Currency Resets

"Mr. Chávez said the authorities would remove three zeroes from the denomination of the currency, the bolívar. Then he said the new bolívar, worth 1,000 old bolívars, would be renamed the 'bolívar fuerte,' or strong bolívar." The Times seems to be portraying this as some kind of wacky scheme, but I think it's reasonably common. France sliced some zeros off the franc in 1960 and this had been done in Russia shortly before I arrived there in 1998. It's a perfectly reasonable thing for a country with a big bout of inflation in its past to do as part of setting a new beginning.

The issue, of course, is that you also do need to change the actual policies that led to the inflation, or else rejiggering the values won't do anything.

Comments

Fair enough, but Chavez's renaming of the bolivar to the 'bolivar fuerte' is the kind of unadulterated propaganda that one can only shake his or her head at. Just when you think Chavez can't possibly get any more ridiculous with his rhetoric, he does in fact get more ridiculous with his rhetoric. Renaming the franc to the 'new franc' is slightly understandable and tolerable, but naming your currency 'strong' (when it's not) is more than people should be able to bear. And yet they do.

Posted by James Diggs | March 18, 2007 9:50 AM

"The decisions to rename the currency and reintroduce the unusual coin, known here as the locha, a term thought to derive from an anachronistic practice of dividing monetary units into eighths, have dumbfounded many Venezuelans."

As opposed to America's non-anachronistic practice of dividing monetary units into quarters? Or charging for gasoline by the tenth-of-a-cent?

Posted by Matt G. | March 18, 2007 10:04 AM

Italy was noted for not re-valuing the lira, so that when the Euro took over the lira was running about 2000 to the USD.

Posted by Thlayli | March 18, 2007 10:24 AM

"The issue, of course, is that you also do need to change the actual policies that led to the inflation, or else rejiggering the values won't do anything."

You know that, I know that, and most readers of this blog know that, but does Chavez know that?

If I were a business, these are the sort of things that would make me hesitant to invest in Venezuela.

Posted by golddog | March 18, 2007 10:25 AM

As opposed to America's non-anachronistic practice of dividing monetary units into quarters? Or charging for gasoline by the tenth-of-a-cent?

There's a difference between maintaining an anachronistic practice and actually reintroducing one.

Posted by Matthew Yglesias | March 18, 2007 10:49 AM

Mexico did it too, in '95 or '96.

Posted by Matt (not the famous one) | March 18, 2007 11:21 AM

Also, Romania dropped four zeros off of its currency, the leu, a couple years ago. The unrecognized republic of Transnistria in eastern Moldova lopped six zeros off of the Transnistrian Ruble a few years before that.

Posted by oljb | March 18, 2007 12:01 PM

The only retrospective limit on nations revaluing their currency is the actual emergence of nations. Queen Boadica, in the mists of Celtic Briton, called in and reminted the currency, and she was hardly the first.

There's more than one reason for doing this. Another reason, beyond dealing with inflation, is to force hoarders out of the closet. Of course, in ye olden days, coins were devalued by clipping, and who knows, the way things are going, it may become too expensive for the US government to keep minting pennies.

Rightwingers, of course, will clasp to their bosoms this simple mantra- "Trillions to attack foreign countries, not one penny for groceries for the poor"- and lash themselves into a frenzy about the "unsound" economics of Venezuela.

Because, as we all know, it's not like the dollar spent on Halliburton will end up feathering the nest of some fly-by-night war contractor who ends up perched in Dubai.

Most frequent cause, historically speaking, of reminting currency: bankruptcy caused by ill-advised foreign war.

Posted by serial catowner | March 18, 2007 12:28 PM

"Fair enough, but Chavez's renaming of the bolivar to the 'bolivar fuerte' is the kind of unadulterated propaganda that one can only shake his or her head at."

Ummm... well isn't shaping perception important in stopping inflation cycles? Perception that a currency will be roughly worth its current value in a year or so is what causes unions to not demand excessive wage increases which cause further inflation. Cutting off zeros can be incredibly effective in causing a general shift in perception... as long as the cutting of zeros has been proceeded by changes in actual policy.

And as far as the actual policies... Current account balance is what would cause actual real changes in currency values. I'd bet you that the current account of venezuela is in much stronger shape than the US, since ours has been steadily eroding for a while and theirs has been steadily improving. I think that the nationalization of more industries in Venezuela could hurt this, of course. But that has nothing to do with central banking policy.

I also love americans lecturing others about central banking policy. Our dollar is being propped up by our soon-to-be Chinese overlords, who lend to us knowing they are losing money so that their economy can continue to grow at unprecedented rates. The Chinese had created a de facto currency area between the US and China by buying so many of our bonds and pegging their currency to the dollar. This will change very soon (some of it already has - they have switched from a dollar peg and announced they will not buy so many treasuries). Even with this crazy lending, the dollar has lost 1/3 its value vis a vis the Euro and the pound in 5 years. I know when I go to europe today I sure feel poorer. The only time i feel rich is when I go to Walmart and buy chinese stuff.

Posted by tomboy | March 18, 2007 12:37 PM

Thank you. Now I know why I see subtitles on French movies from the early sixties saying "ten francs" when I can hear perfectly well that they're saying "mille."

Posted by Matthew B. | March 18, 2007 1:21 PM

Turkey did this as well a couple years back, with the added fun that it made its new currency worth one million of its old one.

Posted by right | March 18, 2007 1:23 PM

Those accustomed to enjoying the strong dollar criticize the bolivar fuerte. How ironic!

Also, people need to realize that by early last year Chavez had reduced Venezuela's cronic inflation to the lowest level in 18 years. Since then it has crept up, in large measure due to the country's extremely rapid economic growth, the fastest in Latin America.

America's chattering classes love to criticize Chavez, when in fact Venezuela's economic and social progress makes America look sick by comparison.

Check the facts!

Posted by JohnH | March 18, 2007 1:38 PM

"America's chattering classes love to criticize Chavez, when in fact Venezuela's economic and social progress makes America look sick by comparison."

It is possible to have a nuanced view of a person. One can praise the "economic and social progress" in Venezuela while still criticizing Chavez's authoritarian tendencies.

Whether on the left or the right, we should all have a strong aversion to concentrated power in one person.

Posted by golddog | March 18, 2007 1:53 PM

Brazil did this multiple times over the 80s/90s. If I recall correctly, they removed something like 9 zeros cumulatively from what is now just the real.

Cosmetic currency changes do have an effect on inflation expectations. In the short term they can break an inflationary cycle that hasn't progressed beyond certain equilibrium breakpoints. See this paper by Sargent, Williams and Zha:
http://www.atl-res.com/~zha/WorkingPapers/swz_final2d.pdf

for an interesting hypothesis into the exact effects.

dsmint

Posted by dsmint/ex | March 18, 2007 1:57 PM

Strong Bolivar? How foolish! If only Chavez was as smart as us Americans with our Patroit Act!

Posted by Rob | March 18, 2007 4:06 PM

All of this criticism of Chavez's "authoritarian" tendencies would be a lot more convincing if our electoral process was as believable as the Venezuelan elections.

Ths simple fact is that 60-70% of the American people want marijuana legalized, support a woman's right to an abortion, want universal healthcare, want us out of Iraq, think we depend too much on foreign oil, and think Social Security is just fine the way it is.

If our elections reflected what the polls continually tell us about the American people, the people who were elected would be getting the same 60% that Chavez gets in elections, and the ruling party that resulted would be just as capable of doing what people want.

The only people who think this would be dangerously "authoritarian" are the upper classes here who are accustomed to being the authoritarians in charge. That their followers are not really disturbed by authoritarianism is illustrated by who they choose to follow.

As for Chavez "wrecking" the Venezuelan economy by nationalization, a lot of what's being nationalized is farmland that wasn't used, and factories that were sitting idle. As JohnH said, check the facts.

Posted by serial catowner | March 18, 2007 5:17 PM

The mother of all such revaluations was the Weimar Republic's, when it issued "rentenmarks" to replace the inflation-obliterated older currency. The exchange was calculated at a rate of 4.2 trillion (not a typo; imagine the italics I want to add here) to one.

Posted by Tom Levenson | March 18, 2007 5:46 PM

The Israeli currency used to be called the lira in Hebrew (for some reason it was known as the pound in English). It was revalued and renamed the shekel, which was a word with biblical roots. Replacing a foreign loan-word with a word implying a continuity of biblical and modern Israel may not be as obvious as the name bolivar fuerte, but it stems from the same impulse.

Posted by bloix | March 18, 2007 8:59 PM

Instead of worrying about Chavez, why don't you smart liberals do something about the weak dollar. 'Trip to Europe' time is fast approaching and the Euro is at $1.33. Unless you do something quick, I may be forced to holiday in Thailand.

Posted by rumpus | March 18, 2007 11:45 PM

Strong Bolivar? How foolish! If only Chavez was as smart as us Americans with our Patroit Act!

We have a winner. If this "propaganda" is the worst of Chavez's authoritarian tendencies, then the world could do with more dictators like these...

Posted by tps12 | March 19, 2007 11:23 AM

"The decisions to rename the currency and reintroduce the unusual coin, known here as the locha, a term thought to derive from an anachronistic practice of dividing monetary units into eighths, have dumbfounded many Venezuelans."

Outstanding. He's reintroducing pieces of eight!

He missed a trick not renaming the currency the "bolivarrr", in that case.

Posted by ajay | March 19, 2007 12:03 PM

Wheee, the commentariat here apparently has multiple people that believe that Venzuela is doing better than the US from an economic view and an electoral view. Brilliant!

Now, it is possible that Chavez will be able to pull off his anti-inflation game by setting prices (which apparently he has done in some areas already upon pain of criminal enforcement). That is going to lead to everyone's favorite direct effect of price controls. Shortages! I'm sure we will then be visited by left-wing commenters suggesting that the people didn't really need that stuff anyway.

Posted by Sebastian Holsclaw | March 19, 2007 2:02 PM

Well, Sebastian, it's pretty well incontrovertible that Venezuela a) has better economic growth than the US and b) has a president who got elected in a free and fair election, unlike the US.

Posted by ajay | March 19, 2007 3:29 PM

Italy was noted for not re-valuing the lira, so that when the Euro took over the lira was running about 2000 to the USD.

As a consequence Italy did not have coins. And when Italy switched to the Euro they all needed new wallets. Or so I was told.

Posted by jasper emmering | March 19, 2007 7:59 PM

Amazingly, at one point early in the Reagan Administration, William Safire wrote a column calling for slicing a zero off of U.S. prices--revaluing the dime as a penny, the dollar at 10 cents, etc.

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Posted by hosting | June 8, 2007 9:35 PM

"Ummm... well isn't shaping perception important in stopping inflation cycles?"

No, not particularly; Inflation is primarily driven by an increase in the ratio of currency to economic activity, usually as a result of governments monetizing debt rather than financing their activities by borrowing or taxing. Perception is an effect of inflation, not a cause of it.

Naturally, governments are not particularly eager to admit that THEY are responsible for inflation. Hence the effort to blame the citizenry for allowing their perceptions to accurately reflect the government's irresponsible actions.

Posted by Brett Bellmore | June 8, 2007 9:54 PM