Concluding Comments at the Dallas Fed's Dollarization Conference

I agree with Professor Cohen—it's been a long conference. Well, I also think it's been a pretty good conference. About as good as you can get on a prairie. Now, if we were in Jackson Hole, Wyoming, with the Grand Tetons in the background, maybe we could improve on it. Speaking of which, I'd like to acknowledge the presence of my good buddy Tom Hoenig, the president of the Kansas City Fed and King of the Tetons.

I had to miss some of the sessions yesterday, which makes me nervous about trying to summarize or draw conclusions. I did learn some new things, "fear of floating" being one of them. "The Road to Limerick" was also interesting. I was in Ireland in November, and I actually saw a highway sign indicating a road to Limerick. I guess that's where you have to start to get to Limerick [1].

I'd never heard the phrase "hyperactive central bank" efore, although I'm familiar with the genre. Likening hyper central banks to a boxer who just won't quit really does complete the picture.

I still can't spell "seigniorage," but that may not matter as much as I thought. It didn't seem to be the crucial issue I thought it would be—at least in the sessions I heard. I can still spell "paradigm," but I'm not sure what it means, except that a pair of dimes and a quarter will buy you a cup of coffee some places. I don't know what "paradigm" means, but I do know a paradigm shift when I see one.

Our annual report will be out in about two weeks, and its essay is about the new economic paradigm. We cleverly titled the essay "The New Paradigm." We'll send you a copy. If you are a skeptic, I hope it converts you.

Now, to dollarization. I studied exchange rate regimes in school in the 1960s, about the time Milton Friedman's case for flexible exchange rates was gradually creating a paradigm shift. Floating—as I saw it—went from a radical idea to the new orthodoxy in about a decade, as do all Friedman's ideas, apparently.

I wrote my dissertation on the idea that floating rates insulate domestic economies from foreign disturbances and provide scope for independent domestic policies focused on domestic objectives. I used Canada in the 1950s as a case study.

At the time, the literature seemed to be saying those were the two big advantages of floating rates—independence and insulation. But the literature at that time usually assumed trade dominates international transactions and capital flows are mostly passive, financing trade. Even then, though, independently motivated capital flows were a fly in the ointment.

This is even more so now, although I still prefer floating for large economies with a decent record of monetary stability. But some countries don't have those prerequisites—especially countries like Argentina with a long history of monetary instability and high inflation. So I figure there are exceptions to the general case for floating.

I visited with Milton Friedman in 1997 and asked him if he still preferred floating rates. He said he'd always been misunderstood about that. He said that floating rates would work for many countries, but so would fixed rates that were really, really fixed—meaning currency boards. I believe he cited Argentina.

Then came the Asian crisis, beginning in mid-1997. We'd already had the Tequila Crisis; now it was the Mai Tai Crisis. And both seemed to confirm that both extremes worked better than anything in between (floating or currency boards). Fixed rates subject to doubt would not work for long. You had to float or totally burn all your bridges. Nothing in between worked very well.

Of course, since then much attention has been paid to the fact that there is a version of fixed rates even more fixed than currency boards. The common currency, or dollarization, solution would remove the doubt and burn the last bridge.

A few weeks ago we had a conference in this room on Europe and the euro, in cooperation with the European Institute. After the conference, the institute asked me to write an article on the euro for its new magazine.

Forgive me, but let me quote my first paragraph of that article:

"Well, they did it. I didn't think they would, but they did. Eleven European countries adopted a single currency and a single central bank. And they did so voluntarily and deliberately, without benefit of a crisis. A Texan might say 'in cold blood.' If monetary union can happen in Europe, perhaps dollarization in Latin America is not so far-fetched after all."

It does seem there's been a paradigm shift on this issue, if Europeans did what they did without the impetus of a crisis. It does seem reasonable to think that dollarization is doable in Latin America, where needed crises are readily available.

I know it hasn't been unanimous at this conference, but I think it's fair to say that among the top scholars in the field, the majority apparently do favor dollarization. As Ricardo Hausmann said, "We're not pros or cons, but pros and ex-cons."

I can't speak for the Federal Reserve. And, as was pointed out yesterday, it's more a Treasury decision than a Federal Reserve decision anyway, if we're talking about formal dollarization with a rebate on seigniorage. Formal agreements are probably desirable, but not necessary. If the need is great, countries that want to dollarize don't need our permission.

Charlie Daniels, in one of his songs, says, "Speaking for me and some folks in Tennessee…" Well, speaking for me and some folks at the Dallas Fed, we think dollarization is probably a good idea for countries that want to try it.

Speaking for me only, it seems like it's about as close to a free lunch as you can get, from the U.S. viewpoint. We keep doing what we're doing—promoting sound money through price stability. And others are able to import our sound money and the ever-so-wise policies of the Federal Reserve. They would likely get the benefits of greater price stability, including lower interest rates, cold turkey, without having to go through decades of austerity to reach that point on their own.

No, I don't want to take questions on that.

So, thank you very much for coming to our conference. Y'all come back soon, you hear?

Notes

1. Dollarization: A Limerick

   There once was a hyperactive central banker
   Whose boat needed a stronger anchor.
   The ocean was big,
   The boat was small,
   So he tied his anchor to a tanker.