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Hjalmar Schacht


I want to finish with a few words about the MEFO bills, one of the means by which, in four years, Germany advanced from a broken economy with over six million unemployed, deprived by international law of the means of defending itself, to a military power capable of taking on and defeating almost the whole of Europe. The architect of the MEFO bills was Hjalmar Schacht, who had been President of the Reichsbank in 1924 and as such responsible for introducing the new gold-based reichsmark (the old gold-based mark with twelve noughts struck off) which finally put an end to the period of hyper-inflation. Schacht resigned as President of the Reichsbank in protest against the terms of the reorganisation of reparations payments under the Young Plan (which he had helped to negotiate). It was the struggle against the Young Plan which brought him together with the coalition of nationalist groups that included the National Socialists. He played an important role in the 'business circle' of leading industrialists formed to influence Hitler towards a more modest, business friendly economic policy. He was recalled to the presidency of the Reichsbank soon after the National Socialists came to power and was appointed Minister of Economic Policy in August 1934. (17)

(17) There is a useful account in Arthur Schweitzer: 'Business Policy in a Dictatorship', The Business History Review, Vol. 38, No. 4 (Winter, 1964), pp. 413-438

In his book, The Magic of Money, written after the war, Schacht presents himself as a fairly conservative, orthodox economist, a believer in gold, distrustful of paper money: 'The war of 1914 provided telling proof of the fact that state guaranteed paper money, unlike gold and silver coins, does not represent any substantial value.' (18) He insists that war should be paid for out of taxation rather than loans (though he seems curiously to exaggerate the extent to which Germany's opponents in the First World War relied on taxation); and he denies responsibility for the invention of the rentenmark:

'From a point of view of currency theory, the Rentenmark was a misconception. Not even Helfferich could close his ears to the objections which were advanced. He had to admit that the new money was no use in effecting international payments, and that it could only constitute an emergency bridge to the gold standard. He also admitted that in addition to the Rentenmark a foreign bill or gold Mark would, as I had suggested, be needed in order to facilitate the transmission of foreign payments. 

'Helfferich' s change of front brought him generally into line with my own thoughts on the matter. Soon after, when I became Commissioner for Currency and then President of the Reichsbank, I made every endeavour to take the Rentenmark out of circulation as quickly as possible and finally to abolish it altogether, at the same time bringing the Reichsmark back to full validity. To this end the Reichsbank gave the Rentenmark parity with the new Reichsmark. The Reichsbank exchanged every Rentenmark al pari into Reichsmark, or, in other words the Reichsbank guaranteed the Rentenmark exactly as it did the Reichsmark.' (p.67)

(18) Hjalmar Schacht: The Magic of money, translated by Paul Erskine, London, Oldbourne Book Co Ltd, 1967, p.94

Schacht would almost certainly have denied the claim sometimes made that the MEFO bill was a non-gold based fiat currency. It was a bill issued on behalf of a company specially invented for the purpose - the Metallurgische Forschungsgesellschaft (Metal Research Company) - used to pay for government contracts. It could be exchanged for ordinary gold-based reichsmarks but had this been done in large quantities the system would have collapsed. The ingenuity of the system was the incentive provided not to do so. Schacht explains:

'The Reich guaranteed all obligations entered into by MEFO, and thus also guaranteed the MEFO bills in full. In essence all the Reichsbank' s formal requirements were met by this scheme. It was a question of financing the delivery of goods; MEFO bills were therefore commodity bills. They rested on a threefold obligation: that of drawer, acceptor and Reich. This provided the Reichsbank with every justification for discounting the bills, and, although it was put to every test by the Reichsbank's directorate in collaboration with the country's best legal brains and economists, they agreed unanimously that it was valid.

'The Reichsbank declared itself ready to prolong the bills, which true to the form laid down were drawn on three months' credit, to a maximum of five years if so required, and this point was new and unusual. Each bill could thus be extended by a further three months, nineteen times running. This was necessary, because the planned economic reconstruction could not be accomplished in three months, but would take a number of years. By and large such extensions by themselves were nothing new with the Reichsbank; it was quite common to prolong agricultural bills, but an extension over five years, together with a firm declaration that such extensions would be granted, that was most unusual.

'One other aspect was even more unusual. The Reichsbank undertook to accept all MEFO bills at all times, irrespective of their size, number, and due date, and change them into money. The bills were discounted at a uniform rate of four per cent. By these means the MEFO bills were almost given the character of money, and interest-carrying money at that. Banks, savings banks, and firms could hold them in their safes exactly as if they were cash. Over and above this they proved to be the best of all interest-bearing liquid investments, in contrast to long-dated securities. In all, MEFO bill credit transactions took place over a period of four years, and had by 1938 reached a total volume of twelve milliard [ie 12 billion, understanding billion as a thousand million - PB] Marks. This amount was not issued all at the same time, but in step with the progress in production. On average, bills to the value of three milliards were issued each year. Whether this was the right amount, whether more or less was to be issued, depended on the currency policy the Reichsbank decided to pursue. The politicians had different ideas. They wanted the highest possible number over the longest possible period. After a hard-fought battle, the decision went in favour of the Reichsbank.

'This decision was of great importance for currency policy. It granted the Reichsbank the opportunity - of which it subsequently availed itself- to suspend the MEFO transactions when the currency position required that. it should do so. The Reichsbank's task was made easier by the fact that until 1938 some half of the MEFO bills in issue at any one time were always taken up and held by the market, and thus not presented to the Reichsbank for discounting.' (pp.112-3)

The effect was that a large amount of money was in circulation in addition to the amount that could be justified by the gold reserves held by the Reichsbank. (19) It should be said that when in April 1933 the US suspended gold convertibility and allowed the dollar to depreciate, Germany did not follow its example. According to the account by Adam Tooze: 'in the spring of 1933, Schacht seconded Hitler in denouncing any currency experiments. Pandering to popular sentiment, Hitler and Schacht made the defence of the official gold value of the Reichsmark into a symbol of the new regime’s reliability and trustworthiness. Unlike in 1923, it was now the dollar not the Reichsmark that was plunging in value on the foreign exchanges.' (20) According to Emil Puhl, who had been a director of the Reichsbank at the time when Schacht was President: 'The devaluation of the currencies of other leading countries increased the difficulties of Germany's foreign trade position. Earlier the Bruening Government had decided not to devalue the RM because it felt itself bound to the international agreements on which the German currency was based, and it was unwilling to violate these international agreements. These deflationary policies did not prove popular with the German people and the leadership of the German government passed successively from Bruening to von Papen, to von Schleicher and to Hitler. Von Papen and von Schleicher, who held office briefly, did not devalue the RM officially. Hitler too refused to devalue the RM officially through fear that such a move would cost him the support of the German people, who had a deadly fear of inflation and who believed that devaluation meant inflation.' (21) Tooze points out that though 'Germany would be left completely uncompetitive in every export market in the world ... the dollar’s devaluation also brought a huge windfall, by reducing the Reichsmark value of the debts Germany owed to the United States.'

(19) Actually I haven't yet been able to find anything very definite about the policy regarding gold reserves or the ratio between gold actually held and the issuance of notes. I'm assuming that the 3 to 1 rule was still in force.

(20) Adam Tooze: The Wages of destruction, Penguin Books, 2007 (first published 2006), p.41

(21) Nazi conspiracy and aggression [documents prepared for the Nuremberg trials} Vol VII, pp.496-7

But Schacht's commitment to maintaining the value of the mark was clearly much more than a simple matter of 'pandering to popular sentiment'. In an interview given in September 1937 to S.R.Fuller, acting as a representative of President Roosevelt, Schacht complained against England's going off the gold standard and stressed Germany's commitment to a policy of 'stabilisation' of foreign exchange rates:

'S[chacht]: If an attempt is made to get stabilization, I assure you Germany will do her cooperative part. Germany wants to pay her debts; she will pay them as soon as a stabilized exchange is reached."
F[uller]: "Can you hold the German mark where it is?"
S: "Yes : because we control our exchanges."
F: "Can you hold the mark regardless of what the other gold countries may do, even if Holland and/or France go off the gold standard?"
S: "Yes."
F: "For how long?"
S: "Indefinitely."
F: "By that you mean until you have worked out your present domestic problems, both agricultural and industrial?"
S: "Yes, until we have completed a German world of the mark where our raw material necessities can be produced and our excess workmen can be employed: a German world of the mark."

(22) Ibid, p.507. The last remark is interesting. It's not a theme I'm developing here but in the course of the interview Schacht insists that Germany needs 'colonies' in order to create a world in which Germany could access raw materials using the mark - much as Britain had the advantage of being able to access raw materials in the Empire using sterling.

Schacht handled the trade balance with another much admired expedient, entering into agreements with countries on a one by one basis by which the amount of imports Germany accepted would be balanced by the other party's willingness to accept an equivalent quantity of German exports - effectively a system of barter. Puhl again:

'Schacht in his dual capacity as president of the Reichsbank and Minister of Economics developed measures which he announced under the title of the "New Plan" to broaden the control over the German economy. It provided totalitarian controls over devisen and commodities. The program under the "New Plan" put Germany's foreign trade largely on a barter basis. Schacht, by these measures, sought to restrict the demand for foreign exchange and to increase its supply. He was successful in restricting the demand for foreign exchange by various measures suspending the service on Germany's foreign indebtedness, by freezing other claims of foreigners on Germany, by a stringent system of import controls and by eliminating foreign travel and other unessential foreign expenditures.

'To increase the available supply of foreign exchange, Schacht repeatedly requisitioned all existing foreign exchange reserves of German residents, required all foreign exchange arising out of current exports and other transactions to be sold to the Reichsbank and by developing new export markets. Exports were encouraged by direct subsidies and by accepting partial payment in German foreign bonds or in restricted marks which could be acquired by foreign importers at a substantial discount.

'Schacht actively developed barter with foreign customers and "clearing agreements" with foreign nations. Under Schacht's leadership Germany was quite successful in developing her foreign trade by these methods in Latin America and in southeastern Europe. He cleverly exploited Germany's bartering power in driving down import prices and raising export prices and, in some instances, securing credits from weaker countries which were subsequently used for imports from Germany.

'The clearing agreements were primarily for the purpose of obtaining raw materials for armament and food and export industries.

'Where clearing and payment agreements between governments or central banks were not used, the foreign exporters were often paid in mark balances called Aski marks, which they had to sell to the importers of German goods in their country. These marks sold at a substantial discount. Up to the end of 1938 clearing and payment agreements with over 40 countries had been concluded by Germany, and German foreign trade was dominated by this system. The share in Germany's export trade of countries using these methods exceeded eighty per cent in 1938.' (23)

(23) Ibid., pp.497-8. Skidelsky: Keynes vol iii gives an explanation of 'the Schachtian system', pp.228-230. See also N.I.Momtchiloff: 'Schachtian mercantilism', Journal of Industrial Economics, Aug 1954, Vol 2, No 3, pp.176-173.

Schacht showed a marked preference for imports of raw materials and a reticence with regard to the Nazi (and military) preference for autarchy and therefore for import substitution: 'Until the middle of 1936 Hitler did not concern himself in any way with the economic preconditions for waging a war. But he was repeatedly told that I, as Minister of Economic Affairs, emphasized the need to maintain foreign trade at a high level. In my deliberations with the government and business circles I always harked back to the fact that it was senseless to replace raw materials which could be imported cheaply with substitute materials expensively produced at home.' (Magic of Money, p.101). 1936 was the year in which Schacht began to lose control of the situation with the launching of the four year plan under the patronage of Göring, marking the transition from a policy of rearmament for defensive purposes to what Arthur Schweitzer calls 'a war economy in time of peace'. A policy of self sufficiency was outlined by Hitler in a memorandum written in September and proclaimed at the annual rally of the party in Nuremberg:

'On September 2, 1936, Hitler informed Schacht of the main ideas of his memorandum. Schacht argued against it by saying that a promotion of exports was the only solution of the raw material crisis, while Hitler's proposal would antagonize other countries and ruin Germany's foreign trade. Returned to his office, Schacht in greatest anxiety would call for General Thomas. To him Schacht proclaimed his opposition: "If we now shout our decision abroad to make ourselves economically independent, we cut our own throats, because we can no longer survive the transitory period of such a shift in economic policy". Schacht requested General Blomberg, through Thomas, to see to it that Hitler drop his plans of self-sufficiency. Blomberg heard the message but did nothing, thereby indicating his agreement with Hitler's policy directive.' (24)

(24) Arthur Schweitzer: 'Foreign exchange crisis of 1936', Zeitschrift für die gesamte Staatswissenschaft / Journal of Institutional and Theoretical Economics, April 1962, Bd. 118, H. 2. (April 1962), p.275

For Schacht the circulation of the Mefo bills was certainly a risk but one that could be taken so long as Germany, in the circumstances of the depression, was operating so much under capacity, with well over six million unemployed and a large amount of unused and unusable plant. The money was kept under a very tight rein. This was no sloppy 'helicopter money' aimed at increasing demand among the general public, nor was it anything like 'quantitative easing', supplied to banks in the hopes that they would find profitable outlets for lending. Comparison has often been made with the ideas being developed by Keynes at the same time in the General Theory published in 1936 but insofar as it could be said to have involved 'demand management' the intention seems to have been to restrict consumer demand rather than to encourage it. It was purposeful state spending, very largely oriented towards rearmament, and this became the basis for Schacht's arraignment at the Nuremberg trials as part of the 'Nazi conspiracy' to wage aggressive war. Schacht argued at the trial that he had indeed helped with rearmament in the early 1930s:

'I considered an unarmed Germany in the center of Europe, surrounded by armed nations, as a menace to peace. I want to say that these states were not only armed but that they were, to a very large part, continuing to arm and arming anew. Especially two states which had not existed before, Czechoslovakia and Poland, were beginning to arm, and England, for example, was continuing to rearm, specifically with reference to her naval rearmament in 1935, et cetera. ... I considered the inequality of status between the countries surrounding Germany and Germany as a permanent moral and material danger to Germany.'

But, he complains:

'Mefo bills, of course, were a thoroughly risky operation, but they were absolutely not risky if they were connected with a reasonable financial procedure and to prove this I would say that if Herr Hitler, after 1937, had used the accruing funds to pay back the mefo bills, as had been intended - the money was available - then this system would have come to its end just as smoothly as I had put it in operation. But Herr Hitler preferred simply to refuse to pay the bills back, and instead to invest the money in further armament. I could not foresee that someone would break his word in such a matter too, a purely business matter.
'DR. DIX: But, if the Reich had met the bills and had paid, then means would no doubt have partly been lacking for further rearmaments and the taking up of the bills would therefore have curtailed armament. Is that a correct conclusion?
'SCHACHT: That, of course, was the very purpose of my wanting to terminate the procedure. I said if the mefo bills were not met, it would obviously show ill-will; then there would be further rearming, and that cannot be.'

(25) Nuremberg trial transcripts, 118th day (1st May 1946), pp.474-475

In The Magic of Money (p.97) he says:

'It did not require the second sight of a prophet to forecast the unfortunate outcome of a war fought against opponents so rich in raw materials and foodstuffs as England and France. When Japan ventured to make war on America I commented "A country which produces nine million tons of steel a year can never win a war against a country which has a steel output of 90 million tons per year"'.

His disagreement with Hitler on the issue led to his dismissal as President of the Reichsbank in January 1939 (he had already resigned as Minister for Economic Policy) but he continued in favour as Minister without Portfolio until 1943. He was arrested in 1944 in connection with the July assassination plot against Hitler.

The period covered in this article sees Germany passing through the essentially defensive 1914-18 war; the loss of territory and resources, hyperinflation, reparations; the dependence on foreign, mainly US investment together with the collapse that followed the depression in the US; the rebuilding of industrial capacity and achievement of full employment under the Nazis and, though not discussed here, the period of the war when Germany occupied most of Europe and of the Western areas of the Soviet union. But in all that one thing at least seems to remain constant, and that is the 'cartelisation' of the economy - the dominance of large scale, technically advanced industrial enterprises, relatively free of the constraints of price competition nationally or internationally, operating on a scale that required extensive exports, but an economy also highly dependent on the import of raw materials and food not available to anything like the required quantities within Germany. This will be one of the main topics when we enter into the substance of the understanding of post war European economic history offered by Joseph Halevi. But first I want to say something about the British-American negotiations that led to the agreement at Bretton Woods in July 1944.