Should Javier Milei make the U.S. Dollar Argentina’s Official Currency

Newly elected Argentine President Javier Milei, a self-described libertarian, plans to replace Argentina’s current currency, the Argentinian peso, with the United States Dollar(USD). Is this policy workable, consequential, and/or good? Let’s tackle each aspect in this post.

As far as Milei’s policy being workable, he would first need to figure out how to get physical U.S. dollars into the country. This is going to be no easy task, as Argentina would effectively have to import dollars from abroad, primarily the United States, where most USDs circulate among private citizens, rather than just by governments and central banks in other countries like Argentina currently, Canada, the United Kingdom, and so forth. Currently, most of the big cities in Argentina, like Buenos Aires, accept dollars as payment, especially to bolster their tourism industry, a major service export for the country. However, outside of those big cities, USDs are not commonly carried or even accepted as payment as merchants in the smaller Argentinian towns don’t have the means, and sometimes not even the knowledge, to convert the USD into a more locally usable currency. Therefore, Argentina would have to figure out how to get USDs imported into the country; to do this, Argentina would need to export significant volume to the United States.

This gets to how consequential Milei’s proposed policy would be. Right now, Argentina’s main goods exports are in crops, such as soybeans, along with gold, raw fuels and minerals, according to this link. Furthermore, Argentina exports close to $5 million to the United States, constituting a little over 6% of total Argentine exports. However, hardly any of Argentina’s exports to the United States are of finished and assembled consumer or industrial goods, unlike in the cases of China and Taiwan, which produce an abundance of finished physical goods to the United States. Therefore, if Argentina adopted the USD as the official currency, only the population in Argentinian big cities would get consequential access to physical dollars.

Furthermore, as Gresham’s law states, bad money drives out good money. Not that the USD is good money, but certainly is closer to it than the Argentine peso. As such, even if Milei made the USD Argentina’s official currency, people would still likely use the peso as often as they could for purchases, as Argentines would prefer to sacrifice their less valuable currency and hold on to their far more valuable good money, the USD. This is why U.S. citizens who own gold, even in large quantities, generally make their goods and services purchases in USD instead of gold, in order to hold on to the gold that, unlike the USD, won’t lose value over time due to never-ending inflation caused by the Federal Reserve.

So, even if the low USD quantity in Argentina would drive the prices in terms of USDs downward and keep the USD prices of Argentinian goods and services from rising too rapidly, certainly not as rapidly as the peso prices, it would likely not be consequential outside of Argentine big city population areas. In light of all this, the majority of benefits of dollarizing Argentina, meaning replacing the national Argentine peso with the USD as currency, would be limited to Argentina’s big cities, at least at first. There is a chance that dollars could find their ways to smaller towns, but that isn’t probable, and even if it did happen, it would take time for smaller towns to be as readily accepting of USDs as the big cities.

What Milei needs to do to bring about long-term effective solutions to Argentina’s rampant inflation problem is to end the Argentinian central bank and bring the gold standard to the nation, as all nations, including the United States should also do, as discussed in detail here. To Milei’s credit, he has promoted these excellent ideas and rightfully been very outspoken about these wonderful ideas, and hopefully he’ll succeed in materializing these ideas, which will be no easy task at all.

In light of all the above points, the question then becomes, is Milei’s idea to dollarize Argentina good? The answer is that the idea isn’t really good or bad. As explained earlier, the true solution is to abolish Argentina’s central bank and put the country on a gold standard; however, this cannot be accomplished overnight, or even in a year. Achieving such immense reforms takes lots of times, perhaps years, even beyond Milei’s first term as Argentina’s president. Sure the USD is so widely circulated in global trade and is used by other countries to hedge against their currencies’ own hyperinflation, that Argentina’s currency would get strengthened if replaced by the USD, but it wouldn’t do much, if any, long-term good, because the USD is also highly inflated and backed by nothing materially real, such as gold or silver.

As such, dollarizing Argentina could provide some short-term relief from Argentina’s long-running rampant inflation of the peso, which isn’t bad. But in order for dollarization to qualify as good, it would have to have the same long-term beneficial consequences of abolishing the central bank and putting Argentina on the gold standard, which dollarizing does not; therefore, only the latter reforms qualify as good.

So in conclusion, Milei’s policy idea to dollarize Argentina is not really workable, hardly consequential(limited to areas where the dollar is already commonly used like Buenos Aires and other big cities that get considerable tourism business), and neither good nor bad in terms of providing any broad major benefits to the Argentine people.