The Nazi Economic Mirage

Submitted by Erico Matias Tavares via Sinclar & Co.,

Many believe that Adolf Hitler’s centrally-planned economic policies produced an economic miracle in the 1930s, with Germany finally regaining its tempo and getting out of a terrible depression.

Conventional economic indicators confirm this view. However, they can also be misleading as to the true condition of the German economy and the sustainability of its finances. Moreover, the heavy burden placed on society, where millions of people suffered tragic losses and virtually everyone lost their freedoms, cannot be just regarded as a footnote. And these policies, or more precisely their failure, put Germany on a collision course with the rest of the world.

In 1930 Germany had a functioning democracy, world class scientists and engineers and impressive industrial capabilities. Still, prosperity levels were well below those of its US and UK counterparts, as the country never fully recovered from the socioeconomic turmoil that resulted from its defeat in World War I.

The global depression that soon followed only worsened the economic conditions of Germans, with unemployment reaching a staggering 30% of the population by 1933. In their desperation, they turned to a man with a grand vision and a plan, promising he would fulfill the great Germanic promise and usher in a new era of prosperity: Adolf Hitler. His siren song and radical policies set in motion a chain of events which eventually lead to a diametrically opposed outcome for his country.

From Failure to Savior

Hitler had been pretty much a failure most of his early life. While he valiantly served as a Private during World War I, often volunteering for the most dangerous jobs and even receiving two Iron Crosses as a result, he was never promoted because he could not interact well with his comrades, nor – if you can believe it – did he have the charisma to lead them into action.

In 1918 he was blinded by a gas attack and put of commission for weeks. When he recovered his entire world had changed: his country lost the war and everything he had fought for collapsed.

Hitler was quick to blame his misfortunes on others, particularly wild conspiracy theories about the undue influence of the Jews in world events, as he would later articulate in his book “Mein Kampf”. Disillusioned with the outcome of the war and prospects for the future, he settled in Munich and joined a radical workers party, along with other former soldiers. In charge of propaganda, he became a prolific public speaker, so much so that people began to think that the National Socialist German Workers’ Party – abbreviated to Nazi – was in fact his own party.

After being imposed hefty war reparations by the Allies, Germany’s woes got progressively worse, leading to a humiliating foreign occupation of the Ruhr in 1923, along with a devastating bout of hyperinflation. This was too much to bear and the Nazis decided to take violent political action, seeking to expand their influence in society.

After this strategy failed to deliver any tangible results, and most importantly put him in jail for a while, Hitler realized that he would have to resort to legal means to achieve power. He then split the party and headed the new faction, with the financial backing of several Bavarian industrialists and landlords.

Although progress was very slow at first, the Nazi party grew steadily. In May 1928 they had won less than 3% of the vote in the elections to the Reichstag, Germany’s parliament. They fared even worse in the presidential elections almost a year later, with their candidate getting barely 1% of the vote. But as Germany’s socioeconomic crisis deepened, all of the sudden their influence exploded. In the parliamentary election of July 1930, the Nazis scored 18% of the vote, doubling it within two years and becoming the largest party in the Reichstag. Hitler became Germany’s chancellor in January 1933 – at 39 years old, and absolute dictator by August 1934, marking the end of the Weimar Republic.

The Nazis had finally reached their goal—the establishment of the Third Reich, an authoritarian state in Germany under the control of the Fuhrer, Adolf Hitler.

An Economic Revival – Of Sorts

Having tightened their grip on politics, the Nazis promptly implemented their plan to reshape society and the economy with the following goals:

  • Solve the unemployment problem – a key promise of Hitler
  • Drag the German economy out of the recession and make the country self-sufficient (“autarky”)
  • Promote the population growth of “true” Germans
  • Get rid of Jewish socioeconomic influence
  • Realign the economy with the Nazi’s expansionist objectives

Hitler launched several government programs and policies to reduce unemployment, with much fanfare to boot.

Massive public work schemes were announced. Over 2,500 miles of autobahn (highways) were built, linking major cities. Hospitals, houses, canals and so forth were also built across the country. All this work was done manually, shovel in hand, so that more workers were needed.

Trade unions were banned and all workers were forced to join the Nazi Labor Front. Working hours were thus increased and wages frozen. Workers were strongly encouraged to go along with this, as any dissenters were immediately accused of economic sabotage and sent to forced labor camps.

To counter any resentment for the loss of worker rights, the “Strength through Joy Movement” (KdF) was established specifically to make workers “happy”, providing them with a range of leisure opportunities. This of course included a healthy dosage of Nazi ideological indoctrination and thanking the Fuhrer for their good fortune. The KdF also introduced a plan that enabled workers to buy a car. The Volkswagen (the People's Car) was conceptualized so that most people could afford it. The Beetle, designed by Ferdinand Porsche, cost the equivalent of 35 weeks wages for the average worker, and he could pay for it on a weekly basis.

Women’s rights – which had flourished under the Weimar Republic, were significantly curtailed. Since they were no longer allowed to work, men took over their jobs and were the only ones allowed to make decisions in society. The Nazis had another role in mind for women, since they had always been particularly concerned with the decline in “true” German population numbers. Accordingly, there was a great deal of propaganda celebrating the image of the mother and the family unit. Prizes were given to women who would bear a large number of children.

Industry was also reorganized – around a very pressing Nazi concern: rearmament. Hitler had devolved great many powers to large private industrial interests, which were now headed by Nazi sympathizers and who stood to gain a great deal from weapons production. Entire factories were uprooted to parts of the country less exposed to French aggression. New railways were built in record time (but with dubious efficiency). The whole productive scheme was now rethought and planned in the context of war.

Of course the Treaty of Versailles had prohibited all of this, but Hitler went ahead regardless. From 1935 onwards, every man aged between 18 and 25 had to spend two years in the armed forces. While in 1933 there were 100,000 members in the armed forces, by 1939 this number would balloon to 1.4 million.

Rearmament created jobs of course, but also a lot of disturbances in established industrial practices and logistics. All the while, the Nazis attempted to reconcile these efforts with making Germany more self-reliant – which was clearly contradictory given the massive increase in demand for raw materials to support the construction new ships, tanks and airplanes. At first they searched for artificial ingredients to replace oil, rubber, textiles and coffee, to no avail. Then they struck a deal with the Soviets, exchanging raw materials for arms in the lead up to the war. By 1939 Germany was still importing 33% of its raw materials. Autarky turned out to be another grandiose Nazi policy ill-adjusted to the needs of the economy.

Unfortunately, not only factories were uprooted. The Jewish community, which had played a prominent role in German society for centuries, was promptly segregated and then progressively eliminated. Other minorities followed, with all their jobs and possessions reallocated.

Hitler’s vision for the German nation was finally becoming a reality. But he was far from done.

The Crucial Role of the Farming Sector

Many of the traditional Germanic themes were associated with the land. As such, this became a centerpiece of the Nazis’ ideology, further accentuated by the historical support of many landlords to their cause.

Some 9 million people worked in German farms by the time Hitler came to power. In comparison, the US had 10 million people employed in the sector (curiously many from German descent, particularly in the Midwest) with seven times as much arable land. This was emblematic of Germany’s meager productivity and incomes in the farming sector.

In 1933, Hitler implemented the State Hereditary Farm Law, where selected lands were declared hereditary, as an Erbhof, to pass from father to son, and could not be mortgaged or alienated. Any farm of 7 to 125 hectares, the size deemed to be adequate to maintain a family and act as a productive unit, could be declared Erbhof. All farms of over family size were also made secure in possession of their owner's family, with no possibility of alienation.

While farmers benefited from the elimination of debt and some aid from the government – such as fixating prices and production to promote that elusive autarky, their ability to finance crop expansions and purchases of new equipment was also reduced. The sector saw a continuous outflow of workers, who were now being employed in all the other government sponsored projects and the military.

As a result, agricultural productivity suffered and shortages of food developed across the country. In response, the Nazis implemented food rationing – which would remain in place until the end of the war. In 1937, annual consumption of wheat bread, meat, bacon, milk, eggs, fish, vegetables, sugar, fruit and beer had fallen to levels comparable to a decade earlier (only rye bread, cheese and potatoes had increased). Malnourishment was starting to become a real problem amongst German workers, in farms and factories across the country.

In typical fashion, rather than blaming his own policies, Hitler believed that this situation resulted from a lack of “space to live” for his people. All major European powers had access to vast territories in Africa and elsewhere. The US had a huge continent at its disposal. But not Germany, who had lost out in WWI and was now confined to its diminished borders.

If other countries could obtain large amounts of land by force, why couldn't Germany? After all, security was not the only reason to build a powerful army.

The Miracle Begins to Unravel

By the time the Olympic Games took place in Berlin in 1936, cracks were starting to appear in German society. This was not immediately obvious to large parts of the population (nor to foreign economists and commentators, for that matter), who for the most part were still seduced by the Fuhrer’s promises of a glorious pan-Germanic future.

Any dissent was violently crushed through party terrorism (via the infamous SS and Gestapo). The persecution of Jews was intensified. The regular police were circumvented by the party’s police; the regular avenues of justice were bypassed by the party’s courts; the regular prisons were eclipsed by the party's concentration camps. In short, a rational bureaucracy was replaced by a virulent irrational one.

Government controls and management of certain parts of the economy were creating huge distortions which in turn prompted even more intervention, invariably at the expense of some other society group. While the big industrial concerns were benefiting from these arrangements, small businesses and the middle classes were squeezed out of the market; as were most of the staples that ordinary people needed.

With taxation revenues curtailed by design, Hitler’s expansionary policies had to be financed with debt. But these funds were neither unlimited nor free, and Nazi leaders were starting to become very aware of this. There was some debate as to which economic policies should be adopted as a result, with some prominent figures recommending a more liberalized approach to the economy.

However, like any good central planner, Hitler decided to press ahead with his original policies with even more gusto. During a cabinet meeting in 1936, he and Hermann Göring, his aviation minister and trusted adviser, announced that the German rearmament program must be sped up. There was no turning back.

As a result, Göring was put in charge of the four year economic plan, creating a new organization to administer it. He subordinated the ministries of labor and agriculture and bypassed the economics ministry in his policy-making decisions, which meant that he had de facto control of the economy. Expenditures on rearmament were increased, in spite of growing budget deficits. In 1937, the Reichswerke Hermann Göring was established under state ownership with the aim of boosting steel production beyond the level which private enterprise could economically provide. This was command-and-control policies on steroids.

German Unemployed (in millions): Jan 33 – Jan 39

Source: historylearningsite.co.uk

As shown in the graph above, the reduction of unemployment was an unequivocal bright spot, but largely at the expense of women, Jews and other minorities, as well as over a million people serving in the military. The same formula was applied to other territories that were subsequently annexed, yielding similar results. For instance, unemployment also dropped in Austria after the Anschluss in 1938.

But the Nazis had a strategy to fund their grand vision and release the German people from the shackles of want: territorial expansion and plain robbery. And so the hostilities began with the invasion of Poland in 1939.

The War Years

The early months of the war went fairly smoothly for the German army, which overran large territories as the Allies were still gearing up for battle. However, as the war intensified, so did the chronic shortages back home. Farms lacked equipment and people, which were now being absorbed in ever expanding numbers by factories supplying the military, or by the military itself.

By early 1941, when the German army arguably had its strongest foothold across Europe, civilian consumption was already down 18% from 1938 levels. And it would continuing going down from there.

The labor force kept on shrinking, although now irreversibly. Impressive military victories soon turned into stalemates and finally into catastrophic losses across all three war fronts: East, West and South. The Nazis were left with little choices on how to replenish those losses and continue fighting. Accordingly, farmers were next to be enlisted, which was then extended to everyone once Germany was on the brink of defeat. To get a sense of the catastrophe resulting from Hitler’s stubbornness, a third of all boys born between 1915 and 1924 was either dead or missing by the end of the war.

But in addition to soldiers Germany needed to eat. As its farming population shrank, the Nazis came up with a devious plan to make up for it: enslave their neighbors and prisoners of war.

Every season there used to be a flow of workers coming across from Poland to work in German farms, given that higher wages were on offer. But after the German invasion in 1939, the Nazis brought back hundreds of thousands of Polish workers and POWs against their will. Then came the invasion of France, which provided a labor pool of over a million POWs. But even that paled in comparison to the number of workers brought in after the invasion of the Soviet Union in 1941, almost three million in total. When the Italians changed sides in 1943, the German army captured as many of them as they could to work in the fields. None of this was enough to sustain production as all these people died quickly due to appalling working conditions.

Such was the insanity of the Nazi war machine. By the end of the war nearly one in every four workers in Germany was a foreigner, in most cases unwillingly.

The Nazi Economic Mirage

Hitler’s policies are still viewed to this day as a great example of how unprecedented government intervention fixed a dire economic problem. In short, Hitler laid a golden egg and produced an economic miracle.

As early as 1933, even before any miracle could be seen, the New York Times had nothing but praise for his ambitions, according to the following front page headline:

“There is at least one official voice in Europe that expresses understanding of the methods and motives of President Roosevelt—the voice of Germany, as represented by Chancellor Adolf Hitler.”

For sure, some of Hitler’s policies made a lot of sense. Building up the country’s infrastructure, which was so vital to a modern industrial economy, proved to be a winning bet. German workers could now afford cars to drive in the new roads, as well as other modern conveniences. Economic activity and incomes responded accordingly. That Weimar Republic feeling of uncertainty and malaise finally subsided. And the dramatic increase in fertility rates during the Nazi years also provided a boost (after all, babies can promote consumption). So in a sense there was no mirage here, the growth was real.

Perhaps if the real economy had been allowed to flourish at that stage, Germany could have indeed produced a real economic miracle. If anything the most prosperous nations of the 20th century proved that the economic reigns and decision-making must eventually be decentralized in order for any gains to be sustained and expanded. Women also needed to play a role in the economy, much beyond just having babies.

Unfortunately for the people living under the Third Reich, this was never allowed to happen. All of these efforts became increasingly subordinated to the logic of war. As a result, the economy was stifled by top-down industrial policies and readjustments, price controls, misallocation of resources and so forth. Personal and commercial freedoms had to be restricted so that the prevailing Nazi ideology could never be challenged.

Rearmament thus became the most significant government expenditure. The resulting increase in GDP was significant. In fact Germany boasted the highest growth rates in Europe in the prewar years. But this can be misleading as any comparison could not be done on an apples-to-apples basis, since other major economies spent considerably more on consumption and productive activities. Just because Germans were producing more guns does not mean that they were better off.

The government went ever deeper into debt as a result of this policy. Of course any leader, no matter how incompetent, can create growth if enough money is thrown at the economy; the problem is that those debts will need to be repaid at some point.

During the war, Albert Speer, the minister of armaments and war production and a close friend to Hitler, also directed a miracle of his own: doubling Hitler’s production orders as Germany was under heavy Allied bombardments. No doubt his administrative genius played a role, but so did exploiting millions of slave laborers who were starved and worked to death in his factories. It was the same ideology at work all over again. And the war effort was significantly prolonged as a result.

Speer was arrested in 1945 and interrogated by a committee of US representatives, who wanted to learn more about the inner workings of the Third Reich. John Kenneth Galbraith, the famous Harvard economist and adviser to several US presidents later in his career, was also in attendance.

Here’s a transcript of the committee’s report after that meeting:

“The German people, [Speer] said, had worked hard and faithfully and had suffered greatly. They had won victory after two years and had been denied the fruits of the victory they deserved by the inadequacy of their leaders. That inadequacy he felt obliged to expose.

 

“The fall of the Third Reich Speer attributed to the moral decay of its rulers. This decay was well advanced before the outbreak of the war. Its most spectacular manifestation was soft, expensive living. In some instances it took the form of extreme corruption. Speer cites Göring as the most corrupt of his colleagues. Göring's acquisitive looting and hoarding was unmatched by the other party leaders. But nearly all of the party leaders, Berlin ministers and Gauleiters alike, showed a penchant for a rich, easy, well-nourished existence and variety in wine and women.”

Göring of course was the prime architect of Germany’s war economy after 1936. All of the sudden the Nazi elite was not looking so brilliant after all. Here’s what Galbraith would later say about the whole bunch in his book “The Age of Uncertainty”:

“Hermann Göring, Joachim von Ribbentrop, Albert Speer, Walther Frank, Julius Streicher and Robert Ley did pass under my inspection and interrogation in 1945 but they only proved that National Socialism was a gangster interlude at a rather low order of mental capacity and with a surprisingly high incidence of alcoholism.”

Rather than being some central planning geniuses, Galbraith’s quote is a rather more accurate description of the Nazis. After over a decade under their leadership, Germany reversed its gains and prosperity all the way back to the late 19th century, with a large part of its population annihilated in the process. The country was then sectioned off to different Allied factions.

The mirage was finally over.