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currency you want to own? Argentina had long been the world’s inflation bad boy—the monetary equivalent of someone who stands you up for three straight dates and then tries to tell you that the fourth time will be different. It won’t be, and everyone knows it. So when Argentina finally got serious about fighting inflation, the central bank had to do something radical. Basically, it hired the United States as a chaperon. In 1991, Argentina declared that it was relinquishing control over its own monetary policy. No more printing money. Instead, the government created a currency board with strict rules to ensure that henceforth every Argentine peso would be worth one U.S. dollar. To make that possible (and credible to the world), the currency board would guarantee that every peso in circulation would be backed by one U.S. dollar held in reserve. Thus, the currency board would be allowed to issue new pesos only if it had new dollars in its vaults to back them up. Moreover, every Argentine peso would be convertible on demand for a U.S. dollar. In effect, Argentina created a gold standard with the U.S. dollar substituting for the gold.

It worked for a while. Inflation plummeted to double digits and then to single digits. Alas, there was a huge cost. Remember all those wonderful things the Fed chairman can do to fine-tune the economy? The Argentine government could not do any of them; it had abdicated control over the money supply in the name of fighting inflation. Nor did Argentina have any independent control over its exchange rate; the peso was fixed against the dollar. If the dollar was strong, the peso was strong. If the dollar was weak, the peso was weak.

This lack of control over the money supply and exchange rate ultimately took a steep toll. Beginning in the late 1990s, the Argentine economy slipped into a deep recession; authorities did not have the usual tools to fight it. To make matters worse, the U.S. dollar was strong because of America’s economic boom, making the Argentine peso strong. That punished Argentine exporters and did further harm to the economy. In contrast, Brazil’s currency, the real, fell more than 50 percent between 1999 and the end of 2001. To the rest of the world, Brazil had thrown a giant half-price sale and Argentina could do nothing but stand by and watch. As the Argentine economy limped along, economists debated the wisdom of the currency board. The proponents argued that it was an important source of macroeconomic stability; the skeptics said that it would cause more harm than good. In 1995, Maurice Obstfeld and Kenneth Rogoff, economists at UC Berkeley and Princeton, respectively, had published a paper warning that most attempts to maintain a fixed exchange rate, such as the Argentine currency board, were likely to end in failure.7

Time proved the skeptics right. In December 2001, the long-suffering Argentine economy unraveled completely. Street protests turned violent, the president resigned, and the government announced that it could no longer pay its debts, creating the largest sovereign default in history. (Ironically, Ken Rogoff had by then made his way from Princeton University to the International Monetary Fund, where, as chief economist, he had to deal with the economic wreckage that he had warned against years earlier.) The Argentine government scrapped its currency board and ended the guaranteed one-for-one exchange between the peso and the dollar. The peso immediately plunged some 30 percent in value relative to the dollar.

Funny money. Some currencies have no international value at all. In 1986, I crossed through the Berlin Wall into East Berlin, behind the Iron Curtain. When we crossed into East Germany at “Checkpoint Charlie,” we were required to change a certain amount of “hard currency” (dollars or West German marks) for a certain amount of East German currency. How was that exchange rate determined? Make believe. The East German mark was a “soft” currency, meaning that it did not trade anywhere outside of the communist world and therefore had no purchasing power anywhere else. The exchange rate was more or less arbitrary, though I’m fairly certain that the purchasing power of what we got was worth less than the purchasing power of what we gave up. In fact, we weren’t even allowed to take our East German money out of the country when we left. Instead, the East German border guards took what we had left and “put it on account” (that’s really what they said) for our next visit. Somewhere in the now unified Germany, there is an account with my name on it that contains a small amount of worthless East German currency. So I’ve got that going for me.

Soft currencies were a more serious problem for the few U.S. companies doing business in communist countries with soft currencies. In 1974, Pepsi struck a deal to sell its products in the Soviet Union. Communists drink cola, too. But what the heck was Pepsi going to do with millions of rubles? Instead, Pepsi and the Soviet government opted for old-fashioned barter. Pepsi swapped its soft-drink syrup to the Soviet government in exchange for Stolichnaya vodka, which did have real value in the West.8

That all sounds so orderly, except for the riots in the streets in Argentina. In fact, the Argentina-type currency meltdown is surprisingly frequent. Let’s revisit a line from a few pages ago: “Investors take their capital somewhere else, selling the local currency on their way out.” Only now, let’s dress that statement up to more closely approximate reality: “Investors panic, weeping and screaming as they sell assets and ditch the local currency—as much as possible, for whatever price is possible—in hopes of getting out the door before the market completely collapses!”

Argentina, Mexico, Russia, Turkey, South Korea, Thailand, and the country for which we’ve named the chapter, Iceland. What do they have in common? Not geography. Not culture. Certainly not climate. They are all countries that have suffered currency crises. No two crises are exactly the same. They do

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