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

by Adam Tooze

we must also not underestimate the damage done both inside and outside Germany by the Great Depression. Even if Hitler had not been appointed Chancellor and Schleicher had remained in power, it is hard to imagine Germany pursuing a course that was anything other than disruptive to the last-ditch efforts to restore peace and stability to the world, at the disarmament talks in Geneva and at the World Economic Conference in London.

Germany could pursue a policy more or less congenial to global stabilization, but the chance of achieving that elusive goal depended critically on the other major powers. And in 1933 the environment was far less congenial to a multilateral strategy than ten years earlier. Above all, the position of the United States had dramatically changed.

Ten years later America’s position was fatally weakened by the most severe crisis in recorded economic history. As Hitler took power, Hoover was replaced by Roosevelt, who in his first months in office was focused, to the exclusion of all else, on saving America from the final disastrous spasm of the Depression.

The unifying thread of his speech was the determination of his government to overcome the disintegration that had resulted from Germany’s surrender in November 1918 and the ‘Communist’ revolution that had followed.2 The fact that Hitler chose even on this triumphant occasion to return to this moment, fourteen years earlier, provides a striking testament to the centrality of this trauma to his politics.

On foreign policy, by contrast, one had to read between the lines. Hitler paid ritual lip-service to the Geneva disarmament negotiations, stressing his willingness even to accept the abolition of Germany’s army, provided there was general disarmament. However, he also stated that the highest mission of the national government was the ‘protection of the [national] right to life and thereby the restoration of the freedom of our Volk’.3 This was nationalist code for the opposite.

The task of domestic policy was to consolidate the foundations of rearmament. The destruction of Marxism, the reconstruction of the economy and the rescue of the peasantry were means to that end.

The longer-term objective was ‘possibly the struggle for new export possibilities [i.e. colonies], possibly–and probably better–conquest of new Lebensraum in the East and its ruthless Germanization.

Less than a week later, on 9 February, whilst chairing the cabinet committee on work creation, Hitler reiterated the same basic points. As far as Hitler was concerned there was only one priority: rearmament.

The general election scheduled for 5 March was a crucial test of Hitler’s popularity. It was essential that the government parties should gain a large majority if they were to push through their dictatorial agenda under cover of legality.

If the Hitler government was to secure a solid majority, it was clearly essential to avoid alarming the public with dangerous foreign policy adventures. It was also crucial to preserve the façade of nationalist unity on which Hitler’s government was based.

Alfred Hugenberg the leader of the DNVP, an essential element in the Hitler coalition, held the portfolios both for economic affairs and for agriculture. Though he was an economic nationalist in every sense of the word, Hugenberg too opposed work creation beyond that already approved by Chancellor Schleicher.

From his predecessor General Schleicher Hitler inherited a fully fledged, credit-financed work creation programme budgeted at a total of 600 million Reichsmarks. None of this money had been spent by the time Hitler took office. The initial rearmament and the initial work creation measures of Hitler’s government therefore consisted of spending Schleicher’s money.

The results of the March election were a disappointment to Hitler and Goebbels. The failure of the Nazis to achieve anywhere near an absolute majority, even when their electoral appeal was backed up by considerable intimidation, confirms the conclusion reached by most observers in the autumn of 1932.

After applying massive pressure to the Catholic Centre party, Hitler got the two-thirds majority he needed for the Enabling Law of 23 March 1933. This freed his government to rule by decree.

Across Germany in the spring of 1933, the Nazi party and its nationalist allies unleashed a ferocious wave of violence directed above all against the Communists, Social Democrats and Germany’s small Jewish minority. Inexplicably, the socialist trade unions lulled themselves into believing that they might be able to cooperate with Hitler’s government.

Thallman you blockhead

They even joined with Hitler and Goebbels in orchestrating 1 May 1933 as a celebration of national labour, the first time that May Day had been treated as a public holiday. On the day after, brownshirt squads stormed the offices of the trade unions and shut them down.

Hans Luther was dispatched as the new German ambassador to Washington. He was replaced as president of the Reichsbank by Hjalmar Schacht, returning for his second stint at the helm of German monetary policy. Given Schacht’s open affiliation with the Nazi party since the autumn of 1931, this came as no surprise. But it sent a clear signal as to Hitler’s aggressive intentions.

Schacht’s position on work creation and credit inflation was complex. He was no friend of public works schemes.12 On the other hand, he clearly did believe in a creative role for monetary policy.

What is often overlooked in parochial discussions of the Nazi seizure of power is the tumultuous international context in which it took place. Hitler’s Machtergreifung coincided both with the inauguration of a new American President and the final dramatic aftershocks of the Great Depression.

As Roosevelt took office the United States was swept by a financial panic which forced him to impose a nationwide bank closure and restrict the export of capital. On 19 April 1933 the United States unilaterally suspended gold convertibility and allowed the dollar to depreciate. Over the next four months the dollar fell by 30 per cent against the Reichsmark. Replicated across the world this delivered a devastating shock to what remained of the international system of fixed exchange rates.

If it did not follow the dollar off gold, Germany would be left completely uncompetitive in every export market in the world. On the other hand, the dollar’s devaluation also brought a huge windfall, by reducing the Reichsmark value of the debts Germany owed to the United States.

But in the spring of 1933, Schacht seconded Hitler in denouncing any currency experiments.15 Pandering to popular sentiment, Hitler and Schacht made the defence of the official gold value of the Reichsmark into a symbol of the new regime’s reliability and trustworthiness.

Ha!

Reinhardt’s funds were directed towards precisely the priorities outlined before 1932 by Strasser and other advocates of work creation. The money was to flow into ex-urban settlements, road works and housing, appealing to a wide spectrum of both social and national interests. Above all the package was to be credit-financed.

‘Productive credit creation’ was the nub of the debate that bitterly divided economic opinion across the world in the inter-war period.18 The fundamental question was whether public expenditure, financed in the short term by newly minted money, could have any real impact on production and employment.

The only way to finance work creation that was guaranteed not to squeeze private economic activity was through the creation of ‘new credit’. For the defenders of orthodoxy this was illogical. Writing cheques could not produce more real goods, more equipment or plant. Money was merely a token, a means of exchange.

For the advocates of work creation, this orthodox argument was based on a misunderstanding. If the economy was fully employed–with every worker and every factory at full stretch–new credit creation might well lead to inflation. In that case it would indeed be true that additional government spending would be financed by ‘involuntary saving’. But if labour and machinery were lying idle, the game need not be zero-sum.

The art of economic policy was to provide the correct dose of credit-financed stimulation, sufficient to restore full employment, but not an excessive amount that would push the economy beyond the limit of full employment and unleash an inflationary free-for-all.

The initial experiment in credit-financed work creation was launched not by Hitler’s government, but by General Schleicher in December 1932.

in fact, closer investigation reveals that the East Prussian ‘Battle for Work’ was, from start to finish, a carefully stage-managed media event. The agricultural economy of East Prussia was ideally suited for fast-acting but primitive work creation measures. And it was Walther Funk, the ex-business editor now acting as State Secretary in Goebbels’s Propaganda Ministry, who chose Koch’s provincial backwater as the launch pad for the national campaign.

The jobless of East Prussia were ruthlessly conscripted. Thousands of married men were herded together into so-called ‘Camps of Comradeship’ (Kameradschaftslager),

Koch even managed to get one of the early, improvised concentration camps accredited as a work creation venture.

Christ

No surprise, therefore, that the fall in unemployment during 1933 benefited mainly the rural areas. The actual hot spots of unemployment, Berlin, Hamburg, Bremen and the Ruhr, as well as the southern cities of Stuttgart and Munich, benefited relatively little in the early stages of the recovery.

The majority of the moneys was reserved for local infrastructure work of various kinds. However, between 1933 and 1934 a steadily rising amount, finally to reach 230 million Reichmarks, was siphoned off for ‘special measures’ at the discretion of the Reich’s authorities. ‘Special measures’ was a euphemism for military infrastructure–strategic roads, airfields, barracks and waterways.

the autobahns were never principally conceived as work creation measures and they did not contribute materially to the relief of unemployment.26 They followed a logic, not of work creation, but of national reconstruction and rearmament, a logic indeed that was as much symbolic as it was practical.

As far back as 1925 a company had been set up to promote a new motorized Hansa, a network of commercial cities joined by superhighways. Hitler enthusiastically embraced this vision and, soon after he came to power, he nominated Fritz Todt to construct the network.27 Todt was a competent civil engineer, but he was chosen principally for his political commitment.

In his seminal memorandum on ‘Road construction and road administration’ of December 1932, Todt presented the programme of road modernization, not as an answer to the crisis of unemployment, but as a means of national reconstruction.

As Todt himself made clear, the ultimate rationale for these gigantic roadways was military. Germany’s fundamental strategic dilemma was its vulnerability to military attack from both east and west. The autobahns would serve as the ‘lifeline’ of a reconstructed national defence system.

On Todt’s motorways, 300,000 troops could be ferried from the eastern to the western border of the Reich in two nights of hard driving.

Overriding opposition from the Reichsbahn, the national railway company, he gave Todt backing for the establishment of a Reich motorway corporation.

Todt’s organization was to become a powerful institution in the Third Reich, a real counterpart to the Reichsbahn as an influence on national transport infrastructure and one of the seedbeds for the future system of economic control.

In practice, however, the effect of the autobahn programme on unemployment was negligible. In 1933 no more than 1,000 labourers were employed on the first autobahn section. Twelve months after Todt’s appointment, the autobahn workforce numbered only 38,000, a tiny fraction of the jobs created since Hitler took office.

The Germans had to be convinced that they were ‘over the hump’.31 To this end the Nazi party, in the autumn of 1933, redoubled its propagandistic drive against unemployment.

A large open-air theatre was carved out of the nearby forest. In keeping with the mood of the times, it was consecrated as an ancient Teutonic holy place or Thingstaette. But the intent behind this archaism was thoroughly modern. By 1936, the Northeim tourist office was attracting 60,000 visitors annually and the Thingstaette had established itself as a popular venue on the Nazi conference circuit.

as the Gauleiter were to discover twelve months after the Nazis took power, civilian work creation for its own sake was no longer the top priority of Hitler’s regime. Rearmament, the central objective of nationalist politics, now dominated the agenda.

In December 1932 France itself defaulted on its war debts to America. Following that precedent, Germany’s default on the 10 billion Reichsmarks it owed to its long-term creditors, principally to the United States, was only a matter of time.35 Even after the agreement on the end of reparations in Lausanne in 1932, servicing Germany’s international debts required an annual sum of 1 billion Reichsmarks in foreign exchange.

In 1929 German exports had run at in excess of 8 billion Reichsmarks. Germany’s import bill had of course shrunk in line with world commodity prices. But in proportional terms the debt burden had dramatically increased.

To feed its densely packed population, Germany needed imports of fats and animal feed. Nineteen million German households could not satisfy their immense appetite for meat, milk and butter from domestic sources. Germany’s giant herds of pigs and cows could only be sustained through the import of huge quantities of high-energy animal feed.

In 1928, when the Weimar Republic had been close to full employment, the real volume of imports, allowing for the very sharp fall in global commodity prices, had been 50 per cent higher than that on which Germany survived in 1933. The German economy could not recover to anything like its normal level of economic activity without a substantial increase in the volume of foreign inputs.

as Germany recovered along with Britain and the United States, their combined demand would have the knock-on effect of raising prices on world commodity markets. Everything depended therefore on Germany’s ability to sustain a healthy flow of exports with which to service debts and pay for imports.

Though the dollar’s devaluation reduced the Reichsmark burden of Germany’s debts, it made it even harder for Germany’s exporters to earn the necessary dollars. By 1933 the German trade balance began shifting inexorably into deficit and the Reichsbank’s limited foreign exchange holdings drained rapidly away.