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

by Adam Tooze

The combination of rising domestic demand, an end to foreign competition, rising prices and relatively static wages created a context in which it was hard not to make healthy profits.

by 1934 the bonuses being paid to the boards of some firms were so spectacular that they were causing acute embarrassment to Hitler’s government.

Having regulated imports, exports and domestic price-setting, the RWM therefore moved in the spring of 1934 to control the use of business profits. The distribution of profits to shareholders was not to exceed a rate of 6 per cent of capital. This did not of course have any effect on underlying profitability. It simply meant that corporate accountants were encouraged to squirrel profits away in exaggerated depreciation and reserve bookings.

Access by corporate borrowers to the long-term capital market–replenished out of household savings flowing through the banks, savings banks and insurance funds–would be restricted, reserving these funds for use by the state.

The crisis of 1931 had left the Reich with a controlling stake in all three of the major national banks–Deutsche Bank, Dresdner Bank and Commerzbank.

the moment of crisis was turned into an opportunity for managerial reform and tighter oversight by the central bank. Between September 1933 and October 1934 a committee of inquiry held a series of carefully stage-managed debates, in which radical positions were progressively sidelined. The end result was a draft law that gave the Reichsbank extensive powers of oversight.

For the first time, the Reichsbank was given the power to define basic reserve requirements and to fully regulate the deployment of private banking assets.

In purely commercial terms the Berlin Great Banks were amongst the chief ‘losers’ of the Nazi economic recovery.45 Between 1932 and 1939, in which period German output more than doubled, the total assets of the Berlin Great Banks rose by only 15 per cent. By contrast, the assets of the savings banks, the main vehicle for what one might call ‘popular liquidity’, rose by 102 per cent over the same period.

those that did need external funding for the regime’s high priority projects could turn to new, state-backed lenders such as the Bank fuer Industrie-Obligationen or the Aero-Bank of the Luftwaffe.

the Deutsche Bank was closely involved with Mannesmann, and its CEO Wilhelm Zangen, one of the most rapacious profiteers of the Nazi regime.

it is in fact hard to think of any other period in modern German history in which these institutions had less influence than the period between 1933 and 1945.

As in the case of the banking system, Germany’s electricity network was divided between a small group of gigantic oligopolists and a variety of local and municipal suppliers.

That left the small municipal and regional generators, set up in the early years of electrification, as the only real competitors. After 1933 many of these fell into the hands of the local Nazi party organizations and they, not surprisingly, raised a clamour against the overweening power of the major generators.

Schacht’s officials justified the need for centralized control of new investment in electricity generation unabashedly in terms of the ‘overarching interest of the German energy business’ (‘uebergeordenetes Interesse der deutschen Energiewirt-schaft’ ).51 This was too much for the National Socialists, such as Reich Interior Minister Wilhelm Frick, who was so dissatisfied that he had the bill withdrawn and redrafted so that state intervention was now justified in terms of the need to secure ‘unified leadership’ (‘einheitliche Fuehrung’) in the ‘interest of the common good’ (‘interesse des Gemein-wohls’’) and for the sake of ‘securing national defence’ (‘sicherstellung der Landesverteidigung’).

The reformed Reichsbank, the Reich Ministry of Economic Affairs, the Reich Labour Ministry and the Reich Ministry of Food and Agriculture were all products of World War I and its aftermath. 53 Many of the regulatory systems introduced after 1933 had been under discussion since the 1920s, including the electricity law and the new corporation law passed in 1937. However, the situation after 1933 was different, at least in the sense that the state acted with a far greater degree of authority and independence than ever before. For this purpose, the rhetoric of Hitler’s National Revolution was a convenient cover.

The crisis of corporate capitalism in the course of the Great Depression did permanently alter the balance of power. Never again was big business to influence the course of government in Germany as directly as it did between the outbreak of World War I in 1914 and the onset of the Depression in 1929.

The day-to-day inconveniences of the New Plan, not to mention the export levy, were clearly extremely unpopular. But the scope for argument and debate was limited in a number of ways and not only through the regime’s coercive control of the media.

By staking their personal reputations on the stability of the Reichsmark already in the spring of 1933, Hitler and Schacht had done their best to render the topic of devaluation non-negotiable. Schacht, furthermore, in his arguments with Germany’s creditors, played on habits of thought that had become deeply ingrained since the reparations debates of the 1920s. It had become a commonplace in German economic discussion to view the country’s balance of payments problems as ‘structural’ and thus beyond Germany’s own power to control.

if this flow of goods was obstructed by protectionism and beggar-my-neighbour devaluations, this left Germany no option but to resort to ever greater state control of imports and exports, which in turn necessitated a range of other interventions. In this sense, despite the questions about a possible devaluation, the dramatic increase in state control could be seen as an inevitable product of ‘historic necessity’ rather than conscious political choice.

Businessmen had little to lose by concentrating on Germany’s booming domestic markets. Anxieties only really became acute in 1936–7 when it seemed as though the rest of the world economy might finally be returning to prosperity.

we must be careful to avoid falling into the trap of viewing German business merely as the passive object of the regime’s draconian new system of regulation.

At first the profits were used to undo the damage done by the Depression. Then from the late 1930s onwards, they financed an extraordinary investment boom such as had never before been seen in German industrial history.59 What Hitler’s regime positively enabled German business to do was to recover from the disastrous recession, to accumulate capital and to engage in high-pressure development of certain key technologies: the technologies necessary to achieve the regime’s twin objectives of increased self-sufficiency (autarchy) and rearmament.

Whereas to Stresemann’s strategy the importance of German business had been defined by economic factors –the international competitiveness and creditworthiness of German business–the Third Reich needed German industry above all for its productive resources, both technological and organizational.

By the late 1930s IG Farben, with over two hundred thousand employees and assets totalling over 1.6 billion Reichsmarks, was one of the largest private companies not only in Germany, but in the world.

And selling lots of meth.

IG occupied a globally dominant position in a staggering array of chemical and pharmaceutical sectors. It maintained a relationship of equals with the mighty Standard Oil of the United States. Mere chemical companies such as Britain’s ICI and America’s DuPont were no match.

In no sense of the word did the German chemical industry ‘need’ Hitler. And yet, as a result of a series of technical decisions, the leaders of Germany’s chemical industry moved into an ever-closer alliance with the German state.

Bosch’s central objective in promoting the merger seems to have been to attain sufficient scale to be able to finance the progress of his immensely expensive synthetic technologies.

IG Farben embarked on the construction of the world’s first facility for coal hydrogenation, the alchemical process through which coal was transformed into petrol. This programme followed a clear scientific logic. But it was also motivated by that most modern of fixations, the idea that one day the oil would run out.

It was this commitment to synthetic chemistry that made IG Farben into by far the closest and most important industrial collaborator of Hitler’s regime. IG’s technology offered Germany the chance of independence from imported oil.

Conversely, it was IG Farben’s expensive investment in these technologies that gave the otherwise internationally minded corporation a powerful incentive to collaborate with Hitler and his nationalist programme. Bosch’s gamble on the imminent exhaustion of oil backfired spectacularly.

By the late 1920s, after spectacular development in Venezuela, California, Oklahoma and the Permian Basin in west Texas, the world market for crude was glutted.65 To make matters worse, in October 1930 wildcatters in east Texas found the famous ‘Black Giant’. Within months the world oil price had collapsed, leaving IG Farben’s investment at Leuna without economic rationale.

IG could certainly have retreated from hydrogenation. Losses of a few hundred million Reichsmarks would not have broken the company. Such a retreat would, however, have run completely counter to Carl Bosch’s vision of the firm, which now depended on the willingness of the German government to impose high taxes on imported oil.66 It was...

IG was doing little more than hedging its bets. Its chief priority was to secure the future of Leuna and to continue its research programme, not to launch Germany into a large-scale programme of fuel self-sufficiency.

Playing on Hitler’s interest in self-sufficiency, Voegler proposed a scheme to produce several million tons of synthetic fuel. Given the political turmoil in 1933, it took a few months. But on 10 August 1933 Voegler was able to inform Professor Dr Carl Krauch, the key technical man in IG’s synthetics programme, that Secretary of State Erhard Milch at the Air Ministry was interested in consulting with IG about the future of Germany’s fuel supplies.

The essentials of the contract were a commitment by IG to expand its facility at Leuna to a capacity of 350,000 tons per annum, in exchange for a guarantee by the Reich that IG would make a profit of at least 5 per cent on the capital invested.

From 1936 onwards Leuna generated large profits, the majority of which flowed to the Reich. It was IG Farben not the Reich that had cause to regret the terms of the Benzinvertrag.

At the time, even with low world prices, imports of petrol and oil-related products were costing Germany 200 million Reichsmarks per annum. As Leuna had already demonstrated, hydrogenation plants were extremely expensive. Schacht estimated that between 250 and 300 million Reichsmarks would be needed for the first stage of the expansion.

Perhaps not surprisingly, the industrialists were completely taken aback. In their view, coal hydrogenation was uneconomic and the commitment of such large quantities of capital would prevent them from taking advantage of other opportunities in the course of the economic recovery. But Schacht would not back down.

Ten leading coal-mining corporations were conscripted on 25 October 1934 to form the Braunkohlenbenzin AG (Brabag). Each was instructed to make out a cheque for at least 1 million Reichsmarks for immediate use. When more coal companies were added in November, Schacht threatened both unlimited fines and imprisonment of anyone refusing to cooperate.

Day-to-day operations at Brabag were to be overseen by Fritz Kranefuss (1900–1945?). Kranefuss came from a family of cigar manufacturers in Herford, Westphalia, and after a brief spell in the Imperial Navy and the Freikorps had undergone a normal commercial apprenticeship. However, his chief qualifications were his excellent political contacts. He was a nephew of Wilhelm Keppler, Hitler’s personal economic adviser, and had been a member of the Nazi party since 1932. He was a close collaborator of Heinrich Himmler and was employed on the staff of Rudolf Hess, the deputy leader of the party.

The Reich guaranteed Brabag’s shareholders against operational losses. It also provided them with a guarantee to cover the hundreds of millions of Reichsmarks that Brabag was forced to borrow to finance its breakneck expansion. But the rate of profit was fixed at 5 per cent and any amount in excess of the agreed rate was deducted for the benefit of the Reich.

Like chemicals, the steel sector had also undergone dramatic consolidation in the 1920s. The result was the formation of the Vereinigte Stahlwerke (Vst or Vestag for short), a corporate giant that matched IG Farben for size and was second in the world steel rankings only to mighty US Steel.71 Within the steel industry, however, the Vestag’s position was nowhere near as dominant as that of IG Farben in chemistry.

underlying this oligopolistic structure in steel-making was the no less tangled structure of the coal sector, which was closely interwoven with that of steel.72 The result was a scene of bewildering complexity, which is still poorly understood.

It seems that Krupp even contemplated the possibility of reviving the strategy pursued by German industry in the face of the revolution in 1918. This involved an alliance with the German trade union movement, as a way of asserting the autonomous authority of private industry against the civil war threatening between Nazis and Communists.

Thyssen’s real inspiration was the corporatist model of industrial organization pioneered by Fascist Italy. The distinctive feature of this vision was that it included employers and workers in a single organization, imposing social unity by government fiat. Not surprisingly, this was not the sort of thing that appealed to old warhorses of reaction such as Krupp and Reusch. And Thyssen’s social romanticism also found little favour with Kurt Schmitt at the Reich Ministry of Economic Affairs and Schacht at the Reichsbank.

By early 1936 military business already accounted for 20 per cent of Krupp’s sales, with orders flowing both to the Gus-stahlfabrik in Essen but also to Krupp’s Gruson works in Saxony, which was responsible for armoured plate and complex naval sub-assemblies.

Vestag, like Krupp, had absorbed heavy losses during the Depression and was keen for military business. But it had even more urgent reasons than Krupp to reach an amicable modus vivendi with the new regime. As Hitler consolidated his power in 1933, the most pressing concern for the Vestag management was the smooth reprivatization of the shares taken into Reich ownership in early 1932.

In 1933 it was Voegler who approached Hitler with a grand proposal for a new coal-based fuel industry. This was clearly intended as part of a more general reorganization in the coal industry, which also included the notorious manoeuvre through which Paul Silverberg, Germany’s leading Jewish industrialist, was stripped of his control of the lignite producer Rheinbraun and sent into exile in Switzerland.

Not only were Vestag’s shares returned smoothly into private ownership, Germany’s largest steel firm also assumed a controlling position in Schacht’s new organizational structure for the steel industry.

During World War I Borbet had pioneered the introduction of low-cost gun steels requiring a minimum of imported alloys, and in the 1920s he made the Bochumer Verein into one of the centres for the development of centrifugal casting, a revolutionary process in which gun barrels, rather than being bored out of solid steel ingots, were spun out of molten metal.