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Committee on Financial Services

United States House of Representatives

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Opening Statement of Rep. Ron Paul
HR 4818, International Monetary Stability Act of 2000
Domestic and International Monetary Policy Subcommittee Markup Wednesday, July 19, 2000

Chairman Bachus, Ranking Member Waters and bill sponsor Rep. Paul Ryan deserve a lot of credit for bringing this important issue to the forefront. The idea of helping countries rid themselves of their central banks and ending discretionary monetary policy is certainly an enticing one if one hopes to empower citizens at the expense of ruling elites. I do believe that governments should follow sound monetary policies.

Austrian economist Ludwig von Mises explained well the importance to the citizenry of a country honoring its obligations to protect the value of the monetary unit. "It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights," Mises wrote in The Theory of Money and Credit.

If a country unilaterally decides to "dollarize," i.e. use the U.S. dollar as their currency, not only is there nothing the United States could do, there is nothing we should do either to prevent or encourage it. Panama early in the century and Ecuador now (among other countries) have decided that it is in their own best interest to do so. This bill is not only unnecessary, but I find myself in agreement with Treasury Secretary Larry Summers who says that he does not believe that "there is a compelling reason for the United States at this time to establish a framework to permit us to share seigniorage. Such a framework would raise a number of complex political, economic and foreign policy issues, and U.S. budget issues (such as the likely paygo cost for budget purposes) [letter to Sen. Connie Mack, July 13, 2000]." The ten-year delay in sharing seigniorage without offsets is a budgetary gimmick that should be unmasked.

It is important to take note of the caution expressed by Cato Institute Chairman William A. Niskanen who moderated a panel on this topic last year ("The Search for Global Monetary Order," 17th Annual Monetary Conference, the Cato Institute, Thursday, October 21, 1999). He explained that countries that choose to dollarize import U.S. monetary policy for better or for worse: not only monetary "stability" but, possibly, an inflationary problem as well. These countries risk importing potential financial bubbles from the Federal Reserve.

With the globalization of international finance, we need to be cautious on other counts as well. Financial institutions that operate throughout the globe may be seen as " too big to fail" and introduce increased risks of a taxpayer-funded bailouts by operating in dollarized countries that could act effectively as "free riders" of U.S. regulation. The issue of supervision in such a framework raises questions that have not been adequately addressed.

The bill gives too much discretion to secretary of the Treasury. By giving up so much authority to the executive branch, we are abdicating our responsibilities. Even the "recommendations" to the secretary in the bill raise troubling questions. The bill promotes the idea that the secretary of the Treasury, at his discretion, should pick winners and losers of the seigniorage disbursement game based on how well a country follows our dictates on unrelated policies such as money laundering. That approach should be rejected.

Such an idea opens us up to charges of "empire" building. Instead of setting clear ground rules for cooperation with other countries, the bill says instead that the U.S. will uphold its end of the bargain if, and only if, one also "cooperates" with the policy dictates of the United States regarding money laundering and tax policies--or whatever the whims of the secretary of the Treasury in ten years could be. The bill, if enacted into law, could cause resentment toward the United States.

Finally, there is another important issue that has been overlooked by the supporters of the bill. Explanations of H.R. 4818 always use U.S. Treasury securities as the example used in the exchange. With the increased possibility of the United States continuing to pay down our national debt over the next ten years, such examples are disingenuous. With fewer (if any) U.S. Treasuries available, and with the U.S. Government Sponsored Enterprises still retaining an implicit government guarantee, the supporters should be talking about the GSE’s attempt to make their "benchmark" securities the new standard. Foreign central banks already hold an increasing number of GSE securities which are then monetized. In short, we should follow truth in advertising and rename the bill the "GSE ‘Benchmark’ Security Promotion Act."


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