From the Colón to the Dollar, and the Dollar to Bitcoin
El Salvador’s Monetary Odyssey: A visual exploration of the 2001 dollarization, its two-decade impact, and the 2021 pivot to Bitcoin.
The 2001 Decision: Why Adopt the Dollar?
The adoption of the U.S. dollar was not a response to hyperinflation. Instead, it was a strategic pivot to solve persistent issues of credibility, borrowing costs, and remittance friction.
Credibility & Discipline
By tying itself to the dollar, the government imposed strict fiscal discipline, giving up the ability to finance deficits by printing money (seigniorage).
Lower Interest Rates
A key goal was to reduce “country risk” and access cheaper capital, which was expected to lower interest rates for mortgages and investment loans.
The Power of Remittances
Dollarization simplified transactions from the U.S. diaspora, eliminating exchange rate risk for the families who depended on this vital income.
The Foundational Act: A Financial ‘Reset’
The Monetary Integration Law (LIM) of 2001 legally transformed the economy, effectively handing monetary control to the U.S. Federal Reserve.
Bimonetarism
Colón & Dollar coexist, but the dollar quickly dominates.
Fixed Rate: ¢8.75 per $1
An unalterable exchange rate guarantees stability.
No Local Issuance
The Central Bank (BCR) loses its power to print money.
USD Unit of Account
All financial transactions are denominated in dollars.
The Two-Decade Balance Sheet: Pros vs. Cons
The dollar delivered on its promise of stability, but this benefit came at the significant cost of economic growth. The data reveals a clear trade-off.
Pro: Inflation Was Tamed
By importing U.S. monetary policy, El Salvador exchanged its volatile inflation for the low, stable inflation of a major economy, protecting purchasing power.
Con: Economic Growth Stagnated
The “rigidity effect” of the dollar made exports less competitive and, without monetary tools to stimulate the economy, average growth fell significantly.
The Dollar’s Hidden Price: Dependency & Stagnation
While stable, the dollarized model failed to attract the promised investment and made the economy dangerously dependent on one income source: remittances.
Rising Remittance Dependency
With no exchange risk, remittances became the undisputed backbone of the economy, masking low productivity and exposing a deep vulnerability.
The Unfulfilled Promise: Foreign Investment
The promise that the dollar would be a magnet for Foreign Direct Investment (FDI) never materialized. Data shows FDI remained low and stagnant.
UNFULFILLED
A strong currency alone could not fix structural problems like legal security and productivity.
The Case for Bitcoin: Solving the Dollar’s Flaws
The 2021 Bitcoin Law was presented as a direct solution to the problems the dollarized system created: financial exclusion and the high cost of moving money.
Flaw 1: Financial Exclusion
The traditional, dollarized banking system was conservative and costly, leaving the vast majority of the population without access to basic financial services.
Flaw 2: The High Cost of Remittances
Even in dollars, sending money home was expensive. Intermediaries charged significant fees, creating a “silent tax” on the economy’s primary income.
5% – 10%
Average commission on remittances, totaling hundreds of millions annually.