Brazilian Hyperinflation

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Between 1989 and 1994 Brazil saw inflation soar into hyperinflation dimensions, registering annual inflation rates from 1,600 to 2,500 percent.

Brazil can boast of a long history with inconvertible paper money. Notes of the Bank of Brazil appeared no later than 1808, and copper displaced gold and silver as the only metallic currency in circulation. In 1833 the government took over the issuance of paper notes, and in 1835 these notes were made legal tender. The currency system was reformed several times, but periods of monetary disorder became part of economic life in Brazil, although they never reached hyperinflation proportions until 1989.

Brazil shared an inflationary trend with the rest of the world during the post–World War II era, but with greater intensity. Between 1948 and 1965 the inflation rate in Brazil averaged 2 percent per month, lifting prices by a factor of 79 over the same time period. Annual inflation rates finished the decade of the 1960s in the 20 percent range. During the decade of the 1970s, when worldwide inflation gathered momentum, Brazil saw annual inflation rates reach 77 percent by 1979.

The dynamics of inflation seem to require that inflation persistently rise above the expected range. Brazilian inflation rose above 110 percent in 1980, and in 1988 entered four-digit territory. The year 1989 saw annual inflation exceed 1,700 percent. Inflation subsided to the three-digit range before soaring to 2,500 percent annually in 1993. The government began anti-inflation policies in earnest, cutting the inflation rate by half in one year. Annual inflation then dropped rapidly, reaching the 4 to 5 percent range in 1997.

Unlike other famous examples of hyperinflation, the blame for Brazilian hyperinflation cannot be pinned on wartime expenditures or war reparations. Brazil did bear a heavy debt burden, and much of the debt was owed to foreigners. Brazil’s central bank was a buyer of last resort of short-term government bonds, which was the immediate cause of the inflation.

Before inflation reached hyperinflation levels, Brazil had adopted a system of indexation, making inflation more bearable to average citizens. Under indexation, government bonds, wages, and other long-term contracts were automatically revised upward to adjust for inflation. The system of indexation contributed additional inertia to inflation, and initially may have slowed the rate of acceleration of inflation.

Taming inflation required deep and substantial economic reforms. Brazil underwent a capitalist revolution, emphasizing discipline in government spending, privatization, trade liberalization, and stringent monetary control. Brazil also phased in a new currency, and when the old currency was extinguished, prices stabilized. The new currency was tied to the United States dollar, and backed by foreign exchange reserves, including dollars.