Proceedings of the Standing Senate Committee on Banking, Trade and
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
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
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.
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
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
Senator Grafstein: I meant to focus on the weaker currency as opposed to the
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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,