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

by Adam Tooze

Devaluation and rearmament, by contrast, are mutually exclusive; one has to choose one or the other. If not, devaluation will slide into inflation, a second definitive devaluation would follow and rearmament would in any case be brought to a halt.

There was no coherent opposition to the course being pushed by Goering and he made easy meat of Goerdeler. In formal conversation, Goering dismissed Goerdeler’s arguments as ‘completely unusable’.61 In private, he was less complimentary. Goering’s personal copy of the Goerdeler memorandum is dotted with indignant marginalia–‘Oho!’, ‘What cheek’, ‘Nonsense’. Goering forwarded Goerdeler’s report to Berchtesgaden, where the Fuehrer was himself drafting a memorandum on German economic policy, with the following comment: ‘This may be quite important, my Fuehrer, for your memorandum, since it reveals the complete confusion and incomprehension of our bourgeois businessmen. Limitation of armaments, defeatism, incomprehension of the foreign policy situation alternate. His [Goerdeler’s] recommendations are adequate for a mayor, but not for the state leadership.’

memorandum of August–September 1936 is remembered above all as an economic policy statement.63 Indeed, it is universally referred to as the ‘Four Year Plan memorandum’, providing Goering with the warrant for his new economic programme. But Hitler’s statement has as much to say about grand strategy and armaments as it does about economics. This was typical of Hitler’s rambling style. But given the questions facing Germany in 1936, a wide-ranging response was clearly called for. The argument was no longer about the balance of payments. What was at stake was the future of the Third Reich.

‘However well balanced the general pattern of a nation’s life ought to be, there must at particular times be certain disturbances of the balance at the expense of other less vital tasks. If we do not succeed in bringing the German army as rapidly as possible to the rank of premier army in the world . . . then Germany will be lost!’ Economic policy was entirely subordinate to this overriding priority: ‘The nation does not live for the economy, for economic leaders, or for economic or financial theories; on the contrary, it is finance and the economy, economic leaders and theories, which all owe unqualified service in this struggle for the self-assertion of our nation.’

Given the competition on foreign markets there was little prospect of any relief from this side. He wasted no words on the subject of devaluation. Instead, he insisted that Germany’s economic preparations should be approached with the same ‘tempo’, ‘determination’ and ‘ruthlessness’ that was applied in military affairs. Specifically, Germany needed to intensify its efforts to replace imported raw materials with domestic substitutes. Three areas were of immediate importance: petrol, rubber and iron ore. Questions of economic viability, technical feasibility ‘and other such excuses’ had to be set aside.

Agencies of the state had no business siding with private management, as Schacht had done a few months earlier in backing the Vestag against Keppler over German iron ore.

I. The German army must be operational within four years. II. The German economy must be fit for war within four years. Hitler thus answered the questions posed by Goerdeler and Fromm in a manner entirely consistent with the general position he had adopted since the 1920s. Germany’s ultimate salvation could come only through conquest not trade. And the time-horizon for opening this campaign was four years, fully in line with the army’s expansion plan.

The Swiss, Dutch, Czechs and Italians all followed the French in devaluing over the following weeks. The ensuing struggle in Berlin was recorded in the diary of Joseph Goebbels, which for 30 September has the following brief entry: ‘Schacht wanted to devalue . . .’ He was prevented only by the prompt intervention of Walther Funk, former business editor and since 1933 Secretary of State in Goebbels’s Propaganda Ministry. Hearing of Schacht’s intention, Goebbels wrote: ‘Funk went straight to Fuehrer . . . he intervened.’ Only by this timely intervention, Goebbels boasted, had Funk ‘prevent[ed] a German inflation’.70

On 5 December Goering chaired a meeting of the armed forces at which he announced that, in future, he would be in charge of military finances. Raw materials and labour, not money, would dictate the pace of Germany’s military expansion.73 A day later, General Fritsch as commander-in-chief of the army formally approved Fromm’s monumental expansion plan as the basis for all further action.

Within four years, Germany was to achieve independence from all oil imports, with a domestic capacity of 5.4 million tons. Achieving the goal of fuel self-sufficiency consumed the lion’s share of all resources invested in the Four Year Plan. But Krauch at least could build on technologies that had been in operation since the late 1920s. The one area where a truly dramatic technological step was envisioned in 1936 was the synthetic production of rubber.

But from the early 1930s, IG’s annual investment rose at an almost uncontrollable rate, from as little as 10–12 million Reichsmarks per annum at the trough of the recession to 500 million Reichsmarks per annum in the early 1940s. This extraordinary growth was driven not by coercion but by a financial environment of unprecedented generosity. As Schnitzler admitted: ‘A high percentage of our turnover . . . was more or less guaranteed by the Wehrmacht. Agreements of the most different kinds were being

concluded, but nearly all were based on solid financial ground in so far as the Reich guaranteed the amortization or had arranged for a protective duty or prescribed the use for the consuming industry .

Hitler’s Four Year Plan speech answered the strategic question posed in the summer of 1936. But it in no way addressed the immediate practical question of how to conduct an enormous rearmament drive in the face of a severe balance of payments problem. In the short run, by adding to booming domestic demand Goering’s investment programme could only make matters worse, diverting exportable goods for domestic uses, whilst sucking in more foreign raw materials for the production of large industrial facilities. What Germany needed was the precise opposite. To ensure an adequate inflow of hard currency and thus of food and raw

materials, Schacht wanted to repress domestic demand, whilst boosting exports. Rearmament in the widest sense would have to accommodate itself to this wider reallocation, since without imported materials and food the German economy would simply grind to a halt. A devaluation would have provided a market mechanism for achieving this goal, reducing the foreign prices of German exports and raising the cost of imported goods. But, having rejected devaluation, the regime was forced, as in 1934, to resort to increased bureaucratic regulation.

The Reich authorities, however, were desperate to avoid the scarcity of imported raw materials spilling over into general inflation. So, Gauleiter Wagner, who had responsibility for price control in the Four Year Plan, issued a blanket ban on 26 November 1936 prohibiting any price increases.89 Formalizing a development begun in the early 1930s, this effectively eliminated the market mechanism as a means of regulating scarcity in the German economy. The logical next step, as had already been acknowledged by the RNS in agriculture at least a year earlier, was the introduction of rationing, managing scarcity by bureaucratic allocation rather than the market process. Rationing of nonferrous metals was adopted in January 1937; steel rationing was imposed as of 23 February 1937.90 To clear the backlog with the rolling mills, all outstanding steel orders that could not be met by the end of April 1937 were cancelled. From the end of February, new orders for steel could only be placed on the basis of steel entitlements issued according to national priority as defined by the Reich Ministry for Economic Affairs.

Much to its frustration, the Wehrmacht, instead of being allocated huge additional quantities of steel, found itself with a steel quota no larger than that purchased through normal channels a year earlier.92 In effect, procurement and military construction was frozen at the rate already reached in 1936. This was significant by any standard, but in light of the goals set by Fromm, the implications were nevertheless serious. To meet the target, approved in December 1936, of creating a wartime army of 3.6 million men by 1940, the army had requested 270,500 tons of steel per month. The actual monthly allocation as of February 1937 was only 195,000 tons.93 As a result, Fromm’s department estimated that army ammunition stocks would not reach their intended levels before the autumn of 1942. The system of fortifications included in the 1936 Plan would not be completed until 1948.94

For the Luftwaffe, meanwhile, Goering approved a revised programme that implied an immediate 10

per cent cut in the aircraft industry workforce.97 By the autumn of 1937, the Luftwaffe was talking about cutting its production plans by 25 per cent and the plant expansion programme by 66 per cent.98 And the results are evident in the statistics. Rather than expanding, as had been demanded in 1936, aircraft output was actually on a downward trend between April 1937 and the summer of 1938.99 The Luftwaffe carried through its re-equipment with modern combat aircraft, but only at the expense of a drastic reduction in the output of all other types of aircraft, especially of trainers.

After averaging between 330 million and 340 million Reichsmarks per month in 1934 and 1935, Germany’s monthly export earnings rose above 400 million Reichsmarks in August 1936 and scaled 530 million Reichsmarks in the summer of 1937. This would not have been possible without Schacht’s much maligned system of export subsidies, which in early 1937 allowed every Reichsmark of German exports to be supported to the tune of approximately

30 Pfennigs.100 But the export subsidy system had of course been in operation since 1935. What explains the sudden turnaround in German exports was the upsurge in world trade. In 1937 alone, global trade volumes grew by 25 per cent.

As we have seen, the United States had already taken steps to block subsidized imports from Germany. If they had wanted to, Germany’s other major trading partners could have followed this lead in shutting the Third Reich out of their markets. There were voices in Britain calling for precisely such a move.

Schacht, however, held firm, refusing to make any concession to London. He could not afford to allow Britain to unpick the complex structure of bilateral agreements he had established since 1934, of which the Anglo-German Payments Agreement was the cornerstone. And he also knew that he could count on influential friends on the British side. As the British embassy in Berlin opined, a collapse in the Anglo-German Payments Agreement would have ‘shake[n] confidence on both sides and also weaken[ed] Schacht’s position’. Following Goering’s appointment, Schacht was now seen as a vital moderating influence on Hitler’s regime. To bolster his position, London felt it best to hold open the door to Germany’s international trade.

In light of the acute steel shortage it was clearly untenable for the Ruhr firms to resist development of this national asset. By June 1937 the steel industry, in collaboration with the offices of the Four Year Plan, had worked out a programme to raise

German steel production from its current maximum of 19.3 million tons to a ‘final capacity’ of 24 million tons, a figure which they believed would be sufficient to exhaust the capacity of the metal-processing industries.

this proposal had been forthcoming six months earlier, there can be little doubt that it would have settled the argument. By the summer of 1937, however, it was too late.108 After months of obstinate resistance from Poensgen and his colleagues, Pleiger was determined not simply to expand German iron ore mining, but to break the heavy industrial power bloc of the Ruhr. His goal was to establish an independent, state-controlled, vertically integrated steel conglomerate in central Germany large enough to challenge even the Vereinigte Stahlwerke.

The state had shown itself capable of achieving dramatic expansion in the aluminium industry and the Luftwaffe sector. Now the same methods would be applied to steel. All private holdings of German iron ore deposits would be merged into a single state company. Three giant steelworks would be built on the ore fields. Salzgitter was to be the largest steel plant in the world. The shocked industrialists were then each handed a map showing the ore fields of their firms that were to be expropriated in the name of the new Reichswerke. Goering then read out a decree personally approved by Hitler, which authorized the forced sale.

But what Germany did not need was to spend 200 million Reichsmarks on a new steelworks complete with foundries and rolling mills. It would lumber Germany with excess capacity, drive up costs and cause chaos in the complex network of international cartels that regulated the European steel trade.113 Pleiger and Goering, however, were now deploying the full apparatus of the police state. They had informants both inside the Reich Ministry of Economic Affairs and the steel cartel and this, together with Goering’s personal wire-tapping service, gave them advanced warning of Poensgen and Schacht’s strategy.

However, this extraordinary empire-building can give a false impression of the significance of the Reichswerke to the wider economic history of the Nazi regime. The many affiliates added in the

process of the expansion were only loosely controlled by corporate headquarters and many of them were divested after 1941. Since the expansion of the Reichswerke was mainly due to acquisitions rather than internal investment, it added little to the overall dynamic of the armaments driven economy. Though Pleiger’s technological gamble paid off and the Salzgitter steelworks produced perfectly acceptable steel, it never acquired the dominant position in the steel industry that Goering and Pleiger had aimed for. The one crucial sector in which the Reichswerke did establish a leading position was in coal. Here Pleiger profited both from a series of ruthless Aryanization deals orchestrated by Friedrich Flick and from the seizure after 1939 of extensive Silesian mining interests.120 In the 1940s it was coal not steel that was to make Paul Pleiger into a pivotal figure in the organization of the German war economy.

The steel squeeze continued unabated and Hitler himself was forced to become involved. In the summer of 1937 a strongly worded memorandum from the military-economic department of the War Ministry headed by Colonel Thomas brought the derailment of the rearmament programmes directly to his attention.

For Hitler, the central issue was one of timing. It was crucial to resolve the issue of Lebensraum before 1943–5, because after that point he expected Germany’s relative advantage in the arms race to decrease. Hitler’s reference to 1943–5 is significant because it suggests a modification of the timescale suggested in his Four Year Plan memorandum. Hitler was showing his awareness of the deceleration in the pace of rearmament over the last twelve months. The statement also indicates an awareness of the threat posed by the rearmament of the other European powers. And Hitler went further than this. If, prior to 1943, France were to be disarmed by a sudden escalation of internal social strife, as had occurred in early 1934, or if Britain and France were to be distracted by a conflict in the Mediterranean, then it might be profitable for Germany to act, even though its own military preparations were not yet fully completed. What this indicates is that though Hitler clearly understood the complexities of the armaments timetable, his decision for war would ultimately depend on the unpredictable evolution of the international scene.

To break the deadlock, what was needed was a significant increase in steel production, not from the Reichswerke Hermann Goering–that would take years–but from Germany’s existing blast furnaces and steel mills. And that is exactly what was set in motion in the weeks following the Hossbach conference.

In 1937, however, the damage had been done. Rather than undergoing a dramatic expansion, as had clearly been intended in 1936, armaments procurement had stagnated. Indeed, in the entire pre-war history of Hitler’s regime, 1937 was the only year in which military spending did not significantly increase.132 As Blomberg had predicted this had serious strategic ramifications. As of December 1937, the German army high command did not expect Germany’s wartime army to be fully equipped and ready for combat until the spring of 1943.133

Whilst doing everything possible to raise steel production and reallocate it to the military, he now ceaselessly raised the level of international tension. Rather than domestic mobilization creating the conditions for war, international tension was to become the principal lever through which the leadership of the Third Reich–ably assisted both by key industrialists and careerist soldiers–catapulted the German economy into a dramatically higher level of mobilization. International escalation opened the door to domestic mobilization, not the other way around.

Even more important was the new role assumed by Hitler himself in relation to economic policy. Of course, neither Goering nor Hitler had the stomach for the excruciating technical details of industrial policy, but both were acutely interested in the armament programme and this meant that they had to take a serious interest in the problem of raw-material rationing. From November 1937 until the end of the Third Reich, there was not a single occasion on which the allocation of steel, the basic raw material of the industrial economy, was significantly altered without Hitler’s personal approval.

Hitler’s timing was good and depended on a clear-headed reading of the wider diplomatic scene.

1937, Austria produced only 600,000 tons of steel, of which more than half went to exports. That was just under 4 per cent of German production.

For the German economy as a whole, the main benefit of the Anschluss was the addition of the underemployed Austrian workforce. According to the official figures, the Anschluss added 401,000 unemployed to the German roll, increasing the labour reserve available to Germany by between 30 and 40 per cent. By contrast, the impact of the Anschluss on the all-important balance of payments was ambiguous. In the longer term, the effects were clearly negative. Like Germany, Austria depended on imports both for its food and industrial raw materials and it struggled to sustain

exports at a sufficiently high level.6 A large-scale revival of the Austrian economy could, therefore, be expected to add to Germany’s balance of payments problems.

Altogether, the Austrian foreign exchange dowry came to at least 782 million Reichsmarks, more than doubling Germany’s reserves. These funds were crucial, because in the first weeks of 1938 Germany’s balance of payments situation looked extremely bleak.

Instead, thanks to the Austrian booty, Germany in 1938 was able to run a trade deficit of almost 450

million Reichsmarks, larger than at any time since 1929. For a brief moment at least, the Anschluss freed Hitler’s regime from the balance of payments constraint. But the motivation for the Anschluss was not booty. The real imperative was strategic. The joining together of Germany and Austria dramatically increased the Reich’s power in relation to the smaller countries of Central and South-eastern Europe.

Annexing Austrian trade to the share already going to Germany, raised Hungary’s import-dependence on Germany from 26 to 44 per cent. Germany’s share of Yugoslavia’s imports rose from 32 to 43 per cent.11 Over the months that followed, Germany was able to use its enhanced leverage to conclude new trade treaties with both Hungary and Poland.12 For Czechoslovakia on the other hand, the Anschluss came as a devastating blow. The deployment of German troops into the eastern provinces of Austria meant that Bohemia was now encircled on three sides.

He still hoped that the British would see reason and that the confrontation with France could be delayed until 1943–4, by which time the German army would have completed its build-up. But if the Western powers were determined to oppose his first steps towards eastward expansion, Hitler would not shrink from war. From the spring of 1938 onwards, Hitler began seriously to contemplate the need for a major war in the West, as a prelude to his drive against the Soviet Union. As hard as it may be to credit, given the subsequent fate of Czechoslovakia, this was the essential lesson that was learned in Berlin by the early summer of 1938. The Third Reich had to regard the British Empire as a force opposed to Hitler’s dream of conquest in the East.

If Germany had to force both France and Britain into submission, then by any reasonable reckoning, the prospect of a campaign of conquest in the East receded into the distant future. Our knowledge of the Wehrmacht’s sweeping Blitzkrieg victory in 1940 tends to cloud our thinking on this point. In 1938 no one–neither the Germans nor their opponents–anticipated the Blitzkrieg. To reasonable German strategic planners, the French and British empires with friends in Eastern Europe and backing from across the Atlantic looked like truly formidable opponents.

The British and French fleets patrolling the Atlantic and the Mediterranean ensured their access to the raw materials of the world. Only if Germany was able to combine its puny naval forces with those of Italy and Japan could it even contemplate an open battle with the Royal Navy.18 In the air race, Goering’s Luftwaffe definitely had the lead. But there was no reason to doubt that the British and French aircraft industries had the potential to catch and overtake Germany’s. Above all, a confrontation with the Western powers forced the Nazi regime to reckon with the enormous economic power of the United States. If America provided support to Britain and France, even if the Americans did not enter the war as combatants, one did not need to engage in detailed statistical comparison to realize that the odds were stacked hugely against Germany.

Rather than narrowing the gap, Britain’s already overwhelming advantage in warships had actually increased over the first five years of Hitler’s rule.20 And Germany’s disadvantage was further emphasized on 17 May 1938, a few days before the ‘weekend crisis’, when President Roosevelt signed into law the Naval Expansion Bill. At $1.15 billion this was the largest peacetime military appropriation in American history, and it ensured

that the United States outspent any of its rivals in the worldwide naval arms race.21 Of even greater concern was Britain’s clear intention of matching Germany in the air. At the end of April 1938, sweeping aside the Treasury’s financial concerns and the principle that British industry ought to be permitted to continue with ‘business as usual’, London adopted an ambitious new air programme (Scheme L), which called for the production of 12,000 modern combat aircraft over the next two years.22 Meanwhile, in France the decision was taken both to step up naval construction, enhance the army and carry out a complete re-equipment of the air force under the so-called Plan V.23 By May 1938 Edouard Daladier’s new right-wing government was arguing over a doubling of the military budget.

The full, wartime army was now to be completed by

April 1939, sooner even than the original target date of April 1940.