Chasing Gold: The Incredible Story of How the Nazis Stole Europe's Bullion (8 page)

Schacht quickly put autarky into practice. In his early months in office, he worked closely with Nazi officials to set out a multifaceted strategy to solve the country’s economic problems and get it on the road to self-sufficiency. Everyone knew that during wartime Germany had to expect that its military opponents would again attempt to starve the country into submission. The Nazis wanted to make sure that didn’t happen again, and Schacht was ready to help them.

Only two months after returning to the Reichsbank, Schacht traveled to the U.S. to meet the leaders of the new Franklin D. Roosevelt administration. The new president greeted him on the White House terrace and had four separate sessions with him. The president and his top aides, though, did not look favorably on the new Nazi government. Nonetheless, Roosevelt, who once called Schacht a “bastard,” and had been suspicious of the Nazis almost from day one, still hosted him at a White House lunch, and Hull honored him with a dinner. The German basked in the glow of all the attention.
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Back in Germany, the central banker soon took on more titles that reflected his growing power within the Hitler regime. On July 26, 1934, the Führer was in southern Germany at the Bayreuth Wagner festival when he asked him to come down from Berlin to meet with him. He offered his banker the additional post of Minister of Economic Affairs. Two loyal Nazis who occupied the position previously had been complete flops.
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When he learned of the proposal, Schacht asked, “Before I take office, I should like to know how you wish me to deal with the Jewish question.” Hitler replied, “In economic matters the Jews can carry on exactly as they have done up to now.” Schacht then accepted the new position. Less than a year later on May 21, 1935, a secret law also named Schacht the General Plenipotentiary of War Economy. That gave him authority over the entire German economy in time of conflict. He would be the co-equal to the commander of the country’s armed forces. He was charged with placing “all the economic resources in the service of warfare.”
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The first step in the autarky program was to reorient as much as possible of Germany’s trade away from the country’s traditional economic partners. Berlin would simultaneously reduce its commerce with Britain, France, and the U.S., while increasing it with peripheral and less developed nations with whom Germany had historically done little trade. Those countries would be much less likely to demand payment in gold or major currencies and be willing to accept barter trades. Berlin could sell its surplus production of non-vital products in exchange for important ones that it needed to buy abroad. That would keep the country’s sparse financial resources for only the most important imports. The two areas with the greatest potential were the Balkans and Latin America. Both were rich in natural resources.

As far as can be determined from historic records, Schacht never wrote out his autarky policy or presented it in any public speech, although he explained it clearly to top Nazi officials. He repeatedly insisted on the need to husband precious foreign currency so that the country could buy vitally needed imports, especially war materiel. The use of foreign currencies and gold turned into a major subject of conflict between the General Plenipotentiary of War Economy and other top Nazis. It was a classic case of the historic choice between guns and butter. Nazi leaders such as Hitler and Göring believed they could have both, and the central banker never succeeded in changing their view.

Schacht’s immediate challenge in the early months of the Third Reich was to find a way to finance Hitler’s huge military buildup. The Führer’s goal was to make Germany the mightiest military power in Europe, if not the world, in just five years. Moreover, this had to be accomplished without setting off a new 1920s-style inflation, which still terrified Germans. Initially, at least, it also had to be done without attracting attention from other countries. Schacht not only had to pull a financial rabbit out of his hat, he had to do it without anyone noticing.

The centerpiece of Schacht’s plan was a new corporation called the Metallurgische Forschungsgesellschaft (Metal Research Company), which soon became known as Mefo for short. In financial terms, it would issue promissory notes permitting the government to get around the law that limited central bank lending to 100 million Reichsmark. All the money went to rearmament. At the behest of the Berlin government, four major German companies, Siemens, Krupp, Rheinstahl, and Gutehoffnungshütte, started a dummy company that had no employees, but capital of one million Reichsmark. German businesses doing rearmament work would present their bills and be paid in Mefo currency, which they could either sell at a discount to a German bank or hold. In addition, the companies would get four percent interest on the Mefo bills. They were to have a total longevity of four years, after which repayment would begin. The Metallurgische Forschungsgesellschaft would raise 12 billion Reichsmark in capital over four years, and the Reichsbank would buy back the Mefo bills. In effect, the companies doing rearmament work were giving Berlin a loan that the government promised to start paying back in four years. The repayment date continued to lengthen, and at one point was pushed out to seventeen years. One of the best-kept secrets of the Mefo bills was that foreigners bought a majority of them from the Reichsbank without knowing how the money was being spent. In a memo to Hitler in May 1935, Schacht gleefully wrote, “Our armaments are, therefore, being financed partially with the assets of our political opponents.”
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Schacht came up with the target of 12 billion Reichsmark because he thought that was the most he could spend without setting off new inflation. He called it “an ingenious and well-adapted method of providing funds.” During his interrogation at the Nuremberg trials, Schacht proudly said, “The 12 billion Mefo bills were exclusively appropriated for armament, so I knew that money was not spent on dinners.”
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Another attraction of the Mefo bills was that they were hidden from the world. No reference to them appeared in the published statements of the Reichsbank or the German national budget. Even within the government, few officials knew about them. Hans Lammers, Hitler’s chief of staff, told interrogators after the war that he had seen the term in documents but had no idea what it meant. German defense spending between April 1935 and March 1940 totaled 20.5 billion Reichsmark, of which 12 billion came from the Reichsbank via Mefo financing.
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In early 1934, Schacht ran into unexpected balance of payments difficulties because rearmament spending almost wiped out the country’s holdings of gold and foreign currency. Secret reserves and official bullion reserves fell to just $55.5 million on June 30, 1934. Schacht’s reaction to that crisis was to put through his New Plan on September 24, which introduced state control over foreign trade. The name was in homage to Franklin Roosevelt’s New Deal. The German objective, though, was very different. According to Schacht’s plan, Germany should buy nothing that could not be paid for with exports. The program promoted bilateral trade and limited imports to essential products, in particular raw materials and agricultural products. This was to be done by reorienting Germany’s trade to just twenty-five states, with most of them in the Balkans and South America, where countries were still suffering from the lingering effects of the global depression and would accept almost any deal. Berlin thus began importing large quantities of goods from countries such as Romania, Spain, Argentina, and Turkey, which became the main supplier of chromium, the still coveted key resource in the making of certain products essential to the war effort.

The policy achieved its goals. Germany’s balance of trade had a deficit of 284 million Reichsmark in 1934, but a 111 million surplus the following year. The benefits kept increasing. In a letter to Göring in August 1937, Schacht bragged that Germany had a trade surplus of a half billion Reichsmark.
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Thanks to Schacht’s economic policies, the German economy was soon flourishing. The Gross National Product, which in 1932, the year before he took over the economy, had been 58 million Reichsmark, rose to 83 billion by 1936. From 1934 to 1937, imports of non-essential finished products such as consumer goods fell by 63%, while imports of raw materials increased sharply: iron ore by 132%, petroleum 116%, grain 102%, and rubber 71%.

Hitler came to power in 1933 largely because the country had six million people unemployed, but by the end of 1934 that number was down to 2.6 million and falling. In fact, Germany would soon face a shortage of skilled workers. In early 1934, Germany bought $1 million worth of high-quality air force hardware from American manufacturers and paid for it with bullion. In 1936, Hitler, Schacht, and War Minister General von Blomberg argued about the importance of gold in the military buildup. Schacht thought that the purchase of military equipment from the Americans in the early days of the Reich was proof that it could now buy needed goods. Hitler, though, continued to believe that he could fight wars without gold. Blomberg listened to both sides in several discussions without taking a position, but Georg Thomas, his top economist, shared Schacht’s views, telling a group of young military leaders in November 1937, “In wartime, Germany will need a considerable reserve of gold and foreign exchange for propaganda, espionage, and other purposes.”
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Schacht hid German gold by spreading it into five different places in the country’s books. He also kept the world in the dark about what he was doing by creating a whole variety of accounts on the Reichsbank’s books, some hidden and some public. He and only a handful of associates understood what was going on. Officials referred to these as the country’s “war reserve accounts” and nicknamed them the “new Julius Tower,” a reference to the location where gold had been hidden during World War I. Reserves at the end of 1933 were $174.5 million, with $156.1 million in official records and $18.4 million hidden off the books. After the 1934 run on the currency, the numbers were $28.4 million in public documents, but $40.4 million hidden. By the end of 1935, gold holdings started heading back up, with $33.3 million acknowledged and $81.6 million not made public. Because of heavy spending on the military, though, both published and hidden reserves remained in overall bad shape.

Most of the credit for the economic prosperity in the early Hitler years went to Schacht, and he thoroughly enjoyed the adulation. When the central banker celebrated his sixtieth birthday in January 1937, General Blomberg told him, “Without your help, my dear Schacht, none of this rearmament could have taken place.”
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Only three years after he had joined the Hitler government, Hjalmar Schacht’s economic policies had been a major success. Perhaps because of that success, Schacht could not help treating the Nazi leaders, even Hitler, as his intellectual inferiors. A British intelligence report from its Berlin embassy to London said Schacht was “one of few if not the only man who dares to speak out to Hitler.” U.S. Ambassador William Dodd wrote in his diary on June 21, 1935, “No man in Germany, perhaps none in Europe, is quite so clever as this ‘economic dictator.’ His position is always delicate and even dangerous.”
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Confident that he had become indispensable to the Nazi regime and therefore untouchable, Schacht on August 18, 1935, at the Ostmesse, a major business fair held annually in the Baltic city of Königsberg, voiced opposition to major party policies, including the treatment of Jews. Top Nazis attended his speech, which was also broadcast nationally on the radio. An
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general walked out in protest, and when Schacht sat down Erich Koch, the party boss of East Prussia, whispered to him, “Little monk, little monk, you are on a difficult road.” Martin Luther had received that same warning, which any educated German would recognize, at his trial at the Diet of Worms after launching the Protestant Reformation.
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Hitler reluctantly recognized the importance of a strong economy in building his Nazi state. At the same time, he was instinctively and frequently at odds with Schacht, who never paid him the homage others did. He arrogantly told Hitler early in the Third Reich, “You need me. And you’ll continue to need me for several years. After that, you can shoot me if you want to. But you can’t shoot me yet.” Ironically, the better the economy, the less Hitler needed Schacht. The Führer also had an underlying contempt for economic advisors, once saying, “The nation does not live for the economy or for the leaders of the economy . . . The leaders of the economy and all theories have to serve exclusively this struggle for the maintenance of the nation.” In his post-war memoirs Schacht wrote candidly, “From the middle of 1936 onwards my relations with Hitler had slowly but steadily deteriorated.”
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Henry Morgenthau, Jr. was the brother that President Franklin D. Roosevelt never had. The two men shared much in common, and both even wore pince-nez glasses. Each was born into great wealth and to families who believed that privileged people had a duty to help those less fortunate. Morgenthau’s father, Henry Sr., made a fortune in New York City real estate; Roosevelt was from old money. Henry and Franklin were both gentlemen farmers in upstate New York. In some ways, however, they were polar opposites. Roosevelt was the happy-go-lucky politician who charmed voters, while Morgenthau was reserved and reflective. His main mission in life now was to serve his friend.

Morgenthau’s parents knew early on that their eldest son suffered from some kind of learning disability that may have been dyslexia, which at the time was not easily diagnosed or treated. He entered the prestigious Exeter Academy, but didn’t do well in class and left. He eventually graduated from high school and went to Cornell University with plans of becoming an architect, but again failed academically despite the help of a tutor, and soon dropped out.
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