Remember the three day week, miners strikes and the glories of fixing British Leyland cars, where every motor was a Friday afternoon job? No, you probably don’t because you weren’t born then 😉 To be honest I was a kid then so I didn’t really understand the horror.
This was after the 1973 oil shock, and there was this thing called inflation stalking through the land. A chap called Adam Fergusson looked back in time, to 1930’s Germany, to garner information about inflation, and this book encapsulated what he found.
Though the stage had been set for the inflation by the conditions set at Versailles, the story has curious resonances with now. In the initial stages, the inflation took the form of a slow-motion economic train wreck, which is similar to now in terms of the middle classes slowly being destroyed by their purchasing power dropping. Some people who either have non-financial capital, particularly businesses connected abroad, do quite well, and foreigners do particularly well as their hard currency is highly sought after.
Now of course the German experience was far worse that anything we have experienced in recent times, and has had a deep effect on the German psyche, with a low tolerance of debt and a low tolerance of Club Med profligacy at the moment. This book is a powerful cautionary tale of what may lie ahead if we don’t get a grip on inflation.
Money can die, it’s happened before and it’ll happen again. My great-grandmother saw it happen to her.
I was lucky enough to have met my great grandmother, who had lived in Germany through the 1920s. She didn’t trust paper money, she didn’t trust banks, her economic belief was in holding hard goods and land.
Bear in mind that though this was in the 1960s, the German Deutschemark already had a legendary reputation as a result of Konrad Adenauer’s Wirtschaftswunder. As a very small child, I visited her in a nursing home which seemed a model of clean and attentive services (she was physically though not mentally frail that I could see) and the Germany I travelled through by train was clean and modern. This struck me when compared with the shabbiness of early 1960s Britain and the bomb-sites that still littered London which would provide me and my schoolmates a playground in the years to come.
As another example of why this looked odd to even an unsophisticated pre-schooler like me, my grandmother wondered why there were so many bangers on the roads of Britain, compared to at home where the VWs, Audis, BMWs and Mercedes Benzes that were the output of the Wirtschaftswunder were humming up and down the federal highways of West Germany.
So against this backdrop, what on earth was this good lady on – after all, her son-in-law worked for a bank. My mother explained that she had seen some bad stuff happen in the past and had lost her life savings, twice.
Inflation in 1920s Germany
This kind lady’s eyes sparkled as she passed over a piece of knowledge across four generations in the peculiar way that only personal knowedge can, and my grandfather from the bank filled in the backstory over te years to come, I think he even showed me one of these, which I recently saw again in a free exhibition entitled Inflation, War and Global Financial Crisis at the Fitzwilliam Museum in Cambridge.
Here it is, a big, strapping 100,000 Mark note. It’s difficult to say how much this would have been worth, but the number on the front wasn’t so outrageous. For instance if it were Italian Lire before 2000 this would be about equivalent to a fifty pound note.
However, soon it wasn’t enough. It was causing the sort of problems the chap in the photo on this post was having. With the aim of easing the workload of the Weimar Republic’s chiropractors, and returning the country’s sack-barrows to the urgent task of moving barrels of Pilsner about, there was clearly a need for a bigger denomination.
Now let’s think about this for a moment. We’ve shifted scale from 100,000 to 1,000,000,000, four orders of magnitude. Consider the UK currency, which manages with a smallest note of £5 and a largest denomination of £50, just one order of magnitude. The Euro manages with two orders of magnitude, €5 to €500. Something very dramatic must have happened in Weimar Germany to need such a range.
You can see in the five years from 1918 to 1922 the German population ate a hit of 100 times inflation. That’s pretty bad – though I’ve spent enough time berating UK inflation as rotting savings, these poor Germans experienced the same amount of inflation in five years as you would if you took 20 five pound notes from Queen Victoria’s reign and presented them to the Bank of England in return for two shiny £50 notes. That’s tough, but nowhere near as tough as the ten thousand million to one inflation they experienced in 1923. This ended when the Reichsmark took over and twelve zeros were struck off the paper marks.
This story impressed me as a pre-schooler. Imagine what it did to the German nation.
The ghosts of those who lost everything the Weimar Republic still whisper across the generations in modern Germany
I noticed it as a young adult when I took my first road trip to Germany and Switzerland in the 1980s. I was able to use my credit card in France, but as soon as I crossed the border at Aachen I had to use Eurocheques and a Eurocheque card. The Germans just didn’t do credit, they had seen where that had gone and even three generations down the line they would have none of it.
Even nowadays though credit cards find wider acceptance you would be ill advised to rely on it in Germany for everyday purchases, and cash is used more than I am used to in the UK. Other apsects of life are touched by the background radiation of the 1920s still decaying in the German collective conciousness, for instance a German would look at the British twenty-something’s eagerness to buy a house with a mixture of pity and wonder. Germans tend to save money and buy a house in middle age; and as a result they have a rental market that is far more lifestyle-friendly than in the UK.
This attitude to credit is part of why Germany now looks around it and the wreckage of European Monetary Union and asks itself “how did things get this way?” It is part of why Germans save more than Greeks, why they run a tighter fiscal ship.
Deep within the family traditions, the ghosts of the 1920s Weimar Republic are preserved and whisper to Germans why you don’t live life on the never-never, burning through tomorrow’s money today as we have been doing in the UK and in America. It wouldn’t be so bad if we spent it all on wine, women and song, but what we did with it is inflate the price of property, making ourselves feel richer by taking money from our future selves, and in a casual drive-by shooting of our younger folk inflating the price of an essential asset, accommodation.
History doesn’t repeat itself, but it can rhyme
There’s a clear takeaway from the German experience. It is harsh, and few people will have the balls to use it, but it is written in the graph above. As a German with financial wealth, you had one chance to do something about this, and it was in 1918 to 1919 (I’m aware that they may have been dealing with other problems as a result of action prior to 1918….) The message is this
When you have lost half your financial wealth to inflation within the space of a couple of years, convert your paper wealth into hard assets, or prepare to kiss it goodbye.
Now I’m not saying that it will happen here. Though our situation is dire, I’m not making the case that it is as desparate as that of the Weimar Republic. But I am saying that it could happen here.
It is hard to take that action under fire. It takes great intestinal fortitude to surrender the norms of one’s life to a new reality and then take action on that new reality. This sort of crisis is not within living memory in the West. It may take a different form, for instance peak oil and resource shortages might change the value of non-financial assets too. However, in general, the people that survive a black swan event are usually the people that do something different in response to their new reality.
The response to inflation and the threshold is my opinion, and should be read as such. Look at the data and form your own opinion, and act accordingly. None of this should be construed as investment advice.