Some Reflections on Monetary Institutions and Exchange‐​Rate Regimes


Chairman Allan Meltzer requested that I present an overview ofmy thoughts on exchange‐​rate regimes. I will do this as briefly aspossible, with an emphasis on emerging market countries and what Iconsider to be some of the more important points that merit yourconsideration. For more details, allow me to refer you to the twopapers Professor Meltzer has distributed to the Advisory Commission(S.H. Hanke, “Some Reflections on Currency Boards,” in: M.I. Blejerand M. Skreb. Central Banking, Monetary Policies, and theImplications for Transition Economies, Boston: Kluwer AcademicPublishers, 1999 and S.H. Hanke, “Dollarization for Argentina,“Journal of Applied Corporate Finance, Vol.12, No.1, Spring1999). In addition, my testimony contains other references thatmight be of interest and use.

The World’s Changing CurrencyLandscape

To put my reflections into perspective, it is instructive toconsider recent changes in the world’s currency landscape. Itsmorphology has been in a state of flux during the decade of the1990s. The continued liberalization of international capital flowsmixed with pegged exchange rates has proven to be a deadlycocktail. Indeed, volatile hot money flows have battered peggedexchange rate regimes, causing volcanic‐​like eruptions in theEuropean Exchange Rate Mechanism (1992 and 1993), the CFA franc(1994), the Turkish lira (1994), the Mexican peso (1994−95), theThai baht and the other Asian currencies (1997−98), the Russianruble (1998) and the Brazilian real (1999).

Balkanization has also been a prominent force in the 1990s. Withthe collapse of the Soviet Union, a large unified currency area wasdismembered. In consequence, 15 national currencies officiallycirculate where the ruble once ruled the roost. Much of the sameoccurred after Yugoslavia broke apart. Now six currencies circulateas legal tender in a region where one currency used to do thejob.

The last time currency balkanization occurred on such a groundscale in Europe was during the monetary chaos that followed WorldWar I. In 1914, Europe had ten currencies, all with fixed goldparities and fixed exchange rates. By 1920, Europe had twenty‐​sevenpaper currencies, none with a gold parity or a fixed exchangerate.

Even more dramatic than the trend toward balkanization has beenthat of unification. Argentina, Estonia, Lithuania, Bulgaria andBosnia have unified their domestic currencies with stronger anchorcurrencies by establishing currency board systems (CBSs), or what Irefer to as currency board‐​like systems. And in 1998, Indonesia andRussia flirted with CBS proposals.

These two CBS episodes merit attention for the light they shedon the international politics of currency reform and the roleplayed by the U.S. Department of the Treasury and the IMF. TheClinton administration was determined to mortally wound or topplePresident Suharto, and it was betting on monetary chaos to do thejob. When President Suharto embraced the CBS idea in February 1998,the U.S. Treasury and its stalking horse, the IMF, panicked becausethey thought the CBS would stabilize the rupiah and elevate Suhartoto the status of a Javanese god. This explains why the U.S.Treasury and the IMF mounted a swift and massive counterattack.Although the counterattack never reached the level of analysis –it began and ended with ad hominem attacks on me in the popularpress (I was operating as Suharto’s chief economic advisor at thetime.) — it was effective.

At Suharto’s side during most of the CBS episode, I was wellaware of the Clinton administration’s end‐​game. (S.H. Hanke, “How ISpent My Spring Vacation,” The International Economy,July/​August 1998). And since then, many leaders in Asia andelsewhere have come to realize why there was such an uproar over aCBS for Indonesia. Indeed, Mr. Paul Keating, the former AustralianPrime Minister, recently stated that “the United States Treasuryquite deliberately used the economic collapse as a means ofbringing about the ouster of President Suharto” because that was akey policy aim of the Clinton administration (AFP, November 11,1999). And surprisingly, this judgement was confirmed by none otherthan Mr. Michel Camdessus, the former managing director of the IMF,when he stated that “we created the conditions that obligedPresident Suharto to leave his job” (David E. Sanger, “Longtime IMFDirector Resigns In Midterm,” New York Times, November 10,1999).

The Russian story was quite different from Indonesia’s. InAugust 1998, the Clinton administration was desperately trying toprop up the ruble and President Yeltsin. That’s why a CBS forRussia was viewed in a favorable light by the U.S. Treasury and theIMF. They knew that a CBS had provided a quick and sustainable fixfor the hyperinflating Bulgarian lev in July 1997. Incidentally, asPresident Petar Stoyanov’s economic advisor, I can attest to thefact that Bulgaria’s CBS was virtually mandated by the Clintonadministration and the IMF because they wanted to ensure thesuccess of the newly elected Kostov government.

On January 1, 1999, eleven European countries embarked on thegreatest monetary experiment of the century. That’s when theyunified their national currencies and replaced them with a newcurrency, the euro. This currency unification was accomplished byestablishing a monetary union. The European Monetary Union has beenfollowed by calls to establish other monetary unions, most notablyin the Mercosur and Asian regions.

If all these changes in the world’scurrency landscape weren’t dramatic enough, in January 1999,President Carlos Menem suggested that Argentina make its monetaryunification with U.S. complete by dumping its CBS and replacing thepeso with the U.S. dollar. Although President Menem had threatenedto dollarize Argentina in 1996, only the speculators took note.That was not the case in 1999, when President Menem’s proposal setoff a worldwide debate about dollarization. Indeed, even the U.S.Congress has held hearings on dollarization and the House andSenate Banking Committees are reviewing dollarization legislation(H.R. 3493 and S.1879). And to top it off, late in 1999, threelocales — Kosovo, East Timor and Montenegro — granted foreigncurrencies legal tender status. As we enter the new millenium, the“dollarization” option remains a front‐​burner issue in LatinAmerica, Eastern Europe, the Balkans and parts of South EastAsia.

Exchange Rate Regimes

There are three types of exchange‐​rate regimes: floating, fixedand pegged rates. Each type has different characteristics andgenerates different results. Although floating and fixed ratesappear to be dissimilar, they are members of the same family. Witha floating rate, a monetary authority sets a monetary policy, buthas no exchange‐​rate policy – the exchange rate is on autopilot. Inconsequence, the monetary base only contains a domestic componentwhich is determined by a monetary authority. Whereas, with a fixedrate, a monetary authority sets the exchange rate, but has nomonetary policy – monetary policy is on autopilot. In consequence,under a fixed‐​rate regime, the monetary base only contains aforeign component which is determined by the balance of pay​ments​.In other words, when a country’s official net foreign reservesincrease, its monetary base increases and vice versa. With both ofthese exchange‐​rate mechanisms, there cannot be conflicts betweenexchange‐​rate and monetary policies, and consequently, balance ofpayments crises cannot occur. Indeed, under floating and fixed‐​rateregimes, market forces act to automatically rebalance financialflows and avert balance of payments crises.

While both floating and fixed‐​rate regimes are equally desirablein principle, it must be stressed that floating rates, unlike fixedrates, do not perform well in developing countries because thesecountries usually lack a strong rule of law, have weak monetaryauthorities and histories of monetary instability. In consequence,monetary authorities in developing countries have great difficultyin imposing rules that control the growth in the base money. Notsurprisingly, currencies in developing countries rarely float on asea of tranquility. Knowledge of this fact would, no doubt, haveprompted IMF Deputy Managing Director Stanley Fischer to temper hisremarks concerning Indonesia’s float of the rupiah. On the day ofthe float, August 14, 1997, Dr. Fischer proclaimed that “Themanagement of the IMF welcomes the timely decision of theIndonesian authorities. The floating of the rupiah, in combinationwith Indonesia’s strong fundamentals, supported by prudent fiscaland monetary policies, will allow its economy to continue itsimpressive economic performance of the last several years.” (IMFNews Brief, No. 97/18, August 14, 1997). Dr. Fischer failed torealize that the Bank of Indonesia had no rules to regulate thegrowth in base money. In consequence, by January 1998, the rupiahcurrency in circulation was growing by over 35% per month and therupiah’s exchange rate was collapsing at a rate unprecedented for acurrency in a country not subject to a war, a fiscal crisis or ahyperinflation.

Fixed and pegged rates appear to be the same. However, they arefundamentally different. Pegged rates, such as those that wereemployed throughout most of Asia and in Russia and Brazil beforethe recent currency crises, require a monetary authority to manageboth the exchange rate and monetary policy. With a pegged rate, themonetary base contains both domestic and foreign components. Unlikefloating and fixed rates, pegged rates invariably result inconflicts between exchange rate and monetary policies. For example,when capital inflows become “excessive” under a pegged system, amonetary authority often attempts to sterilize the ensuing increasein the foreign component of the monetary base by reducing thedomestic component of the monetary base. And when outflows become“excessive,” an authority attempts to offset the decrease in theforeign component of the base with an increase in the domesticcomponent of the monetary base. Balance of payments crises erupt asa monetary authority begins to offset more and more of thereduction in the foreign component of the monetary base withdomestically created base money. When this occurs, it’s only amatter of time before currency speculators spot the contradictionsbetween exchange rate and monetary policies and force adevaluation.

Several points are worth stressing. First, my taxonomy ofexchange‐​rate regimes is totally dependent on the nature of themonetary base in each regime. With a pegged regime — whether it bea managed float, a band, a crawling peg or an adjustable peg — themonetary base can be decomposed into a domestic and foreigncomponent. For example, recall that in 1994, when the Turkishlira’s peg blew apart, the foreign component of the monetary basefell and was more than offset by an explosion in the domesticcomponent. With a floating regime, the monetary base only containsa domestic component and with a fixed regime the base only containsa foreign component. In consequence, with either a floating or afixed regime, the monetary base cannot be decomposed.

The second point concerns the instability of pegged regimes andthe inevitability of their collapse. My analysis of these regimesassumes that there are no effective exchange and capital controls,something that I deem to be highly desirable. Under theseconditions, pegged regimes give rise to volatile hot money flowsand currency crises. To avoid currency crises with open exchangeand capital flows, pegged rates must be abandoned. Alternatively,if pegged rates are employed, they must be coupled with exchangeand capital controls, if crises are to be avoided.

China has chosen to protect its pegged regime by using thislatter option. And although I don’t approve of this strategy, Ihave predicted that it will work to protect the renminbi from adevaluation (S.H. Hanke, “The Renminbi Revisited,” Friedberg’sCommodity and Currency Comments, Vol.20., No.4, August 2,1999).

China made several policy changes in June 1999 that merit ourattention. All these changes are designed to arrest the deflation,boost nominal GDP and hopefully real GDP, and at the same time,protect the renminbi’s peg.

To accomplish these objectives, China embarked on a strategy ofmonetary easing, with an interest rate cut on June 10th.A monetary easing should eventually put downward pressure on therenminbi. A relatively easy monetary policy should also putdownward pressure on the black market for the renminbi, asspeculators chase higher yields in assets denominated in foreigncurrencies and exploit loopholes in China’s exchange controls.

China, in its simultaneous pursuit of an independent monetarypolicy and a pegged renminbi, has anticipated all this.Consequently, it has built a fortress around its foreign exchangecontrol regime by closing the remaining loopholes in the system. OnJune 3rd, it ordered foreign banks with renminbiaccounts at Chinese banks to close those accounts by June10th. It also said that offshore renminbi could nolonger be converted into foreign currencies or remitted to China.This means that the 2% of Chinese international trade (imports plusexports) that was conducted in renminbi will no longer be permittedto be conducted in the Chinese currency. It also means that therenminbi held offshore, which were fully convertible at overseasbranches of Chinese banks, will no longer be convertible. And ifthe closing of these loopholes was not enough, the authorities havebegun to crack down on money laundering and illegal capital flight.Starting on August 1st, Chinese citizens wishing to takemore than $10,000 cash out of the country will have to apply for alicense.

It is clear that the authorities plan to play hard ball underthe new exchange — control regime, too. On July 30th,the State Administration of Foreign Exchange announced that itsmassive enforcement campaign was bearing fruit. During June, morethan 260 people engaged in illegal foreign exchange trading werearrested, more than fifty trading sites were smashed and largeamounts of foreign currency were confiscated. Not surprisingly, theblack market RMB/$ rate has tightened.

While the western press has focused on the implications ofChina’s abandonment of its “no devaluation pledge,” the 1,100officially registered Chinese newspapers and over 8,000 magazineshave been deafeningly silent about a devaluation. This does notsurprise me. The real story is that China has begun to pursue anindependent, easy monetary policy, and that it is coupled with abeefed up fortress around China’s exchange control regime, onedesigned to protect the renminbi’s peg at all cost. In consequence,the devaluation of the renminbi is not imminent and does not pose athreat to other Asian currencies.

Third, after spending the last decade writing and speaking aboutthe exchange‐​rate regime taxonomy presented above, Washington hasfinally embraced it (S.H. Hanke, “Two Cheers for Rubin andSummers,” Central Banking, Vol X, No.2, 1999 – 2000). Bothformer Treasury Secretary Rubin and current Secretary Summers haveconcluded that floating and fixing are “in” and pegging is “out.“Rubin’s remarks were made at The Johns Hopkins University on April21, 1999 and Summers’ were made in an address at Yale University onSeptember 22, 1999 (see the U.S. Treasury’s website www​.ustreas​.gov).

Fourth, why not three cheers for Messrs. Rubin and Summers?Because both failed to address the issue of how one should choosebetween floating and fixing in developing countries. The only wayto choose is to adopt Professor Ronald Coase’s methods and conducta detailed investigation of the actual results of handling theproblem with the two options that are equally desirable inprinciple. When the Coasian method is used, floating quickly dropsout of the picture. There have not been floating regimes that havebeen sustained in any developing countries. Indeed, when started,floating regimes in these countries degenerate into some type ofpegged regime because the monetary authorities cannot sustain amoney supply rule that produces low inflation and rapid economicgrowth. In consequence, pegged and fixed‐​rate regimes are the onlytypes we find in developing countries. The fixed‐​rate systemsproduce lower inflation rates, higher growth rates, and lowerfiscal deficits as a percent of GDP than do pegged regimes.

Some Misinformed Criticisms of CBSs andDollarization

In order to maintain their position as the final arbitratorsover whether a country can adopt a fixed exchange‐​rate regime, thepowers that reside in Washington hold to the notion that certainpreconditions must be satisfied before either CBSs ordollarization can be adopted. The Washington dogma, as stated bythe Council of Economic Advisers is: “a currency board is unlikelyto be successful without the solid fundamentals of adequatereserves, fiscal discipline and a strong and well‐​managed financialsystem, in addition to the rule of law” (The Annual Report ofthe Council of Economic Advisers. Washington: USGPO 1999,p.289).

This statement is literally fantastic. Indeed, as I have saidbefore, “what nonsense.” As a former Senior Economist at the CEA, Iam shocked that such an absurd and unsupportable statement couldhave passed muster at the CEA, an institution that traditionallyhas had very high “fact‐​checking” standards. The CEA’s statement onpreconditions demonstrates how far off base professional economistscan get when they fail to carefully study the history, workings andresults of alternative institutional arrangements.

At best, few of the so‐​called preconditions have been met by anycountries that have introduced CBSs or dollarized in the 1990s.Indeed, I would go so far as to state that none of thepreconditions have been met in the countries that have mostrecently adopted CBSs or a foreign currency — Bulgaria, Bosnia,Kosovo, East Timor and Montenegro. All were basket cases. And asthe table shows , Bulgaria’s currency board has been a roaringsuccess, and the one in Bosnia, which was mandated by the DaytonAccords, represents perhaps the only achievement of the thatinternational treaty. The story is much the same for all other CBSsthat have been introduced in the 1990s (S.H. Hanke, “MonetaryStability for Economies in Transition,” Zagreb Journal ofEconomics, Vol.3, No.3, 1999).

Bulgaria — Before and After Setting Up aCurrency Board in 1997
Annual Inflation
Gross Domestic Product
Public Debt as a Percentage of GDP
Interest Rates (central bank base rates,annualized)
Foreign Reserves
$792.8 million
$3.05 billion
Source: Steve H. Hanke. “Montenegro, The Next Balkan Hot Spot,“Forbes Global, September 6, 1999.

In the historical context, it is important to mention that theso‐​called preconditions argument has never held water. Indeed,since the first currency board was installed in 1849, no currencyboard has ever failed to produce a stable, fully convertiblecurrency. And that includes cases in which none of the so‐​calledpreconditions were met, a notable example being the North Russiancurrency board that was designed by none other than John MaynardKeynes in 1918 (S.H. Hanke and K. Schuler, “Keynes’s RussianCurrency Board,” in: S.H. Hanke and A.A. Walters. CapitalMarkets and Development, San Francisco: ICS Press, 1991). Italso includes cases in which all the preconditions were met,notably the with reintroduction of Hong Kong’s currency board in1983.

Also unsupported by the application of a Coasian methodology areclaims that CBSs or dollarization will fail to produce deservedresults because they don’t protect countries from externalshocks; they don’t have adequate lender of lastresort facilities; and they are not part of optimalcurrency areas; and they cannot be established becausecountries don’t have adequate foreign reserves. (see Culp,Hanke and Miller below).


My experience in Indonesia was quite interesting. Indeed, a realeducation in the politics of currency reform. Christopher Culp,Merton Miller and I addressed many of the technical aspects of myIndonesian experience and I won’t dwell on them here (C.L. Culp,S.H. Hanke and M.H. Miller, “The Case for an Indonesian CurrencyBoard,” Journal of Applied Corporate Finance, Vol.11,No.4, Winter 1999).

What is interesting is that no official from any government orthe IMF, no professional economist and no journalist ever inquiredas to what was contained in my CBS and related proposals whichPresident Suharto called “the IMF‐​plus program.” It is no wonderthat we cannot find any analysis of the technical questions raisedby the CBS proposal and we can find no mention of the CBS episodein the IMF’s account of the Indonesian crisis. The IMF’s exercisesin revisionist history are truly remarkable. This has astonishedme, particularly given all the ink that was spilled on that sorryepisode in early 1998. It all reminds me of a quote from theWallet of Kai Lung: “It is the mark of insincerity ofpurpose to spend one’s time looking for the Sacred Emperor in thelow‐​class tea‐​shops” (quoted in: R.H. Coase, “Coase on Posner onCoase,” Journal of Institutional and TheoreticalEconomics, Vol.149, No.1, March 1993).

And to add insult to injury, I read in the Wall StreetJournal of today (January 3, 2000) that the Bank of Indonesiais bankrupt. Indeed, it requires a huge infusion of foreignreserves to remain solvent and avoid hyperinflating the rupiah.Would a “dangerous” CBS really have produced this mess?


When Carlos Menem was first elected President of Argentina in1989, the economy was in shambles. Since then, his governments havedelivered an impressive set of economic reforms. The linchpin forArgentina’s economic reforms has been its currency board‐​likesystem which was instituted on April 1, 1991. Argentines call thissystem, and the wider economic reforms it has spurred,“convertibility,” an uncommon term for an unusual system.

An orthodox CBS is a monetary institution that issues notes andcoins. These notes and coins are backed with a minimum of 100percent (up to a maximum of 110 percent) of foreign reservecurrency, and they are fully convertible into the reserve currencyat a fixed exchange rate on demand. In addition, an orthodox CBScannot act as a lender of last resort, does not regulate reserverequirements for commercial banks, only earns seigniorage frominterest on reserves and does not engage in forward‐​exchangetransactions.

Argentina’s convertibility system engages in limited lender oflast resort activities; it regulates reserve requirements forcommercial banks; it can hold up to one‐​third of thedollar‐​denominated reserves it keeps to back its monetaryliabilities in the form of bonds issued by the government ofArgentina; and the Convertibility Law only requires that thecentral bank’s monetary liabilities be covered by a minimum of 100%in dollar‐​denominated assets. Accordingly, when the central bank’sassets exceed its monetary liabilities, the one‐​to‐​one link betweenforeign reserves and the monetary base is broken, indicatingdiscretionary sterilization.

These deviations from currency‐​board orthodoxy result in lessthan a perfect unification of the peso and the U.S. dollar. Eventhough the peso‐​dollar exchange rate has remained absolutely fixedat 1‑to‑1, there has often been speculation that the peso will bedevalued. Interest rates in pesos have accordingly beenpersistently higher than interest rates in U.S. dollars withinArgentina. Incidentally, all the CBSs of the 1990s, as well as HongKong’s, also deviate from orthodoxy in important ways. That is whyI refer to them as CBS‐​like systems. Although these systems looklike CBSs, a careful examination reveals that they have manyfeatures that are associated with central banks, not orthodoxCBSs.

To make their monetary unifications more effective, countriesshould either reform these CBS‐​like systems or they should“dollarize.”


As President Djukanovic’s economic advisor, I recommended thatMontenegro adopt the German mark as legal tender. They did so onNovember 2, 1999. I have also recommended that Montenegro installan orthodox CBS because such a system would generate much neededrevenue for the government which is operating with a fiscal deficitof about 20% of GDP (Z. Bogetic and S.H. Hanke, The MontenegrinMarka, Podgorica, Montenegro: Antena M Mermont, 1999).

The regime that I have recommended for Montenegro approximatesProfessor F.A. Hayek’s notion of a competitive currency regime(F.A. Hayek, Denationalization of Money — The Argument Refined:An Analysis of the Theory and Practice of ConcurrentCurrencies, 2nd ed., Hobart Special Paper 70,London: Institute of Economic Affairs, 1978). Under my proposedsetup, Montenegro would produce its own currency, the marka, via aSwiss‐​based orthodox CBS and use it as a unit of account forkeeping the government’s accounts. And in addition, all othercurrencies would be legal for private parties to make transactions,contracts and for purposes of keeping their accounts.

The following law — and everything of importance is alwayscontained in the CBS laws, something professional economists rarelydirty their hands with — contains the elements of a MontenegrinCBS and the competitive currency regime I have recommended forMontenegro. It is important to stress that I have opposed allinitiatives to issue a Montenegrin marka via a Montenegrin‐​basedCBS or central bank.

1. The Montenegrin Currency Board is herebycreated. The purpose of the Board is to issue notes and coins inMontenegrin markas, and to maintain them fully convertible at afixed exchange rate into a reserve currency as specified inparagraph 6.

2. The Board shall have its legal seat inSwitzerland and shall be subject to the laws of Switzerland.

3. a) The Board shall be governed by fivedirectors. Three directors shall be citizens of the Group of Sevencountries appointed by the Bank for International Settlements (BIS)in Basel. Two directors shall be appointed by the Government ofMontenegro, with one being a citizen of the Group of Sevencountries and one being a citizen of Montenegro. The directors fromthe Group of Seven countries shall not be employees of governmentsor multi‐​governmental organizations. b) A quorum shall consist ofthree of the Board’s directors, including at least one of thedirectors chosen by the Government of Montenegro. Decisions shallbe by majority vote, except as specified in paragraph 15. c) Thefirst two directors appointed by the Government of Montenegro shallserve terms of one and four years. The first three directorsappointed by the BIS shall serve terms of two, three, and fiveyears. Subsequent directors shall serve terms of five years.Directors may be reappointed once. Should a director resign or die,the BIS shall choose a successor to complete the remainder of theterm if the former director was appointed by the BIS, or theGovernment of Montenegro shall choose the successor if the formerdirector was appointed by the Government of Montenegro.

4. The board of directors shall have the powerto hire and fire the Board’s staff, and to determine salaries forthe staff. The by‐​laws of the Board shall determine salaries forthe directors.

5. The Board shall issue notes and coinsdenominated in Montenegrin markas. The notes and coins shall befully convertible into deutschemarks (euros after July 2002). Thenotes shall be printed outside Montenegro. The Board may acceptdeposits of deutschemarks (euros after July 2002).

6. a) Initially, the reserve currency shall bethe deutschemark, and the fixed exchange rate shall be oneMontenegrin marka equal to one deutschemark. b) Failure to maintainthe fixed exchange rate with the reserve currency shall make theBoard and its directors subject to legal action for breach ofcontract according to the laws of Switzerland. This provision doesnot apply to embezzled, mutilated, or counterfeited notes, coins,and deposits, or to changes of the reserve currency in accord withparagraph 13.

7. The Board shall charge no commission forexchanging Montenegrin markas for the reserve currency, or thereverse.

8. The Board shall begin business with foreignreserves equal to at least 100 per cent of its notes and coins incirculation and deposits with it. It shall hold its foreignreserves in securities or other forms payable only in deutschemarksor euros. These reserves shall be held on deposit at the BIS. TheBoard shall not hold securities issued by the national or localgovernments of Montenegro, or by enterprises owned by thosegovernments.

9. The Board shall pay all net seignorage(profits) into a reserve fund until its unborrowed reserves equal110 per cent of its notes and coins in circulation and deposits. Itshall remit to the Government of Montenegro all net seignoragebeyond that necessary to maintain 110 per cent reserves. Thedistribution of net seignorage shall occur annually.

10. The head office of the Board shall be inPodgorica. The Board may establish branches or appoint agents inother cities of Montenegro. The Board shall also maintain a branchin Switzerland.

11. The Board shall publish a financialstatement, attested to by the directors, monthly or more often. Thestatement shall appraise the Board’s holdings of securities attheir market value. An annual audit of the Board shall be made byan international audit firm and shall be published by theBoard.

12. The Board may issue notes and coins in suchdenominations as it judges to be appropriate.

13. Should the annual change in the weightedaverage of the consumer price index for the member countries of theEuropean Monetary Union fall outside the range — 5 per cent to 20per cent for more than two years, or — 10 per cent to 40 per centfor more than six months, the Board must, within sixty days,either: a) devalue (if the change in the index is negative) orrevalue (if the change in the index is positive) the Montenegrinmarka in terms of the reserve currency by no more than the changein the index during the period just specified, or b) choose a newreserve currency and fix the exchange rate of the Montenegrin markato the new currency at the rate then prevailing between the newreserve currency and the former reserve currency.

14. If the Board chooses a new reserve currencyin accord with paragraph 13, it must convert all its foreignreserves into assets payable in the new reserve currency within oneyear.

15. The Board may not be dissolved nor may itsassets be transferred to a successor organization unless all of thefollowing conditions are satisfied: 75 percent of the members ofthe Parliament of Montenegro approve, the President of the Republicof Montenegro approves and all of the directors of the Boardapprove.

16. The Board may accept loans or grants ofreserves from multi‐​governmental organizations or foreigngovernments. During the life of the Board, the cumulative value ofthese loans and grants shall not exceed 130 million deutschemarksvalued in 1999 deutschemarks.

17. Exchanges of currency by the Board shall beexempt from taxation by the Montenegrin governments.

18. Both Montenegrin markas and deutschemarks(euros after July 2002) shall be legal tender for paying taxes andsettling debts in Montenegro, and these legal‐​tender currenciesshall be the only currencies used for final settlements in thepayments system of Montenegro. However, Montenegrin markas anddeutschemarks (euros after July 2002) shall not be forced tenderfor contracts between private parties. Private parties shall befree to contract among each other in any currencies they wish tospecify.

19. The Montenegrin Currency Board Law shalltake effect upon its passage by the Parliament of Montenegro.(Note: The Parliament of Montenegro must amend the laws governingthe banking system, the payments system and contracts, so that theyare in accord with the Montenegrin Currency Board Law).

Steve H. Hanke

International Financial Institutions Advisory Commission
United States Congress