If you take a Brazilian Real bill, you will notice that it bears a French symbol, Marianne—the effigy of the Republic. Brazilian economists like to joke that after changing currencies five times between 1986 and 1993, the country had run out of founding fathers, writers, artists, and educators to use on the new currency the government decided to create in 1994 to tame inflation. That illustrates just how desperate 1994 Brazil was for some economic stability.

Between 1980 and 1994, hyperinflation haunted Brazil. At the beginning of the 1980s, the rate hovered around 100 percent a year—and while that seems absurd by today’s standards, it was nothing next to what was to come. By 1990, during the transition between Presidents José Sarney and Fernando Collor—the first democratically elected leader since 1960—yearly inflation reached 6,800 percent.

</span></p> <p><span style="font-weight: 400;">During that time, prices were readjusted on a daily basis—sometimes, multiple times a day. It was a common scene in supermarkets for people to outrun employees who were changing the price tags, to get their products before it had become more expensive. That helps explain Brazil&#8217;s culture of buying large loads of groceries for the whole month—if you waited to spend your salary, it wouldn&#8217;t be worth much.</span></p> <p><span style="font-weight: 400;">In 1987, the government declared a moratorium, stopping all debt payments, which only increased the uncertainties around the Brazilian economy. From that point on, numerous attempts of freezing prices or even blocking savings accounts brought some immediate relief, but ultimately failed to correct the issues hampering the economy.&nbsp;</span></p> <p><span style="font-weight: 400;">The successive crises were caused by the government&#8217;s overspending, lax regulation on bank loans, and an economy with a heavy level of indexation. Salaries, taxes, and payments were adjusted according to inflation—which created a snowball effect.</span></p> <h2>Why the Brazilian Real was a different currency</h2> <p><span style="font-weight: 400;">To make the Real work, President Itamar Franco&#8217;s administration tried to work on the causes of the crisis (high public deficit, the indexation of the economy, and a lack of international credibility by the Brazilian economy), rather than on its effects (inflation). The government reduced the public deficit through severe austerity measures and higher taxes, and raised the benchmark interest rate (attracting foreign investors, even if speculative).</span></p> <p><span style="font-weight: 400;">The side effect was a loss in the purchasing power of the minimum wage, which hit a 25-year low when the currency changed.</span></p> <p><span style="font-weight: 400;">Another key point for the success of the new currency was pegging it to the U.S. Dollar. Instead of indexing the currency to inflation, as previous administrations did, the government tied it to the American currency. BRL 1 would be equal to USD 1.</span></p> <p><span style="font-weight: 400;">Rapidly, inflation was cut to much lower rates, and people&#8217;s purchasing power increased—with many middle-class families being able to afford, for the first time, imported goods or international trips.</span></p> <div class="flourish-embed" data-src="visualisation/543439"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p>The currency launched then-Finance Minister Fernando Henrique Cardoso into stardom. He became the <a href="https://www1.folha.uol.com.br/opiniao/2019/07/o-dia-em-que-a-moeda-se-tornou-real.shtml">face</a> of the Real and won two landslide presidential elections off the back of the currency.</p> <p>The importance of the Real cannot be overstated. The currency gave Brazil stability, allowed the country to reduce the poverty rate (from 43 percent in 1993 to 35 percent in 1995), helped curb inequality, and lowered the country&#8217;s exposure to foreign crises.&nbsp;</p> <p>At 25 years old, it is the longest-living currency in Brazilian history. It might not seem like a lot to people from many countries (the British Pound Sterling was created 1,200 years ago), but the Real is a major achievement for Brazil.</p> <h2>The Real&#8217;s worst crisis</h2> <p>The Real would suffer a major hiccup in 1999. During its first 5 years, the Brazilian currency was artificially pegged to the U.S. Dollar. After crises in Asia (1997) and Russia (1998), the government could <a href="https://brazilian.report/society/2019/05/03/brazilian-economy-crises-history/">no longer control the exchange rate</a>, as the country had sold most of its international reserves to tame the exchange rate.</p> <p>The Real lost 80 percent against the dollar, Brazil’s debt-to-GDP ratio soared from 28 to 48 percent in one year, and basic interest rates reached 40 percent.</p> <p>That&#8217;s when Brazil adopted new anchors for its monetary policy: inflation targets, a floating exchange rate, and primary surplus goals. Twenty years later, inflation is controlled—but Brazil is heading to its sixth-straight year of primary deficit.</p> <div class="flourish-embed" data-src="visualisation/512253"></div><script src="https://public.flourish.studio/resources/embed.js"></script> <p><em>Cultural tip: A movie about the adoption of the Real was launched in 2017, drawing mixed reviews. </em><a href="https://www.youtube.com/watch?v=LgPA9jKl9Yw"><em>Watch the trailer</em></a><em>.</em>

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MoneyJul 01, 2019

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BY Gustavo Ribeiro

An award-winning journalist with experience covering Brazilian politics and international affairs. His work has been featured across Brazilian and French media outlets.