Currency Boards

Abstract

Once ubiquitous in the colonial regimes of Africa, Asia and the Caribbean, currency boards now survive only in such small countries as Singapore, Brunei and Hongkong. The main characteristic of the currency board system is that the board stands ready to exchange domestic currency for the foreign reserve currency at a specified and fixed rate. To perform this function the board is required to hold realizable financial assets in the reserve currency at least equal to the value of the domestic currency outstanding. Hence in the currency board system there can be no fiduciary issue. The backing to the currency must be at least 100 per cent. Although in principle it is the currency board that is required to convert on demand all offers of domestic or reserve currency, in practice, where there is a banking system, however elementary, it is the banks that have carried out most of the exchange business. The buying and selling rates for both currencies have a sufficient spread so that the costs of exchange are covered. This convertibility of currencies in the currency board system does not extend to bank deposits or any other financial assets. If a person has a bank deposit and wishes to use the currency board to convert it to foreign currency then the deposit must be first converted into domestic currency and then presented to the currency board.