Some notes on dual currency> Argentina went to dual currency to try to keep small dollar investors solvent. Also Europe is going through a dual currency phase now to phase out national monies and convert all transactions to Euros.
On May 21, IMF Managing Director Horst Köhler said he
welcomed Argentina's efforts for a debt swap it claimed would support medium-term financing sustainability. Eleven days later,Minister Cavallo engineered a swap that obliged Argentine banks to exchange relatively good, liquid government bonds fornew longer-dated, illiquid paper. The central bank was obliged to inject liquidity into the banking system (a feature which is not
present in orthodox currency board systems), which greatly
expanded the monetary base and reduced dollar reserve backing of the currency below 100 per cent for the first time.
Soon after, on June 15, Minister Cavallo announced a dual
exchange-rate regime: one for imports and another for most
exports. When markets worried again about devaluation, interest rates spiked and capital flowed out of Argentina. A week later, IMF Director of External Relations Thomas Dawson told a press conference that the IMF continued to support Argentina's efforts.
By September 7 last year, three events had occurred, with the IMF's approval, which seriously compromised the credibility of the convertibility system. Predictably, this did not stop the IMF from augmenting Argentina's stand-by credit to $21.57 billion. IMF First Deputy Managing Director Anne Krueger appeared utterly oblivious in a press release, saying: "The [new Argentine] program aims at restoring the credibility of the fiscal position and
the convertibility regime."
At the end of November, Mr. Cavallo further undermined the
convertibility system by requiring banks to exchange treasury bills for illiquid new ones. As a result, banks could not meet demands for deposit withdrawals, so he instituted restrictions on deposit withdrawals and transfers of funds abroad. A week later Thomas Dawson informed us "there is no Fund staff view on the
subject."
Dissatisfaction with these measures led to rioting and a revolving- door political crisis, producing five presidents in two weeks. Eduardo Duhalde became Argentina's fifth president on January 1, 2002, and ended convertibility five days later. He broke the monetary contract and created a new exchange-rate regime which stole about 40 per cent of the value of the peso—similarto FDR's breaking our domestic gold standard contract and devaluation.
This ended the legal right of people to convert pesos into dollars,amounting to outright theft of the central bank's foreign reserves. Duhalde's administration proceeded to violate contracts with foreign companies, steal the dollar deposits of Argentines, and wreak havoc on the banking system. Since Argentina's devaluation, all eyes have been on the IMF to come to Argentina's aid. And the Duhalde administration is already penciling in a bailout package to support its budget.
http://www.enterstageright.com/archive/articles/0302/0302argentina.txt Dual currency systems never work because they create huge black markets and lawlessness in general.