Commentary

Letter to the Editor: Central Banking Has Troubled Past

Allow me to take issue with the opinion piece by Peter Draper and Andreas Freytag (“No Easy Choices” Available for Zimbabwe Currency Reform, March 2). The authors favour the retention of central banking in Zimbabwe and reject both the “dollarisation” and currency board options I proposed in my 2008 book Zimbabwe: Hyperinflation to Growth, which was published in Harare.

During its history, Zimbabwe has had several types of monetary systems. Central banking is the only system that worked badly. The long-term record of central banking in most of Africa is also poor-though not as wretched as Zimbabwe’s. To retain central banking is to perpetuate a system that has destroyed the livelihoods of millions of Zimbabweans. In contrast, the longterm records of currency boards and dollarisation are good.

Historical experience shows that currency boards and dollarisation are both easy to implement. Governments have adopted them in the midst of war, economic crises and political turmoil. They have proven to be durable. Small initial stocks of foreign currency have never created a problem because, by promoting economic stability, currency boards and dollarisation have enabled the stocks to grow quickly.

The authors’ theoretical arguments against currency boards and dollarisation are oft-repeated. Indeed, they always seem to arise whenever these monetary regimes are debated. But, in fact, they have never posed serious obstacles to establishing currency boards or dollarisation in practice.

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute.