Apropos my previous posting some economists, however, can be very creative.
Keith
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From NPR.org, 4 October
HOW FAKE MONEY SAVED BRAZIL
Chana Joffe-Walt
This is a story about how an economist and his buddies tricked the people
of Brazil into saving the country from rampant inflation. They had a crazy,
unlikely plan, and it worked.
Twenty years ago, Brazil's inflation rate hit 80 percent per month. At that
rate, if eggs cost $1 one day, they'll cost $2 a month later. If it keeps
up for a year, they'll cost $1,000.
In practice, this meant stores had to change their prices every day. The
guy in the grocery store would walk the aisles putting new price stickers
on the food. Shoppers would run ahead of him, so they could buy their food
at the previous days price.
The problem went back to the 1950s, when the government printed money to
build a new capital in Brasilia. By the 1980s, the inflation pattern was
in place.
It went something like this:
1. New President comes in with a new plan.
2. President freezes prices and/or bank accounts.
3. President fails.
4. President gets voted out or impeached.
5. Repeat.
The plans succeeded at only one thing: Convincing every Brazilian the
government was helpless to control inflation.
There was one more option that no one knew about. It was dreamed up by
four guys at the Catholic University in Rio. The only reason they enter the
picture now -- or ever -- is because in 1992, there happened to be a new
finance minister who knew nothing about economics. So the minister called
Edmar Bacha, the economist who is the hero of our story.
"He said, 'Well, I've just been named the finance minister. You know I
don't know economics, so please come to meet me in Brasilia tomorrow,' "
Bacha recalls. "I was terrified."
Bacha had been waiting for decades for this call.
He and three friends had been studying Brazilian inflation since they were
graduate students -- four guys at the campus bar complaining to each other
about how no one else knew how to fix this. And now they were being told
"Fine, do it your way."
Bacha was invited to meet the president.
"I asked for an autograph for my kids," Bacha says. So the president wrote
Bacha's kids a note that said, "Please tell your father to work fast for
the benefit of the country."
The four friends set about explaining their idea. You have to slow down
the creation of money, they explained. But, just as important, you have to
stabilize people's faith in money itself. People have to be tricked into
thinking money will hold its value.
The four economists wanted to create a new currency that was stable,
dependable and trustworthy. The only catch: This currency would not be
real. No coins, no bills. It was fake.
"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."
Still, people used URVs. And after a few months, they began to see that
prices in URVs were stable. Once that happened, Bacha and his buddies could
declare that the virtual currency would become the country's actual
currency. It would be called the real.
"Everyone is going to receive from now on their wages, and pay for all the
prices, in the new currency, which is the real," Bacha says. "That is the
trick."
The day they launched the real, Bacha says, a journalist friend asked him,
"Professor, do you swear that inflation will end tomorrow?"
"Yes, I swear." Bacha said.
And, basically, inflation did end, and the country's economy turned around.
In the years that followed, Brazil became a major exporter, and 20 million
people rose out of poverty.
"We were in awe," Bierrenbach says. "Everybody was very happy."
Keith Hudson, Saltford, England
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