Weimar period and the MEFO
Bijou Smith
Hitler banned trade unions. Individuals worked 60 hours a week for 25% pay cut with no right to change jobs. That was the Nazi job guarantee.Which is kind of remarkable because an economist, whose name I won’t mention, glazed Adolf’s labor policy as a source of his popularity.Later the Nazis relied on slave labor because men were fighting wars.”
I drafted a comment back to my friend, does anyone wish to make corrections?
Mosler & Armstrong have a good analysis of the Weimar state currency. There is nothing wrong with their analysis. They did not come across this MEFO though.
The wikipedia article gets a bit of it totally wrong imho. It was more than a parallel currency. Because they did not peg to the ℛ︁ℳ︁ they escaped the effects of the war reparations. But they would not have been able to run full employment. The MEFO was not generating the unemployment. This skews the reading of that history.
No parallel currency can get to full employment, they are absolutely limited. They work in regions because the regions can maintain a degree of currency float relative to the State scorepoints. But employment & unemployment is not a closed system regional thing, unemployment is a cancer and pestilence like an epidemic.
It is so tragic. Every war machine boost is s story of an unseen green/sustainable economics boost that was never realized.
When the MEFO notes fell due in 1938, the government discovered a serious cash shortage. To resolve the problem, the Nazi regime employed "highly dubious methods" where "banks were forced to buy government bonds to be used to repay these bills, and the government took money from savings accounts and insurance companies. This made the ordinary German citizen the financier of the German rearmament."[7] Eventually, the government had to resort to the printing press to help mitigate the cash shortage.
Jay Mills
There are several important corrections. The central MMT point is that MEFO bills were not really a separate tax-driven currency in the sense the draft suggests.
First, MEFO bills were a Nazi-era instrument, introduced in 1934, not a late-Weimar currency. More importantly, they were essentially state-guaranteed bills of exchange used to finance rearmament off the ordinary Reich budget. Armament contractors received the bills; they could hold them for interest, discount them at commercial banks, and ultimately the banks could rediscount them at the Reichsbank. By April 1938 roughly RM12 billion were outstanding. The Nuremberg documentary record describes the arrangement explicitly as a device that let the Reich obtain Reichsbank credit it legally could not obtain directly.
That makes this statement in the draft problematic:
“Because they did not peg to the RM they escaped the effects of the war reparations.”
They effectively were tied to Reichsmarks. Their usefulness depended precisely on their convertibility into Reichsbank money at a predictable value, backed by a Reich guarantee. A recent macro-financial reconstruction goes even further: much of the MEFO stock ultimately migrated onto the Reichsbank balance sheet and was effectively permanently financed there.
There is also a chronology problem with the reparations argument. By the time MEFO bills appeared in 1934, the international reparations regime that had dominated Weimar Germany had essentially collapsed. The Hoover Moratorium came in 1931 and the Lausanne Conference effectively ended reparations in 1932. So MEFO cannot sensibly be interpreted primarily as a mechanism for escaping reparations. Its immediate purposes were concealing rearmament, circumventing statutory restrictions on direct Reichsbank lending to the government, and mobilizing domestic resources without initially showing the expenditure transparently in conventional government borrowing. The contemporary documentary record is unusually clear about those motives.
From an MMT perspective, the question “what was the tax that drove MEFO?” therefore contains a category error. MEFO bills did not need their own tax obligation because they weren’t an independent state currency. Their monetary hierarchy looked roughly like:
Reich government guarantee → MEFO bill → commercial-bank discounting → Reichsbank rediscounting → Reichsmarks
A contractor accepted a MEFO bill because it was an interest-bearing claim backed by the Reich and transformable into Reichsbank money. That is much closer to an unusual Treasury bill/commercial-paper hybrid with a central-bank put than to a parallel fiat currency.
The later coercion of banks, savings institutions, and insurance companies is therefore not the “tax that drove MEFO.” It is better described as financial repression or compulsory funding. The regime increasingly directed private financial saving into government liabilities. Nuremberg records describe the capital market as effectively being pre-empted for government financing and private issues being suppressed so they would not compete with state borrowing. Economically, coercively redirecting household savings can certainly reduce private command over resources, somewhat like taxation in incidence. Institutionally, however, it is not taxation, and it did not create the original demand for MEFO bills.
There is also an important point where I would push back on the draft:
“But they would not have been able to run full employment.”
MEFO financing absolutely could contribute to full employment, because the relevant mechanism wasn’t people wanting to accumulate MEFO bills. It was government-directed spending mobilizing previously unemployed labor and industrial capacity. Contractors received claims against the state, hired workers, ordered inputs, workers received Reichsmarks as wages, and aggregate nominal demand increased.
That distinction matters. The MEFO bill was the financing/payment architecture; rearmament expenditure was the fiscal impulse.
Indeed, the historical literature explicitly connects state purchases financed through MEFO with increased labor demand, investment, incomes and tax receipts. Germany did move from extraordinarily high unemployment toward labor scarcity during the 1930s. That empirical observation does not imply that Nazi labor policy was benign. Trade-union destruction, wage suppression, compulsory labor allocation, removal of groups from ordinary employment statistics, conscription, and eventually forced and slave labor are separate questions concerning how the resulting economy distributed income and controlled labor.
And that is actually where an MMT interpretation becomes more interesting.
MEFO demonstrates something Mosler repeatedly emphasizes: financial arrangements do not create the real resources. Germany had unemployed workers, idle factories and productive capacity in 1933. The Nazi state found an accounting mechanism permitting it to command those resources despite self-imposed financial/legal restrictions. As unemployment disappeared, however, the constraint increasingly became real: skilled labor, steel, petroleum, foreign exchange and imported raw materials. Schacht himself eventually wanted rearmament curtailed because he feared inflation and Germany’s external-resource position. The regime responded increasingly with price controls, import controls, foreign-exchange controls, compulsory resource allocation and ultimately territorial conquest. The Nuremberg documentation describes an elaborate system for directing scarce raw materials and foreign exchange toward military production.
So the strongest MMT reading isn’t:
“MEFO was an independent parallel currency that escaped reparations.”
It’s closer to:
“MEFO was an off-budget state-credit mechanism that allowed the Nazi government and Reichsbank to circumvent legal/institutional financing restrictions and mobilize idle domestic resources. Once idle resources were exhausted, the binding constraints became labor, productive capacity, raw materials and foreign exchange rather than the availability of financial claims.”
That is both historically stronger and much more recognizably Moslerian.
And the final observation in the post is basically correct but can be made much more precise: the same unemployed labor, engineering capacity, steel, machinery and fiscal capacity directed toward armaments could in principle have been directed toward housing, infrastructure, electrification, environmental projects or increased civilian consumption. The monetary operation doesn’t determine what society produces. Fiscal policy determines which real resources the state commands and what it commands them to produce.
That, rather than MEFO being some special alternative currency, is the genuinely interesting lesson here.
On Aug 12, 2026, at 12:49 AM, Bijou Smith <achrono...@gmail.com> wrote:
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Michael Orourke
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