At age twenty, he landed a job at the Toronto Star. Some say the paper made him the writer he would later become. He honed his craft at the paper. He observed people and traveled to places he would later feature in his fiction.
Still just twenty-one, the paper moved him to Paris as its European correspondent. He fell in love with the city, saying Paris was a city that stayed with you even after you left, a moveable feast.
While stationed in Paris, the young Ernest Hemmingway traveled about Europe, most likely in search of adventure, but also to find stories. On more than one occasion, he traveled due east from Paris to Strasbourg, a French city on the country’s eastern edge. It was from Strasbourg, one day in the fall of 1922, that Hemmingway crossed the Rhine River into the small town of Kehl, an all-but-forgotten German town sandwiched between the Rhine River on one side and the Black Forest on the other. In Kehl, Hemmingway would find his story.
Hemmingway had earlier exchanged French francs for German marks. He used some of those marks to buy five apples from a nice German lady at a fruit stand. An old German gentleman approached him and asked, “how much were the apples?”. Hemmingway responded that he paid twelve marks for the apples. The old man said, “I can’t pay. It is too much.”
The odd thing about Hemmingway’s encounter, and no doubt what made it his story, was the twelve marks were the equivalent of just 1.6 cents. That was for all five apples. Hemmingway had paid 1/3rd of a cent for each apple and it was still too much for the old man.
Germany in 1922 was in the early stages of a great inflation, one that over the subsequent eighteen months would reduce the value of its currency to zero. What Hemmingway stumbled on in Kehl that day in 1922 was an economy struggling with the ongoing devaluation of its currency.
When a currency loses its value, the price of everything denominated in that currency goes up. We call that inflation. The prices of all items, however, do not rise at the same time nor at the same rate. The prices of some things are faster to respond than the prices of others. It is that timing difference that creates large scale economic distortions in the economy. It was that timing difference that gave Hemmingway his cheap apples.
As a currency devalues, the prices of goods and services traded in large liquid markets tend to move faster than the prices of goods and services traded in less liquid and more local markets. We think that is attributable to several things. First, large liquid markets are more likely to have daily price discovery. Oil prices are set every day. Salaries are not. Oil prices tend to adjust faster to currency devaluations than salaries because they are set every day.
Also, participants in large liquid markets (that is, the buyers and sellers) are more likely to be professionals with a sharp eye on profits. They look forward and try to anticipate market events. If they are right in their anticipations, their collective actions accelerate events that would otherwise occur more slowly. If an oil trader correctly anticipates a future rise in oil prices, in order to profit from his belief he would buy oil at a cheaper price today and store it for future use or for future sale. That action would accelerate the oil price move. Large liquid markets with daily price discovery are more likely to have these types of forward-looking profit-seeking participants anticipating price moves and acting accordingly.
The currency markets - that is, the foreign exchange markets where people exchange one currency for another - are as large and liquid as the Mississippi, have daily price discovery, and feature loads of forward-looking profit-seeking participants. Currency markets are nearly always among the early movers when a country devalues its currency.
Hemmingway’s cheap apples were the result of fast-moving foreign exchange markets combined with slower-moving local markets. He bought marks at the new (lower) value and spent them at the old (higher) value. That gave Hemmingway his windfall.
If the prices of the local goods and services and the price of the mark in the foreign exchange markets had moved in unison, Hemmingway’s windfall would have evaporated. It was the timing difference that created the windfall for Hemmingway.
The poor lady selling the apples didn’t adjust her prices quickly enough. She got smoked without knowing it. The effective purchasing power she received for her apples was far lower than she thought it was. She was giving apples away for practically nothing.
Apples weren’t the only thing on sale for foreigners in Germany at the time. Hemmingway described a five-course meal at Kehl’s finest restaurant that was priced at fifteen cents. The same meal would have cost more than a dollar just three miles away in Strasbourg. German cakes, bread, beer, and coffee were all being handed out almost for free all because they were priced at the old value of the mark rather than the new. Hemmingway called it the miracle of the exchange.
Local markets tend to respond slower to a currency devaluation. Big global markets tend to respond faster. That works against the local markets in nearly every case just as it worked against the Germans during Hemmingway’s visit.
He was a master at all things literary. His phrases, though, were especially precious. The Sun Also Rises. A Moveable Feast. A Farewell to Arms. The Old Man and the Sea. For Whom the Bell Tolls. Simple everyday words combined in unique ways to form intriguing phrases. No one did it better. They pique our curiosity just enough to make us peak behind the curtain to see what he meant.
