Title: Hitler's Banker

It was October 1, 1946, Nuremberg. Hjalmar Horace Greeley Schacht, sixty-nine, in his rumpled business suit, stood trial in Nuremberg's Palace of Justice. Nearly a year of incessant interrogation and cross-examination, he awaited the verdict of his fate, read out by a presiding Judge.

He was acquitted.

Schacht, the renowed the financial genius, who single-handedly saved Germany from runaway inflation after the post war period of World War I as well as rehabilitated Germany's rearmament during Hitler's reign was far from retiring of the world stage.

In the post war period following the Nuremberg's Trial, despite his infamous reputation as Hitler's banker and at retirement age of seventies, he was still one of the most sought-after financial gurus in the world.

Who was he? What had he done which earned him his international fame as a financial genius? This book review examines.

However, my judgement rests heavily on the accuracy of events reported in this book. My confidence has taken a slight beating when in the penultimate chapter, the author mentioned Schacht reading an article from a newspaper by the name of , in verbatim, "Singapore Straight Times".

Born in January 22, 1877, Schacht's parents intended to name him Horace Greeley Schacht, after their American idol, a radical journalist and a active campaigner who fought to end slavery in US; and both parents were at one time in US. His grandmother, however, intervened by insisting on a proper Danish name "Hjalmar" in front. His parent acquiesced.

That was how Hjalmar Horace Greeley Schacht came to possess this unusual name.

Despite being born into a poor family, his parent made sure that both of their children received the best education available. Schacht graduated with a doctorate in economics.

From then onwards, he was addressed as Dr Schacht.

His first pay cheque came from a German newspaper where he worked as a journalist. His stint as journalist proved useful in his later career as a banker. As he matured, he came to regard money as merely a medium of exchange backed by faith of people. To create and maintain this faith, careful and selective dissemination of information is paramount. One of the channels was through the use of the media.

In his early thirties, his financial acumen as well as his savvy dealings with the press made him a sought-after banker in Germany. However, his actual rise to prominent on the international stage came after WWI.

In June 1914, the Archduke of the Austria-Hungarian empire was assassinated. In October, the same year, Germany declared war on Russia and French. Britain, French and Russia declared war on Germany and Austria. By the early 1915, almost every nation on this earth declared war on another. It was WWI, the first modern war of a global scale.

WWI came to an end when Germany was defeated. The fatherland subsequently signed the humiliating Versailles treaty, a punitive agreement that required the loser, Germany, to compensate the victors - the Allies. Some historians believe the prohibitive compensation demanded by the Allies had the intention to crush Germany's industrial and financial might once and for all. The famous English economist John Maynard Keynes was so disgusted by the action of the Allies and prophesied this would only incur the wrath of the Germans and thereby laying grounds for another global war, as expressed in his "The Economical Consequences of Peace" published in 1919.

1919 was also the year when inflation revealed its ugly head in Germany. Haunting stories like the one that follows showed how serious the situation was then. A man left his wheelbarrow filled with marks (Germany's currency) unattended while he entered a shop. When he came out, he saw his wheelbarrow gone (stolen) but his pile of marks was left unmolested on the ground. Germany was at the brink of an economic collapse.

Schacht was offered the post of a Currency Commissioner. He said he would only accept the post on the condition that he was given carte blanche. He was granted. The desire for absolute power while executing his duties followed him throughout his career.

Schacht began his new appointment by substituting old marks with the new rentenmark. One rentenmark was equivalent to 1,000,000,000,000 old marks. Money to Schacht is merely a medium of exchange. In order for the medium to be stable, it has to have value and scarcity, at least to the minds of people.

Schacht secured value and scarcity in the new currency from the mortgage of Germany's industrial and residential estates. He achieved this by issuing rentenmark bonds to landowners at 5 per cent. In effect, landowners loaned out their land to earn interest on their bonds. The banks then "mortgaged" out the land in exchange for value in the new currency. It was merely paper-transaction, the landowners still held on to their lands. The lands served to limit the amount of rentenmark in circulation; hence, created scarcity. The book did not elaborate how he carried out his duties. However, I could imagine it to be arduous. First, flow of money is both elusive and ubiquitous, and with a financial system the size of Germany did not make the task anymore simpler. To patch up quickly whatever leaks there are in the system before speculators or profiteers could exploit them perplexes economists even to this day.

The draconian regulations used by Schacht and the supports given to him by prominent businessmen helped to reined back the inflation. However, he saw the measure as a stopgap; a permanent fix would be to peg the currency to the gold standard.

Schacht was a hero, both at home and aboard. Towards the end of 1923, Schacht added the presidency of Reichsbank – Germany’s national or central bank – to his post as the currency commissioner of the Reichs. He became the economic czar of Germany, holding absolute rein to Germany’s economic fate.

Fortunately for the Fatherland, his patriotic son used this power selflessly, to serve his people and his nation. (In the German’s language, masculinity is given to their native country compared to motherland in English.)

He staunchly believed only by pegging the currency to gold would give the German’s mark its real backing, rather than on some mystical value using bonds and mortgages. Instead of waiting for the Dawes negotiation, a committee set up by the Allies, to decide the fate of Germany’s reparation, he went to England to offer the English bankers a unique proposal.

The proposal consisted of setting up a gold discount bank, with investment mostly from British investors and remaining gold reserves of Germany. German export manufacturers would be the main borrowers and the foreign capital (foreign currency) earned should be able to repaid British investors within in three years. The Reichsbank would manage the discount bank. This discount bank would give the current rentenmark its much-needed stability and laid the path to the eventual pegging of the currency to the gold standard.

My analysis: this move is brilliant on several counts. In addition to its role as a currency stabiliser, the discount bank repaid British investors with foreign capital earned through Germany’s export. This would stimulate Germany’s export industries. Schacht was basically a mercantilist, believing that Germany should export itself out of its economic ruins. Second, the British actually agreed that the discount bank should be fully managed by the Germans. This fact would decide on how and to whom the funds could be lent, which was then safely in Germans’ hands. Third, Schacht must have been a great salesman in convincing the British to accept a deal glaringly advantageous to the Germans.

Meanwhile, the Dawes committee made sure the discount bank scheme was not the way which Schacht wanted. Credits were given only to German’s manufacturers who import raw materials to make finished goods for exports. The foreign capital earned was used for reparation as well. Despite all these, Schacht achieved his main aim of setting up the discount bank, to stabilise the currency.

In the subsequent Dawes meetings, Schacht fought hard to have most of the reparation paid through German exports, instead of taxes that would further drain the already bankrupted Germany. In the end, Germany still had to pay a colossal sum to the Allies, something which Schacht could not bring himself to accept.

In the years that followed, Germany’s economy gradually improved. However, another danger loomed ahead from a country across the globe.

In the roaring twenties, the only direction the US stock market could go was up. The “too much money chasing not too many goods” situation in US had their investors’ eyes turned to Germany, an emerging market that offered high potential returns. Easy credits were given to the most “frivolous” projects like opera houses, parks and sports stadiums in Germany. This infuriated Schacht who believed foreign credits should only be used to boost exports and Germany’s manufacturing competitiveness, not on entertainment. He believed reparation should be paid using foreign capital which without taxes would have to rise, adding further burden to the German people. Schacht sounded the alarm several times but mostly unheeded. Situation even went to the extent that some German people, infected by US speculative euphoria, borrowed short term credit to buy stock on margin.

In 1929, Wall Street came clashing down, with deadly repercussion to strike Germany soon. Around the same time, Schacht resigned from his currency commissioner post on reason that Germany had compromised on the Young Plan that was to replace the Dawes Plan.

Schacht was a patriot. He hated the Versailles Treaty and saw it as nothing but economic exploitation by the Allies. He wanted Germany to be strong again. To achieve all these, political will would be needed, and he found himself leaning towards National Socialism and one man.

He met Adolf Hitler in 1930, and his remark on him was not too flattering. “He is a fanatic and a true agitator.’’ Schacht was neither interested in politics nor regarded Hitler as Germany’s saviour, but merely saw them as means to his ends.

His made the right bet when in 1933, Hitler was sworn in as Chancellor. The most pressing task for the new Chancellor ahead was to create jobs for 6.5 million unemployed Germans, about 20 per cent of the workforce. The author claimed Hitler made sweeping promises to the German people during the election but the time had come for someone, not Hitler, to deliver it.

As president of Reichsbank, Schacht agreed to lend all assistance until the last unemployed was back at work. That was what Hitler wanted to hear.

To carry out his draconian measures, Schacht needed absolute power to avoid interferences from power-hungry party members, criticisms from the press, and protests from industries and banks. Hitler granted his wish.

Schacht faced the uphill task of restoring his Fatherland to his former glory. The coffer of Reichsbank was almost dry; foreign nations erected walls of tariffs that hurt German’s exports; the devaluation of pound, dollar and other currencies had made German’s goods uncompetitive.

However, these did not deter Schacht from carrying out his new duties, he began his appointment by pledging money for urban projects like new railways and the autobahns - the superhighway. His or the Nazi party’s approach was basically Keynesian – spending your way out of a depression. However, the author did not elaborate how the new government were to repay these loans. I suspect it had to come from either taxation or tariffs, but at a low interest rate over an infinitely long period of time. In a new political environment where trade unions were banned, protests quelled, and press censored, implementation of such scheme quickly showed results.

Schacht had to quickly replenish the bank’s coffers in order to finance more spending; and but not forgetting those hateful reparation to the Allies. He knew floating government bonds might be too early, given the fledging Nazi in power; rising taxes and tariffs would only add further burden to the German people and reduced the competitiveness of German industries; printing more money would push Germany into inflationary spiral.

Undaunted, he came up with a novel idea. He set up a Conversion Fund which acted as a clearing house for all foreign debts. Germans who took up foreign loans had to pay via this house or faced legal punishment. Not surprising, Reichsbank or Schacht himself managed this Fund and dictated the method of payments to foreign creditors. The terms were a mockery to the foreign powers. Schacht only agreed to paying the debt at half the original interest rate and half of these payments were made in the forms of special coupons which could only be used in Germany or for German goods. Surprisingly, this “take it” or “leave it” ultimatum did not provoke the Allies into sanctioning Germany.

Moreover, Schacht refused to devalue the German marks even thought the marks was trading at a discount in the open market; he effectively reduced the real value of the debts. However, the German businesses continued to pay the full amount of their debts to Reichsbank, conveniently enriching the central bank’s coffer, much to the delight of Schacht.

Next on his list was rearmament. Schacht agreed with Hitler that Germany should rearm but for a very different intention. Hitler wanted to expand the “living space” of the Germans through military conquest, while Schacht hoped to leverage on this military force to improve Germany’s international standing. To raise money for this noble task, he set up a shell corporation, participated by four German leading industrial companies. Bonds were floated at four per cent, matured in five years, redeemable anytime, and guaranteed by Reichsbank. The money was to finance large government contracts for rearmament.

Schacht was made plenipotentiary for war economics in 1934, the apex of his career.

The author quoted a conversation between Schacht and a leading American banker which I find extremely witty but captured the situation in Germany then.

“Dr Schacht, you should come to America,’’ said the American bank. “We’ve lots of money and that’s real banking.’’

Schacht replied, “You should come to Berlin. We don’t have money; that’s REAL banking.’’

By the beginning of 1935, rearmament was in full swing. The year also saw Schacht’s disagreement with the Nazi party widened, especially on how the Jews should be treated. Nazi Germany had problem in housing and feeding these Jews who were still in Germany’s boundary. Schacht thought out an ingenious way: Set up a trust, which would be run by an international committee and some Jews, to float twenty-five maturity bonds at five per cent with dividends denominated in dollar. Jews all over the world were expected to buy these bonds. Part of the dividends would be used to help German Jews to emigrate and part for German export. Unfortunately, Hitler later aborted this suggestion.

By 1936 onwards, Hitler started curbing Schacht’s power. This infuriated Schacht and he tendered his resignation in 1937. That spelled the end of Schacht’s influence in Nazi Germany. Later, during the failed attempt to assassinate Hitler, Schacht was implicated because he knew one of the accomplices. Although there were not sufficient reasons to indict him, Schacht was imprisoned for ten months in Nazi’s prisons which followed by another seventeen months by the Allies after the defeat of Germany.

Schacht, in my opinion, was one of the luckier people when compared to the tragic figure Erwin Rommel. His hope for a stronger Germany was for peace, not war. If he had erred, it was on the side of patriotism for his fatherland.

Leo Kee Chye