News Release

December 5, 2001

Argentina needs dollarization, private bank notes, study says
Coupled strategy would avoid devaluation, increase bank dollar reserves

WASHINGTON—Earlier this week, Argentina began to restrict its citizens from transferring funds abroad or withdrawing more than $250 per week in cash. The move came after an alarming run on banks prompted by fears of devaluation.

In the new Cato Institute report, "Argentine Endgame: Couple Dollarization with Free Banking," Johns Hopkins Economics Professor Steve H. Hanke calls for the official dollarization of the Argentinean economy to stave off a financial collapse and spur economic growth. "By unilaterally dollarizing the economy, monetary policy would become 'looser' because the exchange-rate risk with the dollar would be eliminated, interest rates would be lower, and credit would be more readily available," he writes.

"High rates of interest for peso loans, which result from uncertainty about the government's monetary policy, indicate that the best course of action would be to eliminate the central bank and cease issuing pesos," Hanke writes. "Doing so would eliminate the perceived risk of devaluation that is hurting Argentina's economy."

A former advisor to Argentinean President Carlos Menem, Hanke also recommends that private banks be allowed to issue their own dollar-denominated notes. Competitive note issue by private banks would help increase the supply of reserves on hand at banks and allow Argentina to capture seigniorage—the profit from issuing notes, which otherwise would accrue to the U.S. government, he says.

"There is nothing novel about such a system," according to Hanke. "It is technically feasible and can begin to operate as soon as banks can get notes printed."

"Provided that banks have any confidence in the future, reversing Argentina's recent trend of declining bank reserves would therefore lead to an expansion of bank credit and lower interest rates, enabling businesses to undertake projects that are not profitable in today's very high-interest rate environment," he writes. "More business activity would create jobs and spur economic growth."

"Argentine Endgame: Couple Dollarization with Free Banking"