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Pastimes : C$ - The Peso of the North? -- Ignore unavailable to you. Want to Upgrade?

To: Kitskid who wrote (151)	4/23/1999 12:45:00 AM
From: Kitskid	Read Replies (1) \| Respond to of 177

This article is from the New York Times on-line edition. It's a non-charge site but one has to register. <snip> nytimes.com - April 23, 1999 Greenspan View on Wider Use of Dollar By RICHARD W. STEVENSON - -- Alan Greenspan, the Federal Reserve chairman, joined the Clinton Administration Thursday in saying the United States would be open to proposals from other countries that want to adopt the dollar as their national currency. But in testimony before a Congressional committee, Mr. Greenspan and Lawrence H. Summers, the Deputy Treasury Secretary, warned countries that might be contemplating such a step that monetary union with the United States could never be a substitute for pursuing sound policies to strengthen their economies and financial systems. Presenting a united view on the topic, Mr. Greenspan and Mr. Summers also emphasized that the United States would not change its monetary policy to deal with economic problems in other nations using the dollar or serve as a lender of last resort to their banks. A number of countries have been considering abandoning their national currencies and adopting the American dollar -- the accepted international benchmark of financial stability -- as a way of reducing interest rates, inflation and exchange-rate volatility. The discussions have been most serious in Argentina, which has already held informal talks about the possibility with the Treasury and the Federal Reserve. The issue is also being openly debated in Mexico and, to a lesser extent, in Canada. The idea has got increasing attention following Europe's decision to create a common currency, the euro, a step that is expected to increase the European Union's growth prospects and competitiveness in the long run. Some economists say making the dollar the common currency of the Americas could greatly expand trade and help the United States by creating more stable and vibrant markets for its goods among its neighbors. Mr. Summers said the Administration's position on another country's desire to adopt the dollar would depend on the country and the circumstances. "But it is absolutely not our intent to close the door on the consideration of this issue by countries who have that interest," Mr. Summers said. Other countries would not have to seek permission from the United States to use the dollar as their legal tender. Several countries, including Panama, already use the dollar as their official currency, and the dollar is widely used on an unofficial basis in many other nations, from Russia to the Philippines and Bolivia. So strong is foreign demand for dollars that roughly two-thirds of all American currency is in circulation outside the United States. But because of the stakes involved, the big countries weighing the possibility of dollarization have signaled that they would only take such a step in coordination with the United States. Among other things, countries would need large quantities of cash from the United States during any changeover. Speaking before two subcommittees of the Senate Banking Committee, Mr. Greenspan said that in recent years some small countries with generally sound economic policies had found themselves buffeted by global forces. Those countries, he said, probably would have fared better had they "locked themselves into a currency of one of the more stable, larger countries" like the United States. But Mr. Greenspan said adopting the dollar would not help another country unless that country was also willing to develop a well-regulated, well-capitalized financial system, keep a lid on budget deficits and avoid running up big foreign debts. "It is very important for us to be certain that dollarization as we view it is not some means to bypass the types of policies that are required to create stability," Mr. Greenspan said. A country that adopts the dollar without pursuing sound policies generally, he said, "will find within a reasonably short time that it will fail, and that in the process of failure, they almost surely will be worse off than they were without it." Dollarization is a component of a broader debate over how developing nations can best manage their currencies and foreign-exchange systems in a world where rapid flows of capital can knock all but the mightiest of economies off track. At meetings next week, financial officials from the leading industrial nations and delegates to the International Monetary Fund and the World Bank will consider how to respond to the global financial turmoil of the last two years. Exchange-rate systems are at the top of the agenda, with many countries having come to the conclusion that developing economies need to choose between two options at opposite ends of the spectrum of possibilities: allowing their currencies to float freely in value, or irrevocably fixing the value at a certain level. Replacing a national currency with the dollar is in effect the most dramatic and unambiguous way of freezing that currency's value irrevocably. Such a move would effectively eliminate the exchange-rate fluctuations that can bedevil borrowers and exporters in a developing nation, since the dollar is the benchmark against which other currencies are usually valued. It would all but eliminate inflation, since the money supply would be controlled not by the nation's central bank but by the Federal Reserve. And because exchange-rate and inflation risks would be substantially reduced, interest rates within the nation adopting the dollar would probably come down. But in adopting the dollar, a country would give up control of its own monetary policy, reducing its ability to cope with any ups and downs in its economy. It would be restricted in its ability to deal with a banking crisis, since it could not inject money into the financial system. And it would give up what economists call "seigniorage," the interest payments it receives from holding foreign currency reserves in the form of United States Treasury bonds, for example. Many economists favor dollarization as a realistic way to help bring stability to emerging economies, especially in Latin America. Before joining the Clinton Administration, Mr. Summers was an enthusiastic proponent of dollarization. But the issues involved are not just economic. Giving up a national currency -- even a troubled or weak currency -- is a major political decision in any country, and involves a substantial ceding of sovereignty. And Mr. Summers and Mr. Greenspan discussed in their testimony today the possibility that a dollarized nation that hits a rough economic patch will likely attribute its problems to the United States, creating diplomatic issues as well.