A Reform That’s No Shame: Ten Years with a Currency Board in Your Pocket

If some ten years ago we had talked about things such as “a currency board,” “a pegged litas” or “an anchor currency,” the overall majority of people would have shrugged their shoulders wondering. Today it is not a mistake to say that nearly everyone is aware of this monetary system. But this awareness did not come along just because people had taken special interest in it or because the idea of pegging the national currency – litas – had been actively propagated.
People in Lithuania are familiar with the currency board system because they have tested and experience it with their pockets. Being able to draw a fixed amount of the anchor currency for litas and vice versa at any time they needed and with no impediments, people have made friends with this simple and companionable system. More than that, they have not only tried it themselves but also have shaped a firm opinion about this monetary-policy regime.
If we were to rephrase a well-known expression, it would run like this: eliminate the currency board and you will realize how immensely significant it is for the people and the economy. This is all very true of Lithuania: politicians have encroached on a host of things good to people, but they have not ventured to dismantle this system and don’t dare to do so today. At the moment, virtually no one doubts that this system will be preserved until the launch of the euro in Lithuania. And who can scrap the possibility that the European Central Bank who is contemplating serious change won’t introduce certain elements of the currency board one day either.
On April 1, 2004 the currency board system in Lithuania marked its ten-year anniversary. It was launched by adopting the Law on Litas Credibility which tied the litas to a strong foreign currency at a fixed exchange rate. However, the fixed exchange rate is not the keystone feature of the currency board. The underpinning of this arrangement is a 100 percent reserve backing which ensures that every litas in circulation is freely convertible into foreign currency. At the start the anchor currency was the U.S. dollar, and on February 2, 2002 the litas was re-pegged to the euro. The reserve currency has been replaced but the system has remained in place. It is a system where a central bank’s major task is to maintain foreign reserves, while the remainder of monetary policy is run automatically.
It was precisely this system’s automatism that stirred hostility of its opponents, the partisans of an active monetary policy. These were really many in number – interest groups who sought to exert influence on the exchange rate of the litas and gain from that, politicians or bureaucrats who wanted ease-come litas into the budget, or academicians who believed sacredly that an individual at the helm of money can perform the mission much better than the flawless market would. There is no point in disputing with the former and the existing opponents today. Those who didn’t trust the system have found answers to their questions in the ten-year history. Once foreshadowed, the bugaboos have not emerged. All the actively championed advantages of the currency board turned into reality: inflation was curbed, political discretionary powers were eliminated, the economy gained long-term stability, and money became the people’s, not the government’s, property. Lithuanians do not fear to join the EU’s monetary system as they are actually already a part of it.
But the struggle was intense and fierce in the past. If to look at the history of ten to eleven years, it nevertheless seems incredible that confronting colossal resistance the architects of the currency board managed to install this system. The adoption of the currency board, make no mistake, has been the most steadfast reform ever effected in Lithuania. The Bank of Lithuania, who once stood firmly against its introduction, currently enjoys top ratings according to opinion polls. But it is not the ratings that matter. The pre-eminent thing about this reform is that it is no shame today.
This issue of “The Free Market” is dedicated to mark the ten-year anniversary of the currency board system in Lithuania. It presents the outlook and evaluation of people who took an active part in the launching of this system ten years ago – both arduous prophets and fervent opponents of this idea. Let us take a look at the picture of the reform after ten years…