Quarterly Journal of Austrian Economics

Volume 5, No. 4 (Winter 2002)

The authors argue that a currency board is a creation of the state, aiming at granting particular political favors,and purposefully designed to secure the reappearance of an independent domestic money producer.  A currency board establishes a foreign fiat money standard enforced by legal tender laws for its bank notes, which are mere money substitutes in the context of fractional-reserve commercial banking.  This insight helps us to understand why currency boards have always degenerated into national central banks of the modern type: they were intentionally created to do so.  This surely will also be the fate of present-day currency boards.  Although technically the transition from a currency bank to a commodity money (gold or other commodity standard) is facilitated by the warehouse aspect of the currency board, this institution does not present any incentive for the policy-makers to subject the production of money to the regulation of the free market.