Nazi Monetary Policy

When I saw Ezra Klein had a post titled “How Hitler and FDR Actually Ended The Great Depression,” I was hoping we were going to get the discussion of Nazi monetary policy the world needs. It turns out that he’s just rehashing Executive Order 6102 and the later gold inflows to the United States that were prompted by fear of Nazi conquest.

A different point to make is that not only did Nazi militarism accidentally prompt monetary expansion in the United States, but Hitler ended the German Great Depression. A strangely persistent myth holds that the Weimar Republic collapsed under the weight of hyperinflation, but the fact of the matter is that hyperinflation was whipped years before the Nazi coup. And, indeed, in the late-’20s Germany was experiencing prosperity and a decline in the political popularity of extremist movements. Then came the Great Depression. The German government, paralyzed by economic orthodoxy and pride in its efforts to whip inflation, was paralyzed and unable to respond. Mass unemployment wracked the country for years even as the currency stayed perfectly stable. Political parties promising a radical, violent break with the status quo gained in popularity. The rising Communist Party, under orders from Moscow, refused to collaborate with the Social Democrats in a broad left front against the Nazis. And the non-Nazi parties of the German right refused to collaborate with the Social Democrats in a broad front of centrist Democrats. So the right threw its support to Hitler, he took over blah blah blah.

However, this merely left Hitler with the problem of what to do about the German economy. The fact that the guy was a ruthless madman hell-bent on world domination turned out to be useful here. What he wanted was a stronger German military, and he wasn’t about to allow procedural scruples or financial orthodoxy stand in his way. Of course Germany couldn’t produce more tanks than Germany had the ability to make, but the point was that real resource constraints — not “financial markets” or “confidence” — was the limiting factor. Hitler, like Roosevelt, undertook what amounted to a two-stage monetary expansion before Europe slipped into total war. FDR’s first move was to devalue the dollar relative to gold. Hitler’s parallel move was devised by the very clever Hjalmar Schacht who (as you can read in his Nuremberg Trials indictment) essentially introduced a parallel currency called “Mefo bills” by setting up a government-backed shell company that issued scrip. FDR’s second move was to have people panic that Hitler was going to conquer them and shift their gold to the USA. Hitler’s second move, by contrast, was to conquer Austria and the modern-day Czech Republic and take their gold.

Then came the actual war, during which period all participating governments adopted what amounts to large-scale central planning of the economy. Centrally planned economies have a lot of problems, but since military supplies are always a case of monopsony purchasing by the government, if military supplies are the only thing you care about, this is what you do. Centrally planned economies have the useful side effect of essentially eliminating unemployment, because you’d have to be an extremely sloppy planner to simply not notice that 9 percent of your labor force isn’t doing anything.

Schacht, incidentally, was acquitted at Nuremberg over the objections of the Soviet judges and went on to have a career as a banker and what I guess we would today call a development economist. He also wrote a book titled Confessions of the Old Wizard that I’d love to track down a copy of.