U. S. ECONOMIC SANCTIONS DID NOT AT
any time threaten to seriously weaken Noriega.
From press reports and statements by U.S. ofliclals, tne
sanctions were designed to provoke a cash-flow crisis in
Panama (“starve the economy of cash,” as it was fre-
quently put in the press). This was to be achieved by
freezing Panamanian bank deposits in the United States
and blocking the payments of various sorts of revenues
to the Panamanian government. The inspiration for this
strategy came from the virtually unique characteristic of
the Panamanian monetary system: It has no currency of
its own and uses U.S. dollars as means of circulation. Put
simply, the argument assumed that if the Administra-
tion could cut off Panama’s overseas supply of dollars,
the economy would grind to a halt since, unlike other
countries, Panama cannot print money.
It is difficult to believe that U.S. policy makers were
so ignorant of the basics of monetary theory as to
embrace this line of argument. Even more surprising is
that no major newspaper pointed out its absurdity. The
fact that Panama uses U.S. dollars is largely irrelevant to
the effect of economic sanctions. The first error of the
argument is a confusion about what is meant by “cash”
and “dollars,”since journalistic reports gave the im-
pression that the Panamanian economy floundered for
want of U.S. folding money.* If the consequence of
restricting the flow of cash into Panama means few dollar
bills, tne snort-term errect is minor, since transacuons can
still be carried out with checks drawn on banks either by
private or government transactors.
Difficulties may arise if suspended foreign payments,
by not replenishing bank accounts, result in a drawing
down of bank money so that private citizens and the
government face low balances in their bank books. It is
perhaps this result that the Reagan Administration hoped
to achieve by blocking payments from the United States to
the Panamanian government and invoking the Emergency
Powers Act to prohibit U.S. companies in Panama from
paying bills owed to that government.
Here, presumably, enters the “printing money” argu-
ment: Mexico, for example, could get the presses rolling
and turn out pesos to pay the bills. (Of course, almost no
country in Latin America actually prints its own money,
but has it printed overseas.) But in an economy as open
as Panama’s, the expansion of domestic money would
result immediately, or even instantaneously, in an in-
creased demand for foreign exchange-dollars. Thus, the
effect of freezing accounts in the United States and
suspending payments is basically no different for Pan-
ama than for any other Latin American country.
Restricting a government’s access to foreign exchange
is not a form of economic intervention likely to bear fruit
in the short run, since there are too many ways to frustrate
its impact-such as buying on credit-particularly when
overseas suppliers know that sanctions are temporary. In
any event, the amount of foreign exchange which the
United States could effectively deny Panama, in the range
of $100 to $200 million during March and April 1988
when the sanctions were enforced, was tiny compared to
Panama’s merchandise exports of close to $2.5 billion in
1987.
“W HAT THEN OF THE SO-CALLED “CURREN-
cy crisis ” during March and April, and of newspa-
per accounts of pensioners and public servants going
unpaid? Government employees could neither cash nor
deposit their checks because the banks were closed in late
February by Noriega’s government to prevent capital
flight. Thus, the aspect of the crisis most commented
upon by the U.S. press was a consequence of action by the
Panamanian government, not the United States. Once it
was clear to Noriega that he had weathered the storm, the
bank closure was cancelled in early May and the “cur-
rency crisis” was over.
This is not to suggest that the sanctions were not costly
to the Panamanian economy, for they certainly were. But
the costs were primarily long-term and not designed to
bring Noriega down quickly. The major consequence of
the sanctions was a general loss of business confidence in
Panama, stimulating capital flight, the decline of the
international banking center, and the almost total sus-
pension of economic activity.
The Reagan Administration carried on a campaign of
economic and political sanctions ill-designed to over-
throw Noriega, but well-suited to the longer term devas-
tation of the Panamanian economy. It was precisely this
combination that induced the Panamanian private sector,
the church, and virtually every opposition party to de-
nounce the sanctions in late April 1988, with their denun-
ciations supported by the ever-malleable ex-president
Delvalle. JW
* The active money supply of any country is made up of
currency (U.S. dollars in this case) and bank money
(private and public credits in financial institutions) which
exists as ledger entries with no significant backing of
currency. In Panama, as elsewhere, bank money ac-
counts for a much larger proportion of the money supply
than currency and most transactions are not made with
currency, but with dollar-denominated checks.
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