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

by Adam Tooze

A few weeks later this was institutionalized by an agreement, which removed the military from detailed scrutiny by the Finance Ministry.

Blomberg simply presented a grand total for military spending to a three-man committee consisting of Krosigk, Schacht and himself.

Not corrupt in ANY way. /s

Under the pressure of the balance of payments problem and the refusal to devalue, Schacht was imposing a system of ever more comprehensive bureaucratic control on the German economy and on German business.

One should not forget that as recently as May 1932 Gregor Strasser had publicly committed the Nazi party to abandoning the gold standard.

Whereas devaluation had once been a ‘radical’ cause, it now seemed the only way to preserve a degree of normality in the day-to-day business of that part of the German economy that depended on foreign trade. As we have seen, in commercial cities such as Hamburg, unemployment was still painfully high in 1934 and without a revival in foreign trade there was little prospect of any immediate improvement.

Krosigk said in public what Schacht was quite willing to admit in private. The Third Reich rejected devaluation, not in principle, but because it was impractical and too risky for a country like Germany with enormous foreign debts and minimal foreign exchange reserves.

If devaluation was ruled out, then there was no alternative but to begin as soon as possible with the establishment of a new and powerful system of economic controls.

Since the surveillance agencies regulated only raw materials, traders imported increasing volumes of finished goods, which were more expensive. The restrictions did not apply to the clearing agreements covering trade with the Netherlands and Switzerland. So importers diverted trade through those countries.

Indeed, it is hard to escape the conclusion that rather than seeking to stabilize the situation Schacht was deliberately forcing the crisis, turning the screw on Schmitt.

The tension reached its climax in the second half of June, with Schacht’s announcement on 14 June of a complete moratorium on foreign debt repayment and the imposition of a new regime of daily foreign exchange allocation. This not only plunged Germany’s foreign relations into crisis. It also put Schacht in complete control.

The senior civil servants in the RWM, however, were made of sterner stuff. Under the leadership of Secretary of State Hans Posse, the Ministry made one last effort to change the course of events.

In early July he and his staff drafted a plan for the management of Germany’s foreign account based on a scheme devised by Vincent Krogmann, the Gauleiter of Hamburg, whose ideas reflected the commercial and free trading proclivities of his constituency.

What Krogmann proposed instead was the creation of a ‘pseudo-market’ for foreign exchange, in which the price mechanism rather than bureaucratic regulation would be used to bring demand and supply into equilibrium.

Thomas stated bluntly that the desperate situation of the Reich’s currency reserves posed an immediate threat to the continuation of rearmament. If, as seemed possible in the fraught summer of 1934, Germany were to be entangled in a war, the result would be a disaster.

The direction of German economic policy had been decided. Rather than attempting to manoeuvre its way out of the crisis through a combination of devaluation and rapprochement with the Western powers, the Third Reich would stay the course of nationalist self-assertion. The means to do so would be divisive bilateral diplomacy abroad and authoritarian organization at home.

The German balance of payments crisis of 1934 left a lasting impact on Germany’s trade relations. It is commonplace to describe Germany’s trade policy from the summer of 1934 onwards as autarchic–a generalized effort to restrict imports and achieve self-sufficiency. A close look at the trade statistics reveals that ‘autarchy’ in fact amounted to a selective policy of disengagement directed above all against the United States, the British Empire and, to a lesser degree, France.

Germany’s balance of payments problems in the early 1930s were above all problems in relation to the world’s largest economic blocs: the United States and the British Empire. The United States was overwhelmingly Germany’s largest foreign lender.

The leaders of the Weimar Republic accepted this situation so long as they needed American backing in the struggle against reparations. Once reparations were lifted at Lausanne in 1932, this consideration no longer applied.

America could cut off supplies of key raw materials. But in an all-out trans-Atlantic trade war all that Germany stood to lose was a large trade deficit.

The significance of the summer crisis of 1934 from Schacht’s point of view was that it splintered the Anglo-American front. A trade war with Britain would undoubtedly have been a disaster for Germany, but it would also have had severe consequences for the British. Schacht’s brinksmanship was clearly motivated by an acute sense of what was at stake for the City of London and for British exporters in Anglo-German economic relations.

To avoid the imposition of compulsory clearing, the Germans agreed to resume service on the Dawes and Young loans, the most sensitive of Germany’s debts. The British for their part allowed themselves to be enrolled in a bilateral commercial agreement in the form of the Anglo-German Payments Agreement of 1 November 1934.

There can be no doubting the strategic importance of the Anglo-German agreement. Not only did it split the Anglo-American front and stabilize relations with Germany’s most important trading partner, but the Anglo-German agreement also offered an escape from the impasse that had been reached in previous clearing agreements with Germany’s Western European neighbours.

Fifty-five per cent of Germany’s sterling revenues were to be set aside for unrestricted import of British goods to Germany. A further 10 per cent were to be used to service Germany’s short- and long-term obligations to British creditors. The rest, notionally at least, was available for use outside the sterling zone.

After 1934 Germany singled out its American creditors for particular discriminatory treatment. Even American holders of Dawes and Young loans, supposedly the most privileged form of debt, were repaid at a rate 30 per cent lower than that granted to British creditors. Meanwhile, at least $900 million worth of corporate and local government bonds were caught up in the complete moratorium on transfer payments.

Schacht’s strategy of bilateralism, crowned by the Anglo-German Payments Agreement, clashed with the strategy of multilateralism being pushed no less assertively by Secretary of State Hull in Washington. With the dollar having finally ended its precipitate collapse, Hull began a systematic campaign for trade liberalization with the Reciprocal Trade Agreements Act of June 1934.

Entering into bilateral trade agreements with Germany would have undermined the credibility of Hull’s entire strategy, notably in the eyes of America’s major trading partners in Latin America.

In 1928, American exports to Germany had been worth 2 billion Reichsmarks and exports from Germany to the United States were valued at 796 million Reichsmarks. By 1936, this trade had shrunk to derisory levels. American exports to Germany were worth no more than 232 million Reichsmarks and German exports amounted to less than 150 million Reichsmarks.

By the late 1930s, the overall shift in the structure of German imports was very substantial. But the scope of Germany’s new trading relationships was inherently limited by the imbalances in purchasing power between Germany and the less developed countries.

Germany’s urgent drive to increase its imports of cotton and coffee allowed Rio to extricate itself from Cordell Hull’s vision of a hemispheric free trade zone.70 Indeed, such was American concern about the growing German influence in Brazil that Rio was able to follow Germany in defaulting on its large debts to the United States, without having to fear aggressive retaliation from Washington.

Whereas the British mandate restricted immigration by applicants without financial means, anyone equipped with at least 1,000 Palestinian pounds (1 pound Palestine=1 pound sterling) was granted free entry under a so-called ‘capitalist visa’. The Haavara Transfer was designed to take advantage of this loophole. The scheme operated by allowing German Jews to make payments into a fund in Berlin in exchange for certificates crediting them with sufficient Palestinian pounds to allow them to obtain the coveted visa.

In effect, the arrangement ensured that every Reichsmark of capital exported by a German-Jewish emigrant was matched by a compensating export order. As the Reichsbank tightened its grip on its foreign exchange reserves, Haavara became, despite the tiny size of the Mandate economy, one of the most efficient means for Jews to export capital from Germany.

50,000 people, one-tenth of the German-Jewish population in 1933, were able to use the scheme to make good their escape. They took with them 106 million Reichsmarks for which they obtained the remarkable total of 5.5 million Palestinian pounds.

Structural rearrangements of this kind in Germany’s trading relations, however, were a matter for long-term strategy. What was required in 1934 was an immediate solution to the looming foreign exchange crisis.

The Reichsbank would allocate the available foreign exchange on the basis of the export returns. It would reserve the funds required to make agreed debt repayments and to ensure that Germany could meet its short-term obligations. The remainder would then be handed to a group of supervisory agencies, twenty-five in total, one for each major class of commodities.

How Soviet of them.

The supervisory agencies would not themselves engage in the import trade. Their job was to sift applications for foreign currency from private importers and to allocate the limited funds according to their national priority. Top priority, it was clear, was to be given to exporters and to suppliers to the armaments effort.

As of 1935, imports without Exchange Certificates were banned.

It is also significant, however, that the plan had to be cleared with Hitler. The Fuehrer may not have followed the day-to-day details of economic policy, but no important decisions could be taken without his approval.

Characteristically, Schacht referred to his own design as a ‘monstrosity’ forced on Germany by the refusal of its creditors to accept more reasonable trade terms. Completely ignoring his own role in systematically exacerbating the crisis, Schacht blamed Germany’s retreat into autarchy entirely on external circumstances.

By the third quarter of 1935, the volume of imports was almost exactly equal to that at the trough of the recession three years earlier. But, by comparison with 1932, industrial production was up almost 100 per cent.

Any substantial increase in imports depended on achieving a recovery in exports. This, however, failed to arrive. By the summer of 1934, the optimism that had surrounded the export subsidy schemes a few months earlier was largely dispelled.

The Reichsbank estimated that to offset Germany’s crippling competitive disadvantage it needed to provide more than two-thirds of Germany’s exports (240 million of 340 million Reichsmarks) with a subsidy of 25 per cent. This would cost 60 million Reichsmarks per month, of which at most 40 million could be raised from Germany’s foreign creditors.

What saved Schacht were three things: the continuing recovery of the global economy, which produced a resurgence in demand for German exports; the willingness of countries other than the United States, most notably Britain, to comply with Germany’s new trading system; and the sheer determination and effectiveness with which the New Plan was imposed.

As of May 1935 a progressive tax was levied on the turnover of German industry to raise the tens of millions of Reichsmarks needed every month to maintain the competitiveness of German exports.79 In effect, the profits of the domestic armaments boom were being recycled to assist the ailing export sector.

To take one example, the steel tube industry had monthly domestic sales in 1935 of 15.6 million Reichsmarks. The profit on this business was 1 million Reichsmarks per month. Of this amount, no less than 400,000 Reichsmarks, or 40 per cent, was taxed away in contributions towards the export subsidy.

From German industry as a whole, the levy raised 700 million Reichsmarks in its first year. Not surprisingly, it was extremely unpopular. But protests from industry were rebuffed with reference to the ‘special emergency of the state’.83 And it could not be denied that the system was effective. By the end of 1935, the industrial levy was raising funds sufficient to provide the average German exporter with a subsidy of almost 30 per cent on every foreign order.

The measures taken in response to the foreign exchange crisis of 1934 laid the organizational foundations for the management of the Nazi economy for years to come.

From 1935 onwards, as a result both of the recovery of the world economy and the effective new subsidy scheme, the disastrous decline of German exports was halted. From June 1935 until the spring of 1938, steady growth in exports was vital to sustaining the momentum of Hitler’s economic recovery.

Under modern conditions of uninhibited free trade and international lending, the IMF advises central banks to hold precautionary reserves equivalent to six months of imports. The elaborate apparatus of Schacht’s New Plan allowed the Reichsbank to sustain the international trade of one of the world’s largest and most sophisticated economies with foreign currency reserves amounting in the mid-1930s to little more than one week’s cover.

From the spring of 1934 onwards, the Reichsbank and the RWM squeezed down hard on all aspects of household consumption that were dependent on imported raw materials. The result was to split the German economy in two. Whilst the investment goods industries and all sectors associated with the drive towards self-sufficiency continued their surging recovery, the upswing in the consumer sectors, above all textiles, was suddenly stopped in its tracks.

The conventional image of the German economy as a powerhouse of industrial modernity, too often obscures the continued importance of ‘traditional’, consumer-orientated sectors such as food and textiles. The textile and clothing sectors did not boast the corporate champions of heavy industry, nor could they claim political connections at the highest level.85 But in 1933 textiles and clothing were still amongst the largest industrial employers in Germany.