The above quote appears on the Internet home page of the Central Bank of Argentina. Let us consider it akin to the Hippocratic Oath but for central bankers and examine the situation continuing with that analogy. The disease is inflation and the patient is Argentina. Argentina has one of the highest inflation rates in Latin America (12 percent per year) and, clearly, the Bank is not fulfilling its Hippocratic Oath because the value of the peso declines daily. The symptoms include price increases which damage the social fabric of the country with the most severe damage suffered by the lower classes, and strikes which affect the quality of life and well-being of all Argentineans.

Having recognized the symptoms, the logical and crucial next step is to correctly diagnose the cause of the inflation and the accompanying loss of value of the national currency. A correct diagnosis will result in a cure while an incorrect one may irreversibly damage the patient.

In the case of Argentina, President Kirchner and his ministers have found productive and retail chains to be to blame but there is little to support this diagnosis, other than political convenience. If they were, in fact, the cause of inflation, then the remedy would be price controls or price ceilings. This solution likely would kill the patient. The Government also has argued for “price agreements” by which producers heed government “advice” regarding future price increases. These agreements only serve to distract attention from the true problem.

The actual virus is monetary inflation. In the past twelve months the Central Bank has increased money supply by more than 20%. The main source of this increase has been net dollar purchases by the Central Bank. The Bank’s policy is to maintain an artificially “high dollar” by fixing the exchange rate at a value that is not market determined. This artificially expensive dollar was intended to serve as a mechanism to increase fiscal revenues by taxing exports. Of course, when the Central Bank buys dollars, it must print pesos to finance the purchase and it is this additional money that really generates inflation.

In fact, the policy of maintaining a high dollar—first implemented by Economy Minister Roberto Lavagna with the agreement of several Central Bank governors—is unsustainable because the inflation causes all prices except that of dollars to rise, and then the dollar loses relative value. In other words, the Central Bank can control the nominal price of the dollar but it cannot control its real price.

High inflation has been subdued in an atmosphere of optimism do to the exceptional high growth of the real economy during the last three years. The economy owes this upswing to various causes including rebounding from a deep recession, very high international prices for argentine exports (soybean, wheat, maize, beef, etc.), the default on its foreign debt and the expansion of the local industry due the tax on imports implied by the exchange rate policy. But these are not factors that can sustain permanent growth and soon Argentina will suffer from both high inflation and low growth. To quell inflation a healthier solution than price controls would be for the Central Bank to stop increasing the quantity of money that causes inflation and to allow the value of the dollar to float freely according to the supply and demand of the market.

The government diagnosis blaming inflation on merchants and supermarkets is wrong, unjust, and dangerous. It is wrong because there is neither theory nor experience to support it, it is unjust because it places the blame on innocent parties, and it is dangerous because it sets groups against one another—such as union members demonstrating outside supermarkets. Additionally, its logical consequence is price controls, whose likely results are shortages and black markets. And where there are black markets there is corruption—if the government does not wish to create incentives for corruption it should not impose price controls or price “agreements.”

The Central Bank should abide by its charter and we should remind its authorities that such charter states that “The first and foremost mission of the Central Bank of the Republic of Argentina is to protect the value of the national currency.” Consequently, the government must stop blaming others for the loss of value of the national currency and curb its own printing press.

* Valeriano F. Garcia is a former World Bank Executive Director, an economist and independent consultant.