From Notes on the Crisis, December 5, 2024:
Pavlos Roufos is a Greek political economist living in Berlin. He has a PhD in political science from Kassel University. He works on central banks, constitutional law and European integration from the 1920s to today, with a special emphasis on the Eurozone crisis. You can find his newsletter "The End of Times" here
Editor’s Note: Hello, Nathan here. I’m publishing this guest piece as part of a larger interest in the politics of central banking, especially the politics of central banks as fiscal agents. Next week I will be launching a premium “#MonetaryPolicy201” series that will start with a set of legal issues in the 1930s. In 2025 I will be writing more about 1930s and 1940s “fiscal agent” politics at the Federal Reserve. Since my focus is primarily on the United States, it's helpful to get expert perspectives on related histories from other countries. None, of course, are as charged as the history of Nazi Germany. Thank you to Pavlos for writing this fascinating article for Notes on the Crises
In the autumn of 1938, an internal memorandum was circulated among Reichsbank officials about the dire economic situation of Nazi Germany as a result of the frenzied rearmament policy through central bank monetary expansion. Warning against its inflationary effects, the memo suggested a “smooth landing” from a war to a peacetime economy. In the following months, seeing that instead of restraint there was a further acceleration of the armament race, Reichsbank President Hjalmar Schacht and the banks’ directorate decided to issue an official memorandum, which Schacht delivered directly to Hitler’s hands. Emphasizing that the Fuhrer himself had always “rejected inflation as stupid and senseless”, the letter stressed that “Reichsbank gold and foreign exchange reserves were ‘no longer available’”, that the trade deficit was “rising sharply” and that “price and wage controls were no longer working effectively”. With the volume of notes in circulation accelerating, state finances were bluntly described as “close to collapse”. (Marsh 1992: 119; Mee 2019)[1]. As the memorandum stressed,
…the unlimited increase in government expenditure defeats every attempt to balance the budget, brings the national finances to the verge of bankruptcy despite an immense tightening of the taxation screw, and as a result is ruining the central bank and its currency. There exists no recipe, no system of financial or monetary techniques – however ingenious or well thought-out – there is no organisation or measure of control sufficiently powerful to check the devastating effects on the currency of a policy of unrestricted spending. No central bank is capable of maintaining the currency against an inflationary spending policy on the part of the state.
Hitler did not appreciate the objections. After all, Schacht was the wizard central banker who had come up with the Mefo Bills, an ‘ingenious and well thought-out’ plan (Tooze 2006: 54).[2] Hitler was also not particularly concerned about inflation. As he had already explained to Schacht “[...] the first cause of stability of our currency is the concentration camp: the currency stays stable, when anyone who asks higher prices is arrested.”.[3] According to some testimonies, after he read the Reichsbank memorandum, Hitler “fell into rage” demanding that Schacht be relieved of his duties, alongside two more Reichsbank officials.
The 1939 memorandum was not critical of the rearmament process, or the military intentions behind it. Hitler was already committed to expanding Germany’s Lebensraum through military action and all state officials were fully aware of that. What the Reichsbank President and directorate members such as Karl Blessing and Wilhelm Vocke expressed was their opposition to what they saw as bad economics.[4] In their postwar testimonies both Schacht and Vocke would claim that the tone of the letter was chosen deliberately in order to ensure their dismissal from the bank. Given that these testimonies appeared when building anti-Nazi credentials was a question of survival, one can take them with a pinch of salt. In any case, Schacht was dismissed (though he remained a Minister without portfolio - Reichsminister) while Blessing and Vocke, who were not mentioned in Hitler’s dismissal order, resigned one month later.
Officially, Hitler’s actions after the memorandum ended the independence of the Reichsbank and has post facto served as evidence of opposition to the Nazi regime by Reichsbank officials. As Simon Mee has shown, however, the so-called ‘independence’ of the central bank had already been ended by a 1937 law[5] — which was itself a merely legal affirmation of changes that had taken place with Hitler’s 1933 rise to power.[6]....
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