When we speak of dollarization, we refer to a procedure generally carried out by the jurisdiction of a country that consists of adopting the US currency to carry out the different transactions carried out in a given territory. The term originates from the currency adopted, which is the dollar, attaching the suffix “tion” of action and effect, and where the word dollarization is erected, a phenomenon that has been carried out or has been implemented in various countries for their economic transactions through the replacement of its domestic currency by the United States currency in terms of its functions that include the reserve of value, the unit of account and means of payment.
Regarding the dollarization of a country, it can be translated in various ways since it can be equivalent to a measure carried out of a formal or informal type; Furthermore, it can occur indirectly or directly or on its mixed or absolute part.
When we speak of a formal dollarization, we refer to whether an administration tries to legalize the currency so that its citizens can use it for functions such as legal tender, or that it has the same rigor as the national currency. The direct dollarization is the US currency replacing the national currency, so that it no longer flows completely throughout the national territory; On the other hand, the indirect means that the national currency continues in circulation but in a forced way, and the citizens of the territory use the foreign currency either formally or informally in their different transactions and little by little they adopt the currency out of habit.
On the other hand, an absolute dollarization occurs when the promulgation of a State completely substitutes the national currency for the foreign currency, used as completely legal money; when the State allows the free circulation of both currencies, according to the discretion of the citizens.
In several Latin American countries this process was carried out, which is generally carried out when a territory is in economic crisis; An example of the application of this system occurred in Panama in 1904, this was carried out as an economic convenience for the United States due to the construction of the Panama Canal. Another country that was dollarized was Ecuador after its economic crisis in the late nineties; finally, in 2001, specifically on January 1, El Salvador was dollarized thanks to a great economic instability that it was going through.
