NCPA - National Center for Policy Analysis

Hard Money And Prosperity In Argentina

February 28, 1997

A century ago, Argentina reformed its currency by going on a strict gold standard and became one of the leading economies in the world. Beginning in the 1930s, Argentina and the rest of the world abandoned free trade for protectionism, monetary stability vanished and labor unions rose -- paving the way for Juan Peron and skyrocketing inflation.

By the early 1980s, only some 3,000 Argentineans paid income tax and the big question was why so many bothered to do so.

But since Argentina got its new currency and adopted a hard money policy in 1991, decades of monetary decline has been reversed. Even though the country has paid a price with higher unemployment, politicians and people alike understand the rules. Going off hard money means going back to hyperinflation.

  • In 1991, President Carlos Saul Menem and his uncompromising finance minister, Domingo Cavallo, introduced the Convertibility Law which established fixed parity with the dollar, recognized the dollar as legal tender, and backed the country's currency 100 percent with dollar reserves.
  • Hard money provided cover for urgent reforms -- privatization, restructuring of the public sector and elimination of subsidies.
  • Argentinean productivity was shrinking almost 0.5 percent per year in the 1980s, but since the monetary reforms were introduced, annual growth over the past six years has been in the 5 percent range.

Some economists say Mexico should emulate Argentina's monetary reforms, abandoning the peso and going on a dollar-based system. They say this would offer relief from the six-year cycle of devaluation and collapse that coincides with presidential elections there.

Source: Rudi Dornbusch (Massachusetts Institute of Technology), "Argentina's Monetary Policy Lesson for Mexico," Wall Street Journal, February 28, 1997.

 

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