Mefo bills

A Mefo bill (sometimes written as MEFO bill), named after the company Metallurgische Forschungsgesellschaft (Metallurgical Research Corporation), was a promissory note used for a system of deferred payment to finance the Nazi German government's programme of rearmament, devised by the German Central Bank President, Hjalmar Schacht, in 1934. These Bills acted as a highly liquid form of debt for the Nazi government, allowing them to rearm under the Versailles Treaty.

Mefo bills followed the scheme for which the Öffa bills were the blueprint.

As Germany was rearming against the terms of the Treaty of Versailles, the Nazi government needed a form of money that one, did not leave a paper trail, and two, allowed them to spend extravagantly on military rearmament. Billions of MEFO bills were issued throughout the regime's time in power, though the records are not precise.

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-armament 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. Additionally, a large, visible government deficit would have attracted attention. MEFO bills could be traded between companies, allowing for increased circulation of currency.

An imaginary company
Hjalmar Schacht 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 mature in six months, initially, but with a provision for indefinite 90-day extensions. To further entice investors, Mefo bills carried an annual interest rate of 4%, higher than that of other trade bills at the time.

To make sure that the bills were never exchanged for Reichsmarks, which would lead to inflation, the 90-day maturation period bills was extended until the actual maturation period became five years by 1939. The total volume of Mefo bills issued was kept secret.

Essentially, Mefo bills enabled the German Reich to run a greater deficit than it would otherwise have been able to. By 1938, there were 12 billion Reichsmarks of Mefo bills, compared with 19 billion of standard government bonds. This enabled the German government to re-inflate the economy while rearmaming.

Economic Consequences
The Nazi governments continued use of debt funding created a large financial deficit. However, MEFO bills were very effective in providing funds. Previous to the MEFO program, the Reichsbank was not allowed to loan more than 100 million reichsmarks to the government. MEFO bills allowed billions in military and public-works funding. Effectively, Germany, through MEFO bills, began printing money. However, inflation did not increase. This is because the Nazi government rarely redeemed MEFO bills. In addition, the interest rate and security of the MEFO bills meant most were kept in circulation and rarely cashed.

Political Implications
The use of MEFO bills allowed Hitler and the top Nazi leaders to consolidate power. As MEFO bills became more prevalent throughout the Third Reich, the economy became ever more reliant on military expansion and conquest at the expense of consumer goods.

Fueling growth
This strengthened the German economy by providing the government with goods and services that it was able to reinvest in the economy, fueling growth and preparing for Hitler's aggressive foreign and domestic policies. Not only did the bills serve the above functions, but they also concealed military spending forbidden by the Treaty of Versailles.