US Dollar issue

Hi guys,

I‘m currently reading a textbook and having issues related to the passage down below. Could anybody please help? Thank you

“Another contributing factor is the increasing “dollarization” of 
Latin America. On New Year’s Day 2001, El Salvador made the U.S. 
dollar legal tender there. El Salvador’s Central Reserve Bank 
purchased $450 million worth of U.S. currency to implement 
this change. Ecuador adopted a similar policy in mid-2000, and 
Guatemala has taken steps to dollarize its economy as well.
These foreign holdings of U.S. paper currency provide an 
important benefit to the U.S. Treasury and ultimately to the U.S. 
taxpayer because they effectively serve as an interest-free loan. 
Normally, to fund the U.S. debt, the U.S. Treasury must float loans in 
the form of bonds, notes, and bills. Currency holdings substitute for 
such loans and reduce the amount the treasury must borrow. If 30-
year treasury bonds bear an interest rate of 5 percent, then the U.S. 
Treasury saves $22.7 billion (5 percent times $454 billion) in interest 
payments annually as a result of foreign holdings of U.S. currency. 
This is one of the benefits U.S. citizens receive as a result of the coun-
try’s economic and political stability. Other countries—particularly 
those members of the EU using the euro—also benefit from large 
holdings of their paper currencies by residents of other countries.“

 

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