Between 1988 and 1991 Argentina saw the climax of more than a half century of inflation, sending runaway annual inflation rates into four-digit territory.
Unlike Chile, Argentina was no stranger to paper money in the early nineteenth century. In 1822 the Bank of Buenos Aires issued bank notes that traded at a premium, but war with Brazil in 1826 led to the suspension of convertibility of these notes into gold. The notes depreciated significantly before resumption of convertibility in 1867. Convertibility was suspended again in 1876, and Argentina’s peso depreciated by more than 50 percent.
In 1899 Argentina adopted the gold standard and began an era of price stability that, aside from the interruption of World War I, lasted until Argentina and the world abandoned the gold standard early in the depression of the 1930s. Argentina’s wholesale price index (based upon 1943 prices equaling 100) stood at 31.6 in 1907, rose to 38.3 in 1914, and climbed steadily—reaching 68.0 in 1920. Then Argentina saw prices decline steadily until reaching a trough of 42.1 in 1933.
From 1934 until 1990 prices rose and inflation fluctuated with a long-term upward trend. Inflation averaged over 50 percent between in 1940 and 1950, and then subsided to an average slightly over 23 percent between 1961 and 1965. Inflation began to creep upwards and really took off in the early 1970s, averaging nearly 109 percent between 1973 and 1976. Inflation finished the decade of the 1970s in the 170 percent range, and approached 400 percent in the mid 1980s. By 1989 the annual inflation rate exceeded 3,000 percent. Inflation exceeded 2,000 percent in 1990 and declined to 84 percent 1991. By the mid-1990s Argentina had tamed inflation to well within the single-digit range and had become a model of monetary stability.
The root cause of the inflation originated in isolationist foreign trade policies, political instability alternating between military dictatorships and civilian governments, interventionist domestic economic policies emphasizing subsidies, and the failure of the tax system to fund public expenditures. The unfortunate episode of the Falklands war in 1982 may have helped put Argentina on the road to bankruptcy and collapse. Between 1980 and 1990 real wages fell 20 to 30 percent. Between 1973 and 1990, per capita income fell 26 percent. Tax revenue as a percentage of the gross national product (GNP, a measure of total national output and income, comparable to the gross domestic product in use today) fell in the 1980s and the public debt surpassed 100 percent of GNP. Printing money became a substitute for taxation.
Dissatisfaction with economic chaos helped bring a democratic revival in Argentina, and early in the 1990s a democratic government brought inflation under control, a feat that had eluded military governments. Worldwide inflation in the 1970s had led some observers to doubt the ability of democratic governments to face up to the disease of inflation.
In March 1991 the Argentine legislature enacted the Law of Convertibility, creating a new Argentine peso convertible into one U.S. dollar. The new monetary base was backed by 100 percent of reserves in gold, dollars, or other foreign currencies. United States dollars were also accepted as a currency for domestic transactions. The value of the peso was pegged at 1 dollar, and the central bank maintained convertibility between pesos and dollars. This currency reform not only broke the back of inflation, but made Argentina’s monetary system a model for other developing countries. Monetary reform coincided with a capitalist revolution in Argentina, emphasizing privatization, less government intervention, and openness to foreign trade.
