{
  "id": "RL31093",
  "type": "CRS Report",
  "typeId": "REPORTS",
  "number": "RL31093",
  "active": false,
  "source": "EveryCRSReport.com",
  "versions": [
    {
      "source": "EveryCRSReport.com",
      "id": 100503,
      "date": "2004-05-26",
      "retrieved": "2016-04-07T20:15:05.834026",
      "title": "A Currency Board as an Alternative to a Central Bank",
      "summary": "The Foreign Operations Act ( P.L. 102-391 ) signed on October 6, 1992 allows the U.S. quota,\nor\ncontribution, increase to the IMF of $12 billion to be used to \"...support monetary stability in\nmember countries through the instrumentality of currency boards.\" What is a currency board? How\ndoes it differ from an alternative monetary arrangement such as a central bank? Why was it adopted\nby countries with histories of chronic inflation (e.g., Argentina) and those emerging from the Soviet\nbloc (e.g., Bulgaria), and urged upon those suddenly hit by currency speculation (e.g., Indonesia)? \nWhat role did the currency board play in Argentina's 2001-2003 financial difficulties and why was\nit abandoned? Although factors affecting the decision to adopt a currency board vary from country\nto country, as do outcomes, fundamental differences between currency boards and central banks\nremain constant. This report focuses on their differences to provide a foundation for evaluating\ndisparate cases. \n  To understand the differences, it should be noted that the most important function of a central\nbank is its ability to alter the supply of money. When this power is abused, as occurs when central\nbanks must provide the monetary wherewithal to finance government budget deficits, it undermines\nthe functions that money performs in a market economy: that of a unit of account, medium of\nexchange, and store of value. History is replete with episodes of such an abuse of monetary policy. \nThe most egregious consequences of abuse are to be found in episodes of hyperinflation with prices\nrising daily. Countries have sought a variety of monetary arrangements to curtail abuse in the\nissuance of money. \n  A significant example is a currency board. Currency boards now function in Bulgaria, Hong\nKong, Djibouti, Lithuania, Estonia, and Brunei, and are promoted by some economists as a means\nfor developing countries to achieve macroeconomic stability. The sole function of these boards is\nto issue currency (and coins) that are 100% backed by a commodity (e.g., gold and silver) or by the\nstable valued currency of another country. A currency board is forbidden from altering the amount\nof currency by buying or selling assets denominated in domestic money. As a result, the currency\nit issues is \"safe\" or of stable value (or as stable in value as the currency to which it is linked), and\nthis stability would contribute to the vital role money plays in market economies. A currency board\narrangement is very similar in nature to the formal adoption of another country's currency, popularly\nknown as \"dollarization.\"\n  Using a currency board has a potential downside for a country. It is exposed to every shock that\naffects the exchange rate of the country to which it has tied its currency, and prevents the use of\nmonetary policy to counter those shocks. Argentina is a recent example of what can happen in a\ncurrency board country. Argentina linked its currency to the U.S. dollar. The large appreciation of\nthe dollar between mid-1995 and 2002 had a severely depressing affect on the Argentine economy\nwhich led to the abandonment of the currency board and economic crisis. Unlike central banks,\ncurrency boards also lack a lender-of-last-resort function. In a financial crisis, currency boards\nwould be unable to lower interest rates and lend banks money to quell bank runs. This report will\nnot be updated.",
      "type": "CRS Report",
      "typeId": "REPORTS",
      "active": false,
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      "topics": []
    }
  ],
  "topics": [
    "Economic Policy",
    "Foreign Affairs"
  ]
}