Historical Sketch

During the Spanish colonial period, entire Central America was part of the Kingdom and General Captaincy of Guatemala, which itself was subordinate to the Viceroyalty of New Spain (Mexico). In the 1820s, it was briefly annexed to independent Mexico but became the Central American Republic in 1823. The confederacy consisted of five free states which enjoyed large autonomy. This led to its quick disintegration already in the late 1830s. The Free State of Salvador was formed from the original province of the same name. It proclaimed independence from the Central American Republic in 1841 and became a republic seven years later. It was the last of the free states to leave the confederacy, which thereby had ceased to exist.

Monetary History Overview

The Central American monetary system simply went on after El Salvador had left the confederacy, no currency law was enacted in the country for the next four decades. Already during the time of the confederacy, the Salvadoran monetary situation had been in disarray. Several presidents had issued the so-called "moneda provisional" to cover finance military expenses. The debased coins displaced the full-valued coins, why the confederacy banned their further issue and ordered the withdrawal. The Salvadoran government was neither willing nor able to do so such that low-valued coinage dominated the circulating medium. To make things worse, various foreign coins were officially imported and put into circulation, including the crude Spanish-colonial silver coins called "Macuquina". The imported coinage was partially counter-stamped to combat forgery, but the deterioration of the coinage went on. In 1880 finally, at least the Macuquina was demonetized. In 1877, the government began issuing paper money, and commercial banks did the same shortly afterwards. As there was no national currency at the time, the notes were initially denominated in Guatemalan Pesos. In February 1883, a currency law was finally passed, and the Salvadoran Peso got created. Initially, the bimetallic standard of the Latin Monetary Union was adopted like in neighbouring Guatemala, but in 1892 El Salvador switched to the gold standard. A few gold coins were even produced in small numbers but did not play any role in payment transactions, which were dominated by paper money and foreign coinage. In October 1892, a presidential decree introduced the name "Colón" for the Peso coin in silver in celebration of the 400th anniversary of Christopher Columbus' arrival in America. The currency name remained "Peso" for another thirty years, and only the currency law of 1919 renamed it into Salvadoran Colón. At the same time, the currency got pegged to the US Dollar. In 1934, Central Reserve Bank of El Salvador began operations. Private bank note issuance had already been restricted in 1922 but continued until end 1950. The Colón, which had been depreciating during the economic crisis of the 1930s, got devalued by 20% against the Dollar in 1934. After that, the value was kept stable for the next fifty years. In early 1980s, the Colón's official rate had become inconvertible, and parallel rates emerged. In January 1985, it was devalued by 50% to re-unify the rates, and in mid-1990, the Dollar peg was abandoned. The monetary policy switched back in 1995, and the peg to the US Dollar was reinstated. The government initiated the abolition of the national currency, which was legislated in the Monetary Integration Act of November 2000. Beginning of 2001, banknotes and coins of the United States Dollar were issued and are the sole legal tender since then. The Colón was, however, not demonetized and nominally remains the Salvadoran currency unit, but the further issuance of notes and coins is suspended indefinitely. In September 2021, El Salvador has become the first country to declare Bitcoin a legal tender.

El Salvador joined the International Monetary Fund (IMF) on 14.03.1946.

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