This month, Venezuela’s central bank will be lopping off zeroes from its currency — and not for the first time. When the change takes effect later this year, everything that used to cost 1 million Bolivars (Venezuela’s currency) will cost 1 Bolivar, and a worker earning a 100 million Bolivar monthly wage will earn 100 Bolivars. It’s the latest in a series of naked attempts by the Venezuelan socialist regime to masquerade the consequences of hyperinflation.
Venezuelans aren’t buying it.
In the past few years, Venezuelans have gradually ditched their government’s currency in favor of the U.S. dollar. Between mobile payment apps and pre-existing U.S. dollars that people had saved in cash over the last several decades, Venezuelans are making most of their daily payments in the greenback. This de facto dollarization process has helped many stay afloat, but it has also resulted in an even more stratified Venezuelan society: There are those who have dollars in cash or U.S. bank accounts and those who are doomed to use Bolivars and suffer the consequences of hyperinflation.
The good news is that the U.S. government can help ordinary Venezuelans with a few simple regulatory changes.
One of us has firsthand experience with the Bolivar. As a kid growing up in socialist Venezuela, Daniel watched prices for empanadas and tequeños — traditional Venezuelan staples — increase unabated. In elementary school, he remembers paying a mere 5 Bolivars for a ground-beef empanada, then 10, 50, 100, 1,000, and ultimately many thousands, until the regime slashed several zeroes off the currency to obfuscate the skyrocketing cost of living. By the time Daniel was a high-school senior, he couldn’t fit enough cash in his wallet to buy a single empanada.
You’d think, why not just use a debit or credit card, right? For one, a large portion of Venezuelans don’t have access to banking services. But even for those who do, including Daniel and his parents when they lived there, credit-card limits are so low as to render them useless. The socialist regime caps interest rates below inflation, so banks lose money by lending. Consequently, credit-card limits are the equivalent of a couple of dollars per month.
Hyperinflation takes place when the money supply grows at a significantly faster rate than economic output, and inflation expectations spiral out of control. In Venezuela’s case, it has occurred as a result of the government printing money to perpetuate its out-of-control spending. But printing money carries physical as well as inflationary costs. Venezuela doesn’t actually print its own bills; they are shipped from neighboring Brazil and paid for in U.S. dollars. In order to cut costs, Venezuela’s socialist regime now expands the money supply almost exclusively digitally.
This practice has landed Venezuela in the paradoxical position of having so large a money supply that prices increase rapidly but so little cash that people don’t have currency to pay their bills.
The silver lining of this crisis is that hyperinflation and the cash shortage precipitated a spontaneous dollarization of the economy. People who had cash saved in U.S. dollars started using it as means of payment. Businesses, too, started using it to pay their workers. Venezuela, once a rich country and now one with millions of citizens abroad, has millions of people with access to foreign bank accounts, especially in the United States, Latin America, and Europe. These individuals make use of mobile payment apps such as PayPal and Zelle. Venezuelans use cryptocurrencies as well, but given their volatility, they prefer the U.S. dollar.
But Venezuela has a shortage not only of cash Bolivars but of cash dollars, too. Most Venezuelans don’t have foreign bank accounts, and very little U.S. currency enters the country. There are over 5 million displaced Venezuelans abroad sending billions in remittances to their families in Venezuela, but they can use only online methods. If they tried sending cash by mail, it could get stolen or lost by the regime.
This is where America can help. While we can’t drop helicopter loads of cash, as interesting an economic experiment as that may be, the U.S. Treasury can allow Venezuelans to apply for an Individual Taxpayer Identification Number (ITIN) from abroad and then issue regulations to allow them to open U.S. bank accounts remotely. This would allow any Venezuelan with a smartphone or computer to use mobile payments.
Most banks require an ITIN or a Social Security number to open a bank account. Some allow foreigners with a valid passport to open an account in person, but few Venezuelans can travel abroad to do so. When processing ITIN applications, the Treasury Department could vet applicants to make sure that sanctioned regime members do not avail themselves of the program.
This simple change wouldn’t just help lift Venezuelans out of poverty by letting them run businesses smoothly and escape the hyperinflation caused by their oppressive regime, it would further entrench the U.S. dollar’s reserve-currency status, which has historically allowed the United States to borrow at lower interest rates than other countries. It would set the precedent that Washington will step in to facilitate the use of its currency around the world, and it would discourage oppressive governments from raising revenue through excessive inflation.
Venezuela’s dollarization presents a historic opportunity for the United States. The Biden administration would be smart to enact this simple regulatory change that can rescue Venezuelans from hyperinflation, and in the process strengthen the place of the U.S. dollar as the world’s dominant reserve currency to the benefit of Americans and Venezuelans alike.
Daniel Di Martino is a Venezuelan Ph.D. in Economics student at Columbia University, a Young Voices Senior Contributor, and conservative speaker and writer. You can follow him on Twitter here. Jonathan Hartley is a Ph.D. in Economics student at Stanford University and is a Visiting Fellow at the Foundation for Research on Equal Opportunity. You can follow him on Twitter at @jon_hartley_
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