Dollarization: A Common Currency for the Americas?
March 6–7, 2000
Federal Reserve Bank of Dallas

It’s a pleasure to be here today and to have this opportunity to address this gathering with such great collective influence on an issue with such critical impact on the economic growth and prosperity, not just of the United States but of countries throughout the Americas.

We talk all the time today about a truth that at this point has become a truism: the globalization of our economy. My point of departure this morning is that with economic globalization comes a globalization of our policy concerns as well: a need to expand our horizons, our aims and our objectives beyond the narrow confines of national borders.

All of which leads me to my topic today: dollarization—not the "de facto" dollarization practiced in scores of countries where people hold U.S. dollars as a hedge against local currency fluctuations—but official dollarization, whereby a nation abolishes its own currency and formally adopts the U.S. dollar as legal tender.

I haven’t run a Nexis search, but I doubt you’ve heard dollarization come up in any one of the innumerable debates involving any of the candidates running for the Presidency—although if, between now and November, any of you have the chance to press them on the issue, I invite you to do just that. I don’t think it’s at all surprising that dollarization doesn’t register right now at the top of the public policy debate because it takes time to get any new issue up on the screen.

Even so, in all my experience as a legislator—compared with the impact of any other single policy I can think of—dollarization would do more to ensure the long-term economic health of the nations in this hemisphere, more to expand trade, more to enhance economic stability and more to increase standards of living and create jobs than any other single policy shift that I know.

That’s why my aim today is to make the case for dollarization: how it will work, what benefits it will bring in terms of economics and why dollarization promises a considerable noneconomic dividend as well.

I know we have a sizable contingent of Latin American leaders from both the public and the private sector here today. That gives us an opportunity to take our dialogue to a new level, the next level, as we seek ways to broaden prosperity and raise the standard of living across our hemisphere.

It’s always good to begin from common ground—aspirations which we all share. We all agree that the people in every nation in this hemisphere aspire to democracy. We all agree that the people of all of the Americas seek economic prosperity—and social stability as well.

To a remarkable degree, look for places that enjoy political and social stability combined with economic prosperity and you’ll find sound money. I’m talking about a stable currency—one that allows people to save and invest in their future and their children’s future, one that invites the entrepreneurs among us to invest and take the risks that generate jobs, opportunity and economic growth.

Those of you who know me know that it’s a long-standing aim of mine that the United States ought to seek not only to export our products, but to export our principles as well—principles like freedom, justice, democracy and the protection of basic human rights. To that hallowed list of principles, I’d like to add another: in terms of global growth, our #1 export right now ought to be our principled approach to price stability.

Last year, with that aim in mind, I introduced a bill called the International Monetary Stability Act, a bill that constitutes a kind of standing offer to every nation looking for monetary stability to adopt the U.S. dollar as its own currency and thereby import into its economy the kind of price stability the U.S. has long since enjoyed.

Now, official dollarization may be a new idea, but price stability is an enduring interest of mine. Not only because I came to public service out of the banking industry, but also because as recently as the late 1970s, before I even began to think about running for the U.S. Congress, I saw the ravages of rampant inflation, stagnant economic growth and high unemployment. I still remember visiting with voters in my hometown of Ft. Myers, Florida, and other communities throughout the state. I heard first-hand what inflation was doing to folks who’d come to Florida to retire on fixed incomes, how in just a few years time inflation could erode a lifetime’s worth of savings, leaving people without income, without options, without hope. I understood right then that one key to a nation’s long-term political health is keeping inflation in check.

And let me say this morning that no organization or entity deserves more credit for bringing inflation to heel than the U.S. Federal Reserve.

But if the inflation dragon has been slain in the U.S., it is still very much alive and at large in the global economy.

Take Latin America as a case in point. Inflation has been such a problem in Latin America’s recent past, that even when countries manage to keep prices relatively stable, businesses, banks, workers and investors alike lack the confidence that stability will continue—and expect inflation to roar back. This fear of future inflation injects an "inflation premium" into interest rates for local currency loans that harms investment, saddles private individuals with higher-than-necessary loan rates, and makes investors both less likely to lend capital to local businesses and more likely to pull capital out at the first sign of economic weakness.

It’s a vicious cycle—a self-fulfilling scenario that has created a roller-coaster effect for the economies of too many of our Latin neighbors.

Dollarization can help end all that—for three main reasons:

One: dollarization will increase trade, which in turn will help raise living standards.

Two: dollarization will increase investment and thereby promote growth.

And three: dollarization will provide countries a more stable general level of prices as well as a currency widely accepted throughout the world.

Taken together, these three factors will strengthen financial markets, spurring growth, raising living standards—and create new jobs.

To see the kind of stabilizing impact dollarization can have, it’s not necessary to deal in hypotheticals. Consider Panama, a country that has been officially dollarized for almost 100 years now. As Chairman of the Joint Economic Committee, I spend a fair amount of my time with our economists, and I will say readily that economists will tell you how difficult it is to disaggregate the impact of dollarization from all the other forces and factors influencing any economy. But with all due deference, I don’t think it’s any mistake that precisely because Panama’s official currency is the U.S. dollar, Panama enjoys solid growth and far more price stability than any of its neighbors. And monetary stability makes a difference in people’s lives. Panama is today the only country in Latin America where people can routinely get a 30 year fixed-rate mortgage for a home purchase, for instance.

But economic policy is never a matter of altruism. Just as it’s critical to see the benefits for dollarizing countries, it’s fair to ask, What’s in it for us—why should the U.S. seek to share its currency with the rest of the world? In a word: trade.

Again, take Latin America as a case in point. Right now, our two-way trade with 500 million Latin Americans is less than our trade with 31 million Canadians. As dollarization puts more Latin American nations on a higher growth path and gives millions of people more purchasing power, we’ll see new markets emerge for U.S. goods—with all of the attendant benefits trade brings.

With all that dollarization has going for it, at this point, you’re probably wondering why haven’t other countries beaten a path to the U.S. Treasury’s door, seeking to dollarize before now. The answer, as with any issue, is that there are always concerns with the way a policy will play out. So let me address several concerns about dollarization—both from the U.S. side of the issue and in countries that might officially adopt our dollar.

Here at home, some view dollarization as making the U.S. the de facto financial guarantor of any country that adopts the dollar, creating foreign pressure on the Federal Reserve. In point of fact, a significant amount of de facto dollarization exists already. Worldwide right now, about 2/3 of all dollars in circulation are held outside the United States. We’ve seen significant liberalization on the part of many countries opening up the ability to hold non-national currencies. Right here in our hemisphere, in countries like Ecuador, for instance, with inflation rates gusting anywhere from 40 to 200% at any given moment, most long-term contracts are denominated in U.S. dollars, and people routinely cash their paychecks and convert a good portion to dollars to ensure that their income holds its value. I have no doubt that is why, just last week, Ecuador passed milestone legislation making the U.S. dollar legal tender.

On the matter of foreign pressure on the Fed, as Chairman Alan Greenspan testified to the U.S. Senate last April, foreign pressure exists now, and that pressure presents no problem for the Fed Governors. And as Chairman Greenspan went on to testify, the Fed could handle any additional foreign pressure that might result from official dollarization.

As all of you know, I have the greatest faith in Chairman Greenspan. Even so, as further insurance against foreign pressure on U.S. monetary policy, my bill explicitly states that the Fed would not be obliged to act as lender of last resort to dollarized countries, nor would the Fed be obliged to consider foreign economic conditions when formulating monetary policy, nor would the Fed have any supervisory responsibility over banks in dollarized countries.

Now, what are the objections to dollarization in other nations? I see two main obstacles, one reasonably simple to deal with, the other more significant. The simpler of the two is the loss of seignorage—the fee a nation earns from maintaining its own currency, which derives from the difference between the face value of a unit of currency and the actual cost of printing it. And as small as seignorage might be in terms of a nation’s overall GDP, it can loom large as a percentage of a nation’s government budget. In the case of official dollarization, that is money lost to the treasury of the dollarizing country—and money gained by the treasury of the country whose currency you adopt.

That’s why my bill puts in place a mechanism that will rebate back 85% of the seignorage a nation loses to the U.S. as a result of dollarization. 15% will remain in the U.S. to pay for increased costs to the Federal Reserve, and to cover the cost of lost seignorage to countries that have already dollarized, with the rest reverting as profit to the U.S. Treasury. Looking at that 15%, from the perspective of a dollarizing nation, the benefits of price stability, increased trade, investment and jobs will easily outweigh any revenues lost through seignorage.

But seignorage is merely the dollars-and-cents side of a more significant objection—one that touches on a nation’s very sense of self: the way in which maintaining a separate currency underscores a nation’s sovereignty. From this perspective, money alone cannot compensate for giving up one’s own currency.

It’s a concern to which we should all be sensitive. The plan I’ve set out is all carrot and no stick—based solely on the inherent attractions of greater stability and greater economic growth. And while I understand the impulse that leads a nation to wish to retain its own currency, I can see no national value in staying with a currency that is subject to wide and unsettling swings and costs one’s people a chance to protect the true value of their savings against the ravages of inflation.

Add to that the fact that countries that dollarize will continue to make their own decisions with regard to tax policy, budget policy and regulatory policy—and they’ll continue to set their own priorities on public policy issues across the board. Dollarization will mean no changes in a nation’s sovereign power in these spheres. What will change is the degree of price stability those nations can expect to enjoy as they set the policies they believe will promote the public good in their countries.

In many ways, I see dollarization as an antipoverty, prodevelopment policy—a policy that promises to be far more effective than foreign aid or World Bank efforts in the past. In fact, for those who see sovereignty at issue, I see dollarization as a way to decrease the dependency of some of our Latin neighbors on foreign assistance programs that, quite frankly, have been a mixed blessing. By eliminating the root cause of currency crises, widespread dollarization would eliminate the need for international institutions to make the complex and highly controversial interventions in national economies that have been an integral part of recent currency rescue efforts.

And just as it’s going to take cooperation between the U.S. and any other country that wants to adopt dollarization as its formal monetary standard, it’s going to take cooperation in the implementation phase as well. It’s a simple fact: there is no blueprint to follow, no instruction manual that takes us step-by-step through this process. It will be a cooperative, collaborative venture that by its very nature will strengthen cooperation and collaboration in our region.

I also want to underline that as critical as I believe this issue is, dollarization by itself is not a panacea. It simply creates a favorable environment for taking strong and steady actions on a whole host of other issues—the tax and budget and regulatory policies I mentioned a moment ago—all of which remain within the sovereign power of every nation.

Up to now, I’ve focused this morning on the economic benefits of dollarization. But there are critical non-economic dividends to dollarization as well, which leads me to my third and final point today: We’ll see not just greater prosperity, not just greater trade, not just an increased standard of living—as critical as that would be in so many countries.

We’ll see more social harmony. We’ll see less social conflict—less of the strife and uncertainty that’s led to upheaval in the past, creating friction within and between nations. That’s a net gain for democracy, freedom and prosperity, not just in one country or another, but across the Americas.

As I said a few moments ago, sound money is sound policy, rooted in sound principles. It’s one American export I think people the world over would very much welcome.

And that really is the challenge I want to issue to all of us today: The challenge to take what is clearly on one level an issue owned by the economists, and engage in the sustained education campaign that makes it an issue with broad popular, pocket-book appeal for people across this region: An issue that taps the hopes and aspirations of people everywhere to provide better lives and brighter futures for themselves and their families.

That’s an effort that starts with leaders like the ones in this room—and it’s a legacy that all of us should be proud to leave the countries we call home.