I understand that Hitler stimulated the economy with public works and forced labour etc. but did this really improve the German economy enough to sustain the massive rearmament ? Did Hitler take loans from other countires to aid the rearmament ?
This is a copy of an old post of mine on the subject, where the question was how did Hitler afford his expansion of the army.
By economic tricks and inflationary spending, then plunder. Note that all values are in 1938 dollars.
Hjalmar Schacht, the Chairman of the German Central bank introduced the MEFO, a currency with which the state could pay companies for contracts and deliveries, that could only be used to pay taxes and fees to the state. Thus the Germans could in essence print a lot of money without it entering circulation and creating inflation.
Still, the reichsmark was in theory pegged to gold, but no exchange to gold was possible, and the value was set so high that no-one outside Germany accepted it, forcing the Germans to pay for vital imports - such as iron ore, led and copper from Sweden, tungsten from Spain and Portugal, oil from Romania, nickel from Finland, chrome (essential for armour) from Turkey and so on - with gold, hard currency or industrial produce.
The nazis kept a very strict price and wage regulation and set interest rates high to ensure a low inflation, despite printing a lot of reichsmark (not just MEFOs).
Weimar Germany had kept, expecting a British blockade in case of a new conflict, a law that forced all factories to keep 6-18 months worth of raw materials stockpiled, a law that was abolished by the nazis and allowed companies to burn through this reserve, granting a temporary boost.
The nazis burned through the German gold and currency reserve and all assets seized from Jews and other "undesirables" and had defaulted on all foreign loans by 1939. During 1936, the German gold reserve fell from $33 133 000 to $26 707 000, despite all these schemes and siezed assets.
The Germans seized the Austrian gold reserve in March 1938, yet at the end of 1938, Hjalmar Schacht reported to Hitler that all currency and gold reserves had been exhausted, that 6 billion MEFO bills could not be honoured by the government and that re-armament would have to be cut by 20-30%, or Germany was bankrupt. Hitler promptly sacked Schacht in Januari 1939.
The Czechoslovak gold reserve was siezed in 1939, and parts were delivered to the nazis from the Bank of England in April-September 1939. The nazis also took over the Free State of Danzig's gold reserve in September 1939, and plundered sizable amounts of gold from the central banks of Belgium and Netherlands.
The Germans set the exchange rate of the reichsmark at about three times as high towards the French Franc as it had been 1930 and thus plundered the French economy (German soldiers were amazed at what prices the German occupation forced the French traders and merchants to sell them French goods) systematically. They did the same in Belgium and the Netherlands.
To total things, stolen gold:
Austria and Czechoslovakia: $146 000 000 in gold.
Free State of Danzig: $4 000 000 in gold.
Poland: The gold was evacuated through Romania, Turkey and Lebanon to France and then to French West Africa and then to the USA.
Denmark: Had almost all their gold in Britain and USA.
Norway: Managed to evacuate their gold to Britain.
The Netherlands: $163 000 000 in gold.
Belgium: $269 000 000 in gold. This gold was, like the Polish evacuated to Dakar, but were delivered to Germany 1940-42.
Luxembourg: $4 857 832 in gold, evacuated to France and taken in the port of Marseilles, awaiting transport.
Yugoslavia: $69 000 000 in gold.
Greece: $28 000 000 in gold (it is hard to confirm that this really was seized by the Germans, but some sources indicate it).
In addition to this, Germany took over the administration of the gold reserves of Slovakia, Bulgaria, Hungary and Romania, a total of $200 000 000, of which none of those countries ever saw any of again.
In addition, the occupied countries were forced to pay for their own occupation in manufactured goods and other assets, a total of $33 735 000 were siezed this way.
Sources:
Short answer: Mefo bills. Named after Metallurgische Forschungsgesellschaft - the imaginary company that backed the notes - Mefo Bills were a promissory note used for a system of deferred payment devised by the German Central Bank President, Hjalmar Schacht, in 1934.
Schacht was a German economist, banker, liberal politician, and co-founder in 1918 of the German Democratic Party - which he left in the twenties after becoming more and more sympathetic to the Nazi party. He served as the Currency Commissioner and President of the Reichsbank under the Weimar Republic. He also was a major critic of Germany having to pay war reparations. In August 1934 Hitler appointed Schacht as Germany's Minister of Economics. To help pay for rearmament - which was illegal under the Treaty of Versailles - he created Metallurgische Forschungsgesellschaft, m.b.H. which existed on paper only. The company's "mefo bills" served as bills of exchange, convertible into Reichsmark upon demand. This allowed the German government to pay manufactures without actually paying them - neatly side stepping the Treaty of Versailles.
An interesting point about Schacht is that he became heavily disillusioned with the Nazi party and in fact became involved in the resistance. He was tried at Nuremberg and acquitted after the war after being dismissed by the Nazi regime because he did not agree with their policies towards war and the jewish population.
According to the book "The meaning of Hitler" of historian Sebastian Haffner (great read btw), one aspect of the economy boom was also to produce as many goods as possible within the country instead of relying on other countries. This way they were able to diminish unemployment rates, poverty, opposition and increased spending power while they also kinda created an isolationistic economy that was easier able to pull out of the world wide depression everyone else was still suffering from.