Argentina has applied practically every single monetary system known by the

economic theory, each monetary system was always followed by a dreadful

crisis. The flexible exchange rate system led to a hyperinflation and the
currency board led to a dramatic recession. Nonetheless, these periods of
tribulations were not caused by the currency mechanisms per se, but by the
unsound institutions that were in charge of the economic structure. Thus,
dollarization represents an optimal policy, which would force the regime to be
responsible with the money supply and at the same time this policy will provide
economic stability. This paper will illustrate in an extensive manner the
reasons why dollarization is the best route for Argentina.
A brief history of Argentina monetary procedures
The macroeconomic theories, specially the monetary and fiscal, that are addressed to
maximize grow in the long term and minimize the output variations have became more
complex during the last decade due to the financial crisis of this period. The reasons of
this complexity have their origin in the unchanged monetary policy philosophy by the
economic authorities, such as the Central Bank and the Finance Ministers. These
authorities have been always focused on three main points: the acceptance of free
circulation of capital (no restrictions to substitute national financial assets for
international financial assets), the desire to maintain national macroeconomic policy
and the desire to keep exchange rate stability.
The crises of the second half of the 90’s, tequila effect, Asian crises, Russian and
Brazilian have shown the incompatibility of such philosophy, especially in the
developing countries. These crises have proven that is not viable to adapt autonomy
monetary policies and at the same time maintain fixed exchange rates in a economy of
free circulation of capitals. Moreover, once financial globalization is accepted as the
most efficient way to attract investment projects and foreign savings, the only valid
solutions are the extreme ones. These solutions are flexible exchange rate with
autonomy in the monetary policy or fixed exchange rate without monetary autonomy.
In Argentina, the macroeconomic policy makers have decided to renounce to
the freedom of monetary policy and the flexible exchange rates for the following
reasons:
 A high default risk (spread) applied to the interest rates, which
discourage foreign investment
 The lack of credibility in the macroeconomic authorities
 A high inflation which discourage financial planning and reduced the
acquisition power of the citizens
 The high costs to the nations wealth (GDP) as a result of external shocks,
such as the Brazilian and Asian crises (lost of competitiveness and trading
partners)

All of these costs have developed an authentic fear to float (Calvo and
Reinhart 2000), which obviously led to the application of constitutional
compromises to use firm exchange rate system (currency broad). However, we
have seen that this mechanism did not bring the benefits that Argentina was
expecting.
In this context, new proposals have been discussed about a possible solution
for the Argentine crisis. One of these proposals that have caught significant
attention is dollarization for Argentina as the new monetary system. Thus, this
proposal has deployed several debates among economist and academics. On
one hand, several analysts argued that Argentine regime already gave up
to its monetary freedom and applied a fixed exchange rate system to bring
financial stability to Argentina and it did not work. Therefore, a more
radical currency system would not work either. Nevertheless, in spite that
the currency broad and dollarization are very similar (at least in a first
sight) the differences are quite significant.
The cost of the Seinoriage lost
In a more extensive analyses it would imperative to explore what would be the
consequences for Argentina if it decides to dollarized. The main cost of
dollarization that would be lost is seignorage. At present, Argentina earns
perhaps 750 million pesos a year in seignorage. Since the size of Argentina’s
economy, as measured by gross domestic product (GDP), is roughly 340 billion
pesos, seignorage is only about 0.22 percent of annual GDP. In other low
inflation countries, the seignorage can be as much as 1 percent. (Minisro de
Economia Argentina) Argentina’s long history of inflation before the
Convertibility Law has made Argentines less willing to hold local notes and
coins than people in other countries with low inflation, so seignorage in
Argentina is lower than average. Since the peso-dollar exchange rate is 1-to-1,
there would be almost no one-time costs associated with converting computer
programs and cash registers from pesos to dollars. In consequence, the
administrative costs of dollarizing in Argentina would be very small.
Interest rates
The major benefit of dollarization would be, reduced interest rates in Argentina.
With no peso-dollar exchange rate, currency risk would be eliminated, and the
spread in interest rates between pesos and dollars for loans within Argentina
would be closed. In January 1999, the interest rate for interbank loans in
pesos was about 1 percentage point higher than the rate in dollars, and the
spread was fluctuating around 5 percentage points for 1-year interbank loans.
For non-bank borrowers, the spreads are higher. It is true that people who
want to pay lower interest rates can borrow in dollars, but that exposes them
to a currency risk that many do not wish to take, given Argentina’s long history
of devaluations before the Convertibility Law.
By eliminating currency risk, dollarization would reduce interest rates. In
consequence, Argentina’s trend rate of growth would be higher and the
variability of annual growth would be lower with dollarization than with its
currency board system. Indeed, a government memorandum (Ministro de
economia de Argentina)estimates that lower interest rates resulting from
dollarization would add 2 percentage points to the trend rate of economic
growth (Warn 1999). This benefit exceeds the cost of seignorage lost (0.22
percent of GDP).
Even using the conventional benefit-cost framework, as we have just done,
leads us to conclude that the benefits of dollarizing Argentina clearly are
greater then the costs. However, when evaluating alternative monetary regimes,
conventional benefit-cost analysis fails to capture important benefits and costs,
namely the needs of the consumers.
The consumers in a dollarized economy
The ‘‘consumers’’ of money are those who use it—almost everyone except for
young children. Rather than using as their starting point a determination of
what characteristics consumers find desirable in money, economists simply
assume that a well-intentioned, competent, politically independent central
bank would produce the best outcome, and that is where they begin their
calculations. In the case of Argentina, this is as unrealistic as assuming that a
government-owned telephone monopoly would produce efficient, low-cost
service. Argentines have shown that the characteristics they want in a currency
are those that the dollar has: low inflation, full convertibility, the prospect of
continued good performance in the future, and international acceptability. The
Convertibility Law succeeded, where past monetary reforms had failed, because
it made the peso a close substitute for the dollar. However, the dollar is still
perceived by consumers as being superior to the peso. Dollarization would
allow consumers fully to take advantage of the perceived superiority of the
dollar.
The Central Bank
Another significant aspect about different monetary systems, in which the
Central Bank would be "playing the game". There are three options: a) A flexible
exchange rate, b) an orthodox exchange rate, which is a fixed exchange rate
system with relative monetary freedom (Currency board) and c) dollarization.
-Flexible exchange rate: With this exchange rate type, the Central Bank
has monetary freedom but the economy could have inflation problems. If
it tries to increase the money supply (to finance banks or the government) the
interest rates tend to fall, the people send their money to another countries
with higher interest rates. This also leads to an increase in the exchange rates
and the price levels increase. The Argentine experience has proven that this
monetary system does not work in this country, mainly because of the inflation
repercussion that it brings. Furthermore, it seems that the Argentines would
be reluctant to use this system again.
-Currency board exchange rate system: With this type the Central Bank
could control the inflation in an optimal way but it would have less freedom in
its monetary decisions. In effect if it tries to increase the money supply (to
finance banks or the government) the interest rates tend to fall, the people
send their money to other countries with higher interest rates and this leads to
fewer credibility in the peso, which means that the citizens would their trust in
the value of the peso. Now the Central Bank has to buy pesos bonds with its
dollars in its reserves (it compromised to maintain a currency board) and take
the pesos out of the economy. The result was a stable currency board but the
government lost part of its reserves. Moreover the lost of these reserves was the
main reason of the past crisis.
-Dollarization: the C.B no longer has monetary production power. If the
C.B needs to give aid to the government, banks or the private sector with state
resources, the regime will have to increase taxes or get indebted. This possible
situation could be very hard for the country, but yet this cost is lower than a
large lost in the dollar reserves. The most frequent economic objection to
dollarization is that it would deprive Argentina of flexibility in monetary policy,
even the limited flexibility of its currency board system. However, the empirical
evidence contradicts it. Annual growth rates in developing countries without
monetary flexibility were over 50 percent greater than in those with central
banks and monetary flexibility during the 1950–93 period. Furthermore, the
variability of those growth rates, as measured by their standard deviations, was
virtually identical, indicating that a lack of monetary flexibility did not result in
a greater incidence or vulnerability to external shocks (Hanke 1999, Schuler
1996). Because of these reasons, it would be safe to say (according to the
experience) that the most convenient system for the Central Bank if an external
occurs is dollariztion.
The lender of last resort
Another objection to dollarization is that it would eliminate the Argentine
Central Bank’s capacity to act as a lender of last resort. Contrary to what
most individuals think, it is undesirable to have a central bank as a lender of
last resort. Most of the expensive rescues of banking systems have occurred
under central banking. Argentina, in fact, holds the record for the most
expensive bank rescue in proportion to the size of its economy: the banking
crisis of 1980–82 cost 55 percent of GDP (Caprio and Klingebiel 1996).
Argentina already has in place a liquidity fund of $6.7 billion (BCRA 1998). The
key provision of the fund, which was established in December 1996, is
something called the Contingent Repurchase Facility. Under this program, the
Argentine central bank has the option to sell certain domestic assets for dollars
to a group of banks subject to a repurchase clause. As of October 1998, 14
international banks were participating in the facility. The assets underlying the
repurchase facility included $6.2 billion in Argentine U.S. dollar-denominated
bonds and up to $500 million in dollar-denominated Argentine mortgages.
Consequently, the facility can provide emergency liquidity, but it is not a lender
of last resort arrangement, which by its nature also provides the government
with the power to inflate.
Private argentine banking system
Argentina’s banking system has become very internationalized under the
currency board system, with foreign banks accounting for about 41 percent of
the banking system’s total deposits and 64 percent of the deposits in private
banks (BCRA 1998). This has dramatically increased the banking system’s
access to liquidity provided by international capital markets. The Repurchase
Facility, along with the extensive internationalization of Argentina’s banking
system (which makes the international banks’ head offices, in effect, lenders of
last resort to local branches), ensures that arrangements for emergency
liquidity are adequate for a dollarized system.
Another objection is that Argentina would be hurt if the dollar someday
becomes an unstable currency with high inflation. The solution to this
potential problem is to extend the considerable freedom that already exists for
people in Argentina to use any currency. Though initially the dollar would be
the most widely used currency, people would be free to use whatever currency
they prefer. If people wish to make contracts specifying payment of wages,
business expenses, or loans in euros, yen, or even Brazilian reals, they should
be allowed to do so. That way the Argentine people would be able to use the
most stable currencies in the world.
Argentina in the Mercosur
Still another objection is that dollarization is an inappropriate basis for a single
currency in the Mercosur, because other countries, especially Brazil, will not
dollarize. Again, the goal for Argentina should be the retention of political well-
being and the enhancement of consumer well-being. A Mercosur monetary
union would not achieve
this, in principle, whereas dollarization would do so, in principle and in
practice.
Speculative attacks
Another factor is that the currency board system retains some features of a
C.B, the peso has experienced periodic speculative attacks. Especially during
speculative attacks, interest rates in pesos have been much higher than
comparable rates in dollars. It seems that dollarization would eliminate the
rationale for speculative attacks. However, in a speech made last November,
Alan Greenspan, chairman of the Federal Reserve System, said, ‘‘It is
questionable whether a sovereign nation, otherwise inclined to economic
policies that are ‘off the wagon,’ can force itself into ‘sobriety’ by dollarization’’
(Greenspan 1998: 6). It seems that sound fiscal policies must precede a sound
currency, as if the monetary system exerts no influence on government finance.
Argentines know from their own experience, though, that the monetary system
does exert considerable influence. It is generally recognized that without the
Convertibility Law, economic reforms in Argentina would not have progressed
so far and so fast. Other countries have had similar experience. In a study of
98 developing countries during the period 1950–93, Hanke (1999) found that
fiscal deficits were, on average, 65 percent larger and 1.4 times more variable
in countries with central banks than in those with currency boards or
dollarized systems.
Dollarization would not absolutely guarantee sound economic policies, but no
system could. The important thing is that dollarization would improve the odds
that Argentina would continue to follow sound policies, much as the
Convertibility Law greatly improved the odds that Argentina would implement
sound policies in the first place. Moreover, sounds policies and their benefits
are attainable when the institutions that make them are responsible and
effective, once again this is not attainable by a simple change of the currency
system. It also seems that issue would have to be individually explore.
Deposits and private assets
Depositors would have no more reason to make mass conversions of U.S. dollar
deposits into U.S. dollar notes than they now have to make mass conversions
of peso deposits into peso notes. Depositors would also have no reason to
switch deposits from some banks to others under dollarization. The assets and
liabilities of banks would be the
same as they are now. Only the unit of account would change. Expressed in
terms of U.S. dollar values, nothing would change. The investment portfolios of
banks, and hence their creditworthiness, would stay the same. Critics will no
doubt devise other objections to dollarization, but that is no reason for
dismissing dollarization. It is possible to make objections about any monetary
system. However, the true test of a monetary system is experience. There is
plenty of historical data and current experience with official and unofficial
dollarization. No far-fetched conjectures are necessary. If you want to know
how dollarization works, look at Panama, Puerto Rico or Ecuador. Dollarization
works well there and elsewhere. It does not encounter the problems that critics
claim would arise. Purely hypothetical objections are not sufficient to out-weigh
the practical success of dollarization.
Conclusion
In conclusion, it has been determined in several aspects why dollarization
represents the most advantageous path for Argentina to follow. The cost of
losing the seniorage will be offset by the benefits of dollarization such as, low
interest rates, no speculative attacks and the tranquility of the consumers.
Moreover, the empirical evidence of the viability of dollarizattion in other
countries strengths the decision to dollarize. However, we have to remember
that the stable currency is not the only part of the blissful triad, Argentina also
needs sound institutions in order to make the dollarization work.
 
Bibliography
 Guillermo Calvo "Notas sobre el sistema financiero en Argentina"
 Greenspan, A. (1998) ‘‘The Structure of the International Financial
System.’’
 Gwartney, J., and Lawson, R. (1998) Economic Freedom of the World
1998/
 1999 Interim Report. Vancouver, B.C.: The Fraser Institute.
 Hanke, S.H. (1999) ‘‘Some Thought about Currency Boards.’’ In M.I.
Blejer
 and M. Skreb (eds.) Balance of Payments, Exchange Rates and
Competitiveness
 in Transition Economies. Norwell, Mass.: Kluwer.
 Hanke, S.H., and Schuler, K. (1991a) ¿Banco central o caja de
conversion?
 Hanke, S.H., and Schuler, K. (1991b) ‘‘Argentina Should Abolish Its
Central Bank.’’ Wall Street Journal, 25 October: A15.
 Hanke, S.H., and Schuler, K. (1999) ‘‘A Dollarization Blueprint for
Argentina"
 Ministro de economia Argentina (website)

PERU.

The Monetary System of Peru is the gold stand-

ard. The unit is the Peruvian pound ( LIBRA),
divided into ten soles of 100 centavos. It contains
7.32238 grammes of fine gold, the same as the Eng-
lish pound, and its par value in terms of U. S. cur-
rency is $4.8665. British gold is legal tender and
circulates freely with the Peruvian pound.

Under normal conditions no premium exists on

gold, since that is the standard currency of Peru. A
premium is now exacted for gold, however, due to a
recent issue of banknotes under Government authori-
zation and also the prevailing exchange conditions.

The news of the declaration of war caused a panic

in Lima, the Capital and center of commercial and
industrial life in Peru. A three-day bank holiday
was declared and business was brought to a complete
standstill. This was followed by a moratorium,
which is still in effect.
The Peruvian Government, with the idea of
remedying the local situation, authorized the banks
in Lima to issue circulating checks or notes to the
extent of £p2,500,000, the issue to be especially
guaranteed in the form hereunder noted:

Gold 20%

Mortgage Securities 30%

. Fiscal Securities 14%

Drafts and Promissory Notes 36%

This issue has now been completed.

The past experience of Peru with notes or paper

currency had been disastrous, and at the first intima-
tion of a note issue the gold in circulation went into
hiding. The export of gold was prohibited, and this,
together with a marked decrease in the export of raw
products (copper, cotton, sugar, etc.) caused a
notable scarcity of drafts on Europe and the United States. As a result of this scarcity
of bills, a
premium of from 7% to 10% now is demanded for
foreign drafts, and even at this premium drafts for
foreign remittance are difficult to secure.

The "Nuevo Sol" is Peru's current currency

Since 1991 the Nuevo Sol is Peru's currency. However, almost everywhere in Lima the US Dollar is
accepted. The international code for the Peruvian currency Nuevo Sol (S/.) is PEN. The Nuevo Sol is
subdivided into 100 Centimos. There are banknotes for S/. 10, S/. 20, S/. 50, S/. 100 and S/. 200. Coins
have been issued for 1 Centimo, 5 Centimos, 10 Centimos, 20 Centimos, 50 Centimos, S/. 1, S/. 2 and S/.
5. Nowadays the Nuevo Sol is a quite stable currency with a moderate inflation (not to mention a few
hiccups due to the worldwide turbulences in 2008) and has a more or less steady exchange rate with the US
Dollar.

The Four Monetary Systems of Peru

Peru had since 1897 four main monetary systems. The first one was the Libra Peruana de Oro (Peruvian
Gold Pound) that was in circulation as legal tender from 1897. In 1930 followed a new currency called the
Sol de Oro (Golden Sun). Due to high inflation the currency of the era of Republican Peru was abandoned in
1985 and the Inti introduced. The bad economic state of Peru and terrorism in the late 1980s forced the Inti
to lose its value very quickly. Hyperinflation struck the country and the Peruvian government was forced to
introduce a new currency in 1991: the Nuevo Sol (New Sun). The Nuevo Sol was introduced at a rate of 1
Nuevo Sol = 1,000,000 Inti's. The return to this name is considered appropriate as it could be derived from
historical use and devotion of the sun as a symbol of power and as a way of connecting the new currency to
the old Inti, which was named after Inti, the Sun God of the Incas.

Banknotes & Personalities - Description of the Peruvian Banknotes

Do you know the background and history of the pictures on the banknotes for your country? In Peru you
won't find any pictures of former presidents on them, but rather some of the famous personalities which are
all part of our extensive history. This is why such a banknote doesn't only stand for the pure nominal value,
but also passes on culture. In this chapter we would like to introduce our money and give you a short
explanation of the illustrations.