This blog is pushing an agenda, but it seems to have some history that's not generally known: ... ... ... ... ... ... ... ...
This blog is pushing an agenda, but it seems to have some history that's not generally known:
Panamanians were stridently opposed to the centralizing of the Colombian state under Núñez’a La Regeneración. Panama was the most prosperous state in the United States of Colombia since the mid-19th century, partly because of the Panama Railway Company. It served many travelers journeying from the east coast of the USA to California via Panama (which was shorter than going overland). However, when the USA built the first transcontinental railroad, the number of passengers via the Panama route dramatically reduced. Moreover, Núñez’s policy was to extract more money from the Department of the Isthmus (Panama) via increased taxes and control of its fiscal surpluses. Inevitably, this caused great discontent.
The exploitation exacerbated by the Thousand Days War (also with the USA “nudging”) led Panama to separate from Colombia in November 1903. At the birth of this new nation, the people there had inflationary trauma fresh in their minds. The new state kept Colombia's legal prohibition on state issuance of paper money.
Interestingly, Colombia’s constitution, until 1910, still prohibited issuing paper money, but it was subsequently reformed (poorly, by US money doctors—a topic for a future post). Panama has maintained the original Colombian prohibition principle to this day.
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Let’s start with the original 1904 constitution. In it Article 117 states that there ‘shall be no obligatory tender paper currency in the Republic’ (“No podrá haber en la República papel moneda de curso forzoso”).
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When “curso forzoso” (obligatory-tender) is correctly interpreted, it has two parts. First, it means that the currency in question has liberatory power (referred to in local jurisprudence as el poder liberatorio), which is the power granted by law to discharge debts. Second, it means that the currency is not a claim on underlying silver or gold and cannot be substituted for such. Remember that in 1904, “true” money was silver or gold metal. So, obligatory-tender paper money should be considered non-convertible paper money.
For a paper currency to be convertible means that it is backed by underlying assets (often in those times silver or/and gold), and if you wanted to, you can return the paper currency to the issuer and receive the underlying gold or silver.
So, to be absolutely clear, the constitution does not prohibit all paper currency, only non-convertible paper currency.
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It is usually assumed that the United States government forced the Republic of Panama to make the United States dollar legal tender. The populace, academics, and literati in Panama also generally believe this. But that’s not what happened. The initial request to make dollars legal tender in Panama actually came from the Panamanians.
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In June of 1904, Secretary Taft was notified that a Fiscal Commission from Panama was in New York on official government business, and they also wanted to meet with him.
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I know these details because a stenographer recorded the meeting, and later, the transcript was entered into the record at a U.S. Senate Hearing in 1906.
The conversation was revealing. The Panamanians had started creating new monetary laws as part of their state-building process. Remember that Panama had just separated from Colombia, and all the elements of a state needed to be built almost from scratch.
The stenographically recorded conversation explicitly states that the Panamanians already made this decision and are now seeking confirmation.
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The post-separation transitional government in Panamá wanted to avoid a situation where the economic activity of the Canal Zone placed severe pressure on the monetary capacity of the new Republic. (Remember, finite metal coins were the norm—not infinite digits on a screen.) The increased demand for metal coins to pay imported labor would put a great strain on Panama’s capacity.
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The Isthmian Commission did not have the idea to create a new currency within Panama. They thought that would be wholly impractical. It was necessary that Panama's money would remain stable relative to the US gold dollar which they would need to use concurrently.
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Panama did not dollarize because of a macroeconomic crisis. Dollarization was part of Panama’s initial state-building process. The state leaders' monetary ideology was based on their recent experience of an inflation spiral caused by excessive paper money creation in Colombia. They wanted to avoid this entirely in their new country, so they chose the dollarization path.
It was a coincidence that the Secretary of War at the time was William Taft, who had first-hand experience with currency mismanagement in the Philippines. Taft knew the best way forward was to agree to the idea of the Panamanians to adopt USD as a legal tender in Panama. And he entered this agreement even though he was unsure if he had the power to do so by Congress. Yet, it worked. And today, Panama has the most stable monetary system in Latin America.
This blog is pushing an agenda, but it seems to have some history that's not generally known:
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