How do central banks outside the U.S. issue USD? Sometimes, during a recession, you need to issue currency to get the economy going, but sometimes you have a central bank that uses the currency of another country, so what do they do, nothing? Also, if you can't issue currency, how can you control the macroeconomics of a country?


I was wondering how Ecuador gets around that problem.

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    see also Argentina : timely question. Nov 20 at 23:03
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    @Fizz quantitative easing is essentially printing money, although nowadays they are electronic ones. Though what is exactly money is also a complex question - banks create money (M2) by issuing credits.
    – Roger V.
    Nov 21 at 9:32
  • " Sometimes, during a recession, you need to issue currency to get the economy going" or not, depends on your beliefs.
    – paulj
    Nov 23 at 11:00
  • Do you not think this is about Economics, not Politics? Nov 24 at 23:10
  • Is this really about central banks 'issuing' USD, or merely permitting its use? Further, does 'issuing' currency mean actually 'printing' it, or merely 'handing it out' to commercial banks? Nov 28 at 19:21

5 Answers 5


TL;DR: Not being able to issue USD is the point of it.

The full discussion can be found in Wikipedia article Currency substitution.

The main disadvantage of the currency substitution (i.e., using another country's currency instead of issuing one's own) is the inability to "print money", i.e., to control the money supply via increasing M1 aggregate (see Money.) However, the state usually can raise funds using other methods, notably:

  • increasing taxation
  • issuing government debt

In fact, the inability to "print money" is also the main reason why some countries resort to the currency substitution - it usually follows printing previously too much money, associated with high inflation and low investor confidence. Adopting a foreign currency or simply committing to maintaining a fixed exchange rate vis-à-vis a stable currency restores the investor confidence. Ironically, it may even result in increasing overall money supply (aggregates M2 and M3, which are not "paper money"), since in absence of inflation people may prefer to keep money in the bank, rather than spend it immediately, and bank issues loans, thus creating more "virtual money".

Another reason for currency substitution is easing the international transactions, when foreign trade is an important fact of the economy, and many negative effects may be associated with fluctuations of the exchange course, currency speculation, deflation pressures on the exports, etc. Introducing Euro could be viewed as such a substitution scheme, since none of the European countries has independent control of the European monetary policy.

Nowadays money is not literally "printed" (beyond renewing the existing supply of paper money) - rather it is created by buying back the government debt at higher interest rates, a practice known as quantitative easing, which means creating "electronic money" in the form of the deposits on bank accounts. In the wake of the 2007 financial crisis, massive amounts of money were in injected into the economy, to compensate for banks not giving loans (i.e., shrinkage of M2 aggregate, known as liquidity trap).
See Latest data on Money Supply M0 (USD Million):
enter image description here


Lots of mixed-up questions here.

How do central banks outside the U.S. issue USD?

Of course other banks (central or not) cannot print USD (at least legally).

If they issue USD, they must get them by other means.

For example, if the economy works with USD, then taxes will be paid in USD and the government will have that cash available. Even if most of the economy is not using USD, the government can control money exchange and/or foreign trade and get taxes in USD or other convertible currencies out of it.

Also, if you can't issue currency, how can you control the macroeconomics of a country?

There are many other tools other than issuing currency. For example, a central bank typically sets the level of reserves of the bank. Raise the required level and the banks can loan less money, thus slowing the economy and fighting inflation. Lower the level, you get more money flowing but inflation rises.

Mind you, nowadays in many countries most of the money is "virtual" in the sense that it does not need the physical note to use it. I pay my taxes as a charge into my bank account. The government pays my employer with a deposit at his account, my employer pays me the same way, and I pay the groceries with a card. As long as there are enough notes for the people who request them, there is no issue. The issues could happen if there is a sudden extra need for physical cash (as, for example, in a bank run).

  • If a country want to "dollarize" then it will have to earn dollars from 1)exports or 2)selling assets to foreigners. On the other hand, there might already be a lot of dollars in the economy: paper dollar bills for most people, overseas bank accounts for rich people. But I don't know if that's enough to finance the government's taxes.
    – Daniel
    Nov 21 at 2:24
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    @Riwen: They can. And others will flat-out ignore them. In addition, that country will then be seen as unreliable. Much easier to print fake USD.
    – MSalters
    Nov 21 at 11:08
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    @Riwen: this is a little besides the topic here, but the US can easily disprove that. All electronic dollar transactions ultimately go through the Fed, although in somewhat "bulk" level between the banks.
    – Fizz
    Nov 21 at 19:47
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    Could I start up a bitcoin exchange where I just tell people I have 20 trillion bitcoin? I could try. I wouldn't actually have 20 trillion bitcoin, but if I can get more deposits than withdrawals, I can keep the scam going for a while. The real money banking sector is more regulated than crypto, so if I tried to do it with USD, I'd probably get found out.
    – user253751
    Nov 22 at 12:05
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    @Blueriver You can easily verify that I don't have 20 trillion blockchain bitcoin because they don't exist. You can't easily verify that I don't have 1 million blockchain bitcoin. You also can't verify that I have bitcoin IOUs totaling 20 trillion (money which will have to circulate many times to repay all of them).
    – user253751
    Nov 26 at 15:03

Such a country has lost a major lever for controlling their economy. They find the benefits of using a widely trusted currency more important than the loss of control. Remaining tools to manage the economy include:

  • Subsidies for selected parts of the economy, out of the general tax revenue or out of debt.
  • Loan guarantees.
  • Tax and customs rates, including special economic zones with tax exceptions.
  • Investments in infrastructure, a trained workforce, etc.

All of this stands and falls with the trust of financial markets in the ability of the country to service debts. Which may be improved in the long run if the government cannot print money on demand.

  • Fiscal measures (deliberately changing the difference between taxation and government spending) can still be used for macroeconomic policy purposes, even when monetary measures (deliberately changing short-term interest rates) are no longer available. The problem comes when governments want to borrow more: without a domestic currency, they are borrowing from the world rather than from their own citizens.
    – Henry
    Nov 21 at 12:06
  • They've also lost a major lever for screwing the economy. Even the US is potentially in a death spiral due to unsustainable expenditures - and other nations are even worse. Nov 21 at 19:23

Some apparent misconceptions in the Q:

  • First, issuing money is complicated thing. Straight "printing" or increasing the monetary M1 mass (be it electronic) is not how central banks normally fight a recession or downturn. The normal mechanism is to lower the interest rate. It's only when you can't do that (the famous "zero lower bound"--ZLB) than more creative methods like quantitative easing have to be used.

  • The general danger with just printing money as economic stimulus is runaway inflation. Which Argentina is experiencing right now, and I think Ecuador was experiencing too when they decided to dolarize. Or when Bulgaria decided to peg their currency to the Deutschemark etc. (aka currency board, which is a half-way measure to just giving up your currency completely. You still retain the possibility to unpeg somewhat more easily, although there's a more complicated discussion relating to credibility of the peg.)

  • At ZLB, quantitative easing can be done is such a way as not to cause inflation. This is possible because inflation is not just more money being available or stored, but more money circulating (the famous velocity of money matters--if agents just "sit" on their money, it doesn't matter how much money they have or is given to them "out of nowhere"--prices [aka inflation] can't increase if nobody is buying anything extra. Which sometimes happens due to psychology/expectations.)

  • Fourth, most economic agents get money via M2 rather than M1, i.e. they get their money from commercial banks, which typically produce much more of it than M1, i.e. they're allowed to multiply the central bank money to some degree. (In fact, in the US, the Fed is strongly opposed to any bank that doesn't do that.) These banks are however sensitive to the central bank interest rate.

  • Fifth, most developing (or "2nd world") economies much more seldom reach the ZLB (in their own currency). This is because "1st world" currencies (and not just that of the US, but e.g. the Swiss franc too) act as an attractor when there is an economic crisis, but other currencies do not. So there's almost no reason for developing countries to "print money" (in their own currency) as a stimulus. It's only done there in an inflationary manner because they (often enough, alas) fail to otherwise have sound economic policies.

So if you give up your currency entirely, you give up a fairly useful lever, but not just/primarily because of lack of printing though. Lack of own printing is actually much more often the benefit.

Finally, currency substitution (dolarizaion included) is pretty close to a monetary union. There is an elaborate theory when the latter makes sense. One of the cases where it doesn't is if there's high risk of "asymmetric shocks", e.g. having an economic crisis/downturn in one part of your union, but not in another. So, if say the US economy experience a downturn at the same time as Ecuador's then that's that much less of a problem [for Ecuador] than if they happen at different times. And the level of synchronization between economic cycles is fairly dependent on the level of economic integration in broader terms.

There is a benefit [of sorts] for a state to print money though, even in inflationary manner: it devalues the state's own debt in their own currency, essentially giving itself a cut on their own debt without the (domestic) creditors having to explicitly approve of that, and even without passing legislation that could otherwise force them to agree to the cut. You'll note that Argentina has a high level of debt... However, in other corners inflation is also considered a bad way to approach debt, although historically speaking even the US has done some of that.

OTOH dolarization has also been desrcibed as a crutch for not being able to legislatively act against high deficit spending directly.

There is one more thing to keep in mind though: some countries, including Argentina experience effective dolarization [to some degree] even when they have their own official currency, if a lot of the population tries to avoid using it. That has nearly as many downsides as doing it officially. This includes the fact that people literally stashing dollars under their mattress means fewer reserves under the control of the authorities, so less knobs for them to tweak.

In a highly dollarized economy, the external credibility of the national currency is usually already largely compromised. And since the U.S. dollar is an international “reserves money,” economic agents who hold a large amount of dollars have the means to react to a temporary external shock. Thus, the main difference in the status of “reserves” seems to be that these “reserves” are in the hands of agents, rather than in those of the monetary authorities. [...]

In a highly dollarized economy, the foreign currency component of broad money cannot be directly influenced by the monetary authorities. Money supply in the economy is not determined by the monetary authorities but by the behavior of agents holding both foreign- and domestic-currency-denominated assets, including cash. As money supply in the economy becomes endogenous, the authorities may not be in a position to fight inflation by tightening domestic money supply in an appropriate manner. Based on empirical evidence, Hoffmaister and Végh (1995) assert that in Uruguay (a highly dollarized economy), dollarization may have severely hindered the effectiveness of monetary policy.

(Uruguay is/was not officially dollarized.)

Somewhat interesting, Uruguay has pursued a policy of de-dollarization since then, partially successful [in that regard]:

[D]eposit de-dollarization in Uruguay has had mixed results. The dollarization of fixed-term deposits fell from 91% to 51% between 1998 and early 2020. However, the dollarization of demand deposits has persisted at approximately 80% since 1999.


El Salvador is a paradigmatic case for official dollarization: OD was adopted in quiet times, without inflationary or exchange rate pressures, with an eye set on the traditional theory of monetary unions focused on the dilemma between trade gains (in a country with strong ties to the United States both in trade and through labor exports via remittances accounting for more than 15% of GDP) and economic cycle synchronicity. The other official dollarization case in the region, Ecuador, is more problematic: it resulted from a desperate attempt to put an end to a devastating currency crisis, in a country soon to become a commodity exporter with limited access to international finance.

The analysis for El Salvador in that paper concludes that they haven't benefited much if at all from OD, although this conclusion is somewhat confounded by structural factors in El Salvador's economy.

OTOH, in crisis-hit Ecuador, it was apparently more beneficial, at least in the short run:

The first issue worth highlighting is that, like the Argentinean currency board (de la Torre et al., 2003) and as argued by economic theory, dollarization helped to contain and reduce inflation, albeit at the expense of a somewhat higher volatility of the economic cycle.

enter image description here

And Venezuela has experienced "spontaneous" dollarization this century, even somewhat applauded by its anti-US president, perhaps surprisingly.

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    I thought "second-world" specifically meant Eastern-bloc countries rather than having anything specifically to do with a particular stage of economic development? The lack of economic development in the "Second World" is more just a function of the general economic failures of socialism and, especially, communism than something that is inherent in the definition.
    – reirab
    Nov 21 at 22:01

Question #1

How do central banks outside the U.S. issue USD?

They can acquire them through trade, buy them, or sometimes the US will provide emergency relief. Russia and China both keep sizable foreign currency reserves and they do this through trade. When the US buys something the US pays in USD. The Chinese or Russian governments will acquire some or all of those dollars and rather than purchase something from the U.S. with them, aka trade; they will set them aside in a bank, or invest them. In this way they have acquired trillions of dollars.

Question #2

Sometimes, during a recession, you need to issue currency to get the economy going, but sometimes you have a central bank that uses the currency of another country, so what do they do, nothing?

Typically using a foreign currency within ones domestic economy is a way to try to stabilize that economy. If the domestic currency is mired in depreciation due to inflation. Using some other currency which you know is more sound is a hedge against this symptom of instability. It allows the transactions in ones own economy to continue while giving up some control over domestic money supply. As for how they get US dollars, US dollars can be purchased on the international market as can the Euro, They can be acquired from U.S. through trade. They can be provided by the U.S. as relief.

Question #3

Also, if you can't issue currency, how can you control the macroeconomics of a country?

If your bank is issuing USD then you could still control currency by not having your bank issue those USD into the economy. Also you would still have interest rates and regulations to work with to control our macroeconomics. Yes your citizens could also go abroad to purchase their own dollars but this is always the case. U.S. citizens could go abroad and acquire US dollars even while the fed is trying to tighten money supply. Such individual activities are typically less influential than the FED with regard to overall macroeconomic influences.

The deal though is if your domestic economy is using the U.S. dollar it's because their is a problem with the domestic currency. There are benefits to using a foreign currency domestically in these cases, but their are also problems. Chief amongst them is USD would be an expensive solution, and most countries mired in inflation would have a problem affording that solution in a way which would not seriously hamper their own economy. Even China or Russia each with very large reserves of dollars would struggle to convert their entire economies over to that currency.

So this is typically a boutique solution not used by the entire economy but used by people and companies influential enough or wealthy enough to insulate themselves from domestic currency instabilities.

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