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

by Adam Tooze

In 1933 no more than 1,000 labourers were employed on the first autobahn section. Twelve months after Todt’s appointment, the autobahn workforce numbered only 38,000, a tiny fraction of the jobs created since Hitler took office.

In 1929 German exports had run at in excess of 8 billion Reichsmarks. Germany’s import bill had of course shrunk in line with world commodity prices. But in proportional terms the debt burden had dramatically increased.

Everything depended therefore on Germany’s ability to sustain a healthy flow of exports with which to service debts and pay for imports. Germany’s export trade, however, had been hit hard by the wave of currency instability precipitated by the British abandonment of gold in 1931 and the ensuing upsurge in global protectionism.

The monthly returns of the Reichsbank suggested that Schacht was deliberately exacerbating the currency shortage by needlessly accelerating the repayment of short-term debts.

On 8 June the cabinet gave its approval for a unilateral moratorium on Germany’s long-term foreign debts, to begin as of 30 June.

Payment in foreign currency would only resume once Germany’s foreign trade position was restored to a healthy surplus. This ultimately depended on the creditor countries. If they wanted repayment of their debts, they would have to purchase German goods. If Germany could not achieve the required trade surplus, it could not be expected to engage in large-scale foreign debt service.

The World Economic Conference that opened in London on 12 June 1933 might have provided the stage for a concerted international response. But in the summer of 1933 there was little chance of that. The United States, Britain and France were deeply divided over all fundamental issues of economic policy.45 Indeed, American policy was divided even against itself.

In every respect except propaganda, the civilian work creation measures of 1933 were dwarfed by the decisions taken in relation to rearmament and foreign debt.

According to the agreement of June 1933, military spending was to be almost three times larger than the combined total of all of the civilian work creation measures announced in 1932 and 1933.

As a propaganda exercise, the battle for work entered a new phase in the spring of 1934. However, the remarkable fact was that not a single Reichsmark of new money was allocated to national work creation projects in 1934 or at any point thereafter, a formal decision to this effect having been taken by the Berlin Ministries on 6 December 1933.70 Enough projects had already been authorized to maintain the momentum into 1934.

There was to be no new money for work creation after December 1933. Indeed, from the spring of 1934 the Reich’s subsidy for local work creation projects was cut by a sixth, much to the horror of local officials anxious to maintain the downward pressure on the unemployment statistics.

Their appeals were in vain. By the spring of 1934 the balance of priorities had shifted irrevocably. In the capital, it was now an open secret that civilian work creation was no longer a top priority.

This meant that by the second year of Hitler’s government, military spending already accounted for over 50 per cent of central government expenditure on goods and services. In 1935, the military’s share rose to 73 per cent.

What is unmistakable is that in both 1933 and 1934 there was a powerful ‘natural’ recovery in the German business sector. In 1933 investment expenditure–mainly in stock-building–was a major driver of recovery.

In 1933 private investment both in construction and stock-building was by far the largest single contributor to the recovery.

From the outset, therefore, Hitler’s economic recovery was driven primarily by the public sector.

By 1935 German GDP in real terms had recovered to roughly the same level it had stood at in 1928. This was no doubt a rapid recovery. But it was not vastly superior to the recovery achieved in the United States under a very different policy mix. Nor, in terms of the rate of growth, was it superior to the rebound from the Weimar Republic’s first severe recession over the winter of 1926–7, when the twelve-month growth rate was higher than at any time during the Third Reich.

In this strict counterfactual sense, Nazi economic policy cannot claim to have ‘caused’ the German economic recovery.86 However, what is unarguable is that the recovery as it actually occurred bore the clear imprint of Hitler’s government. In 1935 private consumption was still 7 per cent below its pre-Depression levels and private investment was 22 per cent down. By contrast, state spending was 70 per cent higher than it had been in 1928 and that increase was almost entirely due to military spending.

And yet at precisely the same moment Germany teetered on the brink of economic disaster. Between March and September 1934 the Nazi regime suffered the closest thing to a comprehensive socio-economic crisis in its entire twelve-year history.

The economic crisis came to a head right on cue.12 On 14 June 1934 Schacht declared a complete suspension of foreign currency payments on all Germany’s international debt. At the same time he slashed the foreign currency allocated to German importers. On 23 June 1934 the Reichsbank abandoned altogether the orderly system of monthly foreign exchange rationing.

From day to day, German importers could not be certain of obtaining the foreign exchange they needed to satisfy the claims of their foreign suppliers. Foreign trade threatened to grind to a complete halt.

As the SS did their dirty work, Britain and Germany, the two largest economies in Europe, moved perilously close to an all-out trade war. Such a confrontation would have had incalculable effects on Hitler’s economic recovery. Britain was not only Germany’s main export market and hence its main source of hard currency; the British Empire was also the chief source of many of Germany’s imported raw materials. To make matters worse, the City of London was the chief provider of short-term finance for German foreign trade. Even if German imports were not British in origin, they were, more often than not, financed by British banks. A concerted effort by Britain to punish Germany for its default would have had a serious impact on Hitler’s still fragile regime.

The immediate cause of the crisis was the dangerously low level of the Reichsbank’s foreign currency reserves.

Driving this disastrous haemorrhage was the increasing deficit on the current account.

The truly alarming problem was the trend in exports. Whilst the German domestic economy rebounded, exports continued to decline. In every month of 1933 exports were lower than they had been in 1932 and the gap widened as the year wore on. The trend continued into 1934, with export earnings in the early summer of 1934 fully 20 per cent lower than they had been a year earlier. Without exports, Germany could not pay for its desperately needed imports, or service its foreign debts.

The causes of the decline in German exports were hotly disputed both inside and outside the country.

There is no doubt that the enormous hike in global protectionism that followed the currency crisis of 1931 made exporting very difficult.20 But Germany was not simply a victim of other countries’ protectionism. Other than Britain, Germany was Europe’s largest market for exports and Germany’s own turn towards protectionism since 1930 had played an important role in accelerating the cycle of tit-for-tat trade restriction.

One of the most alarming features of the Reich’s trade statistics in 1934 was the serious fall in exports to France, the Netherlands and Switzerland. All three had responded to Germany’s default in 1933 by negotiating clearing agreements, which ensured that they recouped at least some of Germany’s export earnings in the form of debt service.

German exports were impeded by the bureaucratic formalities of the clearing agreements. German importers on the other hand had every incentive to take full advantage of the open account offered under the terms of the treaties. From Germany’s point of view this was a disastrous development, since it relied on the surpluses earned in trade with its European neighbours to pay for its imports of food and raw materials from overseas.

Furthermore, there can be no doubt that these obstacles to German exports were compounded after 1933 by widespread international antipathy towards the lawlessness and anti-Semitism of Hitler’s regime.

In July 1933 Hitler stated to a key meeting of leading Nazis that the first wave of revolutionary action against the Jews had had to be brought to a halt because of the front it created against Germany in international opinion.

The Reichsbank was required by its statutes to provide migrants with the foreign currency needed to meet visa requirements abroad. But if prosperous Jewish families had emigrated en masse from Germany in 1933 and 1934, the effects on the Reichsbank’s foreign currency reserves would have been disastrous. At a conservative estimate German Jewish wealth in 1933 came to at least 8 billion Reichsmarks. Transferring even a modest fraction of this amount was clearly beyond the Reichsbank.

According to a detailed account compiled by the Reichsbank, the hard currency losses due to emigration between January 1933 and June 1935 came to a total of 132 million Reichsmarks, of which Jewish emigrants accounted for 124.8 million Reichsmarks.

However, the net effect was profoundly contradictory. Rather than encouraging emigration, the Third Reich was now imposing a severe tax on anyone seeking to leave the country. And the result was predictable. Once the initial violence of the seizure of power had passed, Jewish emigration dwindled to only 23,000 in 1934 and 21,000 in 1935. From 1934 onwards the lack of foreign exchange was to become the central obstacle to a coherent policy of forced emigration.

In 1933 Hitler and Schacht had ruled out the most obvious solution to this problem, a devaluation. In Hitler’s terms, a devaluation was tantamount to inflation and it was certainly true that by raising the cost of imported commodities any significant devaluation would have raised the German price level.

By the end of May, the choices facing Germany had become starkly obvious. In a remarkably frank article, the Wirtschaftsdienst demanded that if the Reich government had decided definitively not to devalue, it should draw the necessary conclusions.48 In the journal’s view, the choice against devaluation marked a fundamental divide between the liberal economic policies of countries such as Britain and a newly emerging system of National Socialist economic management. If devaluation was ruled out, then there was no alternative but to begin as soon as possible with the establishment of a new and powerful system of economic controls.

If the German government meant to break definitively with the liberal economic order, then it was in a position much like that at the beginning of a war. It was dangerous to remain on the defensive. The Reich authorities needed to go over to the attack, adopting far more comprehensive measures to regulate imports and to promote exports regardless of the consequences for relations with its trading partners.

A close look at the trade statistics reveals that ‘autarchy’ in fact amounted to a selective policy of disengagement directed above all against the United States, the British Empire and, to a lesser degree, France.

The United States was overwhelmingly Germany’s largest foreign lender. Service on American debts alone came to at least 600 million Reichsmarks in addition to the large bilateral trade deficit with the United States. In 1929 this had stood at close to 800 million Reichsmarks. By 1933–4 the deficit had been reduced to 230 million Reichsmarks. But, at 800 million Reichsmarks per annum, the combined American claims on the German balance of payments for debt service and net imports were clearly unsustainable.

Indeed, such was American concern about the growing German influence in Brazil that Rio was able to follow Germany in defaulting on its large debts to the United States, without having to fear aggressive retaliation from Washington.

Such a dramatic squeeze on foreign inputs to the German economy was clearly not sustainable. It was only possible in the short term because producers were able to draw on accumulated stocks of raw materials. Once these were exhausted, the economic recovery would be cut short. Any substantial increase in imports depended on achieving a recovery in exports. This, however, failed to arrive.

For more than two years, starting in the spring of 1934, Hitler’s Germany saw virtually no growth in the output of consumer goods. The significance of this development should not be underestimated. The conventional image of the German economy as a powerhouse of industrial modernity, too often obscures the continued importance of ‘traditional’, consumer-orientated sectors such as food and textiles.

There can be no doubt that the regime paid a serious political price for the economic difficulties of 1934. All the evidence we have on public opinion, mainly from confidential reports by the regional offices of the Gestapo, confirms that in the summer of 1934 the German population was unsettled far more by the economic problems resulting from the foreign exchange crisis than by the violence of the Night of the Long Knives. The simplistic cliché, which sees the Germans as having been won over to Hitler’s regime by the triumphs of work creation, is simply not borne out by the evidence.

Furthermore, after the crisis of 1934, the lopsidedness of Germany’s economic recovery was acute. Millions of people who depended for their livelihoods on the consumer goods industries faced an outlook of short time and shortened wages. For entire regions of Germany, such as Saxony and Baden, that were disproportionately dependent on exports and consumer goods production, the recovery was partial at best.88 Even those who did have jobs had to put up with price increases and deteriorating quality.

Wherever crowds gathered in the autumn of 1934–in the queues at the labour exchanges, at bus stops–there was more or less open agitation against the regime.

The meeting of 20 February and its aftermath are the most notorious instances of the willingness of German big business to assist Hitler in establishing his dictatorial regime. The evidence cannot be dodged. Nothing suggests that the leaders of German big business were filled with ideological ardour for National Socialism, before or after February 1933. Nor did Hitler ask Krupp & Co. to sign up to an agenda of violent anti-Semitism or a war of conquest.

But what Hitler and his government did promise was an end to parliamentary democracy and the destruction of the German left and for this most of German big business was willing to make a substantial down-payment.

Krupp and his colleagues were willing partners in the destruction of political pluralism in Germany.

The labour movement was destroyed. But so too, after the Night of the Long Knives, was the autonomous paramilitary potential of the right. Power shifted decisively upwards.

In material terms, the consequences of demobilization made themselves felt in a shift in bargaining power in the workplace.8 In effect, the new regime froze wages and salaries at the level they had reached by the summer of 1933 and placed any future adjustment in the hands of regional trustees of labour