President Jamil Mahuad of Ecuador put a radical proposal to his 13 million citizens last week. Let's get rid of our inflation-ravaged currency, the sucre, he said, and replace it with something that everyone can trust: the U.S. dollar.

People would turn in their sucres at banks for greenbacks. All salaries would be paid in dollars. Taxis, restaurants and corner stores would charge in dollars. The government would budget in dollars and collect taxes in dollars.

Can a country really do that, just help itself to the United States' currency as its own?

Yes. It's called "dollarization" and ever since 1997, when a financial panic swept over much of the world, destroying the value of one currency after another, some victimized countries have been flirting with what can appear to be a simple, one-stroke solution.

Argentina gave serious thought to converting to the dollar earlier this year, but backed off. It's also been discussed with varying degrees of seriousness in Mexico and several countries in Central America. The dollar is the currency in Panama, not because of any recent economic woes but because of that country's century-long relationship with the United States.

David Rothkopf, chief executive of Newmarket Co., an international affairs consultancy, goes so far as to say that with today's global economy the days of small currencies may be numbered. "Do they have any right to exist in the world anymore, in a world economy where the flows in these markets are so great? . . . The answer is no," he said.

"Ultimately these currencies will go the way of the New Jersey pound," he added, referring to the days in which the American colonies had their own currencies.

Over all, he contends, dollarization will be good for the United States, by tending to tie those countries to the U.S. economy and U.S. companies.

American officials aren't pushing for dollarization but say they are willing to cooperate with it, while warning that it's not for everyone. "We would hope and expect that any country that was choosing to adopt the dollar would consult . . . with us," said Treasury Secretary Lawrence H. Summers. But ultimately it "is a choice for other countries to make."

It's their choice because the dollar has been circulating globally for years, the closest thing the planet has to a single currency. In many countries, people simply don't trust their own currencies to keep their value, whether the ruble, rupiah or peso, so they hoard or use dollars. The Federal Reserve estimates that about two-thirds of the $550 billion in U.S. bank notes are held outside the United States.

Dollarization takes unofficial use of the U.S. currency one step further, by formally replacing the local currency. Its logic goes like this:

* Local citizens will get stability and faith in the future because the dollar is not normally subject to wild swings. Foreign investors won't have to worry about surprise devaluations eroding the value of local currency they've bought with dollars, since that currency won't exist. As a result, the economy will tend to stabilize and pick up.

* Fiscal discipline will be strengthened. Since the government won't issue its own currency anymore, it will no longer be able to print it on demand and cause inflation.

* Transaction costs will decline. The hassle and cost of changing back and forth between dollars and local money will disappear; again, the economy will function more efficiently.

As with any big idea, there are serious costs. Number one in many minds is that going with the dollar can erode sovereignty, by taking crucial decisions out of local hands. Because the dollarizing country no longer has a central bank overseeing a currency, it couldn't set interest rates, a key determinant in the well-being of any economy. The rates would in effect be set in Washington, based on the interests of the United States.

Suppose, said Robert Solomon, guest scholar at the Brookings Institution, a dollarized country suffers declining exports because recession has hit its trading partners. "Normally, the central bank would do something about that, in the form of changing the interest rates" to lower the value of its currency and help exports. But not a dollarized country. " . . . You give up monetary policy."

National pride can get dented, too. In most every country, bank notes are an important symbol of identity, bearing images of great landmarks and independence heroes. Doing away with the local notes can make people feel that they've lost something valuable, even if they've gained a stable currency.

On a more practical side, the country's government loses income called seigniorage--an economist's term for profit that comes from issuing a currency. Also lost is the country's "lender of last resort," the central bank that in crises can turn out local money to rescue failing institutions.

U.S. officials make clear that the Federal Reserve would not commit to play the rescuer role in a country that chose to dollarize. And "it's to be understood that monetary policy will continue to be made by the United States in the United States' interests," said Summers.

Moreover, many economists say that by dollarizing, a country may delude itself into thinking it's hit on a painless solution to deep-rooted economic problems. It will back off from balancing its budget, closing ailing banks, and taking other politically unpopular steps that might be needed.

"Dollarizing without having underlying fiscal soundness is like buying a new pair of pants without having lost the weight first," said Rothkopf.

Still, in the right country, with the right underlying policies, it could help quell short-term disruption and over time fuel prosperity. In Europe, 11 countries that last year introduced a common currency, the euro, are hoping it will increase general economic efficiency. The creation of a joint central bank that pledges to take all their monetary policy concerns into consideration alleviated sovereignty concerns; so did a plan to let countries help design their own euro bank note, which will start circulating in 2002.

To smooth the way for any country that wants to try converting to the dollar, Sen. Connie Mack (R-Fla.), a fan of fiscal responsibility, has introduced a bill intended to overcome one objection to the idea--the dollarizing country's loss of seigniorage income.

The bill would require the Federal Reserve to rebate to a dollarizing country 80 percent of extra seigniorage income it took in by expanding the dollar supply because of the country's decision.

Panama's use of the dollar dates to 1903, the year it seceded from Colombia with U.S help. With Americans spending huge volumes of their own money there on building the Panama Canal, the dollar became the official currency. Panama does issue its own coins.

From time to time, leftist politicians there complain that the dollar is another form of U.S. control. Panama has felt some pain as the dollar has risen and fallen based on considerations to the north, but many bankers there think the country has been better off for it.

Dollarization is a dramatic step, and the easier approach is to go halfway, with a "pegged" exchange rate that preserves the local currency but makes its value dependent on the dollar.

Argentina took this route early in the 1990s, when it faced hyper-inflation. It pledged to exchange one dollar for one peso, on demand. It was already taking other steps to reduce deficits; knowing that any Argentine could demand a dollar for a peso created discipline to not expand the supply of pesos and stoke inflation.

The Argentine government has kept the pledge, though not everyone remains convinced it will hold. Last year, when neighboring Brazil devalued its currency, the real, there were jitters in Argentina that the peso would follow suit. Not so, declared the government of President Carlos Menem: In fact, we're thinking of going in precisely the other direction, dollarization.

Many people think Menem was just trying to calm the markets. In any case, the new government that took office in December, led by President Fernando de la Rua, is cool to the idea.

Brazil, which has a much larger economy than Argentina, is dead-set against dollarization for itself, for both economic and nationalistic reasons. The idea of a common currency for the Mercosur trading bloc of Latin America wins more respect.

Ecuador's case involves true economic emergency. The country is on its knees, hit by rapid inflation, occasional civil unrest and a general breakdown in government decision-making. Dollars are being hoarded; late last year, the nation defaulted on interest payments on Brady bonds, financing instruments that helped it climb out of a financial crisis in the 1980s.

Many economists view President Mahuad's proposal as more political than economic, and not accompanied by other needed reforms.

Last week, after he put forth the idea on television, the central bank approved it, under political pressure from him. "There is about 60 percent approval by the population in general in polls and overwhelming approval in powerful economic sectors and chambers of commerce," Gustavo Arteta, an economist in Quito, said in an interview.

An International Monetary Fund team was in town, and it will doubtless have opinions to offer. Leftist political parties were trying to block the plan as a shameful loss of independence and were planning mass demonstrations.

CAPTION: An Ecuadoran street trader displays wad of sucres. Economically troubled Ecuador is weighing a proposal to replace its currency with the dollar.