To fight inflation, Brazil has already gone through six currency exchanges; understand

“Instead of surprising the people, we are going to explain what inflation is and how we are going to fight it, step by step”. This is how the former president and former finance minister, Fernando Henrique Cardoso, defined, in an interview with Veja, in 2009, the strategy behind the launch of the new currency, the real, on July 1, 1994.

The currency, which turns 28 this Friday (1st), played a crucial role when it was conceived, that of trying to contain the lack of control over inflation that had been eroding Brazilians’ income since the 70s.

Prior to his arrival, Brazil underwent six banknote exchanges, among various currency reforms.

the six exchanges

Cruise (1970 – 1984)

Until 1970, the currency in force in Brazil was the Cruzeiro Novo, which had been implemented in 1967. At that time, the country was already facing an inflationary process.

The government of Emílio Garrastazu Médici (1969-1974) concluded a monetary reform that had begun in 1967. As of May 15, 1970, the new currency, the Cruzeiro, was put into circulation.

The doctor in Economic History and professor at Insper Vinícius Müller explains that the 1967 policy was part of a package to reorganize the Brazilian economy proposed by the military government.

“Fundamentally, they are dealing with an inflation that was generated in the previous decade, they were suffering from its reflexes”, he said.

The inflationary process inherited by the military government had two main causes. The first of these was the sharp increase in public spending. According to the professor, this carelessness with public accounts occurs between the government of Juscelino Kubitschek and João Goulart.

The second factor was the decrease in Brazilian production capacity. Until then, the country followed a high rhythm of production of goods, but that did not sustain itself during the first half of the 60’s. In this way, there is a drop in the supply of products.

“Our economy was partially closed, a characteristic of the time, not exclusive to Brazil. Therefore, the combination of exaggerated public expenditures with the drop in productivity, caused a shortage of products and with an increase in inflation”, explains Müller.

The new banknote remained in circulation until 1986, when inflation reached high levels for the time, up to 16.2% per month. As a solution, the government of then President José Sarney (1985-1990) conceived one of the plans that would be marked in the memory of Brazilians, the Cruzado Plan.

Crusader (1986 – 1989)

The reasons for the continuation of high inflation rates were the same: a disorganized economy, with exaggerated spending by the federal government – mainly due to the execution of works that demanded high investments -, in addition to the country’s foreign debt that increased exponentially during the military government. .

The goal with the new currency was to perform a three-zero slash to facilitate accounts and transactions. Müller says that the amount of zeros present was harming the reliability of Cruzeiro by the population, a feeling that ends up spreading to the government.

The big problem with the Cruzado Plan, according to the expert, was the abrupt implementation made by Sarney, without clear communication, which resulted in a feeling, on the part of Brazilians, that they would be losing purchasing power with the new currency.

“The most classic example, with the change to Cruzado, was the price tables that were established to prevent product values ​​from rising – price fixing. Sarney realized, in the change of currency, that the feeling for the public was that they had lost money”.

In this way, many merchants and companies began to hide goods and sell them in a kind of “parallel market” to charge a higher price, the so-called “premium”. If consumers were willing to pay more, the merchant made the sale.

The population then begins to demand a salary increase. This pressure will get out of government control until such time as the claim is met. The government in 1986 was very concerned about this issue, as it could generate this credibility crisis and, in addition, it could also impact the elections that took place at the end of that year.

“There was a political interest in holding, albeit artificially, prices so as not to generate greater distrust, dissatisfaction among the population and, therefore, compromise government supporters”, explains Muller.

New Crusader (1989 – 1990)

In 1988, inflation accumulated exponentially, reaching 264.11% in 12 months. In yet another attempt to cut zeros from the currency, the government launches the Cruzado Novo, which lasts only one year.

The plan also did not show results and remained until the election of Fernando Collor de Melo, in 1990. From then on, the then president-elect was already planning the next steps to try to fight the rise in prices.

Cruise (1990 – 1993)

As one of the first acts of his government, Collor carried out the confiscation of the assets of Brazilians, the Plano Brasil Novo, better known as Plano Collor and announced by the then Minister of Finance, Zélia Cardoso de Mello.

The confiscation took place as follows: 80% of all deposits, current accounts or savings accounts exceeding 50,000 new cruzados would be frozen for 18 months.

The economic team imagined that a shock in the money supply, added to the new change in the currency, which undergoes a new change and returns to being called Cruzeiro, would impact an immediate drop in inflation.

At first, there is a drop in inflation, but it is not sustained for more than a month. The plan was implemented in March 1990, when the country registered an inflation of 82.39% in 12 months.

In April, the IPCA dropped to 15.52% and, in May, reached 7.59%. However, the results rose again in the following months, until, in 1993, the monthly balance was already at 38% per month.

Cruzeiro Real (1993 – 1994)

Already in 1993, with the government of Itamar Franco, after Collor’s resignation in the midst of the impeachment process, the IPCA indexes do not give a truce to Brazilians. The accumulated, in 12 months, in 1992 was 278.23%. In this way, the government has carried out the fifth exchange of Brazilian currency since the 1970s.

Without much news, the new currency, Cruzeiro Real, implemented was based on cutting “zeros” in relation to the previous currency, Cruzeiro, so that one cruzeiro real would be worth one thousand cruzeiros.

The new banknote came into circulation in August of that year, at which time the Ministry of Finance was already commanded by former President Fernando Henrique Cardoso, who had assumed the post in May of that year.

For Vinícius Müller, If the creation of the cruzeiro real can be seen, on the one hand, as another attempt at monetary reorganization in the name of fighting inflation, on the other hand, it was important for the creation of the URV (Unit Real de Valor) in 1994. And, therefore, to Real also in 1994.

The expert believes that the change, in principle, was not designed with this objective of facilitating the adoption of the URV, but it was a secondary effect, since, ultimately, the monetary system was updated.

With a short period of existence, the Cruzeiro Real remains in circulation until 1994, when the currency is collected in exchange for new Real standard banknotes.

At that moment, Fernando Henrique had already formed the economic team that would plan the Real Plan. The then minister brought together a group of economists, including Persio Arida, André Lara Resende, Francisco Lopes, Gustavo Franco, Pedro Malan, Edmar Bacha and Winston Fritsch.

Real Plan (1994 – current)

In 1994, the next plan begins to have its implementation phases thought out. The difficulty to fight inflation remained high, as well as the index that, in 1993, reached 375.79% in 12 months.

Still in 1994, the then minister FHC resigns to run for the presidency. As a substitute, the then Minister of the Environment, Rubens Ricupero, assumes the post and becomes the coordinator of the implementation of the Real Plan.

While Sarney and Fernando Collor had tried abrupt actions that anticipated and surprised the Brazilian economy, the team responsible for the Real Plan was concerned with announcing all the actions in advance, explaining and explaining all the steps, from the fiscal adjustments, through the adoption of the Real Unit of Value (URV) until finally the effective exchange of currency in circulation.

The URV was the first step towards putting the Real into circulation, in the gradual way the government had planned. It was nothing more than a scriptural currency for all economic transactions, a way to make people adapt to the new standard that would come to be established.

That is, through it the population could convert contracts to the new unit, for example. Trying out the new currency and observing how it works on a daily basis.

The unit was used until July 1st, when the stabilization plan was concluded and the Real was effectively launched as the new Brazilian currency that became the most enduring monetary standard since the colonial period.

Even with transparent communication, the Real Plan faced disbelief from some sectors of the media and politicians. According to former minister Rubens Ricupero, President Itamar Franco’s confidence in the economic team allowed him greater freedom to achieve the objective.

“He [Itamar] I didn’t believe it would work without price fixing, I had a mania for the Cruzado Plan, for freezing prices, I had to convince him. Although he had a suspicion, he gave us credit so that it was possible to carry out our plan”.

current challenge

Brazil is currently facing a new challenge related to inflation. According to the latest data released by the IBGE (Brazilian Institute of Geography and Statistics), the IPCA (Broad Consumer Price Index) – which measures the country’s official inflation – slowed to 0.47% in May.

However, in the year the indicator accumulates a high of 4.78% and, in the last 12 months, of 11.73%, below the 12.13% observed in the 12 immediately previous months.

Ricupero explains that the country has a new challenge, however, he points out that the factors for the current inflation differ from those that existed in the past.

“Brazil had at least 30 years of persistently high inflation, which threatened to turn into hyperinflation. We need to remember that the present inflation does not only affect Brazil, it is a global phenomenon”.

However, the former minister warns of the persistence of the IPCA increase. According to him, the longer the duration of inflation, the more difficult the challenge of controlling the index becomes.

“It is more difficult to fight because of expectations, because expectations are created that it will remain high, a psychological phenomenon with which the measures have no effect”, says Ricupero.

From now on

Experts say that, although we are facing a new inflationary cycle, there are no prospects for a debate on a change in the monetary standard. Economist and professor at FGV Mario Rubens recalls that there is no scenario for current inflation levels to reach the numbers that were seen in the decades prior to the Real Plan.

Rubens Ricupero also does not see a scenario for such a possibility. For him, we had several changes in the monetary standard, finally, after all the trials and errors, he managed to get right with the real plan. Now the situation is not comparable, it is an inflationary surge that is growing a lot in the world, not just here.

Insper professor Vinícius Müller recalls that inflation itself is also one of the causes for the increase in public spending. He recalls that inflation is increasing, countries’ internal difficulties, a lot of pressure to increase government spending and, therefore, the tendency is for the problem to return, but not to the same extent that we saw in the 1980s.