Hitler came to power in the post-war Germany bent under the load of contributions. By means of propaganda and well-defined plan to restructure the economy and direct all resources towards military state economy, Hitler was able to quickly and efficiently restore the living conditions to the level that preceded the Great Depression decline. The following work discusses in detail the reforms and changes that took place under the Nazis and argues that the “economic wonder”, as some commentators call the rapid improvement, was only a byproduct of the aggression plans fueled by Hitler’s theory of national supremacy and made possible by masterful propaganda. The new economy was originally counted to last on its own for a limited period before a war would start.
After the defeat in World War I and signing of the Treaty of Versailles in 1919, Germany was to pay contributions of such scale that any economy would be under enormous pressure. In attempts to solve the arising problems the German government turned to printing money, which led to hyperinflation (Dorpalen 278). Reichmark plummeted. The exchange rate jumped to 1886 marks per dollar in 1922, and finally to the astronomical value of 525 billion marks for one dollar in 1923. The price of the newspaper, which cost less than a mark in January 1921, soared to 70 million within 2 years (Mankiw 412). Gradual improvement, made possible with the short-term foreign loans accessible to private banks, began in 1924 and was capped in 1929 when the world economy crashed.
The Great Depression
The global economic crisis of 1929 became a particular shock for Germany. However, in fact, signs of economic crisis appeared in Germany in early 1929, when the unemployment overreached 3 million (Fest 398). By mid-1929, growth in industrial production has stopped. After the stock market crash in the United States, 55 bankruptcies were declared in Germany within the first five days. In November of 1929 foreign credit lines were cut. The sharp decline in world trade killed any prospect of at least partially compensating for the losses by increasing exports (Fest 423) The crisis has affected all spheres of economic life. Industrial production fell by almost half. By the end of 1929 the number of unemployed was conservatively estimated 3.4 million (Dorpalen 293).
During the 1930 crisis aggravated. By 1932 15/20 million people lived entirely on unemployment payments (Dorpalen 300).
Jung Plan was developed to cope with the emergency. It called for reorganization of the insurance coverage of the unemployed, as employers required that payments would be reduced significantly. The trade unions were against reducing benefits. There was even an attempt to increase the beer tax (Dorpalen 303).
In the summer of 1932 the Germany experienced moderate economic growth followed by a more significant improvement by the end of the year. Economic recovery has been slow. Measures to stimulate agricultural sector met resistance from landowners. Part of the money was stolen. Reducing social benefits sparked a wave of strikes. In January 1933, the Schleicher Cabinet even proposed to nationalize the coal mining and steel industry (Dorpalen 303). All this time between 1929-1932 Germany witnessed election after elections, which was an annoyance for burghers.
After coming to power in 1933, Hitler inherited quite a sad state of affairs: 6 million unemployed and the country in economic ruin. It was necessary to urgently save the situation.
In Germany, the main harmful effect of the crisis was the brunt of US reparation payments, which were to be paid in under such harsh conditions. There was no realistic anti-crisis program at the Nazis’ disposal. For example, one Nazi spoke at the rally about the national-socialist bread prices, which was heavily applauded by the public (Fest 98).
The fight against unemployment
When Hitler came to power in Germany, the unemployment rate reached 30%. Therefore, in order to attract the sympathy of the population, the regime engaged in hiring programs and successfully solved the problem of unemployment so that full employment was achieved. Hitler chose a policy aimed at reducing unemployment by involving the population in the production, especially in the military sector. Minister of Economy in 1933-1937, Hjalmar Schacht, took a risk by taking a relatively small loan (1 billion of Reichsmarks) and spent it exclusively on creation of jobs (Fest 234). A significant portion of the unemployed has been removed from the labor market by conscription.
Nazi leaders believed that depression was caused by overconsumption and insufficient investment in the industry and full employment could be restored only by the increase of national income that would not be consumed. Therefore, to eliminate the depression, it was decided to reduce the consumption. Thus from the point of view of Nazism, all investments that were not focused on the reproduction of the labor force were not economically justified (Drucker 76). Hitler was convinved that any other economical system was not efficient. He was greatly influenced by Gottfried Feder who had become Nazi theorist. Hitler described the view in his opus magnum:
Previously I did not recognize with adequate clearness the difference between capital which is purely the product of creative labour and the existence and nature of capital which is exclusively the result of financial speculation. Here I needed an impulse to set my mind thinking in this direction; but that impulse had hitherto been lacking (Hitler 175).
The policy of engaging masses in big national projects, which had began before Hitler, was continued. “Reinhardt Program” of extensive contrustion was introduced. Roads were being built especially fast "Imperial Autobahn" project, which had a high infrastructure value, rather than a military one (the main military cargo flow was on rails) (Dorpalen 250).
Decrease in consumption
For a long time it was thought that the consumption of mainly the working class was reduced. This is not so. In general, the industrial workers remained at almost the same level of income in Germany. But they did not receive an increase from augmented industrial activity. A liberal eight-hour working day was nowhere to be found before the war. 58-65 hour working week became the new norm (Fest 173). In the period from 1933 to 1938, real wages fell by 25% (Wikipedia).
In fact, since the conquest of power by the Nazis in Germany other classes reduced consumption to a considerably larger extent than workers. Consumption of the middle class, the so-called professionals, fell by 60%. Before Hitler came to power the average annual income of a doctor was 9,000 marks, and in 1939 it was 6000 marks. All that has been mentioned, the doctor had to give (as expected from them) to fund the party. It was expected that the highly qualified staff and all senior officials will give up 15% of their salary to the party. These “donations” cut into their income as well.
On the other hand, the purchasing power of the upper and middle classes in Germany declined very sharply also due to the fact that the products consumed by the lower classes were plentiful and cheap, whereas high-quality products were scarce and very expensive (Drucker 155).
Taxes were raised on the upper and middle classes. In general, under the Nazis living standards fell by 20% since 1932. In 1939, Hitler's government believed that living standards must fall another 60% until it reaches the standard of living of the lower classes (Drucker 167)
German government introduced restrictions and limits not only on price increases, but on workers’ wages as well. The size of salaries remained at the level, which amounted to 83% of the pre-crisis 1929 level (Drucker 170).
Reich was faced with a serious problem of consumer goods production, financing of science and education. To build modern tanks and aircrafts one required investments and applied sciences, and, as in everything else, the money was running out. Production of goods for the civilian sector of the country exceeded pre-crisis level only in 1938 (Drucker 201).
The biggest scam was Hitler's idea with the "people's car". Built in 1934, the car factory "Volkswagen" proposed those eager to get the car to make a prepayment. Over 300 thousand customer made advance payments mounting to more than 110 million. None of them received the car (Drucker 208).
When Hitler became Chancellor, he first gathered the leaders of major industrial companies in Germany and told them that if they acted within the framework of the corporate economy, they would be subject to the requirements of the Reich. However, he assured the industrialists that was not going to encroach on their private property and was ready to cooperate with mutual benefit (Fest 131).
March 24, 1933 the Reichstag adopted the “Law to Remedy the Distress of the People and the State” giving the government legislative power, including the right to resolve budget issues.
The entrepreneur was not free from then on. He had to obey the orders coming from the state, even if they did not conform to his personal or economic interests. Often, the industry received orders without prior consultations. Only to be executed. For example, when the workers were sent to build fortifications in the summer of 1938, entrepreneurs were not only required to pay their salaries, but also to keep their jobs (Fest 142).
In 1933, the General Council of the Economy was created, which was to determine the general direction of development of the German economy. The "Law for the Organic Reconstruction of Germany's Economic System" was passed
on 27 February, 1934. All sectors of the economy were divided into "Imperial Groups", the number of which was at first 12 and then reduced to 6: industry, banks, trade, security, energy, and handicraft industry. In parallel, territorial structures of economic management were created – the district groups in the industry, or business districts. The general management of the industry carried out by the Imperial Economic Ministry.
In Nazi Germany, the owner of the company, Party secretary, the chairman of the trade union committee made the main operative decisions. Enterprises were given a plan as to where and what to ship, how and by whom these plans were to be worked out. Had the companies simply received orders, the Nazis would not have remained in power for a long time. In fact, the entrepreneur was guaranteed sales and credit. It was a corporate plan. The government acted as a partner.
Centralization and Planning
Another Hitler's anti-crisis measure was the centralization and planning, in which all turned out to be dependent on the Hitler’s decision. In Nazi Germany the principles of profitability and implementation of plans were combined. The owners of enterprises and banks were declared state officials, leaders of their teams. Big capitalists entered Nazi elite and were appointed to leading positions in the state apparatus. They were given positions related to the regulation of the economy (Fest 167).
In 1936, a special agency was created to implement a four-year plan for the transfer of the entire German economy on a war footing. Goering headed this agency. Central planning affected the allocation of resources, limited the entrepreneurial freedom and the formation of new businesses, and eliminated competition. Large industrial and financial cartels were created whereas the small business was limited (Drucker 215).
Such government intervention in the economy was very effective and put an end to the crisis within 1934, especially in heavy industry, and lay basis to rapid growth (Drucker 230).
Bureaucracy has become the most powerful class. There was a giant privileged class of bureaucrats amounting 2.5 million people: overseers, party secretaries, leaders of and agricultural fronts. The cost of maintenance of the bureaucratic apparatus reached 25% of the cost in the industry (Drucker 235).
In the agricultural sector, the government of the Reich took hold of production, transportation and marketing of agricultural products. It cemented the land for farming, and obliged farmers to work only in those areas, even against their will. Every German peasant was given a production plan indicating volume, delivery locations and prices (Dorpalen 260).
Farms have become inalienable, so they could not be separated, sold or mortgaged. The farmers were tied to their farms. They had to sell products to the state or the army and at the prices set by the government. So farmers, too, lost its economic independence. (Dorpalen 263)
In order to achieve maximum productivity and efficiency of agriculture, it was collectivized and industrialized. The industrialization of agriculture was held under the slogan of military isolation. Mass production of agricultural products was necessary in case of blockade or to cater during the war (Drucker 324).
The economic efficiency of small farmers was low and prevented the development of industrial agriculture, so Germany introduced industrial methods in agriculture. In southern Germany peculiar organization of manufacturing of agricultural products appeared, like the Soviet collective farms. There remained private ownership of farm lands, but the owners were obliged to use mechanized and labor-saving methods. The state used the farmers as well as landless wage earners. Grain mills were established in East Prussia, where large landholdings were expropriated (with or without compensation) and transferred to reserve professional soldiers who settled on them. Formally, these soldiers were employees carrying out the orders of the government (Drucker 326).
However, the Nazis faced a problem. Making products affordable for the consumer blocked the increase in purchase prices, which adversely affected the farmers. As a result of low pay and poor working conditions farmers fled to towns by hook or by crook (Drucker 326).
In order to strengthen patriotism propaganda was used. Radio and newspapers were constantly praising farmers as the backbone of race. This perfectly fit Hitler’s philosophy: “By the skillful and sustained use of propaganda, one can make a people see even heaven as hell or an extremely wretched life as paradise (Hitler 230)”.
All this allowed the fascist state to reduce the consumption by 1/4 and double the amount of capital for investment. Reduced purchasing power of the upper and middle classes became one of the sources of capital for investment. More than half of the national income was made up by harsh economizing (Drucker 340).
The fascist economy became deflationary. The number of credits was greatly reduced because of their centralization and control. All private borrowing in the capital market was banned. It was low emission economy with little cash turnover. The sharp increase in production led to lower prices (Drucker 341).
The West helped Hitler out. As a kind of payment for economic and political stability in Europe, under the Dawes Plan, the winner countries provided their former enemy with large loans (Dorpalen 270).
High taxes largely limited the ability of self-investment. The state chose where it wanted them to go. But it did not invest in technology. It invested in the development of the war industry. The state has become a monopoly and began to control the investment of capital.
Autarky and Imports
A huge challenge for fascism has always been a problem of imports. Dependence on imports is a very serious weakness in the war. In 1939 there was no single international currency. Therefore, Germany had to buy Brazilian coffee in exchange for the German goods that Brazil agreed to buy. Germany then resold coffee at a lower price, then used the money to buy imported components, which could not be directly exchanged for German goods (Drucker 346)
In order to save foreign exchange reserves by the Office of Foreign Trade, it was decided to take control of them, as well as expanding of barter: Ruhr coal to be exchanged for Brazilian coffee, paint and pharmaceuticals of "IG Farben" to be changed for soybeans from Bulgaria, and German artificial fertilizers to trade for Egyptian fiber. It did not apply to countries that were self-sufficient, such as Russia. So Hitler was constantly trying to reduce the country's dependence on imports. In 1939, more than 2/3 of the imports were used by Germany for the creation of military products and industrial upgrading (Drucker 215).
Essential imported materials were increasing problems for the fascist economy that was steadily declining production of high quality products for the benefit of arms. Import goods had to be paid for by export. Because of the fall in prices for finished products and a rise in prices for raw materials, Germany faced difficulties in maintaining the balance of trade. The situation in Germany became similar to the situation in countries where there was a monoculture or in those that exported only raw materials. Along with the falling prices of exported goods of low value-added products, Germany had to cover imports by having to export more and more of single product, and this led to an even greater fall in prices. The circle closed. In 1939, total imports of Germany dropped only slightly. But even before Hitler about 2/3 of imports were used for consumption and the rest for production of higher-value products for export. For example, import of coarse grains was used for the production of meat, which was then exported. If before 1933 about 35% of feed grain had to be imported. In 1939, imports of coarse grains was terminated and all currency thrown on the import of materials of military significance. Deliveries of the of feed grain to German owners of cows continued to fall, despite increasing of its overall production by 20-30%. This led to a state in which cows almost starved (Drucker 216).
Despite the attempts to develop the agricultural sector, Germany still imported one fifth of the agricultural products (cereals, vegetable oil, meat). Importing vast quantities of raw materials depleted gold reserves of the country: from 1933 to 1937 of half a billion Reichsmarks in the treasury there remained not more than 70 million. To immediately get 500 million in 1936 Goering had sold most of the shares of foreign companies and much of the property of the Reich abroad (Dorpalen 116).
If the production of goods for consumption was reduced, the share of goods going to cover imports increased, as the number of indispensable imports remained unchanged. Weaponry had the highest ratio between the raw material and labor costs. The role of labor was minimal. Reducing consumption was the response to militarization. But the construction of import-substituting technology required capital investment (Drucker 220). In 1936, Goering replaced Schacht in order to achieve an autarky state, and imports were sharply reduced (Dorpalen 118).
As a result, there was a constant increase the production of export goods, which were traded for imports. In 1932, the fourth product capacity in Germany was produced for export. 25% of the imports were going to consumption, so the trade balance was normal. In 1939, imports amounted to less than one fifth of the national income. But to pay for imports the Reich had to spend almost half of the German products. This led to a sharp deterioration in the trade balance (Drucker 222).
Hitler found an original way out. He made the threat of war the means economic pressure. Threatening war to neighbors on the continent, Germany has forced them to take on some of the problems caused by the militarization of the German economy, and also made them reduce domestic consumption (Drucker 350). Under the threat 50% of foreign trade of Yugoslavia, Bulgaria, Hungary, Romania and Greece was reoriented to Germany (Drucker 350).
How to finance the war
The main method of bringing the country out of the crisis was a total militarization of the national economy. So, to prepare for war, it was decided to create an autonomous economy, that is to create strategic reserves in Germany, such as the necessary raw materials for the production of metal, fuel, rubber products, food supplies, etc. (Drucker 351)
The internal debt of the state by the beginning of the war rose to 50 billion marks. “Ariazation” of Jewish businesses, robbery of Jews, billion debt imposed on the German Jewish community after the so-called Crystal night (Jewish pogroms in the Third Reich on the night of 9 to 10 November 1938), was an attempt to patch holes in the budget (Dorpalen 260).
Low salaries in the defense industry would have to reduce the cost of military products, but this led to high staff turnover and to disruptions in production.
Poor housing conditions (mostly rental housing or general barracks), prolonged separation from their families and a lot of work and low stimulation were the factors that affected the performance of the German proletariat. Even in an over-organized Germany of that time there were many cases of failing the labor discipline, including the abandonment of work and absenteeism. Before 1938, the ordinary burghers had not yet fully realized, what the purpose was of a large number of guns, more and more refusing themselves butter. The Nazis also increasingly looked burgher in the pocket in order to shake out something else (Dorpalen 262)
In 1939, the gross domestic product of Germany exceeded the indicator of 1929 by 51%, its increase was mainly due to the production of military forces and equipment (Drucker 352).
In Hitler’s Germany, production growth was stimulated not only through public works, but also through the growth of the army. Nazism in Germany created a closed economy, which banned the export of capital, and the prices were fixed for the most part. Anti-crisis measures in Germany were of an extraordinary nature. They pursued not only tactical goals in the output of the economy, but also strategic – the return of the lost territories and markets, further expanding the boundaries of the state, the conquest of world domination. The Nazis created a powerful apparatus of state regulation of the economy, which was the main lever of concentration of financial, commodity, industrial, human and other resources. Hitler was able to survive in times of peace only 5 years, and then resorted to war as his main goal. Economic recovery was just part of the plan. In Hitler’s understanding “[t]he man who lays down the program of a movement must consider only the goal.” So the wondrous economic growth was a byproduct of the general scheme the Nazis had in mind. And that was one of domination of the Arian race and, in fact, world domination. First, the Nazis had to solve economic problems to be able to provide for wars they planned to wage. The closed economy that followed was the result of Hitler’s and Feder’s vision of the main enemy: “I clearly saw what was developing in Germany and I realized then that the stiffest fight we would have to wage would not be against the enemy nations but against international capital (Hitler)”.
This economy could not function without a war for which it was built. The debt bubble was the main reason that Hitler began military expansion to the East in the autumn of 1938 (the annexation of the Sudetenland of Czechoslovakia), and not later as was planned. Nazis intended to pay unmanageable credit obligations at the expense of the occupied countries. And they succeeded to a certain extent. As of 1939-1940. by direct robbery in occupied countries and grey clearing schemes German treasury received by various estimates more than 28 billion Reichmarks that were invested in subsequent campaigns.
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Fest J.C. (2002). Hitler. Harvest Book
Drucker P. (1969). The end of economic man. New York. Harper Colophon Books
Mankiw N. (2014). Principles of Economics, 7th Edition Hardcover