Schacht is generally known for two key policies: (1) MEFO bills and (2) foreign exchange controls. MEFO bills served a variety of purposes, but the main one was to keep the extent of Germany's rearmament secret because they were not part of Germany's official spending/budget. But this post is intended to focus on Schacht's other major policy: foreign exchange controls.
Adam Tooze describes Schacht's foreign exchange policy as follows. First, Schacht maintained the government's tight control of foreign exchange that was imposed by his predecessor:
Schacht then sought to increase the government's centralized control of foreign trade:However, from the summer of 1931 onwards private holdings of foreign currency in Germany were nationalized. Any resident who received foreign currency in any form was required to exchange it for Reichsmarks provided by the Reichsbank. Anyone requiring foreign currency could obtain it only by application to the Reichsbank and all such applications were subject to severe rationing. Foreign currency was allocated to importers as a fixed percentage of the volume of their foreign transactions in the twelve months prior to the crisis. The Reichsbank thus acquired a direct means for regulating all imports to the German economy.
Tooze, Adam. The Wages of Destruction (p. 20). Penguin Publishing Group. Kindle Edition.
And again:At the end of 1931 he put before some of Germany’s leading industrialists a new trade plan. Using an organization reminiscent of that employed during World War I, all German imports would be subject to central control. They could then be used to force those countries supplying Germany with goods, to accept at least equal quantities of German exports.
Tooze, Adam. The Wages of Destruction (pp. 28-29). Penguin Publishing Group. Kindle Edition.
Tooze summarizes: "Under the pressure of the balance of payments problem and the refusal to devalue, Schacht was imposing a system of ever more comprehensive bureaucratic control on the German economy and on German business."The Reichsbank would allocate the available foreign exchange on the basis of the export returns. It would reserve the funds required to make agreed debt repayments and to ensure that Germany could meet its short-term obligations. The remainder would then be handed to a group of supervisory agencies, twenty-five in total, one for each major class of commodities. The proposal that Schacht had originally drafted in 1932 for import monopolies modelled on those of World War I, was modified to provide for a greater degree of decentralization and private initiative. The supervisory agencies would not themselves engage in the import trade. Their job was to sift applications for foreign currency from private importers and to allocate the limited funds according to their national priority. Top priority, it was clear, was to be given to exporters and to suppliers to the armaments effort.
Tooze, Adam. The Wages of Destruction (p. 90). Penguin Publishing Group. Kindle Edition.
The reason for Schacht's tight control of foreign currency was Germany's refusal to abandon the gold standard or even to devalue the Reichsmark. Contrary to the long-running Nazi party commitment to abandon the gold standard, Schacht partnered with Hitler to keep the Reichsmark at its existing value as a sign of national prestige, to prevent dreaded hyperinflation, and supposedly to make it easier to repay Germany's foreign denominated debts.
It seems to me that Germany would have been better served by abandoning the gold standard and eliminating the government/Reichsbank's mandatory hoarding of all foreign currency. When Hitler came to power in 1933, inflation was not a threat to the economy. Deflation was the problem in the economy. It is by now accepted economic policy that anti-deflationary measures should be sought when a country is going through a recession/depression.
As for repaying foreign debts, Germany wasn't able to repay them even with Schacht's tight foreign exchange controls. Germany was perpetually short of foreign exchange throughout the 1930s. Schacht and his apologists blame this on Hitler's vast armaments expenditures eating into goods manufactured for export, but that is viewing the economy as fixed sum from a centralized, bureaucratic approach. A better approach would have been to allow the Reichsmark to float freely (as Britain did with the Sterling in 1931) and allow private individuals and businesses in Germany to hold and spend foreign currency as they saw fit. This free-market liberalization would have allowed the private sector to find appropriate sources of foreign currency and export opportunities.
This has parallels with German armaments production, which was managed by government bureaucrats who followed Schact's economic policies, such as Georg Thomas. The government was obsessed with preventing "war profiteering" so it tightly regulated the production of armaments and Thomas controlled allocations of raw materials to each service. When Germany finally abandoned this bureaucratic management of arms production in 1942, production soared.
The same thing arguably would have occurred if Germany had abandoned Schacht's hyper-regulation of foreign exchange and abandoned the gold standard in the early 1930s. Private businesses would have found the foreign markets and currency they needed. Germany would have had to default on its foreign loans, but that was a foregone conclusion in any event, and France and Britain had already done the same on their American loans.
The issue is that once Germany came close to full employment, military spending would have been limited by the free-market sector of the economy. Germany arguably would not have been able to spend as great a portion of its economy on the military, but the economy as a whole would likely have been bigger. Germany also would not have been desperately short on foreign currency, which is what prompted (in part) the annexations of Austria and Czechoslovakia and perhaps even Poland.