Steffen Murau and Herman Mark Schwartz

Sovereign Currency View (SCV) and the Global Credit View (GCV) on the international monetary system regarding four crucial assumptions: credit theory of money instead of monetary theory of credit; the co-evolution of public and private credit rather than metallism vs. chartalism; interlocked balance sheets in global finance rather than a ‘triple coincidence’; and a focus on gross flows rather than net flows in global payments. By constructing a 2×2 “Matrix of Monetary Thought,” we show that the SCV’s monetary theory of credit leaves critical issues about the global money and credit system unexplained compared to the GCV’s credit theory of money. Viewing the credit money system as subject to a co-evolution of public and private liabilities/assets in which a central public actor repeatedly validates excess private credit creation explains the hierarchical structure of national credit systems connected through interlocked balance sheets, and crisis dynamics within those systems. This approach reverses the understanding of the current account deficits and net foreign debt that SCV authors identify as fundamental problems for the dollar, or more precisely, for dollar-based credit systems backed by a hegemonic US state. These are features, not bugs, of credit systems, and help offset capitalism’s inherent deflationary tendencies. The GCV also helps unify academic analyses that suffer from the fallacy of composition, an excessively unit-level analytic framework, or incoherence in their theoretical premises, and provides an understanding of the structural features that have sustained US dollar dominance at a time when Trump Administration policies have made dedollarization more attractive to other states.

Friederike Reimer, Andrei Guter-Sandu, Armin Haas, and Steffen Murau

In the summer of 1931, Germany faced the nadir of the Great Depression. After the Machtergreifung of the Nazis in 1933, Hjalmar Schacht was appointed president of the Reichsbank and invented the “Mefo operation” to circumvent the Reichsbank’s legal constraints for credit expansion and finance German rearmament against the terms of the Treaty of Versailles. Mefo stands for “Metallurgische Forschungsgesellschaft”, a letterbox company set up by five German blue-chip companies and operated by staff from the Reichsbank and the military. Endowed with an equity of 1 million Reichsmark, Mefo was the debtor of commercial bills amounting to 12 billion Reichsmark. Despite its historical significance, the Mefo operation is still insufficiently theorised from a monetary theory perspective and is often explained away through the myth of “financial wizardry”. We approach the Mefo operation through the prism of the Monetary Architecture framework and perceive the Mefo company as an off-balance-sheet fiscal agency introduced to finance re-armament as a politically desired large-scale transformation of capital stock. We divide the Mefo operation into three distinct periods—the covert monetary financing stage (July 1933 to February 1936), the shadow money stage (February 1936 to March 1938), and the consolidation and war finance stage (April 1938 to May 1945)—and use balance sheet methodology to re-construct the underlying financial mechanics. On the one hand, we provide transactional balance sheets for an idealised depiction of flows and sketch stocks via snapshots of the monetary architecture as webs of interlocking balance sheets. On the other hand, we discuss how expansion, funding, backstopping, and contraction was planned ex ante and played out ex post. We find that against Schacht’s original plan, the Mefo bills ended up on the Reichsbank balance sheet where they were permanently funded until the collapse of German state structures in May 1945. We connect our balance sheet analysis to quantitative data of the Mefo company and the wider macro-financial environment in order to draw conclusions about the significance of the Mefo operation for the financial expansion after 1931.

The OBFA-TRANSFORM Working Paper Series publishes ongoing research output by the group that applies the Monetary Architecture framework and the OBFA concept on various contemporary and historical subjects.

Gregor Laudage, Armin Haas, Andrei Guter-Sandu, and Steffen Murau

The state as a fiscal actor is commonly perceived to be a unitary entity that interacts with the wider financial system via its core budget operated by the treasury which generates inflows via taxes and outflows through government spending. However, an emerging literature places increasing emphasis on off-balance-sheet fiscal agencies (OBFAs)—financial entities that are separate from the treasury but carry out, on behalf of the state, activities that could also be run via the core budget, and often receive explicit or implicit fiscal backstops. This gives rise to a ‘fiscal ecosystem’ of national and sub-national treasuries and OBFAs that is different in each country, historically specific, and inherently opaque. Fiscal ecosystems are subject to constant transformation that is driven by political, economic, and legal concerns, with ample path dependencies. In this article, we use Germany as a case study to develop a methodology that combines scholarship in law and political economy to categorise and empirically map its contemporary fiscal ecosystem. Throughout its turbulent history, Germany has developed a highly complex web of OBFAs across various layers of its federal system. Their number ranges in the tens of thousands, possibly close to a hundred thousand. We place them in a coordinate system and depict their proximity or distance to the core budget by drawing on their legal status, revenue model, and characteristics of their issued debt (if there is any). Moreover, we carve out the conditions under which OBFAs are subject to Germany’s constitutional debt brake and the EU fiscal rules. If and how OBFAs are affected by debt brakes has been notoriously opaque but is a matter of great political salience since in November 2023 Germany’s constitutional court objected to the financial treatment of special funds (Sondervermögen), which created a budgetary crisis and a spending freeze.

The OBFA-TRANSFORM Working Paper Series publishes ongoing research output by the group that applies the Monetary Architecture framework and the OBFA concept on various contemporary and historical subjects.

(Deutsche Version)

Staatsfinanzen jenseits des Kernhaushalts. Bilanzexterne Fiskalagenturen im deutschen fiskalischen Ökosystem

Der Begriff der staatlichen Fiskalpolitik bezieht sich gemeinhin auf Einnahmen und Ausgaben, die über den staatlichen Kernhaushalt laufen. Dieser wird typischerweise vom Finanzministerium eines Staates verwaltet. In der wissenschaftlichen Literatur wird demgegenüber zunehmend die Bedeutung von ‚bilanzexternen Fiskalagenturen‘ (off-balance-sheet fiscal agencies, OBFAs) betont. Dies sind Institutionen, die im Namen des Staates finanzielle Aktivitäten durchführen, die zwar grundsätzlich über den Kernhaushalt laufen könnten, aber in der Praxis vom Kernhaushalt getrennt sind. Häufig erhalten bilanzexterne Fiskalagenturen dafür explizite oder implizite Absicherungen oder Garantien durch den Kernhaushalt. Daraus ergibt sich ein komplexes ‚fiskalisches Ökosystem‘ aus Kernhaushalten und bilanzexternen Fiskalagenturen, das aus historischen Gründen in jedem Land anders aussieht und häufig so unübersichtlich ist, dass es sich einer genauen Analyse entzieht. Fiskalische Ökosysteme unterliegt einem ständigen Wandlungsprozess, der durch politische, wirtschaftliche und rechtliche Erwägungen bestimmt wird und zahlreiche Pfadabhängigkeiten aufweist. In diesem Aufsatz verwenden wir Deutschland als Fallstudie, um eine interdisziplinäre Methodik zu entwickeln, die Rechtswissenschaft und politische Ökonomie kombiniert und es so erlaubt, das gegenwärtige fiskalische Ökosystem konzeptionell zu erfassen und empirisch abzubilden. Im Laufe seiner turbulenten Geschichte hat Deutschland auf den verschiedenen Ebenen seines föderalen Systems ein komplexes Netz an bilanzexternen Fiskalagenturen ausgeprägt. Nach unseren Schätzungen beläuft sich deren Anzahl auf mehrere Zehntausend, möglicherweise liegt sie sogar in der Nähe von Hunderttausend. Wir ordnen sie in ein Koordinatensystem ein, das es erlaubt, ihre Nähe oder Distanz zum staatlichen Kernhaushalt darzustellen. Dabei berücksichtigen wir die rechtliche Stellung, das Einnahmemodell sowie die Verschuldungsmöglichkeiten der jeweiligen Institution. Darüber hinaus zeigen wir auf, inwiefern bilanzexterne Fiskalagenturen der im Grundgesetz verankerten Schuldenbremse und den fiskalischen Regeln der EU unterworfen sind. Die Frage nach dem Zusammenhang von bilanzexternen Fiskalagenturen und der Schuldenbremse ist von großer politischer Bedeutung. So beanstandete etwa das Bundesverfassungsgericht im November 2023 die Nutzung eines bestimmten Sondervermögens, was zu einer Haushaltskrise und einem staatlichen Ausgabenstopp führte.