The apostle of the pure currency-board movement wants to bring Hong Kong back into the fold. Stephen Hanke, professor of applied economics at John Hopkins University in the United States, says the Hong Kong Monetary Authority (HKMA) should be reformed and transformed into an orthodox currency-board system, one that is governed by a strict monetary constitution. Readers will remember Mr Hanke as the man who advised then Indonesia president Suharto to establish a currency board earlier this year, before the International Monetary Fund threatened to quit any rescue efforts for Indonesia if the idea went ahead. Not surprisingly, in an opinion piece published by this newspaper on Monday, Mr Hanke also blamed the IMF for Asia's economic difficulties. His argument is that currency boards are at their best when they are orthodox, operating only by fixing an exchange rate firmly to another currency and issuing notes that are fully backed by reserves in that foreign currency at that exchange rate. Hong Kong's currency board, he says, has never been orthodox and the HKMA into which it was subsumed in 1993, has, through a 'voracious bureaucratic appetite' become a 'hodgepodge' of different activities, which makes it difficult to tell whether it is a pseudo-central bank or a fiscal authority. This, he argues, encourages speculative flows, which will continue unless the monetary functions of the HKMA are 'unbundled' from its other activities. He has a point, but it needs some examination. First, Hong Kong has never been able to establish a Hanke-like currency board. Our banknotes are issued by commercial banks, not by the government, which means the currency board has always had to operate through the banks. This intervening layer has meant the market exchange rate has always deviated a little from the official HK$7.80 peg. The fact that it still is stronger than the official rate (see chart below) can probably be put down to the fact that the HKMA intervenes at a stronger level because letting it go back to $7.80 would encourage rumours of a dissolution of the peg. But of more importance, we no longer live in the 1930s. Our commercial transactions are predominantly carried out through credit card or electronic transfer, not by handing over physical cash. This means a system based on transfers of physical cash has too narrow a base. The problem has confronted all countries that operate currency boards. They have adopted different methods of expanding the reach of their currency boards to deal with it. Hong Kong's has been to control the aggregate clearing balances of the banking system. So Mr Hanke is right when he says that it is not orthodox. But he is wrong to assume that it can be made orthodox except at considerable risk to maintaining the peg. The HKMA intervenes with new tools of monetary control because modern financial arrangements force it to. If these tools are somewhat experimental it is also true there are no others to hand. Hong Kong is in the forefront of wrestling with the development of currency boards. Mr Hanke is on firmer ground in advocating unbundling of the HKMA. It functions as both a monetary authority and a treasury. If it were made clearer that much of its recent activity in financial markets was related to its treasury function, there would not have been so much public apprehension about its intervention in the markets. But moves are afoot to split the HKMA in just this way.