Currency Board as an Alternative to a Central Bank [Updated May 26, 2004]   [open pdf - 94KB]

"Although factors affecting the decision to adopt a currency board vary from country to country, as do outcomes, fundamental differences between currency boards and central banks remain constant. This report focuses on their differences to provide a foundation for evaluating disparate cases. To understand the differences, it should be noted that the most important function of a central bank is its ability to alter the supply of money. When this power is abused, as occurs when central banks must provide the monetary wherewithal to finance government budget deficits, it undermines the functions that money performs in a market economy: that of a unit of account, medium of exchange, and store of value. History is replete with episodes of such an abuse of monetary policy. The most egregious consequences of abuse are to be found in episodes of hyperinflation with prices rising daily. Countries have sought a variety of monetary arrangements to curtail abuse in the issuance of money. A significant example is a currency board. Currency boards now function in Bulgaria, Hong Kong, Djibouti, Lithuania, Estonia, and Brunei, and are promoted by some economists as a means for developing countries to achieve macroeconomic stability. The sole function of these boards is to issue currency (and coins) that are 100% backed by a commodity (e.g., gold and silver) or by the stable valued currency of another country. A currency board is forbidden from altering the amount of currency by buying or selling assets denominated in domestic money."

Report Number:
CRS Report for Congress, RL31093
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