How did Brazil’s Plano Real use the URV and the real to stabilize the economy and cut back on inflation?

582 views
0 Comments

I get the basics of inflation and interest rates, but I’m having trouble understanding the concept behind the URV.

In: Economics

1 Answer

Anonymous 0 Comments

I’m not a scholar of Brazilian economic history, but the basic idea is that Brazil had been hounded for a while by hyperinflation. That’s when prices change so quickly it starts to affect everyday life. People are constantly renegotiating their salaries. You can’t rely on the price of milk to stay the same week-to-week. Stuff like that. Eventually it got to a point where hyperinflation was just part of life and people always expected prices to change wildly.

Eventually, the Brazilian government got a bright idea and introduced the “Unit of Real Value” or URV. This was a stable measure of value that was able to stay stable because its relationship to the old currency (cruzeiros) was constantly changing. Instead of having milk cost 10 cruzeiros one week and 20 cruzeiros the next, it always cost 1 URV, and 1 URV changed from 10 cruzeiros to 20.

The old currency was still around, but they encouraged people to think in terms of URVs. You would just write a contract with your boss that said “Pay me 20 URVs a week,” and they could look up how many cruzeiros that was every payday and give you that amount. Then you would be assured of having enough cruzeiros to buy your groceries, which were also marked in URVs. Eventually, the scheme worked so well that Brazil decided to formalize it by exchanging the old currency for a new one – the real – pegged to URVs.

Mind you, this wasn’t a completely painless process. The hybrid cruzeiro-URV system would still have been a pain. If you don’t spend your paycheck the day you get it, its value still decreases rapidly. All that inflation destroyed savings in general. However, the URV system demonstrated to people that the underlying value of things was generally stable and that the government understood that (despite their having selfish reasons to inflate away government spending). This went a long way towards reestablishing trust in the system and legitimizing the real when it was released.