SANE Views

Vol.3 No.19, 03 June 2003

Peru's Parallel Currency

The letter below was sent to us by Mark Hennessy, one of our SANE Views list members. Mark is a tourist guide who frequently takes tourists to South America. His letter makes an interesting case for a parallel currency. In South Africa we used to have the Financial Rand before it was swept away in the destructive Neo-Liberal mania dictated by the Washington consensus ideology. Peru's circumstances are quite different from South Africa's but there are lessons to be learnt.

Aart Roukens de Lange
Editor, SANE Views

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Dear Margaret and Aart,

I have been in Peru for the last month or so. Right now the country is going through a series of strikes by teachers asking for a pay increase that is more than deserved, and by peasant farmers who are being told that they are now going to have to pay for water that comes off the mountains because it is being privatised. Can you believe it. Farmers are also calling for a ban on cheap food imports that are preventing them from competing in the local market. The President has just overreacted by imposing a national state of emergency which of course is going to solve nothing. The problem as usual is that he, a former economist with the World Bank, is sticking to the IMF's requirements. So far the railways and the telephone system have been privatised to private foreign firms that makes them local monopolies. Spanish telecom now has the telephone monopoly, and Orient Express the railways. In fact from what I can see Spain is doing a good job of quietly recolonising South America.

But none of that is new and is not what I am writing about. What might interest you is that, from what I have been able to understand, for years now Peru has been running what to me looks like a national LETS scheme. In Peru they run what amounts to a dual currency system. They have never formally dollarised but you can keep your bank account either in the local currency, soles, or in US dollars. All local trade between people for the normal needs of life is conducted and priced in Soles but whenever you want to buy anything of a luxury nature which is probably imported, it is priced and you pay in dollars. So TV sets, appliances etc are priced in dollars. All tourism services are also priced in dollars. (This is a generally poor country where what is regarded as a luxury item is set at a level much lower than we are used to in South Africa.)

Due to their history very few people here will trust a cheque so virtually all dealings are in cash and there is a thriving industry of money changers on the streets changing between soles and dollars.

I am not sure who sets the relationship between the soles and the dollar, presumably the central bank, but it does vary. Over the years that I have been coming here the relationship has remained remarkably stable. It certainly has not been driven by the market because at times when every currency in the world was falling against the dollar the soles was rising slightly and vice versa. It seems to provide a means to decide how much value should be extracted into the local economy from the international economy. For example, we run a tourist business which is dollar based but we pay our staff in Soles. When the rate of exchange is put up, we end up paying more of the dollars we earn out in salaries. Similarly all meals and similar services that tourists pay for are effectively more expensive or vice versa without disrupting the normal internal currency trade. As far as the local people are concerned going about their trade with each other nothing has happened. The local essentials economy is insulated from the goings on in world currency markets. Is that not essentially a LETS scheme?

Peru probably does very little international trade that is not dollar based but I was wondering if there isn't an idea here for a formula similar to that you have been proposing in terms of a return of the financial Rand or something like it. Create what is effectively an external based currency just as Peru is effectively using the dollar. South African trade is more diversified and less dollar based but we could have an International Rand related to a basket of currencies. Then the relationship between that and the local Rand and essential goods would at least be under the control of our own authorities rather than international currency traders. Or is that too simplistic for a more complex economy which South Africa certainly is?

I am a great believer in the theory that ideas seem to be going nowhere and then suddenly they reach a critical point when they suddenly gain general acceptance and power. I am sure that is bound to happen with regard to new economics soon. There is too much going on which defies common sense. I read in an article in the New York Times the other day that the UK Financial times went so far as to say that the lunatics have taken over the asylum in reference to the current goings on in the US fiscal arena. Also a local tour guide has written a book about the history and mythology of the Incas and their ruins. Virtually the whole last chapter is devoted to how the modern world economic structure is keeping the descendants of a great empire in a state of poverty. He had it right too. So maybe the critical point is not that far away.

Hope you are keeping and doing well,

Mark Hennessy