However, the source monetary supply usually exceeds the value of the Dollar currency reserves, and therefore, a transitional cybernetic system is required.

The M1 monetary units, which is cash in circulation, must be converted to the target currency by means of the Central Bank reserves. This usually does not present a problem since the amount of M1 is usually low in
comparison to the reserves. All old paper currency is recalled, and US Dollar bills obtained in the open market are issued. Coins can remain in use for small denominations.

The M2-M1 units, which we can publicly call "Bank" accounts, are the values in checking accounts (DAD) and various types savings accounts, do present a different problem. The Central Bank Dollar reserves usually do not cover the total to be converted. What is required is a cybernetic mechanism to perform the transition as painlessly as possible for all account holders on an equal risk basis.

Given the obvious fact that all such accounts are in cybernetic systems, with the exception of savings passbook accounts, a cybernetic system can accomplish the optimal conversion. The only exception being the savings
passbooks, which must be recalled and converted to statement savings accounts upon presentation at the teller windows.

A transitional balance can be placed in each account record, along with the original balance at cutoff date in the source currency, and a new balance in Dollars. The original balance would be frozen in source currency units, and
the new balance would be zero US Dollars, at cutoff time.

The transitional balance will contain the value of that account balance at cutoff date, at the agreed upon exchange rate for M2-M1 monetary instruments. That is to say, the exchange rate in M1 will be at 1 to 1 with the target currency, but the exchange rate for the "Bank" accounts will be at that amount which can be covered by the remaining Central Bank reserves at the cutoff date.

Which means that the balance on the Central Bank reserves at cutoff date, after deducting the amount needed for M1 conversion, spread out upon all "Bank" accounts in a proportional manner, will yield a transitional exchange rate. For example, if the total "Bank" account balances in the source currency is 10Bl "source" units, and the remaining Central Bank reserves are 5Bl Dollars, then the transitional exchange rate at cutoff time will be 2/1 or .5000.

By timing the cutoff date to a period in time when economic conditions are such that the reserves can cover higher "Bank" balances, then a better transitional balance can be granted to all accounts. It would be wise to
place these in a progressive fashion, once the situation improves, and a smaller discount rate can be obtained from the market. Rushing to cover transitional balance would be counter productive.

Now, the transitional balance is in reality just that, a balance of the old monetary units remaining in the account. New deposits could well be in cash, and therefore must be granted a 1 to 1 conversion to the target currency. There would be a "New" balance on each account, which would start on zero, and would accrue after the cutoff date and time. All banking transactions would involve this balance as the standard reserve balance of the account after the cutoff date, and would of course be in Dollars, since Dollars will be deposited into the account.

Funds in the transitional balance must wait for better economic times, when reserves can be built up on the Central Bank. That will occur when the Central Bank can place National Treasury Notes in Dollar denominations on
the open market, and thereby bring in further reserves. In the US economy, the Fed performs such a function.

The transitional exchange rate then would vary daily, according to the reserves in the central bank that would make the exchange balance on that day. In essence, this would involve repeating the computation of the spread
of the Central Bank reserve over the transitional balances on a daily basis. The higher the reserves, the better the rate obtained. It would therefore be in everyone's interest to wait for an appropriate time to exchange their
transitional funds to Dollars. Such an exchange would involve a paper transaction similar to a bank draft,
which would be processed by the banks. The transaction would convert the amount of the draft to Dollars, at the transitional rate, deduct from the transitional balance and add to the new or Dollar balance.

The transitional system would then be in place until all transitional funds have been depleted form the "Bank" accounts, and a stable economy is reached in Dollars. This could occur in a few months, but surely would come
to pass within a few years.

Using a transitional cybernetic system is far superior to using paper bonds, or placing any time constraints or interest rates on the funds being converted. It allows all those with balances in transition to share in the risk of conversion, and to try to achieve a better value for their transitional funds.

It would also be advisable to have ISO standard banking software installed on a private bank data processing center. The private banks administrative costs would be shared among all participating banks, and the high cost of the technology involved would pose no problem. On the contrary, the reason some private banks in the developing world have such high administrative costs is that the technology they use is obsolete.


Atlanta, GA
January 12, 2000