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Germany was virtually prostrate in the early part of 1933; she was faced with dwindling revenues from taxation and seemingly unable to raise money either through external or internal loans. Hitler entrusted to Schacht the task of wringing from the depressed German economy the tremendous material requirements of armed aggression, and endowed him with vast powers over every sector of German industry, commerce, and finance to carry out that task. Some of the devices which Schacht employed to fulfill his mission will now be examined.

Schacht's program, as hereinafter outlined, was, by his own admissions, dedicated to the accomplishment of Hitler's armament program. In a memorandum to Hitler dated 3 May 1935 concerning the financing of armament, Schacht wrote:


"The following comments are based on the assumption that the accomplishment of the armament program in regard to speed and extent, is the task of German policy, and that therefore everything else must be subordinated to this aim, although the reaching of this main goal must not be imperiled by neglecting other questions.

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all expenditures which are not urgently needed in other matters, must stop and the entire, in itself small, financial power of Germany must be concentrated toward the one goal: to arm." (1168-PS).

In a letter to General Thomas dated 29 December 1937, Schacht stated:

"I have always considered a rearmament of the German people as conditio sine qua non of the establishment of a new German nation." (EC-257).

Schacht's vast achievements in furtherance of the conspirators' program may conveniently be considered under four headings: (a) armament financing; (b) the "New Plan"; (c) control of production; and (d) plans and preparations for economic controls during war.

(1) Armament Financing.

(a) Mefo bills. The financing of the conspirators' huge rearmament program presented a twofold problem to Schacht. First, was the need of obtaining funds over and above the amount which could be obtained through taxation and public loans. Sec


E ond, was the conspirators' desire, in the early stages of rearmaAment, to conceal the extent of their feverish armament activities.

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Schacht's answer to the problem was the "mefo" bills, a scheme which he devised for the exclusive use of armament financing (EC-436).

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. The amount of "mefo" bills outstanding was a guarded state secret (EC-436). 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).

In a speech delivered on 29 November 1938, Schacht glowingly described the credit policy of the Reichsbank of which he was the author as follows:

"It is possible that no bank of issue in peacetimes carried on such a daring credit policy at the Reichsbank since the seizure of power by National Socialism. With the aid of this credit policy, however, Germany created an armament second to none, and this armament in turn made possible the results of our policy." (EC-611).

The "daring credit policy," which made possible the creation of "an armament second to none," obviously embraced the "mefo" bill financing which he had contrived.

(b) Use of funds of opponents of Nazi regime. In his efforts to draw upon every possible source of funds for the conspirators' rearmament program, Schacht even used the blocked funds of foreigners' deposits in the Reichsbank. In his memorandum to Hitler of 3 May 1935, Schacht boasted:


"The Reichsbank invested the major part of Reichsbank accounts owned by foreigners, and which were accessible to the Reichsbank, in armament drafts. Our armaments are, therefore, being financed partially with the assets of our political opponents." (1168-PS).

(c) Taxation and long term indebtedness. "Mefo" bills and the funds of political opponents of the conspirators were, of course, not the only sources from which Schacht drew to finance the armament program. Funds for rearmament were likewise derived from taxation and an increase in public debt-channels through which part of national income is ordinarily diverted to public authorities. But what distinguished the conspirators' program of public indebtedness was the fact that the German capital market was completely harnessed to the expanding needs of the Nazi war machine. 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 (EC-497; EC-611).

During the period from 31 December 1932 to 30 June 1938, the funded debt of the Reich rose from 10.4 billion Marks to 19 billion Marks (EC-419).

This large increase in funded debt was dedicated "as far as possible" to "the financing of armament and the Four-Year Plan” (EC-611).

(2) The New Plan. The conspirators' grandiose armament plans obviously required huge quantities of raw materials. Schacht was a proponent of the view that as much of the requisite raw materials as possible should be produced within Germany. At the same time, however, he recognized that large imports of raw materials were indispensable to the success of the conspirators' gigantic armament program. To that end, he fashioned an intricate system of controls and devices which he called the "New Plan" (Reichsgesetzblatt, 1934, I, pp. 816, 829, 864; Reichsgesetzblatt, 1935, I, p. 105).

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. Under the


"New Plan", economic transactions between Germany and the outside world were no longer governed by the autonomous price mechanism; they were determined by a number of Government 11 agencies whose primary aim was to satisfy the needs of the conspirators' military economy (EC-437).

Schacht accomplished the negative task of 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 export controls and by Heliminating foreign travel and other unessential foreign exSpenditures." (EC-437).

In order 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." (EC-437).

A vast network of organizations was erected to effectuate these various measures. Suffice it for the present purposes to mention merely one of these organizations: the supervisory agencies (Ueberwachungsstellen). 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. The overriding military purpose of the series of controls instituted under the "New Plan" is plainly shown in Schacht's letter of 5 August 1937 to Goering, wherein he said:

66* * * The very necessity of bringing our armament up to a certain level as rapidly as possible must place in the foreground the idea of as large returns as possible in foreign exchange and therewith the greatest possible assurance of raw material supplies, through exporting." (EC-497)

There remains for consideration that aspect of the "New Plan" which involved extensive use of clearing agreements and other arrangements made by Schacht to obtain materials from abroad without the expenditure of foreign exchange. 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.

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. Speaking of his system of obtaining materials abroad without the use of foreign exchange, Schacht has stated:

"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. And this thesis is somewhat connected with general social and political observations, because it establishes the fact that the number of consumers is considerably larger than the number of producers, a fact which exercises a not inconsiderable social and political pressure." (EC-611)

Schacht's clearing agreements were particularly effective in Southeastern Europe, where agricultural exports had been considerably curtailed by competition from the more extensive and efficient overseas agriculture. The success of Schacht's ruthless use of Germany's bargaining position is indicated by the fact that by August 1937, there had been imported into Germany approximately one half billion Reichsmarks of goods in excess of the amount delivered under the clearing arrangements. In his letter to Goering dated 5 August 1937, Schacht stated:

66* * * in clearing transactions with countries furnishing
raw materials and food products we have bought in excess of
the goods we were able to deliver to these countries (namely,
Southeastern Europe and Turkey) roughly one half billion
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Thus, through this device, Schacht was able to extract huge loans from foreign countries which Germany could not have obtained through ordinary channels. The device as developed by Schacht was subsequently used during the war as a means of systematically exploiting the occupied countries of Western Europe.

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