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In Israel in the late 70s early 80s the currency (Lira) became worthless. Suppose one day the American dollar would become worthless, and one owes another $1,000,000- would the borrower just pay back 1 million worthless dollars? Or is there a responsibility to pay back the value (purchasing power perhaps) of the money when borrowed? (sources would be appreciated)

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1 million dollars becoming worthless? That's nothing. Looks what's been happening in Zimbabwe en.wikipedia.org/wiki/Zimbabwean_dollar –  Double AA Dec 13 '12 at 21:27
    
Related: judaism.stackexchange.com/q/11386/3 –  WAF Dec 13 '12 at 21:54
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Bava Kamma 97a/b, last line. Rav says you must pay back value, Shmuel says you can pay back even that currency and say "go spend it where it works". And even Shmuel only meant when you could get to such a place. I would presume that a with regards defunct currency that wont work anywhere, even Shmuel would agree that you must pay back value. The halachah (Choshen Mishpat 74:7) is like Shmuel.

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איתמר המלוה את חבירו על המטבע ונפסלה המטבע רב אמר נותן לו מטבע היוצא באותה שעה ושמואל אמר יכול לומר לו לך הוציאו במישן אמר רב נחמן מסתברא מילתיה דשמואל דאית ליה אורחא למיזל למישן אבל לית ליה אורחא לא –  moses Dec 14 '12 at 0:49
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Does this imply that someone must pay additional to account for inflation? Currency devaluation is just a matter of degree - so where is the line? –  Ariel Dec 14 '12 at 2:26
    
Perhaps the Halacha is different now. In those days coins had value - silver or gold - not like today's funny money. –  Gershon Gold Dec 14 '12 at 13:55
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