The Free Market 20, no. 3 (March 2002)
As with all economic calamities, pundits will find some way to blame the meltdown and collapse of Argentina on capitalism, deregulation, or the private sector generally. Such nonsense. This crisis is a product of government incompetence, made to order by the IMF, the Argentine political leadership, and the US. As a reminder that the choice of economic policy isn’t politically trivial, the government’s errors ended in hunger, bloodshed, and the resignation (and narrow escape) of the country’s president.
Signs of the latest trouble came in late November when Domingo Cavallo, Argentina’s economic minister, announced: “Argentines will realize it is much better to keep our cash in the bank.” Wondering where Cavallo’s personal cash was, every Argentinian with a brain assumed he was lying, and, quite reasonably, put personal economic concerns ahead of silly appeals to patriotism.
Citizens rushed to withdraw every peso they could from the nation’s banks. More than $2.5 billion in cash was privatized on November 27, before things really spun out of control.
Until this point, the government had poohed-poohed rumors that it was considering limiting cash withdrawals as a means of lessening its damage from a national debt default. The wise citizens of Argentina, on the other hand, know that when it comes to government finance, it is always better to believe the worst. So they took the safe way out, which (surprise!) prompted government officials to limit withdrawals to $1,000 per month, exactly as had been rumored.
Not only that: the government, on executive order, forbade cash from leaving the country—backed by body searches at the airports—and instituted a moratorium on transactions in peso loan deposits. The order said that interest on peso accounts could not legally be higher than those on dollar accounts. Moreover, any cash withdrawals above $1,000 were to be accomplished using debit cards or checks so that the government could keep a complete record of who was doing what.
What possible excuse was there for such totalitarian measures? As Cavallo said, “Argentina is under attack by those looking to profit . . . from a devaluation of the currency.” The implication is that keeping your family savings safe from the looter class amounts to financial terrorism.
Note too the attempt to ape the “we are under attack” language of US officials after September 11, as if the people hoping to protect their savings are the moral equivalent of hijackers who destroy skyscrapers and murder thousands. In an interview with the Financial Times, Cavallo was even more brazen in blaming the people: “What is happening is that the financial entities are suffering a liquidity problem because of the withdrawal of deposits, and that is what we still need to resolve.”
Then Cavallo, credibility shot, spoke again: “Putting money under the mattress or in safety deposit boxes is not good for the whole of Argentina.” Translation: not good for the government. Of course the best thing for the government, if that’s all we care about, is for citizens to hand over every penny earned, now and in the future, to officials. But to pretend that this coincides with what’s in the individual’s interest is sheer lunacy.
The runs on the banks accelerated, which is not a terrible thing. Bank runs keep governments and banks a little honest. They help wash away financial irresponsibility, remind banks of the need for sound practices, and force governments to enact sound economic policies. But most of all, they are the means by which the people protect themselves from rapacious governments.
Bank runs are not the cause of the crisis; they are the evidence that government and its allies in the banking industry need to shape up. In any case, trying to prevent them is futile.
Many others were anxious to blame Argentina’s crisis on the currency board, a system that eliminates the ability of the central bank to create money beyond its foreign reserves. Trouble is that this country never had a true currency board, despite the propaganda. In 1991, the government merely pegged an overvalued peso to the dollar. Meanwhile, between 1991 and 1994, the central bank zoomed the peso supply at an average annual rate of 60 percent (at one point reaching 140 percent!) before slamming on the brakes.
The tightening pretty well solved the problem of inflation in Argentina, but it didn’t address the problem of the overvalued peso, nor the rising debt problem caused by irresponsible IMF lending. Taxing and spending accelerated. Top individual and corporate rates were raised to 35 percent, which is far more than any developing economy can tolerate.
To make matters worse, the government (again, at the urging of the IMF) instituted a crackdown on the informal sector, driving it further underground, and instituted new taxes on imports. One year ago, the IMF gave the government another $40 billion, which only ended up delaying the pain. Then in August 2001, the US approved an $8 billion loan package, reminding us that the government is the worst investor known to man. As for the promised spending cuts, they never materialized.
Pegs are no cure for an overvalued currency or a government that is fiscally out of control. In this case, there is only one way out: slash spending. But rather than take this route, the government has turned its guns on bank customers, calling them names and denouncing them for merely wanting to protect their assets.
No matter how many controls on cash the government imposes, and no matter how closely it sticks to the IMF’s advice, no power on earth can repeal Gresham’s Law. This ancient principle observes that good money (in this case, the dollar) drives out bad money (in this case, the peso).
Default can only be prevented by doing more of what caused this crisis in the first place: ignoring market pressures and bailing out a bankrupt system. Like the bank run, default too has a certain merit: it brands the Argentina government as unworthy as a credit risk. It would be a long time before the IMF and US banks loaned the government any additional money. Sometimes you just have to pull the plug.
Llewellyn H. Rockwell, Jr., is president of the Mises Institute (rockwell@mises.org).
