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

by Adam Tooze

According to contemporary estimates, as much as a quarter of German industry was already occupied in 1935 with ‘non-marketed production’ of various kinds.

The massed ranks of the brownshirts (SA) were resentful at the failure of ‘their’ government to deliver a thoroughgoing populist, nationalist and anti-Semitic revolution. On the other flank of Hitler’s coalition, ex-Chancellor Franz von Papen and his aristocratic bevy were alarmed by signs of what they took to be ‘plebeian degeneration’. Most ominously of all, the SA and the army were engaged in a bitter struggle over the future of rearmament.

Whilst Goering and Himmler plotted against Roehm, Goebbels idolized the SA and fantasized about a final reckoning with ‘the reactionaries’.

On 21 June Hitler was confronted by President Hindenburg and Defence Minister Blomberg with the demand to bring the ‘revolutionary trouble-makers . . . to reason’. Otherwise, the army would impose martial law and Hindenburg would declare an end to the ‘Hitler experiment’.

Early in the morning of 30 June 1934, in the Munich resort of Bad Wiessee, he ordered the arrest and later the execution of the most senior leaders of the SA.

Papen himself was only spared because of the diplomatic embarrassment involved in liquidating an active member of the German government. Others were less fortunate. General Schleicher, the former Chancellor of the Republic and head of the Reichswehr, was murdered along with his wife. Gregor Strasser, the architect of the Nazi party’s work creation policy, who had been expelled from the party in December 1932 after intriguing with Schleicher, was killed in Berlin. The confirmed victims of the Night of the Long Knives numbered 85.

On 25 July, with the encouragement of the German party, the Austrian Nazis launched a coup. Hoping for a spectacular success, Hitler instructed his southern army command to stand ready to provide aid to the putschists. In the event, the Austrian army remained loyal and the uprising was easily put down. But Chancellor Dollfuss was dead, shot down in the Vienna Chancellery by men wearing swastikas.

To forestall any attempt to carry out an immediate Anschluss, Mussolini mobilized several divisions. Italy had no interest in seeing German influence extended across the Alps.

According to the Gestapo, Germany in the summer of 1934 was in the grips of a veritable ‘war pyschosis’.

at precisely the same moment Germany teetered on the brink of economic disaster. Between March and September 1934 the Nazi regime suffered the closest thing to a comprehensive socio-economic crisis in its entire twelve-year history.6 From the beginning of 1934 the Reichsbank’s reserves of foreign currency dwindled alarmingly. So desperate was the situation that Germans travelling abroad were restricted to a foreign exchange ration of no more than 50 Reichsmarks per month.

the Reichsbank and the Ministry of Economic Affairs (RWM) began the painful process of reducing the monthly allocations of foreign exchange to Germany’s importers. By the summer they were cut to 5 per cent of the levels they had received before the crisis in July 1931. Since all the most important industries in Germany were dependent on raw materials from abroad, this savage restriction prompted fears of a new wave of lay-offs.

Popular discontent with the rising price of imported food was widespread. And it was not just consumers who had little to cheer about. The mood in business circles in the second year of Hitler’s regime was far from good. The stock market responded to Hitler’s aggressive opening address for the new Battle for Work on 21 March 1934 with a sharp fall in share prices.

Wilhelm Keppler, Hitler’s personal economic adviser, conspired with Heinrich Himmler to bring about a more ideological turn in economic policy.11 The shopfloor radicals of the NSBO and Robert Ley’s German Labour Front demanded a new deal for German labour. Schacht at the Reichsbank sided with Goering and the army in arguing for ever greater rearmament and made himself into the chief public spokesman for an aggressive programme of unilateral debt default.

The economic crisis came to a head right on cue.12 On 14 June 1934 Schacht declared a complete suspension of foreign currency payments on all Germany’s international debt. At the same time he slashed the foreign currency allocated to German importers.

German importers could not be certain of obtaining the foreign exchange they needed to satisfy the claims of their foreign suppliers. Foreign trade threatened to grind to a complete halt. Meanwhile, the international response to Germany’s pending default was more enraged than ever.13 On 25–6 June the House of Commons in London held an extraordinary forty-eight-hour session rushing through legislation authorizing coercive action.

After only fifteen months of Hitler’s aggressive unilateralism, London’s patience was exhausted. With support from both sides of the House, Parliament ratified comprehensive powers allowing the Treasury to impound the earnings of German exporters for the benefit of Britain’s creditors.

As the SS did their dirty work, Britain and Germany, the two largest economies in Europe, moved perilously close to an all-out trade war. Such a confrontation would have had incalculable effects on Hitler’s economic recovery. Britain was not only Germany’s main export market and hence its main source of hard currency; the British Empire was also the chief source of many of Germany’s imported raw materials.

Even if German imports were not British in origin, they were, more often than not, financed by British banks. A concerted effort by Britain to punish Germany for its default would have had a serious impact on Hitler’s still fragile regime.

The end came on 28 June during a routine after-dinner speech to an audience of Berlin exporters. The Minister began by setting out the extremely serious situation facing the German economy and asked: ‘What is to be done?’ Before he could answer his own question, the blood drained from his face and he collapsed in mid-sentence. The water from his glass dribbled across the pages of his speech.16 The next day the press were informed of the Minister’s leave of absence.

As we have seen, reserves declined sharply in the first months of Hitler’s government. They then stabilized over the summer of 1933 at around 400 million Reichsmarks, before beginning a renewed and precipitate decline in February 1934. By June 1934 the Reichsbank’s currency holdings were reduced to less than 100 million Reichsmarks, sufficient to cover barely a week’s imports, even at minimal levels.

The truly alarming problem was the trend in exports. Whilst the German domestic economy rebounded, exports continued to decline. In every month of 1933 exports were lower than they had been in 1932 and the gap widened as the year wore on. The trend continued into 1934, with export earnings in the early summer of 1934 fully 20 per cent lower than they had been a year earlier.

The light manufacturing districts of central and eastern Germany, the great commercial cities of the Rhine valley, the port towns of the Baltic and the North Sea all earned their living through foreign trade. The fact that German export volumes remained 40 per cent below their level in 1932 was one of the principal causes of unemployment both in industry and commerce.

There is no doubt that the enormous hike in global protectionism that followed the currency crisis of 1931 made exporting very difficult.20 But Germany was not simply a victim of other countries’ protectionism. Other than Britain, Germany was Europe’s largest market for exports and Germany’s own turn towards protectionism since 1930 had played an important role in accelerating the cycle of tit-for-tat trade restriction.

One of the most alarming features of the Reich’s trade statistics in 1934 was the serious fall in exports to France, the Netherlands and Switzerland. All three had responded to Germany’s default in 1933 by negotiating clearing agreements, which ensured that they recouped at least some of Germany’s export earnings in the form of debt service.

German exports were impeded by the bureaucratic formalities of the clearing agreements. German importers on the other hand had every incentive to take full advantage of the open account offered under the terms of the treaties. From Germany’s point of view this was a disastrous development, since it relied on the surpluses earned in trade with its European neighbours to pay for its imports of food and raw materials from overseas.

Furthermore, there can be no doubt that these obstacles to German exports were compounded after 1933 by widespread international antipathy towards the lawlessness and anti-Semitism of Hitler’s regime.

they had culminated in the official boycott of Jewish businesses proclaimed on 1 April 1933.22 This in turn provoked Jewish organizations, most notably in the United States, into organizing a boycott of German goods. Though it is hard to assess the precise impact of this negative sentiment, it is clear that it was taken very seriously in Berlin.

In July 1933 Hitler stated to a key meeting of leading Nazis that the first wave of revolutionary action against the Jews had had to be brought to a halt because of the front it created against Germany in international opinion.

In so far as the anti-Semitism of Hitler’s regime had a coherent objective in the 1930s, it was the removal of Jews from German soil. In this respect it was fairly ‘successful’ in 1933, with 37,000 German Jews driven out of the country by the violence of the seizure of power. The ‘problem’ was that emigrants, unless they were very desperate, would move in large numbers only if they were permitted to take at least some of their possessions with them. German Jews were no different in this respect than any other migrant population. The Reichsbank was required by its statutes to provide migrants with the foreign currency needed to meet visa requirements abroad.

At a conservative estimate German Jewish wealth in 1933 came to at least 8 billion Reichsmarks. Transferring even a modest fraction of this amount was clearly beyond the Reichsbank. As it was, the drain was serious enough. According to a detailed account compiled by the Reichsbank, the hard currency losses due to emigration between January 1933 and June 1935 came to a total of 132 million Reichsmarks, of which Jewish emigrants accounted for 124.8 million Reichsmarks.

In response, the Reichsbank therefore sharply raised the discount that was applied to holders of personal accounts wishing to transfer them abroad via the Golddiskontbank.26 In addition, as of May 1934 the provisions of the so-called Reich flight tax were tightened up, with the lower threshold for liability being cut from 200,000 to 50,000 Reichsmarks and greater discretion given to the authorities in making the assessment.

However, the net effect was profoundly contradictory. Rather than encouraging emigration, the Third Reich was now imposing a severe tax on anyone seeking to leave the country. And the result was predictable. Once the initial violence of the seizure of power had passed, Jewish emigration dwindled to only 23,000 in 1934 and 21,000 in 1935.

None of this, however, prevented paranoid anti-Semites such as Joseph Goebbels from placing the full blame for Germany’s balance of payments problems on the machinations of world Jewry.

To stormy applause Goebbels announced that in the event of an economic crisis, the ‘hatred and anger and desperation of the German people would direct itself first of all against those we can get our hands on at home’.

The basic problem was the uncompetitive exchange rate of the Reichsmark. As we have seen, this fundamental misalignment had first emerged in the autumn of 1931 after the devaluation of sterling. The second shock had come in April 1933 with the devaluation of the dollar. By 1933 only 20 per cent of world trade was still conducted between countries with currencies fixed in terms of gold. Germany’s failure to follow this trend meant that the prices of its exports, translated at the official exchange rate of the Reichsmark, were grossly uncompetitive.

At prevailing exchange rates, the entire system of prices and wages in Germany was out of line with that prevailing in most of the rest of the world economy.

The Reichsbank in the summer of 1934 estimated that a 40 per cent devaluation, sufficient to offset the British and American competitive lead, would have raised the working-class cost of living by 5.4–7.4 per cent, with the price of food going up by at least 10 per cent.29 Whether or not this resulted in sustained inflation, of course, was another matter.

Devaluing the Reichsmark would negate all the advantage that Germany had gained since 1931 through the devaluation of its creditors’ currencies.

Either through a complicated system of buy-backs, or through manipulating the blocked accounts of the foreign creditors in Germany, the Reichsbank found ways of subsidizing Germany’s exporters at the expense of its creditors, earning Hjalmar Schacht his dubious reputation in the 1930s as the dark wizard of international finance.

One system of subsidy, therefore, involved German exporters using their foreign earnings to buy up the heavily discounted German bonds in London and New York. A bond with a face value of $100 (valued at 350 Reichsmarks, at the prevailing exchange rate of 3.50 Reichsmarks to the dollar) could be purchased in New York in April 1934 for roughly $50 (175 Reichsmarks, at the going rate). With the German exporter now holding the discounted IOU, a debt owed by a German debtor to a foreign creditor had been converted into a debt owed by one German to another.

To an exporter benefiting from this scheme, $50 in export earnings once cashed into dollar bonds was worth not 175 Reichsmarks, but closer to 350. In effect this amounted to a devaluation of the Reichsmark by 50 per cent, allowing the exporter to price his goods very keenly in dollars, selling on terms that would otherwise have implied severe losses.

Under the buy-back scheme, the cost was borne by Germany’s foreign creditors, who sold off their German bonds at a fraction of their face value.32 Not all German exporters of course required subsidy. Goods sold through cartels, specialist equipment or commodities in which Germany held a monopoly accounted for almost a third of German exports.

Germany, it seemed, had found a way of boosting its exports without imposing the penalties of a devaluation–the high cost of imports and the onerous burden of foreign debt–on the rest of the economy.

Germany could not produce, work or consume without imports. As we have seen, the basic priorities of the government had already been indicated in the first half of 1933. The quantity of spending envisioned for rearmament far outweighed anything that was ever contemplated for work creation, as did the diplomatic, financial and political risks that were taken.

could either take radical measures to boost exports, or it could choose to prioritize selectively one type of import over another, either the import requirements of the industries catering to civilian consumer needs, or the requirements of state driven investment and rearmament. It could not have both.

Within Germany, any public acknowledgement of the trade-off between civilian and military priorities was taboo. But foreign observers were not subject to the same restrictions. The connection between war debts and rearmament had been a staple of international discussion since the 1920s. The increase in Germany’s military spending after 1933 was clear enough even in the published figures of the Reich’s budget.

If Germany was serious about managing its foreign exchange crisis, if it wanted concessions from its creditors, then it would have to back away from unilateral rearmament.

Indeed, so clear-cut was the choice facing Germany that debate could not be entirely suppressed, even within the Reich itself. Too much was at stake, for too many people.

The RWM wanted to focus its efforts on raising the level of consumer demand, by cutting social insurance contributions and the levies of para-state organizations such as the German Labour Front. The RFM for its part hoped to clear the way for a ‘natural’ business-led recovery, by imposing a rigorous programme of fiscal discipline, not exempting the military.

Rather than supporting Kurt Schmitt in his effort to limit military spending, Schacht deliberately outflanked him. The key moment appears to have come in March 1934, when Schmitt and Schacht were summoned by Hitler to a private meeting on the Obersalzberg at which they were to settle the future direction of economic policy. In advance of the meeting, Schmitt took care to reach an agreement with Schacht not to concede more than 15 billion Reichsmarks for rearmament. But when it came to the crucial meeting with Hitler, Schacht allowed Schmitt to break the unwelcome news before announcing that, as far he was concerned, ‘no amount of money was too much for this vital national task’.