Designing a Regulatory Apparatus

In its first year in power, the Nazi Party could claim relatively little power over banking policy. Ongoing discussions over the establishment of a new state bank in Mecklenburg-Schwerin, for instance, aimed to offer relief to the agricultural sector, particularly for farmers who had voted for the party. When the government rejected the plan in December 1933, the Regional Governor (Gauleiter), Friedrich Hildebrandt, wrote to the Führer inquiring about the decision to block the much-needed credits.Footnote ¹⁴ It was, however, the Reichsbank President and Economics Minister, Hjalmar Schacht, who had been the one to dismiss the proposal on grounds of potential manipulation. From one perspective, an ongoing government inquiry had already been in discussions on the prospect of banking reform. Furthermore, because the proposal did not specify the potential source of the bank's capital, he wrote in January that “a better credit supply of the economy will probably not be achieved by founding a state bank, but by other means.”Footnote ¹⁵

What instead determined the overarching legal framework for intervention in the financial system was the new Reich Banking Law (Reichsgesetz über das Kreditwesen). Enacted in December 1934, the law aimed to resolve the long-standing problems associated with Germany's exposure to foreign capital. During the 1931 banking crisis, the rapid withdrawal of funds from domestic financial institutions, especially from the Great Banks of Berlin, had destabilized the Reichsmark and demonstrated the vulnerability of the domestic economy to foreign crises.Footnote ¹⁶ In response, the legislation included a wide array of technical clauses on minimum-liquidity rules, lending restrictions, and licensing requirements on domestic banks and branches of foreign banks based in the country.Footnote ¹⁷ These changes, according to one Reichsbank official, intended to “subject [Germany] to comprehensive regulations and controls based on uniformcriteria.”Footnote ¹⁸

To enforce the new regulation, a newly created Credit Supervisory Office obtained legal jurisdiction over the banking sector. Although the office reported directly to the Economics Ministry, its advisory board included representatives from the Reichsbank and various government ministries. The head of the regulatory office, the Reich Commissioner for the Banking System (Reichskommissar für das Bankgewerbe), was also given the ability to set standards on lending practices and interest rates. Discretionary policies allowed the commissioner to decide which banks, both domestic and foreign, would effectively be granted exemptions to stringent regulatory requirements. These arrangements ensured that there would be a relatively broad distribution of administrative responsibilities across different government agencies.

While neither the Credit Supervisory Office nor the Reich Banking Law were inherently national socialist in origin, both were later used as a legal pretext for state intervention. Franz Willuhn (Reich Chancellery), although not formally a party member until 1937, called for the immediate “reordering” of money and credit markets in line with the tenets of national socialism.Footnote ¹⁹ His intention was to use the legitimacy of existing institutions, such as the Credit Supervisory Office, to promote an ideological agenda. For other government officials, the Weimar legal system seemed to provide a range of instruments for maintaining investors’ confidence in response to the demands of rearmament. As a report by the Committee for Banking and Stock Exchange Law from February 1935 asserted, “[t]he starting point for the renewal of the law in the area of safekeeping and acquisition of securities is the demand … for the creation of a capital market sufficient for the needs of National Socialist Germany.”Footnote ²⁰

Although the Nazi Party was unable to seize immediate control over banking law, its repeated attempts to exert influence over the financial sector defined the post-Machtergreifung years. Even before a law concerning a reform of the civil service was enacted in April 1933, purges across the government ministries had already been underway.Footnote ²¹ As a result, Nazi officials were able to promote many of their own members and sympathizers to higher roles within the state bureaucracy. In subsequent years, new legislation sought to align economic institutions with the Nazi Weltanschauung. In October 1934, the Tax Adjustment Law (Steueranpassungsgesetz) allowed the authorities to exercise discretionary control over fiscal collection, while the Stock Dividend Law (Anleihestockgesetz) in December placed restrictions on the amount of dividends that private companies could issue.Footnote ²² These measures further centralized the system of economic governance in Germany.

In this context, the Credit Supervisory Office emerged as another tool for government intervention. It was initially led by a leading financial expert, Friedrich Ernst, who had risen through the ranks of the state bureaucracy.Footnote ²³ While working in the preeminent Prussian Trade Ministry, Ernst advised the Brüning cabinet on its interventions in the financial sector during the 1931 crisis. Considered by one Reichsbank official to be “the best qualified man for the office,” he was then appointed Reich Commissioner for the Banking System.Footnote ²⁴ The position was tasked with leading the regulatory office and acting as a mediator between government officials and private bankers. By 1935, it had been renamed the Reich Commissioner for the Credit System (Reichskommissar für das Kreditwesen).

On credit policy, Ernst described his largely bureaucratic, technical role as the Reich Commissioner. He endeavored “to keep himself informed about the situation of the German banking industry and the German credit economy, in particular their relations with foreign countries, and to influence general banking policy from the point of view of the German economy as a whole.”Footnote ²⁵ Given these overarching priorities, the Credit Supervisory Office would be willing to work with other “purely administrative bodies” (reine Verwaltungsorgane) of the government apparatus to regulate the “more than 30,000 credit institutions” across Germany.Footnote ²⁶ However, political pressures on the office could already be seen in its first meeting on March 13, 1935. Various government officials, such as Wilhelm Keppler (Commissioner for Economic Affairs) and Fritz Reinhardt (State Secretary of the Finance Ministry), tried to exert influence over regulatory affairs.Footnote ²⁷ Their goal was to confront the pressing question of political control: would there need to be a complete overhaul of the system, or could existing arrangements accelerate the rearmament drive?

In these early debates, the latter seemed to be the case. There was the possibility that the Credit Supervisory Office would only play a minor role in economic affairs as other initiatives appeared to be more successful. After being appointed the Economics Minister in September 1934, Schacht proposed a new mechanism for financing rearmament. The scheme involved the creation of a shell corporation, the Metallurgische Forschungsgesellschaft (MeFo), to issue short-term bills that would cover rearmament spending.Footnote ²⁸ By using an alternative means of payment, the state could purchase weapons from the major industrial giants without raising the national debt. Meanwhile, a general plan for economic recovery (the New Plan) addressed Germany's persistent shortage of gold and foreign-exchange reserves.Footnote ²⁹ Exchange-control offices helped to rationalize the country's reserves by limiting the volume of foreign imports. Through a series of bilateral trade agreements with countries in Latin America and Southeastern Europe, the authorities were able to conserve their reserves of hard currencies. Schacht also advocated the imposition of import restrictions on raw materials as a means of halting the decline in the exchange rate, much to the opposition of his predecessor, Kurt Schmitt.Footnote ³⁰

In contrast to interventions related to foreign trade, house construction, and work creation, projects with more definitive outcomes, the Nazi Party had an indeterminate plan with regard to the banking sector. Its endeavor was to seize financial assets and prepare for a future war, but the means to achieve this goal had yet to be decided. In many instances, Weimar-era legislation still exerted considerable influence over regulatory affairs. The Reichsbank was responsible for drafting a public announcement to confirm that cooperative and savings banks would be subject to the same reporting requirements as commercial banks.Footnote ³¹ According to the Reich Banking Law, all banks were prohibited from lending excessively to one or a few individual clients.Footnote ³² This maximum-credit rule, which had been the outcome of deliberations of the 1933–34 Committee of Inquiry into the Banking System (Untersuchungsausschuss für das Bankwesen), intended to prevent overexposure to any particular industry. It also reflected a legal framework that could continually legitimize state intervention in the private sector. Banks, in turn, were willing to ensure their compliance with the new legislation. When Deutsche Bank's directors received notice of the law in December 1934, they alerted the branches to the regulatory procedures that would require them to collect the balance sheets of all its borrowers applying for loans of more than 5,000 RM.Footnote ³³

The Credit Supervisory Office primarily used its legal prerogatives to address potential violations of regulatory law. In March 1935, Clemens Max Kunert, head of the Berlin-based Inland Bank, was accused of breaching a clause of the Reich Banking Law related to “unreliable management” (Unzuverlässigkeit des Geschäftsleiters). Kunert responded by protesting the accusation and attempted to prove his innocence. Writing to Ernst, he sought to demonstrate how his bank had long backed “today's national movement with considerable resources,” particularly in its support for a right-wing politician, Reinhold Wulle.Footnote ³⁴ Ernst, still believing the company had “not been running an actual business,” ordered the dissolution of the bank on November 21, 1935.Footnote ³⁵ Four days later, Kunert was transferred from a detention center in Moabit, Berlin to the Sonnenburg concentration camp, which housed social democrats, communists, and other political dissidents.Footnote ³⁶

The outcome of the Kunert case depended on an array of legal regulations that had existed since the Weimar years. To discourage a rapid outflow of capital from Germany, the government had enacted a Flight Tax, initially set at 25 percent, in 1931.Footnote ³⁷ Other measures, such as the Standstill agreements, served to stabilize the Reichsmark by freezing withdrawals of short-term foreign capital. As the Credit Supervisory Office reported, Kunert had been in violation of exchange-control regulations that threatened to destabilize the value of the Reichsmark. Therefore, a resolution to his case was a matter of national security. By 1935, additional legislation had imposed even greater restrictions on the private sector. Before his arrest, Kunert complained that the new laws, difficult to understand from the beginning, had now become “so complex that even high-ranking ecclesiastical dignitaries of the Catholic Church have come into conflict with them.”Footnote ³⁸

Although the distribution of regulatory power continued to resemble the structure inherited from the Weimar Republic, subsequent government ordinances involved the consolidation of state control over the banking sector. In October 1935, the Law over State Banks (Gesetz über Staatsbanken) bestowed upon the Economics Ministry the prerogative to alter the statutes of state banks and introduce new requirements as it deemed necessary.Footnote ³⁹ The law, which surprised many of the banks, gave the economics minister (Schacht) jurisdiction over the entire system of national credit. Because the legislation exempted state banks from several different types of taxes, it reflected the erosion of their independence and a shift towards effective nationalization.

In other instances, members of the Nazi Party, who were often uninformed of the technical aspects of the financial system, clashed with the Reichsbank and the Credit Supervisory Office over the regime's priorities. According to Leo Quassowski (Justice Ministry), the maximum-credit requirements enforced by Ernst presented major difficulties for rural cooperative banks.Footnote ⁴⁰ Instead of stringent regulatory requirements, more borrowing facilities at lower interest rates appeared more conducive to economic recovery, especially for domestic agriculture. However, more orthodox officials opposed such changes due to the possibility of inflation. They instead chose to offer concessions to Nazi ideologues only in certain areas of the banking sector. At the Reichsbank, one official endorsed a revision to the Banking Law that would grant exemptions to certain types of banks, including mortgage banks (Hypothekenbanken), ship mortgage banks (Schiffspfandbriefbanken), building societies (Bausparkassen), savings banks (Sparkassen), and other public-credit institutions (Kreditanstalten des öffentlichen Rechts).Footnote ⁴¹ Imposing too onerous restrictions on all these institutions could have impeded progress towards rearmament. For foreign banks as well, the law would only apply to those that managed foreign investments on behalf of German citizens.Footnote ⁴² Through these revisions, the regulatory authorities planned to make banking law compatible with the regime's existing objectives.

In the transitional phase between Weimar and Nazi regulatory regimes, a range of legal uncertainties pervaded government debates. As the Credit Supervisory Office began to adopt a more prominent role in the reorganization of the national financial system, Ernst remained a vocal advocate of statutory law. Before a conference held by the German Labor Front (Deutsche Arbeitsfront) in October 1936, he spoke on the need for strict adherence to the reporting and lending requirements outlined in the Reich Banking Law. As he claimed,

Under Ernst, the Credit Supervisory Office often aimed to ignore overt attempts to infuse banking law with Nazi rhetoric or priorities. Preventing the encroachment of outwardly political interests in regulatory affairs seemingly allowed the institution to maintain a degree of legitimacy before the banking community.

However, the regulatory institutions did not remain neutral, as strict banking rules were also made compatible with Nazi ideology. The Credit Supervisory Office might have initially sought to enforce the ad hoc policies of Brüning's government. In its first full year of operations, it revoked licenses to 20 financial institutions, seven of which were private banks.Footnote ⁴⁴ A series of government decrees reaffirmed the Credit Supervisory Office's legitimacy in granting licenses, levying fines, and bringing financial institutions, most notably employee savings banks (Werksparkassen), under its purview.Footnote ⁴⁵ The Nazi state willingly backed these reforms for ideological reasons, partly motivated by a belief that savings banks were symbols of “German” values, such as thrift and community.Footnote ⁴⁶ Far from acting as an “apolitical” ministerial bureaucracy, the regulatory office was able to align its own operations with the regime.

On a technical level, state intervention had mostly involved punishing violations of exchange control. In August 1937, the Credit Supervisory Office ordered the imprisonment of Ludwig Paulus, a Bavarian banker, for illegal “foreign-currency offenses” (Devisenverfehlungen).Footnote ⁴⁷ Although his business had been “relatively small,” he had initially been fined 3,000 RM. A district court, several months later, imposed an additional penalty of 300,000 RM and sentenced him to three years of imprisonment.Footnote ⁴⁸ For officials who had remembered the 1931 crisis, the verdict appeared to be a justifiable response to violations of exchange-control legislation. During the Great Depression, a collapse in investors’ confidence had led to sudden withdrawals of capital, which threatened to deplete the Reichsbank's foreign-exchange reserves. Following the enactment of the Reich Banking Law, the regulatory authorities reaffirmed their objective to ensure the “elimination” of “any deficits in the credit system.”Footnote ⁴⁹

One may assess these cases from the perspective of legal institutionalism.Footnote ⁵⁰ According to this view, the law not only reflected the set of rules dictated by the government, but it also encompassed how various institutions interpreted and enforced the legal code. What emerged was a “dual state” (Doppelstaat) that lay between the administrative bodies that underpinned the legal order (the normative state) and the central government, characterized by arbitrary rules and unchecked violence (the prerogative state).Footnote ⁵¹ In this environment, the Nazi interpretation of Rechtsstaat did not involve the complete rejection of extant statutes, but instead resulted in the preservation of Germany's legal structure to maintain legitimacy.Footnote ⁵² Strict adherence to the Reich Banking Law served a distinct political purpose by ensuring that any policy would provide a veneer of legality.

However, there was no clear dichotomy between Nazi elites and “apolitical” fonctionnaires. Many government bureaucrats, such as Riehle and Quassowski, tried to demonstrate their technical expertise while still supporting the principles of national socialism. From this perspective, the position of the Credit Supervisory Office's role as an “independent” regulatory body merits close attention. Neither fervently ideological in backing the Nazi regime nor wholly neutral in its application of regulatory rules, the office exercised authority over the banking sector, applying a legal standard to all financial institutions in potential violation of exchange-control legislation. Its legitimacy may have derived from its ability to uphold the numerous restrictions that had been in place since the Weimar years. Yet the office's interventions in the mid-1930s reflected its willingness to support the Nazi Party's goals. It did not maintain its nominal independence as it willingly targeted banks accused of having Jewish clients, Jewish employees, or both. In these instances, its officials continued to believe that part of its public-oriented responsibility was being both a technocratic body and an integral part of the state bureaucracy.

What characterized Germany's regulatory regime in the mid-1930s was neither the unhindered dominance of Nazi ideology nor the complete investiture of power in an “independent” supervisory body. The Credit Supervisory Office did not predominantly focus its operations around an “Aryanization” program, but it did not offer any active resistance. Its officials claimed that they imposed regulatory legislation on all German financial institutions, even those that “had no business relations in Jewish circles.”Footnote ⁵³ Opposed to the liquidation of Jewish-run banks on the basis of religion, Ernst explained to the Finance Minister that the priority for his office was to ensure compliance with reporting requirements.Footnote ⁵⁴ As he further indicated, the “required Aryanization of private banks” (die erforderliche Arisierung von privaten Bankfirmen) had provoked “certain changes in the structure of the Austrian credit system” (gewisse Wandlungen im Aufbau des österreichischen Kreditgewerbes), which demanded the office's attention.Footnote ⁵⁵ Motivated by these goals, Ernst nominally applied the same reporting requirements to all banks, such as during his investigation of the Essen-based bank, W. Löhr & Co.Footnote ⁵⁶ Because the bank had not submitted its balance sheets with the regulatory authorities from 1931 to 1934, it was ordered to pay a relatively small fee of 100 RM, a penalty that it then appealed.Footnote ⁵⁷

Nevertheless, the Credit Supervisory Office, far from upholding entirely standardized or transparent procedures, reinterpreted the law in ways that aligned with Nazi objectives. In 1937, it conducted an on-site visit of “a more informal character” to one of Deutsche Bank's branches.Footnote ⁵⁸ The impromptu inspection involved acquiring a random assortment of financial statements to ensure continued adherence to the law. For the regulatory office, the audit initially seemed to reflect a legitimate belief in the importance of compliance. In a letter to the Finance Minister, Ernst reiterated his de jure responsibility to uphold the Reich Banking Law, which had set the broad regulatory guidelines over the banking sector.Footnote ⁵⁹ However, the intervention was also an exercise in indirect regulation. Although the inquiry nominally centered on fee-setting procedures and accounting practices, the Credit Supervisory Office effectively pressured Deutsche Bank to implementpersonnel changes. It suggested that the deposit business should be managed by “an official who has a thorough understanding of these relevant provisions.”Footnote ⁶⁰ Hiring a new employee would have ensured that Deutsche Bank was in compliance not only with the Reich Banking Law but also with the ongoing “Aryanization” campaign.

The Credit Supervisory Office was one of many institutions that therefore willingly aligned itself with the Nazi regime. A government ordinance on April 26, 1938 required all Jews to report their assets that exceeded 5,000 RM.Footnote ⁶¹ Additional legislation subsequently targeted Jewish owners of capital. In November, the “Atonement Payment” (Sühneleistung) was a fine levied on the assets of Jewish individuals, and another decree the following month prevented emigrants from taking their personal jewelry or money abroad.Footnote ⁶² With the state's ideological agenda, the myriad of programs for confiscating Jewish-owned assets and property were wide-ranging, capricious, and dependent upon the particular decisions of civil servants and foreign-exchange offices.Footnote ⁶³ They expropriated private sources of wealth held by individuals, while the Credit Supervisory Office targeted the assets of businesses. By July 1939, the Reich Association of Jews in Germany (Reichsvereinigung der Juden in Deutschland) had adopted the façade of being a safe haven for “Jewish” assets, even though it had been managed by the Gestapo.Footnote ⁶⁴

In the months prior to the war, the Nazi Party was able to retool existing interventions to seize control of the financial sector. For many officials, effective control over the central bank became a key priority. In June 1939, the government revised the Reichsbank's statutes to revoke the autonomy of monetary policy. Although less controversially viewed at the time, the legislation effectively brought monetary policy under state control.Footnote ⁶⁵ Kurt Lange—a committed member of the Nazi Party who, following the resignation of Friedrich Dreyse, had become vice president of the Reichsbank—affirmed the alignment of the central bank's policy with that of Nazi ideology: “It is for us National Socialists self-evident that we should implement the Führer's wishes as quickly as possible … . [I]t is about the German people standing in this fight like a solid block of steel welded together behind the Führer.”Footnote ⁶⁶

The Credit Supervisory Office similarly became a de jure component of the Nazi apparatus. In September 1939, a revision to the Reich Banking Law led to its renaming as the Reich Credit Supervisory Office, in addition to the transfer of its responsibilities to the Economics Ministry.Footnote ⁶⁷ Government officials understood the new legislation to mean the continuity of the office's work, albeit under the effective control of a government ministry.Footnote ⁶⁸ This change allowed the government to begin forcing private banks to extend medium- and long-term credits to domestic agriculture, a goal it had long endorsed, while the regulatory office served as only an enforcement agency.Footnote ⁶⁹ Ernst, not being a formal member of the Nazi Party, was transferred to another office and became the Reich Commissioner for Enemy Assets (Reichskommissar für das feindliche Vermögen) the following year.Footnote ⁷⁰ In his place was an official from the Economics Ministry, Konrad Gottschick, who was supported by experts from across the civil service, including Kurt Wolf (Economics Ministry), Ernst Feßler (Justice Ministry), and Fritz Paersch (Reichsbank).

The revision to the Banking Law did not fundamentally improve Germany's structural weaknesses, which had become increasingly apparent to contemporaries. On the contrary, it led to additional uncertainties over the future of state–business relations. In December, Johann Baptist Gradl, an economist at the German Savings Banks Association, wrote of the increasingly onerous “reporting obligations” that had overburdened the banking sector in recent years. It had, he believed, “gradually become difficult to navigate through the plethora of these regulations on annual financial statements, interim reports, special disclosures, and related guidelines.”Footnote ⁷¹ Moreover, the Nazi Party had no coherent economic frameworks or theories from which it drew. A 1940 revision included a few changes, such as the provision that any banks needed permission to “to acquire permanent holdings in other credit institutions.”Footnote ⁷² Although the reasoning behind this alteration centered on the “circumventions of the law” that had “been observed repeatedly in recent times,” the legislation allowed Nazi officials to sustain its regulatory interventions for the duration of the war.Footnote ⁷³

Credit Supervision in the Annexed Territories

From 1938 onwards, the regulatory authorities—encompassing the Credit Supervisory Office, the Reichsbank, and the Economics and Finance Ministries—restructured the banking system of Central Europe. Their discussions revolved around the need for the expropriation of resources and capital to cover Germany's wartime needs. In March 1939, two government ordinances granted the Economics Ministry, with the agreement of the other ministries, full jurisdiction over the banking systems of Austria and the Sudetenland.Footnote ⁷⁴ Yet the ambiguities surrounding the law, coupled with the difficulties of financial governance, compelled officials to adapt and identify alternative ways of reorganizing the banking system. The result was the establishment of an economic order based on the principles of regulatory oversight and collaboration with local elites, yet one without an overarching grand strategy.

To a certain extent, the integration of the Austrian financial system into the German one had begun even before formal ordinances were legislated. According to Joachim Riehle, a financial expert in Department IV (specializing in money and credit) of the Economics Ministry, regulation was needed because German banks had long provided credits to Austria. Some, such as credit institutions in Baden and mortgage banks in Saarbrücken, had the majority of their loan portfolio in the annexed areas.Footnote ⁷⁵ Riehle claimed that delayed mortgage payments from tenants during the invasion meant that landlords who had secured mortgages were now unable to repay their (often German) creditors.Footnote ⁷⁶ As early as 4 April, he suggested to Ernst that the Reich should establish a large mortgage bank for the public sector, and another for the private sector.Footnote ⁷⁷ An additional credit institution would have helped inject liquidity into the financial system. Ernst agreed with this argument and, later that month, considered “the introduction of this law [the Reich Banking Law] to be urgently needed.”Footnote ⁷⁸

The regulatory authorities aimed to intervene not because of a concern for the Austrian banking system itself, but rather due to the potential impact on private creditors. Many German financial institutions, particularly the savings banks, had lent extensively to Austria in the years prior to the Anschluss. After 1938, the collapse of Austrian banks and the seizure of their assets threatened to make German banks insolvent. Officials thus considered ways of mitigating the spread of financial contagion. The Economics Ministry, for instance, proposed the creation of a centralized guarantee fund from which German banks could borrow.Footnote ⁷⁹ Doing so would offer financial institutions temporary relief from their expected reduction in expected profits.

Over the course of the war, Germany's large universal banks played an active role in the annexation. Deutsche Bank led negotiations with the government to acquire Austria's most prominent bank, Creditanstalt.Footnote ⁸⁰ Meanwhile, smaller private banks had less direct involvement in regulatory affairs but were equally as willing to take part in the process. The Central Association of the German Banks, for instance, acted as the main channel for member banks to engage in political debates.Footnote ⁸¹ Upon learning of Ernst's declaration concerning the extension of the Reich Banking Law to Austria, the banking association crafted a plan to integrate their Austrian counterparts into the German financial system, such as through agreements over the setting of interest rates and lending practices.Footnote ⁸² This arrangement, although not accepted, would have facilitated the process of Austro-German financial integration, while also avoiding the state's further encroachment in private affairs. Because of the exigencies wrought by the invasion, government officials overrode such proposals and unilaterally imposed regulatory restriction over foreign banks.

The dissolution of the Austrian National Bank constituted the first major financial decision after the Anschluss.Footnote ⁸³ A decree issued on March 17, 1938 ordered the liquidation of the central bank, the assets of which were transferred to the Reichsbank.Footnote ⁸⁴ After technical discussions with the Finance Ministry, the Reichsbank agreed to an acquisition price (Übernahmepreis) of 3.92 million RM in May.Footnote ⁸⁵ The publicly known reserve of gold and foreign-exchange assets at the central bank amounted to 420 million Austrian schillings (248.1 million RM), while the country's clearing accounts amounted to 150 million schillings (88.6 million RM).Footnote ⁸⁶ Additionally, the Reichsbank was able to relocate a special reserve fund of nearly 6.2 million RM, originally designated for discounting financial bills (Finanzwechsel), to the account of the Finance Ministry at the Reichsbank's branch in Vienna.Footnote ⁸⁷

Although the transfer of Austria's reserves helped to ease Germany's resource constraints over the following year, the acquisition itself bore major short-term costs.Footnote ⁸⁸ The Reichsbank acknowledged the potential inflationary consequences of an unsustainable influx of capital into Germany. Its directors declared that it would be willing to acquire only enough assets from the liquidation to offset recent issuances of notes and short-term obligations without destabilizing the exchange rate.Footnote ⁸⁹ They also expected to compensate the Austrian central bank's shareholders with Reich bonds yielding an interest rate of 4.5 percent.Footnote ⁹⁰ Yet even with the transfer of assets, the issue of Austria’s national debt remained an unresolved matter. The regulatory authorities did not want to assume debt payments to foreign creditors, especially those in the United States. Over the ensuing months, Germany therefore settled Austria's outstanding obligations owed to countries with which it had a trade surplus on a case-by-case basis.

With the net influx of capital, German officials directed their focus to the operations of the Austrian banking sector. They began to contend with the diverse array of private bankers based in Vienna. In March 1939, the Economics Ministry conducted an audit of a merchant bank, J. Chrystoph. A report written by the Credit Supervisory Office showed that the bank was effectively insolvent and could therefore justifiably be brought under state control.Footnote ⁹¹ Although the authorities could not come to an agreement over the potential restructuring process, such as whether it should be acquired by a Berlin-based bank, they decided to issue a ban on the company's operations in June and, by the following month, forced the company to close its doors.Footnote ⁹² Because of its “overindebtedness,” Ernst placed the company under the office's provisional supervision and, on the same day as the invasion of Poland, authorized its complete liquidation.Footnote ⁹³

However, the company's dissolution proved more difficult than expected. As a private business, J. Chrystoph had around 690 creditors, which included 650 individual savers, civil servants, widows, pensioners, and businessmen, each with claims of less than 10,000 RM. After a payout to the preferred creditors of 224,000 RM, a payout to the “anonymous creditors” (likely, the board of directors), and an accounting adjustment for the expected profit losses, only approximately 100,000 RM was left for the remaining 650 creditors whose total claims amounted to 1,185,000 RM.Footnote ⁹⁴ Although the authorities felt compelled to reimburse the many creditors in the ensuing liquidation process, this undertaking would have involved the settlement of the bank's accounts and the mass sale of its assets, the proceeds from which needed to be shared with the company's other creditors. Ernst therefore proposed issuing a loan of 400,000 RM from the state's guarantee fund.Footnote ⁹⁵ In support of the scheme, Otto Donner (Reich Credit Supervisory Office) and Josef Bürckel (Reich Commissioner for the Reunification of Austria with the German Reich) agreed to extend a loan to J. Chrystoph, given that it was the “only Aryan institution on Mariahilferstraße.”Footnote ⁹⁶

The Economics Ministry initially denied the request on the grounds that the Viennese bank was “of no great importance” (nicht von großer Bedeutung ist).Footnote ⁹⁷ As a comparatively small financial institution, J. Chrystoph did not have enough assets to merit a loan, nor did it require numerous state officials to be involved in its dissolution. Yet what the case did offer was a legal precedent for interventions elsewhere. In November, Bürckel presented his case to Finance Minister Lutz Graf Schwerin von Krosigk, directly appealing to Nazi ideology. Emphasizing again that J. Chrystoph was the “only Aryan bank” in its district and “used by all those who wanted nothing to do with a Jewish company,” he claimed that it was inconceivable that the Reich would be “unprepared to help.”Footnote ⁹⁸ Although reluctant throughout the negotiations, the Economics Ministry approved an emergency grant of 100,000 RM as a special request in January of the following year.Footnote ⁹⁹ A group of Austrian banks provided an additional 50,000 RM.

On one level, forced liquidations allowed the Reich to lay claim to the holdings of other financial institutions. The German Audit and Trust Company (Deutsche Revisions- und Treuhand AG), for instance, had conducted inspections of private companies to collect information on European markets and seize control of enemy assets.Footnote ¹⁰⁰ With the sale of property held by financial institutions across Germany, which had already been declining in number since the mid-1920s, the Third Reich was able to implement a similar form of legalized expropriation in Austria.Footnote ¹⁰¹ Viewed through another lens, liquidations meant that the state could impose and sustain the German model of supervision abroad. After the Anschluss, a single regulatory framework would be used to justify continued interventions in the Austrian private sector. The Credit Supervisory Office then became responsible for procuring estimates on the volume of funds owned by banks, corresponding with lawyers working on the case, and managing subsequent claims by depositors.Footnote ¹⁰²

Although the liquidation of J. Chrystoph represented a case of dispossession, its broader implication was thus establishing a legal precedent for the liquidation of other banks. The regulatory authorities aimed to use the dissolution of small banks as a model for future interventions. In 1938, Ernst delivered a speech concerning the importance of bank liquidations in the annexed territories as a form of “land clearing, which as such had long been necessary.”Footnote ¹⁰³ A restructuring of the Austrian financial system, as he described, was predicated on an adherence to a legal code that protected private creditors. In these negotiations, the Credit Supervisory Office, a relatively small office within the state bureaucracy, could maintain influence over the Austrian banking system only if it cooperated with other government bodies. The regulatory work involving J. Chrystoph demonstrated its willingness to align with the tenets of national socialism in exchange for its continued existence.

Economic warfare might have begun with acts of expropriation, but new legislation accelerated the integration of banking systems across Central Europe. In October 1939, representatives from Dresdner Bank and Deutsche Bank approached Ernst with a plan for regulating the banks based in the Sudetenland. They presented a “reorganization” scheme that included the establishment of two regional banks with financial support from private banks.Footnote ¹⁰⁴ Doing so would have allowed German banks to obtain easier access to the Czech market and, by extension, financial assets across the rest of Czechoslovakia. Yet the plan faced significant pushback from government officials who wanted to see banks based in the Sudetenland more directly integrated into the Reich, thereby contributing to the overall rearmament program.Footnote ¹⁰⁵ The Economics and Finance Ministries therefore rejected the proposals forwarded by the Credit Supervisory Office and private banks in favor of a complete integration.

After Schacht's dismissal from the Reichsbank in January 1939 and Ernst's transfer to another office in November 1939, the Nazi government was able to initiate another campaign of liquidations.Footnote ¹⁰⁶ The Credit Supervisory Office, now led by Konrad Gottschick, provided an official stamp of approval on the liquidation of Austrian banks.Footnote ¹⁰⁷ One year earlier, Gottschick had written to Wilhelm Frick, the Interior Minister, that there was “an urgent need for the immediate introduction of the Reich Banking Law in the Sudetenland.”Footnote ¹⁰⁸ After being appointed president of the regulatory body, he began to oversee the dissolution of merchant banks in Vienna that had reportedly violated the Reich Banking Law. For firms unwilling to change their name and dismiss their Jewish employees, the Credit Supervisory Office could refuse or delay renewals of required operating licenses, effectively forcing them out of business.Footnote ¹⁰⁹ In other instances, the office required banks to convert their legal status from general partnerships to limited partnerships, a change that would allow German banks to purchase a majority stake in their business and assume control.Footnote ¹¹⁰

The Nazi authorities largely agreed on the importance of these interventions for managing the overall level of credit. Centralized control of interest rates would ensure that a sufficient volume of capital could be used to fund rearmament, while at the same time avoiding an inflationary spiral. In March 1939, a government decree required all bonds from April 1 onwards to be issued with a maximum interest rate of 4.5 percent, thereby bringing borrowing costs in Austria into closer alignment with those in Germany.Footnote ¹¹¹ The legislation similarly applied to the partially annexed Protectorate of Bohemia and Moravia. After a transition period of three months, the regulatory office acknowledged that interest rates should be fully harmonized between Germany and the Protectorate by January 1941.Footnote ¹¹²

However, the inefficacy of wartime regulatory practices, as initially demonstrated by continued bureaucratic infighting, was further evident from the inability of the Nazi authorities to decide how to enforce the new legislation. A discussion on how to keep Austrian banks solvent was the topic of one meeting in October 1939, when representatives from other government ministries weighed the benefits of several different proposals.Footnote ¹¹³ The Economics Ministry planned to issue a loan to Austria, although Riehle estimated that around 12 million RM from the Reich's budget would still be needed to support Austrian banks.Footnote ¹¹⁴ One supporter of this plan was Friedrich Landfried, State Secretary of the Economics Ministry and the Prussian Finance Ministry. Several months prior, he had criticized Ernst and the Credit Supervisory Office for having “never dealt with fundamental questions” related to “credit and banking policy.”Footnote ¹¹⁵ The demands of the rearmament campaign, as outlined by the Four Year Plan, had necessitated greater state control over capital markets. As Landfried asserted, “[i]t seems to me, therefore, imperative that the cumbersome apparatus of the Supervisory Office should be dissolved and its powers placed in my hands.”Footnote ¹¹⁶

Following the annexation of West Prussia (later, Danzig–West Prussia) and the Warthegau in October 1939, the Nazi authorities expedited the plan for confiscating foreign assets. The Main Trustee Office for the East (Haupttreuhandstelle Ost) began to liquidate local businesses and transfer ownership of their property to the Reich.Footnote ¹¹⁷ Its close collaboration with the Gestapo led to the seizure of cultural assets, including books, art, and antiques.Footnote ¹¹⁸ Additionally, the government funneled resources from the financial sector to support the settlement of ethnic Germans in the Eastern territories. Through the newly established German Resettlement Trust Company (Deutsche Umsiedlungs-Treuhandgesellschaft), Germans could access loans without requiring the authorities to add to the national debt.Footnote ¹¹⁹

Along with these expropriative policies, the regulatory authorities sought to address more structural questions related to the disparate banking systems of Central Europe. In September 1939, Ernst had opposed the establishment of new savings banks in the Warthegau, a policy had advocated in Austria.Footnote ¹²⁰ His view was that the Polish banking system, markedly distinct from the Austrian one, needed to be more carefully assessed before a financial integration could take place. This view gained traction in banking circles. In response to the fifty-five saving-bank branches that had been recently established, Hans Helferich, President of the German Central Cooperative Bank (DZ Bank), voiced his discontent with the state's interventionist policy. As he argued, all “superfluous” banks “pose a risk because competition among credit institutions” could lead to “excessive indebtedness among farmers.”Footnote ¹²¹ Although not wholly opposed to the idea of financial reform in theory, Helferich claimed that such decisions had been made without the consent of his organization or the Reich Credit Supervisory Office. Gottschick, agreeing that the Warthegau had a fundamentally different system of credit, offered an even stronger rejection of Germany's expanding banking model: “We will not allow an unhealthy expansion of the cooperative system in Warthegau.”Footnote ¹²²

Although the Reich Credit Supervisory Office was aware of the issues related to a complete financial integration, prevailing ideological goals overrode such considerations. Gottschick conceded to the proposed plan following a private meeting with the Economics Minister and Reichsbank President, Walther Funk.Footnote ¹²³ Amidst a sense of heightened urgency, both the Economics and Finance Ministries developed a strategy for financial exploitation. They planned to lend 1.5 million RM to Polish savings banks to pay expropriative membership fees, contingent upon “the satisfactory course of the discussions in the Reich Credit Supervisory Office.”Footnote ¹²⁴ Offering emergency loans not only made savings banks indebted to the Reich, but they also bought the regulatory authorities additional time to formulate a more comprehensive plan.

Similar to prior interventions in Austria and the Sudetenland, the decision to intervene did not come from a desire to keep the Polish banking system afloat. Rather, the priority for main Nazi officials was to bolster capital inflows into Germany through a circular system of lending to foreign banks, allowing them to reclaim their assets in the process. By imposing the Reich Banking Law on the annexed territories, they intended to secure a reliable source of funds for the Nazi regime through a façade of debt deferral and a shroud of legality. After a meeting of several government ministries in July 1941, State Secretary Reinhardt approved the legislation devised in consultation with the Reich Credit Supervisory Office.Footnote ¹²⁵

Rationalization and Wartime Governance

On January 30, 1941, Hitler proclaimed the establishment of the European New Order (Neuordnung Europas). He envisioned the further subjugation of European nations to the Reich's ideological agenda. In line with this goal, various economic measures appeared vital for overcoming Germany's resource constraints. Currency reform, the seizure of food and raw materials, and forced-labor camps all constituted key parts of the new economic order.Footnote ¹²⁶ Banking regulation was another component of this evolving system. It allowed the state to secure a regular source of credit over the course of the conflict. According to one legal expert, strict “supervision” over the banking sector helped the regime reorient funds to domestic industry “in a way that is sensible for the national community.”Footnote ¹²⁷

The regulatory authorities initially used the Reich Banking Law to promote the standardization of banking systems across Europe. However, seeking to divert more resources to the domestic economy, they aimed to weaponize the regulatory apparatus to prolong the war. Whereas the Reich Commissioner had handled cases of noncompliance on a discretionary basis prior to the war, other government ministries began to clash over the right to use the regulatory office as an extension of their own bureaucracies. What followed was an attempt to develop a more streamlined, rationalized approach for bank liquidations in the annexed territories.

Not only did regulation entail the dissolution of financial institutions and the extraction of resources, both of which were vital to the regime, but the New Order also called for the replication of the German banking system abroad. On June 3, 1941, the Reich Credit Supervisory Office issued a decree concerning the “simplification of the banking system” (Vereinfachung der Organisation des Kreditgewerbes).Footnote ¹²⁸ The legislation had been proposed by Funk and the Economics Ministry in an attempt to conduct “a Gau- and province-based examination of the credit apparatus” (eine gau- und provinzweise Überprüfung des Kreditapparates).Footnote ¹²⁹ Their concern was that the overextension of German banks, particularly the large private banks, would produce a sudden lack of domestic capital or, at least, an inefficient distribution of wartime resources. Further pressured by the plans for an invasion of the Soviet Union, Funk preemptively mandated the closure of bank branches by ordering all “surplus employees” to be deployed to the Eastern Front.Footnote ¹³⁰

In the months after the decree, the Economics Ministry attempted to develop a less haphazard process for managing banking interventions. It grappled with the question of how to impose regulatory law in regions strained by the ongoing conflict. Initially, the Reich Credit Supervisory Office had supported the overall message of the proclamation, with Gottschick describing how “[t]he credit industry is not an end in itself, but only has the right to exist insofar as the national economy requires it. Every superfluous organization complicates the fulfillment of tasks related to the credit industry, increases the cost of credit, and takes resources from the labor market that could be better employed elsewhere.”Footnote ¹³¹ According to contemporary estimates, around 829 locations with fewer than 20,000 inhabitants already had more than two credit cooperatives each. Savings banks also fulfilled a community-oriented for local businesses. For these reasons, he recommended the closure of small credit cooperatives, measured by either balance sheets or the size of the communities, unless they served “a special local need.”Footnote ¹³²

After the proclamation of Hitler's New Order, Nazi ideologues continued to enforce regulatory law over the annexed territories, while also offering a degree of flexibility due to the escalating conditions of the war. In part, inefficient supervisory practices would have undermined the war effort even more than non-intervention. Yet little was known about the structural differences between the two banking systems, especially within the Economics Ministry. As Riehle reported, “only the associations of commercial and agricultural cooperatives will have the legal knowledge and practical experience required to carry out the merger and dissolution.”Footnote ¹³³ He therefore wrote a proposal in which private associations and interest groups would be allowed to undertake their own rationalization projects, so long as they prioritized the banks’ creditors.

This concession allowed Austrian officials to propose their own version of wartime governance in the later years of the war. In 1943, the Reich Governor in Vienna (Reichsstatthalter in Wien), Baldur von Schirach, suggested working with Austrian experts who knew the Viennese banking system rather than entrusting the merchant banks to undertake their own form of self-regulation. One collaborator was Hans Stigleitner, who had previously worked in the city's treasury (Kämmerer) and served as General Secretary of the First Austrian Savings Bank (Erste Oesterreichische Spar-Casse). As chairman of a business association of banks in the Ostmark, Stigleitner was willing to support the Nazi Party, even though his application to join had previously been denied twice. To win the favor of party elites, he endorsed the subsequent proposal by the Economics Ministry to liquidate several merchant banks in Vienna.Footnote ¹³⁴

Despite this potential moment of collaboration, the regulatory authorities held increasingly disparate views on the form and nature of state intervention. From Stigleitner's perspective, the smaller banks in Vienna should not be granted any exemptions from the rationalization project. He sent Walter Rafelsberger, the regional economic adviser (Gauwirtschaftsberater) in Vienna, a list of the merchant banks and branches of commercial banks that would need to be liquidated in the near future.Footnote ¹³⁵ Whereas Austrian officials were keen to close Viennese banks, the government ministries in Berlin sought to offer more flexibility. The Reich Credit Supervisory Office, for instance, wanted to grant private banks exemptions to the Reich Banking Law, especially for ongoing rationalization projects, which needed to accommodate the banking conditions unique to each of the annexed territories.Footnote ¹³⁶ After receiving an inquiry from one merchant bank in Vienna, the office approved the extension of its operating license for an additional year, provided that the bank could prove that it had a “healthy” and “liquidity-secure” business.Footnote ¹³⁷

The fact that state bureaucrats in Berlin were willing to offer exceptions indicated the subordination of banking law to party interests. In contrast, the Austrian authorities aimed to force two of the largest savings banks in Vienna to revise their statutes in accordance with the legal requirements stipulated by German law.Footnote ¹³⁸ While the company's statutes from 1936 had prohibited the use of bills of exchange as cover for its loans, the removal of this requirement by the Reich Credit Supervisory Office and the German Savings Bank and Giro Association would have allowed the banks to extend additional credits. A report from the Central Savings Bank of the Municipality of Vienna (Zentralsparkasse der Gemeinde Wien) opposed the forced imposition of German law, citing both historical precedence and practical reasons behind maintaining their existing statutes.Footnote ¹³⁹ Based on this argument, as well as the fact that there were severe administrative delays due to the number of conscripted personnel, the regulatory authorities in Berlin allowed the non-compliant banks to continue operating without revising their statutes. The Economics Ministry conceded that, with its shortage of resources, it “currently can only deal with matters that are decisive for the war.”Footnote ¹⁴⁰

With the escalation of the conflict, Nazi bureaucrats sought to expand the state's regulatory capacity. Widespread fears of inefficient lending practices, especially among the savings banks, seemed to justify additional regulation in the annexed territories.Footnote ¹⁴¹ In September 1943, Hitler issued a decree concerning the “concentration of the war economy” (Konzentration der Kriegswirtschaft). Although the order transferred oversight of raw materials and industrial production to the new Minister for Armaments and War Production, Albert Speer, it also reasserted the Economics Ministry's jurisdiction over the organization of the banking system.Footnote ¹⁴² Both offices were willing to commit more of the Reich's resources and personnel to the war effort.

However, officials also recognized the issues with inadequate financial governance. In March 1944, Funk wrote to Field Marshal Wilhelm Keitel about the burden on the banking sector due to the “ongoing withdrawal of manpower by the Wehrmacht.”Footnote ¹⁴³ As the staff of the private banks and Reichsbank were called to the frontlines, a shortage of personnel prevented the continued functioning of the regulatory apparatus. According to Funk,

Complaints about ongoing staffing issues and bureaucratic inefficiencies indicated the broader discontent over state–business relations. The prevailing view was that political power had been distributed across too many government ministries and agencies. By June, civil servants had begun planning for the complete dissolution of the Reich Credit Supervisory Office, the responsibilities of which were to be transferred to the Reichsbank.Footnote ¹⁴⁵

The ongoing shortage of credit compelled the Economics Ministry to weigh the benefits of additional legal reforms. In mid-June 1944, Riehle transmitted a planned revision of the Reich Banking Law to the Chancellery.Footnote ¹⁴⁶ The draft stipulated the dissolution of the Reich Credit Supervisory Office with the transfer of its responsibilities to the Economics Ministry, although the Reichsbank would have accepted additional administrative work. He argued that the government could no longer depend on an apolitical body for regulatory efforts, as the priority needed to be an adherence to “a state-political objective” (einer staatspolitischen Zeilsetzung).Footnote ¹⁴⁷ He concluded that “the ordinance will simplify banking supervision, while at the same time ensuring uniform control and supervision over the banking industry.”Footnote ¹⁴⁸

Yet the functions of the Reich Credit Supervisory Office had been inherently political since its founding. Its de jure dissolution aimed to address oppositional forces within the Nazi regime, as well as to maintain the existing financial order. Ernst, the former head of the regulatory office, was indirectly associated with the conspirators who had plotted the failed assassination attempt of Hitler on July 20. On this charge, he received a sentence of two years in prison. With his subsequent dismissal, the Nazi authorities envisioned fully severing ties and removing all traces of Weimar's regulatory law. These internal threats to the regulatory regime were exacerbated by the exigencies of war. In August, reports from the Eastern Front indicated how rapid withdrawals of capital from savings and deposits banks threatened to undermine the wartime economy. The Economics Ministry advised against imposing any more restrictions due to the potential psychological effects: “In order to avoid unrest, the RWM [Economics Ministry] has ordered that any amount requested be paid out. It believes this is the best way to counteract a sense of panic.”Footnote ¹⁴⁹ Although the evacuation of the Eastern territories had caused “debtors to disappear or become insolvent,” officials still believed that the financial institutions had enough liquidity to sustain themselves.

With the dissolution of the regulatory office, unhindered financial repression continued. The rushed revision to the Reich Banking Law in September 1944 confirmed what had already been a de facto policy, namely the dominance of the Economics Ministry in regulatory affairs. The following month, Riehle and Lange delivered a briefing to the German savings banks that justified their ongoing regulatory efforts. For Riehle, in particular, it was important to delineate the responsibilities of each government department because “a uniform Reich law was lacking.” As he outlined, the Finance Ministry exercised control over capital markets and interest-rate policy, the Economics Ministry oversaw the “pure steering measures,” and “everything else rested with the Reichsbank.”Footnote ¹⁵⁰ The simplification of banking law, according to the Völkischer Beobachter, would improve the efficiency of the state bureaucracy as staffing shortages became even more pervasive.Footnote ¹⁵¹ By redistributing administrative responsibilities, the state sought to maintain control over credit levels and banking systems across Central Europe for the duration of the conflict.