Betting on Deflation in 1923/4 Germany: the trade you didn’t hear about!

The inflation in the Weimar Republic is widely understood to be one of the worst periods of monetary debauchery in the history of the world. Of course, I agree with this notion. However, in the spirit of a true contrarian, I’m interested in one of the great trades that you didn’t hear about: betting on deflation in 1923/4.


In school, along with the millions of other children in the UK, I ‘learnt’ about the inflation in the Weimar Republic. However, pretty much the only thing that had a lasting impact on me, were the pictures of cartloads of paper marks being hauled to the local grocery stores. (Ironically, at the time I was rather jealous that the children of the Weimar Republic got to play with so much ‘real’ money.)


So it’s important to note that – at least in the UK – the thoughts of Germany in the 1920s invoke a knee-jerk fear of money printing. Rightly so, but it also invokes a notion that normal rules don’t count and that you’d have to perpetually own material goods. As a self-proclaimed contrarian; I’m looking for opportunities on the other side of such widely held convictions. In my search, I have stumbled across what I must call an epic trade by an epic trader: Jacob Michael’s deflation (mark stabilization) trade.


I quote from Constantino Bresciani Turroni’s book: “The Economics of Inflation: a study of currency depreciation in post-war Germany”.


“Like many other fortunate post-war speculators (Kahn, Mannheimer, and Steinberg in Germany and Bosel in Austria) [Jacob Michael] was in 1924 scarcely thirty years old. His case was interesting because, unlike the other new rich, Michael made the greater part of his money in the period immediately following stabilization. He threw over the principle which had ruled during the inflation, when the watchword had been “fly from the mark and buy material goods.” Michael shrewdly foresaw that the first effect of the stabilization would be the appearance of a scarcity of capital, which had been hidden until then by the continuous issues of paper money. Consequently, in the first period of stabilization, when everybody was jealously holding on to the real goods bought during the inflation, Michael sold the majority of his own shares, and, at a time when the ordinary sources of credit were almost dried up, had at his command enormous sums of money, which he lent out at extremely high rates of interest.”


I say, forget Warren Buffett and George Soros! Point your admirations toward the legend of Jacob Michael! When transposing the above to today’s inflation/deflation debate, there are some things that come to mind:


As I have written previously, central bankers do not know what to do until after the cat is already out of the bag. So what really constitutes the intermediate periods of market stress? A profound realization that capital is much more scarce than previously thought. It comes to be understood that the previous norms were illusory. In other words, we find out that we’re not as rich as we thought. This sounds rather familiar when reading the above quote.


I’m not saying that problematic monetary policies won’t ensue, I don’t know. What I am saying is that I believe in man and his will to live and thrive. I say that – at some point – we will embrace reality and recognize that we’ve been wasting precious capital for decades. These are periods of a ‘scarcity of capital’, where it pays to positioned in concrete forms of liquid capital (i.e. not Citibank demand deposits etc.).


A note about the speculators mentioned above: During the Weimar Republic inflation, there was a host of excellent speculators that clearly understood the nature of the mark (unlike their less enlightened peers). Hats off to them. However, a significant proportion of these speculators didn’t prepare adequately for the most lucrative twist: the stabilization crisis. One can understand how this could happen; we are all human and get comfortable when the market corroborates our long-held view. Now, our inflation bubble has been epic in its proportions. Perhaps we haven’t had a proper clear-out since the late 1970s? Or perhaps not since 1933? The implications of this are fantastic, because – potentially – people have lived their entire lives in an environment where the stock of capital has been vastly overestimated! Potentially, some of the very great speculators could miss this most lucrative turn of events.



See here for our collection of rare historical economic data.

Posted Mar 3, 2011
  • Henry Chisholm

    Excellent article. Yes, you can see the potential for the same phenomenon right now in the coming aftermath of the worlds massive money printing spree.

    I wondered if you had more info on Jacob Michael and others?

    These deflationary gamblers will surely be the new “rock stars” on the financial scene.

    To understand and profit from a potential devastating deflation after the mess the worlds central bankers have created is top priority now!

    Cheers Henry

    • Aftab Singh

      Henry, indeed I agree that such speculators will end up being colossal giants when everyone else has fallen. Although, unfortunately, I doubt they’d receive the positive vibes that comes with being a rock star! Rather I’d guess they’d be reviled by most (although not you and I).

      Unfortunately I can’t seem to find that much information about this elusive character. However, in Constantino Bresciani’s Book (link at the end of the above post or perhaps on scribd for free) there’s quite a lot of interesting work on stock prices, speculators and so on.. Check out my other articles here and here if you’re interested in what else the book has to offer.

      In a way, the epic traders of modern times are less extreme versions of Jacob Michael. Paul Tudor Jones in 87, Templeton in 00, Paulson in 2007/8 all got that a ‘scarcity of capital’ was the next turn of events to be revealed… There’s certainly more info around on these if that helps.

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