If Hyperinflation Strikes, What Would You Use as Currency?

January 9, 2009 by  
Filed under Economics

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.

Mr. ToughMoneyLove remains firmly in the “inflation is coming” camp.  I do wonder how bad it could get.  The experts claim that the Fed has learned how to control it.  I’m not so sure anymore.  My level of confidence in any institution making national fiscal and monetary policy has shrunk to new lows.  I suspect that many of you feel the same way.

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.

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10 Responses to “If Hyperinflation Strikes, What Would You Use as Currency?”
  1. G says:

    Hopefully we would never experience hyperinflation, but if it did we could potentially use ammunition. Why not? During WWII cigarettes were used to “barter” for goods; sure it sounds absurd today, but it did happen.

  2. Curt says:

    Within the next 5 years, we are going to see a major currency crisis. The government will try to keep everyone using dollars and try to ban the use of other currencies and metals. At the same time, I don’t see any long-term national currency becoming the new reserve currency of the world.

    Therefore, my guess is that the formation of a global financial system (central bank, monitary union and regulatory), which is currently under discussion – will introduce a new global currency within the next 10 years, which will be fazed in to replace all major currencies.

  3. goldenrail says:

    Bartering can occur outside rural situations. My dad’s an attorney in Milwaukee (the city proper) and has often gotten paid in kind over the years: cases of beer, baskets of fruit, etc. If we switch to trading in shoes, I’ll be set.

  4. MasterPo says:

    There is no question that big inflation is coming. There is just no way Obama can print and spend $1-2 trillion (on top of the $1.2 trillion in deficit already) then pass it off as saying “We’ll just pay it off later” – WTF?!?!

    I want some of whatever he has been smoking.

  5. Strabo says:

    Gold was never and will never be a “emergency currency” during hyperinflation. It always comes down to a barter system, as anyone could see at the examples of Germany after WW II or more recently in Simbabwe. Gold is a part of this barter system for large transactions at best, useless at worst (because food is more precious than practically useless metal if it comes down to the worst).

  6. Boss says:

    Dear TML,
    First,my profound thanks for recommending The Coming Generational Storm. An invaluable book to anyone interested in our country and the world. Perhaps one of the best books on the subject I’ve ever read. I would be interested in your and the reader’s opinion regarding I-Savind Bonds and TIPS as inflation tools. Many thanks. Boss

  7. pam munro says:

    My collection of various vintage items – including lots of vintage costume and semi-precious jewelry could always go on the block. I have sold off excess rhinestones before – ones I didn’t particularly like – and vintage costume jewelry does have a market – ditto collectibles – I guess life would be one big yard sale! But seriously – diamond rings are an informal bride price – and women have always counted on the jewelry in hard times – think about it. If nothing else, as they are advertising on TV – you could turn in all your gold for the value of the metal itself….

  8. Bobby Hawk says:

    Since we are currently backed by only about 28% gold to dollars, printing more money will only serve to make that situation worse. Its that point at which people understand that the paper money is worthless is when the evil hyper-inflation starts to become active and hysteria sets in.
    Do I think it will occur? The answer is yes. Most certianly it will occur. It always occurs just before a huge war, and this timeing will be no different.
    With the stimulus package not showing any signs of improving the economy or job growth in the next 6 months, the current administration will react by suddenly ending the wars in Iraq and Afghanistan. They will take that money and throw it after more Democratic stimulus (the same type of government spending that did not work initially).
    With Iraq and Afghanistan destablized, Iran will move in and take over. Next this now re-constituted Persia will take over Pakistan and become a nuclear powered Islamic extreamists state. It will move against Israel to destroy the state of Israel.
    But what about the US? It will become part of the world power that will move against Persia. Further it will become part of the world bank and its monetary system will be controled and issued by that bank.
    The result will be one world order under socialism/communism and one world currency under the world bank.
    I expect the hyperinflation to start within the year. and the building of the Persian empire within the next two years.
    Before the O would have left office, we will be part of a socialist/comunist one world government.

  9. RC Brooks says:

    I do think some steep inflation is coming. Even gold would be of limited use, save for trading between countries. I feel that barter is going to be the best way to hold value.

    The EU is becoming increasingly more unstable. In fact, with nationalism on the rise in many countries, it is unlikely any one world government or monetary system could take hold in the next decade.

    I do think that we will see a major conflict between technologically advanced countries in the next two decades.

    Barring a plague of some fashion or other major catastrophe, holding onto things people NEED will be a good way to hold value. Tools of all fashions will always be of value, whether something as simple as screwdrivers or needles, or even air hammers and sewing machines. Anything people use to make something else. At the very least, loses are minimal over time.

  10. mark says:

    I believe people will band together. This world will become a huge dump. The powers that be will spend are last tax dollars on a moon base that will morph into a resort. In the next 30 yrs the rich people of this world will leave this planet. They will live on the moon and leave the world to the poor. Only taking from this planet. They on the other hand will have cyborgs to take care of them. Not trusting poor humans in space to service them.
    That is the future. Two worlds one for the rich and one for the poor. They will likely forget the poor on earth, and let the cyborgs manage them.It’s not the N.W.O. it is the ; Two world order!
    Ha just kidding. I think things will turn out fine… just fine…. :}

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