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Lockdown Lessons: Mefo Bonds

It always intrigued me as to how the third Reich rebuild their economy so quickly. The Great Depression only deteriorated their woes. The Treaty of Versailles was creating an impasse. So, amidst all these factors how did they rebuilt their economy and can we take a lesson or two from their from them?

To start off with, the Treaty of Versailles restricted Germany's army, air force and navy. They were restricted to only one lakh soldiers, they had to demilitarize Rhineland, were not allowed to possess submarines amongst many other conditions. But, Hitler had other plans. He wanted to rebuild Germany's economy by rebuilding its military. For this, as opposed to the socialist policy of nationalizing all industries, he privatized each and every industry, clubbed all labour unions under a single unified national labour union whose main motto was to optimize productivity rather than social welfare, reduced the minimum wages which in resulted in more profits to the corporates who in turn funded Hitler's war effort. Most of the factories were free to employ prisoners as labour. These labour were left to the wrath of their owners. They were heavily underpaid and were made to work overtime but the labourers knowingly reduced their output to hurt the war efforts. But, the most tool used by the Third Reich was the "Mefo Bills".

Mefo bills are nothing but a promissory note which were used as a system for a differed payment. These Mefo Bills were issued by a dummy company known in short as Mefo (Metallurgische Forschungsgesellschaft ). These Mefo Bills were a brainchild of Hjalmar Schacht, the then president of the German Central Bank.

These bills could be converted into ReichMark (German Currency) when needed. They could be exchanged between various parties and essentially served as the "Industrial Currency". They had a time period of six months but could be indefinitely extended for ninety days. These bills were never really cashed in but were extended until 1939 (World War 2 started in 1939). They worked well to support the rearmament of Germany without really breaking the Treaty of Versailles as none of this expenditure would reflect on Germany's spending. These bills were of the company known as Mefo and not of the German government and hence, did not show an impact on their balance sheet. Essentially, Mefo bills enabled the German Reich to run a greater deficit than it would normally have been able to. By 1938, there were 12 billion Reichsmark of Mefo bills, compared to 19 billion of normal government bonds. Mind = Blown isn't it?

So, what can we learn from this?

The current Indian government is reluctant to have a fiscal deficit. They do not want to spend more than they earn at any cost. I believe that these "Mefo Bonds" can come handy. India Bonds as you would want to call them now should have a maturation period of five years with a validity of two years. This essentially means that industries can exchange these bonds for a period of two and will have to wait another three years before they can cash in these bonds. These three years can be used by the government in case the idea of bonds fail. It'll give them enough time to create a plan B. As for the companies, they don't have to spend real money while dealing with other industries. This saves them precious rupees.

Another similar idea is being discussed in Europe. Countries such as Italy and Spain want to issue "Corona Bonds". These "Corona Bonds" would have all other European Union countries as surety which makes them attractive. Countries such as Germany are not interested to be a part of such a scheme because they'll have to bear the consequences in case either Italy or Spain defaults. But then, the pros outweigh the cons and in case consensus is not reached, we might see "ItalExit" eventually which might lead to the collapse of the European Union.

All in all, the idea of having something such as "Mefo Bonds" seems interesting for now. We'll have to wait and see what the future has in store for us.

Lockdown could be boring and if you are having any unsolved mysteries then you tell them to me here and I'll try to solve them.



#NaziGermany #ThirdReich



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