by Daisy Luther, The Organic Prepper:
“The government has just announced freezing all banking deposits and savings above the limit of Cr$ 50.000 for eighteen months. There will be a three-day bank holiday, and further details of the new economic plan will be unveiled soon”.
That was breaking news on radio and TV all over Brazil as people prepared to go to work on the morning of March 16, 1990.
Exactly 35 years ago, just-elected President Fernando Collor de Mello’s economy and finance secretary implemented the infamous “Collor Plan,” which included the controversial confiscation of people’s savings, among other measures.
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The plan aimed to reduce money supply and address inflation, which at a monthly 80 percent rate was quickly entering hyperinflation territory.
Controversial is an euphemism: that was the day money disappeared in my country.
At the stroke of a pen, everybody became equally poor, unable to pay for daily necessities. Well, not really, but it was just as dramatic. And there was nothing anyone could do.
(Editor’s note: Possibilities like this are why I recommend keeping some of your savings in precious metals in your physical possession.)
The context
The 1970s and 1980s were a period of worldwide stagflation, a dreadful combination of low or negative growth, high inflation, and widespread unemployment. In LatAm, the 1980s are called “The Lost Decade.”
Brazil had already undergone numerous stabilization plans, including monetary resets, slashed zeroes, price freezings, and more, to combat the constant loss of purchasing power. Nonetheless, the previous government had brought yearly inflation from 200 to 1,500 percent and a supply shortage to boot.
When President Collor took office, monthly inflation reached 56 percent in January, 73 percent in February, and 84 percent in March.
It’s possible to live with inflation, high inflation even. It sucks, but possible. Hyperinflation, however, is another animal: it quickly destabilizes the whole system, leading to recessions, depressions, unemployment, shortages, widespread disorder, and civil unrest – all impacting the social contract and governability, destroying a nation.
The plan: drain liquidity from the system to force prices down.
Estimates account for the equivalent of $100 billion that was taken from the system overnight, which made up 30% of the GDP at the time.
Freezing people’s savings limits the amount of money circulating, cooling down inflation by aligning the demand for goods and services with low productivity and a shortened supply.
That’s the theory, and things can get out of control with economic instability, loss of confidence, and hyperinflation. In short, it’s a gamble.
The economy is a delicate arrangement highly susceptible to intervention. A lot can go wrong, and usually does, especially in certain moments. And that’s not counting Black Swans.
I’m not saying anything new here, but read the news and look around because it’s happening again today.
The aftermath
Only ninety days later, it was clear that the ambitious stabilization plan had failed: inflation was back. However, unlike in previous plans, this time, a recession had also been installed. The GDP dropped a huge 7.8 percent in the second half of 1990.
The plan affected commerce, companies, businesses, and industries. The money confiscated and locked into the Central Bank would be returned after 18 months in 12 monthly installments, with a 6% yearly correction. Of course, that never happened.
Words cannot describe the carnage: there was panic, anxiety, revolt, and suicides. At the time, my father was starting to recover from Black Monday (as the market crash of October 19, 1987 became known), so he didn’t have much to be confiscated.
It sounds wild to think of that in those terms, especially when so many around were devastated. But you must find positives in everything, or life gets even harder.
A very negative effect was the loss of confidence in the government. That’s always bad for everyone. Fernando Collor de Melo was the first democratically elected president (i.e., by popular voting) after Brazil ended the 1964-1985 military government.
Enacting such a radical and punitive plan only to see it go belly up ninety days later was devastating. His government lost public and political support. I was in college at the time and took part in the huge student marches calling for his resignation.
Finally, he was impeached by Congress in December of 1992 on charges of corruption and other misconduct.
The positives of the 1990 Collor Plan
I’d be remiss to omit the positive aspects of the ill-fated plan. Even though at a high price, it managed to reduce inflation from almost 90% to 10% in the first months, somewhat alleviating the condition of the population during the period.
Parallel to the confiscation, the government launched an administrative reform, reducing the number of secretaries from 23 to 12, among other measures – an always-welcome measure.
President Collor also opened Brazil to the world, dropping the importing restrictions that had kept the country in the dark ages for decades.
But most importantly, the plan’s failure and consequences created the social, political, and administrative conditions that made the 1994 reform plan possible.
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