Replies

Yes, but what amounted to “instant deflation”, both then and now.

What had happened was that because of the use of margin to buy stocks, that is, being able to buy $1 of stock for .10 cents, a vast amount of “imaginary money” was created. Stock became an inflated alternative currency. However, the assumption was that it could be redeemed 1 for 1 with cash money. This couldn’t happen because there was vastly more stock than there was physical money to back it.

So when the market crash happened, there was a margin call, in which everyone who had purchased stock on margin then resold it was supposed to cough up the other .90 cents. Nobody had that much cash money, so went bankrupt. You couldn’t pay for your margin with stock.

Today we face a similar situation, because our virtual money on computers has become vastly inflated beyond our physical money. This means that if there was a “cash run” on the nation’s banks, they would be emptied of cash in an hour or two.

But couldn’t the government just print more paper money? In a word, no. There are only two printing offices in the US, and they work at capacity. And most of what they print are $1 bills.

But couldn’t they print higher denomination bills? There are relatively few $100 bills in circulation. Were the government to print even $500 or $1000 bills, nobody could make change for them.

So here we have two extremes. A severe shortage in cash money, and massive quantities of virtual money. But only cash money is legal tender. Nobody is required to take virtual money for debts. So if retailers refuse virtual money: credit and debit cards and checks, that money is worth only the amount of cash someone will give you for it.

In effect, we will have a split currency.

It would probably be a good idea to keep some mattress money at home in a safe place. Banks can no longer be considered as safe.