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

by Adam Tooze

In the space of a week between 25 and 31 May 1938, the German army tripled its request for steel from 400,000 extra tons to more than 1.2 million.25 And this was only the beginning. In the immediate aftermath of the May crisis, the Luftwaffe’s planning also underwent a quantum leap as Goering placed an order for a fleet of no less than 7,000 Ju 88 twin-engined bombers.

Table 7. The democratic oceans: worldwide naval spending

After the completion of the Reich’s new armaments schemes in 1942–3 they estimated that the Reich’s annual requirement for fuel and oil would rise to no less than 13.8 million tons. Thanks to the steel shortages, the Four Year Plan was behind schedule. In 1938 synthetic production would not exceed 2.4 million tons and the supply of air fuel was even more inadequate. Deficiencies in explosives and gunpowder were no less glaring. In 1918, Imperial Germany had produced 13,600 tons of high explosives and 13,250 tons of gunpowder per month. In the summer of 1938 the Third Reich’s capacity was no more than 5,400 tons of either. To make up the gap, on 12 July 1938 Goering approved a new version of the Four Year Plan known as the New Military-Economic Production Plan (Wehrwirtschaftliche Neuer Erzeugungsplan).30 By the middle of 1941 Krauch aimed

to reach monthly production of 17,100 tons of high explosives and 18,100 tons of powder. Synthetic fuel output was programmed for 8.3 million tons by 1942–3 and 11 million tons by 1944. And in August 1938, with war over the Sudetenland perhaps only weeks away, even this was not enough. To reach World War I levels by the end of 1939, Krauch launched the Schnellplan, a short-range emergency programme with absolutely top priority amongst all the Wehrmacht’s many programmes. To ensure that Krauch got the resources he needed, Goering promoted him to the special status of general plenipotentiary for special questions of chemical production (GB Chem), a position from which he dominated the German chemicals industry until the end of the war.

In the summer of 1938, though nominally still at peace, the Nazi regime was pushing the German economy onto a war footing.

Between April and October 1938, the German army alone spent no less than 4.9 billion Reichsmarks, more than 5 per cent of total national income.36 For the calendar year the share of military spending in national income topped 19 per cent.

In 1938 the German economy reached the limit of this type of extensive economic growth. It was impossible to reconcile a 70 per cent increase in military spending and the heavy investment programmes of the Four Year Plan with any further increase in consumption. In an economy in which output was expanding at 8 per cent per annum, household consumption stagnated.37 And this understates the drama of the adjustment process going on within the German economy. Steel is more indicative. Measured in terms of steel, the quantity of materials available for non-Wehrmacht purposes was cut by 25 per cent between March and July 1938, from a high point of 1.345 million tons to 1.041 million tons.38 The cutback would have been even more serious, but for the decision taken in late 1937 to raise German steel production to the limit of capacity. By mobilizing all available labour, scrap and a special consignment of top-quality Swedish iron ore, Germany’s steelmills in 1938 achieved a record annual output of almost 21.5 million tons.

Goering’s crass bullying aside, it is clear that the Reich’s economic administration fully understood the problem of macroeconomic management facing them in 1938.43

And from this point of view the problem facing the Reich authorities was a classic problem of macroeconomic management: how to regulate the total volume of demand so that the key priorities of armament and autarchy were met, whilst at the same time ensuring that Germany did not slide into inflation? The problem facing the Reich Ministries was a problem of excess demand. After allowing for consumer expenditure, financed directly out of household income, the total volume of planned government spending and business investment on the one side of the equation substantially exceeded the available sources of financing, namely tax revenues, retained business profits and household savings.

To ensure that it was the Reich not the private sector that secured the lion’s share of German private saving, the Reichsbank exerted systematic pressure on savings banks and insurance offices to invest their funds in government bonds and short-term paper.51 Most dramatically, the Reich made a determined effort to curb private construction, the most important form of private investment. As of the autumn of 1938 the Reichsbank banned all new mortgage borrowing.52 Given the importance of both public and private construction contracts to tens of thousands of small businesses across the country and the importance of the housing shortage as a social issue, the significance of these restrictions can

hardly be exaggerated.

Figure 9. Inflationary imbalance between financing requirements and available funds, a contemporary view (billion Reichsmarks)

But, more worrying for the Reich authorities was the impact of underinvestment on the German railway system. By 1938 the Reichsbahn was increasingly unable to cope with the combined demands of the Wehrmacht and a booming economy. Rail investment had been badly squeezed by the steel shortage. In 1938 the Reichsbahn was not able to obtain even half the steel it needed to maintain its current rail infrastructure and rolling stock.

There was no option but to go over to an overt system of rationing in which priority was given first of all to the Wehrmacht and then perishable foods, coal, sugar beet and high-priority export orders.55 The authorities did their best to suppress technical reports on the deterioration in the system.

The situation of the Labour Ministry officials might have been easier but for the effects of the wage stop that had been reinforced in November 1936 along with the price stop. This helped to prevent excess demand from spilling over into general wage inflation. But it also meant that there was no market mechanism to guide a ‘spontaneous’ redeployment of workers into the highest priority sectors. Here too Hitler’s regime had robbed itself of one of the most effective, flexible and unobtrusive mechanisms for managing shortages. Indeed, by 1938 the fear of the inflationary pressure that everyone knew to be hanging over the German economy was such that any flexibility in wage setting was liable to be interpreted as indiscipline or even sabotage.63 If the market was not allowed to function, the logical alternative was to allocate labour by administrative means, as in the rationing of steel. And by 1938, the

Third Reich was clearly moving in that direction.

Though compulsion was not the norm in relation to German workers, any more than it was in the regime’s dealings with German business, the possibility was now established that if rearmament demanded, the state could intervene in the working life of every single individual.

Workers wanted better wages and employers–keen to take advantage of the boom–were willing to pay for their labour. Given the formal ban on wage increases, the resulting upward adjustment of earnings was a covert

process, hidden in accelerated promotion, high-status apprenticeships, retraining schemes, hiring bonuses, improved working conditions and a variety of supplementary social benefits.

Allowing for the natural increase which Darré believed should have been expected, he arrived at the shock figure of 700,000 for the number of workers lost to agriculture since 1933.72 Of course, agricultural labour had long been at the bottom of the occupational hierarchy. But the racist ideologues of Nazi agrarianism now feared that farm labour was becoming a sink for the least valuable elements in German society.73 RNS experts scared themselves with surveys such as one conducted in the vicinity of Goettingen that counted four cases of ‘subnormality’ and two forced sterilizations in a sample of only twenty-six unmarried maids. In Marienburg the situation was no better with six cases of ‘subnormality’ and one forced sterilization in a sample of thirty-eight. This, needless to say, was not how Darré and his cohorts had imagined the future of the new countryside.

But there can be no doubt that in the summer of 1938 the leadership of the Third Reich believed itself to be threatened by a crisis in the national food supply. For the agrarians, a significant lobby in their own right with vital connections to the ideological heart of the Nazi party, the problems of agriculture called into question the entire achievement of Hitler’s government. Above all, there was alarm in RNS circles about the way in which farming families were responding to the labour shortage. Farm women were the most overworked group in the rural population, and reducing the number of children was the most obvious way to cut their work burden.74 In Niedersachsen, the very heartland of the German peasantry, the number of children per couple had fallen by as much as 33 per cent in a single generation.75 At the same time the labour shortage was also threatening the efforts of the RNS to raise domestic production. Already in 1937 the harvest had borne all the hallmarks of an emergency ‘Aktion’.76 The regular farm workforce had had to be supported by Labour Front draftees, soldiers, convicts and schoolchildren.

The prevailing school of thought in the Third Reich blamed the collapse of the German home front in World War I on the failure to maintain the food supply. And no less a figure than Ludwig Beck, chief of army general staff, repeatedly stressed a satisfactory harvest in 1938 as a key precondition for war readiness.

What caused labour to drain out of agriculture was the huge differential in wages and standard of living between town and country. This imbalance had been the driver of labour migration in Germany at least since the mid-nineteenth century. The acute labour shortage of the late 1930s merely accelerated the flow. The booming market for construction workers

was particularly attractive for unskilled farm labour.

Setting aside the shock to the urban economy that any of these proposals would have inflicted, it is the assumptions on which the arguments rested that are worthy of note. The RNS started from the premiss that all forms of labour were equal in worth and that one would, therefore, expect to see an equal distribution of per capita incomes across the economy. This assumption is alien to any kind of conventional economic reasoning, which assumes that relative incomes ultimately reflect productive contribution as valued at prices determined by supply and demand. From this point of view the fundamental explanation for the poverty of German agriculture was simple: low labour productivity. According to conventional measures, the productivity of the more than 9 million people employed on Germany’s farms was roughly half that of the typical non-agricultural worker.84 What was

really scarce in the countryside was not labour but the necessary capital and technology to use labour efficiently.

By the late 1930s, however, the ‘world market’ as far as Germany was concerned was an increasingly irrelevant abstraction. Given the politicization of its foreign trade, Germany no longer purchased at ‘world’ prices. Instead, agricultural imports were bargaining items in a complex web of bilateral deals, in which Germany often paid substantial premiums for the willingness of its trading partners to remain loyal to the Third Reich.

The real issue facing the Third Reich in the summer of 1938 was not the question of how to deal with the bothersome social side effects of breakneck rearmament. What had to be faced was the question of peace or war. And it was over this existential decision that a dangerous fissure threatened to open between various factions within the leadership of Hitler’s regime.

Obviously, what these men had in common was not principled opposition to Hitler’s regime. Nor were they opposed to war per se. What they had in common was the view that, given the state of the Wehrmacht’s armaments and the German economy, the Third Reich in the summer of 1938 was in no position to risk a major war with Britain and France, especially if those countries were backed by the United States.

As Beck clearly understood, given the underlying balance in population, raw materials and financial power, it was the Germans not the British and French who needed to force a rapid military decision. Following the logic of Beck’s own analysis it was most unlikely that the French would take the risk of a major offensive in the West. Instead, they would settle for a long war of attrition. The behaviour of Roosevelt’s administration gave them every reason to expect American assistance.100 Furthermore, Beck was clearly correct in his assessment of the state of the German army. Whatever the precise timetable for the conquest of Bohemia, Germany in 1938 certainly did not have the military means to follow up an invasion of Czechoslovakia with a swift and decisive blow against France. The Third Reich would therefore have been forced into a defensive posture, encircled in both East and West by potentially or actively hostile powers.

Between April 1938 and the end of August, the German stock market had fallen by 13 per cent.106 The Reich, Krosigk claimed, was in the grip of a mounting wave of ‘war- and inflation psychosis’. This ‘psychosis’ was strengthened by the signs of incipient inflation visible throughout the German economy. But above all the state of the markets was a reflection of the fact that the Reich was ‘steering towards a serious financial crisis . . .’, precipitated by a drive to war.

‘As every war in the future will be fought not only with military means but also will be an economic war of greatest scope’, he considered it his ‘unavoidable duty’ to present ‘in fullest truthfulness and sincerity my deep anxiety for the future of Germany . . .’. Whether or not the war stayed localized in the event of a showdown with the Czechs depended mainly on Britain.

For she possesses two great trump cards. One is the soon-expected active participation of the United States of America in the war.’ For Krosigk, no less than for Goering, Weizsaecker and Beck, American backing for the enemies of the Third Reich was axiomatic.108 The second British ‘trump card’ was their knowledge of Germany’s ‘financial and economic weaknesses’. With this in mind, Britain and France would fight a war of attrition. ‘The Western powers would not run against the Westwall but would let Germany’s economic weakness take effect until we, after early military successes, become weaker and weaker and finally will lose our military advantage due to deliveries of armaments and aeroplanes from the United States.’

In the final analysis it is hard to know how seriously to take the internal ‘opposition’ to Hitler in the summer of 1938.109 The sources are simply too scanty and unreliable.

Hitler had wanted war on 1 October 1938, he could have had it. The French and British had reached the point at which they could make no further concessions.111 The armies of France and the Soviet Union had mobilized. The Royal Navy stood at full alert. On 29 September 1938 it was Hitler who stepped back not his opponents, and there is no better explanation for this abrupt change of course than the sheer weight of evidence, argument and pressure that had been brought to bear on him over the previous weeks.

Reluctantly, Hitler backed down and accepted the extraordinarily generous settlement on offer at the hastily convened conference in Munich. In so doing, he almost certainly saved his regime from disaster.

The violent energy pent up within the Nazi movement during the summer of 1938 unloaded itself not in war, but in an unprecedented assault on the Jewish population. Beginning already in the summer of 1938, the Nazi party orchestrated a wave of anti-Semitic outrages that culminated in a nationwide pogrom on 9 November 1938, an event without parallel in the modern history of Western Europe.113 To make this connection between the Sudeten crisis and Kristallnacht is more than mere socio-psychological inference. In their reports on the pogrom in November 1938, the local branches of the SS intelligence service (SD) uniformly offered as their explanation that it was the behaviour of the Jewish minority during

the crisis that had driven the German population to take violent reprisals against them. The SS leadership were clearly haunted by the fear that Germany might find itself engaged in a major war with hundreds of thousands of Jews still in the country. It was the fear of ‘Jewish subversion’ that led the SS in late October to carry out the brutal expulsion from Germany of 70,000 Polish Jews, including the parents of Herschel Grynzspan, the young man whose botched assassination attempt on the German ambassador in Paris provided the immediate trigger for the November pogrom.

For the German Jews alone, not including the Austrian population, it came to an estimate of between 2.2 and 5.15 billion Reichsmarks. Barring a large external loan, this was many times the hard currency reserves of the Reichsbank.114 In light of this disparity, it is hardly surprising that the Reich imposed punitive taxes on would-be emigrants. And as the Reich’s foreign exchange situation deteriorated after 1936, these financial penalties escalated.115 Perversely, the very fact that Jews were being encouraged to emigrate made them prima facie suspects of wishing to smuggle capital out of the country. Rather than facilitating emigration, the bureaucracy of foreign exchange and emigration became an additional means of harassment and discrimination.116 Having been closely involved in questions of foreign exchange since 1936, Reinhard Heydrich and the SD were in no way naive about the financial obstacles to ‘voluntary emigration’. In the summer of 1938, the SD was in direct negotiations with the RWM in the hope of procuring more hard currency for this purpose.117 But, not surprisingly given the Reichsbank’s situation, they were disappointed. The SD’s anti-Jewish

Jewish policy thus faced a logjam. And it was against this backdrop that the mounting wave of anti-Semitic violence and discrimination in 1938 took on its real functional significance. If the SS could not make emigrating easier, it could at least increase the incentive, through a wave of physical terror and discrimination that rendered Jewish life in Germany impossible.

All German and Austrian Jews with assets of more than 5,000 Reichsmarks were required to report them to an official register. Henceforth, the Four Year Plan organization was to ensure the ‘utilization’ of Jewish assets ‘in the interests of the German economy’.

Both ‘ordinary’ Germans and leading representatives of German corporate capitalism seized the chance to buy businesses, property and other assets at knock-down prices. The major banks, led by the Deutsche and Dresdner, competed fiercely for Aryanization business.120 Acquisitive heavy industrial groupings such as Flick and Mannesmann took full advantage.

By far the biggest beneficiary of the economic persecution of German Jewry was not German business, but the German state and thus indirectly the German taxpayer in general.122 Since 1933 the Reich had led the way in stripping the Jewish population of its wealth through the flight tax and the discounts charged by the Reichsbank. To go further than this would

have required an act of outright fiscal persecution.

It took the mounting tension of the Sudeten crisis to overcome their inhibitions. As the expectation of war built to a climax in September 1938, so did the climate of violence against the Jews. The municipal authorities of Munich and Nuremberg set an important precedent with the demolition of their synagogues over the summer. This was followed by a rash of anti-Semitic attacks and demonstrations across south and south-western Germany, which according to the SD took on ‘in part the character of pogroms’.124 In Vienna, the hostility was unrelenting. By the autumn, entire Jewish neighbourhoods were being forcibly removed to temporary accommodation, pending ‘voluntary’ emigration. The nationwide pogrom ordered by Hitler on the night of 9 November thus came as the ghastly finale to a period of prolonged escalation. According to the meticulous records compiled by German loss adjusters, the material damage came to more than 220 million Reichsmarks.

What this meant, in the first instance, was the imposition of a punitive tax. In the words of the decree formally announced on 12 November: ‘The hostile attitude of Jewry towards the German people and Reich . . . makes necessary a decisive defence and harsh expiation.’

The Jewish community was ordered to pay a fine of 1 billion Reichsmarks. In addition, Germany’s Jews were required to repair all damage done on 9 November whilst forfeiting their insurance claims to the Reich. So anxious was the Reich Finance Ministry to get its hands on the funds that it persuaded a consortium of the major Berlin banks to provide it with an advance against the revenue from the ‘Jew tax’.127 At the same time the First Decree for the Removal of Jews from Economic Life (Erste Verordnung zur Ausschaltung der Juden aus dem Wirtschaftsleben) did exactly as its title promised. It banned all Jews from retail and crafts. It banned them from selling goods at trade fairs and debarred them from holding any position of authority in any firm.

The proceeds nominally still held in the name of the Jewish community were invested in government bonds, thus easing the financial situation of the Reich.130 By the end of the year, with regulations concerning the sale of real estate firmly in place, virtually all Jewish wealth remaining within the Reich was accounted for and the Reich’s exchequer was several billion Reichsmarks to the good. To avoid confusion, it is worth stressing that this was a purely financial transfer. These acts of persecution in no way improved the overall position of the German economy. Of course, some gains in efficiency were to be expected from closing down the many small and inefficient craft businesses belonging to Jews.131 But too much should not be made of this rationalization effect. Given the small scale of such businesses, the amount of labour and other resources released by these means cannot have been more than trivial. Nor should we exaggerate the fiscal benefits reaped by the Reich. According to the records of the Finance Ministry, revenue from the two main taxes levied on the Jews, the wealth tax and the flight tax, in the 1938–9 fiscal year came to 498.5

million and 342.6 million Reichsmarks respectively.

Apart from more or less explicit anti-Semitic prejudice, the open expressions of which provided a field day for the Nazi press, the main obstacle to any such relaxation of immigration quotas was the question of finance. How would the refugees support themselves in countries all of which were still suffering substantial unemployment? The answer to that question, it was commonly agreed, depended on the willingness of Germany to allow would-be emigrants to take with them at least some of their personal assets. The German government, however, refused to have anything to do with the Évian Conference, denouncing it as a concerted international effort to strip Germany of its last remaining foreign currency reserves.