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‘The Mefo Operation. A Macro-Financial Analysis of Hjalmar Schacht’s Shadow Money Scheme’ (with Armin Haas, Andrei Guter-Sandu, and Matteo Giordano)

In summer 1931, the collapse of two major banks pushed Germany into the nadir of its great depression. Large-scale credit creation programs were discussed but considered unfeasible due to the constrained macro-financial environment at the time, including restrictions imposed via the Treaty of Versailles. After being appointed president of the Reichsbank, Hjalmar Schacht invented the Mefo scheme in order to circumvent the Reichsbank’s legal constraints for credit expansion. Mefo stands for “Metallurgische Forschungsanstalt”, a letter box company set up by four German blue-chip companies, and operated by Reichsbank staff. Endowed with an equity of 1 million Reichsmark, Mefo issued commercial bills of the volume of 12 billion Reichsmarks, which eventually ended up in the Reichsbank’s asset book. Despite its historical significance, the Mefo scheme is insufficiently theorized from a monetary theory perspective. Moreover, it is an open empirical question whether the Mefo scheme played a significant role for manufacturing a system-wide financial expansion or was merely a side show with limited quantitative impact. We approach the Mefo scheme through the prism of the Monetary Architecture framework and perceive the Mefo company as an off-balance-sheet fiscal agency (OBFA), introduced to finance a politically desired large-scale transformation of capital stock—first to overcome the economic slump but soon to finance the rearmament for World War II. Mefo bills were a form of shadow money that functioned as close substitutes to bank deposits in a closed domestic payment system and facilitated industrial production while being backstopped by the Reichsbank. To investigate the Mefo scheme, we map its functioning and operations in a visualized web of interlocking balance sheets. We model the initial balance sheet expansion, the ensuing strategies for long-term funding in the system, and the different options discussed for a final contraction. Schacht’s original plan was a full contraction when the treasury repays the Mefo bills; the treasury suggested rolling them over on the treasury balance sheet and converting them into regular sovereign debt; in fact, however, the Mefo bills ended up on the balance sheet of Reichsbank where they were permanently funded until the collapse of all German state structures in May 1945. We connect our visual analysis to quantitative data related to the balance sheets of the Mefo company and the wider monetary architecture in order to draw conclusions about the significance of the Mefo operation for the financial expansion after 1931.

Presentation at the workshop ‘Building a Dataset for the OBFA-TRANSFORM project’ at Global Climate Forum, Berlin (07/2023).

Armin Haas, Global Climate Forum, Berlin
Andrei Guter-Sandu, University of Bath
Matteo Giordano, School of Oriental and African Studies (SOAS)

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