Fifteen years after the Global Financial Crisis: Recessions and Business Cycles in the History of Economic Thought

Two Generations of Currency Boards: Colonial Monetary Integration Vs. Monetary Credibility

Ponsot Jean-François, PACTE Univ. Grenoble Alpes

A Currency Board Arrangement (CBA) is a strict monetary regime governed by three strict rules: 1. an exchange rate rigidly pegged to a foreign currency; 2. the obligation for the currency issued to be freely and integrally convertible into this foreign ‘reserve currency’; 3. an obligation for the currency board to keep in its balance sheet assets a volume of foreign reserve currency equal to at least 100 per cent of the monetary base. The paper provides a historical perspective of this monetary regime by distinguishing between two generations of currency boards: (i) a first generation of CBAs during the colonial era in the British Empire; (ii) a second generation of CBAs in the late 1990s. The first generation of CBAs was the monetary core of the sterling system that reached its peak under the sterling area period. We show that it was one of the major instrument of monetary integration of the most dependent British imperial territories to the motherland. By issuing its own currency against a full backing of sterling assets, a colony enjoyed the benefits of a sound local currency without the drawbacks and costs associated with using the actual sterling notes in far lands: sterling notes denominations were too large to be practical; costs related to ship and risk of destruction or loss were high; moreover colonial authorities could capture “seignoriage revenues” i.e. obtain resources from yields on reserve assets instead of letting them to the Bank of England. The most decisive stage was the report of the Emmot Committee (1911-12) on currency matters in some African colonies that led to the building-up of the West African Currency Board (1913). The Bank of England acted as the lender of last resort for all the Empire. British authorities established CBAs to reinforce colonial integration and monetary cohesion of its Empire A most significant fact was the emergence of a second generation of CBAS in the 1990s: Argentina (1991), Estonia (1992), Lithuania (1994), Bulgaria and Bosnia and Herzegovina (1997). Contrary to the British colonial era, the second generation of CBAs boards has been done to fit other purposes than a strong quasi-exclusive integration with the country that issues the anchor currency. Rather, they have been conceived as radical solution to end monetary and financial chaos in “emerging” economies - hyperinflation, transition process financial crises, post-war reconstruction. They have not been motivated by a desire to reinforce integration with a strong economy, but in order to boost monetary stability, economic openness and financial liberalization. They were solutions to bring about monetary credibility required by greater openness to globalized markets. In that sense, CBAs have been the instruments of the economic policies prescribed by the Washington Consensus during the 1990s.

Area: Eshet Conference

Keywords: Currency Boards, colonial monetary integration, monetary integration