—Mary Anastasia O’Grady

February 22, 2002

In 1913, Argentina ranked among the world’s ten richest countries—ahead of Germany and France! In December 2001, Argentina succumbed to the biggest sovereign debt default in world history: $155 billion of national and provincial debt. Since December, the Argentine peso has been devalued 50%; bank savings accounts have been frozen and forcefully converted by government from dollars to devalued pesos; depositors are severely restricted on withdrawals from their accounts; banks have been mostly closed; per capita income has been halved; imports (including vital medicines) have dried up; unemployment has risen to 25%; massive bankruptcies and bank failures loom on the horizon; and Argentina has its fifth president in three months. Argentina’s decline ranks among the most astounding and tragic of modern times. How did this nation of 35 million people and ample natural resources become a basket case?

In the 1970s and 1980s, hyperinflation was wreaking havoc in Argentina. In the early 1990s, just after Carlos Menem was elected president, consumer prices were rising at a rate of 200% per month (5000% per year!), capital was fleeing, and markets had ceased functioning. Menem and his capable economy minister, Domingo Cavallo, then pegged the peso to the US Dollar, began privatizing state-owned industries, and opened up the economy to foreign investors. It worked! Inflation stopped dead in its tracks and the economy took off. From 1991-94 Argentina’s economy grew at a spectacular rate of 7% per year, one of the highest in the world.

The key to sustained economic performance was for the peso to become competitive—not too high, not too low—so exports would remain strong and the trade balance favorable. However, since the peso was pegged to the US Dollar at a fixed one-to-one exchange rate, and since the US Dollar was rising against all other currencies and dragging the peso up with it, Argentinean exports became expensive. Regardless, despite this strong dollar headwind, the economy continued performing well, exports continued rising, and low inflation coupled with market liberalization led to greater productivity, rising real wages, and increased trade competitiveness.

In 1999, the IMF led a devaluation of Brazil’s currency (the real), but to retain its dollar peg, Argentina could not devalue its peso to compete. Why didn’t it abandon its peso-dollar peg? First, Argentina feared return of hyperinflation, which had been tamed under the peg. Second, much of Argentina’s massive debt was dollar-denominated, and devaluation would raise the peso value of outstanding debts and might trigger widespread bankruptcies. Third, the Argentine government held out false hope that the dollar would weaken against other world currencies and make the peso more competitive. And lastly, the IMF (International Monetary Fund) impressed upon Argentina that it should follow the IMF’s not-to-be-ignored advice to maintain the peso-dollar peg. This despite the fact that on numerous prior occasions—for example, when East Asian economies collapsed in 1997-98—IMF advice was found to have major flaws that worsened, not eased crises.

During the 1990s, Argentina’s GDP grew a healthy 50%. The problem, according to Argentine economist Pablo Guido, is that during the same period government spending (combined national and provincial) rose about 90%, erasing all the gains and putting the country into deeper debt than before. Government spending was supported on the back of privatization proceeds from state-owned industries, but when those funds ran out and the music stopped, "the hoodlums running Argentina" (the words of William Baldwin, Forbes Editor, Mar. 4) had to look elsewhere for money.

Argentine government officials raised taxes and began suffocating the economy, squeezed pension funds and banks, precipitated capital flight (estimated $75-100 billion), increased trade tariffs, blocked depositors from getting money from their own accounts, forced commercial banks to hand over money to the central bank, repealed peso-collar convertibility guaranteed under the peso-dollar peg, and confiscated $17.8 billion of foreign reserves. Economics professor Steve H. Hanke, The Johns Hopkins University, calls it "nothing short of criminal" and "legalized theft." Hanke is right to say the U.S. should not help Argentina until its leaders "restore people’s property and the rule of law."

It seems not to matter whether generals or Peronists are running Argentina, they all take there turn at plundering people’s property and assets. Is there any way to stop not only the Argentine government, but any government, from legalized theft? Again, William Baldwin, Forbes (Mar. 4), advances an intriguing proposal for Argentina: "Nothing that government can say or do about money will have any credibility, so salvation must come from outside. It could come in the form of software. I envision Microsoft as savior of the dispossessed in Latin America."

Baldwin says that Microsoft’s Passport service may soon allow creation of an encrypted, hacker-proof, Internet e-currency that allows anyone, anywhere in the world to bank on the Internet and bypass corrupt governments altogether. A person in Argentina could have an account in Zurich and with a Palm i705 transfer funds from his account to the account of another person in Argentina who also has a Palm, and bypass government completely. Baldwin says a firm called E-gold Ltd, domiciled in a Caribbean tax haven, already "offers a [Internet] micropayment system using precious metal."

We all get frustrated by hi-tech and the Internet, and alternately consider it a blessing or a curse. But might e-banking be an improvement over legalized theft by "the hoodlums running Argentina" [or any corrupt government]? And while they’re at it, how about an Internet e-gold standard to bypass crooked governments also, and return a firm foundation to global currencies? In the words of Victor Hugo: "Greater than the tread of mighty armies is an idea whose time has come."