Via The Big Picture.
Indexing 1913 to 100, by October 1918 Prices of Goods Produced in Germany and Prices of Goods Imported went to 239 and 214 respectively. Thus a fixed income buyer in 1914 would have seen the real value of his or her investment cut in half in real terms as the war came to an end. The Quantity of Money In Circulation hit an index value 440 by October 1918, suggesting that a future acceleration of inflation could have been expected as money during the war grew over twice as fast as inflation. And accelerate it did. Re-indexing October 1918 to 100, by February 1920 Internal Prices and Prices of Imported Goods exploded upward to 506.3 and 1898.5 respectively. All the while the dollar/mark exchange rate was collapsing as well. Repressed inflation from price controls during wartime no doubt surfaced in 1919. After a period of relative stability in 1920- 1921, helped no doubt by the short but deep Depression of 1921 experienced in the United States, the hyperinflation began. By June 1923 and setting July 1922 to 100, Internal Prices and Prices of Imported Goods hit 18194 and 22496 respectively. The numbers just got worse until the currency reform at the end of 1923.
How did German investors survive during 1914-1923? Of course fixed income investors didn’t survive. The German investing public had never experienced serious inflation for all the years under the gold standard. The world had changed on them. Nobody rang a bell. They got totally blindsided.
Actually the German inflation period should be divided into two phases – wartime and post-war. For both periods the best investment strategy was to buy gold or get money out of Germany into foreign exchange. Of course during the war that was unpatriotic and illegal. After the war that was still illegal as the German government tried to prevent capital flight. Sadly, governments frequently betray their citizens’ trust and obedience to the law and patriotism turn out to be the refuge of wealth destruction.
A second choice was domestic shares. The best that can be said from the German experience is that in high and hyperinflationary periods shares in the very long run can preserve wealth if you can stand the volatility and/or are clever at trading. They can bring huge gains to those who pick the right time to enter the markets. According to Bresciani-Turroni, share prices in real terms were substantially below 1913 levels by the end of the war in 1918. From then on shares had a mixed record. For a time through 1920-1921 shares rose when the mark fell against the dollar in the foreign exchange markets. But then shares (in real terms) collapsed in 1922 and hit a low in October. Buyers prescient enough to buy at the 1922 low could have bought and held and made some 1088 percent on their investment by the high in 1928.(This number comes from Bryan Taylor, Global Financial Data) The large industrial companies had preferential access to credit and heavily invested in plant and equipment during the inflation. When it ended they were in good shape although things turned out less well for financial institutions.
Other investment classes turned in differing results. Residential rental housing was a disaster thanks to government imposed rent controls. On the other hand, land – or anything else – that was mortgaged fared very well as in real terms the value of the mortgages was wiped out. Better a borrower than a lender be.
Related previous posts: