Proof

The most common objection to currency boards is that speculators can attack the peg. The historical record refutes this entirely — but the theoretical reason is equally compelling:

1. A speculator attacks a peg by selling domestic currency, forcing the monetary authority to buy it with foreign reserves
2. This works against central banks because central banks can run out of foreign reserves
3. A currency board holds 100% foreign reserves against the entire monetary base
4. As speculators sell and the board buys, the monetary base automatically contracts
5. Contraction raises domestic interest rates, making the attack increasingly expensive
6. The peg becomes self-reinforcing: harder to attack the more it is attacked

Comparison: Currency Boards vs. Central Banks in Crisis

The pattern is unambiguous. Currency boards held. Central bank pegs collapsed.

The Hanke-Schuler Research Program

The empirical case for currency boards rests on Hanke and Schuler's systematic historical analysis. Their research program at Johns Hopkins University, co-founded with Sir Alan Walters (Margaret Thatcher's personal economic adviser), examined:

• Balance sheet data for all 70 currency boards
• Inflation performance relative to contemporaneous central bank countries
• Exchange rate stability and real competitiveness outcomes
• Episodes of speculative pressure and their resolution
• Transition dynamics when currency boards were adopted in crisis conditions

The research culminated in Currency Boards for Developing Countries: A Handbook (with Schuler, 1994; 2nd ed. 2015), the definitive reference work on currency board design and implementation.

Related Pages

• The Case Against Central Banks
• Hong Kong — The Original Template
• Indonesia — The Crisis of 1998
• Russia — Blueprint for Reform
• Home: Currency Boards — Return to the Currency Boards overview

Related Topics

• Monetarism — The theoretical foundation
• Hyperinflation — What happens without monetary discipline