In 2006, Venezuela’s president Hugo Chavez declared:
There is a market that can be reactivated through barter and not through currency. Let us break that curse [of capitalism].
Well, twelve years later barter is indeed replacing currency transactions throughout the economy but with hardly the results that the late socialist dictator envisioned. Nor is this an intentional outcome of economic policy. In fact the degeneration of the economy into barter was caused by the socialist government of Chavez’s successor Nicolás Maduro abusing the accursed capitalist tool of currency to transform the economy by printing money to finance its redistributionist programs as oil prices and revenues plunged.
As Ludwig von Mises explained in his pioneering work Theory of Money and Credit, published over 100 years ago, there comes a time during the inflationary process when the general public begins to expect prices to rise continually at rapid and accelerating rates. At this point, the demand to hold money plummets and people scramble frantically to exchange any money they receive for goods as soon as they can. Once such inflationary expectations take hold, the level of prices becomes completely unmoored from the quantity of money in circulation and prices hurtle upwards at an ever-increasing rate that far exceeds the rate of monetary expansion. The result, ironically, is that, while the central bank floods the economy with progressively larger quantities of new money, there develops a shortage of cash in circulation to pay prevailing prices because the printing press can no longer keep up with the inflationary price spiral.
Venezuela entered this stage of the inflationary cycle a few years ago with the inflation rate significantly speeding up since the beginning of 2018. The average annual inflation rate reached 27,000% in May 2018 and spiked to over 46,000% in June 2018, according to economist Steve Hanke and the Venezuelan opposition-led congress , respectively. Annual inflation rates of those magnitudes mean that prices double within a month. It is impossible for the monetary authorities to print and distribute throughout the country every few weeks a quantity of currency equal to the exponentially expanding absolute amount already in circulation. In addition, because people are exchanging the Venezuelan bolivar notes for goods as soon as they can, hand-to-hand turnover of currency speeds up causing the notes to wear out very rapidly. Banknotes in Venezuela need to be replaced every 7 to 9 months compared to the average six-year life expectancy of a U.S. dollar bill. This has exacerbated the shortage of currency by raising the production cost of printing small denomination notes above their face value leading the government to discontinue their issuance. While banks run out of bills on a daily basis and some ATMs need to be replenished every few hours, depositors must wait on line for hours to withdraw $.10 worth of banknotes. Local bodegas have jumped into the breach to sell notes at a premium of 40% to 120% payable in bank transfer or credit card.
Hyperinflation imposes the added costs of transporting and counting mountainous quantities of notes to make even the smallest purchase. In Venezuela shoppers have replaced wallets with backpacks and some merchants regularly weigh rather than count their cash payments . One deli owner uses the same scale to weigh currency that he uses to weigh cheese. This further impedes the use of cash and promotes the demonetization of the economy.
As reports have indicated ( here , here , and here ) , in Venezuela, as in other hyperinflationary episodes, the currency shortage falls hardest on low-income buyers and small merchants and service-sector workers who do not have access to banks or electronic technology to make or receive payments. These groups are turning increasingly to barter, despite its well-known costs and inefficiencies. Direct exchange for food and personal care items are replacing currency transactions in small towns and even in larger cities. For instance, in the coastal Caribbean town of Rio Chico, fishermen seek to trade their catch for flour, rice, and cooking oil. One man drives his car to the lagoon stocked with boxes of oil, pasta, and corn flour—the ingredients for the Venezualan staple of arepas (a type of bread)—to swap for fish and trades for his wares are rapidly executed with the fishermen. But this is the exception. The main problem with barter and the reason why money developed spontaneously on the market is what economists call “the double coincidence of wants.” It costs a great deal of time and effort to find someone who possesses the particular item you want and who wants the good you are offering in exchange. Thus one woman with a cooler full of fish walks the shore of the lagoon searching for people who desire fish and are willing to exchange a variety of food items or medicine for her son’s epilepsy. Some days, a fisherman may spend hours trying unsuccessfully to trade his fish only to wind up bringing his catch home.
In the poorer areas of Caracas and its hillside slums, people in service industries regularly resort to barter. One barber charges 1 million bolivars (equal to about $0.30 at the current black-market exchange rate), but accepts food items as well. He also occasionally accompanies his customers to a local butcher shop where they buy him something of equal market value, presumably with debit or credit cards. The owner of an accounting firm allows his clients to settle their bills in steak, chicken, butter and deodorant. One hairdresser makes arrangements with his customers to pay their monthly bills by permitting him to select items from their stores. A plumber repairs a dishwasher in exchange for a few lbs. of pasta, a bit of beef and 200,000 bolivars (worth about $1.20 at the beginning of 2018).
Resourceful people have begun to develop their own crude media of exchange. A teacher with diabetes and a family member wait in line for hours to purchase highly salable items such as packages of pasta to trade for the insulin that she requires. She is able to exchange 1.5 kilos (about 3.3 lbs.) of pasta for the required dose of medication. With sources of protein in general demand, a professor of architecture at the University of Caracas discovered that that the egg is a “perfect” medium of exchange, while onions or bananas will not do. She paid cash and two eggs for parking and her university department compensated a computer programmer with a carton of eggs.
The currency shortage has added to the tremendous inefficiencies caused by widespread government interventions and pandemic political corruption. It is no surprise that the Venezuelan economy has been shrinking rapidly, with growth rates of -16.50% and -13.20% in the 2016 and 2017, respectively . With the government unlikely to give up its use of the printing press anytime soon, the collapse of the entire monetary system is imminent and the gruesome consequences of Chavez’s vision of a barter economy may come to pass.
This article originally posted here.
