The Evolution of the Hong Kong Currency Board during Global Exchange Rate Instability: evidence from the Exchange Fund Advisory Committee 1967-1973

During the 1990s there was considerable enthusiasm for currency boards, particularly for small open economies, until the collapse of the Argentine system in 2001-2 and the subsequent decline of the USD. Since then, currency boards have been used mainly by colonies and by Eastern European countries seeking to dispel the shadow of chaotic monetary episodes by operating currency boards pegged to the Euro. Hong Kong SAR is now by far the largest economy to operate a currency board and no longer conforms either to the colonial rationale, nor to the regime change rationale for a currency board. This system has recently become more controversial because of the intensified economic integration with the mainland, the decline of the USD on world markets and the appreciation of the RMB against the HKD since it adopted a flexible basket peg in July 2005. Several authors who have noted the relatively poor performance of Hong Kong relative to Singapore have recommended a monitored band system similar to Singapore, although this advice came before the RMB regime was changed. In this context, it is timely to reconsider why Hong Kong abandoned the currency board under similar circumstances when their anchor currency was depreciating on world markets, the RMB was appreciating against the HKD and the international monetary system appeared on the brink of disarray.

Disentangling from Sterling: Malaysia and the end of the Bretton Woods system 1965-72

A decade after independence, the Malaysian government and central bank were faced with a series of challenges that forced them to develop an independent policy, leading to the end of the historic role of sterling in their international monetary regime. Like some economies today that are faced with accumulated reserves largely comprised of a depreciating currency (now the US$), Malaysia had to disentangle itself from sterling at a time when there were no clear alternatives since gold was scarce, the US$ was weak and Germany, Switzerland and Japan resisted the use of their currencies as national reserves. This paper uses new archival evidence to show that external obstacles as well as some misjudgement meant that this was only achieved in June 1972, 15 years after Merdeka. This process also reveals new evidence about the post-colonial relations between Malaysia and Britain and sheds new light on the neo-colonial interpretation of the first decade of independence.

The evolution of the Hong Kong currency board during global exchange rate instability, 1967-1973

Hong Kong SAR is well known as one of the few economies to operate a form of currency board as the basis of its monetary system. This system arose out of colonial status and has been retained except for a period of floating from 1975-83 to the present day, with some amendments. This article explores the evolution of the Exchange Fund during a period of global exchange rate instability showing that the abandonment of the monetary anchor in 1975 was part of a series of innovations to the use of the Fund as the colonial government sought to manage the exchange rate risks posed by the collapse of the Bretton Woods system

Reforming the International Monetary System in the 1970s and 2000s: Would an SDR Substitution Account Have Worked

This paper analyzes the discussion of a substitution account in the 1970s and how the account might have performed had it been agreed in 1980. The substitution account would have allowed central banks to diversify away from the dollar into the IMF’s Special Drawing Right (SDR), comprised of US dollar, Deutschmark, French franc (later euro), Japanese yen and British pound, through transactions conducted off the market. The account’s dollar assets could fall short of the value of its SDR liabilities, and hedging would have defeated the purpose of preventing dollar sales. In the event, negotiators were unable to agree on how to distribute the open-ended cost of covering any shortfall if the dollar’s depreciation were to exceed the value of any cumulative interest rate premium on the dollar. As it turned out, the substitution account would have encountered solvency problems had the US dollar return been based on US treasury bill yields, even if a substantial fraction of the IMF’s gold had been devoted to meet the shortfall at recent high prices for gold. However, had the US dollar return been based on US treasury bond yields, the substitution account would have been solvent even without any gold backing

Reforming the International Monetary System in the 1970s and 2000s: Would an SDR Substitution Account Have Worked

This paper analyzes the discussion of a substitution account in the 1970s and how the account might have performed had it been agreed in 1980. The substitution account would have allowed central banks to diversify away from the dollar into the IMF’s Special Drawing Right (SDR), comprised of US dollar, Deutschmark, French franc (later euro), Japanese yen and British pound, through transactions conducted off the market. The account’s dollar assets could fall short of the value of its SDR liabilities, and hedging would have defeated the purpose of preventing dollar sales. In the event, negotiators were unable to agree on how to distribute the open-ended cost of covering any shortfall if the dollar’s depreciation were to exceed the value of any cumulative interest rate premium on the dollar. As it turned out, the substitution account would have encountered solvency problems had the US dollar return been based on US treasury bill yields, even if a substantial fraction of the IMF’s gold had been devoted to meet the shortfall at recent high prices for gold. However, had the US dollar return been based on US treasury bond yields, the substitution account would have been solvent even without any gold backing

Reforming the international monetary system in the 1970s and 2000s: would an SDR substitution account have worked?

Advocates of a more pluralistic international monetary and financial system seek to reduce reliance on a single national currency and to bring international liquidity under collective control. One recently revived proposal would transform US dollar official reserves into claims denominated in the IMF's key currency basket, Special Drawing Rights (SDRs). Drawing on new archival evidence and simulations, this article highlights issues that derailed earlier agreement on such an account and shortcomings of design and ambition revealed by subsequent developments. One design issue was account losses if US dollar yields failed to exceed SDR yields enough to offset dollar depreciation. In fact, uncovered interest parity did not hold and could well have left the account persistently insolvent. Another shortcoming was ambition: the proposed account proved simply too small to achieve the desired lowering of the dollar's share of foreign exchange reserves. Any new proposal needs to address these shortcomings

'Trust is good, control is better': the 1974 Herstatt-Bank crisis and its implications for international regulatory reform

With its international supervisory and regulatory implications, the failure of Bankhaus Herstatt is one of the landmarks of post-war financial history. This article offers the first comprehensive historical account of the Herstatt crisis, and contributes to the wider discussions on international supervisory and regulatory reform since the mid-1970s, including regulatory capture, markets' self-regulation and resolution of failed banks. In doing so, it first argues that contrary to a widely held view, the German authorities received early and repeated warnings about Herstatt's dealings but this involved only limited and ineffective regulatory/supervisory responses, then it turns to the actual collapse of the bank in June 1974, and finally explores the wider regulatory issues raised by the Herstatt case