With attention now being focused on El Salvador for it being the first country to accept bitcoin as legal tender, it’s important to examine how the country got here in the first place, and what may have motivated the country to adopt bitcoin.
Start with the country’s very roots: its beginnings as a territory with a rich mix of indigenous peoples, from the Nahuas to the Lenca. The earliest peoples of the region would often use cacao to serve as a means of exchange and a unit of account, and commodities such as coffee still play an important role in El Salvador’s economy today.
Spanish colonization shook the region: after tentative unions with Mexico and other central American states, El Salvador became part of a collective of states that declared independence from Spain in 1821, able to wrestle their freedom away from Napoleon’s occupation of their colonizing power. At that time, the coins circulating at the time were either from Spain or small irregular silver pieces called macacaos. It was only in 1880 with the Banco Internacional that the first truly Salvadorian piece of money was issued.
Why El Salvador took on the US dollar is an important matter here. Panama and Ecuador are central American neighbours that did the same, yet the results for them have been quite different (though Panama has long had a dollarized economy, while dollarization is more recent in El Salvador).
What binds the three countries is not only their history, but the consequences of being so close to the world’s preeminent superpower. This has led to a history of political, economic, and military interventions in El Salvador that have wrought their toll — displacing the Salvadoran population into other countries, while cementing a gradual then stark rapprochement to the US dollar.
The first gradual step was the creation of the colón, named after Christopher Columbus. This happened in 1892, a century before El Salvador’s full adoption of the US dollar, yet already, it was pegged to the US dollar at a rate of 2 colones to one US dollar, showing how the currency was related to the growing American economy in the first place.
The central bank of El Salvador released a financial history of the country leading up to its complete dollarization in 2001 (it’s in Spanish). After the Colón was implemented, it was left to float in 1931 when El Salvador left the gold standard. Then, in 1934, the Central Reserve Bank of El Salvador was created in order to manage monetary policy and to issue Colones, though at first it was a public company with private profit as a motive, rather than a directly controlled state entity. This was a centralizing exercise: plenty of private banks, including the aforementioned Banco Internacional issued notes. Now all of them would exclusively work through the Central Reserve Bank.
This exercise was mostly pulled forward by the 1929 “Great Crash”, a disaster for El Salvador’s financial system, and a reminder that financial crashes in the American ecosystem have crushing and surprising effects abroad.
This entire period was marked by the 1931 military coup that meant El Salvador’s economic institutions and the entire country was run by the military until 1979 — presaged by a 1932 massacre of civilians during a Communist uprising.
During this period, the Central Reserve Bank of El Salvador was reorganized into a government entity in 1961 with the passage of the Law of Reorganization of the Central Bank, resembling a traditional central bank, and in 1970, was given supervisory powers over the entire financial system. In 1973, in a rather MMT-like set up, the Central Bank was…