Currency Board or Central Bank? Lessons from the Irish Pound's Link with Sterling, 1928-79

There has been a resurgence of interest in currency boards as a possible approach to achieving a stable currency in newly established or hyperinflationary financial systems. This paper draws attention to one of the more successful currency board experiences, namely that of Ireland. We review the institutional arrangements which underpinned the Irish pound for a half-century and consider the benefits and costs which resulted. While the regime did have a credibility which led to low interest rates and a degree of price stability, its resilience was partly due to the large additional foreign reserves held by the private banking system and partly to the weakness of sterling, to which the Irish pound was pegged. As a result, the inflexibility of the system was not severely tested. An attempt in 1955 to evade the interest rate discipline of the regime was quickly punished, however, with far reaching policy consequences.