Cato Journal

Spring/Summer 2003

 

The Argentine Straw Man: A Response to Currency Board Critics
By Steve H. Hanke

 

Introduction

It is noticeable, on the one hand, that a large part of the best work on Money is topical. It has been prompted by particular episodes, by particular experiences of the writer's own time.
—Sir John Hicks (1967: 156)

Sir John certainly would have agreed that particular experiences prompt faulty work on Money, as well. Argentina's recent crisis is a case in point. It has spawned a deluge of commentary on alternative exchange rate regimes. The majority of this writing (aimed at both an academic and lay readership) contains elementary analytical and factual errors. The most oft-repeated and egregious errors are the following:

• Argentina employed a currency board from April 1, 1991, until January 6, 2002, that rendered the central bank, the Banco Central de la República Argentina (BCRA), incapable of employing a domestic monetary policy.
• The peso's one-to-one exchange rate with the U.S. dollar was overvalued and made Argentine exports uncompetitive in world markets.
• The inflexible currency board and overvalued peso caused the Argentine crisis. A three-part reform consisting of a peso devaluation, "pesofication" of the economy, and a freely floating exchange rate would reinvigorate the economy.
• Replacing the peso with the U.S. dollar—"dollarization"—was and is an infeasible alternative.

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