1938 the government had used 12 billion Mefo bills to finance its rearmament program. The secretive nature of this financial scheme was indicative of how the Nazi regime tried to avoid its financial obligations to the Western powers, especially the United States.
Schacht’s mission was to find ways and means to renege on reparations payments and to obtain the necessary funds for massive rearmament. The very notion of subordinating most economic activities to rearmament was bound to alarm the democracies, once they got wind of it. It did not take Roosevelt very long to realize that the new German government was pursuing policies—trade discrimination, a managed economy, and autarky—that violated every principle of free enterprise capitalism.23 Like Woodrow Wilson, Roosevelt was an internationalist who believed in free trade and low tariffs. Nations who traded freely and reduced tariffs were unlikely to go to war. The president’s secretary of state, Cordell Hull, was an even more passionate believer in reducing barriers to trade, and he was instrumental in getting Congress to pass the Reciprocal Trade Agreement Pact, which allowed the president to reduce tariff rates by as much as 50 percent, providing that the trade partners did likewise. Hull succeeded in negotiating pacts with twenty-one nations. The Germans rejected the American vision of a free-trade international economic system. Their aim was self-sufficiency (autarky) on the assumption that overdependence on international markets, especially when controlled by hostile powers, could lead to embargos or economic blockades, as in World War I. To make up for Germany’s lack of crucial resources (rubber, copper, base metals, minerals, oil), the Nazis invested in research and development of synthetic goods. Two major corporate giants, I. G. Farben and Wintershall, received lucrative government subsidies to develop synthetic substitutes for the armed forces.
These economic measures undoubtedly stimulated business and industry, while at the same time reducing unemployment. They also accelerated the development of an increasingly bloated, overmanaged, and centralized government. Furthermore, the Germans ran serious balance of trade deficits, exacerbated by the fact that they did not strengthen their export markets. Schacht countered Western free-trade agreements, which he denounced as discriminatory to Germany, with his “New Plan” that called for bilateralization of all trade and payment balances, import limitations and planning dependent on national priorities, and encouragement of exports based on barter.24 Schacht’s New Plan also called for government regulation of imports and bilateral trade agreements with southeastern Europe.
The American response to these German economic policies was vocal opposition. Secretary of State Hull was particularly offended by Schacht’s deceptive strategy of evading debt payments, calling it a colossal fraud. When Schacht came to America in May 1933, President Roosevelt told Hull to receive Schacht but to pretend to be looking at certain papers, letting him stand there for a few minutes, thus hopefully putting him in his place.25 What so riled both Roosevelt and Hull was that the Germans were not only defaulting on the interest on their foreign bonds that had been sold in the United States during the 1920s, but also profiting from these defaults and thereby financing their rearmament program. By defaulting to their American creditors, the Germans caused the value of the bonds to drop steeply in the American money market; the Germans then turned around and purchased the bonds at a fraction of their face value. They permitted their exporters to keep part of the dollars from their exports in America if they used them to purchase the bonds at low prices. The exporters could then sell the bonds to the German government for Reichsmarks, thus financing further exports. Hull estimated that 85–90 percent of these bonds were repurchased in America by Germany at a great loss to American investors. “In devilish fashion,” Hull noted in his diary, “the Germans tied in nonpayment of bond interest, depreciation of bond prices, redemption of bonds at their low prices, and subsidization of German exports and at the same time they were able to continue their enormous purchases of material that went into armaments.”26 The historian Gerhard Weinberg did not exaggerate when he said that this amounted to forcing the American people to subsidize German rearmament.27
German Rearmament and Aggression
The early skirmishes between the United States and the new Hitler regime, mostly over economic policies, subsided by the end of 1934. Hitler knew why. By the mid-1930s the United States gave every indication that it would avoid serious entanglements in the affairs of Europe and in the Far East. This isolationist mood manifested itself in 1934 when Congress passed the Johnson Act, which prohibited loans to nations that had defaulted on their financial obligations and set up the Nye Committee charged with investigating munitions makers who had allegedly dragged the country into World War I. There followed three neutrality acts in succession in 1935, 1936, and 1937. These acts prohibited the exports of arms, ammunition, and implements of war to belligerent countries. In cases of war between two or more foreign states, the president was required to proclaim the existence of such a state of war, at which time the exportations of arms became illegal. Violators, the act specified, would receive a fine of no more than $10,000 or imprisonment of no more than five years, or both. The act also contained provisions restricting travel by American citizens on belligerent ships during war.
When Germany revealed on May 9, 1935, that it had reestablished an air force and also reintroduced conscription, the United States hardly made a peep, choosing to stand on the sidelines. Roosevelt hoped that the allied defenders of Versailles would take more decisive action, but the will to resist Hitler was too feeble. The Western powers were concerned enough, however, to convene a conference on April 11 at Stresa on Lake Maggiore. Mussolini still maintained that he supported an independent Austria, which he saw as a buffer against an expanding Germany. He called for more decisive action against Hitler than empty resolutions by the League of Nations. No real action, however, resulted from the Stresa Conference because the Western powers were too divided in their foreign policy objectives. In June the British negotiated a naval agreement with the Germans that tacitly permitted the Germans to rearm by letting them build up their submarine fleet to be on par with the British, though limiting the German surface fleet to 35 percent of the British. Hitler was pleased with Ribbentrop for negotiating this favorable treaty, but he had no intention of honoring it in the long run because he wanted to build up a large navy that had complete parity with the British navy.28 London signed the Naval Agreement of 1935 in order to stave off the sort of naval race that had poisoned Anglo-German relations in the late 1890s, but the French and the Italians, who had not been consulted, regarded the British action as a breach of the allied unity that they thought had been achieved at Stresa. Both powers would henceforth pursue a more independent path when it came to their own security concerns. In the same month that the British and the Germans negotiated their naval agreement, the United States Senate could not muster a two-thirds majority that would have enabled the United States to join the World Court at The Hague. The measure failed as a result of a furious public relations campaign that had been waged against the internationalist legislation by the Hearst newspapers, Detroit radio priest Charles Coughlin, and isolationist senators such as William E. Borah, Hiram W. Johnson, and Breckinridge Long. It was a bitter defeat for Roosevelt and showed what a vocal and determined minority could do in blocking a more interventionist foreign policy. In October 1935 Mussolini invaded Ethiopia, and by so doing outraged the civilized world except for Nazi Germany. Anxious appeals by the Ethiopians to the League of Nations produced only meaningless resolutions. When the British asked for an embargo, the French balked. Mussolini got what he wanted, and more: an open invitation of Nazi friendship. Thus began Il Duce’s fatal embrace with the German dictator.
Hitler became increasingly convinced by these events that the Western powers would do almost anything to avoid another war. With America in isolation and the Western powers indecisive and vacillating, he took his first major gamble, violating the Versailles treaty by reoccupying the Rhineland on March 7, 1936, justifying this step by saying that he was merely reoccupying German territory. The reaction by the allied powers was epitomized by Lord Lothian’s matter-of-fact observation that the Germans were “after all only going into their own back garden.”29 The United States did not take a stand and justified its position by saying that it had not been a party to either the Versailles treaty or the Locarno Agreement of 1925.
In the United States,
