Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks Correct into Bitcoin Happy Thanks Halving - Earnings Season Buying Opps - 4th July 24
24 Hours Until Clown Rishi Sunak is Booted Out of Number 10 - UIK General Election 2024 - 4th July 24
Clown Rishi Delivers Tory Election Bloodbath, Labour 400+ Seat Landslide - 1st July 24
Bitcoin Happy Thanks Halving - Crypto's Exist Strategy - 30th June 24
Is a China-Taiwan Conflict Likely? Watch the Region's Stock Market Indexes - 30th June 24
Gold Mining Stocks Record Quarter - 30th June 24
Could Low PCE Inflation Take Gold to the Moon? - 30th June 24
UK General Election 2024 Result Forecast - 26th June 24
AI Stocks Portfolio Accumulate and Distribute - 26th June 24
Gold Stocks Reloading - 26th June 24
Gold Price Completely Unsurprising Reversal and Next Steps - 26th June 24
Inflation – How It Started And Where We Are Now - 26th June 24
Can Stock Market Bad Breadth Be Good? - 26th June 24
How to Capitalise on the Robots - 20th June 24
Bitcoin, Gold, and Copper Paint a Coherent Picture - 20th June 24
Why a Dow Stock Market Peak Will Boost Silver - 20th June 24
QI Group: Leading With Integrity and Impactful Initiatives - 20th June 24
Tesla Robo Taxis are Coming THIS YEAR! - 16th June 24
Will NVDA Crash the Market? - 16th June 24
Inflation Is Dead! Or Is It? - 16th June 24
Investors Are Forever Blowing Bubbles - 16th June 24
Stock Market Investor Sentiment - 8th June 24
S&P 494 Stocks Then & Now - 8th June 24
As Stocks Bears Begin To Hibernate, It's Now Time To Worry About A Bear Market - 8th June 24
Gold, Silver and Crypto | How Charts Look Before US Dollar Meltdown - 8th June 24
Gold & Silver Get Slammed on Positive Economic Reports - 8th June 24
Gold Summer Doldrums - 8th June 24
S&P USD Correction - 7th June 24
Israel's Smoke and Mirrors Fake War on Gaza - 7th June 24
US Banking Crisis 2024 That No One Is Paying Attention To - 7th June 24
The Fed Leads and the Market Follows? It's a Big Fat MYTH - 7th June 24
How Much Gold Is There In the World? - 7th June 24
Is There a Financial Crisis Bubbling Under the Surface? - 7th June 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

It’s Time for Private Cryptocurrency Boards

Currencies / BlockChain Jun 22, 2020 - 03:42 PM GMT

By: Steve_H_Hanke

Currencies

With the onset of the coronavirus pandemic, currencies around the world took a deep dive. To name but a few casualties: Argentina, Brazil, Colombia, Iran, Lebanon, Mexico, Nigeria, Russia, South Africa, Syria, Turkey, Venezuela, and Zimbabwe. Not only have the currencies in these countries plunged, but the burden of their foreign debts has soared. Exchange-rate instability is a curse.

Indeed, currency instability, banking crises, soaring inflation, sovereign-debt defaults, and economic booms and busts all have a common source: exchange-rate instability. The ills induced by exchange-rate instability bring with them calls for policy changes. Karl Schiller, the German Finance Minister from 1966 until 1972, understood this simple fact. Schiller’s mantra was clear and uncompromising: “Stability is not everything, but without stability, everything is nothing.” Well, Schiller’s mantra is my mantra.


I offer a regime change that would enhance stability in the international monetary sphere: private currency boards. Just what is a currency board?

A currency board issues notes and coins convertible on demand into a foreign anchor currency at a fixed rate of exchange. As reserves, it holds low-risk, interest-bearing bonds denominated in the anchor currency and typically some gold. The reserve levels (both floors and ceilings) are set by law and are equal to 100 percent, or slightly more, of its monetary liabilities (notes, coins, and, if permitted, deposits). 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. By design, a currency board has no discretionary monetary powers and cannot engage in the fiduciary issue of money. It has an exchange-rate policy (the exchange rate is fixed) but no monetary policy. A currency board’s operations are passive and automatic: Its sole function is to exchange the domestic currency it issues for an anchor currency at a fixed rate. Consequently, the quantity of domestic currency in circulation is determined by market forces; namely, the demand for domestic currency.

A currency board cannot issue credit. It cannot act as a lender of last resort or extend credit to the banking system. Nor can it make loans to the fiscal authorities and state-owned enterprises. Consequently, such a regime imposes discipline on the economy through a hard budget constraint. As a result, when compared to countries that employ central banking, currency-board countries have lower fiscal deficits, lower debt-to-GDP ratios, lower inflation rates, and more rapid growth.

Historically, currency boards have existed in about 70 countries, and none have failed — including the North Russian currency board installed on November 11, 1918, during the civil war that followed the Bolshevik revolution. Its architect was none other than John Maynard Keynes, who was a British Treasury official at the time. Today, the most notable currency board is Hong Kong’s. What all currency boards — past and present — have in common is that they are public institutions. But, there is no requirement that currency boards be publicly owned.

For many years, my long-time collaborator Kurt Schuler and I have advocated private currency boards. In our draft law for such a regime, we proposed that its home offices and reserves be located in Switzerland and that it be governed under Swiss law. With the advent of cryptocurrencies, the prospect of our idea, or something similar to it, is close to becoming a reality. Indeed, the white paper issued by the Libra Association in 2019 explicitly states that the Libra cryptocurrency would resemble a currency board. While that is correct in broad terms, Libra stumbled out of the gate and is not yet a reality.

Central banks are clearly feeling the competitive threat posed by the prospect of private currency boards, like Libra.  Indeed, a 2019 report on digital currencies by the Official Monetary and Financial Institutions Forum in London and IBM presents results from a survey of 23 central banks. Half of the respondents indicated that they perceived the widespread use of decentralized, private, digital currencies as a real threat. As the central bankers put it, private currencies would potentially “disturb the global financial system and undermine the sovereignty of monetary authorities.” This is nonsense. What central banking authorities are actually worried about is competition from private, stable currencies.

The prospect of private currency boards — which are either backed by stable fiat currencies or gold — is a promising one. The competitive forces unleashed by private currencies would be a great stabilizer.

Follow me on Twitter.

By Steve H. Hanke

www.cato.org/people/hanke.html

Steve H. Hanke is a Professor of Applied Economics and Co-Director of the Institute for Applied Economics, Global Health, and the Study of Business Enterprise at The Johns Hopkins University in Baltimore. Prof. Hanke is also a Senior Fellow at the Cato Institute in Washington, D.C.; a Distinguished Professor at the Universitas Pelita Harapan in Jakarta, Indonesia; a Senior Advisor at the Renmin University of China’s International Monetary Research Institute in Beijing; a Special Counselor to the Center for Financial Stability in New York; a member of the National Bank of Kuwait’s International Advisory Board (chaired by Sir John Major); a member of the Financial Advisory Council of the United Arab Emirates; and a contributing editor at Globe Asia Magazine.

Copyright © 2020 Steve H. Hanke - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in