A Comprehensive Overview Of Past Currency Board Constitutions

Information collected from all reachable founding laws (constitutions) of past currency boards— more than 50 in all—is used to better observe changes in features and characteristics implemented in currency boards over time. The founding laws of many currency boards have been highly general, allowing, in principle, for discretionary monetary policy even though, in practice, many currency boards did not implement it. Only a minority of currency boards had founding laws that clearly specified the most important features of currency board orthodoxy: (1) a fixed exchange rate with an anchor currency, (2) full, two-way convertibility into and out of the anchor currency, (3) a ratio of 100% net foreign reserves to monetary liabilities, (4) the board cannot be a lender of last resort to the domestic financial system, and (5) the board must generate its own profits via seigniorage. Additionally, the authors identified five other properties that, although not necessary for a functioning currency board, proved to be beneficial and thus became widely adopted. They are: (1) transparency measures, (2) an upper limit on net foreign reserves, (3) policies for liabilities exceeding assets, (4) escape clauses, and (5) minimum limits on currency exchanges. Comparing constitutions shows that these systems have been adaptable in many different political and economic environments, thus explaining their longstanding success in multiple countries over the last 170 years.