[NB* Murder rather than euthanasia was Preobrazhensky's forte; he was of all the Bolshevik leaders the one most directly implicated in the execution of Nicholas II and his family.]The Russian example is a reminder that Germany was not the only vanquished country to suffer hyperinflation after the First World War. Austria - as well as the newly independent Hungary and Poland - also suffered comparably bad currency collapses between 1917 and 1924 . In the Russian case, hyperinflation came after the Bolsheviks had defaulted outright on the entire Tsarist debt. Bondholders would suffer similar fates in the aftermath of the Second World War, when Germany, Hungary and Greece all saw their currencies and bond markets collapse.*
[NB* The highest recorded inflation rate in history was in Hungary in July 1946, when prices increased by 4.19 quintillion per cent (419 followed by sixteen zeros).]If hyperinflation were exclusively associated with the costs of losing world wars, it would be relatively easy to understand. Yet there is a puzzle. In more recent times, a number of countries have been driven to default on their debts - either directly by suspending interest payments, or indirectly by debasing the currency in which the debts are denominated - as a result of far less serious disasters. Why is it that the spectre of hyperinflation has not been banished along with the spectre of global conflict?
PIMCO boss Bill Gross began his money-making career as a blackjack player in Las Vegas. To his eyes, there is always an element of gambling involved when an investor buys a bond. Part of that gamble is that an upsurge in inflation will not consume the value of the bond's annual interest payments. As Gross explains it, 'If inflation goes up to ten per cent and the value of a fixed rate interest is only five, then that basically means that the bond holder is falling behind inflation by five per cent.' As we have seen, the danger that rising inflation poses is that it erodes the purchasing power of both the capital sum invested and the interest payments due. And that is why, at the first whiff of higher inflation, bond prices tend to fall. Even as recently as the 1970s, as inflation soared around the world, the bond market made a Nevada casino look like a pretty safe place to invest your money.
Gross vividly recalls the time when US inflation was surging into double digits, peaking at just under 15 per cent in April 1980. As he puts it, 'that was very bond-unfriendly, and it produced . . . perhaps the worst bond bear market not just in memory but in history.' To be precise, real annual returns on US government bonds in the 1970s were minus 3 per cent, almost as bad as during the inflationary years of the world wars. Today, only a handful of countries have inflation rates above 10 per cent and only one, Zimbabwe, is afflicted with hyperinflation.*
[NB* At the time of writing (March 2008), a funeral in Zimbabwe costs 1 billion Zimbabwean dollars. The annual inflation rate is 100,000 per cent.]But back in 1979 at least seven countries had an annual inflation rate above 50 per cent and more than sixty countries, including Britain and the United States, had inflation in double digits. Among the countries worst affected, none suffered more severe long-term damage than Argentina.
Once, Argentina was a byword for prosperity. The country's very name means the land of silver. The river on whose banks the capital Buenos Aires stands is the Rio de la Plata - in English the Silver River - a reference not to its colour, which is muddy brown, but to the silver deposits supposed to lie upstream. In 1913, according to recent estimates, Argentina was one of the ten richest countries in the world. Outside the English-speaking world, per capita gross domestic product was higher in only Switzerland, Belgium, the Netherlands and Denmark. Between 1870 and 1913, Argentina's economy had grown faster than those of both the United States and Germany. There was almost as much foreign capital invested there as in Canada. It is no coincidence that there were once two Harrods stores in the world: one in Knightsbridge, in London, the other on the Avenida Florida, in the heart of Buenos Aires. Argentina could credibly aspire to be the United Kingdom, if not the United States, of the southern hemisphere. In February 1946, when the newly elected president General Juan Domingo Perôn visited the central bank in Buenos Aires, he was astonished at what he saw. 'There is so much gold,' he marvelled, 'you can hardly walk through the corridors.'
The economic history of Argentina in the twentieth century is an object lesson that all the resources in the world can be set at nought by financial mismanagement. Particularly after the Second World War the country consistently underperformed its neighbours and most of the rest of the world. So miserably did it fare in the 1960s and 1970s, for example, that its per capita GDP was the same in 1988 as it had been in 1959. By 1998 it had sunk to 34 per cent of the US level, compared with 72 per cent in 1913. It had been overtaken by, among others, Singapore, Japan, Taiwan and South Korea - not forgetting, most painful of all, the country next door, Chile. What went wrong? One possible answer is inflation, which was in double digits between 1945 and 1952, between 1956 and 1968 and between 1970 and 1974; and in treble (or quadruple) digits between 1975 and 1990, peaking at an annual rate of 5,000 per cent in 1989. Another answer is debt default: Argentina let down foreign creditors in 1982,1989, 2002 and 2004. Yet these answers will not quite suffice. Argentina had suffered double-digit inflation in at least eight years between 1870 and 1914. It had defaulted on its debts at least twice in the same period. To understand Argentina's economic decline, it is once again necessary to see that inflation was a political as much as a monetary phenomenon.
An oligarchy of landowners had sought to base the country's economy on agricultural exports to the English-speaking world, a model that failed comprehensively in the Depression. Large-scale immigration without (as in North America) the freeing of agricultural land for settlement had created a disproportionately large urban working class that was highly susceptible to populist mobilization. Repeated military interventions in politics, beginning with the coup that installed José F. Uriburu in 1930, paved the way for a new kind of quasi-fascistic politics under Perôn, who seemed to offer something for everyone: better wages and conditions for workers and protective tariffs for industrialists. The anti-labour alternative to Péron, which was attempted between 1955 (when he was deposed) and 1966, relied on currency devaluation to try to reconcile the interests of agriculture and industry.
Another military coup in 1966 promised technological modernization but instead delivered more devaluation, and higher inflation. Perôn's return in 1973 was a fiasco, coinciding as it did with the onset of a global upsurge in inflation. Annual inflation surged to 444 per cent. Yet another military coup plunged Argentina into violence as the Proceso de Reorganization National (National Reorganization Process) condemned thousands to arbitrary detention and 'disappearance'. In economic terms, the junta achieved precisely nothing other than to saddle Argentina with a rapidly growing external debt, which by 1984 exceeded 60 per cent of GDP (though this was less than half the peak level of indebtedness attained in the early 1900s). As so often in inflationary crises, war played a part: internally against supposed subversives, externally against Britain over the Falkland Islands.
Yet it would be wrong to see this as yet another case of a defeated regime liquidating its debts through inflation. What made Argentina's inflation so unmanageable was not war, but the constellation of social forces: the oligarchs, the caudillos, the producers' interest groups and the trade unions - not forgetting the impoverished underclass or descamizados (literally the shirtless). To put it simply, there was no significant group with an interest in price stability. Owners of capital were attracted to deficits and devaluation; sellers of labour grew accustomed to a wage-price spiral.
The gradual shift from financing government deficits domestically to financing them externally meant that bondholding was outsourced. It is against this background that the failure of successive plans for Argentine currency stabilization must be understood. In his short story 'The Garden of Forking Paths', Argentina's
greatest writer Jorge Luis Borges imagined the writing of a Chinese sage, Ts'ui Pen:
In all fictional works, each time a man is confronted with several alternatives, he chooses one and eliminates the others; in the fiction of Ts'ui Pen, he chooses - simultaneously - all of them. He creates, in this way, diverse futures; diverse times which themselves also proliferate and fork . . . In the work of Ts'ui Pen, all possible outcomes occur; each one is the point of departure for other forkings . . . [Ts'ui Pen] did not believe in a uniform, absolute time. He believed in an infinite series of times, in a growing, dizzying net of divergent,
convergent and parallel times.
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