I have just finished Prof. Dieter Stiefel’s book about Camillo Castiglioni. Written by A University of Vienna Professor, it is one of the rare exhaustive information sources about one of the most controversial figures of Europe’s interwar period. Unfortunately, for english speaking readers, the book is only available in German.
Camillo Castiglioni was one of the most notorious interwar speculators on the European continent. He was the owner significant industrial shares and a pioneer of Austrian Aviation at the beginning of the century. After his flight over Vienna’s St. Stephen’s cathedral, which stunned the Viennese at that time, he was personally congratulated by Emperor Franz Joseph II. As a chairman he played an important role in the early history of BMW – a company, of which he was a majority owner for some time. One Ferdinand Porsche worked as a chief engineer in one of his major holdings before quitting after a serious dispute with Castiglioni who wanted Porsche to focus on cheap, mass-market cars rather than on cutting edge sports vehicles. Besides, he was much into art and sponsored the Salzburg festival founded by his friend Max Reinhardt, today one of the worlds most remarkable festivals of music and drama. His luck turned somewhen around 1924, when he, like so many speculators large and small on the Continent, lost a significant amount of money in the famous speculation against the french franc from which he never fully recovered.
So, how did he do it?
As you can imagine I read the book with the intention to find out what principles guided the man in his speculations. Unfortunately, the book focuses too much on details regarding corruption and scandals (Castiglioni more than once got sweet deals at the expense of taxpayers) and less on the economics behind his actions. The book also lacks a coherent structure. It seems Prof. Stiefel hastily assembled it from pieces of his archive. Nevertheless I still could take away a few principles:
1.) In a heavily regulated market (FX controls, Import/Export controls a.s.o) it matters whom you know and who you are.
The book sometimes hints at price discrepancies between different market places, i.e. Vienna and Zürich that can only be exploited if you can work around the rules impeding the free flow of capital. Knowing officials was also necessary for Austrian and German industry which found itself cut-off from its major raw material suppliers as a result of newly erected borders. Interestingly, in the interwar period it mattered whether you where a citizen of a defeated (Austria, Germany) country or not. Castiglioni, born in Trieste, main port of the Austro-Hungarian Empire, shrewdly opted to become an italian citizen after the war (despite the fact that he had supplied the Austrian army during the war) which brought him considerable advantages. For instance, the book mentions one episode where the Czech government was pondering about nationalizing assets of a Vienna-listed company. Fearing expropriation the shares were trading at depressed levels. Castiglioni, having the advantage of his Italian citizenship, organized a loan from a friendly italian bank and bought the depressed shares, knowing that the Czech government would not dare to nationalize a company belonging to a citizen of a friendly government.
2.) When trying to profit from an hyperinflation environment, you need a bank.
In order to truly profit from a fall in the currency you need to be able to get loans in that currency, preferably loans you are able to roll and repay at some later date. Castiglioni seems to have been among the first to recognize the steady fall of the Austrian Crown as a result of which he could trick some creditors by agreeing to pay the purchase price at a later settlement date thereby lowering the real cost of his investment. The book is not explicit of what made him suspect the crown to fall more than expected, but I got the impression that watching prices of shares in different currencies and gold was a key to understanding of what was going on. It took the rest of the population some time before they realized that the notes had been seriously debased. The author mentions that Castiglioni, after inflation had subdued in Vienna, turned to Berlin where the printing presses were running mad and had a competitive advantage because he was used to calculating in gold.
Nevertheless, once the inflationary mentality is well entrenched, there is only one way to procure a loan in a debasing currency: you had to own a bank-which is exactly what Castiglioni did. The book is not precise, but it seems that more than half the share capital of his bank was lent out to himself, something which also seems to have happened in Greece, more recently.
3.) Castiglioni seems to have had no true economic insight, he just repeated his strategy to buy hard assets with depreciating currency which was successful at first but devastating in the end.
After his first successes in Austria, he went to Berlin where the inflation lasted longer (as an aside: Ludwig von Mises seems to have had played a major role in the stabilization of the Austrian Crown, which is one reason the inflation if Austria was not as devastating as in Weimar Germany, for more information see his memoris). After both currencies had fallen substantially, his attention turned to the french franc, reasoning, like many others as this was a crowded trade, that the same fate that had befallen the Austrian Crown and the German Mark would come over the French Franc. He overlooked that France at the time was ruled by hard money men and had huge gold reserves (difficult to believe, I know). Further as a victor country it could always procure USD from the (friendly) US. Ultimately the news that JP Morgan had provided a credit line to the Banque de France lead the speculators to capitulate inflicting heavy losses on Castiglioni.
The author, being an economic historian, could have provided more hard economic data (balance sheets, interest rates a.s.o.) – then the book would be a gem to the investor community. Unfortunately, the author exessively focuses on questions of morality (highly subjective), which should not necessarily feature in economic history. I dare to say: properly researched and presented the topic would have the potential to become a classic. Furthermore, although the world cannot be compared to the crazy interwar period, you can bet that China’s closed capital account is a source of riches for the entrenched elite, just as it was back then for Castiglioni and friends. The story once more stresses the importance of process over outcome as the only way to asses the sustainability of an investment strategy.