Currency Unification - Causes and Limits

Currency Unification: Causes and Limits / Dimas Castellano

Posted on December 27, 2013



The road to exit the crisis is clear; what is lacking is the political

will to travel it. Among the partial reforms the government of Raul

Castro announced was the enforcement of a timeframe for measures to

eliminate the dual currency, implemented following the loss of Soviet

subsidies. A look back at the topic helps to identify some of the causes

and limitations of the announced timeframe.



In the period between the two great wars of independence that took place

in the second half of the Cuban 19th century, the Island became the

first country to exceed a million tons of sugar, of which more than 90%

was exported to the United States. That permitted the neighboring

country to impose on Spain the reciprocal trade agreement known as the

McKinley Bill, through which was established the free entry of Cuban

sugar into that nation.



At the same time there was a high concentration of land ownership,

especially in American companies. In that condition of economic

dependence, at the end of Spanish domination, the occupation government

introduced the dollar as the basic monetary standard, which was imposed

until the disappearance of the other currencies (French, Spanish,

Mexican), which explains the presence of the dollar in the first years

of the Republic born in 1902.



In that context, with the nationalist purpose of diminishing the

dependence with respect to the American dollar, the government of

General Mario Garcia Menocal dictated in 1914 the Law of Economic

Defense, which gave birth to the national currency. That law established

a gold standard as the monetary unit with the same weight and purity as

the dollar. So, from a nationalist decision emerged the first version of

dual currency in Cuba, which lasted until the '50's of the last century.



In a different way, in 1991, the disappearance of the Soviet Union

provoked the loss of the enormous subsidies based on ideological

relations, which overlapped decades of inefficiency of the Cuban model.

That fact, united with the depression in sugar prices, drove the country

to a profound structural crisis baptized with the euphemism Special

Period in Times of Peace. In answer to the crisis, the Cuban government,

instead of undertaking a profound reform aimed at achieving a proper and

efficient economy, defined a strategy aimed at saving the model and

maintaining power. With that goal it introduced several contingency

measures.



In 1993 the Basic Units of Cooperative Production were created, by which

a beneficial interest in idle state land was given to workers; farmers

markets and self employment were authorized; tourism and foreign

investment were introduced; family remittances from abroad were

admitted; possession of the dollar was decriminalized, and, in 1994, its

free circulation was authorized, giving rise to the current dual currency.



As one might appreciate, the dual currency introduced in 1914 was

motivated by reasons diametrically opposed to what happened in 1994. The

first created the introduction of a national currency parallel to the

dollar, the second legalized the dollar as a parallel to the national

currency.



The road and political will



The causes that led to the dollarization in 1994 have their roots in the

first revolutionary measures, whose declared goal was the disappearance

of all commercial relations and, with them, the disappearance of money.

In 1960, all domestic and foreign banking entities that existed in Cuba

were nationalized, in 1961 they were centralized in the hands of the

State, while the direction of those activities was placed in the hands

of the revolutionaries from the armed struggle.



The same thing happened with figures whose conception of the economy

differed from those of the leader of the revolution, as happened with

the economist Felipe Pazos Roque, founder and first president of the

National Bank of Cuba since its foundation in 1948, who in spite of

abandoning that responsibility because of his position against the Coup

of 1952 and being named again as head of that institution in 1959 was

replaced some months later by commander Ernesto Guevara.



The course of the process was more or less the following: the dollar was

introduced in 1994; the convertible peso (CUC), a second national

currency as an alternative to the dollar and the same value as the

dollar, was created; in 2004 the circulation of the dollar was

eliminated; then a tax of 10% was imposed on the dollar, and the CUC was

re-valued relative to the dollar by 8%; in March of 2011 the original

one-to-one value was resumed but the 10% tax remained. In summary, the

duality was maintained thanks to which Cuba is the only country in the

world with two national currencies, neither of which is really convertible.



The dollarization and the dual currency, besides magnifying social

differentiation, increased the loss of value that the Cuban peso already

had, one of whose manifestations was the expressed inflation in prices

on the black market, the drop of wages and the discouragement of production.



Cuban currency, a representation of money, lost or reduced its functions

as a means of value, an instrument for acquisition of goods, a means of

accumulation of wealth, an instrument of liberation from debt and a

means of payment. That's why monetary unification, even if it

constitutes an essential step for the current or for any other

Government, will not resolve the current structural crisis, due to the

fact that Cuban currency is not backed by the Gross National Product,

that is to say, by the sum of goods and services that permit it to

resume its functions and to be compared with foreign currencies.



The way out is in prioritizing productive efficiency, for which domestic

and foreign investment is required, which would provide the country with

capital, technology and markets, which in turn demands a new Law of

Investments and the elevation of current salaries, which do not manage

to cover more than one-third of basic necessities. But as one can only

distribute what is produced, the Government faces a complex

contradiction: without increases in salaries, Cubans are not ready to

produce, and without production, it is impossible to raise salaries,

which will make monetary unification by itself futile.



In short, a comprehensive project that includes the decentralization of

the economy, permits the formation of a middle class, removes the

obstacles that stop production and restores citizens' rights and

liberties is missing. The road is clear, what is lacking is the

political will to travel it.



Translated by mlk.



Taken from: Diario de Cuba

17 December 2013



Source: "Currency Unification: Causes and Limits / Dimas Castellano |

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