Mefo bills
Encyclopedia
A Mefo bill named after the company Metallurgische Forschungsgesellschaft, was a promissory note
used for a system of deferred payment to finance the German rearmament, devised by the German Minister of Finance, Hjalmar Schacht
, in 1934. As Germany was rearming against the terms of the Treaty of Versailles
they needed a way to fund rearming without leaving a paper trail; Schacht created this system as a temporary method to fund rearming with only one million Reichsmarks in capital. Schacht has later said that the device "enabled the Reichsbank
to lend by a subterfuge to the Government what it normally or legally could not do".
industry. However, it faced two problems. First, rearmament was illegal under the terms of the Treaty of Versailles
, and secondly there was a legal interest rate
limit of 4.5%.
The government would normally borrow extra funds on the money market
by offering a higher interest rate. However, because of the limit it was unable to do so. And a large, visible government deficit would have attracted attention.
formed the limited liability company Metallurgische Forschungsgesellschaft, m.b.H., or "MEFO" for short. The company's "mefo bills" served as bills of exchange
, convertible into Reichsmark
upon demand. MEFO had no actual existence or operations and was solely a balance sheet
entity. The bills were mainly issued as payment to armaments manufacturers.
Mefo bills were issued to last for six months initially, but with the provision for indefinite three-month extensions. The total amount of mefo bills issued was kept secret.
Essentially, mefo bills enabled the German Reich to run a greater deficit than it would normally have done. By 1939, there were 12 billion Reichsmark of mefo bills, compared to 19 billion of normal government bonds.
This enabled the government to reinflate their economy, which culminated in its eventual rearmament.
's aggressive foreign and domestic policies. Not only did the bills serve the above functions, but they also concealed the military expenditure forbidden by the Treaty of Versailles.
Promissory note
A promissory note is a negotiable instrument, wherein one party makes an unconditional promise in writing to pay a determinate sum of money to the other , either at a fixed or determinable future time or on demand of the payee, under specific terms.Referred to as a note payable in accounting, or...
used for a system of deferred payment to finance the German rearmament, devised by the German Minister of Finance, Hjalmar Schacht
Hjalmar Schacht
Dr. Hjalmar Horace Greeley Schacht was a German economist, banker, liberal politician, and co-founder of the German Democratic Party. He served as the Currency Commissioner and President of the Reichsbank under the Weimar Republic...
, in 1934. As Germany was rearming against the terms of the Treaty of Versailles
Treaty of Versailles
The Treaty of Versailles was one of the peace treaties at the end of World War I. It ended the state of war between Germany and the Allied Powers. It was signed on 28 June 1919, exactly five years after the assassination of Archduke Franz Ferdinand. The other Central Powers on the German side of...
they needed a way to fund rearming without leaving a paper trail; Schacht created this system as a temporary method to fund rearming with only one million Reichsmarks in capital. Schacht has later said that the device "enabled the Reichsbank
Reichsbank
The Reichsbank was the central bank of Germany from 1876 until 1945. It was founded on 1 January 1876 . The Reichsbank was a privately owned central bank of Prussia, under close control by the Reich government. Its first president was Hermann von Dechend...
to lend by a subterfuge to the Government what it normally or legally could not do".
Funding rearmament
The German government needed to spend a large amount of money to fund the depression era reconstruction of its heavy industry based economy, and ultimately its re-armamentGerman re-armament
The German re-armament was a massive effort led by the NSDAP in the early 1930s in violation of the Treaty of Versailles.During its struggle for power the National Socialist party promised to recover Germany's lost national pride...
industry. However, it faced two problems. First, rearmament was illegal under the terms of the Treaty of Versailles
Treaty of Versailles
The Treaty of Versailles was one of the peace treaties at the end of World War I. It ended the state of war between Germany and the Allied Powers. It was signed on 28 June 1919, exactly five years after the assassination of Archduke Franz Ferdinand. The other Central Powers on the German side of...
, and secondly there was a legal interest rate
Interest rate
An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...
limit of 4.5%.
The government would normally borrow extra funds on the money market
Money market
The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...
by offering a higher interest rate. However, because of the limit it was unable to do so. And a large, visible government deficit would have attracted attention.
An imaginary company
Hjalmar SchachtHjalmar Schacht
Dr. Hjalmar Horace Greeley Schacht was a German economist, banker, liberal politician, and co-founder of the German Democratic Party. He served as the Currency Commissioner and President of the Reichsbank under the Weimar Republic...
formed the limited liability company Metallurgische Forschungsgesellschaft, m.b.H., or "MEFO" for short. The company's "mefo bills" served as bills of exchange
Negotiable instrument
A negotiable instrument is a document guaranteeing the payment of a specific amount of money, either on demand, or at a set time. According to the Section 13 of the Negotiable Instruments Act, 1881 in India, a negotiable instrument means a promissory note, bill of exchange or cheque payable either...
, convertible into Reichsmark
German reichsmark
The Reichsmark was the currency in Germany from 1924 until June 20, 1948. The Reichsmark was subdivided into 100 Reichspfennig.-History:...
upon demand. MEFO had no actual existence or operations and was solely a balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
entity. The bills were mainly issued as payment to armaments manufacturers.
Mefo bills were issued to last for six months initially, but with the provision for indefinite three-month extensions. The total amount of mefo bills issued was kept secret.
Essentially, mefo bills enabled the German Reich to run a greater deficit than it would normally have done. By 1939, there were 12 billion Reichsmark of mefo bills, compared to 19 billion of normal government bonds.
This enabled the government to reinflate their economy, which culminated in its eventual rearmament.
Fueling growth
This strengthened the German economy by providing the government with various goods and services which it was then able to reinvest in the economy, fueling its growth, and preparing it for HitlerAdolf Hitler
Adolf Hitler was an Austrian-born German politician and the leader of the National Socialist German Workers Party , commonly referred to as the Nazi Party). He was Chancellor of Germany from 1933 to 1945, and head of state from 1934 to 1945...
's aggressive foreign and domestic policies. Not only did the bills serve the above functions, but they also concealed the military expenditure forbidden by the Treaty of Versailles.