[drcode]

Right, that all sounds very sensible and something virtually every economist would agree with, the only question is if the concept of the URV really made any difference (which was the main claim of the "Planet Money" story).

The fact is that the value of currency is impacted by controlling demand (which the URV was attempting to do with a psychological hack) or by controlling supply (which was being accomplished by the many other very sensible changes)

In the PM story at least, it was unconvincing to me that using a "traditional" currency instead of the URV wouldn't have led to the same result.

[apalmer]

The psychological part of it was really not 100% the cause of its effectiveness a part of the reality of why it worked is the government couldn't print more URV.

This is why it was a great trick, it was a trick to the people but also a trick to the government.

Basically it was a double jedi mind trick.

[drcode]

I like that interpretation, that sounds more plausible to me.

[pyre]

Inflation is just as much about public confidence as it is about the actual amount of money in circulation. That money doesn't have intrinsic value. People give it value by using it.

The claim is that public in the government-issued currency (what ever they renamed it to) was nil. This 'hack' brought back public confidence by saying that it wasn't "really" a currency. Once public confidence built up for the URV, they merged the "not currency" with the real currency, riding the coat tails of that confidence.

[ufo]

The problem with a new traditional currency is that Brazil had already gone through many currency changes[1] during the hyperinflation period so just doing that wouldn't work anymore. Supermarket owners got used to a pattern of bumping prices everyday by 2%, contracts worked so that payments were adjusted by the official inflation rate and so on. By switching to URV, you stop this "inertial inflation": supermarkets didn't have to relabel their prices every day, contracts went back to having fixed values for payments, etc.

Before the introduction of the Real, there were 5 occasions when they introduced a new currency to "cut three zeroes" from the old currency. It really got out of control in the 80s and early nineties and there was even a point where they resorted to just stamping the old bills instead of printing new ones.

A fun side effect of all of this is due to all the currency changes and to the need of printing bank notes with higher and higher numbers, they ran out of famous people to put on the bank notes. By some point they starting using general themes like "Gaucho cowboy" or "Bahia woman" on the bank notes and the current Real has pictures of native animals.

http://www.dplnumismatica.com.br/tabcedcruzreal.html

http://www.dplnumismatica.com.br/tabcedreall.html

[drcode]

I understand the claim, I just find in unconvincing that supermarket owners would keeping raising prices on their goods if your stopped printing more money, once it's clear to everyone the oversupply has stopped.

[ufo]

Hyperinflation leads to some really strange things going on that are a bit hard to imagine when you live in a time with modest inflation. One example that really surprised me when my parents told me is that buying a car was considered an investment. Nowadays this sounds insane because cars are expensive and depreciate in value quickly but back then you needed to spend all your paycheck ASAP before it evaporated and cars are something you can purchase that has high liquidity.

For something that is closer to answer your question, one thing that happened in those times is that interest rates were really high in order to make it possible for people to keep money in the bank instead of having everyone run away with their money and spend it on physical goods. In a way, this kind of forced the government to print money to pay its debts, which perpetuated the oversupply of money. The disastrous Plano Collor tried to solve the problem from this angle by freezing all the money in savings accounts.

In the end the root of the problem is that the Brazilian economy got so dysfunctional that market prices started to be based on the inflation rate instead of it going the other way around. The URV system got rid of this coupling, which is something a regular new currency can't do. By tying the prices to the US dollar you can cause prices to stop changing in a much more direct way than hoping that everyone is going to simultaneously that the money supply is stable and therefore they should stop raising prices.

[felipellrocha]

"once it's clear to everyone the oversupply has stopped." Exactly.