"It is just as well that the people don’t understand money and banking for, if they did, I believe there would be an armed revolution before tomorrow morning." – Henry Ford, founder of Ford Motor Company
Like many history making events, this one went almost unnoticed by the media. If there was any announcement at all it was a one-inch note in the financial pages. For most Costa Ricans, it was an event of minor importance and generally represented good news, although as with all bankers’ schemes, there were winners and losers.
Costa Rica’s central bank announced that it was lowering the limit of the range in which the local currency, the colón, would trade against the dollar without bank interference. The bottom of the range would be about 4% lower than it was before. The dollar immediately dropped to the lower limit.
It was bad news for gringos living here who kept money they were planning to spend here in dollars. In effect, the national bank had just confiscated 4% of dollar accounts and divided the money evenly among all the holders of colones. It was also bad news for Americans who might like to vacation here. The cost of everything priced in colones went up by 4%. As did the cost of Costa Rican exports to the U.S.
On the other hand, the cost of stuff imported from the U.S. went down by 4%. Now a box of Triscuits will cost only $5.28 instead of $5.50 (if you keep your money in colones.) Wheee! Winners and losers.
As always, however, it is not the cost of Cracker Jacks that concerns me here, but the prize in the box, the larger lessons that are not in plain sight. In the big picture the dollar falling against the colón represents a dramatic, unprecedented turning point for the United States and for Americans. The dollar has been weakening for years, but until now it’s never been as bad as the banana republic chits of tiny Central American backwaters.
Historically, the currencies of Latin American and Central American countries have been cruel jokes played by bankers and politicians on their people. Inflationary catastrophe is commonplace in these regions. No one with money and an understanding of how it works ever kept money in the local currencies of Latin countries.
People with money always kept it in the more stable currencies of free market countries. English pounds, Swiss francs and most commonly American Dollars were the currencies of choice for protection against rapacious Latin American banking practice. You can pick almost any Latin country for a hilarious example of how quickly the local tokens depreciate against anything of value. But we’ll stick with the colón in this case. It’s performance, although appalling, is better than most.
While the U.S. was honoring, or at least paying lip service, to an international gold standard between 1950 and 1971, the colón was stable against the slowly depreciating dollar at about 8 to 1. Starting in 1979, a few years after the U.S. stopped redeeming dollars for gold, the bankers all put on party hats and hopped up on the tables. From 1979 on, the graph of the number of colones you need to buy a dollar shows a uniform, rapid climb.
In 1979 you could buy a dollar for less than 9 colones. By 1989 a dollar cost around 100. Since then it has run up to 500 colones per dollar. That’s a decrease in buying power for the colón of over 5,500% in just under 30 years. And remember, we are not talking about a stable dollar. Official U.S. inflation figures, which are almost certainly inaccurate on the low side, tell us that today’s dollar only buys about a third of what it did in 1979. That means the buying power the colón fell by over 16,000% in 28 years. No wonder nobody wants these things. And no wonder this country is still poor.
The sickening fall in the value of colones is interesting but typical for third world countries. What is truly remarkable is that, now that the once mighty "good as gold" U.S. dollar is officially falling against these laughable tokens, it’s not even a newsworthy event.
The depreciation of dollars against colones represents a critical transition. It means that Americans’ impoverishment by bankers and politicians has become obvious and excessive even to bankers in countries where such predatory practice against their own people is taken for granted.
That bankers and politicians are fleecing us is becoming clear to everyone but Americans. We still willingly accept payment in coupons whose value is uncertain except that it is always less than it was yesterday, while the few tokens we have saved are slowly confiscated by the dilution of the total supply. Our impoverishment has reached a rate that is alarming to foreign bankers who recognize their own ravening practice when they see it, while clueless Americans puzzle over their own growing poverty.
Expats are converting dollars to the historically miserable colón to protect themselves against the depreciating dollar. It’s as though Monopoly money has suddenly become "legal tender." Next stop, shells, beads and feathers.