In his review of Eric Helleiner’s Towards North American Monetary Union: The Politics and History of Canada’s Exchange Rate Regime David Laidler makes two analytical points. First, he suggests that the proponents of a North American monetary union failed to take account of the political-historical obstacles facing their proposals, which explains why they were not adopted. Second, he argues that the Bank of Canada institutions and recent performance are perfect and therefore should not be changed.
On the first point I plead not guilty. Awareness of political obstacles has caused me to modify my detailed recommendations for NAMU institutions and practices to be different from those I would have recommended if only economic efficiency were at stake.
However, it is essential to the operation of a supra-national central bank that its member countries give up their own monetary sovereignty. There is no way to modify NAMU proposals to take account of the strong Canadian desire to remain sovereign and independent of U.S. influences, which both Helleiner and Laidler considered to be the most important political and historically based obstacle to NAMU.
At the same time I remain optimistic that Canadian nationalism is not an insuperable obstacle to NAMU. After all, both Canada and the United States gave up some national sovereignty when they joined the North American Free Trade Agreement, the International Monetary Fund, the United Nations, the North Atlantic Treaty Organization and other international organizations. The economic case for monetary union is as strong as is the case for free trade, which led to NAFTA.
Laidler is right in praising the success of Canadian monetary policy and related institutions in achieving price stability and full employment in recent years. However, Canada’s monetary policy should also be judged on the basis of its success in fostering productivity. By this criterion, Canada has not done particularly well by historic and international standards.
One reason is that the Bank of Canada during the 1990s allowed our exchange rate against the U.S. dollar to fall persistently and significantly. Tom Courchene and Richard Harris argued that these trends caused Canadian firms to face much higher costs of imported capital goods than did the Americans, resulting in relatively lower investment and productivity growth in Canada.
My own case for NAMU rests fundamentally on the fact that flexible exchange rates that are influenced by the interest rate policies of the Bank of Canada and by private speculators contribute much to the risk facing investments in Canada. This higher risk resulted in lower investment and productivity growth than would have been the case had the exchange rate been fixed permanently and credibly under the proposed NAMU institutions.
The size of this effect has been very large in recent years as the exchange rate against the dollar fell from $0.89 in November 1991 to $0.62 in January 2002 and then rose to $0.90 in May 2006. Firms cannot protect themselves against such exchange rate changes by any available hedging strategies and dealings in forward and futures markets.
During that period the NAMU currency circulating in Canada, Mexico and the United States would also have fluctuated against all of the currencies in the rest of the world, much like the value of the U.S. dollar did. However, the effect of such fluctuations on Canadian firms would have been minimal since 87 percent of their trade would have been within the NAMU currency area.
Herbert Grubel
Vancouver, British Columbia
A response from David Laidler
Canada’s monetary order, though not perfect, is coherent, is well run and deserves an “if it isn’t broken don’t fix it” defence against the only kind of NAMU that is politically feasible, namely the adoption of the U.S. dollar as Canada’s domestic currency. Grubel’s new North American currency and supra-national central bank are non-starters, because the U.S. has no interest in creating them.
Officials of both the Clinton and Bush administrations have unequivocally ruled out any change in monetary arrangements in this hemisphere that would commit them to policies serving the interests of any country but the U.S., so the only version of NAMU that is available would destroy the Canadian electorate’s ability to hold those who make monetary policy for them responsible for its consequences. It is not Canadian economic nationalism, therefore, but a Canadian attachment to accountable government that constitutes the political element in the case against NAMU.
Grubel seems to think that the Bank of Canada could have held the exchange rate constant during the 1990s with no further consequences, but such a policy would have needed very tight money. The resulting domestic stagnation would have had its own effects on investment, productivity and living standards.
David Laidler
London, Ontario
