Senate Report 106-354 - INTERNATIONAL MONETARY STABILITY ACT OF 2000

[Senate Report 106-354]
[From the U.S. Government Publishing Office]

Calendar No. 705
106th Congress Report
SENATE
2d Session 106-354
_______________________________________________________________________

INTERNATIONAL MONETARY STABILITY

ACT OF 2000

__________

R E P O R T

of the

COMMITTEE ON BANKING, HOUSING,

AND URBAN AFFAIRS

UNITED STATES SENATE

to accompany

S. 2101

together with

ADDITIONAL VIEWS

July 24 (legislative day, July 21), 2000.--Ordered to be printed
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PHIL GRAMM, Texas, Chairman
RICHARD C. SHELBY, Alabama PAUL S. SARBANES, Maryland
CONNIE MACK, Florida CHRISTOPHER J. DODD, Connecticut
ROBERT F. BENNETT, Utah JOHN F. KERRY, Massachusetts
ROD GRAMS, Minnesota RICHARD H. BRYAN, Nevada
WAYNE ALLARD, Colorado TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming JACK REED, Rhode Island
CHUCK HAGEL, Nebraska CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania EVAN BAYH, Indiana
JIM BUNNING, Kentucky JOHN EDWARDS, North Carolina
MIKE CRAPO, Idaho

Wayne A. Abernathy, Staff Director
Steven B. Harris, Democratic Staff Director and Chief Counsel
John E. Silvia, Chief Economist
Robert S. Stein, Subcommittee Staff Director
Martin J. Gruenberg, Democratic Senior Counsel
George E. Whittle, Editor

(ii)
C O N T E N T S

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Page
Introduction..................................................... 1
History of the Legislation....................................... 1
Purpose and Summary of Need for Legislation...................... 2
Description of Legislation....................................... 4
Certification................................................ 4
Decertification.............................................. 5
Payments..................................................... 6
Previously Dollarized Countries.............................. 8
Treasury Department Concerns................................. 8
Answers to Frequently-Asked Questions........................ 9
Section-by-Section Analysis of S. 2101........................... 11
Section 1. Short Title....................................... 11
Section 2. Findings and Statement of Policy.................. 11
Section 3. Certification..................................... 11
Section 4. Payments.......................................... 11
Section 5. Previously Dollarized Countries................... 12
Section 6. Decertification and Payment Cancellation.......... 12
Section 7. Regulations....................................... 12
Section 8. Expenses.......................................... 12
Changes in Existing Law (Cordon Rule)............................ 12
Regulatory Impact Statement...................................... 13
Cost of the Legislation.......................................... 13
Additional Views of Senator Sarbanes............................. 18

Calendar No. 705
106th Congress Report
SENATE
2d Session 106-354

======================================================================

INTERNATIONAL MONETARY STABILITY ACT OF 2000

_______

July 24 (legislative day, July 21), 2000.--Ordered to be printed

_______

Mr. Gramm, from the Committee on Banking, Housing, and Urban Affairs,
submitted the following

R E P O R T

together with

ADDITIONAL VIEWS

[To accompany S. 2101]

The Committee on Banking, Housing, and Urban Affairs, to
which was referred the bill (S. 2101) to promote international
monetary stability and to share seigniorage with officially
dollarized countries, having considered the same, reports
favorably thereon with an amendment in the nature of a
substitute and recommends that the bill (as amended) do pass.

INTRODUCTION

On July 13, 2000, the Senate Committee on Banking, Housing,
and Urban Affairs (the Banking Committee) met in legislative
session and marked up and ordered to be reported S. 2101, the
International Monetary Stability Act of 2000, a bill to promote
international monetary stability and to share seigniorage with
officially dollarized countries, with a recommendation that the
bill do pass, with an amendment in the nature of a substitute.
The Committee reported the bill favorably by voice vote.

HISTORY OF THE LEGISLATION

The International Monetary Stability Act of 2000, S. 2101,
was introduced on February 24, 2000, by Senators Connie Mack
and Robert F. Bennett. The legislation introduced was similar
to S. 1879, the International Monetary Stability Act of 1999,
which was introduced on November 8, 1999 by Senator Mack. The
purpose of S. 2101 is to make it easier for other countries to
adopt the U.S. dollar as their official currency.
The Subcommittee on Economic Policy and the Subcommittee on
International Trade and Finance conducted two joint hearings on
the issue of other countries adopting the U.S. dollar as their
official currency. On April 22, 1999, the two subcommittees met
in open session and heard and received written testimony from
the Honorable Alan Greenspan, Chairman, Board of Governors of
the Federal Reserve System; the Honorable Lawrence H. Summers,
Deputy Secretary, Department of the Treasury; Dr. Wayne Angell,
Chief Economist, Bear, Stearns & Co., Inc.; Dr. Judy Shelton,
Member of the Board, Empower America; Dr. Guillermo Calvo,
Director, Center for International Economics, University of
Maryland; Dr. Catherine Mann, Senior Fellow, Institute for
International Economics; and Dr. C. Fred Bergsten, Director,
Institute for International Economics. On July 15, 1999, the
two subcommittees met in open session and heard and received
written testimony from the Honorable Manuel Hinds, Former
Minister of Finance, Republic of El Salvador; Dr. Michael
Gavin, Director of Economic Research for Latin America, Warburg
Dillon Read, LLC; David Malpass, Director for International
Economics, Bear, Stearns & Co., Inc.; and Dr. Liliana Rojas-
Suarez, Managing Director and Chief Economist for Latin
America, Deutsche Bank Securities, Inc.
The Subcommittee on Economic Policy conducted a legislative
hearing to consider S.1879 on February 8, 2000. The
Subcommittee received testimony from the Honorable Edwin M.
Truman, Assistant Secretary for International Affairs,
Department of the Treasury.

PURPOSE AND SUMMARY OF NEED FOR LEGISLATION

The purpose of the bill reported by the Banking Committee
is to make it easier for other countries to adopt the U.S.
dollar as their official currency.
Many emerging market countries have had a recurring problem
with bad monetary policy. The effects of a history of bad
monetary policy include high interest rates and a lack of long
term lending in the local currency. High interest rates and a
lack of long term lending stifle investment and job creation,
make it difficult to purchase homes and other durable goods,
and weaken local financial systems.¹ These problems,
in combination with the traumatic events in emerging market
countries in recent years and the creation of the euro, have
generated interest in dollarization, particularly in Latin
America.²
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\1\ Testimony of Manuel Hinds, Former Minister of Finance, Republic
of El Salvador, Joint Hearing in the Subcommittee on Economic Policy
and the Subcommittee on International Trade and Finance, July 15, 1999
at 27.
\2\ Testimony of Lawrence Summers, Deputy Secretary of the
Treasury, Department of the Treasury, Joint Hearing in the Subcommittee
on Economic Policy and the Subcommittee on International Trade and
Finance, April 22, 1999 at 5.
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Much of Latin America is already dollarized on an
unofficial basis.³ Unofficial dollarization means
that, despite the existence of a national currency, people
often use the U.S. dollar for everyday transactions, bank
deposits, and lending, and governments often issue debt
denominated in dollars.⁴ Official dollarization
means a country eliminates its own paper currency and adopts
the U.S. dollar as legal tender.⁵ (Unless otherwise
explained, references to dollarization in the remainder of the
report refer to official dollarization.)
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\3\ IMF Occasional Paper #171, Monetary Policy in Dollarized
Economies, International Monetary Fund, 1999.
\4\ Testimony of Michael Gavin, supra note 2 at 32-33.
\5\ Testimony of Manuel Hinds, supra note 2 at 26. Staff Report,
Issues Regarding Dollarization, Subcommittee on Economic Policy of the
Senate Committee on Banking, Housing, and Urban Affairs, July 1999 at
2.
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Panama, which has been dollarized since 1904, is the
largest dollarized foreign country. Others include the Marshall
Islands, Micronesia, Palau, Pitcairn Island, East Timor, the
Turks and Caicos Islands, and the British Virgin
Islands.⁶ Ecuador enacted dollarization legislation
earlier this year and, as of mid-July, had completed more than
two-thirds of the process of swapping the local currency for
dollars. El Salvador, Guatemala, and Costa Rica are all
studying the possibility of dollarization.⁷
Argentina has also considered dollarization.⁸
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\6\ Staff Report, Basics of Dollarization, Joint Economic
Committee, January 2000 at 7.
\7\ El Salvador Government Weighs Dollarization--Minister, Reuters,
March 15, 2000; Hernandez, Edin, Guatemala Considers Adopting U.S.
Dollar as Currency, Agence France Presse, February 22, 1999; Costa Rica
Central Bank President Calls for Dollarization Study, Dow Jones
International News Service, July 6, 2000.
\8\ Oppenheimer, Andres, Latin America Considers U.S. Dollar, The
Miami Herald, January 19, 1999.
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The potential benefits for countries that dollarize include
greater economic growth, more fiscal discipline, stability for
exporters and importers, lower inflation expectations, lower
interest rates, deeper financial markets, lengthier loan
maturities, insulation from instability caused by international
capital flows, and greater economic integration with the United
States (including more trade and investment).⁹ The
potential costs include losing the ability to run an
independent monetary policy.¹⁰
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\9\ Testimony of Lawrence Summers, supra note 3 at 6; Testimony of
Alan Greenspan, supra note 3 at 9; Testimony of Wayne Angell, supra
note 3 at 23-24; Testimony of Manuel Hinds, supra note 2 at 28-29;
Testimony of Michael Gavin, supra note 2 at 34.
\10\ Testimony of Lawrence Summers, supra note 3 at 6.
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An additional cost of dollarization for a country that
dollarizes is a loss of seigniorage, which is the profit a
country earns when it issues its own currency.¹¹
Seigniorage (roughly) equals the difference between the face
value of a currency and the cost of printing it. If a country
were to eliminate its own currency and adopt the U.S. dollar it
would no longer earn seigniorage. Meanwhile, because more
people would use the U.S. dollar, the United States would earn
more seigniorage.¹²
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\11\ Testimony of Guillermo Calvo, supra note 3 at 30.
\12\ Staff Report, Citizen's Guide to Dollarization, Subcommittee
on Economic Policy of the Senate Committee on Banking, Housing, and
Urban Affairs, September 1999 at 4.
---------------------------------------------------------------------------
The transfer of seigniorage from a country that dollarizes
to the United States makes dollarization politically difficult
for countries considering dollarization. First, the seigniorage
loss could be perceived as a payment of ``tribute'' to the
United States.¹³ Second, seigniorage can be a
significant portion of government revenue. For example,
Argentina earns about $750 million per year in seigniorage,
which equals about 20 percent of the country's education
budget.¹⁴
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\13\ Testimony of Wayne Angell, supra note 3 at 25.
\14\ Testimony of Michael Gavin, supra note 2 at 36.
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The United States can substantially reduce the political
problem of the loss of seigniorage by offering to rebate a
portion of the amounts transferred to the United
States.¹⁵ The bill reported by the Banking Committee
would establish a framework under which the Secretary of the
Treasury (the Secretary) would have the authority to make
rebates of seigniorage to countries that dollarize. If the bill
results in a country dollarizing that would not otherwise have
dollarized, then the rebates would come at no net cost to the
United States.¹⁶ The benefits to the U.S. of
dollarization also include elimination of foreign exchange risk
in business transactions, lower costs of doing business with
dollarized countries, and larger and more stable export
markets.¹⁷
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\15\ Testimony of Wayne Angell, supra note 3 at 25; Testimony of
Michael Gavin, supra note 2 at 36.
\16\ Testimony of Edwin Truman, Assistant Secretary for
International Affairs, Department of the Treasury, Hearing in the
Subcommittee on Economic Policy, February 8, 2000.
\17\ Testimony of Lawrence Summers, supra note 3 at 6; Testimony of
Guillermo Calvo, supra note 3 at 31.
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DESCRIPTION OF LEGISLATION

The bill reported by the Banking Committee would create a
standard offer of seigniorage rebates from the United States to
countries that dollarize. The Secretary would have the
authority to certify a country as officially dollarized. If a
country is continuously certified for ten years it would then
start to receive rebates of seigniorage. The payments would be
financed by revenue the Treasury Department receives through
the Federal Reserve System as a result of dollarization. The
payments are designed to rebate 85 percent of the extra
seigniorage earnings of the United States due to official
dollarization in countries certified by the Secretary. The
Secretary would have the authority to reduce payments to a
country or decertify a country, thereby ceasing U.S. payments
altogether. The billmakes it explicit that the Federal Reserve
is not obligated to be a lender of last resort to dollarized countries,
would not supervise their financial institutions, and would not
consider their economic conditions when setting monetary policy.

Certification

The bill reported by the Banking Committee would give the
Secretary broad discretion in deciding whether to certify a
country as officially dollarized. The Secretary's latitude
should encourage countries interested in official dollarization
to cooperate fully with the United States. Certification is not
an endorsement by the United States of the policies of a
dollarized country. Certification simply represents a judgment
by the Secretary that rebating seigniorage to a country is in
the interest of the United States.
Before certifying a country as officially dollarized the
Secretary would have to consider whether the country was in
fact officially dollarized, had opened its banking system to
foreign competition or met international banking standards, had
engaged in advance consultations with the Secretary regarding
dollarization, and had cooperated with the United States
regarding money laundering and counterfeiting. As evidence of
whether a country was in fact officially dollarized the
Secretary would have to consider whether a country has ceased
issuing a domestic paper currency, destroyed the materials used
to print that currency, repurchased and extinguished the
currency, ended the currency's legal tender status in favor of
legal tender status for the U.S. dollar, ceased making
government payments in the domestic currency, and substantially
re-denominated prices, assets, and liabilities into U.S.
dollars. The Secretary could consider any additional factors
the Secretary deems relevant.
The Secretary may refrain from certifying a country even if
it meets every factor listed in the legislation. On the other
hand, the absence of any one or more of these factors does not
preclude the Secretary from certifying a country as officially
dollarized. Upon certification, the Secretary must issue a
written statement explaining why that country has been
certified.
Most of the factors the Secretary must consider have to do
with whether a country is in fact officially dollarized.
Destruction of the plates and dies used to print the domestic
currency is a consideration because it indicates the level of
commitment to dollarization. It would be difficult to re-
introduce the domestic currency absent ready access to the
plates and dies used to print such currency. The Secretary must
consider a country's openness to foreign banking competition or
compliance with international banking standards because an
unstable banking system may limit the successfulness of
dollarization. Panama, by far the largest country to be
officially dollarized, allows foreign competition in its
banking sector and that has been a source of stability.\18\ The
Secretary must consider cooperation with the United States on
money laundering and counterfeiting because of the concern that
a dollarized country could attract these activities.
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\18\ Moreno-Villalaz, Juan Luis, Panama: No Central Bank, No
Capital Controls, No Problem, The Wall Street Journal, September 10,
1999 at A19.
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The bill implicitly allows for the dollarizing country to
continue issuing coins, as Panama does. That is why the first
in the list of considerations, whether a country has ceased
issuing a local paper currency, does not mention ceasing to
issue coins. U.S. territories, such as Guam, are not eligible
for payments because they already benefit from the seigniorage
generated from the dollar. Territories are part of the U.S.
federal system of spending and taxation, so through federal
spending they already get back seigniorage that their citizens
generate.
The bill makes it explicit that countries that are not
certified by the Secretary as officially dollarized, and
therefore unable to receive rebates of seigniorage, are free to
dollarize unilaterally. In addition, nothing in the bill
prevents the United States from establishing a separate
agreement to rebate seigniorage to a particular country or
group of countries, although such agreement would require a
separate action by Congress to be legally binding.

Decertification

The bill describes the conditions under which a country can
be decertified. A declaration of war by the United States
against a country automatically causes decertification. There
is no reason for the United States to pay an enemy. A country
can also be decertified if the Secretary determines that it is
no longer dollarized. The most obvious reason this would happen
is that another currency displaces the dollar as the
predominant paper money. A country might decide to issue a
national currency again, or its residents might prefer to use
the euro or another currency rather than the dollar. If the
dollar loses its predominance as the paper money of a country,
the country is no longer generating the level of seigniorage
presumed by certification, so it loses its right to a rebate of
seigniorage. As with certification, the bill requires the
Secretary to issue a written statement explaining the reasons
for decertification, so as to provide accountability.

Payments

The bill establishes two formulae that would generally
govern the amount of payments made to dollarized countries. The
two formulae are designed to rebate 85 percent of the
seigniorage a country transfers to the United States by
officially dollarizing.
An example would be useful in explaining how the formulae
were derived. Country X uses the peso as its currency. One peso
is worth one U.S. dollar, and the country has 10 billion pesos
in circulation. If its central bank has $10 billion worth of
securities backing up the value of the pesos and the interest
rate on these securities is 5 percent, then the country earns
$500 million per year in seigniorage: 5 percent of $10 billion.
If Country X were to dollarize it would have to use the $10
billion in securities on reserve at the central bank to buy
U.S. dollars from the Federal Reserve. Once dollarized, Country
X would no longer have the securities and would no longer earn
seigniorage. The Federal Reserve would have an extra $10
billion in securities and would therefore earn an extra $500
million per year. The formulae are designed to rebate 85
percent of the $500 million. A country would not receive
payments based on the extent to which it was already
unofficially dollarized.
The Secretary would make a lump sum payment to a country
after it has been continuously certified for ten years. The
lump sum payment will be an 85 percent rebate for ten years
worth of seigniorage, plus interest. After that, the Secretary
would make much smaller payments every quarter year. The ten
year delay acts as a safeguard to ensure that countries will
not get any payments unless they are sufficiently committed to
dollarization. Countries certified for less than ten years get
nothing.
It is easier to understand the payment formula for the
quarterly payments, so this will be explained first. The
Secretary starts by taking the amount of U.S. dollars purchased
by the country for the purpose of official dollarization. In
Country X's case, this would be $10 billion. The Secretary
would then multiply that amount by the prevailing short term
interest rate on 90-day Treasury bills. Consistent with the
above example, let's use 5 percent. After multiplying these
together we get the amount of seigniorage Country X would have
earned in the absence of dollarization: $500 million. The
Secretary then multiplies this amount by 85 percent, as the
rebate is only intended to be an 85 percent rebate. This amount
($425 million in the case of Country X) is then multiplied by
25 percent, because the payment is for a quarter year. At that
point, Country X's payment would be $106,250,000 every three
months. However, if Country X had maintained its own currency
it is likely that its seigniorage earnings would have risen
over time, along with increases in the amount of pesos in
circulation. Hence, the formula adds an inflation adjustment,
so that the amount of the payment to a country increases as the
U.S. price level increases. For example, if the U.S. price
level rises 50 percent in the twenty years after certification
of Country X, then Country X will then get a quarterly payment
of $159,375,000--50 percent more than $106,250,000.
The amount of the one-time lump sum payment depends on
similar principles. The Secretary would start with the amount
of U.S. dollars purchased by a country for the purpose of
official dollarization. This amount would be multiplied by the
average interest rate on 90-day Treasury bills during the full
ten year waiting period. The amount would then be multiplied by
850 percent: 85 percent for ten years. The inflation adjustment
would depend on the average price level during the full ten
year period, compared to the price level at the time of
certification. In addition, an interest component is added to
compensate the country for having to wait ten years for the
payment. The interest component is calculated by taking the
average interest rate on 10-year Treasury bonds during the ten
year waiting period and taking it to the power of 4.875. So,
for example, if the 10-year Treasury bond has had an average
yield of 6 percent, the lump sum payment would be multiplied by
1.06 to the power of 4.875. Why 4.875? An exponential factor of
4.875 is used because the country must wait an additional 9.75
years for the lump sum payment (the country would have to wait
a quarter year anyhow even if quarterly payments started from
the time of certification). Therefore, interest accumulates for
4.875 years on the median payment: half of 9.75 years.
If a country attempts to purchase more U.S. dollars than
are needed in order to officially dollarize, so that it can
receive artificially large payments from the United States, the
Secretary may use the dollar value of the local currency in
circulation prior to certification instead of the amount of
U.S. dollars purchased by a country. The price index used for
calculating payments is the same index used to calculate
payments on inflation indexed U.S. Treasury securities. If this
price index is discontinued the Secretary may, after consulting
with the Bureau of Labor Statistics, substitute an alternative
index. Similarly, if the 90-day or 10-year Treasury security is
discontinued, the Secretary may substitute an appropriate
alternative interest rate.
Payments would not be subject to the annual appropriations
process, and the Secretary would make payments out of revenue
received by the Treasury Department from the Federal Reserve.
This source should easily provide enough revenue to make
payments. In Fiscal Year 1999, the Federal Reserve paid the
Treasury $25.9 billion; revenue from this source in Fiscal Year
2000 is expected to be $32.5 billion.\19\ Official
dollarization abroad should increase these amounts as more
people use the U.S. dollar.
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\19\ Historical Tables, Budget of the United States Government,
Fiscal Year 2001 at 41.
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Despite the specific formulae, the Secretary has the
authority to reduce payments to a country if the United States
is losing revenue on the payments, because the payments over-
represent the amount of extra seigniorage the United States is
earning due to official dollarization in that particular
country. For example, if a country were to be certified by the
Secretary and subsequently have another currency become heavily
used (such as the euro) the United States could be overpaying a
country. In addition, the Secretary has the authority to cancel
payments to a country by decertification, explained above.

Previously dollarized countries

Eight countries were already dollarized before the bill was
reported by the Banking Committee: Panama; Ecuador; three
former U.S. trust territories that are now independent (the
Marshall Islands, Micronesia, and Palau); and two British
colonies (the Turks and Caicos Islands and the British Virgin
Islands). Pitcairn Island was also previously dollarized, but
because of its extremely small population (about 40 people) the
bill omits it.
The bill could have simply omitted rebating seigniorage to
previously dollarized countries. However, they could then have
become certified by introducing a temporary national currency
expressly for the purpose of circumventing the bill and gaining
certification. Paying seigniorage to previously dollarized
countries removes the incentive for such strategies and
recognizes that it is fair to put previously dollarized
countries on a similar basis to countries that dollarize after
the bill is enacted.
The bill therefore allows rebates to countries that are
previously dollarized. However, rebates to these countries must
wait not only the initial ten years, but as long as it takes
for enough new countries to dollarize so that 10 percent of the
payments the United States makes to the newly-dollarized
countries is equal to or larger than the payments that would be
made to the previously dollarized countries. In theory, when a
new country dollarizes it will eventually get a rebate of 85
percent of its lost seigniorage. The remaining 15 percent helps
defray the costs to the Federal Reserve of managing a larger
money supply, finances rebates to previously-dollarized
countries, and leaves a small profit for the United States.
Therefore a 10 percent requirement helps ensure that the costs
of making rebates to countries that were previously dollarized
come out of net gains for the United States from countries that
are newly dollarized.
Previously dollarized countries do not have to purchase
U.S. dollars from the Federal Reserve in order to dollarize.
Hence the payment formula for previously dollarized countries
uses 4 percent of a country's nominal U.S. dollar gross
domestic product in 1997 as a surrogate for the amount of U.S.
dollars in circulation. The figure of 4 percent corresponds to
the low end of the international average of currency in
circulation as a percentage of GDP. More complicated formulae
would havebeen possible, but in every formula there is some
element of arbitrariness, so a simple and uniform formula seems least
open to dispute.²⁰
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\20\ Staff Report, Encouraging Official Dollarization in Emerging
Markets, Joint Economic Committee, April 1999 at 18-19.
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Treasury Department concerns

Treasury Secretary Lawrence Summers sent a letter to
Senator Mack, dated July 13, 2000, in which the Secretary
expressed his reservations about the bill. The primary concern
is that the dollarization issue is not yet sufficiently
``ripe'' to establish a framework under which the United States
would offer to rebate seigniorage to dollarized countries.
However, in 1992, as chief economist for the World Bank,
Lawrence Summers, said, ``In the long run, finding ways of
bribing people to dollarize, or at least give back the extra
currency that is earned when dollarization takes place, ought
to be an international priority. For the world as a whole, the
advantage of dollarization seems clear to me.'' ²¹
Now Ecuador is in the process of dollarization, and Argentina,
El Salvador, Guatemala, and Costa Rica have all expressed an
interest in dollarization. Countries are most likely to be able
to dollarize successfully during periods of relative stability
rather than during crises. Relative to 1995 and 1997-98, the
current period is relatively stable for emerging market
countries.
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\21\ World Bank Discussion Paper #207, Proceedings of a Conference
on Currency Substitution and Currency Boards, The World Bank, January
1992 at 32.
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Answers to frequently-asked questions

Would the bill require countries to dollarize?
No. The bill would not impose dollarization on any country.
The decision to dollarize would remain each country's to make
for itself.
What does the United States gain from the bill?
Bad monetary policy and devaluations abroad have been a
source of volatility and slow growth in our export markets. At
present the United States exports more to the 31 million people
in Canada than to the 500 million people in all of Latin
America.²² Dollarization should result in faster
economic growth and more purchasing power in Latin America,
thereby creating larger markets for U.S. goods. In addition,
dollarization should reduce currency risk, thereby helping U.S.
investors. And by helping foreign governments strengthen their
economies it would reduce the need to use U.S. taxpayers' money
to bail out countries due to sudden currency-related economic
problems.
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\22\ Bureau of Economic Analysis, Department of Commerce.
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Why is this legislation important now?
Ecuador is in the process of dollarization right now. El
Salvador, Guatemala, and Costa Rica are all considering
dollarization. Argentina remains a candidate for dollarization.
The bill would encourage countries to consider dollarization
during periods of relative stability, when it is most likely to
be successful, rather than during periods of economic crisis.
Is official dollarization right for all emerging market
countries?
This issue is not addressed by the bill. The bill merely
removes the obstacle of the seigniorage transfer to the United
States. Countries would still refrain from official
dollarization if they did not think it was in their best
interests. In addition, if a country thinks official
dollarization is in its best interests but the Secretary
disagrees, the Secretary could refuse to rebate seigniorage.
Would dollarization eliminate the ability of countries to
run an independent monetary policy?
Countries that dollarize would adopt U.S. monetary policy
as their own. Independent monetary policies in emerging market
countries have often aggravated rather than eased economic
problems. Historically, the discretionary use of monetary
policy has been a major source of instability in many
countries.
Would other countries have a say in U.S. monetary policy?
No. The bill would not alter the structure or policy
mandate of the Federal Reserve.
Would officially dollarized countries pressure the Federal
Reserve to conduct monetary policy in their
interests regardless of the U.S. economic
situation?
According to Chairman Alan Greenspan, the Federal Reserve
is already under foreign pressure, but this pressure does not
lead the Federal Reserve to do things that benefit foreign
countries to the detriment of the United States. Chairman
Greenspan testified that official dollarization would not make
the Federal Reserve more readily take such actions. He also
noted that all of the monetary policy stances the Federal
Reserve takes within its ordinary range of looseness to
tightness would be improvements compared to what many countries
have now.²³
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\23\ Testimony of Alan Greenspan, supra note 3 at 14-15.
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Official dollarization would leave countries without a
central bank to serve as a lender of last resort
during a banking crisis. Would this pressure the
United States to adopt this role for dollarized
countries?
First, the bill explicitly states that the United States is
not obligated to serve as a lender of last resort to dollarized
countries. Second, before certifying a country as officially
dollarized, the billrequires the Secretary to consider whether
a country has opened its banking system to foreign competition or met
international banking standards. Either of these would greatly diminish
the risk of a bank crisis. The presence of international banks has made
Panama's banking system very stable. Third, a country could establish a
lender of last resort facility outside its central bank. For example,
Argentina has a $7 billion emergency line of credit with international
banks.²⁴ The Treasury Secretary may hinge certification on
establishment of this kind of line of credit.
---------------------------------------------------------------------------
\24\ Hausmann, Ricardo, Michael Gavin, Carmen Pages-Serra and
Ernesto Stein, Financial Turmoil and the Choice of Exchange Rate
Regime, Inter-American Development Bank (Paper presented at IADB
Conference on New Initiatives to Tackle International Financial
Turmoil, Paris), March 14, 1999.
---------------------------------------------------------------------------
How would official dollarization be implemented?
If a country decides to dollarize officially, its central
bank would take the assets that back its currency and convert
them into U.S. Treasury securities. It could do this in the
financial markets. The central bank would then use the Treasury
securities literally to buy dollar notes from the Federal
Reserve. The country would then use the dollars to repurchase
and retire the local currency. In the meantime, the country
must cease issuing the local currency and cease accepting local
currency for payments (except in exchange for dollars). Dollars
would be used for taxes, wages, debts, loans, and bank
deposits, just like in the United States.
Why not go country-by-country and have Congress examine
each country's request for a rebate separately?
First, bills involving a particular country are likely to
become magnets for all issues dealing with that country.
Second, jealousy could result if one country gets a higher
percentage rebate than another. (The bill reported by the
Banking Committee offers a standardized 85 percent rebate.) And
third, it would be destabilizing for a country's economy and
financial markets for it to say it will dollarize if the U.S.
offers a rebate and then have to wait while a bill winds its
way through Congress, with all the ups and downs of the
legislative process.

SECTION-BY-SECTION ANALYSIS

Section 1. Short title

Section 1 provides that the bill may be cited as the
``International Monetary Stability Act of 2000.''

Section 2. Findings and statement of policy

Section 2 sets out the findings and statement of policy of
the Act. The ``findings'' of the Act state the importance of
monetary stability to emerging market countries, the
deficiencies of certain methods of achieving monetary
stability, the benefits of official dollarization, and the
ability of the United States to remove an obstacle to official
dollarization by offering to rebate seigniorage to countries
that officially dollarize. The ``statement of policy'' provides
that the United States is not obligated to act as a lender of
last resort to officially dollarized countries, consider their
economic or financial conditions in setting monetary policy, or
supervise their financial institutions. It also states that
countries are free to officially dollarize unilaterally if they
do not want rebates of currency profit from the United States.

Section 3. Certification

Section 3 provides the Secretary with authority to certify
a country as officially dollarized upon the issuance of a
written statement explaining why that country has been
certified. The Secretary may certify a country as officially
dollarized after considering whether it has in fact officially
dollarized, opened its banking system to foreign competition or
complied with internationally accepted banking principles,
cooperated with the United States on money-laundering and
counterfeiting issues, and consulted with the Secretary prior
to certification. The Secretary can consider any other factors
he deems relevant. The absence of any one or more of the
factors does not preclude the Secretary from certifying a
country as officially dollarized. The presence of all the
factors does not require the Secretary to certify a country.

Section 4. Payments

Section 4 provides that ten years and three months after
certification the Secretary will commence payments to the
country every three months. The amount of these payments will
depend on the amount of dollars the country purchased from the
Federal Reserve in order to dollarize officially (or the dollar
value of the local currency in circulation prior to
certification, if less than the amount of dollars purchased by
the country from the Federal Reserve), short-term interest
rates in the United States, and changes in the U.S. price
level, using the same inflation-adjustment to the one used to
index payments on inflation-indexed Treasury securities. The
payments are designed to rebate 85 percent of the currency
profits the country would have earned had it not officially
dollarized. In addition, ten years after certification, the
Secretary will make a one-time lump sum payment to the country
approximately equal to the amount of the quarterly payments
that would have been paid during the first ten years had
quarterly payments commenced upon certification, plus interest.
The Secretary is given the authority to reduce payments to a
country if he believes such payments would result in a net
revenue loss to the United States. The payments are not subject
to the annual appropriations process and are provided out of
revenue paid the Treasury Department by the Federal Reserve.

Section 5. Previously dollarized countries

Section 5 provides the circumstances under which countries
that were officially dollarized prior to this Act can receive
payments. Panama, Ecuador, East Timor, the Marshall Islands,
Micronesia, Palau, Turks and Caicos, and the British Virgin
Islands may not receive payments from the Secretary until 10
percent of the payments to other countries under this Act
equals or exceeds the payments that would be made to these
countries. Payments to previously-dollarized countries will
otherwise follow the same rules as payments to other countries,
expect that instead of depending on the amount of dollars
purchased from the Federal Reserve, payments will depend on
nominal dollar gross domestic product in 1997.

Section 6. Decertification and payment cancellation

Section 6 provides that the Secretary may cease payments to
a country if the U.S. declares war on it or if the Secretary
issues a written public statement that the country is no longer
officially dollarized. In making a determination of whether a
country is no longer officially dollarized, the Secretary shall
consider the same factors listed is Section 3 in determining
whether to certify a country as officially dollarized.

Section 7. Regulations

Section 7 provides that the Secretary and the Federal
Reserve System may issue regulations to carry out this Act.

Section 8. Expenses

Section 8 authorizes appropriations to the Secretary of
such sums as necessary for expenses and payments under this
Act.

CHANGES IN EXISTING LAW (CORDON RULE)

In the opinion of the Banking Committee, it is necessary to
dispense with the requirements of paragraph 12 of the rule XXVI
of the Standing Rules of the Senate in order to expedite the
business of the Senate.

REGULATORY IMPACT STATEMENT

In compliance with paragraph 11(b) of the rule XXVI of the
Standing Rules of the Senate, the Banking Committee makes the
following statement regarding the regulatory impact of the
bill.
The Committee has determined that this legislation will not
result in a significant net increase in the regulatory burden
that the Federal Government imposes. S. 2101 explicitly states
that the supervision of financial institutions in dollarized
countries remains the responsibility of those countries and not
the Federal Reserve.

COST OF THE LEGISLATION

U.S. Congress,
Congressional Budget Office,
Washington, DC, July 21, 2000.
Hon. Phil Gramm,
Chairman, Committee on Banking, Housing, and Urban Affairs, U.S.
Senate, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for S. 2101, the
International Monetary Stability Act of 2000.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is G. Thomas
Woodward.
Sincerely,
Steven Lieberman
(For Dan L. Crippen, Director).
Enclosure.

congressional budget office cost estimate

S. 2101--International Monetary Stability Act of 2000

Summary: S. 2101 would permit the Department of the
Treasury to make payments to countries that officially adopt
the U.S. dollar as their currency and maintain it as legal
tender (known as dollarization) for at least 10 years. The bill
would establish conditions for the Treasury to certify
countries as eligible to receive such payments. When a
specified amount of dollarization occurs, the bill also would
permit payments to be made to countries that dollarized prior
to the bill's passage. No payments would be made to any of the
eligible countries until at least 10 years after certification
by the Treasury.
CBO estimates that enacting S. 2101 would increase
governmental receipts by $90 million over the 2001-2005 period
and by about $1 billion over the 2001-2010 period. Because
countries could not receive payments until after 2010, CBO
estimates that enacting the bill would only have a negligible
effect on direct spending over the 2001-2010 period. In 2013,
CBO estimates that the bill would require the Secretary of the
Treasury to pay about $980 million to countries that have been
continuously dollarized under the bill's provisions for 10
years, followed by additional payments each quarter. CBO
estimates that implementing the bill's provisions would have no
significant effect on spending subject to appropriation.
Because the bill would affect governmental receipts (revenues)
and direct spending, pay-as-you-go procedures would apply.
The bill contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would not affect the budgets of state, local, or tribal
governments.
Description of the bill's major provisions: The bill would
offer countries that adopt the U.S. dollar as their official
currency a share of the income that the United States would
earn from issuing the additional dollars needed to satisfy
their total currency needs. The United States, like all
countries, earns seigniorage--that is, a profit--on the
currency it produces and places into circulation, currently
about $25 billion a year. To the extent that the dollar
displaces other currencies around the world, the United States
would increase these seigniorage earnings while other countries
lose seigniorage.
Under S. 2101, a country would receive payments if it
adopts the U.S. dollar as its sole legal tender and is
certified by the U.S. Treasury as meeting other requirements
specified in the bill, and maintains the dollar as its currency
for at least 10 years. To dollarize, the country would use
eligible liquid reserves held by its central bank to purchase
dollars from the Federal Reserve. Ten years after
certification, the dollarizing country would become eligible
for quarterly payments from the Treasury that are equal to 85
percent of the 90-day Treasury bill interest rate times the
value of dollars acquired by the country up to the dollar value
of the local currency in circulation at the time of conversion,
increased by the change in the U.S. Consumer Price Index for
All Urban Consumers (CPI-U), from the date of dollarization.
In addition, 10 years after certification, the dollarizing
country would receive a lump-sum payment from the Treasury that
approximates the value of the payments it would have received
had the quarterly payments commenced immediately upon
certification and the interest that would have accrued using
the rate on the 10-year Treasury bond. After the lump-sum
payment, countries would receive the additional quarterly
payments as specified above. Countries that dollarized prior to
passage of the bill become eligible for payments (85 percent of
the interest earnings on 4 percent of their GDP), if their
prospective payments would be less than 10 percent of the
payment to newly dollarized countries.
Estimated cost to the Federal Government: The estimated
budgetary impact of S. 2101 is shown in the following table.
For the purposes of this estimate, CBO assumes that S. 2101
will be enacted by the end of fiscal year 2000. We assume that
the Treasury would begin certifying dollarized countries in
fiscal year 2003.

Estimated revenues................................................. -4 (\2\) 15 29 51
----------------------------------------------------------------------------------------------------------------
\1\ S. 2101 would also increase direct spending. Over fiscal years 2001-2005, CBO estimates such amounts would
not be significant. Beginning in 2013, CBO estimates such amounts would be substantial, with the first payment
totaling $980 million.
\2\ Less than $500,000.

Basis of estimate
The budgetary effect of S. 2101 cannot be estimated with a
great degree of confidence because of the unavailability or
unreliability of certain data necessary for the analysis.
Existing estimates of dollar use abroad vary in quality.
Moreover, it is difficult to predict the demand for currency
and deposits that would exist in a country if the dollar were
legal tender. Most critically, an assessment of the likelihood
that countries will dollarize either with or without enactment
of the bill is necessarily subjective.
CBO identified 10 countries that might have a significant
probability of dollarizing their economies. Ecuador is already
in the process of officially dollarizing in the absence of the
legislation, and is classified in the bill with the other
already-dollarized countries: East Timor, Marshall Islands,
Micronesia, Palau, Panama, Turks and Caicos Islands, and the
British Virgin Islands.
To calculate the revenue impact of the bill over the next
10 years, CBO assumes that currency and bank deposits will
remain at their current ratios to GDP (gross domestic product)
in each of the countries we identified as potentially
dollarizing. The amount of currency needed in each dollarized
country includes not only currency in circulation (less dollars
already present in the country), but cash needed for bank
reserves. CBO assumes that each country's banking system
requires cash reserves of 25 percent of its M1 deposits (demand
deposits). The figure of 25 percent approximates the combined
central bank and commercial bank dollar reserves in Argentina,
which requires that all banks maintain reserves in U.S.
dollars.
To estimate the amount of local currency in circulation in
each year in each potentially dollarizing country, CBO
increased the most recent estimates available from the
International Monetary Fund (IMF) by the nominal growth (or
predicted growth) of each country. For the value of U.S.
dollars currently circulating in each country, CBO made
estimates based on data from the Federal Reserve.
For this cost estimate, CBO assumes that the probability
that each country would officially dollarize before the
enactment of S. 2101 is between 6.6 percent and 33.3 percent.
CBO assumes that enacting S. 2101 would increase all the
countries' probabilities of dollarizing by about 25 percent.
This cost estimate is probabilistic; the costs are computed by
multiplying the countries' currency demand under dollarization
by their respective probabilities of dollarizing, which are
phased in slowly over 10 years, from 1 percent of the
probability of dollarizing in 2001 to 100 percent of the
probability in 2010.
Finally, CBO assumes that currency demands will be limited
to bills. We assume that countries would continue to provide
their own coins under the legislation.
Revenues.--CBO expects that S. 2101 would likely increase
the number of countries that officially dollarize. The
additional currency required by such countries would generate
additional interest income for the Federal Reserve beginning in
2002. This interest income is based on the current Federal
Reserve patterns of portfolio holdings. The additional currency
demand also would increase currency production and processing
costs for the Federal Reserve. CBO estimates this cost would be
similar to the current costs of issuing and processing U.S.
currency. We assume that for the countries that dollarize, the
distribution of denominations, longevity of individual bills,
and frequency with which the Federal Reserve processes bills
would be similar to those in the United States. In addition,
CBO assumes that the Federal Reserve would establish additional
facilities to distribute and return currency under its Extended
Custodial Inventory Program, and incur travel and other costs
associated with monitoring the additional currency use. As a
result, CBO's estimate of the additional interest earnings each
year from enacting S. 2101 is the sum of the increase in
interest earnings from the additional currency in circulation
less the increase in costs to the Federal Reserve from the
additional currency.
Because the Treasury would need time to issue regulations
and establish certification procedures, CBO expects that
countries could not be certified as officially dollarized until
2003. As a result, CBO expects that countries that might have
otherwise dollarized in 2001 without S. 2101 would wait until
the specifics of the Treasury's certification requirements are
reasonably certain. Hence, CBO estimates the bill would reduce
dollarization and dollar use in 2001 from the levels assumed in
the baseline. Beginning in 2002, CBO estimates the bill would
increase dollarization and the revenues from dollarization.
Because of the initial slowing of dollarization described
above, CBO estimates that the United States would forgo $4
million in federal revenues in 2001. Since CBO expects
gradually increasing probabilities of dollarization, the
estimates of increased revenues grow over the 2002-2010 period
to reflect the phase-in of those probabilities. We estimate
increases in revenues of $15 million in 2003, growing to about
$50 million by 2005, and to more than $300 million by 2010.
Direct Spending.--Payments made to countries--representing
their share of the seigniorage from dollarization--would be
recorded in the budget as outlays. CBO estimates that no
payments would be made to the dollarizing countries until 2013.
We estimate that payments in that year would be $980 million
and would grow thereafter. The bill authorizes the payments to
be made from receipts deposited by the Federal Reserve with the
Treasury.
In addition, S. 2101 would authorize the Treasury to pay
its expenses to implement the bill's provisions without further
appropriation. CBO estimates that such costs would increase
direct spending by less than $500,000 a year.
Pay-as-you-go considerations: The Balanced Budget and
Emergency Deficit Control Act sets up pay-as-you-go procedures
for legislation affecting direct spending or receipts. The net
changes in governmental receipts that are subject to pay-as-
you-go procedures are shown in the following table. The bill
would not have a significant effect on outlays from direct
spending until after 2010. For the purposes of enforcing pay-
as-you-go procedures, only the effects in the current year, the
budget year, and the succeeding four years are counted.

----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
----------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
----------------------------------------------------------------------------------------------------------------
Changes in receipts................ 0 -4 0 15 29 51 80 118 169 231 311
Changes in outlays................. 0 0 0 0 0 0 0 0 0 0 0
----------------------------------------------------------------------------------------------------------------

Intergovernmental and private-sector impact: The bill
contains no intergovernmental or private-sector mandates as
defined in UMRA and would not affect the budgets of state,
local, or tribal governments.
Previous CBO estimate: On May 23, 2000, CBO transmitted a
cost estimate for S. 2101, the International Monetary Stability
Act of 2000, as introduced. CBO estimated that version of the
bill would increase direct spending by $422 million over the
2001-2005 period and $4,012 million over the 2001-2010 period.
The difference between the estimate for the bill as introduced
and this version is the result of the 10-year delay in payments
of seigniorage to officially dollarized countries that is
incorporated into the bill as ordered reported by the
committee. Hence, the estimate for the introduced bill includes
increased outlays beginning in 2003. In addition, the delay in
payments would reduce the incentive to dollarize under the
bill, so that the estimates of additional revenues from
dollarized countries in this cost estimate are also smaller
under the bill as ordered reported than for the version as
introduced.
Estimate prepared by: Federal costs: Carolyn Lynch and
Thomas Woodward; impact on State, local and tribal governments:
Susan Sieg Tompkins; impact on the private sector: Patrice
Gordon.
Estimate approved by: Peter H. Fontaine, Deputy Assistant
Director for Budget Analysis; G. Thomas Woodward, Assistant
Director for Tax Analysis.

ADDITIONAL VIEWS

The lead sponsor of S. 2101, International Monetary
Stability Act of 2000, Senator Mack, has sought to bring to the
attention of the Congress, the Administration, and the public
the issue of dollarization in a serious and responsible manner.
He believes strongly that dollarization holds significant
promise for countries that choose to dollarize, as well as
potential benefits to the United States.
Dollarization, however, is a complex and in some respects
highly technical issue. The Secretary of the Treasury, Lawrence
Summers, has sent a letter expressing reservations about the
legislation. The letter states:

As the Administration has indicated in the past,
responsible dollarization may be a sensible decision
for a government to make. However, we believe that it
is fundamentally a unilateral sovereign decision.
We believe the United States should remain open to
the possibility of sharing seigniorage revenues, after
full Congressional authorization and consultation, with
countries that dollarize under the right circumstances.
We do not believe, however, that there is a compelling
reason for the United States at this time to establish
a framework to permit us to share seigniorage. Such a
framework would raise a number of complex political,
economic, foreign policy issues, and U.S. budget issues
(such as a likely paygo cost for budget purposes).
These issues and the establishment of a framework for
sharing seigniorage should be more fully debated and
decided.
Consequently, the Administration does not think the
time is ripe for this legislation and cannot support it
at this time.

The full text of the letter is included at the end of these
remarks. I share at least some of the concerns of the Treasury
Department. The Committee's action in reporting this
legislation out on a voice vote recognized the conscientious
and thoughtful manner in which Senator Mack has sought to
address this issue. However, it was done with the understanding
on the part of at least some members of the Committee that
there would be efforts to address the concerns expressed by the
Treasury before further Senate action would be taken on this
legislation.

Paul S. Sarbanes.

Department of the Treasury,
Washington, DC, July 13, 2000.
Hon. Connie Mack,
U.S. Senate,
Washington, DC.
Dear Senator Mack: I understand that the Banking Committee
intends later this week to consider your proposed legislation,
S. 2101, ``The International Monetary Stability Act of 2000,''
which would authorize the Treasury Department to share
seigniorage revenues with countries that adopt the United
States Dollar as their official currency. I would like to take
this opportunity to offer our views on this proposal.
Your thoughtful, forward-looking leadership on this issue
has contributed enormously to the intellectual debate on this
important policy issue, and has expanded public awareness of
both the potential benefits and costs of dollarization and
seigniorage-sharing. We very much appreciate your efforts.
As the Administration has indicated in the past,
responsible dollarization may be a sensible decision for a
government to make. However, we believe that it is
fundamentally a unilateral sovereign decision.
We believe the United States should remain open to the
possibility of sharing seigniorage revenues, after full
Congressional authorization and consultation, with countries
that dollarize under the right circumstances. We do not
believe, however, that there is a compelling reasons for the
United States at this time to establish a framework to permit
us to share seigniorage. Such as framework would raise a number
of complex political, economic, foreign policy issues, and U.S.
budget issues (such as a likely paygo cost for budget purposes.
these issues and the establishment of a framework for sharing
seigniorage should be more fully debated and decided.
Consequently, the Administration does not think the time is
ripe for this legislation and cannot support it at this time.
However, we look forward to continuing our dialogue with you
and others in Congress on this important subject.
Sincerely,
Lawrence H. Summers.