I found the staff report very informative. An issue was touched on that has always puzzled me. I’ve wondered, and been asked, why countries with foundering currencies don’t just “peg” their currency to the US dollar. Many of the Latin American countries referred to in the column, http://www.straightdope.com/mailbag/mexchangerates.html, could surely have benefited if this was easily done.
Unless I am mistaken, the Bahamas and some other countries do indeed peg their currency to the USD. So it can be done successfully. Is this because they are awash in US tourists and dollars? Relatively prosperous?
I suspect that the answer I’m looking for is that prices and/or purchasing power would not necessarily be magically aligned with US levels after such a nominal switch, but am not sure, and wonder whether there are other dimensions to such a “peg to USD” that I am not yet aware of. Anybody out there able to enlighten me further?
Setting a fixed exchange rate of your currency against another, more stable one, takes something hardly any governments have: good management.
They try, and try, but someone has ordered you to build a new mega-airport dedicated to the President-for-Life so they borrow some money, raise taxes, kill the local economy, and the next thing you know you have to devalue the currency. (I.e., “re-peg” it.)
There’s also problems like the two economies not being intermeshed. So they go thru economic cycles out of sync. That can cause big trouble for the smaller economy.
Note that Ecuador’s official currency is the US dollar now. This is an interesting trend.
Several LA countries have “dollarized”: some by adopting the dollar, period, some by allowing the USD to circulate freely as co-legal tender, even while retaining their own currencies (e.g. Guatemala). Panama, due to a century of a sometimes turbulent “special relationship” with the USA, was the first to adopt the USD for most transactions, relegating the home-grown “Balboa” to a symbolic role.
As the Report mentions, having your curreny inflate is not necessarily in and of itself such a horrible thing, it has to be taken in context.
ftg is right, “good management” goes before “currency pegs” in order of priorities. Heck, good enough management and you may not need a “peg”; rather, the “peg”, if adopted, must be a tool at the service of good economic management, not the other way around. ftg also points correctly to the other problem: with a “hard peg” you lose a tool to stimulate/regulate your own economy – e.g. modifying interest rates – and have to rely on the policies of someone whose economic problems may be totally different from yours.
Take Argentina. After decades of cyclical episodes of hyperinflation, they “pegged” the peso to the USD through the 1990s. This cured hyperinflation, but: the Argentine economic program of the 1990s produced billions in debt accounted for in dollars that an economy dependent on Agri/RawMats export to the US/EU could not create internally, an exhaustion of assets to sell for cash, and unsustainable growth. Meanwhile the US economy was growing well enough that the Fed controlled the USD to avoid “overstimulating” the US economy, meaning by extension not stimulating ANY dollarized economy, and both the US and EU were not particularly interested in buying Arg’s dollar-priced exports.
Part of their problem was that they became trapped by how if they de-pegged in time to regain control of their money supply, they would have ticked off their creditors and potential lenders/investors and thus dried off the sources of credit and capital… that they needed “now” to keep things running.
In the end, when the 2000-2001 recession hit, all the “real money” at hand was tied up as debt obligation, none was coming in from outside, there was no way to generate more internally while keeping the hard-peg, and the Argentine economy just ran out of cash to function with.
Apparently, 16th century Spanish coins showed the Pillars of Hercules (today’s Gibraltar strait) with a ribbon saying “plus ultra” (“further on”), a proud indication that the Spanish Empire had broken the old tradition of the strait being the point not to be trespassed by humans: the “non-plus ultra” (“the not further on”). The two columns and a ribbon became eventually an S with two (and later one) vertical bars, originating today’s pesos/dollar sign.
You can find an interesting article (in Spanish, I’m afraid) with a more detailed account of the origin of the pesos/dollar sign, and the etymology of the words “dollar” and “bit” in http://www.elcastellano.org/bit.html .
Incidentally, when I was a child, we used to read American comics translated into Spanish. Wherever there was a dollar sign, the translators had to make clear that the $ referred to US dollars and not to pesos, so they would write U$S for us kids to realize that they were talking big money.
Sorry, somehow I managed to miss the first paragraph of my previous posting. Here’s the complete version, with my apologies.
I found the article very good. However, I’d strongly disagree with the statement that "Many countries use the dollar sign ($) for their currency – in Mexico, for instance, prices are labeled 10 meaning 10 Mexican pesos". This is not true: The used in other countries is not a dollar sign; the $ is called peso sign in all countries where the currency is the peso (Argentina, Mexico, Philippines, Colombia, etc.). It’s perhaps more accurate to say that the dollar sign and the peso sign derive from a common ancestor.
Apparently, 16th century Spanish coins showed the Pillars of Hercules (today’s Gibraltar strait) with a ribbon saying “plus ultra” (“further on”), a proud indication that the Spanish Empire had broken the old tradition of the strait being the point not to be trespassed by humans: the “non-plus ultra” (“the not further on”). The two columns and a ribbon became eventually an S with two (and later one) vertical bars, originating today’s pesos/dollar sign.
You can find an interesting article (in Spanish, I’m afraid) with a more detailed account of the origin of the pesos/dollar sign, and the etymology of the words “dollar” and “bit” in http://www.elcastellano.org/bit.html .
Incidentally, when I was a child, we used to read American comics translated into Spanish. Wherever there was a dollar sign, the translators had to make clear that the $ referred to US dollars and not to pesos, so they would write U$S for us kids to realize that they were talking big money.
Welcome to the Straight Dope Message Board, claw, glad to have you with us! …and a very impressive first set of posts!
Your comment on the peso evolving into the dollar sign is, of course correct, but there’s an easier site to give – the Straight Dope Archives, where Cecil Himself answers What does the S in the dollar sign represent?
In terms of the being a "peso"-sign in Mexico and an "Australian dollar"-sign in Australia, that was just too complex to write out. The symbol "" is called a dollar-sign in the U.S., so I used that identifying mark. It’s used as the currency symbol in lots of different countries, referring to their own currency. I think the Staff Report as worded is clear, but thanks for the comment.
I really appreciate the explanations and now have a better idea of why it’s not so easy to just declare that your currency is equivalent to USD. Thanks a million (lira – just kidding)!!
I work for a company that writes software for commodities traders, and I liked this article enough that I want to print it out and put it up at work. I hope that’s OK with the copyright holders?
However, I’d like to mention that the Big Mac comparison has it’s own market forces. I would guess that Big Macs in England and the continent would be lower priced than in the U.S., not because of the relative strengths of the involved economies, but because the rash of Mad Cow disease reports has actually affected the demand for all meat products, and McDonalds has responded to the market forces. Just shows that ANY single comparison cannot be definitive.
Keep up the good work. I’ve been “lurking” for years!