THE GRAND ILLUSION: THE COVERT FUNDING OF NAZI GERMANY(TM)S REARMAMENT PROGRAM, 1933 -1938
THE GRAND ILLUSION: THE COVERT FUNDING OF NAZI GERMANY'S REARMAMENT PROGRAM, 1933 -1938
SUBMITTED TO
PROFESSOR MARC WEIDENMIER
AND
DEAN WILLIAM L. ASCHER
BY
NICOLE COLRAINE
FOR
SENIOR THESIS X190
Table of Contents
ACKNOWLEDGEMENTS 3
I. INTRODUCTION 4
II. THE GRAND ILLUSION 13
III. FINANCING THE IMPOSSIBLE 17
TABLE 1 - DISTRIBUTION OF NATIONAL INCOME 19
TABLE 2 - GERMAN ECONOMIC ACTIVITY, 1933 - 1939 21
TABLE 3- INDUSTRIAL OUTPUT OF CAPITAL AND CONSUMER GOODS 22
TABLE 4 - FLOTATION OF ARMAMENT AND WORK-CREATION BILLS BY FISCAL YEAR (MIL. RM) 25
TABLE 5 - BILL PORTFOLIOS OF GERMAN BANKS 1928-1939 (MIL. RM) 29
TABLE 6- FINANCIAL INDUSTRY: MEFO VS. NON-MEFO ANNUAL STOCK RETURNS 30
IV. THE WIZARDS OF FARBEN: 32
TABLE 7 - I.G FARBENINDUSTIE DOMESTIC SUBSIDIARIES 33
TABLE 8 - INDUSTRIAL CHEMICAL INDUSTRY: MEFO VS. NON-MEFO ANNUAL STOCK RETURNS 36
V. DOUBLE, DOUBLE TOIL 36
TABLE 9.1 - REGIONAL COAL PRODUCTION & LABOR FORCE PRODUCTIVITY AND RUHR COAL OUTPUT 37
TABLE 9.2 - LABOR FORCE PRODUCTIVITY AND RUHR COAL OUTPUT 37
TABLE 10 - COAL INDUSTRY: MEFO VS. NON-MEFO ANNUAL STOCK RETURNS 39
TABLE 11 - CAPITAL GOODS: GERMAN INDUSTRIAL PRODUCTION 1929, 1932, 1938 40
TABLE 12 -ANNUAL ELECTRIC POWER GENERATED FROM COAL, 1932 -1938 41
VII. THE MARITAL DIAMOND 41
TABLE 13 - AMERICAN AND GERMAN TUNGSTEN PRICES 44
TABLE 14 - STEEL INDUSTRY: MEFO VS. NON-MEFO ANNUAL STOCK RETURNS 46
TABLE 15 - VEREINIGTE STAHLWERKE: PROPORTION OF TOTAL GERMAN NATIONAL OUTPUT 47
VII. HIDDEN MONEY AND ECONOMIC ACTIVITY: LESSONS FROM NAZI GERMANY 48
Equation 1 - Granger Causality: General Methodology 49
TABLE 16 - CORRELATION MATRIX: VARIABLE X VS. MEFO BILL CIRCULATION (Y) 50
Equation 2 - Granger Causality Regression 52
TABLE 17 - GRANGER CAUSALITY TEST: MEFO BILL CIRCULATION AND FINANCIAL STOCK RETURNS (N=22) 52
TABLE 18 - GRANGER CAUSALITY TEST: MEFO BILL CIRCULATION AND COAL INDUSTRY STOCK RETURNS (N=22) 53
TABLE 19 - GRANGER CAUSALITY TEST: MEFO BILL CIRCULATION AND STEEL INDUSTRY STOCK RETURNS (N=22) 54
TABLE 20 - GRANGER CAUSALITY TEST: MEFO BILL CIRCULATION AND PIG IRON OUTPUT (N=22) 55
Equation 3 - Short-Run Aggregate Supply Movement 56
VII. CONCLUSION 58
REFERENCES: 62
Acknowledgements
To you, who have stood beside me, I owe more than my own life. I owe you the future. You have been strong and have not faltered even in my darkest of nights. You have held my hand tight, not allowing me to fall, you have pulled me along and together we have arrived at a better end.
I. Introduction
The First World War imparted two crucial lessons on future warmongers. Firstly, that it is crucial to have access to or possess enough raw materials needed to support all needs throughout the duration of the war. Secondly, the countries waging war should be prepared to devote all of the national income towards the war effort. From the first day that he seized control of Germany, January 30, 1933, Adolf Hitler knew that only sudden death awaited him if he failed to restore pride and empire to post Versailles Germany. In his statement to his general counsel, Adolf Hitler proclaimed that "the next five years in Germany must be devoted to the rearmament of the German people. Every publicly sponsored work creation measure must be considered from the point of view of whether it is necessary in terms of the rearmament of the German people ... For the next four to five years the guiding principal must be everything for the Wehrmacht." (Silverman, 6)
Since the end of WWII, Hitler's rearmament program has been the subject of continual controversy. Some economists and historians argue that rearmament was not the crucial factor in Germany's economic recovery while others contend that Hitler's priority to the rearmament of Germany directly resulted in Germany's remarkable economic recovery. In his article on German war preparations, economist Burton Klein attempts to demolish the myth of massive German rearmament. He asserts that Nazi economic policy was ultraconservative and shied away from rearmament because of the repercussions of inflation. (Klein, 8) Klein argues that the military effort was modest in the 1930s, and continued to be so during the first two years of war as the regime attempted to provide both guns and butter.
Historian A.J.P. Taylor emphasizes that Hitler made no serious efforts to rearm and only wanted to wage a series of small scale opportunistic wars in an effort liberate Germany from the militaristic limitations imposed by the treaty of Versailles. Klein and Taylor both conclude that with the combined problems facing the German economy in 1933 - an impoverished rural sector, a stagnant export industry, a massive balance-of-payments deficit and a credit system on the brink of collapse - the economy would have been exacerbated by high levels of military spending. Klein notes that when rearmament spending was at a record level high in 1936, it began to impose irreversible strains on the recovering German economy.
R.J Overy (1982) takes a different perspective in evaluating the key factors responsible for the German economic miracle. He asserts that the problematic situation the government undertook in 1933 was increasing both production and employment without stimulating a rise in prices. A rise in prices would have made it exceedingly difficult for the government to raise the funds necessary to prevent an unbalanced budget. He takes the stance that Germany's economic focus between 1932 - 1933 and 1934 -1935 was directed towards achieving full employment rather than developing the infrastructure for large scale rearmament because "rearmament represented some 17 percent of total government expenditure and only 1.3 percent of GNP over the period." (Overy, 65)
Kenyon Poole backs Overy's economic timeline and cites that expenditures on non-military employment projects exceeded rearmament expenses from 1932-1935. During the first stages of the Nazi regime, economic priority was accorded to restoring full employment; rearmament as a political objective surfaced later. Aimed at the elimination of unemployment, the Third Reich undertook a serious of ambitious work creation projects. Theses public works projects were a method used by the regime to stimulate industrial activity and inject life into the economy. Every unemployed German male was considered an asset to be brought into active use. Some economists believe that the contribution of public works in the restoration of the German economic revival is overstated. Harold James argues that Germany's economic recovery wasn't a house of mirror constructed by the Nazi propaganda machine. Rather, economic recovery was "real and resulted from a dramatic revival of economic activity" unaided by "statistical manipulation," a "statistical conjuring trick" or "jiggery pokery with numbers." (James, 371)
Germany's sub-standard transportation system, according to R.J Overy (1975), led to the construction of state of the art superhighways and Germany's economic recovery. A national network of highways spread throughout Germany that served to increase commerce and communication throughout the Reich. Moreover, the revitalized German highways also served to jumpstart the automobile industry and increase automobile production. On the other hand, G.F Spencley downplays the role of highway construction and believes that the revival of construction activity dominated the German economy. Timothy W. Mason supports Spencley's premise: "the economic key to recovery and to the decline in unemployment lay in the building industry, which was highly labour intensive." (Mason, 117) In his book Nazi Work Creation Programs, Dan Silverman focuses solely on Nazi public works programs and methodically argues that both the construction of the autobahn and the growth of the housing industry were the main switches activating economic recovery. Lastly, Silverman arrives at the conclusion that the Germany recovery (1933-1936) was not due to the stimulus of rearmament, which is a theory that many scholars actively defend. Rather, Silverman believes that Nazi work creation programs played the most significant role in the German economic revival.
While Overy, Spenceley, Mason and Silverman broadly agree that public works projects were fundamental in economic recovery, Avraham Barkai assumes a counter position elucidates that preparation for total war was Hitler's primary objective from day one. According to Barkai, job creation was allocated for the sole purpose of expediting rearmament. He states that Nazi polices were guided by the need for Lebensraum and economic autarky rather than the reduction of unemployment; reduction of unemployment was simply a by-product of the former. In Barkai's opinion, public works financed by deficit spending merely camouflaged the actions of rearmament. Quoting Adolf Hitler, he maintains that the first years of Nazi policy were dominated by war preparations "I can achieve just as much by rearmament as by the construction of houses and by settlement." (Baraki, 161)
Before we delve into the essence of Nazi economic policy it is important to highlight the German data limitations. One particularly important study crucial to the validity of Nazi economic data was written by Adam Tooze, who exposes the relationship between fantasy and reality in the collection and analysis of economic statistics in the Third Reich. He shows how economic censuses were designed to sustain a romantic image of the economy. Furthermore, Tooze describes the interplay between the Nazi political agenda and the professional obligations of German statisticians. He concludes that crooked financial analysis should stimulate further rethinking of the role big business played in the Nazi regime. His account of how government statistical bureaus improved their numbers during pre-war period by enlisting German big business as their ally diminishes faith is the accuracy and validity of Nazi statistical techniques.
When the Nazis assumed power in 1932, the Great Depression had destroyed the Germany economy. After it left its aftermath in the wake of the German economy, financial investors with available capital lacked confidence in the Reichsmark, they worried about Germany's ability to make reparations payments and they were especially apprehensive about the chaotic political instability within Germany. In a nutshell, Germany was a country in dire straits. As a country deficient in essential raw materials, the Reich government did not have enough foreign currency in its coffers to pay for the raw and manufactured materials needed to fuel a war economy.
The Third Reich's gold and foreign exchange reserves had virtually disappeared. (Crump, 171) In his article "Schachtian Mercantilism," N.I Momtchiloff explains that the Great Depression had transformed Germany into a nation economically crippled by debt and unemployment. Instead of the government alleviating the people's misery, they amplified the already disparaging situation due to the government's inherent instability: it was impossible for them to pursue any kind of recovery plan for more than a year or two. Germany was teetering on the edge of disaster "in just a few years there had been 224,000 suicides - a horrifying figure, bespeaking a state misery even more horrifying."(Degrelle, 300) To exacerbate this unfavorable situation, Germany's exports grinded to a halt after the Great Depression. Within a year, her trade surplus had plummeted from 2.8 billion RM in 1931 to a mere 667 million RM in 1932; about a 75 percent decline in German international trade. (Degrelle, 301) Faced with the economic obstacles of stagnate of international commerce and lack of income from foreign investments, Germany was confronted with a 'guns or butter' crisis: either Germany could buy butter, or it could buy the raw materials to make armaments, but not both. (Klein, 63)
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.
II. The Grand Illusion
To wage a modern war is to fuse into a gigantic machine the resources of our most advanced technologies. Petroleum, rubber, and a host of other chemicals are the fuel of War; light and heavy materials its armor. Without aluminum, magnesium, tin, tungsten, molybdenum, quinine - those looking to wage a total war cannot survive very long. The buttress of the Allied strategy rested secure in the knowledge that they, not Germany, controlled these resources and could therefore restrict German access to them. Blockade - enforced by British dreadnaughts and backed by the US navy - had been the basic element of Allied hope to thwart the German menace. Simple in its grandeur and apparent impregnability, this barricade of the sea lanes had the semblance of a wall which a mailed fist could never breach. In 1914, the Schleiffen Plan called for a swift and overpowering march to Paris as the coup de grâce to end the war. However, since the Schleiffen Plan was not diligently obeyed, the Great War lasted longer than originally expected and resulted directly in a German defeat, a complication the axis powers did not account for. The tourniquet of the British Royal Navy constricted the German arteries of supply. By 1917, the German resource coffer that was needed to fuel its war machine was sucked dry and her people were withering away from starvation. Forced at last to surrender to the Allies, Germany studied this imprisoning cordon with great detail.
With the cunning and aggression of Germany militancy eliminated from the world stage, the Allied forces finally relaxed. As the world order was gradually restored, science and technology forged ahead. In the early 1920's, German industry became evermore integrated and as a result, its dependence on the outer world for resources increased dramatically. However, with every addition to the myriad of materials NOT found within the Reich, it seemed to the Allied powers that the German threat was virtually eliminated. Without the necessary materials essential to technological progress, Germany was bound to her Allied captors.
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With the cunning and aggression of Germany militancy eliminated from the world stage, the Allied forces finally relaxed. As the world order was gradually restored, science and technology forged ahead. In the early 1920's, German industry became evermore integrated and as a result, its dependence on the outer world for resources increased dramatically. However, with every addition to the myriad of materials NOT found within the Reich, it seemed to the Allied powers that the German threat was virtually eliminated. Without the necessary materials essential to technological progress, Germany was bound to her Allied captors.
To begin with, Germany had absolutely no oil reserves; for a new war to be waged she would require a fathomless amount of petroleum. Conversely, the United States and Britain commanded more that half of the world's oil supply. Germany had no rubber; Britain controlled a significant proportion of the world supply. From the context clues surrounding Germany's economic and financial state of affairs, the Allies concluded that it would be impossible for Germany to engage in rearmament and to escape the strangulation brought about by a dearth of strategic resources.
The Great War revealed vital weak spots in the German armor -- the difficult task of rearming would be futile unless any new war could be started with a wider margin of advantage than it did in 1914. This requisite superiority required that Germany become an absolute autarky with the ability to provide for all its domestic needs. Was this economically possible when the Nightmare of Versailles continually haunted Weimar Germany? The Treaty emaciated the German military machine, slapped crippling monetary reparations on her, removed swathes of land from the German Empire, and left her in no viable economic position for wage any future wars. Of course, this was the consensus in the short run; Germany knew it had to focus on domestic policy and the rebuilding of its devastated country in the short-run. However, in the long run, Germany harbored a devious hidden agenda
In hindsight, it can be assumed that the sweep of German aims in the early 20th century had but one reoccurring theme: world domination. Viewed by its captors as the "have-not" power on the Continent, Germany could not have asked for a better predicament to become a fortress of self-sufficiency. Hitler had the ruthlessness and cold, cruel realism to consolidate a position of power out of the collapse of the German economic structure. Resultantly, the vast centralized cartel organization which characterized German industry became a tool in the hands of a disillusioned dictator who no longer embraced private profit, but operated solely to serve his ruthless political ambitions. Thus, Hitler shouldered the conquest of the continent on the German industrialist.
The First World War should have taught democratic nations that Germany used international cartels as the spearhead of aggression. Stronger in 1933 than 20 years prior, Germany's cartel brethren took back control of crucial industrial fields despite all the constraints imposed by Versailles to prevent their from doing so. With Hitler's compulsive determination to rearm, German controlled cartels simply served as the economic puppets of German interests.
Neither before 1914 nor 1939 did Allied industrialists and financiers discover the truly destructive connotation of this outlook. Rather, to the savvy turn-of-the-century industrialist, cartels were considered as an efficient means of guaranteeing domestic monopoly. The industrialists operating businesses outside of the Third Reich thought of cartels in terms of low output, high prices, and maximized profits. However, the cartels of democracy were easy dupes and did not suspect that Germany's output was growing by leaps and bounds. These industrialists who consorted with German economic arrangements during the interwar period knew not what they did. Of course, history tells us that Germany lost WWI, but neither by this loss nor by the period of social unrest and inflation slowed the production of German industrial cartels. The failure of the allies to recognize that these cartels were not disarmed was their biggest mistake. This fait accompli, possibly due to the political myopia of the Allied powers, had repercussions in the war to come. Germany's consortium of cartels concealed from prying eyes what it could of its real operations. Armed with patents and secret "know-how", the German cartels laid siege to the economies of prospective antagonists. These bold tactics, interlocked perfectly in design, are evident in the succession of maneuvers which characterized German policies in the 1920's. For example, rampant inflation liquidated the costs of the First World War and with a stabilized Mark in the mid 1920's, Germany extended an alluring invitation for foreign capital. The victors, not the vanquished, unknowingly provided the capital that helped fund Germany's reconstruction and later her massive rearmament program.
In the late 1920's Germany made a portentous discovery: coal could be made into oil and oil could be made from rubber. The obstructions on the road to Armageddon were slowly being removed. While the rest of the world floated into oblivion, in Germany, war became certain. Lulled into a state of sleep, the world did not detect the direst omens of catastrophe. Sporadically, embedded in academic science journals and business reports, hints of German economic plans could be found. However, clouded in a haze of polysyllables - the smattering of German blueprints evaded the eyes of the outside world. The Allied forces had characterized the German nation as economically dependent, unable to stand without the Allied crutch of raw materials and supplies.
III. Financing the Impossible
With the United States as the exception, the Great Depression had the most adverse impact on the Weimar economy. During the preceding years, a myriad of "democratic" governments had come and gone, often in utter confusion. Instead of alleviating the people's misery, they had increased it, due to their own instability: it was impossible for them to pursue any given plan for more than a year or two. The devastating economic effects of the Great Depression branded on the Germany economy served as the Nazi's newest raison d'être.
By the beginning of 1933, the misery amongst German people was practically universal. At least six million unemployed and hungry workers roamed aimlessly through the streets; many of the down-and-out had families to feed. Sadly, millions of Germans were reduced to trying to feed their families on the meager provisions private unemployment subsidies. Unemployment benefits, moreover, were limited to a period of six months. After that came only the meager misery allowance dispensed by the welfare offices. Notwithstanding the gross inadequacy of this assistance, by trying to save the six million unemployed from total destruction, even for just six months, both the state and local branches of the German government saw themselves brought to ruin: in 1932 alone such aid had swallowed up four billion marks, 61.2 percent of the total tax revenues of the federal government and the regional states. (James, 99)
A good many German municipalities defaulted on their debts and went bankrupt. Table 1 illustrates the dire straits the Weimar economy and German households faced between 1929 and 1932, as national income declined by 40 percent and welfare support payments increased by 20 percent. The proportion of real income available for civilian consumption and investment rapidity deteriorated and by 1932, it fell by 39 percent from its 1929 level of 71,895 mil RM. Those considered lucky enough to have some kind of job were really not much better off. Workers and employees had taken a cut of 25 percent in their wages and salaries and 21 percent of them were earning between 100 and 250 marks per month; 69.2 percent of them, in January of 1933, were being paid less than 1,200 marks annually. No more than about 100,000 Germans, it was estimated, were able to live without financial worries.
Table 1 - Distribution of National Income
At its demise in January 30 1933, the Weimar republic bequeathed to the National Socialist's an economy teetering on the verge of collapse. Faced with an agonizing domestic tragedy - rampant unemployment, general misery, and almost complete industrial stagnation, Hitler rolled up his shirt sleeves and aggressively implemented his vision of economic recovery.
Germany couldn't wait for a business upswing to get the economy moving again; the government had to bring forth economic renewal through bold action and imaginative enterprising. The nationalization of big business was never attempted by the Nazi regime. However, the absolute domination over the industrial economy was achieved not by expropriation, but by other means; every sort of economic activity was made to conform to restrictive government regulations, leaving little more than the title of private ownership. (Nathan, 131) In May 1933, trade union centers were seized by Nazi storm troops and union officials were jailed. These independent organizations that represented freedom and individual rights, were formed over several decades were destroyed in one day, leaving the worker without a voice on the industrial front. These measures were designed to restructure the relationship between labor and capital on a rigidly autocratic basis. Beginning step by step but then increasing in rapidity, first under the necessity of ameliorating unemployment, later in the course of rearmament, an economic system was constructed that made the state an economic dictator.
At its onset, rearmament activity was concealed though an intricate maze of public works projects. In order to breathe life into the German economy and restore morale to the millions of unemployed, the government concluded that unemployment could only be combated and eliminated by providing German industries with the financial means to modernize and develop as a means of job creation. Massive pubic works projects were another way to create new jobs and to stimulate industrial activity. It inaugurated a series of work -creation programs outwardly focused on reducing unemployment and promoting economic recovery and internally focused on erecting infrastructure that would in later years serve the interests of the Wermacht and pave the way towards military conquest.
The Autobahn, for example, was a remarkable system of concrete life lines meant to encourage increased commerce and communication throughout the Reich's many regions. Moreover, the creation of a highway system would also encourage increased automobile production. Hitler pointed to it as an example of economic development, but his real purpose in building it was militaristic in nature, intended to provide quick access to the front lines for tanks and military equipment. Public works were funded on the basis of how they would later benefit Germany's military build-up; a hydroelectric dam that would later provide for the immense energy needs needed to transform a stagnate economy into a mighty war machine would be funded over the construction of a bridge, which would only provide economic utility on a local level. Table 2 accentuates the beneficial effects that these public works projects had on the local economy. This statistical table shows that from 1933 to 1938, employment gradually accelerated and by 1938, the reserve of unemployed labor was virtually exhausted; unemployment was basically eliminated from the economy.
Table 2 - German Economic Activity, 1933 - 1939
The rest of the world was also combating the economic remnants of the Great Depression with public works projects aimed at alleviating unemployment and economic revival. However, when President Franklin Roosevelt was called upon at that same time to resolve a similar crisis in the United States, he had at his disposal immense reserves of gold. When Hitler took office, thousands of German factories lay lifeless, their smokestacks like a tombstones marking the existence of a once prolific industry. Many had gone under. Those companies which survived were operating on a limited liability basis. (Nathan [1944], 60) Table 4 shows that in 1932, before the fall of Weimar, Germany's gross industrial production had fallen by 38 percent. The Allied powers had no idea that Germany's work-creation policies were secretly focused on a hidden agenda - the rearmament of the German state.
Table 3- Industrial Output of Capital and Consumer Goods
By observing the quarterly production statistics listed in Table 3, we can see that after the Nazi's took control of Germany, her industrial production rapidly accelerated. This outcome can most likely be attributed to her unfavorable trade balance and the need to pursue economic autonomy. In contrast to their fascist counterparts, the industrial growth in France and the United States does not show a positive trend in industrial growth between 1933 and 1938. Rather, the Allied production during this time frame is more cyclical. German's concentration on output shifts in 1933 when the Nazi's seize the economy. During the years of Weimar, Table 4 shows that industrial production was focused on the manufacture of consumer goods. This trend is immediately reversed when in 1933, the Nazi's came to power with an economic plan concentrated solely on output of war materiel. However, in order to engage in these ambitious work creation projects, many billions of marks were quickly needed to finance Germany's economic reconstruction. Where was this money to be found? It did not take the Nazi government very long to realize that its ambitious plans required the stockpiling of huge government deficits, much of which would have to be financed in the capital markets. With this notion in mind, the government reached into the capital market and through a series of legislative and administrative steps soon altered its role to meet the economic objectives of the Nazi party.
As discussed earlier, after the hyperinflation of the 1920's, the Reichsbank didn't even consider open-market operations nor did it allow for the discounting of bills on behalf of the government as a source of funding. The only financial instrument against which the Central Bank is permitted to extend cash money is through the commercial bill. The commercial bill carries the guarantee that tangible wares are circulating, instead of triggering inflation through virtual financial flows.
To clarify, a commercial bill is a bill of exchange, or a piece of paper by means of which an individual A orders a second individual B to remit a sum of money to a third party C. This is essentially a financial instrument that embodies the dynamics of a credit: A in this context is the Reichsbank who then calls upon B (specific German financial institutions), to pay C a specified commission (German businesses involved with work-creation/rearmament). The business then receives this bill, deposits it at a commercial bank, and receives cash in exchange. With this final action, the traditional discounting transaction is completed where interest is subtracted from the amount inscribed on the paper certificate. To ensure the process is fluid, if the commercial bank, for some reason is financially incapable of rediscounting the certificate, it has the option to resort to the Reichsbank. Thus, the bills are guaranteed both by the powers of taxation and the central bank. Voila! Like magic, money suddenly becomes less expensive.
The Nazi state relied heavily upon these special bills for the funding of their system of public works program. This part of program was financed by short-term government notes known as work creation bills. These bills took on the name of the project they were meant to finance: i.e. - "work-creation bills," "special highway bills," "land-reclamation bills," etc. (Poole, 102-104) These work-creation projects, for the most part, were not directly funded by the government. Rather, orders were accorded to individual companies involved with construction and engineering. Maxine Sweezy (1941) describes criteria companies had to comply with in order to win a project:
In every case, the contractor had to fulfill four specifications: The project must provide for work which would not have been carried out within a reasonable time by the organizations concerned, give a large amount of employment, have usefulness for the public economy, and be carried out within a fixed time limit. (Sweezy, 17)
Once a contractor won a project, they would take their "work-creation bills", these companies cash their bills in at a specified bank, have their paper discounted, and use the money to pay for fund the projects and pay their employees. The commercial banks then turned to the Reichsbank. The use of these bills declined after 1934, as did the circulation of tax remission certificates - an ineffectual financial scheme devised by the Brüning government that did little to revive economic activity.
In 1934, Hitler called on the brilliant Dr. Schacht to devise a new method of acquiring the massive amounts of capital needed to finance rearmament. In his personal memoirs, Schacht recalls that:
It was 'de rigueur' to devise a financial method that would avoid inflating the investment holdings of the Central Bank yet excessively increase the circulation of capital. I had to find some means of getting the sums that were lying idle in pockets and banks, without meaning for it to be long term and without having it undergo the risk of depreciation. That was the logic behind the Mefo bonds.
(Schacht, 94)
Table 4 - Flotation of Armament and Work-Creation Bills by Fiscal Year (Mil. RM)
In order to disguise the Reich's rising short-term debt, the brilliant Hjalmar Schacht invented the so-called Mefo bills by creating a short term credit instrument drawn on the Metallurgische Forschungsgesellschaft. (Research Corporation of the Steel Industry) With a paltry capital endowment of 1 million Reichsmarks, the fictitious nature of the company was made blatantly obvious. This was not a company directed at technological improvements in the steel industry, but rather, it was Dummy Corporation that served as a camouflaged financial tool of German Rearmament under the 4 year plan. The puppet company was fronted by Germany's leading industrialists (Krupp, Siemens, Rheinmetall, Gutehoffnungshüette, etc.) who each assumed responsibility for 250,000 Reich marks' worth of Mefo shares. (Momtchiloff, 167) Although the financial scheme began with the four Mefo owners, several important industrialists, like I.G. Farben and its host of subsidiary companies, later joined it. (Weitz, 377) Arthur Schweitzer (1948) describes the technicalities of the Mefo scheme "Mefo bills originated with the placement of armament orders, where contractors withdrew the special bills against procurement agencies in payment for armament orders. These bills were accepted by a dummy organization of the government called Metallurgische Forschungsgesellschaft" (Schweitzer, 3)
The Central bank served as the regulator of monetary and capital markets. Two laws, enacted when the Nazi's assumed power, gave the Reichsbank widespread powers over all private credit institutions. (Dessauer, 218) Furthermore, it was the central bank that facilitated the acceptance of Mefo bills and devised two strategies for their acceptance. First of all, the central bank declared that Mefo bills could be rediscounted. A confusing concept in and of itself, by attaching a rediscount clause onto Mefo, it meant that the Central Bank would offer rediscount facilities in the form of Mefo bills, which holders could use to generate cash by selling (rediscounting) the notes to the Central Bank. Mefo bills were subtly injected into economy through the modification of private bank liquidity requirements. Savings banks were required by law to invest 30 percent of their deposits in short-term debt instruments. (Momtchiloff, 168)
These statutes imposed on the banking system did the trick. According to Arthur Schweitzer (1948), by financing rearmament though Mefo-bills, the Central bank was able to assume a monopolist position in the money market. (Schweitzer, 4) As a monetary monopolist, the Central bank executed two strategies to ensure the acceptance of Mefo bills in the market. One of these policies was that the central bank flooded the market with these special bills and suppressed the issuance of commercial or financial bills of private industries or banks. The excessive increase of Mefo bills into the economy can be observed in Table 4. Basically, the goal of the Central bank was to significantly limit general debt instrument from entering into the marketplace - it wanted Mefo bills to dominate the marketplace. From 1934 to March 1938, the Reich amassed a debt of 12 billion RM against herself through the short-term financing of rearmament expenditures and the market took up six-billion RM worth of them.
By the use of Mefo bills, the Reich and Reichsbank circumvented the Central bank Law that prohibited the supply of credits by the central bank to the Reich. As Mefo bills were legally treated in the same way as ordinary commercial bills, this nominally short-tern Reich debt remained invisible within the Reichsbank's balance sheet. Banks found Mefo bills an attractive investment since the Reichsbank guaranteed their rediscount and accepted them as liquid assets. (Simpson, 112) Furthermore, at an interest rate of 4 percent Mefo bills were a better investment in comparison to other trade bills. At such a lucrative interest rate, these bills were practically better than cash; after all, money stashed under the mattress earns no interest. For reasons of secrecy, Mefo bills were not displayed separately in balance sheets, making it almost impossible for financial institutions outside of the Reich to estimate the banks' total holdings.
In regards to Germany's banking system, Maxine Sweezy (1941) imparts several surprising statistics concerning the German financial sector: the Reichsbank in fact owned 91 percent of the Dresdner Bank, 70 percent of the Commerzbank and had a nominal share of the Deutsche Bank. (Sweezy, 31) From 1932 onwards; the Reich exerted its influence over banking policies by serving on their Board of Directors. These three financial institutions played a significant role in Mefo program and enabled the Reichsbank to exceed by many of billions the 400 million Reichsmarks it was permitted by its charter to lend to the government. (Simpson, 110) The Deutsche, Dresdner and Commerz banks were responsible for orchestrating Reich financing and correlating the financial activities of war industries.
By accepting Mefo bills for discount, these financial institutions knowingly gave Germany's rearmament its financial backing and helped to keep the volume of such financing, and the extent of the rearmament effort a well-guarded secret. As previously discussed, in the first period of economic recovery - the work-creation period - the increase in public expenditures was financed through the creation of additional cash that was created by bills of exchange discountable at specific banks. The same method was used for the Mefo program which funded both rearmament and Germany's quest for self-sufficiency. As illustrated in Table 5, Total bill holdings for the Reichsbank and the Big Three Banks rose significantly from 1933 to 1938 as these were the institutions funding the majority of the program.
Table 5 - Bill Portfolios of German Banks 1928-1939 (Mil. RM)
When the Nazi's took office in 1933, the Deutsche, Dresdner and Commerz banks were Germany's three largest banking firms, respectively, and were especially geared to an ever-increasing degree to support Germany's preparation for and conduct of a war of aggression. Rearmament activity engulfed the entire economy and financial institutions - which were unequivocally responsible for the direct or indirect financing of the whole venture. This is not to say that the banks had no choice - basically, from 1933 onwards the Deutsche, Dresdner and Commerz banks were forced to chose between two alternatives courses: to continue its financial operations along traditional lines as long as possible without offering up their services to the government or to throw the full weight of their operations into the support of the Nazi Party and state.
However, did there exist a significant disparity between the stock returns of the financial returns of the financial institutions closely associated with the Mefo rearmament scheme and the returns of the regional banks who did not serve a strategic role in the scheme? Were the returns of the financial institutions excluded from this arrangement significantly lower?
Table 6- Financial Industry: Mefo vs. Non-Mefo Annual Stock Returns
Until 1935, the variation in annual financial performance between the five Mefo affiliated financial firms and the two commercial banks unconnected with the program was minimal. There exists a remarkable disparity in stock returns between 1935 and 1936, where the aggregate stock returns of the non-Mefo banks decline by 7 percent, but given the time period and the influx of Mefo- bills in the money supply, this divergence in stock returns fits the scenario. By studying the statistical data in Table 4, we can see that it was during this timeframe when Mefo bills were at their peak; circulation increased by 15 percent in 1935 and peaked at 27 percent in 1936. From 1936 to 1938, as the level of Mefo circulation in the economy declines, the returns between the two are once again converge. The regional banks, on the other hand, did not have a key role in the financing of German rearmament, so between 1934 and 1937 when the economy was diverting capital to the financial institutions directly responsible for financing rearmament.
The Mefo scheme, orchestrated by the Big 3 Banks, stands as a remarkable feat of financial swiftness. Consummated in less than four years, by the end of 1938, the Nazi resurgence could vaunt the erasure of nearly 8 million destitute and unemployed Germans, the complete absence of inflationary pangs, and the mobilization of a war machine created for the purpose of total destruction and world domination. Mefo bills were crucial in reviving German's stagnant industrial production. With the foresight of war in the horizon, German cartels engaged in calculated over-production - producing at war time levels during the short-lived period of peace. Conversely, democratic cartels reduced their production and raised prices during this time. As Germany marched into the demilitarized Rhineland, affected Anchluss with Austria, and negotiated Munich the Allied forces did not seem concerned by Nazi Germany's bellicose behavior and complete disregard of Versailles.
Was the Mefo scheme successful in concealing this enormous expansion of Germany's strategic war industries - financial, chemical, steel, coal, and electro-technical? Could have extraordinary market performance or abnormal stock returns earned by Mefo contractors served as silent clue to expose Germany's detailed preparations for war? What about the mysterious growth in the German money supply? Did the unexpected expansion in German money supply reveal that this increase could be attributed to one entity - a fictional corporation existing for the sole purpose of rearmament? By analyzing the financial performance of Mefo and non-Mefo companies in heavy industry and by examining the monetary dynamics between 1933 and 1938 we will be able to determine to what extent the Allied forces could have penetrated Germany's glossy veneer to reveal its rotten core of vengeance.
IV. The Wizards of Farben:
The terms "monopoly" and "cartel" are inadequate when applied to I.G. Farbenindustrie. It is a conglomeration of monopolies and an aggregation of cartels. Table 7 offers a glimpse of the sheer immensity of the Farben cartel. Beyond Reich borderers it was considered an international monopolist - owning hundreds of cartels. I.G became one of the chief advance agents of the Third Reich and an integral cog in their pre-war machinations by hewing the autarchic features sought by Germany and in sapping the economic livelihood out of its opponents. There is a quality of Faustian alchemy in the rapidity with which one development in the chemical or metallurgical field transforms or affects all other aspects of the field. Farben not only took advantage of the illimitable permutations of the chemical industry itself, but also used the forces of science to build one of the world's greatest systems of industrial domination.
Without I.G Farbenindustrie, Germany could not, twice within a generation, have filled the German beakers of wrath and flung their fascist acid in the eyes of the world. The record of I.G. Farben in the 20th century is a recital of Germany's attempt to use scientific achievements to gain control of the European continent. Germany suffered a humiliating defeat in 1918, but neither by this loss nor during the period of social unrest and inflation that followed, was the strength of the chemical combine vitiated. Farben was stronger at the end of the Great War than at its beginning, because the War increased demand for various goods.
However, it is not too much to say that the direction of Farbenindustrie's policies from 1926-1939 can be accredited to the combination of sheer genius unbridled by ethical conscience. The coupling of economic and political insight into Farben's policies is clearly traceable in the fabric of cartel agreements that Farben interwove into American industry. The web of calculating contracts promoted by Farben with leading American concerns were superimposed on the dye industry, the pharmaceutical industry, the oil industry, the magnesium industry, etc. It is in the sphere of international industry that Farben's policies and practices take its most sinister mask.
Farbenindustrie had cartel agreements with Standard Oil of New Jersey, The Aluminum Company of America (ALCOA), Dow Chemical Company, DuPont Chemical Company, Monosonto Chemical Company, Pennsylvania Salt Company, Remington Arms and Plaskon Corporation. These are just a handful of the hundreds of American affiliations, associations, or contractual agreements in which Farben was either a promoter or a principal party. In the case of American industry, Farben's foresight tacitly provided for a modus vivendi during the war. Although Germany suffered from a scarcity of materials, the probability was certain that somewhere along the line there was an international cartel with the letters I.G FARBEN embedded in its contract.
Table 7 - I.G Farbenindustie Domestic Subsidiaries
Farben's commercial peacetime monopolies operated for the sole purpose of reestablishing the glory to German militarism. Time after time, financial profit was subordinated by Farben in order to achieve nationalistic aims. The antecedents of Farbenindustrie reach far back into the industrial revolution of the 19th Century, specifically the developments which resulted in the establishment of the coal tar chemical industry. Germany's economic might was molded and shaped by her chemical and metallurgical industries. Rapid growth, increasing economic power, and a tendency to carry industrial integration both vertically and horizontally to its limits favored the Farben cartel in their single minded pursuit of world monopoly in the chemical field. Mutual competition was quashed while technical expertise and resources were pooled. Farben made every effort to overcome Germany's dependence on foreign sources of supply.
Not only had Farben fortified Germany against the strangulation of Allied blockade, but their control over patents and technological "know-how" made it almost impossible for England or the United States to build and operate the chemical plants they needed so desperately in the world war. A veil of secrecy was cast over the whole matter revealing very little of war activities and the future significance of Farben. Late in 1925, Germany's leading industrialists launched a massive program to unify control of the German economy. Therefore, Krupps, and Siemens- Halske became willing brothers-in-arms under the aegis of Farben. A few astute Allied agencies saw past Germany's smoke and mirrors. In October 1925, The British Chemical Mission reported that "the German manufactures, consisting of the powerful I.G combination, were careful to do all in their power to hinder the work of inspection" and in 1923 a foreign representative of the DuPont Company keenly concluded that "Disarmament is a farce while Germany retains organic chemical monopolies." (Borkin, 71)
Whatever Germany needed and modern science could make, Farben produced for Germany and tried to hide from others. The famous Buna rubber was the award of these experiments. Bunas were made from petroleum; however, Germany had very little oil. Farbenindustrie developed a method of hydrogenated coal into oil. Panzers and armored cars serve as the Calvary in modern warfare. Their wheels and treads are made out of rubber and without rubber, the must halt. With a single stoke of genius, Farben made possible the mechanization of the Reichswehr. Furthermore, since all metals are precious in Germany, Farben produced new plastic materials to take their place in consumer goods while raw materials were diverted towards the replenishments of munitions supplies. Lastly, from the most universal raw material in Germany - wood -- Farben managed to magically produced substitutes for metals, cotton, wool, explosives, fuel for vehicles, food related goods, medicines and dyes. A whole new science was developed from the Chemistry of wood.
The combined effect of Farben's revolutionary scientific research and Farben cartel restrictions on the development of other countries was set fourth to assume its true proportions. I.G. Farbenindustrie willingly followed in the wake of Hitler's armies for the sole purpose of acquiring outright ownership of the entire European Chemical industry.
Table 8 - Industrial Chemical Industry: Mefo vs. Non-Mefo Annual Stock Returns
Did I.G. Farben's integral role in the Mefo program allow it and its gaggle of subsidiaries to outperform other companies in the Chemical industry unconnected with the Mefo scheme? Given its role as the world's leading chemical cartel and strategic importance to the war effort, one would assume that the Farben conglomerate would consistently outperform its non-Mefo counterparts. Given historical stock returns from 1933 - 1938 we can conclude that the industrial chemical companies involved in Mefo steadily outperform the companies not linked to the program.
V. Double, Double Toil
Oil is the blood of mechanized armies - the richest prize of battle. No sacrifice in lives or money has been deemed too great to pay for its possession. Like a phoenix rising from the ashes of its defeat, Germany emerged from the post-war period clutching the basic secret by which one of its most basic needs could be fulfilled and in 1926 announced to an unperceiving world that in a matter of time, that it would produce all the oil the world required from coal. The Allied forces did not realize that from that day forward, there was no chance for peace; the core of Germany's military problem had been pierced. The oil which her ancient foes withheld could now be synthesized. What did this mean in terms of global strategy? First of all, all the oil-bearing lands of the world were almost, without exception, were located in countries that had been Germany's enemies. The deposits in Romania were owned by the U.K, and after the First World War, Romania was a buffer state against German aggression. (Krammer, 408)
Table 9.1 - Regional Coal Production & Labor force productivity and Ruhr coal output
Table 9.2 - Labor force productivity and Ruhr coal output
What resources did Germany have? It had massive amounts of coal reserves and the ingenuity of Krupp, Gutehoffnungshüette (GHH) and Farben - whom were all involved with the production of coal. But coal was of no use in planes. If the combined magic of GHH, Krupp and Farben could conjure oil from coal, then Germany could begin to calculate, free from the torment of knowing that the noose of Allied strategy could garrote her war machine. Coal became the denominator of Germany's future. Little did the Allied powers know that the sandbox of the German earth would yield the vital elixir to fuel her mechanized might? Surrounded by enemies and lacking the most essential materials of motorized war, the covert funding of the Mefo program allowed for Germany to place all her hopes in the hands of technological innovations and efficiency; she was not disappointed. Was technological cataclysm recorded on the financial seismograph?
Not in the ledgers of government, but in balance sheets of finance tallied the true nature of this discovery. The incredible growth of coal output can be seen in Table 9.1 where coal production steadily increases between 1933 and 1936. Growth in coal output doubles phenomenally between 1936 and 1938. During this same time frame, German efficiency in coal production dramatically improves. Statistical Table 9.2 brings to light the gain from efficiency in the coal industry. From 1936 to 1938, employment in the Ruhr coal mining region decreases by 10%, but amazingly, total coal output increases by 18%. Technical improvements between 1933 and 1938 led to increased productivity in the coal industry and to labor shedding. Given the significant growth in output and the increase in efficiency, it should have been a signal to Allied powers that the Germans were building stockpiles of coal and one would need such large inventories of coal only if their objective was large-scale production.
Table 10 - Coal Industry: Mefo vs. Non-Mefo Annual Stock Returns
According to Table 10, the stock-returns between Mefo and non-Mefo coal producers show a similar trend to the industrial chemical sector. Between 1933 and 1938, Mefo and non-Mefo move parallel to one another experiencing increasing returns between 1933 -1934 and 1935-1936 while facing declining stock prices between 1934 and 1935 and after 1937, when returns sharply decline. What distinguishes these two entities from one another is the level of returns, the ten Mefo companies consistently experience higher returns than those of their eight non-Mefo counterparts. However, the Mefo companies served but one purpose - restoring Germany's military might -their focus was more strategic in nature.
The majority of the coal industries outside of the Mefo sphere did not experience the same elevated returns because their role in the national economy was often times focused on the commercial sector and the national economy. These were the industries extracting coal to be used as a domestic energy resource (coal-generated electric power) by local utilities, rather than by giant businesses procuring war materiel.
Table 11 - Capital Goods: German Industrial Production 1929, 1932, 1938
For a foreigner looking at the level of stock returns on the Berlin Börse, it would be nearly impossible to separate the Mefo from the non-Mefo companies since they have comparable returns. However, a discerning outsider would question the considerable jump in coal industry returns in 1935-1936 and use this context clue to foretell Germany's ill intentions in the coming years. Tables 11 and 12 furthermore cipher the suspicions of Germany's plot for world domination. There was a 77 percent increase in Germany's total output of coal and 128 percent increase in electric power. According to Table 12, coal generated electricity showed a significant increase in output between 1934 and 1936, which corresponds with the level of Mefo circulation and the increased funding for war-oriented industries.
Table 12 -Annual Electric Power Generated from Coal, 1932 -1938
VII. The Marital Diamond
The industrial war is a series of campaigns that are measured by the yardstick of iron and steel production; the possession of coal and iron is the prerequisite of industrial greatness. In Germany, close cooperation between the national government and the steel industry developed. In May 1932 the Bruening government secretly acquired a controlling interest in Vereinigte Stahlwerke and paid the stock about four times its market price. (Stocking, 210) After the Nazi's seized power in 1933, this bond between government and industry grew even closer. Nazism and rearmament were both nourished with funds supplied by German steel industrialists. It was the steel industrialists who were the backbone of the Mefo scheme.
In Germany, Krupp and Vereinigte Stahlwerke held one of the foremost controlling positions in the iron cartel. During the 1920's, the objects of this cartel were the maintenance of domestic markets, the standardization of steel operations, and especially the elimination of any competition among it members in the markets outside of Germany. Already the manner has been pointed out in which I.G. Farben exercised patent control over processes and products.
In WWI, Krupp also withheld several patents on important steel and ordinance techniques. The trailers for field guns, which the United States Army used, were covered by Krupp patents. Krupp methods of producing stainless steel was one of the most valuable patents.(Manchester, 263) Krupp's factories and foundries poured fourth the torrent of cannons and other arms which pounded Allied lines for four miserable years. Though it was not any fault of Krupp that Germany lost the Great War. When the war ended, Krupp's machines were dismantled, and Krupp was specifically forbidden from engaging in the manufacture of arms.
The mines, foundries and factories were converted to the production of trains, trucks, diesel engines, and other ostensibly neutral objects of everyday commerce. After the Treaty of Versailles, Krupp transferred many of its operations to surrounding countries and reestablished its connections with the major steel and metallurgical interest of the world - the United States, England and France. (Leitz, 144) Although within Germany, Krupp was only supposed to be producing peaceful articles of trade, the ink on the Treaty of Versailles was hardly dry before it had begun a refurbishing and reorganizing of its armament industry. Internal correspondence within the United States Army in 1926 reveals that the U.S military was acutely aware of Krupp's rearmament activities.
The secretary of War has an investigation to be made of the patents and applications for patents recently announced as having been obtained by German citizens and assigned to Fredrick Krupp. The investigation disclosed a rather striking circumstance in view of the conditions which Germany is supposed to observe as to disarmament and manufacture of war materials under her treaty obligations. If the 228 patents and applications for patents assigned to Krupp, 26 were found to relate to artillery fire control devices, 18 to electric control apparatuses, 9 to fuses and projectiles, 6 to gas engines and appurtenances, 17 to guns and their appurtenances, 3 to the process for the production of metals, 10 for naval fire control devices, 3 to projectiles and machines for handling the same, 14 to railroad artillery, and the balance to varied uses which might well relate to military use. Incident to making this investigation, it was noted that a large number of patents and applications for patents had been assigned to numerous other German companies, and a considerable number relate to aeroplanes and their accessories, chemicals, radio apparatus, and naval equipment" (Borkin, 255)
The rearmament activity of Krupp is further exposed by Nicholas Snowden in his book, Memoirs of a Spy. In 1925, he describes his travels to Germany:
I learned that the Krupp, although ostensibly devoting the plant to the making of agricultural implements, were actually and secretly manufacturing guns also. I learned through some of the workmen that whenever the Disarmament Control Commission of the Allies was to come for an inspection of the factory, the management was notified 48 hours in advance. This gave time to stop the work in the departments where artillery and rifles were in the making and to cover the machines and arrange things so that the commission would find the place deserted." (Snowden, 249)
In 1926, a new international steel cartel came into being and was an alliance between Germany, France, Belgium, and Luxembourg; it was later joined by Poland, Austria, Hungary, and Czechoslovakia. Within a few years of the cartels existence, as with similar agreements, difficulties arose from the German members who insisted they be allowed to produce in excess of the quota. (Hughes & Barbezat, 219) Eventually, German steel production, which rose from year to year, far outstripped the other nations of Europe.
Krupp's relationship to other German sectors in the post-war era provides an interesting commentary on the purposes of the German cartel system. During WWI, Krupp and Rheinische Metallwaarenund Maschinenfabrik (Rheinmetall) were major armament competitors. However, after the war, the two companies worked very close with one another, both demonstrating their commitment to the Reich and rearmament when agreed to take part in the Mefo scheme. (Leitz, 137)
Table 13 - American and German Tungsten Prices
As it had in WWI, the same scenario also occurred in the steel market in the 1920's and 1930's as German steel interests exercised patent control over processes and products which the Allied powers desperately needed upon entering the WWII. In modern war, machine tools basically act as the engineer battalion. Where there is a shortage of machine tools, production lines slow down. The steel that was forged by Krupp and Rheinmetall was carved into tanks, cannons, airplanes, etc using machine tools. However, hewing the fearful contours of howitzers and panzers from hardened steel is an arduous task. An essential part of industrial machine tools is a sharp blade, which is comprised mostly of tungsten steel. (Manchester, 388-378) China had control over the majority of the world's tungsten supply. While not produced in large amounts due to its scarcity and the difficulties surrounding its extraction, it is "one of the most essential tools of modern industry ...it [tungsten] would supplant copper and steel, it there were enough of it, but there just isn't. Tungsten is the king of metals." (Farrell, 92)
There was no way to collect a stockpile of tungsten; the large reserves were far away from German over the horizon of the oceans. If Germany could reduce its use of tungsten in machine tools, it could efficiently husband its limited supplies. The solution was tungsten carbide; a pound of tungsten could go much further in the form of tungsten carbide. Moreover, tungsten carbide is one of the hardest materials known to man and is the best material for machine cutting tools. By withholding the patent, the Nazi's could produce tungsten more cost effectively than her Allied counterparts. Table 13 shows the difference between production efficiency between the United States and Germany. In 1930, American tungsten was selling at 400 times the German price. In 1938, the German's were selling tungsten at $37.14, while the American product was 600 times more expensive. How was impoverished Germany able to produce her awesome war machine in six short years? The January 1942 issue of Fortune magazine asks this very question:
The answers have been many ... All the popular explanations have overlooked the possibility that a few hundred tons of phenomenal steel cutting material called tungsten carbide may have been a decisive factor in building the arsenal of Hitlerism ... In many machining operations, substitutions of tungsten carbide for high-speed steel multiples the rate of production at least 500 percent ... Britain, France, and the U.S were sluggish about retooling and it is estimated that in 1938 Germany had 60 times as much tungsten carbide in use as in the U.S. This - according to many experts - is one of the greatest secrets of German rearmament.
Table 14 - Steel Industry: Mefo vs. Non-Mefo Annual Stock Returns
The figures listed in Table 14 impart that steel firms involved with Mefo earned significantly higher stock returns than their non-Mefo competitors. Of course we would expect the Mefo firms to earn higher returns than their non-Mefo counterparts since the steel industry was the primary recipient of Mefo armament contracts. Remember, Mefo originated as collaboration between the Reich's major steel industrialists; it later joined by several other crucial rearmament sectors. Since Mefo was founded on the guise of the iron and steel industry, a significant proportion of Mefo funds were channeled into this sector. This helps to clarify the significant disparity that exists between Mefo and non-Mefo steel producers in Table 14. We would expect for this relationship to exist and
non-Mefo returns to be much lower than those of Mefo firms, especially between 1934 and 1937, when Mefo circulation was at its height. The injections of Mefo-credits into the market were fueled by steel demand. As the intensity of rearmament activity accelerated, so did the need for capital to fund industrial production. Thus, as demand for war materiel increased, so did the supply of Mefo-credits in the money supply.
Table 15 - Vereinigte Stahlwerke: Proportion of Total German National Output
The Mefo recipients thus served an especially strategic role in the war effort - rebuilding the mighty German war machine. An example of the considerable disparity in earnings between Mefo and non-Mefo producers can be seen with Mefo collaborator, Vereinigte Stahlwerke (United Steel Works). United Steel entered the Mefo program shortly after its formation. Although it was not an original Mefo member, United Steel's contribution to the war effort far outstripped that of founding Mefo members Krupp, Rheinmetall, Gutehoffnungshüette
The books of United Steel in 1944 showed assets equivalent to $1,200,000,000 - a figure which was considerably higher than the postwar valuations of any Allied steel firms. (Martin, 99) The Allied forces were bewildered by United Steel's astronomical earnings. From this, we can conclude that United Steelworks, like several other German industrial firms, was ruthlessly understating both output and profits in an effort to avoid detection from the outside world. Table 15 shows the proportion of German National output United Steel single-handedly produced between 1934 and 1942 and amazingly, it alone was responsible for the production of 50.8 percent of pig iron diverted towards the war effort.
VII. Hidden Money and Economic Activity: Lessons from Nazi Germany
A question that remains is the causality that exists between the injection of Mefo bills into the German money supply and stock returns for Mefo and non-Mefo industries. A more difficult question arises with respect to whether the forward-looking nature of stock prices could have driven an apparent causality between stock markets returns and the supply of Mefo bills in the money market. The rationale behind this assertion is that current stock market prices should represent the present discounted value of future profits. Assuming we are dealing in an efficient, fully-informed debt-equity market, we can expect that future growth rates will therefore be capitalized into industry stock prices.
The study of capital market efficiency examines how much, how fast, and how accurately available information is incorporated into security prices
Did Mefo circulation increase as a response to the stock market or did stock returns rise because more Mefo bills were added to the money supply? Did Mefo circulation serve to increase the stock returns of Mefo Allies? Were the stock returns of non-Mefo industries compromised by not partaking in the scheme? In econometric terms, although we cannot establish causality, we can observe whether one variable can help forecast another variable by using the concept of Granger Causality. The intuition behind the Granger Causality test is that we often don't know in time series data whether X causes Y, Y causes X or both. The test is to determine if lagged Mefo bill circulation 'explain' Mefo and non-Mefo stock returns over and above lagged returns. If lagged Mefo circulations do not, then it does not Granger Cause industry stock returns because they have no explanatory power. More simply put, Granger is the quintessential "chicken or the egg" problem, which asks us: "Which came first the chicken or the egg?"
Equation 1 - Granger Causality: General Methodology
Before we can delve further into the complexities of Granger Causality, we must first determine the strength of our variables in relation to the circulation of Mefo bills - this measure is known as correlation (r). The correlation coefficient measures of the extent of linear relationship between two variables, X and Y. While in Granger Causality, the emphasis is on predicting the relationship of one variable from the other, in correlation the emphasis is on the degree to which a linear model may describe the relationship between two variables. However, no discussion of correlation would be complete without a discussion of causation -- It is possible for two variables to be related (correlated), but it is also possible that although these two variables are related they do not have a variable effect on one another. Then, in order to determine whether the association between the variables is statistically significant, we look at the F-test.
The F-test is indicated by "Significance F", which is the associate P value for the F-test. The value of "Significance F" hinges on the results of the regression analysis and the confidence level -- in this scenario it is set at a confidence interval of 95 percent. If "Significance F" is <0.05, then the null hypothesis is rejected. (There is a statistically significant association between Variable, X and Mefo-bill circulation, Y) Conversely, if "Significance F" is >0.05, then the null hypothesis is accepted, meaning that the relationship between X and Y is not statistically significant. In this case, we can see that F-values associated with Mefo Coal stock returns and non-Mefo steel and financial sector stock returns exceed the statistically significant range.
Table 16 - Correlation Matrix: Variable X vs. Mefo Bill Circulation (Y)
Table 16 establishes the validity and strength of relationship between the circulation of Mefo-bills on Mefo/non-Mefo stock returns and on pig iron output. The table focuses specifically on the three major German industrial sectors: financial, coal, and steel/iron. The data is quarterly and spans a period of six years, 1933-1938.
With the exception of stock returns of Mefo Coal industries (r = 0.31) and non-Mefo steel firms (r = 0.11), we can asset with 95 percent certainty that all of the other variables are moderately correlated with Mefo bill circulation. Therefore, according to the correlation values, we can conclude that stock returns and industrial output are only moderately explained by the circulation of Mefo exchange bills.
Since we have now established that our variables are moderately significant, we can now estimate our model. To reiterate and elaborate on an earlier argument, the procedure for testing statistical causality between stock prices and the circulation of Mefo-bills in the economy is the Granger Causality test proposed by C. J. Granger in 1969. (Studenmund, 503) Granger causality may have more to do with precedence, or prediction, than with causation in the usual sense. It suggests that while the past can cause/predict the future, the future cannot cause/predict the past.
According to Granger Causality, X will cause Y if the past values of X can be used to predict Y more accurately than simply using the past values of Y. In other words, if past values of X statistically improve the prediction of Y, then we can conclude that X "Granger-causes" Y. It should be pointed out that given the controversy surrounding the Granger causality method, our empirical results and conclusions drawn from them should be considered as suggestive rather than absolute. (Studenmund, 503) This is especially important in light of false signals that might arise from Nazi statistical manipulation. Our first step in testing for Granger Causality is to determine whether there is a trend in our sample data. An important assumption in any time-series analysis is that the variables being tested are stationary. (Studenmund, 504)
During the period 1934-1937, stock prices and Mefo bill circulation follow an upward trend. However, in order to eliminate this trend, we need to calculate percent changes within the two samples and then examine if the two are stationary. Since the two variables do not appear to have a trend, we reason that the percent changes are stationary and proceed with the Granger test. Our next step in testing for Granger Causality is to determine whether a relationship exists between stock prices and the circulation of Mefo. In order for causality to hold true, a relationship must already exist between the variables being tested. For example, if X was not related to Y, then how could X possibly cause the variation in Y? To determine whether a relationship exists between Mefo/non-Mefo stock prices and the injection of Mefo into the money supply, the e-views statistical program regresses the %? Mefo circulation on past values of %?Mefo/non-Mefo stocks, and due to the limited number of observations (n=22) the data is lagged 2 quarters:
Equation 2 - Granger Causality Regression
%?Mefo Circulation= a + b(%?Mefo/non-Mefostocks-1) + c(%?Mefo/non-Mefo stocks-2)
The results of these regressions are shown in the Tables 17-20 and will either indicate that stock prices and Mefo circulation are related or that there is no significant relationship between the two variables.
The Granger Causality tests in Table 17 measure the impact of Mefo bill circulation on the stock returns of Mefo and non-Mefo financial institutions. This relationship is estimated using the summation of logarithmic values of quarterly stock prices and quarterly Mefo from the period 1933 - 1938.
Table 17 - Granger Causality Test: Mefo Bill Circulation and Financial Stock Returns (n=22)
According to the results obtained from Table 17, we can reject the hypothesis that Mefo bill circulation is not directly responsible for the change in stock returns for Mefo and non-Mefo financial firms. Rather, at the ten percent level of significance, we can conclude that the circulation of Mefo bills Granger Causes a change in quarterly stock returns for Mefo industries. In addition, we are able to conclude that at a one percent level of significance, Mefo bill circulation does in fact influence the stock returns of non-Mefo industries. In sum, the results of the Granger Causality tests indicate a causal relationship between stock returns and the volume of Mefo bills within the economy. Moreover, the results reveal that the circulation of Mefo bills do Granger Cause stock activity, but the stock prices do not Granger Cause Mefo circulation. This clearly demonstrates that Mefo-bill circulation mattered for investment and share prices.
Table 18 - Granger Causality Test: Mefo Bill Circulation and Coal Industry Stock Returns (n=22)
By analyzing the Granger-Causality results for Mefo and non-Mefo coal firms in Table 18, we can further construe that Mefo bill circulation had influence over the stock market. For the relationship between Mefo circulation and Mefo industries, the results show that the F-statistics are not sufficient to reject the null hypothesis. Although there is not a clear link between Mefo circulation and Mefo coal industries, at a 5 percent level of significance, we can safely assert that Mefo bill circulation Granger Caused stock returns for the non-Mefo coal industries.
Table 19 - Granger Causality Test: Mefo bill circulation and Steel Industry Stock Returns (n=22)
The link between Mefo circulation and stock returns for Mefo/non-Mefo industries is further supported with the results in Table 19, where we see that the circulation of Mefo bills Granger Causes Mefo steel industry returns at a one percent level of significance; it also Granger Causes non-Mefo steel industry returns at the five percent level of significance. However, when considering the iron and steel sector, we must remember the origins of the Mefo program. While we have established that the trail of Mefo ran much deeper than simply iron and steel, we must take into consideration that the steel industries were the primary recipients of Mefo funding. It was to the Mefo- affiliated steel sector in which a significant proportion of capital subsidies were diverted to fund Germany's massive rearmament campaign. This explains the considerable divergence between Mefo and non-Mefo steel firms; this distinct deviation between stock returns was not as clearly understood in Mefo's other industrial sectors.
With the exception of Mefo-affiliated coal industries, we see a well-defined relationship emerge between Mefo circulation and industry stock returns. With the exception of pig iron, Granger Causality is unidirectional, running from Mefo bill circulation to Mefo/non- Mefo market returns. Pig iron embodies the converse of this relationship, which is depicted in Table 20. At a ten percent level of significance we can conclude that pig iron output Granger Causes Mefo and non-Mefo stock returns.
Given the nature of Mefo contracts, we can see the validity in this assertion. The purpose of the Mefo scheme was to strategically conceal rearmament activity from the wandering eyes of the world. In order for there to be a supply of Mefo bills to fund rearmament, the must first be a demand for the rearmament good. Furthermore, the quarterly data shows that a growth in iron demand triggered the need for the circulation of more Mefo bills, which gave the contractors the financial backing to feed the belly of the German war machine.
Table 20 - Granger Causality Test: Mefo Bill Circulation and Pig Iron Output (n=22)
However, we must remember that Germany's economic data has several limitations. While some economic indicators were profuse, the vast majority of economic statistics were inadequate. Economist Maxine Sweezey (1938) describes her frustrations with compiling Nazi economic data:
After working carefully and critically with German official figures, however, one discovers that concealment often takes the form of not publishing certain economic facts rather than actually tampering with the figures. An economic series which was available up to 1934, for example, will no longer be published or the specifications of the numerical items will be changed from year to year so that they are no longer comparable and must be rejected. Current figures which might have a direct military significance are drawn up so as to conceal a part of the truth - that is, summary numbers are used which makes interpretation almost impossible. (Sweezy, 384)
As previously mentioned, in an effort to evade Allied detection, German industrial sectors significantly underreported profit earnings and total output. Statistical manipulation was especially rife within Germany's key industrial sectors, primarily, the steel sector. According to modern economic theory, in the short run, the aggregate-supply curve is upward sloping. That is, over a period of a year or two, an increase in the overall level of prices in the economy tends to raise the quantity of goods and services supplied; a decrease in the level of prices tends to reduce the quantity of goods and services supplied. What causes this positive relationship between the price level and output?
According to economist Gregory Mankiw, there are three theories for the upward slope of the short-run aggregate-supply curve. However, the theory that divulges the inconsistencies with the validity of Nazi Germany economic statistics, explains specific market imperfection causes the supply side of the economy to behave differently in the short run than it does in the long run: The quantity of output supplied deviates from its long-run, or "natural," level when the price level deviates from the price level that people expected. When the price level rises above the expected level, output rises above its natural rate, and when the price level falls below the expected level, output falls below its natural rate. (Mankiw, 361) This concept is illustrated in Equation 3, where ? represents a number that determines how much output responds to unexpected changes prices.
Equation 3 - Short-Run Aggregate Supply Movement
However, the Reich government fashioned an intricate system of economic controls and devices that suppressed the transmission of economic information. Nazi Germany shackled its economy with prices controls in an effort to curb inflation. Because of these economic distortions, we can conclude that the total effect of Mefo circulation was not accurately reflected in German production statistics.
In regards to Mefo's hidden effects on the Germany money supply, there are two ways by which hidden money can potentially affect stock returns - through higher profits and though a liquidity effect. In the short run, monetary expansion is associated with an increase in stock prices because more money has been injected into the market that is available for investment. The fact that there is significant correlation between several of the non-Mefo industrial sectors may suggest that there was indeed a liquidity effect or perhaps a partial liquidity effect explaining the response of asset prices to a change in money supply. In this view, added liquidity creates demand for assets, thereby causing their prices to rise; this stimulates the economy as a whole. In regards to Germany's financial sector, banks were holding hidden commercial paper in their reserves as a secondary asset allowing for banks to loan more money. Then, as the money supply increases, money is transferred from one bank to another. This multiplier effect explains why non-Mefo banks also expanded from 1933 to 1938.
In reference to the higher stock returns and profits recorded by Mefo industries, what it suggests is that the financial markets had an idea that something out of the ordinary was occurring in the economy. This inexplicable factor was responsible for triggering abnormally high stock returns for those companies involved with Mefo. Through further analysis of Table 16, we observe that according to the standard error statistics, the data are moderately consistent with the expectations that Mefo bill circulation seems to have been capitalized into stock prices to some extent. However, since all the standard errors statistics are less than 1, we can draw two conclusions: that Mefo was not fully capitalized into stock prices and that this information was not registered instantaneously in financial markets - there was a lagged transmission of information. We can therefore assert that the financial Markets to some extent, accurately paralleled Mefo's movements.
The effects of liquidity and covert funding are clearly seen in Mefo's principal industry - iron and steel. In Table 16, we are able to see that the correlation value for Mefo steel industries (r=0.49) is much larger than that of the non - Mefo steel industries (r=0.11). What this suggests is that there was both a liquidity effect and there is a covert effect driving this significant discrepancy. We can further assume that with such a considerable difference in correlation values in the steel sector, that the market is mirroring the activities of Mefo's hidden effects.
VII. Conclusion
In 1938, the product of Germany's four-year secret rearmament effort was characterized by decisive blitzkrieg. The Allied powers were rendered numb and speechless after witnessing the total destruction of the German war machine. Henkels, Messerschmitts, and Focke-Wulfs were just a few of the hidden cast of characters patiently lurking behind the German veil of rearmament. How did such large scale rearmament go undetected by democratic nations? One reason was the analysis of the economic system in totalitarian German was full of many obstacles. Uncertainty concerning the statistical figures presented a particularly difficult task due to Nazi censorship and propaganda.
Furthermore, in a further effort to cloud the Allied eye, the Nazi's devised a clever ruse that allowed them re-channel their military might and engage in blitzkrieg- this thick smokescreen was known as the Mefo bill. It was shortly after WWI when, against the statues of the Treaty of Versailles, the Germans began drafting their plans for European conquest. The enormous expansion of productive facilities in the iron, steel, coal, and chemical industries from 1934-1938 was an imperious necessity of waging global war.
To summarize an earlier argument, in drafting the blueprints for future war,
Germany did not want the same fate to befall them as it had in WWI. Reflecting on their defeat in 1918, some Germans put much blame on the failure of economic preparation. Their conclusion was that in the future, war would be a conflict not fought between nations, but the battle would be fought amongst economies. The Mefo rearmament plan saw to it that the Germany industrialist received the necessary funds needed for Germany to achieve economic autarky. In Nazi Germany autarky was especially relevant for industries that were associated with armament production, notably iron and steel, and while some industries were also receptive to the regime's autarkic drive, such as the chemical industry.
Following German economic improvement, 1933-5, under the stewardship Nazi work-creation and pubic works programs, the Second Four Year Plan was started which was focused solely on rearmament. It was during these four years in which industrial output increased by leap and bounds. With an exponential increase in output - which was fueled by Mefo funds - we would assume that the Allied powers would have been suspicious of such a dramatic increase in industrial production - especially during a supposed time of peace.
However, with covert Mefo funding and statistical half-truths, the Allied powers were left in the dark concerning the degree of Germany's industrial production; they left the Nazi's motives for post-war over production unchecked. Statistics are suppose to be the rock solid foundation of modern science -- a science concerned exclusively with objectively determined quantities, measurements and numbers. Of course, one of the major faults and failings of modern statistics is that a clever statistician can work his magic with the numbers and quite intentionally create the illusion of proving or disproving almost anything. This was the nature of Nazi economic statistics - they were nothing but smoke and mirrors; an illusion cleverly concocted by the Reich Economic Ministry.
Through Granger Causality, we have established that the effects of Mefo were reflected in the disparities between Germany's Mefo and non-Mefo stock prices, suggesting that Mefo bill circulation Granger Caused stock prices. That is, the supply of Mefo bills in the economy does predict the stock returns. To further explain the theory surrounding this result -- if markets are truly forward-looking then the price of stocks reflects expectations about future economic activity. If a recession is anticipated, for example, then stock prices will decline in value.
The Mefo policy was created to resurrect military rearmament with the idea that it was supposed to be hidden and less inflationary. However, we cannot assess the inflationary effects of Mefo due to the distortions that price and wage controls created. However, we have established that financial markets seemed to have understood this scheme since its effects were partially capitalized into stock prices. Since financial markets did reflect Mefo's covert economic effects, we cannot conclude that Mefo indeed a hidden policy. In fact, from the period between 1935 and 1937, Mefo's inflationary effects were tacitly registered in stock prices on the Berlin Börse. Although there were already countless economic controls repressing the transmission of perfect information, for Mefo to have been a completely hidden policy, the Nazi government needed to impose controls that would have completely suppressed information surrounded military rearmament from being understood and absorbed into other parts of the economy.
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