Monday, March 9, 2015

Venezuela’s Currency Circus: “Henceforth, $20 bills will be sold here for $1.”

By Francisco Toro and Dorothy Kronick

In a faraway land, an eccentric king nailed an edict to the door of his palace that said: “Henceforth, $20 bills will be sold here for $1.”

Within minutes, his subjects were clamoring for those cut-rate twenties. So the king posted a second edict: “Each $20 bill shall be used only to buy things abroad.” Then a third: “Whatever you buy abroad with your $20 you must sell in our kingdom for $2.”

“This will make me beloved!” he thought. “Foreign goods will be cheap for all.”

But it didn’t work out that way. Soon, the lines for $20 bills were matched by lines at every store that sold foreign goods.

Since nobody saw much point in buying anything abroad to sell for just $2, people mostly pocketed the twenties and the imports never showed up on store shelves. And if any item did hit the shelves, whether it was a $2 box of diapers or a $2 sack of flour, it could be sold for $6 on the black market — so standing in line at the shops became a job.

The king was incensed. A new edict appeared: “Pocketing your twenty and marking up a $2 import are henceforth economic crimes, punishable by imprisonment.”

Riot police officers roamed the queues sniffing out dissent; subjects were recruited as spies. “It must be a conspiracy! A foreign plot to overthrow the monarchy,” raged the king.

If this fable strikes you as far-fetched, spare a thought for the people of Venezuela. For 12 years, their economy has been run pretty much along these lines.

In 2003, a beleaguered President Hugo Chávez imposed currency controls to try to hold down inflation and prevent a speculative run on the Venezuelan bolívar. Over the years that followed, these controls evolved into the byzantine tiered system by which the government’s oil dollars are sold at three different official prices — while hard-currency dollars fetch a fourth, higher price on the black market.

Read the rest here.

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