In only five years, #Hitler & the Schacht’s programme transformed a bankrupt state (Germany) into Europe’s strongest economy through labour backed bonds & #ProofOfWork. Here's how. #Thread.
Context: In 1921, as per the Treaty of Versailles, war reparation obligations upon Germany amounted to $33 billion. Keynes (1920) strongly criticized the Treaty. It did not include any plan to revamp the economy, just showed the might of the winners.
Keynes predicted this would lead to new conflicts and instabilities, instead of seeking to secure long-lasting peace.
Results?
- Weimar hyperinflation (1921-1923)
- Dramatic austerity of the Bruning government (1930-1932)
- Rise of Hitler & National Socialism
#Hitler rose to power, in Jan 1933 & this was Germany's economic situation
- Stocks of raw materials had been depleted
- factories and warehouses lay empty
- 6.5 million people (~25% of workforce) unemployed
- Crushed by debt & its foreign exchange reserves approached 0
17 March 1933, Hjalmar #Schacht was appointed President of the #Reichsbank. Schacht had previously helped to bring Germany out of the crisis in 1923 & was a well-respected banker. His appointment calmed people fearing the radical Nazis and gave hope to the business community
What'll you do, you can't borrow money as you already have mounting debt and can't print money (inflationary). In 1932, the previous president of #Reichbank rediscounted Öffa bills / job-creation bills / promissory notes by German Society for Public Works to fund public works.
#Schacht extended this to Metallurgy through MEFO bills. Here's the magic. #ProofOfWork - Each bill stood against the sale of newly-produced goods, and each issue of money was based on the exchange of the new goods.
The employees of MEFO checked that every MEFO-bill issued was tied to a quantity of newly-produced goods, and only bills issued against the sales of these goods were granted. This way, the circulation of money and the circulation of goods remained in equilibrium #ProofOfWork
Bills to Money: The Reichsbank accepted on demand all MEFO bills, irrespective of their size, number, and due date, and exchange them for money. The bills were discounted at a 4% interest rate.
Thus the bills were given the character of interest-bearing money, and banks, savings banks, and firms could hold and use them exactly as if they were money. Here's the catch. If all MEFO-bills had been presented for discount at once, inflation would have resulted.
But this did not happen - making the bills both re-discountable and interest-bearing allowed for much of them to be absorbed by the market without going through the Reichsbank. #Decentralization.
Results? State purchases fed into a growing demand for labour, and firms restarted investments using MEFO-bills as collateral for borrowing. Investments put additional manpower to work, and incomes and savings increased as a result, raising fiscal revenues.
This economic policy allowed Germany to regain monetary sovereignty and finance its reconstruction in the interwar period – an unconventional labor-bill-financed fiscal expansion.
It enabled a national economy to exit a long and deep depression and to attain non-inflationary full employment in a short span and with no use of price controls or rationing. In only five years, Schacht’s program transformed a bankrupt state into Europe’s strongest economy
In 1938, Schacht strongly urged terminating the MEFO programme, as full employment had been reached as closing output gap was raising price tensions. He clashed with Hitler on this, and on 19 January 1939 the Führer removed him from the Reichsbank. In Sep WW2 begins.
Learnings: The novel use of labor-backed bonds to reinstigate an economy, decentralizing institutions to accept interest-laden bills, and #ProofOfwork to give bills & exchange money. This happened when tech like #blockchain wasn't there. Imagine what we can achieve now.
We, at www.TheThirdPillar.Club, are experimenting with a labor-backed token to build a community (DAO / Cooperative) Economy. And this story is part of the #TheInternetOfSkills book.