Re: Dollarization -- Moore's argument

[Bruce McFarling <ecbm@xxxxxxxxxxxxxxxxxxx>]

On Fri, 04 May 2001 17:05:25 -0500,
Paul Davidson <pdavidson@xxxxxxx>
wrote, replying to:

>>Think of a branch bank. Under dollarization we no longer have to
>>ensure that each branch has no deficit or surplus, and depress
>>the local economy if it should run a deficit.

>But Basil there is a difference between a branch bank of a single bank
>not having to worry about a balance of payments between itself and the
>mother bank AND two separate banks at the same clearing house.  In the
>latter case, one bank can get into deficit problems at the clearing house
>while the other runs a surplus -- even though both banks keep their
>accounting records in the same unit of account, say the dollar.
>
>You are apparently envisioning a single commercial bank spanning the
>globe -- which is a lot more than mere dollarization.

Note that under the theory of international money 100 years ago,
that was EXACTLY how the gold standard was SUPPOSED to work.
A country running persistent surpluses would have an outflow
of gold, resulting in a restriction of the domestic money
supply, resulting in a depreciation (of prices in the country,
rather than of the rate of exchange), resulting in terms of
trade moving against the country and an improved trade balance.

I don't believe that it ever worked as the story claimed, but
the first part, involving gold outflows and a restriction of
the domestic money supply, certainly happened, for example in
the leadup to the debt crisis in the Southern Cone in the
1890's.  And if the economies of the countries were well-oiled
equilibrating machines *instead of* a collection of social
systems, one can certainly imagine the well-oiled response of
theory taking place, instead of the crisis and economic collapse
that took place in reality.



Virtually,

Bruce McFarling, Shortland, NSW
ecbm@xxxxxxxxxxxxxxxxxxx