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timeline
Dollarization
Background & economic context
In the early 1990s Argentina adopted the Convertibility Law, fixing 1 peso = 1 U.S. dollar and requiring the central bank to back pesos with foreign reserves, which made the system look like a currency board rather than a standard central bank.
Over time, high and complicated taxes (VAT 21%, social security and medical taxes 31.9%, top income tax 35% at relatively low income levels) pushed activity into the underground economy and weakened growth.
Tax hikes deepened the recession, tax revenue fell, and fears about a debt default spilled into the currency and banking system; interest rates jumped and deposit withdrawals accelerated.
After the peg was abandoned and the peso devalued around 2002, exports got a temporary boost, but even a large devaluation added “less than half a percent” to GDP in back-of-the-envelope calculations, highlighting how weak the broader economy was.
Hanke’s role and influence
Beginning in the late 1980s, Argentina was mired in triple-digit inflation, repeated currency collapses, and deep economic uncertainty. In 1989, Steve H. Hanke entered the scene at the direct request of Argentina’s leadership. That year, he and his wife first met President Carlos Menem, beginning a full decade of Hanke’s informal advisory relationship with Menem and senior economic policymakers. Throughout the 1990s, Hanke was deeply involved in Argentina’s internal debates over how to end inflation and rebuild confidence in the national currency.
Soon after that first meeting, President Menem encouraged Hanke to produce a book setting out a durable solution for Argentina’s inflation crisis. Working with his colleague Kurt Schuler, Hanke drafted a blueprint for an orthodox currency board — a monetary system designed to eliminate discretionary money creation and fix the Argentine peso firmly and credibly to the U.S. dollar. While preparing this blueprint, Hanke worked closely with Congressman José María Ibarbia and reform-minded members of Congress known as the Alsogaray faction. Their plan was published in 1991 under the title Banco Central o Caja de Conversión, and became part of Argentina’s policy conversation at the highest level.
In April 1991, Argentina introduced what became known as the Convertibility system. It linked the peso to the dollar and sharply reduced inflation, giving the country a powerful economic rebound. But although Convertibility borrowed design elements from Hanke’s currency-board proposal, he stressed from the beginning that it was not a genuine currency board. The central bank retained the ability to hold domestic assets and conduct discretionary policy, which meant the system still had loopholes that could later be exploited. Months after Convertibility went into effect, Hanke publicly warned that it would eventually unravel unless Argentina moved to a fully rule-based currency regime.
By the mid-1990s, Hanke was not only an intellectual participant but also a market practitioner in Buenos Aires. In 1995, he served as President of Toronto Trust Argentina, which that year became the world’s best-performing emerging-market mutual fund. During the same period, he worked closely with Minister of Economy Domingo Cavallo during the “Tequila Crisis.” In public settings Hanke explained how Convertibility operated, but privately, he continued to urge Argentina to abolish its central bank and either adopt an orthodox currency board or fully replace the peso with the U.S. dollar.
As warning signs grew in the late 1990s, President Menem once again turned to Hanke for advice. Concluding that Argentina could never fully escape monetary instability as long as its central bank controlled the currency, Hanke recommended a much more radical solution — one that is widely discussed in the country today: mothballing the central bank, retiring the peso from circulation, and adopting the U.S. dollar as legal tender. At Menem’s request, Hanke and Schuler drafted a full dollarization law, which they later published in 1999. Hanke presented the proposal to the Argentine Bankers Association in Buenos Aires, where the plan received support from the banking community. Ultimately, however, Argentina did not dollarize. The Convertibility system failed a few years later, validating many of the concerns Hanke had raised as early as 1991.
Over two decades later, Argentina is again debating whether to permanently replace the peso with the U.S. dollar. Hanke remains an active voice in the current discussion, though independent from any political campaign, and continues to argue that full dollarization is the only reliable way for Argentina to escape the recurring cycles of inflation, currency collapse, and loss of confidence that have plagued the country for generations.