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The origin of the East African currency


Date Posted: 4/16/2012 1:06:57 AM

Posted By: sashoo  Membership Level: Silver  Total Points: 382

The origin of East African currency comes from the Indian connection. Owing to the influence of the Indian businessmen and their settlement in East Africa, the currency mostly in use in the region was the Rupee. In Kenya, currency commissioners also issued small quantities of local coins. In Tanganyika, the German colony was issuing German silver rupees until the end of World War I. This led to the establishment of the Currency Board System 1919. The board was charged with the responsibility of issuing lawful money to the East African Territories. The first currency that was issued was the East African Florin in 1920, which was later replaced by the East African Shilling in 1922.

A board was appointed by the secretary of the state and had its headquarters in London. Its membership comprised of British residents but were represented in the territories they served by agents. The headquarters moved from London to Nairobi in 1960. In 1960s, the East African Board was established, and it operated in a simple way. The board had the following functions:

• It supplied the local currency to the East African territories, in exchange for sterling pounds.

• It redeemed the local currency, in sterling pounds on demand.

• It held the reserves in sterling pounds.

The principle on which the system operated meant that additional currency could only be put in circulation in exchange of equivalent accumulation of the sterling pound. There was one-on-one correspondence between changes in the currency supply and changes in the sterling pound reserves of the currency board.

It would be incomplete if we did not discuss the drawbacks of the Currency Board System. Hence, the Currency Board System suffered from the following drawbacks:

1. It prohibited any kind of monetary policy by the authorities in the East African territories. This was because

the automatic exchange of currency was utterly passive, leaving the monetary situations to be determined by balance of payment, the propensity of the public to hold cash and lending policies of commercial banks.

2. The board system did not make any allowance for the expansion of credit. The banking system was fully loaned up since it operated on 100% reserves. There was no way in which the monetary authorities could expand the cash base in order to create additional credit.

3. The currency board system held high proportion of the reserves in the East African territories in London as external cover for domestic currency in circulation. Poor countries in the East African territories could not afford idle foreign currency reserves in such a fashion. However, the situation was improved somewhat in 1956, when the principle of the fiduciary issue was introduced.

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