Tuesday, January 28, 2014

MEFO request

I got a request to comment on Nazi MEFO bills, which I've done elsewhere in the past and it's a story that needs to be retold and hammered in to public consciousness as some people actually still buy the fiction that Nazi economics works.

Starting in the Weimar period the German Society for Public Works, AG (in german Deutsche Gesellschaft für öffentliche Arbeiten AG) was founded in 1930. It was a sham corporation, a shell with insufficient capital that nonetheless was permitted to issue OEFFA bonds. In fact, that was its whole point of being. The bonds were rediscounted by the German Reichsbank, which meant that the state issued cash in exchange for worthless paper, creating money at a time when Germany still had a gold peg. The scheme was not detected at the time and formed the basis for a number of parallel schemes for other purposes.

The most sinister of the lot was the MEFO bill which was used to secretly finance rearmament in violation of the Versailles treaty. The amount of MEFO bills in circulation and their value was a state secret but at peak was about 12 billion Reichsmarks of the things floating about at a time when the published figures for official German debt was only 19 billion Reichsmarks. The bills carried a 4% rate if held to maturity so in the generally deflationary times, many receivers of MEFO bills held on to them instead of immediately presenting them to a German bank for payment.

By issuing bonds for which there was no underlying asset, Germany could formally keep its gold peg while floating what were in essence parallel currencies in the form of these bills which could be, but often were not converted back to Reichsmarks because of the interest rates that they carried. This only works for so long though. Eventually, the chickens started coming home to roost sufficiently to alarm the Reichsbank president, Hjalmar Schacht, the major author of the plan. He demanded that the plan be wound down. Instead, Hitler dismissed Schacht from the presidency of the Reichsbank in January 1939 and 8 months later invaded Poland while instituted a policy of looting to finance the war. Thus was born the term "Nazi gold", which is a shorthand term that meant looted gold from Nazi victims of all types.