Straining at the Anchor: The Argentine Currency Board and the Search for Macroeconomic Stability, 1880-1935

Published by EH.NET (May 2002)

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).