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The pariah pioneer of Modern Monetary Theory

Building the Nazi war machine was a massive experiment in stimulus
The pariah pioneer of Modern Monetary Theory
  • German economic policies in the lead up to the Second World War could provide an interesting blueprint for stimulus today 
  • Hitler's ideas are reflected in modern monetary theory

Nazism is rightly flagged as a heinous example of humanity’s dark side: the ultimate warning from history. Fascination with the sick ideologies that spawned war and genocide endure and, understandably, the economic policies of the Third Reich are overlooked. But the blend of fiscal and monetary policy that financed Hitler’s programme of rearmament is worth studying. Not least because modern monetary theory (MMT) bears more than a passing resemblance.

The core tenet of MMT is countries that control their own currency can slash interest rates and print money to lend to their governments cheaply. These monetary tools fund an expansionary fiscal policy, which is the combination of tax cuts and spending governments undertake to stimulate growth in the economy.

Before the jack boots marched into Poland, stimulus was something the Nazis managed to do rather well. In his free e-book, The Changing World Order, Ray Dalio (who is co-chief investment officer at Bridgewater Associates) explains how building the Wehrmacht was funded. Unsurprisingly, there was a big increase in government debt and, in the same way quantitative easing (QE) works today, bonds were bought by banks using money created by the central bank – the Reichsbank.

Whichever banks acted as the primary market makers for German government bonds, they were forced by Hitler to buy new issues of the term debt. From them, the bonds could be bought outright by the Reichsbank or it could take them as collateral for cash loans. Either way, the process helped to oil Germany’s financial system and provide Hitler with a ready source of funding.

Amazingly, this policy came barely more than a decade after Germany had suffered devastating hyper-inflation following France’s 1923 invasion of the industrial Ruhr region. The difference was the Weimar Republic printed money at a time when no more goods were being produced in the economy. In fact, thanks to the French incursion, German output fell. The result was too much money chasing too few goods and prices rocketed to the point where wheelbarrows full of paper Deutschmarks were needed to buy a loaf of bread.

Hitler’s economic policy differed from that of the early 1920s in two important ways. Firstly, much of his government’s direct expenditure funded infrastructure projects. This included rearmament in contravention of the Treaty of Versailles, signed by a defeated Germany after the First World War. It also included food production and quasi-civilian projects such as construction of the Autobahn.

New motorways were of course motivated by the Wehrmacht’s desire for rapid mobilisation capability, but they also helped the pre-war economy. All these projects put bread on the tables and money in the pockets of German workers.

Second, and crucially, productivity was also growing in the private sector, which meant that although the money supply and overall demand was increasing, so was the quantity of goods (the aggregate supply). Hitler encouraged private companies, most famously Volkswagen, to produce goods the German consumer wanted. This helped raise standards of living and led to a multiplier effect in the economy, which was lubricated by a ready supply of credit from banks flush with liquidity thanks to the Reichsbank.

The debt created was manageable, the Reichsbank was successfully monetising debt and the profits companies were making covered their interest obligations. In his book, Dalio summarises the Nazi economic policy as “another good example of how borrowing in one’s own currency and increasing one’s own debt and deficits can be highly productive if the money borrowed is put into investments that raise productivity that produces more than enough cash flow to service the debt”.

Of course, benefits of the economic policies shouldn’t be lionised, given what was to come, but they are testimony to the potential of co-ordinated stimulus. The unemployment rate, Dalio notes, fell from 25 per cent in 1933, to zero five years later. Per capita income was up by 22 per cent. Real GDP growth averaged 8 per cent between 1934 and 1938, a trend that supported a near 70 per cent rally in the German stock market in Hitler’s first half-decade in power.

Ultimately, this type of growth would have seen inflation rise, especially as Germany lacked vital raw materials such as oil. But then Hitler always fully intended to sustain the Reich by expanding eastwards, winning "lebensraum" for the Aryan master race, as he saw it.  Here the creation ended, and the philosophies of National Socialism plunged the world into one of the most destructive conflicts in history, with a further 6-8 million people murdered in the death camps.

These tragedies must never be forgotten but economically, can Hitler’s model act as a blueprint for stimulus? If you swap panzers and Messerschmitt planes for wind turbines and electric grid storage capacity, maybe it can. The problem is inflation but, replace insane dreams of territorial expansion with trade, and perhaps this risk can be offset. It’s over to President Joe Biden this springtime.