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

by Adam Tooze

There was a connection in 1938 between Nazi anti-Semitism and the escalation in international tension. But

it was international abhorrence at the outrages committed by Nazism, not Jewish agitation, that did the damage.142 In this respect, Kristallnacht was a decisive turning point. In its aftermath, Lord Halifax, Britain’s Foreign Secretary, abandoned his earlier advocacy of appeasement in favour of a more aggressive form of containment.143 Of even greater long-term significance, however, was the reaction in the United States.

In his State of the Union Address on 4 January 1939 Roosevelt drew stark conclusions.150 Linking ideological questions directly to foreign policy he emphasized the threat both to the security and to the core values of the United States posed by states ‘where religion and democracy have vanished’ and where ‘good faith and reason in international affairs have given way to strident ambition and brute force’.

But if the warmongering ‘Jewish media’ in America and their allies in British and American politics got their way then National Socialism stood ready for battle. It was this specific context of post-Munich and post-Kristallnacht frustration that led Hitler to utter his famous ‘prophecy’: ‘If international finance-Jewry inside and outside Europe should succeed in plunging the nations once more into a world war, the result will be not the Bolshevization of the earth and thereby the victory of Jewry, but the annihilation of the Jewish race in Europe!’

But, in the autumn of 1938, at the moment of Hitler’s greatest triumph, the economic foundations of his success were in question. The Reichsbank was forced to acknowledge that despite its best efforts, there was ‘no longer . . . complete stability of the German currency’. ‘An inflation of the Reichsmark’ had begun, even if this was ‘not yet fully apparent’. This was an admission that Schacht repeated a few weeks later in a report to the Capital Market Committee (Kapitalmarktauschuss)–the committee of the RFM, RWM and Reichsbank which oversaw the raising of funds on the German financial markets.2 In front of his colleagues, Schacht openly stated: ‘It cannot be denied . . . that we are already on the threshold of inflation.’ To restore the Reichsmark to a state worthy of a great power, Germany needed a restoration of monetary and fiscal stability. Since the spring of 1938, the Reich’s finances had been spiralling towards disaster. For months the Finance Ministry had been living ‘from hand to mouth’ and the Reichsbank had been forced into an ‘inflationary creation of money’.

As the Reichsbank put it: ‘The currency must now underpin not an expansive power politics, but a policy of peaceful construction. Historically we have before us the same task of conversion as Frederick the Great after the Seven Years War, Prime Minister Peel after the Napoleonic War and Mussolini after the war in Abyssinia. The main task is to manage the transition from the current war economy to a peacetime economy.’ This transition would not be painless or free of risk. But there was no alternative. Any further government spending financed by monetary expansion would simply add to the overhang of excessive purchasing power, which could only be contained by a further elaboration of the already cumbersome and unmanageable apparatus of surveillance and control.

In his diary in late September, Major-General Thomas of the military-economic office of the Oberkommando Wehrmacht (OKW) noted: ‘The day of Munich. By telephone I receive instructions: all preparations now for war

against England, target 1942!’6

Within four years the Luftwaffe was to reach a peacetime strength of 21,750 aircraft. This was the logical extension of the decision taken five months earlier to base Germany’s airfleet around a force of as many as 7,000 Ju 88 medium bombers. These were now to be flanked by over 800 heavy four-engined bombers (He 177) and swarms of long-range fighter escorts and Messerschmitt interceptors.10 The navy, for its part, launched a new fleet-building programme, designed to put Germany in a position to compete with the Royal Navy within six years.11 In December 1938, Hitler and Admiral Raeder agreed on a programme that gave first priority to the construction of 6 giant battleships, followed by a fleet of 249 U-boats and 8 cruisers for long-range operations. By 1948 the German navy was to include 797 vessels, at a total cost of 33 billion Reichsmarks over nine years.

Thomas was a fierce proponent of the absolute priority of rearmament over all other national concerns. At the same time, however,

he supported Schacht in insisting on the need to promote exports and secure Germany’s financial stability. That these priorities–armaments on the one hand, conventional economic stability on the other–were in fact contradictory was abundantly apparent by 1937 at the latest. To provide at least a partial reconciliation between them, Thomas made himself into the principal advocate of a draconian system of economic organization, through which the interests of every other aspect of the civilian economy would be systematically subordinated to the double priority of arms and exports. It was precisely this drastic reorganization of the economy that seemed to be within reach in the autumn of 1938.

The convulsive acceleration of armaments activity in 1938 was the catalyst for the intimate coupling of these two key concepts in the politics of Hitler’s regime: mobilization and rationalization.

Given the usual presumptions about the internal politics of the Third Reich, this suggestion of concerted and long-term preparations may strike some readers as far-fetched. However, the evidence is there in October and November 1938. And the best reason for thinking that in the last months of 1938 a degree of overall strategic coherence was reached by Hitler’s regime was the shock therapy provided by the Sudeten crisis. In September 1938 the German leadership had confronted the real possibility that they would soon be involved in a general European war. It is perhaps not surprising that in the aftermath, having been given a ‘second chance’, Goering, Keitel, Thomas and Ribbentrop were able to achieve at least some degree of unity.

The aim of tripling the total armaments effort from its already high level in 1938 was simply unrealistic. For a middle-income country such as Germany in the 1930s, military spending on the scale being contemplated in November 1938 was incompatible with maintaining even the semblance of a normal standard of living. More immediately, it was incompatible with preserving either price stability or balance of payments equilibrium.

In August 1938, despite the desperate need for cash, the Finance Ministry had been forced to do without a new loan due to the uncertainty provoked by the Sudeten crisis. The sharp drop in market sentiment made it unsafe for the government to launch a new bond issue. In early October the markets were buoyed, as was the Reichsbank, by the hope that Germany could now look forward to an era of peaceful prosperity. In a surge of optimism, savers, insurance funds and other financial institutions swallowed not

only an offering of 1.5 billion Reichsmarks in government bonds, but also a further 350 million added at short notice by the cash-starved Finance Ministry.34 As one expert has put it: ‘After Munich . . . there appeared to be no end to the willingness of Germans to hold public debt . . .’35 But this was to prove short-lived. At the end of November, the Reichsbank’s efforts to float a fourth loan of 1.5 billion Reichsmarks suffered a spectacular failure. Almost a third of the new bonds failed to find a buyer.

If the Reich could no longer raise funds through safe long-term borrowing, then there was no alternative but to engage either in more or less open inflation or to make painful cuts to government spending and to further raise taxes.

In June 1939, the statutes of the Reichsbank were revised to abolish any formal limitation on the expansion of the money supply. Though the external value of the Reichsmark remained officially at gold parity, the abandonment of the gold standard demanded by Nazi monetary theorists since the 1920s was now finally acknowledged as a reality. Hitler as Fuehrer of the German people was given the power to determine the money supply at will.

They amounted in effect to a compulsory low-interest loan to the Reich, which by October 1939 had already risen to a total of 4.831 billion Reichsmarks.44 The idea behind the New Finance Plan was that if the Reich’s demand for credit could be met by paying its contractors in tax certificates, then the capital markets would be able to provide at least 1 billion Reichsmarks in loans to serve the needs of the Four Year Plan. From the outset, however, this emergency measure did little to hide the regime’s financial embarrassment.45 Technical expedients could not remedy the underlying problem of excess demand.46 By reducing the share of cash payments, the New Finance Plan simply imposed a serious squeeze on the liquidity of government contractors. Nor was it ever substantial enough in scale to fill the Reich’s financing gap.

By the outbreak of war, the volume of money in circulation had doubled relative to the level prevailing only two years earlier. The effort to impose financial restraint on armaments spending thus failed. As in 1934 and in 1936–7, the factor that ultimately dictated the pace of rearmament in 1939 was the balance of payments and the scarcity of foreign currency. This was entirely predictable.

The Four Year Plan would have to be intensified and the German labour force mustered in the most efficient way possible. Through ‘rationalization’ and technical improvement the German economy would be brought to a new pitch of performance, enabling it to meet the competing demands of domestic investment, export and rearmament.

The dilemma, however, could not be escaped. Something had to be done to revive Germany’s faltering exports and this was bound to come at the expense of the armaments programmes. Already on 24 November 1938, the armed forces received the news that in the coming year their overall steel ration was to be cut back from 530,000 to only 300,000 tons.

By the spring of 1939, army procurement was in full retreat. As usual, the cuts fell most heavily on the big steel users.

Perhaps most dramatically in light of later events, the tank programme, which aimed for the production of 1,200 medium battle tanks and command vehicles between October 1939 and October 1940, was now to be cut in

half.

Furthermore, specialist armaments manufacturers would be forced to cut more than 100,000 skilled workers from their rolls.64 Since they would be immediately snapped up by other employers, this would make it far harder to start up mass-production when war began. The army administrators now estimated that it would take six months after the outbreak of war for the ammunition factories to achieve peak production. The ammunition stockpiles of the Wehrmacht were sufficient to cover only fourteen days of heavy fighting.

For aluminium, the all-important material in airframe production, the Luftwaffe’s ration as of January 1939 was a third lower than that required to meet the modest procurement targets of Plan 11. For copper, the initial ration was set at 50 per cent of requirement. As of July 1939 this was cut to a derisory 20 per cent.

Nor was armaments planning the only element of Hitler’s anti-Western strategy that was derailed in the first months of 1939. Germany’s foreign policy came unstuck as well.68 Ribbentrop’s ambition had been to combine the liquidation of the rump of Czechoslovakia with an effort to enrol Poland as Germany’s ally. At the same time the German Foreign

Ministry hoped to win the support of Japan and Italy against Britain and France. By the spring of 1939, Ribbentrop had been able to achieve none of these objectives. Poland warded off Germany’s initial advances and even had the temerity to improve its relations with the Soviet Union. Japan was preoccupied with its war in northern China and had no interest in adding to its enemies. Italy was bent on a course of aggression that took it eastward into the Balkans, rather than westwards against France. When Hitler sent German troops into Prague on 15 March 1939 to establish a protectorate over the Czechs, the result was a diplomatic disaster.69 Though the occupation of Bohemia outflanked Poland’s border defences, Warsaw definitively rejected any possibility of an alliance with Germany. And by the end of the month, Britain had taken the unprecedented step of issuing a public guarantee of Poland’s territorial integrity. To give this promise substance, Britain and France opened negotiations with the Soviet Union over the possibility of concluding a security agreement that would protect the rest of Eastern Europe against any further German aggression. With hindsight it is clear that these negotiations were doomed to failure. Ironically, a guarantee to the Poles made a deal with the Soviets impossible. However, in the spring of 1939 the formation of a triple alliance of France, Britain and the Soviet Union against Hitler seemed inevitable.70 The

British cabinet, despite the reservations of Chamberlain, was genuinely committed to seeking a Soviet deal. And though the replacement of Maxim Litvinov as Soviet Foreign Minister was disturbing, Stalin and his new Foreign Minister Vyacheslav Mo...

Figure 10. Production of ammunition, 1937-1939 (June 1937=100)

The British and French hand was further strengthened by the apparent assurance that the European democracies could count on the support of the United States. The Anglo-American Trade Agreement signed on 2 November 1938 sent a clear message to Berlin.

Roosevelt had embarked on a ‘major bureaucratic and political effort’ to shift America’s stance away from strict neutrality, opening the door both to American rearmament and the possibility of military assistance for America’s friends in Europe.74 By the end of the year, the French had dispatched a purchasing mission with instructions to buy as many as 1,000 American combat aircraft and Roosevelt personally intervened with the American armed forces to ensure that the French were shown the best weapons that American industry had to offer.

Following the occupation of Czechoslovakia in March 1939, there was no longer any restraint. Roosevelt imposed a 25 per cent punitive tariff on German imports, a measure viewed in Berlin as tantamount to a declaration of economic war.77 Though the occupation of Prague was fêted in Berlin as a huge triumph, it had conjured up against the Third Reich the nightmare of German strategy, an encirclement from both East and West, to which Hitler really had no answer.

But, as Krauch clearly recognized, given the scale of the threat facing Germany, autarchy was no longer enough. If the Third Reich was to survive a truly global war, it would need to extend its influence systematically to the oil fields of Romania and Iran. Turkey thus took on a strategic importance as the gateway to the Middle East.

In addition, Germany urgently needed to cultivate its trade relations with the Soviet Union.

A step in the right direction was the German-Romanian trade treaty of 23 March 1939.81 This provoked great alarm in London and Paris, because Romania was Eastern Europe’s only major oil producer and because the treaty was clearly the result of coercion as much as bribery.82 In Berlin, the deal was heralded as a major breakthrough, which would secure Germany’s oil and grain supplies for the foreseeable future. For the Romanians, however, it seems to have been little more than a means of warding off German and Hungarian pressure. A few weeks after concluding the deal, Romania inveigled the French into guaranteeing its security along with that of Poland. The British were forced to follow suit. Following the occupation of Prague, the balance of power in South-east Europe was delicately poised.83 Whereas Germany attempted to suck Romania into its orbit, Turkey opted for the Western powers, securing the right flank of the British Empire in the Middle East.84 Turkey’s decision was premised

on the common understanding in the spring of 1939 that there would soon be the announcement of a triple alliance binding the Western powers to the Soviet Union. Driven by the same assumption, the Yugoslavs, Greeks and even the Bulgarians drifted towards London and Paris in the summer of 1939, not towards Berlin. Even the Romanian trade deal failed to live up to German expectations. Once the threat of Hungarian military action had been lifted, the willingness of Bucharest to supply Germany with oil depended on Germany’s ability to provide reciprocal deliveries, in particular of arms.

The effort to establish German economic dominance over South-eastern Europe by peaceful means was reaching its limit. In fact, the Wehrmacht’s military-economic office had already concluded

in April 1939 that oil supplies from Romania would be sufficient to cover Germany’s needs only if the country was occupied by German troops, and if the entire Romanian oil industry, in which France and Britain currently held the dominant share, was turned over to production for Germany.86 The fundamental problem for Berlin was that in the aftermath of Prague, with Britain and France united and apparently able to count on the support of the United States, any conventional strategic analysis suggested that Germany was outmatched.

He concluded that, once differences in purchasing power were allowed for, Britain, France and the United States would outspend Germany and Italy by a margin of at least 2 billion Reichsmarks in the coming year. Even more strikingly, Thomas went on to compare the burden of rearmament in macroeconomic terms, by placing military spending in relation to national income. In this respect, the Axis disadvantage was even starker. Whereas Germany in 1939 was already planning to devote 23 per cent of its national income to the Wehrmacht, the figure for France was 17 per cent, 12 per cent for Britain and only 2 per cent for the United States.

the vast industrial capacity of the United States came in on the side of Britain and France, the German disadvantage would be overwhelming.

In an all-out arms race with the ‘democracies’, time was clearly not on Germany’s side.88 If one gave credence to Thomas’s figures, if the democracies were already outspending Germany by 2 billion Reichsmarks in 1939, with the United States making a minimal contribution, how large might their advantage be in a few years’ time? This argument applied with most force to the Luftwaffe, where the extraordinarily rapid development of aviation technology in the 1930s had the effect of levelling the international playing field. Despite Goering’s periodic outbursts, it was clear that the British were concentrating all available resources on the Royal Air Force, first as a defensive, but ultimately also as an offensive threat. There was no reason to believe that the German aircraft industry enjoyed any pronounced technical superiority over the British. Though intelligence was faulty on both sides, as of the spring of 1939, British aircraft production matched that of the Third Reich. In the short term, on the other hand, due to the rapid pace of expansion since 1933, the German air force still enjoyed a clear margin of superiority both in terms of the number of combat-worthy aircraft and in terms of overall war readiness.

allocation of raw materials as of July 1939 would permit production of less than 37 million. Instead of 650,000 3.7 centimetre anti-tank rounds per month, German industry would produce 39,000. Instead of 450,000 shells per month for light howitzers, German industry would produce 56,300. Figure 11 summarizes the future of German ammunition production, as it was presented to Hitler by the army staff in the summer of 1939.

Figure 11. The future of German ammunition production, as presented to Hitler, July 1939 (January-February 1942=100)

If on the one hand Hitler knew that the outlook for the immediate future of the German armaments effort was not good, he also knew in the summer of 1939 that the Third Reich had assembled both the largest and most combat-ready army in Europe, as well as the best air force.

The re-equipment of the front-line units with the latest generation of tanks and machine guns was incomplete. Ammunition stocks were sufficient to cover only a few weeks of fighting. But the progress since 1938, when the thought of a war over Czechoslovakia had been enough to drive the German army to near mutiny, was undeniable. By the summer of 1939, despite the protests from the procurement office, the German army was ready for a short war. There was no doubt at all that it could handle Poland. When Hitler gave the order to prepare for an attack in the spring of 1939 there was not a murmur of opposition from the

generals.98 To overwhelm Poland’s 30 infantry and 7 cavalry divisions, the Germans could deploy 54 divisions, including 6 Panzer divisions equipped with at least a smattering of medium to heavy tanks.99 Furthermore, the encircling position that Germany occupied in East Prussia and the former Czech lands meant that success was virtually guaranteed.

However, at least Germany was no longer defenceless. Whilst concentrating the bulk of its forces in the East, the Wehrmacht would be able to defend its western border with at least 11 first-line divisions, as opposed to only 5 in 1938. Furthermore, thanks to Todt’s efforts, the gateway to the Rhineland between the Rhine and the Moselle was now heavily fortified.

It was possible, in short, to construct a rationale for war in the autumn of 1939, considering only the dynamics of the armaments effort. If war was inevitable, as Hitler clearly believed it was, then the Wehrmacht had little to gain from waiting.