Countries "Dollarize" Formally And Informally
February 9, 2001
Ecuador, El Salvador, Panama, and a few Caribbean and Pacific island nations now officially use U.S. currency. The process is called "dollarization," and there are a number of economic benefits to countries that do so.
- Substituting the strong, stable U.S. dollar for a weaker domestic currency insulates a country from economic shocks such as currency devaluation or runaway inflation because the local government can't inflate the currency.
- A stable currency makes economic calculation less risky for business -- and thus makes possible long-term loans at fixed rates, such as mortgages, which were previously unobtainable in those countries.
Having foreigners using dollars is nothing new -- it is estimated that 55 percent to 70 percent of the $480 billion in U.S. paper currency in circulation is circulating outside the United States. Many countries have semi- or unofficial ties to our currency.
- Argentina, for example, has fixed their peso to equal one dollar, and half the country's bank deposits are in dollars.
- Most of Latin America, the former Soviet Union and even Vietnam have heavily dollar-dependent economies -- people often make purchases of big-ticket items like cars in dollars.
- It is estimated that Russia has more dollars in circulation than rubles.
When Ecuador made the switch, the country swapped $400 million in U.S. Treasuries and other assets for cash through a Miami bank and had the whole caboodle flown down.
Source: Emily Yoffe "How Do You Replace the Sucre With the Dollar?" Explainer, Slate, February 7, 2001.
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