When Money Dies

“When Money Dies” is the title of a 1975 book by Adam Fergusson, in which he describes the downfall of the Reichsmark in Weimar Germany. A fascinating look at that period of history, one can glean quite a few useful pieces of advice on how to survive a currency crisis. But “when money dies” could also describe the current currency crisis in Greece, in which many Greeks seem to have taken those lessons from Fergusson’s account of the Weimar hyperinflation to heart.

Even though the Greek currency crisis isn’t a traditional hyperinflationary crisis, many Greeks are trying to get their hands on, and then spend, cash. One of the fears is that bank depositors will be forced to take losses on their accounts, the so-called “haircut”. This happened in Cyprus to some larger depositors, but the fear in Greece is that people with even just a few thousand euros in their accounts might be forced to take losses of 30-50% or more. Just imagine that you have $10,000 in your bank account and overnight the government says, “Sorry, your account balance is now $5,000.” Overnight, the purchasing power of your bank account has been cut in half.

So even though the government isn’t printing more money (yet!), the fear of a 50% devaluation of the purchasing power of bank accounts is causing Greeks to line up at ATMs to withdraw money. And because there is the additional fear that Greece may exit the euro, with unknown consequences, many people seek to convert their euros into tangible goods. Shoes, handbags, refrigerators, gold, jewelry, anything that can maintain value and be resold or bartered is fair game for those desperate not to lose all of their hard-earned savings.

The important thing to remember here is that capital and goods are wealth, not money. You can print as much money as you want, but if it can’t buy you anything then holding or using large amounts of it cannot make you wealthy. During currency crises, those who have the most tangible goods are the wealthiest. When you read about the Weimar hyperinflation in Fergusson’s book, who were those who survived and thrived and who were those who suffered the most? Those who suffered were savers and retirees on fixed incomes. Once their money was completely devalued they were forced to start selling and bartering their limited possessions in order to get enough food to eat. Those who prospered were those who had gold, silver, foreign currency, and who had plenty of possessions. The more physical, tangible items you have to barter or sell, the stronger your position will be when money “dies.”

The Greek people understand that, hence the rush to get their hands on cash and to use that cash to stock up on physical goods now. It’s almost like a perverse game of musical chairs. No one wants to be left with huge cash balances or bank account balances at the end of the game, because he with the most money will be the one who stands to lose the most.