In 1999, several of the world’s major economies decided to stop using their indigenous currencies. They were switching to the newly introduced Euro. In 2000-2001 some Latin American nations abandoned their currencies in favor of the US Dollar. In 2009 Zimbabwe did something very similar. In an event as recent as December 2019, eight West African countries announced that they would discontinue the use of their currencies, and adopt a completely new one. What do these nations gain by making such fundamental changes to their money systems? Let’s take a quick look at what currency substitution entails.
In the years preceding the World Wars many of the world’s currencies were based on the ‘gold standard’. These included the USD, GBP, CAD, and many others. Under the gold standard governments guaranteed the exchange of currency notes for fixed amounts of Gold. The price of gold was steady, and it could be traded as a currency. Many nations kept vast amounts of gold in reserve. The outbreak of World War I created widespread economic uncertainty. In an effort to ensure a reliable financial fallback people everywhere rushed to exchange their paper money for gold. Governments, facing enormous wartime expenses, made this almost impossible. Most countries abandoned the gold standard immediately. Others switched during the years that followed. Gold prices have been climbing unabated ever since. Today the gold standard has become a thing of the past. The abandoning of the gold standard can be considered one of the earliest and the most widespread example of currency substitution.
Latin American case studies
In the year 2000 the small South American country of Ecuador was suffering from all the ill effects of hyperinflation. Their local currency, the ‘sucre’, was trading at 28,000 per dollar. The severe devaluation of currency was causing all sorts of problems. The government of Ecuador decided to abandon the sucre and adopt the US dollar as their official currency. Interestingly, most Ecuadorians had already discarded the sucre and were using dollars for months. The government simply made it official.
The following year another Latin American nation went the same way. El Salvador is a small and densely populated country located south of Mexico. This nation had its own currency ‘colon’, named so after Christopher Columbus. The currency had been in use for more than a century. The country had a history of political and economic turmoil. In 2001 El Salvador’s government officially adopted the US Dollar as the country’s currency. The exchange rate between the colon and the dollar was fixed. This was effectively a partial currency substitution, since the colon remained in use.
Zimbabwe in Southern Africa also faced problems with hyperinflation. Their currency, the Zimbabwean dollar, entered the record books for being the most devalued currency at one time. In 2009 the country’s government abandoned it and officially switched to the US Dollar.
These examples show that currency substitution is sometimes the only way to control hyperinflation, and to save your country’s economy.
The African monetary union
In December 2019, eight West African nations jointly announced a radical proposal. They want to create something called the West African Monetary Zone (WAMZ), and adopt a brand new currency called the ‘Eco’. Most of these countries are former French colonies. Their currencies were pegged, originally to the French Franc, and more recently to the Euro. These nations feel that full independence of their financial governance would bring them prosperity. Some would-be members of this group are still to meet the qualifying criteria for membership. Some economists have called the move dangerous. The French president called it a “historic reform”.
Lessons from the EU
The idea of European unification had been around for centuries. In 1992 the EU was formally created. One of the primary goals of the formation of EU was the creation of a single market with uniform standards and laws. One way to achieve this was to have member states adopt a single currency. Today 19 of 27 EU member countries use the Euro. They have abandoned their indigenous paper currencies entirely. More member states are planning to follow suit. The Euro has become one of the strongest and most important currencies in the world. The EU is home to millions of migrants who send billions of Euros in remittances to developing nations. They do so via fast and efficient services such as Ria Money Transfer. None can better attest to the prosperity and stability that the adoption of Euro has brought, than migrants.
The success of the Euro is a compelling case. It proves that planned and deliberate currency substitution can create wealth and benefits for all.