A Case Against U.S. Dollarization

Challenge, July, 2000 by George von Furstenberg

The Reckoning

Countries clearly are in a bind if they can neither profitably keep their own small currency nor gain accession to a multilateral union. But those with the dominant currency may want to beware of taking and keeping all: A unilateral monetary union is not anchored in international treaties or binding undertakings but is predicated on the convenience of the adopting country. Once the thirty-three OAS member countries roughly to the south of the United States in the Western Hemisphere have been completely U.S.-dollarized long enough to be used to world-standard stable prices, there may be nothing, not even the market, to stop them from eventually seeking to leave the unsettled state of unilateral monetary union with the United States. For seignorage recapture, they may try to form a multilateral subunion of their own by creating popular demand for changing legal tender, tax, and unit-of-account rules. They may thus be able to induce U.S. dollars held by the public to be swapped for a freshly minted common curren cy by a future Latin American and Caribbean System of Central Banks. Alternatively, they may join an existing multilateral monetary union that gives better terms than the United States does.

Once led on the path of monetary rectitude, why pay royalties to the U.S. dollar forever for a lesson well learned? It is unrealistic to think that the likes of Brazil, Argentina, and Chile will accept and then stay with U.S. dollarization for much of the current century, no matter how "American" it will be. Even Mexico, which is showing ever less determination to keep down the dollar portion of its money supply, could eventually come to resent dollarization, which would tax it more than $1 billion per year off the bat, [3] and then more each year as its economy and monetary base keep growing, compared with enjoying the flow of seignorage from all the currency used inside the country.

Once a superior alternative has been worked out among the Latin American and Caribbean countries or with an established multilateral union, they will undollarize jointly. They will stop paying rent for the use of foreign currency and will turn it in for income-yielding investments and also for U.S. goods and services down the road. Uncooperative unilateral union in which the external currency-customer be damned thus may have an eventual comeuppance: if the dollar should ever come to reign from Seattle to Santiago or from Alaska to Antarctica, as famous alliterators have recommended, that reign will be shorter than the half-life of James Monroe. The model of shared control and ownership of the type pioneered in Europe is more sustainable as it contributes to the wealth of a plurality of nations and does not just make the monetary wealth flow e pluribus ad unum. It is time for the United States to take a careful look at Europe's multilateral model of monetary union and to develop a variant that would remain ben eficial for the Western Hemisphere as a whole in the long run. Until then, there is no bridge that leads from European to American monetary union, or from EMU to AMU.