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Dollarization
Picture Credit: CitySam
Traditionally, each independent nation had its own currency as a symbol of sovereignty, but in a globalizing world national currencies have been weakening or even disappearing. The US dollar has been taking over as the world's currency of account. Neo-liberal open markets and rapid currency conversion have reinforced the dollar's role since the mid-1970s. Much trade is now dollar-based, countries prefer to hold their central bank reserves in US dollars, and private companies as well as wealthy citizens often hold dollars or dollar-denominated assets. The United States derives great economic and political power from this dollar hegemony. During the 1990s, dollarization accelerated. A number of countries pegged their currencies to the dollar or even adopted the dollar outright as their national currency, hoping that this would solve inflation problems. Dollar-denominated notes, especially $100 bills, grew in popularity with individuals as well as criminal networks, becoming the US's largest export. But huge US trade imbalances and federal budget deficits undermined the dollar and eventually knocked down its value in international currency markets. Further erosion of the dollar could undermine and reverse decades of dollarization, but a globalizing world still needs a strong common currency. If the dollar weakens further, alternatives might emerge. But for the moment, the (weaker) dollar still is King.
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Articles
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Basics of Dollarization (January 2000)
The paper impartially explores the pros and cons of dollarization for the US and for the countries, which choose to adopt the dollar. It also explains the concepts in the dollarization debate and exchange-rate regimes. (Kurt Schuler website)2006
Dollarize the UK (April 11, 2006)
According to this Wall Street Journal op-ed, the UK remains disadvantaged by adhering to the pound sterling. With US$ 8 trillion in financial stock, the UK controls a sizable quantity of capital, but is dwarfed by the much larger financial systems of the US and European Union. Instead of adopting the euro, the author argues, the UK would benefit more from switching over to the dollar. At $48 trillion, the US financial stock is significantly greater than the euro zone’s $32 trillion. Furthermore, when setting monetary policy, the UK would have a much easier time negotiating with a single “compatible counterparty” than the more politically fragmented EU.The Case for Fewer but Stronger Currencies (February 19, 2006)
Many economists argue that smaller countries benefit from replacing their national currency with the dollar as it stimulates foreign investment, GDP growth and economic stability. However, critics argue that some countries, such as Mexico, have already overcome inflation without adopting a foreign currency. They also point out that unlike the eurozone, where countries have a seat in the European Central Bank, dollarized countries lack any influence over US monetary policymaking. (New York Times)2004
Cuba to Stop Accepting US Dollars in Transactions (October 26, 2004)
In response to “hostile US policies,” Cuba decides to ban all transactions involving the US dollar. Instead, the country’s banks and businesses continue to accept the “convertible peso” and foreign currencies such as the euro. (Agence France Presse)2003
Putin: Why Not Price Oil in Euros? (October 10, 2003)
Russian President Putin said that Russia could switch its trade in oil from dollars into euros. Such a move by the world’s second largest oil exporter could provoke a chain reaction among other oil producers, which would diminish the importance of the dollar and question US hegemony over the global economy. (Moscow Times)Not Yet the Almighty Euro (October 2003)
Le Monde diplomatique analyzes whether the euro could replace the dollar as the world’s reserve currency. Tracing back the history of the global economy’s dollarization, this article highlights the obligations of the reserve currency’s country of origin.Venezuelan Move to Replace US$ with the Euro Upsetting Washington More than Saddam's Euro Conversion Last November (June 18, 2003)
Russia, China, North Korea, Malaysia and now Venezuela begin to convert from dollars to euros for more stable transactions as the dollar devaluates against the euro. (VHeadline)Reimposing the Dollar Hegemony (April 26-May 9, 2003)
Sukumar Muralidharan analyzes the economic decisions behind the US plans for the occupation of Iraq and the reconstruction of its decimated infrastructure, and suggests that "the reassertion of the dollar hegemony is precisely what the invasion of Iraq is all about." (Frontline (India))US Floods Iraq With Dollars (April 17, 2003)
The US Federal Reserve airlifted millions of US dollars into Iraq to begin paying Iraqi civil servants in dollars, while denying allegations that it plans to dollarize the economy. The sudden influx of dollars may weaken confidence in the dinar, and will likely prove to be a politically sensitive issue. (BBC)A Casualty of War: The Dollar (April 8, 2003)
Among many theories on why the US is attacking Iraq, some analysts believe the Bush administration wants to preserve the dominance of the dollar in world oil transactions. However, war has hit the dollar hard and may in fact deepen the US current account deficit, with grim implications for the US economy. (Asia Times)Euro Could Outshine Dollar in Indonesia (April 3, 2003)
The central bank of Indonesia and many Indonesian businesses may switch from the dollar to the euro for international transactions, citing the dollar’s potential long term instability and “political baggage.” The US led war on Iraq has had a direct impact on weakening the dollar in relation to the euro. (Asia Times)Venezuela's Dollar Problem (March 20, 2003)
In January, Venezuelan President Hugo Chavez imposed a tight restriction on buying dollars to stop a freefall of Venezuela's currency, the bolivar. However, business representatives warn that the bolivar is useless for buying imports, and the restrictions could cause at least 30,000 businesses to close by the end of the year. (Associated Press)Not Oil, But Dollars vs. Euros (March 2003)
Control over some of the world’s most extensive oil reserves represents only one prize of a war against Iraq, argues writer Geoffrey Heard. The US also wants to ensure that the dollar remains the currency in which the oil trade takes place, in an effort to secure US global economic dominance.Russians Turning From Dollars to Euros (January 31, 2003)
For years, Russians have hoarded US dollars in safes and under mattresses to protect themselves in case the ruble collapses. Now, as the strength of the dollar declines and travel to the US has become more difficult, many Russian citizens and businesses have begun to favor the Euro instead. (New York Times)2002
Spoilt for Choice (June 3, 2002)
The crash of the Argentine economy has prompted economists to look for new exchange rate-regimes, such as the “managed floating exchange rate”. Such regimes aim at reducing the dependency of dollarized economies on Washington, and provide alternatives to the currency boards. (The Economist Global Agenda)Dollarization? Not here (May 17, 2002)
In the past 20 years, Canada has moved away from dollarization. A new report suggests that the increase of US dollar bank-deposits, dollar-denominated bond issues, and company financial statements in dollars, do not lead to dollarization but support business activities abroad. (The National Post)Camping Out (March 29, 2002)
“Dollarization continues the process of foreign indebtedness and colonial dependency, with the long-known outcomes of poverty [and] social inequality,” assert activists in Ecuador. Social unrest in the capital, Quito, highlights discontent with the government’s currency policies. (In These Times)Afghanistan: The 51st American State? (February 1, 2002)
The Globalist proposes that the “European-dominated” International Monetary Fund hopes dollarizing Afghanistan would force the US to play a greater financial role in the reconstruction of the country, and ensure it has a greater commitment to the region.Dollar Considered to Replace Afghani (January 30, 2002)
In an effort to bring stability to the Afghan economy ravaged by years of war, the International Monetary Fund recommends a period of temporary dollarization. (Bloomberg News)2001
From Poster Child to Basket Case (December 2001)
This in-depth article from Foreign Affairs analyzes the economic situation of Argentina and asks what went wrong after the 1990 Convertibility Plan, which tied the peso to the dollar.FTAA (Free Trade in the Americas) Is a Threat, Warns Nobel Laureate (October 29, 2001)
Joseph Stiglitz criticizes US economic domination of Latin America and opposes “dollarization.” He argues that Latin American countries will not benefit from international financial institutions and free trade agreements as long as the US uses its power in a discriminatory way.(Inter Press Service )Urging East Timor to Buy the Dollar (May 30, 2001)
UNTAET tries to dollarize the Timorese economy, to boost the coffee trade and alleviate the devastated economy. (International Herald Tribune)The False Dilemma of Dollarization (March/April 2001)
This study analyzes Ecuador’s dollarization as a renunciation of monetary control and subordination to a larger state. The author concludes that dollarization weakens a state’s ability to strengthen and protect its domestic market. (Nueva Sociedad)Gaining Dollars, Town Is Losing Its Folkways (January 1, 2001)
Although El Salvador’s changeover to the dollar is likely to increase remittances into the country and improve the lives of many, some critics argue that it threatens to fade away El Salvador’s culture and sovereignty. (New York Times)2000
Baghdad Moves to Euro (November 1, 2000)
In late 2000, Iraq switched from the dollar to the euro for its international oil transactions, despite a weak euro and large currency conversion fees. Saddam Hussein wanted to align Iraq with countries in the euro zone that favored easing sanctions, while challenging the dollar's dominance in the world oil trade. (Radio Free Europe / Liberty Radio)US Dollar Becomes Ecuador's Currency (September 12, 2000)
As Ecuador replaces the sucre with the US$, officials are cautiously optimistic that this move will curb rampant inflation. (Associated Press)Greenback Magic? (March 27, 2000)
Are dollars magical pieces of paper that if used in other countries can mean stability, growth and development, or agents of destruction, stealing national sovereignty away from countries? Ecuador's plan to "dollarize" is bringing this intense debate back to the forefront. (Business Week)Texas Fed Reserve Bank President Favors Dollarization Programs (March 8, 2000)
A discussion of dollarization from the Lone Star State. (Agence France Presse)Military-Indigenous Coup Aborted by Military High Command (January 22, 2000)
A collection of articles and opinions on the protests in Ecuador, as well as a critical evaluation of the government and its controversial push for dollarization.
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