Why and How Panama Made USD Legal Tender

By Rasheed J. Griffith , Law student at Universidad de las Hespérides.

This article continues from Part 1, which explores the historical foundations behind Panama’s decision to forgo its own currency. Reading it will provide a fuller understanding of the events leading to dollarization. In this part, I will explain why Panama specifically chose the USD as its legal tender.

I want to explain why exactly Panama decided to adopt the USD. It is usually assumed that the United States government forced the Republic of Panama to make the United States dollar legal tender. The populace, academics, and literati in Panama also generally believe this. But that’s not what happened. The initial request to make dollars legal tender in Panama actually came from the Panamanians. 

The usual starting point for understanding how dollarization came about is the document known as El Convenio Monetario, referenced in a Decree made by the President of Panama in 1904 (Decreto 74 de 1904). It is held up as the defining legal basis for the United States' monetary imposition on Panama. 

But rather than being a detailed legal agreement, it is actually just a very short two-page memo issued by US Secretary Taft in 1904, which imposes nothing. The true starting point should have been months prior. Let's dissect this.

In June 1904, Secretary Taft was notified that a Fiscal Commission from Panama was in New York on official government business, and they also wanted to meet with him. The Fiscal Commission consisted (most importantly) of two Panamanians, Ricardo Arias and Eusobio Morales, and an American lawyer, William Nelson Cromwell, their Counsel. When the US “acquired” the land rights for the Canal Zone, around $10M (1903 $) was paid to the new Panama state. The government of Panama decided to invest around $6M in US investment banks. The Fiscal Commission was in New York to find suitable institutions to invest the money into securities. 

When the Commission met with Secretary Taft, Admiral Walker (Chairman of the Isthmian Commission, which was overseeing the building operations of the canal) and Mr. Conant (a financial expert who worked with Taft in the Philippines) were also present. They all had a conversation regarding monetary matters in Panama.

I know these details because a stenographer recorded the meeting, and later, the transcript was entered into the record at a U.S. Senate Hearing in 1906. 

The conversation was revealing. The Panamanians had started creating new monetary laws as part of their state-building process. Remember that Panama had just separated from Colombia, and all the elements of a state needed to be built almost from scratch. 

The stenographically recorded conversation explicitly states that the Panamanians already made this decision and are now seeking confirmation. 

To emphasize the point of the Panamanian origin of dollarization, the lawyer of the Fiscal Commission stated in the recorded transcripts that a version of the same bill had been voted in Panama a few weeks prior, but it failed because the 32 voters ended up in a tie, 16 were in favor, and 16 were against. They hoped that this agreement with the US would push it over the mark to instill confidence in the plan to get it approved in Panama.

Another key feature of the monetary agreement Taft made with Panama is woefully under-examined. The Isthmian Commission (and, therefore, the US government) agreed to help stabilize the Panamanian silver currency by loaning its own money to Panama to backstock a depreciation in the exchange rate between the silver peso and US gold money. This arrangement by Taft was unprecedented in many ways. Remember that the United States Federal Reserve did not yet exist.

I believe this historical episode would have gone differently if Taft had not been the Secretary of War in charge of the Panama Canal construction, and for that matter, if Taft had not been the Governor of the Philippines immediately prior to his appointment. He represents a precarious hinge point in the history of dollarization in Panama. 

Accordingly, the monetary agreement was approved by the US Congress and President, and later, the President of Panama confirmed its contents in Decreto 74 de 1904, in which the President officially declared, “Apruébase en todas sus partes la Convención acordada Washington…”. 

(You can read the deep-dive version of this blog on cpsi.media).