Economic recovery in Germany in the thirties and the real work of Mephistoles
from Merijn Knibbe
The real work of Mephistoles was of course not that the most influential central banker of the twentieth century, Hjalmar Schacht, used 1 million of capital to emit 8 billions of ‘Mefo-bills’ in Nazi Germany, bills presumably named after the Mephistoles in Goethe’s Faust who promoted money printing (update: see my reaction to a comment on this). In the vision of Schacht: money had to ‘move’ goods and services. If that was the case it would not lead to higher inflation. And goods and services were moved, in Nazi-Germany. Production went up, unemployment went down and prices were stable. And the real work of Mephistoles was that this money was used for armaments.
Source: B.R. Mitchel, ‘International historical statistics‘.
What was the case, why did money printing lead to economic prosperity instead of inflation? Well,
* The process of ‘modern economic growth’ had led to an increase of the investment rate in Germany (as in other countries)
* As investments are volatile this led to a new kind of business cycle caused by wild and large swings in the investment rate. Net investments even became negative in Germany, like in the USA, see the graph below.
Wow. The two most important economies of the world had a negative net rate of investment…
However, despite of this ‘learning curve’ effects led to an increase in productivity of the new, larger stock of capital build during the twenties whenever demand picked up, despite the lower rate of investment (think of my grandfather from fathers side and his Ford truck, driving over improved roads, who enabled farmers to shed time consuming transport activities to and from the market, to specialize on production and to diminish their number of expensive horses).
* At the same time, there was no way, considering the fast and massive rise in unemployment, that increasing consumption could fill the ‘output gap’ caused by the fall of investments (note: quite a large part of these investments were houses) and the connected decline of production
* Exporting your way out of misery was not an option in the thirties (increasing trade barriers)
Which led to the government as the ‘spender of last resort’. But the government would, considering the size of it, have to double or triple its expenditures – and only an utter maniac, not to say lunatic, would seriously consider this…
Well, that happened and production doubled between 1932 and 1938 and unemployment went down from 44% in 1932 to 12% in 1936 and 3% in 1938 (Pierenkemper, T. (1987), ‘The standard of living and employment in Germany, 1850-1980: an overview’, Journal of european Economic History 16-1 pp. 51-73).
And we did not live happily forever after.
Any lessons?
Caveats: Production went already up and unemployment down in 1933, i.e. before Nazi policies were effective (the ‘Autobahn’ projects started in 1932, by the way). Mitchell, linked above, gives somewhat lower data on unemployment but uses admittedly inconsistent sources, the data I use are based upon an extensive footnote in Mitchell, citing the source. After 1936, prices in Germany were increasingly held in check by administratieve measures. Hjalmar Schacht resigned as central banker and chief economic policy designer in 1937, partly because he wanted tho end expansionary policies but was not allowed to do so, partly because he increasingly gauged the true nature of the Nazi’s (and spoke out in public against some of their ideas).
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Real-World Economics Review Blog 
I’m sure that Modern Monetary Theory can be used in the service of any ideology, no matter how toxic.The Common Man who benefits will,like Schact,wake up too late to the poison in the ideology.But the Theory is no less valid for all that.
Spot on, Podargus. The poison in the ideology is the theme that bankers and employers are more trustworthy than most ordinary people, who (if treated decently and taught how to do things) are happiest making the best of what they’ve got and mucking in with others doing what needs doing.
Mefo bills were actually named after “Metallurgische Forschungsgesellschaft,” a shell company set up to fund arms spending in Nazi Germany. Mefo had no existence except as a note-issuing body, which gave out bills the banks could rediscount. It funded the huge rearmament programme in the 1930’s.
It was just a way for the Reichsbank to print money without breaching restrictions on its ability to buy as opposed to rediscount bonds. A similar scheme was used on a smaller scale before Hitler.
I know, but without a doubt Schacht knew his Faust. See this article: http://www.scribd.com/doc/74667288/Preparata-HITLER%E2%80%99S-MONEY-The-Bills-of-Exchange-of-Schacht-and-Rearmament-in-the-Third-Reich
It is essential that we not forget that the building of the autobahns and other public works put German workers back to work BEFORE Hitler re-armed. The US could have done something similar if the expenditures on the New Deal programs had been larger and if Roosevelt had not mistakenly cut back expenditures in 1937 believing the “pump had been primed” (!!).
BY the way, Keynes said as much in his Preface to the German edition of the General Theory. (Not about the US but about Germany being an “experiment” with his solution of increased government spending.)
Mind my caveats!
It seems to me that the 9.5% growth rate in Nazi Germany was due to short term credit made available by Real Bills, ie. short term credit advanced against finished goods. The current low velocity of money (about 1.5 according to the St Louis Fed) indicates a glut of long term debt and a dearth of short term credit.
Under the Nazis the government abandoned the market and used uniform charts of accounts (Kontenrahmen) and comparative firm analysos to regulate industry. The whole thing amounted to an ambitious attempt to set standards, to regulate business and industrial production and to use accounting in the running of a planned economy. Bureaucratic regulation not markets governed inflation.
The increased expenditure on autobahns, etc. increased the productive capacity of the whole economy. Increased armaments production does not.
Therefore the principle is correct. Government can increase significnatly its proportion in the the total level of investment, to a decisive or determining point for the whole economy. But the value of that investment over the medium-term depends on what the focus for investment is.
Absolutely right, Frank. Robert, what do you think of the idea of automating bureaucracy? I’ve been going on in the games theory thread about Lewis Carrol’s “The Hunting of the Snark”, where “The Beaver’s Lesson” is about Babbage automating logic and Lady Lovelace doing his programming for him. Here’s a lovely passage about the computer if you understand how electricity was first collected (and measured!) in jars and delicate instruments were protected in mahogony boxes:
‘As to temper the Jubjub’s a desperate bird.
Since it lives in perpetual passion:
Its taste in costume is entirely absurd –
It is ages ahead of the fashion: [i.e. in 1876].
‘But it knows any friend it has met once before:
It never will look at a bribe:
And in charity meetings it stands at the door,
And collects – though it does not subscribe.
Its flavour when cooked is more exquisite far
Than mutton, or oysters, or egss:
(Some think it kept best in an ivory jar,
And some, in mahogony kegs)…
The great German bsiness economist Eugen Schmalenbach, who divised charts of accounts in the 1920s that were subsequently adopted internationally, said that the technical, i.e., acccounting techniques, were not sufficently developed to allow the state to run the economy without the discipline of markets. So we need markets AND bureaucrats to run our lives, the worst of all possible combinations.