If Hyperinflation Strikes, What Would You Use as Currency?
If there is one thing we have learned about economic experts in the past year, it’s that most of them are terrible at predicting if and when the economy will enter a period of high inflation. Ever since it became apparent that the federal government would be using extreme measures to inject liquidity into the credit markets followed by various forms of deficit-building “stimulus” packages, most experts assumed that an inflationary spike would follow close behind. However, that has not happened (yet) and now there are concerns about deflation.
The hard truth is that we cannot rule out the possibility that not only will the U.S. economy experience high levels of inflation (as in the days of that economic bumbler, Jimmy Carter) but perhaps even hyperinflation. There is no single definition of “hyperinflation” but it is essentially inflation that is uncontrolled, with consumer prices moving upward almost daily. Other countries have experienced it, including Zimbabwe right now. Other famous hyperinflationary episodes incude Germany after the first world war, Yugoslavia in 1993-1994, Bolivia (1985), Nicaragua (1988), Poland (1989), Brazil (1989 – 90), Peru (1990), Zaire (1990 –94), Russia (1990), Georgia (1992–94) and Angola (1994–97).
I’m not suggesting that the U.S. currency would ever become worthless or experience hyperinflation to the degree of these other countries. However, I can imagine a scenario where the U.S. inflation rate is so high that many consumers start to wonder if holding dollars or accepting dollars as payment is a good thing. If that were to happen, what would we use instead?
A couple of things could happen. Some people (mainly those who are buying gold now) would encourage a reversion to the days when gold was the currency of choice. Gold-backed paper currency started as slips of paper that were actually receipts for gold owned by an individual that was being held for safe keeping at a local business. People eventually tired of using the gold itself as a means of trade so they started swapping the paper receipts instead. Gold-backed paper currency was thus born.
Of course, the U.S. dollar is no longer tied to a deposit of gold. So in a hyperinflationary period, would some consumers start using gold coins or other gold items as a means of payment? Would those having gold coins or gold bullion stored at a local bank or other depository use receipts issued for those deposits as payment?
Would a system like PayPal be created in which the underlying account is not a bank account but a precious metals account?
The risk associated with such informal currency systems – even on the local level – is that the government would deem them illegal currencies, just as they did in the well publicized case of the “Liberty Dollar” back in 2007. The Constitution (Article I, Section 8, Clause 5) grants to Congress the exclusive authority to coin money and regulate its value. Congress, in turn, assigned that authority to the Department of the Treasury. The Fed and Treasury have lots of experience at coining money but a poor track record of regulating its value.
Also, Congress made it a crime to issue coins as money:
Whoever, except as authorized by law, makes or utters or passes, or attempts to utter or pass, any coins of gold or silver or other metal, or alloys of metals, intended for use as current money, whether in the resemblance of coins of the United States or of foreign countries, or of original design, shall be fined under this title or imprisoned not more than five years, or both.
(18 U.S.C. Section 486) Personally, I don’t think that this statute would prohibit an agreement between individuals to exchange paper receipts for gold as a means of payment for goods or services. The government’s main concern would be making sure it receives any taxes that would be owed.
A second possibility is that U.S. consumers could use currency of another country, just as many other countries have unofficially adopted the dollar as a local currency. I rather doubt that if the U.S. was experiencing hyperinflation that there would be another stable national currency but who can be sure? Perhaps the oil-rich countries would be a safe haven?
A third possibility is that people would use a barter system as much as possible, trading goods for services and vice-versa. This would have limited application, except perhaps in rural communities where people grow and produce their own food and could “bank” their surplus food for trading with others.
Do any of you believe that we could experience hyperinflation? If so, what would you use as currency?
Photo credit: Shaun W.