When you travel around the world nowadays, it’s not uncommon to find that there is a marked preference for a particular currency say the USD. Let us have a look into as to how this scenario developed.

Overview
During the eighteenth and nineteenth centuries, the British pound reigned as the world’s reserve currency but in the twentieth century, the US dollar took over this title.
Dollarization is a generic term that can fall into three categories:

  1. Official Dollarization: The dollar is the only legal tender; there is no local currency. Examples of this can be seen in Panama, El Salvador and Ecuador. For example, since independence in 1903, Panama has only used the U.S. dollar. Surprisingly, the U.S. government does not have to provide approval for another country to use its currency as legal tender.
  2. Semi-Dollarization: A country will use both its own currency and the U.S. dollar interchangeably as legal tender. Lebanon and Cambodia are good examples of this.
  3. Unofficial Dollarization: For many countries in the developing world, the dollar will be widely used and accepted in private transactions, but it is not classified as legal tender by the country’s government.


Why is the U.S. dollar the currency of choice?
One of the major reason is stability of the currency. The U.S. dollar has never been devalued, and its notes have never been invalidated. Business is easier to conduct when a stable currency is used.

Unofficial dollarization can be so prevalent in some countries that more U.S. currency is in circulation than local currency. Once this happens, it can be difficult to reverse. Ironically, the very stability that dollarization brings can be a curse to local governments, as they lose the power to control inflation and fiscal policy. However, to many, what is a curse to the government is a blessing to others.


Money is only valuable if it is acceptable. Therefore, the U.S. dollar is not without its problems. For example, $100 bills have a reputation of being vulnerable to counterfeiting. As a result, they also tend to be the ones that are most rejected or discounted around the world. Long gone are the days when bills denominated in $500, $1,000, $5,000 and even $10,000 circulated because money launderers love large bills. This also represents the final attraction of the U.S. dollar: anonymity. While the U.S. dollar is accepted around the world, it’s not necessarily tracked well around the world.

Conclusion
This article should have helped unveil some of the mystery of unofficial dollarization. It’s a topic that comes up repeatedly with international travelers and business people. Stability, acceptability and anonymity are all reasons why the U.S. dollar has become the world’s currency of choice. Despite its popularity, however, don’t become too enamored with the U.S. dollar, as no currency has held onto the title of “currency of choice” forever.

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