One of the most difficult investment disciplines to master is to learn from one’s experience but not to over-learn. It is human nature to give greater weight to those things one has experienced and less to the experience of previous generations. Inflation is one of the most fundamental of investment concepts. Its effects are extremely pervasive and hard to avoid. Yet chronic inflation is a very modern phenomenon. For most of British history, periods of falling prices are as common as those of rising ones. One reliable estimate puts prices at the beginning of the first world war as little changed from Samuel Pepys’s day. Nor was this confined to the prices of goods and services. The Moyse’s Hall museum in Bury St Edmunds has the deeds of a Suffolk farmhouse which was sold in 1924 at the depths of the postwar agricultural depression for the same price as it had fetched in 1647. As readers of 19th-century novels know well, it was not inflation but debt defaults and the associated bank failures which were the biggest threats to savings of previous generations. One such failure is a plot device in Elizabeth Gaskell’s Cranford.
Although the first world war resulted in a large rise in prices due to shortages, prices fell back after the war ended. This was in line with experience and Britain avoided the hyper-inflation that afflicted many countries in the interwar period. It has been since the second world war that inflation has emerged as the saver’s great enemy—and the borrower’s dearest friend. The high inflation of the 1970s was ruinous to the savings of the older generation and a boon to the younger generation who had borrowed to buy homes. Given the opposition to inherited wealth by the government of the day this was more than a little ironic. The ability to borrow in order to acquire a real asset and to then pay back the loan in depreciated currency created the conditions for one of the biggest tax-free generational transfers of wealth in history.
It’s easy to see how inflation crept up on a generation of investors who had been conditioned by a long period of falling as well as rising prices and how the exceptional circumstances of the destruction of industrial capacity by the war were seen as temporarily prolonging a period of high prices. The story is also an object lesson in not…