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.
