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

by Adam Tooze

the cities.

However, the RNS’s influence was enormous, since it controlled the prices that the processers paid for their raw materials. Taking agriculture and the food industry together, the RNS was a truly formidable organization. Exercising more or less direct control over more than 25 per cent of German GDP, it was, Darré boasted, the largest single economic unit in the world, with sales of more than 30 billion Reichsmarks.50 As well as a total of 6 million independent producers, it controlled more than 40 per cent of the total German workforce. The RNS had an even more direct impact on German households, since it controlled the prices at which they purchased their food and drink, which on average accounted for almost 50 per cent of family budgets.

By the autumn, it was Darré who found himself fighting a rearguard action against the dominating influence of Schacht’s system of exchange and trade controls, a struggle dictated by the fact that German agriculture no less than German industry depended on imported inputs.

In 1933 the mood in farming had been buoyed not only by the activism of the new government, but by perfect weather and a bumper harvest.

The generous prices paid to farmers were passed on directly to consumers, who were faced with a sharp increase in the cost of living. After years of falling prices, the official food-price index rose between 1933 and 1934 from 113.3 to 118.3. At the end of 1933, milk prices were raised by the direct intervention of the RNS to 22 Pfennigs per litre. These may seem like small changes, but one can gauge their significance when they are set against the modest budgets on which most German households coped from week to week. Furthermore, the inflation was highly unevenly distributed. One labour office in Hamburg in early 1934 reported panic buying, as consumers were faced with a 10 per cent increase in food prices in a single month. As we have seen, popular unrest about the inflation in food prices was one of the most worrying signs reported by the Gestapo in 1934. So severe were these anxieties that they seem largely to have outweighed any propaganda advantage gained in the struggle against unemployment. This extremely negative response to price increases during the economic and political crisis of 1934 had a remarkably long-lasting impact on the politics of agricultural production in the Third Reich. Thereafter the RNS faced enormous political pressure to refrain from any further price increases even if these were needed to stimulate production.

Once we allow for the reduction in imported inputs, farm production from domestic sources went up by 28 per cent between 1927 and 1936.60 Given the structure of German agriculture and dietary patterns in the 1930s, it is hardly surprising that the RNS never achieved self-sufficiency. Maintaining, let alone raising production, with much reduced imports of energy and protein, without being able to substantially raise prices paid to farmers, was a tall order. What the RNS was able to achieve was not only a

substantial increase in domestic food production, but also a substantial improvement in the resilience of German agriculture in the face of shocks.

After 1933 the Reichsbank never allocated more than 260 million Reichsmarks to the importation of oilseeds, less than half the level of the Weimar Republic. Though feed was much cheaper in the 1930s, in volume terms the import of oilcake was cut between 1932 and 1936 from 2.3 million tons to less than 1.1 million tons per annum. Imported carbohydrate feeds such as maize, which could be more easily substituted by domestic production, were reduced by an even larger margin. By 1936 German farm animals were consuming only half the imported protein and 30 per cent of the imported carbohydrates that had been available in 1928–9.63 To cover the gap, farmers were encouraged to substitute hay, turnips and the nutritious by-products of sugar beet farming–sugar beet leaves and heads. To make this feed palatable for the dairy herd, the RNS pushed through the near universal adoption of fermentation silos (Gaerfutterbehaelter). In the 1920s feed fermentation

had been rare on German farms. By 1939 the RNS had overseen the installation of more than 8 million cubic metres of capacity.

It was normal, prior to the advent of the RNS, for anywhere upwards of 2 million tons of rye to enter the food chain as pork rather than as bread grain. After 1935, given the difficulty of ensuring the grain supply for human consumption, this was no longer sustainable. The price of rye was raised and Germany’s pigs were fed overwhelmingly on potatoes and other domestically produced feeds.

Shortfalls in 1934 and 1935 were covered by running down the stock accumulated in the first good year of the Third Reich. This, however, was by its nature a short-term solution. By the summer of 1936 the grain stock, which in early 1934 had stood at 3.5 million tons, had been drawn down to the dangerous level of less than 700,000 tons. This was barely enough to ensure continuity to the new harvest. Already in the summer of 1935 there had been talk of the need to introduce ration cards for bread. For obvious reasons, this was deemed to be politically unacceptable. Instead, the RNS resorted to an organized programme of substitution through which bread flour was diluted with maize meal and even potato starch.

It is easy to misunderstand the constant talk of crisis that afflicted the RNS. At no point was the German population threatened with real food shortages.69 The ‘shortages’ of meat and butter were due not to a collapse in supply, but to a huge surge in demand, especially from working-class consumers. Newly re-employed Germans with money in their pockets simply did not want to eat the austere vegetarian diet publicly espoused by the Nazi leadership with their Sunday lunches of vegetable stew.

In general, however, a wholesale increase in food prices was ruled out by fear of provoking the kind of public outrage that had shown itself in 1934. It was this political freezing of the price system that created the appearance of shortages, forcing the RNS to resort to more or less overt forms of rationing. It was not until 1938, with the appearance of real supply problems in dairy farming, that the regime finally raised the prices paid to German farmers for milk. But even then the increase was not passed on to consumers. The price increase thus helped to stimulate production but did nothing to restrain demand.

But the grumblings of the peasantry are rarely a good guide to the economics of agricultural support. German peasants had long memories and a well-cultivated sense of entitlement. They harked back to the golden days of the early twentieth century, when North American competition had been manageable with modest tariffs and minimal government interference. Those days were long gone. When we bear in mind the disastrous situation of world agriculture in the 1930s it is clear that German

farmers, in fact, enjoyed a historically unprecedented level of protection and it is hardly surprising that this came at a price. In return for the exclusion of foreign competition from home markets, peasant smallholders had to accept comprehensive regulation and control. Farming in Germany, as in Europe generally, from the 1930s onwards resembled less and less a market-driven industry and more and more a strange hybrid of private ownership and state planning.

Though it is true that grain producers clearly enjoyed a larger margin of protection than dairy farmers, for all major types of farm produce the prices paid to German farmers under National Socialism were at least twice those prevailing on world markets. Of course, under Schacht’s New Plan, German industry enjoyed blanket protection as well. So the really telling development after 1933 was the sharp improvement in the terms of trade between agriculture and industry.

The promise Hitler made on the night of 30 January 1933 was to restore the economic fortunes of the German peasantry within four years and the RNS certainly made good on that pledge. According to figures calculated by Germany’s most authoritative economic research agency, total farm income, of which animal products accounted for more than 60 per cent, rose by almost 14 per cent in 1933–4 and by another 11.5 per cent in 1934–5. At the same time the burden of taxes and interest payments on agriculture fell significantly.73 When we allow for the general deflation in prices, increases in money incomes on this scale more than made up for the Depression. The situation would have been even better if it had not been for the bad weather and poor harvest in 1934. In its inability to satisfy any of the major constituencies in the Third Reich, the RNS became a victim of its own effort to extend control to every aspect of food production. The creation of the RNS undoubtedly gave the Nazi regime an unprecedented degree of control over a vital part of the economy. But by the same token it politicized a vast swathe of everyday life. The organizational influence of the RNS extended into every home in the land. For the peasantry,

there was virtually nothing, except the weather, that could not with some reason be blamed on the RNS and its intrusive regulation. Similarly, consumers found that their everyday tasks of shopping for food and even of preparing family meals were now the subject of political intervention and propagandistic comment. 74 In the final analysis, however, the difficulties faced by the RNS were not attributable to Darré’s ideological whimsy or the lumbering incompetence of his organization. The problems facing the RNS were effects of Germany’s struggle to manage its rapid economic recovery and its massive programme of industrial restructuring in the face of a binding balance of payments constraint. Since 1934, increases in industrial prices and wages had been held back in an attempt to prevent the industrial boom spilling over into inflation and a further deterioration n German competitiveness. This in turn meant that agricultural prices could not be substantially increased without hurting urban standards of living. At the same time the shortage of foreign exchange dramatically impeded progress in protein and fat production, by restricting the quantity and quality of feed available for the animal herd. All this meant that a gap between the consumer aspirations of Germany’s urban population and the productive capacities of German agriculture

was bound to make itself painfully felt. Straddling this gap were Darré an...

The threat of war was obvious, so obvious in fact that the main global insurance market–Lloyds of London–ceased trading in war cover on property by the end of 1936.2

For both France and Britain the first priority was to ensure that they could negotiate from a position of defensive military strength. Both countries, therefore, began in 1936 to make serious efforts to respond to Germany’s rearmament.4 The second key element was to undo some

of the damage done by the Great Depression in restoring a degree of economic coherence between the three major Western powers–France, Britain and the United States.5 Since 1933 both Britain and the United States had experienced recovery from the recession, but they were still at loggerheads over America’s new agenda of trade liberalization. France for its part languished in the tightening corset of the gold standard. The third and most familiar facet of appeasement, finally, was the effort to construct a package of concessions sufficient to tie Hitler into a lasting peace settlement in Europe.

The case for appeasement was powerfully reinforced by the fact that Hitler’s regime, after weathering the storm of indignation that followed the Rhineland Aktion in March 1936, seemed to be entering a phase of comparative ‘respectability’. In the summer of 1936, Germany hosted the athletes of the world at the Berlin Olympics, accompanied by a mob of international journalists. Goebbels bit his lip as the German press was instructed to give ample coverage to the triumphs of Jesse Owens and other African American athletes.7 In 1937, at the Paris world’s fair, the German pavilion was one of the star attractions.8 In its fifth year, Hitler’s regime could present itself as the model dictatorship. Unemployment had fallen to negligible levels. The economy was booming. Life for millions of German households was returning to something like normal.9 The savage wave of repression in 1933–4 had done its job. Inmate numbers in Himmler’s concentration camps dwindled to a few thousand. For a time, even the regime’s anti-Semitism was toned down. When compared to the warlike aggression of Fascist Italy in Africa and Imperial Japan in China, not to mention the well-publicized excesses of Stalin’s show trials, Hitler’s government appeared positively reasonable.

Furthermore, the majority of Germans would probably have accepted such an arrangement as a highly satisfactory outcome to the ‘National Revolution’ begun in 1933. All evidence of public opinion suggests that whatever their resentment at the outcome of World War I, the German population was deeply afraid of a European war and would have welcomed a settlement on the basis of the status quo as of 1936.10

As the authoritative Berlin Institute for Business Cycle Research pointed out in its report for early May 1936, the principal problem facing the

German economy was access to raw materials.11 This depended on increasing exports. And by the spring of 1936, there were at least some grounds for optimism on this score. The Institute counted the United States, Great Britain, Japan, Sweden, Argentina, Chile, Brazil, Norway, Austria and Belgium amongst the important economies that were now in full recovery. Only the gold-bloc states, led by France, remained in recession.

Faced with this existential threat, Hitler was in no mood for compromise. Backed by Goering and the army, Hitler evaded the efforts of the British, French and Americans to lure him into a negotiated settlement, in which economic concessions would be traded against a moderation of Germany’s rearmament. In private, from the summer of 1936 onwards Hitler was frank. Having consolidated his regime and begun the process of rearmament, he now wanted Germany prepared for war. Hitler had not wavered from his central idea. Though he had yet to clarify the concrete steps, he was determined to realize his dream of expanding the Lebensraum of the German people. He knew that this must lead to military conflict, certainly by the early 1940s. He knew that it involved huge risks and he was determined to maximize Germany’s chances of success both through systematic military-economic preparation and through opportunistic diplomacy.

On the one hand, armaments were one aspect of industrial and economic activity in which Hitler displayed a lasting and persistent interest. On the other, it was military spending that increasingly dominated the behaviour of the German economy. Of the growth in total national output in Germany between 1935 and 1938 almost half (47 per cent) was accounted for directly by the increase in the Reich’s military spending.15 If we add investment, of which a very large part was dictated either by the priorities of autarchy or rearmament, the share rises to two-thirds (67 per cent). Private consumption, by contrast, was responsible for only 25 per cent of the growth over this same period, even though in 1935 it had accounted for 70 per cent of total economic activity. If we consider only that part of economic activity that was directly under the control of the state, the dominance of military spending is even more dramatic. Of the goods and services purchased by the Reich, the Wehrmacht accounted for 70 per cent in 1935 and 80 per cent three years later. Not surprisingly, therefore, discussion of every aspect of economic policy was increasingly dominated by rearmament. And it was through rearmament in turn that the future of the German economy was coupled to the ultimate question now facing Hitler’s government, the question of peace or war.

By 1936 France, Britain, the United States and the Soviet Union were all raising their military spending. And rather than responding with moderation, the German military leadership reacted to each new threat by heightening the pace of the build-up.19 In December 1933, the army had envisioned a peacetime strength of 21 divisions. By the end of 1934 this was no longer enough. In March 1935 Hitler announced to the world the creation of a German peacetime army of no less than 36 divisions.

The only weapon that seemed to offer any chance of success against Germany’s heavily fortified neighbours was the tank. So, in December 1935 Beck added 48 tank battalions to the projected 36 divisions, bringing forward by at least a year the creation of an offensive striking force that had originally been planned for the second phase of rearmament.20 At the same time, the Luftwaffe began its latest phase of multiplication, with an expansion scheduled to raise its strength from 48 squadrons in August 1935 to over 200 by October 1938.21 In March 1936, Hitler accelerated further by authorizing the Luftwaffe to begin the immediate introduction of the latest generation of streamlined, all-metal aircraft.

The implications of this extraordinary expansion programme were spelled out in detail by Major General Friedrich Fromm, head of the central administrative office of the German army (Allgemeines Heeresamt), in a memorandum which marks a turning point in the history of the Third Reich.35 Not only did it give the clearest statement of the kind of army that the Third Reich was trying to

construct. Fromm also described with stark clarity the consequences of any such armaments programme for the German economy.

1936, however, the only tanks in series production in Germany were the Mark I and Mark II light tanks, both of which were armed only with machine guns. For the offensive purposes that Beck had in mind they were clearly inadequate. The hard core of Germany’s armoured fighting force, as envisioned in 1936, was to consist of 1,812 medium tanks–Mark III and Mark IV models. These, however, were still in development in 1936 and were not expected to enter production until 1938.

As compared to a wartime complement of 120,000 trucks, mainly drafted from private business, Fromm allowed for 630,700 horses, one animal for every four men in the active field army. In the average Wehrmacht infantry division, cars and trucks were outnumbered by carts and wagons.

The German military was now embarked on the accelerated construction of a gigantic force, of which a significant element was explicitly intended for mobile, offensive operations. But we must clearly set aside any idea that the armaments effort of the Third Reich was carefully tailored towards the construction of a motorized ‘Blitzkrieg’ juggernaut. In quantitative terms the German army’s expansion undoubtedly set new standards. But in qualitative terms, even in its moments of most florid fantasy, the German army remained rooted in a society characterized by very uneven development.

To produce the wartime equipment for a force of more than 4 million men in the space of only four years, large parts of German industry would have to be retooled. New factories would need to be brought into production in the shortest possible time. And the question would have to be faced of what was to be done with this capacity, once the targets for the accelerated build-up had been met. If the plants were to be maintained at war readiness, the ordnance office would need to issue huge follow-on orders for equipment that went far beyond the peacetime needs of the armed forces. If the Reich wished to escape these costs, it would have to undertake an extremely difficult process of conversion to civilian activity. It would be surprising if this could be accomplished without serious unemployment. And even if it were successful, a conversion to civilian production would leave Germany unready to actually resupply its enormous army in the case of war. As Fromm put it: ‘Shortly after completion of the rearmament phase the Wehrmacht must be employed, otherwise there must be a reduction in demands or in the level of war readiness.’

The question of war and peace was now unavoidable. The gigantic machinery of mobilization could not be kept spinning indefinitely. If there was no intention to use the army at a predetermined point, then the whole rationale for rearmament at the pace being envisioned in the summer of 1936 had to be questioned. Given the scale of the resources required, means and ends could no longer be separated. War now had to be contemplated not as an option, but as the logical consequence of the preparations being made.

To stave off immediate disaster, Goering ordered a draconian intrusion into private property. Every dollar, franc or pound, every ounce of gold and all Germany’s remaining foreign assets were to be put at the disposal of the Reich. Significantly, the man Goering charged with responsibility for setting up the special investigative service for foreign currency assets was Reinhard Heydrich of the SS.42 Schacht opposed these measures, fearing that signs of desperation would shake confidence in the Reichsmark. But over the next twelve months Goering’s teams bagged 473 million Reichsmarks in foreign currency, enough to see Germany through at least the next eighteen months.

On the agenda was the creation of a new organization, under Goering’s control, charged with an all-out drive to make Germany ready for war by expanding its domestic sources of food and raw materials. Goering guaranteed both the necessary funds and the necessary political protection against Schacht. He also announced that he was due to discuss the entire matter with Hitler during the Fuehrer’s summer retreat in Berchtesgaden.

Goerdeler began by rejecting Schacht’s existing system of export promotion. The New Plan had succeeded in offsetting much of Germany’s competitive disadvantage in price terms. However, Goerdeler did not believe that Germany’s trading partners would long tolerate

a system that was tantamount to state-subsidized dumping. Instead of promoting trade, Germany’s efforts to increase its exports would result only in hostility and aggressive countermeasures.

As far as Goerdeler could see, the only way to avoid a steady deterioration in Germany’s international economic position was devaluation accompanied by a liberalization of foreign exchange movements. Goerdeler acknowledged the risks involved, but also pointed out the enormous advantages. By bringing the German price level into line with that of its competitors, devaluation would render redundant the entire cumbersome apparatus of trade promotion.

Devaluation, if it was to bring its full benefits, would have to be accompanied by a diplomatic rapprochement with Britain and America.

The precondition for cooperation, however, was an end to unilateralism. Germany would need the support of the British and French. It would need to bring its military spending under control. And Goerdeler went further than that. He believed that concessions would also have to be made on the ‘Jewish question, freemasonry question, question of the rule of law, Church question’: ‘I can well imagine that we will have to bring certain issues . . . into a greater degree of alignment with the imponderable attitudes of other peoples, not in substance, but in the manner of dealing with them.’51 One is tempted to say that, given the mood prevailing in London and Paris, Goerdeler exaggerated the price that Germany would have had to pay for an economic accord. Moderation of rearmament certainly was a sine qua non. But the idea that the British and French would have made the anti-Jewish laws of 1935, or the treatment of the Churches, into a sticking point seems far-fetched.

fetched. Goerdeler was pursuing an agenda that was as much domestic as international. What he wanted for Germany was a return to conservative respectability.

One of the principal attractions of a policy of devaluation and exchange liberalization for Goerdeler was precisely that it would have a bracing effect on German public finances. To maintain the confidence of the currency markets following a devaluation, Germany would need to return to fiscal discipline. In the short run, the effects on the German economy might be severe. Goerdeler calculated that there might be as many as 2 to 2.5 million unemployed. But, as a veteran of Bruening’s deflation, Goerdeler did not shrink from such hardships. A liberal policy demanded a long view. In due course, Germany’s export industries would revive.

They shared Goerdeler’s contempt for the parvenu corruption of the Nazi party. And they shared his anxiety that the recovery driven by ever increasing state spending was unsustainable.

Faced with the prospect that Léon Blum’s Popular Front government, which depended on Communist support, might complement its policy of domestic work creation with the imposition of exchange controls–Schacht’s formula since 1933–the French right wing abruptly abandoned its dogged attachment to the gold standard. If the choice was between devaluing the franc in cooperation with Britain and America, or following Germany into ‘economic fascism’, the decision was easy.

Unlike in 1934, when even the Reichsbank’s confidential memoranda had steered clear of any mention of rearmament, the connection was now too obvious to be ignored. Perhaps the most comprehensive of these papers was compiled by three Reichsbank department heads under the title ‘The German Currency in Case of a Devaluation of the Goldbloc’.58 It was far from optimistic. The consequences for Germany of a French devaluation would certainly be serious. But determining the appropriate response raised fundamental

strategic questions. A successful devaluation, the Reichsbank officials concurred with Goerdeler, had to be flanked by fiscal consolidation.