China's Peg: A Trojan Horse

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March 6, 2009 

Dear Prime Minister Harper, 

I am writing to you today to present an option that could not only resolve our present economic malaise, but set the stage for multi-fold growth for the decades to come. That option is pegging the Canadian dollar to the U.S. dollar à la People’s Republic of China. 

China’s Peg: A Trojan Horse 

In Virgil’s Aeneid, Father Aeneas recounts the story of the capture of his city by the Greeks: 

                        But if so great desire

      Moves you to hear the tale of our disasters,

      Briefly recalled, the final throes of Troy,

      However I may shudder at the memory

      And shrink again in grief, let me begin. 

      Knowing their strength broken in warfare, turned

      Back by the fates, and years – so many years –

      Already slipped away, the Danean captains

      By the divine handicraft of Pallas built

      A horse of timber, tall as a hill,

      And sheathed its ribs with plankings of cut pine.

      This they gave out to be an offering

      For a safe return by sea, and the word went round.

      But on the sly they shut inside a company

      Chosen from their picked soldiery by lot,

      Crowding the vaulted caverns in the dark –

      The horse’s belly – with men fully armed.¹ 

The main idea behind this proposal is that the PRC is flooding the currency markets of the world with Renminbi by selling it at a lower price than that determined by market forces. This works well for the PRC’s long-term objectives.  

To mark the bi-centennial of the United States, Herman Kahn, William Brown, Leon Martel and the Staff of the Hudson Institute published The Next 200 Years: A Scenario of America and the World. In the preface we have:  

Often contemporary issues are not fully understood until they have become history and can be seen in a historical context. To some degree futurology can furnish such a context now by giving us an artificial vantage point from which to look backward; examined in this long-term perspective, current issues look quite different and can be better comprehended. 

… 

Mankind is now operating on such a grand scale that many current activities and programs raise issues that – at least conceptually – can be dealt with only in a much longer time frame. There is an obligation for all – but especially for the most advanced nation on earth h- to define the problems of our future and suggest the means for dealing with them. In effect we are suggesting that both publish and private institutions try to act as an early warning system and as a lobby for the medium- and long-term future; for we believe, to rephrase Santayana, that those who neglect the future risk losing it.² 

To finish the story of Father Aneas: 

‘The offering must be hauled to its true home,’

[The crowd] clamoured. ‘Votive prayers to [Minerva]

Must be said there!’

                  So we breached the walls

And laid the city open. Everyone

Pitched in to get the figure underpinned

With rollers, hempen lines around the neck.

Deadly, pregnant with enemies, the horse

Crawled upward to the breach. And boys and girls

Sang hymns around the towrope as for joy

They touched it. Rolling on, it cast a shadow

Over the city’s heart. O Fatherland,

O Illium, home of gods! Defensive wall

Renowned in war for Dardanius’s people!

There on the very threshold of the breach

It jarred to a halt four times, four times that arms

In the belly thrown together made a sound –

Yet on we strove unmindful, deaf and blind,

Then, even then, Cassandra’s lips unsealed

The doom to come: lips by a god’s command

Never believed or heeded by the Trojans.

So pitiably we, for whom that day

Would be the last, made all our temples green

With leafy festal boughs throughout the city. 

… 

                  Opened wide,

The horse emitted men; gladly they dropped

Out of the cavern, captains first, Thessandrus,

Sthenelus and the man of iron, Ulysses;

Hand over hand upon the rope, Acamas, Thoas

Neoptolemus and Prince Machaon,

Menelaus and then the master builder,

Epeos, who designed the horse decoy.

Into the darkened city, buried deep

In sleep and wine, they made their way,

Cut the few sentries down,

Let in the fellow soldiers at the gate,

And joined their combat companies as planned.³ 

In a chapter entitled “Exchange Rate Diplomacy” in his book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World, John B. Taylor writes: 

In the hours immediately following the 9/11 attacked, I called my counterparts in the G7. When I reached Haruhiko Kuroda of Japan, he first expressed his condolences and then got right down to business. He suggested that Japan and the United States should by dollars in the foreign exchange market to prop up the value of the dollar. I said that it was best to let the exchange markets adjust to the new information on their own, without government intervention. I would never completely rule out foreign exchange market intervention, but I had followed the markets closely for years and had spent time on the trading floors in New York and Tokyo. My experience made me reluctant to intervene, and that was a policy position held throughout the Bush administration.  

In fact, the United States did not intervene in the currency markets during my tenure at Treasury. This set a new record, and it was a big change from past administrations. The Clinton administration intervened twenty times in the foreign exchange markets, the last time just before the 2000 president elections. Kuroda had worked with the U.S. Treasury during that intervention, so it was not surprising that he would ask the United States to intervene just one year later. The first Bush administration also intervened in the foreign currency markets, as did the Reagan administration, the Carter administration, and so on. However, I believe that adopting a policy of non-intervention was for the better. Traders soon adjusted their expectations to be absence of the U.S. government in the markets, and as a result the markets have worked more smoothly and with less volatility. 

… 

Japan was not the only country to intervene heavily in the currency markets during this period. The Chinese intervened in even larger amounts. The Chinese were more secretive about their interventions than the Japanese, who regularly informed me of their interventions, a common practice in the G7. In contrast, the Chinese did not inform me of their interventions on a daily basis, but their purpose was no secret. They wanted to prevent the Chinese currency, the yuan, from rising in price against the dollar. The appreciation of the yuan would make Chinese exports more expensive abroad.⁴ 

History of the Peg 

Renminbi/US Dollar exchange rate, 1952-20075
Year	RMB/$US	Year	RMB/$US	Year	RMB/$US	Year	RMB/$US
1952	2.26	1966	2.46	1980	1.50	1994	8.62
1953	2.62	1967	2.46	1981	1.70	1995	8.35
1954	2.62	1968	2.46	1982	1.89	1996	8.31
1955	2.47	1969	2.46	1983	1.98	1997	8.29
1956	2.46	1970	2.46	1984	2.32	1998	8.28
1957	2.46	1971	2.46	1985	2.94	1999	8.28
1958	2.46	1972	2.25	1986	3.45	2000	8.28
1959	2.46	1973	1.99	1987	3.72	2001	8.28
1960	2.46	1974	1.96	1988	3.72	2002	8.28
1961	2.46	1975	1.86	1989	3.77	2003	8.28
1962	2.46	1976	1.94	1990	4.78	2004	8.28
1963	2.46	1977	1.86	1991	5.32	2005	8.19
1964	2.46	1978	1.68	1992	5.51	2006	7.97
1965	2.46	1979	1.56	1993	5.76	2007	7.61

 

When CNOOC (a state-owned Chinese company) made a bid to buy Unocal Corporation in June 2005, the PRC’s fiscal policies attracted widespread criticism from Congress. Wayne M. Morrison, of the Foreign Affairs, Defense, and Trade Division of the Congressional Research Service, published “China-U.S. Trade Issues” shortly thereafter, which contained the following: 

U.S. Trade with China 

U.S.-China trade rose rapidly after the two nations established diplomatic relations (January 1979), signed a bilateral trade agreement (July 1979), and provided mutual most-favored-nation (MFN) treatment beginning 1980. Total trade (exports plus imports) between the two nations rose from about $5 billion in 1980 to $231 billion in 2004; China is now the third-largest U.S. trading partner. Over the past few years, U.S. trade with China has grown at a faster rate than that of any other major U.S. trading partner.⁶ 

… 

China’s Currency Peg 

China pegs its currency, the yuan, to the U.S. dollar at about 8.3 yuan to the dollar. It is able to maintain this peg because its currency is not fully convertible in international markets and because it maintains restrictions and controls over capital transactions. As a result, China’s exchange rate is not based on market forces. Many U.S. policymakers and business representatives have charged that China’s currency is significantly undervalued vis-à-vis the U.S. dollar (with estimates ranging from 15 to 40%), making Chinese exports to the United States cheaper⁷, and U.S. exports to China more expensive, than they would if exchange rates were determined by market forces. They complain that this policy has particularly hurt several U.S. manufacturing sectors (such as textiles and apparel, furniture, plastics, machine tools, and tool and die), which are forced to compete domestically against low-cost imports from China, and has contributed to the growing U.S. trade deficit with China. They have called on the Bush Administration to pressure China either to appreciate its currency (by increasing the band in which it is allowed to be traded in China) or to allow it to float freely in international markets. 

During the mid-1990’s, Chinese officials indicated that they were considering making the yuan fully convertible by 2000. However⁸, these plans were abandoned as a result of the 1997 Asian financial crisis, when the economies of East Asian countries experienced⁹a number of economic shocks, including a sharp depreciation in their currencies. China’s currency peg and capital controls were a major factor in enabling China to maintain economic growth and stability, while many of its neighbors experienced sharp economic declines. While Chinese exports suffered somewhat from sharp currency depreciations in several East Asian countries, China pledged not to devalue its currency, a policy that many analysts claim helped stabilize the effects of the economic crisis in Asia and gained China high praise from U.S. officials. 

Chinese officials argue that its currency peg policy is not meant to favor exports over imports, but instead to foster economic stability. They have expressed concern that abandoning the peg could cause ¹⁰ an economic crisis in China and would especially hurt its exports industries sectors at a time when painful economic reforms (such as closing down inefficient state-owned enterprises and restructuring the banking system) are being implemented. Chinese officials view economic stability as critical to sustaining political stability; they fear an appreciated currency could reduce jobs and lower wages in several sectors and thus could cause worker unrest. 

U.S. critics of China’s currency peg contend that the low value of the yuan is forcing other East Asian economies to keep the value of their currencies low (vis-à-vis the U.S. dollar) in order to compete with Chinese products, to the detriment of U.S. exporters¹¹ and U.S. domestic industries competing against foreign imports. They further note that while China is still a developing country, it has been able to accumulate massive foreign exchange reserves ($659.1 billion at end of March 2005) and thus has the resources to maintain stability of its currency if it were fully convertible. They also argue that appreciating the yuan would greatly benefit China by lowering the cost of imports for Chinese consumers and producers who use imported parts and machinery. Finally, critics of the peg argue that China’s accumulation of large amounts of foreign exchange reserves (in order to maintain the currency peg¹²) could better be spent on investment in infrastructure and development of poor regions¹³. 

Some economists are skeptical over the wisdom of pushing China too hard to appreciate its currency. They note that a significant share of U.S. imports from China is produced by foreign multinational corporations that are increasingly shifting production to China (and other countries) to take advantage of low costs¹⁴ there and that a change in China’s peg would do little to reverse this trend. Many warn that, given the weak state of China’s banking system, moving to a fully convertible currency might actually cause the yuan to depreciate, rather than appreciate. Such analysts have called on the United States to press China to implement currency reform in stages over time. Finally, economists note that China is the second-largest purchaser of U.S. Treasury securities ($223.5 billion as of March 2005), which helps the U.S. federal budget deficit and helps keep U.S. interest rates low.  

Legislations Addressing China’s Currency Policy. A number of bills addressing China’s currency have been introduced in 109^th Congress: 

• S. 14 (Stabenow), S. 295 (Schumer), and H.R. 1575 (Myrick) direct the Secretary of the Treasury to negotiate with China to accept a market-based system of currency valuation, and imposes an additional duty of 27.5% on Chinese goods imported into the United States unless the President submits a certification to Congress that China is no longer manipulating the rate of exchange and is complying with accepted market-based trading policies. H.R. 3004 (English) would require the Treasury Department to determine if China manipulated its currency and to impose additional tariffs on Chinese goods comparable to the rate of currency manipulation.

 

• S. 377 (Lieberman) directs the President to negotiate with those countries determined to be engaged most egregiously in currency manipulation and to seek an end to such manipulation¹⁵. If an agreement is not reached, the President is directed to institute proceedings under the relevant U.S. and international trade laws and to seek appropriate damages and remedies for the U.S. manufacturers and other affected parties.

 

• H.R. 2208 (Manzullo), S. 984 (Snowe), and S. 1048 (Schumer) adds changes to the criteria that the U.S. Treasury Department is required to consider when making a determination on currency manipulation (including a protracted large-scale intervention in one direction in the exchange markets) in its bi-annual reports on International Economic and Exchange Rate Policies.

 

• H.R. 2414 (Rogers) would require the Treasury Department to make a determination whether China’s currency policy interferes with effective balance of payments adjustments or confers a competitive advantage in international trade that would not exist if the currency value were set by market forces¹⁶. If such a determination were made, the President would be required to bring a WTO case against China to seek across-the-board tariffs¹⁷ on Chinese goods in order to offset the subsidy effects of undervaluation.

 

• Some Members of Congress support changing U.S. law to apply countervailing laws to nonmarket economies so that U.S. firms are able to take action against unfair government subsidies, especially in regards to China.¹⁸ They contend that China’s currency peg constitutes a government export subsidy that should be actionable under U.S. countervailing laws. H.R. 1216 (English) and S. 593 (Collins) would apply U.S. countervailing laws to nonmarket economies. H.R. 1498 (Tim Ryan) would apply U.S. countervailing laws to countries that manipulate their currencies¹⁹.

 

On April 6, 2005, the Senate failed (by a vote of 33 to 67) to table an amendment, S.Amdt. 309 (Schumer) to S. 600 (Foreign Affairs Authorization Act), which would impose a 27.5% tariff on Chinese goods if China failed to substantially appreciate its currency to market levels. In response to the vote, the Senate leadership moved to allow a vote on S. 295 (which has same language as S.Amdt. 309) no later than July 27, 2005, as long as the sponsors of the amendment agree not to sponsor similar amendments for the duration of the 109^th Congress. However, on June 30, Senator Schumer and other sponsors of S. 295 agreed to delay consideration of the bill after they received a briefing from Administration officials and were told that China is expected to make significant progress on reforming its currency over the next few months.²⁰ 

President Bush on a number of occasions has criticized China’s currency peg, stating that exchange rates should be determined by market forces, and he raised the issue in a meeting with Chinese President Hu Jintao on October 19, 2003. On October 30, 2003, the Treasury Department released its semiannual report on exchange rate policies. Although Treasury was under intense pressure from several Members of Congress to state that China “manipulated”²¹ its currency (which by U.S. law would have required Treasury to negotiate with China to end such practices), it did not make such a designation²². However, the Bush Administration pledged to pursue the issue with China, largely under the auspices of a joint technical cooperation program, agreed to on October 14, 2003, to promote the development of China’s financial markets and to examine ways China can move more quickly toward a floating exchange rate²³.  

The Administration’s position on China’s currency peg appears to have toughened recently. In April 2005, U.S. Treasury Secretary John Snow stated at a G-7 meeting that “China is ready now to adopt a more flexible exchange rate.” On May 17, 2005, the Treasury Department released its latest International Economic and Exchange Rate Policies report to Congress. The reported [sic.] stated that China’s currency peg policy “is a substantial distortion to world markets” and that “China is now ready to move to a more flexible exchange rate and should move now.” The report warned that Treasury would closely monitor China’s progress over the next six months, but did not precisely spell out what moves it expected China to take to make its currency more flexible.²⁴ 

In 2005 the U.S.-China Commission argued that across-the-board tariffs were permitted as per Article XXI of the World Trade Organization, “which allows members to take necessary actions to protect their national security.”²⁵ 

Possible Outcomes 

In his attempts to avoid a possible Japanese-esk “lost decade”, President Obama has taken a page out of inter-war history and has okayed a stimulus fund meant to build U.S. infrastructure and get America and the rest of the world out of the present economic crisis. This may help stabilize the current crisis somewhat, but let us recall more of the thinking that Cold War-hardened “deep thinkers” such as Herman Kahn et al. have left in The Next 200 Years:  

We frequently find that what is well know is poorly understood, and what is taken for granted is taken without thought. We also disagree with much of the thinking and discussion in academic, intellectual and literary establishments today. Therefore, for both the common and academic wisdom we offer uncommon analysis. The exercise may please some, jar others and perhaps upset more than a few. But we are confident that it will open a new perspective on the issues we discuss. For America and the world – in this anniversary year – we could hardly ask more or offer less.²⁶ 

China has an up-to-date and impressive nuclear arsenal: 

When China detonated its first atomic bomb on October 16, 1964, the United States and Soviet Union faced a new and potentially destabilizing change in the Cold War balance of power. Both countries, along with Britain, had signed the limited nuclear test band treaty in 1963. Both countries had reason to fear the consequences of China’s possession of the bomb. The United States saw China as an uncompromising adversary, and had threatened to use nuclear weapons against the communist state on more than one occasion [The note for this reads as follows: “Such threats were made through statements or nuclear deployments in the Korean War and the Taiwan Straits crises of 1954-1956 and 1958. See Richard K. Batts, Nuclear Blackmail and Nuclear Balance (Washington, DC: The Brookings Institute, 1987), 31-47, 54-62; John Wilson Lewis and Xue Litai, China Builds the Bomb (Stanford: Standford University Press, 1988), Chapter 2; and Melvin Gartove and Byong-Moo Hwang, China Under Threat (Baltimore: Johns Hopkins University Press, 1980), 82]²⁷. The Soviet Union viewed Mao Zedong, China’s leader, as warlike and imprudent. In 1959 it had formally reneged on a promise made in 1957 to give China a prototype atomic bomb. Relations had been deteriorating since that time, and within five years of China’s first nuclear explosion, there would be serious border clashes between the former allies.²⁸ 

Just as a refresher, let us look at some classic scenarios for a nuclear escalation:  

1. Cases of ambiguity, because of either uncertainty of definitions or doubts about the facts or whether the nuclear taboo had indeed been violated

 

2. Cases with minimal or no collateral damage to civilians, in which the weapons were used mostly or entirely against military targets

 

3. Cases with uncertainty about the responsibility for the decision to strike, ranging from simple accident, to insubordination, to outright madness and nuclear terrorism

 

4. Clear and highly destructive nuclear escalation, with definite government responsibility with the world begin inclined to retreat thereafter

 

5. Clear and highly destructive nuclear escalation, with definite government responsibility, launched by a rogue state, but with a braver outside world response

 

6. Clear and highly destructive nuclear escalation, but in an ongoing context where two opposing sides are hitting each other with nuclear weapons

 

7. Clear and highly destructive nuclear escalation, but where the perpetrator retains a major residual nuclear force, with the aftermath perhaps having to take the form of “limited strategic nuclear war”.²⁹

 

Besides the impressive outcome of WWIII, another likely outcome of the breakdown of a stable global trading environment is that the world be thrown into a Dark Age.  

The following is an excerpt from Alan Winnington’s account of the slaves-societies of the remote South-Western borders of China (published only five years before the PRC tested its first atomic bomb):  

This was indeed the heart of the Norsu area and I was said to be the first non-Chinese to reach it. I spent more than a week in this hamlet of a town, drinking buttered tea from daybreak to late at night, and talking with Norsu slave-owners, slaves and commoners, Communist Party leaders, people responsible for trade, education and medicine, before leaving…By the time I left the town I had a pretty clear picture of Norsu slave-society. 

In the Cool Mountains – now officially Ninglang County – the Norsu live on the highlands and the other nationalities live in the level basins between the mountains. People who actually are Norsu, those who reckon themselves as Norsu and those who have descended from abducted slaves and claim no other nationality, make up a total of 56,294 as far as they have been counted. Possibly a few others exist in remote valleys by they cannot be many. 

Of these 56,000, fewer than 3,000 are nobles, the hereditary aristocracy and ruling class, alone having full political, citizenship and property rights. They are tall, healthy and warlike, with a strong belief in the inferiority of all other human beings couple with an exaggerated view of characteristics they think they possess. They call themselves the Nor which means “black” and claim to have “strong black bone”, in the same way as English aristocrats refer to their “blue blood” and think it better than the vulgar sort. (Since su means “people”, Norsu means “black people”.³⁰ 

… 

About 47 per cent. Of all the Norsu living in the Cool Mountains are slaves. Most of these are descendents of other nationalities captured and enslaved, though a very large number are first generation slaves, captured within the past few decades as children. This reflects the intensified abduction of slaves since the early ‘twenties. 

Slaves exits in two categories: “house-slaves” who live in the owner’s house; “separate-slaves” who live in an uncertain state of matrimony in separate households. 

These are the two aspects of the Norsu slave’s life-cycle. 

Separate-slaves are called in Norsu Apa-i-su, which means “people sleeping on the side”. Their “marriages” are formed by the master and can be liquidated by him at any time. The slave-owner pairs off male and female slaves, provides a wattle “house” and some land and allows the slaves a small part of their time to cultivate for themselves. This encourages the reproduction of what has now become the main form of wealth in Ninglang – slaves. As one separate-slave said to me: “In the daytime we produce in the fields for our masters and at night we produce for him in our beds.” 

Children of separate-slaves become house-slaves. 

House-slaves are called Gashigalu which means “those at the lower end of the fireplace”. They are also know as A-i-zen or “small children”. They enter the master’s house at the age of five or six, when they can perform simple tasks, and their education stops at that point. A slave-owner with enough slaves and a big household may keep one slave doing nothing but carrying water, another milling grain or getting firewood and able to do no other work.  

House-slaves are divided among their master’s sons and daughters of the same generation when these marry. Boy slaves go to the sons and girl slaves to the daughters. On marriage the girls take their girl slaves to the home of their new husband, who has his share of male slaves. The male and female slaves are paired off as separate-slaves and the cycle begins again.³¹ 

In 1789, Adam Smith wrote the following:  

By preferring the support of domestic to that of foreign industry, [the merchant] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intentions. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.³²  

In a book called Grand Strategy, published in 1941, there is the following segment on “Nationality and the Problem of Continual Change”: 

Watch the everlasting flow of buses in New York, or the unloading of the multifarious merchandise on the docks with the cries of the worker as the long arms of the cranes swings backward and forward in the sunlight. Watch the precision of the traffic lights as the stream of vehicles check and passes on. Move to the suburbs with their comfort-seeking houses, their search for personal pleasure, their gardens, their endless radios and automobiles, each home alike, perhaps, but each expressing an individual’s attempt to furnish and furbish it in a way that pleases him. Go further out, to the fields and hills, to the sound of singing birds in the thickets, the plowing of land, the cutting of trees, the new attempt to make the soil of each farm produce more by the teachings of science, the country towns and villages, the inland cities, the ports and seaside resorts, the blackened industrial areas and the high wind-swept mountains. Imagine the network of roads, railways, canals, and telegraph wires connecting them, the busy broadcasting stations, the movement of people between work and home, between toil and leisure. 

These glimpses of society might be taken not only from America but from almost any part of the civilized world, for everywhere, despite local differences, men have adopted primarily one method of organizing this vast conglomeration of activities – that of nationality. We have in effect all of us accepted the national structure as the framework within which we shall live and work, take our mates in marriage for better or worse, pay our taxes and grumble, lie down in our beds and die. We are all primarily Frenchmen, Americans, Englishmen, Germans and so on, rather than rich men, poor men, or middle-class workers. “The nation is the political unit, and nationalism the group symbol of the present stage of civilization.” It is this fact which gives the modern world its peculiar character and forces upon it many of its special problems. 

In a world of competition, one of these problems is the question of development. Imagine a modern nation which fails to move with the times. Gradually it will fall behind in its scientific discoveries. Its factories will no longer be equipped with the latest techniques. Its products will cease to appeal in the markets of the world. Its financial and other resources will have to be extravagantly drawn upon to maintain an adverse trade balance. Soon its war potential and power of armed resistance will be sapped. Its whole safety will be in danger. Thus in the last resort a modern nation finds itself dependent for its entire existence upon this basic ability to evolve – so much so that whatever induces progress is of vital national importance as the key to the everlasting struggle for survival. Yet how is such progress to be ensured? After all, it is not the normal wish of those in control to have incessantly to be making changes and adjustments. Would a signalman on a railway be particularly pleased to have the signals he already understands changed to a set he does not know? Surely only when his own system is proved so bad that the new effort is adequately compensated for by the extra efficiency it brings. But that moment in a world of struggle is often too late. Changes which have been put off for too long bring no lasting benefits.³³ 

Possible Solutions 

To consider the three possible solutions available to Canada at this stage, it would be a good idea to consider some concepts about money: 

Fiat money is a type of paper or symbol with which any individual may buy most things by law. It has virtually no intrinsic value but immediately assumes a trading value when its shortage (i.e. when it is no longer a stack variable to everyone in the appropriate set of simultaneous programs) can prevent trades that would have been deemed profitable in a monetary competitive equilibrium system.³⁴ 

An equilibrium system based on fiat money is no longer globally enjoyed due to the massive commodification of the Renminbi (translated as “the people’s money”). In lieu of this development we must consider the Quantity Theory of Money. Unfortunately: 

Hardly any theory in economics has been so long debated as the quantity theory of money. Yet, no thorough analysis of its original content and purpose, of its historical development, and of all its numerous misinterpretations has been undertaken. Thus there is still no unanimity as to the formulation and interpretation of the quantity theory. Almost every economist has written something about the quantity theory, but only a very few have manifested a correct understanding of it. This lack of clear definition is, curiously enough, very much due to the simplicity of the theory; it has occasioned a vagueness in its formulation which has lead to innumerable misinterpretations of its content. Indeed, the poet’s words: ‘the simple thing is the difficult thing’, seems to be more than a rhetoric phrase.³⁵ 

The first solution is moot: make no change. This will lead to the PRC continuing to filibuster about it’s currency exchange strategy, more and more U.S. dollars to concentrate in the Chinese Central Bank’s reserves, and an even larger amount of Mao Zedong-stamped RMB’s propagating throughout the world.  

If Canada does not make economic accommodations now for China’s preponderance, it will soon have to make social and political ones. 

The second solution is the Amero. This, would lead to a European-style socio-political imbroglio. Let us consider some common language on the European Economic Union monetary union issue:  

The plans for a common currency and the economic union were treated in the EEC in an organic unity. The maintenance of fixed exchange parities is in itself an irrealistic [sic.] aim. The inflation of the national currencies, which is very likely to develop differently both in size and rate, will result in a relative over- and undervaluation of the individual currencies. The different growth rates of efficiency and productivity would yield the same results. And the under- or over-valuation of the currencies may give rise to cumulative tensions in respect of both the equilibrium of fixed exchange rates and balances of payments and, in the long run, of growth, modernization and export expansion. Therefore, the maintenance of the equilibrium of the balances of payments within the area presupposes collective aid and reserve funds, as well as comprehensive co-ordination of financial policies (issue of banknotes, interest and credit conditions, etc.) and budgetary policies (taxes, state expenditures, etc.). In connection with the long-run problems, the necessity of harmonizing structural differences, of co-ordinating regional and social policies also emerges. Thus, monetary union based on fixed exchange rates and economic union can only jointly be achieved. This is also reflected in the plan of the economic and monetary union of the EEC. 

The plan of the monetary union accepted in 1971 set the aim of realizing a common currency and economic union by 1980. In the interest of fixed exchange rates, the member countries narrowed down, on the one hand, the respective floating margins of their currencies. They had planned to reduce these margins to 0.60 per cent, but it failed to materialize because of the international monetary crisis. In 1972, a ±2.25 per cent floating margin was introduced on a mutual basis, which followed from halving the ±4.5 per cent floating margins accepted in the currency reform of December 1971. The central banks of the member countries set up in 1970 a short-term support fund of 2 billion dollars to tide over the temporary balance of payments deficits. In April 1973, with more than a year’s delay, the so-called European monetary co-operation fund was created, which started its activity with 1.4 billion units of account in July 1973. The fund was assigned as its primary task to organize multilateral settlements relating to the ensurance [sic.] of the narrowed-down margins of floating exchange. Included in the aims of the fund is the elaboration of a concerted reserve policy, which may lead in the future to the gradual merging of national reserves. The fund has also taken over the task of operating the system of a common short-term support. Many regard the fund as the core of a common central bank of the EEC. To keep the floating of currencies within a “channel”, common intervention mechanisms have been set up at the short- and medium-term co-ordination of the economic policies of the member countries, especially for a collective action against inflation.³⁶ 

However highfaluting the sound of Economic Union may seem to Canadians today, it would still not address the advantage proffered unto the PRC by the RMB/$US peg.

The third solution is to peg the Canadian dollar to the U.S. dollar³⁷ for three month, in order to maintain and stimulate growth in all sectors of Canadian industry. 

For those who are concerned by the notion of setting too much store by the Americans, I will conclude with the following passage from Livy: 

…The city [of Rome in 492 B.C.] was in great apprehension; all business came to a halt from mutual dread: the plebs left behind feared violence from the senators, while the senators, wary of the plebs who remained, could not decide whether they preferred them to have stayed or to have departed. Besides, how long would the multitude that had seceded remain quiet? And what would happen if some outside military emergency arose in the meantime? They became convinced that no solution existed except in concord among all citizens: the plebs must be reconciled to their country at all costs. 

So they decided to send to the plebs Menenius Agrippa as their spokesman, a forceful speaker whom the plebs liked, for he had come form their ranks. On being admitted to the camp his speech is said to have consisted simply of the following parable, couched in old-fashioned and homely language. Once upon a time man’s bodily parts did not work as one as they do now, but each limb went his own way and had his own voice. The other parts unhappily complained that the belly received the benefit of their care, help, and hard work and that it stayed contentedly in the middle doing nothing but enjoying the good things they gave it. They then concocted a plan: the hands would not carry food to the mouth, the mouth would not accept food if given, the teeth would not chew it. They aimed to starve the belly into submission, but their anger brought the limbs and the whole body close to wasting away completely. Then it dawned on them that the belly’s job was important: it received as much nourishment as it gave back, carrying everywhere that by which we live and breathe – our blood, which, enriched by the food we digest, spreads through the blood vessels to all parts of the body. By comparing the internal revolt of the body with the anger of the plebs against the senators, Agrippa brought the plebs round to his way of thinking.³⁸ 

I send your, dear Excellency, the expression of my highest consideration and remain meanwhile, 

Yours sincerely, 
 

Saeed Fotohinia

Representative

Youth Against Racism

P.S. Special thanks must go to Prof. Desmond Morton, Prof. Noam Chomsky, and the Library Staff at McGill University.