NCPA - National Center for Policy Analysis

What Would Dollarization Mean?

May 12, 1999

As the issue of Latin American countries replacing their currencies with the U.S. dollar heats up, two subcommittees of the Senate Banking Committee recently looked into the matter.

The hearings revealed that dollarization holds exciting potential benefits for the U.S.

  • Countries that dollarized would attract increased U.S. investment, which would help them become wealthier -- thus creating huge new markets for American producers and more jobs for their workers.
  • Growth of U.S. exports would be encouraged since the risks of devaluations would be eliminated.
  • To encourage dollarization, the U.S. might agree to share with dollarized countries the revenue the U.S. receives from issuing currency -- a process called "seigniorage."
  • Federal Reserve chairman Alan Greenspan, generally favorable to dollarization, cautioned that the Fed should not alter monetary policy for the sake of dollarized countries nor should it act as a lender of last resort for their banks.

To facilitate the process, Sen. Connie Mack (R-Fla.), chairman of the Senate Banking Committee, has announced that he will reintroduce a bill to direct the Federal Reserve to focus on the sole goal of price stability -- reinforcing confidence in it and encouraging countries to dollarize.

Source: Sen. Connie Mack, "A Fist Full of Dollarization," Investor's Business Daily, May 12, 1999.


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