A currency board arrangement presupposes adoption of a strong foreign currency to which the domestic currency is tied in a fixed exchange rate mechanism. The quantum of the two currencies is predetermined and the central bank operating the system agrees to the discipline of not increasing the quantum of domestic currency in circulation without a proportionate increase in the quantum of foreign currency in its possession.

This is similar to gold standard that was in vogue long ago. Gold standard prevented central banks from printing domestic currency mindlessly without restraint. Currency board imposes a similar discipline but has the effect of tying the fortunes of the nation to the currency adopted for the purpose. Hankering after gold at least could prove a productive investment in the long run. One cannot be as sure with a currency though, howsoever powerful the currency might be for the time being.

S. MURLIDHARAN

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