How Argentina learned to love the US dollar

One day, Argentina's peso could be a thing of the past.

Javier Milei, the victor in last year's presidential race, won the election on a mandate to abolish the country's own currency and replace it with the US dollar - although he has talked less about the idea of late.

In some ways, it's surprising the idea hasn't caught on before. Argentines are reckoned to hold more greenbacks than anywhere outside the US and hoarding them is a way of life for many people.

The move is part of the right-wing libertarian's shock therapy plan aimed at transforming Argentina's economic prospects.

Polls show that 60% of Argentines oppose the idea because it would give too much power to the US central bank, the Federal Reserve.

But like it or not, the dollar already plays such a big part in their economy that to some, the idea feels like a foregone conclusion.

Argentines have traditionally set little store by their own currency, preferring to convert their spare pesos into dollars as soon as they can.

They don't trust financial institutions much either, so they resort to what is locally known as the "colchón bank" - that is, stuffing their dollars under the mattress.

Anecdotal stories abound of people keeping money buried in the garden, hidden in the walls or even secreted in heating systems - occasionally with disastrous consequences if there is an unexpected cold snap and the cash isn't retrieved before it goes up in smoke.

It's a symptom of the country's deep-seated structural economic problems. And like all chronic illnesses, it didn't develop overnight.

To get to the root of the Argentine people's obsession with the US dollar, you have to go back to the dark days of the 1970s and 1980s, when periods of hyperinflation blighted the country's economy.

It's estimated that during the 1980s alone, middle-class Argentines saw their purchasing power shrink by 30%.

During that time, uncontrolled price rises eroded the value of wages and made a mockery of savings, to the point where people lost faith in their own currency.

The pesos in their pockets shed their worth so quickly that no-one held on to them for long.

There were basically two ways of keeping up: buying goods in bulk or buying US dollars, because either of those would hold their value better than your original pay packet.

Now Argentina has a cost-of-living problem again, with annual inflation at nearly 300%. This has led to an astonishing rise in the number of people living in poverty, from about a quarter of the population in 2017 to more than half now.

You might think that no self-respecting government would want this state of affairs to go on for ever. And you'd be right.

There have been various attempts to restore Argentina's confidence in its currency - either by shoring up its value or merely choking off the supply of dollars. But they have all, ultimately, failed.

The most ambitious effort was the so-called Convertibility Plan launched in 1991. This pegged the peso's value at one-to-one with the dollar.

Previous governments had fuelled inflation by printing money. But this time, it was decreed that every peso issued would be backed by one dollar in the central bank's vaults.

The idea was that by telling people they could swap their pesos for dollars at any time, they would eventually decide that they had no need to.

And for a time, it did the job. But it had other side effects which eventually led to a catastrophic economic meltdown in 2001-02.

Argentina had basically outsourced its economic policy to Washington, by locking itself into a currency regime that gave it no flexibility.

Without going into too much detail, Argentina had also let its public debt get out of control. At the same time, the link to the dollar meant that it suffered from the ups and downs of the US economy.

In the two decades following that crisis, Argentina basically muddled through under left-wing protectionist governments.

Their solution to the peso's credibility problem was simply to make it harder to buy dollars.

By the time of the 2023 presidential election, there were as many as a dozen different exchange rates, depending on who wanted to access the US currency and why.

For the official rate, you needed 287 pesos to buy a dollar, but you could only buy $200 a month and you had to pay punitive taxes on the transaction.

After that, it got increasingly bizarre. There was the Coldplay dollar rate (374 pesos to the dollar), especially created for foreign rock bands visiting the country.

And there was the Malbec rate (340 to the dollar), designed to boost exports of wine and other agricultural produce.

Since then, under Mr Milei, it has become less complicated but more expensive to buy dollars, with each one officially now worth more than 860 pesos after a shock devaluation of the Argentine currency.

And yet the public's hunger for dollars continues, while everyone from taxi drivers to restaurateurs happily accepts the greenback as payment for goods and services.

It all makes dollarisation look desirable, maybe even inevitable. But it didn't have to be that way. Argentina's powerful neighbour and rival, Brazil, faced a lot of the same problems and yet chose a different path.

Brazil took a leaf out of Argentina's book in 1993 when it launched the Real Plan, pegging its own currency to the dollar.

But in line with the long-standing Brazilian practice of bending the rules, known locally as the "little way", they gave themselves some wiggle-room, allowing the real's value to fluctuate, within limits, against the dollar.

Other economic and cultural factors helped Brazil, so it never developed the same distrust of banks and desire for the dollar.

In Brazil, no shopkeeper or snack bar owner will accept dollars as payment, no matter how much you plead. (I should know - I once tried it as a last resort when trying to pay for a meal in São Paulo because the restaurant's credit card machine had broken down. The stony-faced proprietor forced me to phone a friend to come and bail me out.)

Nowadays, both countries are far from the 1:1 exchange rate they adopted in the 1990s. But it takes just under five reais to buy a dollar in Brazil nowadays, whereas in Argentina - well, take your pick.

Dollarisation for Argentina? It certainly wouldn't be the first South American country to do it - Ecuador got there in 2000 and pushed down inflation as a result.

And it might be easier to achieve than the idea recently mooted by the Argentine and Brazilian presidents - a common currency for the two countries, possibly to be called the "sur" or even the "gaucho".