The Wages of Destruction: The Making and Breaking of the Nazi Economy

by Adam Tooze

Nor was 1918 the end of the war as far as Rohland was concerned. Some of the most vivid passages in his memoirs relate to the resistance to the French occupation of the Ruhr in 1923. When Hitler declared Germany’s open rearmament in 1935, though Rohland had now risen to a responsible position within Vestag, he immediately seized the opportunity to resume his military career, joining the 11th Panzer regiment as a captain of the reserve and taking an enthusiastic part in manoeuvres.

Borbet and the Bochumer Verein may not have designed the Wehrmacht’s cannons. But it was Borbet’s success in developing the technique of centrifugal casting that allowed the famous 8.8 centimetre anti-aircraft gun developed jointly by Krupp and Rheinmetall to be put into low-cost mass-production.

Ever since the early 1920s, the managers of the Ruhr had been struggling to cope with chronic over-capacity, the legacy of ‘over-investment’ during World War I and the hyperinflation that followed.

Whereas German output of regular steel even at the height of production barely reached half the capacity of the United States, in electrically smelted steel Germany was level pegging by 1939.

The story of aircraft production in the Third Reich deserves to stand at the centre of our understanding of the regime’s entire industrial history.90

Less than ten years later, the regime had created a multi-billion Reichsmark aircraft and aero-engine industry. It employed at least a quarter of a million people and was capable of turning out every year more than 10,000 of the most sophisticated combat aircraft in the world. Of all the industrial effects of rearmament this was by far the most significant.

But alongside the contribution of these diversified industrial corporations, the really striking feature of the list of top corporations in Germany in the late 1930s is the presence of no less than six specialized aircraft producers, none of which, in 1933, would have ranked even in the top 500. By 1938 Junkers, even before it began its most dramatic period of expansion, already ranked alongside Daimler-Benz as Germany’s twelfth largest private employer.

What was distinctive about the aircraft producers was that, unlike ship-builders, gun- or tank-makers, the aircraft producers had no significant civilian production.92 The military aircraft they were producing by the late 1930s had little or no value as commercial products.

Fundamentally, therefore, Germany’s largest new manufacturing sector was not merely state controlled. It was a product of state initiative, state funding and state direction.

Junkers was Germany’s leading aviation pioneer, a celebrated engineer who at his plant at Dessau had constructed the world’s first full-metal aircraft. Junkers’s factory, though modest in size, was by far the largest aircraft factory in Germany.

Junkers was in fact a conservative nationalist, who eagerly embraced the cause of rearmament. His difficulty was simply that he owned the largest aircraft plant in Germany and that Goering and his Secretary of State Erhard Milch were determined to have control of it.

After twenty-four hours in police detention, Junkers agreed to sign away his firm to the Reich. Managerial control was placed in the hands of Heinrich Koppenberg (1880–1960), a veteran of the Flick industrial conglomerate, who, like Krauch in chemicals and Voegler and Borbet in steel, had made his reputation in the armaments effort of World War I.

It was clearly no coincidence that the same combination of Keppler and Koppenberg was also to play a key role in the establishment of the Brabag synthetic fuel venture.

Under tight supervision from the Ministry, the industry underwent a phenomenal expansion, from less than 4,000 workers in January 1933 to almost 54,000 two years later. At the same time the Air Ministry issued design contracts for an entire new generation of aircraft and aero-engines.

By the spring of 1938 almost 120,000 people worked in airframe manufacture and another 48,000 in aero-engine production, with 70,000 more employed in aircraft equipment and repair.

Though all the Luftwaffe firms other than Junkers remained in private hands, their expansion had to be financed almost entirely by the RLM.

In the mid-1930s, the RLM actually offered to sell Junkers, the crown jewel of the aircraft industry, to Vestag, the steel giant, only for the accountants of the Steel Trust to reject the offer as too risky.

Every parameter of the business was fixed by the state and could be altered by the Air Ministry at will. Engaging in this market exposed a firm to enormous risks, unless the finance for expansion was provided by the state itself.

On 10 June 1936 the Air Ministry signed a second major contract with IG Farben, this time to build a plant at Leuna capable of turning out 200,000 tons of air fuel per annum. The highly toxic tetraethyl lead additive required to boost the fuel’s octane rating was supplied courtesy of IG’s patent-sharing agreement with Standard Oil of New Jersey.

In return, and with the full agreement of the German authorities, Standard received the secrets of IG’s new synthetic rubber technology.

At times, indeed, the German aircraft industry was to become a byword for independent, competitive and often counterproductive entrepreneurship. Fundamentally this stemmed from the extreme difficulty of controlling a highly complex manufacturing industry which was subject to extreme technological uncertainty.

The Luftwaffe only tested its first generation of full metal monoplanes powered by high-performance piston engines in 1935. Less than five years later Ernst Heinkel launched the world’s first prototype jet fighter, opening the prospect that military aircraft might soon be able to operate within striking distance of the sound barrier or beyond. Each of these transitions involved fundamental breakthroughs in aerodynamics, metallurgy, airframe and aero-engine design that were extremely hard to predict.

Nobody would ever describe the textile industry as a beneficiary of Hitler’s regime. However, even here, through a bold exercise in industrial policy, the Nazi regime gathered around itself a cluster of collaborators with a stake in its programme of self-sufficiency and rearmament.

the synthetic fibres programme was to be of crucial significance for a very large part of German industry and it was to be of vital importance in reshaping the clothing supply to the German population.

The Reich authorities wished to see a doubling in the production of viscose-rayon and a huge increase in the production of so-called staple fibres to at least 100,000 tons per annum.100 The problem, as in the case of oil, was that world prices for wool and cotton were dramatically depressed.

direct coercion was never a serious option in relation to Germany’s largest corporation. Instead, Kehrl was authorized to outflank the incumbent producers.

Kehrl set up four ‘voluntary’ syndicates, one for each of the major textile-producing regions of Germany: Silesia, Saxony, Thuringia and the Rhineland. Each syndicate subscribed 4 million Reichsmarks of capital towards the construction of a new synthetic fibre plant, each with a minimum capacity of 7,000 tons per annum. There can be no doubt that political pressure played an important role in this subscription drive.

It is true that there was substantial foreign direct investment in Germany both in the 1920s and before 1914. During World War II the Americans estimated that there were in the order of $450 million invested directly in businesses in Germany.

All of these industrial investments in various ways profited from Hitler’s economic recovery. The more they detached themselves from their foreign parents and the more closely they collaborated with the regime, the better they did. The regime for its part, particularly in its early years, went out of its way to reassure representatives from Ford, GM and ITT of their position in Germany. Wilhelm Keppler advised ITT to appoint the banker Baron von Schroeder, one of the men who had brokered Hitler’s appointment to power in January 1933, to its board.105 Ford had extremely pro-Nazi management at its plant in Cologne. And Opel probably profited more than any single car-maker from Hitler’s motorization boom.

one cannot ignore the fact that the cumulative total of direct investment in Germany was dwarfed by the billions that were in default to American and European banks and bond holders. And on the crucial question of repatriating the capital they had invested or the profits they earned, direct investors were treated no better than the holders of Germany’s other foreign debts. They were all subject to the same exchange controls that made it possible to exchange Reichsmarks for foreign currency only at punitive discounts.

in a desperate effort to liquidate its investment in IG Farben, DuPont of the United States offered to sell shares valued at $3 million in 1929 for less than $300,000.106 Britain’s ICI did finally manage to sell its shares in IG Farben, but only after protracted negotiation and only after accepting a complicated swap involving shares in IG’s Swiss affiliate.

once the initial panic was over, most of Germany’s trapped investors chose to stay put and to plough ...

However, in virtually every context, even settings in which one might have expected some resistance, the regime’s political representatives found active collaborators in German business.

Hitler is famous for having said that there was no need to nationalize German businesses, if the population itself could be nationalized. Certainly in relation to Germany’s managerial elite, one of the more important segments of that population, the regime found willing partners.

Hitler’s dream was undoubtedly collectivist at its core. But he derided the ‘ideology of frugality’ and ‘the cult of primitivism’ propagated by Bolsheviks. The German people deserved better. They needed to be raised to a higher level of life, more appropriate to the vision of the racial Volksgemeinschaft (racial community) as a community of superior racial worth.

The fundamental problem was the enormous gap between these high-flown aspirations and German reality. By the standards of the day, let alone by the standards of the later twentieth century, Germany in the 1920s and 1930s was not an affluent society.

this was not a short-term effect of the Great Depression. The problem of international economic inequality was deep-seated.

In terms of per capita income, Clark estimated that Germany enjoyed a standard of living that was half that of the United States and at least a third lower than that prevailing in Britain.

In late-twentieth-century terms, German per capita national income in 1935 came to roughly $4,500, as compared to the current per capita income of Germany of around $20,000. In today’s league table of economic development, the Third Reich would rank alongside South Africa, Iran and Tunisia.

By the 1920s the standard accoutrements of twentieth-century mass consumption–the car, the refrigerator, the radio–were already establishing themselves as the norm in the United States, at a time when the enjoyment of these same commodities was limited to a restricted circle of the European upper middle class.

The origins of the ‘American system’ date back at least to the mid-nineteenth century and the early mass-production of rifles in United States government arsenals.7 But as the new century dawned the idea of mass manufacture was progressively extended to ever more complex machines: from rifles to sewing machines, from sewing machines to bicycles and from bicycles to cars.

So cheap were Ford’s cars and so high were his rates of pay that Ford’s workforce provided a major market for the cars they were making, a situation virtually unthinkable in Europe.

It would be naive, of course, to take the Ford myth at face value. Henry Ford was nothing if not a propagandist.8 European industry by the early twentieth century was by no means ignorant of the techniques of mass production.

One step down from these corporate giants, there were literally hundreds of smaller mass-producers in Germany, making everything from screws to gas lamps and harmonicas.

Perhaps most remarkably, by 1918 Britain, France, Germany and Italy were outbidding each other in the production of combat aircraft, surely the most spectacular mechanical invention of the early twentieth century.12 Between 1914 and 1918 Germany alone turned out 47,000 aircraft of all types, a record which was in no way inferior to American production, which peaked in 1918 at 14,000 aircraft.

what was undeniable was the huge American advantage in mass-manufacturing. According to contemporary comparisons, in the mid-1930s America’s productivity advantage over its European rivals was in excess of 2 : 1 in most branches of manufacturing, widening to as much as 4 : 1 or even 5 : 1 in the production of motor vehicles and radios.

According to Clark, Britain not only had a higher per capita income than Germany; he believed that despite the much smaller size of the British population, the British economy was still somewhat larger than that of Germany.

What dragged Germany down was its large and highly inefficient agricultural sector and the substantial tail of small shops and workshops in the craft and service sectors. In the 1930s productivity per head in German agriculture was only half that in German industry, at a time when more than 9 million people were still employed in farming.

In the 1890s and 1900s Wilhelmine Germany had cheered itself with the belief that it was rapidly catching up with Britain.16 Though this was clearly good news, it also carried with it an acknowledgement of Germany’s relative backwardness. In the aftermath of World War I, hyperinflation and the imposition of a punitive reparations regime, it was merely common sense that Germany’s economic development had been thrown back by decades.

The remarkable affluence of the British middle classes in the inter-war period had no counterpart in Germany. Added to this, the impression of British economic power was multiplied by its Imperial possessions. To Germans it seemed that Britain and the other colonial powers, along with America, exercised a stranglehold over the raw materials of the world.