Bogus Bills
Subject Monetary Policy
Topic International Finance
Key Words Monetary Policy, Inflation, Currency
News Story

About a year ago, Ecuador abandoned the sucre, its national currency, and adopted the U.S. dollar in the hope that it will end Ecuador's economic problems. While the promised economic benefits have been slow in arriving, Ecuador's move has been a boon to drug traffickers and counterfeiters, especially in Columbia.

Ecuador's decision to adopt the dollar as its currency was seen as a remedy for its economic ills. Ecuador was suffering from the worst recession in a generation. The inflation rate was about 60 percent, and over 78 percent of the population lives in poverty. The government was hoping that adopting the dollar would bring monetary stability, lowered inflation, increased economic growth and a reduction in the incidence of poverty. Other Latin American countries are following suit: El Salvador adopted the dollar on January 1 and Guatemala will follow on May 1. As the United States negotiates a hemispheric trade agreement, several other Central American and Caribbean nations will consider switching.

The dollarization of Ecuador has been a boon to counterfeiters. Before Ecuador adopted the dollar, individuals had to go to an exchange house to get dollars. The exchange houses were experts at spotting fakes and so, few counterfeit dollars circulated. Now that the dollar is the currency, it circulates freely among the public, and individuals are much less able to detect counterfeit currency.

The success of counterfeiters has been aided by conditions in Ecuador. One out of every eight Ecuadorians is illiterate and in the past has relied on the different colors in which denominations of the sucre were printed as a guide to their value. U.S. currency is one color and Ecuadorians are not familiar with the faces on the bills.

The transition to the dollar also included adoption of coins as well as bills. Because Ecuador is a poorer country than the U.S. and transactions generally involve smaller sums, the demand for coins is higher. Since coins are heavier than bills and more difficult to transport, Ecuador has been minting its own coins that are the same size, shape and composition as U.S. coins. Some of these coins have started to show up in vending machines in American cities.

(Updated March 1, 2001)

1. The article states that counterfeiting has increased since Ecuador moved to make the dollar its national currency. According to the article, what factors account for the increase in the use of counterfeit dollars?
2. Coins are what percent of the total supply of money in the United States? Why would you expect coins to be a higher percentage of the money supply in Ecuador?
3. Ecuador hoped that adopting the dollar would be a way of imposing strict fiscal discipline. Ecuador, in effect, has no control over its monetary policy. What factors were cited as reasons for Ecuador's shift to the dollar?
Source Larry Rohter, "Ecuador's Use of Dollars Brings Dollars' Problems," The New York Times, February 5, 2001.

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