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means, a persistent effort to keep interest rates low can only have
the effect of prolonging this tendency indefinitely and of bringing
about a continuous and progressive fall of the exchanges.
Whether the outward flow of capital starts with a withdrawal of
balances held in the country by foreigners, or with an attempt on
the parts of nationals of the country to acquire assets abroad, it
will deprive banking institutions at home of funds which they
were able to lend, and at the same time lower the exchanges. If the
central bank succeeds in keeping interest rates low in the first in-
stance by substituting new credits for the capital which has left the
country, it will not only perpetuate the conditions under which
the export of capital has been attractive; the effect of capital ex-
ports on the rates of exchange will, as we have seen, tend to be-
come self-inflammatory and a flight of capital will set in. At the
same time the rise of prices at home will increase the demand for
loans because it means an increase in the real rate of profit. And
the adverse balance of trade which must necessarily continue
while part of the receipts from exports is used to repay loans or to
make loans abroad, means that the supply of real capital and
therefore the natural or equilibrium rate of interest in the
country will rise. It is clear that under such conditions the central
bank could not, merely by keeping its discount rate low, prevent a
rise of interest rates without at the same time bringing about a
major inflation.84
Hayek goes on to explain how the monetary nationalists must then in-
evitably argue for capital controls, as Stiglitz has of course done, in order
to stop the people from disturbing the government s control of national
credit conditions. But the government cannot stop there, as exchange
A BRIEF HISTORY OF MONETARY SOVEREIGNTY 99
control designed to prevent effectively the outflow of capital would really
have to involve a complete control of foreign trade, since of course any
variation in the terms of credit on exports or imports means an interna-
tional capital movement. 85
Indeed, this is precisely what the Argentine government has been doing
since 2002. Since writing off $80 billion worth, or 75% in nominal terms,
of its debts, the government has been resorting to ever-more intrusive
means in order to counteract the ability of its citizens to protect what re-
mains of their savings and to buy or sell with foreigners.
In 2003, the Argentine government introduced capital controls and do-
mestic price controls, targeting the energy sector. The goal was to keep
the exchange rate from rising in order to maintain export competitive-
ness while simultaneously containing the inflation that policy was giving
rise to.
In 2004, energy sector controls were extended to include export taxes
on crude oil, in order to insulate the domestic price from the full effect of
international fluctuations, 86 in the words of the economy minister, and
partial export bans were imposed on natural gas and oil. President Kirch-
ner excoriated gas and oil companies for underinvestment, though in-
vestment was irrational given the price controls. The government founded
a state energy company, Enarsa, which it was then able to order to under-
take unprofitable investments. The government also began the first of its
major attacks on foreign investors, repealing a 1997 airwave licensing con-
tract with a French company, Thales Spectrum, declaring the precrisis pri-
vatizations to have been a failure.
In 2005, President Kirchner called for a nationwide boycott of Shell
after it raised Argentine oil prices in line with global oil prices. French
company Suez announced it was leaving the country, selling its control-
ling share in Aguas Argentina, the Buenos Aires water supplier, after
years of losses following a 2001 freeze in utility prices. New currency
rules were imposed, forcing companies to convert most foreign pro-
ceeds into pesos and limiting the amount of foreign currency that indi-
viduals could acquire to invest abroad. Government price controls
were extended throughout the economy. President Kirchner attacked
supermarkets for rising inflation, which had surpassed 12%, demanding
that they accept voluntary price controls. Incoming economy minister
100 A BRIEF HISTORY OF MONETARY SOVEREIGNTY
Felisa Miceli dismissed her predecessor s concerns about rising inflation
as an argument to maintain low wages. She announced that she would
not resort to orthodox methods of inflation control, such as tighten-
ing money supply or raising interest rates.87
In 2006, President Kirchner expanded his price control campaign to
foreign consumer goods companies, summoning executives from Procter
& Gamble, Unilever, and Kimberly-Clark to demand that they stop rais-
ing prices. Targeted companies complied by reducing the size of their
products, thus raising unit price without raising the shelf price. Local tex-
tile companies were next in line, being forced to sign an agreement with
the government pledging a price freeze. In an effort to hold the official in-
flation rate at 1% per month, President Kirchner then called for volun-
tary price freezes on about 300 products, such as sugar, flour, noodles,
bread, shampoo, and pencils, targeting particularly component products
of the official consumer price index. Beef exports were also banned in an
attempt to increase domestic supply, but this had the effect of exacerbat-
ing the trend of Argentine landowners converting cattle pastures to soya
bean fields. Voluntary price control agreements were further extended
to items as diverse as medicines and private school tuitions. In October,
President Kirchner announced that price controls expiring at the end of
2006 would be extended until the end of 2007, just after the scheduled au-
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