The Dollar as Anchor
By David Henderson
Lots of people lately have been talking about how lousy the dollar is as a store of value. I’ll repeat the offer I made in a recent book review in Regulation, in response to an economist’s claim that government had made money “completely worthless by printing pictures of dead presidents on it.” I wrote that if you agree with the author:
then please contact the publisher for my address and send me all of your bills with pictures of dead presidents on them, especially the ones with pictures of Ulysses S. Grant. (I will even accept the ones with pictures of Benjamin Franklin, although he was not a president.) In return, I will send you an equal weight of blank paper. I promise.
Clearly, the U.S. dollar is worth quite a bit, especially compared to some other paper currencies. Evidence that the dollar is quite a good store of value compared to some alternatives comes from a recent op/ed by GMU Ph.D. student Pedro P. Romero. Writes Mr. Romero:
Dollarization put an end to the vicious cycle by burying the sucre. It was the most egalitarian policy that Ecuador has adopted in the last few decades, because it was the marginalized who suffered most from inflation and devaluation. Even so, it received a skeptical reception. At the time, IMF head Michel Camdessus said, “Dollarization was not, I must be frank, the kind of policy we would have recommended at this stage to Ecuador.” Paul Krugman compared it to witchcraft and thought it would leave the economy dead. Sebastian Edwards of UCLA said, “Ecuador has so many problems that if dollarization works, it would just be a coincidence.”
Nine years later, one cannot dismiss the survival of dollarization as coincidence. Dollarization has provided Ecuador with the longest period of a stable, fully convertible currency in a century. Its foremost result has been that inflation has dropped to single digits and remained there for the first time since 1972. The stability that dollarization has provided has also helped the economy grow an average of 4.3 percent a year in real terms, fostering a drop in the poverty rate from 56 percent of the population in 1999 to 35 percent in 2008. As a result, dollarization has been popular, with polls showing that more than three-quarters of Ecuadorians approve of it.
HT to Dan Klein