How a Bankrupt Nation Built a War Machine: The Hidden Economics Behind Hitler’s Path to War

Germany entered the 1930s as a nation shattered twice over. First came 1923, when hyperinflation annihilated the value of the mark so thoroughly that families fed banknotes into their stoves because they were cheaper than firewood. Bread cost hundreds of billions of marks; people demanded wages twice a day before their money evaporated between noon and sunset. Savings, pensions, insurance—everything the German middle class had built over a lifetime—vanished in weeks.

Just as the country slowly stabilized, disaster struck again. In 1929, the Great Depression hit like an avalanche. American lenders called in their loans, German banks folded, factories closed, and unemployment surged to six million people—about a third of the entire workforce. Engineers, teachers, and clerks sold their furniture on sidewalks to buy food. Street clashes between extremists turned cities into battlegrounds while the Weimar government drifted helplessly.

This desperate, chaotic society is what Adolf Hitler inherited when he became chancellor in January 1933. Germany was impoverished, restricted by the Treaty of Versailles, and limited to a token army with no tanks, aircraft, submarines, or heavy guns. Yet just six years later, in 1939, Germany marched into Poland with millions of soldiers and thousands of tanks and aircraft—the most modern military force in Europe. How did a broken nation rearm so dramatically in such a short time?

The answer lay in an extraordinary financial illusion engineered by one man: Hjalmar Schacht.

Schacht, an economist famed for ending the 1923 hyperinflation, returned to power in 1933 as head of Germany’s central bank and, later, minister of economics. Hitler gave him an almost impossible mandate: rebuild Germany’s military without triggering inflation and without alerting foreign powers. Germany had no money, yet it needed to secretly create billions in purchasing power.

Schacht’s solution was as ingenious as it was deceptive.

In 1934, he set up a fictional company called MEFO—the Metallurgical Research Company. On paper, it was a minor industrial consortium; in reality, it had no employees, no factories, and no purpose other than to disguise spending. The government placed massive orders for weapons—tanks, aircraft, ammunition—but instead of paying manufacturers directly, it handed them MEFO bills, promissory notes promising payment in five years.

Factories, needing real cash, took the bills to private banks. Banks accepted them because they understood the truth: the central bank would honor the notes. When banks exchanged MEFO bills for cash at the Reichsbank, the central bank quietly created new money—but not in a way visible on official records. Because the bills were technically liabilities of a “private” company, they never appeared on government balance sheets. To outside observers, Germany looked like it was spending far less than it truly was.

Between 1934 and 1938, more than 12 billion Reichsmarks of hidden MEFO debt financed rearmament—more than the entire official national debt in 1932. Germany rebuilt its army, air force, and navy while foreign governments underestimated the danger.

But the scheme had an unavoidable flaw: MEFO bills matured after five years. The first came due in 1939, and Germany had nowhere near enough money to repay them. Like a Ponzi scheme, the model required new inflows to satisfy old obligations. Unable to generate the necessary revenue internally, Germany turned outward.

Beginning in 1938, the Nazi state launched a series of aggressive expansions that doubled as economic seizures. The annexation of Austria brought gold reserves and foreign currency under German control. The dismantling of Czechoslovakia added the vast Skoda armaments industry to the Reich. The conquest of Poland supplied natural resources and millions of forced laborers. Every step deeper into Europe served not just ideology but a fiscal lifeline. Germany was feeding its economic engine with the assets of the territories it absorbed.

This pattern spread across the continent. Occupied France was forced to pay staggering daily “occupation costs,” effectively financing Germany’s presence on French soil. In the east, Hitler’s regime planned to drain the Soviet Union of grain, oil, and minerals to sustain the war effort. Forced labor became a central component of the economy: prisoners from concentration camps and subjugated nations were worked to death in mines, factories, and construction sites, their labor replacing costs Germany could not otherwise afford.

The regime also looted on a domestic level. Savings collected for the promised Volkswagen “people’s car” were diverted into military production, leaving ordinary Germans empty-handed. Jewish property—from businesses to bank accounts to artwork—was confiscated and absorbed into state finances. Even wartime spending had been partly underwritten by defaulting on foreign loans originally taken to pay Versailles reparations.

By 1939, the Nazi economy survived through four mechanisms: hidden debt, plunder, forced labor, and theft. It was structurally incapable of sustaining peace. When MEFO bills matured, Germany’s only alternatives were economic collapse or territorial expansion.

Hitler chose expansion.

The war that followed was not only ideological—it was the only way the Nazi economic system could continue to function. Once German forces began losing territory in 1943 and 1944, the economic engine broke down. With no new lands to seize, no new gold, no new factories, no new forced labor, the system imploded. Like every pyramid scheme, it collapsed the moment it stopped growing.

In the end, Hitler did not “pay” for World War II. He financed it with promises he could never honor, with the resources of conquered nations, and with the lives of millions forced into servitude. When conquest ended, the economy—and the regime—died with it.