A Dollarization Strategy for the Americas
A once in a generation opportunity to revive an initiative that could secure monetary stability, foster trade and economic growth in the Americas and strengthen the dollar at minimal cost.
For more than a century, the dollar has underpinned U.S. global power. But its recent and abrupt decline suggests its dominance can no longer be taken for granted. Bond and currency investors are beginning to question the dollar’s primacy, and a looming trade war with China—whose leaders openly promote the internationalization of the yuan—adds to the uncertainty. In this new landscape, the United States needs a bold and multilateral response. Encouraging the voluntary adoption of the dollar as official currency—known as official dollarization—would expand Washington’s influence and reinforce the dollar’s central role in the global monetary system. For Latin America, it would provide a credible monetary anchor, promoting prosperity and integration.
In 2000, Sen. Connie Mack introduced the International Monetary Stability Act to facilitate the adoption of the dollar as official currency by other countries. The bill proposed a rules-based framework through which the United States would share a portion of seigniorage—the profit a country derives from issuing its own currency—with countries that adopted the dollar as their currency.
Dollarization had strong support from leading economists such as Robert Barro, Rudiger Dornbusch, Guillermo Calvo, Steve Hanke, and Robert Mundell. A 2001 Congressional Budget Office report found that it would have no fiscal impact on the United States, meaning no taxpayer-funded bailouts or subsidies. The plan offered mutual benefits through stable, rules-based incentives. Though it faded into oblivion amid shifting White House priorities, its revival could help strengthen the dollar while at the same time providing an anchor for monetary stability in Latin America at a minimal cost.
Today, the stakes are higher. The global monetary order is fragmenting. China is using swap lines and infrastructure lending to promote the yuan—especially in Latin America countries. The BRICS bloc is exploring non-dollar trade settlements. In response, Washington should think beyond containment and act strategically and proactively. Reviving and updating Mack’s proposal could broaden the dollar’s reach through voluntary adoption, at virtually no cost to U.S. taxpayers. It would also provide an anchor for monetary stability throughout the Americas, a key ingredient for long term economic growth.
Argentina could be a leading case. For decades, populist governments have used the peso as a wrecking ball, pushing the economy into persistent stagflation. Even with unprecedented fiscal and monetary discipline under President Javier Milei’s government, efforts to restore confidence in the peso continue to require substantial support from the International Monetary Fund (IMF) and multilateral organizations.
Official dollarization would end what can only be described as a state of chronic monetary schizophrenia: for decades the Argentine government has tried to impose a depreciating currency on its citizens while simultaneously discouraging dollar use through a web of restrictions, capital controls, and penalties
Despite these efforts, Argentines hold significantly more dollars than pesos; they stash their greenbacks under the mattress or lock them in safe deposit boxes in their local bank. Private companies and the government can only secure long-term financing in dollars. Granting legal tender status to the dollar would reduce transaction costs while monetary stability would promote economic growth. It would also take away a weapon of mass economic destruction from populist politicians.
Critics warn that dollarization entails a loss of sovereignty and policy flexibility. Sovereignty should not be confused with the ability to print money. As John Stuart Mill wrote nearly 170 years ago, a national currency is a poor symbol of national pride, particularly in inflation-prone countries. In fact, adopting a stable foreign currency can be viewed as a form of institutional self-discipline that protects citizens’ rights. Also, emerging economies rarely enjoy true monetary independence. Most simply track the decisions made in Washington or Frankfurt, without the credibility or institutional strength to chart their own path. Dollarization makes explicit what is already implicit. As to policy flexibility, in countries where central bank independence is routinely undermined and the electorate is addicted to populism, it tends to enable economic mismanagement
Another argument against dollarization is that it removes a country’s ability to devalue. But that’s precisely the point. In many countries, central bank intervention in foreign currency markets rarely cushions external shocks but instead, as Dornbusch once noted, acts as “the dominant instrument of destabilization.” Dollarization offers a way out of this trap by locking in credibility and aligning the incentives of policymakers.
Others caution that official dollarization losing a lender of last resort, which could compromise financial stability. However, experience shows that this fear is overblown. In the last 25 years, the banking systems of Panama, Ecuador, and El Salvador—all of which use the dollar—have been as able as those of their neighbors to withstand a succession of external shocks, such as the 2008 global financial crisis, the reversal of the commodity price cycle, and the COVID-19 pandemic. Financial stability was not compromised, and price stability was maintained. More importantly, dollarization limited the damage caused by populist policies. Besides, in Argentina and many other countries that already have a de facto dollarized economy, the true lender of last resort has always been the IMF.
What about the line that dollarization is irreversible? That is precisely its strength.1 Credibility stems from commitment. Most stabilization programs in Latin America fail not because they are poorly designed but because they are easily reversed. By locking in sound money, dollarization removes the temptation of inflationary finance, eliminates exchange rate uncertainty, and promotes long-term investment. In this way, it sets in motion a virtuous cycle of stability, growth, and structural reform. But irreversibility is tied to politics. The Ecuadorean experience shows that dollarization survived because voters wanted it.
Of course, not all countries are natural candidates for dollarization. The proposal makes more sense in countries that suffer from chronic inflation, weak institutional frameworks, and have a high degree of financial dollarization. For countries with stable monetary institutions, low inflation, and strong fiscal anchors, the costs may outweigh the benefits. However, even countries such as Chile and Peru, which might tend toward the latter category, could benefit from anchoring their policies and avoiding the persistent temptation to inflate or devalue.
If a large number of countries adopted the dollar, could that compromise the United States’ monetary policy? Would the U.S. Federal Reserve be forced to consider foreign conditions in its domestic decisions? These concerns are not new. The U.S. dollar already serves as the de facto global currency, and the Fed’s decisions inevitably have global spillovers. Official dollarization would not alter the institutional autonomy of the Fed. It would, however, increase the benefits to the U.S. economy: greater demand for dollars, deeper capital markets, and closer economic ties with Latin America.
Moreover, an updated framework of Mack’s proposal would not be about forcibly imposing the dollar. It would be about providing incentives for its voluntary adoption under a stable, long-term institutional framework sponsored by the US government. Participating countries would formally incorporate themselves to the dollar area in exchange for a share in seigniorage revenue.
A revised and updated International Monetary Stability Act could also expand U.S. influence throughout Latin America. In contrast to China’s state-driven, top-down approach, it would be voluntary, market-based, and mutually beneficial. For many countries, it could provide an alternative development path based on sound money and open markets. By fostering regulatory convergence and reducing currency risk, it would also catalyze trade and investment flows across the Americas.
To succeed, this initiative must address Latin America’s long-standing wariness of U.S. influence. Many countries may view the policy as another attempt at exerting undue influence on the region. Washington can counter this argument by emphasizing the voluntary nature of the framework. Integrating dollarization with regional trade agreements could make the offer even more attractive. In other words, it is key is to frame the initiative as a partnership for shared prosperity.
Promoting official dollarization could forge a dollar-based economic bloc rooted in democracy and open markets, which would help counter China’s growing influence in Latin America. By offering a voluntary, market-based path to stability, the United States can reassert leadership through soft power and institutional innovation. Relaunching the International Monetary Stability Act, is a generational opportunity to secure monetary stability in Latin America while strengthening the dollar’s global role.
In truth, reversibility is always possible for a sovereign nation but as the experience of Ecuador shows in a democracy it may not be a viable political option. The general population prefers to earn its salary in a hard currency and votes accordingly.