In the early 1920’s Hugo Stinnes became the richest man in Germany due in large part to his excessive borrowing of fiat (lots of cheap debt, which was rapidly declining in value due to hyperinflation) and using this debt to purchase hard assets. By 1923 Hugo Stinnes was the Richest Man in Germany. Tragically Stinnes died on April 10 1924 in Berlin as a result of a gall bladder operation. By 1925, his entire business empire had collapsed.
What is Hyperinflation?
Between 1921 and 1923, Germany experience one of the worst cases hyperinflation in modern history, affecting the local currency called the 'Papiermark'. Hyperinflation devalued the currency to the point that is was worthless, as the pictures from this time period illustrate.
Hyperinflation is typically caused by massive country debts and excessive money printing without any economic resources to back it (sound familiar?). From a personal/ wealth preservation standpoint, hyperinflation is bad. Great depression loss of wealth bad. This is because the currency’s value goes to zero and therefore, any money saved in cash or denominated in that currency also loses its value.
Taking on debts in the native fiat currency ('Papiermark') and immediately converting that debt into hard assets (materials, metals, land, infrastructure) can preserve wealth and help combat hyperinflation. This strategy works because as the value of the currency declines, so too does the value of your fiat debts. I call this the ‘Hugo Stinnes’ playbook, as that is what he did to become the richest man in Germany by 1923. This topic was also covered extensively in a previous article I wrote entitled “Who was Hugo ‘The Inflation King of 1920’s Germany’ Stinnes” and can be read here.
Inflation Today
Fast forward to today, the 'Hugo Stinnes playbook' (taking on fiat debts and using said debts to purchase hard assets such as: bitcoin, real estate/ land, materials (wood, steel, copper), precious metals (gold, silver)) is the way to preserve (and even grow) wealth. It goes against traditional financial advice such as paying down your debts and saving your money (typically in fiat cash). As confusing (and possibly irresponsible) as this sounds, this is the way to go to combat inflation. In my opinion we are in the early stages of inflation today. Its starting to creep its way into food prices, into material prices (wood, metals etc..), into gas, stocks and real estate prices. I’m starting to notice it is costing more to live today than it did just a month ago. Rising prices make cash (dollars), and by extension debt in those fiat dollars’ worth less and less over time. Hard assets (relative to the declining fiat currency) appear to be increasing in value as it takes more and more fiat dollars to purchase today what it did the month before. In the beginning everybody thinks they are getting rich (ociety today), because things they own (houses, cars, stocks, whatever) are increasing in value. If your house increases 20% and your food bill increases 30% how much further ahead are you? Worse, if you don’t own a house, and suddenly everything is 30% more expensive you are really falling further behind. This actually has a term; it is called a ‘Crack Up Boom’. When people realize this, that’s when things will get scary.
Some degree of inflation is manageable for an economy, but when inflation gets out of control (high inflation) that is when cracks in the economy become noticeable to the general public. If you want to know how bad runaway inflation can get read ‘When Money Dies’ by Adam Fergusson. It is an extreme case, but worth noting as there are many parallels leading up Weimar hyperinflation and todays economic situation. That book is equal parts fascinating and frightening. Despite runaway inflation, eventually hyperinflation (if it does occur) will end. The end of hyperinflation seems to be the catalyst for the fall of Hugo Stinnes’ empire.
End of Weimar Germany Hyperinflation 1923/1924
Jumping back to 1920’s Germany, Hyperinflation ended around 1923-1924 with the creation of the Reichmark. The Reichmark was a newly created fiat currency (by the Germany Government) similar to the old Papiermark. The Papiermark was the native German Currency during hyperinflation (1920-1923), but lost essentially all of its value relative to the value of one gold mark as shown in the below chart. The continual loss of the Papiermark’s purchasing power caused people to spend their money as quickly as they earned it. The increase in money velocity further increased inflation creating this vicious feedback loop. When the Reichmark was introduced, confidence in the governments fiat currency returned. This confidence caused the velocity of money to slow and started to stabilize and restore balance to the new currency (Reichmark) and thus the economy.
When the new currency stabilized, the ability for Entrepreneurs to borrow as much (practically free) money as they wanted ended. The Reichmark meant more stable and higher costs for many goods (transport, fuel, food, taxes, employee salaries) to run a business than during hyperinflationary times. Money, which was cheap and plentiful for years suddenly costed more to borrow once again and there was a real shortage of liquidity in the system. At this time (1924-1925), most Germans, especially the middle class had lost almost all of their wealth and many people were starting over again (from scratch). This transitionary period is explained clearly in the quote below from ‘When Money Dies’:
When Money Dies - Quote
“Germany’s trouble was that the inflation boom had never been liquidated. Stabilization had ended the period where entrepreneurs could borrow as much money as they wished at the expense of everyone else. A vast number of enterprises established or expanded during monetary plenty, rapidly became unproductive when capital grew short. More realistic transport, fuel and food prices and the return of rents to economic levels meant that wages too had to be raised substantially in real terms.
Firms that mushroomed during the inflation, now found that the real interest they paid on loans for the first time was positive rather than negative, lower though the rates appeared to be. Perhaps most significant was for the first time they were obliged to pay real taxes, many of which were extremely high because of the necessity rapidly to balance the budget and to bring official salaries, which had fallen disastrously, up to an acceptable level again. Companies were often unable to buy new machinery after stabilization came, so much so that huge stocks of unsold iron and coal began to build up in the Ruhr. Not even the foreign loans flowing in were able to prevent the seizing up once again of the Ruhr mining industry where pit after pit, especially any producing poor-quality coal, was forced to close.
Workers were to flock from pit to agriculture, from mines and quarry and engineering to the production of food and direct consumer goods and to building. Hugo Stinnes himself had been deceived by the artificial prosperity of inflation into a fanatical confidence in the future of coal. It was the post stabilization depression in the coal, iron and steel industries contriving even the deep population of rural townships which led eventually in June 1925 to the collapse of the Stinnes Empire.”
Ability to Change
This rise, and subsequent fall of Hugo Stinnes empire is a cautionary tale; one that demonstrates the importance of financially adapting to the ever-changing macro-economic conditions. Taking on debt and buying hard assets made Stinnes the richest man in Germany, but when the music stopped (money printing) and liquidity dried up, the onus shifted to income producing assets (value investing) very quickly. Entrepreneurs who overexpanded and over speculated were caught flat footed “The speculators in a word found they had to pay for their foley in providence and greed.” “The Stinnes debacle demonstrated above all that great industrial possessions could not be held without adequate liquid resources.” – When money dies. The Rise and subsequent fall of Hugo Stinnes empire reminds me of the famous quote from Charles Darwin’s book, the origin of species: “it is not the most intellectual of species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself”.
As it stands today, to benefit the most from today’s economic climate, the purchase of hard assets is needed/ essential to preserve wealth. Taking on fiat debts to purchase hard assets can leverage your wealth during these inflationary periods. However, learning from the fall of the Stinnes Empire, one must remain prudent not to overextend their debt commitments. There will come a time in the future when getting additional fiat loans will be very difficult and investors will have to rely on their liquid resources for economic expansion and wealth growth rather than cheap fiat debt.
Disclaimer: This article should not be taken as legal investing advice, I am wrong 100% of the time. The choice is yours whether to invest in any asset or not.
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