Hanke Advises Venezuela to Fully Adopt U.S. Dollar

Economist Steve Hanke, known as the "Money Doctor" for his expertise in currency stabilization, has advised Venezuela's National Assembly to fully adopt the U.S. dollar as its official currency. Hanke, a professor of applied economics at Johns Hopkins University and a special advisor to Venezuela's National Assembly, proposes this measure to combat the country's rampant inflation, which currently stands at approximately 400%. The core of his strategy involves eliminating the Venezuelan bolivar and the central bank to prevent the government from printing money to finance its expenditures, a practice that historically fuels price increases.

Hanke emphasized that taming inflation is paramount for restoring stability in Venezuela, stating that "all the other progress flows from that." He views stable prices as the foundational element for any national recovery, citing Venezuela's own economic history as a case study. This is not Hanke's first foray into currency reform. He previously advised Montenegro in 1999 to replace the Yugoslav dinar with the Deutschemark and oversaw Ecuador's transition from the sucre to the U.S. dollar in 2000, marking the first dollarization in Latin America since Panama a century prior. More recently, in 2009, he advised Zimbabwe on dollarization, which successfully curbed inflation until a new government abandoned the dollar in 2013, leading to a resurgence of hyperinflation.

Hanke's current effort in Venezuela represents his second attempt; a previous proposal for a currency board in the mid-1990s did not gain sufficient support in the National Assembly. He estimates there is a 50%-80% probability that the National Assembly will approve full dollarization this time. If implemented, Hanke told Fortune's Shawn Tully, it would constitute the most significant shift from a domestic currency to an alternative since the euro was introduced in 1999. Despite the formal proposal, the U.S. dollar is already deeply integrated into Venezuela's economy. The bolivar has depreciated by 78% against the U.S. dollar over the past year, leading most consumers to conduct nearly all their transactions in dollars due to the bolivar's collapsing value. This widespread de facto dollarization indicates a strong existing preference for the U.S. dollar among the Venezuelan populace and businesses as a more stable medium of exchange.