Black Caucus Members Slow Movement Toward Dollarization

Last week the Domestic and International Monetary Policy Subcommittee of the House Banking Committee held a markup on HR 4818, the "International Monetary Stability Act of 2000". The bill's stated purpose was "To promote international monetary stability and to share seigniorage with officially dollarized countries". The bill principally sponsored by Rep. Paul Ryan (R-WI) was designed to provide an incentive for developing economies to officially dollarize. Dollarization is the process by which a foreign country uses the U.S. dollar as its unofficial or official currency. The bill mandates that seigniorage, the profit made off of the issue of a currency, be shared with any foreign country that officially dollarizes with 85% of the profit going to the dollarized nation and 15% going to the United States. Normally all of the seigniorage would go to the United States. The bill was expected to make it out of the subcommittee and be placed before the full committee for a vote but largely due to resistance from members of the Congressional Black Caucus that sit on the subcommittee, the bill was voted down.

Recently, among developing nations or struggling economies, the practice of dollarization or the use of other foreign major currencies has become increasingly popular. Several countries use either the Deutsche Mark or U.S. dollar as legal tender and an even larger number of nations are considering doing so. A country usually decides to dollarize when their local national currency has been dramatically devalued and or fluctuates wildly in value. Such inflation or instability makes economic activity virtually impossible. By using a foreign currency, countries undergoing currency crises are seeking to obtain a measure of stability.

During the markup, Rep. Ryan, the strongest advocate for the process in the House of Representatives, persuasively articulated the benefits of the dollarization bill to both Republican and Democratic subcommittee members explaining how the process works and mentioning that it was some of the United States' closest neighbors- Guatemala, Honduras and El Salvador who were considering dollarizing, because they wished to break inflationary and deflationary cycles.

Ryan's arguments met initial resistance from two members of the committee: Rep. Ron Paul (R-TX.) and Rep. Brad Sherman (D-Ca.). Rep. Paul objected to the bill in principle because he did not believe that it would be possible for the United States to stabilize other countries via their use of the U.S. dollar "I am not excited about the U.S. becoming a printing press. Paper currencies are inherently instable", he said. Rep. Paul believes that dollarization will ultimately result in inflation being spread from the U.S. throughout the rest of the world and he argued that dollarization can backfire, " If the dollar today was under 1979-1980 like conditions then we wouldn't be talking about doing this. The dollar is vulnerable to inflation" Rep. Paul was making reference to the inflationary years of the late 70s and early 80s.

Rep. Sherman, while supporting the bill in general and dollarization in principle, disagreed with the 85% to 15% ratio in the distribution of seigniorage. He argued, " If the U.S. is going to be in the dollarization business, we should be in this business for a profit." Rep. Sherman argued that the U.S. should not be giving 85% of the seigniorage to the dollarizing country. He argued that the seigniorage should be split 50%-50% and he introduced an amendment to that effect.

Rep. Ryan essentially dismissed Rep. Paul's arguments and subsequently explained to Rep. Sherman that the 85% to 15% ratio had been established after careful consideration with the rationale being that the 15% that the U.S. received would represent just enough revenue to cover printing costs and an excess that the U.S. would share with countries like Panama that had already dollarized but which had not previously been given any of the seigniorage. He then explained that the 85% ratio was designed to give the countries an incentive to dollarize. Rep. Ryan argued that such an incentive was justified because countries that are destabilized by currency crises eventually end up receiving foreign aid or bailout money from the U.S. He described dollarization and the 85% in seigniorage, that the dollarized country would receive, as a more effective form of foreign aid and much cheaper. He did indicate to Rep. Sherman that he would be open to a compromise on the seigniorage percentages (eventually Rep. Ryan would accept Rep. Sherman's 50%-50% amendment)

Then Black Caucus member Rep. Maxine Waters entered the fray by voicing her concerns, " Has there been any discussion about security and intrigue surrounding our country's printing of money for foreign countries? Have we talked about the security of all of this and how we can destabilize other countries if this isn't done right?" she asked. Rep. Waters explained that she believed the process was so new and that so little was known about its impact that it amounted to little more than an experiment.

Black Caucus member Rep. Melvin Watt (D-NC) added an additional concern that the 85% of seigniorage going to a developing country in the process was peculiar. "Why are we bribing countries to do this [dollarize]? And why is there such a rush?"

Rep. Ryan responded that the 85% could hardly be considered a bribe because a country would have to wait 10 years before they could receive the 85 % and that ultimately countries were not deciding to dollarize because they wanted a portion of the seigniorage, but rather they were dollarizing because they wanted stability for their economies which would result in far more revenue than the 85% in seigniorage to be received from the U.S. "The goal is for these countries to import our monetary policy" Rep. Ryan countered.

Banking Committee Chairman Rep. Jim Leach (R-IA) in support of dollarization, argued that it was inconsistent for the Democratic members of the committee to deny dollarization for the very same countries on whose behalf they had lobbied for debt relief. Rep. Leach said, " I see the two policies as compatible and complimentary and I don't understand how you can support debt relief on one hand and then fight dollarization with the other…it doesn't add up."

But Rep. Leach may have subsequently made a tactical error in his emphasis on the 15% in seigniorage by referring to the 15%, which according to the Congressional Budget Office (CBO) would amount to $1 billion for the U.S. over 10 years, as "a nice profit for this country to make in the process of helping other countries". The characterization seemed to disturb several Democrats on the committee.

Rep. Leach's framing of the 15% in seigniorage as a "nice profit" seemed to contradict Rep. Ryan's earlier argument that the U.S. was performing the procedure "at cost" with no real profit.

Another possible mistake made by the Republicans was their continued reference to a 1992 comment in favor of dollarization made by Treasury Secretary Larry Summers when he was then an economist for the World Bank. The continual references to Summers' comments in support of dollarization in 1992 seemed to backfire when Rep. Waters produced a letter from Secretary Summers written on July 13, 2000 that clearly indicated that although Summers sees value in dollarization, he and the Clinton administration could not support dollarization legislation at this point in time. Rep. Waters' dramatic presentation of the letter seemed to embolden Democrats who, up until that moment, seemed undecided on the matter.

Then, two hours into the markup, Rep. Watt introduced three amendments that dealt with the technical wording of the bill while he firmly argued that there was no need to rush to dollarize and that all of the ramifications of the process had not been studied. He added that it was not the United States' place to create legislation for countries to do this. He stated that this was a sovereign decision of another country and that the decision to dollarize should be made inside of that country and not the U.S. " I will rise in opposition to this bill whether the seigniorage percentage is 50% or 85% for the dollarizing country. The bill is internally inconsistency. We simply can't buy what the stability of the dollar will gain with 50% or 85%. We ought not be paying people to dollarize. This notion that we can "buy" a country's movement to dollarization is not something that I can subscribe to. I don't think this has been thought through. We are rushing toward something that isn't going anywhere anyway," Rep. Watt concluded.

The bill failed to get a majority in the final vote and was not referred to the full committee. The defeat was a blow to the movement inside of Congress toward dollarization, especially after the Senate had moved almost identical legislation forward the week before.

Afterward, Rep. Leach expressed disappointment that the legislation did not make it " I think that this is an excellent idea and a win-win that helps the poorest countries get out of the cycle of currency devaluations. And I especially think that it was inconsistent for the other side to support debt relief but not dollarization. The wages of the poor will rise in these countries as a result of dollarization and the 85% to 15% is a great deal for us. I am surprised that President Clinton is not for this and I just don't think that the opposition was aware of the issues involved. They are all very busy and I know that some of them missed the hearings that we have held on this issue - four hearings altogether, and they have not really looked at this".

Yesterday, Rep. Ryan expressed disappointment at the defeat but clearly indicated that his work on the issue was far from over, " I had hoped to get this bill out of the subcommittee even though I was less than optimistic about its chances in the full committee. My goal was to raise this issue from an obscure academic idea to the level of a viable policy alternative. I think that I accomplished that." When offered the opinion that the Republican members of the subcommittee inadvertently undermined the bill's chances by making arguments that contradicted his own, Ryan agreed. " That is true. That did happen. We have a long way to go to educate the members of Congress on dollarization."

Rep. Ryan also addressed the role that Rep. Waters played in the demise of the bill with her presentation of Sec. Summer's letter. " I wasn't surprised by what he wrote. But in my conversations with him he was supportive of dollarization. In 1992 he was expressing his true feelings (in support of dollarization). Now he is constrained in the Clinton administration. I saw the letter that he wrote this month. If you read it carefully, you can see that he wasn't opposing dollarization. I think Rep. Waters tried to interpret the letter for more than what it was."

As for the possibility that Rep. Watt's three amendments at the end of the markup also contributed to the bill's defeat Rep. Ryan admitted that probably was the case. "It was a turning point and it bought more time for them to get more Democrats into the committee room. We [Republicans] just didn't have enough votes."

Rep. Ryan said that his next step will be to advance a resolution in the House that will convey the merits of dollarization and that dollarization "really is a policy that is beneficial to all".

Cedric Muhammad

Wednesday, July 26, 2000