Venezuelans Embrace Gold, Crypto, and Dollars as the Bolívar Dies

From Fortune to Famine - a Venezuelan History

The Venezuelan government has driven its currency — the bolívar — six feet underground. In typical fashion, the government and its central bank — Banco Central de Venezuela (BCV) — have exacerbated the inflation problem by repeatedly attempting to fix it with more inflation.

The BCV has stopped reporting inflation numbers, presumably either because they’re embarrassed or they just can’t keep up. In 2019, the annual inflation rate was estimated to be as high as 10,000,000%. Yes, you read that right — 10 million. It is currently estimated by the IMF to be down at an annual rate of about 2,700%, but at this point, the situation is so dire that any estimate is essentially meaningless.

Venezuela’s condition fits the definition of hyperinflation. Its economy has collapsed.

The best way to understand the current state of Venezuela’s economic crisis is by stepping through a timeline of critical events that unfolded in Venezuela’s past. It is a history that led Venezuela from fortune to famine through decades of destructive central planning policies and currency debasement. Let’s first review some history and then we will see how gold, crypto, and US dollars have come to the rescue of the Venezuelan people on the free market.

18th century money

Up until Venezuela’s declaration of independence in 1811, the silver Spanish dollar and the gold escudo were the money used throughout Spanish America. The Spanish dollar was also known as “the piece of eight,” worth eight Spanish reales.

1811 - A new Venezuela experiments with paper

On August 27, 1811, the independence-seeking Estados Unidos de Venezuela (United States of Venezuela) issues its first instance of paper money in the amount of 1 million pesos (with a valuation of 8 reales = 1 peso).

But it was a short life for the paper peso as Venezuela’s first attempt at independence was lost in 1812. After the defeat, Spanish royalist forces gathered up as many paper peso notes as possible and burned them in the city of La Victoria.

1821 - Venezuelan independence

Independence from Spain was finally achieved in 1821 under the leadership of, Simón Bolívar, through the formation of Gran Colombia (a federation consisting of modern-day Venezuela, Colombia, Panama, and Ecuador). The money was based on gold, silver, and copper minted to the old Spanish standards. In 1830, Gran Colombia dissolved and Venezuela separated to become a sovereign state.

Once sovereign and independent, Venezuela flirted with various forms of legal tender for ~50 years in attempts to establish a national mint and settle on a uniform national money.

1872 - Venezolano, a national currency

Finally, in 1872, a single currency based on copper, nickel, silver, and gold coinage was created in the country — it was called, the venezolano.

1879 - The bolívar is established

The venezolano lasted less than a decade. In March of 1879, Venezuela undertook a monetary reform and adopted the bolívar as the official currency, named after the avowed hero of the independence movement — Simón Bolívar. The bolívar replaced the venezolano and other outdated currencies as the single monetary unit, with 5 bolívares = 1 venezolano.

Within ten years, a national mint was finally inaugurated at Caracas. The import of foreign coinage was then prohibited, withdrawn from circulation, and recoined.

The bolívar was considered among the most stable currencies around the world. It’s history is one of initial adherence to gold and silver standards, and then pegged to the US dollar. But things changed for the worse and culminated into a disaster roughly 100 years later in 1983. Don’t worry, we’ll get there. Keep reading to find out.

1930s - The gold standard is abandoned and the bolívar is pegged to the US dollar

Through the 1920s and into the ‘30s, the bolívar was a very strong currency. As the world struggled with the Great Depression, the bolívar appreciated nearly 70 percent against the U.S. dollar, making Venezuelan exports more expensive for foreigners, but increasing the purchasing power of Venezuelan consumers who could suddenly afford to import just about everything.

But a gold standard restrains the government and its central bank from inflating its currency to finance expenditures. A gold standard requires the government to exchange its currency for a certain weight in gold. Thus, the central bank must be prepared to make-good on such an exchange. Otherwise, the government risks losing gold reserves if it inflates its currency beyond the comfort of those that hold it.

On the flip side, this restraint puts a burden on public spending and obligations. So it’s no surprise that governments around the world, including that of Venezuela, favored a move away from the gold standard. Venezuela went off the gold standard in 1930.

But, the currency was then subject to a US dollar exchange standard, so there was still a mechanism for restraint, albeit not as strict as a gold standard. The bolívar exchange rate was fixed in 1934 at a rate of 3.914 bolívares = 1 USD and revalued in 1937 to 3.18 bolívares = 1 USD, a rate which lasted until 1941.

Oil revenue supplied 2/3 of the state’s income and made it possible for the government to expand its role as central provider. But the government’s uncontrolled spending coupled with its heavy reliance on oil revenue as a primary source (which went on to experience volatile price swings throughout the century) was a recipe for disaster.

1939 - The BCV is established

The Banco Central de Venezuela was formed in 1939 as the country’s central bank with a mandate to control the monetary policy of the nation.

1943 - A step toward oil industry nationalization

By 1943, Venezuela had been producing oil for roughly 30 years and was the third-largest oil producer in the world. The US entry into World War II presented the opportunity for Venezuela to satiate the oil demand of the US government. Venezuelan President, Isaías Medina Angarita, seized the opportunity and enacted the Hydrocarbons Law of 1943 as an initial step toward more government control over the industry. Under this law, the government took 50% of oil industry profits through royalties and income taxes. Oil revenue almost quadrupled through the years up to 1958.

1960 - OPEC is formed

As the Middle East grew into the oil market and thus increased overall supply, oil prices began to fall through the 1950s. Although low prices were a benefit to the world in providing affordable oil products, oil-producing governments saw them as a threat to their revenue. So in response, Venezuela, Iran, Saudi Arabia, Iraq, and Kuwait met in September 1960 to cartelize. They formed the Organization of the Petroleum Exporting Countries (OPEC). The main goal of this organization is to work together to fix international oil prices in their interests. Governments hate competition.

1970 - Further tax pressure on the oil industry

The state increased the income tax on the oil sector repeatedly throughout the 1960s until reaching a rate of 67.7 percent in 1970.

1973 - The oil crisis

The Persian Gulf OPEC members decided to raise their prices by 70 percent and to place an embargo on countries friendly to Israel (the United States and the Netherlands). This event became known as the 1973 oil crisis. The US turned to Venezuela, which then experienced a significant increase in oil production profits. With the abundance of new revenue, the Venezuelan government went on a spending spree full of mismanagement and corruption. But the revenue increase was short-lived.

You can never trust cartel members to live up to agreements. OPEC members had been violating the production quotas, and oil prices fell again in the 1980s, pushing Venezuela deeper into debt.

1976 - Nationalization through PDVSA

Amid the oil boom, the Venezuelan government fully nationalized the oil industry, creating state-owned Petroleos de Venezuela, S.A. (PDVSA). Although the PDVSA was now the central planner of the oil industry, they didn’t have the capital or specialized capabilities compared to that of private, foreign oil companies that built up the domestic industry to date. This move of nationalization was a key catalyst in the succeeding reversal of Venezuela’s economic growth to the downside.

1983 - The beginning of the end to the bolívar

Known in Venezuela as Viernes Negro (Black Friday), February 18th, 1983 marked a day on which the bolívar was devalued considerably. The President at the time, Luis Herrera Campins, was attempting to stop the capital flight occurring in the country due to the perception of debt default — a result of unrestrained government spending. Campins established currency controls and the bolívar’s purchasing power dropped ~80% overnight.

1989 - IMF bailout

In 1989, President Perez launched a fiscal austerity package as part of a financial bailout by the International Monetary Fund. The measures provoked deadly riots as the removal of government subsidies added upward pressure to rising prices on an already struggling population.

2002 - A new Hydrocarbon Law

In stark contrast to the government of 1943 that favored investment of the oil industry, the Chavez government was more focused on control. The Hydrocarbon Law of 2002 further discouraged foreign investment in the industry and hampered development of new projects. In late 2002, discontent with Chavez culminated into a general strike that included PDVSA workers. Chávez reacted by firing 19,000 PDVSA employees and replaced them with government loyalists. This eliminated a tremendous amount of experienced personnel from Venezuela's oil industry.

2003 - Currency exchange controls

Exchange controls were again imposed on February 5, 2003, to try and limit capital flight from the country. The bolívar was pegged to the U.S. dollar at an official fixed exchange rate of 1,600 bolívares = 1 USD. But you can’t fool the market. The result was a booming black market for dollars at a real rate of 2,500 bolívares = 1 USD.

2004 - Spending, spending, spending

With elections on the horizon, President Chavez ramps up spending on social outreach programs, known a missions, to provide education, medical services and subsidized food to low-income communities. This only fuels the fire as monetary inflation is used to fund the programs.

2007 - Further nationalization

The Chavez administration increased oil nationalization, but some companies, such as Exxon and ConocoPhillips, refused to accept the new terms. As the government nationalized countless companies during Chavez's 14 years in office, the result was a crippling of domestic production and an increased reliance on imports.

2008 - Redenomination and the creation of the bolívar fuerte

The bolívar lost three zeros in 2008 under the late President Hugo Chávez, with the introduction of the bolívar fuerte. In other words, the government simply took a 1,000 bolívar bill and renamed it as 1 bolívar fuerte. They did this in the name of simplifying financial transactions, but it was only an illusion that obfuscated the reality of runaway inflation. “Fuerte” is Spanish for strong, so clearly this is an oxymoron.

As the bolívar was rapidly losing value in 2019, Venezuelans spontaneously began to adopt the US dollar, Euro, Colombian peso and other foreign currencies to survive. But even getting their hands on foreign currency is a challenge for the people due to the government’s harsh currency exchange laws. Bypassing the official currency exchange platforms — which offer crushingly lower rates compared to the black (free) market — can land you in prison. Venezuelans have to find work-arounds, such as communicating with code words. They have used the code word “lechuga” (Spanish for lettuce) to represent US dollars.

2016 - Exchange rate system revised with another devaluation

The Venezuelan government had a complex, multi-tiered exchange rate system consisting of various acronyms that was seemingly ever-changing. This certainly didn’t help ease the volatility of the currency. In 2016, all previous systems were replaced by a new dual-exchange rate:

  • DIPRO, fixed-rate of 10 bolivars per dollar on “essential” goods as defined by the State (e.g., food, medicine, oil)

  • DICOM, floating-rate available for all “non-essential” goods not subject to DIPRO

The government can tinker with an exchange rate all it wants, but the bitter reality is that the market ain’t dumb. The following chart shows the disparity between the black market rate and the various official exchange rates from 2013 to 2016.

December 2017 - The “Petro”

Venezuelan President, Nicolas Maduro, announced the creation of a state-backed digital currency called the “Petro,” which in theory is backed by the nation’s oil reserves. Maduro’s stated reasoning for the creation of the Petro was to help overcome the US-imposed embargo. But, the government of Venezuela is simply struggling to gain control of their money amid an economic crisis. So in reality, the main reason governments tend to create these Central Bank Digital Currencies (CBDCs) is for the purposes of control. It’s no surprise that the Petro announcement came as Venezuelan’s started turning to Bitcoin to navigate life in a hyperinflationary environment. Governments hate competition after all, which is why they crack-down on crypto-miners, arresting and detaining them for possession of “contraband.

Venezuelans did not fall for the “Petro” gimmick. The experiment was far from successful and the state of the Petro today is unclear. The fact that the underlying philosophy would use oil reserves to back the Petro is the first red flag. If the Petro was truly commodity-backed, this would force a bit of discipline on the Venezuelan government. In the same way the devaluation of the bolívar leads to capital flight, the devaluation of the Petro would lead to oil flight. No one trusts the Venezuelan government with fiscal discipline right now, so naturally the Petro is a bust.

Whether the government manages a physical currency or a digital currency does not address the underlying problem. The problem is the government management — specifically, the devaluation of the currency to finance public expenditures.

2018 - Redenomination (again) and the creation of the bolívar soberano

Venezuela eliminated the DIPRO rate as it struggled to provide US dollars for the system. So they rehashed a previously used acronym and establish a new rate yet again — back to DICOM.

Later in the year, President Nicolás Maduro, eliminated another five zeros from the currency with the creation of the new and “improved” bolívar soberano. The English translation: sovereign bolivar — another oxymoron.

Right off the bat, the soberano notes were quickly becoming worthless as inflation continued to soar. Just over a year after the creation of the currency, the highest denomination bill — 500 bolívares soberanos — was essentially worthless.

2019 - Higher denominations needed

Thus, on June 13, 2019, three new banknotes were issued with higher denominations: the 10,000, 20,000 and 50,000 soberano notes.

March 2021 - Even higher denominations needed

As you suspected, the 2019 updated denominations just couldn’t keep up. The central bank issued yet another series of notes in early 2021 with even higher denominations: 200,000, 500,000 and 1,000,000 bolívares soberanos. The 1-million bolívares bill was unveiled at the official exchange rate of just 52 U.S. cents — essentially worthless right out of the gate.

October 2021

And now, at the start of October of this year, a new currency, known as the digital bolívar with six fewer zeros was unveiled. There’s nothing really digital about it — it’s just another series of bills and coins. It reflects the government’s intention to eventually go digital. The digital bolívar is a million-to-one change from the previous bolívar soberano. Similar to what was done with the bolívar fuerte in 2008, the government simply took their highest denomination bill — a 1 million bolívar soberano— and equated that to a new 1 digital bolívar bill.

Payment systems were having trouble processing transactions with endless zeros. So what was the government’s response? Well, they simply removed the zeros! This might make it easier to use a calculator, but certainly does nothing to address the underlying problem of monetary inflation.

Going truly digital will also fail to tame the hyperinflation. Who would think otherwise? A digital version will just make it even easier for the government to devalue. Instead of having to physically print new bills with more zeros on the paper, the government will simply type in an extra zero here and there as the purchasing power slides. It’s a positive feedback loop — inflating the currency to deal with inflation. It’s the definition of insane.

The new digital bolívar will meet the same fate as its predecessors, if it hasn’t already. Venezuelans aren’t fools:

I only had 3 million bolivars in my account, with that you don’t buy a single (piece of bread),” said Elena Díaz, a 28-year-old cleaning worker standing outside a supermarket.When they remove the six zeros, with those 3 bolivars, I won’t be able to buy anything either.

People see a price and they don’t even think about the digital bolivar. They think dollars,” said Jose Estrada, manager of a butcher shop.


Gold, Crypto, and Foreign Currency Come to the Rescue

The Venezuelan government realizes that it has lost all control of the currency and desperately struggles to keep it relevant. But the market always provides where the government fails. Beyond the failure of the Petro, use of decentralized crypto-money continues to grow in the country. Venezuela ranks #7 in crypto-money usage in the world, with the US following just behind at #8.

Businesses use crypto to quickly swap out bolívares before they lose to inflation. Economist and finance expert, Aaron Olmos, provides some insight from the inside,

“Nobody is going to tell you 'every night when we do the books, we convert bolivars into bitcoin,' but yes, this is happening.”

One of the largest local international airports — Simón Bolívar International Airportis — is prepping for the acceptance of digital money, including Bitcoin. Venezuelans may soon have a chance to escape after all.

In a remote region southeast of Caracas, the use of gold as money has spontaneously emerged. You’ll find prices displayed in grams of gold. Gold flakes peeled from raw nuggets have become the medium of exchange. Three gold flakes roughly equals one-eighth gram (approximately $5 USD). Half of a gram buys you a one-night stay in a local hotel. An eighth of a gram will get you a haircut.

But foreign currencies still dominate as a medium of exchange in Venezuela, with the US dollar as the primary choice. Along the borders of neighboring countries, the neighboring currency is favored: the peso near Colombia and the real near Brazil.


What Now?

What has to happen to resolve this inflation crisis is a realization that the government’s money will be rejected unless it is stabilized. If the Venezuelan government doesn’t reform and eliminate the primary cause of inflation (creating money out of thin air to spend what it doesn’t have), the people will continue to reject the official currency and look to the free market for alternatives.

Unfortunately, the Venezuelan government doesn’t seem to understand the need to detach itself from its assumed central planner/provider role. Any attempts at currency stabilization — short of significant, momentous reduction in government spending — will continue to fail the Venezuelan people. A stable money needs to be based on a trusted, accepted, and scarce commodity. Only time will tell whether a winning currency takes the form of crypto, gold, or something else entirely. But if the government doesn’t wake up to reality, it will quickly become irrelevant to Venezuelans, if not already.

As of 8:57 PM, November 1st, 2021, 1 US dollar = 437,245.99 bolívares and climbing.

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