All Commentary
Friday, January 1, 1988

Hyperinflation Threatens Brazil

Imagine a place where prices of nearly everything change by the week—and always upward. Coffee up 50 percent in two months, while a McDonald’s hamburger more than doubles. Hotel rooms rise 110 percent in just 30 days. Supermarket employees spend half their time at the shelves—replacing old price stickers with new ones. Restaurant menus wear thin from the frequent erasures of prices penciled in. Interest rates for a one-month bank loan—25 percent—are higher than what Americans pay on their credit cards in a year.

This is Brazil, a South American giant gripped by runaway inflation that threatens to sink both its economy and its fledgling democracy.

For ten days in April 1987, I examined hyperinflation in Brazil’s vast, beautiful, critter-infested steam bath we know as the Amazon region. Far from the country’s monster cities of the south (São Paulo alone boasts a population of nearly 15 million), I talked to dozens of people in three towns: Belém, a port city near the mouth of the Amazon with a population of a million; Santarém, a town of about 100,000 people 300 miles upriver; and Alter do Chao, a village of about 1,000 on the Tapajos River, about 30 miles from where the blue-green Tapajos flows into the muddy Amazon at Santarém.

The Amazon rain forest is an exotic place for any activity, but it can be uncomfortable for someone accustomed to a dry climate. Water thickens the air and drenches the earth in superabundance.

One-fifth of all the fresh water on the planet flows through the mighty Amazon. As it pours into the Atlantic, it drives back the salt water of the ocean for more than 100 miles.

Ocean-going ships can navigate for 2,300 miles up the river’s 4,000-mile length. More than 1,500 species of fish inhabit the Amazon and its 1,000 tributaries, in a basin which drains an incredible 2.5 million square miles of mostly jungle territory.

But water isn’t the only thing of which this nation of 135 million* seems to have more than enough. It’s drowning in paper money, too, which explains why the value of the stuff plummets with each round of price hikes. The administration of President José Sarney, an ill-fated one from the start, is getting most of the blame for it.

*Editor’s note: 207 million as of 2017

In 1985, 21 years of military rule ended with the election of Tancredo Neves to the presidency. Before ever taking office, however, Neves died.

His vice-presidential running mate was Sarney, a poet and politician of little note who suddenly found himself wrestling with the accumulated economic problems the military had willingly deserted. He succeeded in making them worse by boosting public spending and printing more money to help pay for the 50 percent of Brazil’s gross national product that the government was consuming.

By early 1986, inflation in Brazil was running at an annual pace of 400 percent. In February of that year, Sarney startled the nation with a dramatic announcement: To end the inflation, he was freezing wages and prices and reforming the currency. Three zeroes were dropped from the old “cruzeiro” and a new money, the “cruzado,” was introduced.

While the freeze was in effect, the government ballooned the spending of the public sector, fostered a yawning budget deficit, and tripled the money supply.

Sarney “deputized” the nation’s housewives to report on price violators and sent swarms of armed men onto cattle ranches to force owners to sell their beef at fixed prices. Goods vanished from store shelves as black markets flourished. It was like clamping a lid on a boiling kettle and turning up the heat simultaneously.

The whole thing blew up in February 1987, as the president was forced to lift the controls and, in a move that sent shock waves throughout the world’s financial community, suspend interest payments on most of Brazil’s $110 billion external debt.

The economy seems to be careening toward an abyss, with no one sure of what the future will bring. The prestigious financial magazine, The Economist (February 21, 1987) put it this way: “Brazil’s economy is going downhill so fast it may jump the rails.”

Talking to consumers and vendors in Belém’s famous Ver-O-Peso Market, I discovered widespread skepticism about the government’s inflation figures. Rather than the 400 percent officials proclaim, the consensus in the street is that the real rate is much higher.

“The clothes I would like to buy are three times in price what they were last month,” one woman complained bitterly. And like everyone else I spoke with, her wages had not kept pace, in spite of the widespread practice of “indexing” wages to the inflation rate.

“Business is way down,” lamented a seller of hammocks, “and with interest rates at 25 percent per month now, I can’t afford to borrow anymore.” He blamed the collapse of his customers’ purchasing power for the loss of business.

“No one saves and no one plans for anything beyond today,” another shopper told me. “As soon as you earn cruzados, you get rid of them, either for dollars or for something that’s real.”

The inflation seems to have accentuated class divisions. A common complaint is that “the not-so-rich are getting poorer while the rich hold their own or get richer.”

“The rich can find ways to protect themselves, but inflation is doing to the poor and middle class what the piranhas of the Amazon do to a cow in the water,” a vendor of wicker baskets said. Piranhas are those carnivorous fish with teeth like a newly sharpened saw and a disposition to match. Schools of them have been known to clean a live cow to the bone in half an hour.

Labor strife and civil unrest appear to be on the rise as a consequence of the deteriorating economy. Some residents spoke of mutiny on the railroads because of a rail strike. Dock-workers are threatening to shut down Brazil’s port cities. In the banks of São Paulo, an average of 13 assaults per day occur against bank employees. Rumors of a military coup are on the rise throughout the country.

In Santarém, I gathered detailed price information on several dozen items. “What did this sell for one month ago, and what is its price today?” I asked many of the vendors. Here’s a sample of what I found:

“Glymiton,” a popular liquid vitamin supplement: from 24 to 60 cruzados (about 26 cruzados equals $1); a one-kilo roll of twine: from 111 to 390 cruzados; a cup of mineral water: from 2 to 5; a spool of fishing line: from 60 to 90; and one kilo of meat: from 20 to 70.

Businessmen complain of shrunken inventories and shortages because of the evaporation of credit.

“We used to get supplies and pay for them 30 days later,” a hardware store owner told me. “Now,” he said, “everyone wants cash up front.”

“It’s ironic,” a restaurant manager said, “that my suppliers demand immediate payment from me in this worthless paper, only to turn around and get rid of it themselves.”

At the Aparecida Hammock Factory in Santarém, the best hammocks of the region are made. Automation hasn’t come to this place yet. The hammocks are hand-woven on giant wooden looms by craftsmen who work with lightning speed over the intense clacking of fast-moving shuttles. Profits from sales are given to the Catholic Church to support social welfare programs. I asked the manager how inflation has affected the business and heard a familiar story.

“We have been hit hard,” the manager said. “Tourism is down and even local people aren’t buying like they used to. There are needy people who depend upon our success here who will have to do with less this year. It’s sad, but what else can we do?”

When asked where things are going from here, everyone expressed either complete uncertainty or outright pessimism.

“These problems represent the worst crisis in our memory. We have no way of knowing what lies ahead,” a hotel manager said.

In Alter do Chao, several people suggested that the main cause of the inflation was the government’s massive external debt and that the solution was for Brazil to go further than Sarney’s suspension of interest payments and cancel the foreign debt unilaterally and entirely.

Some blamed the United States for “suckering” Brazil into the debt dilemma in the first place, but anti-American sentiment did not seem to be much a part of people’s thinking anywhere I traveled.

One of the few enterprises that the inflation actually may be helping is gold prospecting. In fact, Brazil is in the midst of one of history’s greatest gold rushes.

Nearly half a million “garimpeiros”—individuals working with little more than a pick and shovel or a pan at the riverside—hauled out nearly 80 tons of gold from the Amazon region last year. The Brazilian minimum wage of $70 per month does not affect them, for they earn whatever the gold they find fetches them, and not an insignificant number have made a fortune.

I talked to one of the officials at SUDAM, the government agency that supervises the development of the Amazon area, about the gold discoveries. The richest find, in a place known as the Serra Pelada, “may solve Brazil’s debt problem one day,” he confided. “If the gold doesn’t do that for us, maybe the oil will; we think we are sitting on a vast sea of oil here in the Amazon.”

It’s hard to imagine enough gold or oil to bail Brazil out of its present difficulties in time to prevent upheaval. This is not an economy with a lot of time to work on its troubles. The specter of worsening inflation, depression, and political turmoil clearly stares it in the face.

Sadly, the Brazilian government seems to have learned little from the last two years of chaos. In June 1987, it announced a new program which includes another round of wage and price controls. That same month, the money supply increased 28.8 percent.

This is not the first hyperinflation the world has witnessed. It isn’t the first Brazil has had, either. But seeing it firsthand and sensing the pain and confusion it engenders make one wonder why it has to happen at all. Surely one of the most enduring lessons of economic experience is that drowning a nation in paper money always wrecks the currency and the economy along with it. It’s a lesson Brazil is learning now in a most painful way.

  • Lawrence W. Reed is FEE's President Emeritus, having previously served for nearly 11 years as FEE’s president (2008-2019). He is also FEE's Humphreys Family Senior Fellow and Ron Manners Global Ambassador for Liberty. His Facebook page is here and his personal website is