The other day an elderly Brazilian woman took a taxi from her home in Copacabana to downtown Rio de Janeiro with a pocketbook full of dogeared bank notes. Recently widowed, she came upon the stash going through the pockets of her late husband's clothes. They were cruzeiros, 60,000 of them in all, handsome bills decorated with barons and presidents and splendid tropical megafauna. They dated from the early 1990s, not exactly ancient history, but when she arrived at the Central Bank building, the teller had some disappointing news. The whole pile was worth maybe $20, barely enough to cover her cab fare.
Lately the story of money in Latin America has been a little like this, a bizarre and not altogether happy tale. Sift through the muck of monetary policy below the Rio Grande and you'll find a compost heap of rotten australs, sucres, intis, cruzeiros and more kinds of pesos than you could stuff into Columbus's caravel. Like the anguished miners in John Huston's "Treasure of the Sierra Madre," Latin Americans knew they could scratch and save and still end up with a fistful of wind.
Enter the bold '90s. A new generation of Latin leaders swept to power and introduced free-market reforms. They threw open borders, courted capitalists and shrank the elephantine bureaucracies. New currencies were minted, but this time they were "pegged"--firmly tethered, that is, to the more muscular money of the rich nations, like the dollar, or a basket of world currencies. The pegs were strong enough to suppress inflation, yet flexible enough to allow for controlled devaluation if the markets got rough. So the logic went, anyway. And for a moment, it all seemed to work. By mid-decade, prices were steady and trade was soaring, while foreign investment poured in from Tijuana to Tierra del Fuego.
Then the world groaned. In late 1994 the tequila crisis devastated the Mexican high-flying peso. The financial shock waves kept coming, from East Asia to Russia to Brazil, and soon Latin America's new money began to come unpegged. Brazil spent $50 billion in hard-currency reserves to prop up the real last January, but was forced to devalue anyway. Last September Chile abandoned its currency peg, and now even Argentina, where every peso is solidly backed by a U.S. dollar, is feeling the heat. The message seems clear: don't fix your exchange rates. But letting the currency float in the gale-force winds of world finance may be even worse. "After the biggest devaluation in Brazilian history, we have little to show for it," says Mailson da Nobrega, a former Finance minister. "Interest rates are sky high, choking growth, and the trade balance will be negative."
Fix, float, peg or pray? The region's authorities would be forgiven for being confused. Like the widow from Copacabana, Latin Americans are wondering whether they'll be left holding the bag. So why bother? Why not scrap local funny money altogether, in favor of a proper, world-caliber currency like the dollar? Or maybe Central and South America should go the way of Europe and print its own regional currency--say the America or the Columbus--which might rescue the economy without wounding national pride. "Latin America is immersed in recession and crisis, and there is a strong relationship between a weak currency and economic crisis," says Ricardo Hausmann, chief economist of the Interamerican Development Bank. "The world would be a safer place with fewer currencies."
It's a prickly issue. Like a country's flag or anthem, money is a powerful emblem of nationhood that is instantly recognized, understood and even cherished by all citizens. But where economies are feeble, a handsome bank note can be a hollow, and expensive, symbol. "We still confuse currency with the national banner," says the Argentine economist Aldo Abram. "In fact, money is just an instrument of economics." A badly managed instrument, at that. Despite a decade of bold free-market reforms and handsome money, Latin America is in the midst of its worst recession since the 1980s, the "lost decade." According to the International Monetary Fund, foreign-capital flows to the region were down 55 percent last year. Poverty is deepening. There are plenty of reasons for these travails. But wherever there is economic emergency in Latin America, a crumbling currency is not far away.
Surveying the damage, leaders across the Americas are now groping for alternatives. Hausmann openly favors dollarization: scrapping local currencies outright in favor of the greenback. "We live in a world with two soft-drink makers, two airliner manufacturers, three toothpaste makers and 180 currency manufacturers," Hausmann told a U.S. Senate panel on dollarization earlier this year. The proposal has drawn a wide range of support, from important Chilean and Mexican business leaders to prominent economists, like Rudiger Dornbusch of the Massachusetts Institute of Technology. Central America has also said "Ole!" to gringo money. "The more we hear about dollarization the better we like it," says Eduardo Lizano, central-bank president of Costa Rica. There is no bigger booster than Argentine President Carlos Menem. "If the dollar were the regional currency," he recently told NEWSWEEK, "we wouldn't have seen the Mexican tequila crisis or the Brazilian devaluation."
The dollar's champions have some potent arguments. Backed by the buck, countries would be dealing in an instantly credible world currency that could inoculate them from deadly hazards such as massive devaluation. Better, pork-barrel politicians would be restrained from financing populist adventures, because only the U.S. Treasury can print dollars. True, this would make Alan Greenspan the world's virtual central banker. But that's hardly news. "Since when have we been independent of the Federal Reserve?" asks Lizano of Costa Rica. Yet for all its fans, the greenback is official currency only in one Latin American country, tiny Panama. Enthusiasts like El Salvador and Argentina have stopped shy of abandoning their own currencies. Going to formal dollarization would be a giant step, and one that the market has not taken.
Not everyone is thrilled with the idea. Sebastian Edwards, formerly the World Bank's chief Latin American economist, has declared dollarization a false panacea, one that "trivializes an extremely complex situation." Dollarized Latins would lose control over their own interest rates and be hit with hefty bills known as seigniorage, a kind of fee countries pay for using someone else's money.
The fear of Yankee dominance has spurred the call for a rival supranational currency--which, an IDB report last March suggested, might be stamped with a portrait of Columbus. But supporters admit that such a regional currency is at least a decade away. Like Europe, Latin nations would have to align their monetary policies, banking systems and rules of trade. That looks like a pipe dream. As Argentine economist Abram says, "If we don't trust our own leaders to run a currency, we certainly aren't going to trust Argentina plus Brazil."
Even if Latin American nations came to use good money, it doesn't guarantee they will spend it wisely. "Dollarization is like wiring your mouth shut if you're an obese person," Katherine Mann, a senior fellow at the Institute for International Economics, told a U.S. Senate panel last July. "[It] doesn't necessarily make you any healthier." Meanwhile, however, hardly anyone is comfortable with the current arrangement, where a continent of currencies swoon or sink at every spasm of the world financial system. Ask the widow from Copacabana.