At the tail end of 1983, during my final year of university, I left the US to spend nearly 6 weeks in Israel, where I toured the country and worked for a short time on a kibbutz outside of Tel Aviv. I’d been given a chance to make such a trip for practically no cost–about 1,400 dollars. I had two clever professors who arranged the trip, and about 10 of us made the journey. Someone from the Israeli Dept. of the Interior (equivalent) took us from North to South in about a week and a half, and then we worked on a kibbutz for about four weeks. I repaired trees in the citrus groves, after the harvest.
We were quite aware that Israel was experiencing inflation, at that time. Understandably, this was of virtually no concern to us. After all, we were carrying Dollars. And besides, one tends to worry more about bombs and random shootings when in Israel. Just prior to our arrival, there had been a flurry of bus bombs (non-suicidal) using the standard package or suitcase method, left under seats. This made for tense feelings, indeed, when riding public buses in both Tel Aviv and Jerusalem.
In 1983, Israel’s inflation rate was 191%. In 1984, it advanced to 445%. By 1985, the government froze prices, and by 1986 inflation was back down to 20%. A wild ride indeed. And, this illustrates that once inflation reaches these very destructive levels, even a return to “slower” inflation can still mean rates in double digits.
My primary experience of this inflation, during that 6 week period, was via the extraordinary purchasing power of my US Dollars, but more importantly, the demand on the street for my US Dollars. The experience is potentially instructive for what may come, eventually, in the United States and other OECD nations like Britain that are debasing their currencies.
When inflation takes hold, the phenomenon is understood at street level and no longer does an average person need an Economist on TV to provide an explanation. I quickly learned that merchants would give me a premium exchange rate for my Dollars, and there was no point in making the trade at Bank Leumi or Bank Hapoalim. This was true when buying a lamb pita in old Jerusalem, or, bargaining for some goods in the markets. I also learned to negotiate first in Shekel(s), and then to offer my Dollars for the extra discount.
Should a similar inflation come to the US or the UK (or Switzerland? After all, they too are debasing) then I expect the hard currencies will be Gold and Silver. In the United States, there would also be a chance that Canadian Dollars could take on some attributes of a hard currency, and in the UK, perhaps Euros. But the principle will be the same: sellers of goods and services in a time of inflation can preserve their capital and, if the inflation is quite strong, start “saving” almost immediately by taking gold/silver or hard currencies without making any additional banking transactions. Since that speed and efficiency is an advantage, it makes economic sense for sellers to offer buyers a premium for their hard currencies at the point of sale. It’s a win-win for both buyer and seller.
In fact, what’s interesting about inflation is that the marketplace, at street level, is the place where this value discovery process unfolds quickly. Should strong inflation come to the United States, you can expect your butcher, your mechanic, and your other fee-based service providers like consultants and accountants, for example, to be among the first to not only embrace gold and silver transactions, but to initiate them.