Uruguay once excelled with the gold peso; today it has a currency that is just painted paper
A university colleague shared with me the article published in the Uruguayan news section of the Argentine newspaper ámbito.com, this March 29.
Its title "The fall of the dollar goes beyond the global context and is explained by local factors," and the relationships indicated later, is what I will try to refute.
Since we left behind the Uruguayan gold peso, the short but fruitful period of free banking, with the creation of BROU in 1896 and the subsequent abandonment in 1914 of metallic convertibility, politicians began an irreversible path of plundering the population.
In those early days, as narrated by historian and economist Ramón Díaz in his book Economic History of Uruguay; with the bad experience of the Argentine Banco Nación bills along with the degraded Brazilian copper, the temptation to issue (devaluation) was resisted.
The authorities of yesteryear, along with a population resistant to devaluation, managed to preserve the value of the peso, aware of the historical damage caused by neighboring countries through strategies known as the beggar-thy-neighbor policy.
Abandonment of the Gold Standard
Old convertible Uruguayan gold peso bill 50 Uruguayan gold peso bill, convertible according to the 1862 law, was equivalent to 5 gold doubloons, about 77.8 grams of fine gold.
In 1862, the parity to the metal had been set at 1.556 grams of fine gold per unit of Uruguayan gold peso, and although by 1914 convertibility had already been abandoned, formal devaluation was decreed in 1938, setting that peso to 0.585 grams of the same metal, a 62.4% loss of that value.2
The reasons for detaching from the yellow metal are the same as those for which, more recently in history, Argentine politicians in 2001 abandoned convertibility to the dollar, uncontrolled public spending.
In the table, I show some decades of how the Central Bank of Uruguay (BCU) and the Federal Reserve of the United States of America have debased their citizens' currency, which can be appreciated, albeit partially, through the percentage increase of the CPI.
Average annual CPI inflation by decades, since 1940, of Uruguay, the United States, and Switzerland.
average annual inflation by decade in Uruguay, USA, and Switzerland. Source: Own construction with data from INE Uruguay, DineroEnElTiempo, BFS Switzerland, Macro Data
Only in the last 85 years have Swiss rulers done the best job, with an accumulated inflation of 70%, the Americans not so much with 2184%, but our politicians take the grand prize, having caused an inflation of 63,778 million %.
The problem manifested in the degradation of the currency, which the rulers claim to protect, is moral as often described referring to the economic history of our countries by President Milei.
In a previous post Our Elephant State, I compared the size of the Uruguayan parliament with countries in the region and rocks like Switzerland.
Regarding the global strengthening of the dollar, as indicated in the news in a very vague appreciation, a currency will strengthen against those weaker currencies and weaken in relation to others stronger than it, like the Swiss franc with less inflationary history.
Interest and Exchange Rate
The exchange rate is a price, that of a unit of the currency in question (dollar here), concerning the local currency (Uruguayan pesos), like any good, the price is determined by the interaction of supply and demand forces.
Thus, any variable affecting one or the other will impact that value, whether measurable or not, the impact can be so insignificant that giving it undue importance may rather divert attention from the truly essential reasons.
Henry Hazlitt said in his famous work "Economics in One Lesson," an elementary book we should all read, particularly our public servants, the good economist considers the repercussions of actions in all markets and terms, not just in what is initially affected.
