flavianopolis

Some years ago Ecuador "dollarized" it's economy. Dollarizing is another word for the liquidation of the the national central bank and the payment of the debts of the Central Bank in US dollars combined with a legislation giving the US dollar legal tender status in the "dollarized" country.

However; Ecuador did not liquidate it's central bank completely. The Central Bank of Ecuador still issues small change called centavos de sucre. I am not sure about the legal tender status of those coins, but I guess that that they are legal tender only for small sums. The Central Bank of Ecuador buys and sells centavos de sucre 1:1 against US cents and always holds enough dollar-denominated assets to be able to repurchase each and every centavo de sucre in circulation. One centavo de sucre equals one US cent.

In my opinion those small coins could be used as the basis for a new and truly sound currency. Suppose that the Central Bank of Ecuador would stop the further issuance of centavos de sucre, but continue to redeem them in US cents in the relation 1:1. What would happen? Well, people in Ecuador would probably continue to accept them as a substitute for american currency.

I suggest that the Central Bank of Ecuador should stop the further issuance of centavos de sucre, but continue to redeem them in american currency just like the Central Bank of Ecuador already does. In addition to that I suggest that the Central Bank of Ecuador ought to redeem centavos de sucre in gold. If somebody would ask the Central Bank of Ecuador for redemption of centavos de sucre, he should have two alternatives.

1. US cents in the relation 1 centavo de sucre per US cent, or
2. One ounce of gold in the relation 100.000 centavos de sucre per ounce.

It would of course cost the government of Ecuador a lot to give the centavos de sucre "double backing", but since I suggest that the further issuance of centavos de sucre ought to be stopped, the cost would only occur once. After that people would know that the centavo de sucre would always be worth one US cent or more. I think that that would make the centavo de sucre more attractive than the US cent and that that might be enough to give birth to a new and important currency.

To avoid all speculation about the trustworthiness of the arrangement I suggest that the Central Bank of Ecuador ought to hold 100% gold reserves in vaulted coin or bullion against the centavos de sucre as well as a good 100% backing in dollar denominted assets.

It would also be necessary to issue a law according to which instruments of debt issued prior to this reform denominated in sucres would always be fully payable in US currency. Otherwise this reform might become an unbearable burden for debtors. It would also be necessary to exempt from taxation all nominal profits, which only in terms of inflationary dollars would be profits, but in sucres not. Otherwise, I suspect that the sucre will be demonetized once it's value exceeds it's US counterpart.

If the government of Ecuador would do this, I do not think it would take too long until interest rates in sucres would be lower than interest rates in dollars. It would also give a small and poor nation a really sound economy as well as a good reason for national pride.