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Q:  What did the “smart” people do during the 1918-1924 period of hyperinflation to preserve their wealth? 

Was gold considered currency during that time, and how did it keep up with the crazy daily devaluations of the German Mark?

David Schectman’s Answer:

The German Reichs Mark during the 1918 – 1924 period was not tied to a gold standard.  It was, however prior to WW1.

30 years ago I read an article that pointed out that many Jews in Germany kept their wealth in gold (and diamonds) and not in the currency.  It was rather traditional since their history taught them that they might have to pick up and leave whatever country they were in.  So when the hyperinflation arrived, a large number of Jews were sheltered from the devastation of hyperinflation.

Although they were able to maintain their wealth, it caused envy and hatred. They did not suffer like the general population.   It was one of the reasons that anti-Semitism in Germany was able to morph into the Holocaust.

It was gold ownership that also allowed many Jewish families to leave Germany in the early 1930s, while it was still possible, with their wealth intact.  You could take gold and diamonds with you but not factories or real estate.

Gold is very portable and holds its value during hyperinflation.  The problem is that when hyperinflation arrives, governments will enact currency controls and will not allow you to take your gold out of the country.  You will be stuck with dollars that are rapidly depreciating.  That is why we recommend that you store a meaningful portion of your gold outside of the U.S.  We offer a fabulous program that allows you to safely store gold and silver with Brinks in Montreal. We can also arrange for storage in the Far East and in Switzerland.

I suggest keeping a portion of your gold, in 1/10th oz Gold Eagle coins, British Sovereigns (roughly ¼ oz) or ¼ oz Gold Eagles here, where you can access them if needed.  I also recommend a few bags of pre-1965 silver dimes (a bag is $1,000 face value, or 10,000 dimes) for use as barter, should the need ever arise.  The rest can be kept safely off shore.  These would serve you well during a hyperinflation.

Here is an excerpt from Wikipedia:

In order to pay the large costs of the First World War, Germany suspended the convertibility of its currency into gold when that war broke out. Unlike France, which imposed its first income tax to pay for the war, the German Kaiser and Parliament decided without opposition to fund the war entirely by borrowing, a decision criticized by financial experts like Hjalmar Schacht even before hyperinflation broke out. The result was that the exchange rate of the Mark against the US dollar fell steadily throughout the war from 4.2 to 8.91 Marks per dollar. The Treaty of Versailles further accelerated the decline in the value of the Mark, so that by the end of 1919 more than 6.7 paper Marks were required to buy one US dollar.

As you can see in the charts below, hyperinflation didn’t really take hold until the beginning of 1922.  Then it really took off.

Here is an easy way to understand how the inflation took hold:

Wholesale Price Index
July 1914 1.0
Jan 1919 2.6
July 1919 3.4
Jan 1920 12.6
Jan 1921 14.4
July 1921 14.3
Jan 1922 36.7
July 1922 100.6
Jan 1923 2785.0
July 1923 194,000.0
Nov 1923 726,000,000,000.0

The way to avoid the total loss of value of the currency was to own tangible assets.  Gold was certainly one way to do it but owning property or artwork was also a hedge.  In hyperinflation, barter becomes the way of life.  You can’t barter your real estate or expensive artwork in any practical manner and that is one of the reasons that gold and silver coins work so well.

The currency became worthless.  In 1923, the price of a postage stamp was 5 billion Marks.  Paper Marks that is.  See chart below for the value of Gold Marks, which were redeemable in gold.

The currency became worthless.  In 1923, the price of a postage stamp was 5 billion Marks.  Paper Marks that is.  See chart below for the value of Gold Marks, which were redeemable in gold.

Germany Marks

Conversion Table

Pictured below are German gold coins from 1905.  If a German had their wealth in these coins or U.S. dollars for that matter, they would have come out of it with all of their wealth…

Scientific Market Analysis published the following in 1970.

How Investments fared.

Cash: Money held in cash lost value rapidly and soon became completely worthless. Of all investment forms, this was the most disastrous.

Bank Deposits: In theory, bank deposits became as worthless as cash. However, after the stabilization the government decreed partial reimbursement, and sums in the range of 15-30% of the original deposit value were repaid. Naturally, however, the great majority of depositors withdrew their funds at some time during the inflation, after much of the value had been lost, and exchanged them for goods. Few Germans held money in deposits through the entire period.

Bonds, Mortgages: As usual in an inflation, bonds and mortgages fell in value even faster than cash. After the stabilization, some restitution was provided by law. Holders of government bonds were reimbursed to the extent of 2.5% of the original bond values. Mortgage holders also received some repayment, while a 1925 law provided for 15-25% reimbursement of corporate bondholders, though the payment was delayed for some years. Here again, few investors held bonds or mortgages throughout the entire period; most holders got rid of them for whatever pittance they would bring during the inflation.

Real Estate: Farmers and holders of urban property seemed to benefit if their property was mortgaged; the inflation soon wiped out the mortgage debt. However, they received no income, as noted above, since rents were frozen. After the stabilization, heavy new taxes and the urgent need for cash forced most holders to remortgage their property, often more heavily than originally, so that their gains were illusory. Still, those who held real estate throughout managed to save the capital thus invested. However, those who sold during the inflation (often through desperate need for cash) fared poorly. Because it brought no income, real estate sold at extremely low real price levels during inflation.

Foreign Exchange: Those who held funds in dollars, pounds or other stable currencies, or in gold, saved their capital. The government set up rigid exchange controls as the inflation proceeded. As usual under such conditions, a black market flourished. The ones who fared best were the small minority who had the foresight to exchange marks into foreign money or gold very early, before new laws made this difficult and before the mark lost too much value.
Gold Coins
Personal Property: Capital was preserved by those who early changed it into objects of lasting value–rare coins, stamps, jewelry, works of art, antiques–or into merchandise such as clothing, fabrics, etc. Of course, most people did not understand the advantage of accumulating such property until the inflation was well along. By that time the prices of all goods had risen so much that they seemed outrageously bad bargains. In the event, however, cash proved an even worse bargain.

Common Stocks: In an inflation, common stocks are generally considered a desirable hedge to protect against or even to profit from the rise in prices. In practice, it is not so simple. In this country stock prices have been known to fall violently just when inflation was most evident (1946, 1957, 1966, 1969). Market fluctuations–the rise of exciting new speculative stocks, waves of fear or greed–all make it much too easy to buy or to sell at the wrong time or to go into the wrong stocks.

Q: I must have missed the G -20 massacre– Or should I say it did not happen? – Why did nothing happen?

Bill Holter’s Answer:

I am not so sure “nothing” happened.  The G-20 did a version of “tit for tat” with APEC and the BRICS.  While Mr. Obama was placed in the “wives club” for the official APEC photo, Mr. Putin was isolated in the G-20 photo.  Mr. Putin left early and before the Sunday meeting had concluded.  Remember, this is public diplomacy and leaving early is a sign or signal, this is how diplomacy works.  Mr. Obama on the other hand showed up to APEC to meet the Chinese president while chewing gum and then refused to use Chinese limos.  While almost nothing appeared in our press, the internet exploded in China with Obama being chided as a “rapper” and other insults by many university professors.  Professors are paid by the state, they do not write their “own opinion” unless that opinion is approved from above.  The fact that negative opinion was voiced publicly by the “scholars” of China is a very bad sign and one that suggests she was insulted.

If you go back to read the official APEC statement versus the G-20 communique you will see the former was very precise and the latter without any substance.  Mr. Obama immediately left afterwards while President Xi spent several days afterwards doing business.  He did deals with Australia, New Zealand and then went to Fiji and met with the heads of 8 Island nations.  China is building goodwill all over the place, can the same be said for the U.S.?  To answer your question directly, no, there was no public defection from the G-7 nations but I do believe there is an internal shift closer to China and further from the U.S. within the remainder of the G-20.  I believed China might have stepped up and sent a message, they did not do so directly but I believe Mr. Putin was the messenger instead.  The split between the G-7 and (the rest) led by Russia/China was deepened by the treatment of Putin who the week before signed a 2nd “Holy Grail” energy deal with China.  Sides have and are being taken, the movement is not toward the U.S. and the G-7, and it is toward China and “rest of the world.”  It is in this “rest of the world” where trade and increased standards of living will be while the G-7 is in decline.  I would make mention of one more thing, do you have any idea how these meetings were reported in other countries?  In Europe, China or Russia?  Most probably you rely on U.S. press reports, are they complete and fair?     …On a side note, I wonder if Angela Merkel knew at the time Germany had been front run by The Netherlands repatriation.

Q:  Why am I hearing that if interest rates go up gold will go up. I was under the assumption that they were inversely proportional. How does higher interest rates translate into higher gold prices?

Andy Hoffman’s Answer:

Just more propaganda.  There’s no real correlation between gold and interest rates, particularly in a rigged market.  That said, there is certainly a relationship between precious metals and real rates, as opposed to nominal rates.

In other words, they more negative real rates are – utilizing TRUE inflation rates such as those published by John Williams of Shadow Stats – the more appealing gold’s “0%” interest rate is.

Today, the Fed actually holds nominal rates at zero, and some Central banks – like the ECB – have pushed them into negative territory.  This could not be more bullish for PMs; and as you know, I have for more than a year predicted even long-term U.S. rates would go to Japan-like levels, as the entire world front runs “QE to Infinity.”  Just look at today’s bond action, as yields collapsed despite the so-called “strong” (i.e., massively rigged) GDP number.

Eventually, hyperinflation will destroy the fiat regime.  And when it does, perhaps sooner rather than later, you’ll get your correlation between rising rates and PMs.  And then some!