A Real by Any Other Name

The story of the Real, the currency of Brazil, is a remarkable one. It doesn’t take a Portuguese-English dictionary to figure out that Real means real, as is “This is our real currency…really.” So why would a government go through such pains to insist upon the veracity of their currency? One word. And in Brazil, as much of South America, this is a four-letter word.

Inflation.

In any modern economy, especially in those that are not pegged to a precious metal standard like gold or silver, inflation is a way of life. Even the United States’ Federal Reserve has a policy goal of keeping inflation to 2%-3%. However, inflation in Brazil has been much more of a problem. Through the 1970’s inflation was often around 100%, meaning consumer prices doubled every year. In the 1980’s this trend only worsened with inflation soaring into the 1000% range. Finally, by 1991, inflation had spiked to an outrageous 7000%. By 1993, the government of Brazil had decided to act and by early 1994 had adopted the Plano Real. For all it’s macro-economic ingenuity, the plan was brilliant in its psychological simplicity. The government would create a second currency, the Real, and peg it to the U.S. dollar. They would then index prices, essentially posting prices in both Cruzeiros (the previous currency) and the Real. Brazilians began to notice that one number, the Real, wasn’t changing while the other number, the Cruzeiro was. As the psychology of stability set in, people no longer expected prices to skyrocket every year, and the cycle of inflation was broken.

Now this description is horribly over-simplified and does a dis-service to the true magnitude of the macro-economic achievement. But what I’ve always be fascinated by in this story is the power of positivity. The plan was devised and implemented by a group of people who truly wanted to help their country out of a terrible cycle of inflation and economic ruin. They believed they could do it and, more importantly, they made the country believe that it was possible as well.