As earlier mentioned, in order for Germany to decide between guns or butter, she needed capital to fund her expenditures. However, since the Weimar Republic was forced to make scheduled reparations payments to the victors of war, Germany’s pockets were empty – she had little capital for indulgence. In his book, Hitler’s Magician, Norbert Muhlen ironically proves that the Nazis in fact benefited from reparations payments “…
after liberating itself from the chains of Versailles, instead of making an end of them, [the Third Reich] laid them on other nations. ” (Muhlen, 215) Germany sacrificed 10 billion in reparations from 1924-1931 – but Minister of Economics Hjamler Schacht worked tirelessly to wheedle and bully money from the rest of the world; within the first few years of the Nazi Regime he miraculously managed to amass18 billion RM.
Foreign creditors and their governments had no idea they were financially supporting Germany’s rearmament program, “so they might have guns instead of butter. ” (Muhlen, 214) In considering the various forms of capital to get the economy on track, Germany’s possibility of obtaining a foreign loan was out of the question; because of the depression, other countries were batting their own domestic situations and therefore could not afford to spare penny.
Furthermore, foreign investors had little faith in this nearly bankrupt economy where German businesses lie motionless in their industrial graves; the one thunderous roar of production all but silenced. As far as Germany’s domestic lenders were concerned, there was of course, the Reichsbank, where the option of pursuing an easy monetary policy was blocked by “the mortal fear of money expansion. ” (Poole, 19)
With the reoccurring nightmare of hyperinflation contaminating the course of economic policy, the Reichsbank was prohibited from conducting open monetary operations (i.e. – purchasing government notes to provide the government with credit) Although macroeconomic measures were not included in the Reichsbank’s toolbox of economic troubleshooting, the Reichsbank did however wield a considerable amount of control over the commercial banking sector, which gave it regulatory powers over the money and capital markets of the country. (Poole, 33) Furthermore, the Reichsbank was granted monopoly powers over foreign exchange transactions, which gave it virtual control over foreign trade.
In order to gain money, the government lowered interest rates on short and long-term debt and repurchased German bonds held abroad. (Muhlen, 216) The fundamental factor vital to Nazi economic performance was the need to increase domestic profits; in severe cases the penalty for smuggling money out of the country resulted in the death penalty. (Muhlen, 215) The Nazi’s had a great deal of power over German industry and trade; industry was to be organized into government dominated estates.
(Nathan, 65) These estates were created as a means to perimeter the influence of trade unions and prevent the working class from exerting any influence over German industries. RJ Overy and Arthur Schweitzer examine the relationship between German business and the Nazi regime. Arthur Schweitzer argues that the role of big business during the Third Reich was uncertain. He argues for a “partial fascism,” in which generals and big businessmen Allied with the Nazis in a failed attempt to control their own business policies.
Economic and political life between 1933 and 1938 was mostly dominated by a triumvirate of political oligarchs, military figureheads, and business tycoons each dominating certain industrial sectors. All three groups joined forces for the common good; the increase German power abroad through rearmament at home. Through strong-arm tactics the Nazi party was able to get monopoly in politics. Big business as a result faced a cowed labor force and stockholders whose returns were limited by rigid legislation and economic controls; record profits were the result. R.
J Overy (1982) discusses business’ role in the Nazi economic recovery and concludes that “much more research is needed to arrive at a satisfactory historical judgment of the relationship between Nazism and German business. “(Overy, 58) Since Nazi economic policy was geared towards rearmament it is not surprising that the importance of Germany’s industrial sectors increased exponentially. Burton Klein cites that between 1933 and 1938, the government spent approximately 90 billion RM in preparing for war — a sum that was more than double the German national income in 1932.
(Klein, 62) The expansion of the military sector would not have been possible without strict price and wage controls enforced by the government that served to suppress credit expansion. In his article The Economics of the Third Reich, Norman Crump provides a thorough account of Nazi financial policies. Nazi economic policies successfully increased economic growth via public works, rearmament orders and unemployment programs – all of which was accomplished without a massive expansion of either German currency or credit.
However, in order to finance its ambitious public works projects, the Nazis had to create money that the government didn’t have. Schacht and his minions in the Reich Economic Ministry “conducted a policy of deficit spending that was unprecedented in peacetime economies. ” (Peterson, 62) It is nevertheless true that their fear of inflation was deeply embedded in economic policy and significantly influenced the methods by which the Nazis carried out deficit spending policy.
The matter of financing the rearmament program presented a difficult problem for the Nazi regime. As previously noted, in 1934 and 1935 the German economy could by no possibility have raised funds for their extensive rearmament program through taxes and public loans. Aside from the problem of raising the huge sums required to sustain this program, Arthur Schweitzer (1982) reminds us that “the Nazi conspirators were exceedingly anxious, in the early stages, to conceal the extent of their feverish armament activities.
” (Schweitzer, 5) After considering various techniques of covertly financing the armament program, the Schacht developed the ingenious concept of the “Mefo” bill. One of the characteristics of Mefo that the Nazi’s found especially advantageous was the fact that figures indicating the extent of rearmament that would have become public through the use of other methods could be kept secret through the use of Mefo bills; they were used exclusively for armament financing.
Using Mefo as deficit financing scheme served a dual purpose: first, it diverted Reichsbank statutes, which permitted only limited financing of government expenses in the form of a loan but allowed for the inclusion of short-term commercial bills as legal coverage of the currency; second, it is thought that the Mefo strategy served to successfully camouflage the scope of rearmament.
After analyzing both sides of the aforementioned arguments and examining the corresponding data, I conclude that both rearmament activity and the role of Nazi work creation programs were vital factors that led to Germany’s economic recovery. Furthermore, the covert nature of the ingenious Mefo instruments served a particularly strategic role in financing Germany’s rearmament. This brings us to our present impasse: During the height of rearmament (1934-1937) many economists and historians believe that the effects of Mefo remained undetected in financial statistics and in macroeconomic indicators.
However, my aim is to quantitatively measure and detect the extent to which the Mefo program remained a hidden policy before 1938. In an effort to accurately measure this hypothesis, I used the German financial newspaper, Das Berliner Tageblatt, to collect monthly stock price over a six year period: 1933 -1938. The data set is a compilation of 126 German industrial firms from the following sectors: Iron, steel, coal, chemical, and electro-technical.
These companies were not chosen at random; rather, companies were selected by separating Mefo armament firms from non-Mefo firms. I then analyzed the stock differentials between Mefo and non-Mefo firms and measured the effects of Mefo bill circulation in German money market. By examining Mefo’s influence on stock returns, money supply and output production, we can objectively speculate as to what extent the Mefo rearmament scheme was a hidden policy.