World War Debt: Germany’s Debt Caused The Second World War – The Federal Reserve Isn’t Far Behind

The Second World War had countless effects on the world but there was one primary cause with strictly empirical roots. The grim lessons of this root cause of the war serve as an important reminder of how mega debt can lead to mega death.

The trouble began in 1914 when in an effort to finance the fighting of the First World War with money that Germany didn’t have, the country abandoned the Goldmark and begin printing the Papiermark. This fiat money would lead to an infamous cycle of inflation in post-war Germany. Whilst Britain also abandoned the classical gold standard in order to finance its war efforts with unsound money, Germany’s loss in the war left the country fully exposed to the dangers inherent in fiat money.

By 1924, German authorities realised that only a return to sound money could stem the tide of hyperinflation. The introduction of the gold backed Reichsmark helped to improve on the outrageous hyperinflation of the early 1920s. This solution however proved to be temporary due to the policies that would be enacted in the 1930s.

The victory of Hitler’s National Socialist German Workers’ Party in 1933 forever changed the course of both German and world history. Whilst Hitler’s Reich is most remembered for its ideology, genocide and occupation of foreign lands, it was Hitler’s monetary and fiscal policies that were the linchpin of his political programme.

Like most advocates of fiat money, Hitler wanted to have his cake and eat it too. Specially, he sought to artificially stimulate rapid GDP growth whilst not having to worry about the fiscal discipline that a monetary system based on sound money demands. Hitler’s solution was to create a parallel currency system to the existing gold back Reichsmark.

The Nazi government set up a shell company (which in reality was just an arm of the government) called Metallurgische Forschungsgesellschaft. This company issued MEFO bills which were described at the time as promissory notes which could be redeemed at any time for gold backed  Reichsmarks at the rate of 1:1.

The frivolous issuing of MEFO bills allowed the government to effectively print a parallel currency in order to stimulate industrial growth without having to formally break the country’s official currency from the gold standard. Of course, such a system had an predetermined lifespan because eventually, recipients of MEFO bills would seek to exchange their promissory notes for actual money.

By the end of the 1930s, the government had resorted to literally printing Reichsmarks in order to redeem MEFOs but this meant that a breakage with the gold standard would be inevitable once it became clear that there were more Reichsmarks in circulation than that which could be redeemed in gold.

Hitler’s solution to this problem of his own creation was two-fold. First of all, he filled hard labour camps with slaves who did not need to be paid for their work. This itself is anathema to the spirit of a free market as a free market requires the free access to the market among all citizens and residents of any given state.

Secondly, Hitler’s Reich decided that rather than attempting to trade his way back to sound money, he Germany instead invade its way into sound money. As protectionism had become increasingly fashionable among the industrialised powers of the 1930s, the most peaceful solution to creating prosperity in a solvent manner was already off the table although wiser political leadership could have certainly attempted to push the world back towards policies to economic openness.

The Nazi invasion of Poland and Czechoslovakia helped the German Reich to absorb the gold and silver reserves of these neighbouring nations whilst the incorporation of Austria into the Reich served a similar purpose.

The ultimate prize for Germany however was the Soviet Union. The USSR not only held gold that could be used to stabilise the Reichsmark but the vast state was also home to all of the major resources that Germany needed to fuel its economy. Soviet oil, gas, gold, silver, copper, timber, rubber and grain were just some of the resources that Germany needed and could scarcely afford to pay for doing to its shortage of real money.

Initially, Berlin and Moscow signed a pact under whose conditions the USSR would provide Germany with resources in exchange for Germany providing its high quality finished industrial goods to the USSR. This barter system tended to function adequately for both sides until Germany began to slow the transfer of finished goods to the USSR.

For reasons still not unanimously agreed upon by war historians, Hitler decided to end his system of barter with the USSR and instead invade his previous partner of convenience in the summer of 1941. This ended any pretence of Germany attempting to use trade as a means of stabilising its Reichsmark. Although this reality was clear enough by 1938, by 1941 it was undeniable that the Second World War was a war brought about because of Germany’s internal debt which itself was caused by the irresponsible system of MEFO bills which temporarily financed deficit spending that could not be paid back.

It has become increasingly common to compare negative trends in today’s world with the horrors of the Second World War. Many of these comparisons are more hyperbolic than historic. But when it comes to debt and an abandonment of sound money, pre-war and war-time Germany have many a grim lesson to teach 21st century policy makers.

First of all, one should recall that the sound money which Germany adhered to prior to 1914 could not finance a large scale war. In order to pay for the First World War, Germany required fiat rather than sound money. Because Germany lost the war, the abandonment of sound money rapidly led to hyperinflation which was stabilised by a return to a gold backed currency in 1924. But in many ways, the damage was already done by 2024. People were so aghast at the hyperinflation of the early 1920s that they became willing to entertain previously unfashionable political extremism in the hopes that such aspiring leaders might have some solution to avoid a return to inflation.

Hitler’s Nazis thought that they could cheat the market by maintaining a proverbially sound Reichsmark whilst simultaneously printing promissory notes (MEFOs) in order to finance astronomical deficit spending. It seemed as though the method was working due to Germany’s high GDP growth and near total employment by the end of the 1930s. However, it soon became clear that this MEFO “stimulus” was merely creating a bubble that would soon burst as the country ultimately had no way to redeem the MEFO bills without printing more Reichsmarks than could be exchanged for gold.

Germany went into debt in order to finance an economic bubble and then went to war as a means of illegally capturing the resources of others (including human slaves) as a means of fuelling economic growth without having to pay for it.

The parallels to today’s fiat money system operated in the US by the Federal Reserve are stark. Just as the first world war cut Britain and Germany off from their classical gold standard, America’s spending spree of the 1960s, particularly in respect of financing the Vietnam war led the US to print more dollars than could be redeemed for gold at the rate of $35 per ounce. Thus, in 1971 Nixon closed the gold window and ever since then, the dollar has been based on fiat rather than on sound money.

Today, whenever policy makers desire economic growth and high employment, their solution is simply to print money. This of course was ultimately Hitler’s economic solution.

This printed money however does little else in the long term aside from creating the kind of economic bubble which ultimately lead to Germany invading other countries for their resources.

Debt is dangerous because inevitably, the market will call the bluff of the money printers. It happened with Germany’s MEFO scam and it will eventually happen to the United States. For the moment the US is temporarily cushioned from the effects of its irresponsible fiat money system due to the dollar’s status as a global reserve currency.

In spite of this, anyone with foresight can see that unless the dollar returns to being a currency backed by sound gold money, the world will eventually look for an alternative to the dollar. This will result in a major calamity when a future bubble bursts.

Germany could have saved itself and avoided war if it choose to persuade fellow nations to open up avenues of trade and if it engaged in genuine free market practices rather than enslave fellow human beings as a means to receive labour without having to pay for it.

Ending the Federal Reserve would end a monetary system based on a dangerous fiction which results in the all too real phenomenon of wars being financed without the backing of sound money – all the while the cycle of economic bubbles bursting continues to harm ordinary people – especially those on fixed or low incomes.

The largest war in history was a product of debt. If the amount of debt in today’s world starts another war, it will be a world war and a far larger and more deadly one than that which started in 1939.

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