Hjalmar Schacht, Mefo Bills and the Restoration of the German Economy 1933-1939


So, I was doing a bit of that aimless reading one so often does on the internet and I came across the transcript from the trial of Hjalmar Schacht at Nuremberg after the war. Schacht was, of course, the chief architect of Nazi economic policy and the inventor of the infamous Mefo bill, which we shall discuss in more detail below. The transcript is fascinating because it includes a nice overview of Nazi economic policy during the war and the years of rearmament.

I’ll give some context first of all. As is well-known, after WWI the allies had banned the defeated Germany from having a size-able standing army. In the 1930s, however, after the election of Hitler in 1933 the allies moved more and more to appease the Nazi regime and effectively looked the other way as the Nazis rearmed. But rearmament still had to be done under something of a cloak of darkness. One of the restrictions on Germany was that the government was only allowed to borrow 100m Reichsmark from the Reichsbank (the German central bank at the time). With such a budget limit in place Germany could not obtain the funds needed to rearm. So Hitler turned to Schacht who was, with the notable exception of Albert Speer, one of the only higher-ups in Germany at the time with any degree of intelligence.

The first step, of course, was to obtain financing. In order to do this Schacht introduced the Mefo bill which the Nuremberg prosecution described as such,

Transactions in “mefo” bills worked as follows: “mefo” bills were drawn by armament contractors and accepted by a limited liability company called the Metallurgische Forschungsgesellschaft, m.b.H. (MEFO). This company was merely a dummy organization; it had a nominal capital of only one million Reichsmarks. “Mefo” bills ran for six months, but provision was made for extensions running consecutively for three months each. The drawer could present his “mefo” bills to any German bank for discount at any time, and these banks, in turn, could rediscount the bills at the Reichsbank at any time within the last three months of their earliest maturity.

It was not a terribly complex plan. The military contractors were paid in bills of exchange issued by a shell company. These contractors would then take the bills to a private German bank which would then gladly turn over cash to the holder because they knew that they could then hand the Mefo bill to the Reichsbank which would in turn convert it into cash using their money-issuing powers.

The resulting spending resulted in the German economic boom that took place under Hitler. Here is a nice graph from Erwin Mahe that compares the growth and inflation in Nazi Germany to that in the Netherlands in those dark years:

Nazi GDP inflation

This is an incredible story from an economic point-of-view. After Hitler’s election in 1933 the Nazis were able to sustain between about 8-10% GDP for five years running with an inflation rate that would be the envy of the Bank of England and other inflation-targeters today. Now, we know how this growth was financed — that is, by money issuance — but how was it achieved? Here we turn back to the Nuremberg transcripts.

Well, first of all the capital markets were brought firmly under control so that rearmament became priority number one. The prosecution explains,

By a series of controls, they reduced to the minimum consistent with their rearmament program, all private issues which might have competed with Government issues for the limited funds in the capital market. Thus, the capital market was, in effect, pre-empted for Government issues.

Next Schacht seized control over the foreign exchange market to ensure that only those goods that were truly needed for the war machine — such as raw materials — were imported. This was referred to as the ‘New Plan’.

There were three main features of the “New Plan” as devised by Schacht: (1) restriction of the demand for such foreign exchange as would be used for purposes unrelated to the conspirators’ rearmament program; (2) increase of the supply of foreign exchange, as a means of paying for essential imports which could not otherwise be acquired; and (3) clearing agreements and other devices obviating the need for foreign exchange… These agencies, which were under Schacht’s control as Minister of Economics, decided whether given imports and exports were desirable; whether the quantities, prices, credit terms, and countries involved were satisfactory; and in short, whether any particular transaction advanced the conspirators’ armament program.

In addition to this Schacht took advantage of the clearing system that existed (and basically still exists) and allowed other countries’ exporters to send Germany raw materials in exchange for claims on the German clearing house. These claims are then only paid when Germany stops running a trade deficit and begins running a trade surplus. What follows is an amazing moment in Nuremberg where the truth of the international clearing system is laid bare for all to see.

The principle of the clearing system is as follows: The importer makes a deposit of the purchase price in his own currency at the national clearing agency of his country, which places the same amount to the credit of the clearing agency of the exporting country. The latter institution then pays the exporter in his own currency. Thus, if trade between two countries is unequal, the clearing agency of one acquires a claim against the agency of the other. That claim, however, is satisfied only when a shift in the balance of trade gives rise to an offsetting claim.

And why did the other countries’ clearing houses turn the other cheek and accept claims that may never be paid? Well, ask yourselves why China pegs its currency to the dollar and you’ll likely come up with the answer: they desperately want to take advantage of the aggregate demand provided by the foreign consumer. Here is the Nuremberg prosecutor making a far more savvy economic argument than many modern commentators manage in their lifetime,

This device was used by Schacht as a means of exploiting Germany’s position as Europe’s largest consumer in order to acquire essential raw materials from countries which, because of the world wide economic depression, were dependent upon the German market as an outlet for their surplus products.

How did Schacht dare to take what must have seemed to others to be enormous policy risks by bending both the domestic and international monetary system to the will of the Nazis? Because, it seems, Schacht was a very sophisticated economist who was not only far ahead economists in his own time but is also far ahead of most economists in ours. Here is a quote from Schacht… the Keynesian,

It has been shown that, in contrast to everything which classical national economy has hitherto taught, not the producer but the consumer is the ruling factor in economic life.

I believe what Schacht is here getting at that, as Keynesian economists know well, it is the demand-side of the economy which is important in most respects. The supply-side — the producer — is of secondary importance.

Schacht also invented what was called the ‘aski’ system to ensure that money paid for imports was then only spent on German exports. This seems to have been done through negotiation and, despite the sometimes moronic trade laws that exist in our world today, would certainly be worth another look by development economists should we ever move into a more enlightened future.

This scheme likewise obviated the need for free currency (i.e. Reichsmarks freely convertible into foreign currency at the official rate-U. S. dollars, pounds sterling, etc). The system worked as follows: The German foreign exchange control administration would authorize imports of goods in specified quantities and categories on the condition that the foreign sellers agreed to accept payment in the form of Mark credits to accounts of a special type held in German banks. These accounts were called “aski”, an abbreviation of Auslander Sonderkonten fuer Inlandszahlungen (foreigners’ special accounts for inland payments). The so-called “aski” Marks in such an account could be used to purchase German goods only for export to the country of the holder of the account; they could not be converted into foreign currency at the official rates of exchange. Each group of “aski” accounts formed a separate “island of exchange” in which the German authorities, under Schacht’s leadership, could apply their control as the country’s bargaining position in each case seemed to warrant.

Schacht’s ‘New Plan’ for the foreign sector of the German economy was enormously successful and probably contributed significantly to the low inflation in Germany in those years noted above. But what was going on at home? We know that Schacht had suppressed the capital market in what can only be described as the ultimate historical instance of ‘crowding out’ and we know that he had freed up the fiscal system to be used in any way he pleased but what was going on in domestic industry? It is to this we now turn.

Well, this is a rather simple story and can be told in a single paragraph: Schacht basically turned the German economy into a control economy. Here it is probably best to allow the Nuremberg prosecution to explain,

Schacht adopted a host of controls over the productive mechanism of Germany, extending, inter alia, to the allocation of raw materials, regulation of productive capacity, use of abundant or synthetic substitutes in place of declining stocks of urgently needed materials, and the erection of new capacity for the production of essential commodities. The structure of regulation was built up out of thousands of decrees in which governmental agencies under Schacht’s control issued permits, prohibitions, and instructions These decrees were the outgrowth of carefully laid plans of the Ministry of Economics, of which Schacht was the head, concerning “economic preparation for the conduct of war”, and in accordance with its view that “genuine positive economic mobilization” demanded that “exact instructions for every individual commercial undertaking are laid down by a central authority’.

All in all there is much that can be learned from Germany’s experience in the 1930s. While their attempts to control production and consumption directly are probably not suitable outside of warfare or rearmament Schacht’s monetary manipulations were, by any standard, rather ingenious. They were also extremely brave in that they had never been tried before and Schacht was not, so far as I can see, working off any truly articulated Keynesian theory. Rather he was working from the basis of intuition — an intuition, it should be noted, that was rather sharp.

So, what happened then to Schacht? Well, it turns out that he was not the monster those he worked for undoubtedly were. Even the prosecution conceded that “he was not in complete sympathy with that aspect of the Nazi Party’s program which involved the wholesale extermination of the Jews” and that he “gave aid and comfort to individual Jews who sought to escape the indignities generally inflicted upon Jews in Nazi Germany”. That is more than can be said of many German soldiers and officers who went home to their families after the war. Nor was Schacht an official member of the Nazi party, in fact he was a former liberal politician.

The Soviets, who wanted to convict Schacht, saw him as the man who had, through his economic genius, facilitated the growth of the Nazi war machine. The British, on the other hand, saw him as another instance of a common character type: an ambitious functionary who tied himself to the power structure in Nazi Germany while maintaining his distance and they favoured acquittal. In their own way, both sides were probably correct. But Schacht was acquitted and he went on to found a bank and give economic advice to developing countries. My guess is that this advice was far superior to that given by modern day economists.

About pilkingtonphil

Philip Pilkington is a macroeconomist and investment professional. Writing about all things macro and investment. Views my own.You can follow him on Twitter at @philippilk.
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32 Responses to Hjalmar Schacht, Mefo Bills and the Restoration of the German Economy 1933-1939

  1. NeilW says:

    “The so-called “aski” Marks in such an account could be used to purchase German goods only for export to the country of the holder of the account; ”

    The floating rate gets some way towards that position, and is based on the same idea.

    Ultimately you can only export to a currency area if there is a matching offsetting import, or you are prepared to save financially in the foreign currency. Otherwise the financing arm of the transaction will not be in place and the whole transaction will never happen.

    I can see some merit in restricting foreign use of those savings to the purchase of export goods and services only, but how would you enforce it?

    • If a country closed itself to imports from outside — or to some imports, or whatever — they could then negotiate with companies to undertake limited imports based on conditions. The companies would face either getting “stuff” from the country in question or not being able to sell their goods at all. Unless the country produced useless garbage it would probably be in their interest to take the stuff.

    • John H. says:

      Offer them something more attractive, like oil?

  2. Lord Keynes says:

    This is some excellent historical research you’ve done here.

    When a bank presented a Mefo bill at the Reichsmark, did the Reichsmark create new money to add to the bank reserves, so that this whole process was a sly way of monetizing the German government budget deficit?

    Now I have also assumed that this was how it worked, but it would be nice to have some direct evidence.

    In my mind, three countries stand out as having got out of the depression rapidly:

    (1) New Zealand

    (2) Japan under Takahashi Korekiyo,

    and (as you point above)

    (3) Germany

    I also think some of the Scandinavian countries were able to achieve some degree of fiscal stimulus by the unusual method of increasing government spending and taxing the rich whose money was not being spent on consumption/investment, but they never seem to have been able to restore full employment.

    • Thanks LK, I always wanted to look into this but I never knew where to turn. Who would have thought the Nuremberg Trial records would contain such economic detail?

      As to your question, yes, this is almost certainly how it worked. While there is no record that I can find of the actual reserve operations of the Reichsbank in those years the sheer scale of the credit expansion under the Mefo Bill program suggests money creation. From the transcripts at Nuremberg,

      The “mefo” bill system continued to be used until 1 April 1938, when 12 billion Reichsmarks of “mefo” bills were outstanding (EC-436). This method of financing enabled the Reich to obtain credit from the Reichsbank which, under existing statutes, it could not directly have obtained. Direct lending to the Government by the Reichsbank had been limited by statute to 100 million Reichsmarks (Reichsgesetzblatt, 1924, II, p. 241). Schacht has conceded that his “mefo” bill device “enabled the Reichsbank to lend by a subterfuge to the Government what it normally or legally could not do” (3728-PS).

      12bn Reichsmark seems like a very large number. And remember, these were 6 month issues sometimes extended out by three months. So, how many had expired in the meantime? Over the course of 5 years… maybe 90-120bn RM worth? All of these would have had to be paid off which was done by the Reichsbank. If we take an intermediary number, say 100bn RM, then we’re talking about maybe 10% of German GDP worth of money being issued through the Mefo system by the time it expired.

      I cannot see where else they would have come from except that the Reichsbank was creating money in order to rediscount and ultimately pay off the Mefo Bills.

      • Actually, on second thought those estimates are probably far too conservative. In order to account for German GDP growth of the magnitude we saw in the period 1933-1938 (which was accompanied by significant trade deficits) we would probably have to assume spending by the government through the Mefo system of about 20% of GDP a year. So, the likely amount of money created by the Mefo system probably ended up being about 100% of GDP by 1938.

        Why then were there so few Mefo Bills left outstanding in 1938? I don’t know. Perhaps knowing that the program was going to be wound down creditors stopped accepting them a year beforehand or so and consequently most of them expired and were paid off. It’s hard to say really. But that 12bn figure simply cannot be representative.

  3. Lord Keynes says:

    That is fascinating data. Thanks for the reply.

  4. Lord Keynes says:

    There is a real mystery here:

    (1) According to this table from Overy (The Nazi Economic Recovery, 1932–1938, p. 43), , the money supply only increased from 13.9 billion to 23.7 billion by 1938-1938:

    Year | Money Supply RM
    1933-1934 | 13.9 billion
    1934-1935 | 15.7 billion
    1935-1936 | 16.7 billion
    1936-1937 | 18.1 billion
    1937-1938 | 20.0 billion
    1938-1939 | 23.7 billion

    Why was the growth so low, if so many Mefo were being discounted and turned into reserves in the banking system?

    (2) Also, there was yet another bill used by the Germany government in these years: the Öffa bills .

    (3) According to some sources, many of the Mefo bills actually continued to circulate as negotiable instruments (adding to money supply without direct discounting at the Reichsbank) or were held as financial assets:

    Mefo bills were issued to last for six months initially, but with the provision for indefinite three-month extensions. The total amount of mefo bills issued was kept secret.

    (4) The Minister of Finance did think of Mefo bills as a way of printing money:

    “From 1935 to 1938 they were used exclusively to finance rearmament and amounted to a total of twelve billion marks. In explaining them once to Hitler, Count Schwerin von Krosigk, the harassed Minister of Finance, remarked that they were merely a way of “printing money”.

    • (1) Someone’s figures are wrong then. According to Maddison German GDP in 1936 was around $250bn (I’m quoting from memory). If we take the late-1920s exchange rate of 4RM:1USD that means that it was about 1trn RM. If those money supply figures were correct then the money supply would have been about 1.8% of GDP. That would have made the money velocity about 50! That means that a coin, note or deposit would have turned over 50 times in a year! That sounds highly unlikely to me outside of a hyperinflation. The typical money velocity is somewhere between about 1.5 and 2.2.

      Either the money supply figures are wrong or the GDP figures are wrong. I trust the GDP figures more.

      (2) Yes, I think these were experimental and not too important.

      (3) I would not be surprised at all. But they still fell due after 6-9 months. So they couldn’t have circulated for long.

      (4) I think this is a fact, not speculation, although the operations cannot be shown in balance sheet form.

  5. DeusDJ says:

    I would ask Jim Sturgeon at UMKC to see if he has any ideas on this conundrum, every year in his Institutional economics he always brings up the nazis and how they financed rearmament, which is why I think he may know of some sources for one to read.

  6. Great article, PK. Leads me to a question I have wondered about for some time…

    “China” holds tremendous amounts of foreign reserves, of course. I have always assumed that Chinese businesses aren’t interested in holding dollars, so banks convert those dollars to renminbi while the Chinese govt. accommodates this by trading new renminbi for dollars and just sitting on those dollars. But this would require Chinese deficit spending in about the same amount as they run in trade surpluses. So, who is actually holding American dollars/bonds? Govt., banks, or businesses?

  7. Ryan says:

    I don’t know if you’ve already read it, but this is a PDF of the English version of Schact’s book, ‘The Magic of Money’, written in the 60s. It’s quite interesting.


  8. Pablo says:

    It is beyond doubt that Schacht was a genius. However, I am currently reading “The wages of destruction”, by Adam Tooze (so far, a brilliant book), and he says that the origin of the idea, and the first implementation, of the Mefo’s plan was not Schacht, but the previous government, led by Schleicher, implemented in December 1932. That government lasted one more month, and was the last one before Hitler. Page 43-44 of that book, there is the reference.

    • Pablo says:

      I want to add a couple of things on my short message. I think Schacht was a genius, but also an evil person. He supported Hitler as early as 1931, a nationalist on his own. He was accused of participating in the 1944 assassination attempt by von Stauffenberg, though that’s uncertain. He was saved from the Nurenberg trials by his long time friend Montagu Norman. The book by Tooze gives a more, mmmmm, nuanced view of the domestic work creation program implemented by the Nazis. It’s a great reading, so far.

  9. William Allen says:

    Can we imagine that “accepted” but not discounted, not redeemed mefo notes were used as currency amongst industrial concerns? This would provide purchasing power without creation of deposits, so recorded money supply figures, based on bank deposits, would not include these? This becomes a complementary type of currency.

  10. Pingback: Philip Pilkington: Hjalmar Schacht, Mefo Bills and the Restoration of the German Economy 1933-1939 | naked capitalism

  11. uhliga says:

    It would be interesting to know if there are any parallels with todays loose monetary policy and the clearing system of the Eurozone.

  12. Hi Philip, once again a very interesting post. I may have a lot more to say on the subject but, for the moment, just very briefly, on the question of just how many Mefo bills were ever issued, I think this paper http://personal.lse.ac.uk/ritschl/pdf_files/ritschl_dec2000.pdf has details.

    • Interesting paper. The author reaches an odd conclusion though. He writes,

      Economic recovery in Germany in the 1930s remains the paradox case of public demand expansion without Keynesian demand creation.

      That would be consistent with the “balanced budget multiplier” which is well-known in Keynesian economics. It does appear that economic growth was not facilitated by budget deficits per se, however. If I get the time I’ll write a critical review of this paper.

      • First, just to make clear that I have not (yet) read that particular paper, although I have read other papers by Ritschl. By all means, write a refutation. Don’t be surprised about Ritschl’s odd conclusions, he was a student of German economic historian Knut Borchardt. Borchardt gained some moderate fame in Germany with his “Borchardt hypothesis”. If you understand German, you will find something about it in the entry on Borchardt in the German Wikipedia and, of course, a lot more in German literature. I am assuming (but would be pleasantly surprised to be proven wrong) that you do not understand German, so I’ll briefly summarize the hypothesis for you. It seeks to refute the dominant view, that the German Chancellor of 1930-32, Heinrich Brüning, got it horribly wrong in sticking with his hugely deflationary policy which caused mass unemployment and, ultimately, led to the Nazi takeover. Borchardt’s thesis is that Brüning really had no alternative (other than going off the gold standard and repudiating German debts) since Germany had gone on a borrowing spree in the mid 20s which had pushed up wages and hurt German competitiveness (if this reminds you of what happened to South Europe after the introduction of the Euro, it’s because it should) so, as long as Germany did not wish to leave the gold standard (shall we say the Euro of the day?) they had no option (well, substitute “Papandreou” or “Samaras” for “Brüning and you basically have the story of current, post-memorandum and post-troika Greece and of the dilemma faced by her leaders). Borchardt’s hypothesis is supposed to have caused a huge controversy among German economists and historians but, as far as I’m concerned (but who am I to say, I’m not even an economist), there is nothing so controversial about it. It all falls into place when you realize that it was a fanatical criminal that (by pure coincidence, of course) had his economics right and it was the sensible moderates (and Brüning was one of those, believe me) who got it horribly wrong. Which gives you a chilly feeling, if you try to draw an analogy with modern Eurozone, esp. Greece and other crisis countries. Because, of course, for all his correct economics, Hitler really was a criminal fanatic who ended up completely ruining his country, and much more besides…

  13. larry says:

    Phil, in order to completely understand your comment, “. One of the restrictions on Germany was that the government was only allowed to borrow 100m Reichsmark from the Reichsbank (the German central bank at the time). With such a budget limit in place Germany could not obtain the funds needed to rearm.”, It is necessary to explain how the currency system differed from the one we use today, which is a fiat system with a flexible exchange rate.

    By the way, Goering had brains. We would now probably say that he was in it for the money, as it were, rather than a “true believer”. He protected his anti-Nazi brother and stole a lot of art. So did Heydrich. It is best not to underestimate the enemy.

  14. larry says:

    I meant only to contend the Heydrich had brains. He seems to have been a true believer.

  15. larry says:

    Phil, Re Ritschl, I recommend “The German Transfer Problem, 1920-1933:
    A Sovereign Debt Perspective”, Centre for Economic Performance, July 2012, where, as I remember it, he supports Mantoux’s argument, in his A Carthaginian Peace or the Economic Consequences of Mr Keynes (1946), that the Germans deliberately engineered the Weimar hyperinflation expressly in order to avoid paying reparations, especially to the French.

    The link to Ritschl’s paper is:

    Click to access dp1155.pdf

  16. Pingback: Wall Street e nazismo: un legame mai interrotto | Lorenzo Piersantelli

  17. mookid says:

    Nazis introduced price- and salary-caps in 1936. together with ability to disown and throw “traitors” in concentration camps, of course it’s much easier to control inflation. but most germans could accept these measures in return for booming economy during peacetime.

  18. jan says:

    The fact, that in the third reich, someone created money by ledger-entry is done by many,
    national banks especially the privately owned versions, ie the fed and the like.
    The main difference with germany was, no interest was collected on the created funds!
    the rest is not relly that important.

  19. jan says:

    I seem to have to correct my typing errors and add some more facts.
    According to Rakowski, Hitler was not aware, that he infringed on a scheme, others had reserved for themselves only, ie the creating of money by ledger-entry!
    But Rakowski did not necessarily read Gottfried Feder, he may not have known about him.

    Collection of interest on ledger-entry money is a very good schem for those, who have
    the power to do so.
    For the critical historian, Hitler was very well aware of what he did.
    In Hitlers Speeches, that are widely distributed, we hear his saying:
    Wollt Ihr den Totalen Krieg?
    This was the very important question, including the fact, with whom the war was to be fought.
    For those inclined, the message was clear enough.

  20. jan says:

    as a final comment: as one reads the various entries here, one is at times rather surprised.
    Galileo had it:
    if someone does not know the truth, he is just a stupid (he used ignoramus)
    if someone knows the truth and calls it a lie, he is a criminal.

    We may all deduct, as we please.

  21. Pingback: Mefo Bills : The Unethical Lifehack of NAZI | THE FLYING FORTRESS

  22. Michael Pilsworth says:


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