Kojima, Kiyoshi

English

Research Papers in Economics

Hitotsubashi University Repository
Title
A Pacific Currency Area : Reply to Professor
Arndt’s Comment
Author(s) Kojima, Kiyoshi
Citation Hitotsubashi Journal of Economics, 11(2): 73-76
Issue Date 1971-02
Type Departmental Bulletin Paper
Text Version publisher
URL http://hdl.handle.net/10086/8028
RightA PACIFIC CURRENCY AREA = 
REPLY TO PROFESSOR ARNDT'S COMMENT 
By KIYOSHI KOJIMA 
I am very grateful to Professor Arndt for the valuable comments he has made on my 
Pacific Currency Aaea scheme.] This scheme is still in the formulative stage and, of course, 
f r from realization in th P 'fi but a similar scheme has every prospect of implementation  a e acl c,  in Western Europe. The development of monetary integration in Western Europe, and the 
reactions of the United States to European monetary integration, deserve serious study. Many 
of the technical problems which, as Professor Arndt pointed out, remain somewhat ambiguous 
in my paper also deserve further study. Some of the issues that 'have been raised should 
becorne clearer in the course of European monetary integration. Thus, in this context, I 
would prefer to concentrate on exploring the two main purposes of the Pacific Currency Area 
proposal which Professor Arndt seems to have misunderstood. 
I. Strengthemng the Dollar as an hdernatlonal Currency 
Firstly, my proposal aims at supporting the United States dollar, at buttressing the dollar 
as an international currency, and thus strengthening the present international monetary 
system. A PCA dollar should replace the US dollar as international currency, US dollars 
held by US residents would not constitute part of the supply of PCA dollars. Only dollars 
earned and held as foreign exchange reserves by other PCA countries would be deposited with 
the PCA reserve centre and comprise PCA dollar supplies. Prefessor Arndt seems to be 
mistaken when he says: "The United States, as the reserve centre country, could contribute 
its total gold reserves but beyond this she would be contributing her own currency and this 
is to her in unlimited supply." (p. 70). The PCA dollar, an international currency, should be 
distinguished conceptually from the US dollar, a national currency, although practically they 
may have equivalent values. 
The PCA dollar would be held as international liquidity not only by Pacific countries but 
also by other countries outside the region. There would be more confidence in the stability 
of its value than in the stability of the US dollar since PCA dollars would be backed by a 
larger pool of gold reserves, combined with PCA dollars and other reserves, and drawing 
rights on the International Monetary Fund. In addition, fluctuations in the balance-of-pay-
ments position of PCA countries as a whole vis-~-vis the outside would-or imbalances in the 
1 Kiyoshi Kojima, "A Pacific Currency Area: A New Approach to International Monetary Reform," 
Hitotsubashi Journal of Economics, February 1970, pp. 1-17. H.W. Arndt, "A Pacific Currency Area: 
Comment," ibid., February 1971, pp. 67-72. 74 HITOTSUBASHI JOURNAL OF ECONOMICS [February 
demand for and supply of PCA dollars in the world market-would be minimized by the 
mutually offsetting element in member country's balance-of-payments. 
What was explained in Table 2 (p. 7) of my paper is important: 
1) Suppose the United States fell into overall balance-of-payments deficit and into deficit 
with Japan. Japan would increase her dollar deposits with the PCA reserve centre. 
2) In the reserve situation, if the United States had an overall balance-of-payments surplus 
and a surplus vis-~-vis Japan, Japan's dollar deposits with the PCA reserve centre would fall. 
3) Also, the United States overall deficit might be offset by an overall Japanese surplus, 
and vice versa, even when there was no imbalance between the two countries. 
4) Only when the balance-of-payments of each and every PCA countries on balance was 
in deficit (or surplus) would there be flows of reserves from (or to) the region or pressure 
on the rate at which PCA dollars were exchanged for other countries. 
If the US dollar is supported in this way by a larger pool of reserves and the inter-
relationships between reserve ho]dings are as I have observed them to be empirically, the 
dollar would become a stronger currency. The Pacific Currency Area would supersede the 
United States alone as a reliable centre in the world monetary system. 
Professer Arndt appears to suggest that the PCA scheme would have benefits for all 
member countries (especially Japan) other than the United States, and seems disturbed that 
the function of 'the US dollar as an international currency might be reduced. 
"The scheme would pre-empt the international reserves of the United States for a limited 
regional currency reserve pool, an arrangement which could hardly be anything but an 
obstacle to further advance towards a more satisfactory world-wide system for adequate 
international liquidity." (p. 68) 
"Professor Ko"m  Jl a expects the world's main reserve centre country, the United States, to 
place her total gold reserves at the disposal of the four proposed partner countries in the 
Pacific Currency Area " (p 70) 
"No doubt Japan would be happy to swap her present holdings of dollars for deposit 
receipts which would give her unlimited access to the United States' gold reserve, and perhaps 
this is what Professor Kojima means by saying that his scheme wou]d have the effect of 
putting existing gentlemen's agreement on a sounder institutional footing." (p. 70). 
My intentions in putting the PCA proposal forward were quite the reverse. Japan and 
Canada have been holding large dollar reserves partly for interest-earning purposes but more 
importantly, in circumstances of uncertainty about the US dollar, because of United States' 
persuation to refrain from gold conversion under a 'gentlemen's agreement'. Such a gentle-
men's agreement is not entirely capable of preventing Japan or 'Canada from converting 
dollar reserves into gold in the United States, the IMF, or in free gold markets. This makes 
the United States' gold reserve position somewhat more precarious. It would seem better for 
the United States to put the existing gentlemen's agreement on a sounder institutional footing 
through the establishment of PCA in which member countries would not request gold-
convertibility but merely a gold-guarantee to the value of PCA dollar reserves. 197l]  A PACIFIC CURRENCY AREA= REPLY TO PROFESSOR ARNDT'S COMMENT  75 
II. Relations with Asia and Latin American Countries 
As Professer Arndt suggests (pp. 67-68) it would have probably been better not to emphasise 
the connection between the theory of optimum currency area and the characteristics of the 
Pacific Currency Area in my exposition. Only relaxation of the connections for an optimum 
currency area allows the useful application of theory to Pacific area problems, and I did not 
specifiy fully the less rigid model which I had in mind. This objection is even more valid 
when Asian and Latin American countries are taken into consideration. Asian and Latin 
American countries would, in my scheme, be granted associate membership of PCA. They 
would not have all the obligations of full membership, but they would receive benefits from 
membership-similar to the "one way free trade" benefits which would denve from Implementa 
tion of the UNCTAD principles. For example, they would not be required "to maintain 
fixed (or at least stable) exchange rates with all other member currencies and to move towards 
concerted domestic monetary-fiscal po]icies." (Arndt, p. 72). 
Associate members would be obliged to use the PCA dollar as a common unit of 
account and instrument of settlement. Their dollar reserves may or may not be deposited 
with the PCA reserve pool and gold-guarantee would be assured, but conversion into gold 
would not be allowed. 
There is no doubt in my mind that trade, aid, and investment in the Asian-Latin American 
region would increase more rapidly in consequence of the dynamic effects of the formation 
of a Pacific Frec '1'rade Area and Pacific Currency Area. However, these dynamic effects 
are difficult to measure. Originally I argued that as a direct effect of the establishment of 
PCA, a 'Lent Currency Scheme' could be initiated. This would facilitate the untying of aid 
in the Pacific-Asian-Latin American region without inducing balance-of-payments difficulties 
and a drain on American gold reserves. The idea behind my Lent Currency Scheme is 
developed into a more concrete proposal for a "Revolving-Aid Fund" in a report presented 
to the Asian Development Bank.2 With the successful implementation of such a scheme, the 
advanced countries within PCA would be able to provide more aid to neighbouring less 
developed countnes wlthout havmg to "tie" aid individually. "Untied" aid not only allows 
more eflicient aid allocation, but also increascd offshore purchases among less developed 
countries themselves. 
The Asian Payments Union schemc devised by Professor Triffim for the ECAFE region 
should be compared with the Lent Currency Scheme or Revolving-Aid Fund scheme, not 
with the Pacific Currency Area scheme as Professor Arndt suggested. Under our Revolving-
Aid Fund scheme, regional settlements and c]earing among less developed countries would be 
ftrcilitated by the provision of short-term credits from accumulated aid-money in the Fund. 
The limitation of the Triffih plan is that its successful operation would probably require year 
by year increases in the contribution of surplus countries to the regional surplus reserve pool. 
Our scheme would seem more acceptable to the advanced country participants as well as less 
developed country porticipants. 
2 Kiyoshi Kojima, Saburo Okita and Peter Drysdale, "Foreign Economic Relations," in South-East Asia's 
Econo'ny in thc 1970's, Asian Development Bank, I November, 1970, pp. 401-5. 76 HITOTSUBASHI JOURNAL OF ECONOMICS 
There are a number of technical issues which Professor Arndt raised but it is better to 
limit the discussion at this point. The PCA scheme has a more complicated mechanism than 
I originally imagined and I am grateful for Professor Arndt's making me aware of this. 
However, there is one theoretical issue which should be clarified. 
Professor Arndt is doubtful that exchange rate changes would be more effective for 
balance-of-payments adjustments for a Pacific Currency Area, or any such large currency 
area, than for a single country. He says that "a small country is more like]y to benefit from 
a devaluation than a large one, for the same reason that the demand curve confronting an 
mdivldual firm rs more elastic than that confrontmg the mdustry as a whole." (p, 71). 
The formula which I used to show the effect on the price elasticity of import demand 
in my paper (p. 9) is well known. Guy H. Orcutt3 established clearly that "the effectiveness 
of depreciation by a small economic area is accepted, but a model is developed which supports 
the view that the effectiveness will be even greater for the case of depreciation between two 
exrstmg large blocs." There is now an extensive literature incorporating this principle.4 
8 Guy H. Orcutt, "Exchange Rate Adjustment and Relative Size of the Depreciatlng Bloc," Review oj 
Economics and Statistics, February 1955, pp. 1-11. 
4 Bela Balassa, "Tariff Protection In Industrial Countries : An Evaluation," Journal of Political Economy, 
December 1965. 

A Pacific Currency Area : Reply to Professor Arndt’s Comment

http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/8028/1/HJeco0110200730.pdf

A Pacific Currency Area : Reply to Professor Arndt’s Comment

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics