(Tim Worstall) A useful little rule of thumb is that when a government manages to make money worth nothing then they’ve been doing something wrong. There have been hyperinflations of this kind before: Weimar Germany (no, not what brought Hitler to power, a decade before that), post WW II Hungary and of course modern Zimbabwe. Where it got so bad, at the end, that they couldn’t actually print banknotes of sufficient value to purchase the ink with which to print banknotes. That’s why the Z $ finally died.
Venezuela hasn’t got quite that bad as yet. With the black market rate for the Bolivar Fuerte at around 400 to the US dollar the money is still worth more than the paper it is printed upon. So Reason is using a little bit of rhetorical hyperbole here, rather than strict fact:
Back in February, when the Venezuelan government introduced its official and complicated three-tier exchange rate, 190 bolivars bought you one U.S. dollar on the black market—which is where real people without government connections shop for hard currency in Caracas. Now, just a few months later, the bolivar is worth about half that much. This is a brilliant testimony to the innovative power of the government’s socialist policies: faced with a crushing shortage of toilet paper, the Bolivarian regime has converted its own currency into butt-wipe.
The smallest Venezuelan note is currently the 2 bolivar, this is worth around half of a US cent. Toilet paper does not cost as much as half a US cent per sheet so, hyperbole, not strict fact at play here.
Which brings us to the idea of seigniorage. This is the profit you can make by making money. Take a sheet of that toilet paper, print 2 bolivars on it and if you’re the government at least, then people will give you 2 bolivars for it. In exactly the same way that in the US some paper, some ink and the right incantations (or, more accurately, laws allowing you to do this) turns into a $100 bill. There’s very good profits to be made in doing this. And those profits are called seigniorage. The profit that accrues to the money maker through the act of making money.
As above, it is actually possible for seigniorage to go into reverse: it did in Zimbabwe, the printed notes were worth less than the ink used to print them. Reverse seigniorage is much more common in coins though. It’s happened pretty much everywhere over the past century too, as the long inflation of the 20th century passed by. In the 19th century a gold $1 coin (if such existed) was worth $1 and could be and was spent like $1. The silver dollar as well. The gold sovereign of my native UK had a nominal value of one pound and could be, and was, spent as one pound, the equal value to twenty shillings. As inflation took hold over the decades gold went out of circulation, then silver, then the partially silver coins vanished (usually mid 60s by which that happened in US and UK) and so on. Coins are now cupro-nickel, nickel silver (which doesn’t contain any silver) and the lower values usually steel with a coating of some kind. This is how we’ve kept the currency value of coins ahead of the metals values and thus stopped people hoarding them to melt down.
It doesn’t always work this way: the Russian inflation after the Soviet collapse meant that the old rouble coins were worth more as metal than coinage: I bought a couple of truck loads to melt down myself (well, not melt down myself, but send to a smelter and get paid for the metal values).
And that’s the point we’ve got to in Venezuala. The coins are worth more as scrap metal than they are as coins. Here’s a listing of the weights and compositions of those bolivar fuerte coins. And a little calculation. If it’s 400 bolivars to one US$ then each bolivar is worth 0.25 cents (note, that’s a quarter of a cent, not a quarter of a dollar). And 1 centimos is worth 0.0025 of a cent US.
There’s 1 million grammes to a tonne (one thousand kilos of one thousand grammes each) and the one centimos coin is 1.36 grammes. Thus 735,300 one centimos coins to one tonne. This has a currency value of around $18 (735,300x 0.0025 cents, or x 0.000025 dollars). This isn’t quite right because there’s a copper coating on the steel blanks and dependent upon the thickness of that you might get a higher price (copper is worth more than steel) or a lower one (copper is something you don’t want in steel scrap) but the steel scrap price is around $100 a tonne at the moment. So, turning the money into scrap metal makes a profit: or, the other way around, turning metal into coins loses money for the Venezuelan government. That’s our reverse seigniorage.
The 50 centimos coin looks safe for the moment, its weight value being above the scrap value, but the bolivar coin looks like a very tempting indeed profit opportunity. I’m simplifying a bit, I’m not differentiating the bimetallic nature of the coin (a cupro nickel heart with a brass circlet, just treating it all as 70/30 cupro nickel) but this is still indicative. The scrap value of such cupro nickel is around $3.50 a lb, or some $7,700 a tonne. The one bolivar coin is 8 grammes, meaning 125,000 to a tonne. And the money value of one bolivar is 0.25 of a US cent. So, the value of one tonne of bolivar coins as money is 125,000 x 0.25 US cents or $312 dollars. The scrap value (roughly, recall) of those same coins is some $7,700.
A country really has come to something when robbing banks isn’t the way to make money. Instead, go and make change at the bank is. Swap paper money for metal money and make a 2,000 percent profit by melting it down.
There’s something called Gresham’s law, bad money drives out good. And my prediction here would be that there’s going to be a terrible shortage of bolivar coins real soon now in Venezuela, if there isn’t already. Because people aren’t dumb, if this hasn’t been worked out already locally then it soon will be. And that good money, the stuff worth more as metal than as money, will disappear into the furnaces and the bad money, the paper and ink, will replace it.
Public policy comes in two flavours here. The first being that obviously the Venezuelan government should stop making at least the bolivar coins, if they haven’t already. Whether they have or not would be a very interesting test of the basic competence of that government. Turning $7,000 worth of metal into $300 worth of coins just doesn’t look like something sensible people would do. So, if they are doing it then we’ve a guide to their good sense: if they’ve already stopped then a guide to the fact that at least someone inside that structure has some good sense.
The second is that when this sort of situation exists we can be very certain that there’s been some appalling public policy in the recent past. Because recall what actually happens here. You can walk into a bank in Venezuela with $300 worth of banknotes and someone will give you $7,000 worth of metal. Assuming they will make change for you, of course. And who would rob banks when this is true, when such profits are available entirely legally?
Another way of putting this is that the Venezuelan government is managing to subtract value from copper and nickel by turning it into money. That doesn’t bode well for their other public policies, does it?