On Wednesday I wrote to you about the great German inflation of the early 1920s.
It was the first part of a book review of Jens O. Parsson’s Dying of Money.
Germany abandoned the gold standard and tried to pay for the war and consequent (and gigantic) reparations not through taxation, but with printed currency (German marks).
Money supply – the number of marks in circulation – grew consistently and increasingly from the end of the war in 1918 all the way until 1923. Price rose, paused, inched higher, jumped and flitted around, but the trend was an acceleration upward.
The speed and scale of price rises seem terrifying and alien to us now, after 50 years of falling inflation.
Prices rising four-fold in a year, let alone 40, would be unthinkably extreme in 2021.
But that’s what happened after the calm period of 1921, when the economy was booming, exports soared and the party was unstoppable.
The final countdown
Ater a calm period (100 years ago) in 1921, prices in Germany started rising again. Speculation took hold and volumes soared on the stock markets.
In the summer of 1921, prices rose fourfold. That alone would mean a £24 pint by this September, if you’re not counting the inflation that had already gone before.
After that, they rose another ten times by 2022. So all told, a 40-fold increase in around a year… after a 17-fold increase before 1921. And we’re not even at the real hyperinflation yet.
The higher-ups in business and politics were moving their money into gold and other currencies by this point.
In an 11-month period, prices rose 200-fold.
To put this all into context…
Germany’s total prewar mortgage indebtedness alone, for example, equal to 40 billion marks or one-sixth of the total German wealth, was worth less than one American cent after the inflation.
As Jens Parsson himself put it, which has deep connotations for investors today…
You don’t want to be a creditor when the government is the biggest debtor.
Well today, governments are the biggest debtors in town.
Back then, they forced trustees, pension funds and financial institutions to invest in what they were selling – bonds – and were duly wiped out. Savers get punished during inflation.
Parsson notes that money supply (the number of marks in circulation) led inflation every step of the way. Often, because currency markets were unconstrained, they were the first to show the signs of inflation, as money seeped out and then fled the German mark.
Are we seeing something similar today, with gold, bitcoin, and other commodities? A flight to safety of sorts? Perhaps – but if so, then it hasn’t yet begun in earnest.
Finally, Germany’s famous Versailles reparations amounted to four times the size of the national GDP. It was too much, and it could never be repaid in good money.
In the end, the crushing burden forced the printers to go brrrr, and it was ultimately paid off in a worthless currency – so nobody won.
Though it was always possible to dismount, it was never possible to dismount painlessly. Every day that passed, appeasing the inflationary dragon with more inflation, increased the assured severity of the inevitable medicine. So long as the Siren-like lure of the easy wealth continued, it was impossible to persuade enough of the nation that titanic measures of austerity and self-denial were necessary. When the Siren’s song stopped, the crash had already begun and it was too late.
The inevitability of it all is something I find scary. Those descriptions of Germany’s addiction to free money and the inflationary boom echo with the addiction of financial markets to quantitative easing today, and the easy money policies we’ve had for so long.
In the end, Germany paid the ultimate price.
The later agony of Germany and the world, personified in Hitler, was deeply rooted in the inflationary crash. It was no mere coincidence that Hitler’s first Putsch occurred in the last and worst month of the inflation, and that he was in total eclipse later when economic conditions in Germany improved. When still another economic crash struck Germany in the 1930’s, Hitler rode into power not by coup but by election.
It took Hitler multiple attempts to surge to power.
And no doubt there were many other forces at play. But desperate people are the best audience for the simplistic messages and quick fixes of extremists, nationalists, and populists.
Five years of wild inflation, a hyperinflationary melt-down, and then a later financial crisis in 1929 proved too much for the Germans, and they turned to a man who promised to help. To change things, to turn the tide.
Today, we have seen populists rise to power across the globe in the wake of the global financial crisis 13 years ago.
With a pandemic, lockdowns, and even more extreme central bank policies, inflation is the last thing the world needs. Food prices are soaring across the world…
The International Monetary Fund recently put out a report explaining how with high inequality, pandemics tend to lead to social unrest about 14 months after the event, on average.
Germany provides a real warning to us, and to the guardians of our currencies, that the long-term costs of excessive monetary policy (too much printing) can far outweigh the short-term pain of reducing support for financial markets.
So that’s a flavour of what the book offers on Germany – economics, politics, history, and many modern parallels.
But really… it’s amazing. I found it as gripping as any thriller, so incredible are the stats, the development, and the feeling of inevitability to it all.
I haven’t even been able to cover the political machinations which saw politicians believing that they had to keep the printers rolling in order to keep up with inflation. They saw the cause as the solution, and it drove the spiral higher and higher.
So go out there and get it for yourself! There are PDFs online too, if that’s more your thing.
Next time out, I’ll look at what happened in the US in the 1960s, which could offer an even closer parallel to where we are today. Learning more about inflation is essential reading for me right now, and for all investors I would say.
All the best,
Editor, UK Uncensored
PS If you’re worried about inflation or the value of the pound, then you need to read this.