President Carlos Menem of Argentina recently proposed that his country abandon its peso and adopt the U.S. dollar as its currency. Hoover Institution economist Robert J. Barro thinks such a switch might be tricky politically, but suggests that the U.S. promote dollarization throughout Latin America -- seeing an opportunity to help those economies achieve monetary stability.

• Much of Argentina's financial system already operates in terms of the dollar -- and in the early 1990s fixed the value of the peso at one-for-one with the dollar.

• If a switch to the dollar were made, the Argentine central bank would have to use about $16 billion of its reserves to provided for a circulating stock of dollar bills -- forcing it to forgo roughly $750 million in annual interest income.

• Barro says the U.S. could compensate Argentina for this loss -- alone with other countries which joined a dollar zone --by providing transfer payments each year.

• Or we could provide Argentina a one-time allotment of dollar bills -- taking as collateral 16 billion non- interest-bearing pesos.

Such an arrangement, Barro says, would cost the U.S. nothing other than the cost of paper and printing.

The main consequence of dollarization is that it would eliminate the potential for a country to deal with problems by devaluing.

Barro believes that a dollar zone in the Americas would counter Europe's euro zone. There is speculation that if the U.S. does not move in this direction, some Latin American countries might defect to the euro -- subjecting them to the influence of Europe's anti-market social and economic policies.

Source: Robert J. Barro (Harvard University and Hoover Institution), "Let the Dollar Reign from Seattle to Santiago," Wall Street Journal, March 8, 1999.