II

106TH CONGRESS

1ST SESSION S. 1879

To promote international monetary stability and to share seigniorage with

officially dollarized countries.

IN THE SENATE OF THE UNITED STATES

NOVEMBER 8, 1999

Mr. MACK introduced the following bill; which was read twice and referred to

the Committee on Banking, Housing, and Urban Affairs

A BILL

To promote international monetary stability and to share

seigniorage with officially dollarized countries.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘International Monetary

5 Stability Act of 1999’’.

6 SEC. 2. FINDINGS; STATEMENT OF POLICY.

7 (a) FINDINGS.—Congress finds that—

8 (1) monetary stability is a prerequisite for

9 strong long-term economic growth and increasing

10 standards of living;
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1 (2) many emerging market countries lack mone2 tary stability and have therefore suffered economic

3 and financial problems that suppress economic

4 growth and living standards, including financial fra5 gility, inflation expectations that are built into labor

6 markets, and high and volatile inflation rates and in7 terest rates;

8 (3) many emerging market countries have used

9 pegged exchange rate systems to try to foster mone10 tary stability and have experienced temporary peri11 ods of higher economic growth and lower inflation

12 followed by drastic balance of payments problems,

13 steep devaluations, and major losses in international

14 reserves;

15 (4) emerging market countries that have adopt16 ed currency board systems have enjoyed higher rates

17 of economic growth and lower interest rates, al18 though interest rates have remained higher for loans

19 denominated in the local currency than in the an20 chor currency;

21 (5) since the financial and economic crisis that

22 struck Asia in 1997, there has been growing inter23 national interest in official dollarization, whereby a

24 country would substantially or totally eliminate its
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1 domestic currency and adopt the United States dol2 lar as legal tender;

3 (6) official dollarization would let a country im4 port monetary stability, thereby bringing inflation

5 and interest rates down toward the levels of the

6 United States;

7 (7) official dollarization would make it impos8 sible for governments to print domestic currency to

9 pay for government programs, thereby promoting

10 fiscal discipline;

11 (8) official dollarization would make it easier

12 for people to conduct financial transactions in the

13 currency they use for daily commerce, thereby pro14 moting deeper financial markets;

15 (9) lower inflation, interest rates, and inflation

16 and interest-rate volatility, greater fiscal discipline,

17 and deeper financial markets would increase long18 term economic growth and raise living standards in

19 emerging market countries;

20 (10) by increasing trade and investment flows

21 and decreasing the need for foreign assistance,

22 greater economic growth and higher living standards

23 abroad would serve the interests of the United

24 States;
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1 (11) countries that become officially dollarized

2 would lose seigniorage (the profit from issuing a cur3 rency) and this is a significant barrier to official

4 dollarization;

5 (12) official dollarization would increase the sei6 gniorage earnings of the United States;

7 (13) it would be mutually beneficial for the

8 United States to encourage official dollarization by

9 offering to share with countries that become offi10 cially dollarized a portion of the extra seigniorage

11 earnings that the United States would earn; and

12 (14) encouraging official dollarization com13 plements ongoing efforts by the United States to

14 strengthen the international financial architecture.

15 (b) STATEMENT OF POLICY.—It is the policy of the

16 United States that—

17 (1) the Federal Reserve System has no obliga18 tion to act as a lender of last resort to the financial

19 systems of dollarized countries;

20 (2) the Federal Reserve System has no obliga21 tion to consider the economic conditions of dollarized

22 countries when formulating or implementing mone23 tary policy; and
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1 (3) the supervision of financial institutions in

2 dollarized countries remains the responsibility of

3 those countries.

4 SEC. 3. CERTIFICATION.

5 (a) IN GENERAL.—The Secretary of the Treasury (in

6 this Act referred to as the ‘‘Secretary’’) may certify a

7 country as officially dollarized, after consideration of

8 whether the country has—

9 (1) ceased issuing a local paper currency;

10 (2) destroyed the materials (such as plates and

11 dies) used to produce such currency;

12 (3) extinguished a substantial portion of the

13 local currency in circulation, with plans to extinguish

14 as much of it as feasible;

15 (4) ended the legal tender status of the local

16 currency;

17 (5) granted legal tender status to the United

18 States dollar;

19 (6) ceased accepting local currency, except in

20 exchange for dollars;

21 (7) ceased making government payments in the

22 local currency;

23 (8) substantially redenominated its prices, as24 sets, and liabilities in dollars;
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1 (9) either opened its banking system to foreign

2 competition or met international banking standards

3 (such as those described in the Core Principles for

4 Effective Banking Supervision issued by the Basle

5 Committee on Banking Supervision of the Bank for

6 International Settlements); and

7 (10) engaged in advance consultations with the

8 Secretary to determine whether the country is a

9 good candidate for official dollarization.

10 (b) STATEMENT BY SECRETARY.—The Secretary

11 shall issue a written statement upon certification of a

12 country under this section that explains why that country

13 has been certified. The Secretary may not certify United

14 States territories or commonwealths as officially

15 dollarized.

16 SEC. 4. CONSOL.

17 (a) ISSUANCE.—

18 (1) FACE VALUE.—Upon certification of a

19 country under section 3, the Secretary shall issue to

20 the dollarized country a consol. Except as provided

21 in section 5, the face value of the consol shall be

22 equal to the amount of dollars exchanged for United

23 States Treasury securities by the Federal Reserve

24 System with the dollarized country for purposes of

25 official dollarization under this Act.
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1 (2) LIMITATION.—Face value may not exceed

2 the dollar value of the local currency in circulation

3 in the dollarizing country prior to the certification of

4 that country as officially dollarized under section 3.

5 (b) INTEREST PAYMENTS.—

6 (1) IN GENERAL.—Starting with the first busi7 ness day of the fourth full calendar month following

8 the date of certification of a country under section

9 3, the owner of the consol will receive interest pay10 ments every 3 calendar months equal to

11 (FV0)(i)(.25)[(C2-FV2)/(C1-FV1)](85%).

12 (2) DEFINITIONS.—In this Act—

13 (A) FV0 = face value of the consol issued

14 under this Act to the country receiving the pay15 ment;

16 (B) FV1 = face value of all consols issued

17 under this Act by the end of the most recent

18 full calendar year prior to the date of certifi19 cation under section 3 of the country receiving

20 the payment;

21 (C) FV2 = face value of all consols issued

22 under this Act by the end of the most recent

23 full calendar year prior to the payment;

24 (D) i = average yield to maturity on 90-

25 day Treasury bills in the most recent full 3-
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1 month calendar period prior to the date of pay2 ment (using the average of monthly interest

3 rates, as calculated by the Board of Governors

4 of the Federal Reserve System);

5 (E) C2 = total global dollar currency in

6 circulation at the end of the most recent full

7 calendar year prior to the payment (as provided

8 by the Board of Governors of the Federal Re9 serve System); and

10 (F) C1 = total global dollar currency in

11 circulation at the end of the most recent full

12 calendar year prior to the date of certification

13 of the country receiving the payment (as pro14 vided by the Board of Governors of the Federal

15 Reserve System).

16 SEC. 5. PREVIOUSLY DOLLARIZED COUNTRIES.

17 (a) IN GENERAL.—

18 (1) LIMITATION.—The Republic of the Marshall

19 Islands, the Federated States of Micronesia, the Re20 public of Palau, Panama, the Turks and Caicos Is21 lands and the British Virgin Islands may not be cer22 tified as officially dollarized or issued consols until

23 10 percent of the face value of consols issued to

24 countries other than those listed in this paragraph

25 equals or exceeds the total combined face value of
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1 consols that would be issued to the countries listed

2 in this paragraph upon their being certified.

3 (2) CONSOL CALCULATION.—

4 (A) IN GENERAL.—Upon certification

5 under section 3, each of the countries listed in

6 paragraph (1) shall receive a consol with a face

7 value equal to (4%)(Y).

8 (B) DEFINITION.—For purpose of sub9 paragraph (A), Y = nominal dollar gross do10 mestic product, as calculated by the World

11 Bank (or other recognized statistical authority),

12 as of September 30, 1999, for calendar year

13 1997.

14 (3) PAYMENTS.—Interest payments on consols

15 to countries listed in paragraph (1) shall be made in

16 accordance with section 4.

17 SEC. 6. RIGHTS AND OBLIGATIONS.

18 Owners of consols issued under this Act shall have

19 the same rights and obligations as other owners of pri20 vately held obligations of the United States Treasury, ex21 cept that a consol originally issued to a country is ren22 dered null and void upon a United States declaration of

23 war on the country or a publicly issued statement by the

24 Secretary that the country is no longer officially dollarized

25 in accordance with this Act, but only if such written state-
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1 ment lists the reasons for such a finding. In making a

2 determination under this section, the Secretary shall con3 sider those factors listed in section 3(a).

4 SEC. 7. REPURCHASE.

5 The Secretary may repurchase a consol issued under

6 this Act at market value, but not sooner than 10 years

7 after the date of issuance. Purchases may only be made

8 upon the joint agreement of the Secretary and the owner

9 of a consol. Consols issued under this Act are not callable.

10 SEC. 8. EXCHANGE STABILIZATION FUND.

11 Payments on consols issued under this Act to coun12 tries that are in default or arrears on loans from the Ex13 change Stabilization Fund shall be used to cover such

14 debts.

15 SEC. 9. REGULATIONS.

16 The Secretary and the Board of Governors of the

17 Federal Reserve System may issue regulations appropriate

18 to carry out this Act.

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