Copyright John T. Reed 2014
When I began to research past hyperinflations, I quickly came across mention of smugglers.
When you think about it, smuggling is the essence of free markets. Because international borders almost aways are places where different laws regarding the sale of certain goods exist merely several feet apart on the different sides of the border, smuggling arises across those borders.
Free trade is one of the seven pillars of prosperity. It simply means that a sale of goods is the business of the buyer and seller and no one else. But businesses often see laws as a way to defeat their competitors and moralists see laws as a way to force their fellow citizens to adhere to their moral code.
Thus do we have federal laws that prohibit import of certain goods, or that place tariffs or other extra costs on them so that the American producers of comparable goods can charge higher prices than they could if free trade prevailed. These are accurately called protectionism because they protect domestic producers from foreign competition—at the expense of American consumers. The very idea of tariffs and import bans is immoral and outrageous. Examples include my two-door convertible which has two unusable back seats (no place for your legs) because there is a low quota on the number of two-seater cars that Japan can export to America; and cane sugar which is targeted by high tariffs. Coca Cola around the world is made with cane sugar. But not in the U.S. It used to be made with cane sugar in the U.S., but American sugar beet growers, most notably the Fanjul family, contribute lots of money to politicians like Marco Rubio and they vote again and again to keep high tariffs on imported sugar. So American Coca Cola is the only Coke in the world made from corn syrup.
And we have laws that prohibit or raise the price of certain foreign goods that a political powerful group of citizens fervently believe are immoral or sinful. This is called puritanism. Examples include alcohol during prohibition and recreational drugs now. Canada and Mexico have lots of anti-gun laws which causes smuggling of guns from the U.S. into those two countries.
Other things currently being smuggled across the Canadian and Mexican borders include illegal immigrants, alcohol and tobacco products, medicines, undeclared quantities of cash,
Smugglers become more important during hyperinflation because Hyperinflation is always accompanied by five evil laws: price controls, capital controls, rationing, anti-hoarding laws, and financial repression laws. Roughly speaking, the combination of U.S. dollar (USD) hyperinflation means all store shelves and gas pumps will all be empty. Google Argentina and Venezuela today to read news articles about those things happening there—because they now have high inflation and price controls.
American sellers of goods would sell you food, gas, and other necessities if you paid for them with currency that is not hyperinflated, like Canadian dollars (CAD), but your possessing such currency and/or the seller accepting it and then possessing it himself, will be outlawed by capital controls during hyperinflation. Furthermore, rationing and anti-hoarding laws would prevent you from buying as much as you wanted even if the stores had anything to sell.
So what happens in hyperinflated countries? You might think people starved. You’re right. Many did in Germany and Austria during the hyperinflation there during the early 1920s. Survivors of past Latin American hyperinflations often say that only bartering of their household valuables enable them to avoid starvation. (Do not think “I’ll just do that, then.” In the typical case, you will be bartering something valuable, like a gold ring, to get something nowhere near as valuable before the hyperinflation started, like a loaf of bread or a gallon of milk or a dozen eggs. And they rarely give change in barter markets.)
There has always been smuggling, at least since laws pertaining to imports were first passed. There always will be smuggling in the future. During periods of hyperinflation, the amount of smuggling will skyrocket in the hyperinflated countries. And you will be extremely grateful for it. Necessities must be acquired and you won’t be able to get them from stores with empty shelves. You will only be able to get them from smugglers, if at all.
The closer you live to the border, the more smuggled goods you will have access to and the cheaper they will be. Living from from a border will be like living on an island. Everything will be more expensive because it has to be transported a great distance from the border. And since it is illegal, that transporting will cost more to hide from the authorities and you will pay for the hiding expense.
Products produced in the U.S. will disappear because the combination of price controls and hyperinflation will make it impossible for the manufacturers and farmers to produce them and sell them at a profit.
Price controls never apply to imports or exports but foreign producers will not sell to Americans for hyperinflated USD during the hyperinflation. So you will be stopped from buying imports in the U.S. legally because of capital controls preventing you from legally having foreign currency that is the only kind the foreign exporters will accept.
Smuggling works best with small, light products that have above-average value. During prohibition, smugglers smuggled whiskey from Canada, not beer which sells for less per gallon. Drug cartels smuggle cocaine, not marijuana. Because they are harder to hide, large products are either not smuggle-able or would cost far more as a percentage of their pre-hyperinflation value compared to the smaller, easier-to-hide objects. Smugglers who would smuggle whiskey, not beer may also smuggling beer-making equipment or marijuana seeds or growing equipment.
The Canadian land border is not the only border through which Canadian goods could come. Any place where customs guys work is also a border. And they also work at international airports and seaports on international waterways.
Being someone who works in international trade like imports, exports, international tourism, international banking, or international travel also has proven extremely helpful during periods of hyperinflation because such workers come in contract with foreigners and their goods and currencies.
There is a sort of Laffer Curve point of diminishing returns on the regulation of goods. This is true even within the U.S. Any prohibition, tax, tariff, raises the cost of the goods in question. That raises the profit opportunities for smugglers who ignore the prohibition, tax or tariff. That, in turn, requires the government to spend more money enforcing the prohibition, tax or tariff. That, in turn, drives up the cost of the legal goods and thereby the profit margin for successful smugglers of those same goods. The bigger the smugglers’ profit margins, the more money they have to bribe law enforcers.
When I read books about the Canadian border, Canadian border guards repeatedly told their superiors that many if not most of the tariffs or other restrictions were costing the Canadian taxpayers more to enforce than the tax revenue such enforcement was producing.
There is no constituency for the anti-smuggling laws except customs officials, the aforementioned unethical companies who hope to use import restrictions to hamper foreign competitors or puritans who cannot stand to see others engaging in behavior they hate. The smugglers’ customers love the smugglers. Businesses in the smuggling border area love the elevated prosperity smuggling brings. Paradoxically, smugglers love anti-smuggling laws because without them there would be no profit in smuggling, just as drug dealers are horrified by the prospect of drugs being legalized or bootleggers were horrified at the thought of repeal of Prohibition.
The June 12, 2014 Mises Daily email said there is a good new book about this subject called How Smugglers Made America by Mark Thornton.
Basically, all goods will sell worldwide for market prices. Any and all laws that try to stop that will be evaded to one extent or another by smugglers. That is a law of economics. I do not recommend that you smuggle or buy from smugglers. Rather, I recommend that you pre-position rainy-day savings abroad in foreign currencies in foreign savings accounts in foreign countries. Having that money or those currencies here inside the U.S. won’t work then because of capital controls. Then, if and when the USD hyperinflation hits the fan, either move to the northern U.S. right next to the Canadian border—and go across it regularly to shop with your foreign currencies—or leave the U.S. and take an extended vacation in un-hyperinflated countries using a succession of 90-day tourist visas and paid for by the foreign money you pre-positioned abroad.
For the bigger picture on this, read my book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition
John T. Reed