US inflation has recently been surging and is now “trotting”. From Gerald Feldman’s description of Germany’s inflationary episode a century ago, one is struck by many similarities with today…

US CPI inflation recently hit 7.9% - not only is this a 40-year high but it’s also a pace one might refer to as “trotting” inflation. If inflation keeps rising, we - or at least the Americans among us - might be about to experience “galloping” inflation.

A shift from trotting to galloping inflation is described in Gerald D. Feldmans great book “The Great Disorder” which analyses Germany’s economic and political situation between 1914 and 1924. One comes away with the conclusion that Germany probably had a theoretical ability to combat inflation in the early 1920s, as well as the intent - at least among some key decision-makers - but in the end the country’s political ability was shown to be lacking.

A trotting horse and its driver

A trotting horse and its driver Source: Wikimedia Commons

What makes Feldman’s book even more interesting is that he - writing about the beginning of the 1920s - describes an environment which in many ways is ominously reminiscent of today.

Conditions when Germany transitioned to galloping inflation vs the US in 2021

Germany 1920 United States 2021
The central bank had accumulated a large share of government papers which had led to more money in circulation. The size of the Fed’s balance sheet AND the amount of money in circulation is record-high.
The weakening of the currency enabled a “permanent bull market” in equities. “Permanent bull market” is unlikely to be technically correct - nothing is permanent, but the phrase has been prevalent in recent years.
It was a time of “never before seen speculation”, where even rich capitalists accumulated “real values”. Measured as S&P500’s market cap as share of GDP or margin debt as share of GDP, we may have experienced unprecedented speculation. Individuals such as Bill Gates have been accumulating real values such as farm land and Fink’s BlackRock have been buying houses.
Companies were importing more commodities in anticipation of them becoming even more dear. Companies across the globe has been importing plenty of resources. In some countries and sectors even hoarding commodities. World Bank recently warned (or recommended) against hoarding of food and gasoline - never a good sign.
The Chancellor worried that citizens had started to “flee” the reichsmark in order to protect themselves against currency weakness. Individuals have been fleeing fiat currency into equities, gold and crypto for years. A friend of mine said more than two years ago that he “was afraid to hold cash”.
Increased use of foreign currencies was seen as threatening the country’s “monetary sovereignty”. Central banks ARE worrying about reduced “monetary sovereignty” due to the rise of crypto currencies such as Bitcoin. Facebook’s Libra/Diem currency scared e.g. the ECB and caused an acceleration into CBDC development.
The working class was losing confidence in the government. The larger trend of falling confidence in Congress and media remains in place, and Biden’s approval rates have been falling since inauguration 2021.
The Chancellor at the time was distressed by “reports that women appeared to be in a particularly belligerent mood”. Just have a look at social media :-) (nota bene: I’m not implying Biden is as “distressed” by this phenomenon as was Germany’s Chancellor, but perhaps it can help explain why the Biden admin is seeking help from teenage TikTok stars). But I digress.

What finally caused Germany’s inflation to start galloping in the early 1920s was a change in wage formation. According to Feldman:

The tide against wage restraint was turned in the summer of 1921.

After a bread price hike of 50% on August 15 2021, workers in the coal industry demanded higher wages, which the industry accepted - and subsequently hiked prices in order to preserve their profits. Government employees didn’t want to lose out on the fun, and successfully sought to compensation for the high cost of living as well. “The private sector was no less troubled.”

Simply put, the workers had finally gotten tired of falling real wages and now sought to anticipate the inflation rather than react to it… ´. And it was at this point that inflation started to gallop.

A couple of months later, the city of Berlin prohibited public meetings in order to prevent plundering and “panic buying” of clothes and shoes.

US wage inflation has reached its highest pace in 40 years, and gauging by quit rates and other measures of labour market strength wage earners are in a stellar position currently…

Piles of new banknotes awaiting distribution

Piles of new banknotes awaiting distribution Source: Wikimedia Commons

Good intentions and theoretical abilities not always enough

Fed Chair Powell was recently asked whether the Fed is prepared to do what it takes to get inflation under control, he obviously responded in the positive. As Fed Chair he is not allowed to say anything else. The intention to combat inflation is likely present within the Fed.

Theoretically, the authorities are also likely to be able to dampen inflation. The “easy” way to combat inflation is simply tighten monetary policy enough, possibly triggering a new recession. Fiscal austerity could help out: just stop spending and/or hike taxes, Austerity does not seem likely, as evidenced by the discussions regarding (inflationary) tax cuts on fuel, not to mention Green New Deals, Build Back Better Programs and prospects for more wars…

Two weeks to flatten the price?

There are also unorthodox tools that can be put to use. The German city of Berlin prohibited public meetings to prevent “panic buying” in 1921. Perhaps it was on to something? If current authorities were to prohibit public gatherings this would offer another way to combat inflation - perhaps delay it, simply via implementing more lockdowns (though perhaps this could turn the population restless after the past two years).

In related news, the International Energy Agency (IEA) has suggested taking away other freedoms, such as implementing “car free Sundays”, and also to prohibit people from driving their private cars: “cars whose number plate ends with an odd number can drive on Monday”. What’s not to like, if you’re not a climate denier?

Feldman’s book shows that good intentions are sometimes not enough, not even when coupled with theoretical abilities. At times the political ability is simply not present. Those in power cannot always control everything, and what they think they are controlling might even revolt against them.

Prohibitions of public meetings and consumption bans were not enough to change Germany’s trajectory towards galloping inflation in the 1920s.

Galloping inflation rates were followed by still-higher ones - hyperinflation.

Note: the source for the cover photo is RareHistoricalPhotos.com