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

by Adam Tooze

By 1932, however, the voices of liberalism were drowned out by the deafening clamour of economic nationalism. Indeed, given the disintegration of the gold standard, even the Reich’s industrial association found it difficult to sustain a consensus on multilateral free trade.

In so far as economic interests were responsible for the collapse of the Weimar Republic and the installation on 30 January 1933 of Hitler’s government, the group chiefly responsible was not big business or even heavy industry, but Germany’s embattled farmers.

By the late 1920s, however, the respectable parties of the centre right were struggling to maintain their support in agrarian circles, as the German farming community became progressively radicalized by the worldwide collapse in commodity prices.

On quotas, however, Bruening dug in his heels. His government was lavish in its support for agriculture in every other respect, but on quotas there could be no compromise.107 On this point both Papen and Schleicher followed Bruening’s lead. Papen though he approved quotas in principle, did so only within the limits ‘permissible according to current trade treaties’ and when Papen fell, there was no decisive action by Schleicher.108 This, however, drove the farm lobby into outright opposition to the Republic. 109 In early 1933 key leaders of the agrarian lobby intervened decisively with President Paul von Hindenburg, himself the owner of a large estate, to push him towards accepting a coalition between Hugenberg’s DNVP and Hitler’s Nazi party. Like the advocates of debt default and rearmament, what the agrarians wanted was a government that would pursue their conception of Germany’s national interest unilaterally, forcing Germany’s neighbours and trading partners to accept its terms.

By 1932 the damage done to the parliamentary system may well have been irreparable, making it more likely than not that the Weimar Republic would have been replaced by some kind of authoritarian, nationalist regime.

The electorate were clearly disappointed with Hitler’s failure to take office. The party activists were beginning to flag. The momentum that had carried the NSDAP from victory to victory since 1929 was exhausted. In the aftermath of the November setback, the divisions between left and right wings that had plagued National Socialism in the 1920s, suddenly re-emerged.

Meanwhile, the first hints of an economic recovery had made their appearance in America in June 1932.112 After the lifting of reparations at Lausanne, demand for German bonds

began to strengthen.

The German economy in 1933 was not a lifeless wreck. It was beginning what

might well have become a vigorous cyclical rebound.

In the event, what decided the fate of Germany and with it the world was the tragic miscalculation of a small coterie of ultra-nationalist conservatives. Ex-Chancellor Papen, embittered by his ousting in December 1932, conspired with the agrarian lobby and some of the most aggressive elements in the military to pressure the ailing Hindenburg into dismissing Schleicher and forming a new government founded on the popular platform of National Socialism. This was not possible without giving Hitler the Chancellorship. But the ultra-nationalist Hugenberg would take responsibility for both Agriculture and Economic Affairs. General Blomberg would take the Defence Ministry and Papen the Vice-Chancellorship. Nor should we assume that the balance of forces within the Hitler–Hugenberg–Papen–Blomberg government was foreordained. There were powerful forces in German society, most notably the military and the churches, but also the leadership of German business that could have done much to deflect Hitler and his followers from their path.119 The policy of anti-Semitism, aggressive rearmament and unilateral diplomacy was clearly in no sense forced on

Germany. Indeed, it may strike some readers as absurd to have to make this point. But doing so makes clear that this standard of counterfactual criticism is not always applied even-handedly to all aspects of Hitler’s regime. The economic sphere, in fact, is often exempt from such critical scrutiny altogether. Too often it is assumed that real strategic choices in economic policy, choices in which National Socialist ideology really mattered, were faced by Hitler’s regime only in 1936, four years after the seizure of power.

But, as has already been suggested and will be shown in detail in the next chapter, the ‘Keynesian’ issues of work creation and unemployment were never as prominent in the agenda of Hitler’s government as is commonly supposed. The most crucial economic policy decisions taken in 1933–4 concerned not unemployment, but Germany’s foreign debts, its

currency and rearmament, and in relation to these questions there could never be any pretence of political innocence. These issues were at the very core of the nationalist programme of self-assertion that was the true agenda of Hitler’s government. Furthermore, once we give due emphasis to the questions of foreign debt and foreign trade, it becomes clear that, for many millions of Germans, Hitler’s economic miracle was in fact a highly ambiguous experience.

Even if Hitler had not been appointed Chancellor and Schleicher had remained in power, it is hard to imagine Germany pursuing a course that was anything other than disruptive to the last-ditch efforts to restore peace and stability to the world, at the disarmament talks in Geneva and at the World Economic Conference in London. Added to which, one would be falling into the solipsistic trap of nationalist strategy if one imagined that the question was ultimately Germany’s to decide. Germany could pursue a policy more or less congenial to global stabilization, but the chance of achieving that elusive goal depended critically on the other major powers. And in 1933 the environment was far less congenial to a multilateral strategy than ten years earlier. Above all, the position of the United States had dramatically changed. In 1923 Stresemann had clearly been right to gamble on America as the dominant force in world affairs, both economically and as a future military superpower. Ten years later America’s position was fatally weakened by the most severe crisis in recorded economic history.

The first priority of German rearmament was to escape the overwhelming threat posed by France and its Allies, who might intervene at any time. The longer-term objective was ‘possibly the struggle for new export possibilities [i.e. colonies], possibly–and probably better–conquest of new Lebensraum in the East and its ruthless Germanization. Certain that the current economic situation can be changed only with political power and struggle. Everything that can occur now . . . mere makeshift.’5 Less than a week later, on 9 February, whilst chairing the cabinet committee on work creation, Hitler reiterated the same basic points. As far as Hitler was concerned there was only one priority: rearmament.

If the Hitler government was to secure a solid majority, it was clearly essential to avoid alarming the public with dangerous foreign policy adventures. It was also crucial to preserve the façade of nationalist unity on

which Hitler’s government was based.

The results of the March election were a disappointment to Hitler and Goebbels. The failure of the Nazis to achieve anywhere near an absolute majority, even when their electoral appeal was backed up by considerable intimidation, confirms the conclusion reached by most observers in the autumn of 1932. As a political movement, the Nazi party had reached its limit well short of a majority of the German electorate. Now, however, Hitler and his party no longer needed to rely exclusively on the electoral process.9 After applying massive pressure to the Catholic Centre party, Hitler got the two-thirds majority he needed for the Enabling Law of 23 March 1933. This freed his government to rule by decree. The road was open to the decisive application of physical force. In stark contrast to the reluctant revolutionaries of November 1918, who had done their best to suppress the popular uprising against World War I and the Wilhelmine monarchy, the Nazis did not hesitate to combine the ballot box with physical force. Across Germany in the spring of 1933, the Nazi party and its nationalist

allies unleashed a ferocious wave of violence directed above all against the Communists, Social Democrats and Germany’s small Jewish minority.

What is often overlooked in parochial discussions of the Nazi seizure of power is the tumultuous international context in which it took place. Hitler’s Machtergreifung coincided both with the inauguration of a new American President and the final dramatic aftershocks of the Great Depression.13 As Roosevelt took office the United States was swept by a financial panic which forced him to impose a nationwide bank closure and restrict the export of capital. On 19 April 1933 the United States unilaterally suspended gold convertibility and allowed the dollar to depreciate. Over the next four months the dollar fell by 30 per cent against the Reichsmark. Replicated across the world this delivered a devastating shock to what remained of the international system of fixed exchange rates.

Pandering to popular sentiment, Hitler and Schacht made the defence of the official gold value of the Reichsmark

into a symbol of the new regime’s reliability and trustworthiness. Unlike in 1923, it was now the dollar not the Reichsmark that was plunging in value on the foreign exchanges.

If the economy was fully employed–with every worker and every factory at full stretch–new credit creation might well lead to inflation. In that case it would indeed be true that additional government spending would be financed by ‘involuntary saving’. But if labour and machinery were lying idle, the game need not be zero-sum. After all, with millions of workers desperate for work and with factories starved of orders, there was little reason to expect prices to rise. Under conditions of mass unemployment, government spending financed by new credit would result in greater real demand, greater production and employment rather than inflation. The art of economic policy was to provide the

correct dose of credit-financed stimulation, sufficient to restore full employment, but not an excessive amount that would push the economy beyond the limit of full employment and unleash an inflationary free-for-all. In 1933, given that there were 6 million unemployed and most of German industry was running at less than 50 per cent capacity, this was not a hard balance to strike.

No surprise, therefore, that the fall in unemployment during 1933 benefited mainly the rural areas. The actual hot spots of unemployment, Berlin, Hamburg, Bremen and the Ruhr, as well as the southern cities of Stuttgart and Munich, benefited relatively little in the early stages of the recovery.

The majority of the moneys was reserved for local infrastructure work of various kinds. However, between 1933 and 1934 a steadily rising amount, finally to reach 230 million Reichmarks, was siphoned off for ‘special measures’ at the discretion of the Reich’s authorities. ‘Special measures’ was a euphemism for military infrastructure–strategic roads, airfields, barracks and waterways.24 In the work creation mythology of the Nazi regime, the autobahns occupy a special place.25 Ironically, however, the autobahns were never principally conceived as work creation measures and they did not contribute materially to the relief of unemployment.26 They followed a logic, not of work creation, but of national reconstruction and rearmament, a logic indeed that was as much symbolic as it was practical.

As Todt himself made clear, the ultimate rationale for these gigantic roadways was military. Germany’s fundamental strategic dilemma was its vulnerability to military attack from both east and west. The autobahns would serve as the ‘lifeline’ of a reconstructed national defence system.

In the last days of June 1933, Todt was appointed as general inspector for German roads, with authority over both the autobahns and major provincial roads. Todt’s organization was to become a powerful institution in the Third Reich, a real counterpart to the Reichsbahn as an influence on national transport infrastructure and one of the seedbeds for the future system of economic control.

The first wave had come in the first half of 1933. The second, the Reinhardt programme, was a vigorous holding action aimed to consolidate the gains of the previous year. Nineteen thirty-four would see the third wave in the battle for work. But, as the Gauleiter were to discover twelve months after the Nazis took power, civilian work creation for its own sake was no longer the top priority of Hitler’s regime. Rearmament, the central objective of nationalist politics, now dominated the agenda.

The German economy could not live without imports. To feed its densely packed population, Germany needed imports of fats and animal feed. Nineteen million German households could not satisfy their immense appetite for meat, milk and butter from domestic sources. Germany’s giant herds of pigs and cows could only be sustained through the import of huge quantities of high-energy animal feed. Huge industries such as textiles depended entirely on imported cotton and wool. The blast furnaces of the Ruhr were fed with iron ore from Scandinavia, a dependence made worse by the loss of Alsace-Lorraine in 1918. The one resource that Germany did have in abundance was coal. But Germany’s growing fleet of cars, trucks and aircraft burned oil and they rolled on tyres manufactured from imported rubber. Given this dependence, the level of imports was the best indicator of the vigour of the German economic metabolism. In 1928, when the Weimar Republic had been close to full employment, the real volume of imports, allowing for the very sharp fall in global commodity prices,

had been 50 per cent higher than that on which Germany survived in 1933. The German economy could not recover to anything like its normal level of economic activity without a substantial increase in the volume of foreign inputs. To make matters worse, as Germany recovered along with Britain and the United States, their combined demand would have the knock-on effect of raising prices on world commodity markets. Everything depended therefore on Germany’s ability to sustain a healthy flow of exports with which to service debts and pay for imports. Germany’s export trade, however, had been hit hard by the wave of currency instability precipitated by the British abandonment of gold in 1931 and the ensuing upsurge in global protectionism. As Sir Frederick Phillips of His Majesty’s Treasury admitted with disarming frankness: ‘No country ever administered a more severe shock to international trade than we did when we both (1) depreciated the £. (2) almost simultaneously turned from free trade to protection.’37 Roosevelt’s devaluation of the dollar in April 1933 made things even worse. Though the dollar’s devaluation reduced the Reichsmark burden of Germany’s debts, it made it even harder for Germany’s exporters to earn the necessary dollars. By 1933 the German trade balance began shifting inexorably into deficit and the Reichsbank’s limited foreign

exchange holdings drained rapidly away.38 In January 1933 the national foreign exchange reserve had stood at over 800 million Reichsmarks. By the summer the Reichsbank’s holdings had been reduced by debt repayments to only 400 million, enough to cover no more than one month of minimal imports. 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 ...

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.42 The failure to reach a compromise provided Schacht with the excuse he needed for unilateral action. 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. Payment in foreign currency would only resume once Germany’s foreign trade position was restored to a healthy surplus. This ultimately depended on the creditor countries. If they wanted repayment of their debts, they would have to purchase German goods. If Germany could not achieve the required trade surplus, it could not be expected to engage in large-scale foreign debt service.

The World Economic Conference that opened in London on 12 June 1933 might have provided the stage for a concerted international response. But in the summer of 1933 there was little chance of that. 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. The recovery of the United States had absolute priority, even if this meant beggaring America’s major trading partners.

At precisely the same moment as Germany announced the moratorium on its long-term debts, Hitler’s government also took the decisive steps towards rearmament. The terms of the financial package that underpinned the first real phase of rearmament were documented retrospectively in a Wehrmacht memorandum dating from 1938. This source is unclear as to the precise date on which the agreement was reached, but the balance of probabilities points to the cabinet meeting on 8 June 1933, the same day on which Germany announced its debt moratorium.48 The meeting was attended by Schacht, Defence Minister Blomberg,

Goering and Erhard Milch, Secretary of State at the Air Ministry. And 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. Total national income in 1933 had slumped to as little as 43 billion 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.

As of April 1934, armaments contractors were to be paid in IOUs issued in the name of the Mefo GmbH. This shadowy company was formed with a capital of 1 million Reichsmarks, provided by the Vereinigte Stahlwerke, Krupp, Siemens, Deutsche Industrie Werke and Gute-hoffnungshuette (GHH).51 Krupp and Deutsche Industrie Werke were major armaments producers. The Deutsche Industrie Werke were Reich-owned. Siemens and the Vereinigte Stahlwerke, though they too would benefit on a grand scale from military spending, were most probably included because of their premium credit rating. Secured by these big names, the rearmament bills became acceptable collateral for the Reichsbank. For a small discount, contractors to the rearmament drive could cash in their Mefo bills at the central bank. In the

event, since they paid good interest and were effectively guaranteed by the Reich, the majority of the Mefo bills in fact stayed in circulation. Small numbers of Mefo bills were issued in the autumn of 1933 to tide the early Luftwaffe contractors over a cash crisis.52 Large-scale disbursement began in April 1934, conveniently timed to coincide with the renewed propaganda surrounding the second wave of work creation measures.

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. After the initial announcement they agreed to continue at least partial repayment. Meanwhile, German propaganda continued to pay lip-service to the need to preserve good relations with America. The moratorium, however, was a decisive first step and it was only logical that it should be coupled with rearmament. 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.

Hitler’s government chose to interpret this as a British retreat from the all-important principle of parity that had supposedly been conceded to Germany in December 1932. On 14 October 1933 Hitler announced that he was no longer willing to accept Germany’s humiliating second-class status and withdrew both from the disarmament talks and from membership in the League of Nations.

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 1934.57 Poland was neutralized in early 1934 with economic concessions and a friendship treaty. 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.58 In rapid succession, all three branches of the German armed forces prepared to take advantage of the 35 billion Reichsmarks promised by their benefactor at the Reichsbank.

By the end of 1937 Germany was to have a standing army of 21 divisions, or 300,000 men, which in wartime could be inflated to 63 divisions. This would be enough, it was hoped, to mount an effective defence against a combined attack by Poland and France. Offensive striking capacity was to be added in the next four-year phase stretching from 1938 to 1941. 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. Furthermore, the issue of the Rhineland had to be resolved. Under the provisions of the Treaty, the zone west of the Rhine had remained demilitarized. 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 January 1934 the British government delivered Germany a formal ultimatum that unless Schacht returned to the bargaining table, German export earnings in Britain would be subject to forced clearing. They would be subject to official British control with a levy being imposed to satisfy the claims of the City. The violence of the British reaction forced Schacht into a temporary retreat. A general meeting of creditors was called to Berlin for April 1934 and service on the Dawes and Young loans temporarily resumed.

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. Given the cost and complexity of naval construction, the time-horizon of Raeder’s planning was expansive. The new fleet would be ready for action no earlier than 1949. However, spending had to start immediately and from the second half of 1934 onwards large orders began to be placed with the dockyards of north Germany.

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.

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.