The Argentine Inflation; A. B. Lynch, Jr.

The ArgentineInflati ALBERTO BENEGAS LYNCH, JR. THE ARGENTINE political and eco nomic evolution seems so closely correlated with her monetary situ':: ation that it may be said that the history of this nation is principally the history of its currency. The period of national organiza tion following emancipation from Spain in 1810 until adoption of the Constitution of 1853 was marked by internal struggles and long pe riods of despotism and anarchy, interspersed with times of relative peace and progress. One of the first measures taken by the na tional 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 ex changed by the public at the rate of 1.8 grams of minted gold. In 1823 conversion was suspended by Doctor Alberto Benegas Lynch, Jr. is pro fessor of Public Finance in the Universidad del Museo Social Argentino and professor of Political Economy in the Argentine Naval Intelligence Service.

decr~e'; for the first time because he/government issue of notes ex ee'd~d the stock of gold. Converti ilJfy was restored in 1825. The ',lowing 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 infla tion 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 eco nomic prostration lasted until adoption of the Argentine Consti tution 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 prop erty were commanded. In a second period we may in clude almost a century, from 1853 to the rise of Peron in 1943, a pe riod of enviable economic progress 715 716 THE FREEMAN December 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 es tablishment of the National Bank, and at intervals until 1890, the currency was again issued without backing, conversion being tempo rarily 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 en tirely 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, Ar gentina turned to that sadly re nowned bankers' bank: the Central Bank. This period, which lasted until 1943, was still one ofprog .. ress owing to the strict limits placed on the authority of the bank and to the reliability and prudence of the government au thorities of the time. But even with the best intentions, the es tablishment of the Central Bank laid the foundations of the State control of the currency which in evitably followed. From the military coup of Peron in 1943 until he was overthrown in 1955 marked the darkest mo ments of Argentine history. The entire banking system was re formed. The Central Bank was transformed from a relatively in dependent body into the lackey of the government, thus allowing cap ricious control over currency and credit. The policy of deficit spend ing became the rule; open market operations were carried out sys tema tically in order to inj ect "fresh money" into circulation; rates of interest were manipulated at will; bank reserve requirements were constantly lowered by gov ernmental action. In addition to such monetary policy, compulsory membership in trade .unions was imposed, the level of taxation be came 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 de1972 THE ARGENTINE INFLATION 717 pleted; international trade fell to a quarter of its earlier volume; real incomes and salaries con tracted sharply; indebtedness in creased; agriculture and cattle raising, so basic to Argentina's economy, were largely despoiled; many subsidized and protected in dustries were created as a further burden on the people; all in the midst of a terrible moral corrup tion. Unfortunately, the Peronist eco nomic policy of socialistic tenden cies has persisted to a greater or lesser extent up to this day in Ar gentina. 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 notice ably, and as a result the rate of capital formation is ridiculously low. Real income and salaries are always below the cost of the "fam ily basket." The distribution of wealth does not depend on one's efficiency in meeting the consum er'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 Na tional 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 imi tate Argentina's folly-the bastion of the free world also bowing to socialist policies. Today, perhaps the strongest currency is the Swiss franc, al though currencies such as the Jap anese yen have promising pros pects. It is interesting that a recent lead article in a widely circulated Japanese periodical rec ommends a return to the gold standard at a rate of 0.78 grams per yen. This is precisely what Ar gentinaought to do in currency matters. The foreign exchange re maining .in the hands of the Cen tral 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. Theoniy way to put ahrake on :inflation, although it ,may appear tobea 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. ~ EDMUND A. OPITZ as to make us Iluman (Part Two) PART ON;E of this essay presents a diagnosis of the present malaise in terms of a loss of contact with six vital ideas. The ideas which keep us human may be summar ized as follows: • 1. Free Will. Man's gift of free will makes him a responsible being.