Copyright 2003 by Kurt Schuler. This essay may not be reproduced in any form. A modified version, in French, is
forthcoming in Revue Labyrinthe (Paris). As with all the writings on my Web site, the material here reflects my personal
views, which are not necessarily those of my employer, the Joint Economic Committee of the U.S. Congress. Thanks to
George Selgin and José Luis Cordeiro for comments.
"[T]he issue by this country of its own currency will be one of the more significant marks of its attainment of full
nationhood. I wish there to be no doubt that, in taking this momentous step, the Goverment will ensure that the new
currency will provide a sure basis for the future development of this country and will be a medium of exchange on which
everyone will be able to rely with complete confidence." Minister of Finance of the Gold Coast (now Ghana) in the
Legislative Assembly, April 5, 1955, reprinted in West African Currency Board, Report, 1954-5, p. 10.
The big question about Africa's economic history over the last century is why Africa has remained relatively poor. In the
early and mid 20th century Africa made large gains in life expectancy, education, and wealth, but since the emerging
markets debt crisis of 1982, progress has slowed or stopped in many countries. The combined GNP of all African countries
is below 2 percent of the world total--less than Spain.
A contributing factor to Africa's limited progress has been that many of its countries have monetary institutions that impede the productive specialization and trade necessary for a modern economy. It was not always so. Fifty years ago, Africa's monetary systems were nearly equal in quality to those of Western Europe; today, Africa's monetary systems are palpably inferior. Reviewing Africa's monetary history can help us understand how recent monetary policies have contributed to Africa's underdevelopment and what can be done to improve matters.
African monetary history can be viewed as consisting of three periods so far: the precolonial era, during which parts of the
continent had regional currencies that promoted regional economic integration; colonialism, marked by integration into the
world monetary system through rigid links to the currencies of the European colonial powers; and the first generation or
more of independence, which has seen the disintegration of previous regional and world monetary links (except for
countries that have remained in the CFA franc zone and the South African rand zone). Africa may now be on the brink of a
fourth period, in which monetary reintegration may be possible, contributing to higher economic growth.
Africa north of the Sahara was for thousands of years home to civilizations that were among the most advanced on earth. Ancient Egypt, then Carthage, the Roman Empire, and the Islamic civilization that stretched around the Mediterranean Sea all had monetary systems that were highly developed for their times. By the 1600s, though, North Africa had definitely fallen behind Western Europe in economic development, including money and credit. Although North Africa's lag cannot be ascribed to any single factor, a key factor may have been that the printing press and innovations connected with it--including bank notes--originated in Western Europe, and spread faster there than in North Africa. North Africa's economic underdevelopment is thus a recent occurrence in the long view of history.
People in the parts of sub-Saharan Africa closely tied to the north by trade were familiar with coinage and banking long
before the era of European colonization. Besides gold, silver, and bronze coins from the north, sub-Saharan Africans used
so-called primitive monies that included salt, iron, copper, cattle, and slaves. Perhaps the best-known type of primitive
money was the cowrie currency of West Africa. Cowries, which are small seashells, were portable, durable, difficult to
counterfeit, and scarce in West Africa. They were readily accepted throughout the region as a means of payment and were
widely used as a store of value and unit of account as far back as the 700s. In fact, use of cowries persisted in some remote
areas at least until a generation ago. Though well adapted for use as money, cowries became subject to inflation from 1600
to 1900, first because European traders imported large amounts of cowries from the Indian Ocean and later because
European governments recognized only their own currencies as legal tender, thereby reducing demand for cowries. (1)
European trade and colonization in Africa were generally confined to the coast from the 1400s until about the time of the Berlin Conference of 1884-5, at which the European powers divided the interior of West Africa into spheres of influence. An important element of colonialism was replacing existing monies with European currency, principally by imposing taxes that had to be paid with European currency. Doing so allowed European soldiers, bureaucrats, and traders to deal in familiar European currencies rather than in African currencies that were not as widely accepted in international trade. Early colonial monetary legislation and practice emphasized the use of coins rather than notes (paper money). Initially in all colonies, the coins used were those of the colonial power plus other coins that circulated widely in international trade, such as Austria's Maria Theresa thaler, the U.S. dollar, and, in East Africa, the Indian rupee. Over time, each colonial power took steps to exclude currencies other than its own. For example, the British colony of Lagos began importing British coins systematically in 1892, and continued doing so until the British West African colonies established their own coinage in 1913. Southern Nigeria, as Lagos was later called, outlawed native currencies as well as barter transactions in 1904. Two years later, it outlawed use of the Maria Theresa thaler, which was often used for trade with Northern Nigeria (Onoh 1982: 32-3).
Many colonies eventually established their own government coinage, which generated profits for them. (2) A number of colonies made small government issues of notes in the 1800s to relieve shortages of coins. Angola and Sierra Leone made larger issues of notes, to finance government spending. Their notes were issued directly by government treasuries that had no actual or pretended independence from the executive branch. Many colonies made emergency issues of small-denomination notes during the two world wars, when naval warfare cut off shipments of coins from Europe. However, the habitual use of notes was confined to traders and European colonists for decades, and did not become really widespread until after the Second World War. In Nigeria, Gambia, Ghana, (3) and Sierra Leone, the value of notes in circulation did not exceed the value of coins in circulation until 1953 (Loynes 1962: 42). British colonies followed the practice of Britain itself, where until 1914 the smallest notes issued were for £5--more than the monthly salary of the many British workers who toiled in low-wage jobs. During the First World War the smallest denomination fell to 10 shillings (£0.50), but even that was more than the weekly wage of an average African worker at the time. In colonies of countries other than Britain, notes were issued in lower denominations, but housing conditions of the time made paper money highly vulnerable to deterioration by humidity and destruction by insects, unlike coins or primitive monies.
The European powers had different approaches to note issue in their colonies. Italy and Spain circulated the notes of their central banks. France, Portugal, Belgium, and Germany granted monopoly privileges of note issue to privately owned banks. Because the monopoly privileges were creations of government, the banks had partial state ownership or at least were subject to state supervision to an extent that was unusual for the era. (In French colonies, banks were government creations arising from the abolition of slavery in 1848. The French government compensated former slave-owning colonists by granting them shares in the new banks. Former slaves received no compensation.)
Most of the private monopoly note-issuing banks had their headquarters in Europe. Initially, besides being granted monopolies of note issue in the colonies, they had legal or de facto monopolies of commercial banking. The most prominent of these banks were the Banque de l'Algérie (later the Banque de l'Algérie et de la Tunisie) for the French colonies of Algeria and Tunisia; the Banque du Sénégal (succeeded by the Banque de l'Afrique occidentale) for French colonies in western and equatorial (central) Africa; the Banco Nacional Ultramarino for the Portuguese colonies of Angola, Mozambique, Cape Verde, and São Tomé and Principe; and the Banque du Congo belge for Belgium's Congo colony and its trusteeship territories of Rwanda and Burundi.
A private monopoly note-issuing bank was not expected to conduct an independent monetary policy, like a central bank; rather, it was expected to rigidly maintain the exchange rate between its European "anchor" currency and the colonial currency. A colonial currency typically had the same name as its anchor currency, and an exchange rate of 1 to 1 with the anchor currency. The main exception was East Africa, where German colonial currency and initially also British colonial currencies were denominated in the widely used Indian rupee.
Britain was the only colonial power that in some colonies allowed free banking. (4) Free banking arose in Mauritius and South Africa in the 1830s because at the time it was the norm in other British colonies and in Britain itself. Lesotho, Malawi, Swaziland, Zambia, and Zimbabwe were in effect offshoots of British colonialism in South Africa, so they later had free banking also, from the time the first bank branches were established (1892 in Zimbabwe, the earliest case) until 1939. Banks continued to issue notes in Namibia until 1962 (Schuler 1992a: 43). In Nigeria, the Bank of Nigeria briefly issued notes around 1900, but ceased after demand proved small (R. Fry 1976: 74).
In 1848, one of the two note-issuing banks in the free banking system of Mauritius failed as a result of a fall in the price of sugar, the island's most important crop. The other bank survived, but confidence in it was shaken and its notes traded at less than their face value. In response, the colonial government the following year established the world's first currency board to become a monopoly issuer of notes (Mauritius Commercial Bank Limited 1963: 10). After a similar failure in Sri Lanka in 1884, currency boards became the standard monetary system for most British colonies that were not self-governing. After some experimentation with various types of reserve assets, reserve ratios, and operating procedures, the currency board system received its classic expression in the West African Currency Board. The West African Currency Board was established in 1912 and opened for business in 1913 to serve Nigeria, Ghana, Sierra Leone, and Gambia. It issued the West African pound, equal to the pound sterling. The currency board supplied West African pounds passively in response to demand, without undertaking an activist monetary policy, and held at least 100 percent assets in pounds sterling against its notes and coins in circulation. Liberia, though not a member of the currency board, used the West African pound as its currency until switching to the U.S. dollar in 1943. The West African Currency Board became the model for all subsequent British colonial currency boards, including the East African Currency Board (for Kenya, Uganda, Tanzania, the British part of Somalia, and southern Yemen), the Southern Rhodesian Currency Board (for Zimbabwe, Zambia, and Malawi), and currency boards in Libya and the Italian part of Somalia. Ethiopia and Eritrea used currency of the East African Currency Board after the British army routed occupying Italian forces during the Second World War (Schuler 1992b: ch. 3-6).
The most prominent colonial banks of European powers other than Britain have already been mentioned. Prominent British colonial banks, also termed imperial banks, included the Bank of British West Africa, the Colonial Bank, the National Bank of India (later National and Grindlays Bank), and the Standard Bank of South Africa. Unlike France, Portugal, Belgium, and Germany, Britain never granted legal or de facto monopolies in banking for its African colonies.
Banking had existed for centuries in parts of Africa before the colonial banks came, but those banks were partnerships, in which the owners were also the managers. The European-based banks established in Africa in the 1800s and early 1900s, and local banks influenced by European models, were corporations, in which the hundreds or thousands of owners of stock could be entirely separate from the managers. The colonial banks were not multinational in today's sense because they did most of their business within the limits of their respective colonial empires. With few exceptions, notably the Portuguese Banco Nacional Ultramarino, they were strictly overseas banks, having extensive branch networks in the colonies but not in Europe. The Standard Chartered Bank is the only remaining bank to follow this pattern: its headquarters are in London but its branches are mainly in former British colonies in Africa and Asia. The corporate ancestors of the Standard Chartered Bank include the Bank of British West Africa and the Standard Bank of South Africa. Other former British colonial banks have been absorbed into such larger entities as Barclays Bank and the Hongkong and Shanghai Banking Corporation (HSBC) (Jones 1993).
Colonial currencies and banks promoted economic integration with the colonial power, its other colonies, and to a lesser extent the rest of the world. In the Portuguese, French, and British colonies, there were important trade and financial connections between colonies, especially between India and East Africa and between South Africa and its neighbors. Within the currency zone comprising a particular European country and its colonies, there were no exchange controls. Capital was free to migrate from Europe to Africa or within Africa. A Nigerian who used a West African pound was using a version of the same pound as existed in Britain, South Africa, Australia, or Jamaica. A Senegalese who used a West African franc was using a version of the same franc as existed in France, Madagascar, Tahiti, or Martinique. (The Portuguese colonies were a partial exception to this rule [Estêvão 1991: 25-102].) Colonial banking systems, with their links to European money markets, facilitated movements of capital. Moreover, the currencies of the colonial powers had rigid exchange rates with each other under the so-called classical gold and silver standards before the First World War, under the interwar gold standard from 1926 to 1931, and under the Bretton Woods system from 1945 to 1973. The success of these arrangements varied, but all provided a form of worldwide monetary integration.
Table 1 summarizes the variety of monetary systems African countries have had in the modern era, which I identify as
starting with the first issue of paper money or fairly widespread use of coins. More detailed historical information on each
country can be found on my personal Web site (www.dollarization.org). When looking at the dates ascribed to various
monetary systems, readers should recall that they apply to the most important trading cities; in most countries, modern
banks and use of modern money took several decades to spread to the interior.
[See Table 1 in the "References and tables" file for African country monetary histories.]
By imposing their own currencies, banking systems, and other economic regulations within the arbitrary boundaries according to which they had divided Africa, the colonial powers partly disrupted economic integration within Africa. At the same time, though, colonialism promoted economic integration with Europe and the rest of the world. The monetary and banking systems of the colonial era were often criticized for supposedly not doing enough to promote economic growth. Today, with the advantage of hindsight, we can see that they generally performed better than the systems that have replaced them.
With few exceptions, colonial currencies succeeded in preserving rigid exchange rates with their anchor currencies. Government-issued currency was at a discount to the currency of the colonial power chronically in Angola and briefly in Sierra Leone (Sousa 1969; Cox-George 1964: 97). The case of Mauritius has already been discussed. In Réunion, the local private monopoly note-issuing bank experienced trouble because "it was considered more an aid-granting institution than a commercial establishment" (elle était considerée plus comme une institution d'assistance que comme un établissement commercial) (Neurrisse 1987: 72). France's African colonies south of the Sahara, on the other hand, emerged from the Second World War with less damage than France because they had not suffered invasion and widespread destruction of property. Consequently, by 1948 the CFA franc, created in 1945, was worth two French francs, whereas before the war the local franc had been equal to the French franc. (The French franc was redenominated in 1960, with 100 old francs being equal to one new franc; the CFA franc became worth 0.02 new francs, with no change in its real value.) "Currency famines"--shortages of coins relative to notes, or of notes and coins relative to deposits--were rare, though there were a few recorded cases, apparently resulting from the high costs of transporting coins to widely dispersed bank branches (Newlyn and Rowan 1954: 57).
For most of the era of colonial monetary systems in Africa, the currencies of the European colonial powers had rigid exchange rates with gold. Before the First World War, it was ambiguous whether colonial currencies were anchored to gold directly, or only indirectly through European currencies. Wartime policies established that European currencies were in fact the anchors. Fixed exchange rates therefore linked inflation in Africa to inflation in Europe. European currencies were devalued against gold and suffered inflation at times, particularly during and shortly after the two world wars. The gold value of the pound sterling, the most stable of the anchor currencies, fell from approximately 7.3 grams of gold in 1931 to approximately 2.5 grams after sterling's 1949 devaluation. In terms of the U.S. dollar, the depreciation was from $4.87 to $2.80 per pound. From 1914 to 1958 the old French franc, the weakest of the anchor currencies, depreciated from approximately 0.29 grams of gold to 0.0021 grams. African countries could have had lower inflation had they been rigidly linked to gold, but their experience of weak currencies since independence suggests they would not have succeeded in maintaining rigid links.
Colonial banking systems were stable, and failures by European-chartered colonial banks were rare. The Banque du Sénégal was recapitalized in 1901 as the Banque de l'Afrique occidentale and its headquarters was moved to Paris from Saint-Louis, Senegal, but it did not fail. The Banque française de l'Afrique failed in 1931 and was rescued by the Banque de l'Afrique occidentale with help from the French government (Alibert 1983: 48-53, 88-97). Mozambique's Banco de Beira was liquidated in 1929 (Banco Nacional Ultramarino 1977: 13). No British imperial bank seems to have failed in Africa or anywhere else after the Bank of Egypt in 1911. Locally owned banks were far more prone to trouble. For example, Egypt's Bank Misr collapsed and was reorganized in 1939-40, while Nigeria experienced a number of runs and failures among its native banks in the 1950s (Uche 1997: 225-7).
In the colonial era there were frequent complaints about monopoly or oligopoly behavior by banks. As has been mentioned, France, Portugal, Belgium, and Germany created monopoly private note-issuing banks that initially also had legal or de facto monopolies of commercial banking. In French West and Equatorial Africa, the Banque du Sénégal and its successor the Banque de l'Afrique occidentale had no competition until 1904, when the Banque française de l'Afrique was established, and had no strong competition until 1924, when the Banque commerciale africaine was established. Even after that, the Banque de l'Afrique occidentale retained a predominant position until 1940, when some large French banks began establishing branches in its territory (Alibert 1983: 160).
In British colonies, both the British government itself and some colonial governments could grant bank charters. Mauritius, South Africa, and later Nigeria all had locally chartered banks of some importance operating alongside British-chartered banks. However, other than in Mauritius during the early years of banking there, British-chartered banks dominated because they had easier access to the London capital markets and hence could grow larger and more diversified than locally chartered banks. Another factor contributing to their dominance was the reluctance of many colonies to grant charters to small local banks, which were correctly perceived to be more likely to fail than their larger rivals. In Ghana there was an outright prohibition on locally chartered banks under an act of 1906 (Onoh 1982: 95). Two colonial banks dominated the British West African colonies, seemingly with little desire for vigorous competition (Bauer 1963 [1954]: 180-8). In Britain's other African colonies the number of banks was larger, but complaints of oligopoly were still made. However, the profits of British colonial banks operating in Africa do not seem to have been extraordinarily high compared to those earned by banks operating on other continents or in Britain (Jones 1993: 418-88).
No systematic studies of interest rates in colonial monetary systems seem to exist. Rates were closely linked to rates in the colonial power, but were not necessarily uniform (see Bloch-Lainé and others 1956: 244-5). In East Africa, the practice of banks was for many years to pay interest rates on one-year deposits 1.5 to 2.5 percent higher than the Bank of England's discount rate. (Demand deposits typically did not pay interest.) In October 1960, the minimum rate banks that banks charged on loans in East Africa was 8 percent, the rate for one-year deposits was 5 percent, and the rate on savings bank deposits was 3.5 percent (Crick 1965: 402). In Nigeria in 1951, bank interest rates were 8 to 12 percent for overdrafts, 12.5 percent (the legal maximum) for mortgages, and 45 percent (the legal maximum) for unsecured loans (Newlyn and Rowan 1954: 113). Interest rates for loans were higher in the colonies than in the colonial powers for a number of reasons, including higher risk of default and higher transport costs (Greaves 1953: 49).
Africans correctly perceived that gaining access to bank credit was harder for them than for European colonists. A large part of the explanation is that banks were often unable to obtain suitable loan collateral from Africans. Much African land ownership was communal, and could not be transferred to banks without government permission (Crick 1965: 362). Europeans were better credit risks to the extent they had registered titles whose ownership could pass to banks in case of default (Bauer 1963 [1954]: 185; Zwanenberg and King 1975: 287). (5) Since land was the main asset of most Africans, inability to pledge land as collateral meant that if they could obtain bank loans at all, it was at high interest rates. Africans who could not obtain bank loans had to borrow from revolving credit associations, moneylenders, pawnshop dealers and other "informal" lenders who offered less favorable terms than banks. Communal ownership of land and the resulting inability to gain individual title to land persist today (Firmin-Sellers 2000, Jeter 2000). They help account for the continuing importance in Africa of informal finance, particularly the savings circles referred to by many different local names (tontines, etc.).
The advent of banks reduced local interest rates, often dramatically. About 1867, the Banque du Sénégal noted that its presence in Saint-Louis, Senegal had reduced lending rates on merchants' acceptances (effets de commerce) from 12 percent to 6 percent (Alibert 1983: 33). Even so, colonial banking systems and colonial currency boards have been criticized for investing much of the funds they gathered in the money markets of Europe rather than reinvesting it into local economies, whose poverty presumably indicated a far greater need for investment. In British colonies, local assets were typically less than 50 percent of local deposits through the 1950s. But, to repeat, locally owned banks in the colonies, whose local assets were nearly equal to their local deposits, were precisely those most prone to failure (Schuler 1992b: ch. 9). British colonial banks had large holdings of British assets because they saw no further opportunities for colonial lending that promised satisfactory risk-adjusted returns, because of such factors as the inability of Africans to pledge land as collateral. As colonial economies grew, opportunities for local lending also grew, and the ratio of local assets to local deposits increased. For instance, by December 1963 local earning assets were 86.1 percent of local deposits for East Africa as a whole, and 121.6 percent for Uganda (Engberg 1965: 196).
Under colonialism, Africa had monetary systems whose quality was high by world standards. Despite the difficulty in
obtaining accurate economic statistics, it is clear that income per person was growing in most of the continent, and that the
rate of growth was respectable though not spectacular. The contribution of monetary systems to economic growth is still a
matter of debate among economists, (6) but it can be said with confidence that colonial monetary systems contributed to
spreading monetary exchange and establishing more sophisticated forms of credit. To the extent that these developments
were voluntary rather than forced on Africans by colonial governments, they clearly contributed to economic development.
(Of course, good monetary institutions alone are not sufficient for economic development. Liberia, which has never been a
colony, used the West African pound or U.S. dollar for most of the 20th century and welcomed foreign banks. But only a
small elite enjoyed the resulting benefits, leading one group of experts to label Liberia a case of "growth without
development" [Clower and others 1966].)
Upon or before achieving independence, African nations began the policies that would contribute to the disintegration of their links to world financial markets. They were influenced by the prevailing trend in economic theorizing, which since shortly after the First World War had favored central banks for independent nations. Africa already had a few central banks by the early 1900s. Egypt established a central bank in 1898. Like most central banks of the time, it performed some commercial banking activities and was privately owned (by British stockholders, since Egypt was under British domination). Ethiopia in 1905 granted a monopoly charter to a privately owned bank that acted as a quasi-central bank. Morocco in 1907 established a central bank; the Algeciras Conference of 1906 required the central bank to be owned by a consortium of foreign banks. South Africa, which became independent of Britain in 1910, established a central bank in 1921 as a consequence of Britain's difficulties in returning to the gold standard after the First World War. The South African Reserve Bank's influence extended to Botswana, Lesotho, Namibia, and Swaziland, which all used South African currency as their official currency for many years. Portugal in 1926 established the Banco de Angola as a type of central bank. The Banco de Angola also had commercial banking functions, as a result of taking over branches from the Banco Nacional Ultramarino.
Following the Second World War, English-speaking economists debated whether British colonies moving towards independence should establish central banks or continue to have currency boards. Critics of currency boards claimed that currency boards held excessive foreign reserves, representing a loss of income to the colonies; that the currency board system unnecessarily forced the money supply to shadow the current-account balance (trade in goods and services); that currency boards did not allow a discretionary monetary policy for promoting economic growth; and that banking systems would be more stable if they had central banks to act as lenders of last resort. On the other side of the debate, a number of colonial officials, economists, and even central bankers questioned the wisdom of establishing central banks in developing countries. They feared that central banks might become instruments of inflationary deficit finance; pointed to practical problems of training a sufficient number of African officials to operate central banks; and contended that central bank policy in countries without well-developed domestic bond markets would be impotent. World Bank missions to Nigeria and East Africa recommended retaining currency boards temporarily or indefinitely.
By the late 1950s, however, central banking had won the theoretical debate. Economists and policy makers eventually realized the error of the claim that a central bank needs a domestic bond market to conduct an effective monetary policy, which was one of the principal arguments made against establishing central banks in Africa. Even without a bond market, a central can influence credit by changing the minimum reserve ratios required of commercial banks, by rediscounting loans and other assets held by commercial banks, or even by offering credit to the public directly. By the 1960s central banking had won the practical debate also, as central banks were established in one African country after another. (7)
Even before African countries established central banking, the existing monetary authorities in a number of British and French colonies began to operate more and more like central banks, although the necessity of maintaining a rigid exchange rate restricted their independence in monetary policy. The conservatism of British colonial currency boards was often a matter of administrative practice rather than legal statute, since most currency board constitutions allowed considerable latitude of action. The West African Currency Board statute, which became a model for currency board statutes elsewhere, set no reserve requirement, nor did it much restrict the type of assets the board could hold. It said only that "The Board may invest its funds in sterling securities of the Government of any part of His Majesty's dominions, or in such other manner as the [British] Secretary of State [for the Colonies] may approve." The statute added that "When the Board is satisfied, and shall have satisfied the Secretary of State, that its reserves are more than sufficient to secure the convertibility of the note and coin issue [into sterling], and to provide a reasonable reserve against possible depreciation, the Board may pay over the whole or part of the surplus amount in aid of the revenues of the British West African governments" (West African Currency Board statute, reprinted in Loynes 1962: 42-3).
In the 1940s and 1950s, British colonial administrators began allowing currency boards to reduce their holdings of foreign assets from the orthodox level of 100 percent of monetary liabilities. The Southern Rhodesian (later Central African) Currency Board was governed by a more specific law than the West African Currency Board, but in 1942 the law was amended to allow the currency board to invest up to 10 percent of its assets in securities of Zimbabwe or Zambia. A 1947 amendment allowed the currency board to invest in securities of what is now Malawi and provided that "the Board shall, if required by any Government [of the three in its currency area], invest in such local stock of that Government and to such amount as may be requested by that Government" up to a maximum of 20 percent of the currency board's assets. By 1951, 44.9 percent of the currency board's assets were invested in local securities (Newlyn and Rowan 1954: 67, 284). In 1956, a central bank replaced the currency board. In 1964, political tensions with Rhodesia's white minority regime led Zambia and Malawi to establish separate central banks.
The East African Currency Board's regulations were amended in 1955, 1957, 1960, and 1964 to allow it to hold and then increase its local assets. By June 1965 the board's local assets were 28 percent of total assets. In August 1960 the board moved its headquarters from London to Nairobi. The British Secretary of State for the Colonies continued to appoint the directors, but the directors were local government officials rather than officials in London as formerly. In May 1962, during political uncertainty related to Kenya's struggle for independence, the currency board tried to discourage outflows of capital by changing its commission rates from 1/4 percent for both purchases and sales of sterling to 1/8 percent for purchases and 3/8 percent for sales. In November 1964, when interest rates in London increased sharply, the board signalled its intent to act as a lender of last resort for crop finance (Kratz 1966; Crick 1965: 390-3). Despite proposals to replace the East African Currency Board with a single central bank, as Kenya, Tanzania, and Uganda achieved independence from 1961 to 1963, they could not agree on the powers and distribution of profits from the proposed central bank. Part of the disagreement stemmed from Tanzania having a more socialistic approach to economic policy than either Kenya or Uganda. In June 1965, each country announced that it would set up its own central bank (Hazlewood 1967: 103-5). The new central banks opened in 1966.
The West African Currency Board remained orthodox to the end. In particular, it refused to act as a lender of last resort. As far back as 1952, a motion had been proposed in the Nigerian legislature to establish a central bank precisely because the supporters of native banks desired a government rescue (Uche 1997: 224). Ghana became the first member of the West African Currency Board to achieve independence, in 1957. The following year, the Bank of Ghana took over note issuing functions from the Accra branch of the currency board and began operating as a central bank. Nigeria opened a central bank in 1959 and became independent in 1960. Sierra Leone became independent in 1961 and established a central bank in 1964. The currency board remained as the Gambia Currency Board until Gambia opened its own central bank in 1971.
Unlike the case with the British colonies, after the Second World War there seems to have been little public debate in France and its colonies about the merits of retaining existing monetary arrangements versus establishing central banking. There was, however, a growing realization that France would have to allow Africans more influence if it wished to preserve the franc zone. In 1955 France created two monetary institutes, one for west Africa and another for equatorial (central) Africa. They were intermediate steps between the central banking systems of the future and the old system of issue by the privately owned Banque de l'Afrique occidentale. (8) The monetary institutes were French rather than African institutions, in which the French government controlled two-thirds of the votes. In 1959, one year before France granted independence to all its sub-Saharan African colonies, the monetary institutes were converted into central banks that continue to issue the CFA franc today. A treaty of 1962 created the Union monétaire ouest-africaine (UMOA) and reduced France's voting power to one-third in the Banque centrale des États de l'Afrique de l'ouest (BCEAO). Another agreement of the same year reduced France's voting power to half in the Banque des États de l'Afrique centrale (BEAC). Finally, agreements of 1972 and 1973 reduced France's voting power to the level of the African member states; established the central banks as truly international organizations (rather than French organizations); and envisioned moving their headquarters from Paris, which was done in 1977 for BEAC and 1978 for BCEAO.
The Belgian colonies of Congo, Rwanda, and Burundi had had a joint currency since 1916 and a joint central bank since 1952. Soon after becoming independent in the early 1960s, each established its own central bank. Among Portuguese colonies, Angola had had a limited central bank since 1926. Cape Verde, Mozambique, and São Tomé and Principe did not establish central banks until after they achieved independence in 1975. Until then, the Banco Nacional Ultramarino continued to act as both a commercial bank and a monopoly issuer of notes.
As symbols of independence, many countries renamed their currencies. For example, the Libyan pound became the dinar, the Mozambique escudo became the metical, and the Congo franc became the zaïre (today it is again called the franc). To emphasize their reorientation from sterling to the U.S. dollar as the anchor currency, a number of former British colonies did not just rename their currencies: they established new currency units whose worth was closer to $1 than to £1, (9) and converted to the decimal system from the pound-shilling-pence system of 20 shillings per pound and 12 pence per shilling.
The wave of central banks established in the late 1950s and the 1960s weakened but did not end the monetary integration of most African countries with the former European colonial powers. The Bretton Woods system restricted the scope for activist monetary policy in countries that belonged to the International Monetary Fund. Most African countries joined the IMF soon after achieving independence. The necessity of maintaining a pegged exchange rate to the pound sterling, French franc, or U.S. dollar, and hence indirectly to gold, allowed most of the noncommunist world to achieve an imperfect but significant degree of monetary integration. For the most part, the discipline of the system also prevented episodes of high inflation.
However, during most of the existence of the Bretton Woods system (1945-73), the currencies of European colonial
powers other than Belgium were weak compared to the U.S. dollar, the key currency of the system. The pound sterling,
French franc, and Portuguese escudo were all devalued in 1949. The franc was devalued again in 1958 and 1969. Sterling
was devalued in 1967 and allowed to float (that is, depreciate) in 1972. In the absence of incentives such as those offered
by France to the countries of the CFA franc zone, sterling ceased to be widely used as an anchor currency by former British
colonies. Most of the former colonies switched to the dollar as the new anchor, but treated the anchor much more loosely
than they had under the Bretton Woods system. One reason they did so was that in the mid and late 1970s the dollar
experienced problems, as inflation rose to low double digits in the United States. The currencies of many African countries
actually appreciated against the dollar in the 1970s, though all except the Djibouti franc have since depreciated, usually by a
large amount.
Of the currency zones that existed in the colonial era, only the CFA franc zone and the South African rand zone have survived. Guinea (1960), Madagascar (1973), and Mauritania (1973) left the CFA franc zone permanently because of political differences with France. Togo left in 1962 but rejoined BCEAO in 1963. Mali also left in 1962, but re-entered the franc zone in 1967 and rejoined BCEAO in 1984. The zone now also includes the former Spanish colony of Equatorial Guinea (since 1985) and the former Portuguese colony of Guinea-Bissau (since 1997). In total, the zone now has 15 African countries plus France. (10)
The CFA central banks must deposit at least 65 per cent of their foreign reserves with the Bank of France, which pays interest on the deposits and supervises the CFA franc zone. France's willingness to subsidize the CFA franc zone has been crucial to the zone's persistence. The CFA central banks have access the French Treasury, which has typically been willing to grant credit to cover shortfalls of foreign reserves because the amounts have been small. (The population of the CFA franc zone exceeds that of France, but the GNP of the zone, calculated on an exchange-rate basis, is only about 5 percent of France's GNP.)
Contrary to a widespread misconception, the monetary system of the CFA franc zone has never been a currency board. The CFA central banks are required to hold French franc reserves equal at least 20 per cent of their liabilities payable on demand, but may hold the rest in domestic securities. In contrast, orthodox currency boards hold foreign reserves equal to 100 percent of all monetary liabilities. The exchange rate of the CFA franc is pegged, rather than fixed like the exchange rate of an orthodox currency board. The CFA franc's well publicized troubles in the 1990s arose from the agreements that France and the African member countries made in 1972 and 1973, which in effect relaxed monetary discipline in the zone. The central banks, BCEAO and BEAC, were limited in their ability to finance the budget deficits of member governments directly, but the limits did not prevent "off-budget" rescues of state-owned banks or government-run crop marketing boards. By lending excessively, the central banks created an oversupply of CFA francs. The result was capital flight from the CFA franc zone, which threatened to deplete the foreign reserves of the central banks (Guillaume and Stasavage 2000: 1396-1400). To remedy the situation, in August 1993 the central banks restricted exchanges of CFA francs into French francs. In January 1994 the CFA franc was devalued from 50 per French franc to 100, restoring the parity that had existed until 1945. (11) Since the devaluation the CFA central banks have been managed more conservatively, and to promote closer supervision their members in 1994 established closer regional economic unions (the Union économique et monétaire ouest-africaine, which includes the members of BCEAO, and the Communauté économique et monétaire de l'Afrique centrale, which includes the members of BEAC).
The other monetary zone that has persisted is the Common Monetary Area: South Africa plus Namibia, Lesotho, and Swaziland. (Zimbabwe was a sort of subsidiary member until 1972, for the exchange rate between its currency and South African currency remained constant until then.) The South African rand is the anchor currency of the zone, and South Africa is the largest trading partner of the other member countries. At first all the members of the zone used South African currency. Botswana withdrew from the Common Monetary Area in 1976, when its recently established central bank began issuing a national currency, the pula. In 1977, the pula ceased to be pegged to the rand. Lesotho, Swaziland, and Namibia later began issuing currencies worth one rand. They allow the rand to circulate alongside their currencies, and in return South Africa shares with them its profits from issuing the rand. Within the zone there are no exchange controls; uniform controls apply to capital movements outside the zone. The rand itself is a floating currency.
Monetary disintegration in the era of independence was not limited to currency; it also extended to banking. By the time most African countries had been independent for several years, they limited the ability of foreign banks to offer services. The resulting vacuum was filled by government banks or locally owned private banks, a process that came to be called indigenization or Africanization. Egypt was the first African country to begin indigenization, in 1956. Countries that nationalized their banking systems outright included Egypt (by 1961), Algeria, Angola, Cape Verde, Ethiopia, Ghana, Guinea, Libya, Madagascar, Mozambique, Nigeria, São Tomé and Principe, Sudan, and Tanzania. (12) In South Africa, which had the most advanced banking system on the continent, foreign banks divested local operations not as a result of local political pressure, but to comply with international sanctions against the white minority regime's policy of apartheid.
The policy of breaking colonial monetary links enabled political leaders of newly independent nations to create institutions to promote their personal visions of economic development. Ghana, Guinea, Libya, Madagascar, Mozambique, Tanzania, and other countries were powerfully influenced by socialist ideas. Even countries that did not go all the way to socialism established various forms of "financial repression": compulsory lending to specific sectors or state enterprises, interest-rate ceilings, high reserve requirements for banks, and myriad other controls on financial institutions. (13)
Changing the focus of African banking systems from profits to political goals converted them from stable components of the world banking system, with ready access to world financial markets, to small and weak national units with little access to world markets. From 1980 to 1999, 37 African countries experienced systemic banking crises and 10 more experienced borderline crises. (14) Tax-financed rescues of insolvent banks are estimated to have cost 10 to 25 percent of GDP in Benin, Côte d'Ivoire, Mauritania, Senegal, and Tanzania (Kane and Rice 2000: 23-6, 30). In comparison, the U.S. savings and loan rescue of the 1980s cost perhaps 3 percent of U.S. GDP and the failure of Crédit Lyonnais in the 1990s cost less than 1 percent of France's GDP.
Africa's withdrawal from the world monetary system was part of a wider trend. The worldwide economic depression of the 1930s had long-lasting effects on economic policy. It convinced policy makers in many countries, especially those dependent on commodity exports, that a high degree of openness to international trade and finance was dangerous. To reduce dependence on world markets, many countries tried to develop manufacturing sectors that produced mainly for the domestic market. The apparent success of the Soviet Union at achieving rapid industrialization in isolation from world markets inspired imitators, including in Africa. The Soviet model required extensive exchange controls (to prevent consumers from buying the foreign goods they preferred to shoddy domestic substitutes) and centralized control of credit (to channel investment into sectors desired by governments rather than by consumers).
The Soviet model of economic development looked especially attractive in the 1970s, when Western capitalism was experiencing a time of troubles. The Bretton Woods system, a key element promoting international openness, collapsed in 1971 when the United States abandoned the gold standard. The system received its burial in 1973, when governments ceased trying to reconstruct it. The resulting double-digit inflation and recessions in the advanced industrial economies suffered created doubts about their economic resilience. In contrast, the 1970s were a boom period for commodity-based economies such as those of most African countries. Part of the increased demand for commodities resulted from demand to hedge against inflation in developed countries.
In the 1980s the advanced industrial economies tamed inflation, their currencies strengthened, and the prices of many commodities collapsed. Mexico's default on its foreign debt in 1982 triggered a contraction of lending to developing countries generally, causing many African countries to default on their foreign debt. To compensate for the loss of foreign credit, African central banks created money to finance government budget deficits. A number of African currencies were already chronically weak, as a result of the misguided monetary policies they followed after changing the monetary arrangements that had restrained inflation under colonialism. In the 1980s most remaining African currencies also became chronically weak, losing whatever confidence people had in them by depreciating more or less continuously against their former anchor currencies. The consequences of bad monetary policy were worse in Africa than elsewhere because Africa had the least wealth to cushion itself from errors. Bad monetary policy contributed to a long period of lost growth after the debt crisis: for sub-Saharan Africa, GNP per person fell in 10 of the 12 years from 1983 to 1994 (World Bank 2000).
Table 2 takes a long view of currency depreciation, based on exchange rates against former colonial anchor currencies. For
example, in 1950 the local currency of Nigeria, the West African pound, was equal to the pound sterling. Nigeria
introduced the Nigerian pound in 1959 at 1:1 with the West African pound. As part of decimalization it introduced the
naira in 1973 at 2 nairas = Nigerian £1. In 2000 it took 164.32 Nigerian nairas, the present currency, to buy a pound
sterling. Dividing by two to correct for the lower value of the naira when introduced, the result is that Nigeria's currency
depreciated from 1 per pound sterling in 1950 to the equivalent of 82.16 per pound sterling in 2000. Most of the countries
with the worst depreciations have suffered civil wars, but other cases result from inept monetary policy in peacetime.
[See Table 2 in the "References and tables" file for African country monetary histories.]
Indicators of the quality of monetary policy other than currency depreciation have also been bad for most African countries
since they achieved independence. Although the colonial powers imposed exchange controls during and after the world
wars, in peacetime they imposed no controls within their colonial empires. As independent countries, most African
countries have imposed exchange controls applying to all other countries. The exceptions have been countries belonging to
the Common Monetary Area, which has no internal exchange controls, and countries belonging to the CFA franc zone,
which impose relatively few significant controls within the zone or with France. At the end of 2000, almost no developed
countries had significant exchange controls. In Africa, though, there were only three countries-- Djibouti, Gambia, and
Uganda--without multiple exchange rates, restrictions on purchase of foreign securities by residents, or other significant
exchange controls (International Monetary Fund 2001). Since independence, a number of countries (listed in the appendix)
have undertaken currency confiscations, which reduce the real value of currency and sometimes also bank deposits held by
the public. Such confiscations have not occurred in developed countries, or in developing countries without central banks.
At present, Africa is quite poorly integrated into the world monetary system. Reintegration would make Africa more likely to achieve the take-off in economic growth that everyone hopes for. Here again, Africa could be part of a wider trend. Banking crises and dissatisfaction with the performance of local currencies have not been unique to Africa or to developing countries in recent years. Let us first consider banking. The great majority of the world's independent countries experienced banking crises in the 1980s or 1990s (Frydl 1999: 27-9). In many cases, an important reason for the crises was that local banks were weak because they were small and not well diversified. The major emerging-markets currency crises of the last ten years have caused banking crises in most of the affected countries. Only in the extremely stressful circumstances of Argentina in 2002 did the crises cause failures by local branches or subsidiaries of large international banks; in other cases, foreign banks often gained deposits while purely local banks were losing deposits. Economies of scale in banking and other financial services are leading to the creation of increasingly large institutions, with worldwide reach. Isolating African banking systems from foreign competition and foreign participation means missing these economies of scale, in particular the greater stability that can occur when banks are better able to diversify risks through their own international branch networks or through access to world financial markets.
The best policy for African countries, as for all countries, is to open their financial systems completely to foreign participation. When Africa was better integrated into world financial markets, under colonialism and in the early years of independence, its banks were of international quality, and its banking systems were stable. Access to the world's largest financial markets more effectively provided stability in that era than local central banks have done in the era of monetary disintegration. How best to return to the openness African monetary systems once had varies from country to country, depending on the laws and institutions of each. There has been much debate among economists about the proper order of financial liberalization for developing countries. For example, some observers claim that a developing country should wait to abolish exchange controls until it has a highly developed and solid financial system. A lesson of the debate is that for financial liberalization to work well, monetary policy and financial regulation must be consistent. "Financial repression" typically socializes both the profits and losses of the financial system. It is an inefficient but consistent policy. Financial liberalization that privatizes both profits and losses is also consistent, but more efficient. Financial liberalization that privatizes profits but socializes losses is inconsistent and can cause even more problems than financial repression. One way to promote consistency in financial liberalization is to avoid having a central bank. Socializing the losses of financial institutions directly through government spending is usually more difficult politically than socializing the losses by asking the central bank to act as a lender of last resort.
Turning now to currency, most African and other countries with central banks have in general had far worse monetary policy than they would have had by simply using one of the leading international currencies (the U.S. dollar, German mark/euro, or Japanese yen) (Schuler 1996). The establishment of the euro was an implicit recognition that other Western European currencies would probably never achieve the same level of international credibility and acceptance as the German mark. By replacing national currencies with a common currency, the euro zone has eliminated the differences in credibility and acceptance. The establishment of the euro has also shown that renouncing independent monetary policy is possible, even for long-independent countries whose central banks are among the world's oldest.
If currency unification is desirable in Western Europe, it is well worth considering in Africa. (15) As has been mentioned, Africa already has two common currency zones: the CFA franc zone and the Common Monetary Area centered on the South African rand. The CFA franc zone may become part of a larger common currency area. In April 2000, leaders of Gambia, Ghana, Guinea, Liberia, Nigeria, and Sierra Leone agreed to establish a common currency among themselves by 2003, and to work towards merging it with the CFA franc the following year (Masson and Pattillo 2001: 5). Even more ambitiously, the Abuja Treaty of 1991, signed by the member countries of the Organization of African Unity, envisions a number of continent-wide institutions by 2028, including an African Central Bank. It remains to be seen whether these projects will bear fruit.
The question about existing or new common currency zones in Africa is, How good can they be? Africa has no equivalent of the German mark--a highly credible currency to serve as a node around which a common currency could emerge. The CFA franc has perhaps as good a long-term record as any currency on the continent, but since the 1970s it has experienced problems that have already been discussed. Whether a central bank issuing a regional or continental currency chose to have a pegged exchange rate or a floating rate, it would have to spend a number of years achieving credibility. Until then, real interest rates in the currency would likely be higher and financial markets would be much smaller and less liquid than they are in the major international currencies.
My view is therefore that under Africa's particular circumstances, currency unification should take the form not of an independent African monetary policy, but of currency boards linked to the euro or the U.S. dollar, or official adoption of one of those currencies ("euroization" or "dollarization"). The idea is not new: Milton Friedman (1973: 44-5) long ago recommended that developing countries achieve currency unification by unifying their monetary policies with the policy of one of the leading developed countries. In the years since, experience has shown how difficult it is for most central banks, even those with long histories, to make their currencies stable and credible over extended periods. We still do not know precisely why it is so difficult, but it is a brute fact of considerable importance. In contrast, as long as a suitable anchor currency exists, maintaining stability and credibility through a currency board or dollarization is much easier. The record of currency boards in maintaining fixed exchange rates is almost perfect and the record of officially dollarized monetary systems is apparently perfect (Schuler 1999: 86). (16) The recent and long-term record of currency boards in other respects is also good (Hanke 2000, Schuler 1992b). The record of official dollarization has not been extensively surveyed, but dollarized countries have generally had higher-quality monetary policy than countries with central banks. (17)
Orthodox currency boards and dollarization (or euroization) work very much alike. Comparing the two systems, the main advantages of currency boards are retention of profits from issuing notes and coins, and the option of switching to a different anchor currency should the original anchor become quite unstable. (18) The main advantage of official dollarization or euroization is greater credibility, hence lower interest rates. Credibility comes from lack of a separate monetary authority that might be converted into a central bank and a separate currency that might be devalued. In my view, for countries where the political will exists, dollarization or euroization would be better than currency boards anchored to the euro or dollar. Dollarization or euroization would particularly be better where the type of currency board being proposed is an unorthodox one, which includes central banking functions such as lending to commercial banks. The International Monetary Fund seems to favor unorthodox currency boards over orthodox ones in its advice to member countries. However, Argentina, Lithuania, and Hong Kong suffered speculative attacks on their currencies during regional currency crises of the 1990s as a result of the incomplete credibility of their unorthodox currency boards, and Argentina abandoned its system, known as the "convertibility" system, amid extreme, self-inflicted distress in January 2002. More orthodox currency boards have generally not suffered speculative attacks. (19)
It is not necessary for governments to restrict the use of any currency. People should be free to make contracts in whatever currency they wish, which implies that all exchange controls should be abolished. For financial simplicity, though, in countries without a domestic currency the government will choose to operate largely or wholly in a single foreign currency. The government's choice will powerfully influence which currency its citizens mainly use. In choosing between the euro and the dollar, the main advantage of the dollar is that it is the most widely used currency in international trade and finance. Most internationally traded commodities are priced in dollars, and since commodities are the most important exports of many African countries, using the dollar would make economic calculation easier, more transparent, and presumably more accurate. The main advantage of the euro is that geography and history have given most African countries stronger trade and investment links to Western Europe than to the United States. (20)
Neither the euro nor the dollar is a perfect currency, but both are better than almost all African currencies have recently been and are likely to be in the near future under current policies. Even if some African countries were to be linked to the euro and others to the dollar, dividing Africa into two currency zones, it would be a substantial improvement over today's much greater number of currency zones, most of which are limited to single countries.
In the coming years, developments in financial markets will create considerable pressure on African countries to achieve some type of currency unification with the dollar or euro. "Electronic money"--the name given to developments in computer and communications technology--is eroding barriers to holding foreign currency. When Africans become able to make electronic payments conveniently even for small purchases, such as groceries, they will have the possibility of holding their financial assets in foreign currency and only using local currency at the moment of payment. The demand for chronically weak currencies may shrink until issuing them is no longer worthwhile, causing most governments to cease issuing their own currencies. This possibility, which has been dubbed "separating bank and state" (White 1993), seems entirely desirable to me. In monetary matters, the rhetoric of national sovereignty has been used to obscure lack of what the South African economist W. H. Hutt (1936: 257-72) termed consumers' sovereignty. For other goods, most people now implicitly or explicitly agree that consumers' sovereignty is the appropriate standard both from the standpoint of economic efficiency and the standpoint of justice. There is no compelling case for governments to monopolize aviation, cocoa marketing, or electricity, as a number of African countries have done. Ample experience with central planning has shown that monopoly provision of goods obstructs the creation of wealth, not just for a few, but for all. Why should provision of currency be an exception?
I have proposed policies of monetary integration. Such policies as they would be implemented today would differ in a
crucial way from the policies that existed under colonialism. The monetary integration of that period was forced integration
with a particular colonial power. European governments compelled Africans to cease using traditional currencies and start
using European currencies. European governments also established monopolies or chartering rules that gave preference to
banks from their own countries over banks from other countries or banks that Africans might wish to establish. Monetary
integration under colonialism was in fact only a partial integration. African countries today have the option, which was not
open to them under colonialism, of voluntarily choosing to be economically open to the whole world, without being forced
into a system of imperial preferences or other forms of favoritism. African countries today are in a position to have both the
advantages of the regional monetary integration that existed in the precolonial era and the integration into world financial
markets that existed in the colonial era and in the early years of independence.
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1. There is an extensive body of writing on monetary institutions in precolonial Africa, but apparently no authoritative summary for the continent as a whole. Recent books that contain useful bibliographies are Rivallain (1994) and Stiansen and Guyer (1999).
2. See Cribb and others (1990) for a summary history of coinage minted in and for Africa.
3. For convenience, this essay usually calls countries by their names today (Ghana) rather than their colonial names (Gold Coast).
4. Few historical episodes approach the pure case of a system free of all special regulation of banks. However, the African cases that I classify as episodes of free banking are certainly more like free banking than they are like private monopoly note issue or other monetary systems I discuss here. Further research into Africa's episodes of free banking is much needed.
5. In Nigeria, British traders successfully lobbied to make certain types of loans unrecoverable in lawsuits (Uche 1999). This provision was disadvantageous to their African and German rivals, who made more sales on credit.
6. M. Fry (1995) and Caprio and others (2001) summarize evidence and arguments that financial liberalization contributes to economic growth.
7. Schuler (1992b: ch. 7) summarizes these debates and gives references.
8. During the Second World War, the Banque de l'Afrique occidentale permanently lost its power to issue notes in the colonies that sided with General De Gaulle's exiled Free French government. A monetary institute, the Caisse centrale de la France libre, began operations in 1942 in Cameroon and French Equatorial Africa (the Central African Republic, Chad, Congo-Brazzaville, and Gabon). The Banque de l'Afrique occidentale, whose headquarters were in Paris, continued to issue notes in the colonies that sided with the Vichy government--Togo and French West Africa (Benin, Burkina Faso, Côte d'Ivoire, Guinea, Mali, Mauritania, Niger, and Senegal).
9. The pound sterling was worth US$2.80 from 1949 to 1967, and $2.40 from 1967 to 1972.
10. The members of BCEAO are Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal, and Togo. The members of BEAC are Cameroon, the Central African Republic, Chad, the Republic of the Congo, Equatorial Guinea, and Gabon. The Comoros has its own central bank. Réunion and Mayotte, which are overseas parts of France, use the euro.
11. The Comoros franc, issued by a separate central bank, was devalued to 75 per French franc. Since January 1999, when the French franc became merely a subdivision of the euro, the CFA and Comoros francs have been officially anchored to the euro, at 655.957 CFA francs and 491.96775 Comoros francs per euro.
12. Some of these cases are discussed in Brownbridge and Harvey (1998).
13. For a general discussion of financial repression with some examples from Africa, see M. Fry (1995).
14. In several countries, the failures were by affiliates of Meridien BIAO in 1995. Meridien BIAO, a successor to the Banque de l'Afrique occidentale, was registered in Luxembourg and owned by a citizen of Zambia. Despite having branches in many countries, by international standards it was a small bank, with the weaknesses of its size.
15. The conventional wisdom on currency unification is that, as IMF managing director Horst Köhler (2001) has said, "On balance, hard pegs are appropriate only in limited circumstances--mainly for countries with a history of high inflation, that have the determination to implement very disciplined macroeconomic policies and ambitious structural reforms, but no other credible nominal anchor." Proponents of the conventional wisdom neglect that most countries in fact have been unable to make their currencies really credible.
16. In part, the record of these systems is so good because when countries want to break fixed exchange rates, they establish central banks, rather than devaluing within a currency board or dollarized system. That was the case in Liberia, for example.
17. The recent study of Edwards (2001) criticizing official dollarization focuses heavily on the recent experience of just one country, Panama, and contains exaggerated ideas of what monetary policy can do.
18. For suggestions about how a currency board might switch anchor currencies in an emergency, see Hanke and Schuler (1994: 83-4, 103).
19. On Argentina, see Schuler (2003b).
20. A disadvantage is that the euro is potentially more politically unstable than the dollar, in the sense that the euro zone might be shaken or even dissolve should one or more important members of the European Central Bank exit the zone. Hence African countries that euroize should consider from the start what they would do if the euro zone were to dissolve. One option would be to use whatever currency was used in Germany, the largest economy in Europe.