True dollar diplomacy

For Oscar Alcober, this summer marks the 10th anniversary of an event he has no intention of celebrating. During the summer of 1989, his native Argentina endured the worst bout of hyperinflation in its history. "When you went to the grocery store, the price changed from the time you went into the market until the time you went out," recalls Mr. Alcober, then a 26-year-old graduate student in San Juan, about 700 miles west of Buenos Aires. "You grabbed a bag of sugar, and the price would change by the time you got to the cashier." In June, prices had escalated so much that food riots broke out in the southern part of Rosario, about 180 miles north of Buenos Aires. Carolina Rocha Duarte lived there with her parents and sister in a middle-class neighborhood, and she remembers panicked relatives from other parts of the city calling on the phone: "On TV there are riots of angry people headed to your home. Lock the doors!" Her father taught his wife and daughters how to load and unload his guns, in case they needed to protect themselves from rioters. An aunt and uncle living on the same block spent an entire night on the roof of their house, because "up there they were high up and they could see if somebody was coming." These were the circumstances Carlos Menem faced when he became president of Argentina 10 years ago. Hyperinflation-sometimes reaching an annual rate of over 1,000 percent-was eating away at the very fabric of the nation. By April of 1991, with inflation still raging, Mr. Menem and economy minister Domingo Cavallo were ready to try something that seemed radical at the time: "convertibility," or so rigidly linking the Argentine peso to the U.S. dollar that the central bank could no longer freely print money. Convertibility tamed inflation in Argentina, but today many in that country, including Mr. Menem himself, wonder if it is enough. Surveying the financial wreckage of so many developing countries after the currency crises of the last few years, Mr. Menem wants to drop the peso altogether and adopt the greenback as his country's currency. He's not alone. Panama has long been "dollarized," and some business and political leaders in Canada, Ecuador, El Salvador, and Mexico are pushing dollarization for their countries. The paper money that Americans take so much for granted suddenly is the hottest thing in the Western Hemisphere since salsa. U.S. citizens may not understand why so many Latin Americans want to take the dramatic step of giving up their national currency, but then the United States has never experienced hyperinflation, Latin American style. "It was like a war economy," Mr. Alcober told WORLD. "When you would get your salary, you spent all your money on groceries the first day to survive. You would spend your whole salary the same day on food." Black markets thrived. "It was a crazy time and a lot of people were doing different things," says Fernando Rodriguez, who was then a teenager in Buenos Aires. "There were a lot of people working under the table, even in the government." Poor people suffered terribly, but having a good job was no shield. "It was a terrible situation because you couldn't plan your life at all," according to Mrs. Rocha Duarte. "It wasn't a matter of having a job, it was a matter of, 'How much am I getting for this job in order to buy food?'" By 1991, Mr. Menem and Mr. Cavallo had to do something, and what they did became legendary in Argentina. They turned Argentina's central bank into a currency board that couldn't print pesos without having an equal number of U.S. dollars in reserve. Since citizens could trade, or "convert," their pesos for these dollars at any time, each Argentine peso became, and remains to this day, basically a contract for one U.S. dollar. It worked. Convertibility broke the back of Argentine inflation, with price increases slowing to around 1-2 percent per year, or even less. The dollar became as common in Argentine stores and banks as the peso, since both currencies were by law the same thing. Convertibility "made Argentina a civilized country," says Mr. Alcober. "People really should every month meet together and remind each other how it was living in hyperinflation [and] say thanks to convertibility." Such sentiment may not run quite that high throughout the country, but it runs high enough that even Mr. Menem's political opposition doesn't dare question convertibility. But foreign investors wonder how long that will last. They know something about how human nature mixes with power and money: The temptation to debauch a currency can be overwhelming for governments, and not just those in developing countries. Currency devaluation can (at least in the short term) raise growth rates and lower unemployment before it leads to devastating inflation. Richard Nixon understood this during his first term as president of the United States. He delinked the U.S. dollar from gold and the Federal Reserve fired up the printing presses. The economy artificially boomed and Mr. Nixon won reelection by a landslide in 1972, but soon the United States had to face the inflationary reckoning, which lasted for the rest of the 1970s. International investors are worried that something like this will happen in Argentina. With numerous countries' currencies depreciating, especially neighboring Brazil's, Argentina's goods aren't competitive and the country's economy is sluggish. Investors, fearing that Argentina will be tempted to scrap the dollar link and devalue the peso, are demanding higher interest rates, which further slow Argentine growth. For Mr. Menem, who says he has no intention of devaluing, total dollarization would give that claim instant credibility with foreign investors, who could then be attracted without such high interest rates. By adopting the U.S. dollar, the government would give up all control over monetary policy, so devaluation would be impossible. Ultimately, the debate over dollarization comes down to this very point. Critics of dollarization say governments should be able to use the money supply and/or exchange rate as tools to manage the economy. Proponents of dollarization disagree, saying the value of money should be "depoliticized," as Empower America economist Judy Shelton puts it. Dollarization "would have a moral basis," according to Republican presidential candidate Steve Forbes. "If you earn or save a dollar," he wrote in a column for his magazine, "the value of that dollar should not be lessened because of political mistakes." The Argentines with whom WORLD spoke sided with the dollarizers, arguing that convertibility has meant-and dollarization would institutionalize-freedom from arbitrary government. "If I get one dollar, I can spend it whenever I can or in the way that I want," says Mr. Alcober. "In hyperinflation, we got pesos that were nothing. Pesos in 1989 were just paper." Mrs. Rocha Duarte agrees: "At least [people] would have more control of their income. If incomes are paid in dollars and bills are paid in dollars, there's no place for inflation." Of course, the success of dollarization depends on the soundness of the U.S. dollar, which has yet to be depoliticized itself. The Federal Reserve still has the power to print money, backed by nothing at all, at will. The steady hands of former Fed Chairman Paul Volcker and his successor Alan Greenspan have made the dollar a reliable and trusted store of value throughout the world, but future Fed chairmen may not be as responsible. Dollar depoliticizers want a guidepost defined for the dollar, and Mr. Greenspan wrote passionately in favor of the gold standard before joining the Fed. In the meantime, wary from past experiences with hyperinflation, many Latin Americans are ready to take refuge in the greenback.

-with reporting by Deann Alford