The Real Deal

There once was an economics student who, while going to school, would sit in the campus bar at Catholic University in Rio, Brazil with his drinking buddies complaining about the hyperinflation plaguing the country, criticizing those in power who were not doing the right things to solve it.  They were sure that if given the chance, they would have the solution that would reverse the problem.

The inflation problems started in the 1950's when the Brazilian government decided to build a new capital, Brazilia.  There was not enough money in the coffers, so they started printing money. By 1990, the pattern of inflation was so entrenched, the people had lost any hope of the government being able to control it.

The rate of inflation was astounding.  Most years it was above 100%, and some of the bad months it reached 80%!  Between March 1989 and March 1990 it climbed to 5,000%.  A reputable journalist named Joelmir Beting took the official reports, did the math, and calculated that between the years of 1964 and 1994, the total amount of inflation reached 1,000,000,000,000,000% (that is one quadrillion percent)!!

President after president would come up with plans, they would fail, and then he would either be voted out or impeached.  And the cycle continued.

People would spend their paycheck as quickly as they could, sometimes running in front of the man who changed the price stickers on the cans of food so they could grab the can with the old price.

Then in 1992 with a new president came a new Financial Minister.  He didn't know anything about economics, so he called Edmar Bacha, the economist who used to complain in the campus bar.  He was invited to come up with a plan to fix the problem.  Bacha and his drinking buddy's had a plan.  They came up with a crazy one that had not been tried before.  The four friends set about explaining their idea.  First, 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.  Every night the Central Bank would print a table of the conversion rate between a cruzeiro and the URV.

The idea was that people would start thinking in URVs — and stop expecting prices to always go up.  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 (pronounced hey-ow).

“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.”  And the idea was you would start thinking in URVs. Because just last week you got paid a thousand URVs. Milk costs one URV. Next month, you’d get a thousand URVs again and milk would still be one URV. The exchange into cruzeiros, what you actually handed the clerk would change. But the price in URVs would not.

So on July 1st, 1994, the Central Bank released the new money. Everyone in Brazil, collectively, as a country, tricked themselves into believing that this fake currency was real. More real than the actual physical bill they were holding in their hands. And that made all the difference. That made it real. For money, it’s crazy but that’s all you need; people to believe in it. Our four heroes literally turned Brazil’s economy in the opposite direction with their plan. Brazil went from being an irrelevant, economic basket-case to one of the most important economies out there. The eighth largest in the world.

Cardoso, the finance minister who hired our four heroes after admitting he knew nothing about economics, was elected president. Twice. And the four economists, despite the fact that most people don’t know them by name, really are seen as heroes. These guys made money worth something.

If you would like to listen to the one hour podcast of this story from This American Life, you can find it here.

Now you have heard something interesting.