Healthy currency or irrepressible inflation

The title of this note is the one that replaced Raúl Prebisch for the job he handed over to Lieutenant General Eduardo Lonardi in October 1955. A month earlier, this honest military man had led the uprising that ended a regime that, in addition to violating civil liberties, made inflation endemic in Argentina for the first time in history. 68 years after that historical event, it can be affirmed that restoring freedoms was easier than restoring the health of the currency.

Whatever the political sign of the government that is inaugurated on December 10, it will have to face, yes or yes, a profound reform of the monetary system. It will be for any party that wins, because, even if it were the ruling party, it is notorious that it will not be able to continue with the current regime, in which money is created at astronomical rates to finance uncontrollable deficits, then a part of that money is sterilized by paying enormous rates for short-term debts (Leliqs) and, even so, people want to have so little money in their pockets that hyperinflation prices grow and the dollar is paid in free markets twice what is paid in the ridiculous “single market and free exchange”. The Government knows very well that today is a fiction, typical of the electoral campaign.

Monetary reform increased fiscal reform as a necessary condition: the set of measures aimed at eliminating the chronic deficit that the public sector has had as a cancer for decades, and which is the mother of all monetary problems. If there is no fiscal reform, or if such a reform is not credible, there is no possibility of making a successful monetary reform.

Governments finance their excessive spending as they want or as they can. First with distorting taxes, then resorting to foreign debt, up to the point where the “sudden stop” occurs: when no more loans are received from outside. It happened in 2001 and also in 2018. Internal debt with banks and bond markets is also used, which literally drives the private sector out of these markets. Finally, the Central Bank is resorted to, with the result of the inflation that we have, which not only extinguishes credit, but also leads to massive savings in external assets.

Ours is not the best country in the world, but it is not the worst either. We have a product per capita, which is a quarter or a fifth of the rich economies. But it is double or triple or more than what is seen in the poorest countries. What marks Argentina is its stagnation or low growth, which means that this relationship, which was 80 or 90% until 1930, is now 20%. This is the failure of Argentina, a failure that has a lot to do with the rickety credit and which, in turn, has a lot to do with inflation.

Endemic, high and chronic inflation for nearly eighty years, with rates only exceptionally below double digits, have made credit seriously a rarity, a pipe dream. There are twelve installments to buy a television (with interest that they insist on denying!), but there is no financing to start a company, a venture, for a company that innovates, or for a great public work. Bank credit to the private sector is less than 10% of GDP. Just by looking at Chile or Uruguay or Brazil, we see bank credit of 20, 30, 40 or 50% of GDP. We have a huge field to advance, assuming, of course, that the treasury does not take everything there is or does not mess with a tax called “inflation”, a terrible tax, distorting and paid mostly by people who have no idea how much and how they pay it.

A monetary reform, I repeat for the third time, requires a stabilized treasury. Once this is achieved, the Central Bank will be in a position to control the money it issues. The quantum will not only be the power of the Central Bank, but calibrated and resolved politically between the Executive Branch and Congress when discussing and approving the Budget. Above all, Congress, to whom the Constitution, in its article 75, grants the power to “seal currency and set its value.” The value of the currency is nothing more than the inverse of inflation. This is why developed countries aim for low inflation, of 2 or 3 or 4% per year. If there are crisis situations, it could be 6 or 7%, but always trying to go down, to be below 5% per year.

But the banknotes issued by the Central Bank are only a small fraction of the total mass of money. The rest are the “deposits” created (or issued) by banks when they extend credit (loans). That is why the Central Bank keeps an eye on the banks, on how much what they lend can grow, because the deposits they create are just as much money as the bills that come out of the Central Bank. The money issued by the Central Bank must have good support. If it is not full of promissory notes that will never be paid, it is expected that it will have reserves of dollars or euros or gold or other hard currencies. The money created by commercial banks will have as a counterpart something in banknotes (the so-called reserve requirements), but there will be much more mortgage loans, consumer loans or solid companies. It is important that the Central Bank knows against which assets the banks create money. That is, what values, what titles, what credits underlie your liabilities (deposits). Because this does to the health of the financial system, and therefore, to the general stability. If, as happened several years ago in the US with junk mortgages (elegantly called “subprime”), the monetary authority lets the banks lend irresponsibly, at some point there will be a crisis that requires issuing money to prevent banks from failing, which can eventually generate inflation.

For this reason, a monetary reform does not only cover the way in which the Central Bank is going to be managed, it will have independence, the responsibility of its board of directors, the way in which directors are chosen, the way in which they could be removed. Here they have thrown out presidents of the Central Bank who have kept inflation low. And they were fired for resisting pressure from the Executive to issue more money. We have to have a law that ensures that the bank’s board of directors who, without good reason, fail to meet the inflation targets that have been set for them, will be fired. Not only a law that prohibits the bank from lending to the National Treasury or the provinces, but to monitor how commercial banks finance the public sector.

Last, but just as important, is the normalization of the exchange market. We need to quickly move towards a true single market free of exchange. And given the terrible experience of Argentina in terms of its own currency, as long as confidence in the peso recovers, which will always be possible, it must be facilitated that other currencies that the parties agree on can be freely and legally used. That is, that other reputable currencies can replace (for example, in rental contracts, in long-term contracts and even in credit operations) what the peso will not be able to do for some time.

*Academic Counselor of the Libertad y Progreso Foundation; co-director of the “Healthy Currency” project.