Hyperinflation and the birth of the real

NPR has a fascinating piece on how the Brazilian real (plural reais) was created in the early nineties to end hyperinflation. In short: it was originally a non-circulating, purely denominational currency meant to stabilize price expectations :
"We called it a Unit of Real Value — URV," Bacha says. "It was virtual; it didn't exist in fact."

People would still have and use the existing currency, the cruzeiro. But everything would be listed in URVs, the fake currency. Their wages would be listed in URVs. Taxes were in URVs. All prices were listed in URVs. And URVs were kept stable — what changed was how many cruzeiros each URV was worth.

Say, for example, that milk costs 1 URV. On a given day, 1 URV might be worth 10 cruzeiros. A month later, milk would still cost 1 URV. But that 1 URV might be worth 20 cruzeiros.

The idea was that people would start thinking in URVs — and stop expecting prices to always go up.

"We didn't understand what it was," says Maria Leopoldina Bierrenbach, a housewife from Sao Paulo. "I used to say it was a fantasy, because it was not real."
Yes, there are other ways of ending hyperinflation, but you have to say this one has its special charm.

1 comment:

  1. Apparently Weimar-era hyperinflation in Germany got so bad that it generated its own psychological condition, 'zero stroke' or 'cipheritis':




    (hat tip goes to David Lee, friend of FE friend and colleague Dan Neilson, http://www.danielneilson.com)