Download The Nazi Economy I made a comment to Robert Alley on how

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.
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