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Key lessons of protecting your capital during the war

Updated: Feb 4, 2022

In Wealth, War and Wisdom, Barton Biggs argues that in order to protect their wealth during war, investors need to hold diversified portfolios of stocks and properties in safe regions. The book tells about the experience of investors during the Second World War: whose wealth was destroyed and why. And what could you do to protect your wealth.

The author concludes that the following asset classes were the best in wealth preservation:

1. Survival goods

Prices for basic necessities rose sharply during the war. Often people made their wealth on the "black market". The black market was the most lucrative profession and the best source of wealth during the war. On the other hand, stocks, land, real estate, and businesses only made money if you had a very long time horizon.

Black marketers hoarded survival goods such as clothing and food and then sold them at high prices to desperate fellow citizens. Then they bought and saved gold with their "black money".

In Japan, people became desperate as the war progressed. Freezing and starving, paying for clothes, food, and any other survival goods they could get their hands on. They even sold land at bargain prices to survive. Biggs tells stories of people who have been sourcing building materials on the black market to rebuild bombed-out cities, earning fortunes in the process.

After their release, prominent "black marketers" were often subjected to physical abuse and their property confiscated, especially in Italy. But others managed to use their ill-gotten wealth to buy real businesses after the war. In the end, black marketers were ahead of almost everyone.

2. Art, gold, and jewelry

Gold and jewelry are portable, liquid, and better protected than building structures. In the early 1940s, it was easy to transport gold and jewelry to Switzerland from almost anywhere in Europe. Thus, jewels and gold played a crucial role in preserving the wealth of any person who remained in an occupied country.

The difficulty was to hide the jewels from thieves and invaders. You can hide jewelry in safe deposit boxes. But, as happened in France in the early 1940s, French banks were forced to report the contents of all safes to the Germans. Then the contents of these safes were requisitioned and transported to Germany.

Another option is to hide the decorations at home. The downside of keeping jewelry in the house is that bombing tends to increase crime, as it did in Britain in the 1940s. As Barton Biggs says, "War breaks the bonds of civil society." One rich old woman he knew "slept with her jewels for four years instead of her husband" out of fear that they would be stolen from her.

In Italy, some families banded together, moved their valuable possessions to defended villas in the hills, and were ready to fight for their lives, while desperate groups roamed the countryside in search of booty. You had to protect your property with your life. In German-occupied countries, informants told German officers where the jewels were hidden, and often these large estates were looted. The scammers thrived, often promising to keep the jewels safe and then fleeing to distant lands, never to be seen again.

A safe outside the country would keep the jewelry safe. But they had to be kept secret. When your neighbors' children are starving, they will do anything, including report you to the occupying forces.

Jewelry is more liquid than property, so it can be easily traded for essentials such as food and medicine. Of course, with a discount. In an occupied country filled with informers and treachery, you had to watch your back while making jewelery deals. Or agree to a big discount in favor of well-known black market dealers.

In countries occupied by the Soviet Union, Soviet soldiers were often addicted to watches and jewelry and would not hesitate to kill to get them. The Red Army was also used by top Soviet officials for looting. Clothes, cars, fine china, jewelry, art and pianos were sent to the Soviet Union. Thus, jewelry could not effectively preserve wealth in countries occupied by Soviet troops.

During World War II, art performed poorly as a means of preserving wealth. They were vulnerable to fire, easily damaged, quickly looted, and difficult to hide. But if you had the capital to buy them during the war, you would have made a fortune. "In the spring of 1940, Keynes went on a mission to Paris to buy, to the sound of howitzers, two Cezannes and two Delacroix, which rose 40 times in price over the next four decades."

3. Foreign assets

Foreign assets also helped preserve wealth. Especially if they were stored in a safe jurisdiction, such as Switzerland. This was especially the case for individuals in occupied countries, whose domestic wealth was often confiscated by the authorities. The main thing is to keep bank accounts in foreign countries secret - from the tax authorities and even from friends, family.

However, getting the money was not always easy, as currency controls and taxes often ate away much of the capital. For example, by the late 1930s Jewish business owners in Germany were forced to accept heavy discounts if they wanted to sell their business—often for 50% of fair value. Even houses had to be sold at discount prices. And if they wanted to take money out of the country, they had to pay exorbitant taxes on foreign currency - up to 90%.

In some cases, even foreign assets were expropriated. In the early 1940s, the British government did not have enough US dollars to purchase war supplies. Therefore, the Secretary of the Treasury ruled that British citizens who own US shares must report them to the Bank of England. The shares were then sold to finance purchases of munitions. The holders of these US shares received a loan in pounds from the proceeds from the sale of these shares. The secrecy of your foreign assets remained a key factor in preventing confiscation.

4. Home equity market

The experience of World War II shows that stocks in general did retain wealth. But stocks would have had significantly higher returns if their home country had been the winner. The loss of the war and the occupation destroyed the country's long-term earnings on shares.

The US stock market was dormant during the war and stock prices fell to very low levels. A seat on the New York Stock Exchange was worth just $17,000 in 1942, about 97% below the peak of $625,000 in 1929. The P/E ratio (price/earnings - a financial ratio equal to the ratio of the market value of a share to the annual earnings received per share) remained low throughout the war. In 1942, the average P/E ratio for 600 representative stocks was only 5.3 (by comparison, today the P/E is about 40).

The shares reflected the military successes or failures of each country. The British stock market bottomed just before the Battle of Britain in 1940 when the British successfully thwarted a German invasion. The German market peaked when German troops approached Moscow in 1941, shortly before the defeat at Stalingrad. The bottom for the American market in May 1942 coincided with the Battle of Midway, when American troops delivered a decisive blow to the Japanese fleet.

So if you own shares in a certain country, you better be sure that it can win the war and not become an occupied territory.

Military spending from the state budget was generally positive for the domestic stock market in nominal terms. From 1932 until the peak of 1937-38 (a period of record spending), Germany was the best stock market in the world. After a short break, the market continued to grow until the Battle of Stalingrad. This period was characterized by an explosive growth in military production and a sharp increase in profits from cheap forced labor from France, Poland and Holland. Ultimately, however, the budget deficit led to the depletion of foreign exchange reserves, making it difficult to maintain high levels of spending. Stock prices have stopped rising.

After Germany's defeat at the Battle of Stalingrad, the Nazi government finally imposed stock price controls for the remainder of World War II to cover up the damage. No German could legally sell shares without first offering them to the Reichsbank, which was able to buy them at 1941 prices in exchange for rapidly depreciating government bonds. After the war, the German stock market collapsed completely, as you can see in the chart below:

In order to hold shares during the war, "iron nerves" were required. At market bottoms in the UK and elsewhere, newspaper commentary was invariably negative and pessimistic. In every allied country, the market bottomed out during major negative events, such as the evacuation from Dunkirk or the fall of France to the Nazis:

Similarly, the US stock market bottomed out during the Battle of Midway when newspaper commentary was mostly negative. By the time Germany was defeated at Stalingrad, the US market had already grown by more than 50%. So U.S. stockholders have had to endure holding onto these stocks in the face of negative or even catastrophic news:

In Japan, newspapers and radio broadcast only good news about the course of the war. But in the elite teahouses in Tokyo, information about the progress of the war was relayed to intelligent observers. Consequently, the stock market did not correctly factor in the prospects of a Japanese victory in the war. The market gradually fell as the war progressed and collapsed completely in 1945 when Japan was finally defeated. In real terms, Japanese stock prices fell about 26% per year from 1940 to 1949.

The stock markets in the occupied territories did not perform well during World War II. Inflation in the countries that lost was almost twice as high as in countries that managed to avoid war. These are primarily countries located in close proximity to Germany, the Soviet Union, Italy and Japan: European countries and Southeast Asia.

During World War II, some stock markets had "permanent hiatuses" where the market closed and never reopened. This happened in Hungary, Czechoslovakia, Romania, Poland and Finland - when they were taken over by the Soviet Union. Communism is clearly the greatest enemy of the preservation of wealth. Private wealth in Singapore and Hong Kong also suffered greatly in 1942-45 when they were taken over by Japan.

Stock markets in countries occupied by the Germans also suffered. Although some of them remained unscathed: including Austria, Denmark and Holland. Many families in Holland were able to maintain their homes, land and small businesses throughout the occupation. If you were a Jew or an enemy of the state, your property was confiscated, just like in Germany.

The German occupiers treated France badly. The French were not considered Aryan enough to be treated as equals. French patents, equipment and skilled workers were "temporarily" transferred to Germany, depriving French industry of intellectual property. Other French companies did well with military orders. French inflation was 20% a year during the war and rose to 60% in the years after the war, completely ruining the economy. French stocks helped preserve wealth to some extent, but in real terms, the stock market plummeted during the 1940s:

5. Real estate

Possessing physical possessions in wartime is dangerous. It is often stolen, bombed, destroyed or expropriated.

In Nazi Germany property rights were generally respected unless you were Jewish. But in the occupied countries of Eastern Europe, luxury real estate was almost always expropriated. Famous mansions and properties were often used by the Wehrmacht or confiscated to country estates for top German officers. In Hong Kong, the Chinese found that all their money and houses on Victoria Peak were worth very little when the Japanese occupied the city in 1942.

Hyperinflation caused a particular problem as interest rates rose to drastic levels. On the other hand, landowners who paid off their mortgages survived, while business owners who paid off their loans became unencumbered property owners.

Once you have left property, getting it back after the war has proved difficult in many cases. But if records of local property remained intact, the land often retained wealth.

Property in Britain and the US depreciated during the war and prices fell to very low levels. Wall Street office buildings rented as little as $1 per square foot. The seller of a New York hotel had a hard time finding buyers, even with a one-time annual income.

A working farm has often protected both wealth and your life by providing security and food. There are a number of stories of wealthy French families who closed their homes in Paris in 1940 and left with their most prized possessions for family farms in the back countryside, living in relative comfort during the war.

6. Fixed Income Securities

Budget deficits and military spending spell disaster for holders of government bonds. Even in the losing countries, equities tended to outperform bonds, and bonds outperformed short-term bills and demand deposits.

Due to Japan's deficit in spending on war materials, prices rose by 3280% between 1930 and 1949. This caused a massacre with Japanese government bonds, which lost roughly 17% a year from 1940 to 1949.

The purchasing power of German government bonds declined by about 21% a year in the 1940s.

In Italy, fixed income holders have been impoverished by the war. Government bonds lost 27% a year in real terms in the 1940s, and government bills lost 30% a year.

Other European countries did not fare much better, as the table below shows:


The best stocks of wealth in a country are real property, such as remote farmland or vineyards. Just make sure the mortgage is paid off.

Jewels and gold are crucial as they can be easily traded for essentials.

The best stocks of wealth outside the country are stocks, jewelry, and land. They must be stored in secure jurisdictions protected by geography, the rule of law, and strong national defenses. The USA, New Zealand, Great Britain and Switzerland come to mind. Resist the temptation to sell just because the news is getting worse and worse. And maintain a well-diversified stock portfolio.

The most important lesson is to avoid fixed income instruments, including government bonds and demand deposits. Especially in countries under the threat of occupation by communist forces.

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