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

by Adam Tooze

Not having been consulted by Hoover and resenting the fact that the United States was putting the interests of its long-term creditors above French demands for reparations, Paris delayed its approval of the moratorium until 6 July, long enough for the German financial system to haemorrhage hundreds of millions of Reichsmarks in foreign exchange.

On Monday, 13 July the DANAT Bank collapsed, precipitating a general bank run.68 The cabinet and Reichsbank had no option but to declare a general closure of the German financial system and on 15 July to announce a new system of exchange controls ending the operation of the free gold standard in Germany.69 The value of the Reichsmark in terms of gold remained nominally the same. However, from the summer of 1931 onwards private holdings of foreign currency in Germany were nationalized.

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.

After Vienna and Berlin, London was the next casualty of the wave of financial instability sweeping across Europe. On 20 September, after weeks of severe speculation against the pound, Britain followed Germany in abandoning the gold standard.71 Unlike the Reichsbank, however, the Bank of England chose to leave the gold standard not by suspending free convertibility, but by abandoning the fixed peg against gold.

Britain’s abandonment of gold turned a severe recession into a profound crisis of the international economy. By the end of September, twelve countries had followed Britain in allowing their currencies to float freely.

German exporters now faced huge obstacles. With most of Germany’s closest trade competitors having gained a major competitive advantage through devaluation, the volume of German exports fell between 1931 and 1932 by a further 30 per cent. The hard-won trade surplus of 2.8 billion Reichsmarks in 1931 was slashed within a year to no more than a few hundred million Reichsmarks, and even this precarious balance could only be maintained by further savage reductions in imports.

One obvious way to alleviate Germany’s predicament would have been to devalue the Reichsmark to bring it into line with sterling.

In September 1931 Hjalmar Schacht hoped that Germany could take advantage of Britain’s embarrassment to gain concessions on trade or credits, whilst pegging the Reichsmark to sterling.

In the popular mind, devaluation was inseparably connected with the experience of hyperinflation. In 1922 and 1923 the plummeting value of the Reichsmark against the dollar had been the daily index of German misery.

The vast bulk of Germany’s foreign debt was denominated in foreign currency. The immediate effect of a reduction in the value of the Reichsmark would, therefore, have been to raise the burden in Reichsmark terms of Germany’s foreign obligations. Though the Bank of England would have welcomed a German devaluation, the United States made it clear that it wanted to see Germany servicing its long-term loans whilst protecting its balance of payments by means of exchange controls.

Pinned to gold by the American loans, but faced with devaluation of the majority of currencies in which Germany’s trade was transacted, Bruening had no option but to push through another round of deflation and to do so by decree. The fourth Presidential emergency decree of 8 December 1931, apart from banning the wearing of party uniforms and political demonstrations, also ordered mandatory cuts in wages, salaries, prices and interest rates, followed by a further decrease in government spending and an increase in taxation.

Unemployment was rising to more than 6 million and large parts of the business community faced imminent collapse. Clearly inflation was a bugbear to the German public.

Whilst incomes and revenues fell in line with the deflation of prices and wages, debts, mortgages and other financial obligations remained at their high pre-Depression levels. Over the winter of 1931–2, bankruptcies began to eat away at the fabric of German business. After the summer crisis of 1931, all the major banks were under state control. There were spectacular failures in the insurance and the engineering industries.

As the Finance Minister, Hermann Dietrich, put it to a party colleague: ‘I did not set out to nationalize half the Ruhr . . . but the danger that foreign interests would buy up the shares and the fact that a collapse . . . would have shaken . . . the Stahlverein and that in turn would have rocked the painfully reconstructed structure of the German banks, have left me with no choice

Under normal circumstances the continuation of a trans-Atlantic financial axis would of course have remained an attractive option for Germany. However, the collapse of the American economy and the British decision to abandon gold shattered the fundamental assumption on which Stresemann’s conception had been based.

There were, of course, voices both inside and outside Germany calling for a constructive effort to rebuild the fabric of the international order.85 But, given the global economic disaster, it appeared to many that international economic dependence itself was actually the problem.

Same shit different day

There is a deeply entrenched prejudice both in popular historical consciousness and the historical literature that the really important change in economic policy between the Weimar Republic and the Third Reich was the urgent implementation, after 1933, of programmes of national recovery and work creation.

For Keynesians, both in Germany and beyond, the disaster of the Weimar Republic will always stand as the most stark illustration of the consequences that follow from placing too much faith in the self-healing properties of the free market, a rhetorical connection that was put to extensive use in the long rearguard action that Keynesians fought against the intellectual forces of the New Right in the 1970s and 1980s.

Work creation in fact emerged as a subject for intense discussion on the right wing of German politics only in the second half of 1931. The Nazi party did not adopt work creation as a key part of its programme until the late spring of 1932, and it retained that status for only eighteen months, until December 1933, when civilian work creation spending was formally removed from the priority list of Hitler’s government.

civilian work creation measures were clearly not a core agenda item for the nationalist coalition that seized power in January 1933.

Why would it be? They believed in war economies.

Work creation was also viewed with suspicion by business and banking circles close to the Nazi party, who on this issue had a vocal spokesman in Hjalmar Schacht.

That as well.

All of which was in sharp contrast to the three issues that truly united the nationalist right and made possible the Hitler government of 30 January 1933: the triple priority of rearmament, repudiating Germany’s foreign debts and saving German agriculture.

By the end of 1931 it was accepted by all sides that an end to reparations depended on American cancellation of French and British war debts. The emergency moratorium of 1931 had acknowledged this in practice. However, Hoover still had to sell debt reduction to Congress and to do so he needed to make progress on disarmament.

By contrast, from 1932 the governments of Franz von Papen, General Kurt von Schleicher and finally Adolf Hitler adopted a contrary position. Rather than seeking prosperity and security in multilateral arrangements guaranteed by the power of the United States, they sought to secure unilateral German advantage, if necessary even in opposition to America’s efforts to restore the international order.

In the second half of 1932 the Reichswehr leadership began planning for an outright Treaty breach through a significant increase in peacetime military strength. The Umbau Plan, authorized by Schleicher on 7 November 1932, called for the creation of a standing army of 21 divisions based around a cadre of 147,000 professional soldiers and a substantial militia.

With the Depression taking its toll on the German engineering industry, it seemed that unless substantial government funds were soon forthcoming, the industrial capacity on which rearmament ultimately depended might soon cease to exist.

General Schleicher’s government pioneered the use of work creation, both as a means of hiding military spending from foreign observers and as a way of uniting the German people behind rearmament.

Oil for Food but cruder.

The Young Plan did at least offer a reduced annuity and only pressure from the United States offered any prospect of a final elimination of reparations. The ultra-nationalists thus remained in a minority and fulfilment remained the bedrock of respectable politics.

In July 1932 at the reparations conference in Lausanne, Britain and France agreed to a deal that brought a de facto end to Germany’s reparations payments.96 Significantly, they did so, against the will of the Americans, by tying a final end to all German obligations to a cancellation of the war debts owed by them to the United States. Britain made one last payment on its American war debts in December 1932, but only under protest. France, Belgium, Poland, Estonia and Hungary simply defaulted.

In January 1933, Germany still owed 19 billion Reichsmarks to foreign creditors, of which 10.3 billion were long-term bonds and 4.1 billion were short-term loans covered by the Standstill Agreement.97 At least 8.3 billion Reichsmarks were owed to the United States, by far the largest creditor. This debt burden, contracted since 1924, threatened Germany’s standard of living no less seriously than the reparations that had now been removed from the table.

If Germany was to service its debts, exports would have to exceed German imports by at least 1 billion Reichsmarks. This meant a substantial reduction in the standard of living. And with reparations gone, almost half of Germany’s onerous debt service payments would go to one country, the United States.

Nor, in case of default, did Germany have much to fear from American trade sanctions. The balance of trans-Atlantic trade was hugely unfavourable to Germany. In this respect, American efforts to stabilize Europe had been fundamentally contradictory.98 American tariffs in excess of 44 per cent, compounding America’s competitive advantage in virtually every area of manufacturing, made it difficult, if not impossible, for America’s debtors to repay their debts, even if they had wanted to.

There was still the opportunity for Germany to act as a positive force for liberalization rather than nationalist disintegration. By 1932, however, the voices of liberalism were drowned out by the deafening clamour of economic nationalism. Indeed, given the disintegration of the gold standard, even the Reich’s industrial association found it difficult to sustain a consensus on multilateral free trade.

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. Given the damage that this would cause to Germany’s complex multilateral trading relations, Schacht’s plan found favour with only a minority of German industrialists. In the ranks of agriculture, however, the enemies of liberalism found more eager supporters.

Farmers man.

In so far as economic interests were responsible for the collapse of the Weimar Republic and the installation on 30 January 1933 of Hitler’s government, the group chiefly responsible was not big business or even heavy industry, but Germany’s embattled farmers.

In the mid-nineteenth century the share of workers in agriculture had stood at a half. By 1925 that had fallen to 25 per cent, but this still meant that 13 million people depended directly on farming for a living.

By the late 1920s, however, the respectable parties of the centre right were struggling to maintain their support in agrarian circles, as the German farming community became progressively radicalized by the worldwide collapse in commodity prices.104 As a result, the farm lobby began demanding not only increased protection and relief from its debts, but a fundamental reorientation in German trade policy. Since tariffs had not proved effective in keeping out low-priced competition, the agrarians now demanded the introduction of specific quotas with which to restrict the import of key agricultural products to Germany from particular countries.

Papen though he approved quotas in principle, did so only within the limits ‘permissible according to current trade treaties’ and when Papen fell, there was no decisive action by Schleicher.108 This, however, drove the farm lobby into outright opposition to the Republic. 109 In early 1933 key leaders of the agrarian lobby intervened decisively with President Paul von Hindenburg, himself the owner of a large estate, to push him towards accepting a coalition between Hugenberg’s DNVP and Hitler’s Nazi party.

Greed helped Hitler surprise surprise

what the agrarians wanted was a government that would pursue their conception of Germany’s national interest unilaterally,

By 1932 the damage done to the parliamentary system may well have been irreparable, making it more likely than not that the Weimar Republic would have been replaced by some kind of authoritarian, nationalist regime. After all, Germany ended 1932 with generals both as Chancellor and as President of the Republic.

There seems every reason to believe that the world might have been spared the nightmare of a National Socialist dictatorship if only Hitler had been kept out of government for a few months longer.

Despite its electoral triumph, the NSDAP remained in opposition and in the second general election of 1932, in November, it suffered the consequences. Though the poll yielded no workable parliamentary majority, precipitating the fall of Chancellor Papen, it also delivered a severe setback to Hitler’s party, which saw its vote slump back to 33 per cent.

In December 1932 General Schleicher, the real king-maker in German politics, finally took power himself and made a popular start by launching the first national work creation initiative.

After the lifting of reparations at Lausanne, demand for German bonds began to strengthen.113 This was crucial, because it provided an opportunity for hard-pressed banks to offload illiquid assets and to rebuild their cash balances. In late summer there were signs of a revival in construction. Inevitably, once the harvest was in and building activity slowed for the winter, unemployment did begin to rise again, heading back towards the shock figure of 6 million. But the mere fact that this did not exceed the level reached the previous year was encouraging to the experts.

This is a crucial point because it contradicts all subsequent portrayals of the German economy under National Socialism. 117 The German economy in 1933 was not a lifeless wreck. It was beginning what might well have become a vigorous cyclical rebound. Certainly, on 1 January 1933 the New Year editorials of the Berlin press were optimistic. Vorwaerts, the social democratic daily, welcomed the New Year with the headline: ‘Hitler’s Rise and Fall’.

what decided the fate of Germany and with it the world was the tragic miscalculation of a small coterie of ultra-nationalist conservatives.

Ex-Chancellor Papen, embittered by his ousting in December 1932, conspired with the agrarian lobby and some of the most aggressive elements in the military to pressure the ailing Hindenburg into dismissing Schleicher and forming a new government founded on the popular platform of National Socialism.

Nor should we assume that the balance of forces within the Hitler–Hugenberg–Papen–Blomberg government was foreordained. There were powerful forces in German society, most notably the military and the churches, but also the leadership of German business that could have done much to deflect Hitler and his followers from their path.119 The policy of anti-Semitism, aggressive rearmament and unilateral diplomacy was clearly in no sense forced on Germany.

The most crucial economic policy decisions taken in 1933–4 concerned not unemployment, but Germany’s foreign debts, its currency and rearmament, and in relation to these questions there could never be any pretence of political innocence.

If we are to avoid a depoliticized economic history of the Nazi regime, at odds with our view of every other aspect of the regime’s history, we must always bear in mind that even in 1933 there were alternatives to the economic strategy pursued by Hitler’s government. And not only that: these alternatives might well have brought greater material benefits to the majority of the German population.