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.In the April presidentialballoting, however, which Vargas was expected to sweep in a landslideforecast by the public opinion polls, the bubble burst.An unknownpresidential candidate, Alberto Fujimori, operating with virtually nomoney out of astorefront in Lima, rose from a negligible amount ofprevious polls into a virtual tie with Vargas Llosa for first place.Fujimorimay now win the runoff.What exactly happened on the road tothe Peruvian free-market paradise?Vargas Llosa had been converted to the free market by the remarkableeconomist, Hernando de Soto, whose best-selling work, The Other Path,not only called for a free market, but advocated a genuine people s freemarket based on private entrepreneurs, in contrast to Peru s (and otherLatin American countries ) unfortunate experiences with state capitalismthat fosters privileged contractors and monopolists.In the early part of last year s presidential campaign, de Soto was oneof Vargas s key campaign advisors.But de Soto soon broke with Vargas,denouncing him for selling out to the very state capitalism that de Sotohad spent so many years denouncing. 298 Murray N.Rothbard: Making Economic SenseVargas s shift was the beginning of his troubles.His state-capitalistpolicies aggravated the fact that Vargas Llosa is one of the wealthy, whiteminority of European descent the Criollos (approximately 2.8 millionout of a largely Indian and mixed-Indian Peruvian population of 20million) who are the landlords and state capitalists of Peru and whoare therefore cordially detested by the rest of the population.While VargasLlosa surrounded himself with wealthy Criollos, he was visibly uneasy onthe stump in Indian districts.Vargas sealed his doom when he embraced the free-market, anti-inflationist policies of the new Brazilian president, Fernando Collor deMello.His free-market shock treatment for the Brazilian economy hasbeen widely heralded as a salutary if radical strong-man techniqueof ending that country s accelerating inflation.De Mello s policy may well be a shock treatment, but it goes farbeyond any shock administered by a free market.While there are somedecontrol and privatization planks in the de Mello program, most of theshock is blatantly statist: including a massive increase in taxes, and, inparticular, a Draconian deflationary program that freezes for many monthseveryone s bank account, thereby suddenly contracting the Brazilianmoney supply by 80%.Austrian economists have often been accused of being grim deflationists for wanting to allow insolvent fractional-reserve banks(including S & Ls) to go bankrupt without a bailout.But this contraction isnothing compared to de Mello s arbitrary deflation of 80%.Far frombeing free market, the Brazilian policy amounts to first engaging in amassive printing of money, then spending this newly-created money,driving up prices drastically, and then proclaiming a cure by confiscatingthe largest part of that money.In short, the Brazilian government hasdelivered to the country s economy a massive and lethal one-two punch.On his promising to Peru the same treatment as de Mello had just givenBrazil, it is no wonder that the Peruvian voters turned from Vargas indroves.In the meanwhile, Fujimori came up fast on the outside.Amember of the small but highly respected Japanese-Peruvian communityof 55,000 Fujimori found himself embraced by the country s Indians as afellow ethnic oppressed by the hated ruling Criollo elite. Economics Beyond The Borders 299The first Japanese were imported into Peru at the end of the 19thcentury to work as slaves on the coastal sugar plantations.The Japanese,however, rebelled within weeks, and moved to Lima, where they are nowlocated.Fujimori s parents emigrated to Lima in the mid-1930s where hisfather, along with other Japanese, created hundreds of successfulsmall businesses.After Pearl Harbor, the U.S.government pressured Peru to go to warwith Japan, to confiscate Japanese-owned businesses, including the elderFujimori s tire repair shop, and to ship almost 1,500 Japanese tointernment in the U.S.Hence, the Peruvian Indians embrace of Fujimorias a fellow non-white rising up against the Criollos.The fact thatFujimori s immigrant mother does not speak Spanish works in his favorwith the Inca masses, who don t speak Spanish either; Spanish is thelanguage of Vargas Llosa and the Criollo conquerors.Fujimori, by running a non-moneyed, grass-roots campaign, tapped thisfavorable sentiment.Moreover, his campaign slogan: Work, Honesty,Technology, though a bit vague, resonated with the three key precepts ofInca law: don t be lazy, don t steal, don t lie.Fujimori also promised thePeruvians something far more concrete: that he would encouragemassive private Japanese investment.As I write, the race is a toss-up.IfVargas loses, it will be because he deserves it.96A Gold StandardFor Russia?In their eagerness to desocialize in 1989, the Soviets called in Westerneconomists and political scientists trying to imbibe wisdom from thefount of capitalism.In this search for answers, the host of American andEuropean Marxist academics were conspicuous by their absence.Havingsuffered under socialism for generations, the Soviets and East Europeanshave had it up to here with Marxism; they hardly need instruction fromstarry-eyed Western naifs who have never been obliged to live under theirMarxist ideal.One of the most fascinating exchanges with visiting Western firementook place in an interview in Moscow between a representative of theSoviet Gosbank (the approximate equivalent of Russia s Central Bank) 300 Murray N.Rothbard: Making Economic Senseand Wayne Angell, a governor of the Federal Reserve Bank in the U.S.The interview, to be published in the Soviet newspaper Izvestia, wasexcerpted in the Wall Street Journal.The man from Gosbank was astounded to hear Mr.Angell stronglyrecommend an immediate return of Soviet Russia to the gold standard.Itwould, furthermore, not be a phony supply-side gold standard, but agenuine one.As Angell stated, the first thing your government should dois define your monetary unit of account, the ruble, in terms of a fixedweight of gold and make it convertible at that weight to Soviet citizens, aswell as to the rest of the world. Not that the Gosbank man was unfamiliar with the gold standard; it wasjust that he had imbibed conventional Western wisdom that the goldstandard only be restored at some indistinct point in the far future, after allother economic ills had been neatly solved.Why, the Soviet financialexpert asked Angell, should the gold standard be restored first?Wayne Angell proceeded to a cogent explanation of the importance of aprompt return to gold.The ruble, he pointed out, is shot; it has nocredibility anywhere.It has been systematically depreciated, inflated, andgrossly overvalued by the Soviet authorities.Therefore, mark oreven dollar convertibility is not enough for the ruble.To gain credibility,to become a truly hard money, Angell explained, the ruble must becomewhat Angell, with remarkable candor, referred to as honest money
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