CURRENCY QUESTIONS IN THE CARIBBEAN

The Haitian gourde is one of the most curious and exotic currencies of the world. On it is printed the striking statement: “The banknote, in conformity with the Constitution of the . Republic of Haiti, is payable to the bearer in legal money of the United States of America at the rate of five gourdes for one dollar.” Amazingly, the gourde stands exactly where it was set by the Convention of April 12, 1919 at five gourdes per dollar. This fixity in the exchange rate is a remarkable achievement of an otherwise totally squalid economy record, which has been made very much due to the total convertibility of gourdes into dollars and their easy co‐existence and use in Haiti. Such a feat runs counter to early suggestions in the newly developing currency substitution literature that currency competition promotes instability in rates. A very different story emerges due west on the largest English‐speaking island in the Caribbean, Jamaica, where monetary turbulence has been the rule since 1978. The currency there was initially backed 50 percent by pounds sterling when the Bank of Jamaica began operation in May 1961, but switched to a dollar peg in January 1973 at $1,10 US, a rate maintained through 1977. After the economic problems of 1976–77, the Jamaican dollar was devalued 15½ percent in January 1978 and, under the strong advice of the International Monetary Fund, a further 32 percent in May 1978. Following was a “crawling peg” devaluation of 1½ percent per month until October 1978, then 1 percent a month until May 1979, when the current dollar peg of 56.13 cents per Jamaican dollar was established. This dramatic decline in the currency was caused in part by expansionary monetary policies of the Bank of Jamaica monetizing budget deficits, and in part by the decline in tourism, the fall in bauxite and steel output, and the oil shocks Jamaica experienced. (From 1974 to 1979, the government budget deficit went from 168 million Jamaican dollars (J$) to 551 mill J$ with a peak of 625 million in 1978, holdings of government debt by the central bank from 72 to 898 mill J$, and net foreign assets or reserves of the central bank plunged from 141 to minus 778 mill J$ (Source: International Financial Statistics, IMF 1980 Yearbook and IFS January 1981 issue).) The International Monetary Fund set specific performance criteria such as devaluation and ceilings on government budget deficits for successive draws on a substantial loan of 351 million U.S. dollars or 360 percent of Jamaica's quota at the end of 1979.