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Venezuela's Economic Collapse Was Enabled by its Central Bank

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Tags Money and BanksWorld History

01/22/2019

One of the most remarkable aspects of the economic meltdown in Venezuela is just how far the country has fallen in terms of economic prosperity.

After all, Venezuela was the fourth richest economy in the world in the 1950s. The Venezuelan currency, “the bolivar” was one of Latin America’s strongest currencies during Venezuela’s peak from the 1950s to 1970s.

However, the economic meltdown in Venezuela has its origins, in part, in the founding of the Venezuelan central bank in 1939. This was followed by the nationalization of the oil industry in the 1970s by Venezuelan president Carlos Andrés Perez, which was coupled with the central bank’s easy money policies. The final crisis has come with the socialist /communist measures of the past twenty years.

Rising oil prices in the 1970s brought wild speculation in Venezuela. State agencies and private enterprises continuously encouraged and engaged in massive amounts of loans in an unregulated, corrupt banking system , in the naïve belief that an everlasting boom could be sustained. The nations central bank helped fuel the fire.

Oil revenues had reached a peak during Carlos Andres Perez’ presidency, but despite the incredible amount of oil revenues, the national debt reached unprecedented levels. As oil prices eventually collapsed in the 1980s, the bubble burst and Venezuela suffered a banking crisis followed by a deep recession. Government’s use of easy-money policies from the supposedly “independent” central bank was in full swing, and the government used inflationary monetary policy to finance ever higher levels of government spending. This was the beginning of the end.

Eventually, debts began to go bad, and the banking crisis brought with it a currency crisis, as the Venezuelan bolívar suffered its first major devaluation, of nearly 100 percent, on the so called Black Friday of February 18, 1983. The Bolivar has never recovered to its pre-crisis levels and has suffered even larger devaluations since.

When everyone thought that the economic crisis couldn’t get any worse, then Venezuelan presidential candidate Hugo Chávez was able to capitalize on the economic instability plaguing the 90s and win the 1998 presidential elections. His presidency turned into a full-blown socialist/communist regime supporting an agenda of widespread nationalization of private industry. Chávez’s anti-growth policies brought Venezuela to its knees and ultimately destroyed the economy.

But none of this could have been possible without the central bank which enabled the regime to finance its own programs with endless waves of money printing.

This led to price inflation, which the regime than attempted to fight with prince controls. This had had some of the most devastating effects on the Venezuelan economy. According to a Johns Hopkins study by María Belén Wu:

In 2003, Chávez installed price controls for essential consumer products, which increased supply shortages from an average of 5 percent to 22.2 percent in 2013, the last record published by the central bank. Currently, in 2016, the shortage of products in the basic household consumption basket has quadrupled and stands at 41.3 percent.

The exponential increase in Venezuela’s monetary base as well as in official CPI inflation, had devastating effects on the economy and society as a whole. The continuous devaluation of the bolívar occurred with such speed and momentum that in January 2008 the government decided to create a new currency, the bolívar fuerte, by eliminating three zeros from the old currency. Obviously, this did not eliminate the core problem.

The last two decades have been marked by the Venezuelan government nationalization of the banks. As the late Venezuelan president Hugo Chávez nationalized the banks, he added that clients of the banks should not be alarmed: “To those who have their savings in the bank, don’t worry. You will be more than guaranteed in the hands of the Republic. You know the banking sector of Venezuela is one of the most solid in the world.”

According to Steve Hanke and Nicholas Krus in “Inflation by the Decades: 2000s” report, Venezuela stood at number 7 in the world inflation ranking for 2000-2009, with a cumulative inflation rate of 567.7 percent, and this period was only the beginning of the crisis. Hanke calculates the current hyperinflation in Venezuela is running at 48,760 percent at year as of December, 2018.

Today at least 70% of Venezuelans face starvation, food and medicine shortages and no health care. A humanitarian crisis is currently taking place in a country that once had one of the highest standards of living in the world, and this is a tragic example of how a once prosperous country with vast amounts of resources could become a failed state due to vast government mismanagement and corruption through its central banking system and through monetary policy.

Maria Horat is a Venezuelan-American activist for free markets and human rights. She graduated from California State University, Hayward and holds a degree in Business Administration with an option in Finance. She is a real estate broker in Northern California.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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