Breakaway Currencies

We’ve explored nine different scenarios in which we’ve imagined a region has decided to create a new currency. Read more about breakaway currencies or select another scenario from the list below to view in more detail.

In collaboration with Dr Robert Hancké of the London School of Economics, the UK’s No. 1 retail forex provider,1 IG, has considered...

What happens if Puerto Rico leaves the US dollar and creates a new Puerto Rican peso?

Breakaway region Puerto Rico

Parent country United States

Old currency US Dollar (USD)

New currency New Puerto Rican Peso

Puerto Rico map image

The Puerto Rico economy is in a crisis caused by the country’s vast debts. Would establishing a new currency help the island back on its feet, or just add to its problems?

Why might Puerto Rico create its own currency?

  • To settle public debts in its own currency rather than the US dollar
  • To adopt a more competitive exchange rate and make its main manufacturing export industries more competitive
  • To leave behind the vicious spiral of debt growing faster than regional GDP
Pharmaceuticals make up around 50% of the island’s exports, but the industry has been declining in recent years. (photo: Mtmelendez / Wikimedia CC BY-SA 3.0)

Why is Puerto Rico’s position weak?

  • It has very fragile governance structures that suffer from political corruption
  • The territory’s political status vis-à-vis the US is not settled
  • Puerto Rico borrows in a (hard) currency that is not technically its own
  • Multinational companies have relocated away from the island in recent years
  • Since the main exporting industries are cost-sensitive, the exchange rate (and the high inflation rate in Puerto Rico) are obstacles to competitiveness
Top 5 US state/territory governments by amount of state debt 2017 (billions of dollars)   source
California
New York
Massachusetts
Puerto Rico
Illinois
Top 5 US state/territory governments by amount of state debt per capita 2017 (thousands of dollars)   source
Puerto Rico
Massachusetts
Connecticut
Alaska
Rhode Island

What could happen...

...to Puerto Rico?

A softer currency could allow macroeconomic stabilisation and a more competitive exchange rate

The exchange rate would likely have to be monitored closely by a newly set-up independent central bank or currency board to avoid imported inflation

This could destroy the gains from monetary independence

...to the US?

Economically there would likely be very little impact

Puerto Rico is too small a part of the US to have much of an impact on the American economy

Some multinationals might relocate to the US mainland, but that process has been going on for several decades anyway

Currency background

Change in value of US dollar (USD) since 2000, based on SDRs per currency unit   source

Change in value of US dollar (USD) since 2000

Dr Robert Hancké

“Puerto Rico should develop other instruments to address its main problem, which is a lack of economic growth.”

What would the political impacts be?

Puerto Rico would likely instantly settle its political status as an independent country since the US is unlikely to accept a new state that used a currency other than the dollar

The weakest major political party (the Puerto Rican Independence Party, which currently gets less than 5% of the vote) would have achieved their political goals, possibly against the wishes of the vast majority of voters

This could lead to political instability, and even violence

Would the pros outweigh the cons?

Any political and economic benefits would likely be very small

It is also unclear if Puerto Rico’s institutions are strong enough to handle an independent currency

Dr Robert Hancké is an Associate Professor of Political Economy at the London School of Economics. His research interests include the political economy of advanced capitalist societies and transition economies as well as macroeconomic policy and labour relations.

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