Exporting Trust
Brenner, Reuven
EXPORM Tat, S THE TIME FOR A NORTH AMERICAN MONETARY UNION HAS COME. MORE AND MORE COUNTRIES ARE LOOKING TO THE DOLLAR AS AN ECONOMIC ANCHOR. THE U.S. WOULD BENEFITS TOO BUT THAT'S NOT WHAT...
...Mexicans' average income has plummeted by 23 a similar percentage during this period and the number of people living much below poverty level has doubled to an estimated 30 million, about a third of the population—an explosive situation...
...NETARY?' MYTHS Does monetary nationalism, then, offer any advantages except the obvious ones to the government of interest-free borrowing and the power to levy the "tax" of inflation...
...But the timing for a North American monetary union is ideal...
...The myth of monetary nationalism arose in reaction to the experiences of the United Kingdom between 1925 and 1931...
...land-based statistical standard, but commodity-price indices, including gold...
...These difficulties led to the abandonment of the gold standard in 1931, and to the discrediting of exchange-rate pegs ever since...
...Countries have the alternative of building up trust, of course, but that takes time...
...older people in the U.S...
...In a speech at Stanford University in September 1997, he admitted: Whatever its successes, the current monetary policy regime is far from ideal...
...Without ever admitting his mistake in public, the chairman reshaped his policy...
...can export its trusted currency, we have to make a historical detour and look at just what brought the world to the present situation: a lot of paper currencies flying around, most of them blown by the winds, with no anchors whatsoever...
...Not only does the value of their savings and wages drop, but less capital flows to their countries...
...A U.S.-Mexico monetary union under the U.S...
...In consequence, as Friedrich Hayek noted, "it was necessary to reduce all prices and costs in proportion as the value of the pound had been raised...
...WOULD BENEFITS TOO BUT THAT'S NOT WHAT THE POLITICAL PRIESTHOOD WILL TELL YO U• REUVEN BRENNER 22 March 1999 The American Spectator ith Europe moving toward a single currency, Argentina's president advocating his country adopt the U.S...
...Whatever the flaws of any of these benchmarks, they have one advantage in common: none is linked to domestic U.S...
...That's how countries have wandered into a maze of confusion and error, particularly concerning monetary issues...
...Mainly from politicians and an economic priesthood subsidized by them...
...They include Argentina's President Carlos Menem, Ricardo Salinas (no link to the former Mexican president), his relative Roberto Salinas-Leon, and Alfonso Romo of Monterey, one of Mexico's most prominent businessmen...
...Astable currency in, for example, Mexico, would bring increased capital flows to that country, making its people richer and diminishing the flow of immigrants northward...
...Once a monetary standard is adopted, regional fiscal mistakes become instantly visible as capital flows out...
...Money is a matter of trust...
...Consider the monetary events taking place in many countries around the world...
...Every crisis is an opportunity...
...If it ceases to be a standard, the value of people's hard-earned savings drops, as does the value of their negotiated wages...
...Region after region could then adopt the currency and, step by step, the world would get back to an international monetary system of the kind it once had in the gold standard...
...25...
...Argentina, Hong Kong, Austria, and the Baltic republics have adopted currency boards, linking their currencies rigidly to those of Germany or the U.S...
...Even if Greenspan makes poor decisions, his mistakes can never lead to sustained inflation, as do the overtly politically motivated monetary policy decisions in other countries...
...is less obvious, but no less true...
...These numbers are good first indicators of the Mexican situation less than four years after the U.S...
...The Americas would be far better off buying into the dollar today, rather than building all the institutions of checks and balances necessary to restore and maintain credibility in a currency...
...That is what people have always done, be it in Latin America in the past or Russia now...
...24 March 1999 The American Spectator The question thus becomes: Why should countries link the fate of their monetary affairs to the dollar...
...companies, the exchange rate would be locked in, and pesos traded for the respective amount of dollars...
...Europe is moving toward a monetary union...
...Not the people with the better skills, the more mobile, who have the power to re-negotiate their contractual agreements...
...The answer is that even if Greenspan doesn't know exactly what he is doing, at least he is steering monetary policy independent of domestic U.S...
...Indirectly, having Latin America adopt the dollar would solve the approaching U.S...
...The American Spectator • March 1999 To understand under what conditions the U.S...
...But we continuously examine alternatives that might better anchor policy, so that it becomes less subject to the abilities of the Federal Open Market Committee to analyze developments and make predictions...
...If the U.S...
...So don't hold your breath for the dollarization of this continent, or for the adoption of an international monetary standard...
...A number of prominent businessmen and politicians in Latin America have recently spoken of the possibility of a North American monetary union based on the U.S...
...The benefits of a monetary standard should not be exaggerated...
...HA S A MONETARY STANDARD...
...Others, of whatever nationality, have never displayed the slightest sentimental attachment to these pieces of paper...
...dollar umbrella would imply the following steps: • Mexico would pass a "balanced budget" resolution limiting deficit financing to special projects, as is the case today for states in the U.S...
...it is no panacea for fiscal errors...
...SOCIAL SECURITY CRISIS THROUGH HIGHER GROWTH RATES FOR THE ECONOMY AND HIGHER RATES OF RETURN TO THE SOCIAL SECURITY FUND...
...dollar, and busi- nessmen calling for the same in both Mexi- co and Canada, it is time to ask: • Would a monetary union be good for the Americas (excluding the U.S...
...Anticipating devaluation and high inflation, people quickly abandon domestic currencies in favor of stable foreign ones...
...Who suffers from devaluation and inflation, the two policiesthat destroy monetary standards...
...dollar terms), the press has made tentative noises suggesting the same...
...currency would become an international monetary standard and circulate among countries just as it circulates among the states...
...The American Spectator • March 1999 All this would happen not because the U.S...
...Governments would then no longer be able to cloak their mismanagement in the language of macroeconomics, or blame speculators for their countries' poverty...
...If trust in a particular currency is diminished or lost, people will use it less and shift to other currencies, whether governments like it or not...
...Yet those difficulties came about because of a political mistake, not because there is something inherently wrong with fixed exchange rates...
...Each episode has had to be treated as unique or nearly so...
...The answer to the first question is a very simple yes...
...Once these changes were credibly made, the Mexican government and its central bank would act to bring down interest rates...
...The currency crises over the last year in Asia, Russia, and Latin America offer the basis for moving away from monetary nationalism to an international monetary standard...
...Before his appointment as chairman, hardly anyone wrote as fervently as he for restoring the gold standard...
...As more countries adopted the dollar under similar conditions, U.S...
...With rates on the Mexican government's and top-rated companies' bonds similar to those of top U.S...
...dollar...
...But after all, why should the head of the Federal Reserve know what an interest rate (just one particular price in our economy) should be, anymore than the Secretary of Agriculture should know how to price chickens or eggs...
...It may have been the best we could do at the moment...
...If so, under what conditions...
...Just as there are times in business when one builds from inside, and others when one buys into another company, so it is with monetary standards...
...WHO OPPOSES MONETARY STANDARDS...
...Social Security crisis through higher growth rates for the economy and higher rates of return to the Social Security fund...
...Insurance uses up resources that can be more productively employed elsewhere when currencies are stable...
...policies...
...Yet the fault was in Churchill's arbitrary decision, not in the principles underlying adherence to a monetary standard...
...Better wish for one further serious shock...
...dollar was de-linked from gold during the Civil War, citizens did not hesitate to ridicule it as the "greenback...
...Monetary experts, central bank bureaucrats, and the IMF dislike an international monetary standard for another reason, the same reason accountants dislike flat taxes: the prospect of lasting unemployment...
...Moreover, all Latin American countries have very young populations, whereas the U.S...
...to back firmly the restoration of monetary standards...
...Younger people look for capital...
...Even in Canada, land of the plunging Canadian dollaretto and diminishing per-capita incomes (in U.S...
...After all, the origin of the word "credit" is the Latin credere, which means to believe in, to trust...
...The currency crises of the last two years may not have been severe enough to bring about drastic change...
...People lose wealth when their currency is not trusted, and sophisticated financial instruments to insure against such loss are only a partial remedy...
...In his speeches (with the exception of those delivered between September 1997 and September 1998), he has never ceased to emphasize that commodity prices, including that of gold, have been among the factors that guide his policy...
...In 1925, Chancellor of the Exchequer Winston Churchill made the mistake of raising the English pound, which had depreciated during WWI, back to its former gold value...
...The word was an apt metaphor for the condition of the currency, which during 1998 dropped 27 percent against the dollar as the benchmark interest rates went up to 47 percent...
...Recall that when the U.S...
...This goes to show that central bankers, even those as dedicated as Greenspan to the idea of a monetary standard, do not quite know what they are doing...
...The ones who suffer have always been the vast majority of relatively immobile poor...
...I am unconcerned that proud European countries might be giving up power by getting rid of pieces of paper confined to local circulation...
...If he is right, Harlem should have a different currency than Fifth Avenue, and Texas a different one from California, and in Canada Thiessen should advocate a new currency for Newfoundland, the poor land of fishermen without fish...
...Other benchmarks that Greenspan has mentioned as guides for monetary policy are money-supply growth figures and percentage changes in various price indices, though he has been critical of both...
...Treasury-backed International Monetary Fund (IMF) disastrously recommended devaluation, from which Mexico has yet to recover...
...Denationalizing monetary systems and adhering to a monetary standard offer only benefits, notwithstanding all economic theorizing to the contrary...
...and Canada have an aging one...
...In December 1997, even before the turbulence of 1998, the Mexican stock market stood at about half of its pre-devaluation value in dollar terms...
...Not knowing what hit them (for the economic-political priesthood is good at covering the truth with jargon and pseudo-science), this vast majority asks for immediate remedies...
...Now is the time to get out of this maze, and for the U.S...
...would benefit for all the reasons mentioned, and also because the additional dollars would represent the U.S...
...Consider Federal Reserve Chairman Alan Greenspan's statements and actions over the last year...
...This process, particularly because of the notorious difficulty of reducing money wages, proved to be very painful and prolonged...
...It is the basis of all contractual agreements...
...REUVEN BRENNER, a member of McGill University's Faculty of Management, is associated with DUXX, the Graduate School of Business in r, Monterey, Mexico, and is partner in Lamerac Con...
...government's interest-free debt...
...People specialized in currencies and derivatives should not be expected to be enthusiastic about monetary standards, either...
...But Canada's governor of the Central Bank, Gordon Thiessen, has spoken out against it, arguing that geographic areas must be "similar" in their economic composition to benefit from sharing one currency...
...were to declare its monetary policy de-politicized forever and institutionalize its firm stand for a monetary standard, the foundations of the much talked-about global financial architecture would be set...
...This is what West Germany did in East Germany, though it did so at a politically determined rate rather than a market determined one...
...The Federal Reserve would formally declare that the benchmark for its monetary policy was no longer any U.S...
...dollar, even (in pre-Communist China) the Mexican silver dollar, and elsewhere to gold...
...They realized that the only thing behind it was green ink...
...Countries with an unstable monetary history would benefit, and the U.S...
...Would this scheme be good for the U.S., too...
...Well, nobody expects bureaucrats to pull out the cushioned carpets from under their own feet...
...Expect them to use economic jargon and myths to serve their own interest...
...The reason is simple: Money is the basis of all contractual agreements...
...They have shifted to Deutschmarks, the U.S...
...qALIStet Where does the absurd idea come from that currencies—small pieces of colored paper, signed by politicians, decorated with pictures of people and buildings, and fluctuating wildly in value —are a basis for national pride...
...That an American monetary union would be good for the U.S...
...That's why politicians dislike the idea...
...politics...
...Nevertheless, when Ricardo Salinas, owner of Mexico's TV Azteca and Elektra, called the Mexican peso a four-letter word in public late last year, he was forced to apologize...
...and Canada have capital and look for investment opportunities...
...Countries not adhering to the standard would thereby signal that they did not want to pass balanced-budget amendments, and the international capital markets would extract the appropriate price for that...
...The monetary events of 1998 confirmed Greenspan's admitted ignorance...
...A stable currency would increase the circulation of capital and bring higher returns to everyone generally...
...The Federal Reserve would then exchange Mexican government bonds for dollars...
...HAVING LATIN AMERICA ADOPT THE DOLLAR WOULD HELP SOLVE THE APPROACHING U.S...
...I am skeptical of the Euro's success, but that is because of the new central bank's planned monetary policy and the lack of checks and balances on its management...
...Whereas until August 1998 he saw inflation right and left and shaped his monetary policy accordingly, finally in September he took a sharp turn and declared deflation the danger...
...suitants Inc...
...is a superpower, but because its institutions are more trusted than those of other countries...
Vol. 32 • March 1999 • No. 3
