THE ARGENTINE Political and economic evolution seems so
closely correlated with her monetary situation that it may be said that
the history of this nation is principally the history of its currency.
The period of national organization following
emancipation from Spain in 1810 until adoption of the Constitution of
1853 was marked by internal struggles and long periods of despotism and
anarchy, interspersed with times of relative peace and progress. One of
the first measures taken by the national government was to establish the
gold content of the "hard peso." Thus in 1812 a "hard peso" weighed
almost two grams of pure gold. In 1822 the first official bank was
founded: the Bank of Buenos Aires, entrusted with the issue of the first
bank notes, called Argentine pesos, which were exchanged by the public
at the rate of 1.8 grams of minted gold. In 1823 conversion was
suspended by decree for the first time because the government issue of
notes exceeded the stock of gold. Convertibility was restored in 1825.
The 'following year saw a relapse into the bad policy of increasing the
currency without backing and the peso again became inconvertible. On
this occasion, it was mistakenly said that in this way the war with
Brazil could be financed "more comfortably." The resultant inflation
brought with it political and economic instability and seventeen years
of tyranny and barbarity, demolishing what had been achieved with
difficulty in the immediately preceding years.
This situation of moral and economic prostration lasted
until adoption of the Argentine Constitution in 1853, described by one
of its most important authors and proponents, Juan B. Alberdi, as the
document tinder which respect and guaranties for private property were
commanded.
In a second period we may include almost a century,
from 1853 to the rise of Peron in 1943, a period of enviable economic
progress which brought Argentina to eighth place among the civilized
nations of the world. Within the first 75 years we enjoyed, almost
without interruption, the advantages of the classical gold standard, a
bank note being exchanged for 1.7 grams of gold. We say almost without
interruption because in 1876, at the same time as the establishment of
the National Bank, and at intervals until 1890, the currency was again
issued without backing, conversion being temporarily suspended as a
consequence. In 1891 the finances were again put to rights and
convertibility restored at a rate of 1.42 National pesos to a gram of
gold. In the course of time, however, there were successive devaluations
until convertibility was prohibited entirely in 1928, at which time 5.16
National pesos exchanged for a gram of gold.
In 1932, instead of restoring the Conversion Board and
returning to the classical gold standard, Argentina turned to that sadly
renowned bankers' bank: the Central Bank. This period, which lasted
until 1943, was still one of progress owing to the strict limits placed
on the authority of the bank and to the reliability and prudence of the
government authorities of the time. But even with the best intentions,
the establishment of the Central Bank laid the foundations of the State
control of the currency which inevitably followed.
From the military coup of Peron in 1943 until he was
overthrown in 1955 marked the darkest moments of Argentine history. The
entire banking system was reformed. The Central Bank was transformed
from a relatively independent body into the lackey of the government,
thus allowing capricious control over currency and credit. The policy of
deficit spending became the rule; open market operations were carried
out systematically in order to inject "fresh money" into circulation;
rates of interest were manipulated at will; bank reserve requirements
were constantly lowered by governmental action. In addition to such
monetary policy, compulsory membership in trade unions was imposed, the
level of taxation became exorbitant, international trade was totally
controlled through huge bureaucratic organizations with their various
tariff s and quotas and subsidies. To complete the governmental
interference in the market, price controls were imposed throughout the
economy. This suicidal policy provoked an unprecedented economic
situation: Argentina was reduced to one of the lowest rungs among the
socalled "under developed nations." Monetary reserves were sadly
depleted; international trade fell to a quarter of its earlier volume;
real incomes and salaries contracted sharply; indebtedness increased;
agriculture and cattle raising, so basic to Argentina's economy, were
largely despoiled; many subsidized and protected industries were created
as a further burden on the people; all in the midst of a terrible moral
corruption.
Unfortunately, the Peronist economic policy of
socialistic tendencies has persisted to a greater or lesser extent up to
this day in Argentina. The cost of living index in 1972 is 360 times
what is was in 1943! The peso, once one of the world's strongest
currencies, is now the one which is depreciating most rapidly. The cost
of living probably will double this year. Levels of saving have fallen
noticeably, and as a result the rate of capital formation is
ridiculously low. Real income and salaries are always below the cost of
the "family basket." The distribution of wealth does not depend on one's
efficiency in meeting the consumer's needs but, to a large extent, on
the favors of bureaucrats and their irrational monetary policy. The
flight of national and foreign capital is terrible. Malinvestment and
waste are accentuated in line with the directives of the planners of the
day. The United States dollar which exchanged for 3.50 National pesos in
1943 was selling in September 1972 at 1,400 pesos on the black market.
This, in spite of the depreciation suffered by the dollar owing to the
tendency of the United States government to imitate Argentina's
folly-the bastion of the free world also bowing to socialist policies.
Today, perhaps the strongest currency is the Swiss
franc, although currencies such as the Japanese yen have promising
prospects. It is interesting that a recent lead article in a widely
circulated Japanese periodical recommends a return to the gold standard
at a rate of 0.78 grams per yen. This is precisely what Argentina ought
to do in currency matters. The foreign exchange remaining in the hands
of the Central Bank should be used to buy gold in the London free market
and add it to Argentina's existing stocks, dividing the total by the
notes in circulation and fixing the corresponding relationship to gold,
restoring convertibility. The only way to put a brake on inflation,
although it may appear to be a truism, is for governments to stop
inflating. For that purpose, a monetary standard is required to make
people independent of the state manipulation we have here described.
At the time of the original publication, Doctor
Alberto Benegas Lynch, Jr. was professor of Public Finance in the
Universidad del Museo Social Argentino and professor of Political
Economy in the Argentine Naval Intelligence Service.
Reprinted with permission from The
Freeman, a publication of The Foundation for Economic Education, Inc.,
December, 1972, Vol. 22, No. 12.
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