Venezuela’s official currency, the Bolívar, has been battling hyper-inflation for years. Now political dissidents and the government alike are trying to circumvent the country’s high inflation rates and US sanctions with a cryptocurrency revolution that offers ordinary Venezuelans the prospect of a return to commercial and financial freedom.
Plagued by repeated currency devaluations, rises in the minimum wage and significant increases in public expenditure, Venezuela’s current round of currency instability began in 2016. The country’s challenges are not unique. The Weimar Republic’s currency crisis, for example, led to hyperinflation and helped precipitate Hitler’s rise to power. But the issue is not unique to the modern world.
The Bolívar is an example of a fiat currency. Most modern paper currencies, such as the US dollar, are fiat currencies. Fiat money is government issued currency whose value depends on government decree rather than being backed by the value of a commodity.
As I set out in my book ‘PUGNARE: Economic Success and Failure’, the origins of fiat money date back to ancient Rome where the currency used gold (Aureus), silver (Denarius), and copper or brass coins (Sestertius and Dupondius). The relative value of these coins was set by government decree despite the changing value of gold and silver.
Like the Bolívar and most other modern currencies, the Roman currency was underpinned by a sophisticated banking system through which most currency transactions took place. Whereas today transactions take place electronically, in Roman times these were recorded in writing. Transfers of money could be arranged between different branches thousands of miles apart by letter. Most of their money was, like ours, created by banks out of thin air when they made loans.
A fiat currency system drives efficiency, commerce, and trade. Together with an effective banking system, it allows goods to be bought and sold without the transfer of tonnes of precious metal. The purchase and sale of valuable assets, including landed estates, were facilitated by the transfer system.
Yet the dangers of having a currency exchange system based on the premise of trust and confidence in a central government is that that trust and confidence can be lost. The Romans were no more immune to these risks than Venezuelans are today.
For almost three hundred years the relative value of the Denarius and Aureus remained constant. Over time, however, the gold and silver needed to mint new Roman coins became more and more difficult to source. As the problem became more acute, so too did the temptation to cheat by debasing the coins, particularly the silver Denarius, by increasing the amount of base metal. More coins could be issued for the same amount of silver, leaving more money for the central authorities to spend.
In Venezuela, currency devaluations, successive increases in the minimum wage and soaring public expenditure under both Hugo Chavez and Nicholas Maduro have led to hyperinflation as trust and confidence in the government and the Bolívar has diminished.
The parallels between Ancient Rome and Venezuela’s current plight are striking. Having long enjoyed relative price stability, through a combination of wage increases paid to Roman soldiers, currency debasing and increases in public expenditure, by the end of the second century AD inflation had begun to disrupt the Roman economy.
Just as in Venezuela, the negative consequences of this soaring inflation and dwindling confidence in the fiat currency were significant. From the time of emperor Philip the Arab (AD 244 to AD 249), there was no longer a fixed rate between the Aureus and Denarius. The variable rate of exchange meant everyday commercial activity in urban centres became more difficult. It had the equivalent effect of ten pound coins being worth a ten pound note one day and a five pound note the next. Citizens no longer knew the value of their money. Economic activity declined.
Like in Venezuela, the breakdown in confidence was compounded by civil unrest. In Rome, the civil war in AD 193 led to a reversal of key currency reforms that had consolidated the mints and stabilised the currency by centralising control. Centralised monetary control of the currency was lost and manufacturing and trade went into decline.
In both cases, soaring inflation, dwindling confidence in government and civil unrest precipitated the collapse of the banking system and, ultimately, economic collapse.
In Rome’s case this economic crisis spelled the beginning of a gradual economic decline from which it would never fully recover. In Venezuela’s case, however, the digital revolution and the innovation of cryptocurrencies offers a glimmer of hope for possible economic survival.
In Venezuela, ordinary citizens have been able to circumvent the Bolívar and instead use different cryptocurrencies. These typically rely on decentralised control rather than a central banking system. Its value is ultimately determined by mathematical formula rather than state decree or the value of an underlying commodity. While the decentralisation of currency control is proving a virtue in Venezuela’s case, in Ancient Rome it had the opposite effect and ultimately signalled the final nail in the coffin of the fantastic economic achievement that was Rome at its height.
Nevertheless, in larger Venezuelan cities, such as Caracas, Maracaibo or Valencia street vendors now regularly accept payment with digital coins. Bitcoin, Ether, Dash and Eos are among the most popular. The trend is also spreading to traditional stores. The cryptocurrency exchange Binance has become as well known as the country’s biggest commercial bank, Banco de Venezuela. At present a major limiting factor in the wider adoption of cryptocurrencies is the country’s poor rural internet infrastructure.
Whether cryptocurrencies offer a long-term solution to Venezuela’s economic crisis is uncertain. In ancient Rome and Venezuela, however, what is without doubt is that trust destroyed can take a long time to rebuild. It was not until the end of the 18th century in England that the world again had a currency as trusted as the Roman currency had been, or in such widespread use. How long it will take to rebuild trust in Venezuela is not known. Whether Venezuelans will be as quick to trust a cryptocurrency with their wealth in the longer term remains to be seen.
Dr. George Maher is an academic and author. His latest book is PUGNARE: Economic Success and Failure.