Work in Progress

The state as a financial actor is commonly imagined to be a unitary entity that interacts with the wider financial system via its core budget operated by the treasury that generates inflows via taxes and outflows through government spending. However, an emerging literature places increasing emphasis on off-balance-sheet fiscal agencies (OBFAs)—financial entities that are separate from the treasury but carry out activities on behalf of the state which could also run via the core budget while often receiving explicit or implicit fiscal backstops. This gives rise to a “fiscal ecosystem” of national and sub-national treasuries and OBFAs that is different in each country, historically specific, and inherently opaque. Fiscal ecosystems are subject to constant transformation that is driven by political, economic, and legal concerns, with ample path dependencies. In this article, we use Germany as a case study to develop a methodology that combines scholarship in law and political economy to categorise and empirically map its contemporary fiscal ecosystem. Throughout its turbulent history, Germany has developed a highly complex web of OBFAs across various layers of its federal system. Their number ranges in the tens of thousands. We place them in a coordinate system and depict their proximity or distance to the core budget by drawing on their legal status, revenue model, and characteristics of their issued debt (if there is any). Moreover, we carve out the conditions under which OBFAs are subject to Germany’s constitutional debt brake and the EU fiscal rules. If and how OBFAs are affected by debt brakes has been notoriously opaque but is a matter of great political salience since Germany’s constitutional court has objected in November 2023 to the financial treatment of special funds (Sondervermögen), which created a budgetary crisis and a spending freeze.

Co-authors:
Gregor Laudage, Global Climate Forum, Berlin
Armin Haas, Global Climate Forum, Berlin
Andrei Guter-Sandu, University of Bath

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OBFA-TRANSFORM Working Paper No. 1-EN
OBFA-TRANSFORM Working Paper No. 1-DE

The political science literature has long turned its attention to fiscal governance as a core site of political contestation. Typically conceived of as legislative bodies battling it out over the level and distribution of spending through annual, formalized budgetary processes, this view of fiscal governance places at its centre the core treasury balance sheet as the aggregation of the outcomes of these political compromises. However, fiscal policymakers (and other relevant political agents) face two main constraints to advancing their policy aims through traditional budgetary politics and, more specifically, the main treasury balance sheet. First, formal fiscal rules. Governments may self-inflict such rules in the name of fiscal discipline, aiming to tie not only their hands but also those of future generations of policymakers. Germany, the country on which we focus, has been particularly amenable to such restrictions, where fiscal rules play out both at the federal and European Union (EU) levels. Second, policymakers face political opposition, a core component of democratic policy processes, but one that can result in fiscal winners and losers and in more extreme forms, fiscal gridlock. These constraints have the impact of restricting the effective fiscal space that policymakers have available to pursue their objectives, incentivizing new forms of fiscal governance. These different forms of fiscal governance take place off the core treasury balance sheet, through vast and varied network of off-balance-sheet fiscal agencies (OBFAs). Despite their significance to fiscal governance, OBFAs have only gotten limited attention in the political science literature. In this article, we investigate the impact that OBFAs have on fiscal governance in the long run. Put differently, what effect does the proliferation and transformation of OBFAs have on not only current generations of fiscal policymakers but also future ones? To answer these questions, we turn to the historical institutionalist literature, which has long studied the ways in which political agents interact with the structures that constrain them over extended periods of time. Looking at the particular case of Germany, we argue that OBFAs offer a paradox for fiscal governance: on the one hand, they offer both short-term flexibility and crisis responsiveness, making them capacity-enhancing from the operational perspective of the fiscal ecosystem. However, on the other hand, these same innovations can be capacity-constraining from a system reform perspective, as escalating complexity leads to a new set of structural rigidities.

Presentation at the “Spring Meeting” at Hertie School of Governance in Berlin (04/2025).

Co-authors:
Monica DiLeo, Hertie School of Governance
Andrei Guter-Sandu, University of Bath
Armin Haas, Global Climate Forum

This article contrasts the Sovereign Currency View (SCV) and the Global Credit View (GCV) on the monetary system in International Political Economy (IPE) regarding four crucial assumptions: endogenous credit creation versus transaction costs and loanable funds; the co-evolution of public and private credit rather than metallism vs. chartalism; interlocked balance sheets in global finance rather than a ‘triple coincidence’; and a focus on gross flows rather than net flows in global payments. By mobilizing a 2×2 “Matrix of Monetary Thought,” we show that the SCV’s monetary theory of credit leaves critical issues about the global money and credit system unexplained compared to the GCV’s credit theory of money. Viewing the credit money system as subject to a co-evolution of public and private liabilities/assets in which a central public actor repeatedly validates excess private credit creation explains the hierarchical structure of national credit systems connected through interlocked balance sheets, and crisis dynamics within those systems. This approach reverses our understanding of the current account deficits and net foreign debt that SCV authors identify as fundamental problems for the dollar, or more precisely, for dollar-based credit systems backed by a hegemonic US state. These are features, not bugs, of credit systems, and help offset capitalism’s inherent deflationary tendencies. The GCV also helps unify academic analyses that suffer from the fallacy of composition, an excessively unit-level analytic framework, or incoherence in their theoretical premises.

Presentations at the symposium “The Political Economy of International Money” in Berlin (01/2024), a special issue workshop in Lillehammer (05/2024), and at the annual convention of the International Studies Association (ISA) in Chicago (03/2025).

Co-author:
Herman Mark Schwartz, University of Virginia

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OBFA-TRANSFORM Working Paper No. 5-EN

The European Monetary Union (EMU) is often seen as an attempt to shield Europe from USD dominance. However, as BIS data shows, the USD’s volume and share in EMU cross-border payments has been constantly rising for 15 years. To explain this puzzle, we adopt the New European View and posit that the EMU has systematically incorporated the USD into its monetary architecture rather than competing with it. We trace the origins of this setup by investigating the evolution of institutions for clearing and settlement of cross-border payments in Europe. We find that the USD’s integral role results from a process of “subordinate financial integration” after 1945 when the European Payments Union connected non-convertible European currencies and defined them as promises to pay USD on the BIS balance sheet. After 1958, a parallel structure emerged: The “domestic currency channel” allowed making cross-border payments in European currencies but subject to exchange rate fluctuations; private agents organized first resort clearing, central banks provided last resort clearing via the BIS. In contrast, the “key currency channel” facilitated cross-border payment in USD deposits created offshore; clearing shifted from London to New York in the 1960s after setting up CHIPS. The 1999 EMU introduction boosted the “domestic currency channel” by providing an integrated payment system and eliminating exchange rate fluctuations, but the Eurocrisis reinvigorated the legacy structure of the “key currency channel”. Handsomely backstopped via Federal Reserve swap lines, the USD currently has a revival in the EMU as a feature, not a bug.

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OBFA-TRANSFORM Working Paper No. 6-EN

This report studies the transformation of South Africa’s monetary architecture—understood as a complex web of balance sheets that interlock via different credit instruments—from 1983 to 2024. The purpose of this investigation is to provide a new conceptual lens to investigate two large paradoxes that shape the macro-financial the post-Apartheid state: First, why is there persistent poverty and inequality in South Africa despite continuous attempts to change course since the end of Apartheid? And second, why is there persistent underinvestment and lack of infrastructure development during the post-Apartheid era despite phases of economic growth, credit expansion and financial development?

To explore these questions, we compile four idealized ‘maps’ of South Africa’s monetary architecture at four historical points in time—during Apartheid in 1983, after the original post-Apartheid settlement in 1996, after the banking crisis  in 2014, and after the COVID-19 pandemic in 2024—and investigate the political-economic dynamics in between those moments. Our purpose is to get a sense of the specific ‘balance sheet configurations’ that characterized these different moments. This helps us unveil how the contemporary monetary architecture is still shaped by macro-financial path dependencies that persist despite the ‘Dawn of Democracy’ in 1994.

The report has been written with the help of a group of distinguished financial experts who have delivered working papers or given interviews. This has provided the basis to piece together the first systemic picture of the macro-financial dynamics that South Africa has been subject to. The approach involved piecing together—at a certain level of abstraction and with unavoidable simplification and idealization—how various balance sheets (and balance sheet categories—interconnect. To this end, we look at different classes of households (non-banked poor, banked poor, middle class, and elite), firms (small informal enterprises, small and medium formal enterprises, and different types of large firms), state-owned enterprises, banks, development finance institutions, pension funds, unit trusts and other shadow banks, the South African reserve bank, as well as the National Treasury.

We conclude that to alleviate poverty and inequality while triggering investment into gross fixed capital formation for the Just and Sustainable Transition, it will be necessary to reconfigure South African balance sheets in a way that overcomes the path dependencies inherited from Apartheid. As the way forward, we recommend a new policy approach to govern the monetary architecture as a complex adaptive system. We propose to start a process of ‘balance sheet reconfiguration negotiations’ with various public, private, and hybrid actors involved to generate a policy agenda that helps including more household categories into web of interlocking balance sheets; support the development of job-creating small and medium-sized enterprises; think of ways how existing cash pools can channel their funds to support domestic gross fixed capital formation as it was the case prior to the era of neoliberal financial globalization; and look for ways how existing (or new!) domestic balance sheets can positioned in a way that allows them to create credit instruments in a way that is conducive to the Just and Sustainable Transition.

Co-author:
Mark Swilling, Stellenbosch University

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National Planning Commission

It is an established narrative in the literature that the German Empire financed World War I through an extensive issuance of sovereign debt with support of the central bank, the Reichsbank. Indeed, the sovereign debt burden of the Reich and the states combined increased from around 5 billion marks in 1914 to approximately 156 billion Marks in 1918 at the end of the war. Despite these staggering numbers, an understanding of war finance that merely focuses on the balance sheets of the treasury and the central bank cannot provide an accurate picture, as it misses out on the paramount role that off-balance-sheet fiscal agencies (OBFAs) played at the time. In this paper, we trace the activities of six types of OBFAs along three stages of the war finance operations from Summer 1914 to November 1918. First, the Seehandlung was Prussia’s state-bank that acted as market maker for sovereign debt, stimulated expansion and helped with funding throughout the war. Second, the Darlehnskassen (Loan Funds) were sub-balance sheets of the Reichsbank that supported expansion of the war economy by issuing Darlehnskassenscheine as a parallel currency and acted as market-maker for sovereign debt. Third, Kriegskreditbanken (War Credit Banks)were financial institutions that played an important role in the expansion phase of the first two months of war. Fourth, Kriegsgesellschaften (War Societies)were private sector institutions that became increasingly entangled with the state during the war and operated at an accelerated pace in the third stage as the war economy increasingly faced shortages. A similar dynamic was exhibited, fifth, by state-owned enterprises. Finally, industrial associations played an important role in the governance of the German war economy. To carve out the role of OBFAs in the war finance activities, we reconstruct the monetary architecture of the German war economy and translate the activities of the treasury, the Reichsbank, and key OBFAs into flow charts that analytically distinguish between initial expansion and long-term funding. By unpacking the role of OBFAs rather than the treasury–Reichsbank dyad commonly emphasised in financial historiography, we extend the Critical Macro‑Finance perspective into the realm of early‑twentieth‑century war finance.

Co-authors:
Armin Haas, Global Climate Forum
Andrei Guter-Sandu, University of Bath
Olan McEvoy, Global Climate Forum

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OBFA-TRANSFORM Working Paper No. 7-EN

The financing of the World War I created an unprecedented volume of indebtedness within and between the belligerent states. After this déluge, states were confronted with the colossal challenge of reducing the debt overhang. The balance sheets that issued and held the debts originating from the war were intricately interwoven in an international web of hierarchically-ordered interlocking balance sheets. To investigate if and how it was possible to reduce this debt burden, we adopt the Monetary Architecture framework and the associated macro-financial governance process to establish the notion of ‘contraction management’. We apply this framework to three main classes of war debt, i.e., German domestic war debts, German reparation debts, and interallied war debts. We identify four contraction types that can in principle be adopted to actively decrease the debt burden: contraction by fulfilment (the orderly repayment of debt), contraction by cancellation (the partial or full writing off of debt via forgiveness or default), contraction by oblivion (the de facto removal of debt to an off-balance-sheet position), and contraction by redenomination (the change of unit of account to reduce the debt burden). We find that the original attempt for all three debt categories after World War I was to achieve contraction by fulfilment, which turned out impossible. In consequence, the approaches towards contraction management changed throughout different stages that were crucially influenced by the Weimar hyperinflation, the Great Depression, and the outbreak of World War II. In the end, German domestic war debts contracted by two consecutive redenominations, German reparations debts contracted by cancellation, and interallied war debts contracted by oblivion. 

Presentation at the “Spring Meeting” at Hertie School of Governance in Berlin (04/2025).

Co-authors:
Armin Haas, Global Climate Forum
Verena Gradinger, Global Climate Forum
Andrei Guter-Sandu, University of Bath

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OBFA-TRANSFORM Working Paper No. 8-EN

In the summer of 1931, Germany faced the nadir of the Great Depression. After the Machtergreifung of the Nazis in 1933, Hjalmar Schacht was appointed president of the Reichsbank and invented the “Mefo operation” to circumvent the Reichsbank’s legal constraints for credit expansion and finance German rearmament against the terms of the Treaty of Versailles. Mefo stands for “Metallurgische Forschungsgesellschaft”, a letterbox company set up by five German blue-chip companies and operated by staff from the Reichsbank and the military. Endowed with an equity of 1 million Reichsmark, Mefo was the debtor of commercial bills amounting to 12 billion Reichsmark. Despite its historical significance, the Mefo operation is still insufficiently theorised from a monetary theory perspective and is often explained away through the myth of “financial wizardry”. We approach the Mefo operation through the prism of the Monetary Architecture framework and perceive the Mefo company as an off-balance-sheet fiscal agency introduced to finance re-armament as a politically desired large-scale transformation of capital stock. We divide the Mefo operation into three distinct periods—the covert monetary financing stage (July 1933 to February 1936), the shadow money stage (February 1936 to March 1938), and the consolidation and war finance stage (April 1938 to May 1945)—and use balance sheet methodology to re-construct the underlying financial mechanics. On the one hand, we provide transactional balance sheets for an idealised depiction of flows and sketch stocks via snapshots of the monetary architecture as webs of interlocking balance sheets. On the other hand, we discuss how expansion, funding, backstopping, and contraction was planned ex ante and played out ex post. We find that against Schacht’s original plan, the Mefo bills ended up on the Reichsbank balance sheet where they were permanently funded until the collapse of German state structures in May 1945. We connect our balance sheet analysis to quantitative data of the Mefo company and the wider macro-financial environment in order to draw conclusions about the significance of the Mefo operation for the financial expansion after 1931.

Presentations at the workshop ‘Building a Dataset for the OBFA-TRANSFORM project’ at Global Climate Forum, Berlin (07/2023), the workshop ‘Creative Accounting to Finance the Transformation? Exploring the Mefo scheme’ at Forum New Economy, Berlin (03/2024), the annual convention of the German Keynes Gesellschaft in Chemnitz (03/2025), and the World Economic History Conference (WEHC) in Lund (08/2025).

Co-authors:
Armin Haas, Global Climate Forum, Berlin
Friederike Reimer, Global Climate Forum, Berlin
Andrei Guter-Sandu, University of Bath

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OBFA-TRANSFORM Working Paper No. 2-EN

This paper examines how the British state mobilises off-balance-sheet fiscal agencies to address extreme financial pressures inflicted by systemic shocks. It looks at the case of the UK’s Exchange Equalisation Account (EEA), a World War Two (WWII) Treasury-controlled fund operated via the Bank of England, initially established to smooth out exchange rate fluctuations through secret foreign exchange and gold transactions after the pound was taken off the Gold Standard and allowed to float. This experience gained in exchange rate management gave the British authorities a powerful macroeconomic tool, severely lacking in the early interwar period. With the onset of WWII, the EEA’s mandate expanded dramatically: it absorbed the nation’s gold reserves, commandeered foreign securities, and underpinned Britain’s issuance of sterling-denominated liabilities to finance wartime imports and expenditures, all the while keeping these activities outside the official government balance sheet. Drawing on extensive archival sources and time-series data, the paper scrutinises the EEA through the lens of the Monetary Architecture framework, which gauges the international monetary and financial system as a hierarchical web of interlocking balance sheets shaped by political and institutional power, through which liquidity and credit are distributed and contested. From this perspective, the EEA operated as a critical sovereign liquidity facility, enabling Britain to fund large-scale war mobilisation without overtly breaching norms of fiscal orthodoxy or destabilising sterling’s international position. In doing so, it exemplifies how states deploy hidden financial infrastructures to manage monetary-fiscal boundaries and navigate systemic shocks.

Presentation at the Finance & Society conference in Copenhagen (09/2025).

Co-authors:
Andrei Guter-Sandu, University of Bath
Verena Gradinger, Global Climate Forum
Olan McEvoy, Global Climate Forum

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OBFA-TRANSFORM Working Paper No. 9-EN

Following World War II, Britain faced mounting industrial financing challenges amid economic decline, structural weaknesses, and a finance sector ill-equipped to support SME growth and industrial modernisation. While research has extensively analysed Britain’s post-war reconstruction and industrial policy, the role of off-balance-sheet fiscal agencies (OBFAs)—semi-autonomous institutions operating outside core state balance sheets—remains underexplored. This paper addresses this gap by presenting a historical case study of three British OBFAs: the Industrial and Commercial Finance Corporation (ICFC), the Finance Corporation for Industry (FCI), and the Industrial Reorganisation Corporation (IRC), tracing their evolution and impact from 1945 to 1973. Using extensive archival research from the British National Archives and Bank of England, combined with transactional balance sheet flow analysis in the context of the Monetary Architecture framework, the study reveals how these institutions balanced market autonomy and state objectives to fill critical capital gaps, support post-war reconstruction, and drive industrial growth. The ICFC and FCI pioneered new forms of patient capital for SMEs and larger industries respectively, while the IRC marked a shift toward active state-led industrial restructuring through mergers and modernisation initiatives in response to mounting international competition. The findings highlight how these OBFAs constituted vital yet overlooked nodes in Britain’s fiscal ecosystem, mediating between the City, the state, and industry in a period of economic transition. This analysis contributes to political economy debates on developmental finance and offers insights relevant for contemporary discussions about designing national development institutions aimed at fostering industrial growth.

Co-authors:
Olan McEvoy, Global Climate Forum
Moritz Kapff, Global Climate Forum
Andrei Guter-Sandu, University of Bath

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OBFA-TRANSFORM Working Paper No. 10-EN

Homeownership is a key foundation of the U.S. political economy. This paper traces the emergence and growth of a federal housing finance ecosystem that enabled the rapid growth of American homeownership during the mid-twentieth century. This ecosystem was established first during the Great Depression, when the federal government was forced to abandon pretensions of laissez-faire in order to end widespread default by borrowers and the failure of finacial institutions. Federal institutions were set up to provide stable credit in rural areas (the Federal Home Loan Banks), prevent defaults and foreclosures (Home Owners’ Loan Corporation), provide mortgage insurance promote the use of long-term self-amortizing mortgages (the Federal Housing Administration), and to create a secondary mortgage market (the Federal National Mortgage Association). We label these institutions as off-balance-sheet fiscal agencies (OBFAs), highlighting how these agencies acted as ‘workhorse’ balance sheets, managing the financing cycle through targeted credit expansion, long-term funding of mortgage debt, and backstopping in times of crisis in the mortgage market. The use of credit as a tool of federal policy allowed U.S. administrations to achieve policy aims in a way that mediated between fiscal conservatives, who wished to reduce the federal budget, and Keynesians who wished to use fiscal policy to ‘prime the pump’ of the U.S. economy. While this compromise was hugely successful in increasing homeownership during the post-war period, fears of mounting federal debt led to the privatization of federal agencies and the creation of government-sponsored enterprises (GSEs) which would support the private mortgage market, particularly by guaranteeing and issuing mortgage-backed securities (MBS). We find that the federal housing finance ecosystem evolved over time from bring focused on targeted support to prioritized borrowers, to structurally supporting the mortgage market in general. The paper contributes to discussions of how the U.S. state has used credit policies to systematically shape national markets in the aim of achieving social and economic goals, providing a historical case study of 8 different OBFAs over the period from 1932 to 1981.

Co-authors:
Olan McEvoy, Global Climate Forum
Fanny Chaltiel, Global Climate Forum
Andrei Guter-Sandu, University of Bath

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OBFA-TRANSFORM Working Paper No. 11-EN