There’s a lot of hand-wringing in Argentina regarding anti-Keynesian candidate Javier Milei’s expressed promise to dollarize the economy if he’s elected president. After a century of centralized industrial planning and oversized welfare programs, along with insane levels of money printing to pay for it all, Argentina went from one of the wealthiest nations on earth to a country perpetually plagued by economic downturns. Forty percent of its population now lives in poverty and it’s in the grips of another painful bout of hyperinflation. Mr. Milei has proposed a way to stop the madness. His political opponents resist his idea, calling it unwise and unpatriotic. They’re wrong on both accounts. Here’s how I know.
In his masterpiece, Notes on the State of Virginia (1785), which remains the sine qua non of Anglo-American political philosophy, Thomas Jefferson wrote two essays that anticipated Milei’s arguments in favor of dollarization in Argentina. By the way, if we’re honest, these arguments apply to all of Latin America. In Queries XXI and XXII, and as he does with respect to other topics throughout the book, Jefferson offers a demonstration of the art of democracy when thinking about price inflation and currency devaluation. The American founder’s democratic art is always a dialogical process that consists of first admitting error, then embarking on inquiry, and finally suggesting solutions.
Monetary devaluation relates to our capacity for folly as well as to acts of injustice that lead to human suffering. Jefferson was writing around 1783, about seven years after the Declaration of Independence in 1776 and a lustrum prior to the American Constitution of 1789. He’s concerned with what can make the new nation viable once the war with England ends. At the outset of Query XXI, he embraces his own ignorance regarding what has led to the chaos of so many coins with different extrinsic or “face” values throughout the country: “How it has happened that in this as well as the other American states the nominal value of coin was made to differ from what it was in the country we had left, and to differ among ourselves too, I am not able to say with certainty.”
Unable to determine the precise origins of the monetary chaos in America, he moves to describe the anxiety this produces in governing officials trying to manage the public finances. Notice how England’s sovereign and conciliar leadership and the locally elected governments of Virginia both imposed fixed rates of exchange, thereby limiting the citizenry’s ability to circumvent the loss of purchasing power or adopt other barometers of value. The King, Parliament, and Burgesses of Virginia share a self-interested desire to maintain their position at the top of the currency pyramid and to prohibit barter and floating rates of currency exchange. They can’t fix rates too rigidly, but they also want to preserve their privileged purchasing power as first users of new money, as well as their ability to tax commerce:
I find that in 1631 our house of burgesses desired of the privy council in England, a coin debased to twenty-five per cent: that in 1645 they forbid dealing by barter for tobacco, and established the Spanish piece of eight at six shillings, as the standard of their currency: that in 1655 they changed it to five shillings sterling. In 1680 they sent an address to the king, in consequence of which, by proclamation in 1683, he fixed the value of French crowns, rixdollars and pieces of eight at six shillings, and the coin of New-England at one shilling. That in 1710, 1714, 1727, and 1762, other regulations were made.
After this review of past attempts at currency regulation, Jefferson signals the negative results, namely price inflation, which is the inverse of currency devaluation. The problem comes into view due to reliance on an expandable supply of paper money: “The first symptom of the depreciation of our present paper money, was that of silver dollars selling at six shillings, which had before been worth but five shillings and ninepence” (NB: twelve pence = one shilling). Lawmakers were forced to adjust to new market conditions: “The assembly thereupon raised them by law to six shillings.” A “first symptom” of inflation at a little over four percent does not sound like much, but it was only a hint of things to come.
Next, Jefferson indicates the solution, which is not to fix rates of exchange but, rather, to set the mark to the universally agreed and stable value of the silver dollar imported from Spanish America:
As the dollar is now likely to become the money unit of America, as it passes at this rate in some of our sister-states, and as it facilitates their computation in pounds and shillings, & e converso, this seems to be more convenient than its former denomination. But as this particular coin now stands higher than another in the proportion of 133⅓ to 125 or 16 to 15, it will be necessary to raise the others in the same proportion.
This nearly seven percent premium on the silver dollar indicates its relative utility at the time as a means of exchange and a store of value versus other national coins and local paper money.
Query XXI reads like a calm reflection on the past followed by a moderate suggestion about what to do in the future. When we turn the page to Query XXII, however, Jefferson reveals the severity of the present situation. The war against England resulted in a combined fiscal, debt, and inflationary crisis that made it a nightmare to calculate things like income, expenses, and liabilities. Most striking here is the fact that the crisis complicated the activities of government.
The public income and expenses? The nominal amount of these varying constantly and rapidly, with the constant and rapid depreciation of our paper money, it becomes impracticable to say what they are. We find ourselves cheated in every essay by the depreciation intervening between the declaration of the tax and its actual receipt.
Jefferson repeatedly attributes his difficulty determining current financial sums to the rapidly decaying purchasing power of the state’s paper money. The numbers are changing so fast that nobody can keep proper tabulations. Upon declaring a tax, the purchasing power of the state’s own revenues from that tax are on a downward slope that needs constant correction. Thus, a true figure for tax receipts awaits some future moment “when we shall find means of collecting what the people may spare.” Jefferson is unable to tally expenses “for the same reason. They are mostly stated in paper money, which varying continually, the legislature endeavours at every session, by new corrections, to adapt the nominal sums to the value it is wished they should bear.” Finally, he notes that public debts “are growing while I am writing, and cannot therefore be now fixed.”
This chaos should sound painfully familiar to anyone from Argentina. Tragically, a consensus for fixing such problems appears not when inflation impacts the private sector so much as when it causes the actual apparatus of government to falter. The fact that in a country like Argentina with such a high level of public sector employment a serious liberal economist like Milei has a shot at being elected president indicates that our proverbial “return to reason” requires crisis and desperation. Juan de Mariana, the Monarchomach of Madrid, while addressing the same problem of monetary devaluation, had stern advice for leaders in search of good governments and healthy societies: “do not touch the primary foundations of commerce—units of weight, measurement, and the coinage. A many-layered swindle lies hidden behind the appearance of a quick fix” (“De la moneda,” 1605). Spain’s leaders silenced Mariana. As another frustrated reformer, Juan de Palafox y Mendoza—Viceroy of New Spain and Bishop of Tlaxcala and Osma—once observed: “more circumstances are required for doing right than for doing wrong, and that is why erroneous actions are easier than correct ones” (La conquista de China por el Tartaro, 1670).
Circumstances were similar a century after the death of Palafox when Jefferson was writing Notes on the State of Virginia at the end of the War of American Independence. Jefferson—who included books by Palafox and Mariana among those he sent in 1785 to his friend and fellow statesman James Madison—was also wary of the seductive nature of human folly. A year later, Jefferson wrote the following fateful words to his friend the Marquis de Chastellux: “Error is the stuff of which life is woven and he who lives longest and wisest is only able to weave out the more of it” (“Thoughts on English Prosody,” 1786).
When a country hits rock bottom, on the heels of a war for survival or when facing its umpteenth economic crisis, a step in the right direction is sometimes possible. Who can say what comes next for Argentina? And the problem will persist with a U.S. government that spends injudiciously and expands the money supply in response to every social crisis. But it matters not. The game is relative. In light of past and current events, dollarization throughout Latin America is the rational move. We should also admit that even if it excises the temptation of monetary manipulation, Latin America must eschew crime, corruption, and communism in order to grow its economies and offer work and wealth creation to its poor populations.
And the political urge to dollarize is good not just for economic reasons. It’s patriotic. The dollar was a Hispanic institution before it became an Anglo one. More precisely, Jefferson viewed Latin Americans as Italians—“Federo-Americans” he called them. In a prophetic way, the founder of the United States had modern Argentina in mind when writing Notes on the State of Virginia. His admission of ignorance regarding monetary chaos insinuates that fiscal folly is inevitable. What’s important is to fix it. And in Queries XXI and XXII Jefferson points to hard money as the solution, specifically the Spanish piece of eight that would become the basis for the U.S. dollar. He also notes that once the present crisis ends, free trade holds the keys to future peace and prosperity: “Our interest will be to throw open the doors of commerce and to knock off all its shackles, giving perfect freedom to all persons for the vent of whatever they may chuse to bring into our ports, and asking the same in theirs.” It’s hard to imagine better advice for Argentines or, for that matter, any Americans, be they Anglo, Hispanic, or Federo.
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