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Sometimes sovereign nations abandon their currencies (partially or fully) and adopt the currency of another state. For example, the currency of El Salvador was replaced by the United States dollar in 2001.

Has there ever been a case when a country with a larger economy was primarily using the currency of another country? In the above example Salvador's GDP is less than 1/500 of the American GDP.

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    Anglo-Saxon and Norman England continued to use the silver denarius as coinage long after the Roman Empire GDP hit zero. Does that count? Oct 6 '20 at 17:45
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    This question should distinguish between Fiat money and Commodity money. The paper money of today (Fiat money) is probably what is meant. Money based on silver/gold (Commodity money), such as Roman coins (which were still used after the Roman Empire no longer existed) and European currencies, Latin Monetary Union, until 1914 are really not comparable to Fiat money. Oct 6 '20 at 20:29
  • Kosovo also I believe. They don't have larger economies than the EU, though.
    – Tomas By
    Oct 6 '20 at 21:26
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    How does adopting the currency of another country equate to colonization? You need to do a lot more work in this question to justify the question title. Oct 7 '20 at 4:33
  • @curiousdannii I parse the title as saying that the currency was colonized which seems justified.
    – abhilash
    Oct 7 '20 at 6:39
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Since Fiat money (paper banknotes) are often based on the strength of an economy of the country that issued it, it is unlikly that a bigger economy would be able to use the currency of a smaller economy due the amount of currency being printed (in circulation).

The issuing country would avoid printing to much paper money, since they are a form promissory notes that at some point must be redeemed

  • for a fiat currency: goods produced by that economy
  • for a specie currency: gold/silver held by the central bank that issued such notes

So in general, it is not in the (economic) interest of one country to colonize another using Fiat money, since this could lead to destabilization of their economy.

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  • Further, it's impossilble with specie currency because that's just fungible barter. Oct 7 '20 at 1:33
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    This answer and the comment above imply that all decisions on the subject are taken rationally. That is obviously not true, though I don't have an example like OP asks for. Oct 7 '20 at 2:09
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    @RossMillikan During WWII, Germany issued Reichskredit­kassenscheine for usage outside of Germany, to avoid it's local currency (Reichsmark) being spreed outside the country. This is the exact opposite of colonization that the OP is asking for. Many other countries did the same, for the same rational, practical reasons. Oct 7 '20 at 10:58
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    @MarkJohnson: the vast majority of notes have never been redeemed, and it is unclear what redemption even means when, for example, a UK pound doesn't buy you a pound of silver anymore.
    – nomen
    Oct 7 '20 at 15:35
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    @MarkC.Wallace For specie, this is called debasement. This is what happened 1866, during during the Latin Monetary Union, when the Papal Treasury debased it's silver coins. Oct 7 '20 at 16:58
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United States of America used Spanish dollar as the (sole) currency until 1792 - it even remained a legal tender until 1857.

EDIT: In 1820 (when the Spanish dollar was still a legal tender and widely used), US GDP was 12548 million dollars (in 1990 US dollars), Spain 12299 million dollars – and US grew very rapidly very soon since then, while Spain stagnated. Source: Maddison, A.: Contours of the World Economy, 1–2030 AD, Table A4.

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  • The 8-reales might be realy a good example. It was also commonly used in Southeast Asia and China, but not as the sole currency. And, I have a Mexican coin from the XIX c that kept the same size and weight of the 8-reales in order to be exchangeable with it.
    – Luiz
    Oct 6 '20 at 20:35
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    When did USA GDP exceed that of Spain (other than during the interruption of 1808 - 1813)? Further, specie currency doesn't count because it's value is inherent solely on the contained precious metal. It's usage is just as fungible barter. Oct 7 '20 at 1:30
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    @PieterGeerkens by Maddison, A.: Contours of the World Economy, 1–2030 AD, US GDP in 1820 (when the Spanish dollar was still a legal tender and widely used) was 12548 M$ (in 1990 dollars), Spain 12299 M$ - and US grew very rapidly since then, while Spain stagnated. Oct 7 '20 at 11:19
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    @RadovanGarabík: Earlier than I thought. That belongs in the answer, not just as a comment. Oct 7 '20 at 11:21
  • China had an depression which made the paper Yuan era's paper money worthless. Their recourse were the silver from Spanish South America so Feb 2 at 11:56
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Argentina is the classic case of a country that does not trust its own currency. Traditionally, Argentina suffers from inflation, so the US dollar is the refuge for most people. Actually, during the decade of 1990, Argentine currency was fixed to the dollar. So, during that time, Argentinians actually used their currency or dollars.

I still remember those years when Argentinians who traveled outside their country were surprised that in other countries did not accept their currency with the exchange 1 to 1 towards the dollar. They were offered far less than that.

Obviously, that fixed exchange was impossible to sustain, and ended in the crisis of 2001.

In fact, nowadays, there are four times more dollars (link in Spanish) in Argentina's economy than its own currency (pesos). The amount of dollars per capita in Argentina is the highest in the world outside the USA. The exchange is fixed by the government, but in the black market you can buy dollars (called blue dollars) by paying double. In fact, newspapers show both exchanges (check upper left corner).

So, even though Argentina still has its own currency, their own people try to not use it and buy dollars instead. But, since dollars are scarce in an economy where everyone wants dollars, the government sets a limit of dollars that each person can buy (200).

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    When has Argentina used the currency of a country with smaller GDP as its own legal tender? Oct 7 '20 at 1:32
  • Venezuelans also informally use the US dollar due to hyperinflation, but again, that's a way larger economy than their own and it's not state-sanctioned (but allowed by the state).
    – Jurp
    Oct 7 '20 at 3:02
  • If they were asking for a 1:1 exchange wouldn't that actually indicate extreme confidence in their currency?
    – abhilash
    Oct 7 '20 at 19:47

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