Hyperinflation in Venezuela

Based on Wikipedia: Hyperinflation in Venezuela

When Money Dies

Imagine walking into a store where nothing has a price tag. Not because the items are priceless, but because prices are rising so fast that by the time you finish shopping, the numbers would already be wrong. This was daily life in Venezuela by late 2017, when shopkeepers simply gave up on labels and told customers the current price when asked.

By 2018, Venezuela's currency had become so worthless that teenagers playing video games from their bedrooms were earning more than doctors and engineers. They weren't playing for fun. They were "gold farming" in games like RuneScape, collecting virtual currency and selling it to players in other countries for a few dollars a day. In a nation where the minimum wage had collapsed to around thirty dollars a month, those few dollars represented real wealth.

This is the story of hyperinflation in Venezuela, one of the most severe currency collapses in modern history. To understand how a nation sitting atop the world's largest proven oil reserves ended up here, we need to go back decades, tracing a path from boom to bust that holds uncomfortable lessons for economies everywhere.

What Hyperinflation Actually Means

Most of us understand regular inflation. Prices go up a few percent each year. Your money buys slightly less than it did before. It's annoying but manageable.

Hyperinflation is something else entirely. Economists typically define it as monthly inflation exceeding fifty percent. That might sound abstract, so let's make it concrete. At fifty percent monthly inflation, something that costs ten dollars today would cost over one hundred twenty-nine dollars a year from now. At the peak of Venezuela's crisis, prices weren't rising by fifty percent per month. They were rising by thousands of percent per month.

The Venezuelan government eventually stopped publishing official inflation statistics. They simply couldn't keep up. When independent economists tried to measure it, they found rates that boggled the mind. By 2018, the International Monetary Fund estimated annual inflation had reached nearly one million percent. Some estimates put it even higher.

What does one million percent inflation feel like? It means your life savings, whatever you've carefully accumulated over decades of work, becomes worthless in a matter of weeks. It means businesses can't plan because they have no idea what anything will cost tomorrow. It means the economy itself begins to break down, not from a lack of resources, but from a lack of trust in the basic tool we use to exchange them.

The Roots of the Crisis

Venezuela's troubles didn't begin with hyperinflation. They began with oil.

When global oil prices collapsed in the nineteen eighties, Venezuela's economy contracted sharply. The country had grown dependent on oil revenue, and when that revenue dried up, everything else started to wobble. Inflation, which measures how quickly prices rise, crept up from the single digits into the teens.

Then came 1989. That year, President Carlos Andrés Pérez cut government spending and opened up Venezuelan markets to foreign competition. These reforms were designed to stabilize the economy, but they came with immediate pain. In the capital city of Caracas, people rioted. Stores were looted. The chaos became known as the Caracazo, and it left deep scars on the national psyche.

The reforms did produce some results. Venezuela's Gross Domestic Product, the total value of everything the country produces, went from shrinking by more than eight percent in 1989 to growing by over nine percent just two years later. But here's the thing about economic statistics: they don't always capture lived experience. Wages stayed low. Unemployment remained high. Many Venezuelans felt that the recovery had passed them by.

Throughout the nineteen nineties, the country lurched from crisis to crisis. Inflation ran between fifty and sixty percent annually, reaching one hundred percent in 1996. The percentage of Venezuelans living in poverty nearly doubled over a decade, from thirty-six percent in 1984 to sixty-six percent by 1995. A banking crisis in 1994 wiped out savings and destroyed trust in financial institutions.

By 1998, the average Venezuelan's purchasing power had collapsed to a third of what it had been in 1978. Despite sitting on an ocean of oil, the country had spent two decades getting poorer.

The Chávez Era

Hugo Chávez won the presidency in 1998 promising to remake Venezuela. A former military officer who had once attempted a coup, Chávez channeled widespread frustration into a political movement that would dominate the country for the next quarter century.

At first, inflation actually improved. It fell from nearly thirty-six percent when Chávez took office to just twelve and a half percent in 2001. This gave the new government breathing room to pursue its ambitious social programs.

But the calm didn't last. By 2003, inflation had climbed back above thirty percent, and the government faced a new problem. A strike in the oil industry, which provided the vast majority of government revenue, was crippling the economy. The Venezuelan bolívar was under pressure, and foreign currency reserves were draining away.

In response, Chávez made a fateful decision. On January twenty-third, 2003, his government suspended foreign exchange trading and created a currency control board called CADIVI. This board would decide who could buy foreign currency and at what price.

Currency controls are a bit like putting a fence around your money. The idea is to prevent capital flight, where people rush to convert their local currency into dollars or euros before it loses value. But such controls come with serious side effects. They create a gap between the official exchange rate, the one the government sets, and the black market rate, the one that actually reflects supply and demand.

In Venezuela, that gap would eventually grow into a chasm.

The Machinery of Collapse

To understand what happened next, we need to talk about how governments create money and why that matters.

When a government spends more than it collects in taxes, it runs what economists call a deficit. There are essentially three ways to finance a deficit. You can borrow money, which means selling bonds that you'll repay with interest later. You can cut spending or raise taxes to close the gap. Or you can print money, creating new currency to cover your bills.

The third option is tempting because it seems painless. No one has to pay higher taxes. No programs get cut. New money just appears.

But there's a catch. Money only has value because people believe it has value. When a government prints too much of it, that belief starts to erode. More money chasing the same amount of goods means prices rise. If the government keeps printing, prices keep rising faster. Eventually, you get hyperinflation.

This is what happened in Venezuela. As oil revenues fell and government spending remained high, the gap was filled by printing bolívares. The money supply, meaning the total amount of currency in circulation, grew at staggering rates. In 2014 alone, it increased by sixty-four percent, three times faster than any other economy Bloomberg News was tracking at the time.

Venezuelans had a dark joke for what was happening to their currency. The official name was the bolívar fuerte, which means "strong bolívar." People started calling it the bolívar muerto, the "dead bolívar."

The Maduro Years

When Nicolás Maduro inherited the presidency after Chávez's death in 2013, the economic situation was already deteriorating. But what followed was a collapse of historic proportions.

In April 2013, the month Maduro took office, annual inflation was about twenty-nine percent. High by most standards, but not catastrophic. Within a year, it had more than doubled to over sixty percent. By 2014, Venezuela had the highest inflation rate in the world.

And then things got worse. Much worse.

In 2015, inflation hit one hundred eighty-one percent. In 2016, it reached eight hundred percent. In 2017, it exceeded four thousand percent. In 2018, some estimates put it above one million percent.

November 2016 marked the official threshold. That month, Venezuela entered technical hyperinflation, becoming the fifty-seventh country ever added to what economists call the Hanke-Krus World Hyperinflation Table. This database, maintained by economist Steve Hanke and his colleagues, catalogs every episode of hyperinflation in recorded history. Venezuela's name now sits alongside Weimar Germany, Zimbabwe, and Hungary's catastrophic 1946 collapse, still the worst ever recorded.

Life During Hyperinflation

Statistics can obscure the human reality of what hyperinflation means. So let's talk about what it actually looked like on the ground.

By late 2017, shopping had become a kind of surreal treasure hunt. Stores that still had goods to sell stopped using price tags altogether. An item might cost one price in the morning and a significantly higher one by afternoon. Customers had to ask the current price for everything, every time.

The minimum wage, which is supposed to guarantee a basic standard of living, became a cruel joke. In 2012, it was worth about three hundred sixty dollars per month. By 2015, at black market exchange rates, it had fallen to around twenty or thirty dollars per month. The government kept announcing increases, raising the minimum wage by thirty percent here, fifteen percent there. But these increases couldn't keep pace with prices that were doubling, tripling, and more.

This is when the video game economy started to make sense. In games like RuneScape, players can accumulate virtual gold through hours of repetitive gameplay. In wealthy countries, some players preferred to pay real money for this virtual currency rather than spend their own time grinding for it. Enterprising Venezuelans realized they could bridge this gap.

The math was brutal but simple. A few hours of gold farming might net two or three dollars. That's far below minimum wage in developed countries, but in Venezuela, where hyperinflation had destroyed the value of the bolívar, those few dollars translated into real purchasing power. Some gold farmers were making more than professionals with university degrees.

The Currency Circus

As the bolívar collapsed, the Venezuelan government repeatedly tried to reset the currency through redenomination. This is a process where a country replaces its existing currency with a new one, typically removing zeros to make the numbers more manageable.

The original bolívar was replaced by the bolívar fuerte in 2008, with each new unit worth one thousand of the old ones. By 2018, the bolívar fuerte was in turn replaced by the bolívar soberano, with each new unit worth one hundred thousand of the previous version. These changes didn't address the underlying problem. They just made the numbers smaller on paper while inflation continued to eat away at whatever purchasing power remained.

The exchange rate tells the story in stark terms. In early 2018, the government finally abandoned its long-protected official rate of ten bolívares fuertes per dollar, a rate that had become absurdly disconnected from reality. The new official rate was set at twenty-five thousand per dollar, a devaluation of ninety-nine point six percent.

But even that wasn't the real rate. On the black market, where supply and demand actually set prices, the bolívar was worth far less. By August 2018, the informal exchange rate had reached over four million bolívares fuertes per dollar. The currency had become, by some measures, the least valuable circulating money in the world.

Who's to Blame?

Maduro's government blamed what it called an "economic war" waged by capitalist speculators and political opponents. According to this narrative, hostile foreign powers and internal enemies were deliberately sabotaging the Venezuelan economy as part of a grand international conspiracy.

Critics pointed to more proximate causes. The dramatic expansion of the money supply was the most obvious culprit. When a government prints currency to cover its deficits, it's essentially taxing everyone who holds that currency by diluting its value. This monetary expansion continued at breakneck pace throughout the crisis.

The currency controls established back in 2003 also played a role. By maintaining an artificially overvalued official exchange rate while inflation spiraled upward, the government created powerful incentives for corruption and capital flight. Anyone who could access dollars at the official rate and sell them on the black market could make an instant fortune. Meanwhile, businesses that actually needed foreign currency to import goods found it increasingly difficult to operate.

Deeper structural issues were also at play. Venezuela had spent decades becoming ever more dependent on oil revenue while allowing other sectors of the economy to wither. When oil prices fell, there was no alternative engine of growth to cushion the blow. Decades of policies that discouraged private investment had left the country without the productive capacity to meet its own needs.

A Comparative Perspective

Venezuela's hyperinflation stands out even among the relatively small club of countries that have experienced such monetary catastrophes.

In the nineteen eighties and nineties, several Latin American countries suffered severe inflation crises. Argentina, Bolivia, Brazil, Nicaragua, and Peru all experienced episodes where prices spiraled out of control. But Venezuela's crisis has proven more severe and more prolonged than any of these.

The comparison to Zimbabwe is instructive. In the late two thousands, Zimbabwe experienced hyperinflation so extreme that the government eventually printed a one hundred trillion dollar note. That episode, while spectacular, was relatively brief. The Zimbabwean government eventually abandoned its currency entirely, allowing the economy to dollarize, meaning people started using U.S. dollars and other stable foreign currencies for everyday transactions.

Venezuela's crisis has dragged on for years, punctuated by periodic government announcements of new currencies, new exchange rates, and new economic plans, none of which have addressed the fundamental imbalance between what the government spends and what it collects.

The Slow Road Back

In 2019, something unexpected happened. The Maduro government began quietly relaxing some of the economic controls that had contributed to the crisis. Some price controls were lifted. The currency control board that had restricted access to foreign exchange for over fifteen years was effectively abandoned.

These changes didn't end the crisis, but they did begin to contain it. Inflation remained extremely high by normal standards, but it was no longer accelerating into the stratosphere.

By December 2021, economists and the Central Bank of Venezuela announced something that would have seemed impossible a few years earlier. Venezuela was on track to exit technical hyperinflation in early 2022, having achieved twelve consecutive months with monthly inflation below fifty percent.

This is worth pausing on. Exiting hyperinflation doesn't mean the economy is fixed. It just means prices are no longer doubling every few weeks. Monthly inflation below fifty percent still means annual inflation of several hundred percent. It means everything is still getting more expensive, just not quite as insanely fast as before.

The consequences of the hyperinflationary years remain inscribed in Venezuelan society. Savings were wiped out. Businesses closed. Millions of people left the country, creating one of the largest refugee crises in Latin American history. Trust in government institutions, already low, was further eroded. The economy contracted by more than half over five years, one of the largest peacetime economic collapses in the region's history.

Lessons and Warnings

Venezuela's hyperinflation carries lessons that extend far beyond South America.

The first is about the nature of money itself. Economists sometimes describe money as having both objective and subjective components. Objectively, a currency should have some firm basis that gives it value, whether that's gold reserves, a healthy economy, or simply prudent management by a trustworthy central bank. Subjectively, people need to believe in that value. They need confidence that the money in their pocket today will still be worth something tomorrow.

Venezuela's hyperinflation destroyed that confidence. Once people started to doubt the bolívar, their actions, rushing to spend money before it lost value, or converting to dollars at any available rate, actually accelerated the collapse. This is the terrifying reflexivity of monetary crises. Belief matters, and once belief erodes, it becomes self-fulfilling.

The second lesson is about the dangers of dependency. Venezuela bet everything on oil. When oil prices were high, this worked splendidly. When they fell, there was nothing to fall back on. A more diversified economy, with manufacturing, services, and agriculture capable of generating their own wealth, would have been far more resilient.

The third lesson is about the risks of government overreach in economic management. Currency controls, price controls, and exchange rate manipulation all have their advocates, and all can serve legitimate purposes in specific circumstances. But they also create distortions. In Venezuela, the gap between official exchange rates and market reality became so vast that it dominated economic decision-making, encouraging corruption while strangling legitimate business.

The final lesson may be the most important. Hyperinflation is not merely an economic phenomenon. It's a social and political one. When money fails, everything built on the assumption of stable money begins to fail too. Contracts become meaningless when the terms can be inflated away. Long-term planning becomes impossible. The implicit social contract between citizens and their government frays as people realize their lifetime savings can evaporate through policy decisions made in distant capitals.

Venezuela is still living with these consequences. The hyperinflation may have technically ended, but its effects will echo for generations. In the ruins of the old economy, something new will eventually emerge. What form it takes will depend on whether the lessons of these terrible years are remembered, or forgotten.