by Gary Alexander

October 10, 2023

A century ago, hyper-inflation was reaching the explosion point in one nation, while a deflationary boom was about to begin in another. The first event caused a national revolution that led the world into its worst nightmare of the century. The second led to another kind of nightmare, but one that helped defeat the first.

On October 11, 1923, the German mark – which traded at four per dollar before 1914 – fell to four billion per dollar in the postwar hyper-inflation which destroyed the German currency by the end of November. Retirement savings evaporated, leading to social unrest and the Munich Beer Hall Putsch (a violent insurrection) led by Adolf Hitler and his national socialist (Nazi) Party, with all the horrors that followed.

In America, by contrast, better times were just beginning as the Dow Jones Industrial Index bottomed out at 85.76 on October 27, 1923, marking the effective start of the Roaring 20s bull market, which rocketed up 344% in less than six years, reaching Dow 381 on September 3, 1929 – and that was all a real gain (after inflation), as the 1920s were a mostly deflationary decade, in contrast to bull markets since then.

Consumer Price Index Change Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Fed is born (1914), World War I Inflation (1917-19); a deflationary crash (1920-21); then a flat-price boom (1923-29)

Stock Soared During the Roaring Twenties Table

In the 1920s, America was under the discipline of the gold standard and a relatively enlightened financial management team under the direction of Secretary of the Treasury Andrew Mellon. Over in Europe, Germany could have avoided hyper-inflation and returned to its pre-war currency values, were it not for the punitive 1919 Treaty of Versailles, which demanded an unrealistic $33 billion in war reparations.

Young British economist John Maynard Keynes was in Versailles and counseled limited or zero war reparations, preferring debt forgiveness akin to the later Marshal Plan, but he was over-ruled. In his 1919 book, “The Economic Consequences of the Peace,” Keynes predicted a Second World War in 20 years!

In 1920, a shocked Germany did the rational thing – with a touch of vengeance: they printed marks in abundance to pay for losing the Great War they thought ended in stalemate. Even in 1920, there was little evidence of inflation, as the mark traded at 10 per dollar; little changed from its pre-war 4-to-1 rate, but the mark fell to four billion per dollar by November 1, 1923. The next week, a loaf of bread cost 140 billion marks. By November 15, the mark was worthless and most German fortunes were destroyed.

Gold Mark Value in Paper Marks Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In America, the Great Depression was not caused by the 1929 stock market crash. The market recovered strongly by the spring of 1930 but was sent into its death spiral by the Smoot-Hawley tariffs in June 1930 and by the Federal Reserve reducing money supply by approximately one-third, as documented by Milton Friedman and Anna Schwartz in their “Monetary History of the United States, 1867-1960” (1963).

Future Federal Reserve Boards learned from their mistake and avoided deflation in the future, but Paul Volcker (serving 1979-87) sailed close to the shoals of a deflationary shipwreck in 1980-82, after he had been tasked by then-President Jimmy Carter to break the back of inflation. He did so, with a vengeance, probably costing Carter his job, but eventually breaking the back of inflation during Reagan’s presidency.

I’ve been reading my own newsletters of that era, AMEN (“Alexander’s Monthly Economic Newsletter”) and I was frankly terrified during the first half of 1982 that Volcker was creating a new Great Depression with his draconian rate increases (to rates over 20%). I counseled investors to forget their inflationary strategies of the 1970s and treat “cash as king.” I didn’t break out of that funk until August, when Volcker suddenly cut rates in giant steps and the economy recovered in his massive game of financial “chicken.”

Federal Funds Effective Rate Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

It’s unlikely that Jerome Powell or any future Federal Reserve Chair will go as far as Paul Volcker did in attacking inflation, since the recent “transitory” inflation surge was not as seriously entrenched as the decade-long stagflation of the 1970s, which preceded Volcker’s blitzkrieg. In fact, this past July brought us deflation in goods sold by manufacturers (-4.1% year-over-year), wholesalers (-5.6%), and retailers (-0.3%), so the Fed has already achieved its desired 2% inflation target, except for the energy sector.

Manufacturing and Trade Sales Price Deflators Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In answering my August 22 query: “Will the 2020s Be a New Roaring 20s, or another Stagflationary 1970s?” the jury is still out, but the jury also gets to vote – in November 2024, as they did in 1924.

A century ago, the Coolidge team delivered prosperity, while the Hoover team did not. There are many technical reasons why, but Coolidge said it best, “That man [Hoover] has offered me unsolicited advice for six years, all of it bad.” Coolidge’s biographer Amity Schlaes followed up: “When Hoover’s orders emanated from the Commerce Department, they didn’t matter too much. Come to presidency and the Depression, however, his policies did real damage.” Maybe we need to find “a new Cal” for 2024!

For more about the history of that era, read Amity Shlaes’ great trilogy:

Amy Shales' Great Trilogy Books Image

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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