Yesterday, President Mauricio Macri chose to impose capital controls on Argentina. Since being elected, Macri has been reluctant to reform — a gradualist, “do‐nothing” president. But, when backed into a corner of his own making, he acts as if he is bent on committing political suicide. First, he called in the firemen from the International Monetary Fund — a rightfully despised organization in Argentina. And now, he has pulled the trigger on capital controls.
What would Nobelist Friedrich Hayek say about the imposition of capital controls and restrictions on the convertibility of Argentina’s junk currency—the peso?
Currency convertibility is a simple concept. It means residents and nonresidents are free to exchange domestic currency for foreign currency. However, there are many degrees of convertibility, with each denoting the extent to which governments impose controls on the exchange and use of currency.
The pedigree of exchange controls can be traced back to Plato, the father of statism. Inspired by Lycurgus of Sparta, Plato embraced the idea of an inconvertible currency as a means to preserve the autonomy of the state from outside interference.
So, the temptation to turn to exchange controls in the face of disruptions caused by hot money flows is hardly new. Tsar Nicholas II first pioneered limitations on convertibility in modern times, ordering the State Bank of Russia to introduce, in 1905-06, a limited form of exchange control to discourage speculative purchases of foreign exchange. The bank did so by refusing to sell foreign exchange, except where it could be shown that it was required to buy imported goods.
Otherwise, foreign exchange was limited to 50,000 German marks per person. The Tsar’s rationale for exchange controls was that of limiting hot money flows, so that foreign reserves and the exchange rate could be maintained. The more things change, the more they remain the same.
Before more politicians come under the spell of exchange controls, they should reflect on the following passage from Hayek’s 1944 classic,The Road to Serfdom: