Editor’s note: The following is an article originally published on October 20th, 2025, at Ludwig von Mises Institut Deutschland. Its publication sparked a public debate on the topic between Dr. Bagus and Dr. Jörg Guido Hülsmann.
This debate can be followed here:
Hülsmann: Closing a Central Bank: Comment on Bagus
Bagus: Closing Argentina’s Central Bank: A Response to Professor Hülsmann
Hülsmann: Closing Argentina’s Central Bank: Rejoinder
Bagus: The Logic of Hyperinflation: A Rejoinder to Hülsmann
Hülsmann: The Nature of Hyperinflations: Response to Bagus
Since the original article did not previously appear on Mises.org, Dr. Bagus has provided an English translation, published below.
The concept of credit money, introduced by Ludwig von Mises in 1912 in his work The Theory of Money and Credit, receives little attention. Yet the concept of credit money can be beneficial in historical analysis.
Mises distinguishes between three types of money in the narrower sense: commodity money, credit money, and fiat money. In the case of commodity money, money is a commodity that has become a generally accepted medium of exchange. Historical examples include gold and silver.
In addition to money in the narrower sense (or money proper), there are also money substitutes, which are issued by specific issuers. Examples include banknotes and demand deposits. These are considered part of the broader money supply. In Mises’s terminology 100% backed banknotes and demand deposits are called money certificates. Mises refers to unbacked money substitutes as fiduciary media. Money substitutes are immediately and fully redeemable for money proper and are therefore treated like money.
Credit money emerges from these money substitutes. Credit money consists of former money substitutes, such as banknotes, that are no longer exchangeable for commodity money because their issuer has suspended redemption until further notice. These former money substitutes continue to be used ‘in good faith’ out of habit and become credit money.
A historical example of credit money is the British pound notes issued during the Napoleonic Wars. In 1797, redemption of specie payment was discontinued. Nevertheless, the notes continued to be used. There was the hope and promise to resume redemption in gold once the war was over. It was not until 1821 that the redemption of notes in gold was finally resumed. A similar fate befell the greenbacks, which were issued during the US Civil War but did not become redeemable in gold until 1879.
With credit money, there is hope that it will become redeemable again in the future. With fiat money, however, this hope is completely lost. The government has no intention of making fiat money redeemable in the future. Our current euros and dollars are such a fiat currency. Fiat money is based on government decrees and is not redeemable. In Mises’s classification, credit money thus lies between commodity money and fiat money.
Mises’s logic can be profitably applied to the Argentine peso. During the convertibility period from 1991 to 2001, the peso was redeemable for US dollars. Of course, dollars are not commodity money. From the perspective of inflation-plagued Argentinians, however, the dollar appears to be a hard currency whose supply is not manipulated by Argentine politics. In 2002, the Argentine government officially declared convertibility ended.
To the extent that there is still hope that the peso will be redeemable for dollars in the future, albeit at a lower rate, the peso can be understood as credit money. Javier Milei nurtured this hope. The election campaign focused on dollarization and the exchange of central bank liabilities (pesos) for dollars. Therefore, there remains a possibility that pesos will be redeemed or converted into dollars in some form in the future. To the extent that the peso is viewed as credit money, the value of the peso is supported by this hope of redemption.
Let us now turn to the question of what would have happened to the demand for pesos if Javier Milei had closed the central bank on his first day in office.
First, it is essential to note the general price dynamics before Milei took office. Between January and July 2023, the monthly inflation rate ranged from 6% to 8.4%. By August, the inflation rate had already risen to 12.4%, only to skyrocket to 25.5% in December, when Milei took office. In other words, the country was caught in a dynamic in which Argentinians progressively lost confidence in the peso and increasingly exchanged pesos for dollars. Such a process develops a momentum of its own. When confidence in the quality or quantitative limitations of fiat currency melts, demand for money falls, which subsequently raises prices of goods and services, further reducing confidence in the currency, causing demand for money to fall further, and causing prices to rise even faster, and so on. This spiral, typical of hyperinflation (flight into real assets), becomes almost unstoppable beyond a certain point. Confidence in the currency is lost ever more rapidly. If, in this dynamic, Milei had closed the central bank, thereby sending a signal that the peso was left to its own devices, then the flight of Argentinians from the peso to the dollar would have been further accelerated.
With the disappearance of the central bank and the resulting hope of redemption of pesos for central bank dollars, the peso would have deteriorated significantly in quality. The peso would have deteriorated from credit money to pure fiat money. Demand for pesos would have fallen because there would have been no more hope that the central bank would ever redeem pesos for dollars. Argentinians would have tried to sell their pesos for dollars on the market. The peso exchange rate would have collapsed.
Furthermore, closing the central bank would have meant it would not have paid interest on its interest-bearing liabilities to the commercial banks. A large portion of the commercial banks’ investments would have become worthless. The resulting losses would have led to a collapse of the Argentine banking and financial system. Chaos, panic, and social unrest would have ensued. The loss of confidence in the peso would have accelerated. Argentinians would have fled to the dollar. In this sense, Hans-Hermann Hoppe logically argues that after such a collapse, Argentinians would have only used dollars and the peso would have disappeared (“The peso would disappear. That’s good. … Then, people use dollars instead of pesos.”, Hoppe 2024, PFP279, min 36 ). The peso would not “disappear” as long as it still possessed purchasing power in the eyes of its users, but only when, from the perspective of its holders, it no longer had any exchange value for all practical purposes. In other words, “disappear” means that there would have been an extreme inflation rate, i.e., a hyperinflation of the peso. It would have become worthless. Due to the problem of economic calculation, there would have been a decline in the division of labor and an economic collapse.
It’s highly likely that the chaos caused by the rapid depreciation of the peso, as in a hyperinflationary situation, would have been exploited by the opposition for a coup. This is what happened in the wake of the ‘Corralito’ in 2001. The country would be back in Peronism today and extremely impoverished because the division of labor collapses along with the currency due to the calculation problem.
In short, Argentina was on the path to hyperinflation by 2023. Closing the central bank would hardly have halted the momentum but would have accelerated it in terms of inflation and the peso’s depreciation. The banking system would have collapsed, and confidence in the peso and the demand for money would have collapsed. Mises’s concept of credit money and its development toward fiat money helps us understand these connections.
Originally published in German at misesde.org
