The South China Morning Post reports that President Trump and Secretary of State Mike Pompeo have decided to scrap the idea of punishing China by attempting to undermine Hong Kong’s currency board. This idea, which was hatched by some of Trump’s lieutenants, would have dealt a blow not only to Hong Kong, but also to the U.S. dollar. Dumping the plan was a wise move.
China has been struggling for years to promote the international use of its currency, the renminbi. Even though this project has been one of Beijing’s top priorities, it has been handicapped because the renminbi is an unattractive, inconvertible currency.
If Secretary Pompeo wants to make life even more difficult for Beijing’s renminbi promoters, he should grab the mantle and start promoting the use of the U.S. dollar. This would pour cold water on China’s currency ambitions. It would also fit nicely into President Trump’s mission to “Keep America Great.”
There are two ways to expand the use of the greenback, which is already the world’s premier currency. Both would require countries with unreliable central banks that produce junk currencies to replace their junk with the greenback. The first method would be direct and would entail official dollarization. In Latin America, for example, dollarization has existed for over a century in Panama and since 2000 in Ecuador and 2001 in El Salvador. In those countries, the dollar has legal tender status. So, the dollar is not only used for contracts and transactions between private parties but also for government accounts and the payment of taxes.
The second method for a country to adopt the dollar is for it to mothball its central bank and install a dollar-based currency board like Hong Kong’s. With such a currency board, a country would issue its own domestic currency. That currency would be freely convertible and would trade at a fixed exchange rate with the U.S. dollar. The domestic currency would be credible because it would be fully (100 percent) backed by greenback reserves. Therefore, with a currency board, the domestic currency issued would be a clone of the U.S. dollar, and the country that issued such a currency would be part of a unified currency area with the United States.
Countries that are either officially dollarized or employ dollar-based currency boards are, from a monetary point of view, in the dollar zone. They are not in the euro, British pound, yen, ruble, or renminbi zones.
By launching a “dollarization” mission, Secretary Pompeo would be killing two birds with one stone: China’s renminbi ambitions and junk currencies.