The Hong Kong dollar was floating rapidly downwards, indeed plunging, in the foreign exchange market at that time, and the local authorities were desperate to find a solution to save it. New bottle, old wine . Pure currency board . In its pure form, a currency board can only issue domestic notes when it has an equivalent amount of a designated foreign currency as international reserves at a fixed exchange rate. Exchange rate stability is underpinned by such discipline.
Currency boards have a long history.
The first one was established in Mauritius in 1849. Eventually, as many as 70 economies adopted similar arrangements and the system reached its heyday in the 1940s. In the post-war era, they were out of fashion as newly independent territories sought monetary autonomy by setting up their own central banks, and then floating exchange regimes replaced the Bretton Woods system. Currency board economics seems to be enjoying a revival. Hong Kong resurrected it in 1983.