A History of Venezuelan Inflation
Count Venezuela among the victims of hyperinflation.
Economist Steve Hanke has done a meticulous job over the years raising awareness on troubled world currencies, with Venezuela’s Bolivar receiving the bulk of his focus. Hanke’s recent findings place inflation rates at 60,324 percent — rendering the Bolivar practically worthless.
The Bolívar’s collapse is rather tragic, considering the Bolívar was actually one of Latin Americas’ strongest currencies during Venezuela’s peak from the 1950s to 1970s.
Venezuela’s flirtation with socialism is well-documented and is a story of death by one thousand cuts. In the same vein, Venezuela’s current hyperinflationary debacle is also a process decades in the making.
The 1970s: The Consolidation of Venezuelan Central Banking
Ironically, Venezuela was a laggard when it came to the establishment of a central bank. The Venezuelan central bank was founded on the eve of World War II. Nevertheless, Venezuela maintained a gold-backed money throughout most of the 20th century.
Things started to change in the 1970s when the United States went off the gold standard and Venezuela nationalized its oil industry. Carlos Andrés Pérez, the president who presided over Venezuela’s oil nationalization, was a dyed in the wool interventionist who believed that rational state-planning could take Venezuela to new heights.
In addition to oil nationalization, the Venezuelan government politicized its central bank when Pérez’s government bought the central bank’s privately owned stake and placed the Pérez government’s cabinet members on the central bank’s board.
With deficits rising and debt accumulating from the 1970s spending binge, this move proved to be politically smart. Now the Venezuelan government had its way in convincing the supposedly independent central bank to pursue easy money policies.
The Beginning of Inflation in the 1980s
The government expansion of the 1970s wasn’t without its consequences. By the time the 1980s arrived, Venezuela was sinking in debt. Like countless other governments in the 20th century, Venezuela resorted to easy money policies to continue its profligate spending programs.
Venezuela’s easy money escapade soon came back to bite it in the rear. In 1983, the Venezuelan government conducted an unprecedented devaluation of its currency to try to wiggle itself out of its self-inflicted fiscal quagmire.
Colloquially known as Black Friday, the 1983 devaluation was a watershed moment in Venezuelan history. Soon double-digit inflation became the new normal in Venezuela. The last year that Venezuela had inflation in the single digits was in 1983.
Inflation De-Railed Market Reforms in the 1990s
Carlos Andrés Pérez made another presidential appearance in the late 1980s promising to bring back the spending party of the 1970s. But economic realities soon hit him in the face. The Venezuela before him was over-regulated, debt-burned, and uncompetitive at the international level.
Pérez turned to the IMF’s guidance for market reforms and shepherded through several sensible measures such as privatizations, political decentralization in local elections, subsidy cuts, and tariff reductions. Unfortunately, Pérez could not tame inflation throughout his second term.
In 1989, when Venezuela went through the infamous Caracazo, a government crackdown leaving hundreds of people dead, inflation stood at 84 percent. From 1989 to 1993, inflation averaged about 46 percent. Unsurprisingly, people were skeptical of the efficacy of Pérez’s otherwise decent reforms when inflation was constantly eating away at their savings.
Economist Hugo Faria contrasted the Venezuelan reform experience with Argentina and Peru’s relatively successful liberalization transitions in the 1990s:
To secure the people’s approval of new economic policies, it is important that reforms induce rapid, sustained growth. The reelections of Alberto Fujimori in Peru, Carlos Menem in Argentina, and Fernando Cardozo in Brazil were driven by rapid economic growth and reduced rates of inflation.
The key to the latter countries’ successes was their focus on taming inflation first and then pursuing policies that reduced the costs of doing business and spurred strong domestic growth. With a stable economy that enjoys prolonged economic growth, the broader public would be more likely to accept other market reforms like trade liberalization.
Alas, the inflation monster did not go away and was one of the factors that led to Pérez’s undoing. Political tension continued to mount, with two unsuccessful coups launched in 1992. The tipping point came in 1993, when Democratic Action (AD), Pérez’s party, impeached him for embezzlement. By then, any semblance of market liberalization was out of the question.
Subsequent Venezuelan administrations had to deal with Pérez’s inability to tame inflation. Under the presidency of Rafael Caldera, Venezuela’s last democratically-elected president, the average inflation rate from 1994 to 1996 was 74 percent, with a peak of 100 percent in 1996.
Naturally, a freshly pardoned Hugo Chávez was able to exploit Venezuela’s economic instability during the 90s and cruise to victory in the 1998 presidential elections by running as an anti-establishment political candidate.
The Chávez Regime’s Complete Disrespect for Basic Economics
In a cruel twist of fate, Chávez would not only continue the same anti-growth policies of the previous political order but amplify them at catastrophic rates. Massive spending, economic controls, easy money, and constant expropriations had shattered Venezuela’s productive capacities.
In 2014, when Venezuelan protests gained worldwide coverage, inflation was hovering over 60 percent. By 2017, Venezuela was deep in a hyperinflationary territory. According to a report from Reuters, the Venezuelan central bank was increasing the money supply by double digits toward the end of 2017.
Naturally, such increases in the money supply have brought inflation into the aforementioned hyperinflationary rate of 60,324 percent.
Inflation is No Natural Phenomena
In a century of technocratic statism, central banking has become like furniture in the living room, a baseline that people are accustomed to, until its disastrous effects surface. And by then it’s usually too late.
The destructiveness of central banking cannot be viewed as a natural occurrence. It is indeed the manifestation of universalist ideologies that worship at the altar of centralization. Intellectuals can rationalize the Venezuelan crisis away, but the nature of inflation’s causes can never be ignored. Ludwig von Mises set the record straight in his work Economic Policy:
The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague. Inflation is a policy.
Let’s hope government economists get the memo and stop treating the economy like their personal voodoo doll that must be poked and pinned at every turn.