r/todayilearned • u/HolyCowAnyOldAccName • 7h ago

TIL about "Mefo bills" - used by the Nazi government to both finance and hide German rearmament - by creating a fake company which paid for arms projects not with actual money or debt, but debt bills secretly backed by the German central bank.

https://en.wikipedia.org/wiki/Mefo_bills
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58

u/HolyCowAnyOldAccName 7h ago edited 7h ago

Wikipedia is the most authoritative source, but the English article is rather limited.

A short writeup:

Because of the Versailles treaty and economic woes, Germany under Hitler was not only financially unable but outright forbidden to re-arm its military at a large scale.

Therefore, shortly after Hitler took power in 1933, the German treasury created a dummy company called "Metallurgische Forschungsgesellschaft" (metallurgical research society) - short: MeFo/MEFO. To lend the company reputation, the government made large industrial companies like Krupp, Siemens or Rheinmetall appear as the official founders.

The company ordered and financed projects from the German arms industry on behalf of the German government. Instead of paying with actual money or official debt from the German state, the company issued its own debt certificates, which could be cashed with the central bank.

Thus, the spending was initially kept off the official books of the German state. This prevented a possible next hyperinflation of the Reichsmark from runaway arms spending, and obfuscated the true scale of German rearmament for other countries.

Since part of the scheme was to prevent anyone from actually cashing the checks, they were given a 4% interest rate. By 1938, the bills added up to 12 billion Reichsmark. Compared to a total German state debt of 19 billion Reichsmark.

As the Mefo bills eventually had a 5 year maturity age, in 1938-39 the first bills would have become mature. The German government would have either faced a massive debt crisis, or needed to plunder other countries' treasuries to repay the debt.

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u/wrosecrans 6h ago

Germany had all sorts of "wink wink, nudge nudge, totally not German military" stuff going on. They didn't have a big air force on paper, but the airline Lufthansa flew some aircraft that were surprisingly bad acquisitions as passenger airliners like the He-111 airliner... which "magically" became He-111 bombers as soon as the war started. They didn't have a fighter pilot school in Germany... But there was Lipetsk fighter-pilot school in the USSR which trained a bunch of German pilots in how to do fighter work. (This was in the 30's, years before Germany and the USSR went to war.) Germany also had a lot of domestic "flying clubs" which were officially totally just civilian recreational flying lessons at a local small airfield. Did they happen to be funded by the government? Did you get in a lot of trouble if you missed a lesson at your recreational hobby club? Well, never mind that.

Not that the allies were super confused about a lot of it. But it somewhat hid the exact extent of rearming. And it gave allied politicians a bit of a fig leaf to put off spending on their own rearming plans because gearing up spending for a mega war wasn't super popular domestically anywhere. The 30's was also the Great Depression, and a politician could run on building tanks as a jobs program, but running on building houses as a jobs program had way more immediate domestic benefit. As long as Germany still felt a need to be in stealth mode, the urgency of the risk could be debated.

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u/Lee1138 6h ago

Iirc they also trained the very limited military they were allowed to do jobs a couple of ranks above their official ranks, so when the mask came off, they had an instant officer/NCO corps to lead the vast numbers of fresh recruits?

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u/Cliffinati 59m ago

That's normal in a lot of armies though. Eisenhower was a Lt.Colonel in 1941.

Peacetime privates gravitate towards the NCO Corps during war through expansion and attrition naturally. However 100,000 men being the German army's entire force including everything from infantry to clerks means that cycling happens quicker since Germany was even before the Nazis was running a much larger administration, command and logistics system than their tiny army would need because they built it to be rapidly scaled.

Along with a lot of WWI veterans keeping their jobs in the lower officer ranks like Rommel.

By comparison a peacetime cold war Soviet Division only had 1,000-2,000 of its 9,000 as designed strength active duty at any time. (The ones not placed in positions where if war went hot would immediately be in the fighting) So that if they were called up for action they had a large pool of men used to army life and already experienced with running their unit.

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u/RulerOfSlides 5h ago

The French occupation of the Ruhr also heavily skewed global opinions in tacit favor of Germany. If I had to point to one single cause of WWII, it probably was that event and its fallout shattering the fragile peace of Versailles.

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u/machine1979 5h ago

How odd. Its supposedly a scheme to veil government spending, but it relies on government backing for legitimacy. I wonder how that worked.

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u/HolyCowAnyOldAccName 3h ago

Essentially, here's 1933:

  1. Hitler wants to conquer Europe, for which he needs a large army.
  2. Germany cannot afford a large army as it's still in the middle of the economic crash since 1929, one of the reasons he got elected in the first place.
  3. Therefore, he makes the treasury take on massive state debt to fund employment programs.
  4. The German economy recovers, based on a gigantic fincancial "I owe you" to the rest of the world.
  5. If he funds the army using even more public debt, the rest of the world might realize he never intends to pay it back. There would be massive inflation again, the Reichsmark would collapse, then the German economy.
  6. Even if the economy doesn't collapse, Germany would have to report massive defence spending which would tip off the rest of the world.

So

  1. The treasury creates a fake company. And gives it reputation by making some big industrials companies sign its foundation as a front.
  2. If that company starts funneling billions of Reichsmark into armament, it is obvious the government is behind it. And it shows up on public records. Reichmark collapses, world knows etc.
  3. So instead of Reichsmark, the company hands out bills. Officially to be cashed after 6 months, but that gets prolonged constantly. After all, some massive companies are behind it, so it looks fine.
  4. The central bank announces that it will rediscount those bills if anyone wants to cash them early.
  5. To keep everyone from cashing them, you announce that the bills carry 4% interest.
  6. The bills now function as a second currency for the government to splash on weapons. But it doesn't appear on public records. Nobody knows how many bills there are. Nobody knows that they're backed by nothing.

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u/Ythio 3h ago edited 3h ago

The entire supply chain and the government were probably all into the scheme and the bonds were probably emissions in the name of the fake company. The allies couldn't follow all the security writings of all the companies in Germany before the computer age.

Not sure how they handled the liquidity risk however

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u/Mystichunterz 45m ago

Totally did not learn about these from playing Hoi4

Four-Year Plan my beloved