Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 48 - Evidence, March 25, 1999

OTTAWA, Thursday, March 25, 1999

The Standing Senate Committee on Banking, Trade and Commerce met this day at 9:00 a.m. to examine the present state of the financial system in Canada (Common Currency).

Senator Michael Kirby (Chairman) in the Chair.


The Chairman: Honourable senators, first let me welcome all our witnesses, and, if I may, I will just take a minute to set today's discussion in context.

On January 4, the currencies of the 11 participating members of Europe's economic and monetary union were fused. To have reached that stage was, in itself, an amazing political feat. The participating countries have clearly given us some degree of sovereignty and overcome barriers of culture in order to achieve closer economic integration, with economic growth, declining unemployment and declining inflation being the desired result. However, there are those who clearly argue that signing up for the EMU means political integration ultimately.

Of course, there are other models of currency integration besides a negotiated common currency. The official currency of Panama, for example, is the U.S. dollar. Panama has simply adopted the dollar, and the U.S. plays no role in that arrangement. There is also the Hong Kong model. As all of you will recall, Hong Kong set up a currency board in October 1983 as a rescue measure to stop the Hong Kong dollar from collapsing in the midst of the political row between China and Britain on the future of the territory. The Hong Kong dollar was fixed at a rate of 7.8 Hong Kong dollars for every U.S. dollar.

Indeed, through the long history of this country, Canada has had a variety of currency arrangements. The dollar was first adopted at the monetary union of the Province of Canada in 1858, and then of the entire dominion in 1870. The Canadian dollar, which was backed by the gold reserves of the government, was pegged in 1858 at par with the U.S. dollar and at $4.87 to the British pound. With the exception of the short-term drop in the U.S. dollar during the American civil war, this fixed exchange rate continued until 1914. With the onset of World War I, Canada abandoned the fixed relationship with the U.S. dollar until 1926, when the Canadian dollar was again pegged, this time at 82 cents to the U.S. dollar. The fixed exchange rate was abandoned again in 1931, and the dollar was allowed to float until the beginning of World War II, when the Canadian dollar was once again pegged, this time at 91 cents to the U.S. dollar.

Canada has had trouble holding on to an exchange rate in the post-World War II era, and from 1950 to 1962 and again in 1970 Canada dropped out of the pegged exchange rate even though the commitment to peg the currency was mandated by international treaty. Since regaining its floating status again in mid-1970, the Canadian dollar, measured directly against the U.S. dollar, has experienced two types of instability: broad swings or trend swings in the exchange rate, which generally appreciated from 1987 through late 1991 and subsequently declined, and then significant short-term fluctuations around the trend rate.

Possible new currency arrangements for Canada have been the subject of ongoing debate in the press and in academia recently, spurred in part by the launch of the euro at the beginning of January of this year, but also as an ongoing subject of interest to both the business community and the economic community as a result of NAFTA.

The Senate Banking Committee views this issue as one of real significance to Canada. We hope to contribute to the debate by exploring the advantages and disadvantages of a common currency arrangement with the United States. We do so on the understanding that informed public debate must precede any decision by government on a policy issue as significant as this.

Therefore, we have today a very distinguished panel of experts who will debate and discuss with us optimal currency arrangements for Canada. I will list the witnesses in alphabetical order so as not to show any bias on the part of the committee with respect to what the outcome of the debate should be. We have Professor Jack Carr of the University of Toronto; Professor Tom Courchene of Queen's University; Mr. John Crow, economic consultant and former Governor of the Bank of Canada; Professor Herb Grubel of Simon Fraser University, and a former Member of Parliament; and Professor Bernie Wolf of York University.

Gentlemen, thank you very much for coming. I would ask each of you to open with a 10-minute statement in order to get all the views on the table; we will then proceed to ask you questions, and indeed to allow you to comment on each other's statements, and by following that process we should have very much a round-table discussion.

My suggestion is that we begin with the two witnesses who in fact are in favour of a common currency with the United States, Professors Grubel and Courchene; and we will then move on to the three witnesses who are opposed to such an arrangement, Mr. Crow, Professor Wolf and Professor Carr.

I would therefore ask Professor Grubel to begin with his opening comments. Please proceed.

Mr. Herb Grubel, Professor, Department of Economics, Simon Fraser University: Thank you, senators. Thank you, former colleagues. It is nice to be back.

I should like to start at a very simple level by asking you to consider that on January 1, in the year 2000, all Canadian, U.S. and Mexican prices, wages, assets and liabilities are to be converted into a new currency, which might be called the "Amero." With the U.S. dollar set equal to one amero, the Canadian conversion might be .5 amero for every Canadian dollar. The precise conversion rate would be chosen so that Canada's international competitiveness remains unchanged. At the end of such a conversion, Canadian living standards and wealth would be totally unchanged. Your income, in nominal terms, instead of being $100,000 a year, will be 50,000 ameros. However, the car that you buy, which used to be a very nice BMW at $100,000, will now be costing you only 50,000 ameros. Therefore, you will find that your real living standard has not changed. However, there would be a number of economic benefits sure to accrue in the longer run.

First, there would be reduced costs of foreign exchange dealings. It has been estimated by the Delors commission that this might be as much in some European countries as .5 per cent of national income, all of which would accrue in perpetuity. It has been estimated that about 85 per cent of the foreign exchange business of banks in Europe will disappear.

Second, interest rates in Canada will fall by perhaps as much as 1 percentage point as the currency risk for investors is eliminated. These lower interest rates would reduce debt service costs for all governments and private borrowers. The federal government savings alone would be about $6 billion annually at the current level of the debt.

Third, elimination of the exchange risk is equivalent to the lowering of the cost of international trade and capital flow. It is like elimination of a tariff. This effect has been estimated, in the case of the free trade agreement, to come to several percentage points of national income. Hence, we could expect a similar figure in a dynamic sense here with respect to the elimination of the currency risk.

Fourth, labour market discipline would be increased as union leaders and managers face the fact that currency devaluation can no longer be counted on to maintain the competitiveness of firms that have allowed real labour costs to increase. The Delors commission refers to this fact. I consider it to be a very important consequence. For example, in Italy and other countries, when labour unions together with management face pressure to raise wages, and they become uncompetitive, typically they run to the central banks, because there is now a depression and they cannot sell their products abroad, and they say, "Why don't you bail us out by spending a little more money, or letting the exchange rate go? I think we have something like that going on in Canada.

The fifth benefit would be that economic adjustment to the secular decline in world commodity prices would take place at a more appropriate pace, as the depreciation of the exchange rate no longer protects domestic producers from the reality of falling world prices. This is like having a protection erected every time that there is depreciation or fall in world prices. Our producers are protected. Like all temporary tariff protection, this is not good for getting the adjustment that is needed in these industries.

The sixth benefit is that price stability around any existing inflationary trend would be greater, since in the larger currency area positive and negative price shocks are more likely to be offsetting than they are in Canada alone. When we have a bad wheat harvest, there might be a good harvest of oranges, and vice versa. As a result of this, when prices are down in Florida and they are up in Canadian regions that grow wheat, we will find that the two prices are offsetting each other, and the overall level of prices measured in the Consumer Price Index will be more stable. The more stable prices are, the greater is economic efficiency. I am not talking about inflation; I am talking about the stability either around what we have now, virtually zero inflation, or even an upward trend.

The seventh advantage is that monetary policy adventures driven by ideology or politicians would no longer be possible in Canada. The 1970s, from the perspective of a conservative economist like me, were caused by excessive monetary expansion in all of the industrial and developing countries; finally freed from the restraint of fixed exchange rates, they said, "Now we can print as much money as we want to in order to trade up on the Phillip's curve and get lower unemployment rates." When that happened, we got ourselves into the trouble that reserves of natural resources, which historically had always been in abundance, for the next 15 years suddenly began to shrink. We heard all the intellectuals bemoaning that we were in a new world, and that we were running out of natural resources. That monetary adventure of the 1970s was in fact precipitated by the breakdown of the system and the anger that the fixed exchange rate used to provide.

The episode that my colleague, John Crow, was associated with, and which has made him many enemies, was necessitated because of the errors made in the 1970s. Those were wrenching experiences for all of the economies of the western world. Those kinds of experiments will no longer be possible if we have a central bank -- and that is a big "if" -- because it has a constitution that requires it only to provide stability, and they do not, somehow, get around that constitution. That is one of the most difficult issues, and I am sure we will get to it later on.

The eighth advantage is that Canada would gain more influence on monetary policy in Amero-land, because it would have representatives on the monetary policy-making committee of the North American Central Bank, and could form alliances with other districts with similar economic characteristics. People may say, "With just the 12 districts of the United States federal reserve, what kind of influence can you have?" Well, I believe there is a district around Minneapolis where the economy is very much like a large part of our agricultural area in Canada. If there are troubles that affect the midwest in Canada, necessitating certain monetary influence and monetary policy changes, we can form alliances with districts in the United States or in Mexico that have very similar interests.

The ninth benefit is that the seigniorage from the issuance of currency would remain in Canada. As a Bank of Canada, an existing mint would produce the notes and coins used in Canada and the profits would accrue to the Receiver General of Canada. This is one of the big disadvantages of the Panama solution of just using U.S. dollars; and, to some extent, it is also a disadvantage associated with currency boards.

The tenth and final advantage that I like to identify is that the creation of the amero is likely to require that governments limit their deficits, much as happened in the European Monetary Union. This requirement would benefit the Canadian economy and future generations.

The costs at which these benefits are acquired are as follows: First, economic sovereignty would be reduced because of the inability to adopt monetary, fiscal and exchange rate policies to the specific needs of Canada. I do not wish to belittle those who consider this cost to be high. The issues are complex, and I dealt with them at length in a paper I sent to the honourable senators. However, let me summarize my view briefly as follows: Concern over economic sovereignty grew out of Keynesian economic theory. It led to the adoption of the flexible exchange rate system of the 1970s. The economic sovereignty attained did not lead to lower unemployment rates and higher economic growth as had been expected. To the contrary, it worsened these indicators of economic performance in Canada and elsewhere. Keynesian theory, in this respect, is in disrepute. Economic fine tuning is out. For these reasons, I believe, European governments agreed to form their monetary union. I share the judgment of these governments and that of many distinguished economists, like Robert Mundell, that the loss of national economic sovereignty should not so much be bemoaned as welcomed.

The second disadvantage is that the loss of cultural and political sovereignty is seen by many nationalists as a serious problem accompanying a North American monetary union. Again, I do not wish to belittle those who hold such concerns. However, the fact is that Canada's sovereignty in these areas would remain unchanged, just like it has as a result of all of the free trade agreements signed since the end of the Second World War.

Under the amero regime, Lloyd Axworthy could continue to be friends with Fidel Castro, smoke Cuban cigars and drink Moosehead beer with him; and Sheila Copps could continue her brinksmanship of protecting cultural interests in defiance of international agreements. Canada's public health system would remain as deficient as it is now.

Now I would like to come to the broad historical context of why I am in favour of this, and just as I end it here, one might say, "How can a conservative like you, who believes in individual initiative and decentralization recommend such an institution?" Well, the creation of a currency union is an important and needed restraint on the sovereignties of legislators.

Many people came to me as I gave a speech in the House of Commons, arguing in favour of debt limits, saying that, yes, for the first time they had seen the role that such constitutional restraints play in the operation of a democracy. I think almost everybody around this table believes that the introduction of the Charter of Rights and Freedoms in Canada was a desirable explicit restraint on the freedom of legislatures to use their majority, their power, to harm the interests of individuals of minorities. However, it has not quite turned out that way. Many people are now unhappy at the way in which the Supreme Court of Canada interprets this charter. Basically, all democracies have some protection -- the United States has in its constitution the right to free speech, and that has played a very important role in preventing Congress from passing legislation that would in fact have limited the freedom of the press. We have now a similar thing with respect to human rights. I believe that we should have a constitutional clause in Canada that says that governments cannot run deficits, period. The details can be worked out; I have worked them out, and they can be made operational. In the same way, I believe that a common currency would in fact represent an institutional restraint on the ability of politicians to exploit the monetary policy and fiscal policy for their short-run gains and for the gain of their re-election at the expense of future generations in society as a whole.

Another broader perspective is this: The world economy prospered, and there were very few exchange rate upheavals during the gold standard in the 19th century and the parity exchange rate system in the post-war years until the late 1960s. These favourable conditions would be recreated by the creation of major currency blocs in the world, one of which would have Canada as a member.

Finally, putting on my political hat, the political climate in Canada, the United States and Mexico might not favour the creation of the proposed monetary union at this time. However, I am hopeful that these conditions will change as the public in all three countries understands the benefits such a union would bring. I laud the Senate Banking Committee for starting such a process of discussion and education at an important level of specification and prestige.

Mr. Thomas J. Courchene, Professor, Department of Economics, Queen's University: Thank you very much, Senator Kirby; and thanks to all the senators here.

This is a bit of unfamiliar territory for me, because I was fortunate enough for about five or six years in the late 1980s to be working for this committee on the other side of the table, doing, I think, three studies on Canadian financial integration. I will try my hand at being on this side of the table. I used to prepare questions for the senators. Now I guess I have to prepare some answers.

I have circulated a paper that Rick Harris and I have jointly written relating to our earlier work. I do not know whether one reads these into the record or whether the Senate just keeps them and people can get access to them. In any event, I presume you have the paper, and I will speak to the paper. However, in the ten minutes I am allotted, I really cannot get into all that much detail. So my hope is that my comments will be interesting enough to have you probe further and ask questions that are covered in the paper.

I want to begin by carrying Senator Kirby's fascinating introduction one step further: The advent of the euro in January 1999 represents a watershed in the annals of economic and monetary history. At one level, the euro signals the de-ationalization of national monetary regimes. At another and related level, the euro is also signalling that in a progressively integrated global economy, currency arrangements are emerging as one of those supranational or international public goods, an international public good that will be fully consistent with the 21st century notion of what national sovereignty will be all about.

Understandably, this is not the view of Canada's macro-officials. In a recent speech the Governor of the Bank of Canada, Gordon Thiessen, noted:

The euro is not a blueprint for North America. The political objectives that motivated monetary union in Europe do not have a parallel in North America.

I grant that NAFTA is largely a trade and economic blueprint, and European integration in addition incorporates some confederal and, in some areas, some federal overarching infrastructure. However, to link the euro solely to political evolution in Europe is to ignore the compelling economic rationales for a supranational currency. It is highly unlikely that the British will ever buy into the political projects in Europe. It is highly likely, however, that they will buy into the euro, and that will be driven by trade and economic grounds. Indeed, as the paper notes, even Switzerland, not a member of the EU, is going to have a tough problem; and right now, it is undergoing what one might call "market Euroization" as distinct from "policy Euroization." Policy Euroization would mean the Swiss would adopt the euro, but their institutions are going to do it; their private-sector institutions are en route to doing it.

In the paper I focus on three areas. First, the floating exchange rate is not serving us well. Second, there are persuasive arguments for greater exchange rate fixity. Third, the long-term objective of exchange rate fixity should be what I call the North American monetary union, or NAMU. My colleague Herb Grubel calls it the amero; but it is the same animal, I think. While a NAMU is not on the immediate horizon -- it may well take a decade to get this; it took the Europeans that long -- there is an urgency, nonetheless, in terms of focusing on this, and that is because policy development elsewhere in America appears to be moving in the direction of dollarization. I will talk about that a little bit later, but dollarization is simply using the U.S. dollar; it is very different from common currency or North American monetary union. In the latter, we would maintain all our institutions. We would actually maintain our ability to have some Canadian symbolism on our bills. The problem is that, if dollarization proceeds, and we then discover five years from now that we want to have a North American monetary union, it will be too late. That option will be cut off. That is why I think it is incredibly important to be looking at this today.

The first section is the downside of the dollar. The paper looks at four elements: The falling living standards of Canadians; the problems associated with currency misalignment or volatility, which also is dealt with at length in Professor Grubel's paper; the productivity challenge, namely that, as the dollar depreciates, the tendency appears to be that we do not do as well as Americans on productivity -- what John McCallum calls the lazy dollar problem; and then directly attacking the banks' major claim that the floating dollar actually is a buffer.

All I am going to do right now is just focus on the first one of these four, falling living standards. In 1974 the Canadian dollar was worth 104 U.S. cents. Now it is worth roughly 66 cents. It was as low as 63.5 cents last summer. This represents an enormous fall in our living standards vis-à-vis the Americans. It not only puts Canadian prices at bargain basement levels -- I mean it was Canadarm last week. What is it going to be this week? -- but it provides an enormous incentive for young skilled Canadians to ply their trades south of the border, as they are doing in increasing numbers. In our own profession, economics, it is becoming progressively more difficult to keep our bright young colleagues from taking positions in U.S. universities.

Why did we do this to ourselves? One always hears that a floating rate enhances our economic sovereignty, but the implications of a dollar less than two-thirds of what it was 25 years ago represent a dramatic counter to the sovereignty argument.

The second section of the paper then focuses on the case for exchange rate fixity. Here we limit ourselves to three areas. First, there is increasing north-south integration, which dramatically changes the whole nature of the issue. Second, there is the adjustment process under fixed exchange rates. This is probably the most creative part of the paper, and might also be the most controversial and maybe not fully correct. We have a different approach to look at asymmetry, which is the major argument the bank uses for a floating rate.

Since it takes about four and a half minutes to do that, if I do that now, we will never get through the rest of the introduction. So I hope that I have tempted one or more senators to query me further on the nature of the adjustment under an exchange rate fixity.

The third area is the general economic advantages of exchange rate fixity.

Again, I will only focus on one of these, north-south integration. The greater the degree of integration between two economies, the greater will the benefits be of a common currency or a permanently fixed exchange rate. We have not yet in Canada realized just how dramatic our north-south integration is. In 1996, all but two of the provinces exported more to the rest of the world than they did to the rest of the country. Probably by now all of them do that. For each dollar exported in 1996, international exports were running at $1.83. More recent data put international exports twice as high as interprovincial exports. Since over 80 per cent of Canada's international exports go to the United States, it is clearly the case that our exports to the U.S. now substantially dominate our exports to other provinces.

Ontario is a particularly interesting case. This data is available in the larger paper that was handed out earlier, but in 1980 Ontario's international exports were $40 billion, and its exports to the rest of the provinces were $40 billion. In 1996, exports to the rest of the provinces were something like $50 billion. International exports are $150 billion, nearly three times as much. So Ontario has dramatically become north-south.

I just finished a book with a colleague called Ontario as a North American Region State. Other parts of Canada are doing this as well. If you look at the European example, we are more integrated to the United States than the average euro country is to the rest of the European union. On economic integration grounds alone, the case for exchange rate fixity in Canada is at least as strong as the case for the euro in Europe -- but on economic grounds, not political grounds.

The last section looks at dollarization. Dollarization is the ultimate fix. We simply abandon the Canadian dollar. No more central bank. Probably no more financial deregulation in Canada; we eventually adopt the American stuff. It might be useful to distinguish between market dollarization, where you and I try to do it, and policy dollarization, where the Prime Minister officially says we should do it. Market dollarization, I think, is alive and well, and we have to be careful, because I do not think dollarization is the way to go. I would much prefer a North American monetary union, which is far more sovereignty preserving. A willy-nilly drift into dollarization triggered by an unstable exchange rate would be enormously costly to the country. We can get into that a little bit later, but I want to turn now to the North American monetary union and why I think it is a good idea.

It would be equivalent to the euro. As Professor Grubel said, there would be an overarching supranational central bank, probably called the Federal Reserve Bank of North America, with a board of directors selected in part from the still-existing banks. Our Bank of Canada would still be around, just like the Bank of France is still around under the euro. The Bank of Canada would have to decide on its share of the voting rights; they would have to be agreed upon.

However, since the dollar is already the world's best and foremost currency, there is no point in destroying it. So the dollar would still be the American currency. However, we have flexibility here. On our side, we would have a currency that says, "This is equivalent to one North American monetary unit, or one U.S. dollar." On the other side, for the $5 bill, we would put on the Prairies; for the $10 bill, it could be the Rockies, or whatever we want.

The Europeans call that the "landscape" side of their currency. However, at the eleventh hour, they decided not to do this. They are going to have a single landscape side with all the emblems rather than 13 separate currencies; but their coins are going to be different. The German coin is going to have an eagle on it. I do not know what the French are going to have, but it will not be an eagle.

So this gives us some ability to preserve the symbolism that I believe Canadians think is important. As Professor Grubel pointed out, what it is going to require is an internal revaluation of prices. We have to revalue our prices in order that we can be one to one with this new currency. Every single European currency is doing exactly that right now. There is a mark price and there is a euro price, and soon there will only be a euro price. We will have to watch that process, because that is what we would do.

Whether the Americans would be on side or not, I will leave to a little later. I am trying to make sure the Canadians are on side. That is the first point.

I want to conclude with some geopolitics here. Argentina's president, Carlos Menem, recently proposed that his country move away from its currency board towards full dollarization. More important, in January of 1999, the head of the Mexican Bankers Association called for some version of a common currency. When I was in Mexico a week and a half ago, the Mexican equivalent of Canada's BCNI called for full dollarization.

I found it intriguing that U.S. economist Robert Barro, one of the leading American economists, said in The Wall Street Journal that "These are good ideas; we Americans have got to figure out some way to support this." So what he said was, "Argentina needs about $16 billion of U.S. currency to run dollarization. Let's give it to them. It doesn't cost us anything. We will just print it, and it will cost us the paper and ink. We will give it to them and take papers in return. We will get all the seigniorage as those dollars start rising over time." Then he said, "There is another problem with dollarization; there is no lender of last resort. America can be the lender of last resort to anybody who joins the dollar area." He even suggested that the U.S. should take the lead in promoting this monetary integration, and since President Clinton is looking again for some legacy, this could be it.

Robert Barro is not the U.S. government, but it is significant that this issue is now raised in the financial papers like The Wall Street Journal. My concern is that all this emphasis is on dollarization, not on a NAMU. If we want to keep the NAMU option alive, we must become party to these negotiations and these deliberations elsewhere in America. The 'we' I refer to is not only academics, but presumably our peak business associations, and, at the political level, perhaps the Senate could play an important role here. It would be most unfortunate indeed if, when Canadians finally realize that they really want a common currency of the North American monetary union type, we cannot get it, because the dollarization process that we were watching has taken over in the Americas, and the common currency option is no longer open.

For that reason I think this matter is very important, and I congratulate the senators for opening the discussion on this important issue.

Mr. John W. Crow, Economic Consultant, Former Governor of the Bank of Canada: Of course, I am appearing here in an unofficial capacity. I have been unofficial for five years.

The Chairman: You certainly have a lot more flexibility in your unofficial statements than you used to have when you appeared before us in your official capacity. So we are delighted to have you here unofficially.

Mr. Crow: We get the chance, I think, to comment upon what fellow panelists have said. I will just note a couple of things. Herb's opening statement reminded me of the economist joke: a desert island and a can, and the solution of the economist to open the can is: "Let us assume we have a can opener." That is what I think of the amero, by the way.

Like Tom, I have appeared before this committee before, but not on this subject. As I said, now I am appearing in an unofficial capacity. I did supply an opening statement, but it was tailored to 20 minutes, not to ten, and I will try to stick to ten minutes in this regard, and there are other papers that I have prepared.

I will just note that this subject was aired in The Wall Street Journal before Professor Barro aired it. I discussed it three years ago in The Wall Street Journal in relation to NAFTA, and I think there is a copy of my article there, from 1996. I am very skeptical of this whole initiative -- let us say the common currency for Canada. What I think is constructive in the debate is that we have shifted off the so-called pegged or fixed, but adjustable, exchange rates to something that is more unconditional.

In the Americas, Argentina took the lead, if you wish, in this direction, with a currency board. Now Argentina has been, in response to the troubles in Brazil, talking about going to official dollarization. It is interesting, by the way, to note why Argentina went to a currency board in the first place; it did so because it had what Tom called market dollarization, and the Argentines were basically using the U.S. dollar as their currency. If Argentina wanted to preserve the peso in any form, it had to reform its financial arrangements, and that is why it essentially went to a currency board a number of years ago.

As Tom pointed out, whether this is a common currency, however, is yet another question. It would certainly depend upon what the U.S. wanted to do in this regard to make it common. I take it, as he does, that Euro-land does have a common currency; it has a central bank in common where every national central bank is represented. No central bank, by the way, in Europe -- something he did not emphasize -- no central bank is any more important than any other central bank, at least among the five who are members of the executive board as well as the governing council. There are five members. Germany has a member on the executive board, and so do France, Spain, Italy and Finland. Why Finland is there is another story, but that is fine; it is not relevant to this discussion.

Why would Canada want to change its system? "Falling living standards" is what we hear. I would question that very seriously. Whether our living standard has fallen or not is, of course, a very important question. Whether it has much to do with the exchange rate is a very relevant question for this committee. In my piece, I am rather skeptical about the productivity arguments. Tom mentioned John McCallum's stuff approvingly. As probably anybody who reads the newspapers knows, StatsCan put out some different numbers recently. There are some technical flaws in the early discussion anyway, which I discuss in my paper, that illustrate that. We can come back to them if that is important.

What I would suggest is that the productivity question is basically off the table now, given the new numbers. In any case, I would argue that from a conceptual or theoretical point of view, the argument would go from relatively poor productivity to the exchange rate, rather than from the exchange rate to a relatively poor productivity. I think there is more theory and more justification, let us say, for that kind of view of the world than there is for the rather more exotic one that it is the exchange rate that causes less-than-ideal productivity in Canada.

I will note, however, that the so-called "lazy manufacturer" argument for having a common currency, which I think is a very thin thread by which to hold this whole thing together -- in fact I think it is virtually invisible -- has resonated in one place. That is with the Government of Quebec. Anybody who saw the reports on the Davos meeting will remember that Quebec's Deputy Prime Minister Bernard Landry made a lot of this. I guess the interesting question there is whether, once the productivity argument is demolished, the Government of Quebec would continue to favour officially a common currency. That is what they based their argument on, at least in Davos. I suspect that they will not change their argument, for reasons that I think will be fairly obvious to a politician.

Tax policy is one question that, although it may relate to living standards, should not be entered into in any debate about currency arrangements. Tax policy can have something to do with productivity, for all kinds of obvious reasons, I would say. It is not something which should be thought of one way or the other in regard to what our exchange rate arrangements are, although many people do think that whether you have a fixed rate or a floating rate will influence tax policy directly. There are some very indirect relationships, but nothing at all direct.

How has Canada done with flexible exchange rates? I would say we have done pretty well, pretty sensibly in general. It would have been, of course, inappropriate to push up interest rates to hold the dollar at 72 cents in 1998, for very good reasons given what happened to Canada's terms of trade, which deteriorated substantially in that year on the basis of declined economy prices and in fact shaved about a half a per cent off our GDP in that period. It was a perfectly sensible response to the exchange rate to adjust and to shift resources within the Canadian economy. This is something that I am sure that Thomas discussed in his paper, probably taking a different tack from mine; but from what he said, I think it is there.

I would say that the Canadian flexible exchange rate experience has essentially been positive. In this more recent period, we can go back over less positive experiences, perhaps, but in the recent period everything has worked out the way you would expect. The currency has depreciated; that is for sure. Interest rates have stayed down. There has been no inflationary effect particularly, and the Canadian economy has continued to perform pretty decently. There are other factors in how the Canadian economy performs besides this, but I do not think one can lay too much blame at the door of the exchange system.

Something which Herb referred to is domestic monetary policy. I will just note on that that there are some important issues there. I am inclined to agree with Herb: I do not think they have all been settled for Canada in terms of the basis for Canadian monetary policy. A committee of the other House had a go at this a number of years ago. I do not think that they settled it by any means. In any case, I think the Bank of Canada understands the need for a solid domestic anchor of confidence, if a floating exchange rate regime is going to work.

My paper does refer also to Professor Barro's piece, and Tom referred to that as well. The title of his piece was "Let the Dollar Reign from Seattle to Santiago." He did not say, for example, that it should reign from Vancouver to Valparaiso or from Toronto to Tierra del Fuego. Why did he not say that? His argument about what should happen vis-à-vis the countries south of his border was that they had basically screwed up on financial policy, and therefore they would be much better off using the U.S. dollar.

An imperfect corollary of what I have just said about this is that, if Canada screws up on financial policy, maybe it would be better off using the U.S. dollar as well. I think that possibility is very real. I do not mean that we will screw up is a very real possibility, but that the answer would be a very real one. Whether we are going to screw up is another question, which we will have to see.

In my view there are virtually no lessons from Euro-land as regards the North American arrangement. We can debate back and forward to what extent European union is political versus economic as such. Clearly, both factors are there. The central bank is very much a pooling set-up: one bank, one vote. No one is seriously suggesting that for North America.

One of the interesting questions senators might wish to explore within Europe -- and I am not sure that we have the expertise to deal with it here, but we can probably make some comments -- is why Germany would be interested in Euro-land, and what are the issues there. They are as much political, I think, as economic. Why the U.S. would be interested in a U.S. dollar area that would in any sense constrain U.S. behaviour is difficult for me to fathom, but that is a question for the Americans, not for us. We tend to assume that they would be interested. One can ask, I guess, the same question: Why would the U.S. be interested in having a free trade agreement with Canada in the first place? We certainly put much more effort into that exercise than the U.S. did. One could argue, I think, that it emanated from geopolitical considerations in the United States. Perhaps there might be some there who would, as was pointed out, give us the U.S. dollars to start off. We have the reserves, I think, to substitute for Canadian dollars anyway; but if they were to give them to us, that would be nice, but I do not think they are going to.

In terms of Euro-land, one important question here is that what makes a common currency or a fixed exchange rate work is that there is mobility of factors across borders; people can move backwards and forwards in response to economic advantages. Europe does have mobility in principle. Whether people use it as much as they could or should is another question, but you can move anywhere in Europe in response to shifting economic circumstances.

However, labour flexibility, or labour factor flexibility, if you wish, is definitely not on the table in North America. In fact, with the North American Free Trade Agreement, moving from the bilateral to the trilateral now, in part from the U.S. point of view the incentive, as they saw it, was essentially to open up economic opportunities in Mexico in order to stop Mexican labour coming across the border. That is quite the reverse of what one would argue in the case of a common currency.

Mr. Chairman, that is just to illustrate some of the undercurrents of this issue. I have probably used my time, and maybe a little bit more, and I will stop there, Mr. Chairman, and we can come back to particular questions later.

Mr. Jack Carr, Professor, Department of Economics, University of Toronto: Unlike Professor Grubel, I cannot relate my position to either human rights or free speech. I am just going to have to go to mundane economics, that dismal science.

In the question of a common currency between Canada and the United States, as I see it, there are only two real possibilities. Either Canada and the U.S., and perhaps Mexico, form some sort of North American currency union, or Canada adopts the U.S. dollar. My own feeling as a monetary economist is that the second option would be the only real possibility for Canada. People underestimate how expensive it was to adopt the euro. It was very costly. The U.S. dollar is a reserved currency used all over the world. It has taken the U.S. government a lot of time and money to establish the position of the U.S. dollar as an international currency. The U.S. government is not going to get rid of its dollar for some new type of North American arrangement, a North American currency. They have that brand name. The U.S. dollar is staying. We can say all we want, but I do not think that there is any real possibility of a North American currency. If we are going to have a common currency, I think the only real possibility is for Canada and perhaps Mexico to adopt the U.S. dollar. It is, as Professor Courchene called it, dollarization. I am going to talk about that proposal because I think it is the only one that has even a chance of being adopted.

Before I look at the economic considerations, let me consider some political considerations. When I first joined the economics department at the University of Toronto, it was called the Department of Political Economy. Since 1982, it has been the Department of Economics. Monetary unions are, I would argue, more of a political statement than an economic statement. Many euro supporters believe that monetary union is the necessary first step for political union, and I think that is why some people supported it who otherwise would find it difficult to believe that they support a common currency.

In Canada, there does not appear to be any sentiment for closer political union in the North American environment. Hence, this argument falls by the wayside. The only real political impetus that I see for a common North American currency really comes from the separatist government of Quebec. Bernard Landry has stated that this option of using the U.S. dollar should be given serious consideration. They have used a number of rationales, and if those rationales fall by the wayside, I am certain they will find others. If we adopt the U.S. dollar, there will be substantial adjustment costs. I think that the Quebec separatist government would like that adjustment cost to be borne by the Canadian union as a whole, so that if Quebec does leave the union, there will not be any further adjustment costs imposed on Quebec. Quebec will be able to tell its citizens that life after separation is going to be very much like life before, that they would still be using the U.S. dollar. You could say: "Why do they not simply say to the Quebec people that even the status quo is okay? After separation you will still be using the Canadian dollar." I think this is a very difficult statement for separatists to make, because it means that if they use the Canadian dollar, they will have no independent monetary policy, and they will be subject to the dictates of the Bank of Canada, upon which they will have no influence. What is the purpose of separation if you cannot have autonomy in both the fiscal and monetary areas? Having a lack of autonomy with regard to a broader North American union is not as bad as having to rely on Canada.

Let me look at the economic considerations. In the economic literature, there are primarily two strands of argument concerning currency union. One argument is made by monetary economists, and the other is made by trade theorists. I am primarily a monetary economist, and I will concentrate on that, but I will mention some of the trade theorists' arguments.

The adoption of the U.S. dollar essentially means that we replace the monetary policies of the Bank of Canada by the monetary policies of the federal reserve system. Of late, the federal reserve has followed the sensible monetary policy, and the U.S. economy is one of the strongest economies going. That is why, I think, there is some attractiveness in saying, "Let us adopt a U.S. monetary policy." If you look at a broad picture of U.S. monetary policy, unlike Professor Grubel, they have had periods of time when, in the 1970s, things were fairly uncertain with U.S. federal reserve policy. They had high and volatile monetary growth rates, and we would have had those same ones. In fact, some of the data I handed out in Figure 1 shows the price level in Canada from 1910 to the present. The price level in Canada and the United States, shown in Figure 2, behaved very similarly. We have had really a very similar monetary policy to the Americans. If we look at the 1970s and 1980s, we had a slightly higher inflation rate. We had 6.7 per cent average inflation; they had 5.8, which is well within the error of measurement in the Consumer Price Index. We have had a very similar monetary policy. I do not see us gaining.

Senator Kirby mentioned that in a country such as Panama, which has a very unstable government, a government that you cannot trust, it makes a lot of sense for them to say, "We cannot let this government have control of the printing presses," or "We are simply going to not have printing presses; we are going to simply use the U.S. dollar." It makes sense for Panama. It makes sense for Liberia. Maybe even for Argentina now it makes sense.

For Canada, it does not make sense. We have had a fairly sensible monetary policy. We have had periods where things have not been so good, but so have the Americans. In fact, during the time when John Crow was in office, we had almost the most sensible of monetary policies. I had to say that because John and I taught a course together at the University of Toronto. However, I actually honestly believe that. I do not see us gaining. In fact, if we use the U.S. dollar, we would have to pay seigniorage to them. We would not have an independent policy; we would not gain; and we would pay seigniorage.

Professor Grubel said that we would save on the cost of converting money. That is true. However, if you extend his argument about the cost of changing money to its logical conclusion, you would only need one world currency. Why even have the euro and the North American currency? Go to one world currency. That would minimize the cost. The problem with one world currency is that we may not like the policies of the world central bank, and we would have no way to put that in check. Also, I think that the cost of changing currencies is somewhat overstated for Canada.

A lot of trade takes place within corporations. General Motors imports engines from the United States. They do not pay their U.S. parents in U.S. dollars; they re-export finished cars. It is really mostly bookkeeping transactions that take place. Little exchange cost takes place there.

The other thing about our current system is that in some sense it is optimal. Professor Courchene says dollarization is taking place in the Canadian economy already. It is true. High-tech companies are listing on the NASDAQ, and if you want to buy their stock, you have to pay in U.S. dollars. Why are they doing that? They are not doing it because of the nature of the exchange regime; they are doing that to gain access to huge U.S. capital markets. The Toronto Blue Jays players are paid in U.S. dollars. They are not doing it because the exchange rate is floating and there is risk; they are doing it because the players are American, and the players want U.S. dollars. There are areas in the Canadian economy where it is optimal to use the U.S. dollar. It is being used. In our current system, where it is most optimal to use U.S. dollars, they are. For most transactions, most people would not want to use U.S. dollars.

Let me look at the optimum currency area arguments. This is the argument of the trade theory. This argument was first made in 1961 by a noted Canadian economist, a former professor of mine at the University of Chicago, Bob Mundell. It is interesting, just from an academic point of view, that his article was published as a communication, not even as a paper. It has a little note in The American Economic Review, a very prestigious journal. There were new equations in that article, and they had a big effect on the profession. If the article had been submitted in 1981 versus 1961, I do not think it would have been accepted for publication.

Professor Mundell, in that article, talked about optimum currency areas. He said that neither Canada nor the U.S. is an optimum currency area. Canada places the U.S. into a not-optimum currency area, that is, an area in which the economies are similar like regional economies, and most of the external shocks are similar. That is not the case for Canada and the U.S. If you look at the correlation between real shocks hitting the Canadian and U.S. economies, they happen to be negatively correlated. Therefore, this idea that Canada plus the U.S. would be an optimum currency area is not the case. In fact, Figures 3 and 4 show exchange rate movements in nominal and real terms. The nominal exchange rate has moved because of the real exchange rate. Real forces have buffeted the Canadian economy. That is why I do not buy Professor Courchene's argument that the depreciation of the exchange rate has hurt our living standards. Of course it has hurt our living standards, but it has not been because the exchange rate is floated. It is because of these real shocks that have hit the Canadian economy. There is nothing we can do, no matter what exchange rate we are on. If the price of the things we sell goes down relative to the price of the things we buy -- if the prices of oil, gold and lumber fall -- then this will hurt Canadian living standards whether we use the U.S. dollar, have a floating exchange rate or a fixed exchange rate. That is why I think the reasons he gives for this change in living standards are incorrect. He would then argue that the floating exchange rate has helped the U.S. economy because their exchange rate has appreciated with respect to the Canadian dollar. Therefore, that same exchange rate regime must have given them a higher standard of living.

I do not believe that it is the case for Americans, and I do not believe that it is the case for Canada. We do not have an optimum currency area with the United States for two reasons: the real shocks are negatively correlated, and we do not have the labour mobility that exists, and that you need, between Canada and the United States.

There is another problem with the optimum currency area: an optimum currency area in 1960 may be different in 1970, 1980 and in 1990. California was part of the western region with a resource-based economy in 1960. It is certainly not a resource-based economy in 1990. The problem with the optimum currency area argument is that the optimum currency areas change over time. Given the huge cost of adopting some type of monetary unit, you cannot keep exchanging that unit as optimum currency areas change. Both from a political and economic point of view, I do not see any argument in favour of adopting a common North American currency.

Mr. Bernie Wolf, Professor, Department of Economics, York University: The desirability of pursuing a common currency between Canada and the U.S. is clearly something that should not be taken lightly, as Senator Kirby indicated in his opening remarks. The effects are far-reaching and affect every Canadian. Thus, it is very important to look at this thing with a very clear perspective, and also to look at the theory and the history, because I think they both tell us quite a bit. Sometimes the ideology gets in the way. I think a forum like this is extremely important, and I would compliment this Senate committee on discussing this issue.

I would concede to my colleagues that perhaps some day an arrangement such as they have considered might make sense. Given the way the global economy is going, one could even conceivably envisage a situation where you might have a common currency for the whole world. I am never going to see it in my lifetime; I am not sure that my children will; but it is certainly conceivable. There are some very strong arguments for it, and I would concede those strong arguments. However, for Canada today, I am unequivocal. I submit that the costs associated with monetary union dwarf the benefits, and that it is certainly not the time for this fundamental change.

I agree with Professor Carr. It is clear that, if you were to consider it now, no arrangement is possible other than adopting the U.S. dollar. I think that my honourable colleague here is dreaming when he talks about his amero. There is no way that the U.S. dollar is not going to be the currency of the United States.

The costs of monetary unions are sizeable, and they exist in the Canadian context. The most significant of these costs is probably that with respect to the loss of an independent monetary policy. Despite the strides taken in recent years, Canada's economy remains significantly more exposed to the resource sectors than does the U.S. economy, for 40 per cent of our exports are still resource oriented. The sharp decline in the Canadian dollar related to falling global commodity prices over the past 18 months is testimony to this kind of exposure, and it provides the obvious example of the benefit of flexible exchange rates. I do not decry the fact that the Canadian dollar has gone down; and I agree with my colleague Jack Carr that commodity prices have gone down, and one way or another that must be reflected, and it happens to have been reflected in a lower dollar. In the absence of such downward flexibility in wages and prices in our economy, we could not absorb the shock that way. The currency decline provided the necessary offset and support to the domestic economy, which allowed exports to be fostered, and it encouraged import-competing, production-stimulating investment. If we did not have the flexible exchange rate, we would have had been forced to adopt a very different monetary policy, and that monetary policy would have been extremely detrimental to this economy. It would have had to have been really kind of draconian, maybe even more draconian than John Crow's policies.

We should also take into account the history here. In the past, the effect has worked the other way, too. If we go back to the period from 1950 to 1970, at that time the generalized rise in commodity prices, which also led to a significant capital inflow into this country, put upward pressure on the currency. This made the maintenance of the existing fixed exchange rate and those at the fixed level impossible, or at least very difficult. Again, if we had not, we would have run into the opposite kind of problems. Commodity exposure is really the best example of the risk of asymmetric shock, a risk that obviously has been realized historically and is still with us. The currency cushion has no obvious substitute at the moment, and its elimination would be extremely risky.

Now, -- and here I would probably repeat, to some extent, what other colleagues have said, but they are worth repeating -- the factors that would tend to offset the asymmetric shock effect are not significantly in evidence in North America. First, labour mobility between Canada and the United States is not high. Potentially, it could be high. Except for Quebec, there is a common language, and to some extent a much more common culture exists between the two countries than in Europe. The reality is that current immigration policy on both sides of the border does not allow that kind of mobility. It is even hard enough to get people across the border for temporary positions. On either side of the border there are real problems. Labour mobility really does not exist at the moment.

Second, fiscal policy maybe could substitute for monetary policy. If you do not have the monetary policy lever, maybe the fiscal policy would work. Unfortunately, considering the burden of Canada's public debt -- and if we take the total debt to be somewhere around 90 per cent of GDP; we have only had a balanced budget very recently -- you are not going to be able to use that lever; or at least, that lever is limited to fiscal flexibility.

Finally, the other thing that would help in terms of adjustment would be transfer payments between the areas. Within Canada, we of course have these transfer payments, but you are not likely to see them going across a Canada-U.S. border. In the future, of course, some of these things may change, and common currency might make some sense. The Canadian economy has been structurally changed in the 1990s by freer trade, the exposure of Canadian industry to more competition, the quashing of inflation and an end to fiscal profligacy. These are foremost. All of these changes, while intensely positive for the fundamental health of Canada's economy, have been painful for Canadians. I would submit that the process of adjustment has not yet ended; it is not yet complete.

Significant work remains to be done on various fronts, particularly on the issues of taxation and productivity. I disagree here with John Crow that productivity is not really an issue. Yes, the numbers indicate that we have not done as badly as we thought we had, but productivity in Canada is still considerably below that in the United States, and this issue needs to be addressed. In fact, the historic lows on the Canadian dollar must at least in part be recognition that the Canadian economy has not fully worked through these changes and remains vulnerable on a fundamental level.

It is also worth noting here that the Canadian dollar's historically low valuation itself represents a significant barrier to monetary union, in that a large appreciation of the currency would be needed to reach a suitable level at which to enter into a union, posing yet another burden to the Canadian economy. Herb Grubel says, "Let us go with what we have got." I say we should not go with what we have. One reason in fact that the U.K. is not entering the European monetary union at the moment is not just a question of politics and such, but the pound is overvalued vis-à-vis the euro; and in that case, you have a problem. In our case, it would probably be undervalued, but undervalued is not good either. You want a currency that is roughly at the right level.

In addition, I worry also about what might happen in terms of the transparency that would exist. I usually like transparency, but in this case when a worker is able to see what he earns in U.S. dollars, and he looks across the border, and he does not have to make any conversions; it is there right in front of him. I can see that there may be some inflationary push in terms of trying to get higher wages, and I think that that should not be underestimated.

The reunification of Germany is another case where in fact they have gone to a common currency. The conversion of the East German mark into the Deutschmark provides an illustration of the lasting costs of adopting an inappropriate rate. We still have a situation in East Germany where the unemployment rate is roughly double that of the rest of Germany, something like 18 per cent, nothing to sneeze at.

It is always possible to argue that the environment for just about anything may be better down the road. That is what I am trying to do here, and certainly arguments for delay were offered in the case of the European monetary union. These timing arrangements revolved more around the current incompatibility of cycles, the great disparity in growth. Take Portugal and Ireland, for example, and compare them to some of the core countries, particularly Germany. In fact, if you look at what has happened, the weakening of the euro is to some extent vindication of that; these growth rates have continued to diverge, with greater diversions. The European monetary union did become a reality. The euro did come into existence. However, there are problems. I would suggest that if there had not been a political reason for the EMU, it would not have taken place. This was not an economic decision but a political decision. Just as Professor Carr indicated, there are people who went along with this, who saw that the economics of it was questionable, but who did it for political reasons. Clearly, we know that in Europe the paramount reason for a political point of view was the intertwining of the fates of the participants. Fostering cooperation, particularly between Germany and France in the pursuit of ensuring stability and peace, was seen as a worthwhile goal in spite of what I consider to be the net economic costs.

As has been indicated before for Canada, the political imperative works against currency union with the United States. Certainly Canada has no need at present to find a mechanism to provide peace and political stability with its neighbour; it has already got that. What do you have to do if you have it already? Additionally, the loss of sovereignty involved in a currency union is a more pressing issue for Canada than for the individual European countries. As John Crow has indicated, basically the European Central Bank, with its 11 participants, runs the monetary side of things. The situation here is that the U.S. economy is 10 times larger than Canada's. In spite of Herb Grubel's fairytale vision, I do not think that Canada is going to be offered one or two seats on the U.S. federal open market committee.

Finally, there is another benefit to the currency union among some countries in Europe, and that again is largely absent in the case of Canada: the reduction of risk premiums on medium- and long-term interest rates. If you looked at Italian 10-year bonds three years ago, they yielded 5 percentage points over their German counterparts. The participation of Italy in the monetary union and the corresponding drop in the risk premium assigned to Italian assets has narrowed that spread by a factor of 20 to roughly a quarter of a percentage point, which is really very small. Conversely, the yield on Canadian 10-year bonds is already very close to that of U.S. 10-year bonds. Thus, the scope for an additional fall in the risk premium would be very limited. Look, in contrast, to Argentina, Panama and Liberia. Argentina, which is seriously considering the adoption of the U.S. dollar, has credibility problems and would have quite a bit to gain in terms of a reduction in the risk premium and consequently, a reduction in the interest rate burden.

I will stop at this point. I see that sometime in the future, this may make sense, but at the moment the benefits that Canada would receive are far smaller than what the costs are. I really think that we would be putting on a straightjacket; and when you really want to do things, wearing a straightjacket is not the right attire. I see absolutely no compelling arguments at this point for the adoption of a common currency with the United States.

The Chairman: Thank you, Professor Wolf.

I would now like to turn to questions from my colleagues.

Senator Carney: First, let me say that we found your discussion extremely stimulating. I think you should put together an economic road show and take this discussion across the country because it is extremely interesting. In the time we have available to us, obviously, you cannot even answer each other, which I would love to hear.

I just wanted to note that according to your test, Canada does not meet Jack Carr's argument about optimum currency areas because economic shocks in Canada affect the regions completely differently. You may want to re-examine that argument, for it would support it. It would work against you if you presented it in my region, the West, because if oil prices go down, it is good for Toronto; if oil prices go up, it is good for Calgary but poor for Toronto. If a number of exchange rates go down, it has adverse effects on other areas.

My first question is going to be to Tom Courchene, but I hope we have a chance to discuss this further with you. Basically, under the so-called devaluation of the current status quo with the floating dollar, our exports have increased from around 30 per cent to about 40 per cent. What would happen in terms of trade under your argument of a common currency? Who pays the cost of adjustment that Professor Carr talks about? I have a horrible feeling that it will not be central Ontario, and it will not be Quebec.

Mr. Courchene: That is a wonderful question, and I think that, to a certain extent, you anticipated part of the answer. Here is the way that I think the adjustment will work under fixed exchange rates or a common currency. I think that fixed exchange rates are the only way to get to common currency. We are not talking about fixed rates -- and I am probably the only person on this panel who thinks that fixed rates will work, but we may have this discussion later.

On either a fixed exchange rate system or a common currency system, you have to distinguish between two types of asymmetry that can hit Canada and the United States differently. The first I would call mutual asymmetry, and here Senator Carney is exactly right. In Canada, the north, the south, the various Canadian economies, the regional economies, the centre, the Prairies, the West Coast, Alberta and British Columbia all have a counterpart in the U.S., such as the Texas Gulf and Alberta, Oshawa and Detroit. Initially, if you get a terms of trade shock, there is no change in any of these cross-border relationships. The price of lumber hits Oregon and Washington the same way as Vancouver, and any change in the price of wheat affects Montana and Saskatchewan the same way. The auto industry in both countries is affected the same way by shifts in terms of trade. If you change the exchange rate, then every one of Canada's regions is now offside, because the Canadian price is different than the American price. The exchange rate response initially throws the asymmetry in there. British Columbia would like both a fixed North-South link and a fixed east-west link, and the only way to get that is through a common currency. However, there is a second part of the adjustment, the macro side, because resources and commodities do not play the bigger role in Canada. Even if there is no asymmetry on a regional basis, there is a national asymmetry. Your question is very important here. How would we take out this national asymmetry? Here the problem is that the prices affecting the west are different than the ones affecting the east, so you have major internal asymmetry that you have to handle at some point. I am simply saying, "Let us just fix the rate and let that move." What does that imply? That implies that British Columbia will be sort of like Oregon in the United States; it will just have to adjust so you get prices and wages doing the adjusting.

Second, there is some role for national and provincial fiscal policy. Economies that are booming should use their fiscal policy to temper their booms, which is very unlike what Ontario did in the 1980s when it increased its spending well into the teens when that was the source of inflation. If we had a fixed exchange rate system or a common currency at that point, that would not have happened, because it would be clearly obvious what Ontario was doing at that point. We also have in place mechanisms to handle this, Senator Carney. We are very used to handling north-south asymmetry. We have internal migration; we have the national tax system; we have equalization payments; we have unemployment insurance. I would foresee those mechanisms addressing the east-west asymmetry, which is really going to be larger on a region-by-region basis than the north-south asymmetries. If we are letting the exchange rate fall along with commodity prices, the Bank of Canada is effectively saying, "We are going to make sure our commodity industries are not hit." As Herb Grubel points out in his paper, we are giving these resource provinces privileges by buffering them. That is a question of policy because of the five industrial sectors that are falling as a percentage of GDP in terms of their exports. All five of these are commodities. Canadians have to ask themselves, "Why are we gearing our exchange rate to those sectors that are declining and are on the commodity side, when in fact we know that we are going to have to make the transition as a nation from a resource-based mentality to a human capital-based mentality?" Resources will still be important, but they will be high value-added. It is true that adjustment costs will be borne in a different way, but it will depend on what actually happens to the external terms of trade.

Mr. Grubel: I am thinking about the argument that has been made by Mr. Crow and the other panelists about the currency areas. I am sorry that Mundell cannot be here, because he recently wrote an article in The Wall Street Journal in which he said that his original paper had been totally misinterpreted when he said that if flexible exchange rates like we have now are such a great thing, why do we not have flexible exchange rates for the east and west of the United States? Once you accept that argument, you will say, "Why do we not have it for the north, the south or the east and the west?" If that is not true, why not for each county? Why not for each city? If flexible exchange rates are such a great thing, you will come through reductio ad absurdum to the position of flexible exchange rates. We are always pushing for flexible rates for prices unconstrained by institutions. The argument that this facilitates adjustment to shock is simply stressing one side of the coin, Senator Carney. When we look at what has happened in the real world, it has sent the wrong signals to the natural resource producers in Western Canada as to whether or not they have to make the necessary adjustment to the shocks. Mundell himself says that there is no way in which an economy can avoid the outward consequences of falling natural resource prices.

The Chairman: This is going to be a hard situation to manage. I am going to allow Mr. Crow, who would clearly like to make a modest comment on what Professor Courchene and Professor Grubel said, and then I will turn to your next question.

Mr. Crow: Yes, I agree with the burden of Tom's remarks, but you are going to have to make an adjustment one way or the other for trade shifts. If you become relatively poor, you have an issue. It does not matter what exchange rate you have, in a sense; you are going to have to deal with that issue. I will come back to that in a second. I just want to pick up on something that Professor Grubel said. Mundell left open the other question. This is getting a bit abstract, but I wish to just complete the argument. He thought, "How are we going to determine the world money supply with one exchange rate?" We go to gold, which raises quite another set of issues here. I just note that. He was not talking about North American common currency; he had bigger fish to fry.

On the exchange rate question, I think there is a tendency here to see it in a sense of all or nothing. I disagree with the characterization of Bank of Canada policy as one of just trying to protect the resource industries and to hell with everything else. That was the implication. That is just incorrect, the way I see it.

The exchange rate declined. I think any commodity price that you saw last year declined by a multiple of what the exchange rate declined by. Those industries had a major shock. We are talking about adjustments -- there is a margin, a fairly thick margin. An adjustment would encourage the Canadian economy as a whole to perform better than it would have otherwise if they kept the exchange rate unchanged in that situation. That, I think, is the realistic issue in that situation, and I would argue that that was a realistic adjustment to make. You could not realistically protect the commodity, the producers of copper, 100 per cent. The margin was just helpful, not unhelpful.

The Chairman: I should just point out for the record that several of the witnesses have commented or quoted Professor Robert Mundell. Just for the record, he is a Canadian-born and educated economist, one of the leading economists in the United States at the present moment, who is currently a professor at Columbia University.

Senator Carney: My second question is one that any one of you could answer, but I am going to address it to Jack Carr. That involves the issue of dollarization. Has anyone done any work on how much of the Canadian economy is already dollarized, in terms of the American dollar? If you add up all of our commodities that are sold through e-mail or e-commerce, it is done increasingly through American dollars. You have quoted the situation of NASDAQ. It may be that dollarization, as you have pointed out, is not optimum for Canadian control or sovereignty, and we may be well advanced on the path now. What percentage of the economy has already been Americanized? Secondly, given that, what is in it for Americans to change? If they are given the whole ball of wax under the present market forces and dollarization, why would they even consider a common currency? You can start that.

Mr. Carr: On your first question as to whether there is any sort of empirical work, the answer is no; I do not know of anyone who has done any. A lot of work has been done in Europe, but I know of very little work done here. On this idea that it may be bad, or that we may lose control, I do not think so. I think it actually is good. It tells you that there are certain areas where it is optimal to use U.S. dollars, and it lets the market decide. The vast bulk of our transactions will still be in Canadian dollars, and I think that is exactly the way you want it to go. You want currencies to compete.

Senator Carney: I challenge you. If you look at the 40 per cent of our GNP that is exported, and you look at how much of that takes place in American dollars, you may be making a wrong assumption.

Mr. Carr: A lot of goods, a lot of commodities are priced in American dollars. That is natural. When you say that people buy commodities in the U.S., of course they are going to pay in U.S. dollars. A lot of trade takes place within a company. Ontario's biggest exports are cars. Those export figures really, in some sense, overestimate the extent to which we depend on foreign trade. We are bringing in engines, transmissions and various auto parts from the United States. We are adding a little bit or a lot of value, but our export figures are the total amount of those exports, not the value added just by the Canadian production process. When those exports and that trade take place, although the accounting records are in U.S. dollars, they are not actual transactions that are taking place; it is the unit of account. No money is in fact flowing.

On the second part of your question, as to whether it is in America's interest, the answer is no, it is not in America's interest. It is unlike the free trade agreement, where it was mostly in Canada's interest, but which did not cost the U.S. anything, and they gained a little bit. Adopting some other type of currency will cost them a lot, but they will gain very little.

You also asked about whether Canada is an optimum currency area. I quoted Bob Mundell, who said that Canada is not an optimum currency area. He would say that the regions are optimum currency areas, but you do not find regional currencies; you find national currencies. The only country I know of with more than one currency was China. In 1945, it had three different currencies; one for Manchuria, one for Taiwan, and one for the rest of China. It was not done for optimum currency areas either. My own belief is that optimum currency areas are not that optimum. They do not really explain why it is that nations adopt one common currency, even though they have two different regions. In Canada, the big advantage is that we do have transfers. We have fiscal policy. If we form a union with the United States, there would be no flows going in that organization between Canada and the U.S.

Senator Carney: Just to clarify, I am talking about commodity prices, the prices of goods sold around the world from Canada in U.S. dollars, not just commodities. I wanted to make that clear.

Everyone seems to agree that it might not be the time for a common currency. Conditions in Canada would have to change. I would like to hear from some of our witnesses on the conditions that would have to change in Canada before this became a reality. If they are all taking the position that this is a good thing down the road, what has to happen? Do we have to be absolutely economically on the ropes? Do we have to be beggars? I think it would be useful for you to tell us when the common currency alternative might be more attractive to Canadians.

The Chairman: That may make an excellent wind-up question.

Senator Kroft: Like the chairman said at the beginning, I would like to interfere as little as possible with this interchange, as I really feel that I am here to listen. I have to keep reminding myself, as my colleagues do, that we are parliamentarians, and we have a responsibility to try to keep this channelled in a direction that will be helpful to us as we search for answers in a political framework.

The first question I have is perhaps a context question. It is safe to say that I have learned already this morning that I have not yet heard a statement that seemed to be without challenge. However, the object of government is to pursue and preserve Canadian values and objectives in a broad context. That is what governments have to do. If I could get a quick response from each of you, or from whoever wishes to take on the challenge, I would be interested in knowing your own mindset on whether our traditional ideas of economic, political and cultural sovereignty are beyond saving. Are we on a long inevitable slide toward some kind of multinational, binational, global integration; or are we in fact fighting a meaningful battle, issue by issue, at which we can say we have it right; that this is the Canadian way, and we now want to pause? I am talking about a broad range of cultural, political and economic issues. If in the end we feel that we are all going to end up as Americans anyway, that provides one kind of a context, and we are trying to control the timing. If we really have a long-range view of defining the Canadian way, then that to me defines another debate. I would like to get some response to that.

Mr. Courchene: I think that is a wonderful question, and that is really at the heart of what I am arguing for; namely, a strong preference for a North American monetary union over straightforward dollarization. The sovereignty-preserving aspects, including the symbolism associated with the currency itself, are able to be maintained. If we would use the U.S. dollar or fix the exchange rate, it may feel like another round of the free trade agreement, and it is going to concern a lot of Canadians. In arguing for fixed exchange rates, I looked back, and I said to myself, "What is it in our history that makes us not northern Americans, but Canadians?" Part of it, and only part of it, is our welfare system, our approach to health. Ask yourself, "When did this come about?" It came about largely during the Pearson years, along with equalization, Medicare, hospital insurance; the QPP and CPP and other pension plans and regional economic development. What was characteristic of the Pearson years? We were on a fixed exchange rate with the U.S. from 1962 to 1970. The notion that fixing exchange rates necessarily means that you throw your sovereignty away, I think, is wrong, in the sense that what we cherish most in terms of our social policies came during a fixed exchange rate period. We have to be wary, but I think that the sovereignty issue is not as straightforward as the average person might initially think.

Secondly, I will talk about why I prefer working towards a North American monetary union. By the way, I never said that the Americans would have to change their currency, but maybe Herb did with the amero. I think a North American monetary union is important because it will allow us to be Canadian rather than becoming more and more northern American.

The Chairman: Professor Grubel and Professor Carr.

Mr. Grubel: I have heard this certainly from the Finance Committee in the other part of the building here, and my answer is the same. Having a common currency and free trade in the United States has not prevented Tennessee from maintaining a separate cultural and social identity, or from having its own medical plan with a list, or California from doing what it does best. I believe that the fear over the destruction of Canadian cultural and social identity really reflects an inferiority complex. Just as the various states have their own culture, we could preserve our own.

Mr. Wolf: I think that culture can still be maintained. When you fix the rate, your manoeuvrability decreases, so you may not be able to do this program and that. I would not have to agree with Herb there. I do not think that there really is a problem in terms of basic culture. It has to do with what problems you can afford or not afford.

I would like to, at some point, answer Senator Carney's third question.

Mr. Carr: I do not think that this question of Canadian values and sovereignty, other than certain symbolism, should be relevant to this debate. I think the debate should be what maximizes the economic well-being of Canadians. Once we have maximized our well-being, we can then preserve our culture and sovereignty. Currently, Canada's per capita income is less than 80 per cent of what it is in the United States. I do not think it that it would be against our culture if we had an income per capita either equal to or greater than theirs. The question is what arrangements would help, although I do not think that this is the crucial question. A lot of issues are involved in trying to help us maximize our economic well-being. I would be willing, if I believed that we could do much better with the American dollar, to go to the American dollar. It is not a question of sovereignty. I do not care what pictures you put on the money. If I am making more than ever; that is fine; I do not care; I will take whatever picture you have. That is coming.

Mr. Crow: A bit closer to home, the question of sovereignty is a word that is not easy to pin down. I just note that for Quebec sovereigntists, sovereignty does not mean having their own currency, at least according to the record. However, a Quebec sovereigntist would probably argue that the currency be, in some sense, sovereign. I will not go any further than that.

The other point I will make here is that this is just one aspect, if you wish, of a broader issue called globalization. Globalization, in my book, has been led by the private sector and by private financial markets and multinational firms, and governments are kind of scrambling to catch up to that whole phenomenon and figure out to what extent it constrains or enriches possibilities. That is the context in which I would discuss that question. I would just note that the Canadian Association of Business Economists is having a conference in this town tomorrow on globalization, by the way.

Senator Kroft: While there may have been a patina of unanimity and consensus at that end of the table, I did not read it that way. I would just observe that I heard Professor Carr say that whatever makes for economic well-being works, and I heard the scuffle of a lot of treasured Canadian values potentially being slid under the door in the face of that general economic sense of well-being. Perhaps we can pursue that at another time.

My next question is directed more particularly at Professors Grubel and Courchene, those who feel that the floating exchange rate is not necessarily the best, most effective or long-term appropriate way of responding to external shock in the system. It has been suggested to me, rather glibly at times, that we will sort of call up on demand from this great reservoir of productivity to make up some of the differential that has to be made up. I find it a bit mystifying to wonder where the political will and the industrial will and, indeed, the capacity would come from that could sort of call up this productivity on demand. There is a feeling that somehow it is lurking around there, but the lazy manager is not bothering to bring it to the fore. In the world that I come from, the lazy manager wants to maximize the bottom line, and you have exaggerated both sides, both the degree of laziness and the ability of governments and business to call up that productivity. I would appreciate any comments you might have on that.

Mr. Grubel: Up to an estimated 80 per cent of today's wealth consists of human capital, the ability to use high-tech products. It was not always so. In the 19th century, probably 90 per cent of it consisted of natural resources. That is when Newfoundland and New Brunswick flourished, and they were the richest provinces of the nation. In the last 25 years, the terms of trade have moved enormously in favour of products that are produced by human beings rather than taken out of the earth. We have failed to shift at the optimal rapid rate into those new products; we have abandoned the old pursuits. Why has this been the case? Every time the world sends a price signal saying that the prices of natural resources are falling relative to the other things, we change our exchange rates and tell the producers and workers in those industries that it is all right to stay in or to slow down the adjustment. You take that over 25 years, and you have our current problems.

Senator Kroft: Even though that commodity price is not falling just as fast, and the hamster on the wheel does not have much of a sense of satisfaction from this, I am sure, I do not find that a complete answer. The fact that all this protection is being sought and that no one has made the effort to go to a more technology-oriented industry because of this shelter for exchange rates, does not seem to me to be a complete answer. The steady fall in commodity prices has not made those people feel better.

Mr. Grubel: There is a labour shortage of skilled people in Vancouver. High-tech industries would like to come in but they cannot find the workers. Why? Because they are being kept in the sawmills and the forests by depreciated exchange rates.

Senator Kroft: Do you really believe that?

Mr. Grubel: Yes. I could go back to the newspaper articles that agree with my own ideological perception, where they quote companies as saying, "We would have liked to stay here, would have liked to work here, but we cannot find the workers."

Mr. Wolf: As John Crow said, the exchange rate does not go as far as the resource price decline or rise. Resource prices are very cyclical. The long-term trend may be somewhat down, but it is cyclical.You do not want that kind of adjustment taking place, in and out, in and out, because there are enormous transaction costs. It is true that you would want to move your labour force out of this. However, you do not want it to happen as rapidly as might be suggested by the commodity prices. I am sure the commodity prices that we have seen recently are not the same as we will see a few years from now.

Senator Angus: As colleagues have already noted, I am mindful of economics 201 or 401. The chairman should be congratulated for assembling a panel whose members are not afraid to express such disparate views.

There is a problem with our floating exchange rate, and I do not know the answer to it. I do not know whether Professor Wolf was positioned in the centre by design. Even though he tries to line up with those opposed, it is a question of timing.

The Chairman: Like all good economists, Professor Wolf took the position of "on the one hand" and "on the other hand." The others had a tendency to be one-handed economists.

Senator Angus: That is right. I found it interesting that Mr. Crow would say the productivity debate is off the table, becausewe have just heard it is alive and well. Maybe I misunderstood you on that. Do you want to clarify that?

Mr. Crow: I said productivity was not an issue, butI meant to say that productivity is not an exchange rate issue. The exchange rate is not causing any productivity problems,which is not the same as saying that we should not be concerned about productivity. That is quite a different question.

Mr. Wolf: I agree with that.

Senator Angus: I am persuaded by statements indicating that the standard of living of Canadians has been diminished, whether we like it or not, by the 35 per cent decline in the value of our currency since 1960 or so. Think of the cost of travelling for our citizens. It is just one example.

When I look at the list of factors, such as the higher unemployment rate, the interest rates, the brain drain -- which I think all of you at one time or another have referred to in your writings -- the knowledge-based industries simply have not taken hold yet in this place. Some of our best and brightest are moving to more friendly environments, where they are not faced with the hostile, punitive tax situation that they face here in Canada. I think these issues are all related to the exchange rate question in some way or another. I look at the transactions our ingenious entrepreneurs get involved with and I see the huge amounts of money they are spending to hedge the currency risks, to get involved in derivative products, and the kinds of things that businesses have done to get around the declining value of our dollar. I guess these can all be summed up as being market forces at work, notwithstanding the regime that is imposed on us here in Canada.

To what degree do our public policy makers have any power to influence this question in the face of the strength of the market forces that are out there? How much flexibility do our governors really have, given the trade patterns that you, Professor Courchene, indicated so clearly?

I wonder if our business world, our traders, will not establish their own monetary union, or their own "dollarization" regime. Would anyone care to comment on that?

Mr. Grubel: We do not have as serious a problem as they have in Mexico, where extreme instability has driven the private sector to do that. Our natural resources are priced in U.S. dollars to standardize products such as lumber, oil, metals, and so on in the world markets.It is a global phenomenon, but we do not have the situation where, when you go to a hotel,they give you an American dollar price, as they do in Mexico. That is because our exchange rate is much more stable. I think dollarization is not as severe as it was.

Dollarization was a really big problem in Israel when the shekel was extremely unstable. At that time, Israelis had two retail prices, one in U.S. dollars and the other in shekels. That is when this is necessary. People from the University of Chicago proposed that they might go to dollarization at that time, but the idea of making it an official policy was shot down. They then had the further problem of deposits and loans made in U.S. dollars. People tend to flee an unstable currency.

Mr. Crow: I would like to come back to something Senator Angus said at the beginning, thatthe currency went down by 35 per cent. That is the nominal value of the Canadian dollar, and I do not dispute that number. What is relevant in terms of the living standards is the value of our currency, the purchasing power relative to inflation, against that of the currency with which you are comparing it. What happened to their CPI compared with ours, et cetera. Earlier, we had a greater rate of inflation than the United States; at least that was part of the story.

I think Professor Grubel said the fact that prices for our raw materials are in U.S. dollars is not relevant. You can invoice for something in any currency you want. It so happens that the U.S. dollar is used more around the world than other currencies. For example, Argentina is currently arguing about the fact that Brazil's real has gone, let us say, from 120 to 200. That is not such a problem for Argentina because they sell a lot of commodities that are sold around the world in U.S. dollars.The fact that Brazil has gone down is not an issue for them. There are issues, but that is not one of them.

If you do not have very sensible policies at home, markets will find you out rather quicker these days than they would have 30 years ago, and that is not a totally bad thing.

Mr. Courchene: I think the globalizing or future perspective is the right approach to take to some of these issues. We have been focusing too much today on the fall of the dollar. Far more difficult is the inherent volatility in this dollar. The dollar has gone from 104 to 70 in 1986, then from 89 to the low 70s, then to 63 and back up to 66.

I do not think Canada can maintain its degree of exports with this volatility. As a foreigner contemplating locating a plant in Canada, you see that in the last decades, the exchange rate has fluctuated between 63 and 89. You will realize that you have to build in a huge margin of protection, because you could lose twelve-thirteenths of your market through the exchange rate. However, if you go to the U.S. and do something foolish, you only lose one-thirteenth. I think to maintain Canada's fair share of international investment under NAFTA, we have to minimize this exchange rate volatility. It isa problem both on the upside and the downside. On the upside of 86 to 89, during those years, firms exited because there was no productivity improvement over the short period of time they had.

Two things happen with a large depreciation. You do not want to invest in productivity particularly, as that costs you more now because you are buying U.S. equipment. Secondly, your labour is exiting to other markets because Canadian wages are falling relative to U.S. wages. If we add both those together, we end up with a comparative advantage that is focused toward resource-based and physical capital rather than human capital approaches. The result is a less-diversified and less human capital labour force than we would otherwise have.

This is the wrong policy when we know that knowledge is at the cutting-edge of competitiveness. We have to protect that human capital future in Canada, but we cannot do it under the degree of volatility that we have had in the exchange rate.

Mr. Wolf: Just to comment on this volatility question, if you look at any currency vis-à-vis the U.S. dollar, you will see a lot of volatility -- the European currencies, the yen, or whatever it happens to be. The argument then becomes that we need to have a single currency around the world, and that is certainly not in the cards at the moment. Some were clearly calling for limited flexibility and saying things are too volatile. It is not just a Canadian problem.

It also irks me slightly when Tom Courchene cites numbers and then looks at the decline. That was really a very overvalued exchange rate and not sustainable. You cannot then say our standard of living has declined by that amount. We do know that we have volatility, butto some extent, that offsets what else is happening that might have more severe consequences. You cannot suggest that this is creating the standard of living.

Mr. Carr: I want to jump in on the volatility debate. The idea of flexible exchange rates is an old discussion in economics. Let me make two points on the volatility issue. The first is that if you take a look at the volatility, it is not only in the nominal exchange rate, but also in the real, which tells you real forces are causing this.

There is very little we can do about those real forces. We live in a world where those real changes exist. We could have fixed exchange rates; the world had them for a large number of years. That is what Professor Courchene is recommending in the short run. With a fixed exchange rate, you have a large probability that on any given day, there will be no change in the exchange rate; however, you have a small probability of a very large change. Britain went through a continued devaluation.

My second point is regarding human capital and the nature of our exchange rate regime. One has nothing to do with the other. This is a nice buzzword, to say that these are the new industries -- knowledge-based industries. One can think of all sorts of government policies, but to relate our exchange rate policy to any problems we may have in human capital formation is a very long stretch.

Senator Angus: It is fairly commonly argued that a flexible exchange rate masks the structural weaknesses in the system. If, in the new economy, it is deemed to be structurally weak when you are low on the human side, that would be of relevance.

Mr. Carr: Let me answer that, because the argument with flexible exchange rates is the market price. Market price changes direct resources. It does not mask weaknesses and it is not a tariff, as was mentioned by Professor Grubel. It is a real price that, when it changes, directs resources, and that is what we really want to see happen

Mr. Courchene: Exactly. At this price, we are directing our human capital south.

Senator Angus: Correct. That is my point of view.

My last question may be simple and elementary, but a lot of people may not know the answer. How can Panama, how can Quebec, how can XYZ countries, suddenly say, "We are on the U.S. dollar"? What are the technical ways in which that can happen? How does Panama do that? Whose permission do they have to have? There must be a process.

Mr. Crow: There are some technical aspects to this. I think you are asking a technical question, not a political one. We start this process with the consent of the governed.

Senator Angus: You must.

Mr. Crow: Let us take Argentina as one example of a country that has gone part way and promises to go further. As I said earlier, because of inadequate monetary policies, maybe linked to inadequate fiscal policies, Argentines were increasingly using the U.S. dollar on the streets anyway. Everything was being invoiced in U.S. dollars. From that point of view, the Argentine government considered it was losing control of the national situation, at least from a currency point of view. It went one step further and introduced a currency board.

It would not be difficult for Argentina to move to dollarization. The peso and the U.S. dollar are one to one and interchangeable. You can get change in Argentina against one or the other. This does not apply outside Argentina by the way; they will take the U.S. dollar but not the Argentine peso in Brazil. I have tried and it does not work nearly so well.

Now let us take Canada as our example. The U.S. dollar is used a little here but not a great deal. Hotel prices are usually quoted in Canadian and not U.S. dollars. In effect, you must essentially arrange an exchange rate of your bank notes for someone else's. You have to then reinvoice all of the transactions via computer. Assets and liabilities have to be reprogrammed. There are some tricky issues. If your grandmother died and left you $50,000 two days before the currency change, which currency would be the basis for the calculation? We leave those questions to lawyers.

It really comes under the subheading of what the professors of economics would call a currency reform.

Senator Angus: Would you need the permission of the U.S?

Mr. Crow: No, what you need is U.S. dollars. Canada, for example, would be in a good position basically. It has enough U.S. dollars in international reserves. It would sell U.S. treasury bills and buy U.S. dollars and dole them out for Canadian dollars at the given exchange rate.

There are other issues that have only been touched upon. There are issues of who lends to the Canadian banking system. There would not be a Canadian lender of last resort, but that is not an insurmountable problem. You could go to the U.S. for a line of credit. That would need U.S. permission.

None of these problems lacks a solution. The U.S. attitude to date with Argentina has been that if they want to use the U.S. dollar fully as their currency to reinforce their peso in the face of what is happening in Brazil, they can do so. However, it was clear that no particular favours were to be asked. It could be taken one step further by saying that this is not a challenge for the U.S; it is an opportunity. They could grease the wheels in the process.

Have I answered your question?

Senator Angus: I have a sense of it. You are quite correct in assuming it was not a political question as such. Let us say the Province of Saskatchewan, because of its resource-based economy, decides to adopt the U.S. dollar as its currency. Is it a possibility? Could they do it unilaterally?

Mr. Crow: It would have to obtain the U.S. dollars. The province could borrow them. We have to take politics off the table because clearly it is a non-starter.

Technically, it could be accomplished. They would have to borrow the U.S. dollars and give up the Canadian currency and assume the Canadian government would let all that happen. They would need a pocket of U.S. dollars to give to their citizens.

Mr. Grubel: You would go to a bank, and in return for turning in your Canadian dollar coins and bills, the bank would give you the equivalent American dollar coins and bills.

Mr. Courchene: You would have to know that the citizens want to hold them.

Senator Angus: Fifty-one per cent would be enough. What is a real majority?

Senator Grafstein: I would like to welcome the five economists. I was reminded of the three tenors. They all sing different songs, but they make a wonderful concert. I agree with the comment that it would be wonderful if this group of distinguished economists could speak more actively on this subject across the country. Part of our job here in the Senate is to elevate public debate to focus on real issues.

Mr. Chairman, I also want to welcome a former colleague, a Member of Parliament, Mr. Grubel. He worked under my aegis as co-chairman of the Canada-U.S. Inter-Parliamentary Group. I want to say to him, and to you, Mr. Chairman, that he was a superb spokesman on behalf of Canada's interests at those meetings. We miss his articulate and sometimes esoteric comments. I do not say that critically; I say that with some admiration.

Chairman, I also want to start with a bit of a mea culpa. I have only purchased cars manufactured in North America because I did not want to displace Canadian or North American jobs. The good news is that I have never bought a foreign car. The bad news is that one of my most prized possessions, my son, has gone to the United States for all of the reasons we have heard here. He felt that the future for him and his family would be better served in the United States than Canada.

I say that because we talk about these things generally, about the brain drain, but when you find it in your own family, it becomes a very important and aggravating situation. I have a vital familial interest in the question of Canadian competitiveness compared to American competitiveness.

I want to make another comment, if I may, Mr. Chairman. There was a very careful study by another committee of the Senate on the question of the euro. As you will recall, the foreign affairs committee did make a study of that and found some interesting things. I want to give this by way of background to Mr. Crow and others because it was quite unusual.As you will recall, Mr. Chairman, Mr. Thiessen disagreed with some of the comments we made about the euro, and I should put that on the record.

First, $35 billion in indirect taxation was saved as a result of implementing the euro. That was a conservative estimate. That is a huge, indirect tax that went somewhere into the banking system but certainly did not go into manufacturing productivity or trade productivity.

Now in Canada, we will not have that number. To have a fair debate, we should come to grips with this, because there is a huge variation in terms of the exchange costs in real trade. It is not 66 cents to the dollar. If you want to go to Florida for your vacation this Easter, it will be closer to 50 cents on the dollar or lower. Hence there is a huge, indirect tax.

There is another indirect tax. Most Canadian companies, in order to ensure some stability in their forward projections, use the American dollar to reduce inter-firm volatility. We have no notion of what that number is, butthese are huge factors I think we should look at.

Our five panelists are in fundamental agreement -- as a matter of fact, they are in violent agreement -- on the basic issue: How do we devise an economic system in this country that provides the greatest good for the greatest number? None of the economists here disagree with that. We might argue about sovereignty and detail. As one astute observer once said, the devil lurks in the detail. I would like to get at the detail here for a moment.

I want to start with the question of competitiveness. We have big debates in the country about productivity and competitiveness. We have materially different notions about that. As a non-economist, it strikes me that the real issue of competitiveness goes to the question of real value between Canada and the United States in terms of disposable family incomes for real goods. For instance, I buy an imported Chinese shirt in Canada for Canadian dollars, or I go to Miami and I buy the same T-shirt in American dollars. What does it cost in those particular marketplaces? I can tell you it costs less in the United States, even with the difference in terms of the exchange rate.

I would like to comment on Mr. McCallum's statement about the weakness of the currency. What is the direct impact of a weak currency -- not the fluctuating rate -- in terms of our productivity? From his conclusions, it appears to have become a serious cause of productivity rather than a consequence.

Mr. Crow: I would like to speak to the senator's first question about the cost of different currencies. You have a number of $35 billion for Europe, or "Euroland," or whatever. If you divide that number by 10, you will get an equivalent number for Canada. The number I have seen is $4.5 billion. I am not sure whether it is U.S.$35 billion or Canadian.

Senator Grafstein: U.S.

Mr. Crow: The $4.5 billion number is the one I have seen. I suggest you talk to the Bank of Canada. They have done some work on this and that sounds like a plausible number. It is about .5 per cent of GNP, approximately the same amount by which the economy declined last year in terms of trade.

There are micro-arguments about what it might cost to have a separate currency. Professor Courchene has referred to some of these but not given us any numbers.

Are there such huge losses here? I would say the evidence is not very convincing on that point. The other side of the argument is the macro-economic gains in terms of being able to smooth out shocks affecting the system like the ones we had last year.

As to the question of productivity, my position is that the exchange rate is virtually irrelevant to the productivity question. I think John McCallum's material has so many holes in it you could drive trucks through it. I am not sure John McCallum would defend it as strongly as you have promoted it, senator. If we have a productivity problem, one has to look elsewhere than the question of flexible exchange rates.

Mr. Courchene: Obviously I do not agree with aspects of Mr. Crow's analysis. John McCallum was really on the side of floating exchange rates. He does not like exchange rate fixing. In his paper he called it a "lazy dollar hypothesis." When the dollar depreciates, people are initially more competitive. They pursue their exports without necessarily making any productivity improvements, partly because there is a big market out there and their prices are cheaper. Also, that productivity now costs more because the dollar is lower, and if you want to bring in capital equipment, you have to pay more for it.

What McCallum says, using a regression analysis, is that a 10 per cent reduction in the Canadian dollar leads to a 7 per cent reduction in the ratio of Canada versus U.S. productivity. That means we have a temporary advantage for exporting that starts to evaporate in a couple of years because we lack the Americans' productivity. We are then back where we started.

In the longer term productivity increases will make us rich as a nation, not the level of the dollar. I agree that in the long term, we want to be a highly productive economy. I do not care where the exchange rate is at that time. If we are productive, we will do well.

There are some major problems with the productivity numbers. My colleague, Rick Harris, has an article in a volume we published at the John Deutsch Institute at Queen's. In it he poses the enormous data and interpretation problems of productivity.

To state that there is no relationship between the productivity and the exchange rate is going too far. That should be the question, not the answer. If we are going to do a major productivity analysis in this country, we must at least take a look at the relationship between the falling dollar and correspondingly falling productivity. If we decide from the outset that this is not an important aspect for research, then I think intellectually we are sinking too low.

Mr. Carr: With regard to Senator Grafstein's comments about his son moving to the United States, the U.S. happens to be one of the fastest and most stable economies in the world. In the early 1980s, people believed that Japan would be the leader. That was not the case. The important strategies are to attract financial and human capital from all over the world. It is too simplistic to say that if our dollar was back at par, we would be 35 per cent better off. It is too simplistic a calculation. The president of the University of Toronto could tell you why his institution is losing professors. He would say, "The American governments are supporting their universities to a greater extent than both the Ontario and the federal government, and we cannot compete on salaries." We could not compete 10 years ago, and we cannot compete now. That is a problem. We do not have enough resources. There are a number of ills facing the Canadian economy, and a large number of them will not be affected one way or the other by the nature of the exchange rate. We have productivity, tax, and regulation problems. We are a very mobile economy. People compare what is going on in the United States with what is going on here. We compete all the time, but I do not think the exchange rate can be blamed for everything it has been blamed for.

Senator Grafstein: I meant to focus on the weaker currency as opposed to the exchange rate.

Mr. Carr: The weaker currency is mostly all real rather than nominal changes in the currency, and reflective of real forces. It would be one thing if it were a nominal change, because there are real things going on there. Even if we adopted the U.S. dollar, those real changes would have to occur in the Canadian economy. That is an important point. Negative things have happened to Canada, and changing the exchange rate regime would not have prevented them. Traditional argument has it that a flexible exchange rate has insulated us to some extent. Fewer great changes would have occurred if we had been on a flexible exchange rate. There have been changes in wages, prices and employment that would have been negative if we had not had this floating dollar.

Mr. Grubel: I think the issue of productivity is a very complex one andI plan to write a number of articles on that subject.

Senator Grafstein raised an important question separate from all the other issues discussed. First, consider that you are an American investor thinking of going into Canada and buying a Canadian-denominated factory that can only be sold in Canadian dollars. If you look at the history of the Canadian dollar versus the U.S. dollar, you can see that the Canadian dollar has depreciated 1.5 per cent to 1 per cent per year. Are you going to take an expected rate of return that is higher, and has to be higher, in Canada than it is in the United States? Yes, you are. What does that mean? It means that our interest and borrowing costs are higher. If our borrowing costs are higher, the rate at which we substitute capital for labour will be slowed down.The entire interest rate structure in Canada is higher because of that.

Second, I refer you to a little story. What happens when the world prices of natural resources fall? Should we signal to the natural resource producers in British Columbia, saying, "Do not worry. You do not have to make the adjustments otherwise necessary. You do not have to become more efficient because, after all, the exchange rate will bail you out this time, as it has bailed you out every other time in the past."

However, there is another effect. Manufacturers and small businesses suddenly find that their dollar income has risen sharply because of the exchange rate depreciation. They are doing just fine, thank you very much. They are saying, "We do not have to compete as hard, and we do not have to try as hard to be efficient. In fact, we get huge profits."Then the unions say, "You have high profits, and it is about time you shared them with us."

We are locked into this depreciated exchange rate. That is why it is a constant downward trend and never comes back to where it used to be when prices were higher.Those incentives are seriously biased against doing what is right in order to increase productivity. Temporary protection is provided by the exchange rate.

Mr. Crow: Mr. Grubel said interest costs are higher. Our interest rates are lower than in the United States. Look at bonds. If we had a U.S. dollar, interest rates would go up for the equivalent risk with respect to the Canadian government versus the U.S. government.

Mr. Grubel: That has been only in the last few days.

Mr. Crow: Our interest rates are lower. With a floating rate, you can have lower interest rates than in the United States, with better inflation performance. There are no guarantees, but our interest rates are lower, not higher.

The second point is this. When the Canadian dollar goes down, as it did last year, to say that bales out -- to use Professor Grubel's phrase -- commodity producers is going a bit far, given what happens to their prices. It certainly alleviated the situation for them, but it did not bail them out.

At the same time, as Professor Grubel pointed out, the situation of the manufacturers becomes more favourable. In other words, in terms of the relative positions of commodity producers and manufacturers in Canada, the same incentives to shift from commodity production to manufacturing production or knowledge industries exists as before. There is no change in that situation. The argument does not hold water in terms of preventing resources from moving to manufacturing.

Senator Grafstein: I wish to look at the question of political will, which I feel more comfortable discussing than economics. I refer to the political will in the United States to devolve sovereignty into a supernumerary or a transcendent central bank. I am jumping over the whole step-up and assuming that everybody's view of this is that the Americans' unwillingness will be a barrier.

That was the same view held in Europe five or six years ago. Everybody said that the Germans would never give up the Deutschmark. We met with Otto Pöhl, a former colleague of Mr. Crow's, and the former chairman of the Bundesbank, who told us after he left that one of the reasons the Germans were prepared to give up sovereignty on the Deutschmark was to devalue it. They were not able to do that politically because of the political infrastructure. Because the Deutschmark was overvalued, one way to move forward in competitiveness and productivity was to get into the euro, which in effect would be a devaluation.

You will recall, Mr. Chairman, when I asked the chairman of the Bank of Canada the same question, he said that was not the case. In fact it has turned out that the euro has been devalued against the common currency.

If the Americans found that the euro was supplanting the American dollar as the currency of choice, as a reserve currency, why would they not move to seek a wider scope for their dollar? The Americans are pragmatic. Why would they not do that to protect their own economy?

Mr. Courchene: That is exactly what they will do. That is the argument as to why the Americans will come along on this.

The advent of the euro has meant that in formal terms, Euro-land is probably as big as the United States, that is, as big as the formal dollar market. However, informally, I can foresee all the East European economies having currency boards or something similar with the euro. The British will be market euroized to some degree. I think they will eventually join the euro.

This Euro-land is much bigger than the formal U.S. dollar area. Since the United States wants to continue to run such huge balance of payments deficits, their dollar has to compete with the euro in those portfolios across the world. The Americans will say, "Would it not be nice if we had a larger formal dollar area?"

Some economists in the U.S. are annoyed that there will be a 200 euro note. The largest American note is $100. Thus the Americans will lose the seigniorage in the underground economy and the drug market.

Mr. Carr: We should definitely go after that, right, Tom?

Mr. Courchene: It turns out there are a lot of American economists, and I can name a few, arguing in impressive journals that such a loss of seigniorage is a problem.

I would not use that as an argument as to why the Americans will be interested in a common currency. However, it does relate to Jack Carr's earlier statement that if it is good, do it. This is one reason why it might be good. Initially, the will to do this will to have to come from Canada, Mexico, and others. We will have to design and present it to the Americans in the same way we did with both the FTA and NAFTA.

I think you will be surprised to find that the Americans could well be on board. It is not as foolish or improbable or impossible a situation as people who have heard me argue for this assume.

I think there will be political will when the time comes.

Mr. Carr: I do believe, as Senator Grafstein said, that there is a lot of politics in this. You probably have a comparative advantage over me in arguing on politics, senator. My understanding of why Germany went in is that they had the Deutschmark; at best, the euro could equal that. At worst, it could be much worse; it could equal the lira. Thus they could in fact suffer.

I have never heard the devaluation story. They certainly have not devalued with their major trading partners in Europe. They have now devalued with regard to the U.S. This is because the situation in Europe looks so much bleaker now than it did in January. In fact the story was that the euro would take away all this business from the United States and would become the dominant reserve currency. People looking for sources of stability would go into the euro. That has not happened. In fact that is why we have seen the devaluation that may be the beginning of the end. I have been a euro-sceptic and I have been surprised it has gone this far. I predicted 1999 would not occur; it did. However, I am not convinced that we will see this play out exactly as people think in another two years from now because there are problems. There are cracks that are getting bigger and bigger.

On the U.S. side, what do they have to gain by adding Canada? We are a small player in comparison to the size of the U.S. economy. It does not make their currency, a common currency, that much more desirable, and there are huge costs. There is this huge brand name to the U.S. dollar and they do not need us to come along. They are a reserve currency. It would be much more costly to have us in there than just to preserve the status quo.

We are now arguing outside our expertise because we are arguing from a political point of view. I cannot see any great gains for the U.S. They have no objection to us using their currency, since they get the seigniorage. However, they will not come up with some common North American currency and get away from the dollar, as Professor Grubel would like them to do. I think that is a non-starter.

Mr. Wolf: I agree with Jack Carr, and I would like to add to that. At this point, it is not at all clear that the Americans are very unhappy with the level of the dollar. There are certainly advantages to them in terms of lower inflation and so on.

They may also see that the dollar is headed down in the slightly longer run, given the kind of current account deficit that they are running. Therefore, this may all take place on its own.

I do not see that getting Canada to tag along really makes any difference. You let the market forces deal with that kind of issue in terms of currencies. If you want a $200 note, then issue one.

Mr. Grubel: When John Crow put down my ideas by saying that I am a desert economist, it was déjà vu all over again. Before I became an MP, I was a member of an international group of economists who convened periodically in various exotic places. We had one conference in Madrid, where the title was, "Optimum Currency Areas." At that point, there were some visionaries who said there will be a common European currency. There were people like John Crow, and others, who said that this is just absolutely crazy and will never happen. What economists do, in part, and it has always been my role, is be visionaries.

I put forward arguments on how to improve conditions in this world, letting the political chips fall where they may. It is my role to persuade public opinion to go in this direction.

I cannot predict what will happen in the longer run in the world. Maybe rationality will win out; maybe it will not. Maybe the Maude Barlows of the world will win. I do not know. In Europe, the majority of people who looked at it were persuaded that the concept was wrong, and of course everyone is now looking at the little cracks, envisioning how more will occur, and saying that the whole thing will fall apart -- and it may. However, as was said, no one predicted that by January 1999 we would be where we are.

The same thing is true of the Canada-U.S. Free Trade Agreement. What was the benefit to the United States of having a free trade agreement with this little appendix called Canada? There was none; yet they did it.

I believe that the arguments about political lack of reality are correct in the current situation, but I believe, just as Mr. Crow does, that in the longer run economic rationality wins. I admire him for sticking by his conviction that stable prices are better than inflation. Had someone said 20 years ago that we needed stable prices, he would have been thrown out of court, because at that time everyone believed that inflation created lower unemployment. We have seen the evidence develop. The rationality of the case was made. It took the courage of Mr. Crow to go through with it.

Mr. Crow: Mr. Chairman, on the first point I probably was thrown out of court. On a minor point, I was not in Madrid and I did not make predictions about the euro, at least not in Madrid.

We are getting to some interesting questions of motivation. We can talk about the economics as much as we want, but there is a political economy side. I would like to come back to the question of Germany's position. I did not speak to Otto Pöhl on this point, but there is much more to the German position on the euro and the European Union than simply economics. Certainly Chancellor Kohl did not use economic arguments, but rather political ones.

In terms of the currency arrangements and the German interest in this, the argument put forward was something like the following: If Germany could get the other currencies around it tied into it, it could run a price stability policy more easily, because it would not envisage so much of an exchange rate problem in terms of appreciating vis-à-vis France, Netherlands and Italy.

There would be fluctuations, but some people thought the issue was that this would be advantageous in terms of generating monetary stability in Germany, whereas the problem they continually saw was that the other currencies were depreciating against them. That way there was more of a bloc, as opposed to going it alone, and that was seen as possibly advantageous. That is the argument I recall.

Senator Kelleher: As a former trade minister, I have some experience negotiating with the Americans. If the Americans say that they will not give us a say in making up monetary policy, would it still be in our interests to give up control over monetary policy in order to join in a common currency with them?

Mr. Courchene: That is a hypothetical question.

Senator Kelleher: That is not an excuse for not answering it.

The Chairman: I thought those were the kinds of questions that economists generally answered.

Mr. Courchene: That is right, but the answer I give does not trump what I said before; that is all I am saying.

It may well be that over a period of time we would find using the dollar attractive. If the Americans are willing to give us the seigniorage, to provide a lender of last resort, and allow us a little flexibility, it may become attractive. The major move toward it would probably be because of market dollarization; individual Canadians would start using it. The big jump would be policy dollarization -- whether or not Canada ever declared it to be legal tender in the system.

I prefer to answer that question a little differently. I will suggest that much of what motivated the paper I wrote, and the one I wrote jointly with Rick Harris, is only partly a common currency for North America. It is really concerned with the real problems with the volatility, et cetera, of the Canadian dollar and our belief that you have to have exchange rate fixity in order to maintain the types of trade we have with the Americans.

Another alternative is a fixed exchange rate. Dollarization will get rid of the volatility, but so will a fixed exchange rate. We can get into a debate on whether fixed exchange rates work. Most of the people at this table would probably say that there are only two choices -- floating rates or dollarization, or, on the other side, the NAMU; but I think that ignores much of the post-war history. I can give you examples of many countries that have held a fixed rate.

I think that an interim step toward either dollarization or a NAMU would be some experimentation with a fixed exchange rate. I think Canadians would want that interim step. At that point we would be adopting U.S. monetary policy; but if we want to go the full distance, if the advantages are there, I suspect we will end up there.

Senator Kelleher: I am not sure whether you have answered my question. It is a simple question. Is it worth giving up our control over monetary policy to join a common currency with the United States, if that were the case?

Mr. Courchene: The answer is yes, if by "common currency" you mean North American monetary union. If you mean dollarization, it is more difficult, because I think the pull of the U.S. constitutional rhetoric and the American creed generally becomes much stronger on the upper half of North America under dollarization than under NAMU.

I think that is a bigger decision for us. It is a decision that may move us more and more toward northern Americans and less and less toward something distinct in the upper half of North America.

Unlike an average economist, there is a bit of nationalism in me that suggests "NAMU, yes; dollarization, not sure."

Mr. Grubel: It is a very difficult question for me to answer because I am in a mode where I have psyched myself up to be an advocate for this position. I am sure those of you who have taken up causes will know the dilemma in which I find myself.

I discuss this issue briefly in my paper, if you want to look at it. I look at the alternatives -- currency boards, fixed exchange rates and dollarization. They are all so inferior to the solution I have proposed that I do not think it would be worth going there.

Let me say one more thing about why I believe the Americans would be persuaded ultimately. Visionaries in Europe are talking not just about Europe as it stands now; they fully expect Hungary, Poland and the Czech Republic to join within a few years. At that point, the market size of the euro will be larger than that of the American dollar. While it has not yet taken place, euros are being substituted for dollars. I am sure it will work well.

In the same way, you can envision that we would have a currency area for all of the Americas. This is now being discussed by other visionaries and considered to be a very desirable thing. When we have an American dollar, which could still keep the name amero, it would be such a sizeable competition to the euro that it would be "more equal." The relative size of the American dollar is likely to fall in the future, and it will mean all kinds of losses to U.S. interests.

Mr. Crow: I would like to intervene on this monetary policy question. Is it worth it? I will give a more simple answer than you have heard. It depends upon the quality of your monetary policy. If you have a lousy monetary policy, maybe it is worth giving it up to use someone else's monetary policy. That answer is becoming increasingly favoured in Latin America. If you do not have a lousy monetary policy, maybe you do not have such a strong reason for giving it up.

Mr. Grubel: That is like saying it is not raining, so one does not need an umbrella. I would like to have an institution that protects me against the future, when another generation of economists is rediscovering Keynesianism, or whatever threats there might be in the future.

Mr. Carr: Would you want a monetary union with a country in charge that has a horrible monetary policy? Would you want one with China, which has not had a great monetary policy, because you think it will protect you? What kind of umbrella do you think China would give you?

Mr. Grubel: That is why I do not propose that it be for the world as a whole. Hans Tietmeyer insisted he will not put his agreement on the euro unless the constitution of the European central bank is to the liking of the Bundesbank -- namely, an exact mirror of the Bundesbank, their responsibility being nothing but the maintenance of price stability.

He would like other things, as well, such as the independence of personnel policy so they cannot be hijacked by politicians.

I envision a package -- and I have it in my paper -- that would have to deal at length with what kind of constitution the North American central bank or the American central bank would have.

Mr. Wolf: I have to take issue with setting the German central bank, the Bundesbank, as an ideal. As an analysis of the Bundesbank's policies over the last few years indicates, it leaves something to be desired, too. Setting price stability is the only goal, and making that the only master criterion is a mistake, I think. You ought to look at some other central bank models. Mr. Greenspan's running of the Fed suggests not such a monolithic view. He considers a number of variables.

The Bank of Canada is also not as monolithic these days, when it no longer has to overcome the fiscal irresponsibility that existed before. I think the bank went overboard, but it clearly was handed something that was very unpleasant. It needed to do something about that situation.

Mr. Grubel's kneeling to the Bundesbank makes me wonder.

Mr. Crow: I should like to emphasize that if you operate a floating exchange rate regime, there are other questions related to monetary policy. Mr. Grubel has addressed even more fundamental questions, such as what kind of monetary policy the U.S. will have. If you are in favour of a floating exchange rate regime, one consequence is that the anchor of value in your domestic economy will not be the exchange rate, by definition. It will be tied to your domestic financial policy. That is a terribly important point that I think people should take on board if they want to run a floating exchange rate regime. If they want to run such a regime and not take that on board, they would be well advised to use some other currency where they think it might be done better than they can do it.

Senator Hervieux-Payette: My vision, Professor Grubel, is that in order to have an equal seat on the new Bank of America, we will have to trade our water rights or take all the toxic waste of the United States. How will we start to trade this question? I am attempting to figure out what Senator Kelleher was asking you. How do we get the Americans to agree to parity or equality with Canadians in running American policy? In my view, we are living in a dream world.


Senator Hervieux-Payette: National governments have certains economic objectives, objectives like full employment, price stability and an equitable distribution of wealth. To achieve these objectives, we have a fiscal, a monetary, and an industrial policy, and just recently, social union.

So if we abandon our monetary policy, what will be the impacts or changes required in the other policies, in fiscal and industrial policy and in the social union? Which national institutions will we have to sacrifice to achieve the objectives of a new integrated North American monetary policy?

Mr. Crow: I do not believe that there is much of a problem here. Our national monetary policy gives us some flexibility, and this enables us to pursue an objective of confidence in the national currency, which I think is an essential objective for a national central bank. And that contributes to economic growth.

The other objectives, such as the distribution of wealth and tax policy, depend on other things more than on the exchange rate system. They depend on flexibility in factor movement. Incentives to determine where they stand with respect to the U.S. market. For example, adopting a fixed rate of exchange will not in the slightest change the status with respect to fiscal competition. For example, we pay 60 per cent compared to 30 per cent in the United States, and this will continue whether our exchange rate is fixed or flexible. I therefore believe that broadly speaking, the questions you are asking depend more on the globalization of the economy than on the exchange rate. Important things can be achieved by means of a flexible exchange rate, but it should not be applied to all the government's objectives.


Mr. Grubel: In my opening remarks I tried to address this and other questions. Even though California is part of the same currency union as is Tennessee, you still have very distinct cultures and they can do many things with respect to adopting medicare, differences in medicare programs, level of public services provided and taxes. The constraints that are now existing on people moving out of high tax areas exist already. That does not actually change as a result of the lack of the sovereignty.

It is highly desirable that in the future we will no longer have the opportunity for the Bank of Canada to engage in monetary experiments which we have seen have not produced any good outcomes during the 1970s and 1980s.

I could put the question the other way around. We have had, since the post-war years, certainly since 1971 and 1972, the flexibility of the exchange rates in our own currency. How well have we done? Are our indicators of economic well-being better during that period than they have been otherwise? The answer is to say the unemployment rate, as one of the most outstanding indicators of well-being, certainly has not been lowered by our ability to have our own monetary policy.

Mr. Courchene: With regard to Senator Hervieux-Payette's focus on institutions, if you shift from a flexible exchange rate to a fixed exchange rate you obviously must shift your monetary policy, because you are buying into the U.S. monetary policy. We have been there before in the 1960s; therefore, that is not a big institutional shift. Where there is a huge institutional shift is when you are choosing between dollarization and NAMU, or North American monetary union, because in dollarization you lose everything. There is no Bank of Canada. At some point the chartered banking system, without its overarching approach to look at it, may get pulled into the U.S. system. That is what I should have said to Senator Kelleher earlier; it is hard to pull back. To coin a phrase, it is a lobster trap. You cannot get out. You have no institutions so it is hard to back out.

However, under NAMU, if something goes wrong you still have your central bank; you still have your institutions; there is an escape valve. That was one of the differences in which it is a bigger decision to go to dollarization than to NAMU. On the institutional side, there is quite a difference between a North American monetary union and just simply using the dollar.

Senator Hervieux-Payette: Are both of you on the side of dollarization?

Mr. Courchene: Neither of us likes dollarization. We are both trying to maintain a common currency of the nature of the euro, where there is a supranational central bank where we maintain the Bank of Canada as a board member on that supranational bank. In that process, as Canadians, we would get seigniorage under that system, whereas you would not under dollarization. As you pointed out in your opening preamble, we assume that this is possible.

Senator Hervieux-Payette: We are at par with the Americans on that bank?

Mr. Courchene: We are on a par, but only after we make the type of conversion so that one of these new Canadian dollars will exchange for one of the American dollars; however, we will not be worse off as Canadians because it will be exactly what the Germans are doing. It is a currency revaluation to ensure that whatever rate you want to choose is the one reflected in the new currency. We would not be at a competitive disadvantage on the one-to-one basis, because we would sort that out internally.


Senator Hervieux-Payette: Earlier we talked about Argentina and Panama and countries that adopt another country's currency without that country's permission. This approach is generally taken when governments are unstable. Mr. Carr used the term "irresponsible" for Panama. The currency of a country that is strong and economically powerful is adopted without its agreement or any official alliance. Mr. Courchene and Mr. Grubel advocate a formal agreement, an institution and international mechanisms to govern the new bank and the new currency. The other panelists recommend keeping the national currency. I believe I understood that the preference was to keep a floating exchange rate because it allowed more flexibility for the time being. Looking at the long term, which is what our role is, I wonder why we would not take the leap and adopt the euro? Why not lean towards the euro rather than some other institution? My colleague was saying earlier that the euro would perhaps become the common currency when drug traffickers began to use it, although they have not yet done so. I would really like to have a clear picture of the various camps and the different approaches taken by leading economists.

Mr. Crow: Yes, I believe you are correct. You have stated the issues rather well. There is one question that you and my colleagues have not asked yourselves, and that is what kind of voting system should be used, to share power in such an institution? Distinctions need to be made in Europe. In Europe, voting rights are shared fairly well among member countries. Would the same form of sharing be likely here in North America or even for the whole hemisphere? That would depend on the Americans and the desire to reach a general agreement. Professor Grubel would say that in 10 years they will change their mind. We shall see.


Mr. Carr: This question, "Why not adopt the euro?" is actually an interesting, almost visionary suggestion, as Mr. Grubel is accustomed to saying. In fact, if one were to say which currency was the most stable in the last 20 to 30 years, it has clearly been the German mark. If we were to have a monetary union with anybody, it should be with Germany; however, now you cannot have it just with Germany, so the next best would be the euro.

From the point of view of a monetary economist, if you wished to pick a stable currency, that is where you would go.

As to the idea of votes and whether the U.S. would have an interest, we need to understand that we are about one-twelfth the size of the U.S. economy. If they gave us a share equivalent to our size, we would have one-twelfth the voting rights. However, it is of very little interest to the U.S. to include us, because we are rather small relative to the size of their economy.

People ask about NAFTA. Even though we are a small economy, we are an important trading partner for the United States. We take 30 per cent of their exports. We are their number one customer. Even though we are a small country in terms of population, propinquity is the major cause of trade and most of our population lives close to the borders; for that reason we are a very important customer for them. Therefore, for NAFTA, it makes more sense for the U.S. to have a free trade agreement with their most important customer. However, it makes no sense for them to have some type of union by which they would give us any say. The most likely thing is for them to say, "Look, the dollar is there; either you have some inconsequential say or you have no say." That is the only real possibility and, that being so, we would simply have to take whatever monetary policy was adopted by the U.S.


Senator Hervieux-Payette: Seigniorage was the cost of adopting your neighbour's monetary unit. Would we pay annual fees or a percentage on each monetary unit? What seigniorage costs would we have to pay if we were to adopt the U.S. dollar rather than a unified dollar?


Mr. Carr: The seigniorage question is actually an interesting one. It came up at the time the Olympic games were held in Montreal. The Quebec government said, "We do not want any subsidization from the federal government; we want the seigniorage." The suggestion was to mint commemorative coins which would be legal tender. The cost was approximately 50 cents for each coin. They were $10 coins and the Quebec government would receive the profit of $9.50. That was the seigniorage.

When any country prints money, it gets command over real resources. Therefore, when we use U.S. money, it is as if they get command over real resources or we are giving them an interest-free loan. The present value of that interest-free loan is exactly equal to the U.S. dollars that we would be using in this country. That is the seigniorage question. That is the tax that they would impose on us. That is the technical explanation. The Government of Canada now gets the seigniorage, because the Bank of Canada is owned by the government and provides seigniorage to the government of the day.


Mr. Crow: This is a technical issue on which I do not disagree with Mr. Carr's comments. Banknotes are issued as part of the bank's profit margin; let us say that we invest in Treasury bills; the government has to pay some interest, but it is returned in the form of profits worth approximately two billion dollars a year to the government. That is the seigniorage obtained by issuing one's own currency.


Mr. Courchene: I wish to address the subject of voting shares. Mr. Crow is putting the issue exactly the wrong way. He says that the question is whether or not the Americans will give us equal voting rights. Of course they will not. However, we are only asking that question because we think inside Euro-land there are equal voting rights. The way to look at this is to take the existing united states of Europe and compare that body to the United States of America. Each has a big currency. Now let me compare the Canadians and the British. The British will not come in and get one share and then all the rest of the 12 will have one share equal to Britain's. If there are 11 others, they will come in and they will have one twelfth of the total. If the United States had 12 federal reserve districts, we could expect to have one thirteenth of the total.

That is the correct comparison. It is not a matter of our going in and saying we want the same powers as the U.S., any more than Britain would say that they wanted equal partnership with the combined Euro-states.

That is the comparison Mr. Crow is trying to make, and I do not think it is the right one. That part of the voting aspect is just used by people who dislike my views -- which is the majority of Canadians most of the time -- to wipe this out. They say, "Look at how terrible this is. We will not have any influence in the system." Neither will the British, when they join the euro.

Mr. Crow: If I may put it another way, we would get one twelfth, like the U.K.; Germany has one twelfth, like the U.K.; the U.S. has 11 twelfths. I am not saying that is good or bad; I am saying it is a fact.

What I am saying is that, underlying this question of a common currency, clearly there is a question of who will decide how that currency will be run. No one should be under any fond illusions about how it will be run.

If you want to generalize further, and I think Mr. Courchene has done some work here, let us include the Americas -- Brazil, Argentina and Panama; they have what they need, but will vote as well, perhaps, in a central bank of the Americas.

There is then the interesting question of what the votes will be if you get more countries in. Presumably the U.S. will not have 11 twelfths. These are simply factual questions that must be addressed and reflected upon.

In summation, the European situation does not translate directly into the Canadian-U.S. situation.

Senator Tkachuk: My view is that there is a relationship between productivity and the exchange rate. We are here today and this discussion is taking place because of what has been happening to our Canadian dollar. My question is addressed to all of you, but more to Messrs Crow and Carr.

Our dollar is now in the mid-sixties, depending on the morning that you wake up to it. Would you be more prone to look at a common currency if our dollar dropped another 10 cents to the American dollar? Or would you say, as you are saying now, "Well, that has nothing to do with productivity; everything is going pretty well; we have our sovereignty." Would you be more prone to do that? What would it take? Would it be a 45-cent dollar?

Mr. Crow: I would not look at the question quite that way. I would ask myself, first of all, why the currency is doing what it is doing. The currency's position is the result of certain reasons. Without the reasons, it is difficult to say very much.

Let us say that commodity prices fell out of bed further, and people sold the Canadian dollar in markets because they saw our balance of trade worsen, or our current account balance worsen, and they wondered about the sustainability of our balance of payments. If someone said to me, "We should not let our currency go; we should drive up exchange rates, or interest rates or whatever it takes to hold them," I would say, "Wait a minute; that may not be a good policy."

What I would not do, by the way, is get out on the hustings and say, "Oh, by the way, we can let the currency go." I think that is bad policy. It is a bad statement of policy. I do not think anyone should do that. It is not good for interest rates. That is the simple answer.

Let us take another example of where there is a question about the viability of Canada. This is known to my colleagues on the left as the "portfolio shift" argument. The people may not want to hold as many Canadian dollars because they wonder about the future of the currency. That is another, relatively more complex, set of questions.

There again, you would see interest rates move up at the same time that exchange rates move down. They are two sides of the same coin. Unwillingness to hold the currency, and wanting higher interest rates in order to hold the currency, are two manifestations of the same phenomenon -- a lack of confidence in it. It may not be because of monetary policy; it may be due to many other things.

The argument is quite complex. Obviously, in the second case, you should fix up the confidence question. There is no financial policy response that can deal adequately with a confidence issue.

It is somewhat more complex, but what I saw in 1998 did not give me any reason to think that we had a bad currency arrangement. I thought what happened to the Canadian dollar was perfectly sensible, given all the circumstances.

Mr. Carr: I do not think you should decide on the exchange rate regime by talking about either a hypothetical 10 cent fall in the Canadian dollar or a hypothetical rise. If these are real changes, they are real changes. You want an exchange rate regime that is in some sense optimum, and we have been discussing that. However, if the Canadian dollar went up 10 cents, I would not feel happier about my position. If it went down 10 cents, I would not feel it was a threat to any of the arguments I made. Those arguments still hold.

Your initial comments were on productivity; you prefaced your question with that. In fact there has been a productivity problem. It is more severe in Canada, but it is worldwide and started in the mid 1970s. It has nothing to do with the nature of exchange rate regimes. From 1950 to 1975, productivity in the western world was double what it is now. It has fallen by half. It fell when the Canadian dollar went down and it fell when the Canadian dollar went up, so I do not see that direct relationship.

There is a problem facing the Canadian economy on productivity performance relative to the U.S. dollar. There are real policy issues there, but I do not see that interacting with the nature of our exchange rate regime.

When you go back to the facts and look at the dominant changes in the exchange rate -- it is in figure 3 -- those are real changes. It has been volatile. I agree with Professor Courchene on that.

You must ask yourself, if we had had a common currency with the United States over the last 30 years, what would have happened if the same real shocks had occurred? I have a colleague who asked that question. There would have been tremendous price and employment effects on Canada. We would not have been better off. That is the crucial question. If the same shocks had occurred under a different type of regime, under currency union with the United States, what would have been the adjustment processes? We would have had to take those real adjustments regardless.

Senator Tkachuk: I asked that question because I think we are in a crisis in a way, and that is why we should be having this discussion. We should look seriously at some kind of a common currency. Right now, our government shows lack of confidence in its own dollar by saying that only 20 per cent of your savings for retirement can be foreign; 80 per cent must be Canadian. They are saying that they believe they need that restriction to keep you from moving all of your money out; you do not have confidence in the Canadian dollar as it will be when you retire, not now necessarily, but in 10 or 20 years from now.

How would the life of the common man change? Never mind the Bank of Canada and how many people would be working there. How would life change for a man or woman working in Saskatchewan or Alberta if they were using American dollars or a common currency? Would life be any different?

Mr. Wolf: Yes. As we have tried to say in several ways, these shocks would hit us harder. There would be times when we would have considerably more unemployment, because in order to maintain a fixed exchange rate, you need high interest rates. As Jack Carr says, if there are real changes, then something has to give. We would probably see a considerable amount of unemployment, and people obviously would not like that.

Mr. Grubel: I simply raise a question on these arguments. The methods of adjustment, and the willingness of the labour market and of entrepreneurs to make the necessary adjustments, are endogenous to the existing system.

The Delors commission report states that the establishment of the euro will result in greater labour market discipline. In response to shocks then, labour unions will know that they cannot run to their politicians and say that they want to keep their real wages high, even though it is wrong, and let the exchange rate bail them out.

I use that term again because that is exactly what has happened in Italy, and that is why the Italian lira has been falling relative to the Deutschmark for such a long time. It is not right to say that the rate at which we are making adjustments now would still exist under a different monetary regime. History is not a good guide for the future because we are making a fundamental change in the constraints operating on the agents in the economy.

Mr. Wolf: Directly on that point, I think we are using different lenses here, you and I. We do not see a lot of wage pressure at the moment in the Canadian economy. Wage rates have not gone up appreciably in recent times. In fact the degree of unionization has gone down.

In Germany, we see the European metalworkers federation achieving a huge increase in wages, over 4 per cent. Then you have the euro. I rest my case.

Senator Kroft: I began my questioning earlier this morning by touching on a sovereignty issue and trying to come back to the purpose of government. I have listened with appreciation and fascination throughout the morning to the discussion of the various factors that do or do not affect our economic conditions and the value of our currency.

Similar to Senator Grafstein, I have not one, but two children living in the United States. That brings a particular sensitivity to my last question.

Of all the things that may dramatically take decision-making out of the hands of government, the one that concerns me most is a growing and dramatic acceleration of the "brain drain" or the labour market shift, whatever you want to call it. Is a dramatically accelerated movement of talent from Canada to the United States made easier by structures that we are progressively putting in place?

Might that not be the massive intervening event that would cause us to fundamentally re-think a number of the presumptions on which we are now operating?

Mr. Carr: It is very interesting that you use the term, brain drain. That term came from the 1960s, when we were worried about our best, most talented people going to the United States. That was when we had fixed exchange rates.

The term was first used then to the best of my recollection. We had fixed exchange rates. We were worried about people going there because there were more opportunities. It is a problem. We have a number of problems facing the Canadian economy, and some of them have to do with government policy.

This proposed solution of a common monetary union is not taking the problem out of the hands of government. It is taking it out of the hands of the Canadian government and putting it into the hands of the U.S. government. It is still a government, just not our government, that will be conducting monetary policy.

There are a number of problems facing the economy that have to be addressed. My own particular philosophical bent is that we have too much intervention by government in the Canadian economy, and that is why it is not doing as well as the U.S. economy. It is not an exchange rate problem. The exchange rate regime is a lightning rod that attracts people with legitimate concerns about the Canadian economy. There are legitimate problems facing the Canadian economy that must be solved, but they will not be solved by simply changing the nature of the exchange rate regime.

The same is true in Europe. Europe has a large number of structural problems that exist in Germany, France, and a number of other countries. The euro is not solving that problem. If anything, the negative effect is that people may assume that the problem will be solved because of the euro. That is wrong. Those basic structural problems still exist in the Canadian economy. This will not matter one way or the other. No matter what we do with the exchange rate, we will still be faced with those problems.

Mr. Grubel: It is the same point that was made earlier. The fixity of the exchange rate, or a common currency, would clearly shine light on those problems. They cannot be hidden anymore. That is my purpose. The economic conditions caused by all these policies would be clearer. It would be identified that they are at fault.

Mr. Courchene: I agree with part of what Mr. Carr is saying. To associate all of the human capital movements with the exchange rate would be patently foolish. However, to say it has no impact is also foolish. There is enormous anecdotal evidence that this is growing. I actually thought that there were some professions that would not be mobile, like lawyers. I read in The Globe and Mail yesterday that Patrick Monahan from Osgoode Hall Law School has said that 33 of their graduates are going to the U.S. We all know about nurses. The anecdotal evidence is becoming overwhelming.

I return to Senator Tkachuk's question. What if commodity prices fall? What if oil goes to $5 a barrel, as some people say it will? What if the dollar goes to 58 cents? We will see a further exit. We will experience further difficulty in keeping our bright Canadians at home. There is a tax issue. There is the big U.S. economy issue. You cannot have an institutional arrangement with the upper-echelon level having fairly high mobility of capital and not expect some dramatic change like a 10 per cent or 15 per cent change in the Canadian dollar.

This is a critical issue. Our joint concern is that by allowing foreign markets to take the dollar down as the commodity prices go down, we are dehumanizing the Canadian economy. This acts like another regional development policy.

Coming from Saskatchewan originally, I say that if there is a problem in agriculture, let us solve it. The exchange rate is the wrong instrument for solving agriculture problems.

Mr. Crow: There are some things that need to be said. Professor Courchene can quote everything he wants from The Globe and Mail about lawyers moving south. Some people would regard that as an advantage, but that is not the question.

At this point, the issue in this committee is not whether lawyers move south. It is an issue for Canada in terms of brain drain. It is a question as worthy of discussion as productivity. The issue is the relationship or otherwise of this issue to the flexible exchange rate.

Professor Courchene makes a leap. He assumes these things are happening because of the exchange rate. If the price of oil did go down to $5, for example -- which is an hypothesis -- and the Canadian dollar came under pressure and went down, he says that would be due to the exchange rate. I would say that is the fact, that the price of oil has gone down to $5. We produce it and our terms of trade have deteriorated. We would be poorer by world standards because we would be producing something that has gone down in price. By the same token, if it went up in price we would be richer, but that is quite another question.

We will find it difficult to pay the kind of salaries that are being paid in the United States. It will be more difficult than before, whether we have a fixed or a floating exchange rate. We are poorer. That is the essence of the issue.

Professor Courchene will have another argument about the pace at which we shift to industries, which are not declining in importance. That is a profound view about what will happen to commodity prices in the future. More to the point, would the exchange rate actually get in the way of that?

I do not think the exchange rate does get in the way. If the price of oil went to $5 from $13, it would halve the revenue, or the top line, of an oil producer.

We have talked about the Canadian dollar going from 65 cents to 58 cents. That is 10 per cent. No one can tell me very convincingly that the oil patch will not be hurting in that scenario.

Senator Angus: I have listened with appreciation and fascination to this very useful and interesting discussion on flexible exchange rates and the possible North American monetary union. Some of you have mentioned articles in the Wall Street Journal on the subject. In preparation for today, I looked at some of the recent articles. I was taken by one comment from a U.K. currency trader who said that Britain should adopt the euro as soon as possible, before the U.K. turns into the Canada of Europe, marginalized and dull, on the outside of a giant trading bloc. The discussion this morning has proceeded along the lines -- obviously to a much greater degree on that side of the room and to a much lesser degree on the other side of the room -- that the conditions in Canada are not yet right for abandoning our flexible exchange rate and moving to a common currency arrangement for North America. Could you summarize the conditions you feel would make a common currency arrangement desirable in the future? What would be the winning conditions?

Mr. Crow: I will be very brief. There are two things. First, Canada would have to screw up its own policies, which would make Canadians feel there is something better to be obtained on the other side of the fence. Second, the U.S. would have to see a clear political and economic advantage to embracing Canada. One can look at various parallels, such as NAFTA. Those are the two things one would need. My argument this morning has been that Canada has not screwed up with a floating exchange rate, and that the U.S. does not see a clear advantage at the moment.

Mr. Carr: I can sum up fairly quickly by saying that if we had a Bank of Canada or Federal Reserve we could trust, I would say yes, let us trade the Canadian monetary policy for that of the U.S. However, I do not see that yet.

Mr. Wolf: To avoid the possibility of asymmetric shocks, the economic profile of Canada would have to look more like that of the U.S., which would see the gradual decline of the resource industries. It would also be helpful if the U.S. were receptive to such an agreement and saw it as being of interest to them.

You need to have labour mobility. The brain drain now is mobility favouring the U.S. There should be the possibility of real labour mobility, and I do not see that in the cards right now.

Mr. Grubel: I cannot restrain myself from remarking on the brain drain. Three of my five children, the three most productive, are in the United States. I just visited them. They are better off, not only in terms of earnings, but also in terms of productivity and opportunities for having offspring. It has been very disheartening.

I would also like to call your attention to the fact that the Fraser Institute is coming out with a publication on the brain drain. We had a conference on the subject and I have their paper. You may find if very useful in finding answers to some of the questions you have raised.

I found a polarization of opinions among Canadians. One-half said, "What are we waiting for? Why did we not do that yesterday? Can we have a common currency with the Americans"? The other half said, "Oh, it will never fly. This is terrible." We need to do what you people have done, get a debate going on the subject.

Politicians respond to public demand. They may try to shape it, but through information, we can help create a climate where this will become a viable alternative.

I am less sanguine about what will happen in the United States. Robert Mundell told me that he shares my judgement that it would be good for North America to have such an arrangement. However, he will not lend his own prestige and support to that idea at the moment because the United States has too many problems to sort out by itself. We need a couple of sponsors here in Canada -- intellectuals and party leaders -- who can take an idea and run with it.

When NAFTA was being discussed, there was widespread opposition to it, yet some people in the Mulroney government said it was in their interests. They ran with it and were able to do it. I believe that politics in the United States works in much the same way.

Of course, the idea has to be good. The flat tax, for example, had its champions, but they did not have it quite right. Now, I am open to the possibility that I do not have it quite right, that Professor Courchene does not have it quite right, and that maybe these people here are correct. Yet, we will only find out by actually putting the issues on the table, discussing them widely, and giving them publicity in Canada.

Mr. Courchene:When I travelled across the country last November giving this talk, I heard the Canadian opinion. The best response I got was on an hour-long phone-in show in Calgary.The issue was not the fixed exchange rate but a common currency, and the people seemed to be in favour. I figured that being in the oil patch, maybe they should be listening to the flexible rates guys. Anyway, there is some support out there and the people want to hear more about it.

In direct answer to this final question, the winning conditions are here. What is not here yet is the process of how we get there and some of the details. We must start by shadowing the U.S. dollar, as John Crow said. We must start the process of learning how to run a fixed exchange rate; what the underlying philosophy means on the government side; and we must have a system similar to the euro. The Mexicans, Americans, and Canadians will be in there, and our currencies will start converging over time.

One of the most important issues for convergence is to make sure we go into this common currency with about the same ratio of debt-to-GDP as the Americans because we do not want to have a problem. The Europeans are reflecting that with their 60 per cent maximum debt ceiling. It is important we do not go in there with an inappropriate fiscal side.

As these things start converging over a period of time, we will eventually start locking in on the appropriate exchange rate. Then we click in, just as the euro did, and we will have our North American common currency. That is what I think the process would be like.

Even though that process will take at least a decade, there is no urgency, because we are interested in a monetary union rather than in dollarizing. We must get some of our business people, institutions, and politicians to start talking to those people who are on the verge of dollarization and see if we can keep the option of a North American common currency open. That way, when we do think it is time for us to integrate our currency with the American dollar, we will be ready. I am willing to guess that within five years this event will occur in Canada.

The Chairman: This committee believes that informed public debate is a critical part of our role, and we thank you for your testimony today, gentlemen.

The committee adjourned.