U.S. Policy on Dollarisation: A Political Analysis

Dollarisation has become a topic of intense debate throughout Latin America, raising the prospect of a vast new currency bloc in the Western Hemisphere - a potentially pivotal geopolitical event. What policy responses can be expected from the United States? An assessment of potential benefits and costs, both economic and political, suggests that there is no clear presumption regarding U.S. interest, leaving wide latitude for policy discretion. Little change of Washington's current policy of passive neutrality can be expected in the foreseeable future. The only exception would be the possibility of a serious challenge to the dollar's global pre-eminence by Europe's new euro, which could trigger a competitive response from Washington.

In the wake of the recurrent financial crises of the last decade - Mexico in 1994-95, East Asia in 1997-98, Brazil in 1999, Turkey in 2001 - it is not surprising that governments today would look for new ways to cope with the old risks of currency fragility and volatility. The ever-elusive goal is to construct a sustainable regime of exchange-rate stability. The challenge, as always, is to make a commitment to stable exchange rates credible. In 1991 Argentina thought it found the solution in a currency board, an ostensibly permanent peg to the U.S. dollar. But as subsequent developments have demonstrated, not even the guarantees of a Convertibility Law seem sufficient to convince investors and currency traders that an exchange rate is truly irrevocable. So now attention has focused on an even more radical solution: dollarisation. The idea of dollarisation has become a topic of intense public debate throughout Latin America since Argentina's former President, Carlos Menem, spoke out in its favor in early 1999.

Dollarisation is not new, of course. On an informal basis, America's greenback has long circulated alongside national monies throughout much of the Western Hemisphere as well as elsewhere. This is the familiar phenomenon of currency substitution - part of a broader reshaping of the global geography of money, driven by cross-border competition among currencies, that I have elsewhere referred to as the deterritorialization of money. ⁽¹⁾ What is new in Latin America today is a growing interest in formal dollarization: legal adoption of the dollar as a replacement for local money. Formal dollarisation (or its equivalent using some other major currency) used to be seen as an option mainly for tiny enclaves or micro-states like Monaco or the Marshall Islands. Until recently, the world's largest dollarised economy was Panama, with a population of less than three million. But now even nations as big as Argentina or Mexico are debating the merits of the approach; and two countries, Ecuador and El Salvador, have actually gone from talk to action, enacting legislation to formally adopt the dollar. In prospect is the creation of a vast new currency bloc stretching from Alaska to Antarctica, a potentially pivotal geopolitical event.

The purpose of this paper is to assess the prospect of widespread dollarisation from the perspective of the United States. In the past, Americans were barely cognizant of the use of their currency by other countries. Apart from Panama, the only fully dollarised sovereign states were Liberia, Marshall Islands, Micronesia, and Palau ⁽²⁾ - none big enough, in economic terms, to make much of a difference to policymakers in Washington. But with each new Ecuador or El Salvador possible impacts on the U.S. are bound to grow, demanding greater attention. The question is: What policy response can be expected from the United States? The discussion in this paper focuses exclusively on U.S. concerns and is frankly political.

As with all foreign-policy analysis, inquiry must begin with an evaluation of national interest. For the United States, dollarisation poses risks as well as opportunities. An assessment of potential benefits and costs in Section I suggests that there is in fact no clear presumption one way or the other. America's national interest in the issue is uncertain, leaving officials a wide latitude for policy discretion. Section II outlines three broad strategies that might be adopted by the U.S. - active discouragement of dollarisation, passive neutrality, or active encouragement. Each approach reflects a different evaluation of prospective gains and losses, with passive neutrality the current favorite in Washington. Analysis of U.S. decisionmaking in Section III suggests that little change of policy can be expected in the foreseeable future. The only exception, noted in Section IV, would be the possibility of a serious challenge to the dollar's geopolitical pre-eminence by Europe's new common currency, the euro, which could trigger a competitive response from Washington.

In short, a vast new currency bloc may well be coming into being in the Hemisphere. Absent a threat from the euro, however, it will almost certainly happen without the active encouragement of the United States.

I. Benefits and Costs

Will America gain or lose from dollarisation? A priori, it is impossible to say. The process poses both risks and opportunities for the U.S. - potential costs as well as benefits, both economic and political, few of which can be estimated in advance with any degree of precision. The calculus is complex and, in most aspects, inherently subjective, leaving much room for debate and disagreement. No presumption can be established either way, whether for or against dollarisation, from the point of view of U.S. national interest.

Economic Advantages

Three economic benefits are generally expected to accrue to the United States from dollarisation: an increase of seigniorage, a decrease of transactions costs, and an improved environment for foreign trade and investment. Though none of these gains need be trivial, the magnitudes involved can be easily exaggerated. In reality, none is apt to be of more than marginal significance to an economy as large as that of the U.S.

Seigniorage

Dollarisation, when undertaken unilaterally, means that a government must give up interest-bearing dollar reserves in order to acquire the greenback notes needed to replace local cash in circulation. The interest payments thus foregone represent a net saving for the United States - a material gain that comes at the direct expense of the dollarising country.

Economists typically place great stress on the seigniorage issue, perhaps because this is the easiest of all the effects of dollarisation to quantify. Using an approach first developed by Stanley Fischer, ⁽³⁾ two elements are distinguished: first, a one-time stock cost, representing the initial amount of new currency that a dollarising country must acquire; and second, the continuing flow cost represented by the future interest earnings foregone. For Latin American nations, with their comparatively small economies, these costs would not be inconsiderable, as the estimates in Table 1 suggest - 'a very high financial tribute to the United States,' one source asserts. ⁽⁴⁾ But for the United States, with its ten-trillion dollar GDP, gains in relative terms would be barely visible, amounting to a minuscule fraction, well under one per cent, of total government revenues.

[Table 1 goes here]

Moreover, one must take into account the seigniorage that Washington already gains from the circulation of dollars in the Western Hemisphere and elsewhere. Currency substitution is conservatively estimated to earn the United States at least $10-15 billion a year. ⁽⁵⁾ According to the International Monetary Fund, ⁽⁶⁾ the greenback even now accounts for a substantial portion of the broad money supply of many Latin American economies - more than half in Nicaragua and Peru and as much as 80 per cent in Bolivia and Uruguay. The greater the degree of prior informal dollarisation in a country, the smaller will be the additional transfer generated by formal dollarisation.

Transactions costs

By eliminating any possibility of exchange-rate change, dollarisation also reduces transactions costs. This is the standard economic benefit expected from monetary integration, an efficiency gain that is shared by both sides, the United States as well as the country that dollarises. Once a local money is replaced by the dollar, there is no longer a need to incur the expenses of currency conversion or hedging in transactions between the U.S. and its partner economy. The usefulness of money is enhanced for all its basic functions: medium of exchange, unit of account, and store of value. Opportunities for trade and investment, accordingly, could be considerably enhanced. ⁽⁷⁾

Again, however, benefits for the United States are unlikely to be considerable, since most U.S. trade with Latin America, as well as a good part of the nation's portfolio investment, is already contracted in dollars. ⁽⁸⁾ Certain specific sectors will profit, of course. Earnings could be increased at U.S. banks, for example, which are naturally advantaged relative to their rivals in dollarised countries by their privileged access to the resources of the Federal Reserve. Economists have long recognized that international use of a currency generates 'denomination rents' for financial intermediaries based in the country of issue. ⁽⁹⁾ Gains should also accrue to other market actors who currently may still be exposed to exchange risk in the Hemisphere. These would include export and import interests and portfolio investors (high net-worth individuals as well as institutional investors like insurance companies, pension funds, mutual funds, and hedge funds). They would also include American tourists who are fond of travel south of the border. But, overall, the impact on the U.S. economy will be slight.

The environment for trade and investment

Finally, dollarisation is widely predicted to benefit the United States by bringing greater stability to the countries of the Hemisphere, creating an improved environment for regional trade and investment. No longer can loose monetary policy threaten renewed financial crisis. In the words of investment banker Michael Gavin, the monetary regime will now be 'accident-proof,' ostensibly removing a key impediment to economic development. ⁽¹⁰⁾ Faster and steadier growth, in turn, would mean healthier markets for U.S. exports and direct investments. As another observer comments:

Dollarisation would eliminate the cycle of boom and bust, inflation and recession, and overvaluation and devaluation... This would simultaneously create a more secure market for U.S. goods and for U.S. companies who have become substantial players in the domestic economies of Latin America. ⁽¹¹⁾

But will the monetary regime really be 'accident-proof?' Dollarisation addresses only one among many of the causes of economic instability in Latin America - exchange-rate risk - but offers no direct corrective for other critical deficiencies, such as undisciplined fiscal policy, poor banking supervision, or labour-market rigidities. The hope is that by straightjacketing monetary policy, additional structural reforms will fall into place. But as Walter Molano has warned, this could be 'just wishful thinking.' ⁽¹²⁾ Molano continues: 'Dollarisation is a one-sided look at the problem.... Dollarisation is not a solution to the institutional flaws that led to the crisis in the first place. It does nothing to shape the political will needed to sustain the exchange rate regime.' ⁽¹³⁾ (2000: 9). Too much faith, in short, may be invested in a single institutional innovation. Dollarisation, summarizes Catherine Mann, 'does not produce magic changes.' ⁽¹⁴⁾

Besides, as many sources have noted, ⁽¹⁵⁾ Latin America's economies are by no means a natural fit for a currency union with the United States. In more technical language, the Western Hemisphere is not self-evidently an optimum currency area. Apart from Mexico, few of America's southern neighbors are closely integrated with the U.S. economy or convergent with U.S. macroeconomic performance. All are commodity exporters, subject to wide swings in world demand and prices, whereas the U.S. is mostly a commodity importer. Moreover, most Latin American economies lack the degree of factor mobility and price flexibility needed to adjust smoothly to terms-of-trade volatility without the 'shock absorber' that a flexible exchange rate can provide. Many, therefore, could find themselves experiencing greater rather than less variance of economic growth and employment. The market environment for U.S. business might turn out to be considerably less stable than suggested.

Economic Disadvantages

On the negative side, the key economic risks concern possible disadvantages for the conduct of U.S. monetary policy. Most salient is the possibility that by placing a larger share of greenbacks in circulation abroad, dollarisation could impose an awkward constraint on Federal Reserve decisionmakers. If money demand in dollarising countries is subject to sudden or frequent shifts, net flows would be generated that might increase the short-term volatility of U.S. monetary aggregates. Such liquidity shocks could make it tougher for the Fed to maintain a steady course over time.

But here too it is easy to exaggerate. In fact, a large share of the outstanding stock of U.S. banknotes -- conservatively estimated at some 55-70 per cent of the total ⁽¹⁶⁾ -- is already in circulation outside the borders of the United States, with little or no evident impact on policy. The Fed recognizes the phenomenon of informal dollarisation and, as part of its daily open-market operations targeting the federal-funds rate, already factors overseas circulation into its behaviour. In any event the additional sums involved, even if many governments were to elect to dollarise, are unlikely to be great enough to make much practical difference in America's still relatively closed economy.

More remote is the possibility that at some point one or more dollarised countries might suddenly decide to reintroduce currencies of their own - de-dollarisation -- precipitating a mass dumping of greenbacks in global exchange markets. The result for the dollar might be a serious depreciation, generating increased inflationary pressures in the United States. The probability of major defections, however, is undoubtedly low, given the high exit costs that would have to be borne by seceding governments; and in this event too, unless the number of states involved was large, the sums are unlikely to be great enough to make a real difference for U.S. policy.

Political Advantages

Politically, two main benefits are expected to accrue to the United States, summarized by the words 'power and prestige.' ⁽¹⁷⁾ Both advantages are undeniably real. Sincere people, however, may sincerely disagree over how important these may turn out to be in actual practice.

Power

In geopolitical terms, preservation of a national currency is useful to governments wary of external dependence or threat. Control over the issue and circulation of money within their own borders enables policymakers to avoid dependence on some other source for this most critical of economic resources, in effect providing a kind of insurance policy against risk. Money creation can serve as an emergency source of revenue - a way of finding needed purchasing power quickly when confronted with unexpected contingencies, up to and including war. As John Maynard Keynes once wrote, 'A government can live by this means when it can live by no other.' ⁽¹⁸⁾ Spending can be increased immediately without being forced to wait for tax returns to be filed or loans to be negotiated. Conversely, that same measure of autonomy is lost when a foreign money is adopted. Indeed, with dollarisation the United States gains a potentially powerful instrument of influence. The relationship with a dollarised country is clearly hierarchical - a link of dominance and dependence -- and hierarchy unavoidably implies vulnerability.

For a case in point consider Panama, which since its independence in 1903 has always used the greenback as its main legal tender. Although a national currency, the balboa, notionally exists, only a negligible amount of balboa coins actually circulates in practice. The bulk of local money supply, including all paper notes and most bank deposits, is accounted for by the dollar. In economic terms, most observers have rightly had only praise for Panama's currency dependence. ⁽¹⁹⁾ Reliance on the dollar has created an environment of stability that has both suppressed inflation - a bane of most of Panama's hemispheric neighbors - and helped establish the country as an important offshore financial center. In political terms, however, Panama has been extremely vulnerable in its relations with Washington, which of course could sour at any time. In the late 1980s, Panamanians learned just how exposed to coercion they were.

The critical moment came in 1988, following accusations of corruption and drug smuggling against General Manuel Noriega, the country's de facto leader. In March 1988, Panamanian assets in U.S. banks were frozen, and all payments and dollar transfers to Panama were prohibited as part of the Reagan administration's determined campaign to force Noriega from power. The impact was swift. Most local banks were forced to close, and the economy was squeezed by a severe liquidity shortage. The effect on the economy was devastating despite rushed efforts by the Panamanian authorities to create a substitute currency, mainly by issuing checks in standardized denominations that they hoped recipients would then treat as cash. The country was effectively demonetized. Over the course of the year, domestic output fell by a fifth. Admittedly, the sanctions proved insufficient to dislodge Noriega on their own. Ultimately, in 1989, Washington felt it necessary to mount a military invasion that led to a temporary occupation of the country until a new, friendlier government could be installed. But there can be no doubt that the liquidity squeeze was painful and contributed greatly to Noriega's downfall.

Such vulnerability clearly enhances Washington's political authority: its capacity to exercise influence or threaten coercion. But again, it is crucial not to exaggerate. For many, Panama was a very special case, unlikely to be repeated anywhere else in the Hemisphere. In any event, what may work with an economy as small and defenseless as Panama's might be less effective when attempted against a larger and more developed country. Moreover, the United States has worked long and hard to erase unpleasant memories of dollar diplomacy in Latin America. One may legitimately wonder whether any administration in Washington, Democrat or Republican, would wish to do anything that might revive past resentments of Yanqui imperialism. The power derived from dollarisation is tangible but, like nuclear arms, may be something of a doomsday weapon - in practice, more or less unusable except in extremis.

Prestige

Somewhat less tangibly, the United States also gains an additional measure of status and prestige from dollarisation. Money has long played a key symbolic role for governments, useful - like flags, anthems, and postage stamps -- as a means to cultivate a unique sense of national identity. ⁽²⁰⁾ That instrument is lost, however, when a local currency is replaced by the greenback. Instead, as a result of the dollar's universal use on a daily basis, citizens are constantly reminded of America's elevated rank in the community of nations. 'Great powers have great currencies', Robert Mundell once wrote. ⁽²¹⁾ In effect, the dollar becomes a potent symbol of American primacy, if not hegemony - an example of what political scientist Joseph Nye ⁽²²⁾ has called 'soft power,' the ability to exercise influence by shaping beliefs and perceptions.

Symbols, however, can prove to be a two-edged sword, depending on circumstances. What in prosperous times may be accepted as benign, even natural, might become a focal point for protest in the event of recession or crisis. When the greenback was adopted in Ecuador, demonstrators marched in the streets denouncing what they feared would be the 'dollarisation of poverty.' It is easy to imagine similar manifestations in the future, in Ecuador or elsewhere, blaming the dollar - and thus the United States - for any failures of economic management at home. It is even possible to imagine governments deliberately fomenting popular protests as a way of diverting attention from their own policy errors. Prestige could come at a very high price, creating an easy target for grievances.

Political Disadvantages

Nor is that the only price that might be exacted from the United States. By adopting the greenback, a government voluntarily surrenders control over its own money supply and exchange rate. All authority is ceded to the Federal Reserve, making the country in effect a monetary dependency, a client of the United States. Formally, there need be no promises of any kind: no assurance that the dollarising economy's circumstances will be taken into account when monetary decisions are made; no access to the Fed's lender-of-last resort facilities should its banks get into difficulty. Indeed, Washington officials have gone out of their way to deny that U.S. policy or institutions would be adjusted in any way. In reality, however, as frequently noted, ⁽²³⁾ it might be very difficult for the American government to ignore adverse developments in the periphery of its own currency bloc. Even in the absence of any explicit commitment, dollarisation could create an implicit expectation of future monetary bailouts -- a kind of contingent claim on U.S. resources. Such an expectation is the flip side of America's enhanced political authority. With primacy comes not only greater influence but also, potentially, greater responsibility.

Like it or not, therefore, policymakers could find themselves frequently under pressure to accommodate specific needs or fragilities. The Fed might be lobbied to take explicit account of the priorities of dollarised economies in setting its policy goals -- especially in the event of asymmetric payments shocks -- or to open its discount window to local financial institutions. In time, governments might even begin to campaign for indirect or even direct representation on the Federal Reserve Board or Federal Open-Market Committee. Likewise, the Treasury might be importuned to come to some country's rescue in the event of financial crisis or instability. Once again, however, it is crucial not to exaggerate. Though the risk is evident, the probabilities involved are unknowable. No one can forecast with assurance how dollarised countries will behave in actual practice. As with all the effects of dollarisation, there is no strong presumption one way or the other. The national interest is uncertain.

II. U.S. Policy Options

Lacking any strong presumption regarding national interest, Washington officials are left with a wide latitude for policy discretion. In practical terms, three broad strategies suggest themselves: (1) active discouragement of dollarisation; (2) passive neutrality; or (3) active encouragement. Each option has its prominent advocates. Contrasts of preferences reflect differences in the relative weights attached to one or another of dollarisation's several costs and benefits.

Active Discouragement

One possible strategy would be to actively discourage dollarisation by all means possible. Governments considering such a course would be told in no uncertain terms that no help will be forthcoming from Washington - no seigniorage-sharing, no access to the Federal Reserve's discount window, no special accommodation of their monetary needs. Dollarise if you will, they would be advised, but you do so only at your own peril.

The main reason for non-cooperation would be to avoid even a hint of responsibility for the financial affairs of Latin American economies. Americans have long enjoyed a high degree of insularity in the making of monetary policy and might not welcome any obligation, however limited, to compromise domestic priorities for the sake of undisciplined, perhaps even ungrateful, foreigners. Granted, this course would also mean foregoing potential benefits, political as well as economic. But for many observers, gains are expected to be marginal at best - their sacrifice, a small price to pay to maintain the nation's traditional monetary autonomy. The risks associated with dollarisation, it is argued, are simply too great to contemplate. As columnist Robert Samuelson writes:

We are courting trouble if many countries dollarise. They would blame us for their problems; and they would try to influence U.S. policies.... Dollarisation is a vast black hole... We should discourage other countries from dragging us over the edge. ⁽²⁴⁾

Much depends, though, on the counterfactual: What will happen in Latin America if the choice of dollarisation is foreclosed? Several scenarios are possible. Easiest to imagine is a future in which governments seek to maintain and manage their own independent monies, as they have done in the past. In that case, the risks of currency fragility and volatility would remain as salient as ever. Would the United States really be better off if its southern neighbors continue to suffer periodic bouts of monetary and financial crisis? An second possibility is that some Hemispheric governments might consider promoting monetary unification on their own, on the model of Europe's Economic and Monetary Union (EMU). In South America's southern cone, for instance, there has already been discussion of a proposed common currency for Mercosur, ⁽²⁵⁾ which some have suggested might be called the gaucho. In such cases, the United States would avoid any responsibility but might also suffer a decline of status and influence, as well as opportunities for seigniorage, as new joint currencies mature. Finally, a third possibility is that some Latin American countries might decide to throw in their lot with Europe, adopting the euro ('euroization') in lieu of the dollar as a replacement for their own national monies. In that case, America's power and prestige would be even more directly challenged, this time by a strengthened European Union.

Passive Neutrality

A second strategy, favored by many observers, ⁽²⁶⁾ would be passive neutrality - a policy of 'benign neglect,' to borrow a phrase from an earlier era. Governments considering dollarisation would be given moral support, and perhaps some technical assistance, but otherwise would be left more or less on their own. No formal commitments of any kind, whether regarding seigniorage or monetary policy, would be offered. Adoption of the greenback would have to be entirely unilateral, as has already occurred in Ecuador and El Salvador.

Advocates of neutrality, like proponents of non-cooperation, are risk averse. The main motive for either approach would be to resist the prospect of shouldering even a hint of responsibility for Latin American economies. But for those who favor benign neglect, greater weight is attached to potential benefits. Why sacrifice advantages needlessly? By leaving the door open, rather than slamming it shut, the United States can avoid any explicit assurances yet still hope to harvest available gains, whether political or economic. Effectively, Washington can have its cake and eat it too.

In fact, benign neglect best describes U.S. policy as it has existed until now. Both Federal Reserve Chairman Alan Greenspan and Bill Clinton's Treasury Secretary, Lawrence Summers, went on record early, once Carlos Menem raised the subject, to underscore their neutrality. 'It is absolutely not our intention to close the door on consideration of this issue,' Summers said at Congressional hearings in April 1999. ⁽²⁷⁾ But at the same time, he and Chairman Greenspan made abundantly clear that nothing would be done to help underwrite dollarisation efforts. On the contrary, governments were urged to look first to policy reforms at home. 'There is no substitute for sound policies,' Greenspan cautioned. 'If you try to create something out of nothing, you'll end up with nothing, not something.' ⁽²⁸⁾

The main risk of benign neglect as a strategy involves an empirical question: How many states will actually be willing to transform themselves into a monetary dependency, with all the disadvantages implied, without some sort of formal quid pro quo from the United States? Ecuador proceeded on its own only because of a massive financial collapse that seemed to leave Quito policymakers no plausible alternative. El Salvador was simply too small to have much bargaining leverage in Washington. But the same degree of deference is far less likely in larger countries, such as Mexico, Brazil, or Argentina.

Buenos Aires, for example, for a time did seriously pursue the possibility of converting its currency board into full-fledged dollarisation, initiating conversations with the U.S. Treasury. From the start, however, the Argentines made plain that they were unwilling to commit themselves in the absence of a formal treaty outlining clearly what Washington was prepared to do in return. Three concessions, reportedly, were sought -- a return of lost seigniorage, access for Argentine banks at the Federal Reserve discount window, and cooperation regarding bank supervision. ⁽²⁹⁾ When the U.S. proved unresponsive, the effort ultimately was abandoned. And similar attitudes have been expressed in some other Latin American nations as well. In reality, it seems that so long as Washington's policy stance remains officially neutral, the number of countries that will ultimately dollarise will not be large and, most likely, will be limited mainly to the smaller economies of Central America and the Caribbean.

Active Encouragement

Finally, there is a third possibility: active encouragement. Governments would be offered specified incentives and perhaps even the public affirmation of a formal treaty. The element of dependency would be de-emphasized. Instead, dollarising countries would be welcomed as sovereign partners in a great new monetary enterprise. Advocates of a pro-active strategy place greater emphasis on anticipated advantages, correspondingly discounting potential risks. ⁽³⁰⁾

What incentives might be offered? Economist Guillermo Calvo has daringly proposed that dollarising countries be offered seats at the Federal Reserve Board, first perhaps as observers but eventually as full voting members. ⁽³¹⁾ Others have suggested providing some kind of financial safety net to be available in time of need. Not surprisingly, though, such ideas have to date demonstrated little appeal in Washington. Given the importance that Americans traditionally attach to the autonomy of their monetary policy, foreign representation or access at the Fed would undoubtedly be widely resisted if proposed officially. It is difficult to imagine any commitments along these lines any time soon.

Easier to imagine would be some form of seigniorage-sharing, as advocated by voices both inside government ⁽³²⁾ and outside. ⁽³³⁾ From a dollarising country's point of view, the loss of seigniorage revenue is by far the most visible cost involved. It also seems the least equitable since it reverts directly to the U.S. Treasury as a pure windfall gain. Why, Latin Americans are entitled to ask, should the wealthy United States profit at the expense of poorer neighbors? Should they not be entitled to reclaim at least a part of their foregone earnings as compensation for their surrender of monetary autonomy? Though dismissed by some as a 'distant political prospect', ⁽³⁴⁾ seigniorage-sharing might well find resonance with many Americans, who like to pride themselves on their sense of fair play. In the eyes of many, it is the sine qua non for a pro-active strategy. As one source asserts: 'The U.S. decision on how to address this issue will give a clear signal of the support it intends to give to dollarisation.' ⁽³⁵⁾

Seigniorage-sharing could be most easily accomplished simply by transferring to each dollarising country all the cash greenbacks needed to replace local currency, as suggested inter alia by economist Robert Barro. ⁽³⁶⁾ That way governments could retain their existing dollar reserves and thus continue to receive interest in the future. Federal Reserve notes might be given as a pure gift - a one-time allotment to get the process started - or, in a close equivalent, could be sold to dollarising countries at a price covering no more than the cost of printing. ⁽³⁷⁾ But such an approach is opposed by some who fear the possibility, alluded to earlier, of future de-dollarisation by one or more countries. Suppose some government were in fact to defect, reintroducing a money of its own. In that case its entire supply of dollars would become available to be spent in the United States, representing a windfall gift of major proportions. To avoid that risk, notes might instead be offered initially as part of a formal exchange, either for the existing stock of local currency in circulation - a straight currency swap ⁽³⁸⁾ - or else for dollar-denominated, non-interest-bearing government bonds. Either way the U.S. would then hold a claim that could be used to absorb, if needed, the available stock of greenbacks.

Alternatively, if dollar reserves are used initially to retire the local currency, Washington could commit to making regular future transfers to each dollarising country calculated to replace some or all of the interest earnings foregone. Precedent for this type of arrangement already exists in southern Africa, where South Africa makes annual payments to two of its neighbors, Lesotho and Namibia, to compensate for their continued use of the South African rand as domestic legal tender. ⁽³⁹⁾ For the United States a key, albeit unspoken, advantage of this approach is political: it provides a convenient instrument for the exercise of diplomatic influence. A suspension of transfers - or even merely the threat of a cut-off - could suffice to persuade governments to avoid policies inconsistent with U.S. preferences. The main disadvantage is that it would inject the seigniorage issue squarely into Washington's annual budgetary process, where it might easily become a political football. At a minimum, there could be a potential for misunderstandings and partisan wrangling. At worst, it is possible to imagine a future Congress changing it mind altogether, voting to terminate any further compensation to dollarised economies.

The International Monetary Stability Act

Seigniorage-sharing was central to the International Monetary Stability Act - the only U.S. legislation, as yet, formally proposed in support of dollarisation. The Act was submitted in 1999 by Senator Connie Mack of Florida, then chairman of the Joint Economic Committee of the Congress. Informally dubbed the Mack Bill, the Act called for annual rebates to dollarising countries of up to 85 percent of all lost seigniorage (with the remaining 15 percent to finance rebates to countries that have already long been dollarised, such as Panama, and to help pay related costs of the Federal Reserve and Treasury). Governments would initially use their own reserves to replace local currency in circulation. Seigniorage would then be paid in the form of interest on a consol, a perpetual debt instrument, that would be issued to each country as soon as the U.S. Treasury certified that its money supply was officially dollarised. ⁽⁴⁰⁾ The measure's purpose, as Senator Mack emphasized, was quite self-consciously to promote adoption of the greenback. 'It is time,' he declared, 'for the U.S. to show leadership and encourage dollarisation.' ⁽⁴¹⁾ Though reported out by the Senate Banking Committee on a voice vote in July 2000, the Act was never debated by the full Senate and died at the end of the legislative session. A companion House version, sponsored by Representative Paul Ryan of Wisconsin, never made it out of committee.

Was the Mack Bill the best way to encourage dollarisation? From a strictly U.S. perspective, there was still a risk that other obligations might be thought implicit in the legislation. Explicitly, the Act provided 'that the United States is not obligated to act as a lender of last resort to officially dollarised countries, consider their economic or financial conditions in setting monetary policy, or supervise their financial institutions.' Yet not even such blunt wording might not have proved sufficient to relieve pressures on Washington in the event of a crisis. Once having encouraged countries to adopt the greenback, could Washington really be expected to turn its back if any of them got into trouble?

Conversely, from the point of view of potential dollarisers, there seemed reason for concern about the uncompromising unilateralism built into the Act. Certification of eligibility for seigniorage rebates was to be at the sole discretion of America's Treasury Secretary and could be withdrawn at any time. Might these consols have become yet one more handy tool for the exercise of U.S. power? As much, ironically, was admitted by two of the Act's biggest boosters, Congressional staffers Kurt Schuler and Robert Stein, when they wrote that 'the latitude that the Secretary has is one factor that should induce countries... to cooperate fully with the United States.' ⁽⁴²⁾. In the words of an avowed critic of dollarisation:

The consols to be issued to the dollarising country may be declared null and void under certain conditions. These conditions are unlikely to remain fixed at the hands of the U.S. Congress and the administration when penalizing or pressuring an officially dollarised country becomes politically attractive for any reason.... Interest on the consols may also be attached under what could be a broadening list of conditions. ⁽⁴³⁾

For many Latin Americans, dollarisation would be more palatable if accomplished through a formal treaty, as was sought by Argentina, rather than exclusively at the pleasure of the United States. Admittedly, any sort of written agreement would only serve to heighten skeptics' concerns about future contingent claims on the U.S. Government. But expectations of an implied commitment, it seems clear, are likely to be generated no matter how strong the disclaimers emanating from Washington. If so, denials of responsibility would literally not be worth the paper they were written on. More preferable, it could be argued, would be an agreed contract spelling out mutual rights and obligations in clear and explicit detail. A manageable balance between the sensitivities of the two sides might not be easy to find. But there seems no satisfactory alternative if a strategy of encouraging dollarisation were to be made to work effectively.

III. The Outlook for U.S. Policy

What, then, can be expected of U.S. policy? Standard models of foreign-policy decisionmaking in the United States highlight the interactions of several key clusters of actors, including most importantly private interest groups, Congress, and agencies of the executive branch. The process is inherently messy, making all forecasts difficult. But it is certainly possible to make a few educated guesses. With dollarisation, it seems reasonable to argue that the most probable outcome will be continuation of the status quo of passive neutrality. Widespread adoption of the greenback will not be actively discouraged, but neither is it likely to be aggressively encouraged, at least not in the near term.

Private Sector

Unlike more politicized issues of foreign economic policy, such as trade, dollarisation has attracted remarkably little attention from domestic interest groups. Political cleavages on the issue, if they exist at all, remain greatly muted.

As indicated, a number of specific sectors can be expected to profit disproportionately from dollarisation, including U.S. banks and other financial intermediaries, export and import interests, and portfolio investors. Conversely, there could also be some key losers - most prominently, blue-collar workers who might find themselves suddenly unemployed if dollarisation encourages U.S. corporations to locate more production south of the border. In principle, we might thus anticipate vigorous lobbying efforts to develop on both sides of the issue, pro and con. In practice, however, such activity has been most conspicuous by its absence, suggesting that no group foresees much of a direct impact on its own material interests.

Most positively affected, in all likelihood, would be the financial sector. Yet no evidence exists of any systematic campaign, public or private, by either individual institutions or representative associations to shape opinion on dollarisation. A few finance professionals have spoken out in a personal capacity, some quite vigorously. But voices have been anything but uniform, with opinions ranging from highly enthusiastic ⁽⁴⁴⁾ to firmly opposed. ⁽⁴⁵⁾ Nor has there been any formal response from the side of organized labor, despite the risk of lost jobs. 'The AFL-CIO has no official position on dollarization,' insists a high union official. ⁽⁴⁶⁾

Some public debate has occurred, in academic conferences and journals, Congressional hearings, and the pages of leading newspapers and magazines. Yet here too voices have been anything but uniform, with few readily discernible patterns. Experts of a more conservative hue, who tend to put a high premium on monetary stability, do seem more inclined to favor dollarisation ⁽⁴⁷⁾ - though for reasons that have more to do with the interests of potential dollarisers rather than with prospective gains for the United States. Their argument, simply put, is that central banks in Latin America cannot be trusted. Economies would be better off if instead they import their monetary policy from the Federal Reserve. But there are also noted conservatives who oppose dollarisation, ⁽⁴⁸⁾ while more liberal elite opinion is all over the map. ⁽⁴⁹⁾ Positions seem determined less by ideology or partisan affiliation than by the sheer subjectivity of personal judgments about possible effects.

Overall, therefore, the private sector appears unlikely to play much of a role in shaping U.S. policy. Given the lack of strong, coherent lobbies on either side of the issue, the outcome is most likely to be determined by preferences within the public sector than by pressures from outside it.

Public Sector

Whose preferences will dominate? Within the public sector too, dollarisation has yet to attract much serious attention. Hence the inclinations of the Treasury and Federal Reserve, the two lead agencies on international monetary questions, will almost certainly prove most decisive in setting the tone of policy.

Initiatives could come from Congress, of course. The Mack Bill was an example of policy entrepreneurship from the legislative branch; though it failed, there could be others. The probability of any new Congressional action, however, is low. Connie Mack himself, sponsor of the International Monetary Stability Act, has now retired; and no other senator or representative, as yet, has stepped forward to champion a new version of the Bill. Lacking the stimulus of pressure from key constituencies, it is more likely that Congressional leaders will await a signal from the new Bush Administration before taking a stand one way or the other.

Within the Administration, in turn, it is likely that most agencies will defer to the Treasury, along with the Federal Reserve, on an issue that is seen as essentially technical, if not downright arcane, in nature. The only exception could be the State Department, which is sure to take heed of the geopolitical advantages of dollarisation. Why pass up a chance to help consolidate U.S. leadership in the Hemisphere? Most economists scoff, dismissing the relevance of such considerations. The words of former Council of Economic Advisers member Jeffrey Frankel are typical:

I have to say that during my time in the U.S. administration and when subjects related to [dollarisation] came up, I never heard anybody say, yeah, let's go for U.S. imperialism: That this would have foreign policy benefits. But I'm sure that there are political science types out there that would talk about that. ⁽⁵⁰⁾

But this is naive. One does not have to be a 'political science type' to recognize the State Department's bureaucratic interest in exploiting any opportunity for enhancing diplomatic leverage. Obviously no one - certainly no diplomat - is going to speak bluntly in favor of U.S. 'imperialism,' even in the privacy of policy councils. Foreign-policy specialists simply do not talk in such terms. ⁽⁵¹⁾ But neither is the department that is formally charged with responsibility for the nation's external relations apt to ignore any potential new instrument for the exercise of influence. The real question is whether State might actually gain much sway in the final shaping of policy. In fact, that is unlikely. The State Department rarely prevails on matters of international finance. Tradition in Washington has long assigned principal responsibility in this area to the Treasury and Fed.

And what can be expected of these two agencies? The policy priorities of the Treasury and Fed are not entirely congruent, of course, owing to their differing institutional responsibilities and interests. But on this issue there appears to be little disagreement. Both are known to be cautious to a fault, loath to take any action that might destabilize financial markets. Fed Chairman Greenspan, as indicated, has already made clear his desire to avoid precipitous behavior. 'We have to be careful,' he has said, 'to distinguish whether in fact any change in our policy would make any difference at all.' ⁽⁵²⁾ Nor has Summers' successor at Treasury, Paul O'Neill, shown any sympathy for a bold new initiative on dollarization, pro or con. A policy of benign neglect is entirely consistent with the revealed preferences of both agencies.

Of course, it is always possible that the Treasury and Fed are dissimulating. In the eyes of many Latin Americans, Washington's underlying ambitions are clear: to dominate the Hemisphere, economically and politically. If Greenspan and others resist the temptation to publicly encourage neighboring governments to adopt the greenback, it is only in order to avoid provoking anti-American reactions and to elude opprobrium should dollarization experiments go awry. Representative are the words of one Peruvian commentator: "The U.S. government cannot intervene in the initial decision concerning official dollarization... That could lead to a series of demands and accusations against the U.S., which will want to be avoided by all means.... However, we all know that... from an official American perspective [dollarization] seems to be an effective mechanism to fortify their hemispheric and world hegemony." ⁽⁵³⁾ But little evidence exists to back up suspicions of this sort, which remain largely a matter of conspiratorial conjecture.

Among available strategies, therefore, the most likely outcome would appear to be continuation of the policy of benign neglect that has prevailed until now. Neither the Treasury nor the Fed will see any reason to forego potential benefits. But neither will they have any appetite to assume undue risk. Prudence will almost certainly dominate decisionmaking for the foreseeable future.

IV. The Challenge of the Euro

Are there any circumstances in which U.S. policy might become more pro-active? One possibility might be a prolonged downturn in America's domestic economy, which could lead policymakers to promote dollarisation as a means of creating more assured markets for U.S. exports and investments. Another might be renewed financial crises in Latin America, which could enhance the attractions of an arrangement that promises real stability of exchange rates. Neither contingency, however, can be predicted with any degree of certainty.

Much more certain is a possible challenge from the euro, which could in turn trigger a competitive response from Washington. Today the dollar is the world's pre-eminent international money, sitting comfortably atop what I have elsewhere called the Currency Pyramid. ⁽⁵⁴⁾ Even in the absence of formal dollarisation, the U.S. derives considerable benefits from the greenback's widespread circulation, including in some measure all the advantages previously discussed. In geopolitical terms, America enjoys the fruits of hegemony. Few observers doubt, however, that the European Union's new currency could one day emerge as a potent rival, not just in Europe's own neighborhood but perhaps in the Western Hemisphere as well. Latin Americans, as Italian economist Pier Carlo Padoan writes, 'yet may have to choose between the two once the euro takes on a more global role.' ⁽⁵⁵⁾ Should the dollar's global dominance seem seriously at risk, it is not at all difficult to imagine a growth of enthusiasm in Washington for a more activist policy.

Officially, European aspirations remain modest. According to an authoritative statement by the European Central Bank (ECB), the development of the euro as an international money - if it happens at all - will mainly be a market-driven process, simply one of many possible byproducts of EMU. Euro internationalization 'is not a policy objective [and] will be neither fostered nor hindered by the Eurosystem.... The Eurosystem therefore adopts a neutral stance.' ⁽⁵⁶⁾ But these carefully considered words may be dismissed as little more than diplomatic rhetoric, revealing little. Behind the scenes it is known that there is considerable disagreement among European policymakers, with the eventual direction of policy still unsettled. Many in 'Euroland' are indeed inclined to leave the future of the euro to the logic of market competition. But many others, aware of the strong incumbency advantages of the dollar, favor a more pro-active stance to reinforce the new currency's potential. EMU has long been viewed in some circles, particularly in France, as Europe's best chance to challenge the long-resented hegemony of the greenback.

Much more revealing, therefore, is not what the ECB says but what it does. Especially suggestive is the Bank's controversial decision to plan issues of euro notes in denominations as high as 100, 200, and 500 euros - sums far greater than most Europeans are likely to find useful for everyday transactions when euro bills and coins begin to circulate in 2002. Why issue such notes? Informed sources suggest that the plan may have been decided in order to reassure the German public, fearful of losing their beloved Deutschmark, that notes comparable to existing high-denomination DM bills would be readily available. But that is hardly the whole story. As knowledgeable experts like Kenneth Rogoff and Charles Wyplosz observe, it is likely that the decision also had something to do with currency substitution. ⁽⁵⁷⁾ America's profit from the already widespread circulation of large-denomination dollar notes, especially of the $100 variety, was apparently large enough to persuade EMU's authorities to plan on offering a potentially attractive alternative. As Rogoff writes: 'Given the apparently overwhelming preference of foreign and underground users for large-denomination bills, the [ECB's] decision to issue large notes constitutes an aggressive step toward grabbing a large share of developing country demand for safe foreign currencies.' ⁽⁵⁸⁾

Until now, Washington's response has been muted. 'The emergence of the euro as an international currency should not be viewed with alarm,' wrote Bill Clinton's Council of Economic Advisers. 'It is unlikely that the dollar will be replaced anytime soon.' ⁽⁵⁹⁾ U.S. policy statements on European monetary union have always been studiously neutral, asserting that EMU is Europe's business, not America's. But these words too may be dismissed as diplomatic rhetoric, concealing as much as they reveal. As economist Richard Portes has noted: 'It is difficult to believe that the American authorities are indifferent.' ⁽⁶⁰⁾ In fact, in Washington as in Europe, there is still much disagreement behind the scenes about the direction that policy eventually should take, though not many question the issue's saliency. Europe's currency has been very much on the minds of dollarisation proponents. ⁽⁶¹⁾ Manifestly it was among the factors motivating Connie Mack when he sponsored the International Monetary Stability Act. In the words of a staff report from his office: 'Dollarization will help the dollar remain the premier international currency, a status that the euro is now challenging.' ⁽⁶²⁾ Such reasoning is bound to become more popular if the greenback's market position appears seriously threatened.

V. Conclusion

The bottom line is clear. Absent a sustained challenge from the euro, U.S. policy on dollarisation is most likely to remain cautiously neutral. The benefits of dollarisation will be appreciated but not pursued. Governments will not be deterred from following the examples of Ecuador and El Salvador; they may even be offered expert assistance and technical support to help them get through the transition. No special concessions, however, will be volunteered as incentives - no seigniorage-sharing, no share in policymaking, no bailouts of any kind. More countries may yet decide to adopt the greenback. But if they do, it will have to be for reasons of their own, not because of commitments from Washington.

Table 1

Estimated Costs of Dollarization in Selected Latin American Countries,

as a Percentage of GDP

Country Stock Cost Flow Cost

Argentina 3.7 0.5

Brazil 2.1 1.3

Bolivia 4.6 1.4

Ecuador 12.2 7.4

El Salvador 4.1 2.3

Mexico 3.3 0.8

Peru 2.1 2.5

Average 4.6 2.3

________________________________________________________________

Source: Bogeti (2000).

Notes

1. B. J. Cohen, The Geography of Money (Ithaca, NY: Cornell University Press 1998).

2. Additionally, the dollar is used exclusively in East Timor, currently a de facto independent entity under the protection of the United Nations; in all overseas U.S. dependencies (American Samoa, Guam, Nothern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands); in three British dependencies (Bermuda, British Virgin Islands, and the Turks and Caicos Islands); and is legal tender, alongside national currencies, in the Bahamas and Haiti.

3. S. Fischer, 'Seigniorage and the Case for a National Money', Journal of Political Economy 90/2 (April 1982) pp. 295-313.

4. G. von Furstenberg, 'A Case Against Dollarization', Challenge 43/4 (July 2000) p. 109.

5. A.S. Blinder, 'The Role of the Dollar as an International Currency', Eastern Economic Journal22/2 (Spring 1996) p. 131; . Bogeti, 'Full Dollarization: Fad or Future?', Challenge 43/2 (March 2000) p. 46.

6. T.J.T.Baliño, A. Bennett, and E. Borensztein, Monetary Policy in Dollarized Economies(Washington, DC: International Monetary Fund 1999).

7. Estimates by Andrew Rose suggest that with currency unification, trade may be increased by as much as a factor of three. A. Rose, 'One Money, One Market: The Effect of Common Currencies on Trade', Economic Policy 30 (April 2000) pp. 7-45.

8. W.A. Niskanen, 'Dollarization for Latin America?', Cato Journal 20/1 (Spring 2000) pp. 43-7.

9. A. Swoboda, The Euro-Dollar: An Interpretation (Princeton, NJ: International Finance Section 1968).

10. M. Gavin, 'Official Dollarization in Latin America', Hearings on Monetary Stability in Latin America, Subcommittee on Domestic and International Monetary Policy, U.S. House of Representatives, 22 June 2000 (http:www.house.gov/banking/62200wit.htm).

11. J.T. Katzman, 'Dollarization', in P. DeSouza (ed.), Economic Strategy and National Security: A Next Generation Approach (New York: Council on Foreign Relations 2000) p. 208.

12. W. Molano, 'Addressing the Symptoms and Ignoring the Causes: A View from Wall Street on Dollarization,' Hearing on Monetary Stability in Latin America, Subcommittee on Domestic and International Monetary Policy, U.S. House of Representatives, 22 June 2000, p. 1 (http:www.house.gov/banking/62200wit.htm).

13. Ibid p. 9.

14. C. Mann, 'Dollarization,' Hearing on Official Dollarization in Emerging-Market Economies, Subcommittee on Economic Policy and Subcommittee on International Trade and Finance, U.S. Senate, 22 April 1999, p. 2 (http: www.senate.gov/~banking/99_04hrg/042299/mann.htm).

15. J. Sachs and F. Larrain, 'Why Dollarization is More Straightjacket than Salvation', Foreign Policy 116 (Fall 1999) pp. 80-92; J.A. Fontaine, ''Official versus Spontaneous Dollarization', Cato Journal 20/1 (Spring 2000) pp. 35-42.

16. R.D. Porter and R. A. Judson, 'The Location of U.S. Currency: How Much is Abroad?', Federal Reserve Bulletin 82/10 (Oct. 1996) pp. 883-903.

17. Council of Economic Advisers, Annual Report 1999 (Washington, DC: U.S. Government Printing Office 1999) p. 302.

18. J.M. Keynes, Tract on Monetary Reform. Reprinted in The Collected Writings of John Maynard Keynes, vol. 4 (London: Macmillan 1971).

19. J.L. Moreno-Villalaz, 'Lessons from the Monetary Experience of Panama: A Dollar Economy with Financial Integration', Cato Journal 18/3 (Winter 1999) pp. 421-39.

20. Cohen (note 1) pp. 35-9.

21. R.A. Mundell, 'EMU and the International Monetary System: A Transatlantic Perspective', Working Paper 13 (Vienna: Austria National Bank 1993).

22. J.S. Nye, 'Soft Power', Foreign Policy 80 (Fall 1990) pp. 153-71.

23. J.A. Frankel, No Single Currency Regime is Right for All Countries or at All Times (Princeton, NJ: International Finance Section 1999); R.J. Samuelson, 'Dollarization - A Black Hole', Washington Post, 29 April 1999, p. A27.

24. Ibid. Others who have argued against dollarization include Mann (note 14), Sachs and Larrain (note 15), Molano (note 12), and von Furstenberg (note 4).

25. J. Carrera and F. Sturzenegger (eds.), Coordinación de politícas macroeconómicas en el Mercosur (Buenos Aires: Fundacion Gobierno y Sociedad 2000).

26. Niskanen (note 8); C.F. Bergsten, 'Dollarization in Emerging-Market Economies and its Policy Implications for the United States,' Hearing on Official Dollarization in Emerging-Market Economies, Subcommittee on Economic Policy and Subcommittee on International Trade and Finance, U.S. Senate, 22 April 1999 (http: www.iie.com/TESTIMONY/dollariz.htm).

27. As reported in the Wall Street Journal, 23 April 1999, p. A4.

28. Wall Street Journal, 23 April 1999, p. A4.

29. The report was from Jeffrey Frankel, formerly a member of Bill Clinton's Council of Economic Advisers, as quoted at an International Monetary Fund forum in mid-1999 (International Monetary Fund, 'Dollarization: Fad or Future for Latin America?', 24 June 1999, p. 6). His list of Argentina's negotiating goals was effectively confirmed at the same forum by Miguel Kiguel, then a key Argentine government official (ibid. p.15) but was contradicted by Pedro Pou, president of Argentina's central bank, in a conference convened at about the same time by the Federal Reserve Bank of Boston. According to Pou, 'we are asking for neither U.S. supervision of Argentine banks, nor the U.S. lender of last resort facilities for our financial system. What we are asking for is basically very simple - a fiscally neutral agreement on seigniorage for both countries' [i.e., full return of lost seigniorage]. P. Pou, 'Is Globalization Really to Blame?', in J. S. Little and G. P. Olivei (eds.), Rethinking the International Monetary System (Boston, MA: Federal Reserve Bank of Boston 2000) p. 249. The confidentiality of the discussions that took place between the two governments makes the full extent of Argentina's demands difficult to verify.

30. Among those who have argued publicly in favor dollarization are Gavin (note 10); Katzman (note 11); R.J. Barro, 'Let the Dollar Reign from Seattle to Santiago', Wall Street Journal, 8 March 1999, p. A18; K. Schuler, Encouraging Official Dollarization in Emerging Markets, Staff Report (Washington, DC: Joint Economic Committee 1999); J. Shelton, 'The Dollarization Debate', Wall Street Journal, 29 April 1999, p. A26; G.A. Calvo, 'Dollarization,' Hearings on Monetary Stability in Latin America, Subcommittee on Domestic and International Monetary Policy, U.S. House of Representatives, 22 June 2000; C. Mack, 'Dollarization', Central Banking 11/1 (2000) pp. 63-9.

31. Calvo (note 29).

32. Mack (note 29); K. Schuler and R. Stein, 'The International Monetary Stability Act: An Analysis', paper prepared for a Conference on To Dollarize or Not to Dollarize, North-South Institute, Toronto, Canada, 5 Oct. 2000 (http://www.usi-ins.ca).

33. Barro (note 29), Gavin (note 10).

34. Sachs and Larrain (note 15) p. 87.

35. Katzman (note 11) p. 213.

36. Barro (note 29).

37. Niskanen (note 8).

38. Gavin (note 10).

39. Bogeti (note 5) pp. 41-2.

40. For additional detail, see Joint Economic Committee, Dollarization: A Guide to the International Monetary Stability Act, Staff Report (Washington, DC: Joint Economic Committee 2000); Schuler and Stein 2000 (note 31).

41. Joint Economic Committee press release, November 8, 1999.

42. Schuler and Stein (note 31) p. 8.

43. Von Furstenberg (note 4) p. 119.

44. Gavin (note 10), Katzman (note 11).

45. Molano (note 12); Jane D'Arista, 'Dollarization: Critical U.S. Views,' paper prepared for a Conference on To Dollarize or Not to Dollarize, North-South Institute, Toronto, Canada, October 5 (http://www.usi-ins.ca).

46. Personal communication.

47. Barro (note 29), Shelton (note 29).

48. Von Furstenberg (note 4).

49. Samuelson (note 22), Bergsten (note 29), Frankel (note 22).

50. Frankel (note 28) p. 6.

51. I am reminded of the remarks made by William Diebold some years ago when he retired as senior economist at the Council on Foreign Relations in New York. Speaking of the U.S. officials who negotiated the terms of post-World War II reconstruction, which many have since characterized as an exercise of U.S. hegemony, Diebold noted that 'I have never seen a memoir published with the title My Days as a Happy Hegemon.'

52. In answer to a question at a Congressional hearing, as quoted by Bloomberg News Service, 22 April 1999.

53. J. Schuldt, 'Latin American Official Dollarization: Political Economy Aspects," in J.W. Dean, S. Globerman, and T.D. Willett (eds.), Dollarization in the Americas? (Boulder, CO: Westview, forthcoming).

54. Cohen (note 1).

55. P.C. Padoan, 'The Role of the Euro in the International System: A European View,' in C.R. Henning and P.C. Padoan, Transatlantic Perspectives on the Euro (Washington, DC: Brookings Institution 2000) p. 103. A possible straw in the wind came in early 2001, when Argentina chose to replace its dollar peg with a new basket peg composed equally of the dollar and euro. The new basket was to take effect once the euro, then worth roughly 85 cents (U.S.), reached parity with the dollar.

56. European Central Bank, "The International Role of the Euro," ECB Monthly Bulletin (August 1999) pp. 31, 45.

57. K. Rogoff, 'Blessing or Curse? Foreign and Underground Demand for Euro Notes', in D. Begg, J. von Hagen, C. Wyplosz, and K.F. Zimmerman (eds.), EMU: Prospects and Challenges for the Euro (Oxford: Blackwell 1998) pp. 261-303; C. Wyplosz, 'An International Role for the Euro?', in J. Dermine and P. Hillion (eds.), European Capital Markets with a Single Currency (Oxford: Oxford University Press 1999) pp. 76-104.

58. Rogoff (note 54) p. 264.

59. Council of Economic Advisers (note 17) pp. 297-99.

60. R. Portes, 'Global Financial Markets and Financial Stability: Europe's Role,' Discussion Paper 2298 (London: Centre for Economic Policy Research 1999) p. 34.

61. Barro (note 29).

62. Schuler (note 29).