There are many who criticize holders of gold as to its use “if” a hyperinflation scenario were to come to fruition. Emphasis on “if” here for those who read quickly. Whether there will be a hyperinflation scenario is a different topic.
The comments by those critics of gold typically center around a question like this; “how can someone chip off a few flakes of gold and buy food? or “you can’t eat gold!”
During a hyperinflation scenario, gold, unlike paper money, would be “perceived” as having value as it has been this way for centuries. The U.S. dollar however, wouldn’t have any perceived value under this scenario. So a better question to answer would be, “what would critics of gold use as a medium of exchange sans gold since no one will want U.S. dollars?” or “you can’t eat fiat dollars.”
Same Problem, Different Century
The problem is with an agreed upon “exchange of value.” Without a true medium of exchange to make smooth transactions would be the same problem faced by our ancestors centuries ago. If a farmer needed to buy tools but only had cows to offer in trade with the toolmaker but the toolmaker didn’t want cows, then the farmer would have to find someone who wanted cows and also had something to exchange for the cows that the toolmaker desired.
Enter the medium of exchange to conduct smooth transactions. You can see the problems with this scenario were resolved with the appropriate medium of exchange. With paper currency, the farmer could sell his cow to anyone who desired beef, receive paper currency and then pay the toolmaker for his tools. This “medium of exchange” in the past has been beads, furs, gold and silver coins and paper currency to name a few.
The Argentina Example
The way gold would be utilized today during any hyperinflation scenario, in absence of the U.S. dollar as a medium of exchange, for the purchase of food or anything else is provide by a recent example of what transpired during Argentina’s hyperinflation.
Entrepreneur’s in Argentina started co-ops where people could come with their items to exchange for other goods or services. How did it work? Here’s an example, not perfect, but the concept is clear:
Say a dairy farmer needs to buy tools to fix his milking machine, but only has cows (meat) and milk to offer in exchange for the tools. He can’t necessarily offer to the maker of the tools an exact exchange as previously discussed. Also, the toolmaker may have no desire for cows or milk, but want iron and steel to make his tools.
There has to be a medium of exchange to conduct the transaction. What entrepreneurs did in Argentina was create swap meets that would offer scrip. The dairy farmer would prearrange for someone to purchase his milk or cows (two desirable products), possibly a butcher and grocery stand, and based on that days prices (in scrip), receive the prevailing value (in scrip).
The dairy farmer could then take that scrip and purchase the tools from the toolmaker. The toolmaker could then go to the commodity producer of iron and steel and pay them in scrip or whatever they took as payment (which may even be gold coins).
This Will Not Work for Everyone
Of course, if someone produced goods that no one else wanted, then they wouldn’t be able to do any business with anyone else and would have to figure out what they could produce that others wanted.
How Gold Would Be Utilized
Someone with gold coins could exchange them for scrip to make purchases. If they had gold coins that are presently internationally recognized (American Eagle, Canadian Maple Leaf, etc.), it would be easier, but if they only had gold bars, there could be an assayer available to conduct the tests necessary. I imagine there would even be a “scrip for gold” stand somewhere.
The reason gold would be accepted for scrip is simply because of perception and historical relevance. Gold is the fall back when governments get greedy. It is nature’s money dating back to Biblical times.
And the gold of that land [is] good: there [is] bdellium and the onyx stone. Genesis 2:12
Naturally one would concur that there’s always going to be a way to make the transaction between two individuals occur. People aren’t just going to sit and do nothing and wait for the government to do something about the problem. Little Johnny needs to eat. Grandma needs her meds. They didn’t sit around in Argentina and wait for the government solution to occur either.
Those who believe that gold will maintain its value will hold onto it because they think that gold has a longer track record of maintaining purchasing power than a piece of paper that has 38 years of existence without gold backing.
Free will allows individuals to choose whatever they believe in as a medium of exchange. This has happened throughout the history of mankind. Governments can interfere with that free will only to the extent that they don’t abuse the system. There is plenty of evidence of abuse since the creation of the Federal Reserve.
Hyperinflation may or may not happen in the U.S., but history has shown that gold will always have purchasing power and fiat money experiments in the past have never ended with deflation winning out over inflation.
Naturally gold will do well in any hyperinflation scenario should it come. But that doesn’t mean that the dollar and the Fed aren’t still relevant today.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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