By Ewout Van Haeften, De Nederlandsche Bank 

Changes to new currencies are no rarity. As recently as 2002, no fewer than 12 countries officially swapped their national currencies for a single one, ie. the euro. In subsequent years, another five countries have followed suit. In the past decade, other countries, such as Ecuador, El Salvador and East Timor, changed to the US dollar as legal tender. On 1 January of this year, they were joined by the three relatively small Caribbean islands of Bonaire, Saba and St Eustatius, which traded in the Netherlands Antillean Guilder.  

What makes this step so special is the fact that, on 10 October 2010, the said three islands became part of the Netherlands but nevertheless adopted the US dollar instead of the euro as legal tender.

The logic behind this policy is evident from the islands' economies, in which the US dollar has played a major role for many decades. The Netherlands Antillean Guilder used to be, and still is, pegged to the US dollar. Much of the three islands' imports and exports are calculated in US dollars or other currencies pegged to the US dollar. Tourism, a major source of income for the islands, is likewise strongly US dollar-related. 

Radical Change

As always, this time too the currency changeover was a far-reaching event. Central government (one of the chief employers on the islands) as well as enterprises had to convert their accounting systems from guilders to dollars. Retail businesses were required to apply dual-pricing, and residents had to say goodbye to their guilders and familiarise themselves with the new prices. Banks, in particular, had their work cut out for them, for they faced the immense task of converting bank accounts from guilders to dollars.

In the event of the Dutch Caribbean islands, two aspects helped to smooth the changeover. In the first place, many residents were already accustomed to the US dollar, as this currency had already for some time been obtainable from every ATM on the islands. Second, the Netherlands Antillean Guilder will not disappear altogether, as it will continue to serve as legal tender in Curaçao and St Martin (and will be replaced by the Caribbean Guilder in early 2012).

For De Nederlandsche Bank (DNB) the changeover presented a new challenge since, as the Dutch central bank, it is responsible for a smooth payments system across the Kingdom of the Netherlands, and, hence, also for the changeover in the Caribbean part. At an early stage DNB decided not to establish an agency, arguing that this would create too little value, given the relatively small number of inhabitants (some 20,000 in all) and the more than 1,000-kilometre distance between Bonaire at one end and Saba and St Eustatius on the other.

Changeover

The changeover went according to the usual pattern: the inflow of the Antillean guilder in the money in circulation was stopped on 1 January and from that date onwards banks issued only dollars via ATMs and over their counters. Some banks had already converted their ATMs to the US dollar before that date, compelling customers wishing to withdraw Netherlands Antillean guilders to come to the counter in the final days of 2010.

Since the dollar was already a widely accepted means of payment on the islands, everything went without a hitch. Retailers etc were asked to deposit the guilders they received at the banks and as much as possible hand back change in dollar notes and coins. The residents had been invited long before 1 January to bring the money - in particular coins - they kept in piggy banks and kitchen drawers and stowed under their mattresses to the banks in exchange for US dollars.

Logistics

DNB's added value was primarily in the logistics. Although for decades local banks had seen to a smooth circulation of US dollars, they had agreed that DNB would order the 'launch' stock of banknotes and coins, self-evidently on the basis of numbers recommended by the local banks.

During the project, DNB consulted intensively with the US authorities, who were very supportive and maintained close and constructive contact with the Federal Reserve. This greatly facilitated the ordering and delivering of banknotes and coins. For the islands it was a major advantage that the Fed was prepared to make brand-new banknotes and coins available. This made it possible for them to start a practically clean circulation of the new legal tender.

In addition to ordering the launch stock, DNB organised and financed the transportation of the values from the Fed to the islands. To facilitate the issuance by the banks, the coins, which the FED provided 'unpacked', were delivered in rolls commissioned by DNB from a coin processor. Part of the banknotes and coins ordered was used for so-called starter kits for retailers.

One Dollar Coin

While the $1 coin is no favourite with the public in the US and therefore barely used in payments there, on the three islands the policy adopted in consultation with the banks was to bring $1 dollar notes as well as $1 dollar coins into circulation. The great advantage of coins lies in their long life compared to banknotes. This consideration weighed in heavily in this policy, given the relatively high costs involved by the transportation of new dollars from the US to the islands.

As De Nederlandsche Bank will not be maintaining a depot on the islands, the local banks will have to arrange for the requisite dollar supplies. However, the launch stock was so ample that expectations are that there will be enough dollar notes and coins on the islands for some time to come. Besides, tourists and other visitors will ensure a steady inflow of the new currency. If the banks perceive that their dollar stocks start shrinking too much, they can order dollars from their correspondent banks in the US. The banks will also take care of the repatriation of damaged and worn banknotes to the US.