Annals of a Cuban-style Dollarization

Foto: @TatianaMara via Twenty20

by Mario J. Valdés Navia

The package of measures announced in the Mesa Redonda of last July 16 filled a sizable part of the people with expectations. Although it was based on the effects of COVID-19 and the tightening of the blockade, the prevailing view is that the country returns to the path of the Updating of the model, put almost entirely on hold in the last few years. I like to think that’s the case, and not that everything will go back to the way it was as soon as the epidemic-related crisis is overcome, or a new US government retracts its claws.

Of the many measures made public, most require a waiting time that’s yet to be defined. Only one is made effective immediately: the re-dollarization of a significant part of the commercial circulation, not in the form of cash, but through the use of bank cards in FCC (Freely Convertible Currency): dollarization in plastic. Its immediate goal is understandable. Income in FCC has seriously dropped, and there’s no indication that it’ll come back to normal in the short term.

The expenses of facing the pandemic, the payments of foreign debt, and the purchases of basic supplies cannot wait for the economy to prosper, and the most expedite source of financing is within the country. That’s why the US dollars, zealously treasured by distrustful savers in jugs, supposed toolboxes, mattresses, and double-bottomed furniture, have been summoned to manifest themselves with urgency, like supernatural entities in a séance.

Seeing the lines forming in the first days of the shops –suddenly very well stocked, by the way– for that middle- and top-range market, the decision can be described as effective. Meanwhile, those without international cards or accounts in US dollars in Cuban banks are rushing to open them or put away reserves in CUC or CUP –the ones who can– in order to purchase the new products in those shops in the black market.

Those at the bottom of the food chain always suffer the most.

But the presence of the US dollar in the Cuban market is cyclical in our history, and its last occurrence, in the 1990s, never really ended, it only morphed behind a nationalist mask: the CUC. Let’s look grosso modo at the annals how we got to this point.

Already in colonial times, the US dollar circulated in Cuba without restriction, in correspondence with the high volume of imports from and exports to the US, and the movement of people who came and went for various reasons. With the First Occupation and the establishment of the Republic, it gradually imposed itself in a market it shared with weaker currencies. That’s why, in February 1907, during the Second Occupation, the Currency Strike broke out, led by tobacco workers in Havana who demanded they be paid in US dollars. It lasted for 145 days, other labor sectors joined and it enjoyed the veiled support of interventionist governor Charles Magoon. It was the first success of the Cuban workers’ movement.

Although during the government of José Miguel Gómez (1909-1913) its Secretary of the Treasury and native of Sancti Spiritus, Marcelino Díaz de Villegas, made the first proposal of creating a Cuban currency, it would be in the boom years, during the government of Mario García Menocal (1913-1921), when a man from the same region, economist Leopoldo Cancio Luna, would turn into a reality the aspiration of establishing our national currency: the Cuban peso, with a value pegged to the dollars. It would come to be officially in force as the single currency on December 1, 1915, but the circulation of foreign currency would be banned throughout the country since September.

The peso remained a strong currency for a long time. Even after the devaluation of the dollar in the 1970s, and by then freed from its dependency of its American counterpart by the Revolution, it retained a high purchasing power. Its debacle arrived with the inflationary spiral of the Special Period when its value dropped so much that one US dollar, which was informally worth 7 pesos in 1990, got to fetch 150 in 1993.

As part of the anti-crisis strategy, in August 1993 the legal circulation of the dollar was reestablished as the decriminalization of the foreign currency and monetary duality were passed. Additionally, the reception of remittances was allowed, which increased the income of approximately 25% of the island’s inhabitants. The economy began to rise. In 2003, the brand-new Cuban Convertible Peso (CUC) replaced the US dollar in transactions between state-owned companies, at the same time that the mechanisms for assigning and using foreign currencies were highly centralized.

At the end of 2004, in response to US pressures on Cuban transactions in their currency, the Central Bank of Cuba (BCC) extended its exclusion to transactions carried out with the population. Therefore, although the possession of foreign currency or the maintaining of savings accounts in FCC was not re-criminalized, their exchange was made obligatory for internal circulation. Likewise, in order to discourage the arrival of remittances and other flows of US dollars, a 10% tax was imposed on the enemy’s currency in its exchange to CUCs.

We’ve spent more than fifteen years with two Cuban currencies, at least apparently.

In reality, the CUC has always been a stand-in for the US dollar inside Cuba. In the beginning, it was like a revalued avatar of the dollar, but in time it seemed to acquire a life of its own. It’s minting without the backing of US dollars made it devalue so much that it lost its original meaning. That’s why important companies first (2015), and now the population, have been forced to go back to a partial circulation of FCC.

Now, more than ever before, monetary reunification and the arrival of remittances in US dollars become necessary, because when this first wave of currency treasured by private citizens dries out, how will the Cuban accounts in foreign currency be recharged? If US dollar remittances are exchanged by the CADECA (Cuban government-run bureau de change) into CUCs –by now doomed to extinction– and the dollarized mules and international tourists cannot come because there are no flights yet, where will Cubans obtain more dollars? If the markets in CUP and CUC are now almost empty, will there be supplies to keep them stocked and prevent FCC-purchased products from starting to circulate in the black market, in an endless inflationary spiral that would lead the poor majority of consumers without US dollars to desperation?

Let’s hope –paraphrasing the sign at the entrance to Varadero– that every dollar collected by this exclusive market, in a foreign currency, will clearly be to the benefit of all the people.

Contact the author: mariojuanvaldes@gmail.com