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

by Adam Tooze

We cannot know with any certainty what might have happened if a different government had been in power. However, the signs of a continued upswing in German business are there in the statistics. And it is certainly reasonable, therefore, to speculate that even without government intervention there might well have been a strong recovery, as there had been from the first major recession of the Weimar Republic in 1925.79 In 1933 private investment both in construction and stock-building was by far the largest single contributor to the recovery. In the labour market statistics this is mirrored in large increases in employment in iron and steel production, metalworking, construction materials and textiles. In the first six months of

Hitler’s government, however, this recovery in the business sector was offset by a severe contraction in the real value of household consumption. And even in 1934, when one might have expected the recovery in the labour market to have powerfully stimulated household consumption –the famous ‘knock-on effect’ from work creation expenditure predicted by Keynesians–it in fact made no more than a modest contribution to the progress of the overall economy.80 Though our ability to measure consumption is limited, this pessimistic story is confirmed by other indicators, such as the indices for turnover in retailing.81 Sales of food, clothing and other household necessities did not pick up significantly until six months after Hitler took power. This is hardly surprising, when we bear in mind that the real wages of many workers fell quite sharply in 1933, as wages stagnated and prices for food began to rise. Nor was the lagged development of consumption lost on contemporaries.

Since falling consumption offset rising investment, private demand in total accounted for less than half the resurgence in aggregate demand in both 1933 and 1934. From the outset, therefore, Hitler’s economic recovery was driven primarily by the public sector.83 What is also clear, furthermore, is that between 1933 and 1934 the priorities of the German state changed radically. In 1933 civilian work creation expenditure clearly did make a major difference, with increased spending at both local and national levels. Civilian spending by the Reich continued to grow strongly into 1934. But what is often forgotten is that from 1934 onwards this was offset by a severe squeeze on local government. In large part, Reich work creation spending simply ‘repackaged’ funds that might otherwise have been spent by local government. This was the reality behind Hitler’s promise on 1 February 1933 to rationalize relations between the Reich and local government. A state-driven economic recovery went hand in hand with an unprecedented centralization of public spending, of which the military were the prime beneficiaries.

However, what is unarguable is that the recovery as it actually occurred bore the clear imprint of Hitler’s government. In 1935 private consumption was still 7 per cent below its pre-Depression levels and private investment was 22 per cent down. By contrast, state spending was 70 per cent higher than it had been in 1928 and that increase was almost entirely due to military spending. As far as the Reich was concerned, there can be no doubt that rearmament was already the dominant priority by early 1934. Between 1933 and 1935, the share of military spending in German national income rose from less than 1 per cent to close to 10 per cent. A reallocation of total national production on this scale in such a short space of time had never before

been seen in any capitalist state in peacetime. Concentrated within a tight-knit military-industrial complex, the impact of 10 billion Reichsmarks of spending squeezed into the first three years of Hitler’s rule was dramatic. According to contemporary estimates, as much as a quarter of German industry was already occupied in 1935 with ‘non-marketed production’ of various kinds.87 And in 1934 the consequences of this dramatic restructuring of the German economy were to make themselves felt in the first real crisis of the Nazi regime.

The summer of 1934 was the moment at which it became apparent, to all but the most indulgent foreign observers, that Hitler’s was not a ‘normal’ government.

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. In Berlin, meanwhile, Goebbels and Goering dealt with the ‘reactionaries’. SS men stormed the offices of Vice-Chancellor Papen and gunned down his secretary. The rest of Papen’s staff were arrested. Papen himself was only spared because of

the diplomatic embarrassment involved in liquidating an active member of the German government.

Outside Germany, the news of these state-sanctioned murders was greeted with horrified disbelief. Clearly Hitler’s regime lacked any commitment to the basic norms of legality. And within weeks of the Night of the Long Knives this impression was confirmed by another outrageous demonstration of Nazi violence.3 Since early 1934, Hitler’s followers in Austria had been carrying out a campaign of terrorism against the authoritarian government of Chancellor Engelbert Dollfuss. On 25 July, with the encouragement of the German party, the Austrian Nazis launched a coup.

The stage seemed set for a Balkan chain reaction reminiscent of August 1914. According to the Gestapo, Germany in the summer of 1934 was in the grips of a veritable ‘war pyschosis’. But unlike twenty years earlier this was one of fear not enthusiasm.

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. Shortages of raw materials spelled not only unemployment; they also implied shortages of supply for consumers, fears that were compounded by the unusually bad harvest of 1934. 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.8 By May 1934 the groundswell of popular discontent was such that Goebbels felt compelled to launch a national campaign against malcontents: a two-month ‘barrage of meetings, demonstrations and announcements’ against ‘rubbishers and critics’.9 The main theme of this campaign was the need for ordinary Germans to show more fortitude in coping with the effects of the foreign exchange shortage: ‘Helping to overcome

the foreign exchange crisis [transfer crisis] was the duty of every German.’ But, like Hitler, Goebbels did not hold back in his criticism of business: ‘Sacrifices would have to be made by all sides.’ Most of all, the Jews would have to learn how to behave as ‘guests’ in their German home.

Henceforth, foreign currency was doled out on a daily basis, according to whatever was available. From day to day, 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.

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. To make matters worse, the City of London was the chief provider of short-term finance for German foreign trade.

The basic reason for Germany’s lack of competitiveness, however, was not political in this crude sense. 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. This was not a matter of particular industries or sectors. It was not a matter of high wages, or excessive taxes and social levies. 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 problem that now posed itself with ever greater urgency, however, was how to sustain German exports without a devaluation. A solution was found in the autumn of 1933 through a variety of schemes, all of which made use of the advantage that Germany had gained through the oratorium on its foreign debts. 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. The leverage that Germany had gained over its creditors was represented most succinctly in the depressed value of German bonds (IOUs) on financial markets in New York and London. In January 1933, before Hitler took power, bonds owed by German municipalities and corporate borrowers traded on average at 62 per cent of face value.31 Hitler’s accession to power lowered that by twelve points to 50 per cent. After the announcement of the partial moratorium in June 1933 they fell to around 40 per cent. 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 Reich...

To reiterate, it 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.

By the spring of 1934 the foreign financial press was regularly highlighting the contradiction between the exuberant activity of Germany’s military and Schacht’s claim that the country was unable to service its foreign debt.

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. The markets responded with a flurry of speculation.

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 hapless Schmitt was no match for Schacht. After his health let him down he gratefully retired from front-line politics, returning to an influential position in the insurance industry. 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. Posse (1886–1965)

had spent his career at the Ministry in trade policy and was formerly a supporter of Stresemann’s DVP. But he made the best of the Machtergreifung, gaining appointment to the senior civil service position at the Reich Ministry following Hugenberg’s resignation and joining the Nazi party in November 1933.49

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.

Meanwhile, trade between the United States and Germany dwindled rapidly. 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. This extraordinary contraction in trade between Germany and the United States, the two largest economies in the world, was the real substance of Schacht’s ‘autarchic’ trade policy.

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. As Schacht put it with characteristic charm:

‘One can sell far less to coolies . . . than one can to highly qualified . . . factory workers.’69 Furthermore, Germany’s aggressive ‘invasion’ of Latin America did nothing to ease relations with the United States. Most notably in Brazil, Germany and America were in direct conflict. 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.

The system did its job in stopping the haemorrhage of foreign exchange. In the months following the announcement of the New Plan, imports were squeezed dramatically. 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.75 Such a dramatic squeeze on foreign inputs to the German economy was clearly not sustainable. It was only possible in the short term because producers were able to draw on accumulated stocks of raw materials. Once these were exhausted, the economic recovery would be cut short. 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 was so desperate for hard currency that it could no longer afford the bond repurchase mechanism as its main means of subsidy, since this left a substantial fraction of Germany’s export earnings in foreign hands. And the other schemes that operated at the expense of Germany’s foreign creditors were no longer sufficient to provide the necessary rate of support. 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.76 The rest would have to come more or less directly from the coffers of the Reich. Given the general stress on the Reich’s finances and the likelihood of accusations of dumping, this was as Schacht acknowledged ‘a measure of absolute desperation’.

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. The method used to fund the expanded export subsidy system was, as Schacht acknowledged, a measure of last resort. 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. For most industries the levy was assessed at rates between 2 and 4 per cent of turnover.80 This may not seem draconian, but since it was levied on turnover not profit, the impact was very considerable.

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. The surveillance agencies and the export subsidy scheme, together with the elaborate system of business organizations, cartels and price controls that underpinned them, were all still in operation ten years later at the heart of the war economy. The system survived because it worked. 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. Exports did not return to their pre-Depression levels. Nor were they enough to provide the Reichsbank with more than a bare minimum of comfort. But they did permit a steady increase in the volume of imports from the absolute trough reached in the summer of 1935. If we consider the extraordinarily small quantity of foreign exchange and gold at the Reichsbank’s disposal and the difficulty of obtaining credit, the volume of import and export business that Nazi Germany was able to conduct under the New Plan was truly remarkable. 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. To say the least, this was a remarkable organizational achievement.

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. For more than two years, starting in the spring of 1934, Hitler’s Germany saw virtually no growth in the output of consumer goods.

There can be no doubt that the regime paid a serious political price for the economic difficulties of 1934. All the evidence we have on public opinion, mainly from confidential reports by the regional offices of the Gestapo, confirms that in the summer of 1934 the German population was unsettled far more by the economic problems resulting from the foreign exchange crisis than by the violence of the Night of the Long Knives. The simplistic cliché, which sees the Germans as having been won over to Hitler’s regime by the triumphs of work creation, is simply not borne out by the evidence.87 The economic recovery, rapid as it was, was incomplete, even in the first half of 1935. There were still millions of unemployed, many of whom had known nothing other than poverty for years. Their best hope in the first three winters of the Third Reich was the new National Socialist Winter Charity, which distributed hundreds of millions of Reichsmarks’ worth of free food to the poorer Volksgenossen. Furthermore, after the crisis of 1934, the lopsidedness of Germany’s economic recovery was acute. Millions of people who depended for their livelihoods on the consumer goods industries faced an outlook of short time and shortened wages.

The experience of the last fourteen years had shown that ‘private enterprise cannot be maintained in the age of democracy’. Business was founded above all on the principles of personality and individual leadership. Democracy and liberalism led inevitably to Social Democracy and Communism. After fourteen years of degeneration, the moment had now come to resolve the fatal divisions within the German body politic.

Germany’s new Chancellor planned to put an end to parliamentary democracy. He planned to crush the German left and in the process he was more than willing to use physical force. At least according to the surviving record, the conflict between left and right was the central theme of the speeches by both Hitler and Goering on 20 February. There was no mention either of anti-Jewish policy or a campaign of foreign conquest.2 Hitler left it to Goering to reveal the immediate purpose of the meeting. Since German business had a major stake in the struggle against the left, it should make an appropriate financial contribution.

He proposed an election fund of 3 million Reichsmarks, to be shared between the Nazis and their nationalist coalition partners.

But what Hitler and his government did promise was an end to parliamentary democracy and the destruction of the German left and for this most of German big business was willing to make a substantial down-payment.

Though wages had fallen relative to 1929, so had prices. In practice, the Depression brought very little relief to real wage costs.9 In so far as wage bills had been reduced it was not by cutting real wages but by firing workers and placing the rest on short time. Nevertheless, when the wage freeze of 1933 was combined with the destruction of the trade unions and a highly permissive attitude towards business cartelization, a point to which we shall return, the outlook for profits

was certainly very favourable. Though wages did begin to drift upwards as the labour market tightened, there was every prospect that they would lag behind prices and profits in the up-coming recovery. And, perhaps most importantly, Hitler’s regime promised to free German firms to manage their own internal affairs, releasing them from the oversight of independent trade unions. In future, it seemed, wages would be determined by the productivity objectives of employers, not the dictates of collective bargaining.

The domestic agenda was one of authoritarian conservatism, with a pronounced distaste for parliamentary politics, high taxes, welfare spending and trade unions. The international outlook

of German business, on the other hand, was far more ‘liberal’ in flavour. Though German industry was by no means averse to tariffs, the Reich industrial association strongly favoured a system of uninhibited capital movement and multilateralism underpinned by Most Favoured Nation principles.12 In the case of heavy industry this advocacy of international trade was combined with visions of European trade blocs of varying dimensions.13 In important industries including coal, steel and chemicals, international trade was organized within the framework of formal cartels, sometimes with global reach.14 Siemens and AEG divided up the global market for electrical engineering through understandings with their main American competitors.15 However, all of these were arrangements freely chosen by German businessmen and their foreign counterparts, independent of state interference. In this sense, though hardly liberal they were at least cases of voluntarist business self-administration. Meanwhile, large parts of German foreign commerce remained free of cartel regulation of any kind, most notably textiles, metalwares and engineering, with the machine-builders association, the VDMA, being a particularly aggressive exponent of free trade.

By the end of 1934 the Third Reich had imposed a state of popular pacification that had not existed in Germany since the beginning of the industrial era in the nineteenth century. On the other hand, the disintegration of the world economy and the increasingly protectionist drift of German politics was profoundly at odds with the commercial interests of much of the German business community.

As a result, the Reich came into possession of what was potentially a controlling stake not only in banking but in heavy industry as well. And the crisis was not limited to individual firms or sectors, it was systemic. The collapse of the gold standard and the disastrous proliferation of protectionism fractured the bedrock of economic liberalism.

But what possible alternative could there be to an internationally orientated economic policy? With this in mind, big business had little good to expect from the government appointed by President Hindenburg on 30 January 1933. Hitler, Schacht and Hugenberg were all notorious enemies of economic liberalism. And despite the common ground of opposition to the Weimar constitution and hostility towards the parties of the left, this is the essential backdrop against which we must interpret the meeting on

20 February.

Hitler and Schacht knew that they did not need business to agree. In the aftermath of World War I, the business lobby had been strong enough to contain the revolutionary impulses of 1918–19. Now capitalism’s deepest crisis left German business powerless to resist a state interventionism that came not from the left but the right.

The first years of Hitler’s regime saw the imposition of a series of controls on German business that were unprecedented in peacetime history. In large part these stemmed from the difficulty of managing the German balance of payments and in that sense they clearly had their origin in the great financial crisis of the summer and autumn of 1931. However, with the complete disintegration of the gold standard following the dollar devaluation, Germany’s creeping default on its long-term debt, including hundreds of millions of Reichsmarks owed by German corporates, and the imposition of the New Plan, these regulations took on a new and more systematic character.31 As we have already seen, the New Plan, which effectively regulated the access of each and every German firm to foreign raw materials, created a substantial new bureaucracy, which controlled the vital functions of a large slice of German industry.

On the basis of emergency decrees first issued during the latter stages of World War I, the Business Groups were also empowered to collect compulsory reports from their members, establishing an unprecedented system of industrial statistics.34 After 1936 they were authorized to penetrate even further into the internal workings of their members, with the introduction of standardized book-keeping systems. The really indispensable functions of the Business Groups, however, concerned the operation of the New Plan. On the import side, the supervisory agencies all had staff drawn from the Business Groups.35 On the export side, from the summer of 1935 onwards it was the Business Groups that were charged with assessing the turnover of their members and administering the levy that funded the export subsidy.