Gerardo della Paolera and Alan M. Taylor, Straining at the Anchor: The Argentine Currency Board and the Search for Macroeconomic Stability, 1880-1935. Chicago: University of Chicago Press, 2001. xviii + 275 pp. $35 (hardcover), ISBN: 0-226-64556-8.

Reviewed for EH.NET by Peter Temin, Department of Economics, Massachusetts Institute of Technology.

Argentina is endlessly fascinating. It is the counter-example to all theories of industrialization and growth. Hailed as one of the richest countries a century ago, with every prospect of remaining a member of what has become "the first world," Argentina fell out of the progression toward continually increasing prosperity and wealth. It is no longer a rich country, and its recurrent crises are in the news. This year, for example, the peso has been devalued by half, banks have been closed, foreign debts have been renounced, and Argentina is in one of its periodic disastrous crises.

How did this happen? Argentina is not tropical. It is not land-locked. It is not over-populated or devoid of natural resources. European settlers did not die in Argentina, and malaria was not widespread. Rounding up the usual suspects will not resolve the mystery. This is what makes Argentina such a valuable case study. Not that we would wish for such a doleful example. But economic historians do not cause the disasters they study, and we would be remiss if we did not investigate them.

Gerardo della Paolera and Alan Taylor have tried to shed light on this question in their new book, Straining at the Anchor. Note the title. The gold standard was a fetter to Keynes and later Eichengreen; it is proposed as an anchor for Argentina. This, of course, is the dual message of the gold standard. It, and its more recent analogues, can be an anchor that preserves a country's economy and relation to the rest of the world only if it also is a fetter preventing that country from policies that imperil this position. The current crisis, the experts assure us, was not due to any problems with the anchor; Argentina's currency board generated a decade of stability, trade and growth. But Argentina evaded the fetter of policy and spent unwisely and excessively. A foreign-exchange crisis was the inevitable result.

This book argues that the story is not that simple. It centers on the predecessor of Argentina's recent currency board, its commitment to gold from 1890 to 1931. As with the currency board, the gold standard was the cure for Argentina's existing problems, deriving from the Baring Crisis of 1890 and its aftermath. Unlike the recent currency board, Argentina's commitment to gold lasted forty years, surviving the massive shock of the First World War and succumbing finally only to the even bigger shock of the Great Depression. The authors analyze in fine detail the benefits and costs of this long period of exchange-rate stability, as well as the chaos before it and what they characterize as progress thereafter.

The authors employ the tools of modern international macroeconomics to perform this analysis. They describe the institutional history of Argentina's policy formation, and they chart the progress of many specific decisions. They adapt a wide variety of models from the literature for their history, and the book illustrates how much we can learn about the workings of an economy from the application of well-known models. The models in question range from structural VARs to regime changes, from the formal and econometric to the institutional and historical. The narrative, livened by a selection of Argentinian political cartoons, demonstrates the power of applied economics.

The picture of any decade becomes clearer under this scrutiny, but the picture of the century remains clouded. There are several reasons why the trees are illuminated while the forest remains dark. One reason is that the book ends in 1935. Reviewers never should criticize authors for writing the book they wrote rather than the one the reviewer wants, but one cannot stifle a bit of disappointment that the authors have not taken on the problem of Peron and of Prebisch after the war. They describe Prebisch as a far-sighted economist who promoted useful and productive policies in the 1930s, and Argentina was on the way to creating modern macroeconomic controls. Was the post-war disaster an exogenous event that aborted this promising beginning? Or was Peron endogenous to the long history of ill-formed policies and recurrent crises recounted in the book? Was Prebisch part of the solution or of the problem? Only a future book will essay an answer.

Another limitation is that this book is a "money and banking study" (p. 140). The benefit of economic models is that they clarify the economic connections among diverse economic actions and variables. The problem is that they do this by ignoring the political and social constraints on policy that may determine how these interactions take place. A book as focused as this one on the technical aspects of monetary and international policies cannot reach for a broader synthesis of Argentine history. Like the gold standard, the methodology used here has both benefits and costs. Illumination in the small is the benefit; continued ambiguity in the large is the cost.

There also is some reticence on the part of the authors. They note that deflation in the 1890s had costs. They acknowledge that staying on gold during the First World War and paying foreign debts during the Great Depression had costs for Argentina. But they do not explore the relation of these costs to the benefits of fixed exchange rates. This could be done from the point of view of modern observers. We could use macroeconomic tools to do a cost-benefit analysis of orthodox Argentinian policies over almost a half century. Or we could analyze the debates prompted by these experiences. The pain was visible in the short run, while the gains only arrived in the long run. Was this apparent to people at the time? Could the political system deal with this maturity mismatch?

Readers therefore will gain understanding of the specifics of Argentine history from this book. They will understand how skillful use of modern models from international macroeconomics can illuminate the past. But they will remain unclear why Argentina is still a basket case. This book was written in the 1990s, when the recent currency board was working well, or at least appeared to be working well. The authors may be forgiven for not realizing that there was trouble to come that would make the broad sweep of Argentinian history more problematic. But we still await a book that will explain why this promising country of the early twentieth century is such a problem for the early twenty-first.

Peter Temin is a former president of the Economic History Association. His EHA presidential address was "Is It Kosher to Talk about Culture?" Journal of Economic History (June 1997).