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*Written for the Institute for Leadership in the Americas application.

One of the most important problems in Argentina since 2003 (and during most of the 20^th century) is inflation. Its origin is the monetary policy of the Central Bank (Banco Central de la República Argentina, BCRA)[1]. In 2002 Argentinian Peso suffered devaluation after ten years of a Law called “Convertibility” in which one Peso equals one American Dollar. As the Argentinian currency diminished its value, prices rise during that process and the economy was in recession since 1999.

In 2003 the economy went out of said recession and started to grow with the impulse of the increasing world`s food demand and the high prices of commodities in agriculture. But inflation rate didn´t decreased lower than 5% in 2004 and continue growing during the next years. In 2008 it raised over 20%.

Inflation is a very harmful social problem, because it has many negative consequences in both economy and society. The most important are:

• distortion of relative prices, generating more uncertainty for economic agents (shorting the investment horizon and leading to bad decisions),
• diminution of the real income of those people with fixed revenue, generally the poor,
• redistribution of wealth in favor of debtors and against creditors.

My proposal to stop this damaging process involves a political compromise in the economic intervention of the Government. First of all, there is an inertial component of inflation related with the expectative of economic agents (what they believe that the prices will grow after been exposed to an inflationary period).  These only could be eliminated with trust in the Government actions, which is not achieved in a short time, and needs a change in the country leaders.

In the other hand monetary policy should be responsible, because of the non-neutral effect that money has on the real economy. In a Central Bank system there is a State monopoly of the currency, which could lead to a shortage or excess, as in any market. Here are two options for trying to avoid this market disequilibrium.

The first one (and the better in my opinion) is to eliminate the Central Bank System, replacing it with a Freebanking System and letting the market and competition forces generate tendencies to equilibrium and diminish the expansions and contractions of the money supply. In this system private banks would be able to issue their own money and it would generate a competition between currencies.

The second option is that the Central Bank tried to emulate a competitive system. This is not simple, because it doesn´t have the knowledge on how to coordinate the demand with the supply. But there is a chance to try to do this by maintaining constant M x V (M is the total amount of money in the economy in a period and V is the transactions velocity of money in that period, as the quantitative money theory explains).

Both options need to be complemented with free trade and no intervention in the currencies markets so the market forces will coordinate supply with people`s needs.

References

• BCRA Official Website: www.bcra.gov.ar (for statistics).
• “Inflación: una causa de la pobreza”, Tomás Cabrero, Revista Orden Espontáneo Nº 2, Centro Adam Smith – Fundación Libertad, 2009.
• “Seigniorage and Inflation: The Case of Argentina”, Miguel A. Kiegel and Pablo Andres Neumeyer, Journal of Money, Credit and Banking, Vol. 27, Nº 3, August 1995.
• “Macroeconomía”, R. Dornbusch, S. Fischer and R. Startz, Mc Graw Hill, 9º edition, 2004.
• “La inflación Argentina duplica el promedio de América Latina”, Adriano Mandolesi, Fundación Libertad, 2009.

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[1] According to official information of the BCRA between 2003 and 2010 the monetary base increase over 486%.

 

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