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

by Adam Tooze

The cultural crises of early twentieth-century Europe, the vacuum left by the secularizing tendencies of the late nineteenth century, the radicalizing horror of World War I, all demand attention from anyone seriously interested in plumbing the deeper motives of National Socialism. How else can we understand a regime that took as its central objective the destruction of European Jewry, an objective apparently devoid of all economic rationale, a project that, if it can be understood at all, seems to be intelligible only in terms of a violent theology of redemptive purifica tion?

In 1939, as the war started, the combined GDP of the British and French empires exceeded that of Germany and Italy by 60 per cent. Of course, the idea of inherent German economic superiority was not simply a figment of the historical imagination. Germany from the late nineteenth century onwards was the home for a cluster of world-beating industrial companies. Brand names like Krupp, Siemens and IG Farben gave substance to the myth of German industrial invincibility. Viewed in wider terms, however, the German economy differed little from the European average: its national per capita income in the 1930s was middling; in present-day terms it was comparable to that of Iran or South Africa. The standard of consumption enjoyed by the majority of the German population was modest and lagged behind that of most of its Western European neighbours. Germany under

Hitler was still only a partially modernized society, in which upwards of 15 million people depended for their living either on traditional handicrafts or on peasant agriculture.

In 1870, at the time of German national unification, the population of the United States and Germany was roughly equal and the total output of America, despite its enormous abundance of land and resources, was only one-third larger than that of Germany. Just before the outbreak of World War I the American economy had expanded to roughly twice the size of that of Imperial Germany. By 1943, before the aerial bombardment had hit top gear, total American output was almost four times that of the Third Reich.

The originality of National Socialism was that, rather than meekly accepting a place for Germany within a global economic order dominated by the affluent English-speaking countries, Hitler sought to mobilize the pent-up frustrations of his population to mount an epic challenge to this order.

As this book will show, Hitler’s regime after 1933 undertook a truly remarkable campaign of economic mobilization. The armaments programme of the Third Reich was the largest transfer of resources ever undertaken by a capitalist state in peacetime. Nevertheless, Hitler was powerless to alter the underlying balance of economic and military force. The German economy was simply not strong enough to create the military force necessary to overwhelm all its European neighbours, including both Britain and the Soviet Union, let alone the United States.

In Hitler’s mind, the threat posed to the Third Reich by the United States was not just that of conventional superpower rivalry. The threat was existential and bound up with Hitler’s abiding fear of the world Jewish conspiracy, manifested in the shape of ‘Wall Street Jewry’ and the ‘Jewish media’ of the United States. It was this fantastical interpretation of the real balance of power that gave Hitler’s decision-making its volatile, risk-taking quality. Germany could not simply

settle down to become an affluent satellite of the United States, as had seemed to be the destiny of the Weimar Republic in the 1920s, because this would result in enslavement to the world Jewish conspiracy, and ultimately race death. Given the pervasive influence of the Jews, as revealed by the mounting international tension of the late 1930s, a prosperous future of capitalist partnership with the Western powers was simply impossible. War was inevitable. The question was not if, but when.

On the one hand, the crisis of 1918–23 gave rise to an ultra-nationalism–in the form of the radical wing of the DNVP and Hitler’s Nazi party–that was more apocalyptic in its intensity than anything prior to 1914. On the other hand, it also produced a truly novel departure in German foreign and economic policy. This alternative to nationalist militancy also aimed to achieve a revision of the onerous terms of the Treaty of Versailles. But it aimed to do so not by gambling on military force. Instead, Weimar’s foreign

policy prioritized the economy as the main field within which Germany could still exercise influence in the world. Above all, it sought security and leverage for Germany by developing financial connections with the United States and closer industrial integration with France. In certain key respects, this clearly anticipated the strategy pursued by West Germany after 1945. It was a policy that enjoyed the backing of all of the parties of the Weimar coalition–the Social Democrats, the left liberal DDP and the Catholic Centre party. But it was personified by Gustav Stresemann, leader of the national liberals, the DVP, and Germany’s Foreign Minister between 1923 and 1929.5

Gustav Stresemann had first enunciated his view that ‘politics . . . [is] today first of all the politics of the world economy’, as an ambitious young representative of the National Liberal party in the Wilhelmine Reichstag.

Both by his reading of economic history and his practical experience of trade policy, Stresemann was convinced that the dominant forces in the twentieth-century world would be the three major industrial economies: Britain, Germany and the United States. The economic great powers were rivalrous, certainly. But they were also functionally and inescapably interconnected. Germany needed raw materials and food from overseas export markets to provide its population with work and bread. The British Empire was better placed with regard to raw materials, but it needed Germany as an export market. Furthermore, Stresemann was convinced from an early stage that the emergence of the United States as the dominant force in the world economy permanently altered the dynamic of competition between the European powers.

There can be no doubt that Germany’s sudden defeat in the autumn of 1918 shocked Stresemann deeply, leaving him close to both physical and psychological collapse. It permanently shook his confidence in military force as a means of power politics, certainly as far as Germany was concerned. More fundamentally, it raised doubts in his mind about the German social and political system, which had proved less resilient than that of either Britain or France. This, however, merely reinforced his belief in the determining force of economics. The world economy was the one sphere in which Germany was truly indispensable. Already in April 1919 Stresemann demanded that, given Germany’s military weakness, the basis of its foreign policy should be the strength of its major corporations.

His strategy, which relied on manipulating the interlocking interests of the United States, Britain and France, was simply more complex than the confrontational mode favoured by the ultra-nationalists.

Re-establishing the Reichsmark on gold at its pre-war parity against the dollar ended the instability of Germany’s currency.18 Further protection was provided by the so-called Reparations Agent. This office was occupied by a young Wall Street star, Parker Gilbert, who had the power to halt transfers of reparations payments if they would endanger the stability of the German currency.

This merry-go-round in which Germans borrowed money from the Americans to pay the British and French who then paid the Americans raised anxiety on all sides.20 However, it served its purpose. The US Congress insisted on the fullest possible repayment of the inter-Allied credits owing to America.21 The new American lenders to Germany were making handsome profits. And the Weimar Republic enjoyed a standard of living considerably higher than would have been possible if it had been constrained to pay reparations out of an export surplus.

Put at its most simple and most cynical, Germany’s strategy consisted of exploiting the protection provided by the Reparations Agent to borrow so much from America that the service on this debt made it impossible to transfer reparations.23 More subtly, what Stresemann and Schacht aimed to do was to make American financial interests into the main force pushing for the revision of Germany’s reparations, allowing Berlin to normalize its relations with London and Paris.

Specifically, both blamed Great Britain for having initiated the war, in a deliberate attempt to cripple Germany as an economic and naval competitor. In Stresemann’s case, however, this common-sense model of military-economic competition was softened by his understanding of the mutual interconnectedness of the world economy and above all by the importance he attached to the United States as a counter-weight to Britain and France. Hitler’s outlook, by contrast, was far more embattled. He regarded the liberal ideology of progress through industry, hard work and free trade as nothing more than a lie spread by Jewish propagandists. In fact, any effort by the German people to seek salvation through industry and trade would eventually bring them into competition with Britain.

For Hitler, the decisive factors in world history were not labour and industry, but struggle for the limited means of sustenance.

It was fundamental to his strategic conception in the 1920s and early 1930s that he would be able to secure a dominant position for Germany in Europe without coming into conflict with Britain. Indeed, reversing Stresemann’s logic, Hitler believed that Britain would come to view Germany as an ally in the competition that it was bound to face from the United States.

Three years later, given the role played by the United States in German affairs, such parochialism was no longer possible. As Hitler could not fail to note, the United States –even if it was not a military factor in European affairs–was an economic force to be reckoned with. Indeed, the remarkable industrial advance of the United States had changed the parameters of everyday life on the ‘old continent’.

America’s enormous competitive advantage in industrial technology was above all a function of ‘the size of’ America’s ‘internal market’ and its ‘wealth in purchasing power but also in raw materials’. It was the huge volume of ‘guarantee[d] . . . internal sales’ that enabled the American motor vehicle industry to adopt ‘methods of production that in Europe due to the lack of such internal sales would simply be impossible’.32 Fordism, in other words, required Lebensraum.

Along with France and the Soviet Union, the United States thus entered the ranks of Hitler’s enemies, to be confronted, after a period of internal consolidation, if possible in alliance with Great Britain. It is worth emphasizing this latter point. Hitler’s insistent emphasis on the need for an alliance with Britain was driven not only by his focus on conquest in the East, the central strategic argument of Mein Kampf, but also by his awareness of the threat posed by the United States, the new theme of the ‘Second Book’.

The essence of Stresemann’s position was that the war did not change the fundamental direction of world history, which was dictated by the inevitable trajectory of economic development. Though Germany had been defeated, the war, by weakening Britain and France and promoting the United States, opened the door to a reassertion of German power, though limited to the economic sphere. Hitler regarded this kind of thinking as characteristic of the naïve optimism of the German bourgeois. Hitler

was not a pessimist. He rejected the doom-laden prophecies of Spengler. For him, however, history offered no guarantees. The fundamental determining factor in history was not the predictable telos of economic development, but struggle between peoples for the means of life. In this battle for survival the outcome was always uncertain.

The DNVP, the other party on the extreme right, saw its share of seats cut from 103 to 73. These losses and the ensuing leadership crisis in the nationalist movement, leading to the election of the ultra-nationalist Alfred Hugenberg as head of the DNVP, were the headline news of the summer and autumn of 1928. By contrast, the Social Democrats, the founding party of the Weimar Republic, scored a major victory. Their representation in the Reichstag rose from 131 to 153 seats. Together with Stresemann’s DVP, the DDP and the Centre party they had a workable majority with Hermann Mueller as Chancellor. Gustav Stresemann continued for a fifth year as Foreign Minister. In 1928, therefore, despite the presence of elements such as Hitler and his party, the Weimar Republic had a functioning parliamentary system and a government committed to pursuing the revision of the Versailles Treaty under the good auspices of the United States. The potential for disaster was clearly there. But even the most pessimistic observers would have been hard pressed to predict that within ten years Germany would launch Europe back

into a dreadful war and embark on the single most ruthless campaign of genocidal murder in human history.

The disappointment that followed in the wake of the Young Plan was devastating to the credibility of the Atlanticist strategy. The acrimony surrounding the negotiations negated any hope of a large-scale commercialization of Germany’s political debts. From 1928 onwards long-term American lending to Germany began to fall, as rumours swirled about the future of reparations and interest rates in the United States rose.

During its passage through Congress the trade bill which became notorious as the Smoot–Hawley tariff was festooned with a variety of demands, including significant protection against European manufactured imports. By the autumn of 1929 the Europeans knew that not only would Congress not permit any substantial reduction in the inter-Allied debt payments, and not only was there little prospect of any new long-term credit from America, but that the new tariff would in all likelihood make it harder for America’s European debtors to earn the dollars they needed to service their obligations to Wall Street.44

The majority of the German political parties, however, remained committed to the basic principles of fulfilment. Indeed, the requirement to fulfil the Young Plan justified measures of domestic austerity that were extremely attractive to a large section of the right wing and business community. In the spring of 1930, therefore, the Grand Coalition was toppled over

the question of budget cuts.53 Hermann Mueller was to be Germany’s last Social Democrat chancellor for almost forty years. He was ousted in favour of a minority government led by the staunchly nationalist Catholic Heinrich Bruening.

Under the rules of the gold standard, with the Young Plan demanding annual payments of 2 billion Reichsmarks and international capital markets increasingly nervous about German borrowing, deflation was the only option.56 The political costs were huge. Between April and July 1930 Germany’s parliamentary system tore itself apart in the struggle over Bruening’s deflation package. It was to force through the highly controversial poll tax on 16 July 1930 that Bruening first resorted to the emergency powers provided under Article 48 of the Weimar constitution. More cuts and tax increases followed with the comprehensive emergency decree of 26 July. On top of the collapse in world trade and the gathering force of the business-cycle, the effect was to crash-land the economy. Between June 1930 and

February 1931 unemployment rose by 2.1 million, twice the normal seasonal increase. In the general election of September 1930, Hitler’s National Socialists achieved a stunning electoral breakthrough, raising their share of the vote from 2.5 to 18.3 per cent and gaining 107 seats, making them the second largest party in the Reichstag. The ensuing capital flight stripped the Reichsbank of one-third of its reserves and forced a further hike in interest rates.57 But at the same time, the deflation strategy was having its intended effect. A trade deficit of 2.9 billion Reichsmarks in 1928 was, by 1931, turned into a trade surplus of 2.8 billion Reichsmarks (see Appendix, Table A1). This surplus, however, resulted not from rising exports but from the fact that due to the Depression, demand for foreign imports fell even more rapidly than German sales abroad. As factories shut down, and the blight of joblessness and poverty spread across German society, demand for foreign raw materials and consumer goods plummeted. It was a brutal process of adjustment, but Germany was following the normal prescriptions of the gold standard mechanism. And Bruening was rewarded in October 1930 with a bridging credit of $125 million brokered by Lee, Higginson and Co. of New York.

The first element of the new German policy was the decision, despite the Reich’s desperate financial situation, to build two new battle cruisers for the navy. The second and third elements were the proposal for Austro-German customs union and the increasingly proactive German policy in Central and South-eastern Europe, symbolized by the effort to conclude exclusive bilateral trade agreements with Hungary and Romania.

Through aggressive foreign policy, Bruening thus further constrained his own room for economic manoeuvre.61 Without the prospect of a foreign loan, Bruening had no option but to force through another painful round of deflation. And this, to make it palatable to the domestic electorate, required immediate action to accelerate the revision of the Young Plan. On 6 June 1931, therefore, in conjunction with his second emergency deflation decree, Bruening issued an aggressive demand for an end to reparations.62 It was this, finally, which precipitated disaster. The financial markets had been troubled since March by the ominous resurgence of German nationalism. But despite the banking crisis in Austria there had not been a run either on the German banks or the German currency.63 What triggered the crisis was Bruening’s further escalation of international tension. Within hours of the German

government’s aggressive communiqué, fear spread throughout the world’s financial markets that Bruening was about to announce a unilateral moratorium, both on reparations and on Germany’s obligations to its private creditors. Over the next week the Reichsbank’s reserves fell from 2.6 billion to 1.9 billion Reichsmarks. Despite a shocking rise in interest rates, the reserves plunged inexorably towards the minimum level required to provide ‘gold-exchange backing’ for the currency. By the time the trouble at the DANAT and Dresdner banks hit the headlines on 17 June, the Reichsbank was already facing a full-blown currency crisis. Indeed, so severe was Germany’s international financial situation that on 20 June President Herbert Hoover was forced into a dramatic and unprecedented intervention.

With most of Germany’s closest trade competitors having gained a major competitive advantage through devaluation, the volume of German exports fell between 1931 and 1932 by a further 30 per cent. The hard-won trade surplus of 2.8 billion Reichsmarks in 1931 was slashed within a year to no more than a few hundred million Reichsmarks, and even this precarious balance could only be maintained by further savage reductions in imports.

What was ultimately decisive, however, was the effect of devaluation on the Reichsmark value of Germany’s foreign debt. The vast bulk of Germany’s foreign debt was denominated in foreign currency. The immediate effect of a reduction in the value of the Reichsmark would, therefore, have been to raise the burden in Reichsmark terms of Germany’s foreign obligations. Though the Bank of England would have welcomed a German devaluation, the United States made it clear that it wanted to see Germany servicing its long-term loans whilst protecting its balance of payments by means of exchange controls.76 With President Hoover finally intervening decisively in the reparations question and even hinting that he might support German claims against Poland, Berlin opted one more time for the Atlantic strategy. Chancellor Bruening’s government gambled that, sooner rather than later, American action on war debts would enable Britain and France to accept the end of reparations. This, Bruening confidently expected, would open the door to the normalization of both political and economic relations in Europe.77 In the event, however, it took twelve disastrous months until the deal was finally done in Lausanne. Meanwhile, the outlook for the German economy was dire.

Pinned to gold by the American loans, but faced with devaluation of the majority of currencies in which Germany’s trade was transacted, Bruening had no option but to push through another round of deflation and to do so by decree. The fourth Presidential emergency decree of 8 December 1931, apart from banning the wearing of party uniforms and political demonstrations, also ordered mandatory cuts in wages, salaries, prices and interest rates, followed by a further decrease in government spending and an increase in taxation.

By contrast, work creation and the struggle against unemployment played a critical role in the propaganda of Hitler’s regime. And in the light of the near contemporaneous ‘Keynesian revolution’ in economics, this contrast between before and after 1933 took on an even greater historical significance. For Keynesians, both in Germany and

beyond, the disaster of the Weimar Republic will always stand as the most stark illustration of the consequences that follow from placing too much faith in the self-healing properties of the free market, a rhetorical connection that was put to extensive use in the long rearguard action that Keynesians fought against the intellectual forces of the New Right in the 1970s and 1980s.89 Germany’s history between 1929 and 1933 can certainly be made to serve this purpose. But if we seek to understand Hitler’s regime outside this anachronistic frame of reference the emphasis on work creation as the key to understanding Nazi economic policy seems misplaced. Work creation in fact emerged as a subject for intense discussion on the right wing of German politics only in the second half of 1931. The Nazi party did not adopt work creation as a key part of its programme until the late spring of 1932, and it retained that status for only eighteen months, until December 1933, when civilian work creation spending was formally removed from the priority list of Hitler’s government. Despite the claims of Goebbels’s propaganda and despite the preoccupations of later commentators and historians, civilian work creation measures were clearly not a core agenda item for the nationalist coalition that seized power in January 1933. In fact, amongst the coalition partners of January 1933, work creation was highly divisive.

All of which was in sharp contrast to the three issues that truly united the nationalist right and made possible the Hitler government of 30 January 1933: the triple priority of rearmament, repudiating Germany’s foreign debts and saving German agriculture.

By contrast, from 1932 the governments of Franz von Papen, General Kurt von Schleicher and finally Adolf Hitler adopted a contrary position. Rather than seeking prosperity and security in multilateral arrangements guaranteed by the power of the United States, they sought to secure unilateral German advantage, if necessary even in opposition to America’s efforts to restore the international order.

By December 1931, the Reichswehr had finalized the second so-called Ruestungsplan (Rearmament Plan), which called for spending of just over 480 million Reichsmarks over five years.94 It was to provide Germany, in case of attack, with the capacity to supply a defensive force of twenty-one divisions, equipped with a small complement of artillery, tanks and aircraft. A more ambitious version of the plan, the so-called ‘Milliardenprogram’ (billion Reichsmark programme), set out the extra spending on industrial infrastructure required to keep this force permanently in the field.

In the second half of 1932 the Reichswehr leadership began planning for an outright Treaty breach through a significant increase in peacetime military strength. The Umbau Plan, authorized by Schleicher on 7 November 1932, called for the creation of a standing

army of 21 divisions based around a cadre of 147,000 professional soldiers and a substantial militia.

With the principle of equality conceded, the Germans returned to Geneva. Behind Schleicher, however, was a more aggressive cohort of generals, including Werner von Blomberg, who demanded an open resort to unilateral rearmament. Furthermore, the practical problem of rearmament imposed its own timetable. With the Depression taking its toll on the German engineering industry, it seemed that unless substantial government funds were soon forthcoming, the industrial capacity on which rearmament ultimately depended might soon cease to exist.95 It was with this in mind that General Schleicher’s government pioneered the use of work creation, both as a means of hiding military spending from foreign observers and as a way of uniting the German people behind rearmament.

In strictly economic terms, the defining agenda of German nationalism from the Dawes Plan of 1924 onwards was not work creation but the repudiation of Germany’s international obligations, first reparations and then the international credits taken up since the early 1920s to pay them. Until 1932, as we have seen, logic dictated the need to stick to the United States. The Young Plan did at least offer a reduced annuity and only pressure from the United States offered any prospect of a final elimination of reparations. The ultra-nationalists thus remained in a minority and fulfilment remained the bedrock of respectable politics. By the autumn of 1932, however, the situation was quite different. In July 1932 at the reparations conference in Lausanne, Britain and France agreed to a deal that brought a de facto end to Germany’s reparations payments.96 Significantly, they did so, against the will of the Americans, by tying a final end to all German obligations to a cancellation of the war debts owed by them to the United States. Britain made one last payment on its American war debts in December 1932, but only under protest. France, Belgium, Poland, Estonia and Hungary simply defaulted. Prime Minister Édouard Herriot, who had advocated honouring France’s obligations, suffered a crushing defeat in parliament. America was no longer able to hold the ring in Europe. And this in turn had dramatic implications for German strategy.

To service its debts Germany faced the need to transfer abroad interest and principal totalling something close to 1 billion Reichsmarks per annum, and, given the unavailability of new credit, in the 1930s unlike in the 1920s Germany faced the prospect of having to make ‘real transfers’. It could not simply borrow afresh to repay its creditors. If Germany was to service its debts, exports would have to exceed German imports by at least 1 billion Reichsmarks. This meant a substantial reduction in the standard of living.

American tariffs in excess of 44 per cent, compounding America’s competitive advantage in virtually every area of manufacturing, made it difficult, if not impossible, for America’s debtors to repay their debts, even if they had wanted to. Once reparations were lifted, this contradiction at the heart of American foreign economic policy provided Germany’s nationalists with a ready-made excuse for default.