photo credits to japaninc.com

A currency board is a body that can be connected to the world of Foreign Exchange. In a country, a currency board has monetary authority to issue coins and notes.

It should be noted that there is a difference between a Central Bank and a Currency Board. Unlike a Central Bank, the Currency Board is not capable of lending money to those organizations that might need it. The body however, aside from working alone, can function alongside a Central Bank.

Although the Currency Board is not a popular monetary authority, it has been in existence the same length of time as the Central Bank. In theory, a Currency Board issues coins and local notes for circulation that are “attached” to a commodity or a foreign currency. This is also referred to as a reserve currency. The “anchor” currency is one that is strong and is internationally traded (for instance the U.S. dollar, the British pound or the Euro). The local currency’s stability and value is directly related to the value of the anchor currency.

The currency exchange rate in a currency board is fixed, unlike a Central Bank. With the currency board, the country’s policy on currency is not swayed by the decisions of the monetary authority. Basically, the Currency Board will only issue coins and notes, as well as offer the service of changing local currency into an anchor currency at an exchange rate that is fixed. It will not try to manipulate exchange rates by assigning a discounted rate. The currency board is also not obligated to lend money to the government or banks.