Sebastian Edwards (The Americas, Jan. 25) claims that Chile’s peso devaluation in June 1982 was similar to Argentina’s recent devaluation because Chile was operating with an “implicit currency-board arrangement,” one that was similar to Argentina’s convertibility system. This assertion, which is repeated ad nauseam by Chile’s “Chicago boys,” is unfounded. Chile employed a garden variety pegged exchange-rate system, just like the ones that have blown apart since 1995 in, among other places, Mexico, Thailand, South Korea, Indonesia, Russia, Brazil and Turkey. It was not even a distant relative of Argentina’s convertibility system.
Under the Convertibility Law of 1991, Argentina employed a parallel currency system in which the peso and the dollar both legally circulated in Argentina and traded at a peso-dollar rate of 1-to-1. On Jan. 6, the Convertibility Law was repealed and the peso was devalued. What set Argentina’s devaluation apart from other devaluations is that it involved what Frédéric Bastiat (1801-50) termed legal plunder. That’s when a law is passed that takes from some people what belongs to them and gives it to others to whom it doesn’t belong.
The Convertibility Law gave a peso holder the right to freely convert a peso into a U.S. dollar. Argentina’s redemption pledge was credible because the central bank was required by law to hold foreign reserves to fully cover its peso liabilities. This right of redemption made the convertibility system unique and distinguished it from typical fiat money systems, like the one employed in Chile.
With the repeal of the Convertibility Law, the redemption pledge was thrown to the winds and the peso holders’ claims on foreign reserves held at the central bank were revoked. Consequently, Argentina’s devaluation represented a great bank robbery, one in which foreign reserves equal to USD 17.8 billion that were the property of peso holders were confiscated by the government.
For the Duhalde government, that was just the beginning. As the Journal’s Jan. 23 editorial “Argentina Goes Bananas” points out, the government has passed a string of new laws that trample on property rights and make a mockery of the rule of law. All this sets Argentina apart from Chile, a country that upholds the rule of law.
The rule of law is fundamental. Unless the Argentines replace the Duhalde government with one that abides by it, Mr. Edwards’s blithe advice will remain academic.