Want to Fight Inflation? Consider a Currency Board

Floating currencies haven’t worked as well

Letter to The WSJ. 

"In his letter (Aug. 15) responding to my op-ed “Floating Currencies Compound Uncertainty” (Aug. 9), Prof. William Miles states that “currency boards would lead to more of the banking crises, debt defaults and high inflation” that policy makers try to minimize. Solid evidence flies in the face of his assertions.

The first currency board was established in Mauritius in 1849. At their peak, there were over 70 currency boards. Since 1849, there have been 711 banking crises scattered throughout the world. Only 16 occurred in countries with currency boards. Of the more than 500 sovereign-debt defaults since 1849, only five occurred in currency-board countries.

What about inflation? It’s always been much higher in countries with central banks than in those with currency boards. In a study of 98 countries from 1950-93, I found that inflation was almost five times higher in countries with central banks than in those with currency boards. If that’s not enough, there have been 61 episodes of hyperinflation in the world since 1849. All were produced by central banks, not currency boards.

Mr. Miles also claims that since the 1980s and 1990s, most emerging market countries have adopted floating exchange-rate regimes, and “have achieved low inflation with floating currencies.” According to the IMF, the number of emerging-market countries that have freely floating exchange rates has plunged by 50% since 1997. And the current average annual inflation for the remaining floaters is 13%, well above their inflation targets.

Prof. Steve H. Hanke

Johns Hopkins University"