The adoption by one country of another country's currency (in this case, the U.S. dollar
) as its official legal tender currency
Let's imagine a nation that
appears to have a very strong economy. Because of this apparent strength, its currency is held by the people in countries around the world. It eventually gets to a point such that the majority of notes
issued by this country is actually being held and circulated in foreign nations - sometimes in the black market, sometimes as official replacements of the currencies of those other nations.
Incredibly, this nation's economy appears strong despite a huge trade deficit - it imports much more than it
exports. How is this sustainable? It turns out what this nation is actually exporting, is its own currency, while it imports real goods. It is the international equivalent of printing money. Because this nation is the source
of that money, its economy appears prosperous, because other people around the world are doing the work. What was apparently the result of its prosperity is actually the cause.
In reality, this nation's economy is in tatters - it does
not have the ability to support itself. (Spain, for example, after it become a source of gold taken from the New World, became a supplier of money for the rest of Europe.) While it may be only through circumstance that those doing the real work have not attempted to make themselves independent from this nation's currency, if they do, this nation would be faced with the same kind of economic disaster that faces gold mining nations when central banks begin to sell off their gold reserves - this nation's major export is no longer wanted, making it unable to import the goods it needs to survive.