If you asked the average American if it would be a financial catastrophe if the US dollar failed, I’m sure he or she would emphatically agree. In fact, I suspect those answering the question would consider the possibility to be a disaster of epic proportions.
But, if you really think about it, maybe it wouldn’t be quite that horrific.
Here’s what happened in other countries that recently experienced a failed or replaced currency.
The African nation of Zimbabwe suffered such high inflation of the money supply that reached 49 billion percent per month by early 2009! One writer told me of visiting the country a few years ago. After he checked into his hotel, he went to the pool for a dip. He passed the bar on the way and asked how much it cost for a beer. The bartender told him $100 million. After he cooled off in the pool, he stopped at the bar to order that beer and was told that the price was now to $150 million! By 2008 the Reserve Bank of Zimbabwe was issuing $100 Trillion notes.
With prices changing so rapidly, commerce nearly ground to a standstill. Merchants found it almost impossible to purchase inventory and then price it for sale. Consequently, few merchants had any goods to offer to sell.
On January 31, 2009, the government announced that the South African rand, Euro, US dollar, and other currencies would be legal tender in the country. The government suspended the use of Zimbabwe’s currency on April 13, 2009.
In a mid-2010 report, trade policy analyst Albert Makochekanwa stated that Zimbabwe’s inflation rate immediately fell to less than 1% per month. Within a year, manufacturing and production activity in the country had increased by 35%.
By being able to buy goods for payment with currencies that suppliers would accept, local merchants were again able to purchase and sell merchandise. Stores that previously had little or no inventory could now operate normally and profitably.
The result of the failure of the Zimbabwe dollar was a huge economic boom!
A similar story resulted after Ecuador abolished its own sucre on September 15, 2000 and declared the US dollar to be the standard legal tender. At the time of changeover, it took 25,000 sucres to equal one US dollar. As an interesting side note, Ecuadorians are not comfortable carrying paper money, so the US Mint shipped 500 million 2000-dated Sacagawea dollars to Ecuador to satisfy demand for coinage.
There was even a currency failure in early American history. The Continental Dollars issued during the Revolutionary War quickly fell so far in value that they inspired the phrase “Not worth a Continental.” The new nation eventually established a relatively stable dollar defined as a fixed weight and purity of silver or gold. The government also redeemed outstanding Continental Currency at the rate of one new dollar for every 100 Continental dollars, though it took until the early 1800’s to fully pay off this exchange.
But, just like what happened in modern Zimbabwe and Ecuador, the ability to use a stable currency, even during times when multiple forms of money circulated side by side, the US economy started growing.
If the US dollar failed today, there would be significant problems, in large part because of the widespread use of the dollar as an international reserve currency. So any transition would not be as smooth as experienced by Zimbabwe or Ecuador. However, as long as the US government did not try to impose a new fiat monetary system, I am confident that the free market would quickly establish a stable monetary system that would spark the return of prosperity faster than most people expect.
I’m not necessarily saying that the US government is mismanaging the US dollar so badly that it will soon fail. But I am saying that if the dollar failed, I don’t think it would be as bad a development as most people would fear.
Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes “Liberty’s Outlook,” a monthly newsletter covering rare coins and precious metals. Past issues can be found online at http://www.libertycoinservice.com/ Pat Heller is also the gold market commentator for Numismatic News. Past columns online at http://numismaster.com/ under “News & Articles”. His bimonthly columns on collectibles can also be read at http://www.lansingbusinessmonthly.com under “Articles” and “Department Columns.”His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.
How can you compare the U.S. to Zimbabwe and Ecuador? Also, the impact on the purchasing power of Americans who don’t own gold would be devasting, and losing our reserve currency status would raise the cost of servicing our debt to unsustainable levels.
The U.S. dollar having world reserve currency status is the real kicker if (when) it fails. Our country having the world’s reserve currency has been a privilege. Unfortunately it’s a privilege that has been abused and we’ll all pay the price for government greed and corruption.
The Continental Dollars were paper dollars not backed by anything, is that correct? If so, it once again proves that currency backed by nothing more than an IOU will eventually fail.
The dollar’s failure perhaps not being so bad is an interesting line of thinking Patrick. Maybe it depends on what order the other countries fail as well, and if any other significant country’s currency survives.
Coins, you are correct about people who hold all of their wealth in paper (digital) US currency. If you had no hard assets, land/things of value, you would be devastated. But those who hold debt in the same currency could repay the debt with near worthless dollars. Take for example the Continental dollar mentioned in the article. If you owed someone $1,000 Continental dollars you could pay them back with only $10 of the new gold backed currency (back when gold was $20 an ounce). Look at it this way, if you paid $1600 today for an ounce of gold and next week the dollar failed and was replaced with a gold backed currency at an exchange ratio of 100 to 1, you could pay off your old $160,000 mortgage with that one ounce of gold. All US debts are currently held in, and payable in, US fiat dollars.
Many say that one of the main reasons we came out of the great depression was the devaluation of the currency when gold was revalued from $20 to $35. This had the same effect as if say gold today was worth $2,000 and tomorrow the government revalues it to $3,500. Of course back then the paper currency was officially backed by gold. What the Fed is worried about today is a deflationary death spiral. The fractional reserve banking system we have today requires constant inflation or it breaks, resulting in a dollar failure/collapse. Their policies of zero interest rates and money printing are all about trying to create inflation, but they can only kick the can down the road so far, as our debts are growing exponentially. Roosevelt’s move in 1933 of devaluing the dollar against gold ensured the end of deflation at that time by creating a one time punch of instant inflation which made the high levels of debt accumulated during the 1920s boom much easier to repay with cheap dollars. Unfortunately, he confiscated everybody’s gold before the revaluation, in effect taking from the savers and redistributing to the debtors.
In my opinion, today we are way beyond being able to fix our currency crisis with a little gold revaluation like in the 1930’s. It will take something more in line with the Continental revaluation. As Jim Rickards says, a 40 or 50 times revaluation of gold would do the trick. The US would instantly be solvent. Since the US is the largest holder of gold in the world, we could pay off all of our debts with what’s in Ft Knox (if it’s all still there).
Remember Bernard von NotHaus? He invented so-called Inflation-Proof Liberty Dollar, which is a currency linked to the value of Gold, Silver, Platinum, Palladium, and Copper. So if Liberty Dollar is still legal, it will be the best currency to replace U.S. Dollar!
What Free market?
Quote: I’m not necessarily saying that the US government is mismanaging the US dollar so badly that it will soon fail…
Well your not saying it but I sure as hell will. The government is a fricking disaster and it IS THERE FAULT. The Obama administration and the central banks and the FED have straight up destroyed the dollar and this country period.. If Ron Paul doesn’t win in 2012 there will be no more America or at least no free country..
The dollar collapse will be catastrophic and it will happen it’s only a matter of time.. those who aren’t prepared better start quick because there isn’t much time left..
Patrick,
The failure of the US dollar, at this point, would lead us to a national bankruptcy and likely a collapse in the authority of the government. I am buying gold and silver in anticipation of this event, but please don’t make the mistake of thinking it is something to look forward to. The interregnum period while we reorganize is going to be very ugly (expect to go without electricity for months), and the United States will be a very different place when things settle, with many conveniences that we take for granted like 24 hour electricity, heating and air conditioning, (relatively) secure cities and towns, cheap food, etc gone forever. There is also no guarantee that a reorganized government will be democratic either – we are much more likely to be stuck with a dictatorship similar to that of Venezuela.
Your points are well researched and stated. We were in Russia in late 1996, and saw basically the same situation. Other than government agencies, businesses wanted U.S. dollars and accepted them for trade without hesitation.
Eventually, something would work out to replace the collapsed dollar, but getting to that point would be/will be sheer hell. With so many people living on welfare and other public assistance- and not taking care of themselves- the situation would be/will be catastrophic when the free cheese is no longer available.