I keep seeing news stories on Argentina dollarizing their economy. Has it worked for other economies? How?
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When a country gets in certain kinds of economic trouble, it can print money. The idea is, instead of having a fraction of society feel very bad pain (some people lose their jobs, some companies fail, government cuts programs it can’t afford), you spread the burden out (everybody who uses money has their money be worth a little less).
This can avoid a domino effect that leads to something like the Great Depression: Shaky businesses collapse, people are out of work, they don’t buy anything so previously healthy businesses start to collapse, leading more people to be out of work, until your whole economy is totally wrecked.
But you have to print money sparingly, if you print too much money then people will stop trusting your money to be worth anything. Prices go higher and higher, because there’s more money chasing fewer goods. Foreign investors see this, and stop making loans that are paid back in your currency. This means you have to print even more money for your government to pay its bills. Money printing can quickly spiral out of control.
Most governments say “We pinky promise not to print too much money” but what to do when people stop believing that pinky promise? One answer is to switch to using another country’s money, that has a strong economy and hasn’t recently broken a “pinky promise” badly enough to seriously wreck their currency. (Usually, countries in this situation switch to the US dollar.)
Switching to dollars stabilizes the currency, but can lead to another kind of trap. If people take out too many loans and owe more money than they can repay, printing money can help; it spreads the losses from those bad loans across everybody who uses money, instead of having a bunch of lenders fail and causing a banking crisis. But if you use somebody else’s currency, you’re not in charge of printing it, so you end up suffering the crisis, perhaps unnecessarily.
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