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

by Adam Tooze

Quite apart from the political significance of the foreign debts, the moment was fast approaching at which Hitler’s regime would have to face a difficult choice. On the one hand it could take desperate measures to increase exports, including a devaluation of the Reichsmark to make it more competitive with the pound and the dollar. If exports did not increase, they would face a stark choice between sustaining the bare minimum of imports necessary to the German recovery, or aborting the recovery to satisfy the demands of Germany’s foreign creditors.

In April 1933 the cabinet gave Schacht carte blanche to instigate a moratorium on Germany’s international debts, at a moment of his choosing.39 At first, Schacht hoped to exploit the confused situation in the United States by announcing an immediate default.

At the end of May 1933 Schacht convoked a conference of Germany’s creditors in Berlin where he sought to persuade them of the need for at least a partial moratorium. The creditors, however, were not convinced that Schacht was acting in good faith and refused to make any concessions. The monthly returns of the Reichsbank suggested that Schacht was deliberately exacerbating the currency shortage by needlessly accelerating the repayment of short-term debts.

On 8 June the cabinet gave its approval for a unilateral moratorium on Germany’s long-term foreign debts, to begin as of 30 June. As a sign of ‘good faith’, German debtors would go on making payments in Reichsmarks into accounts administered by the Reichsbank. However, the Reichsmarks accumulated in the creditors’ accounts would no longer be transferred into foreign currency.

The suspension of debt repayments was the first overtly aggressive foreign policy move by Hitler’s government. Though it had been widely anticipated, it nevertheless produced shock and outrage in the commercial capitals of the world.

The United States, Britain and France were deeply divided over all fundamental issues of economic policy.45 Indeed, American policy was divided even against itself.

On the other hand, Roosevelt undermined his own pro-trade position, first by publicly postponing any reduction in American tariffs until 1934, and more immediately by allowing the dollar to go into free fall.47 To limit the damage the British desperately tried to persuade Roosevelt to agree to a stabilization of the dollar–sterling rate, at a level close to that prevailing before 1931. But on 3 July President Roosevelt delivered his so-called ‘bomb-shell telegram’, letting it be known that a dollar stabilization was out of the question.

Reich Minister Hugenberg did manage to embarrass the rest of the German delegation with an unscripted outburst in which he demanded not only the return of Germany’s colonies, but also a free hand for expansion towards the east.

the scale of what was agreed marked a dramatic break with all previous conceptions of German rearmament. The figure approved by Schacht was 35 billion Reichsmarks, to be spent over eight years, at a rate of almost 4.4 billion Reichsmarks per annum. To put this in perspective, annual military spending by the Weimar Republic was counted not in billions but in hundreds of millions of Reichsmarks.

Even allowing for a rapid recovery, Schacht’s programme called for between 5 and 10 per cent of German GDP to be devoted to defence for the next eight years. By comparison with the present day, this is two or three times the defence burden of most Western countries, to be borne by a country with a much lower level of per capita income.

The 35 billion Reichsmark programme of June 1933 thus implied, if not the wholesale militarization of German society, at the least the formation of a substantial military-industrial complex with serious ramifications for the rest of the economy.

In every respect except propaganda, the civilian work creation measures of 1933 were dwarfed by the decisions taken in relation to rearmament and foreign debt.

As we have seen, since the early 1920s the basis of Germany’s security strategy had been to play off the economic influence of the United States against the military threat posed by Germany’s European neighbours. Germany’s debts to the United States were the financial embodiment of that trans-Atlantic gamble.

In effect, Hitler’s government was declaring its independence from the implicit security guarantee that America had provided to the Weimar Republic since 1923–4. The break was at first only partial. In the face of creditor indignation, Hitler and Schacht shrank from forcing through a total moratorium.

Having thrown off both the burden of American debts and the protection that America offered, Hitler’s government had announced its intention to re-enter the dangerous game of Continental military competition.

In confidential discussions with Hungary’s authoritarian Prime Minister Julius Goemboes on 17–18 June 1933, Hitler stated explicitly his intention to ‘utterly crush France’.

Germany needed to find a way out of the Geneva disarmament talks. The opportunity presented itself in October 1933 when the British launched a new round of disarmament proposals. The French immediately rejected any suggestion that they should make the first move in reducing their substantial armed forces. The British refused to agree to a German counter-proposal that they should be allowed to rearm to the reduced level being proposed for the other European powers.

Nor can there be any doubt that this bold rejection of the last humiliating relic of Versailles was hugely popular with the German public. However, behind the scenes the mood in Berlin was panicky. Blomberg and Goering apparently expected Poland and France to respond with military intervention. Desperate plans were prepared for a last-ditch defence of Berlin. In the event, the Third Reich benefited once more from the disunity of its enemies. Over the winter of 1933–4 the government of France was paralysed by a sudden upsurge of domestic fascist activity, which culminated in the extraordinary street-fighting of early 1934.

Nevertheless, in a pattern that was to repeat itself, Berlin’s aggression created a sense of menace that in turn provided the justification for an escalation of German rearmament planning.

The army programme of December 1933 is crucial because it pre-programmed the subsequent escalation of Hitler’s foreign policy. To meet the army’s new objective of creating a 300,000-man force, conscription would have to be introduced within the next two years, a fundamental breach of the Treaty of Versailles.

This meant that the Ruhr, the heavy industrial heartland of Germany, could not be defended. But without the industrial resources of the Ruhr, no realistic war-planning was possible. The Rhineland would therefore have to be brought fully under German control, at the latest by the end of 1937. From December 1933 onwards, the clock was ticking towards confrontation with France.

in December 1933, with the full backing of the cabinet, Schacht raised the pressure on the financial front in a way that was calculated to cause maximum offence to the British and the Americans.

If Switzerland, for instance, had imposed a compulsory clearing agreement, asserting a prior claim on behalf of its creditors against all German export earnings, this would have deprived the Reichsbank of the hard currency it desperately needed to pay for imports of raw materials and food from the United States and the British Empire.

The result was clearing agreements, under which the Dutch and Swiss agreed to take high levels of imports in exchange for German agreement to continue repayment on Dutch and Swiss debt. Representatives of both British and American creditors protested strongly against this unequal treatment, but in vain.

On 18 December, at exactly the moment at which the German army finalized its new plan of expansion, Schacht announced a unilateral reduction in the rate of cash payment to foreign creditors from 50 to 30 per cent. What particularly incensed the British was that this moratorium included the Dawes and Young Plan loans, which were supposed to enjoy first claim on German resources.63 The outrage in both London and Washington reached new heights.

Like the Luftwaffe and the army, Raeder started from the premise that Germany should act unilaterally without regard to the international ramifications of its rearmament. So Raeder projected a substantial force in violation of Versailles restrictions: 8 battleships, instead of 6 permitted by Versailles; 3 aircraft carriers, not provided for by the Treaty; 8 cruisers, instead of the 6 permitted; 48 destroyers, instead of 12 permitted under the Treaty; and 72 submarines, which were completely illegal.

In 1933 and 1934 all of this military activity took place under a veil of complete secrecy.

In April 1934, in response to the publication of a Reich budget that brought an extraordinary increase in military spending, the French withdrew from any further bilateral discussions of military issues.66 When asked to explain its rising military budget, the Reich stonewalled, claiming that Germany was engaged only in essential maintenance and renewal expenditure.

Early in 1934 the Propaganda Ministry and the Ministry for Economic Affairs were in busy consultation preparing for the grand opening of the second wave of the Battle for Work timed for 21 March, the traditional date for spring celebrations. The national festivities were choreographed literally to the minute.

So that everyone could hear the Fuehrer, the Propaganda Ministry decreed a nationwide workbreak starting at 10.45. To avoid unseemly disputes, Hitler decided that workers should suffer no loss of wages, but that employers were entitled to an hour of unpaid overtime in compensation.

In practice, the Propaganda Ministry instructions were no more than a minimal guideline. Local party officials took things into their own hands. In the industrial city of Hanover, for instance, the celebrations began at 7 a.m., with the ceremonial ‘call to work’ of 1,000 unemployed before the municipal labour exchange.

As a propaganda exercise, the battle for work entered a new phase in the spring of 1934. However, the remarkable fact was that not a single Reichsmark of new money was allocated to national work creation projects in 1934 or at any point thereafter, a formal decision to this effect having been taken by the Berlin Ministries on 6 December 1933.

Hamburg lived up to its reputation as a dangerous centre of revolution by returning the lowest support for Hitler, in the referendum following Hindenburg’s death in November 1934.

Indeed, from the spring of 1934 the Reich’s subsidy for local work creation projects was cut by a sixth, much to the horror of local officials anxious to maintain the downward pressure on the unemployment statistics.

By the spring of 1934 the balance of priorities had shifted irrevocably. In the capital, it was now an open secret that civilian work creation was no longer a top priority.

In April 1934 the secret financing mechanism for rearmament was set in full swing. Mefo bills flowed in their billions. The bookkeeping was not precise. However, in 1934 military spending came to at least 4 billion Reichsmarks, of which less than half appeared in the official Reich budget.

by the second year of Hitler’s government, military spending already accounted for over 50 per cent of central government expenditure on goods and services. In 1935, the military’s share rose to 73 per cent.

From the spring of 1934 onwards, numbers involved in work creation schemes fell to an average of 700,000, tailing off into 1935. The conclusion is inescapable: despite the propaganda fanfare that accompanied the renewed Battle for Work in 1934, it in fact made little if any contribution to the ongoing reduction in unemployment.

Thanks to the many innovations in economic statistics sponsored by the Weimar Republic, it is possible to reconstruct from contemporary sources a fairly comprehensive picture of the major components of the German economy during the period of the recovery.

What is unmistakable is that in both 1933 and 1934 there was a powerful ‘natural’ recovery in the German business sector. In 1933 investment expenditure–mainly in stock-building–was a major driver of recovery. The first signs of this upswing had underpinned the strange wave of optimism that befell the Weimar Republic shortly before its demise.

We cannot know with any certainty what might have happened if a different government had been in power. However, the signs of a continued upswing in German business are there in the statistics. And it is certainly reasonable, therefore, to speculate that even without government intervention there might well have been a strong recovery, as there had been from the first major recession of the Weimar Republic in 1925.

In the first six months of Hitler’s government, however, this recovery in the business sector was offset by a severe contraction in the real value of household consumption. And even in 1934, when one might have expected the recovery in the labour market to have powerfully stimulated household consumption –the famous ‘knock-on effect’ from work creation expenditure predicted by Keynesians–it in fact made no more than a modest contribution to the progress of the overall economy.

Sales of food, clothing and other household necessities did not pick up significantly until six months after Hitler took power. This is hardly surprising, when we bear in mind that the real wages of many workers fell quite sharply in 1933, as wages stagnated and prices for food began to rise.

Since falling consumption offset rising investment, private demand in total accounted for less than half the resurgence in aggregate demand in both 1933 and 1934. From the outset, therefore, Hitler’s economic recovery was driven primarily by the public sector.

In 1933 civilian work creation expenditure clearly did make a major difference, with increased spending at both local and national levels. Civilian spending by the Reich continued to grow strongly into 1934. But what is often forgotten is that from 1934 onwards this was offset by a severe squeeze on local government.

Reich work creation spending simply ‘repackaged’ funds that might otherwise have been spent by local government.

state-driven economic recovery went hand in hand with an unprecedented centralization of public spending, of which the military were the prime beneficiaries.

By 1935 German GDP in real terms had recovered to roughly the same level it had stood at in 1928. This was no doubt a rapid recovery. But it was not vastly superior to the recovery achieved in the United States under a very different policy mix. Nor, in terms of the rate of growth, was it superior to the rebound from the Weimar Republic’s first severe recession over the winter of 1926–7, when the twelve-month growth rate was higher than at any time during the Third Reich.

what is unarguable is that the recovery as it actually occurred bore the clear imprint of Hitler’s government. In 1935 private consumption was still 7 per cent below its pre-Depression levels and private investment was 22 per cent down. By contrast, state spending was 70 per cent higher than it had been in 1928 and that increase was almost entirely due to military spending.

Between 1933 and 1935, the share of military spending in German national income rose from less than 1 per cent to close to 10 per cent. A reallocation of total national production on this scale in such a short space of time had never before been seen in any capitalist state in peacetime.