The Nazi Miracle

Alan Milward

  • Hitler: Memoirs of a Confidant edited by Henry Ashby Turner, translated by Ruth Hein
    Yale, 333 pp, £25.00, September 1985, ISBN 0 300 03294 3
  • Blood and Soil: Walther Darré and Hitler’s ‘Green Party’ by Anna Bramwell
    Kensal Press, 288 pp, £12.95, October 1985, ISBN 0 946041 33 4
  • Industry and Politics in the Third Reich: Ruhr Coal, Hitler and Europe by John Gillingham
    Methuen, 183 pp, £15.95, October 1985, ISBN 0 416 39570 8
  • Geschichte der Deutschen Kriegswirtschaft 1939-1945. Vol. II: 1941-1943 by Dietrich Eichholtz
    Akademie Verlag, 713 pp, January 1986

In the early summer of 1931, as the storm centre of the century’s worst depression roared back towards a Germany where already 4.5 million people were out of work, the Nazi Party for the first time faced the fact that it might be elected to government. ‘Finance capitalism’, which they had been lambasting for 12 years, had got the country into just the mess they had predicted. How to get out of it? In two years two million jobs had been lost. Promising to ‘do something about unemployment’ – to use the stirring language of Her Majesty’s Opposition – was an electoral necessity for all parties. Genuinely doing something about it was a real necessity for Hitler and the Nazis if they were to attain their first goals of getting power and restoring moral confidence to the nation.

There are two things for which almost everyone has been obliged to give some credit to the Nazi regime: recovery and full employment. In the 1930s really up-to-date economists hinted coyly that the Nazi government was a visible demonstration that Keynesian theory worked. How did it actually come about that a party could in three years transform an almost universal economic and social despair into high growth rates and full employment? How did Germany escape from a depression which makes the two which the British economy has recently traversed look like mild cyclical wobbles, and turn an unemployment rate which Mrs Thatcher has probably envisaged only in her worst nightmares into full employment? Where did jobs and self-respect come from?

Not, it must be said, from accepting the advice of businessmen and bankers. Depression and recovery took place against the background of a monotonous litany, familiar now to British ears, intoned by the world of big business: that wages and social security costs were too high, that the law should be changed to ‘de-bureaucratise’ the labour contract, that corporate taxation should be lower, and that temporary financial help was needed for industries which were part of the ‘national fabric’. The present British government has, of course, invested considerable effort in putting some of these suggestions into practice.

In 1931, the mismatch between the Nazis and the world of business was almost total. The really big businessmen, the heads of the major German corporations, moved in high circles – from which, as Henry Ashby Turner showed in his excellent study,[*] they looked down on the Nazis with shuddering distaste and mounting alarm. For their part, Hitler’s economic advisers regarded the world of big business with something between deep suspicion and open enmity. All their cures for unemployment started from the assumption, now frequently made in this country, that businessmen and bankers had misinvested capital and couldn’t, without some change in the capitalist system, be trusted to invest it in the interests of the whole community.

Both Hitler’s ‘confidant’ Otto Wagener, a managing director in the plywood industry and head of the economic policy section of the Party’s national executive, and Gottfried Feder, the author in earlier days of what sometimes still passed for the Party’s manifesto, insisted that a change of this kind involved drawing distinctions between different types of capital. Some capital was ‘speculative’ and some ‘productive’. For Feder this amounted to little more than an equation between ‘speculative’ capital and foreign investment: only German capital, and only when it was invested in Germany for German purposes, would be ‘productive’. The state, he said, should therefore nationalise the banks and remove the restrictions which the central bank was allowed to impose on the money supply independently of the Government. The way to create, Thatcher-like, a swarm of dynamic new enterprises which would regenerate the economy was to make low-interest loans through state intervention in the capital market. State intervention was necessary in order to recreate ‘individualism’.

But with the markets closing and business confidence plunging, Feder decided that this would not be enough. The Government should build hundreds, perhaps thousands, of hydroelectric plants, even on the smallest rivers, and sell the current at less than cost price. This would have the further advantage of promoting industrial relocations away from the doomed industrial cities with their crumbling infrastructure and their riotous mobs. To encourage the workers in the new enterprises to develop a different sensibility they would be allowed to keep pigs. ‘I sense the dawn,’ said Otto Strasser when he heard this (or so Wagener tells us). ‘A god,’ Hitler said, ‘should take a mighty hammer and smash all the industrial centres.’ For Wagener, whose conversations with Hitler were written as a prisoner-of-war in Glamorgan, full employment depended on eliminating the tendency of capital to degenerate into ‘finance’ capital. Every year a corporate body of entrepreneurs, workers and white-collar employees should supervise the confiscation of about 5 per cent of the capital stock of each industrial enterprise. These holdings would then be gradually resold in the form of special shares to the owner (provided he was working and not fooling about in Monte Carlo instead) and to his employees (provided they were industrious and loyal). This constant re-acquisition of the capital stock – the whole process would begin anew every twenty years – geared to a separate depreciation formula in each industry, would ensure that all capital was ‘productive’. On hearing this Hitler proclaimed ‘the birth-date of a completely new economic theory’.

Interestingly enough, Wagener and Feder, like many of Mrs Thatcher’s critics, equated ‘productive’ investment with manufacturing industry. Yet the fall in investment in German manufacturing industry had not been greater than it was in countries where unemployment was less. In so far as unemployment was related to a decline in investment, the reason the German experience was so catastrophic was that there had been a much steeper decline in central and local government investment in construction, public utilities and services.

There still were serious questions to be faced once lack of investment had been identified as the root cause of unemployment. Why should people move to a higher rate of savings in order to acquire the capital stock of firms operating in a bankrupt economy? And Feder’s remedy, if it was applied, would constitute an attack on reparations and the peace settlement, given that the Reichsbank had deliberately been given independence of the government in order to maintain the value of the German currency. It would also mean exchange controls and probably other forms of protection too. Would this lead to further job losses through loss of exports or to job-creation by the process of import substitution? Industrialists, as always, were divided on this question according to what they sold. And the Nazis, although they did not care a fig for the existing international arrangements if getting rid of them would mean more jobs, feared with reason that doing so would lead to retaliation and perhaps to a collapse of the currency. After their further electoral successes in 1931 it was clear that the Nazi Party like everyone else hadn’t the foggiest idea of how to get back to full employment.

The man who actually brought in the votes that year was Walther Darré, an agronomist who had joined the party organisation in 1930 and energetically propagated the cause of guaranteed higher incomes for farmers. His idea was, on the one hand, to protect the farmers against imports and, on the other, to set up a national food marketing and distribution corporation which would defend them against price fluctuations on the domestic market. As in certain areas of the United States, this produced a powerful electoral swing. It also saddled the Nazi Party with a policy of high food prices, an even more protectionist stance and a commitment to subsidise a low-productivity sector. Raising rural incomes in one step produced a brief though vigorous upward movement in consumer goods output, but that in itself was not enough to counteract the severe fall in output and employment which Germany was experiencing.

Darré, in any case, like Wagener and Feder, was not interested in productivity, because economic regeneration depended – this again is something we hear all the time – on changing people’s deepest attitudes and that depended on changing the socio-economic structure. For Darré, this meant an end to land subdivision, an end to the foreclosure and sale of peasant farms, and the establishment of inalienable, hereditary titles to farms of an adequate size for ‘the new nobility’ which would preserve the remnants of true Nordic stock and morality. He believed he had located those in Lower Saxony. The fate of Germany’s industrial masses in this static peasant world was wholly unclear and there was certainly no question of resettling these unemployed mongrels on the land. For the schemes of the urban intellectuals, Darré had supreme contempt, classifying them as back-to-the-landers, supporters of the allotment movement, vegetarians and nudists.

Small wonder that Hitler sought new advice. Something had to be done to stop the world of big business using its influence to try to prevent the Nazis coming to power and a way had to be found of co-operating with businessmen to cure unemployment. Wilhelm Keppler, whom Hitler charged with getting a regular circle of business advisers together, favoured devaluation – another remedy much talked about in Britain now. This was a justifiable step after the British devaluation in the autumn of 1931 had left Germany’s manufactured exports dependent on the Soviet Five-Year Plan, and it gradually became internationally more acceptable. By the end of 1932, however, manufactured exports had sunk so low as to make their return to pre-depression levels look more than doubtful in a world where new exchange controls, quotas and tariffs were appearing every day. Devaluation, in any case, was a weak move if it was to be accompanied by protection. Walther Funk, an economic journalist for the Berliner Börsen-Zeitung, the German Financial Times of the day, whom Hitler appointed at roughly the same time, believed, in common with many nationalist businessmen, that Germany should seek to dominate the European economy within some form of common market. It would thus serve as the manufacturing core to a less industrialised periphery. This was open to the same objections as Keppler’s proposals.

Pro-business advisers, like business itself, had nothing to offer except some faith that costs would fall to the point where exports would have a competitive advantage, while trying to persuade the Government either to get rid of at least some of the proliferating barriers to international trade or to use its power to create a different framework for international trade in which raw material costs might be kept low and markets assured. When the Brüning Government was discovered late in 1931 to be negotiating a customs union with Austria, this was regarded as so hostile an act that the flight of capital from Germany was even greater than at the time of the Wall Street crash. In any case, until the British left the gold standard exports had been doing better than any other sector of the German economy and hardly seemed the main problem.

The Nazis would have to do something else. Would the outside world allow this without massive retaliation? It was this conundrum which brought Hjalmar Schacht back to office. Schacht was a former president of the central bank who had been struggling from 1930 to make contact with the Nazis and engineer a return to high office, while spattering letters in all directions to his business acquaintances, explaining that he was the man who could make these cranks see sense.

Hitler asked: ‘What would happen if we – or rather, a National Socialist Reichsbank president – were to begin with our way of financing employment the moment we take over the government?’

  ‘The international financial world would stand on its head and attack our currency with all the means at its command.’

So Schacht got his old job back in return for accepting ‘our way’. At the time this didn’t mean anything more than continuing the existing policy of financing on a restricted scale public works and job-creation programmes – the remedies most frequently proposed to Mrs Thatcher by her opponents. The Reichsbank was not obliged to do anything more unorthodox than it had already been doing by the end of 1932: with 5.5 million out of work even central bankers must bow to electoral realities.

How well did ‘our way’ work and what lessons could we draw from it? The origins of the German plight were so different from those of the contemporary British economic situation that the historical lessons are suggestive but of little real use. The collapse of employment in Germany was tied to two closely-linked phenomena: the endemic shortage of capital after 1924 and the cyclical instability of an economy which since 1914 had suffered a series of savage shocks to the pattern of investment and savings. The decline didn’t start in manufacturing, but in the government and service sector. It started before the Wall Street crash and was so precipitate as to lead many to argue that the depression started in Germany and not on Wall Street. Levels of employment and welfare fell steeply before either industrial or inventory investment declined. By concentrating investment in the public sector, Nazi policy, by a mixture of energy, ambition, unorthodoxy and good luck, recreated the links between capital markets, infrastructural investment and employment levels.

Public investment in railways, utilities, roads, telephones, radio, together with investment in house construction and repairs, combined with the upturn in the trade cycle to create 2.3 million jobs in two years. This is a far more rapid rate of job creation than any current forecasts for such programmes suggest is feasible. It was done by singling out certain areas where the national infrastructure could be modernised, but also by spending in a large number of other directions and by using tax incentives to encourage others to do so. The remarkable success in terms of new jobs meant that tax revenues increased very rapidly and the increase in the public debt was perfectly manageable. The story thus gives support to some of the arguments used by critics of the present British government.

It is, however, necessary to define the exact criteria for judging public sector investment to have been successful. It was not the building of the famous motorway system which had the biggest impact over the first two years, for example, but conventional, old-fashioned railway investment. The railways absorbed 14 per cent of the total of public investment in 1933 and 1934 – three times what went into motorway building. If the solution was to select projects which would stimulate the rest of the economy through the multiplier effect, as Keynes had begun to argue, motorways were an excellent choice because of their impact in creating a new and higher level of demand for steel, cement, bricks and cars. Of course, this solution depends on motorways themselves being new. Hitler declined to read Keynes on the grounds that he would not understand it. His own criterion would have been the number of jobs created, in which case railways showed a remarkable capacity to absorb unskilled labour. If the criterion is cost-effectiveness, tax concessions for house construction, conversion and repair were by far the best policy. In terms of the employment – and therefore the increase in tax revenue – which they generated, the initial outlay on subsidised house repair schemes was extremely small. Why have the present and previous Conservative governments not tried that? It meets all their economic and political criteria, yet they have actually made house repair more difficult by their changes in taxation.

The whole policy should be judged against the rising relative costs of public investment programmes as employment levels returned to something near to pre-depression levels, mainly because the rate of increase in tax revenue from increasing employment diminished. And Mrs Thatcher could argue perfectly correctly that the outcome of all this was – on balance – to pour money into low-productivity, low-income sectors, thus condemning the German economy to a lower level of labour productivity than its rivals and to acute foreign trade problems in the years to come. Her critics could reply that the much-needed increase in consumer purchasing power could only come from re-employing the unskilled, which is essentially what all this public investment did. This argument can be assessed in relation to the increase in income in the agricultural sector. Darré’s policies when put into effect increased the flow of money income to German farmers more than threefold in the first two years. This affected ten million incomes. Yet in spite of the rapid increase in employment elsewhere, output in the consumer goods sector began to fall again after two years, and with the exception of this brief experience economic recovery was based on capital goods industries. Thus the ‘dynamic new industries’ which emerged turned out not to be back-street businesses operating on cheap loans, but gigantic factories drinking up capital.

It must also be said that most of this investment took at least a year before it was translated into employment. For politicians this was a serious weakness: the cosmetic effect on the statistics was too slow. A whole series of much more publicised grand-scale job-creation programmes and job-training schemes were therefore devised. Then, as now, they were largely a waste of money.

Why did businessmen put up with a programme so different from what they had advocated? Patriotism counted for something and fear probably counted for more, but profit and influence were the most persuasive reasons. In spite of the managerial problems of full employment, their capital and profits were regarded as ‘productive’, provided they did what the Government wanted. In this story the coal industry was central, because coal remained the basic fuel for more than 80 per cent of manufacturing industry. People do not like working down coal mines in periods of full employment and Gillingham suggests that the coal industry was the ‘worst case of industry-regime relationships’. The companies refused to play a rational role in energy planning or even to extend underground operations. The outcome was acute fuel shortages and the appointment of a ‘Coal Commissar’, while output was kept up only by the use of what amounted to slave labour, no substitute for the missing investment. Productivity dropped steadily. Lack of managerial dynamism in the industry led to Party intervention at several different levels. Nevertheless the Nazi Party, Gillingham concludes, gave business, including the coal business, the political conditions necessary for survival, growth and domination of the European economy. In this sense, the relationship was ‘mutually satisfactory’ and business as a whole became ‘powerful and privileged’ once more.

Of course, if you write history in the DDR the fascinating variety of policy standpoints in the Nazi Party is a minor historical consideration. Professor Eichholtz’s book, much weightier than his first volume on the same theme, is indispensable. It is by far the most comprehensive book on the German war economy and its bias is so huge as to disturb nobody. ‘Finance-capital’, as Eichholtz, like the Nazis in 1931, calls it, manipulated its political arm, the Nazi Party, for straight-forward purposes. It wanted to maximise its profits by extending its political dominion at home and abroad and subjecting the working classes to its own absolute rule. Full employment was presumably a small price to pay for a government which held down real wage increases by dictatorial powers while the share of national income going to dividends increased at an unprecedented rate. War, which was what it was all about, was good business, Eichholtz argues. He estimates the total profit of German companies during the war at roughly 100,000 million Reichsmarks: but this must be too high, because if he is even roughly right it would be about the same sum as the German national income in 1938.

Nevertheless, ‘business confidence’ is a curious affair. It soared under a government the arbitrariness and brutality of whose actions remain without parallel and which, when it needed to, was perfectly ready to act against businessmen in a similar way. It soared, too, in spite of the imposition of a set of priorities by central government which relegated international trade to the last place in an economy where so much business depended on it, where its revival had been the basis of most business programmes for recovery. It soared in a system where private capital markets were virtually non-existent and businessmen were not allowed to make the crucial investment decisions. It turns out that in creating employment businessmen are less important than governments and that provided they make money, they will accept a great deal.

[*] German Big Business and the Rise of Hitler: Oxford, 504 pp., £25, 23 May 1985, 0 19 503492 9.