|Issue No 93||27 April 2001|
Currency Unification: Dollarize or Die?
Dick Bryan asks what happens to an economy when it gives up its domestic currency.
The headline of the Australian Financial Review of September 13, 2000 read 'RBA backs currency union'. The Governor of the Reserve Bank of Australia (RBA), Ian Macfarlane, has come out in support of Australia and New Zealand sharing a common currency. This followed the New Zealand Prime Minister stating that New Zealand adopting the Australian dollar as its domestic currency "might be inevitable" (itself an interesting concept). International mergers and acquisitions happen even in central banking.
More recently, in April 2001, the Chairman of the Australian Stock Exchange, Maurice Newman, has been reported as advocating Australia's adoption of the US dollar as Australia's domestic currency.
So what are the issues involved in currency mergers? The first thing to note is that they are pretty common. The Treaty of Westphalia of 1648 that ended the Thirty Years War was the benchmark of the introduction of the principal of one-nation-one-currency: that each nation state demonstrated its sovereignty by issuing and securing the domestic and international integrity of 'its own' currency. But there have always been exceptions. Australian monetary history shows the range of different national currencies that passed for legal tender within Australia in the early period of white settlement.
Today, there are many cases of small countries adopting a major currency, especially where there is geographical proximity. Panama and Liberia have, from their independence, adopted the US dollar. Several other central American countries have recently been contemplating 'dollarisation'. The South African rand is legal tender in Lesotho and Namibia. Bhutan uses the Indian rupee. Several former Soviet republics, now independent nations, still use the Russian rouble.
But currency unions are not simply a matter of small countries hitching their wagons to large ones. The Euro represents a case of large, rich industrial countries adopting a common currency as a perceived practical economic solution.
As debates about the Euro showed, currency unification plays out a now-standard conflict over globalisation: a logic of accumulation versus national sovereignty.
The supposed benefits of currency unification, simply stated, are twofold. First, in cases where a central bank is unable for some reason to secure a stable monetary system (on-going high inflation in particular) the adoption a currency like the US dollar provides a (generally) stable solution. A number of the cases cited above fit this depiction. Moreover, in many countries the US dollar exists alongside the local currency as the preferred monetary unit.
The second case for currency unification, applying to the advanced capitalist countries, is where different nations are integrated economically by extensive flows of goods and services, finance and investment (and perhaps labour). This is the situation that led to European currency unification and the Euro. It is also the Australia and New Zealand situation. In these circumstances, different currencies are thought to create unnecessary uncertainty. Exchange rate movements create windfall gains and losses for traders and investors - or they add to the costs of having to hedge against uncertainty. With uncertainty eradicated under a single currency, evidence suggests that trade, investment and financial flows increase.
This is central to the Australian Stock Exchange's proposition. The ASX is concerned that, in global financial markets, Sydney will be of diminished importance - shares will be bought and sold only on the world's major exchanges, and companies won't even bother listing on the Australian exchanges. (The AMP and BHP are two companies that have recently reorganised their global operations with the purpose of getting prominent listing on the London stock exchange.) To meet this challenge, the ASX has already established a number of agreements with exchanges in other countries for cross-listing of companies and 'free trade' across exchanges. The most significant of these is a proposal for 10 exchanges, including the ASX and the New York Stock Exchange, to be linked together in the Global Equity Market. (On these ASX links, see http://www.asx.com.au/shareholder/l3/InternationalAlliances_AS3.shtm). However, exchange rates are a problem - Americans will not trade on the ASX because of the risks involved in crossing between US and Australian dollars. If Australia used the US dollar as its trading currency, this risk disappears and the ASX has much more appeal as a site for global share trading.
Extending this case some distance leads to the proposition that countries (and by implication all countries) should adopt the US dollar. The US dollar is the major world currency for trade, credit and investment. If companies are heavily exposed to the US dollar by these means, it is simpler overall if all their costs and revenues are in US dollars. This is the case for dollarising the world.
The argument against monetary unification is essentially the monetary version of debates about sovereignty. There are two basic arguments (three if we indulge the patriotic desire to see pictures of Aussie battlers on notes and coins). First, a separate national currency is required for national monetary policy. National determination of interest rate adjustments is used by the state for management of the overall level of economic activity within the nation. Currency unification denies this policy lever. In Europe, if France is booming and Austria in a slump, there is no mechanism to cut interest rates in Austria to stimulate spending. On the other hand, there is no particular reason now in Europe for nations to have different economic cycles requiring different policies. (Anyway, nations have always been limited aggregations for this purpose. If Sydney is booming and Tasmania in recession, what should happen to interest rates in Australia?)
Second, nation states use their currency for seigniorage. That is when they issue more currency than is required by the current level of economic activity. The benefits of issuing the 'extra' currency accrue to state revenue. US dollars circulating as legal tender outside the US were issued by the US state but they do not create inflation within the US because they had to be bought with other currencies. So their issue generates revenue for the US state. If New Zealand adopts the Australian dollar, seigniorage is lost to the New Zealand state, but the Australian state's capacity expands.
Alternatively, seigniorage signals that the state's control of money and the state's control of public revenue and expenditure cannot be separated, and public finance is an intensely political process. With currency union the New Zealand and Australian governments (or Australian and US governments) would have to reconcile how they raise revenue, where and on what they spend public funds and what their budget strategies would be. There cannot be monetary union without some significant degree of political union.
Note the implications here of the case for US dollarisation - where there is no political merger with the US, a substantial range of national economic policy tools are lost in the dollarised countries. Seigniorage is lost as is any involvement in setting interest rates. George W would all but set social and economic policy in Australia.
Arguments about complete global dollarisation present the extreme case of the dilemma. There is, for accumulation, a clear logic in having a single global currency. Multiple currencies are as sensible as different rail gauges and different power sockets - they are an anachronistic inconvenience and costly. But where that global currency is one nation's currency writ large, there is a fundamental contradiction. The US dollar cannot serve as both the global currency and a national currency used to regulate the level of economic activity within the United States. That was the situation that brought down the post-World War II monetary system, the Bretton Woods Agreement. With dollarisation that experience is destined to be repeated.
So the question here is really whether the US dollar could break free from the United States state, and operating as a globally-regulated, consensually managed currency. The answer has to be that it is at best improbable, and more realistically unimaginable.
In the meantime, the reality of internationally integrated accumulation is likely to see more currency unifications stitched up. As these mega-currencies get bigger and fewer, exchange rates between currencies will become bigger and bigger issues and who controls monetary policy within each currency unit will be a major political battle.
It was always thus. All prices (exchange rates, interest rates, prices of goods, wages) have always been battles over distribution. Currency unification turns an inter-national battle into a 'domestic' battle. The difficult issue of currency unification is not getting everyone to use the same bank notes, but to avoid a predictable process of rule by the strongest central bank - the Reserve Bank of Australia in the case of Australia and New Zealand and the US Federal Reserve in the case of Australia and the Unites States. Building the forums in which these 'domestic' battles over amalgamated monetary policy are played out openly and democratically looks a long way off.
Dick Bryan is from the School of Political Economy at the
University of Sydney
An earlier version of this article appeared in Arena magazine; issue 51, feb -march 2001, inquiries mailto:[email protected]
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