The anti-Nazi demonstrations and boycotts in America, especially by Jewish organizations, confirmed Hitler’s stereotypes about Jews dominating public opinion in the United States. Although the American authorities were generally scrupulous in maintaining a neutral position during these anti-Nazi protests, there were exceptions that raised dark suspicions among the German diplomatic officials. Mayor La Guardia, as previously mentioned, made various insulting remarks about the Nazi regime and participated in anti-German agitation. Judge Louis Brodsky, who presided over the Bremen case, delivered a gratuitous injudicious outburst against the Nazi regime and its “brazen display of an emblem that is antithetical to American ideals.” The sight of the swastika, he opined, made the ship a pirate ship in the eyes of the rioters, who saw it as an atavistic throwback to the dark ages.21 The Nazi press had a field day with this and similar anti-German pronouncements in America, with the Völkische Beobachter denouncing the Bremen decision as “scandalous Jewish justice in New York.”22
Extremist activities in America were followed almost immediately by similar reactions in Germany; the difference was that the extremists in America were merely a nuisance but in Germany they were in power. After becoming aware of just how unpopular anti-Jewish action in Germany was in the United States and elsewhere, Hitler increasingly looked at the German Jews under his control as hostages to be used as pawns in his relationship with the Western powers. The major stumbling blocks for relations between Germany and the United States, apart from the difference between their political systems, were disarmament and debt payments. Hitler disingenuously told the Western powers that he was perfectly willing not to arm (aufrüsten) if they disarmed (abrüsten). Although the German negotiator at Geneva, Rudolph Nadolny, was making some progress in gaining concessions from the Western powers, Hitler had no intention of negotiating seriously because he wanted to rearm as rapidly and as massively as he could get away with. Thus, on October 14, 1933, he withdrew from the Disarmament Conference and simultaneously terminated Germany’s membership in the League of Nations. In this he had the complete support of the German Foreign Office and of conservative nationalists whose revisionist plans coincided with Hitler’s long-range expansionist ideas. In order to soften the foreign impact of this bombshell, Hitler submitted his decision to the German people in a plebiscite. On November 12, the German electorate ratified Hitler’s actions by an overwhelming margin of 95.1 percent. There was very little that the Western powers, including the United States, could do about the German rejection of disarmament. Nor could the United States do much about German defaults on debt repayments.
On May 8, 1933, Hjalmar Schacht announced that the German government would stop payments on its foreign debts, which at the time amounted to about 5 billion dollars, of which nearly 2 billion dollars were held by Americans. That drastic step was regarded as necessary because of the Depression, but perhaps more so because the new Nazi government made rearmament its top priority. This meant finding enough money in the budget and experimenting with deficit spending, a step that represented a radical reversal of the conservative and deflationary policies of the Brüning government. As Hitler saw it, the key to his ambitious rearmament program, which at first had to be hidden from the Western powers, was to change the tight money policies of the Reichsbank. Thus, when Hitler asked the president of the Reichsbank, Hans Luther, to open the money spigot, the president told him that he could give him 100 million marks, the legal limit at the time. Hitler could not believe what he heard; he was thinking in terms of billions rather than piddling millions. Clearly, Luther had to go, preferably as far away from the Reichsbank as possible. He sent Luther to Washington, where he served as ambassador from 1933 to 1938. In Luther’s place, Hitler picked the wily Hjalmar Horace Greeley Schacht, one of the most important financial experts during the inter-war period. Schacht’s parents had immigrated to the United States in the 1870s but returned to Germany to take advantage of the new opportunities opened up by the recent German unification. Schacht’s middle name, Horace Greeley, was chosen by his father, who greatly admired the well-known American abolitionist, social progressive, and failed presidential candidate, Horace Greeley. Schacht was by all accounts the most brilliant member of the Nazi regime. He had studied medicine, German philosophy, political science, and economics, receiving his Ph.D. in economics from the University of Berlin. When Hitler appointed him president of the Reichsbank and subsequently minister of economics, Schacht had already served his country in a variety of important posts. Initially, the stiff-collared and prickly Schacht, calling himself a National Socialist, supported Hitler and introduced him to prominent members of business and industry. Although he would ultimately break with Hitler over the brutal nature of the regime, he threw all his energy and talent behind the German effort to rearm on a large scale. To do so, Schacht invented an ingenious and surreptitious system called Mefo-Exchange (Mefo-Wechsel) by which the government converted “Mefo” bills, secured by a dummy corporation founded by the government and several private corporations, into a concealed form of money. By 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