SYNOPSIS: A rigid monetary system is not a cure-all by any means.
Argentina is a faraway country about which most people in the United States know only what they learned from Andrew Lloyd Webber. And while the government of Fernando de la Rúa is facing serious economic problems -- a weak recovery from last year's nasty slump, growing labor unrest -- "crisis" would be far too strong a word.
Yet Argentina has special symbolic importance in the battle among economic ideologies. The Latin nation has been a sort of poster child for the anti-Keynesian counterrevolution, for those who want to banish discretion and human fallibility from monetary policy. The nation's current difficulties won't cause the true believers to lose faith. But the contrast between the bad economic news in Argentina and good news elsewhere in Latin America is a reminder that green cheese has its virtues after all.
Puzzled? Let me explain. Until the 1930's, recessions were generally regarded as inevitable, and perhaps even desirable -- a sort of purging process that cleansed the economy after the excesses of the preceding boom. The government's job was to provide sound money and balance its own budget; a depressed economy would heal itself.
But in the face of mass unemployment some economists -- most notably the British theorist John Maynard Keynes -- concluded that recessions were neither healthy nor inevitable. They were, instead, an economic pathology that resulted when too many people tried to hoard cash instead of buying real goods and services. In a famous passage Keynes declared that "Unemployment develops . . . because people want the moon: men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot readily be choked off." And he offered an answer: "There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. central bank) under public control." In other words, the government could and should print money to stimulate a depressed economy.
For hard-money types this was and remains anathema. The dream of going back to an objective monetary standard -- preferably gold, but anyway something untouched by human hands -- has been kept alive by a small but well-financed group of enthusiasts. And in 1991 they got their wish: Argentina, desperate to regain credibility after decades of irresponsible policy, not only pegged its peso to the dollar but backed each peso with a dollar in reserves. In effect, the national green cheese factory was shut down.
In the years that followed, Argentina -- helped not only by the end of hyperinflation but also by the removal of many controls that had strangled business -- experienced an economic surge, and the hard-money enthusiasts took full credit. Only last year, as the currency of neighboring Brazil tumbled, an op-ed writer at The Wall Street Journal held up Argentina as a model: "No stimulating of the economy through inflation, no improving the 'competitiveness' of exports through currency devaluation. Just money that works." And she went on to express her ultimate wish: "Now if only America could make the dollar as good as gold."
But while Argentina's money may work, many Argentines don't, because they can't find jobs. The devaluation in Brazil was followed by a flight of manufacturing to Argentina's suddenly lower-cost neighbor. Although Argentina's government has insisted that slashing spending and raising taxes to balance the budget will promote recovery by restoring confidence, the actual effect -- as Keynes could have told you -- has been the opposite: with lower incomes, consumers are spending less, and recovery has been delayed.
And meanwhile Brazil has bounced back: that devaluation has turned out to be just what the doctor ordered. Chile and Mexico, with their floating exchange rates, are doing well. Right now Argentina has the worst, not the best, of Latin America's major economies.
I'm not saying that Mr. de la Rúa should devalue the peso. Too many loans, even from one Argentine to another, are in dollars -- and anyway the political cost would be catastrophic. At least for the time being, I fear that Argentina is stuck. But its travails are a lesson for the rest of us, especially those who are nostalgic for the certainties of the gold standard: Keynes was right. Taken in moderation, green cheese can be good for your health.
Originally published in The New York Times, 6.4.00