• Wed / 23 September 2020 / 15:06
  • Category: Politics
  • News Code: 99070201629
  • Journalist : 99999

Installing gold-backed currency board should be Iran’s first priority: Steve Hanke

Installing gold-backed currency board should be Iran’s first priority: Steve Hanke

Tehran (ISNA) – Iran’s Rial hits another record low these days as U.S sanction’s pressure is on the rise and Civid-19 affecting its economy. For discussing the best possible solution for changing this trend; we’d asked professor Hanke for a commentary.

Steve H. Hanke is a Professor of Applied Economics at Johns Hopkins University in Baltimore (USA). He is one of the world's leading experts on troubled currencies and hyperinflation.

Asking about what should be the first priority of policy makers to stop this trend? Mr.Hanke said, “The first priority should be to install a gold-backed 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. The reserve levels (both floors and ceilings) are set by law and are equal to 100%, or slightly more, of its monetary liabilities. So, the domestic currency issued via a currency board is nothing more than a clone of its anchor currency. 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 saying that: “a gold-backed currency board for Iran, the anchor currency would be gold, which is not issued by any sovereign-- an attractive option for Iran. By doing so, the rial would literally be as good as gold. Indeed, the rial would be a clone of gold.” He added: By design, a currency board, unlike a central bank, 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. The sole function of a currency board 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 solely by market forces, namely the demand for domestic currency. A currency board cannot issue credit. Accordingly, a currency board imposes a hard budget constraint and discipline on the government. This is an underappreciated feature of currency boards. Unlike central banks, a currency board can’t be used as a means to finance government budgets.

According to Prof.Hanke, currency boards have existed in about 70 countries, and none have failed. The first one was installed in the British Indian Ocean colony of Mauritius in 1849. By the 1930s, currency boards were widespread among the British colonies in Africa, Asia, the Caribbean, and the Pacific Islands. They have also existed in a number of independent countries and city-states, such as Danzig and Singapore. One of the more interesting currency boards was installed in North Russia on November 11, 1918, during the civil war. Its architect was none other than John Maynard Keynes, who was a British Treasury official at the time.

Countries that have employed currency boards have delivered lower inflation rates, smaller fiscal deficits, lower debt levels relative to the gross domestic product, fewer banking crises, and higher real growth rates than comparable countries that have employed central banks. Given the superior performance of currency boards, the obvious question is “What led to their demise and replacement by central banks after World War II?” The demise of currency boards resulted from a confluence of three factors. A choir of influential economists was singing the praises of central banking’s flexibility and fine-tuning capacities. In addition to changing intellectual fashions, newly independent states were trying to shake off their ties with former imperial powers. Additionally, the International Monetary Fund and the World Bank, anxious to obtain new clients and “jobs for the boys,” lent their weight and money to the establishment of new central banks. In the end, the Bank of England provided the only institutional voice that favored currency boards.

Since their post-World War II demise, currency boards have witnessed something of resurgence. In terms of size, the most significant currency board today is Hong Kong’s. It was installed in 1983 to combat exchange rate instability. In the wake of the collapse of the Soviet Union, several countries adopted currency boards. They successfully crushed inflation and ushered in stability and growth.

“At present, the annual inflation rate is 134% per year.” He said adding that: Going forward, with further depreciation of the rial, inflation expectations will continue to be very elevated.

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