Populism, The Wizard of Oz, and the return of inflation

The Wizard of Oz can be viewed as a populist political allegory born out of the hardships of two very similar periods of economic upheaval. Things aren’t so different now.


Echoes of the Great Depression run all the way through the film of The Wizard of Oz
(Image credit: 2011 Silver Screen Collection)

We were channel-hopping yesterday to see if there were any decent family films to watch.

There weren't. But we did catch the tail end of The Wizard of Oz. I'd forgotten what a fascinating film it is.

It came out in 1939, and echoes of the Great Depression run all the way through it, from Dorothy's dustbowl existence in Kansas, to the essentially benign but powerless snake-oil salesman running the show in Oz.

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But what's particularly interesting is that the original book took shape during a very similar period of economic upheaval and populist anger among rural communities.

In 1900, the US was nearing the end of several decades of deflation and low interest rates, marked towards the end by a spike in social upheaval and rising support for populist political parties.

Hmm that rings a bell, doesn't it?

Our financial environment is unprecedented but it's not entirely alien

But we have seen environments like this before. And while past performance is no guarantee of future performance, it's worth looking at history for clues as to what might happen next.

On that score, there's an interesting piece in the FT this morning from Laurence Mutkin at BNP Paribas. Mutkin points out that similar circumstances collapsing bond yields and a deflationary environment prevailed between 1873 and 1895.

Prices fell by 40% during that period as the industrial revolution took hold and global trade volumes soared, says Mutkin.

(In the 1880s, of course, they didn't have central banks trying to force up inflation. You have to wonder what "good" deflation might have meant for prices in the 1990s and 2000s following the collapse of the Berlin Wall and the introduction of China into the global trade network had we not had central bankers desperately trying to meet 2% inflation targets across the globe.)

Eventually, though, the fall in prices and interest rates came to a halt. Why? Two things, says Mutkin: a rising money supply, and increasing protectionism.

In the 1890s, new gold fields were found in South Africa, and gold production became more efficient. As a result, the quantity of gold being produced took off.

At the time, gold really was money. So finding all this gold was, in effect, the equivalent of modern-day quantitative easing, says Mutkin.

It wouldn't be the first time that soaring precious metal supplies had driven up inflation it happened to the Spanish empire in the 15th and 16th centuries.

The rise in protectionism and populism

We're certainly seeing an echo of this now. Both of the US electoral candidates are pulling back from globalisation. And the EU has been unable to agree a trade deal with Canada because a region of Belgium doesn't want the deal to go ahead.

(Regardless of how you voted on Brexit and you can spin the story as being negative or positive for a post-EU Britain you have to admit that this clearly demonstrates the unwieldy nature of making trade deals as part of a 27-member bloc.)

The parallels with the US political situation are particularly striking. Political anger among farmers in the US gave birth to the Populist Party in the 1890s.

I'm no expert on this topic and as with every complex economic historical debate, there are plenty of differing viewpoints but, broadly speaking, farmers were angry about falling produce prices, competition from overseas producers, perceived overcharging for moving goods by rail, and a general sense that their position in the economy was in decline.

The Populist Party (and its various offshoots and feeder parties) was fighting for the rural small farmer against elites in the city, with their high-tech railways and manipulation of monetary policy the farmers wanted to drop the gold standard in favour of an easier money' silver standard.

Some even argue that The Wizard of Oz was a political allegory about bimetallism (Dorothy's slippers are silver, not ruby, in the original book). The writer, Frank Baum, apparently denied any agenda beyond writing an entertaining story for children, but he was certainly politically active.

In any case, this all sounds very familiar: today we have Donald Trump and his army of the ignored vs Hillary Clinton, the candidate of the establishment, Wall Street and the banks. Trump's essentially nasty character has reduced his chance of success, but while the Populist Party never produced a president, the entire movement helped to shape political policies across the spectrum.

The return of inflation

In other words, if history is any guide at all, then we really could be drawing close to the end of the bond bull market.

What happens next? Well, let's hope the historical parallels end there. But let's hang on to gold just in case.

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.