We’ve all heard the saying, “Those who cannot remember the past are condemned to repeat it.” That little gem comes from 19th Century Spanish philosopher George Santayana and, if there’s anything at all wrong with it, it’s that old George could have been a bit more upbeat.
He could have said something like, “Those who remember the past are in a great position to make a fortune.”
Now that’s a saying we could really use right now, in these dark, dismal days of recession/depression. So let’s pretend George actually did say something like that (it is, after all, a practical variation of his words).
What particular chunk of history could help us make the most money today?
Actually, there is an historical stretch that bears an uncomfortable resemblance to 2009, one with some timely fortune-building advice for those of us who will pay attention. That’s the ten-year period in Germany from 1914 to 1924.
Let’s take a quick peek at what happened back then.
Off of Gold and Into the FireTo give Germany some financial elbow-room after World War I broke out on August 1, 1914, the Reichsbank (the German Central Bank) broke the tie between the mark and gold. So, as is almost always the case at some point in the life of paper money, the German currency was now no longer redeemable in anything of real value.
With the stroke of a pen the mark became mere paper. Ironically, its new name was the papiermark.
From that moment on, the Reichsbank could print as much money as it wanted. And it didn’t hesitate to do just that. War, as we know through our adventures in Iraq, is a mega-expensive proposition, one that calls for an increase in the supply of money either through the issuance of bonds (Germany borrowed heavily to conduct its war, rationalizing that it would force the nations it defeated to deal with the debt) or directly through its printing presses. The prudent limitations of a gold-backed currency were no longer convenient during wartime; Germany and its enemies chose unbridled inflation to fund their war machines.
And there weren’t any worries about citizens losing confidence in this new barebones currency, either; when national survival is at stake, people tend to rally around their government and everything that issues from it.
It’s when wars are over, generally speaking, that governments have reason to worry—especially governments on the losing side—and that was the case with Germany in 1918.
A Fateful and Familiar DecisionBy the end of the war, Germany was a shattered nation. Germans were saddled with stiff reparations imposed by the Treaty of Versailles, and those war debts—past, present and future—further strained citizen confidence in the already weakened mark. Over the next four years, however, the Weimar Republic had a chance to regroup, restore a measure of confidence, and strengthen its currency.
What it chose to do instead, under its spendthrift socialist regime, was to keep the printing presses running night and day to pay for grandiose health, education and welfare programs.
That turned out to be precisely the wrong move at the wrong time.
As a result, consumer confidence took a nosedive and prices soon skyrocketed. Confidence eventually dropped so low that, in 1922, the nation tipped into a nightmarish hyperinflation.
Dog Chasing Its TailEver see a dog chase its tail? The faster it runs, the more its tail eludes it. Round and round it goes, never quite catching itself.
That’s what hyperinflation is like.
The faster the government prints money, the faster the markets respond by raising prices. Round and round the whole thing madly goes, never quite catching itself .
At the height of Germany’s hyperinflation, there were some 300 paper mills generating currency paper and 150 printers with 2000 presses running day and night to turn out marks. One day, the government even tried printing a quintillion (a million trillion) marks but wasn’t able to meet that fantastic quota.
Understandably, the value of the mark relative to the gold-backed dollar plummeted from 8-to-1 right after the war to 4.2 trillion-to-1 in 1924. Even the lowly American penny was valued at 42 billion marks! To accommodate those kinds of extraordinary imbalances, the Reichsbank finally had to issue such preposterous currencies as the 100 trillion mark.
Meanwhile, prices rose ferociously. There’s the story of a man who stopped by a shop for a cup of coffee, one that cost an outrageous 5,000 marks. After he finished it and drank another, he was stunned to be charged 14,000 marks—the price of coffee had apparently soared during his visit to the place!
Profitable Investment LessonsYou Can and Should Apply Right Now
So, let’s see…mega-costly wars…grandiose health and welfare programs…unthinkable government bailouts…a rapidly expanding yet increasingly worthless currency… skyrocketing prices of consumer goods and services…does any of this ring a bell?
Could we be on the same road as 1914 Germany?
Just as it was back then, we now talk of economic matters in terms of billions, trillions and even quadrillions (last year, there were $1.14 quadrillion of derivatives outstanding). And, like post-World War I Germany, we keep running the printing presses—or their digital equivalents—to pay for excessively expensive bailouts and social programs. There are some uncanny similarities.
So what advice would survivors of the Weimar Republic give us today?
First, the Germans who ultimately did survive and prosper were the ones who invested in gold and gold-backed dollars early in the hyperinflation process. “The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.” That came from a 1970 report by Scientific Market Analysis.
“Exchange” is the key word here. As has often been the case throughout history, a wise minority had enough insight to exchange what they viewed as an increasingly worthless currency for something of enduring tangible value: gold. It turned out to be a great move. Soon bundles of the once-valuable mark would serve only as good, cheap fuel for German stoves and furnaces.
Remember how one dollar was worth 4.2 trillion marks in just a couple of year’s time?
Gold and the dollar weren’t the only smart moves, though. Those who exchanged their marks for things—tangible goods, collectibles, raw materials, equipment and machinery—also did well.
“Capital was preserved by those who, early on, changed it into objects of lasting value—rare coins, stamps, jewelry, works of art, antiques—or into merchandise such as clothing, fabrics, etc. Of course, most people did not understand the advantage of accumulating such property until the inflation was well along. By that time the prices of all goods had risen so much that they seemed outrageously bad bargains. Cash, however, proved an even worse bargain.”
When the virtue of exchanging marks for gold and goods became obvious to the average German citizen, it became a nearly impossible thing to do. Truly, timing is everything.
So where are we on this (hyper) inflationary timeline?
Maybe the better question is, how long will it take for the government’s 2008/2009 $8 trillion dollar orgy to work its way through the economy? Because once those trillions in bank bailouts and social programs finally do make it to the surface, it may be too late to engage in the kind of gold fortune-building you can readily do today.