A dollar-based Free Banking system: The way to nominal stability in Argentina

Inflation is skyrocketing in Argentina and the country seems unable to ever maintaining any form of nominal stability. In my view the problem with lack of nominal stability in Argentina is, however, not fundamentally monetary – it is rather a constitutional problem. Hence, it seems like the country’s politicians are able to make the decisions that are necessary to maintain monetary stability.

So even though I am quite critical about different suggestions for dollarization in different countries I for some time have thought that in the case of Argentina there is no reason to try to come up with an “optimal” monetary regime. In many ways Argentina is economically-politically a failed state. Hence,  simply getting rid of the Argentine peso might be the least horrible solution.

Nicolas Cachanosky and Adrian O. Ravier in a new very interesting paper – A Proposal of Monetary Reform for Argentina: Flexible Dollarization and Free Banking – has an interesting proposal for dollarization in Argentina.

Here is the abstract:

Argentina’s economy and monetary institutions are, once again, experiencing a serious crisis. In this document, we propose a monetary reform for Argentina that consists of flexible dollarization plus a free banking regime. By flexible dollarization, we mean that the peso should be replaced with the U.S. dollar as a first step, but the market should have the freedom to interact with any selected currency. Therefore, the country does not become attached the U.S. dollar; on the contrary, it becomes a free currency country. By free banking, we mean giving financial institutions permission to issue their own banknotes convertible into U.S. dollars or any other currency or commodity of their choice.

It should be noted that the problems of the Argentine economy go beyond those of monetary policy. This proposal should not be understood as a sufficient reform to fix the Argentinean economy but as a necessary one. This proposal should also not be understood as a monetary panacea but as a monetary framework that is still superior to one provided by the Argentine central bank BCRA and Argentine policy makers to their country.

There is only major problem with the suggestion – Argentine policy makers seem unable to make sensible decisions. That said, ideas matter. In fact they matter a lot so hopefully one day some visionary Argentine reformist government will pick-up Cachanosky-Ravier monetary reform plan.

HT Anthony Evans

Leave a comment


  1. Thank you Lars for this post.
    I certainly agree with that “Argentine policy makers seem unable to make sensible decisions” and I fear that might the most important shortcoming of our piece.

    However, we wrote this thinking in the “best second best” with the objective to shake public opinion. For that it may be necessary to propose something that is “scandalous” from a political point of view.


  2. Argentinian politicians are addicted to seignorage, wealthy Argentinians keep their real money offshore (conveniently in Montevideo but may want to take a gamble on the Peso, Austral or whatever when they know they cannot lose); In general, ordinary Argentinians (retail and wholesale) are very bad credit risks so free banking would be very expensive (high risk premia) and would only work if there was no alternative, like in a default situation. But that type of free banking already exists there and it is called loan sharking..When I was working for ABN as international treasurer I visited the Montevideo branch and the manager proudly showed me one of the cashiers, who could accurately guess the amount of USD in a briefcase by just looking at the model and weighing it in his hands (assuming only $100 notes). There are no solutions the Argentinians will not abuse privately, at the expense of “non-tradable” Argentinians and foreigners.

    Happy NY and cheers!

    PS Incidentally just finished reading the Volcker interview (by Feldstein) in the Journ of Econ.Perspectives. As far as I know (first hand at least) the only Fed chairman who was respected by the banking community during his time in office (Greenspan was not and Bernanke subsidized the banks, which earns gratitude but not respect) . See his take on unconventional monetary policy and the dual mandate. I guess that the dual mandate exists in sofar as the BoG majority thinks employment deserves attention, which is an ideological issue, not a technical one. He does not explain how in his view fiscal and monetary policy should be interacting, probably his preference for price stability as a single, but somewhat flexible target will tend to render fiscal policy a priori ineffective which is not politically permissible in a vote buying political system. Politicians will interfere in the economy, but rarely for the common good.

    Rien Huizer

  1. A Proposal of Monetary Reform for Argentina (with Adrian Ravier) | Punto de Vista Economico
  2. Argentina’s peso plunges | The Market Monetarist

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