The ecology of money, by Richard Douthwaite
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Box 7: Regional currencies save the day for Argentina

The best example of the valuable role that multiple currencies can play comes from Argentina. For years, governments there borrowed with gusto and, since the banks created the money rather than transferring it from savers, a lot of additional purchasing power was created. So much, in fact, that prices soared by 4,929% in 1989 alone. Wages failed to keep up, savers saw their nest-eggs vanish and shops had to adjust their prices every few hours. Riots broke out and forced the president, Raúl Alfonsín, to resign.

Carlos Menem, his successor, brought in a law which required the central bank to hold a dollar in its reserves for every peso in circulation. Within four months inflation was down to 1.5% and capital poured into the country. Everything went well until 1994, when a Mexican devaluation caused a rush of money out of the country. Bank deposits dropped sharply and the state had to intervene to prevent a banking crisis.

Later on, other countries devalued too and, trapped by its link to a rising dollar, Argentina became seriously uncompetitive. By 2000, unemployment had soared to around 20%. Believing devaluation was imminent, many better-off Argentines rushed to turn their pesos into dollars while the one-for-one rate held good. As a result, the number of pesos in circulation dropped by 30% and the economy shrank by 11%. Even food sales were 10% lower, showing the depth of the hardship.

In response, existing LETS (ÒtruequeÓ) systems expanded and many new ones were set up. Entrepreneurs even sold kits for start-ups, complete with printed notes. Because systems accepted each other's notes, all notes lost most of their value when the flood of kit money went into circulation. Many trueque markets closed. This was a disaster because, up to that point, thousands had been relying on them for their livelihoods.

The tax received byArgentina's 26 provinces dropped sharply. Buenos Aires province, home to 38% of the country's population, found itself unable to pay its employees and to keep schools and hospitals going. Unable to borrow, it printed its own money - the patacon - and in August 2001 began paying with that instead. In some months, public servants got 90% of their wages in patacones.

Businesses in the provincial capital, La Plata, were divided over whether to accept patacones. The Volkswagen dealership had a sign up saying it would, the electricity company announced that 60% its bills ould be paid in the new money and McDonalds offered a meal called the Patacombo. But Carrefour, a big supermarket chain, turned them away until it lost so much business that it was forced to capitulate. After that, everyone was prepared to accept the new money. You could pay your taxes in them, keep them in a special account at your bank and even get them out of ATMs alongside pesos and dollars.

Buenos Aires was the ninth Argentinean province to print its own money. By November 2001 the provincial currencies made up 15.8% of the total cash in circulation nationwide.

In December 2001, the federal government tried to halt the flood of dollars out of the country by limiting withdrawals from bank accounts to 250 pesos (dollars) per account per week. This aggravated the money shortage and caused the circulation of the provincial currencies to soar. Eventually, at Christmas, the link with the dollar was scrapped and by July the following year, the peso's value had fallen 3.5 to the dollar.

The provincial currencies were withdrawn in mid 2003. They were bought by the federal government for pesos it was able to allow the banks to create now the fixed relationship with the dollar had been broken. Patacones were bought at their face value - one peso per patacon. In other provinces, however, where the credibility of the issuing governments had been low due to corruption and unwise spending, the currencies fetched less than their nominal value.

The currencies were scrapped for two main reasons. One was pressure from the IMF, which felt that Argentina would be unable to control its money supply, and hence its exchange rate and rate of inflation, if the provinces continued to issue their own monies. Another, more powerful, reason was that the federal government felt that the currencies gave the provinces too much autonomy and might even lead to the break up of the country.

Nevertheless, patacones were a remarkable success - the fact that at one stage they comprised over a fifth of the national money stock is evidence of that. So is the fact that their issue saved many people in Argentina from much greater hardships than they actually experienced.

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SearchContentsForewordGlossaryIntroductionChapter 1Chapter 2Chapter 3Chapter 4Chapter 5Appendices