THE THREAT OF INFLATION 49for investors to understand because much of the damage to your
wealth actually occurs at the inflationary stage, not the hyper-
inflationary stage. The hyperinflation of Weimar Germany is a
good case in point.
In January 1919, the exchange rate of German reichsmarks
to U.S. dollars was 8.2 to 1. By January 1922, three years later,
the exchange rate was 207.82 to 1. The reichsmark had lost
96% of its value in three years. By the standard definition, this
is not hyperinflation, because it took place over 36 months and
was never 50% in any single month.
By the end of 1922, hyperinflation had struck Germany
with the reichsmark going from 3,180 to the dollar in October
to 7,183 to the dollar in November. In that case, the reichs-
mark did lose half its value in a single month, thus meeting the
definition of hyperinflation.
One year later, in November 1923, the exchange rate was
4.2 trillion reichsmarks to one dollar. History tends to focus
on 1923 when the currency was debased 58 billion percent.
But that extreme hyperinflation of 1923 was just a matter of
destroying the remaining 4% of people’s wealth at an acceler-
ating rate. The real damage was done from 1919–1922, before
the hyperinflation, when the first 96% was lost.
If you think this can’t happen here or now, think again.
Something like this started in the late 1970s. The U.S. dol-
lar suffered 50% inflation in the five years from 1977–1981.
We were at the takeoff stage to hyperinflation, exactly where
Germany was in 1920 on a relative basis. Most wealth in savings
and fixed income claims had been lost already. Hyperinflation
in America was prevented then by the combined actions of
Paul Volcker and Ronald Reagan, but it was a close call.
Today the Federal Reserve assumes if inflation moves up
to 3% or more in the U.S., they can gently dial it back to
their preferred 2% target. But moving inflation to 3% requires
a huge change in the behavior and expectations of everyday