Argentina Is Short of Cash — Literally

January 5, 2009 • Commentary
This article appeared in the Wall Street Journal on January 5, 2009

Suppose you want to ride the bus or feed a parking meter without exact change. Or suppose you just want to drop a few cents in a street musician’s hat. Nothing easier, right? Not if you live in Argentina. Try doing any of these things there, and you could be in for a major hassle.

Why? Because Argentina is in the grips of a small‐​change shortage. Want change for a five‐​peso (about $1.70) note? Don’t try getting it at a store, unless you plan to buy something — and be ready in that case to have the merchant refuse your business rather than part with precious centavos, or to have him hand you bon‐​bons instead of coins. Banks aren’t much help either. The law says they’re supposed to give you up to 20 pesos worth of change; but most openly flout that rule, supplying just a few pesos worth, or even hanging out “No Change” signs, like the ones at retailers’ kiosks.

Why the shortage? Argentina’s central bank blames it on “speculators,” meaning everyone from ordinary citizens, who stockpile coins, to Maco, the private cash‐​transport company (think of Brinks) that repackages change gathered from bus companies to resell at an 8% premium. But those explanations ring false. “Black marketeering” would not exist if coins were easy to get in the first place. After all, Argentines could just as easily hoard razor blades or matchbooks. Yet there’s no shortage of those. What’s so special about coins?

The answer is that coins are supplied by the government alone. “Put the federal government in charge of the Sahara desert,” Milton Friedman said, “and in five years there’d be a sand shortage.” If Argentina wants to end the coin shortage, it ought to give up its monopoly.

Crazy? Not if history is the guide. Over two centuries ago, Great Britain faced a coin shortage more severe than Argentina’s — so severe that it threatened to stop British industrialization in its tracks. People struggled to get coins for everyday use. The average worker was lucky to make 10 shillings a week, while the smallest banknotes were for 10 times as much. So the coin shortage even prevented factories from paying wages.

Like Argentina’s government today, the British government wasn’t able to end the shortage. Yet the shortage did end — thanks to private‐​sector action. Fed up with the government’s inaction, British firms started minting their own coins. Within a decade a score of private mints struck more coins than the Royal Mint had issued in half a century — and better ones: heavier, more beautiful, and a lot harder to fake. Yet they were also less expensive, since private coiners sold their products at cost plus a modest markup, like other competitive firms, instead of charging the coins’ face value, as governments like to do. Finally, when those who had accepted the private coins for payment went back to the issuer to redeem them, issuers offered to exchange their coins for central bank notes at no cost.

Armed with this history, it takes no great flight of fancy to imagine Argentine firms today, including supermarket and retail chains like Carrefour and Wal‐​Mart, reputable banks like HSBC Bank Argentina, and transport companies like Metrovias, issuing their own centavos and one peso coins. By doing so they’d no longer be at the mercy of the government, or of private coin distributors with their hefty commissions. Ordinary citizens would benefit too.

So why hasn’t private coinage already taken hold? Most likely because private firms don’t expect the government to put up with it. In Great Britain, despite all the good they had done, private coins were banned in 1817, and issuers were confronted by a mass rush to redeem their coins. This happened, by the way, when official British coins were still in very short supply.

If Argentina wants to end the shortage, it ought, not only to tolerate private coinage, but to sanction it. It can do so, while eliminating any risk that such coinage would be abused, through very simple legislation. It should allow any private firm to issue distinctly marked coins, perhaps subject to some minimal capital requirements, while making it clear that no one need ever accept any privately issued coins, even as change for purchases.

Such a law may be all that’s needed to solve the coin shortage, while also preventing anyone from forcing people to accept money they didn’t trust. Anyone, that is, except the Central Bank of Argentina.

About the Author
George Selgin

Senior Fellow and Director, Center for Monetary and Financial Alternatives