Buffet, money and power of name

By Arthur I. Cyr

Scripps Howard News Service

Back in the 1980s, a very successful ad campaign for investment adviser E.F. Hutton featured variations on a populated room ― an airport, cocktail reception, dinner or other venue. When one person mentioned that ``E.F. Hutton says ...” the room would suddenly become silent as everyone tried to hear the valued words from the vaunted company.

That old commercial comes to mind when considering the current impact vaunted investor Warren Buffett is having on the book market.

The usually reliable British Daily Telegraph newspaper this month reported that Buffett has been recommending the previously obscure ``When Money Dies ― The Nightmare of the Weimar Hyper-Inflation” by Adam Fergusson. As a result, in mid-July the book had rose to No. 20 among bestsellers on Amazon's British Web site.

Fergusson's study focuses on the disastrous blunders of the German central bank in the economic and political turmoil which followed defeat in World War I. Facing huge reparations payments from the victorious Allies, in particular France, drastic economic dislocation, and hoarding of enormous amounts of currency by banks and other corporations, senior officials panicked.

Desperate for currency, the Reichsbank ran the printing presses around the clock, churning out paper money to meet a range of otherwise impossible financial obligations. In consequence, the German currency in 1923 was rendered nearly worthless.

Fergusson describes a world ripped apart by war and nationalism.

French military intervention in Germany after the peace settlement damaged the economy, especially the industrial Ruhr, while enraging German opinion. The Bretton Woods coordinating mechanisms, in particular the G8 and successor G20, were utterly absent from 1920s Europe.

Restoring stability began to obsess the German people. Adolf Hitler and the Nazi Party effectively exploited that concern, though Fergusson perceptively argues the new regime was not grounded in any lasting fundamental economic strength. Lies are inconsistent with durable institutional value.

``When Money Dies'' was published in 1975, as inflation was increasing rapidly in global terms, fueled by the combination of large fiscal deficits, escalating government spending, especially in the United States, and the drastic 1973 increase in oil prices by Arab and other members of OPEC (Organization of Petroleum Exporting Countries).

The cartel had failed in a similar price gouging effort in 1960 but 13 years later controlled a much larger share of the global petroleum market. Arab states had the added political incentive of putting pressure on the U.S. and others allied with Israel.

The stagflation ― combined high inflation and high unemployment ― which plagued industrial nations through the 1970s was unnerving and at times apparently unmanageable. This did not end until U.S. Fed Chairman Paul Volcker broke inflation with very tough measures.

The contemporary global economy has been free of severe inflation, but the collapse in housing and associated derivatives markets understandably has raised images of the Weimar disaster. ``When Money Dies'' here has an important lesson for today. Simply injecting funds into an unstable economy without structural reforms is a recipe for failure.

Fergusson stresses the importance of integrity. Weimar officials along with business executives were guilty of widespread corruption.

Others simply did not value the truth.

Very relevant to this discussion, E.F. Hutton eventually was convicted of fraud, burdened with fines and finally sold off to other financial firms. Additionally, Warren Buffett has told a CNBC reporter that he had never heard of ``When Money Dies'' until another journalist recently called about his alleged recommendation.

Arthur I. Cyr is Clausen distinguished professor at Carthage College. He can be reached at acyr@carthage.edu.