Fraser Institute promotes US-Canadian currency


Richard Moore

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The Case for the Amero: Foreword by Gordon Gibson

The three huge public policy issues for Canada over the next decade are unity, 
productivity, and governance. All of these questions will be importantly 
influenced by the current debate over a common currency with the United States. 
This major work by Herb Grubel is the culmination of a decade of research on the
topic. It sets out the best integrated approach to seizing the advantages and 
avoiding the dangers implicit in this current of monetary history, spurred by 
the success of the euro.

Unlike some other commentators, Mr. Grubel does not see a common currency as 
inevitable but, on balance, very desirable. However, the greatest advantage can 
only be gained by carefully examining and understanding our national interests 
and working with the United States and Mexico (and perhaps others in the longer 
run) to establish the institutions that would give Canada a continuing role in 
the management and profits of a North American currency.

In his advocacy of the "amero" for our continent, Mr. Grubel goes beyond the 
work of other commentators. The justification is found not only in negative 
terms--a way of ending the pattern of significant long-term decline that has 
been the fate of the Canadian dollar over the past generation with the 
subsequent international erosion of Canadian wealth--but for highly positive 

These include the benefits of greater price stability, significantly lower 
long-term interest rates, enhanced trade, greater productivity, and the creation
of more wealth in Canada for personal and social ends. He gives chapter and 
verse on the magnitudes of expected benefits and the mechanisms by which they 
will be realized.

Canadian critics of a common currency take three main positions. The first is 
that the present system has worked well, so why tamper with it? The second is 
that a unique Canadian currency is a necessary bulwark of our sovereignty and 
independence. The third is a claim that the United States would never cooperate 
in any event.

On the first issue, the system has not worked well. Mr. Grubel explains how the 
floating exchange rates of the past generation have acted as a kind of 
non-tariff protection from world market forces, leading to the relatively poor 
productivity performance and stunted technological sector we see today. Indeed 
this system has "contributed to Canada's continued high and excessive reliance 
on the production of natural resources." A monetary union will ensure that we 
move to "high-tech and other profitable and expanding industries at a more 
optimal pace."

Simply put, attempts at long-term insulation from economic reality are 
counterproductive in the end. Of course Canada has many such devices scattered 
throughout our economy--marketing boards, industrial subsidies, high deficits 
and government spending--but flexible exchange rates have allowed us to continue
such mistakes by the simple device of lowering our wages in the world year after
year. This is not an intelligent long-term strategy.

Mr. Grubel discusses Robert Mundell's concept of "Optimum Currency Areas." This 
discussion arises from the seminal question (translated into Canadian terms): 
"If a different dollar is good for Canada, why not for British Columbia as 
well?" The debate ranges over site-specific short-term requirements versus 
long-term portfolio diversification. He concludes that while, at one extreme, a 
single currency for the world might not be a good thing (because of the 
advantages of competing systems), regional currencies, as for North America, 
meet the optimality test.

Mr. Grubel brings some fascinating insights to bear on the issue of a separate 
Canadian currency as related to sovereignty and independence. For those who say 
that the North American economic and political situation--with one giant 
player--is different in kind from the European Union, he notes that the 
Netherlands and Austria experienced poor performance for years until they linked
their currencies to giant Germany 20 years ago, long before the advent of the 
Euro. Their sovereignty did not suffer.

Of course, for 100 years Canada used the same Imperial unit measurement system 
as the United States without any loss of sovereignty, and what is money but 
another unit of measurement? Tellingly, when Canada adopted a new unit of 
physical measurement 25 years ago (the metric system), no one forecast an 
increase in sovereignty for this reason, nor has it materialized.

Most fundamentally however, Mr. Grubel makes the sensible observation that 
"sovereignty is not infinitely valuable." Every nation in the world, even the 
mighty United States, has traded off elements of sovereignty to multi-national 
associations such as the WTO, NAFTA, and the United Nations. Canada has been in 
the forefront of encouraging every such development--a natural policy for a 
middle power.

Importantly, none of these associations have impaired our ability to run our own
foreign policy or foster our own cultural institutions. (The magazine war of 
this year is not a counter-example. We have every right under NAFTA to subsidize
our magazine industry and are apparently going to do so.)

Finally, at the conceptual level, Mr. Grubel notes the advantages of a common 
currency in the area of governance. Advanced societies have found it useful to 
put constraints on politicians in fundamental areas. The Charter of Rights and 
Freedoms is exactly such an example in Canada. A tripartite central bank 
established to protect the integrity of the amero would be less open to 
political meddling than any of the Bank of Canada, Federal Reserve, and Mexican 
central banks independently. Mr. Grubel believes the mandate of such a central 
bank should be restricted purely to the value of money, with local governments 
continuing to look after questions of employment and social issues.

As to the claim that the Americans would never enter a currency marriage that 
gave Canada and Mexico seats on the governing board and their own share of 
"seigniorage" (the profits governments gain from printing money, about $2 
billion annually for Canada), he makes several observations. The first is that 
the Americans will need new allies to maintain their ascendency vis à vis a 
large and growing Europe. A second is that they have seen the advantages to be 
gained through the WTO and NAFTA (notwithstanding the Ross Perots of this 
world), and a common currency fits the same mould. Finally, there are strong 
geographical ties across the border--the United States and Canadian prairies for
example share many of the same economic concerns--that could find useful 
expression on a joint board.

Of course this development will take time. No one would have guessed 20 years 
ago that we would be almost 10 years into NAFTA today. But such are the currents
of history.

For now, Canadian government politicians and bankers pooh-pooh the idea of a 
common currency. This is natural; it is the cautious route. And Ottawa is so 
fixed upon making the world difficult for Quebec sovereigntists that they see a 
common currency as solving a problem they do not want solved. This too will pass
in the fullness of time.

For now, the job of academics and commentators is to explore the grand concepts 
and the nitty-gritty details that need to be worked through. Mr. Grubel's work 
attacks both levels admirably, from the major (optimal currency areas) to the 
minor (what symbol do you put on the coins?). It is a major contribution to one 
of the most important public-policy discussions of the coming generation.

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