Lessons from Weimar

Today's economists have learnt enough from the mistakes of the Weimar Republic that we are unlikely to see prices rising at 50% a month. But 14%-15% a year is eminently possible.

I had dinner with Adam Fergusson, author of When Money Dies: The Nightmare of the Weimar Hyperinflation, this week. We reviewed the book in the magazine a few weeks ago. For those who haven't yet rushed out to buy the book, it's a fascinating account of the way utterly uncontrolled inflation turned Germany from a relatively sophisticated capitalist nation into the sort of barter economy that had its middle classes trading pianos for potatoes.

Adam is a slightly bemused man. He wrote the book in the 1970s. When he started it, UK inflation was around 13%. By the time he was half way through, it had flown past 20%, which explains why the book sold as well as it did when it was published. However, after Margaret Thatcher and Geoffrey Howe (to whom Fergusson was an adviser) tackled inflation in the 1980s, he rather lost interest in the book, as did everyone else.

So it came as some surprise to him a few years ago to find it, now long out of print, changing hands in the US for $1,800 as investors and politicians tried to figure out what would happen if they found themselves addicted to quantitative easing (QE), the modern bankers' version of printing money. The republished edition has become something of a best-seller (although the rise in supply has pushed the price down to under a tenner).

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I asked Adam the question he must hear all the time: can it ever happen here? He says absolutely not. There are only two environments in which hyperinflation can really take off, one of total cynicism (think Zimbabwe) and one of utter ignorance.

The latter caused the Weimar Republic's problems, says Adam. With no understanding of the Quantity Theory of Money, politicians assumed the problem was not too much money, but not enough, as did the workers who kept demanding more of it. (As Adam says, workers always strike for the wrong thing they shouldn't demand more money, they should demand policies for stable prices.) So the government printed more and gave it to them over and over.

Our governments aren't quite that ignorant: they know that massive monetisation of government debt (the risk today) is the route to hyperinflation. So it would take a moral vacuum of huge proportions for them to take it. But that doesn't mean high inflation isn't on the way. It's already clear that UK inflation will stay sticky. If, after the biggest recession for generations (one driven by a bank crisis for good measure ) we still have CPI at over 3%, it is, as CLSA's Russell Napier points out, hard to see what might push inflation down.

That's particularly the case given that another round of QE looks quite likely and that rising wages in China mean we are set to import even more inflation from Asia. I asked Adam about this too. We might be lucky enough never to see prices rising at 50% a month, I said, but what about 14%-15% a year? "Oh that's easy," he said.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.