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

by Adam Tooze

Since this entire apparatus of control was designed to limit German imports, it had the effect of virtually eliminating foreign competition from German markets. Nothing was imported that could be produced domestically and that meant virtually all manufactured goods. Combined with rising levels of domestic demand this enabled German producers to put an end to deflation and to push through a marked increase in prices.

His role in the Third Reich was to purge all excessive price increases that had occurred since the summer of 1933. Ironically, given Goerdeler’s liberal proclivities, the result by the end of 1935 was the creation of a comprehensive system of state supervised price-setting. Fundamental to this system were the increased powers of oversight exercised by the Reich over Germany’s ramified system of cartels.39 In July 1933 the RWM equipped itself with the authority to impose compulsory cartels. The same decree also gave the RWM the right to oversee the actions of existing cartels, to issue regulations governing their members’ activities and to regulate their price-setting.

Cartels could now use the courts to pursue outsiders who were charging ‘unfair’ prices, or prices that were ‘detrimental to the welfare of the nation’. Voluntary cartels were thus transformed into compulsory organizations under state oversight. In 1936, day-to-day supervision of the cartels was delegated by the RWM to the Business Groups and Branch Groups.40 And they in turn used their new standardized accounting systems to help reinforce and refine price-setting discipline.

Over the following years, German business built up gigantic financial reserves, which could be used for internally funded investment. And this, apart from the cosmetic aspects, was clearly the real purpose of the dividend decree. From the point of the Reich authorities the aim was to divide up the national resources available for investment and public spending. Industrial investment would be funded out of the profits not distributed to shareholders. 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.

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. At the same time, the international business of the Great Banks was sharply curtailed by the collapse in Germany’s foreign trade. The funds accumulating in the accounts of bankers’ industrial clients made them more independent than ever before of bank loans. And 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.

But, contrary to the view that the Great Banks were the ultimate string-pullers of National Socialism, 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.

The tendency of the Reich’s economic administration to develop in this more interventionist direction had been pronounced ever since the end of World War I. 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. However, in practice the Reichsbank and the Reich Ministry of Economic Affairs had no intention of allowing the radical activists of the SA, the shopfloor militants of the Nazi party or Gauleiter commissioners to dictate the course of events. Under the slogan of the ‘strong state’, the ministerial bureaucracy fashioned a new national structure of economic regulation.

The language of the bureaucracy was rid of the paralysing formula: technically right but politically impossible.’

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.57 In any case, given the limited recovery of world trade in 1934 and 1935, there was no reason for impatience. 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. Furthermore, though it is important to do justice to the shift in power relations between the state and business that undoubtedly occurred in the early 1930s, 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.58 As we have seen, profits were rising rapidly after 1933 and this opened attractive future prospects for German corporate management.

Technology, in fact, is one of the keys to understanding relations between Hitler’s regime and the German business community. 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. And if one of the definitions of ‘power’ is the capacity to get things done, then in this wider sense German industry continued to exercise power in the Third Reich. Despite the dramatic growth of state regulation, industrialists and their managerial and technical staffs were indispensable, if not in the conception then at least in the execution of national policy.

Shortly after the turn of the century, scientists closely associated with IG embarked on the development of a new generation of synthetic chemicals, starting spectacularly with the synthetic production of ammonia, by the Haber–Bosch process.62 By making possible the domestic production both of explosives and fertilizer, this made the German chemical industry and above all BASF into a mainstay of the German war effort in World War I. In the 1920s this path of technological development was pushed further by Carl Bosch, the real inspiration behind the merger that reshaped the Interessensgemeinschaft (IG) Farben in 1925.63 Indeed,

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.64 By September 1923 Bosch’s research group had synthesized methane, and in 1926, at its Leuna facility near Merseburg, in the central German industrial belt, 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. The 330 million Reichsmark investment in Leuna’s coal-based technology would pay off when the oil wells ran dry and fuel prices rocketed. 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. Indeed, in the near future, Bosch’s research teams promised to go beyond hydrogenation to the efficient mass production of synthetic rubber, thus adding the second key ingredient of motorized warfare. 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 backfir...

From a purely economic point of view it would be wrong to produce petrol domestically at a price of 19 Pfennigs, when the world market price is 5 Pfennigs. But I have declared to the importers, what guarantees can you give me for the maintenance of world peace? For us National Socialists, apart from economic criteria ... military reasons are decisive. I am therefore determined to promote fuel production from German raw materials by all means and to provide the necessary price and sales guarantees.

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. In practice, any profits were ploughed back ruthlessly into further expansion. By 1939 Brabag had assets on its books valued at 350 million Reichsmarks. The reluctant investors never saw a dividend, but the Third Reich was well on the way to achieving an important margin of self-sufficiency (see Appendix, Table A2).

Indeed, the difficulty of defining a single heavy industrial position towards Hitler’s regime was evident from the very first months of the Third Reich.

By far the most troublesome part of the Krupp empire was the shipbuilding operation in Kiel, the Germaniawerft, which had been grossly unprofitable throughout the 1920s. The Germaniawerft was the home-base of German U-boat construction in World War I and it was only kept alive in the expectation of one day receiving new naval business. As we have seen, naval rearmament initially lagged behind that of both the army and the Luftwaffe. But by the autumn of 1933, Essen had at least extracted a promise that the navy had a ‘serious interest’ (ernstes Interesse) in the survival of the Germaniawerft. And in August 1934 Krupp’s patience was finally rewarded with the award of orders for 6 small U-boats, followed within a few months by a contract for 5 destroyers and the first series of U-VIIs, what was to become the standard U-boat of the German navy.78 With Gruson also having received notification of major orders for armoured plate, by the end of 1934 all branches of the Krupp business were at least within sight of profit.

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. Walter Rohland’s commitment to the project of rearmament was no less personal than that of Borbet.

But it was Borbet’s success in developing the technique of centrifugal casting that allowed the famous 8.8 centimetre anti-aircraft gun developed jointly by Krupp and Rheinmetall to be put into low-cost mass-production. Walter Rohland, for his part, made the Deutsche Edelstahlwerke into the first choice for Panzer hulls. Not only did the Krefeld works provide top quality electrically

smelted steel, it was also a world leader in the difficult technique of welding armoured plate, the fundamental breakthrough in modern tank production.

The output of coal lagged well behind the growth of overall industrial output and the output of steel hardly increased at an exuberant rate. Nor would it be difficult to supply a rationale for this sluggishness. Ever since the early 1920s, the managers of the Ruhr had been struggling to cope with chronic over-capacity, the legacy of ‘over-investment’ during World War I and the hyperinflation that followed.88 Faced with the armaments boom of the 1930s, they were not about to repeat their mistake. The aggregate figures, however, tell only part of the story. Though fears about over-capacity may have held back a general expansion in heavy industrial output in certain key areas, most notably specialist electrical smelting, there was no such conflict of interest between the needs of rearmament and the profit-seeking of industry. High-quality

electrically smelted steel was both vital to rearmament and a major business of the future. Whereas German output of regular steel even at the height of production barely reached half the capacity of the United States, in electrically smelted steel Germany was level pegging by 1939.89 With Borbet and Rohland leading the way, the Reich’s output of specialist high-quality steel increased sevenfold between 1929 and 1939.

The story of aircraft production in the Third Reich deserves to stand at the centre of our understanding of the regime’s entire industrial history.90 In 1932 the German aircraft industry employed 3,2 00 people and had the capacity to produce no more than a hundred aircraft per year. Less than

ten years later, the regime had created a multi-billion Reichsmark aircraft and aero-engine industry. It employed at least a quarter of a million people and was capable of turning out every year more than 10,000 of the most sophisticated combat aircraft in the world. Of all the industrial effects of rearmament this was by far the most significant.

By 1938 Junkers, even before it began its most dramatic period of expansion, already ranked alongside Daimler-Benz as Germany’s twelfth largest private employer. Further down the list followed Arado, Heinkel, Dornier, Focke-Wulf and Bayerische Flugzeugwerke, better known as Messerschmitt. What was distinctive about the aircraft producers was that, unlike ship-builders, gun- or tank-makers, the aircraft producers had no significant civilian production.92 The military aircraft they were producing by the late 1930s had little or no value as commercial products. There was thus no alternative civilian employment for the vast specialist manufacturing capacity that the Air Ministry had brought into existence. Though all of the firms except Junkers were nominally in private ownership, they were all creatures of the Reich Air Ministry and its director, Secretary of State Erhard Milch.

It has sometimes been suggested that Hugo Junkers’s expropriation was due to his interest in internationalist politics and pacifism. But Junkers was in fact a conservative nationalist, who eagerly embraced the cause of rearmament. His difficulty was simply that he owned the largest aircraft plant in Germany and that Goering and his Secretary of State Erhard Milch were determined to have control of it. In the 1920s Junkers had squabbled with the German military about the future direction of aerial rearmament. The new holders of power were not willing to argue. After twenty-four hours in police detention, Junkers agreed to sign away his firm to the Reich.

Greeting the aircraft industrialists in solemn silence with arm raised in salute, Goering announced the Fuehrer’s intention to re-establish Germany as an air power within the next twelve months. Every aircraft firm would have to accept its integration into the overall plan laid down by the RLM. The first programme was built around the existing designs, with Junkers and Dornier providing a makeshift bomber force, and Arado and Heinkel responsible for fighters, reconnaissance, ground attack and trainers. The new aircraft plants were to be ‘trained up’ by the established producers. Under tight supervision from the Ministry, the industry underwent a phenomenal expansion, from less than 4,000 workers in January 1933 to almost 54,000 two years later. At the same time the Air Ministry issued design contracts for an entire new generation of aircraft and aero-engines. It was after 1935, in the second phase of expansion, that Junkers, Dornier and Heinkel established themselves as the lead developers of bombers and Willy Messerschmitt’s BfW gained its dominant position in fighter design and production.

By the spring of 1938 almost 120,000 people worked in airframe manufacture and another 48,000 in aero-engine production, with 70,000 more employed in aircraft equipment and repair.

Every parameter of the business was fixed by the state and could be altered by the Air Ministry at will. Engaging in this market exposed a firm to enormous risks, unless the finance for expansion was provided by the state itself. And this is what the Air Ministry did, through the mediation of the so-called Aerobank, which acted as the financier for the entire Luftwaffe sector. The state also provided the other critical preconditions for the Luftwaffe expansion. On 10 June 1936 the Air Ministry signed a second major contract with IG Farben, this time to build

a plant at Leuna capable of turning out 200,000 tons of air fuel per annum. The highly toxic tetraethyl lead additive required to boost the fuel’s octane rating was supplied courtesy of IG’s patent-sharing agreement with Standard Oil of New Jersey.97 Standard transferred the technology to Leuna, regardless of protests from the State Department in Washington. In return, and with the full agreement of the German authorities, Standard received the secrets of IG’s new synthetic rubber technology. Needless to say, air fuel expansion was entirely at the expense of the Air Ministry. The Reich also provided a second critical precondition for the Luftwaffe’s precipitate expansion, by underwriting a huge increase in the production of aluminium, the aircraft industry’s most indispensable raw material. Like steel, aluminium production in Germany depended on imports of bauxite ore. But unlike iron ore, bauxite could be obtained in sufficient quantity from Hungary and Yugoslavia, countries with which the RWM had negotiated efficient bilateral trading agreements. To process the ore, the state-owned Vereinigte Aluminiumwerke, part of the VIAG group, poured 180 million Reichsmarks into a tenfold expansion of smelting capacity.98

In 1930 the majority of military aircraft were still wood and fabric biplanes. The Luftwaffe only tested its first generation of full metal monoplanes powered by high-performance piston engines in 1935. Less than five years later Ernst Heinkel launched the world’s first prototype jet fighter, opening the prospect that military aircraft might soon be able to operate within striking distance of the sound barrier or beyond. Each of these transitions involved fundamental breakthroughs in aerodynamics, metallurgy, airframe and aero-engine design that were extremely hard to predict. Nor was designing the aircraft the only problem.

No other area of rearmament, indeed no other area of German industry was afflicted by such profound technological uncertainty. And it was this feature of the Luftwaffe boom that made it such a playground for entrepreneurial initiative, as rival aircraft manufacturers competed to offer the ‘technical fix’ that Goering needed. By 1936 Heinrich Koppenberg was rapidly turning Junkers into a manufacturing complex capable of rivalling the very biggest firms in German industry. Henschel was pioneering a variety of new metal-pressing techniques and the highly complex jigs necessary for mass assembly. Daimler-Benz, BMW and Junkers were all competing fiercely in engine development.

To provide work for the new factories and to ensure that the newly trained air crews had something to fly, all three were pressed into immediate production. But it was clear that none of them was really a weapon of strategic air war. They lacked payload and speed. Furthermore, without protection it was unclear how they could break through enemy fighter defences. Despite its success, therefore, in building up production capacity, it was clear already in 1936 that the Luftwaffe needed to develop at least one more generation of aircraft and engines before it could become a truly effective fighting force. It was the search for this technical fix that was to keep the German aircraft industry in restless motion throughout the 1930s and early 1940s. Both the future of the Luftwaffe as a fighting force and billions of marks of investment hung on the outcome.

On 20 June 1934 the RWM wrote to the two main producers of synthetic fibres–IG Farben and the Dutch-owned Vereinigte Glanzstofffabriken (VGF)–informing them that: ‘The current state of the Reich’s currency reserves necessitates a most extreme reduction in the import of cotton and wool . . .’ More specifically, of course, this was required by

Schacht’s policy of selective uncoupling from the United States, Germany’s traditional supplier of cotton. ‘To strengthen the domestic raw material base as quickly as possible, it is the German rayon factories’ peremptory duty not only to exploit their manufacturing capacity to the full, these must also be expanded with haste.’ The Reich authorities wished to see a doubling in the production of viscose-rayon and a huge increase in the production of so-called staple fibres to at least 100,000 tons per annum.100 The problem, as in the case of oil, was that world prices for wool and cotton were dramatically depressed. Certainly, as far as IG Farben was concerned, synthetic fibres were destined to remain a niche market. Any new capacity created in Germany would be entirely dependent on the state for its viability.

In any case, the Reich did its best to make the investment a low-risk gamble. Under the provisions of the ‘Law on guarantees for expansion of the raw materials industry’ (Gesetz ueber die Uebernahme von Garantien zum Ausbau der Roh-stoffwirtschaft), Keppler was empowered to provide all necessary subsidies to the new staple fibre plants. The Reich arranged to guarantee a syndicated loan under the auspices of the Dresdner Bank and provided the necessary technical expertise in the form of two leading experts, poached from IG Farben’s fibres division.

During World War II the Americans estimated that there were in the order of $450 million invested directly in businesses in Germany.102 Standard Oil’s investment of almost $65 million in the Deutsch-Amerikanische Petroleum Gesellschaft, combined with its close ties to IG Farben, made it the American industrial corporation with the greatest stake in Hitler’s Germany. But it was closely followed by General Motors (GM) which had $54.8 million invested in Opel AG of Russelsheim, Germany’s largest car-maker. By comparison, Ford’s stake valued at only $8.5 million was relatively modest, as was the stake held by IBM in its German subsidiary Dehomag.103 More significant American interests, with investments of roughly $20 million each, included Woolworths, the sewing-machine manufacturer Singer, and ITT, whose German interests included C. Lorenz AG, one of the Luftwaffe’s most important suppliers of radio and electronic equipment. Nor were Americans the only foreigners with a stake in German industry. British and Dutch multinationals such as Anglo-Persian (BP) and Royal Dutch Shell (Anglo-Dutch)

had major interests in German oil refining and distribution. The British tyre firm Dunlop had a considerable investment in the German rubber industry.104 ARBED, the quintessentially European heavy industrial conglomerate, with its main base in Luxembourg, had significant cross-border interests both in coal and the Felten and Guilleaume cable works. All of these industrial investments in various ways profited from Hitler’s economic recovery. The more they detached themselves from their foreign parents and the more closely they collaborated with the regime, the better they did. The regime for its part, particularly in its early years, went out of its way to reassure representatives from Ford, GM and ITT of their position in Germany. Wilhelm Keppler advised ITT to appoint the banker Baron von Schroeder, one of the men who had brokered Hitler’s appointment to power in January 1933, to its board.105 Ford had extremely pro-Nazi management at its plant in Cologne. And Opel probably profited more than any single car-maker from Hitler’s motorization boom. At the same time as acknowledging this important foreign involvement in the Nazi boom, one cannot ignore the fact that the cumulative total of direct investment in Germany was dwarfed by the billions that were in default to American and European banks and bond holders. And on the crucial question of repatriating the capital they had invested or the profits

they earned, direct investors were treated no better than the holders of Germany’s other foreign debts. They were all subject to the same exchange controls that made it possible to exchange Reichsmarks for foreign currency only at punitive discounts. At one point, in a desperate effort to liquidate its investment in IG Farben, DuPont of the United States offered to sell shares valued at $3 million in 1929 for less than $300,000.106 Britain’s ICI did finally manage to sell its shares in IG Farben, but only after protracted negotiation and only after accepting a complicated swap involving shares in IG’s Swiss affiliate. Not surprisingly, once the initial panic was over, most of Germany’s trapped investors chose to stay put and to plough back the profits they earned. In t...

However, in virtually every context, even settings in which one might have expected some resistance, the regime’s political representatives found active collaborators in German business.

The fundamental problem was the enormous gap between these high-flown aspirations and German reality. By the standards of the day, let alone by the standards of the later twentieth century, Germany in the 1920s and 1930s was not an affluent society. And to avoid confusion, it is perhaps worth stressing that this was not a short-term effect of the Great Depression. The problem of international economic inequality was deep-seated.

In terms of per capita income, Clark estimated that Germany enjoyed a standard of living that was half that of the United States and at least a third lower than that prevailing in Britain.

The gulf between Germany and the United States was the least surprising of Clark’s findings. By the 1920s the standard accoutrements of twentieth-century mass consumption–the car, the refrigerator, the radio–were already establishing themselves as the norm in the United States, at a time when the enjoyment of these same commodities was limited to a restricted circle of the European upper middle class.6 As Hitler noted in his ‘Second Book’, this large differential in the standard of living could not be understood without reference to the abundance of natural resources and to the vast scale of consumer markets in the United States. These conditions encouraged dramatic advances in manufacturing technology, which

enabled average Americans to achieve a material standard of living of which ordinary people in Europe could only dream.

So cheap were Ford’s cars and so high were his rates of pay that Ford’s workforce provided a major market for the cars they were making, a situation virtually unthinkable in Europe.

producers in Germany, making everything from screws to gas lamps and harmonicas.11 The ghastly slaughter of World War I would have been impossible but for the fact that all the combatants were capable of mass-producing the means of destruction on an enormous scale. Perhaps most remarkably, by 1918 Britain, France, Germany and Italy were outbidding each other in the production of combat aircraft, surely the most spectacular mechanical invention of the early twentieth century.12 Between 1914 and 1918 Germany alone turned out 47,000 aircraft of all types, a record which was in no

way inferior to American production, which peaked in 1918 at 14,000 aircraft. These flying machines were fragile contraptions strung together from wood, wire and impregnated canvas. But they were complex machines by any standard, and they were driven by aero-engines that only fifteen years after the Wright brothers’ first flight were already twenty to thirty times more powerful than their puny 12-horsepower power plant.

According to contemporary comparisons, in the mid-1930s America’s productivity advantage over its European rivals was in excess of 2 : 1 in most branches of manufacturing, widening to as much as 4 : 1 or even 5 : 1 in the production of motor vehicles and radios.

We now believe that the German economy in the 1930s was slightly larger. However, the claim that per capita incomes in Germany were substantially lower than in Britain has proved robust.

What dragged Germany down was its large and highly inefficient agricultural sector and the substantial tail of small shops and workshops in the craft and service sectors. In the 1930s productivity per head in German agriculture was only half that in German industry, at a time when more than 9 million people were still employed in farming.