Definition of a Currency Board

Currency board is the term used to describe the financial powers that make certain decisions that affect the value of the national currency. The United States does not have a currency board, but it has a Federal Reserve Bank (or Central Bank) which works differently. Currency boards issue the local legal tender, which is anchored by a stable international currency, such as the British pound, Euro, or U.S. dollar. This system creates a fixed exchange rate and the board must maintain a significant amount of foreign reserves. These reserves are used to stabilize the money supply in the event of inflation, or deflation, and to maintain the set exchange rate.

Unlike with the Federal Reserve in the U.S., countries with this system have rates of exchange that are not determined by supply and demand. The board does not make decisions that directly affect monetary policy. Funds are raised through taxes or borrowing and there is no option of altering interest rates.