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Doctor of currency treats hyperinflation Adviser: Steve Hanke is sought by governments worldwide for his expertise on monetary reform.

THE BALTIMORE SUN

A monument to hyperinflation hangs on Steve Hanke's office wall. It's a framed piece of paper money with more zeros than you can count, a 500 billion-dinar Yugoslavian note that in its heyday could have bought, maybe, a modest meal.

Hanke enshrines the bank note the way an oncologist might pickle and preserve a remarkable tumor -- as a testament to the enemy's power and a goad to do better next time. Hanke is a doctor of national currencies, and demand for his skills is growing on several continents.

A professor of applied economics at the Johns Hopkins University, he is also official monetary adviser to the governments of Lithuania, Argentina and Venezuela and has influenced currency reform in Estonia, Albania and, now, Bosnia.

He has dined regularly with the Argentine economic minister. He gets invited to hunting parties with the Lithuanian prime minister. He fields phone calls from international monetary officials at odd hours in his Charles Street condo.

Hanke, 53, has become perhaps the world's leading proponent of "currency boards," a controversial method to stabilize money systems in developing countries. In the process, he has made headlines in several languages, not all of them favorable, and has found ways to reap huge financial gains for investors.

"He's got an outstanding reputation," said Mark Eaker, professor at the University of Virginia's Darden School and a specialist in international finance. "It's a name that you see a lot. He was a Latin American expert, but then his expertise sort of expanded" when the Soviet Union fell apart.

Hanke's not just a monetary guru, either. He teaches at Hopkins. He writes a regular column for Forbes magazine. And he advises high-flying mutual funds that make big bets on currency swings, including one that earned 79 percent last year and was the No. 1 emerging-market fund in the world.

"Steve is a multifaceted guy," said Rocky Worcester, president of Maryland Business for Responsive Government, a conservative group on whose board Hanke sits. "Although he rubs shoulders with CEOs, he has this Olympian kind of view of business worldwide."

Hanke believes that his investment activities help furnish him credibility in the world's capitals.

"I really am not just an academic blowing off steam about currency reform," he said. "I have a pretty good idea about what makes a currency sound and immune from attack."

The monetary malady Hanke treats is widespread. Starved of resources but drowning in need, developing nations often resort to the time-honored expedient of beleaguered governments everywhere: They print more money.

The extra currency finances new government projects and old government deficits. But it also sparks inflation, sometimes spectacularly. In Argentina in the 1980s inflation was 3,000 percent annually.

Inflation-poxed economies can't attract investment, though, either from their own rich people or from overseas capitalists. Without investment, the countries can't stabilize, grow and prosper.

Hanke's solution, which has roots in the Colonial 19th century, is to rigidly lash a developing nation's currency to that of a stable, industrialized country.

With a "currency board," the developing nation guarantees the exchange of its native currency for an anchor currency, often the dollar, at a fixed rate. Forever. For anybody who asks. To back up the guarantee, the developing nation stocks vaults with enough dollars to cover its entire money supply, or close to it.

The exchange guarantee, often constitutionally required, is supposed to reassure investors and lure capital. And it prevents the reckless manufacture of bank notes, since national officials can't expand the money supply without procuring more reserve dollars.

"It's basically a method for tying the hands of the monetary authorities in terms of how much money they can issue," said Richard Marston, director of the Weiss Center for International Financial Research at the Wharton School of the University of Pennsylvania. "It's a farsighted policy which can be very effective if carried out correctly."

Hanke learned about currency boards in the 1980s from Sir Alan Walters, a former Hopkins professor and later personal economic adviser to former British Prime Minister Margaret Thatcher. Hanke published several papers and a book on the subject, some with co-authors, in the early 1990s.

One of the papers was a blueprint for reform in Argentina, and in 1991 the country adopted the plan and made the Argentine peso equal to the U.S. dollar.

Since then, Estonia and Lithuania have adopted currency boards, and Venezuela and Jamaica have started thinking about it.

Hanke, who works closely with his wife, Liliane, on money policy, was instrumental in each case. And Bosnia's monetary plan as described in the Dayton peace agreement is based on a book he wrote on Yugoslavian money reform several years ago. Several Bosnian bankers were in Baltimore last month to consult with him.

Argentina has been the best lab for currency boards recently.

Hanke's anti-inflation medicine has worked; the country's annual inflation rate is below 2 percent.

But it has had side effects. The strong peso has made Buenos Aires hugely expensive for foreigners, has hurt exporters and has contributed to a long recession. Unemployment is 17 percent, and President Carlos Menem has a 15 percent approval rating.

Argentina is not attracting capital as hoped. Interest rates are high, but foreign investors still aren't convinced that the currency board won't be dumped and the peso devalued as it was in Mexico two years ago.

And there's little doubt that the currency board is hurting the economy in the short term. A conventional central bank could buy government securities, pump up Argentina's money supply and prop up wobbly banks. A currency board can't.

A currency board "causes severe problems for banks, because if banks don't have the reserves they need, there's no lender of last resort," said Wharton's Marston.

The plan "has worked very well in Argentina, but there is this other tradition in finance which says the central bank should be ready to stand behind the banking system," he said.

Hanke is unwavering.

A monetary infusion would simply stoke inflation and put Argentina back on its same old path, he said. Low inflation and a steady currency will breed investment and growth, he said.

"Stability isn't everything, but without stability everything is nothing," he likes to say. "Without stability, you can't get any of these other reforms going."

Hanke puts his money where his rhetoric is. And the money of shrewd investors, too. Sure that Argentina would devalue the peso last year, most investors sucked capital out of the country, sold Argentine securities and drove short-term interest rates flying past 50 percent.

Hanke, meanwhile, was buying Argentine bonds for Toronto Trust Argentina, a mutual fund run through Friedberg Mercantile Group, a Toronto firm with $750 million under management. The Argentine fund, of which Hanke is president, posted a stunning 79 percent return last year and is up 49 percent so far this year.

He has made other big currency scores, too, playing a key role in the speculative attack on the French franc in 1993.

Major French newspapers and magazines blamed the franc's swoon on Hanke along with famous currency swashbuckler George Soros.

Le Figaro Economique colorfully called Hanke "the only one to have been, successively, personal counselor to a military dictator (General Pinochet), a liberal conservative (Ronald Reagan) and a reformed Communist (former Yugoslavian Prime Minister Zivko Pregl.)"

Hanke had been on Reagan's Council of Economic Advisers, and he has had other opportunities in U.S. politics. But he said he prefers his present role. "The fish are a little bigger" when you can influence an entire country's money system, he said.

Oh, and one other thing, he adds: Buy Argentine bonds. They're still a good deal.

Pub Date: 9/24/96

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