Bolívar No Longer Credible

By Luis Espinosa Goded

A “healthy” currency does not guarantee a prosperous economy. However, an unhealthy currency does, in fact, guarantee a poor and dysfunctional one.

The monetary system is only the foundation on which an economic system is built. Despite all the attention that economists devote to it based on its importance and complexity, the monetary system should not be our primary focus. We should be able to take for granted that the currency we use serves as a medium of exchange, unit of account, and store of value.

Venezuela, unfortunately, is in a desperate situation. The country uses a currency that has little value, since it is “managed” by the regime and the government has tried to generate revenue through devaluation. This means the central government has diminished the purchasing power of all citizens who use the currency, in order to finance its exorbitant spending and inefficiency.

Without mincing words, the Venezuelan bolívar has no value, because the government devalued it. In other words, the regime depreciated, degraded, distorted, and corrupted it.

It should be abundantly clear what it really means to “devalue” a currency, even though many economists who get lost in “sophisticated” arguments and continue to defend it as a good economic policy.

Money is an institution. It is an agreement generally accepted within a society as to what is acceptable as a means of payment, such as a debt cancellation. And the bolívar no longer has any credibility in Venezuelan society. The government must be prevented from continuing to “manage monetary policy” by devaluing the bolívar.

Therefore, the best alternative that Venezuela currently faces is to adopt a credible currency with significant value. The US dollar is internationally accepted as a means of payment, recognized as a common unit of account, and (more or less) retains its value in an acceptable manner.

The US dollar is far from an ideal currency. I am well aware of the serious problems it has. But perfect is the enemy of the good, and the ideal is impossible and unattainable. Adopting the dollar is a feasible solution, as the economies of Ecuador, Panama, and El Salvador can demonstrate.

Therefore, the best monetary alternative that Venezuela has is to allow its citizens to use the dollar as a means of payment. Give Venezuelan society the freedom to choose which institution to adopt as currency, and their monetary situation will significantly improve.

Unfortunately, the currency is just one of the many problems that Venezuela faces, but it is at least a step in the right direction: the path toward freedom and reliable institutions.