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The Nazi Economy I made a comment to Robert Alley on how Germany couldn?t continue its rearmament program for long without a war. To substantiate that, here is some information on the Nazi economy before the war. For anyone who read my post to the newsgroup about this topic, what is contained here does not differ substantially. My source is The Nazi Economic Recovery 1932-1938, by R.J. Overy, prepared for the Economic History Society. Rearmament spending was not the chief architect of the German economic recovery. Spending on armaments was only 10% of government spending in 1933, gradually increasing to 25% by 1935. By FY (Fiscal Year) 35-36 the majority of increase in GDP, decrease in unemployment, and other such indicators that would happen prior to the war had occurred. Analysis indicates that during this period, some of the largest contributions to growth were spending on motor vehicles, transportation infrastructure, and construction. The Nazi policy in these areas was to link increases in government investment with increases in private investment, and to explicitly manipulate economic policy to maximize investment and increase in employment. From FY 33-34 to FY 35-36, government expenditure exceeded government income by roughly 50%. This is actually consistent with the revenue/expenditure balance present since at least FY 28-29 (before the Nazis came to power). Thus Hitler?s government actually continued a deficit spending trend that was in place before the Nazis came to power. It's interesting to note that the German government did not follow Keynsian economic policies, though there is a stimulating effect on the economy. Their intent was not to stimulate consumer demand through an increase in public spending, and in fact the Nazis go to a lot of effort to prevent an increase in consumer demand, in favor of increasing investment and savings. This may be one of the reasons why the "multiplier" effect they obtain (the Reichsmarks of total economic activity generated by one Reichsmark of government spending) is 1.5. This figure is quite low compared to that obtained by western countries engaged in Keynsian stimulation policies, which is typically at least 2.5. Thus the actual economic benefit of German government spending was rather less than what modern governments, who engage in similar activities from time to time, obtain. In fact, the Nazis were in the process of implementing strict controls on the economy, so that by the beginning of the war financial institutions are effectively reduced to being government stockholders. Corporations were encouraged to cooperate with Nazi policies by being given favorable deals. The government assumed a role over the economy that was primarily supervisory, rather than executive, in nature. The Nazis mostly trusted the large corporations to run things for themselves, and intervened from time to time to ensure compliance with the goals of the state, rather than assuming direct control over all of the operations of industry. Things changed somewhat around 1936 when explicit plans for war began. Government spending increased dramatically, while increases in government revenue did not keep up. By FY 38-39, the last fiscal year before the war, expenditure exceeded revenue by 86% and total debt load exceeded annual revenue by 136%. Government spending reached 33.5% of GNP, up from 19% in 1933. Total production was up 25% above 1928 levels (and up around 100% from what it was at the height of the depression in 1932), almost all of which is due to increased production of capital goods (infrastructure, heavy industry, etc.) rather than consumer goods. Remember, the Nazis were a totalitarian government interested in increasing the power of the state, their goal was not to produce a wealthy consumer economy or to promote trade. While Nazi Germany was technically still a capitalist economy, it was an entirely isolated one with tremendous levels of government involvement, and was never intended (nor, really, able) to engage in long-term competition with the western free market economies. In 1936 rearmament spending doubled from what it was in the previous year, and jumped ahead of the combined figures for transportation and construction for the first time. It also changed its character. In the early years spending had involved significant amounts of research, development, and capital investment. In 1936 rearmament switched to being primarily intended to produce and maintain actual military equipment, an activity which is on the whole less economically beneficial. By FY 38-39, rearmament accounted for 46% of German government spending. This all contributed to a substantial debt load, financed by predominantly by internal borrowing rather than foreign borrowing. Germany's trade agreements were deliberately restricted to the import of critical goods, paid for primarily by bilateral barter agreements. It was explicit Nazi policy to isolate the German economy from the rest of the world, trading only when they had no alternative way to obtain what they needed. It is interesting to note that German productivity only grew 1.3% per year from 1929 to 1938, roughly half the growth rate of Britain in the same period. The primary effect of the Nazi policies was to recover from the substantial collapse of the German economy early in the Great Depression, not to stimulate unusual amounts of fundamentally new capacity. The German economy actually had a lot of structural problems, including the fact that many plants had invested heavily prior to 1929 and so later increased their capacity by putting old equipment back into use. German industry was also slow to adapt many more modern production methods. Thus it may be seen that the ?miraculous? Nazi recovery was not in fact miraculous in terms of what modern economic policies can do. It was clumsy and inefficient compared to what we are now capable of doing through the application of counter-cyclical economic policies. It was helped significantly because the German economy had collapsed to such artificially low levels during the Depression, and in the end German economic growth during the period was not at all impressive. This information has some ramifications for WIs involving alternate Nazi rearmament patterns. Two frequently raised WIs are a significant earlier increase in rearmament expenditures, and what would happen if WW2 did not occur or ended very quickly. Mr. Alley?s scenario dealt with the second. To deal with the first situation, we must simply look at the recovery of the German economy. Earlier mass rearmament would be altogether not as good at encouraging growth as the policy of investment in infrastructure, and would require a significant increase in government spending (and thus debt) at an early point as well. The net result is a negative for German economic recovery/growth prior to the war, how negative depending on the extent of rearmament. Pushing forward military spending by a year could end up delaying growth of the overall economy by a significant portion of a year. While it would certainly have been possible to increase military spending early on, the effects would not have been trivial, especially if Germany did not declare war on schedule. This is a substantial problems for AH scenarios based on the mistaken assumption that speeding up German rearmament substantially in the prewar period would be ?easy? in terms of economic ramifications. This brings us to the second question, how well Germany could have maintained expenditures without other countries to invade and loot. Though I don't have figures for 1939, government expenditures immediately prior to the war were more than double government revenues. New sources of revenues were not forthcoming, and prospects for economic growth are in any case not good. The systemic problems of Nazi inefficiency, industrial inefficiency, the old infrastructure, and more, were still looming problems. The potential of the German economy for overall new growth was not favorable compared to that of other competing economies such as Britain. Furthermore, Germany had mostly been isolated from the world economy by Nazi restrictions on trade, which were not beneficial to medium to long term growth. Removing these restrictions could create significant problems for the increasingly governmentcontrolled economy, which had not had any pressure of international competition. It is my conclusion that regardless of whether or not levels of deficit spending were decreased, Germany would be very poorly placed to compete in international trade, and would likely be outgrown by their major economic competitors. In the short term, they were not well placed to outgrow even the Communist economy of the USSR, which had experienced substantial levels of industrial growth while the rest of the world experienced the Great Depression. The other big problem would be debt. The government was spending almost twice as much as it brought in, and half of that spending was on the military. Since government expenditures were a third of the economy as a whole, this led to a very rapidly growing debt. It was an internal debt, which means that up to that point Germany was not particularly beholden to foreign creditors. That, however, carried its own problems. The government cannot borrow an infinite amount of money internally. Put another way, the government could not continue to increase its debt by approximately 15% of GDP per year indefinitely. Spending must be cut, indeed must be radically cut, by the early 40s. Such levels of internal borrowing could not continue for long without a financial collapse of some kind. External borrowing could not be increased to cover for it, because no nation would loan Nazi Germany that much money at a continued rate. It would be a horrible credit risk. This means, basically, that there must be a substantial absolute drop in government spending including and especially armaments. Armaments, at such a high level of total expenditure, are the easiest place to cut large amounts of spending. Not only that but so much is spent on armaments that if the deficit were to be eliminated without reducing armament spending, non-armament spending would essentially have to drop to nothing (an impossibility). To maintain stability of the German economy and government, it seems to me that nonmilitary spending would likely have to remain at 5066% 1939 levels of expenditure. This means that to attain a balanced or nearly balanced budget, rearmament spending would have to be reduced to 33-50% of 1939 levels. Nazi Economics This fine article appeared in Reason Online magazine in the August/September 1999 edition. It is a book review by Michael McMenamin, Esq., regarding the book "Hitler, 1889-1936: Hubris, by Ian Kershaw, New York: W.W. Norton & Co., 845 pages, $35.00. and were rapidly painting him into a corner were his only choices were war or a loss of power. Adolf Hitler was "wholly ignorant" of economics, Ian Kershaw boldly writes in his excellent new study, Hitler, 1889-1936: Hubris. What the dictator did know was politics and how to achieve public support-Hitler was an immensely popular leader with approval ratings even Bill Clinton would envy-and early on, he made it clear that economics would be subordinate to politics. Hitler, argues Kershaw, was deathly afraid of inflation and a repetition of the early 1920's. Nevertheless, he had to reduce unemployment or he wasn't going to last long enough to begin rearming Germany, a public goal of his since the '20's. Increasing exports was not a possibility since, unless the German government devalued the mark (as Britain had done with the pound and the United States with the dollar), German exports couldn't compete in a way that would add new jobs or bring needed foreign exchange. Hitler nixed devaluation because he thought it was a step on the road to inflation. Tax cuts were also out of the question because he believed they led to less revenue not more growth. One odd result of Hitler's decision is that few of his biographers have paid much attention to his economic policies prior to the Nazis' first overt military act, the reoccupation of the Rhineland in 1936. Indeed, if they pay any attention at all to the subject, most merely accept Nazi propaganda claims of Hitler's "economic miracle" in restoring Germany's prosperity. Kershaw's book is a welcome exception to this tendency. The general view that Germany's shattered economy surged to life in the first few years of the Nazi regime is typified by Sebastian Haffner, a German writer whose short book The Meaning of Hitler (1979) received extravagant praise in John Lukacs' recent The Hitler of History. As Haffner put it, "Among these positive achievements of Hitler the one outshining all others was his economic miracle...In January 1933, when Hitler became Reich Chancellor, there were six million unemployed in Germany. A mere three years later, in 1936, there was full employment. Crying need and mass hardship had generally turned into modest but comfortable prosperity. "Almost equally important: helplessness and hopelessness had given way to confidence and self-assurance. Even more miraculous was the fact that the transition from depression to economic boom had been accomplished without inflation, at totally stable wages and prices. Not even Ludwig Erhard succeeded in doing that later in post-war Western Germany." Haffner is hardly alone in his glowing evaluation of Hitler's supposed economic miracle. In his highly influential Origins of the Second World War (1961), British historian A.J.P. Taylor similarly gave the Nazis credit for creating widespread prosperity, concluding, "The Nazi secret was not armament production; it was freedom from the then orthodox principles of economics. Government spending provided all the happy effects of mild inflation; while political dictatorship, with its destruction of trade unions and rigorous exchange control, prevented such unfortunate consequences as a rise in wages, or in prices." Kershaw's version of things more accurately reflects what was really happening in Germany from 1933 through 1935. Hitler's economic policies were systematically wrecking the German economy Hitler's solution for both the rearmament and unemployment problems was the same: massive deficit spending. In fact, by Kershaw's account, the Nazi government guaranteed some 35 billion ReichMarks to the German armed forces alone over an eight-year period, along with massive road building, subsidies to the auto industry, lots more bureaucrats to enforce all the new controls and regulations, and bribes to women to get married and stop working. Did such policies reduce unemployment from 6 million in 1933 to 1 million three years later? Not exactly. Statistics from Dan Silverman's Hitler's Economy (1998) show that unemployment was reduced in Germany from 34 percent or about 6 million people, in January 1933, to 14 percent, or 2.5 million people, in January 1936. That's a dramatic reduction, to be sure, but hardly full employment. Even the 2.5 million number is extremely unreliable, as Stephen Roberts, an economic historian at Australia's University of Sydney who lived in Germany in the mid-'30s, explained in his 1937 work, The House That Hitler Built. The "official statistics naturally tell only part of the story," wrote Roberts. "They do not take into account the Marxians, Socialists, Jews and pacifists who have lost their jobs and are cut off from relief; such persons do not appear in the official figures of unemployment. The refugees are ignored. In addition, at least a million people have been absorbed in the army, the labour-service camps, the Nazi organization, and various partly-paid forms of labour on public works. Half a million women have been taken off the labour market in the last four years by means of the marriage allowance paid by the Government to entice them away....What they have done has been to introduce a series of emergency steps which have drastically reduced the number of unemployed; but such steps, by their very nature, are in many cases temporary. On the other hand, the reduction (in unemployment), however artificially it may have been achieved, has had a tremendous propaganda value for the Government, and there is the fixed belief of most Germans today that Hitler has achieved wonders in providing employment." Hitler paid for his economic "miracle" partly be depleting his nation's gold reserves, which he used to import critical raw materials for the manufacture of weapons. When he took office, the Reichbank had reserves totaling 937 million ReichMarks; four years later , that figure was down to only 72 million ReichMarks. Massive government borrowing financed the rest of the government-driven economy. As Roberts put it, "The Nazi state is being financed by short-term (90 day) loans-up to 15 billion ReichMarks by the end of 1936...In short, Germany is going round and round. She can get nowhere until she returns to normal economic conditions, but she is afraid to try and get back to those, because she fears economic collapse and social upheaval if she does so." Kershaw makes the same point and suggests that it was this fear of social unrest, heightened by serious food shortages in Germany during the fall of 1935-themselves largely the result of government policies-that played the major role in Hitler's decision to reoccupy the Rhineland in March 1936, considered one of his "brilliant" strokes precisely because it was so unexpected-Germany was unprepared militarily or economically to carry out any extended effort in support of what even Hitler conceded to intimates was nothing more than a bold bluff. Conventional wisdom holds that Hitler moved on the Rhineland when he did because the world was distracted by Mussolini's invasion of Abyssinia. Kershaw allows that motive as a contributing factor but contends that turmoil in Germany occasioned by the food shortages is the real key to the timing of such a risky initiative. Indeed, he argues that Hitler invaded precisely because he knew it would be extraordinarily popular within Germany and divert public attention from his domestic difficulties. Contrary to A.J.P. Taylor, by late 1935 Germany was experiencing anything but the "happy effects of mild inflation" and "freedom from orthodox principles of economics." As Kershaw writes, "A summary of price and wage levels prepared for Hitler on 4 September 1935 showed almost half of the German work-force earning gross wages of 18 ReichMarks or less per week. This was substantially below the poverty line...Wages, then, remained at the 1932 level-substantially lower than the last pre-Depression year of 1928 in the muchmaligned Weimar Republic. Food prices, on the other hand, had risen officially by 8 percent since 1933. Overall living costs were higher by 5.4 percent. Official rates did not, however, tell the whole tale. Increases of 33, 50, and even 150 percent had been reported for some foodstuffs. By late summer, the terms 'food crisis' and 'provisions crisis' were in common use." These facts were well known the the time, both within and without Germany. Roberts and others had written about them, attributing the food shortages to Hitler's centralized agricultural policy, which had virtually eliminated food imports while implementing government controls. The predictable result: Germany produced less food, causing both shortages and price increases. According to Roberts, wheat went up 15 percent, eggs 50 percent, butter 40 percent, potatoes 75 percent, and most meat 50 percent-all despite "official" and ineffectual price controls which Hitler for appearances' sake refused to lift. Well into Hitler's "miracle," Kershaw notes, "poor living-standards, falling real wages, and steep price increases in some necessities...(were) the dismal reality behind the 'fine facade of the Third Reich.'" At the same time, a ferocious economic policy battle was being waged over foreign exchange reserves: Should they be used to buy food imports or raw materials for armament production, the latter being Hitler's primary purpose since he first took office? Hitler appointed Hermann Goring (who knew less about economics than Hitler) to mediate between Economics Minister Hjalmar Schacht, who wanted to purchase raw materials for armaments, and Agriculture Minister Walther Darre, who wanted food to cover up his failed policies. Schacht, a social friend of Goring's, expected a rubber stamp in favor of raw materials for arms. To everyone's surprise, except Hitler's, Goring chose food, an answer that set Germany on the road to foreign conquest. As Kershaw sees it, Hitler gave priority to food imports because the "immediate prime need was to avoid the damaging psychological effects of the only alternative: food rationing." But this decision, in turn, adversely affected German rearmament. "By early 1936," says Kershaw, "available supplies of raw materials for rearmament had shrunk to a precariously low level. Only one to two month supplies were left. Schacht demanded a slow down in the pace of rearmament...As Hitler entered his fourth year as Chancellor, the economic situation posed a real threat to rearmament plans. At the very time when international developments encouraged the most rapid expansion possible, the food crisis-and the social unrest in its turn-was sharply applying the brakes to it...Any slow down in rearmament...would inevitably bring increased unemployment in its train...(Hitler) saw this as all the more reason to hasten expansion to gain 'livingspace.'" In other words, if Hitler had to spend foreign exchange reserves for food to keep the people happy, he would have to get the raw materials for armaments by taking them. Otherwise, there would be more unemployment when the arms workers were laid off due to a lack of raw materials. Hitler knew he couldn't survive both food shortages and a resurgence of unemployment. Commenting in early 1937 on Goring's Four Year Plan for economic self-sufficiency, Roberts had presciently predicted the inevitability of either war or Hitler's fall from power. " There are 34 vital materials without which a nation cannot live, and unfortunately, Germany is worse off than any other great state insofar as these are concerned," he observed. "Whereas the British Empire is largely dependent on outside sources for only nine of these, Germany has only two in ample quantitiespotash and coal. That means she must turn to the foreigner for all of her supplies of 26 of these and for part of six more. Yet this is the Power that sees fit to launch a plan for complete self sufficiency. It is ludicrous, unless she looks forward to obtaining control of the vast raw materials of central Europe or the lands beyond the Ukraine by some adventurous foreign policy...That is (Hitler's) basic dilemma. If he persists in the (economic) policies he has enunciated, he plunges Europe into war; if he abandons them, he can no longer maintain his position within Germany." It's not that Hitler lacked contrary advice. Kershaw tells us that in October 1935 Price Commissioner Carl Goerdeler sent Hitler in October, 1935, "a devastating analysis of Germany's economic position." According to Kershaw, Goerdeler "favored a return to market economy, a renewed emphasis upon exports, and a corresponding reduction in the rearmament drive-in his view at the root of the economic problems...If things carried on as they were, only a hand-tomouth existence would be possible after January 1936." But Goerdeler was ignored and later dismissed. Instead, Germany reoccupied the Rhineland, to widespread popular acclaim, and Goring unveiled his Four Year Plan, putting the economy firmly on a war footing. Hitler himself apparently never had a clue that the economic policies he had followed for the first three years of his regime were responsible for his production problems. By 1936, Kershaw makes clear, Hitler believed his own press clippings regarding his economic acumen. Thus, for Hitler, the food crisis only confirmed his preconceptions. In the secret memorandum on which Goring's Four Year Plan was based, Hitler wrote, "We are overpopulated and cannot feed ourselves from our own resources. The solution ultimately lies in extending the living space of our people, that is, in extending the sources of its raw materials and foodstuffs." That is, the problem is not my fault and the answer is war, not economic reform. Hitler's fears of losing power were not without foundation. His great nemesis, the Soviet Union, found that out 50 years later. In the 1980's, it could not keep up with increased U.S. defense spending and sustain what William E. Odom in The Collapse of the Soviet Military (1998) terms "a permanent war economy" in which 20 to 40 percent of the gross domestic product went to the military. The Soviets faced the same choice as Hitler: economic reform or war? Thankfully, the Soviet leaders chose economic reform, even though it didn't save them or their regime. Freeing yourself from orthodox principles of economics can be a tricky thing. http://www.papillonsartpalace.com/nazi.htm