All Commentary
Friday, December 1, 1972

The Argentine Inflation

Doctor Alberto Benegas Lynch, Jr. is professor of Public Finance in the Universidad del Museo Social Argentina and professor of Political Economy in the Argentine Naval Intelligence Service.

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 under 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 tariffs 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 so-called “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.