Currency Boards and Free Banking

Abstract

The currency board system, unlike free banking, is witnessing a real revival. Like free banking, the currency board system was once wide-spread: it has existed in approximately sixty-five countries. A currency board is an institution that issues notes and coins convertible into an external “reserve” asset, such as a foreign currency or a commodity, on demand at a fixed exchange rate. It does not accept deposits. As reserves, a currency board holds high-quality, interest-bearing securities denominated in the reserve asset. Commercial banks in a currency board system need not hold 100 percent reserves in reserve assets; only the currency board must hold reserves of 100 percent or more. Currency boards originally arose to replace free banking. Currency board systems had excellent records. Currency boards and free banking are similar in their intent to depoliticize the supply of money.