It’s long been a fetish for cranks of all kinds usually more on the right than on the left. From Glenn Beck fans to Ron Paul hardliners, the gold standard seems to hold a magical fascination. Now, it’s Venezuela’s turn.

Patria Para Todos (PPT) and the Frente en Defensa del Bolívar announced that they will meet with the board of the Central Bank of Venezuela (BCV) to hand in a proposal to confront the “war” against the bolívar and recover its value. This proposal is the so called “Bolívar Oro.”

The secretary of PPT Ilenia Medina says that “in 1800, Venezuela had a gold coin that was used as reference.” This sounds like the return of the gold bolívars, which were unlimited legal tender according to the monetary law of 1887. And, as happened pretty much all over the world, gold coins came into disuse due to logistic and security issues.

However, another member of the political secretariat of PPT, Vladimir Miró, clarified that it would not be “a currency of circulation”, but “a reference currency in the foreign exchange market.” Its support would be in gas, oil and gold reserves.

So the “Bolívar Oro” seems to be a gas, oil and gold standard: the last time we tried to ditch fiat money in Venezuela was between 1910 and 1930.

As happened pretty much all over the world, gold coins came into disuse due to logistic and security issues.

A gas/oil/gold standard might limit the wild currency printing party of the last few months, assuming the peg isn’t changed at will every hour on the hour. However, that is only a small part of the problem.

The bolívar loses its purchasing power with every passing hour because nobody wants it. Since bolívars can only be used to buy stuff sold in Venezuela and local supply of everything has dropped while the BCV keeps on printing bolívars, the latter loses its relative purchasing power.

Nobody wants bolívars either in the international markets, since the government keeps printing them like  they’re going out of style. And the government keeps printing them because it spends too damn much and refuses to accept the principle that its expenditures have to be in some sort of rough parity with its revenue.

Adopting a natural-resource peg is a lazy way of sidestepping the underlying issue. Even today, within chavismo, saying “you’re spending too much and too recklessly” is politically verboten. You can’t do it. Still, people thirst for a stable currency. So what do you do if you want to be seen to back a stable currency without calling out reckless spending? You back a crank’s idea of monetary policy: returning to a 19th century technology that worked badly then and works badly now.

So the supposed “war” against the bolívar is actually coming from a Central Government whose policies have discouraged local production and investment and a Central Bank that completely forgot its mission to protect the value of the local currency.

34 COMMENTS

  1. “And the government keeps printing them because it spends too damn much and refuses to accept the principle that its expenditures have to be in some sort of rough parity with its revenue.”

    Rest assured, Venezuela isn’t alone in that regard. It just does it better than anyone else right now. My own government spends taxpayer dollars like a drunken sailor… but at least a drunken sailor spends his own damn money. That is the nature of government… spend now and act surprised when the bill comes due. (blaming the generation before for being spendthrift and the current generation as being miserly and selfish)

    Is there a single government on this planet that pegs its currency to gold?

    • In 1999, Switzerland reformed the constitution via referendum. It went into effect on 1/1/00. Among other changes, they were the last country to leave the gold standard.

  2. Also, according to your reference, Vlad Miró wants to revise the monetary agreements maintained by Venezuela and Colombia, because “private banking sectors …. at present have free will to establish at the border the value of the Bolivar with respect to the Colombian peso.”

    That pesky free market thing again!

    • The basis of an economy is very simply the basis of necessities to maintain bodies: food, shelter, clothing. It builds upwards from there, and one of the central issues is that building is currency, which is simply a convenient means of exchanging any good or service for a fungible yet stable-value proxy for other goods and services. An economy also needs roads, and overseas transportation. Free markets do best as it leaves individuals to negotiate prices, which are simply what one is willing to pay.

      Hegel and Marx came along and simply could not stand to see all the progress and happiness with the remarkably improved standards of living, and since that black moment in history, the world has plunged into mass murder on a scale never seen. The current regime in Venezuela seems determined to squash free markets and capital, squashing agriculture (food). Without that fundamental, you have a nation incapable of supporting itself.

        • Karl Marx read Hegel, a German “philosopher”. Marx probably just glossed over it, took the bold print and proceeded from there. I cannot conceive that Marx had an IQ above the level required to think things through. I haven’t studied up on it, even though it would be simple. I just don’t have the taste for it.. Maybe I’m narcissistic or lazy or stupid or right-wing or heartless or whatever, but it does not interest me to try to explain to someone that you do not advance civilization by putting chains on everyone (except yourself, of course).

          • Marx offers a response to Hegel in The German Ideology, among other places.

            Don’t worry though. Marxists don’t even read Marx anymore.

      • “The basis of an economy is very simply the basis of necessities to maintain bodies: food, shelter, clothing. It builds upwards from there..”

        Not in Venezuela. The basis of the modern Venezuelan economy is taking oil out of the ground and trading it for dollars.

        People have this almost Marxian notion that under proper capitalist leadership, Venezuela will become some wondrous economy where people trade freely in the fruits of their self-directed labour according to the unencumbered laws of supply and demand and the state will play no role and will wither and die.

        The problem is, even under competent management, Venezuelan currency is going to be “pegged” to oil.

        Hegel and Marx came along and sought an answer to the question of why it was that 9 and 10 year old children could work 14 to 16 hour days in a factory and see virtually nothing for the fruits of their labour, while the factory owner did splendidly. Arguably, they provided a useful diagnosis, and were naïve in their proposed solutions. But in any event, 19th century industrial England is not the model that explains why Venezuela sits on the worlds largest oil reserves and vast numbers of its population live in shacks.

        Neither Marx nor Adam Smith apparently have a neat solution to the problem of wealth that is found in the ground, and how you build a functional economy much less a functional democracy around that.

        In any event, Chavismo has produced a cast of quacks tasked with addressing a dire and complicated situation. The quackery sounds like desperation.

        • I’d be very interested to hear MRubio’s opinion regarding what is the MINIMUM that would be required to get the agricultural sector back to something approaching self-sufficiency. I suspect the requirements might start with property rights (not having your land confiscated, not having your harvest subject to a forced sale) and build from there.

          • Given the free market principles of division of labour and efficiency, beyond the obvious, which you mention, his authority on the subject would be questionable.

          • My personal opinion is that this country not only has the agricultural capacity to feed itself, but because of climate, rainfall, water resources, and arable land, could probably feed much of S. America as well IF it was organized.

            Virtually all land here is already owned by the government, but that still doesn’t stop it from confiscating productive farms. What’s owned privated are the “bienechurias” which is basically the improvements that have been made to the land….land clearing, structures, fencing, ponds, etc. This is what is typically bought and sold as opposed to the land itself.

            Our “winter” here, the rainy season, lasts 6 months, and two crops could easily be planted and harvested. Corn could be planted with the first rains in May and harvested during September and October and soybeans or fast-maturing “frijoles” planted thereafter as rainfall tapers off. I’ve seen the Brazilians here do it many years but they have resources we don’t.

            In response to your particular question about the MINIMUM needed to kick-start our agricultural sector, I’d say the following are needed: 1) access to credit 2) access to seeds, fertilizers, and agro-chemicals supplied in a timely fashion 3) access to spare parts for equiment and vehicles, and 4) access to fuel.

            There are plenty of people here who know how to produce a crop, have access to arable land, and have the desire to produce what the country needs, they just don’t have the means. Instead we’ve got a government trying to steer the population to growing vegetables on Caracas high-rise balconies and encouraging them to eat rabbit.

            Here in my area, in a nutshell, we spend more time here trying to resolve problems, than actually working and producing. It’s sad, but it is what it is.

          • re: MRubio:

            #5: access to free market pricing. I’ve seen people invest in local food projects (chickens), only to have their efforts destroyed by restricted access to fertilizer, feed, and finally a profitable sales price. Then out of business. The regime doesn’t want any competition for their imported guisos.

            I find it interesting that over the years Venezuela was once a net exporter of some products (chocolate, coffee), and now is importing nearly all it’s food, importing light crude just to produce heavy crude, and importing gasoline. The reasons are well documented.

            Why this question continues to even arise is stunning. There are over 200 world countries, and you can see who feeds themselves and who doesn’t and investigate why.

            I’ve seen capitalismo salvaje and it is not recommended. On the other hand, savage socialism requires one foot in the grave and one knee on the ground before el pueblo can make a decision. You know what they will choose.

          • That comment was directed to Canucklehead: “Neither Marx nor Adam Smith apparently have a neat solution to the problem of wealth that is found in the ground, and how you build a functional economy much less a functional democracy around that.”

          • Yes. And though I am just guessing, I bet:

            (a) in order to survive, Norwegian farms depend on a heavy duty arsenal of tariffs, subsidies and other forms of direct and indirect government support;

            (b) almost nobody outside Norway has ever bought anything grown in Norway that is also produced somewhere else.

            Or alternatively, if it is the case that Norwegian farmers compete in relatively open markets, which I highly doubt, they must be to a degree bordering on the miraculous, the most productive and efficient farmers on the planet.

          • Yes to A) and B). Lots of tariffs and subsidies. Although, for internal consumption, they are generally self-sufficient in a lot of areas, they have to import fruit and other stuff that just isn’t suitable.

            The only product I’ve ever seen outside of Norway is fish. I’ve seen salmon with a “Product of Norway” tag on it at Costco. I’ve also seen Greenland halibut at Whole Foods…although they apparently believed said fish was equivalent to a gold standard all its own…

          • I spent much of the summer of 2016 in Norway, and can say this about the commerce that occurs among the citizenry:

            Norway levies a heavy tax burden upon both citizen and visitor. However, the average Norwegian takes great pride in avoiding as much of these taxes that it is now considered a national pastime. It is routine to take the ferry from Norway to Denmark, then do all of their major purchasing in Germany. My relatives (Stavanger) do this 2-3 times per year, not including junkets to Newcastle or Aberdeen.

            It is next to impossible to find a restaurant outside of the major metropolitan areas. It is far too expensive to eat out. FACT: We spent over $60 on truck stop (Esso) hamburgers and french fries for 4 people. It was the only place to purchase food in a town of about 2000 people along E39 on our way to Egersund. We were told that nearly all restaurants cater to tourists, because the locals cannot afford to eat out. The food found in grocery stores (REMY 1000) is VERY expensive (nearly everything is imported)

            An imported car? VERY expensive. And the taxes ALONE on a 1/2 ton pickup (Ford F-150) approach the equivalent of $100,000 BEFORE you import the truck. Norway is a country that uses taxes as a means to control behavior. Booze? There is a reason that Norway has so few alcoholics. Nobody can afford to buy it from the State stores… when they decide to open.

            The one thing that props this country up is oil and tourism. Remarkably, the Norwegians have heavily invested their oil into their infrastructure; and knowing full well that the teat will indeed someday run dry, are heavily marketing tourism.

  3. As to the specific of a gold backed currency, it will never recover the value of the bolivar unless the currency is gradually withdrawn from circulation as it is redeemed for gold (the most likely scenario). The government would sell gold at free market prices, taking in virtually worthless currency, handing out gold. I think it’s fairly simple to see that the regime does not have the production value to fund that. It does not have the gold, it does not have the reserves.

    • And as someone who has collected gold (Krugerrands, Maple Leafs, Pandas, etc.), I can assure you it is easier to buy it than sell it. You can walk into any coin shop and buy one and be out the door in 10 minutes (Form 8300). You pay the market value plus any retail mark up, along with special “taxes”. When you bring the same coin back, the SAME coin must undergo an “assay”. And let us not forget about any capital gains taxes! They may or may not be actually assayed, but you will not recoup your cost, unless it has appreciated quite significantly.

      As long as the value of gold keeps increasing, you potentially have a great value. So long as you don’t spend it. People only buy gold for vanity, curiosity or “SHTF Insurance”.

      I cannot understand the logic of what the Hell Maduro and his merry minions are doing. If they think exchanging dollars for yuan for Bolivars is a pain in the ass….

      • “When you bring the same coin back, the SAME coin must undergo an “assay”.

        Never had that problem with any recognizable gold such as Krugerrands, Maple Leafs, Pandas and US gold coins or ingots. They were just as easy to sell as to buy regardless of whether I was selling them back to the original seller.

        • I have bought a few gold coins from the local retailer, and have had no problem with selling/trading my 1 oz coins purchased from him for fractionals. However, when I have brought him my coins purchased elsewhere (non-Krugerrand) he insists that I pay a premium (err… take a financial hit) because he must verify that they are indeed gold. Obviously, they are weighed and the mass calculated, but that is the nature of the business. And since I am a businessman, I know that every cost of doing business is passed on to someone else. (higher costs, lower wages, etc) In this case, me.

          Are you buying/selling coins from the same retailer? I haven’t sold anything yet (for cash), other than to trade in my 1 oz coins for fractionals. I am no longer buying anything but fractionals. I am a “SHTF insurance” buyer only… plus it gives me something to give the grandkids someday.

  4. As an aside, I would like to know what happens to the dollars (cash) that we send our remaining relatives in VZ when they spend it at the retail level. Because while the Bolivar is horrific for retaining its value, the dollar seems to have become the new gold standard.

    Does the retailer pay his/her wholesaler in dollars? Is there a SAFE black market mechanism for exchanging for Bolivars? I know that the banks must exchange at the official rate, so I imagine only foolish businesses put their wealth into those institutions.

    • Yeah dollar inflows through the black market is what is essentially keeping the Venezuelan domestic economy alive.

      For example you can find the cheapest outsourcing or freelance work in the world in Venezuela .

      Heck Caracas real estate is always (unoficially) in dollars.

      • El Guapo opens up a really interesting area, but open public discussion may not be advisable. Goes back to the article about the tourist with dollars who wanted to exchange for bolivares. Do you have any insight into Caracas real estate? It seems really very risky to me, on a country-by-country comparison, but the prices are up to levels one might expect in U.S. suburbs. Even outside major cities you find small houses priced to $100,000 dollars, so it can’t all be enchufados. Is that pricing a reflection of underlying optimism much smarter and deeper than the headlines? (Disclaimer: I positively suck at real estate. I have yet to NOT take a loss on a house I bought, especially when factoring in the carrying costs of taxes, insurance, and maintenance, as well as factoring back in rent that would be paid for comparable living standards v. interest and opportunity cost of capital for the down payment.)

        • Yeah it is kind of mind boggling that Caracas real estate is as expensive as it is considering the country’s position.

          But I think you suggest something that might explain it. It might be the case that those who own real estate, since it’s an asset that can last a very long time, expect that I will will outlive this regime. Also, as I stated, since it really is a market based in dollars then it really is a more stable market. And of course the enchufado’s and other boliburgueses role cannot be discarded in determining these asset prices.

  5. Sounds a lot like those useless cuban pesos that are paid to the slaves in the communist regime.

    Oh, right, these crackpots are LACKEYS of the cuban invaders.

  6. Well, these poor old commies on Aporrea believe you can just dictate “fair” prices in bolivars, and the “50 products” will be in plentiful supply at the local supermarkets to be purchased at said prices. Anything short of that is due to criminal speculators.

    https://www.aporrea.org/actualidad/a252391.html

    I don’t think they understand that their glorious revolution means the end of “supermarkets.” Most all non-food “stuff” (clothes, electronics, you name it) are made in communist China. So seems to me all VE has to do is trade oil for Chinese stuff – no?? Oh, that’s right – the barbie dolls …!

    Soviet commoners could not buy anything western. Was not a question of price; there was nothing to buy. Rubles had no value other than to purchase stuff made in the USSR (junk). For western made products, 1 ruble had same value as 1 billion rubles. (It even looked like and was close in size to monopoly money). Commoners were forbidden to posses hard currency (USD and DMarks), although of course a black market existed. If you were one of the privileged few that had diplomatic positions in a western country, maybe you could bring a few things back to Moscow with you to impress/stir envy, such as clothes, records and (my personal favorite) peanut butter.

    I assume same true in Cuba; Cuban pesos are worthless outside of Cuba, and nearly worthless inside of Cuba.

  7. “the last time we tried to ditch fiat money in Venezuela was between 1910 and 1930.”

    According to the linked Wikipedia article.
    1930 was the year when Venezuela officially first adopted fiat money.
    1910 was when they switched from silver standard to gold standard.

  8. If you look at the underlying dynamic to all of these issues you see a government who only knows how to operate on their own terms. Increasingly, as the rest of the world says “No thanks,” the gov will fall back to what is not there – the ability to provide for itself. A free market goes against everything Maduro values, and number one is absolute control. King of the Ashes indeed.

    • Value would depend on three things basically:

      1) That it’s original and not a fake……plenty of fake early gold coins on the market though they too are made of gold

      2) Date

      3) Condition…..there are varying grades from heavily circulated to uncirculated. Within the uncirculated (Mint State) there are additional grades from MS 60 to MS 70. MS 60 would be the lowest grade mint state coin…..one which has technically never been circulated but otherwise has many “problems” such as bag marks or poor strike, while a Mint State 70 would be technically perfect……no bag marks, perfect strike, booming luster, and eye-appeal. Few truly rare coins attain this classification.

      In another life I participated in the rare coin market attending shows all over the US, though I focusd on Morgan Dollars.

Leave a Reply to Canucklehead Cancel reply