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  April 10, 2002  

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Global Economy

What really killed Argentina?

By Hugo Salinas Price

MEXICO CITY - So the Argentine economy has collapsed and social and financial chaos reigns.

We have read a great deal about it, but very few analysts have mentioned the actual and fundamental cause of this disaster. To do so is too horrifying, for what has destroyed Argentina is the same cause at work all over the world today. Argentina's fate is the world's fate - and that is too drastic a conclusion for any analyst who wants to be paid for his work.

Argentina's fate was determined by the deliberations of John Maynard Keynes and Harry Dexter White when they drew up the Bretton Woods Agreement as World War II was coming to an end. There, they created what France's General Charles de Gaulle later called "an exorbitant privilege": the right, pertaining to the victorious United States, to have its dollars considered as equivalent to gold in the reserves of central banks the world over.

As most readers well know, the agreement was violated by US president Richard Nixon on August 15, 1971, when he "closed the gold window" and refused to continue redeeming dollars in the hands of foreign central banks for gold, at any price.

With a dollar that did not have to be redeemed, as of 1971 the US was free to expand credit out of nothing, and this expansion of credit resulted in conditions that led the American people to believe themselves superior in many ways to the rest of the world.

As the years went on, credit - debt, that is - kept expanding, and this expansion of credit led to more money in the hands of the public. The US public proceeded to buy anything and everything the world had to offer, and to send dollars in payment, to such an extent that today US dollars in the amount of some $400 billion a year leave the US to purchase goods and services, and even for the purchase of all sorts of assets all over the world.

The other side of this "exorbitant privilege" for the US is a corresponding "exorbitant impoverishment" for the rest of the world.

It is essential to recognize that the US trade deficit of $400 billion a year is really a tax on the whole world for the benefit of the US.

Imports are not really paid with dollars sent abroad. Imports are only actually paid with exports of goods and services. Since the US has no intention of ever actually paying for present and past imports with goods and services, and bringing back to the US the immense amount of dollars sent abroad through its accumulated trade deficits, that yearly trade deficit amounts to a yearly tax on the rest of the world. The accumulated taxation extorted by the US is huge. (See the writer's article Why Are the Americans Smiling?) The measure of the taxation is the amount of Central Bank reserves - in dollars - that have built up enormously since 1971.

That is what really killed Argentina: US taxation through the monetary system that prevails and which allows the US to buy things without paying for them.

The process of enriching the US through this exaction of tribute - the correct word - is matched by a corresponding impoverishment of the rest of the world. Some countries, because of various factors, are able to pay the tribute. Japan has been a great payer of tribute: it holds some $400 billion in central bank reserves, which is the measure of the tribute they have been able to pay.

Other countries are just not able to pay the tribute. They fall on hard times and go bankrupt. Such is the case of Argentina. Yes, there has been corruption, mismanagement, political instability, what have you. But that is not the basic reason for its bankruptcy. Basically, Argentina is the momentary loser in an unjust situation, the obligation to deliver tribute to the US and thus maintain its dollar reserves. A kind of "musical chairs" situation, where the Argentines have been the losers. Why is the "chair" missing? It went to the US.

This system of dollar reserves is a massive system of world-tribute payable to the US. It is unjust and implies the impoverishment of the world for the benefit of the US. The impoverishment does not produce its results evenly. Some countries go belly-up before others. Argentina is the nation currently going under.

The euro

What we are saying is proved by the fact that the Europeans have created the euro as currency for a block of 12 European countries. These countries well realized what we are saying and came to the conclusion that though they did not like each other very much, they disliked paying tribute to the Americans even more.

So now, Europe proposes to muscle in on the racket that has been the "exorbitant privilege" of the US, by floating its own currency, which it hopes will also be accepted all over the world, just like the dollar.

This is not a particularly humanitarian move. What Europe wants is to be able to tax the world itself and share the business with the US dollar. Europe too wants to be able to buy things without paying for them, simply by giving the sellers euros. At least so far, that appears to be the European objective.

More Argentinas

So, expect more Argentinas. This taxation of the world may go on for a long time. Perhaps it won't end until the whole world is bled white and every country outside the US and Europe gives up and retreats into protectionism and dictatorship, to keep the people from going at each other's throats.

An equitable and stable world will not emerge until gold reassumes its role as the world's money. Perhaps we should say "a world approaching equitable dealing", for humans being what they are, there will always be some people to take advantage of others. And even gold is not perfect money - some countries have gold mines, others don't. Who was it who said, "Life is not fair"? Indeed, gold is not perfect money; but it's the nearest thing we have.

What killed Argentina? In the last analysis, a world monetary system that turned its back on gold. Under the previous system, the gold standard, there was a minimum of exploitation. Gold only moved from one country to another in minimal amounts to settle transitory differences in value of goods and services traded. There was no system of worldwide payment of tribute in favor of one country, as today. Not surprisingly, financial crises were the exception, not the rule.

The grim truth

"Economists" are forever barking up the wrong tree. Argentina's problems will be blamed on corruption, on ineptitude, on gross mismanagement, on political instability, on the declining world economy - on anything but the truth.

The tribute paid to the US through the world's monetary system destroyed Argentina. That's the grim truth. The whole world, with the exception of Europe, which hopes to escape the trap, is facing the fate of Argentina. As the rest of the world becomes poorer by the day, there is another Argentina in the making. Who will go under next?

A change in the world's monetary system will involve enormous suffering. But not changing it will mean more Argentinas.

Change will mean the kind of suffering that Russia went through, when it abandoned Soviet central planning. Enormous human deprivation came down on innocent people. Now imagine the whole world involved in the throes of such a catastrophe.

It is next to impossible to visualize. And yet there is only one way out of this mess, and it will involve deep suffering: a return to gold and only gold as central bank reserves.

And that is what no analyst is willing to face up to. No analyst really wants to know: "What killed Argentina?" The answer is just too ghastly.

(Copyright Hugo Salinas Price. This article was first published in the website Moneda de plata


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