Debate Over Common Canadian/US Dollar
There was a time when it was one of those textbook facts drummed into the heads of schoolchildren, never to slip the mind: Canada and the United States share the longest undefended border in the world. For Canadians, it was a point of pride to live next to a superpower without needing razor wire to maintain independence. The border was easily crossed on a summer vacation or for a day's shopping, the border posts approached with a frisson of excitement on the premise that something slightly more exotic awaited on the other side. But the border was also something real: a line in the Canadian imagination, comfort and reassurance that despite sharing a continent with a leviathan, Canada was still a distinct society.
Ten years after the two countries signed a free trade accord that bound their economies even more tightly, that line has become blurred to some and a nuisance to others. In money matters, Canadians find themselves attuned to exchange rates the way they follow the weather. So it was perhaps predictable the day would come when a significant number would muster the temerity to ask the sacrilegious question: does Canada really need its own dollar? But when the moment came last week, and currency union bubbled to the top of the soup of public issues, it was unclear what exactly had happened to bring it so much attention.
Washington certainly wasn't talking about sharing its dollar. Yes, the C. D. Howe Institute released a study arguing the merits of Canada using the same currency as the United States, but economists have been kicking that idea around for a while now (admittedly in the safe anonymity of academic conferences). The CBC did breathlessly report that the federal cabinet would meet this week to discuss Ottawa's relations with the United States - including, possibly, the costs and benefits of currency union. But most people seemed to accept Liberal denials that currency union was on the agenda. "A common currency with the U.S. is not on," Finance Minister Paul Martin said on Maclean's TV last week. It was something, he vowed, "Ottawa will not contemplate."
So perhaps it was the visceral, angry, "I-told-you-so" reaction from the anti-free-trade forces that breathed oxygen into the issue with such force. Once again, predictions of Canada's imminent demise tripped from tongues. "I think it is very, very dangerous," said Maude Barlow, chairwoman of the nationalist Council of Canadians, who found her opinion in high demand last week. In the event of a common currency, she added, "I don't see how it would be possible to maintain our social programs or public health care. Culture would be gone." There were just enough signs of Canadian icons under siege last week to feed alarm. In British Columbia, forestry giant MacMillan Bloedel Ltd. was taken over by Weyerhaeuser Co. of Federal Way, Wash., a development that once would have aroused nationalist angst but seemed to elicit only a sad shrug of acceptance. "There is a significant portion of the population that doesn't see nationality of a company as germane," said Rudi Engel, Bell Canada's senior vice-president of business markets.
A common currency is higher on the Liberals' agenda than they let on, declared NDP MP Lorne Nystrom, who said he smelled a "dirty rat" and added that "unless there are protests in the streets we could end up with one North American currency." To hard-core economic nationalists, this Liberal tomfoolery was more evidence that Canadian values were going under, devoured by Washington's voracious appetite to remake every other economy and culture in its own image.
Down south, the beast was apparently distracted. Those in Washington who noted the Canadian debate at all did so with bemusement. "Do Canadians understand that having a common currency does not mean they get to trade their existing Canadian dollars at par for American ones?" said one administration official with a laugh. But the issue of currency union is not even on Washington's radar, and many Canadians know it. "It is unrealistic to think Americans would go for a monetary union, because that is simply not the American way of doing things," said Royal Bank of Canada chief economist John McCallum.
Yet there was a nagging sense that a Rubicon had been crossed last week. Sure, most of the Canadian economic establishment voiced sound reasons on why a common currency would never work for Canada. And radical change does not have a pew in the church of the supremely cautious Jean Chrétien government. But public discussion about surrendering the dollar underscored how quickly and drastically Canada has already been changed by the forces of trade liberalization and globalization.
Listen to John Roth, chief executive officer of Brampton, Ont.-based Nortel Networks Corp. "I report in U.S. dollars already," says the head of Canada's leading high-tech firm. "Nortel keeps its books in U.S. dollars, we operate in U.S. dollars. So a single currency doesn't make any difference to us." The last decade has seen so much of the once-unthinkable come to pass that only fools would rule out more seismic changes. "If you ask me is anybody seriously considering a single U.S. currency now the answer is no," said one senior adviser to finance minister Martin. "But if 10 years from now we are all using the American dollar, I would not be the least bit surprised."
The convergence of countries towards using a joint currency is not, on its own, an outlandish notion. On Jan. 1 this year, 11 European countries folded up their central banking operations and began the often volatile process of introducing a common currency, called the euro, into their economies. Canadian policy-makers watched the advent of the euro with a spectator's curiosity. The euro's lessons for Canada were limited, they said, because Europe does not have one dominant economy as North America does, and because European Union countries favour far more political integration (such as common social and foreign policies) than Canadians would be prepared to consider. Only Quebec separatists used the moment to argue for Canada to adopt the U.S. dollar, something federalists describe as a ploy to further weaken ties between Quebec and the rest of Canada (if past Parti Québécois policy pronouncements are honoured, an independent Quebec would keep the British monarchy and use the U.S. dollar as tender).
In the Western Hemisphere, however, the issue of "dollarization" - simply substituting the American dollar for local currencies - has caught a bit of a tailwind. The idea has notably strong support in Argentina and a growing constituency among bankers and businesspeople in Mexico. Argentina pegged its peso to the dollar in the early 1990s as a way to corral a then-soaring inflation rate. The move has been so successful and popular that outgoing Argentine President Carlos Menem has gone on to advocate unilaterally switching his country over to the dollar. The idea has drawn strength from the global financial crisis in developing economies, with some Argentines seeing dollarization as protection from the possibility of currency plunges.
Menem has subsequently tempered his enthusiasm, especially after warnings in January from U.S. deputy treasury secretary Lawrence Summers that big Latin American countries need the fine-tuning capacity of their own central banks to stabilize their economies. "Menem has put some water in his fine Argentine wine," says Jean-Paul Hubert, Canada's ambassador in Buenos Aires. "He knows a single currency cannot fix Argentina's economic problems, and now says he prefers to have U.S. approval before moving to dollarization." Menem has since mused about first establishing a currency union with his closest South American trading partners such as Brazil.
But it is that slow slide towards dollarization in the Americas that is cited by Canadian economists Thomas Courchene and Richard Harris in their now-notorious C. D. Howe paper calling for Ottawa to negotiate a common currency with Washington. They fear a world in which the rest of the hemisphere gradually adopts the dollar, leaving Canada isolated outside a huge U.S. dollar zone. Instead, they argue, Canada should instigate negotiations for a new common currency that would ensure Ottawa has at least some input into continental monetary policy - though they have few ideas on how to tease Washington to join such a discussion. "U.S. co-operation in establishing the new currency and in providing central banking services to Canadian financial institutions would be valuable," they write. "But if other countries adopted the U.S. dollar without such concessions, Canada's chances of obtaining them would diminish."
When it was released last week, the study was greeted as heresy by the Canadian economic establishment. Economists lined up to take shots at the report's assertion that a dropping Canadian dollar was hurting foreign investment in Canada or dampening trade. "How do you explain that notwithstanding considerable currency volatility, Canada-U.S. trade has more than doubled in the last decade?" says the Royal's McCallum.
Critics also quarrelled with the report's assertion that without pre-emptive action dollarization is inevitable for Canada. Those countries eager to use the American dollar "had lousy monetary policies, utter lack of confidence in their domestic currencies, high interest rates, and their people got fed up," former Bank of Canada governor John Crow told Maclean's. "They said using the dollar will take policy out of the hands of our domestic people because they can't do it. You can't argue that for Canada." And why would Ottawa choose to surrender even more control over the Canadian economy, said everyone from nationalist Barlow to monetarists like Crow and American guru Milton Friedman. "Currency is a very important symbol of sovereignty," says Friedman. "If a nation is going to stay a nation, it needs as many symbols of sovereignty as it can possibly have." Giving up the loonie, added Crow, "means somebody else runs your money, and the policy they run may not necessarily be the one you want to run."
But national governments everywhere are finding their flexibility squeezed under globalization. Finance Minister Martin has, along with British Chancellor of the Exchequer Gordon Brown, become one of the loudest voices calling for new international financial structures to protect the global system from meltdown. In Ottawa, part of that review has included quietly looking at dollarization and other options for the Canadian currency. Last summer's dead drop in the Canadian dollar to record lows - far below any level finance officials thought reflected its true value - jolted Ottawa into looking at all other options.
Business groups have also examined the common currency, though they, too, want to keep the political temperature low. Maclean's has learned that the Business Council on National Issues studied dollarization in depth over the past six months and concluded the debate itself was not worth the traumatic clash it would provoke with economic nationalists.
Not that the Canadian business community is united. There are businessmen like Wolf Haessler, president of Guelph, Ont.-based Skyjack Inc., who likes the idea of a common currency. More than 90 per cent of Skyjack's construction platforms are destined for export - Haessler says he prefers "to have everything as predictable as possible and a common currency gives us that." He predicts the world will, one day, have a single currency. "The fewer times to convert, the better," he says.
But the BCNI discovered most of its members oppose a single currency. And while they are more receptive to the idea of a customs union under which Canada and the United States would set a common tariff policy, what business leaders really want to talk about is the urgency of harmonizing Canada's tax levels with the United States - in other words, lowering them. "There are much more profound issues on our agenda than the currency," says Ottawa trade consultant Gerry Shannon, who helped negotiate the 1989 free trade deal as a senior civil servant. "We haven't yet finished our adjustment to free trade."
That adjustment process, in fact, was the reason the Liberals set aside a half-day at this week's cabinet retreat to talk about Canada-U.S. relations - the so-called blue sky session that was portrayed with such sinister overtones. Ottawa has become unsettled in recent months over the rising number of disagreements with Washington, from trade disputes over magazines, fish and lumber to assertions by the Americans that it is too easy for sensitive Canadian technology to fall into the hands of rogue states or groups. Canada's sometimes casual approach to security issues unnerves Washington - one reason why U.S. border controls are being tightened. "My second-greatest fear," says one Canadian intelligence officer, "is having a terrorist act committed in Canada. My greatest fear is one committed in the United States where the guy got into the States from Canada."
But if Prime Minister Jean Chrétien's aim was to find ways to smooth relations with the country now absorbing 85 per cent of Canadian exports, he may hear the flip side of closer integration from some of his cabinet. "The ministers said to us that given the close ties, we must see how we defend ourselves from being overwhelmed," said Toronto Liberal MP John Godfrey after an Ontario Liberal caucus retreat last week. "This intellectual acid rain keeps drifting north, with different views on health care, the minimum wage and productivity. We should look at how do we defend what we've got now, not how do we give things away."
So Canadians have no need yet to start brushing up on their U.S. presidents to be able to tell a $50 bill from a $10. "There is a kind of faddism in economic reporting, and the fad now is that we should go to an American or a common currency," says former finance minister Donald Macdonald, whose 1985 royal commission report into free trade kicked off the national debate which resulted in the pact with the United States. "But the downs would be greater than the ups. You lose control of your policy-making. It is not just economics - it has to be politics as well, the notion of Canadian independence." But just as with free trade, the issue of monetary union has stepped out of the shadows and assumed a certain legitimacy. It is suddenly less heretical to talk about it, tougher to stuff it back in a closet. Monetary union's time may not have arrived last week, but it is now hard to see it going away.
Countries Using the Dollar
Domestic economic activity is at least partly based on foreign currency in many countries, especially in the developing world. The top 10 nations for residents holding assets in foreign currency denominations (as of 1995):
Source: International Monetary Fund
Options for a Post-loonie World
If Canada were to abandon its 141- year-old dollar, it would face two main currency options:
1. The U.S. dollar. Economic and political considerations aside, the easiest path is to adopt the American dollar. After declaring U.S. currency the legal tender of Canada, so-called dollarization, the federal government would most likely fix a rate at which Canadian dollars could be exchanged. The Bank of Canada would close. The U.S. Federal Reserve Board would continue to direct the policies that influence the ups and downs of the American dollar: Canada would have no say in such matters. From a consumer perspective, everything with a dollar value would reflect the difference in the exchange rate at the time of transition: Canadian salaries, for instance, would be lower, but so would the cost of Canadian goods and services.
2. A common currency. The creation of the euro, which replaces the currencies of 11 European countries, has inspired calls for a similar system in North America. But some experts say that model, with its powerful central bank and shared administration by member countries, would not travel well. There is too much disparity between the United States and its neighbours, creating little incentive for Americans to relinquish control over monetary policy. "The Americans have a dollar that is widely accepted and trusted all over the world," says University of Toronto economist Jack Carr. "They are not going to give us a say in a central bank."
Much of the current debate was touched off by a report for the C. D. Howe Institute, co-authored by Thomas Courchene of Queen's University and Richard Harris of Simon Fraser University. They believe Canada's floating exchange rate is hurting the economy and say the country should consider options to stabilize the currency. Those could include adoption of the U.S. dollar, or - their preferred choice - immediately instituting a fixed exchange rate, then working towards a formal monetary union that would eventually result in a single North American currency.
Maclean's July 5, 1999