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The Day All The ATMs Ran Out Of Cash

Image source: telegraph.com

Image source: telegraph.com

Money plays such an important role in our lives that most of us could not imagine surviving without it. Yet that is exactly what you need to do if you want to prepare for an economic condition called deflation.

Deflation is the term economists use to describe a “general decline in prices, often caused by a reduction in the supply of money or credit.”[1] A good way to think of deflation is as the opposite of inflation. Inflation occurs when there is too much money in circulation, which destroys its value and raises prices. When deflation occurs, there is too little money available, which often causes prices to collapse and the economy to shut down.

In severe cases of deflation there can be no money available at all not — even at the banks. This nightmare actually occurred during the Great Depression of the 1930s, when there were places in the United States where there was no cash available at all. More recently, it has happened in Greece, where ATMs ran out of cash and where banks placed limits on the amount of money that could be withdrawn.

People had no money to pay bills or buy food for their families. Employers had no money to pay employees, customers had no money to buy goods, and many people were reduced to bartering to survive. During the Great Depression, farmers would pay professionals such as mechanics and doctors with food because they had no money and no credit.

The situation got so bad that in some areas of the country, local governments, chambers of commerce and businesses issued their own currencies — the so-called depression scrip. (See a picture of one here.) The scrip often took the form of pieces of paper that people used as money because there was no government currency available. The scrip was used to pay workers or buy goods.

At one point during the Great Depression, the money shortage got so severe that the US government considered issuing a national scrip as an alternative to the dollar. That plan was eventually dropped and the government solved the crisis by simply printing more dollars.[2]

Many people have known survivors of the Great Depression who liked to keep large amounts of cash on hand. Others would hoard food and other items. Those people developed that habit because they remembered what life without money was like. The fear of the deflation that occurred in the 1930s haunted them all of their lives.

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The frightening reality is that the threat of deflation is still real. Some knowledgeable individuals, such as wealth preservation experts Will and Bill Bonner,[3] believe that a sudden deflation leading to a national or international money shortage is still possible today.

The Bonners, who have studied some of the world’s knowledgeable investors such as George Soros, believe that the next financial crisis will begin with a “violent monetary shock” similar to the one that occurred during the Great Depression. They predict that money could suddenly disappear overnight, causing the economy to come to a grinding halt.

What Happens When Money Vanishes

Historical accounts of the Great Depression show us some of the possible effects of such a violent monetary shock. The damage caused by such a violent deflation can include:

The sudden collapse of prices. The Great Depression began with the collapse of stock market prices in 1929. That was preceded by the collapse of agricultural prices in the United States during the 1920s. During that crisis, land prices in rural areas collapsed, causing large numbers of rural banks to fail. When the banks failed, the government liquidated them and their assets, which included lots of foreclosed farmland, an action that further drove prices and made the crisis worse.[4]

soup kitchenEverything you have — your investments, your home and your possessions — could suddenly lose all of its value. We saw this happen during the mortgage bubble of 2007-2008, when many people found themselves “underwater.” That occurs when the amount a home is mortgaged for exceeds the property’s value.

The collapse in prices during the Great Depression particularly hurt farmers who relied on commodity prices. Newsreels from the early 1930s show farmers dumping grain on the ground and pouring out milk because they could not sell them.

Bank runs and the collapse of financial institutions. A bank run or banking panic occurs when all of a bank’s depositors try to take their money out at once. Bank runs often trigger the collapse of financial institutions, which prompts even more bank runs. Between 1930 and 1933 nearly 10,000 banks failed or were suspended.[5] The panic got so bad that President Franklin D. Roosevelt actually suspended all bank transactions in the US between March 6 and March 10, 1933 to prevent further runs in his so-called “bank holiday.”[6]

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During the banking crisis of the 1930s, many Americans lost their life savings simply because they were not able to get to the bank fast enough and withdraw their money. Even some wealthy individuals ended up on the streets and in bread lines because they could not get money from the bank.

Massive unemployment. It is a simple and obvious fact that when there is no money, there are no jobs. At the height of the Great Depression in 1933, 24.75 percent of the nation’s labor force, or one in four workers, were unemployed. Around 12.83 million people were out of work at a time when America’s total population was only around 93 million people. That unemployment persisted for years, with 8.1 million Americans still out of work in 1940 in the 11th year of the Great Depression.[7] The unemployment created by the Depression only ended when World War II created “jobs” in the form of the draft and war production.

Hunger and Starvation. Not surprisingly, hunger and in some cases death from starvation can become a problem after deflation. Historians disagree on the number of people who died during the Great Depression.

depression -- storing food -- pinterestDOTcomMassive expansion of government and its power. In his first 100 days in office in 1933, Roosevelt signed 15 major pieces of legislation, several of which established massive new bureaucracies.[8] During the 1920s there were 553,000 civilian employees of the federal government, but by 1940 the federal government had more than 1 million civilian employees.[9] For the first time in American history, the federal government even tried to set prices for products under the National Recovery Act. The government also told farmers what to grow under the Agricultural Adjustment Act. Those laws were so blatantly unconstitutional that the US Supreme Court struck them down in 1935 and 1936.[10]

Increased taxation. When money disappears government gets desperate and imposes more and taxes in an attempt to squeeze more money out of the economy. During the Depression, the maximum income tax rate was raised from 20 percent to 55 percent, gift taxes were increased from .75 percent to 33.5 percent, and new taxes were levied on automobiles, gasoline, telegrams, telephone calls and even checks. By 1934, the United States had the highest tax rates in the world. In 1935 taxes were raised again. Historian Murray Rothbard estimates that the effective tax rate in the United States increased from 16 percent to 29 percent during the Depression.[11]

Why it Could Be Worse Today

If such an event were to occur in today’s world, it could be far worse than the Great Depression.

People were far more self-sufficient in the 1930s, as large numbers of families lived on farms and grew their own food. Even many Americans who lived in town maintained gardens and chicken coops. In those days people also hunted for meat, canned and preserved their own food and baked their own bread. People also sewed their own clothes and fixed their own cars, which gave them a high level of self-sufficiency.

Today, most Americans rely solely on supermarkets for food, and many families no longer even cook. Few people bother to sew, and most of us do not even change the oil in our cars. If our money were to disappear, we would be as helpless as children.

It’s time that we learn the lessons of the Americans who survived the Great Depression. That lesson was to be as self-sufficient as possible so you can survive, no matter what.

Do you believe that what happened during the Great Depression could take place again? Share your thoughts in the section below:

[1] http://www.investopedia.com/terms/d/deflation.asp

[2] http://www.depressionscrip.com/

[3] http://bonnerandpartners.com/about/

[4] http://www.chicagobooth.edu/capideas/magazine/spring-2014/what-a-1920s-farm-bust-reveals-about-financial-crises

[5] http://econproph.com/2009/10/26/fdic-managing-the-crisis-the-fdic-and-rtc-experience/

[6] http://www.ushistory.org/us/49a.asp

[7] http://www.u-s-history.com/pages/h1528.html

[8] http://dp.la/exhibitions/exhibits/show/new-deal/recovery-programs

[9] http://www.econlib.org/library/Enc/GreatDepression.html

[10] http://www.econlib.org/library/Enc/GreatDepression.html

[11] http://fee.org/freeman/detail/the-great-depression

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10 comments

  1. Thanks for an informative article. Rothbard’s book, America’s Great Depression, should be required reading for all Americans. You can read it online at: https://mises.org/library/americas-great-depression

  2. An excellent article, and so very relevant in today’s environment. I remember my grandmother telling us about life during the Great Depression. Many people came through barely affected by the situation. They were those who lived self-sufficient lives and did the things mentioned in this article. Preppers they were. Preppers we are.

    • My grandparents raise six children during the depression.
      They grew their food, traded for what they needed, and repaired things instead of throwing them away.
      .
      I can’t imagine today’s dependent (on tech and JITD) generation making it.

  3. Get your money out of the bank and hide it from the thieves in the federal government.

  4. We are moving toward a cashless society. This move will ensure that there will not be a run on the banks, because we will have grown accustomed to never having cash. When all transactions are by credit or debit cards and by smart phones and electronic transfers, no one will try to pull cash from their bank.

    Since our “money” is not backed by anything real, and the Federal Reserve can create more “money” whenever it wants, there will never be a shortage of “money”. The move to a cashless world is designed to prevent the situation described in this article, and it will work…

    …Until there is a world-wide power outage. Then there will be no “money”.

  5. So, how then, shall we live? Best to avoid banks? Keep Cash? Stock precious metals in a safe at home? Have funds invested in stuff for barter? Obviously all should be concerned about living off grid concerning water, food, power, security, medical supplies and seeds. But how to be at the right place and the right time doing the right thing as this age comes to an end. I truly expect the next war to be with HEMP’s that are directional. When the U.S. Entitlement Programs can no longer be supported which may happen first. Then Food Riots, Marshal Law and Socialism (or slavery) seems to be on the horizon unless Congress gets a backbone and secures the simple and direct interpretation of our Constitution.

  6. J. Van Wyck Taylor

    With the advent of credit cards in the 1960s, everyone stopped carrying cash and started carrying plastic. Credit was easy to get (In the 1970s, I remember credit card companies sending credit cards to college students, like me, who didn’t have a job, much less the ability to pay their bills), and everyone took advantage of it. With credit cards, a face-to-face meeting with a banker and the completion of a loan application, didn’t happen, and, if the borrower was unable to pay monthly charges in-full, when the bill arrived, it didn’t matter. It only created a balance that was owed, and the spending and the lending on the credit card continued.

    Instead of lying in bed at night, worrying about how to pay off the credit card bill and get out of debt, it was easier to borrow and spend even more money that didn’t exist, hadn’t been earned yet and might never be earned for years, if at all. Until credit cards took the place of cash, there probably wasn’t any such thing as a credit score. Today, credit is king, and, if you have a high enough credit card limit, you can buy almost anything you want, right away. Buy it now. Pay for it later. There is nothing to worry about.

    My father grew up in the Great Depression and was “saved’ by military service in WWII. But he never forgot what the Depression was like, and, even though he was very financially successful, he didn’t buy things he couldn’t afford and even paid cash for automobiles, the really expensive ones. I never understood that, because, when I grew up and began paying my own bills, I learned the rule of OPM, which stands for “Other People’s Money” to buy whatever I wanted, not what I could afford. I even remember speaking with a friend, who was a banker, when I wanted to buy my first family home in 1979. I told him I was having a hard time, just trying to save a 20% down-payment, and he told me not to bother with that, because I could borrow my down payment, and I did.

    Things have really gotten out of whack.

  7. I have cash put away and have plenty of water on hand. I also have survival food on hand. And propane reserves so we can cook.

  8. Great article. Keep informing the sheeple they will come around some day

  9. The underlying issue is fractional reserve banking. Banks can run out of money in the US because the government not merely permits but encourages banks to lend out up to five dollars in credit for every one dollar depositors have given to the bank. Loaning out money you don’t actually have has always been a tremendously profitable practice–until it isn’t, until the market dips, until there’s a run on the banks. Which is always blamed on anything and anyone other than greedy bankster gangsters who want to keep their money machine rolling along at any cost. The banking industry is constantly lobbying to expand to $8:1 or even $20:1 ratios of credit to deposit, and there’s less will every year to resist them.

    This sort of thing is why I’ve reached the point where I refuse to do business with banks at all. It’s making it harder to find work–everyone these days wants to pay by direct deposit, or with some kind of debit card backed by the banksters. I tell them all that I require a paper check, or cash, if they want my services.

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