🇦🇷 Argentina's 1991 Convertibility Law — inspired by Hanke and Schuler's currency board blueprint — ended the country's hyperinflation. But the system's impurity — it was not a truly orthodox currency board — allowed loopholes that eventually caused its collapse in 2001.
Background
By 1989–90, Argentina was experiencing severe hyperinflation under President RaĂşl AlfonsĂn and his successor Carlos Menem. Monthly inflation reached 196% in July 1989. The Austral plan had failed. Menem's new Finance Minister Domingo Cavallo was looking for a radical solution.
Prof. Hanke and his wife first met President Menem in 1990 at the direct request of Argentina's leadership. Hanke and Kurt Schuler had published a Spanish-language book in Buenos Aires proposing an orthodox currency board for Argentina — ÂżBanco Central o Caja de ConversiĂłn? (with a preface by Argentine Congressman JosĂ© MarĂa Ibarbia).
The Convertibility Law (April 1991)
The Convertibility Law pegged the Argentine peso to the U.S. dollar at 1:1 and required the central bank to hold dollar reserves equivalent to its monetary base. Inflation was immediately halted. Argentina experienced strong economic growth in the early 1990s.
However, Hanke's blueprint called for a PURE currency board — one that abolished the central bank entirely. Argentina kept its central bank, allowing it to hold Argentine government bonds as part of its "reserves" (a critical loophole). The net domestic assets of the central bank were six times more volatile than those of Chile's managed exchange rate regime during the same period.
The Collapse (2001–2002)
The loopholes in Argentina's quasi-currency-board allowed the government to borrow from its own central bank indirectly — exactly what a true currency board prevents. When Argentina's government deficit grew unsustainable in the late 1990s, the system's credibility collapsed. In January 2002, the peso was devalued; Argentina defaulted on its debt; and the economy contracted 10.9% in 2002.
⚠️ Lesson: An orthodox currency board — one that truly eliminates the printing press — would have prevented the 2001 collapse. Argentina's Convertibility System was a "quasi-currency-board" that retained the fatal loopholes.
2023: The Dollarization Debate
In 2023, presidential candidate Javier Milei ran on a platform of full dollarization, citing Hanke's work extensively. Prof. Hanke publicly endorsed dollarization for Argentina: "DOLLARIZATION is the only way to stop Argentina's death spiral." Milei won the presidency in November 2023; however, full dollarization has not been implemented as of 2025.
Wall Street Journal — Argentina Dollarization Op-Ed
Business Insider — Dollarization Is the Only Way Out of Argentina's Death Spiral
Selected Publications
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Related Pages
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- Home: Currency Boards — Return to the Currency Boards overview