Inconvertible Paper Money, Inflation and Economic Performance in Early Nineteenth Century Argentina [*].

Abstract. To date, factor endowments or comparative advantages in the international economy, have been at the centre of explanations for the economic performance of Argentina in the nineteenth century. Historians have focused on the increasing volume of rural exports and the availability of land on the frontier. Yet, the contemporary fiscal and monetary events have been ignored. From the 1820s to the 1860s, the state was mainly financed by issues of inconvertible paper currency. Hence, depreciation and high volatility of the means of payment became a basic feature of the Buenos Aires economy. This article will reassess the expansion of the rural economy in the light of the impact of inflationary finances.

In a recent book, Stephen Haber notes that Latin American countries 'fell behind' in comparison with the performance of the North Atlantic economies during the eighteenth and early nineteenth centuries rather than in the twentieth. [1] Previously the roots of Latin American economic backwardness were traced back to the colonial heritage or its dependence on the central economies that developed during this century. Now, it is argued that institutions and governmental policies played a significant role in determining the scope of economic growth. [2] More notably though, Haber's book is concerned mainly with the cases of Brazil and Mexico while similar studies on Argentina are absent. So far, explanations of Argentine economic history of this period have focused on factor endowments -- land and labour, and their relative scarcity -- or the comparative advantages in the international economy. [3] Nevertheless, early nineteenth century Argentina might be a good example to assess how institutions shape economic pe rformance, and to understand the economic foundations of institutional changes.

By the mid-nineteenth century, the state and market had taken a definitive and modern form in Argentina. In the aftermath of independence it proved unfeasible to construct a stable political organisation for the whole of the country, and, until 1852, Argentina was a loose confederation of politically and financially autonomous provinces, often involved in long civil wars. Buenos Aires -- the former colonial capital -- retained the headship of this confederation and enjoyed the monopoly over customs revenue and foreign trade. In the 1850s the province of Buenos Aires seceded and a decisive military dispute over the political constitution of the country took place. The forces of Buenos Aires prevailed and the definitive political and fiscal constitution of the Argentine republic was adopted in 1862. Another important consequence of Independence was the loss of control over the mining territory that later was to be Bolivia. [4] Yet while bullion became scarce, cattle hide, tallow, salted beef and wool produced in the littoral provinces increasingly set off the initial imbalance in foreign trade.

During this period the state -- in the province of Buenos Aires -- was financed by the so-called inflationary tax. Inconvertible paper money became an actual fiduciary currency, and the means of payment for domestic transactions in the province. Bullion did not entirely disappear though, as it was the currency standard in neighbouring economies. Meanwhile, in the UK the currency and banking schools debated at length, and without much success, how to operate with convertible money and several banks of issue. Buenos Aires initiated a forty-year process of dealing with inconvertible paper money issued by the government via the only existing bank. This 'bi-monetary' (non bimetallic) system was an extraordinary phenomenon in contemporary monetary history. [5] Yet, the historiography has not properly considered its occurrence and impact on the performance of the early nineteenth century Argentine economy.[6]

This article will assess the performance of the economy in the River Plate area from the 1820s to the 1860s, in the light of the issues mentioned above. First, it will appraise the supposed growth of the rural economy, pointing in particular at the availability of capital. Secondly, it will analyse the contemporary financial and monetary circumstances. Thirdly, it will outline some micro- and macroeconomic consequences of inflationary financing.

The expansion of the rural economy

During the last decades of the colony rural goods already accounted for one third of the total value of exports. Salted or dry cow hides were the main item, and successively enlarged their share of the total value of exports so that by I 850 they formed over 60 or 70 per cent of the total. [7] The volume of hide exports, largely due to North Atlantic markets, rose from an estimated 460,000 units in 1792-1796, to 624,000 in the 1850S, to the maximum of 2,662,000 in the early 1850S. [8] Despite the volume of River Plate exports, they were never able to set international prices, as steady foreign demand drove the production of those low aggregated value goods. River Plate economies remained as price takers in the international market for their export goods throughout the nineteenth century. [9]

It has been argued that, despite low rates of capital and labour investment - leading to technological archaism - such growth was only possible because empty public land was available. [10] Within the limits of capital scarcity, cattle raising obtained high rates of returns. In fact, cattle formed the bulk of initial capital input required given that land was cheap. Production was not labour intensive and entry costs were low. The state further lowered other installation costs. Military campaigns to prevent Indian incursions and seize their lands, the provision of law and order, plus successive leases or sales of public lands for fiscal purposes, all contributed to the profitability of cattle raising. Traditionally, historians have estimated profits at about 20-30 per cent per annum. [11] Although calculations were based on income and expenditure in paper pesos, this equalled the rate that contemporaries observed for the actual reproduction rate of cattle each year. [12] Notwithstanding the success of estancias (large cattle ranches) mercantile capital sources apparently financed rural expansion, and, given that this growth was related to foreign trade, the role of merchants in the production of staple exports and their investments in large estates remains a key issue in assessing economic performance at the time.

The attention given to the estancia in the literature overshadows the performance of arable farming throughout the first half of the century. Farmers constituted a large share of the rural economy even in the 1850s. The provincial census for the countryside in 1 8 recorded nearly 40 per cent of those listed as 'owners and renters' as committed to crop farming. [13] Yet, agricultural studies have not gone beyond the demographic analysis of rural labour. [14] In fact, methods of cultivation were as primitive in the 1850s as they had been during late colonial times. However, early in the century the output of grain farming had been very high. Yields were even higher than in the most productive areas in Europe, [15] or those achieved in late nineteenth century Argentina. [16] But high yields were unsustainable in the long-term. The estimated average yield of wheat in the mid-1850s was still 25 fanegas to one sown, which was considered normal in the 1800s. [17] Productivity seems to have been low and so agricultu re stagnated. Historians have found reasons for this poor performance in the chronic shortage of labour, high costs of transport and foreign competition. [18] The effects of erratic fiscal policies may well have worsened these hindrances. Fixing prices for bread or imposing differential duties on wheat and flour imports according to the current local political situation sought protection for croppers, albeit not very efficiently.

Similarly, historians have blamed the backwardness of native manufacturing on contemporary fiscal policies. Some argued that the prevalence of free trade policies, which intentionally favoured cattle raisers, were the main obstacle; others saw high tariffs aimed at protecting specific industries, such as hat- or cigar-makers, as the cause of the problem. [19] The lack of domestic savings derived from an export sector 'not dynamic enough to generate surplus capital for investments', alongside the weakness of the domestic market, have also been noted. Thus, industry remained at the 'workshop level' over the decades. [20] Only with the age of railways in the second half of the century, reducing transport costs and so overcoming market fragmentation, does the outlook for urban artisans improve.

The capital scarcity and dominance of mercantile credit

Scholars have noted two features of the lack of finance in the nineteenth-century economy. As contemporaries often assumed that scarcity of money was the same as scarcity of capital, some historians also tended to take them as one and the same thing. They discuss a shortage of capital or a lack of credit as the same phenomenon. Nonetheless, there is agreement about prevailing capital constraints. First, evidence is provided by the high prices of money, although most authors quote nominal interest rates, [21] along with the unavailability of institutional sources of credit. [22] Secondly, the notion that the growth of the rural economy was financed by merchant capital continues to draw the attention of some historians to what one has termed the 'notorious dominance' of merchants over producers in the domestic economy. [23] Both, the 'lack of capital' and the mercantile nature of credit are said to have been major hindrances to capital formation.

Capital insufficiency is assumed to be an outcome of a dearth of specie due to an unfavourable commercial balance. But this explanation remains incomplete, as existing data on foreign trade does not allow exports to be distinguished according to the place of production, neither is the volume of foreign goods re-exported to the interior specified. Moreover, trade from Buenos Aires is usually assumed as the whole country's commerce and so resultant balances may be misleading. [24] Similarly, exchanges with Britain are taken as proxy of total foreign trade. In the 1820s Great Britain was the main trading partner and enjoyed a surplus with the River Plate. By the middle of the century, continental Europe and the USA displaced Britain. [25] Moreover, while the value of imports from Britain by 1850 varied little from the level of 1825, the value of exports from the River Plate had increased despite sharply falling prices. [26] In other words, an increase in the quantity of hides shipped compensated for the decline in the export values. European markets attracted more of the new export produce -- wool -- than did the UK, which remained the main customer for salted hides and tallow. Since exchange with other countries appear to have favoured Buenos Aires, it may be expected that the overall trade balance tended to provide surpluses. It is claimed that Buenos Aires' overseas balance of trade with overseas became favourable from 1836 although blockades sometimes interrupted the trend. [27]

Roughly one third of the goods shipped from Buenos Aires were produced outside the province and nearly two thirds of European goods were consumed far beyond the port. [28] Hence the province persistently enjoyed trade surpluses with the interior and with neighbouring countries. Inevitably, this had distinctive consequences for the public finances of each province. The effects of occasional foreign trade deficits in Buenos Aires were transferred to neighbouring provinces while the Buenos Aires Treasury seized some fiscal revenue from them. Until 1852, foreign goods re-exported inland paid both duties to the Buenos Aires customs and further provincial taxes once they were conveyed beyond the port. Equally, because specie was in …