In 1985 the Brazilian military government allowed an election to choose a civilian government. The winner of the presidency in that election was Tancredo Neves. His vice presidential candidate in that election was José Sarney, a lesser known politician of ambiguous ideology. A few days before he was to be inaugurated Neves died suddenly and unexpectedly. Sarney was thus thrust to the pinnacle of power without time to prepare. The cabinet had already been selected by Neves. Sarney was ambitious and wanted to seek reelection after the term he had inherited from Neves. That meant that he wanted to carry out popular programs without imposing unpopular taxes. This in turn meant budget deficits and the creation of money to finance them. The expansion of the money supply led to inflationary price increases. The Cruzado Plan was an attempt to curb inflation while stimulating the economy.

Brazil has a strong tradition since the Estado Novo of Getulio Vargas of state intervention in the economy. The name for it is corporatism or state capitalism. The military government followed that tradition and as result Brazil had by 1985 an international debt of about $100 billion. The military government also strongly encouraged foreign direct investment in Brazil. For one such project see Jari.

Sarney's political ideology was above described as ambiguous. Before 1964 when the military took control of the Brazilian government Sarney had been a member of a conservative National Democratic Union (UDP) party, He was a member of the lower house of the national legislature for that party. When the military took over he became an avid supporter of the military government. He served two terms as governor of the state of Maranhão on the north coast of Brazil. He was later again a member of the lower house and then a member of the upper house. The military organized a new system of political parties in 1967 and Sarney became a member of the National Renovating Alliance (ARENA) and remained with that party until 1979. In 1979 there was another reorganization of the politcal parties of Brazil and Sarney help create the Social Democratic Party (PDS) and became its president.

In the office of president José Sarney had some definite limits. If he and the civilian politicians antagonized the military too much they might well retake political control of Brazil. On the other hand he needed to do something to garner political support and gain recognition among the electorate. His political past was one being a conservative, pro-military politician from a state remote from the centers of power. He chose to recast himself as a left-of-center politician who wanted to put people to work and get the Brazilian economy going again. He signaled his new center-left stance by meeting with members of the various communist parties of Brazil and working to renew diplomatic ties with Communist Cuba.

one of the constraints on Sarney in the early days of his term was that the cabinet officials had not been selected him. Some were appointees of the military and others were selected by Tancredo Neves and were not necessarily politically compatible with Sarney himself. Some were allies of political foes of Sarney. Even when, after a year in office, Sarney began to make his own cabinet appointments these appointments were people such as leftists who were not likely to be loyal and supportive of Sarney. The Brazilian Democratic Movement Party (PMDB) was a center-left group but made up of strongly anti-militarist academic leftists who were more ideological than Sarney and not supportive of him. There were also some center-right cabinet members.

In his second year in office Sarney began implement a program of accelerated economic growth. Brazil neeed more exports into order to earn the hard currency funds needed to service the $100 million foreign debt. The accelerated growth program provided jobs but it also pushed the rate of inflation from 230 percent per year level to the 500 percent level. This fiscal policy disturbed international lenders such as the United States, Japan and Western Europe. These lenders urged and pressured Sarney to adopt the austerity program recommended by the IMF. However the IMF proposals were likely to force the economy deeper into a recession.

The Cruzado Plan

The official name was the Economic Stabilization Plan but it was popularly known as the Cruzado Plan because it involved a change in the name of the currency from Cruciero to the Cruzad0, with 1000 crucieros being equal to one cruzado. This change in the name of the currency and the striking of three zeroes off of prices is of no economic significance. The significant element of the plan were:

• The freezing of all prices
• The exchange rate of the cruzado was fixed at 13.88 cruzados to the U.S. dollar for at least one year
• The removal of indexing for many contracts and arrangements
• The Brazilian federal treasury notes were to have a fixed value

With interest rates fixed, some depositors withdrew there funds in order to put their funds into physical goods as a hedge against inflation.