Bolivian Hyperinflation

Page 43

During the 1980s Bolivia experienced an episode of hyperinflation that reached annual rates of 24,000 percent during the peak years of 1984 and 1985. Cups of coffee sold for 12 million pesos. A 1 million peso note that was equivalent to $5,000 in 1982 was worth only 55 cents by 1985. During the period of raging hyperinflation, the Bolivian peso depreciated 40,000 percent, sometimes losing 1 to 2 percent per hour.

Paper pesos were counted in bundles of identical bills, and sometimes pesos were measured by the height of stacks of bills. In some cases, paper pesos were weighed. A university professor received pay in a stack of bills about 19 inches in length. A secretary received a stack of bills from 9 to 10 inches in length.

Despite the shortcuts in counting money, an airline desk clerk would spend 30 minutes counting the 85 million pesos charged for an airline ticket. Small-denomination bills became nearly worthless and were often seen blowing in the wind, piling up in muddy clumps alongside sewage ditches and in bushes on vacant lots.

The Bolivian government had to rely on foreign countries to print its paper pesos on the scale needed to satisfy the hunger of a hyperinflationary economy. Paper pesos measured in thousands of tons were flown in from Germany, Brazil, and Argentina, arriving at the La Paz airport on pallets.

Checking account and credit card transactions lost favor because the clearance process took up valuable time as the inflation clock ticked away. Banks had no money to finance mortgages for households and businesses, which paid for construction on a pay-as-you-build basis.

The United States dollar became the de facto, unofficial standard of value in Bolivia during the hyperinflation. Bolivia’s bustling cocaine trade with the United States supplied the Bolivian economy with dollars that fed a black market in currency. Currency traders walked the streets, offering to buy and sell dollars and pesos. Consumers came to town with dollars, traded the dollars for pesos before entering a store, then made their purchases with the pesos. The shopkeeper owner hardly received the pesos before going out on the street and converting the pesos back into dollars. Legally, transactions had to be conducted in pesos, but no one kept pesos longer than necessary. According to an article in the Wall Street Journal describing the Bolivian hyperinflation,

Civil servants won’t hand out a form without a bribe. Lawyers, accountants, hairdressers, even prostitutes have almost given up working to become money-changers in the streets. “We don’t produce anything. We are all currency speculators,” a heavy equipment dealer in La Paz says. “People don’t know what’s good and bad anymore. We have become an immoral society.”

(Wall Street Journal, 1985)

The blame for the Bolivian inflation has to be put at the feet of government finance. Tax revenues covered only 15 percent of the Bolivian government’s expenditures, and the government’s budget deficit equaled 25 percent of the country’s annual output. As late as 1990 the annual inflation rate was still 7,000 percent, well below the levels of the mid-1980s, but still high. In the 1990s the inflation rate began to subside substantially as the government reduced deficit spending.