thestar.ca
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April 3, 1999
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Nations ponder common currency
Will greenbacks rule hemisphere?
By Jonathan Peterson
Special to The Star
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MEXICO CITY - In a land where old struggles with the United States linger ghostlike in the public psyche, Raymundo Winkler offers an almost unnerving vision for the future.
''Maybe we would have coins with the faces of our Mexican heroes for use in parking meters,'' declares Winkler, who heads the largest council of industries in Mexico City.
''But the dominant currency obviously would be the U.S. dollar.''
Remarkably, his voice is blending with a larger chorus throughout the Americas.
In Canada, the launch of the euro has prompted debate on whether the loonie should be dropped in favour of the greenback. Some experts say that may be necessary for North American industry to compete against a united European economy.
At dinner parties in Caracas, Venezuela, news briefings in Mexico City, and political speeches in Buenos Aires, Argentina, opinion leaders are debating a notion that would have seemed unthinkable not long ago: linking their financial destinies to the very symbol of Yankee capitalism.
If emerging nations were to cast aside their own crumbly currencies for the muscular greenback, the thinking goes, they would be shielded from the demoralizing spasms of inflation and recession.
And if the price of shelter from the storm is surrendering crucial financial powers to the U.S. Federal Reserve Board, they are saying, in effect, so be it.
Argentina, the second-largest economy in South America behind Brazil, is leading the way, and President Carlos Menem has urged an official shift from pesos to dollars as his top economic priority.
Elsewhere, the conversation is more preliminary and can still spark a heated, nationalistic backlash.
Nonetheless, the start of any debate at all is a resounding sign of a world in flux, an example of the agonizing choices that sovereign nations confront in an era when they often bounce around like loose change in the pocket of a giant global economy.
Just last week, a group of Mexico's leading business executives called on President Ernesto Zedillo to shift his economy broadly into U.S. dollars.
At the same time, the influential Inter-American Development Bank was urging nations of the hemisphere to start using U.S. dollars, or perhaps even create a new regional dollar-linked currency bearing the likeness of, say, Christopher Columbus.
''Given their historic distrust of the Yankee neighbour, it's quite remarkable that any of them would be willing to surrender such an example of nationhood,'', said Benjamin Cohen, a political economist and author of The Geography Of Money.
Yet more and more countries are ''coming to the conclusion that the cost of maintaining a national currency - no matter how satisfying to their emotions - has simply become too high to bear,'' he said.
Further inspiring champions of the dollar is the example of Europe, where 11 nations this year began to phase out their familiar currencies in favour of the new euro.
Meanwhile, U.S. officials are wary of a more ad hoc rush to dollars, perhaps in some future financial crisis. In theory, at least, a stampede could develop without U.S. approval, unleashing new pressures on the United States to alter its own monetary policies for the benefit of beleaguered neighbours.
Earlier this year, Bank of Canada governor Gordon Thiessen attacked the concept of a common currency. He said the price of a common currency - that is, using the U.S. dollar - for Canada would be a loss of political and economic autonomy. Canada and the United States have different economies, which could lead to conflict, he said. Thiessen added that the Canadian dollar, which has had a floating exchange rate since 1970, has acted as a safety valve for the economy.
A floating rate often acts as a buffer when the economy takes some sort of a shock, like the collapse in commodity prices of the last year.
''If the exchange rate is not allowed to move, then the adjustment would have to take place primarily through declines in prices and wages and the movement of capital and labour,'' Thiessen said.
Throughout the Americas, meanwhile, countries are quietly watching the experience in Argentina, which has shored up its peso with huge dollar holdings since 1991 and where the U.S. currency already is widely used for rent, home purchases and a broad range of everyday transactions.
''We've had discussions with virtually all the countries in the region about our policies and different monetary arrangements,'' said a senior official of Argentina's central bank, which is working out the final details of its ''dollarization'' plan.
Steve Hanke, an economist at Johns Hopkins University who has championed switching to the dollar, declares flatly: ''In five years, most of the economic activity in Latin America will be dollarized.''
In fact, a nation can choose to use U.S. dollars without any special arrangement with Washington, as Panama and Liberia do and as Israel pondered doing in the early 1980s.
Or, like Argentina and Hong Kong, a country might establish a ''currency board,'' in which it backs up domestic cash with large U.S. dollar holdings, in effect relying on the greenback's solidity to maintain investor confidence in its own cash.
Whatever the variant, countries that quit making their own money give up some of the fundamental privileges that go with being an independent nation: the ability to manipulate the money supply, exchange rates and interest rates, all of which can be used to speed up or slow down an economy and defuse fierce political pressure.
Dollars, in other words, come with a price.
But in a global economy, emerging nations face an arguably steeper price should they lose the confidence of investors.
''This is the new world in which they find themselves,'' said Raul Hinojosa, director of the North American Immigration and Development Center at the University of California, Los Angeles, ''and their choices become much starker.''
If some see the spread of dollars as a triumph for U.S. stature in the hemisphere, officials in Washington are actually quite leery of the whole matter. The use of the dollar, they fear, could lead to unwelcome new pressures on U.S. monetary policy.
Even the perception of such pressures could affect financial markets and lead to misunderstandings of U.S. interest rate policies, they caution. It could also be a possible new source of resentment toward Washington, they say.
''We have to be particularly careful to remember that our monetary policy is first and always for the United States,'' Fed chairman Alan Greenspan told the Senate banking committee last month.
He noted that while ''a broadened dollar market would clearly have stabilizing effects, and that is positive,'' the United States should not be ''perceived as creating a safety net'' for countries that switch to dollars.
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