Academic journal article Independent Review

A Proposal of Monetary Reform for Argentina: Flexible Dollarization and Free Banking

Academic journal article Independent Review

A Proposal of Monetary Reform for Argentina: Flexible Dollarization and Free Banking

Article excerpt

Any system which gives so much power and so much discretion to a few men that mistakes-excusable or not-can have such far reaching effects is a bad system. . . . Mistakes, excusable or not, cannot be avoided in a system which disperses responsibility yet gives a few men great power, and which thereby makes important policy actions highly dependent on accidents of personality. This is the key technical argument against an "independent" bank. To paraphrase Clemenceau, money is much too serious a matter to be left to the Central Bankers.

-Milton Friedman, Capitalism and Freedom

The Need for Institutional Reform

Once again Argentina is experiencing a serious institutional and economic crisis. A centerpiece of the economic imbalance is the weakness and untrustworthiness of its monetary institutions, manifested by high inflation and currency devaluation. We acknowledge that the economic and social problems currently affecting Argentina extend beyond monetary policy. The monetary reform that we offer here should not be understood as a sufficient measure to end the recurrent economic problems in Argentina but as a useful step in that direction.

Our plan is an update of the monetary reform for Argentina proposed by Steve Hanke and Kurt Schuler (in Hank and Schuler 1999a, 1999b; Hanke 2001; Schuler and Hanke 2002), with insights from George Selgin's proposal for the United States (1988, chap. 11). Briefly, our proposal, which closely follows Hanke and Schuler's, is that the central bank be eliminated as the monetary authority and that the Argentine peso (ARS) be eliminated as the country's national currency. The central bank should change all ARS into U.S. dollars (USD), but no restrictions should be imposed on the use of other currencies to negotiate contracts. Hence, the term flexible dollarization: the country would not be tied to the USD but freed from the ARS. In other words, Argentina should unilaterally dollarize rather than enter into a bilateral agreement with the U.S. Federal Reserve. In addition, commercial banks should be allowed to issue their own banknotes. As discussed later, this second aspect of the reform has financial and macroeconomic benefits.

The fact that the Central Bank of the Argentine Republic (BCRA) is unable or unwilling to efficiently manage the supply of currency is-or should be-undisputed. Argentina currently has one of the highest inflation rates in the world, yet the highest-ranking authorities of the BCRA and national government publicly deny that mismanagement of the money supply is the cause of prices increasing at annual rates of 25 percent or higher.1 In addition, in 2012 the representatives of Congress approved a reform to the Carta Orgánica, or BCRA Law, that freed the central bank from its responsibility to preserve the Argentine currency's purchasing power; instead, the BCRA's new mandate is to promote, to the extent of its ability and within the bounds of national government policies, monetary stability, financial stability, employment, and economic development with social fairness.2

Politicians' disdain for the inflation issue (and their fear of political consequences if they openly admit responsibility) is not limited to the BCRA. The National Institute of Economic Census (INDEC) has supplied unreliable inflation estimates since at least 2007, which in turn has affected the calculation of other key economic indicators, such as gross domestic product (GDP) and poverty. The World Bank and The Economist are two examples of reputable institutions that have stopped publishing economic data from Argentina. A ruling class that is uncommitted to basic monetary management should not be permitted to maintain a central bank that allows itself to be a political tool of government officials.

The present monetary weakness in Argentina is arguably a reflection of the country's history of monetary mismanagement. From the BRCA's foundation in 1935 to 2013, Argentina had a compounded equivalent yearly inflation rate of 50 percent. …

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