Germany 1933 to 1939: Work Based Money and the Schacht Mechanism

Reading Note: What This Page Is And What It Is Not

This page documents one specific monetary mechanism, the Mefo bill (Mefo Wechsel) and the wider Schacht era apparatus that operated alongside it from 1933 to 1939. It is included as a documented historical data point about what is monetarily possible outside the gold and dollar and private banking framework that has dominated the world since 1913 and exclusively since 1971. It is not an endorsement of the regime that deployed it.

The regime’s broader actions, the persecution and mass murder of Jews, Roma, Sinti, disabled people, political prisoners, and Soviet civilians, the war of aggression that consumed Europe from 1939 to 1945, and the totalitarian apparatus that made all of it possible, are condemned without qualification. They are outside the scope of this monetary analysis, and no monetary success could ever offset them. The reader should hold both facts simultaneously: the instrument worked for several years on its narrow technical terms, and the political project it served was a catastrophe that ended in the destruction of the German state and tens of millions of human lives.

We document the mechanism because the post 1971 fiat credit consensus presents a triad of choices: the dollar system, the gold standard, or hyperinflation. The 1933 to 1939 German experiment is a documented fourth option. Schacht predicted by January 1939 that it would collapse without fiscal restraint. He was correct. The collapse came, in the worst form, through war. None of that erases what the instrument did, mechanically, between 1933 and 1937.

Sources: Adam Tooze, The Wages of Destruction (Allen Lane, 2006); Hjalmar Schacht, Confessions of “the Old Wizard” (Houghton Mifflin, 1956); Deutsche Bundesbank historical archive, https://www.bundesbank.de/en/bundesbank/history .

1923 As Background: The Rentenmark Stabilisation

The 1933 mechanism cannot be read without the 1923 precedent. By November 1923 the paper mark stood at 4.2 trillion to one US dollar; the hyperinflation is documented elsewhere in this knowledgebase. The episode was ended by the Rentenmark, with Schacht serving from 13 November 1923 as Reichswährungskommissar and from 22 December 1923 as Reichsbankpräsident.

The Rentenmark was issued by the Deutsche Rentenbank against 3.2 billion gold marks of Rentenbriefe, mortgage style claims on German agricultural and industrial real assets. It was nominally backed by the productive economy rather than by gold reserves Germany no longer possessed. Issuance was capped at 2.4 billion Rentenmark. The exchange rate against the old paper mark was fixed at 1 to 1 trillion. The hyperinflation ended within weeks.

Sources: Deutsche Bundesbank historical archive, https://www.bundesbank.de ; Constantino Bresciani-Turroni, The Economics of Inflation (George Allen & Unwin, 1937); Adam Fergusson, When Money Dies (William Kimber, 1975).

The 1923 stabilisation established that German monetary issuance could be tied to claims on domestic productive capacity rather than to gold or external creditors, and could function as money. It gave Schacht the template he would draw on a decade later: the man who designed the Mefo bill in 1933 had already designed the Rentenmark in 1923.

1931: The Collapse Schacht Returned To

The Reichsmark, introduced in 1924 to replace the Rentenmark at parity, returned Germany to a gold exchange standard at the prewar parity of 4.20 RM per US dollar. The system depended on continuous inflows of foreign capital, primarily American, to recycle reparations under the Dawes Plan (1924) and Young Plan (1929). When the 1929 crash cut off that flow, the structure was finished.

The banking crisis of July 1931 began with the failure of the Darmstädter und Nationalbank (Danatbank) on 13 July 1931. The Reichsbank lost roughly one third of gold and foreign exchange reserves within weeks. On 15 July 1931 the government imposed exchange controls; the Reichsmark was de facto off gold from that date.

Chancellor Heinrich Brüning’s response was deflationary austerity by emergency decree (Notverordnungen): wage cuts, public sector pay cuts, tariff and tax increases.

Variable	1929	1932
Industrial production index (1928 = 100)	100	~58
Registered unemployed	~1.9 million	~6.0 million (peak Feb 1932)
Unemployment rate (of dependent labour force)	~9%	~30%
Bankruptcies (annual)	~10,000	~14,000
Wholesale price index (1913 = 100)	137	91

Source: Deutsche Bundesbank, Deutsches Geld und Bankwesen in Zahlen 1876 to 1975 (Knapp, 1976); Statistisches Reichsamt annual reports; Carl Ludwig Holtfrerich and Harold James, eds., The Reichsbank and Economic Policy (Frank Cass, 1989).

By the end of 1932 the German economy was in the deepest depression of any industrial country. One in three industrial workers was unemployed. Industrial production was 42 percent below its 1929 peak.

17 March 1933: Schacht Reappointed

Hjalmar Schacht had resigned the Reichsbank presidency on 7 March 1930 in protest at the Young Plan’s reparations terms. On 17 March 1933 he was reappointed Reichsbankpräsident. On 2 August 1934 he was additionally appointed Reichswirtschaftsminister. He held both posts until November 1937, when he resigned the Economics Ministry, and the Reichsbank presidency until 20 January 1939.

Sources: Deutsche Bundesbank historical archive; Schacht, Confessions, chapters 24 to 27; Tooze, chapters 1 and 2.

The Mefo Bill: The Centrepiece Mechanism

The instrument that financed the bulk of German rearmament and a meaningful share of the wider work creation programme between 1934 and 1938 was the Mefo Wechsel.

Construction of the shell company

In April 1933 four major industrial firms incorporated a shell company in Berlin: Metallurgische Forschungsgesellschaft m.b.H. (Mefo). The shareholders were Krupp, Siemens, Gutehoffnungshütte, and Rheinmetall. Nominal share capital was 1 million Reichsmark. Stated purpose: metallurgical research. Actual function: legal counterparty on a class of bills of exchange.

Source: Tooze, chapter 2, pp. 53 to 60; Neal, Economic History Review 32, no. 3 (1979): 391 to 404; Deutsche Bundesbank, Monatsbericht February 2017, https://www.bundesbank.de/en/publications/research .

How the instrument worked

A state contractor, initially Krupp or another armaments supplier, later also contractors in infrastructure and aviation, produced goods for the Reich. Instead of Reichsmark cash the contractor received a bill of exchange drawn on Mefo with original maturity of three months and a renewable feature allowing extension up to five years. The bill carried two layers of credit: Mefo’s acceptance signature, and a Reichsbank guarantee that it would be discounted at any point at par.

The contractor could hold to maturity earning interest, or discount at any commercial bank for cash. The commercial bank could rediscount at the Reichsbank. Mefo bills functioned for all economic purposes as money: they circulated at par and were settled, ultimately, by the Reich.

Source: Tooze, chapter 2, pp. 53 to 64; Schacht, chapter 26.

Why this was off balance sheet

Neither the Mefo bills nor the Reich’s contingent liability appeared on the Reichsbank balance sheet as currency in circulation, and they did not appear on the published Reich budget as government debt. The bills sat on commercial bank books and the Reichsbank discount window as ordinary commercial paper. Official money supply, official deficit, and official sovereign debt all looked moderate throughout 1934 to 1937. The actual financing of state spending was running through a parallel instrument the public statistics did not capture.

Quantitative scale

Mefo issuance ran from late 1933 through March 1938, when issuance was halted; outstanding bills then ran off through redemption until 1945.

Year	Net new Mefo issuance (RM, billion)	Cumulative outstanding (RM, billion)
1934	2.1	2.1
1935	2.7	4.8
1936	4.5	9.3
1937	2.7	12.0
1938 (issuance halted March 1938)	0.0	12.0

Source: Tooze, table 2.1, p. 61, drawing on Reichsbank archival series; Neal (1979); Bundesbank Monatsbericht February 2017.

Total cumulative issuance reached approximately 12 billion Reichsmark, roughly half of all German rearmament expenditure in the window (Tooze, p. 61); Schacht’s figure in Confessions chapter 26 is in the same range. Against 1933 nominal GNP near 59 billion RM, the cumulative Mefo position by 1938 was around 20 percent of one year’s GNP, nominally short term commercial paper standing behind real state spending.

What Mefo Was, Structurally

The Mefo bill answered a financing problem with four binding constraints:

1. No tax route. Raising taxes sharply on a population in 30 percent unemployment was politically impossible.
2. No visible debt route. Issuing Reich bonds at scale would have alarmed domestic savers (1923 memory) and foreign creditors with Versailles claims.
3. No gold route. Germany held almost no gold reserves after 1931.
4. No external creditor route. London and New York capital markets were closed to Germany after 1931.

The Mefo bill solved all four at once. It created claims on future German production, guaranteed by the Reichsbank, that the domestic banking system cleared at par. The state used those claims to pay contractors; contractors paid wages and bought materials; domestic activity rose. The instrument was, in effect, a state issued, productivity backed parallel currency, off balance sheet, denominated in Reichsmark but functionally distinct from it.

A sovereign state with sufficient institutional capacity can monetise its own work creation programme without gold, without foreign creditors, without visible bond issuance, and without the consent of the international banking system. Whether such an instrument is a sustainable steady state or a transitional device is a separate question, and one Schacht himself answered with a warning by 1939.

Source: Tooze, chapters 1 and 2; Neal (1979); Schacht, Confessions, chapter 26.

The Wirtschaftswunder of 1933 to 1937

The real economy results are documented in the Bundesbank historical series, the Statistisches Reichsamt annual reports, the Bank for International Settlements Annual Reports of the period, and modern academic reconstruction.

Year	Registered unemployed (millions)	Unemployment rate	Industrial production (1928 = 100)	Real GNP growth (% YoY)
1932	5.6 (avg), 6.0 (Feb peak)	~30%	58	-7.3
1933	4.8	~26%	66	+6.8
1934	2.7	~14%	83	+8.0
1935	2.2	~11%	96	+7.2
1936	1.6	~8%	107	+8.5
1937	0.9	~4.5%	117	+7.0
1938	0.4	~2%	125	+7.7

Sources: Deutsche Bundesbank, Deutsches Geld und Bankwesen in Zahlen 1876 to 1975; Statistisches Reichsamt, Statistisches Jahrbuch für das Deutsche Reich 1934 to 1939; Tooze, statistical appendix; BIS Annual Report 1934 to 1939, https://www.bis.org/about/history.htm .

By 1937 registered unemployment had fallen from approximately 6 million to under 1 million. Industrial production had roughly doubled from its 1932 trough. Real GNP grew at an average near 8 percent per year for five consecutive years. This is the empirical content of the term Wirtschaftswunder applied retroactively to the period.

Three caveats are essential:

First, a meaningful share of the recovery was rearmament driven. Tooze documents (chapters 1 to 4) that by 1936 to 1937 a rising share of industrial output was directed to military production, and Mefo financing was overwhelmingly concentrated on military procurement. The work creation programme (Reinhardt programme, Reich autobahnen, agricultural settlements) was the visible face; rearmament was the larger component.

Second, the recovery was autarkic. The New Plan of September 1934 cut Germany off from open multilateral trade. Imports were rationed; consumer goods production was suppressed in favour of capital and military goods.

Third, the official inflation rate of 1 to 2 percent per year was an administered price, not a market price. The Reich imposed comprehensive price and wage controls under the Reichskommissar für die Preisbildung (Carl Friedrich Goerdeler from 1934, Josef Wagner from 1936). With prices controlled, inflation showed up as shortages, queues, quality degradation, black markets, allocation rationing. The Mefo mechanism was creating monetary claims faster than the controlled price economy could absorb them; the gap was suppressed rather than cleared. Tooze documents this explicitly (chapters 5 and 6).

The 1933 to 1937 record shows what is monetarily possible in employment and output terms when a state is willing to issue work backed paper at scale. It also shows that the inflationary pressure does not disappear because it is not allowed to register in the official CPI. It accumulates as suppressed inflation, allocation distortion, and political fragility, and eventually has to be resolved. Here it was resolved by war.

Bilateral Clearing: The Aski Mark and the New Plan

In September 1934 Schacht announced the New Plan (Neuer Plan), restructuring German foreign trade toward bilateral clearing. The instrument was the Aski mark (Ausländer Sonderkonten für Inlandszahlungen).

A bilateral agreement was signed between Germany and a trading partner, initially Hungary, Yugoslavia, Bulgaria, Romania, Greece, then Argentina, Brazil, Chile, Turkey, Iran, Egypt, Spain, and others. Each side opened a clearing account at its own central bank in a non convertible bilateral clearing unit. German importers paid for foreign goods by depositing Reichsmark into the clearing account; foreign exporters were paid in their own currency from the same balance, drawn down as their countrymen imported German goods. Trade was forced into bilateral balance by construction. No gold and no convertible foreign exchange flowed at any stage.

By 1938, roughly 50 percent of German foreign trade was conducted under bilateral clearing agreements. For southeast European countries (Yugoslavia, Bulgaria, Romania, Hungary, Greece) the share of trade with Germany under clearing rose to 40 to 60 percent of total foreign trade. The City of London and Wall Street FX clearing system was bypassed entirely.

Sources: Tooze, chapter 3; Albert O. Hirschman, National Power and the Structure of Foreign Trade (University of California Press, 1945); Neal (1979); BIS Annual Report 1936 to 1938, https://www.bis.org/about/history.htm .

The monetary point is that bilateral clearing demonstrated, at industrial scale across dozens of countries, that international trade does not require dollar settlement, gold settlement, or any single hegemonic clearing system. It can be conducted in bilateral accounting units, settled by goods, with central bank bookkeeping at each end.

Schacht’s Resignation and the January 1939 Memorandum

By 1937 Schacht had concluded that Mefo issuance and the rearmament programme were exceeding real productive capacity and would force one of three outcomes: sovereign default on Mefo redemptions, open inflation, or war to convert the military stockpile into territorial gain before the financing structure collapsed.

He resigned as Reichswirtschaftsminister on 26 November 1937. As Reichsbankpräsident through 1938 he wound down Mefo issuance (halted March 1938) and tightened Reichsbank discount policy. On 7 January 1939 he and the Reichsbank Direktorium submitted to Hitler a formal memorandum (Denkschrift) warning that continued deficit financing on the existing scale would force a collapse of the currency.

The Reich, the largest economic entity, must be the first to set a shining example of a strict and natural finance economy, otherwise neither private economy nor any of the other public bodies of the Reich can be expected to maintain their economic and financial health. No financial juggling can ever counter the consequences of a reckless budget policy.

Source: Schacht and the Reichsbank Direktorium, Denkschrift to the Reichskanzler, 7 January 1939, reproduced in Schacht, Confessions, chapter 27, pp. 322 to 327; archival copy at the Bundesarchiv, Berlin; cited in Tooze, chapter 8.

Hitler dismissed Schacht from the Reichsbank presidency on 20 January 1939. Walther Funk replaced him. The Reichsbank Law was rewritten in June 1939 to abolish the bank’s residual independence. From that point until 1945, Reichsbank policy was direct war finance under political instruction. Schacht had predicted in writing that the experiment would collapse without fiscal restraint, and he was correct. The collapse came not through inflation in 1939, but through the war from September 1939 and the destruction of the German monetary order in 1945.

What Ended the Experiment: War and Currency Reform

From 1 September 1939 the German monetary system functioned as an open war finance apparatus. Mefo redemptions were absorbed into general Reich debt; Reichsbank credit to the Reich expanded without effective ceiling; new instruments (Lieferungsschatzanweisungen, Steuergutscheine, occupation costs) financed the war economy. Price controls held, suppressing reported inflation while the monetary overhang accumulated.

By May 1945 the Reichsmark was effectively worthless. Cigarettes, coffee, and chocolate functioned as the actual transaction currency in the western zones; barter dominated rural trade. The overhang has been estimated at 6 to 1 or worse against the official price.

The currency reform of 20 June 1948, in the western occupation zones, retired the Reichsmark and introduced the Deutsche Mark. The Bank deutscher Länder, founded 1 March 1948, conducted the reform; in 1957 it became the Deutsche Bundesbank.

Item	Conversion ratio (RM to DM)
First 60 RM per person (Kopfgeld)	1 to 1 (paid in two tranches: 40 DM, then 20 DM)
Remaining cash and bank deposits	100 to 6.5 (approximately 15 to 1)
Effective overall haircut on monetary assets	approximately 90% (10 RM => 1 DM)
Public debt of the former Reich	written down to zero in the western zones

Sources: Deutsche Bundesbank, https://www.bundesbank.de/en/bundesbank/history ; Währungsgesetz, 20 June 1948.

The 1948 Deutsche Mark is the formal end of the monetary order that began in 1924 with the Reichsmark, was reshaped by the Mefo apparatus from 1933 to 1939, and was destroyed by the war it financed. The Bundesbank has been since its inception explicitly committed to price stability as its primary mandate, in conscious reaction against the arc 1923 to 1948.

What This Case Does And Does NOT Prove

The case DOES show, with primary documentation:

1. A sovereign state with sufficient institutional capacity can finance a large domestic spending programme, including direct work creation, without gold reserves, foreign exchange reserves, external creditors, or visible bond issuance.
2. The Mefo bill was an off balance sheet, productivity guaranteed, central bank cleared bill of exchange that functioned as money inside the domestic banking system.
3. Such an instrument can produce measurable real economy effects within a window of several years.
4. International trade can be conducted at industrial scale through bilateral clearing in non convertible units, without dollar or gold settlement.

The case does NOT show:

1. That such a system is sustainable indefinitely. Schacht, the architect, predicted in writing in January 1939 that it would collapse without fiscal correction the regime refused to make. The suppressed inflation and resource misallocation were resolved by war.
2. That work backed sovereign monetary instruments require authoritarian government. The same monetary insight has operated continuously and democratically through the Swiss WIR Bank since 1934 (next section). The post 1948 Deutsche Mark and the post 1949 Wirtschaftswunder under the Bundesbank operated in a fully democratic framework, as did the Bank of Japan after the war. The choice of monetary instrument is independent of the choice of political regime.
3. That suppressed CPI under price controls is the same as low inflation. The 1933 to 1939 official inflation of 1 to 2 percent per year was an administered number; underlying monetary expansion was substantially larger and showed up as shortages, allocation distortion, and the postwar overhang.
4. Anything in mitigation of the regime that deployed the instrument. Nothing about the technical success of a financing tool offsets the regime’s broader actions: the persecutions, the war, and the genocide are not redeemed by the existence of a central bank instrument from 1933 to 1937.

The Counterweight: WIR Bank, Switzerland, 1934 to Present

The most important counterweight to a naive reading of the German case is that the same monetary insight was implemented in 1934 in democratic Switzerland and has operated continuously, peacefully, and legally for over ninety years.

The Wirtschaftsring Genossenschaft, founded in Zurich on 16 October 1934 by Werner Zimmermann and Paul Enz, both readers of Silvio Gesell (Die natürliche Wirtschaftsordnung, 1916), is a complementary currency and mutual credit system for Swiss SMEs. Trade between members is conducted in CHW (the WIR franc), a non convertible accounting unit issued as mutual credit. Renamed WIR Bank in 1998 and FINMA regulated, it has approximately 60,000 SME participants and annual WIR turnover near CHF 1 billion.

The WIR system shows three things: the same monetary insight (money as a claim within a closed cooperative production network) implemented in a democratic, peaceful market economy for over nine decades; a countercyclical effect (WIR turnover rises in CHF recessions and falls in CHF booms, buffering SME credit when commercial CHF credit tightens); and that the work backed insight predates 1933 (Gesell, 1916), did not originate with the Schacht Reichsbank, and has at least one democratically embedded, non state implementation.

Sources: WIR Bank, https://www.wir.ch ; James Stodder, “Reciprocal Exchange Networks,” Journal of Economic Behavior and Organization 70 (2009): 79 to 95; Tobias Studer, WIR and the Swiss National Economy (1998).

The Deeper Monetary Lesson

Money is a social technology, an institutional choice about how to coordinate claims on present and future production. The historical record contains at least these implementations:

1. Commodity money (gold, silver): claim on a physical stock of metal.
2. Gold standard fiat with convertibility (UK 1815 to 1914, Bretton Woods 1944 to 1971).
3. Pure central bank fiat (post 1971 USD, EUR, JPY, GBP): claims on the central bank, ultimately on the future tax base of the issuing state.
4. Commercial bank credit money (the bulk of M2 and M3 in any modern economy).
5. State guaranteed productivity backed paper, off central bank balance sheet (1923 Rentenmark, 1933 to 1938 Mefo bill).
6. Mutual credit between cooperating businesses (WIR Bank from 1934, Sardex from 2009).
7. Bilateral clearing units for international trade (Aski mark 1934 to 1939, European Payments Union 1950 to 1958, contemporary RMB and rupee bilateral arrangements).

The post 1971 dollar based fiat credit system is one of these choices. It is dominant today, but not the only choice documented to function. The classical gold standard delivered a century of price stability. WIR Bank documents nine decades of cooperative mutual credit. The 1923 Rentenmark ended the world’s most famous hyperinflation. The 1933 to 1938 Mefo bill financed, on its narrow technical terms, a real economy recovery on productivity backed paper. The Aski mark documented industrial scale international trade without dollar or gold settlement.

Each has costs and failure modes. The 1933 case ended in catastrophe. But the monoculture story, in which the only choices are the dollar system, the gold standard, or hyperinflation, is contradicted by the record.

The 1933 to 1939 German case enters this knowledgebase as a documented data point, not a model. The mechanism worked for several years on its technical terms; the project it served was a catastrophe. We document both, separately, without softening either.

Primary And Canonical Sources

• Adam Tooze, The Wages of Destruction: The Making and Breaking of the Nazi Economy (Allen Lane / Penguin, 2006). The canonical modern academic treatment.
• Hjalmar Schacht, 76 Jahre meines Lebens (1953); English edition Confessions of “the Old Wizard” (Houghton Mifflin, 1956).
• Larry Neal, “The Economics and Finance of Bilateral Clearing Agreements: Germany, 1934 to 1938,” Economic History Review 32, no. 3 (1979): 391 to 404.
• Albert O. Hirschman, National Power and the Structure of Foreign Trade (University of California Press, 1945).
• Constantino Bresciani-Turroni, The Economics of Inflation (George Allen & Unwin, 1937).
• Adam Fergusson, When Money Dies (William Kimber, 1975).
• Carl Ludwig Holtfrerich and Harold James, eds., The Reichsbank and Economic Policy (Frank Cass, 1989).
• Deutsche Bundesbank historical archive, https://www.bundesbank.de/en/bundesbank/history .
• Deutsche Bundesbank, Monatsbericht February 2017, https://www.bundesbank.de/en/publications/research .
• Bank for International Settlements Annual Report 1934 to 1939, https://www.bis.org/about/history.htm .
• Statistisches Reichsamt, Statistisches Jahrbuch für das Deutsche Reich, 1934 to 1939.
• WIR Bank Genossenschaft, https://www.wir.ch ; Stodder (2009); Studer (1998).
• Währungsgesetz, 20 June 1948.