Without A Currency Board, Venezuela's Opposition Will Fail

Juan Guaido, president of the National Assembly who swore himself in as the leader of Venezuela, speaks during a rally to propose amnesty laws for police and military, in the Las Mercedes neighborhood of Caracas, Venezuela, on Saturday, Jan. 26, 2019. Secretary of State Michael Pompeo took the U.S. effort to recognize Guaido as Venezuela's rightful leader to the United Nations, part of a broader campaign to replace President Nicolas Maduro, and said the choice is between freedom and mayhem. Photographer: Carlos Becerra/Bloomberg© 2019 BLOOMBERG FINANCE LP

Venezuela’s currency, the bolivar, has tanked. Just take a look at the ugly chart below.

STEVE H. HANKE

Thanks to the collapse of the Bolivar, Venezuela has earned the dreadful distinction of being the world’s only country that is experiencing hyperinflation. Today, its annual inflation rate is 121,583%/yr (see the accompanying chart). By hyperinflation standards, that’s a relatively mild rate, putting Venezuela at the 23rd rank out of the world’s 58 episodes of hyperinflation. What makes Venezuela’s hyperinflation so brutal is that it has lasted for 27 months. Only four of the 58 episodes recorded in history have lasted longer.

PROF. STEVE H. HANKE

So, it’s clear what Venezuela’s big problem is: hyperinflation. The first order of business for any new government in Venezuela is to slay the hyperinflation dragon. This can be done within 24 hours with the introduction of a currency board.

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A currency board issues notes and coins convertible on demand into a foreign anchor currency at a fixed rate of exchange. As reserves, it holds low-risk, interest-bearing bonds denominated in the anchor currency. The reserve levels (both floors and ceilings) are set by law and are equal to 100%, or slightly more, of its monetary liabilities. So, the domestic currency issued via a currency board is nothing more than a clone of its anchor currency. A currency board generates profits (seigniorage) from the difference between the interest it earns on its reserve assets and the expense of maintaining its liabilities.

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