How Hitler Funded Rearmament
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Germany in January 1933, when Hitler became Chancellor, was a country in deep economic crisis: six million unemployed, hyperinflation still fresh in living memory, reparations obligations, and severe restrictions on military expenditure under the Treaty of Versailles. Yet by September 1939, Germany possessed the most powerful military in Europe. How this transformation was financed — without producing a second hyperinflation and without triggering international financial detection — is one of the most studied cases in the history of wartime economic policy.
Hjalmar Schacht and the Mefo Bills
The architect of early Nazi rearmament financing was Hjalmar Schacht, appointed Reichsbank President in 1933. Schacht devised a mechanism that was simultaneously financially sophisticated and deeply deceptive: the Mefo bill (Metallurgische Forschungsgesellschaft — Metallurgical Research Company).
Mefo was a shell company established specifically to issue bills of exchange. The German government — specifically, the armaments manufacturers — would pay for rearmament with Mefo bills rather than cash. The manufacturers could then discount these bills at the Reichsbank for cash, or hold them as financial instruments. The bills were guaranteed by the government but did not appear on the government's official balance sheet. They were, in effect, secret government borrowing used to fund secret rearmament.
Between 1934 and 1938, approximately 12 billion Reichsmarks in Mefo bills were issued — financing the initial rearmament programme while keeping the deficit off the official books. Foreign creditors, dissuaded from looking too carefully, saw a Germany apparently managing its finances responsibly while unemployment fell and economic activity rose.
The Functioning Economy Illusion
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Schacht's genius was creating an appearance of normalcy while conducting a secret military buildup. Germany's nominal GDP grew strongly; unemployment fell from 6 million to near zero by 1938. These were real achievements, funded in significant part by the military spending that the Mefo mechanism concealed.
But the underlying economics were not sustainable. Schacht himself resigned in 1937 when he recognised that the rearmament pace had outrun any financially stable plan. His successor continued, funding an accelerating programme through increasingly explicit deficit financing and eventually through outright occupation and plunder of conquered territories.