Today's Opinions, Tomorrow's Reality 

Revoking the Irrevocable

By David G. Young

Guyaquil, Ecuador, December 4, 2011 --  

History has shown that adopting a common currency like the Dollar or Euro is not irreversible.

Nearly 500 years of minted coins and paper bills are displayed in the money museum of Ecuador's National Bank in Cuenca. Exhibits describe how Spanish colonial coins gave way to the Ecuadorian Sucre in the 19th century. They then describe how Ecuador's 1970s oil boom led to foolhardy borrowing that caused inflation, debt crisis, and a devaluation of the Sucre at the end of the 20th century.

The exhibits abruptly end there, giving no clue as to what happened next. Yet everybody in the museum knew the end of the painful story -- their pockets were filled with the evidence. In 2000, Ecuador abandoned its currency, wiping out much of citizen's savings and sparking a popular revolt that toppled the government, but failed to stop dollarization.

Since then, El Salvador (2001) and Zimbabwe (2009) have both shelved their currencies in favor of the U.S. Dollar, the latter planning to import American coins this year to enable the small transactions of the country's poor.1 These countries joined Panama and a number of minor island nations in using the Dollar as their official currency.

Here in Ecuador, by far the largest external economy using the U.S. Dollar, imported Sacajawea dollar and other US coins and paper bills circulate in abundance alongside Ecuadorian-minted nickels, dimes, quarters and fifty cent pieces. Nationalist sentiment aside, dollarization has apparently worked well for Ecuador in the past decade.

These shifts toward the Dollar run counter to the prevailing trend in Europe, where the Euro zone is under acute threat of rapid disintegration. The Greek and Italian governments are increasingly unable to pay their debts given current economic conditions, and lenders are refusing to give them more money at affordable interest rates. If the Greeks and Italians were not using the Euro, the simple solution would be to devalue the currency, thereby reducing the value of their debt.

But Italy and Greece can't do that. Like dollarized Ecuador, Panama and Zimbabwe the countries in the Euro zone have surrendered monetary policy to an external entity. For years, this has earned them low interest rates and stable prices (precisely because before the Euro nobody trusted Greece, Italy or Ecuador not to devalue their currencies.) Now, saddled with Euro-denominated debts, they must either get a bailout from other Euro nations, implement punishing austerity budgets, or start paying government bills with newly printed national currencies -- in effect, going at least partly off the Euro.

This latter option is looking increasingly likely. This is precisely what a formerly dollarized country, Liberia, did in the 1980s when dictator Samuel Doe could not meet payroll with his supply of US Dollars. He simply minted his own Doe Dollar coins and circulated them along with US Dollars.2 Unsurprisingly, they quickly lost value on the open market, and Liberia rolled along with a two-tiered currency system that it retains to this day.

This is the unspoken option that countries always retain when they claim to be "irrevocably" adopting the Dollar or the Euro. Opponents of dollarization in Ecuador and other countries are likely to get a new lesson in this option if Germany sticks to its guns and refuses to give southern Europeans an easy out from their profligacy.

Of course, such a crude abandonment of a currency will make it hard for a government to hide that it is really just stealing from it employees and creditors. But this is precisely what a government is doing on an even broader basis to all people with savings in its currency during devaluation. And this is precisely why it is generally a good thing when this power to do such evil through monetary policy is taken away.


1. News24, Zim to Import New US Dollar Notes, Coins, October 6, 2011

2. Berkeley, Bill, The Graves Are Not Yet Full, 2001