Israeli Economic Stabilization Plan
Israel's July 1985 Economic Stabilization Plan is the textbook example of how to stop a hyperinflation without a full regime change. Annual inflation had reached 450 percent by 1984. The plan combined a sharp fiscal contraction (the budget deficit was cut from 15 percent of GDP to near zero), a currency reform (the old shekel was replaced by the new shekel at 1000:1), wage-and-price controls for a transition period, and a pegged exchange rate. Inflation fell from 450 percent to under 20 percent within a year and to under 5 percent by 1999. The plan became the model for successful emerging-market stabilizations — including Argentina's 1991 Convertibility Plan and Brazil's 1994 Real Plan.
The Israeli plan was politically successful because it had backing from both major political parties and the major labor unions. The wage-and-price freeze was agreed to by the Histadrut labor federation in advance — a level of corporatist coordination that most countries cannot replicate.
06 · Modern Fiat Failures
With gold constraints gone entirely, currency debasement became a recurring feature of emerging-market economics. Argentina replaced its currency five times between 1970 and 1992, each time lopping off zeros and re-starting. Brazil did similar serial redenominations. Yugoslavia, Zimbabwe, and the post-Soviet states produced spectacular hyperinflations. Meanwhile, major central banks learned to hide their monetary expansion in increasingly technical mechanisms — money-supply measures were redefined, reporting requirements were relaxed, and the Federal Reserve stopped publishing M3 entirely in 2006.
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