Did Fed cause Nazi Germany? At first glance, this is a wild claim — how could the U.S. Federal Reserve have anything to do with Hitler’s victory? Of course, the Fed never provided money to the Nazis or plotted their putsch. But the international finance system of the 1920s and 1930s was such that Fed policy in Washington would send ripples across much of Europe. Those waves had created ripples that brought down the Weimar Republic and brought fascism to the world.
When World War I ended in 1918, Europe had been devastated. France lost about 20% of its industrial capacity, and Belgium’s coal production had decreased by more than half. Germany’s overall industrial production decreased by 40%, and her economy by one third. As a result, the reparations paid by Germany crippled her.
The Treaty of Versailles demanded reparations of 132 billion gold marks ($33 billion in the contemporary currency), more than twice Germany’s annual GDP. Berlin quickly found itself unable to pay. Thus, by 1923, the government resorted to the printing of money, and that triggered the worst case of hyperinflation in history: the price of bread increased from 250 marks in January 1923 to 200 billion marks in November. Ordinary Germans saw life savings disappear overnight.
By the mid-1920s, things had settled down thanks to U.S. loans under the Dawes Plan but at the price of a fresh dependence. In the meantime, European powers returned to the gold standard, stabilizing currencies against gold in an attempt to re-establish credibility. The catch was that by 1920, the U.S. possessed nearly 40% of the world’s gold reserves, exposing European economies to the American monetary policy, so that any Federal Reserve change would drain their gold reserves and unleash deflationary crises elsewhere.
And with little gold to spare, Europe suffered chronic deflation. Wholesale prices in Germany fell by about 25% during 1929-1932, decimating profits as well as wages.
At the close of the 1920s, that delicate balance broke down. The Federal Reserve hardened interest rates dramatically — from 3.5% early in 1928 to 6% late in 1929 — in a move to temper stock market speculation. After the crash on Wall Street, rates were increased again in 1931 to defend the U.S. dollar and recycle gold back into America.
It worked for the U.S.: billions of gold flowed in. But for Europe, every ounce of gold going out meant less money to spend. Credit tightened in Germany, Britain, and France.
The economic costs were catastrophic. German production of industry declined by 42% between 1929 and 1932. Unemployment rose from 8.5% in 1929 to 30% in 1932, putting more than 6 million Germans out of work. In Britain, unemployment hit 23% in 1932, and in the United States itself hit near 25%.
These numbers weren’t abstract. They represented hunger, homelessness, and disillusionment with the system. Weimar Germany’s parliamentary democracy, already in disarray, appeared helpless in the face of the collapse. Mainstream parties squabbled and offered little more than austerity.
The Nazis seized the moment, offering a straightforward message: jobs, order, and national pride. In 1928, they had won just 2.6% of the vote. By July 1932, that figure had skyrocketed to 37%, making them the largest party in the Reichstag. Economic desperation had transformed a fringe movement into a mass political force.
Meanwhile, both Britain and France were busy with their own concerns — Britain left the gold standard in 1931, and France suffered from political paralysis — that hindered them (or their will) from enforcing Versailles or arresting German remilitarization. Even some politicians viewed Hitler as a potential check against the expansion of communism.
So did Fed support Nazi Germany? Not directly. Hitler’s rise was caused by many factors: resentment of Versailles, political turbulence, fear of communism, and toxic nationalist ideology each played their part. But economics was central, and the Fed’s policies mattered. By raising rates and drawing gold out of Europe, the Fed helped turn a fragile recovery into a devastating depression. That depression in turn propelled the extremism necessary to make Nazism possible.
The lesson is sobering; central banks are not just inflation or credit cycle regulators. They can alter the course of history. The choices made in Washington during the 1930s, helped shape politics in Berlin — with consequences the world is still reckoning with.
