You remember those Sacagawea dollars? I don’t know about you, but I hadn’t seen one in years – and had never seen the nearly identical presidential dollar coins – until I landed in Ecuador two weeks ago. They’re all over the place down there.

Like about a dozen other small countries, Ecuador doesn’t have its own currency. It just uses the U.S. dollar. It went to full dollarization in 2000 after a financial crisis that saw its own former currency, the sucre, collapse so badly that people started putting their holdings into dollars, unofficially dollarizing the country’s economy. The government simply went ahead and made the switch official.

That makes it very simple for Americans to travel in Ecuador. No going to the foreign exchange window. No conversion fees or figuring out whether the purple ones are worth more than the orange ones.

What about the Ecuadorians, though? Do they get anything out of using the dollar? For the most part, yes. For starters, it ended their currency instability, which was seriously hampering foreign investment. The country saw an economic surge in the immediate aftermath of dollarization. But the benefits haven’t been uniform. (When are they ever?) What Harvard business theorist Michael Porter calls “traded sectors” – such as finance, transportation, communication, tourism and hospitality, and the county’s significant oil industry – have all benefited quite nicely from the easier foreign transactions and higher investment. “Local sectors," which in Ecuador means predominantly agriculture and other incidents of the traditional village economy, not so much.

Outsourcing control of your money supply (and thus your monetary policy) to another country actually isn’t all that unusual. In fact, 25 countries (including North Korea) currently tie their economies in whole or in part to the U.S. dollar. One of the odd aspects of the impending vote in Scotland on whether to declare independence from Britain is that the rupture would leave the new country’s monetary policy under the control of the Bank of England. The Euro – which the British refused to join for exactly this reason – represents a large-scale outsourcing of monetary policy by a number of independent states to a new collective institution. This has come in for criticism in light of the European Union’s poor performance in the Great Recession as an abject lesson that you can’t successfully create a monetary union without creating a political union to oversee it. Abkhazia and South Ossetia, the portions of Georgia seized by Russia a decade ago, had this problem solved for them by using the ruble and letting Russian President Vladimir Putin dictate its value along with everything else.

This may make it sound like outsourcing monetary policy to another country is a horrid abdication of sovereignty, of everything that makes a state a state. But, of course, it’s not giving up everything, it’s just giving up one thing that makes a state a state. And states have been doing that since the beginning of states. As I noted in a post several months ago, Paul Krugman has observed that, in the new global economy, “you can’t have it all." Rather, like some Heisenberg Uncertainty Principle for economies, at least one of the three incidents of monetary sovereignty – control over the internal economy, control over the in- and outflow of funds, control of trade parity with other sovereign countries – must lie beyond the control of a country’s government.

In fact, state control over the money supply is a fairly recent phenomenon. As Milton Friedman and Anna Schwartz discuss in great detail in their monumental "A Monetary History of the United States," “money” in our country was more often issued by private banks than by the federal government (states are prohibited from issuing their own currencies under the Constitution). This was true in Ecuador, as well, with the added touch of currencies issued by individuals (below, top) and even foreign banks (below, bottom).



Eric B. Schnurer

In short, some of what we think of as inherently governmental functions can be, are and often have long been “outsourced” to other countries or to private entities. And it’s not just in the monetary realm. For instance, Monaco has long left its foreign policy to be conducted by France. During the Cold War, Europe essentially outsourced the larger portion of its defense to the U.S., and the Gulf oil states have been happy largely to do the same. Lebanon has essentially “privatized” the provision of social services (although to Hamas, hardly the model to which most privatizers would want to point).

Eric B. Schnurer

The components of statehood aren’t monolithic. Governments can exercise some and leave others to the private sector and even competing states (or would-be states).

Before free-market conservatives and libertarian enthusiasts of the cryptocurrency Bitcoin get too excited, however, we would do well to remember that some government functions are actually best carried out by, well, governments. But governments, just like everyone else, exist in a world where they must compete and produce a successful business model.

Fortunately, in many areas, American government can outcompete all comers, from other governments to private alternatives. There’s a reason Ecuador and other countries want to rest their futures on the U.S. dollar and why China’s hope to use the Great Recession to supplant the dollar with the renmimbi as the international reserve currency of choice has sputtered: The U.S. economy is, despite Washington’s best efforts the last four years to prove otherwise, remarkably resilient and well-managed. Financial markets vote with their money, and despite recent right-wing attempts to portray the U.S. as bankrupt and unstable because of its levels of government debt, investors still want to put their money in the dollar and the U.S. economy.