Volume 1, Number 31
19 December 2001

Will the United States follow Argentina?

Dear Friends,

The Government of Argentina will likely default on its government bonds, abandon the peso, and adopt the U.S. dollar as its national currency, all of this in 2002. For two main reasons: First, for many, many years the Argentines have wanted to take out of the government pot far more than they are willing to put in (in taxes). Second, each sector is so adamant about its "rights" that it will not compromise by reducing its take. Each sector is willing to destroy the social fabric, shutting down the entire economy, by striking, until it gets its way. How did this come about? Will the United States ultimately do the same?

If you were an impartial observer in, say, 1890, you would not easily guess which country — the United States or Argentina — would be the dominant economic power in the Western Hemisphere a century later. Both were developing their manufactures and their agriculture. Both had good school systems, educated labor, and among the highest living standards in the world. But there were already subtle differences that most eyes could not see. In my 1994 book, Centuries of Economic Endeavor (p. 270), I wrote of three historic properties that have seemed to permeate Argentine society from colonial days to the present:

  • Power for its own sake — not just for the economic advantage it brings — is demanded by competing sectors.
  • Regardless of statements affirming democracy, every group in power has both favored and sustained an interventionist state. All sectors of society endorse this precept, and all solutions or modus vivendi are designed accordingly.
  • Confrontation characterizes the political process. There is no longer an "elite," for those who govern include persons of all classes, from descendants of immigrant laborers to the traditional landowning aristocracy. But these groups do not trust each other, they communicate imperfectly, and they make impossible demands upon one another.

Argentines believe increasingly in the government to super-manage the day-to-day affairs of the economy - what prices will be charged, what wages paid, who will control capital, and so on. The government, in effect, tells business how much it must/may pay in wages. Unions are mainly political, making their demands through government. For decades the government has printed money to "satisfy" demands that collectively exceeded the possibilities. Horrendous inflations ensued, and three zeros have been lopped off the currency more than once. In one visit to Argentina, I thought I would collect one-peso coins for my children to use as play money. But none were to be found. When I told a friend in the central bank about this, he brought me three bags full, which I took home. For years, Argentine pesos kept appearing in various corners of the house.

In the United States, on the other hand, individuals have far more freedom to innovate, put new products on the market, and determine their prices, styles, and quantities. Our inflations have been mild, compared to Argentina. For the most part, wages are determined by bargaining between employers and unions.

As I was lecturing in a university in Córdoba, Argentina, a few years ago, the students told me they were about to go on strike. Why, I asked? Two reasons, they said: (1) Out of sympathy for civil servants who had not been paid for months because the government did not have the money, and (2) to counter the proposal that students pay tuitions for education that had heretofore been free. They thought the government should both pay the civil servants and provide free education, with no increase in taxes.

As the year 2002 dawns, the Argentine government is at an impasse. It cannot pay its debts. If it defaults, the country's credit rating will be ruined, and it will not be possible to obtain foreign investment capital. If capital is not available, companies will close down, workers will be thrown out of work, and chaos and riots will result. The next option is to increase taxes. Without getting out the military and invading people's houses and businesses, however, it cannot force them to pay. Judges will not hand down decisions against their friends. The third option is to decrease expenditures. These, however, have built up over the decades as the government has favored one sector after another. (The government also finances the provinces by annual grants). But no sector will make the sacrifice, and all can hold the government in thrall one way or another. Social services, education, and health are underfunded. Pension funds are not secure, because the government has forced businesses to invest them in the about-to-be-defaulted government bonds.

"Tens of thousands of unemployed workers, public employees and students blocked scores of major highways and city streets across Argentina today to protest new government spending cuts aimed at diverting a default on the foreign debt" (New York Times, 8/1/01). "Several major unions staged a 24-hour nationwide strike today, crippling businesses and government functions" (New York Times, 12/14/01). In my writings, I have referred to these actions as "break-the-system." In some cultures, a sector will be powerful enough, and willing, to bring down the social system or the economy just to get its way on a particular point. "Break-the-system" mentality is widespread in Argentina.

The Dirty War

To preserve the political power of the government against protesting students, during the 1970s the military conducted a "dirty war." They kidnapped dissidents, tortured them, drugged them, and dropped them from airplanes over the ocean. The mothers of missing students still march in front of the presidential palace every Thursday, demanding information the government would not give them. My last visit to Buenos Aires did not occur on a Thursday, but I walked around the Plaza in my own show of support for those mothers.

Until only a few years ago, the military had great power and would even overthrow governments. They believed that their society would collapse into chaos if they did not defend "law and order." More recently, civilian governments have replaced them, yet the military stand ready "if needed." In the United States, our military has never had the power over government, but we occupy the position with respect to the world that the Argentine military does for their country. "For more than fifty years American foreign policy has sought to prevent the emergence of other great powers — a strategy that has proved burdensome, futile, and increasingly risky," say Schwartz and Layne in the January 2002 Atlantic Monthly. Is this not the Argentine military writ large?

Other Confrontation

In Argentina, "I was ordered to do it" has been a valid defense for torture and even murder. When repeal of this law was proposed, "the session ended in a free-for-all screaming match, with human-rights activists rushing on to the floor of Congress and two members trading blows" (New York Times, 2/14/98). One cabinet minister has publicly denounced other cabinet ministers, congressmen, and businessmen as thieves, liars, and mafiosos (New York Times, 11/23/96). In 1983, the President of the Central Bank was indicted for treason because he had negotiated an agreement with the International Monetary Fund.

We do not go to these extremes in the United States. Quakers, in particular, insist on nonviolent protests. Yet some Friends join, even support, those who smash windows to protest the World Trade Organization, the International Monetary Fund, and the World Bank. Each time this happens, I wonder again if we are on the road to Argentina.


Argentine society is permeated by corruption: in the government, court system, military, businesses, everywhere. Often it is impossible to complain because the system is so inter-linked that any remedy would affect dozens of people, some of whom could obstruct the complaint. How do I know? Mainly from talking to Argentines during my visits there, but also from the abundant newspaper clippings I have been collecting for over a quarter of a century. Here are just a few snippets:

"Private talks with executives, both foreign and local, yield accounts of how provincial and Federal officials have to be paid 'commissions' to get jobs done. Very few can take their complaints to court because most who might complain have themselves paid bribes and know they would be exposed if they tried to expose others" (New York Times, 7/17/94.)

"Both foreigners and residents say corruption is endemic in Argentina. In a study in the late 1980s, Graciela Roemer, a political consultant, found that most Argentines thought that tax evasion was smart and paying up was stupid" (The Economist, 10/18/97).

I believe there is far less corruption in the United States, for (1) we have better auditing and (2) better systems of internal control. Internal control means that if someone embezzles, the accounting system is such that others are bound to find out. But when, as in Argentina, embezzling and bribery are everywhere, it hardly matters if one is found out. For the auditing systems to work, I speculate that we have developed — over centuries — a sense of individual responsibility, taught in our families, schools, and churches, that the Argentines do not have. I have no way of knowing this for sure, but it seems to me so. I am also leery of whether this sense of responsibility will continue as government increasingly takes charge of personal behavior (health, retirement, etc.) that was once the province of the individual.

Corruption increases as powers of government increase. In the United States, about one-third of the national product is consumed by the federal government; if we add the state and local governments, this fraction advances to slightly less than one-half. As the amount of money captured by governments keeps increasing, will not corruption increase as well?

Distribution of Income and Wealth

In the United States, the wealthy have become wealthier in recent years, but the poor have — probably — not become poorer absolutely. I say "probably" because the point is disputed, but after studying the data and reports, it is my impression that this is so. The disparity is caused mainly by the innovations of techies and the stock market depending on them. All this may change, as the technological revolution flattens out, and the stock market has already gone down.

In Argentina also, the rich-poor gap is greater than ever before. But the rich have not become rich because they and their companies are technologically efficient. They have done so mainly because they have the connections and the political savvy to effect distributions in their favor. The poor have become poorer absolutely (as well as relatively) because they are less able to withstand the collapse of the economy than are the rich.

Argentina is one of my favorite countries in Latin America: the people are friendly, and Buenos Aires is a garden city, reminding me of Paris. And the Andes are as spectacular as the Alps. But ringing BA are the villas de miseria, or slums, with houses of makeshift materials and mud in the streets. There I have spent many hours making friends with the poorest of the poor. In the center of BA is the cemetery Recoleta, full of marble mausoleums with gold door knobs. Yes, in Argentina the rich dead live much better than the living poor. But it is a beautiful country nonetheless.

Money and the Government Debt

To prevent the government from indefinitely printing money, Parliament ended the central bank and established a currency board in 1991, which was legally allowed to print pesos only to the extent that it held U.S. dollars in reserve. Any Argentine could trade in pesos for dollars at any time. This law stopped inflation in its tracks.

However, the government continued to issue bonds denominated in dollars. Presumably a bondholder could cash in his bonds at maturity and exchange the pesos for dollars. But the government issued these bonds in amounts way beyond its capacity to redeem without violating the peso-backed-by-dollar requirement. As this situation became evident in financial circles, Argentines began withdrawing their money from banks, to convert them into dollars. This month, the economy minister limited the amount they could withdraw, an event that further diminished Argentine financial credibility. He has also "persuaded" current bondholders to accept less than their contractual interest. Since their alternative is default, they had to go along.

Who will invest now, if the peso is about to become worthless? So the proposal is that all outstanding pesos be redeemed for the dollars in the currency board, and hereafter only the U.S. dollar will be legal tender. Ecuador and El Salvador have earlier made this exchange. Doing so means surrendering control over the currency to the U.S. Federal Reserve, since the Argentine (Ecuadorian, Salvadoran) government cannot be trusted.

Argentina and the United States

Do you see any parallels between Argentina and the United States? Surely our economy is much better organized and better run; we trust each other more. But as the Argentine government maintained control over social welfare (education, pensions, health), did it not begin to feel very powerful, maybe like God? So maybe the time had come to take back the Falkland Islands, starting a bloody war with Britain? As the American President finds he is looked to for social security, health care for the elderly, and education, does he not also begin to feel like God? A little problem in Kosovo? "I can take care of that! Send over the bombers." "Afghanistan? A minor problem; we'll get them"

When you give government the power to manage the lives of the people for their own good, you create a culture in which government is looked to as the solver of many other problems as well. Such cultures allow their governments to wage war. On the home front, the government tries to answer all calls. When it oversteps itself — as in Argentina — the economy will fall apart. Have you felt that government bonds are the safest possible investment? So did the Argentines, one hundred years ago.

Is the United States on the road to Argentina? Not yet, I think. We don't suffer from the same historic properties: we want power for its economic advantages and not for the sole reason of commanding. We have more economic freedom, and we don't confront as much. But in many ways, the path is similar. We're just not so far along. How do Friends feel about entrusting more and more powers to your government to do "good?"

Yours for peace and freedom,


Readers' Comments:

Please send comments on this or any TQE, at any time. Selected comments will be appended to the appropriate letter as they are received. Please indicate in the subject line the number of the Letter to which you refer! The email address is tqe-comment followed by @quaker.org. All published letters will be edited for spelling, grammar, clarity, and brevity. Please mention your home meeting, church, synagogue (or ...), and where you live.

Forgive me if I seem obtuse. I have never had any courses in economic theory. What advantages does Argentina have in switching to the dollar? I can understand that Argentina is helped automatically because the dollar is strong relative to the peso. If Argentina doesn't have the infrastucture we have, how can their adopting the dollar help them?

— Dennis Bentley, Freethinker, Morganton, North Carolina.

Reply: You are not at all obtuse; that is a reasonable question. There is no advantage whatsoever, unless the enormity of the move shocks them into living within their means. It is hoped that the psychology of a sound currency, instead of the discredited peso, will cause this to happen. In Ecuador and El Salvador, that has worked (so far). — Jack

Your letter is most thought provoking and I share many of your observations. Governments of, by and for the people inherently encourage citizens to ask for things from their government. After all it is the peoples' government. This is why strong limitations are needed on government power. Our constitution in theory does this but its authority, I am afraid, has been eroding over many years. Also we are more exposed to the corrupting influence of money with ever rising special interest contributions to legislators. Not necessarily the same corrupting influences as in Argentina, but there may be parallels. Increases in government power in general ultimately seem to benefit the more affluent sectors of our society.

— Joseph Mills.

I have just a simple question: in your letter, you imply that government expansion in a country's internal affairs is linked to expansion or aggression abroad. I guess the converse would be that a libertarian state would tend to be pacifist also. But I don't see why this should be true. What is the connection you find between our "war
against terror" in Afghanistan and federal management of our own economy?

— Nicholas Williams, Bethesda (MD) Friends Meeting.

Reply: Well, Nick, this is a matter of opinion, and yours is as good as mine. Mine is that the more power we give to a president to do "good" things (or anything), the more likely he or she is to think he or she is God and the more likely to go to war. A libertarian government, with virtually no power, might not think that. (Don't presume from this that I am libertarian, just classic liberal). — Jack

"For the past few years I have been giving serious thought to leaving Quakerism because, although I love silent worship, I cannot stand the left wing politics, the lack of any knowledge of how capitalism really works, the unwillingness to view anything on the political left, especially Stalinism, as truly evil, and the automatic default position that the United States is wrong in just about everything it does."

— Chuck Rostkowski, Salt Lake (UT) Meeting.

Friend speaks my mind! I'm not quite ready to leave Quakerism, but the only way I can stay is to ignore all of this stuff. I often feel like a misfit among misfits!

— Dick Bellin, Friends Meeting of Washington (DC).

"Corruption increases as powers of government increase. In the United States, about one-third of the national product is consumed by the federal government; if we add the state and local governments, this fraction advances to slightly less than one-half. As the amount of money captured by governments keeps increasing, will not corruption increase as well?"

What makes you think so? Is the UK more corrupt than the US? Isn't corruption, in society in general, more prevalent in authoritarian states where the government does little for the people, and business is less regulated?

— Jim Caughran. Toronto (Ontario), Canada, Friends Meeting.

Reply: Because it is always secretive, no one can truly investigate how much corruption there is. Our inferences come from interviews with business people and others, to ask what bribes they have to pay, and we do not know if they give the true answers. Add to that my own conversations with officials and students in the thirty-five less developed countries where I have had professional assignments.

Hernando de Soto of Peru assigned his students to set up a textile business without paying bribes unless they had to. It took them several years to complete all the regulatory requirements, and they did have to pay a few bribes. My guess is that the more regulation the government can do — i.e., the more permissions required and therefore the more discretion officials have — the more corruption money can be demanded.

I don't know anything about the U.K. compared to the U.S. But I do guess that there is far more corruption in Asia, Africa, and Latin America than in the more developed regions. Virtually all professionals I have met, who have served abroad, tell me that is so. — Jack


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Publisher: Russ Nelson, St. Lawrence Valley (NY) Friends Meeting

Editorial Board

  • Roger Conant, Mount Toby Meeting, Northampton, MA.
  • Amy Cooper, Cambridge (MA) Friends Meeting (but living in Lafayette CA).
  • Ann Dixon, Boulder (CO) Meeting of Friends.
  • Virginia Flagg, San Diego (CA) Friends Meeting.
  • Merlyn Holmes, Unitarian, Boulder, Colorado.
  • Janet Minshall, Anneewakee Creek Friends Worship Group, Douglasvillle (GA).
  • Jack Powelson, Boulder (CO) Meeting of Friends, Principal Editor.
  • J.D. von Pischke, a Friend from Reston, VA.
  • Geoffrey Williams, Attender at New York Fifteenth Street Meeting.

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This newsletter was formerly known as The Classic Liberal Quaker.

Copyright © 2001 by John P. Powelson. All rights reserved. Permission is hereby granted for non-commercial reproduction.

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