Historically, money in the form of currency has predominated. Usually (gold or silver) coins of intrinsic value commensurate with the monetary unit (commodity money), have been the norm. By contrast, modern currency is intrinsically worthless. The prevalence of one type of currency over another in commodity money systems has arisen, usually when a government designates through decrees, that only particular monetary units shall be accepted in payment. Countries currency problems arise from many situations, main issue is the wars in that country.
Also if the country experience high inflation, or if they take a loans that they can’t repaid it. History of the currency: The Colombian peso has been the currency of Colombia replaced the real in 1837 at a rate of 1 peso= 8 real and was initially subdivided into 8 real. In 1847, Colombia decimated and the peso was subdivided into ten realer, each of 10 decides De realer. In 1871, Colombia went on to the gold standard, pegging the peso to the French franc at a rate of 1 peso = 5 francs. This peg only lasted until 1886.
Between 1907 and 1914, coins were issued denominated in “peso p/m”, equal to paper pesos. In 1910, the Junta De Conversion began issuing paper money and, in 915, a new paper currency was introduced, the peso ROR. This was equal to the coinage peso and replaced the old peso notes at a rate to 100 old paper pesos = peso ROR. In 1931, when the U. K. Left the gold standard, Colombia shifted its peg to the U. S. Dollar, at a rate of 1. 05 pesos = 1 dollar, a slight devaluation from its previous peg.
The administration idea behind keeping agricultural products away from foreign investments was that the country should import agricultural products in which it was not competitive like maize, wheat, cotton and soybeans and exports the ones in which it had an advantage like fruits , flowers and coffee beans. Until 1997 Colombia had enjoyed a fairly stable economy . He first five years of liberalizing were characterized by high economic growth rates . Between the year 1994 and 1998 the Ernest Sample administration emphasized social welfare policies which targeted Colombians lower income population.
The economy slowed, and by 1998 GAP growth was only 0. 6%. In 1999, the country fell into its first recession since the Great Depression. The economy shrank by 4. 5% with unemployment at over 20%. While unemployment remained at 2000, GAP growth recovered to 3. 1%. Causes of currency problems in Colombia: 1- Political instability in Colombia: The current instability in Colombia derives from the growth of armed challenges to the state’s authority. The source of instability is reflected in the growth of guerrilla armies , paramilitaries and privatized security forces.
The confluence of this factor has exacerbated even deeper problem in Colombian society. Including loss of central government authority, economic deterioration and maybe creating the condition of a failed state which is characterized by a sever political crisis in which the institution of central government are so weakened that the can no longer maintain authority or lattice order beyond major cities and sometimes not even there. The Colombian economy begun to unravel in the mid of 1990 as a result of a complex political crisis. Colombians recession deepened as the economy contracted at annual rate of 7. Percent in the second quarter of 1999. Urban unemployment hovered near 20 percent and the government projected a 3. 5 projected decline in GAP for the year. The ongoing political violence entailed substantial economic costs. The economic cost of the political violence in Colombia has been estimated at between 4 and 9 percent of GAP. 2- The illegal drug industry: The illegal drug trade weakened the country’s economy by fostering violence and corruption, undermining legal activity , frightening off foreign investment and all but destroying the social fabric. Until the mid-1990 , cocoa production , GAP growth were fairly stable.
However as coca production began to increase in the latter half of the decade , GAP growth slowed and unemployment increases . It is estimate that the illegal drug sector employs 6. 7 per cent of agricultural workers while the main legal crop , coffee employs 12 per cent . Although there may be short term wage gains for individual peasants , in the long run there are negative consequences since tatters have minimal incentives to work towards a modern competitive agricultural sector. Illegal drug trade has serious consequences for the Colombian economy , particularly in terms of the macro economy.
Macroeconomics imbalances resulted from an overvalued peso and influx foreign exchange . The large influx of foreign exchange resulted in phenomena known as ‘Dutch Disease ‘ ( it is when the demand for an exported resources increase dramatically , resulting in an overvalued currency then there exports are made less competitive in the world market and foreign imports are more competitive domestically , this can cause a denationalization of the domestic economy) , and may have precipitated in the economic crisis of the late sass’s. – inflation rate and monetary policy : Even though Colombia was able to avoid the hyperinflation characteristics of Argentina and Brazil in the asses, persistent annual increases in the consumer price index of 20 to 25 percent had been evident since the mid asses. Higher coffee revenues in the asses caused rapid increase in the demand and costs , which ousted inflation. As the economy entered the 1981-85 recession , accelerated deficit spending by the government continued to fuel the inflation.
By the early asses Colombia had entered a period of rising prices combined with economic stagnation. The rapid growth of money supply and frequent devaluation of the peso also fed inflation in the asses. The large number of united states dollar that enters Colombia illegally because of the drug trade also contributes to the inflationary pressure by raising overall demand. The government efforts to ameliorate the effect of inflation roved relatively unsuccessful because of the combined effects of wage indexing , drug money and volatile prices. – Macroeconomic misalignment: Colombia abandoned its exchange rate regime in 1999 in the midst of a deep fiscal gap , as a result international financial market lost confidence in the Colombian economy and its sovereign debt ranking was reduced. Conclusion: From the above information we can conclude that Colombia will continue facing currency problems due to the severe political drug wars which keeps growing year after year while efforts to stopping it have been costly and unsuccessful.