[Senate Report 106-354]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 705
106th Congress                                                   Report
                                 SENATE
 2d Session                                                     106-354
_______________________________________________________________________





                   INTERNATIONAL MONETARY STABILITY


                              ACT OF 2000

                               __________

                              R E P O R T

                                 of the

                     COMMITTEE ON BANKING, HOUSING,

                           AND URBAN AFFAIRS

                          UNITED STATES SENATE

                              to accompany

                                S. 2101

                             together with

                            ADDITIONAL VIEWS




    July 24 (legislative day, July 21), 2000.--Ordered to be printed
            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                      PHIL GRAMM, Texas, Chairman
RICHARD C. SHELBY, Alabama           PAUL S. SARBANES, Maryland
CONNIE MACK, Florida                 CHRISTOPHER J. DODD, Connecticut
ROBERT F. BENNETT, Utah              JOHN F. KERRY, Massachusetts
ROD GRAMS, Minnesota                 RICHARD H. BRYAN, Nevada
WAYNE ALLARD, Colorado               TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             JACK REED, Rhode Island
CHUCK HAGEL, Nebraska                CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania          EVAN BAYH, Indiana
JIM BUNNING, Kentucky                JOHN EDWARDS, North Carolina
MIKE CRAPO, Idaho

                   Wayne A. Abernathy, Staff Director
     Steven B. Harris, Democratic Staff Director and Chief Counsel
                    John E. Silvia, Chief Economist
              Robert S. Stein, Subcommittee Staff Director
             Martin J. Gruenberg, Democratic Senior Counsel
                       George E. Whittle, Editor

                                  (ii)
                            C O N T E N T S

                              ----------                              
                                                                   Page
Introduction.....................................................     1
History of the Legislation.......................................     1
Purpose and Summary of Need for Legislation......................     2
Description of Legislation.......................................     4
    Certification................................................     4
    Decertification..............................................     5
    Payments.....................................................     6
    Previously Dollarized Countries..............................     8
    Treasury Department Concerns.................................     8
    Answers to Frequently-Asked Questions........................     9
Section-by-Section Analysis of S. 2101...........................    11
    Section 1. Short Title.......................................    11
    Section 2. Findings and Statement of Policy..................    11
    Section 3. Certification.....................................    11
    Section 4. Payments..........................................    11
    Section 5. Previously Dollarized Countries...................    12
    Section 6. Decertification and Payment Cancellation..........    12
    Section 7. Regulations.......................................    12
    Section 8. Expenses..........................................    12
Changes in Existing Law (Cordon Rule)............................    12
Regulatory Impact Statement......................................    13
Cost of the Legislation..........................................    13
Additional Views of Senator Sarbanes.............................    18

                                     
                                                       Calendar No. 705
106th Congress                                                   Report
                                 SENATE
 2d Session                                                     106-354

======================================================================



 
              INTERNATIONAL MONETARY STABILITY ACT OF 2000

                                _______
                                

    July 24 (legislative day, July 21), 2000.--Ordered to be printed

                                _______
                                

 Mr. Gramm, from the Committee on Banking, Housing, and Urban Affairs, 
                        submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                         [To accompany S. 2101]

    The Committee on Banking, Housing, and Urban Affairs, to 
which was referred the bill (S. 2101) to promote international 
monetary stability and to share seigniorage with officially 
dollarized countries, having considered the same, reports 
favorably thereon with an amendment in the nature of a 
substitute and recommends that the bill (as amended) do pass.

                              INTRODUCTION

    On July 13, 2000, the Senate Committee on Banking, Housing, 
and Urban Affairs (the Banking Committee) met in legislative 
session and marked up and ordered to be reported S. 2101, the 
International Monetary Stability Act of 2000, a bill to promote 
international monetary stability and to share seigniorage with 
officially dollarized countries, with a recommendation that the 
bill do pass, with an amendment in the nature of a substitute. 
The Committee reported the bill favorably by voice vote.

                       HISTORY OF THE LEGISLATION

    The International Monetary Stability Act of 2000, S. 2101, 
was introduced on February 24, 2000, by Senators Connie Mack 
and Robert F. Bennett. The legislation introduced was similar 
to S. 1879, the International Monetary Stability Act of 1999, 
which was introduced on November 8, 1999 by Senator Mack. The 
purpose of S. 2101 is to make it easier for other countries to 
adopt the U.S. dollar as their official currency.
    The Subcommittee on Economic Policy and the Subcommittee on 
International Trade and Finance conducted two joint hearings on 
the issue of other countries adopting the U.S. dollar as their 
official currency. On April 22, 1999, the two subcommittees met 
in open session and heard and received written testimony from 
the Honorable Alan Greenspan, Chairman, Board of Governors of 
the Federal Reserve System; the Honorable Lawrence H. Summers, 
Deputy Secretary, Department of the Treasury; Dr. Wayne Angell, 
Chief Economist, Bear, Stearns & Co., Inc.; Dr. Judy Shelton, 
Member of the Board, Empower America; Dr. Guillermo Calvo, 
Director, Center for International Economics, University of 
Maryland; Dr. Catherine Mann, Senior Fellow, Institute for 
International Economics; and Dr. C. Fred Bergsten, Director, 
Institute for International Economics. On July 15, 1999, the 
two subcommittees met in open session and heard and received 
written testimony from the Honorable Manuel Hinds, Former 
Minister of Finance, Republic of El Salvador; Dr. Michael 
Gavin, Director of Economic Research for Latin America, Warburg 
Dillon Read, LLC; David Malpass, Director for International 
Economics, Bear, Stearns & Co., Inc.; and Dr. Liliana Rojas-
Suarez, Managing Director and Chief Economist for Latin 
America, Deutsche Bank Securities, Inc.
    The Subcommittee on Economic Policy conducted a legislative 
hearing to consider S.1879 on February 8, 2000. The 
Subcommittee received testimony from the Honorable Edwin M. 
Truman, Assistant Secretary for International Affairs, 
Department of the Treasury.

              PURPOSE AND SUMMARY OF NEED FOR LEGISLATION

    The purpose of the bill reported by the Banking Committee 
is to make it easier for other countries to adopt the U.S. 
dollar as their official currency.
    Many emerging market countries have had a recurring problem 
with bad monetary policy. The effects of a history of bad 
monetary policy include high interest rates and a lack of long 
term lending in the local currency. High interest rates and a 
lack of long term lending stifle investment and job creation, 
make it difficult to purchase homes and other durable goods, 
and weaken local financial systems.1 These problems, 
in combination with the traumatic events in emerging market 
countries in recent years and the creation of the euro, have 
generated interest in dollarization, particularly in Latin 
America.2
---------------------------------------------------------------------------
    \1\ Testimony of Manuel Hinds, Former Minister of Finance, Republic 
of El Salvador, Joint Hearing in the Subcommittee on Economic Policy 
and the Subcommittee on International Trade and Finance, July 15, 1999 
at 27.
    \2\ Testimony of Lawrence Summers, Deputy Secretary of the 
Treasury, Department of the Treasury, Joint Hearing in the Subcommittee 
on Economic Policy and the Subcommittee on International Trade and 
Finance, April 22, 1999 at 5.
---------------------------------------------------------------------------
    Much of Latin America is already dollarized on an 
unofficial basis.3 Unofficial dollarization means 
that, despite the existence of a national currency, people 
often use the U.S. dollar for everyday transactions, bank 
deposits, and lending, and governments often issue debt 
denominated in dollars.4 Official dollarization 
means a country eliminates its own paper currency and adopts 
the U.S. dollar as legal tender.5 (Unless otherwise 
explained, references to dollarization in the remainder of the 
report refer to official dollarization.)
---------------------------------------------------------------------------
    \3\ IMF Occasional Paper #171, Monetary Policy in Dollarized 
Economies, International Monetary Fund, 1999.
    \4\ Testimony of Michael Gavin, supra note 2 at 32-33.
    \5\ Testimony of Manuel Hinds, supra note 2 at 26. Staff Report, 
Issues Regarding Dollarization, Subcommittee on Economic Policy of the 
Senate Committee on Banking, Housing, and Urban Affairs, July 1999 at 
2.
---------------------------------------------------------------------------
    Panama, which has been dollarized since 1904, is the 
largest dollarized foreign country. Others include the Marshall 
Islands, Micronesia, Palau, Pitcairn Island, East Timor, the 
Turks and Caicos Islands, and the British Virgin 
Islands.6 Ecuador enacted dollarization legislation 
earlier this year and, as of mid-July, had completed more than 
two-thirds of the process of swapping the local currency for 
dollars. El Salvador, Guatemala, and Costa Rica are all 
studying the possibility of dollarization.7 
Argentina has also considered dollarization.8
---------------------------------------------------------------------------
    \6\ Staff Report, Basics of Dollarization, Joint Economic 
Committee, January 2000 at 7.
    \7\ El Salvador Government Weighs Dollarization--Minister, Reuters, 
March 15, 2000; Hernandez, Edin, Guatemala Considers Adopting U.S. 
Dollar as Currency, Agence France Presse, February 22, 1999; Costa Rica 
Central Bank President Calls for Dollarization Study, Dow Jones 
International News Service, July 6, 2000.
    \8\ Oppenheimer, Andres, Latin America Considers U.S. Dollar, The 
Miami Herald, January 19, 1999.
---------------------------------------------------------------------------
    The potential benefits for countries that dollarize include 
greater economic growth, more fiscal discipline, stability for 
exporters and importers, lower inflation expectations, lower 
interest rates, deeper financial markets, lengthier loan 
maturities, insulation from instability caused by international 
capital flows, and greater economic integration with the United 
States (including more trade and investment).9 The 
potential costs include losing the ability to run an 
independent monetary policy.10
---------------------------------------------------------------------------
    \9\ Testimony of Lawrence Summers, supra note 3 at 6; Testimony of 
Alan Greenspan, supra note 3 at 9; Testimony of Wayne Angell, supra 
note 3 at 23-24; Testimony of Manuel Hinds, supra note 2 at 28-29; 
Testimony of Michael Gavin, supra note 2 at 34.
    \10\ Testimony of Lawrence Summers, supra note 3 at 6.
---------------------------------------------------------------------------
    An additional cost of dollarization for a country that 
dollarizes is a loss of seigniorage, which is the profit a 
country earns when it issues its own currency.11 
Seigniorage (roughly) equals the difference between the face 
value of a currency and the cost of printing it. If a country 
were to eliminate its own currency and adopt the U.S. dollar it 
would no longer earn seigniorage. Meanwhile, because more 
people would use the U.S. dollar, the United States would earn 
more seigniorage.12
---------------------------------------------------------------------------
    \11\ Testimony of Guillermo Calvo, supra note 3 at 30.
    \12\ Staff Report, Citizen's Guide to Dollarization, Subcommittee 
on Economic Policy of the Senate Committee on Banking, Housing, and 
Urban Affairs, September 1999 at 4.
---------------------------------------------------------------------------
    The transfer of seigniorage from a country that dollarizes 
to the United States makes dollarization politically difficult 
for countries considering dollarization. First, the seigniorage 
loss could be perceived as a payment of ``tribute'' to the 
United States.13 Second, seigniorage can be a 
significant portion of government revenue. For example, 
Argentina earns about $750 million per year in seigniorage, 
which equals about 20 percent of the country's education 
budget.14
---------------------------------------------------------------------------
    \13\ Testimony of Wayne Angell, supra note 3 at 25.
    \14\ Testimony of Michael Gavin, supra note 2 at 36.
---------------------------------------------------------------------------
    The United States can substantially reduce the political 
problem of the loss of seigniorage by offering to rebate a 
portion of the amounts transferred to the United 
States.15 The bill reported by the Banking Committee 
would establish a framework under which the Secretary of the 
Treasury (the Secretary) would have the authority to make 
rebates of seigniorage to countries that dollarize. If the bill 
results in a country dollarizing that would not otherwise have 
dollarized, then the rebates would come at no net cost to the 
United States.16 The benefits to the U.S. of 
dollarization also include elimination of foreign exchange risk 
in business transactions, lower costs of doing business with 
dollarized countries, and larger and more stable export 
markets.17
---------------------------------------------------------------------------
    \15\ Testimony of Wayne Angell, supra note 3 at 25; Testimony of 
Michael Gavin, supra note 2 at 36.
    \16\ Testimony of Edwin Truman, Assistant Secretary for 
International Affairs, Department of the Treasury, Hearing in the 
Subcommittee on Economic Policy, February 8, 2000.
    \17\ Testimony of Lawrence Summers, supra note 3 at 6; Testimony of 
Guillermo Calvo, supra note 3 at 31.
---------------------------------------------------------------------------

                       DESCRIPTION OF LEGISLATION

    The bill reported by the Banking Committee would create a 
standard offer of seigniorage rebates from the United States to 
countries that dollarize. The Secretary would have the 
authority to certify a country as officially dollarized. If a 
country is continuously certified for ten years it would then 
start to receive rebates of seigniorage. The payments would be 
financed by revenue the Treasury Department receives through 
the Federal Reserve System as a result of dollarization. The 
payments are designed to rebate 85 percent of the extra 
seigniorage earnings of the United States due to official 
dollarization in countries certified by the Secretary. The 
Secretary would have the authority to reduce payments to a 
country or decertify a country, thereby ceasing U.S. payments 
altogether. The billmakes it explicit that the Federal Reserve 
is not obligated to be a lender of last resort to dollarized countries, 
would not supervise their financial institutions, and would not 
consider their economic conditions when setting monetary policy.

Certification

    The bill reported by the Banking Committee would give the 
Secretary broad discretion in deciding whether to certify a 
country as officially dollarized. The Secretary's latitude 
should encourage countries interested in official dollarization 
to cooperate fully with the United States. Certification is not 
an endorsement by the United States of the policies of a 
dollarized country. Certification simply represents a judgment 
by the Secretary that rebating seigniorage to a country is in 
the interest of the United States.
    Before certifying a country as officially dollarized the 
Secretary would have to consider whether the country was in 
fact officially dollarized, had opened its banking system to 
foreign competition or met international banking standards, had 
engaged in advance consultations with the Secretary regarding 
dollarization, and had cooperated with the United States 
regarding money laundering and counterfeiting. As evidence of 
whether a country was in fact officially dollarized the 
Secretary would have to consider whether a country has ceased 
issuing a domestic paper currency, destroyed the materials used 
to print that currency, repurchased and extinguished the 
currency, ended the currency's legal tender status in favor of 
legal tender status for the U.S. dollar, ceased making 
government payments in the domestic currency, and substantially 
re-denominated prices, assets, and liabilities into U.S. 
dollars. The Secretary could consider any additional factors 
the Secretary deems relevant.
    The Secretary may refrain from certifying a country even if 
it meets every factor listed in the legislation. On the other 
hand, the absence of any one or more of these factors does not 
preclude the Secretary from certifying a country as officially 
dollarized. Upon certification, the Secretary must issue a 
written statement explaining why that country has been 
certified.
    Most of the factors the Secretary must consider have to do 
with whether a country is in fact officially dollarized. 
Destruction of the plates and dies used to print the domestic 
currency is a consideration because it indicates the level of 
commitment to dollarization. It would be difficult to re-
introduce the domestic currency absent ready access to the 
plates and dies used to print such currency. The Secretary must 
consider a country's openness to foreign banking competition or 
compliance with international banking standards because an 
unstable banking system may limit the successfulness of 
dollarization. Panama, by far the largest country to be 
officially dollarized, allows foreign competition in its 
banking sector and that has been a source of stability.\18\ The 
Secretary must consider cooperation with the United States on 
money laundering and counterfeiting because of the concern that 
a dollarized country could attract these activities.
---------------------------------------------------------------------------
    \18\ Moreno-Villalaz, Juan Luis, Panama: No Central Bank, No 
Capital Controls, No Problem, The Wall Street Journal, September 10, 
1999 at A19.
---------------------------------------------------------------------------
    The bill implicitly allows for the dollarizing country to 
continue issuing coins, as Panama does. That is why the first 
in the list of considerations, whether a country has ceased 
issuing a local paper currency, does not mention ceasing to 
issue coins. U.S. territories, such as Guam, are not eligible 
for payments because they already benefit from the seigniorage 
generated from the dollar. Territories are part of the U.S. 
federal system of spending and taxation, so through federal 
spending they already get back seigniorage that their citizens 
generate.
    The bill makes it explicit that countries that are not 
certified by the Secretary as officially dollarized, and 
therefore unable to receive rebates of seigniorage, are free to 
dollarize unilaterally. In addition, nothing in the bill 
prevents the United States from establishing a separate 
agreement to rebate seigniorage to a particular country or 
group of countries, although such agreement would require a 
separate action by Congress to be legally binding.

Decertification

    The bill describes the conditions under which a country can 
be decertified. A declaration of war by the United States 
against a country automatically causes decertification. There 
is no reason for the United States to pay an enemy. A country 
can also be decertified if the Secretary determines that it is 
no longer dollarized. The most obvious reason this would happen 
is that another currency displaces the dollar as the 
predominant paper money. A country might decide to issue a 
national currency again, or its residents might prefer to use 
the euro or another currency rather than the dollar. If the 
dollar loses its predominance as the paper money of a country, 
the country is no longer generating the level of seigniorage 
presumed by certification, so it loses its right to a rebate of 
seigniorage. As with certification, the bill requires the 
Secretary to issue a written statement explaining the reasons 
for decertification, so as to provide accountability.

Payments

    The bill establishes two formulae that would generally 
govern the amount of payments made to dollarized countries. The 
two formulae are designed to rebate 85 percent of the 
seigniorage a country transfers to the United States by 
officially dollarizing.
    An example would be useful in explaining how the formulae 
were derived. Country X uses the peso as its currency. One peso 
is worth one U.S. dollar, and the country has 10 billion pesos 
in circulation. If its central bank has $10 billion worth of 
securities backing up the value of the pesos and the interest 
rate on these securities is 5 percent, then the country earns 
$500 million per year in seigniorage: 5 percent of $10 billion. 
If Country X were to dollarize it would have to use the $10 
billion in securities on reserve at the central bank to buy 
U.S. dollars from the Federal Reserve. Once dollarized, Country 
X would no longer have the securities and would no longer earn 
seigniorage. The Federal Reserve would have an extra $10 
billion in securities and would therefore earn an extra $500 
million per year. The formulae are designed to rebate 85 
percent of the $500 million. A country would not receive 
payments based on the extent to which it was already 
unofficially dollarized.
    The Secretary would make a lump sum payment to a country 
after it has been continuously certified for ten years. The 
lump sum payment will be an 85 percent rebate for ten years 
worth of seigniorage, plus interest. After that, the Secretary 
would make much smaller payments every quarter year. The ten 
year delay acts as a safeguard to ensure that countries will 
not get any payments unless they are sufficiently committed to 
dollarization. Countries certified for less than ten years get 
nothing.
    It is easier to understand the payment formula for the 
quarterly payments, so this will be explained first. The 
Secretary starts by taking the amount of U.S. dollars purchased 
by the country for the purpose of official dollarization. In 
Country X's case, this would be $10 billion. The Secretary 
would then multiply that amount by the prevailing short term 
interest rate on 90-day Treasury bills. Consistent with the 
above example, let's use 5 percent. After multiplying these 
together we get the amount of seigniorage Country X would have 
earned in the absence of dollarization: $500 million. The 
Secretary then multiplies this amount by 85 percent, as the 
rebate is only intended to be an 85 percent rebate. This amount 
($425 million in the case of Country X) is then multiplied by 
25 percent, because the payment is for a quarter year. At that 
point, Country X's payment would be $106,250,000 every three 
months. However, if Country X had maintained its own currency 
it is likely that its seigniorage earnings would have risen 
over time, along with increases in the amount of pesos in 
circulation. Hence, the formula adds an inflation adjustment, 
so that the amount of the payment to a country increases as the 
U.S. price level increases. For example, if the U.S. price 
level rises 50 percent in the twenty years after certification 
of Country X, then Country X will then get a quarterly payment 
of $159,375,000--50 percent more than $106,250,000.
    The amount of the one-time lump sum payment depends on 
similar principles. The Secretary would start with the amount 
of U.S. dollars purchased by a country for the purpose of 
official dollarization. This amount would be multiplied by the 
average interest rate on 90-day Treasury bills during the full 
ten year waiting period. The amount would then be multiplied by 
850 percent: 85 percent for ten years. The inflation adjustment 
would depend on the average price level during the full ten 
year period, compared to the price level at the time of 
certification. In addition, an interest component is added to 
compensate the country for having to wait ten years for the 
payment. The interest component is calculated by taking the 
average interest rate on 10-year Treasury bonds during the ten 
year waiting period and taking it to the power of 4.875. So, 
for example, if the 10-year Treasury bond has had an average 
yield of 6 percent, the lump sum payment would be multiplied by 
1.06 to the power of 4.875. Why 4.875? An exponential factor of 
4.875 is used because the country must wait an additional 9.75 
years for the lump sum payment (the country would have to wait 
a quarter year anyhow even if quarterly payments started from 
the time of certification). Therefore, interest accumulates for 
4.875 years on the median payment: half of 9.75 years.
    If a country attempts to purchase more U.S. dollars than 
are needed in order to officially dollarize, so that it can 
receive artificially large payments from the United States, the 
Secretary may use the dollar value of the local currency in 
circulation prior to certification instead of the amount of 
U.S. dollars purchased by a country. The price index used for 
calculating payments is the same index used to calculate 
payments on inflation indexed U.S. Treasury securities. If this 
price index is discontinued the Secretary may, after consulting 
with the Bureau of Labor Statistics, substitute an alternative 
index. Similarly, if the 90-day or 10-year Treasury security is 
discontinued, the Secretary may substitute an appropriate 
alternative interest rate.
    Payments would not be subject to the annual appropriations 
process, and the Secretary would make payments out of revenue 
received by the Treasury Department from the Federal Reserve. 
This source should easily provide enough revenue to make 
payments. In Fiscal Year 1999, the Federal Reserve paid the 
Treasury $25.9 billion; revenue from this source in Fiscal Year 
2000 is expected to be $32.5 billion.\19\ Official 
dollarization abroad should increase these amounts as more 
people use the U.S. dollar.
---------------------------------------------------------------------------
    \19\ Historical Tables, Budget of the United States Government, 
Fiscal Year 2001 at 41.
---------------------------------------------------------------------------
    Despite the specific formulae, the Secretary has the 
authority to reduce payments to a country if the United States 
is losing revenue on the payments, because the payments over-
represent the amount of extra seigniorage the United States is 
earning due to official dollarization in that particular 
country. For example, if a country were to be certified by the 
Secretary and subsequently have another currency become heavily 
used (such as the euro) the United States could be overpaying a 
country. In addition, the Secretary has the authority to cancel 
payments to a country by decertification, explained above.

Previously dollarized countries

    Eight countries were already dollarized before the bill was 
reported by the Banking Committee: Panama; Ecuador; three 
former U.S. trust territories that are now independent (the 
Marshall Islands, Micronesia, and Palau); and two British 
colonies (the Turks and Caicos Islands and the British Virgin 
Islands). Pitcairn Island was also previously dollarized, but 
because of its extremely small population (about 40 people) the 
bill omits it.
    The bill could have simply omitted rebating seigniorage to 
previously dollarized countries. However, they could then have 
become certified by introducing a temporary national currency 
expressly for the purpose of circumventing the bill and gaining 
certification. Paying seigniorage to previously dollarized 
countries removes the incentive for such strategies and 
recognizes that it is fair to put previously dollarized 
countries on a similar basis to countries that dollarize after 
the bill is enacted.
    The bill therefore allows rebates to countries that are 
previously dollarized. However, rebates to these countries must 
wait not only the initial ten years, but as long as it takes 
for enough new countries to dollarize so that 10 percent of the 
payments the United States makes to the newly-dollarized 
countries is equal to or larger than the payments that would be 
made to the previously dollarized countries. In theory, when a 
new country dollarizes it will eventually get a rebate of 85 
percent of its lost seigniorage. The remaining 15 percent helps 
defray the costs to the Federal Reserve of managing a larger 
money supply, finances rebates to previously-dollarized 
countries, and leaves a small profit for the United States. 
Therefore a 10 percent requirement helps ensure that the costs 
of making rebates to countries that were previously dollarized 
come out of net gains for the United States from countries that 
are newly dollarized.
    Previously dollarized countries do not have to purchase 
U.S. dollars from the Federal Reserve in order to dollarize. 
Hence the payment formula for previously dollarized countries 
uses 4 percent of a country's nominal U.S. dollar gross 
domestic product in 1997 as a surrogate for the amount of U.S. 
dollars in circulation. The figure of 4 percent corresponds to 
the low end of the international average of currency in 
circulation as a percentage of GDP. More complicated formulae 
would havebeen possible, but in every formula there is some 
element of arbitrariness, so a simple and uniform formula seems least 
open to dispute.20
---------------------------------------------------------------------------
    \20\ Staff Report, Encouraging Official Dollarization in Emerging 
Markets, Joint Economic Committee, April 1999 at 18-19.
---------------------------------------------------------------------------

Treasury Department concerns

    Treasury Secretary Lawrence Summers sent a letter to 
Senator Mack, dated July 13, 2000, in which the Secretary 
expressed his reservations about the bill. The primary concern 
is that the dollarization issue is not yet sufficiently 
``ripe'' to establish a framework under which the United States 
would offer to rebate seigniorage to dollarized countries.
    However, in 1992, as chief economist for the World Bank, 
Lawrence Summers, said, ``In the long run, finding ways of 
bribing people to dollarize, or at least give back the extra 
currency that is earned when dollarization takes place, ought 
to be an international priority. For the world as a whole, the 
advantage of dollarization seems clear to me.'' 21 
Now Ecuador is in the process of dollarization, and Argentina, 
El Salvador, Guatemala, and Costa Rica have all expressed an 
interest in dollarization. Countries are most likely to be able 
to dollarize successfully during periods of relative stability 
rather than during crises. Relative to 1995 and 1997-98, the 
current period is relatively stable for emerging market 
countries.
---------------------------------------------------------------------------
    \21\ World Bank Discussion Paper #207, Proceedings of a Conference 
on Currency Substitution and Currency Boards, The World Bank, January 
1992 at 32.
---------------------------------------------------------------------------

Answers to frequently-asked questions

            Would the bill require countries to dollarize?
    No. The bill would not impose dollarization on any country. 
The decision to dollarize would remain each country's to make 
for itself.
            What does the United States gain from the bill?
    Bad monetary policy and devaluations abroad have been a 
source of volatility and slow growth in our export markets. At 
present the United States exports more to the 31 million people 
in Canada than to the 500 million people in all of Latin 
America.22 Dollarization should result in faster 
economic growth and more purchasing power in Latin America, 
thereby creating larger markets for U.S. goods. In addition, 
dollarization should reduce currency risk, thereby helping U.S. 
investors. And by helping foreign governments strengthen their 
economies it would reduce the need to use U.S. taxpayers' money 
to bail out countries due to sudden currency-related economic 
problems.
---------------------------------------------------------------------------
    \22\ Bureau of Economic Analysis, Department of Commerce.
---------------------------------------------------------------------------
            Why is this legislation important now?
    Ecuador is in the process of dollarization right now. El 
Salvador, Guatemala, and Costa Rica are all considering 
dollarization. Argentina remains a candidate for dollarization. 
The bill would encourage countries to consider dollarization 
during periods of relative stability, when it is most likely to 
be successful, rather than during periods of economic crisis.
            Is official dollarization right for all emerging market 
                    countries?
    This issue is not addressed by the bill. The bill merely 
removes the obstacle of the seigniorage transfer to the United 
States. Countries would still refrain from official 
dollarization if they did not think it was in their best 
interests. In addition, if a country thinks official 
dollarization is in its best interests but the Secretary 
disagrees, the Secretary could refuse to rebate seigniorage.
            Would dollarization eliminate the ability of countries to 
                    run an independent monetary policy?
    Countries that dollarize would adopt U.S. monetary policy 
as their own. Independent monetary policies in emerging market 
countries have often aggravated rather than eased economic 
problems. Historically, the discretionary use of monetary 
policy has been a major source of instability in many 
countries.
            Would other countries have a say in U.S. monetary policy?
    No. The bill would not alter the structure or policy 
mandate of the Federal Reserve.
            Would officially dollarized countries pressure the Federal 
                    Reserve to conduct monetary policy in their 
                    interests regardless of the U.S. economic 
                    situation?
    According to Chairman Alan Greenspan, the Federal Reserve 
is already under foreign pressure, but this pressure does not 
lead the Federal Reserve to do things that benefit foreign 
countries to the detriment of the United States. Chairman 
Greenspan testified that official dollarization would not make 
the Federal Reserve more readily take such actions. He also 
noted that all of the monetary policy stances the Federal 
Reserve takes within its ordinary range of looseness to 
tightness would be improvements compared to what many countries 
have now.23
---------------------------------------------------------------------------
    \23\ Testimony of Alan Greenspan, supra note 3 at 14-15.
---------------------------------------------------------------------------
            Official dollarization would leave countries without a 
                    central bank to serve as a lender of last resort 
                    during a banking crisis. Would this pressure the 
                    United States to adopt this role for dollarized 
                    countries?
    First, the bill explicitly states that the United States is 
not obligated to serve as a lender of last resort to dollarized 
countries. Second, before certifying a country as officially 
dollarized, the billrequires the Secretary to consider whether 
a country has opened its banking system to foreign competition or met 
international banking standards. Either of these would greatly diminish 
the risk of a bank crisis. The presence of international banks has made 
Panama's banking system very stable. Third, a country could establish a 
lender of last resort facility outside its central bank. For example, 
Argentina has a $7 billion emergency line of credit with international 
banks.24 The Treasury Secretary may hinge certification on 
establishment of this kind of line of credit.
---------------------------------------------------------------------------
    \24\ Hausmann, Ricardo, Michael Gavin, Carmen Pages-Serra and 
Ernesto Stein, Financial Turmoil and the Choice of Exchange Rate 
Regime, Inter-American Development Bank (Paper presented at IADB 
Conference on New Initiatives to Tackle International Financial 
Turmoil, Paris), March 14, 1999.
---------------------------------------------------------------------------
            How would official dollarization be implemented?
    If a country decides to dollarize officially, its central 
bank would take the assets that back its currency and convert 
them into U.S. Treasury securities. It could do this in the 
financial markets. The central bank would then use the Treasury 
securities literally to buy dollar notes from the Federal 
Reserve. The country would then use the dollars to repurchase 
and retire the local currency. In the meantime, the country 
must cease issuing the local currency and cease accepting local 
currency for payments (except in exchange for dollars). Dollars 
would be used for taxes, wages, debts, loans, and bank 
deposits, just like in the United States.
            Why not go country-by-country and have Congress examine 
                    each country's request for a rebate separately?
    First, bills involving a particular country are likely to 
become magnets for all issues dealing with that country. 
Second, jealousy could result if one country gets a higher 
percentage rebate than another. (The bill reported by the 
Banking Committee offers a standardized 85 percent rebate.) And 
third, it would be destabilizing for a country's economy and 
financial markets for it to say it will dollarize if the U.S. 
offers a rebate and then have to wait while a bill winds its 
way through Congress, with all the ups and downs of the 
legislative process.

                      SECTION-BY-SECTION ANALYSIS

Section 1. Short title

    Section 1 provides that the bill may be cited as the 
``International Monetary Stability Act of 2000.''

Section 2. Findings and statement of policy

    Section 2 sets out the findings and statement of policy of 
the Act. The ``findings'' of the Act state the importance of 
monetary stability to emerging market countries, the 
deficiencies of certain methods of achieving monetary 
stability, the benefits of official dollarization, and the 
ability of the United States to remove an obstacle to official 
dollarization by offering to rebate seigniorage to countries 
that officially dollarize. The ``statement of policy'' provides 
that the United States is not obligated to act as a lender of 
last resort to officially dollarized countries, consider their 
economic or financial conditions in setting monetary policy, or 
supervise their financial institutions. It also states that 
countries are free to officially dollarize unilaterally if they 
do not want rebates of currency profit from the United States.

Section 3. Certification

    Section 3 provides the Secretary with authority to certify 
a country as officially dollarized upon the issuance of a 
written statement explaining why that country has been 
certified. The Secretary may certify a country as officially 
dollarized after considering whether it has in fact officially 
dollarized, opened its banking system to foreign competition or 
complied with internationally accepted banking principles, 
cooperated with the United States on money-laundering and 
counterfeiting issues, and consulted with the Secretary prior 
to certification. The Secretary can consider any other factors 
he deems relevant. The absence of any one or more of the 
factors does not preclude the Secretary from certifying a 
country as officially dollarized. The presence of all the 
factors does not require the Secretary to certify a country.

Section 4. Payments

    Section 4 provides that ten years and three months after 
certification the Secretary will commence payments to the 
country every three months. The amount of these payments will 
depend on the amount of dollars the country purchased from the 
Federal Reserve in order to dollarize officially (or the dollar 
value of the local currency in circulation prior to 
certification, if less than the amount of dollars purchased by 
the country from the Federal Reserve), short-term interest 
rates in the United States, and changes in the U.S. price 
level, using the same inflation-adjustment to the one used to 
index payments on inflation-indexed Treasury securities. The 
payments are designed to rebate 85 percent of the currency 
profits the country would have earned had it not officially 
dollarized. In addition, ten years after certification, the 
Secretary will make a one-time lump sum payment to the country 
approximately equal to the amount of the quarterly payments 
that would have been paid during the first ten years had 
quarterly payments commenced upon certification, plus interest. 
The Secretary is given the authority to reduce payments to a 
country if he believes such payments would result in a net 
revenue loss to the United States. The payments are not subject 
to the annual appropriations process and are provided out of 
revenue paid the Treasury Department by the Federal Reserve.

Section 5. Previously dollarized countries

    Section 5 provides the circumstances under which countries 
that were officially dollarized prior to this Act can receive 
payments. Panama, Ecuador, East Timor, the Marshall Islands, 
Micronesia, Palau, Turks and Caicos, and the British Virgin 
Islands may not receive payments from the Secretary until 10 
percent of the payments to other countries under this Act 
equals or exceeds the payments that would be made to these 
countries. Payments to previously-dollarized countries will 
otherwise follow the same rules as payments to other countries, 
expect that instead of depending on the amount of dollars 
purchased from the Federal Reserve, payments will depend on 
nominal dollar gross domestic product in 1997.

Section 6. Decertification and payment cancellation

    Section 6 provides that the Secretary may cease payments to 
a country if the U.S. declares war on it or if the Secretary 
issues a written public statement that the country is no longer 
officially dollarized. In making a determination of whether a 
country is no longer officially dollarized, the Secretary shall 
consider the same factors listed is Section 3 in determining 
whether to certify a country as officially dollarized.

Section 7. Regulations

    Section 7 provides that the Secretary and the Federal 
Reserve System may issue regulations to carry out this Act.

Section 8. Expenses

    Section 8 authorizes appropriations to the Secretary of 
such sums as necessary for expenses and payments under this 
Act.

                 CHANGES IN EXISTING LAW (CORDON RULE)

    In the opinion of the Banking Committee, it is necessary to 
dispense with the requirements of paragraph 12 of the rule XXVI 
of the Standing Rules of the Senate in order to expedite the 
business of the Senate.

                      REGULATORY IMPACT STATEMENT

    In compliance with paragraph 11(b) of the rule XXVI of the 
Standing Rules of the Senate, the Banking Committee makes the 
following statement regarding the regulatory impact of the 
bill.
    The Committee has determined that this legislation will not 
result in a significant net increase in the regulatory burden 
that the Federal Government imposes. S. 2101 explicitly states 
that the supervision of financial institutions in dollarized 
countries remains the responsibility of those countries and not 
the Federal Reserve.

                        COST OF THE LEGISLATION

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, July 21, 2000.
Hon. Phil Gramm,
Chairman, Committee on Banking, Housing, and Urban Affairs, U.S. 
        Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 2101, the 
International Monetary Stability Act of 2000.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is G. Thomas 
Woodward.
            Sincerely,
                                           Steven Lieberman
                                    (For Dan L. Crippen, Director).
    Enclosure.

               congressional budget office cost estimate

S. 2101--International Monetary Stability Act of 2000

    Summary: S. 2101 would permit the Department of the 
Treasury to make payments to countries that officially adopt 
the U.S. dollar as their currency and maintain it as legal 
tender (known as dollarization) for at least 10 years. The bill 
would establish conditions for the Treasury to certify 
countries as eligible to receive such payments. When a 
specified amount of dollarization occurs, the bill also would 
permit payments to be made to countries that dollarized prior 
to the bill's passage. No payments would be made to any of the 
eligible countries until at least 10 years after certification 
by the Treasury.
    CBO estimates that enacting S. 2101 would increase 
governmental receipts by $90 million over the 2001-2005 period 
and by about $1 billion over the 2001-2010 period. Because 
countries could not receive payments until after 2010, CBO 
estimates that enacting the bill would only have a negligible 
effect on direct spending over the 2001-2010 period. In 2013, 
CBO estimates that the bill would require the Secretary of the 
Treasury to pay about $980 million to countries that have been 
continuously dollarized under the bill's provisions for 10 
years, followed by additional payments each quarter. CBO 
estimates that implementing the bill's provisions would have no 
significant effect on spending subject to appropriation. 
Because the bill would affect governmental receipts (revenues) 
and direct spending, pay-as-you-go procedures would apply.
    The bill contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act (UMRA) 
and would not affect the budgets of state, local, or tribal 
governments.
    Description of the bill's major provisions: The bill would 
offer countries that adopt the U.S. dollar as their official 
currency a share of the income that the United States would 
earn from issuing the additional dollars needed to satisfy 
their total currency needs. The United States, like all 
countries, earns seigniorage--that is, a profit--on the 
currency it produces and places into circulation, currently 
about $25 billion a year. To the extent that the dollar 
displaces other currencies around the world, the United States 
would increase these seigniorage earnings while other countries 
lose seigniorage.
    Under S. 2101, a country would receive payments if it 
adopts the U.S. dollar as its sole legal tender and is 
certified by the U.S. Treasury as meeting other requirements 
specified in the bill, and maintains the dollar as its currency 
for at least 10 years. To dollarize, the country would use 
eligible liquid reserves held by its central bank to purchase 
dollars from the Federal Reserve. Ten years after 
certification, the dollarizing country would become eligible 
for quarterly payments from the Treasury that are equal to 85 
percent of the 90-day Treasury bill interest rate times the 
value of dollars acquired by the country up to the dollar value 
of the local currency in circulation at the time of conversion, 
increased by the change in the U.S. Consumer Price Index for 
All Urban Consumers (CPI-U), from the date of dollarization.
    In addition, 10 years after certification, the dollarizing 
country would receive a lump-sum payment from the Treasury that 
approximates the value of the payments it would have received 
had the quarterly payments commenced immediately upon 
certification and the interest that would have accrued using 
the rate on the 10-year Treasury bond. After the lump-sum 
payment, countries would receive the additional quarterly 
payments as specified above. Countries that dollarized prior to 
passage of the bill become eligible for payments (85 percent of 
the interest earnings on 4 percent of their GDP), if their 
prospective payments would be less than 10 percent of the 
payment to newly dollarized countries.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of S. 2101 is shown in the following table. 
For the purposes of this estimate, CBO assumes that S. 2101 
will be enacted by the end of fiscal year 2000. We assume that 
the Treasury would begin certifying dollarized countries in 
fiscal year 2003.

----------------------------------------------------------------------------------------------------------------
                                                                       By fiscal year, in millions of dollars--
                                                                    --------------------------------------------
                                                                       2001     2002     2003     2004     2005
----------------------------------------------------------------------------------------------------------------
                                             CHANGES IN REVENUES \1\

Estimated revenues.................................................       -4    (\2\)       15       29       51
----------------------------------------------------------------------------------------------------------------
\1\ S. 2101 would also increase direct spending. Over fiscal years 2001-2005, CBO estimates such amounts would
  not be significant. Beginning in 2013, CBO estimates such amounts would be substantial, with the first payment
  totaling $980 million.
\2\ Less than $500,000.

            Basis of estimate
    The budgetary effect of S. 2101 cannot be estimated with a 
great degree of confidence because of the unavailability or 
unreliability of certain data necessary for the analysis. 
Existing estimates of dollar use abroad vary in quality. 
Moreover, it is difficult to predict the demand for currency 
and deposits that would exist in a country if the dollar were 
legal tender. Most critically, an assessment of the likelihood 
that countries will dollarize either with or without enactment 
of the bill is necessarily subjective.
    CBO identified 10 countries that might have a significant 
probability of dollarizing their economies. Ecuador is already 
in the process of officially dollarizing in the absence of the 
legislation, and is classified in the bill with the other 
already-dollarized countries: East Timor, Marshall Islands, 
Micronesia, Palau, Panama, Turks and Caicos Islands, and the 
British Virgin Islands.
    To calculate the revenue impact of the bill over the next 
10 years, CBO assumes that currency and bank deposits will 
remain at their current ratios to GDP (gross domestic product) 
in each of the countries we identified as potentially 
dollarizing. The amount of currency needed in each dollarized 
country includes not only currency in circulation (less dollars 
already present in the country), but cash needed for bank 
reserves. CBO assumes that each country's banking system 
requires cash reserves of 25 percent of its M1 deposits (demand 
deposits). The figure of 25 percent approximates the combined 
central bank and commercial bank dollar reserves in Argentina, 
which requires that all banks maintain reserves in U.S. 
dollars.
    To estimate the amount of local currency in circulation in 
each year in each potentially dollarizing country, CBO 
increased the most recent estimates available from the 
International Monetary Fund (IMF) by the nominal growth (or 
predicted growth) of each country. For the value of U.S. 
dollars currently circulating in each country, CBO made 
estimates based on data from the Federal Reserve.
    For this cost estimate, CBO assumes that the probability 
that each country would officially dollarize before the 
enactment of S. 2101 is between 6.6 percent and 33.3 percent. 
CBO assumes that enacting S. 2101 would increase all the 
countries' probabilities of dollarizing by about 25 percent. 
This cost estimate is probabilistic; the costs are computed by 
multiplying the countries' currency demand under dollarization 
by their respective probabilities of dollarizing, which are 
phased in slowly over 10 years, from 1 percent of the 
probability of dollarizing in 2001 to 100 percent of the 
probability in 2010.
    Finally, CBO assumes that currency demands will be limited 
to bills. We assume that countries would continue to provide 
their own coins under the legislation.
    Revenues.--CBO expects that S. 2101 would likely increase 
the number of countries that officially dollarize. The 
additional currency required by such countries would generate 
additional interest income for the Federal Reserve beginning in 
2002. This interest income is based on the current Federal 
Reserve patterns of portfolio holdings. The additional currency 
demand also would increase currency production and processing 
costs for the Federal Reserve. CBO estimates this cost would be 
similar to the current costs of issuing and processing U.S. 
currency. We assume that for the countries that dollarize, the 
distribution of denominations, longevity of individual bills, 
and frequency with which the Federal Reserve processes bills 
would be similar to those in the United States. In addition, 
CBO assumes that the Federal Reserve would establish additional 
facilities to distribute and return currency under its Extended 
Custodial Inventory Program, and incur travel and other costs 
associated with monitoring the additional currency use. As a 
result, CBO's estimate of the additional interest earnings each 
year from enacting S. 2101 is the sum of the increase in 
interest earnings from the additional currency in circulation 
less the increase in costs to the Federal Reserve from the 
additional currency.
    Because the Treasury would need time to issue regulations 
and establish certification procedures, CBO expects that 
countries could not be certified as officially dollarized until 
2003. As a result, CBO expects that countries that might have 
otherwise dollarized in 2001 without S. 2101 would wait until 
the specifics of the Treasury's certification requirements are 
reasonably certain. Hence, CBO estimates the bill would reduce 
dollarization and dollar use in 2001 from the levels assumed in 
the baseline. Beginning in 2002, CBO estimates the bill would 
increase dollarization and the revenues from dollarization.
    Because of the initial slowing of dollarization described 
above, CBO estimates that the United States would forgo $4 
million in federal revenues in 2001. Since CBO expects 
gradually increasing probabilities of dollarization, the 
estimates of increased revenues grow over the 2002-2010 period 
to reflect the phase-in of those probabilities. We estimate 
increases in revenues of $15 million in 2003, growing to about 
$50 million by 2005, and to more than $300 million by 2010.
    Direct Spending.--Payments made to countries--representing 
their share of the seigniorage from dollarization--would be 
recorded in the budget as outlays. CBO estimates that no 
payments would be made to the dollarizing countries until 2013. 
We estimate that payments in that year would be $980 million 
and would grow thereafter. The bill authorizes the payments to 
be made from receipts deposited by the Federal Reserve with the 
Treasury.
    In addition, S. 2101 would authorize the Treasury to pay 
its expenses to implement the bill's provisions without further 
appropriation. CBO estimates that such costs would increase 
direct spending by less than $500,000 a year.
    Pay-as-you-go considerations: The Balanced Budget and 
Emergency Deficit Control Act sets up pay-as-you-go procedures 
for legislation affecting direct spending or receipts. The net 
changes in governmental receipts that are subject to pay-as-
you-go procedures are shown in the following table. The bill 
would not have a significant effect on outlays from direct 
spending until after 2010. For the purposes of enforcing pay-
as-you-go procedures, only the effects in the current year, the 
budget year, and the succeeding four years are counted.

----------------------------------------------------------------------------------------------------------------
                                                       By fiscal year, in millions of dollars--
                                    ----------------------------------------------------------------------------
                                      2000   2001   2002   2003   2004   2005   2006   2007   2008   2009   2010
----------------------------------------------------------------------------------------------------------------
Changes in receipts................      0     -4      0     15     29     51     80    118    169    231    311
Changes in outlays.................      0      0      0      0      0      0      0      0      0      0      0
----------------------------------------------------------------------------------------------------------------

    Intergovernmental and private-sector impact: The bill 
contains no intergovernmental or private-sector mandates as 
defined in UMRA and would not affect the budgets of state, 
local, or tribal governments.
    Previous CBO estimate: On May 23, 2000, CBO transmitted a 
cost estimate for S. 2101, the International Monetary Stability 
Act of 2000, as introduced. CBO estimated that version of the 
bill would increase direct spending by $422 million over the 
2001-2005 period and $4,012 million over the 2001-2010 period. 
The difference between the estimate for the bill as introduced 
and this version is the result of the 10-year delay in payments 
of seigniorage to officially dollarized countries that is 
incorporated into the bill as ordered reported by the 
committee. Hence, the estimate for the introduced bill includes 
increased outlays beginning in 2003. In addition, the delay in 
payments would reduce the incentive to dollarize under the 
bill, so that the estimates of additional revenues from 
dollarized countries in this cost estimate are also smaller 
under the bill as ordered reported than for the version as 
introduced.
    Estimate prepared by: Federal costs: Carolyn Lynch and 
Thomas Woodward; impact on State, local and tribal governments: 
Susan Sieg Tompkins; impact on the private sector: Patrice 
Gordon.
    Estimate approved by: Peter H. Fontaine, Deputy Assistant 
Director for Budget Analysis; G. Thomas Woodward, Assistant 
Director for Tax Analysis.

                            ADDITIONAL VIEWS

    The lead sponsor of S. 2101, International Monetary 
Stability Act of 2000, Senator Mack, has sought to bring to the 
attention of the Congress, the Administration, and the public 
the issue of dollarization in a serious and responsible manner. 
He believes strongly that dollarization holds significant 
promise for countries that choose to dollarize, as well as 
potential benefits to the United States.
    Dollarization, however, is a complex and in some respects 
highly technical issue. The Secretary of the Treasury, Lawrence 
Summers, has sent a letter expressing reservations about the 
legislation. The letter states:

          As the Administration has indicated in the past, 
        responsible dollarization may be a sensible decision 
        for a government to make. However, we believe that it 
        is fundamentally a unilateral sovereign decision.
          We believe the United States should remain open to 
        the possibility of sharing seigniorage revenues, after 
        full Congressional authorization and consultation, with 
        countries that dollarize under the right circumstances. 
        We do not believe, however, 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, foreign policy issues, and U.S. budget issues 
        (such as a likely paygo cost for budget purposes). 
        These issues and the establishment of a framework for 
        sharing seigniorage should be more fully debated and 
        decided.
          Consequently, the Administration does not think the 
        time is ripe for this legislation and cannot support it 
        at this time.

    The full text of the letter is included at the end of these 
remarks. I share at least some of the concerns of the Treasury 
Department. The Committee's action in reporting this 
legislation out on a voice vote recognized the conscientious 
and thoughtful manner in which Senator Mack has sought to 
address this issue. However, it was done with the understanding 
on the part of at least some members of the Committee that 
there would be efforts to address the concerns expressed by the 
Treasury before further Senate action would be taken on this 
legislation.

                                                  Paul S. Sarbanes.

                                Department of the Treasury,
                                     Washington, DC, July 13, 2000.
Hon. Connie Mack,
U.S. Senate,
Washington, DC.
    Dear Senator Mack: I understand that the Banking Committee 
intends later this week to consider your proposed legislation, 
S. 2101, ``The International Monetary Stability Act of 2000,'' 
which would authorize the Treasury Department to share 
seigniorage revenues with countries that adopt the United 
States Dollar as their official currency. I would like to take 
this opportunity to offer our views on this proposal.
    Your thoughtful, forward-looking leadership on this issue 
has contributed enormously to the intellectual debate on this 
important policy issue, and has expanded public awareness of 
both the potential benefits and costs of dollarization and 
seigniorage-sharing. We very much appreciate your efforts.
    As the Administration has indicated in the past, 
responsible dollarization may be a sensible decision for a 
government to make. However, we believe that it is 
fundamentally a unilateral sovereign decision.
    We believe the United States should remain open to the 
possibility of sharing seigniorage revenues, after full 
Congressional authorization and consultation, with countries 
that dollarize under the right circumstances. We do not 
believe, however, that there is a compelling reasons for the 
United States at this time to establish a framework to permit 
us to share seigniorage. Such as framework would raise a number 
of complex political, economic, foreign policy issues, and U.S. 
budget issues (such as a likely paygo cost for budget purposes. 
these issues and the establishment of a framework for sharing 
seigniorage should be more fully debated and decided.
    Consequently, the Administration does not think the time is 
ripe for this legislation and cannot support it at this time. 
However, we look forward to continuing our dialogue with you 
and others in Congress on this important subject.
            Sincerely,
                                               Lawrence H. Summers.

                                  
