Color My Money Green

El Salvador's new currency arrived by ship and plane. Exactly $176 million in fresh, green stacks of Washingtons, Lincolns, Hamiltons, Jacksons, Grants and Franklins was flown in from the United States on five jets. The change--$24 million, including 144 million U.S. pennies--was withdrawn from five Federal Reserve banks and shipped in 40 containers on five freighters. The shipments--the first of many--weighed more than 40 elephants. "In 24 hours you can have $50 million delivered to your front door if you have good contacts with the banks," explains Rafael Barraza, head of El Salvador's newly diminished central bank. On Jan. 1, the government began replacing his country's currency, the colon, with the American dollar. As a result, Barraza's job is no longer controlling the colon but importing greenbacks.

These days Federal Reserve chairman Alan Greenspan makes policy not only for the United States but for a growing swath of Latin America as well. Ecuador, facing a crisis of hyperinflation, replaced the sucre with the dollar last year. Guatemala passed a law in December allowing free circulation of dollars alongside the national currency--something already allowed in Peru and Bolivia. Honduras, Nicaragua and Costa Rica are discussing switching to the dollar. The idea of "dollarization" has been mulled over even in Mexico, where nationalist fear of domination by the United States runs particularly hot.

For now, all eyes are on El Salvador's grand experiment, which overnight converted bank accounts to dollars and reprogrammed automated-teller machines to dispense only dollars. Schools are teaching the 8.75-to-1 colon-to-dollar conversion tables so kids will learn how to think in dollars. With the slogan "Monetary integration: Good for you, good for the country," the greenback is hyped by the neoliberal government of President Francisco Flores as the future of prosperity, a boon for the middle class, even the antidote to the devastating earthquakes that struck this month and last.

The idea of dollarization would have been unthinkable in Latin America even five or 10 years ago. But a decade after market liberalization swept the continent, hopes of economic revival have gone largely unrealized. Central banks have failed at their job--stabilizing the local currency--setting off massive inflation. Parties of the right see the dollar as a way of bringing order to the chaos by forcing even soft-money radicals to obey the hard-money discipline of America's inflation fighter in chief. They are willing to dollarize even if it means swallowing their national pride and entrusting monetary policy to the U.S. Federal Reserve. "It is like castration," says Sebastian Edwards, an economics professor at the University of California, Los Angeles, and the former chief Latin American economist at the World Bank. "You can teach abstinence to kids, or you can castrate them. Castration seems like a drastic last resort. Yet dollarization is being embraced with a religious fervor."

Though not a cure-all, the dollar may be the right medicine in some countries. Economists see it as a gateway to lower interest rates, lower inflation, smoother trade flows and more credibility with investors--particularly in small countries already highly dependent on the United States. This may be the start of something even bigger. If El Salvador starts attracting banks and other investors, it will be tough for neighbors not to follow suit on dollarization. Pressure from U.S. banks could push the trend even further. "As U.S. banks and financial institutions become more involved in Latin America, their well-being will depend more on what happens in those countries," says Roberto Chang, a Rutgers University economist who studied the issue for the U.S. Federal Reserve. "The hemisphere will move to a single currency, which naturally will be the dollar."

Not without a fight. Arguing that they need control of monetary policy to provide soft money for spending on such things as health and education, leftist parties are fighting the dollar at every turn. In El Salvador, two parties of the left have filed lawsuits with the Supreme Court to keep the colon. Street protests planned in several towns were canceled by this month's devastating earthquake, but passions still run high. "It is unconstitutional," says Manuel Melgar, a congressman from the FMLN, the former guerrilla army. "It takes economic power away from the government." In Guatemala last November, Congressman Otoniel Fernandez had just made a speech to Parliament attacking dollarization when he received a phone call. "The voice on the line told me to stop defending the poor and the dispossessed or else I would be at risk," he recalls. "I denounced the call on the spot on the floor of the Congress."