The Hindu Business Line : Currency: The seductive demon

SO much of a nation's psyche, honour, and fortunes are tied up with its currency. We put national symbols and the images of heroes on the coins and notes that we use. A nation's history is captured on these pieces of paper and metal. Even songs are written about the currency.

Look at the terms we use. It hurts us when we have to `devalue' the currency to help exports. It `strengthens' when our money buys more of another currency. A central bank has to decide on whether to `defend' it in the face of speculative `attack'. When humanity moved from a system of barter to a monetary base, it probably did not realise what a seductive demon it was creating.

A Panchatantra tale reminds us "Troublesome to acquire, troublesome to protect, troublesome if lost, troublesome if spent: Money is nothing but trouble, from beginning to end.'' Tell that to the poor Argentines.

Along with the rocking of their currency, the president's office has also been rocked; they have had to witness a parade of five presidents since December 20, and all because of the instability of their currency. They devalued their peso on 7 January by 29 per cent.

The peso now operates on a dual exchange rate — a rate of 1.4 pesos to the dollar for export/import transactions and a second rate set by the market forces (currently devalued by 49 per cent) for other transactions such as tourism. The government hopes that the two rates will converge and hopes to have only one rate in about six months.

Many individuals and businesses in Argentina have their loans denominated in the dollar and are now suffering. So to give relief to the smaller borrower, the Government has also decreed that all bank loans of less than $100,000 (Rs 48 lakh) will be switched into pesos at the 1:1 rate. The banks will have to swallow the loss.

In 1991, Argentina went on a bold experiment when it pegged its peso on a 1:1 rate with the US dollar. Called a currency board, the move effectively removed all flexibility from the hands of the government or its central bank since the issue of pesos was tied to the US dollar reserves that the country had. It was a sad comment on the maturity and authority of their political and economic leadership since they had decided that the only way to curb their soaring inflation was to tie the hands of their decision-makers.

The fixed exchange rate worked for several years and brought down inflation.

Foreign investors reacted to the economic stability by investing money and buying up several local enterprises which led to a steady inflow of dollars into the economy to support the peso.

But Argentina is in a free trade arrangement called Mercosur with its neighbour, Brazil. Brazil decided to devalue its currency in 1999 and Argentina's self-imposed rigidity prevented it from taking appropriate action. Its products became too expensive and the country, for the last four years, has been in a severe recession. As the government struggled within its straightjacket to deal with a massive debt taken on during the good years and a looming debt repayment, it imposed in December a $1000 (Rs 48,000) cash withdrawal limit that sparked street riots and has caused the repeated government changes. The government ended up defaulting on its sovereign debt re-payments and there is always the IMF dog one can kick around for an excuse.

Argentina needs to take a very hard look at itself and its economic and political policies if it wants to fix the problem permanently. But one solution being given by some observers, as a fix, is to `dollarise' the economy. That is, completely withdraw the peso and let the US dollar be the official currency! From a straightjacket, that will be nailing it to the wall. That tells you how much faith they have in the country managing its currency.

Europe's tale

Some Europeans have been pondering about their own currencies. As of the first of this year, 12 countries of the European Union (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, and Spain) adopted the `euro' as their currency and gave up what they had for centuries, in some cases. During the last few months of 2001, truck loads of the new notes and coins have been getting the banks all around Europe ready for this big move.

Actually the euro, as a unit of currency for transactions purposes, was introduced in 1999 and the people have had three years to get used to it. Whatever lira, franc, mark, and so on, that you may have will stop being legal tender after end-February and then be of interest only to the numismatists.

It is a truly amazing event for the world to watch as these countries who have fought two major wars amongst themselves within the last 75 years have now come to a stage where not only have they merged their economies but have also adopted a single currency.

(We can take a moment here and reflect on the maturity of two other countries which claim a very old civilisation, which were one till 55 years ago and share the same name for their currency, but cannot get along and are now threatening each other with war. Guess which one I am talking about.) Is it possible to share a currency without a political union?

Although the purists will insist that the EU is only a monetary union without political integration, having the same currency in circulation in all these nations will move them closer and closer towards a form of integration that is fascinating to imagine. The experiment itself is unique in history since it was not imposed by an authoritarian regime but undertaken voluntarily by elected governments who went back to the people for permission through referendums. Many of these currencies go back a long time.

The French, for instance, trace their franc back to 1360. The people of these 12 nations will no more see their historical monuments or popular leaders on their currency.

The euro will just be some nice artistic designs and colours to remind them that they are in a new age where the needs of economic union are greater than national symbols.

The Italians will be nostalgic for an era when almost everyone was a millionaire (an average clerk earned a million lira a week).

The English, who are a part of the European Union but have not signed on to a common currency, are still hiding behind their pound.

But the day will come when sheer economics will force them to tear themselves away from their beloved pound.

They have adjusted to the fact that they do not have an empire anymore, have given up their "English weights and measures'' in favour of the metric system, and even gave up the `shilling' in 1971 when their currency converted to metric form as pounds and pence.

They would like to keep their pound at least a little bit longer. Like the Argentine situation, the euro and its supporting economic policies pose a straightjacket on the national governments that are a part of it.

But they have had practice over the last several years since the Maastricht Treaty in adhering to the norms that they have agreed to, and so the use of the new currency unit is not expected to cause as much a problem as the Argentine decision did.

And closer home

Finally, the Thais are recovering from their currency troubles. However, they feel they can bring closure to their past currency crisis only by suing the former central bank Governor, Rerngchai Marakanond, blaming him for failing to defend their currency against speculative trading.

The intent of the suit, apparently, is more to fix blame than recover moneys. But in 1997-1998 when speculative trading of Thailand's currency, the baht, became rampant, Marakanond tried to maintain its value by using the country's foreign exchange reserves to support it in market transactions.

Within weeks, the reserves dwindled from $32 billion (Rs 1,53,600 crore) to about $800 million (Rs 3,840 crores), leading to a devaluation of the currency and a bailout by the IMF.

Here is a nation, out of pique, blaming one individual for defacing its currency while the other economic managers' hide in their offices.

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