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This Alternative to Central Banks Is Better For Free Societies – Expert

Sead Fadilpašić
Last updated: | 4 min read

Private currency boards, as alternatives to central banks, might become a reality – bringing greater stability and economic freedom, according to Steve H. Hanke, a Professor of Applied Economics at the Johns Hopkins University, a prominent expert on hyperinflation, and a major currency board supporter.

Source: Adobe/tanarch

“Monetary instability poses a threat to free societies,” said Hanke in his recent paper Money, Stability, and Free Societies. They lead to “ills” such as inflation, banking crises and currency instability, which then result in calls for policy changes many of which threaten free societies and economic freedom. Hanke argues that three major regime changes are needed to improve the stability:

  1. USD and EUR should be formally, loosely linked; the European Central Bank (ECB) would have to maintain the zone of stability (e.g. USD 1.20– USD 1.40 per EUR) by defending a weak USD via buying dollars, while the US Treasury would also defend a weak EUR by purchasing it.
  2. Most central banks in developing countries should be replaced by currency boards; these central banks commonly face high inflation, currency and banking crises, relatively high fiscal deficit and debt levels, etc., while these countries often experience unstable growth because their central banks engage in procyclical monetary policies. But before central banks, there were currency boards in places across the world and only rare, mild financial crisis, due to a stable banking system. “Even in the most trying times, currency boards always produced stable money and maintained full convertibility.”
  3. Private currency boards should be permitted to enter the international monetary sphere.

Currency boards are seeing “something of a resurgence,” with the most significant among the fifteen existing today being Hong Kong’s, installed in 1983.

“The prospect of private currency boards—which are backed by fiat currencies, baskets of currencies (like SDRs) or gold—appear to be a promising reality,” wrote Hanke. “The competitive forces that will be unleashed by the private alternatives would be a great stabilizer and enhance economic freedom and free societies.”

In an interview with in April, Hanke explained that the money would be issued from a private currency board and traded at a fixed exchange rate whatever the anchor is (e.g. USD). So, if it’s a gold-based currency board, for example, the anchor is gold, and that currency is a clone of gold. Given the golden standard, a monetary system in which the standard economic unit of account is based on a fixed quantity of gold, this metal is a good hedge over a long period of time, and it’s a currency. A gold-backed, private currency board would be similar to a “gold standard,” Hanke said in April.

“A currency board generates profits (seigniorage) from the difference between the interest it earns on its reserve assets and the expense of maintaining its liabilities,” the Professor explained in his recent paper. “By design, a currency board has no discretionary monetary powers and cannot engage in the fiduciary issue of money.”

It has a fixed exchange rate policy, but no monetary policy. The quantity of domestic currency in circulation is determined by the demand for it. A currency board’s balance sheet only contains foreign assets set at a required level, and any domestic assets are frozen. A currency board can’t sterilize foreign currency inflows or neutralize outflows, and it can’t issue credit, nor make loans to the fiscal authorities and state-owned enterprises. Therefore, it “imposes a hard budget constraint and discipline on the economy.”

As for cryptocurrencies, Hanke said back in April that bitcoin (BTC) is “an interesting speculative asset,” which doesn’t have the characteristics of a currency because it’s not a stable unit of account. However, with “the advent of cryptocurrencies,” the prospect of Hanke’s and his currency board collaborator Kurt Schuler’s idea, “or something close to it, is close to becoming a reality.”

Also, in his paper, discusses the Libra Association and its white paper, per which Libra would be similar to a currency board, which Hanke finds correct “in broad terms.” He previously told that “Libra wasn’t thought out well” and had no experts who understood currency boards and would give advice on its nuances. Nonetheless, “[c]entral banks are clearly feeling the competitive threat posed by the prospect of private currency boards (like Libra),” wrote Hanke.

Per a 2019 report by the Official Monetary and Financial Institutions Forum and IBM a survey of 23 central banks showed half of the respondents indicating that they see the widespread use of decentralized, private digital currencies as a real threat. Meanwhile, the Bank for International Settlements (BIS) has changed its view of digital currencies, Hanke said, now researching the development of central bank digital currencies “to combat private challengers.” He added, quoting the Financial Times, that “BIS officials believe central banks should pool their resources to fend off potentially disruptive competition from better funded private sector rivals.”

According to the professor, “government central banks would probably be much more disciplined if there were a number of private currencies competing with currencies issued by government-run central banks,” as he told

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