The Case for the Amero: What Is in It for the Americans?

[Previous] [Contents] [Next]

The United States is the world's largest and most prosperous economy. Americans are proud of these achievements and the US dollar is an important political and nationalistic symbol. Why would Americans ever want to join a North American Monetary Union, lose the uniqueness of their currency, and give foreigners a seat on the Federal Reserve where they would be able to influence monetary policy? Why would they want to sign an agreement that limits their ability to incur government deficits since no such policy has been enacted domestically? What interest groups in the United States would support such a policy initiative.30

It is tempting to suggest for the reasons inherent in the preceding questions that the government of the United States will never agree to the creation of a North American Monetary Union. However, I am more optimistic for a number of reasons.

History of international agreements and the American national interest

First, if anyone had asked analogous questions 60 years ago about the prospect of the United States becoming a member of the World Trade Organization (formerly the General Agreement on Tarifs and Trade), the International Monetary Fund, the World Bank and, more recently, the North American Free Trade Agreement, most people would have answered much as they now do when it is a question of the proposed agreement on a North American Monetary Union.

Yet, the United States did become a member of all of these organizations and did surrender a significant degree of national sovereignty. There are escape clauses in all of these treaties that can be invoked if the national interest is threatened seriously. Similar escape clauses are certain to be in the proposed monetary agreement. There is still much opposition to these organizations in the United States and it receives much media attention. However, political movements like those headed by Pat Buchanan and Ross Perot that make withdrawal from such organizations a major plank in their platforms have not had significant electoral successes.

I believe that the United States became a member and accepted the accompanying loss of national sovereignty because the benefits from doing so outweigh the costs. Increased trade, more stable economies in the rest of the world, and continuous forums for the exchange of views have increased the prosperity of Americans. The United States may be large but the rest of the world is even larger and American relationships with other countries matter to economic growth and national security. By extension, the proposed monetary agreement will benefit the United States since it is expected to improve the size and stability of the economies of Canada and Mexico; American trade and investment will grow correspondingly.

Finally, the preceding analysis of the merit of monetary union implies that some real economic benefits will also accrue directly to the United States just as they will to Canada and Mexico. These benefits to the United States will be much smaller in relation to national income than the benefits to the other two countries. But, there will be significant savings in the cost of currency exchange and protection against exchange-rate uncertainty. The increased size of the market will make for more efficient and deeper capital markets. American firms will have even more incentives and opportunity to produce and market their goods and services in the entire continent. At the same time, Canadian and Mexican firms will invest in the United States and bring consumers better and lower-priced goods and services. These and other gains will grow through time as the economies of Canada and Mexico grow absolutely and probably also relative to the American economy.

The threat to the power of the dollar

During the postwar years, the US dollar has played an important role in international finance. It has been a standard of value for official and private transactions and statistics. This fact manifests itself in the widespread use of dollars in international trade and capital markets. The most important internationally traded goods like gold, copper, oil, and wheat are quoted and billed in dollars, as are the bonds floated by international organizations and national governments.

The dollar also serves as the key currency in the production of international statistics by the International Monetary Fund, the World Bank, various agencies of the United Nations, and the Organisation for Economic Cooperation and Development (OECD). International comparisons of national incomes, trade, and economic growth are made through national data converted to US dollars.

When small countries experience excessive price instabilities and inflation, the private sector often adopts dollars as a parallel currency in domestic trade and investments. During the inflation in Israel during the 1970s, retail prices of goods were shown in dollars as well as shekels. Israeli banks accepted dollar deposits and made dollar loans. In several Latin American countries, especially Argentina and Mexico, large sectors of the economy rely on dollar prices for domestic transactions.

Foreign-exchange markets between pairs of countries, like India and Austria produce few transactions since trade and capital flows between them are small. For this reason, the exchange rate between such countries is established by first converting each into US dollars and then deriving from these values an exchange rate for the two currencies. This rate is used by traders doing business between India and Austria.

The American economy does not gain anything other than prestige through the use of the dollar as a key currency and standard of value. In these uses, the dollar is nothing but an accounting convenience. However, there are significant indirect gains because the use of the dollar as standard of value has also made it into an international store of value and medium of exchange. National central banks hold the bulk of their international reserves in the form of dollars. Mundell (1999) estimates that the development of the euro will mean that such official holdings of dollars over the next ten years will not grow. People in unstable countries have dollars in their pockets or business accounts to trade goods and services. Illegal activities, the bulk of which involve drugs, involve the use large quantities of dollar notes. Firms and financial institutions engaged in international activities hold large inventories of dollars to carry out transactions involving exports and imports of goods and capital.31

Much of this world business uses US dollar notes and coins and is very profitable for the American government. It costs very little to produce notes but users give up real resources to acquire them. The sums involved are large: Feige (1997) notes that the United States government cumulatively has produced and put into circulation $390 billion in currency notes. He estimates that between 25 percent and 45 percent--between $98 billion and $176 billion--of this total is held abroad and in exchange brought goods and assets of that value into the United States.32

Business using US dollars in the form of bank deposits also give rise to US profits since the banks pay a lower interest on the deposits than they earn by lending out the dollars to borrowers. However, stiff international competition among financial institutions has produced international deposit and lending rates on US dollars so close that this type of banking brings only normal rates of return to the capital and labour used.33

The use of US dollars in the rest of the world developed during the postwar years because of the dominance and stability of the American economy in the world and the country's military power. The economic analysis of the role of the dollar suggests that the advantages that its use have brought will be difficult to challenge in the future. The costs of switching to an alternative standard have been compared to those the world would encounter if it abandoned English as the lingua franca and switched to the Russian or Chinese language. Historically, switches in the lingua franca, like that from Latin to French and, more recently, to English were accompanied by the fall and rise of the economic and military power of individual nations. There are presently no signs that the United States is about to lose her position of economic and military dominance.

Yet, the establishment of the European Monetary Union should give rise to some concerns. Table 1 reveals some interesting facts.34 Initially the euro will serve a market of 11 countries with a population about nine percent higher than that of the United States. However, the GDP of the "euro eleven" (converted at market exchange rates) is seven percent lower than that of the United States.

The first half of the table considers likely future developments in Europe. If the countries already members of the European Economic Union but not yet members of the Monetary Union--the United Kingdom, Sweden, Denmark, and Greece--join the original 11, the new zone will have a substantially higher population and also a greater GDP. Surveys suggest that referenda about membership in the monetary union in the first three countries will pass when they are presented in the near future. The membership of Greece depends on the development of her fiscal conditions but is also expected to take place in a few years.

The table also shows the size of the euro-zone when it will be enlarged through the membership of Poland, Hungary, the Czech Republic, and Estonia. These countries have applied for European Economic Union membership and are expected to be admitted in a few years. It is highly likely that they will also more or less automatically become members of the European Monetary Union. At that time, the euro-zone will have a population 63 percent and a GDP 20 percent larger than that of the United States.

The data in table 1 suggest that the size of population and national income of this probable future euro-zone will affect the use of US dollars in the many ways described above. The euro probably will soon become the standard of value and dominant store of wealth in many third-world countries which have historic links to Europe. There are the former French and English colonies in Africa and Asia, which have many commercial and cultural relationships with these two countries. Russia and the rest of central Europe will be drawn into much stronger economic relationships with the euro-zone than they ever will with the United States simply because of their histories and geographic proximity.

The replacement of the dollar by the euro in countries other than those in the European sphere is likely to take a long time and may never occur. However, the dollar could face additional competition if other regional monetary unions were to be created in Asia, Africa, the Middle East, and South America. In these events, the need for the dollar as a unit of account, transactions medium, and store of value will be diminished greatly.

Perhaps my vision of a world covered with blocks of countries joined in monetary unions is fanciful. However, if the case made above for the North American monetary union is correct, it applies equally to other countries, providing them with the incentive to create similar associations.

The right side of table 1 shows that this possible threat to the power of the dollar can be diminished by the creation of the proposed North American Monetary Union. The United States, Canada, and Mexico combined will have a population and GDP very similar to that of the original 11 members of the euro-zone plus the four countries likely to join it in the near future.

Looking further ahead, the North American Monetary Union could fairly readily be expanded to include the countries of Central America and the Carribean, which have strong economic relations with the original three and are in relatively close geographical proximity. It is conceivable that eventually some of the South American countries will want to join that union, though a separate South American Monetary Union is also possible.

In sum, the United States will benefit from the creation of a North American Monetary Union much less than Canada or Mexico. Nevertheless, there will be some benefits to the United States in terms of greater economic efficiency and stability. Having economically prosperous and stable countries at the American borders is beneficial. Perhaps more important is that the proposed monetary union will diminish the threat to the present power of the dollar in international trade and finance. On the downside, the union will diminish American monetary sovereignty to some extent through votes of Canadian and Mexican representatives on the governing board of the North American central bank. Implicit in this development is a threat to the reputation of the dollar as a stable currency.

I am convinced that for the United States the benefits outweigh the costs and risks from the creation of a North American Monetary Union, as they did when the country joined other international organizations in the past. I hope that this judgement will be shared by those in the position to move the initiative forward.

Support in the United States for monetary union

Public-choice theory in recent years has made the important point that many government policies do not increase a country's welfare. Often policies are driven by the desire of politicians to gather votes and resources to assure their election or re-election. Catering to special-interest groups produces such outcomes. The benefits that politicians can bestow on such groups are concentrated and often large while the costs tend to be spread over the rest of the electorate and therefore do not warrant their attention during election campaigns. Public-choice theory is relevant to my proposal for a monetary union.

Hefeker (1997) analyzed in some detail what interest groups would support fixed exchange rates and monetary union. He came to the conclusion that

exchange rate variability adversely affects the output and the profits of the tradable goods producing industries. Uncertainty about future prices leads that sector to produce less, trade less and hence lowers its output . . . Profits and profit opportunities are reduced . . . The choice of the exchange rate regime can therefore be explained to a large degree by the influence of the tradables sector. (Hefeker 1997: 137)

Hefeker also notes that to mobilize the tradable-goods sector into lobbying for fixed exchange rates requires a period of exchange rate instability brought about by external shocks or unstable monetary policy.

The American tradable-goods sector has been growing since the end of World War II but is still quite small. The depreciation of the Japanese Yen, Canadian dollar, and Mexican peso in recent years has increased competition for American producers. However, in the case of Japan, it has resulted mainly in the demand for policies to make the Japanese market more accessible to foreigners. In the case of Canada, some import-competing American industries have concentrated on demanding import quotas and other import barriers like those on steel and lumber. More generally, the strong American economic boom throughout the 1990s has allowed American industries to prosper and has lowered their concern about import competition. There has been great monetary and price stability.

In the light of Hefeker's conclusions, this recent American economic history suggests that any proposal for a North American Monetary Union will have little support from Amerian interest groups at the turn of the century. But economic conditions do change. If and when the tradable-goods sector in the United States should suffer from large-scale monetary and exchange-rate instability, interest in monetary union will surely increase.

[Previous] [Contents] [Next]

info@fraserinstitute.ca You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.

If you know someone who would be interested in this web page, please enter their email address below, and we will forward this URL to them: Email Address:

Last Modified: Sunday, September 26, 1999.