The Lost Science Of Money



The Finance Policy of Nazi Germany: Feder, Schacht and Hitler

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(1) The Finance Policy of Nazi Germany: Feder, Schacht and Hitler

(2) Hitler sided with Schacht, sidelined Feder under Schmitt, an Insurance magnate

(3) Hitler repudiates Feder, before gaining power, in HITLER SPEAKS

(4) Schacht battled against Feder; MEFO bills paid interest - Stephen Zarlenga

(5) British Empire left the Gold Standard by 1931

(6) Gold-holding US & Britain destabilized Germany's "Fiat" economy - Robert de Fremery

(1) The Finance Policy of Nazi Germany: Feder, Schacht and Hitler

- by Peter Myers, November 16, 2014

The German Workers Party was a socialist party founded by Gottfried Feder, Anton Drexler and Karl Harer. Hitler joined it and took it over, renaming it the NSDAP.

From Feder, Hitler learned that Governments do not need Gold to operate an economy. As long as there are workers and resources, the economy can operate on a "Fiat" basis. The Central Bank can create as much money as is needed to fund employment, infrastructure and social programs. In this respect, Rauschning was wrong and Hitler was right. Whereas Rauschning argued that such money-creation would be inflationary, Hitler insisted that he would control prices and wages, to stop it; and that is what happened, the same as in the Soviet Union.

However, Hitler did not nationalize private property, as happened in the Soviet Union. He simply placed control over private business in the hands of a managerial bureaucracy, subject to the Government. John Burnham's book The Managerial Revolution was the second book about the similarity between Soviet and Nazi management of the economy. Burnham was a Trotskyist who became a leading anti-Communist, and later worked for the CIA.

Burnham's book was not the first on that theme. It had been preceded by one other book, The Bureaucratisation of the World, by Bruno Rizzi (1939). He was also a Trotskyist, who praised the Nazi economic management:



Trotsky himself commented on this book:

The theme was later taken up by Friedrich von Hayek in his book The Road to Serfdom. He argued that the New Deal, and by extension the postwar socialist regimes in Britain and Australia, were a slippery slope that would lead to Totalitarianism. This was the justification for Thatcherism and Reaganomics.

There are a lot of silly debates about whether Hitler wanted war. But that's the wrong question. The right question is, "Did Hitler want an Empire?" And the answer to that question is unequivally Yes. It's just that he preferred it to fall into his lap, without fighting, as much as possible.

Hitler makes his imperial ambition clear in Mein Kampf. It is not for nothing that he visited the grave of Napoleon.

Stalin, not being stupid, prepared for war too. Viktor Suvorov points out that, just before Hitler attacked Stalin, Stalin had been getting ready to attack Hitler. Both sides had dismantled their defensive positions. There was going to be a war between them; the only question was who would attack first. The lesson was not lost on Moshe Dayan in 1967.

Stephen Zarlenga's book The Lost Science Of Money gives an excellent account of Nazi finance policy. He explains how Feder was sidelined by Schacht (and Hitler). MEFO bills paid interest (4.5%), so were not debt-free money like Lincoln's Greenbacks - the sort Feder had advocated.

Feder's problem was that he knew the theory of money, but had no practical experience of, say, running a bank. If you want to learn a new skill - welding metal or grafting trees - the theory is insufficient; you must get practical experience too. Without that, you're nothing. That was the difference bwteeen Schacht and Feder.

Zarlenga quotes Robert de Fremery to the effect that the Gold-using countries were operating a financial war against Germany. The British Empire had left the Gold Standard by 1931, but was producing half the world's Gold. Roosevelt took the US off the Gold Standard in 1933, but the $ remained Gold-backed at $35 per ounce. These two powers did not take kindly to Germany showing that you could bypass Gold altogether.

However, even if that was a contributing cause to the war, Hitler's imperial ambitions were a greater cause. His racial antagonism to Slavs was a throwback from the First World War, during which Germany had conquered Ukraine and the other western provinces of Russia. Hitler wanted that territory back. Just as the British called the Germans "Huns" during that war, the Germans belittled the Slavs. It's was the basis of Hitler's genocidal policies towards them.

(2) Hitler sided with Schacht, sidelined Feder under Schmitt, an Insurance magnate



Gottfried Feder 

[...] Throughout the 1920s Feder was a leader of the anti-capitalist wing of the Nazi Party. In 1924 he was elected to the Reichstag. He put forward his views in Das Programm der NSDAP (1931), Kampf gegen die Hochfinannz (1933) and Die Juden (1933) where he expressed his anti-semitic views.

As Feder held the important post of chairman of the party's economic council, his anti-capitalist views led to a decline in financial support from Germany's major industrialists. Hjalmar Schacht warned Hitler that Feder's economic planning apparatus would ruin the German economy. After pressure from figures such as Albert Voegler, Gustav Krupp, Friedrich Flick, Fritz Thyssen and Emile Kirdorf, Hitler decided to move the party away from Feder's left-wing economic theories.

When Adolf Hitler became chancellor in 1933 he appointed Feder as Under-Secretary at the Ministry of Economics. Feder was disappointed that he had not been given a more senior position. Konrad Heiden pointed out that Feder also had to serve under someone who completely opposed his economic policies: "The post of under-secretary was an humiliating position ... His new superior was almost a stranger to the party, but familiar to the stock exchange... he was Doctor Karl Schmitt, general director of the largest German insurance company. A more pronounced representative of rapacious capital would have been hard to find; Schmitt had spent his life lending money and collecting interest; he had literally bought his way into the National Socialist Movement by giving the party generous aid in hard times."

Feder continued to campaign for nationalization, profit-sharing, the abolition of unearned incomes and the "thraldom of interest". Hitler refused to do this.

(3) Hitler repudiates Feder, before gaining power, in HITLER SPEAKS

HITLER SPEAKS: Conversations of 1932-34 recorded by Hermann Rauschning



{p. 29} THE PLAN IN THE DRAWER

Hitler's questions as to the position in Danzig led us directly to the economic problems. [...] the party's two economic and technical experts, the civil engineers Feder and Lawaczek, whose curious theories, propounded in "intellectual gatherings," invited the ridicule of economists and caused acute embarrassment to all intelligent party members. I therefore asked Hitler, whose relations with Feder were not at the time known to me, about the possibility of financing the economic program. I could not see, I remarked, that Feder's theory was anything but financing by means of an inflation.

"How do you mean?" said Hitler, eyeing me with displeasure. "I am not worrying about financing our program. You may safely leave that to me. As long as speculators are kept out, there are no difficulties."

"But," I ventured to interpose, "it will not be possible to keep prices stable if the creation of employment is financed thus. Feder's money theory will also have an inflationary effect."

"You get inflation if you want inflation," Hitler retorted angrily. "Inflation is lack of discipline - lack of discipline in the buyers, and lack of discipline in the sellers. I will see to it that prices remain stable. That is what my S.A. is for. Woe to the men who raise prices! We need no legal instruments for that. It will be done by the party alone. You shall see— if our S.A . once clean up a shop, such things will not happen a second time."

{p. 30} "Besides," Hitler continued, "I do not worry about the theories of Feder and Lawaczek. I have a gift for tracing back all theories to their roots in reality. I have nothing to do with pipe-dreams. You need not take this man Feder and his associates literally, even though officially the party does so. Let them talk as they please. When I am in power, I shall see to it that they do no mischief. If these men cause confusion, Forster, you will no longer allow them to speak. These people cannot think simply. Everything has got to be complicated. I have the gift of simplification, and then everything works itself out. Difficulties exist only in the imagination!"

Hitler's repudiation of Feder was at that time new to me. It was interesting as an indication of Hitler's supremacy over his entourage. [...]

(4) Schacht battled against Feder; MEFO bills paid interest - Stephen Zarlenga

The Lost Science Of Money

by Stephen Zarlenga

American Monetary Institute, 2002

{p. 590} HITLER TAKEN BY FEDER'S MONETARY VIEWS

When World War I ended, a destitute Adolf Hitler was given an assignment by Gennan Army intelligence to watch a tiny political group called the German Workers Party. He attended a small meeting where Gottfried Feder's monetary views made a very deep impression on him.

The basis of Feder's ideas was that the state should create and control its money supply through a nationalized central bank rather than have it created by privately owned banks, to whom interest would have to be paid. From this view was derived the conclusion that finance had enslaved the population by usurping the nation's control of money.

Feder's views could easily have originated from the work of German monetary theorists such as George Knapp, whose book The State Theory of Money (1905) is still one of the classics in the monetary area. [...]

{p. 591} Near the end of that book, Knapp casually mentions how German monetary theorists of his day and earlier would study and discuss American monetary theories. Thus the ultimate source of Feder's viewpoint may have been the ideas of the American Greenback movement of the 1870s.

Unfortunately, Feder's monetary views were mixed up with an all consuming anti-Semitism. [...]

{p. 592} SCHACHT BATTLES FEDER

When the National Socialists came to power, Schacht was reappointed head of the Reichsbank, partly to reassure German big business and foreign bankers. Schacht battled against Feder's un-orthodox monetary views:

"Nationalization of banks, abolition of bondage to interest payments, and introduction of state Giro 'Feder'money, those were the high sounding phrases of a pressure group which aimed at the overthrow of our

{p. 593} money and banking system. To keep this nonsense in check I called a bankers' council which made suggestions for tighter supervision and control over the banks. These suggestions were codified in the law of 1934 ... In the course of several discussions I succeeded in dissuading Hitler from putting into practice the most foolish and dangerous of the ideas on banking and currency harbored by his party colleagues." [...]

FEDER LOST

Feder quickly lost the battle with Schacht and the German business establishment. [...]

Feder was "put out to pasture" by the National Socialists, serving as an under secretary in the Ministry of Economic Affairs. He was later transferred to commissioner for land settlement, and then completely sidetracked as a lecturer at the Technische Hochschule in Berlin.

{p. 594} BUT "FEDER MONEY" WORKED WELL

Hitler and the National Socialists came to power on January 30, 1933. Germany's foreign exchange and gold reserves had dropped from 2.6 billion marks in late 1929, down to 409 million in late 1933, and to only 83 million marks in late 1934. According to classical economic theory Germany was broke and would have to borrow, but Germany was to demonstrate that "classical" monetary theory is not very accurate.

This period of German monetary history has received far too little attention in English. On May 1, 1933 Hitler outlined the Ist Reinhardt Program - a four-year plan to end unemployment by attacking it on several fronts:

• Spending I billion marks worth of "employment creation bills."

• Tax benefits for industry, agriculture, and the employment of domestic help.

• Marriage bonus loans up to 1,000 marks and

• Government control of the money and capital markets, under Schacht.

Although elements of this program had already started under the predecessor Von Papen and Schleicher Regimes, they had not been all out efforts against unemployment.

On May 31st, the German government decided to issue I billion marks of short term public works bills, designated to pay for specific infrastructure projects:

"These were negotiable certificates paid out to employers who under-took projects of replacement or maintenance projects. Anyone who equipped a factory with new machines or who had his house repainted 34 could finance his operations with these work drafts...," wrote Heiden.

These bills paid about 4 1/2% interest, and as they were taken into the banking system, they were renewed indefinitely, and made eligible for rediscounting by the Reichsbank. This means that they became part of the underlying basis for the nation's money supply, along with gold and foreign exchange and long term Government Bonds.3

The author has seen these bills referred to as "Feder money," and as "work drafts" (Arbeits-Schatzanwersungen). Schacht later referred to MEFO bills, mentioning no connection with Feder.

Many of the bills never found their way to the Reichsbank, since the interest they paid was an incentive for banks and others to hold onto them. Roberts estimated that as much as 15 billion marks worth of such

{p. 595} bills were issued. Heiden made a lower estimate:

"All in all the public Treasury poured out approximately 3 billion marks ... for projects which according to the view hitherto prevailing (e.g. Schacht's) in those times of crisis, were senseless or at least unnecessary ..."

Guillebaud also estimated an upper limit of 15 billion marks of all types of bills used to finance public works in this period, but noted that:

"No exact figures exist for the circulation of employment bills, but they can be estimated with reasonable accuracy at 1.2 billion RM at the end of December 1933, and at 2.6 billion RM a year later."

When the process started in 1933, Reichsbank holdings of all such instruments, including normal treasury issues, totaled 3.03 billion marks. At the end of 1934 total holdings were 3.86 billion and at the end of 1936 there were 4.91 billion marks.39

Thus Germany did not take the full step and create a German equivalent to the American Greenback. The Greenbacks themselves were money, had no interest payments due on them and did not add to any national debt. These German infrastructure bills were a form of debt certificate, promising to pay money; they paid interest and did add to Germany's national debt.

But this very close money substitute still had dramatic effects.

They were an excellent way to get purchasing power into the hands of newly employed workers. Unemployment had been at six million in 1933, and was down to around one million at the end of 1936.

Furthermore, whereas the American Greenbacks had been spent mostly on warfare and destruction, the "Feder money" had gone almost entirely into public works projects, especially the construction of new middle class housing. In 1934 there were 283,995 dwellings built compared to 141,265 in 1932. Then there were the thousands of kilometers of Autobahn construction.

Thus it can be argued that the cause of Hitler's immense popularity among Germans was that he temporarily rescued Germany from English economic theory. For while these activities strongly benefited the German middle and lower classes, they were of great concern to some foreign bankers. Although Germany's move away from gold was more a matter of necessity than choice, it still threatened "vested interests." Robert de Fremery quotes from the June 1940 National City Bank Bulletin which admitted that:

{p. 596} "not only the United States but other countries as well have large vested interests in gold. The British Empire alone accounts for nearly half of the gold output of the world, and in many other countries gold is an important national asset. These countries would not took with favor upon the displacement of gold as a monetary metal; and even in the event of political changes resulting from the war these vested interests will remain, though possibly shifted to other national jurisdictions."

The reader will notice that these "vested interest" countries were the ones that warred with "goldless" Germany. De Fremery thought this could have been one of the causes of the Second World War. However, that decision may have been made earlier, and itself led to Germany being without gold. Perhaps she was expected to borrow gold internationally, and that would have meant external control over her domestic policies. Her decision to use alternatives to gold, would mean that the international financiers would be unable to exercise this control through the international gold standard, as described in Chapter 22, and this may have led to controlling Germany through warfare instead.

SCHACHT ATE SOME CROW OVER FEDER MONEY

Schacht clearly had to "eat crow" and swallow his own words as regards the new monetary issues that he earlier condemned. Thirty years later he justified his change of theory:

"... it was repeatedly asked whether the success of the MEFO bill scheme did not mean that whenever there was a shortage of capital savings one could compensate by replacing such capital savings with credits granted by the central bank, and thus by money specially granted for the purpose. The English economist J.M. Keynes has delt with the problem theoretically, and MEFO transactions prove the practical applicability of such an idea."

But Schacht insisted that certain conditions must exist. There had been no stocks of raw materials; factories were empty; machines were idle and 6 '/2million willing men were unemployed: "The capital which could be expected to result from such developments (putting men to work) was used in advance to grant credit through the MEFO transactions.'"

SCHACHT FIRED OVER THESE MATTERS

These bills were used from 1934 to 1938. Schacht relates how he got himself fired by refusing to continue renewing the bills:

"In January 1939, the Reichsbank handed Hitler a memorandum in which it indicated its refusal to grant the Reich any further credits. The

{p. 597} consequences were drastic. On January 19, I was dismissed from my office as President ... on the following day Hitler issued an edict which ordered the Reichsbank to grant the Reich all credits for which the Fuhrer asked. It is true the MEFO bills were now honored when they came due, but only with the inflated money produced by the printing presses. The second inflation had begun."

Schacht's firing was not made public for five months. His refusal to continue financing the Reich was probably what saved him at Nuremberg. [...]

{p. 599} SCHACHT FINALLY SEES THE LIGHT

Schacht began his banking career as a believer in the gold standard, the system then used in England and America. But by 1967, it appears he had come to agree with some of Gottfried Feder's "unorthodox" monetary views:

"Modern paper money, the banknote is backed by its creator, the state ..."

Thus Schacht made a monetary pilgrimage similar to that of Thomas Jefferson, Alexander Del Mar, and many others, away from the primitive commodity view of money as metal, to an awareness of the "nominal," fiat nature of money as being based in law.

"The granting of credit is unthinkable without a central bank. No central bank can be allowed to act against the government of the country. The government is over the central Bank ... A central bank cannot allow any competition," wrote Schacht.

But then Schacht qualified this, stating that a higher law above both the government and the central bank is the constancy of the value of money. Stated in a more political manner, he is saying is that above both the central bank and the government is the bondholder.

Schacht insisted that only by keeping the currency stable could the small savers ever have a chance to accumulate substantial savings. He rejected their use of investments as indoctrinating them into gambling.

However, the use of well managed instruments such as balanced mutual funds can now overcome this objection. And after all, when unemployment caused by an overly restrictive monetary policy strikes, it is the small saver who generally suffers most.

In Summary

An examination of the German hyperinflation of 1923 shows that the simplistic anti-governmental interpretation of the economists and financiers is without basis. Nearly the opposite of what they contend, was true: the hyperinflation followed the complete privatization of the German central bank and elimination of governmental influence on it.

Again it was governmental action - this time the German govemment - not private bankers - that rescued the monetary situation.

(5) British Empire left the Gold Standard by 1931

{but the British Empire continued to produce half the world's Gold after that - see next item}



In September 19, 1931, speculative attacks on the pound forced Britain to abandon the gold standard. [...] The British benefited from this departure. They could now use monetary policy to stimulate the economy. Australia and New Zealand had already left the standard and Canada quickly followed suit. [...]

Some economic historians, such as Barry Eichengreen, blame the gold standard of the 1920s for prolonging the economic depression which started in 1929 and lasted for about a decade.[28] Adherence to the gold standard prevented the Federal Reserve from expanding the money supply to stimulate the economy, fund insolvent banks and fund government deficits that could "prime the pump" for an expansion. Once off the gold standard, it became free to engage in such money creation. The gold standard limited the flexibility of the central banks' monetary policy by limiting their ability to expand the money supply.

This page was last modified on 16 October 2014 at 22:40.

(6) Gold-holding US & Britain destabilized Germany's "Fiat" economy - Robert de Fremery



Money and Freedom

An Application of Natural Laws to the Problem of Money -- The Disastrous Economic and Political Consequences of our Unsound Monetary System -- A Suggested Remedy

Robert de Fremery

[CHAPTER VII: "Shall We Return To A Gold Standard -- Now?"]

[...] There is also good reason for believing that some of the friction existing between countries prior to the outbreak of the second world war may have had its roots in the gold-credit mechanism. In this connection, the following quotation from the National City Bank Bulletin deserves careful scrutiny:

"A second important reason why gold is unlikely to lose its value is that not only the United States, but other countries as well have large vested interests in gold. The British Empire alone accounts for nearly half the gold output of the world, and in many other countries gold production is an important national asset. These countries would not look with favor upon the displacement of gold as a monetary metal; and even in the event of political changes resulting from the war these vested interests will remain, though possibly shifted to other national jurisdictions." (p. 70) (Italics added)

It will be remembered that Germany had made an effort to get out from under the gold standard during the 1930s. She had carried on quite an experiment with "fiat" money. (See quotation from Dr. B. M. Anderson, Jr.). Now if the gold standard countries "would not look with favor upon the displacement of gold as a monetary metal," it is reasonable to suppose they had tried to hinder the success of Germany's experiment. And the obvious way to hinder the success of that experiment would have been to discount Germany's currency in such a way as to discourage businessmen in other countries from accepting that currency. That would have forced the Germans to engage in barter agreements -- which is what actually happened. And since barter is, at best, a long step backward in the economic development of the world, it is reasonable to suppose that the increasing tensions resulting from such unsatisfactory arrangements would have been conducive to the outbreak of war.

It can be argued, of course, that it was perfectly natural for the bankers of the gold-standard countries to discount Germany's currency if it was not redeemable in gold. That would have been in accordance with the way the international gold standard is supposed to work. But let's face the fact that such a system leads to friction between those countries that wish to keep the gold standard and those countries that wish to free themselves from the tyranny of the gold standard.

It can also be argued that Germany was forced to barter because of her fiat money -- the implication being that if the gold standard were abandoned by all countries, then all foreign trade would have to be done by barter arrangements. But that is not so. Germany was forced to barter because of the clash between the international gold standard and Germany's system of a national "fiat" money that was independent of the gold standard. If there were no international gold-standard, there would have been no clash and therefore no necessity for barter. International trade would have been regulated by mild changes in exchange rates reflecting changes in the supply of, and demand for, various currencies as determined by change in the volume of imports and exports of the countries concerned. Exchange rates would then always reflect supply-and-demand relationships between imports and exports rather than reflecting the degree to which currencies are convertible into gold. (A fuller discussion of this subject is given later.)

So to those who try to blame the breakdown of the gold-credit system on wars, we have a perfect right to say that there would be less tension in the world, and more genuine cooperation between countries, and therefore less chance of wars breaking out, if the gold-credit system were abandoned by all countries.

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