Ideology and the Economy, Implemented Policies, 1933-1936 (Part A) Source: Avraham Barkai, Nazi Economics - Ideology, Theory, and Policy (London, 1990), 158-172, 183-196, 225-235. Chapter 4 Ideology and the Economy Between 1933 and 1936 the German GNP increased by an average annual rate of 9.5 percent, and the annual production index for industry and crafts rose by 17.2 percent. The principal source of this growth, which propelled the German economy out of a deep depression into full employment within less than four years, was increased demand by the Public sector, defined by German economists of the period as Staatskonjunktur (state prosperity). The average annual growth of public consumption during these four years was 18.7 percent, while private consumption rose only by 3.6 percent annually. These data alone already show that the Nazis overcame unemployment primarily through government-initiated public works and/or orders by the government and other public-sector authorities. Additional public consumption and investment in the period 1933 to 1936 came to over twenty-seven billion reichsmarks. Of this sum, eleven billion was forwarded by the Reichsbank; the remainder came from additional taxes, 'donations,' and loans raised from the public and from banks. An overall summary for these four years shows that no less than 80 percent of all additional spending went into rearmament and the expansion of the army. It is therefore true that rearmament played a major role in the liquidation of unemployment. Nevertheless, it would be erroneous to conclude that the latter was merely a fringe benefit of rearmament, successfully exploited by the propaganda machine. Full employment was an autonomous objective of Nazi policy, both as a principle and as a means of stabilising the regime as well as recruiting public support. The availability of idle production factors combined with their open-mindedness vis-a-vis novel economic concepts enabled the Nazis to achieve this objective simultaneously with their political goal of rearmament and preparation for an expansionist war. They could have achieved the same economic effect by allocating all additional resources to public works and the increase of private consumption, with no connection whatever to preparation for War. On the other hand, there is no doubt that, because of their ideological and political principles, they would have executed rearmament plans even if the state of the German economy had been different. They would not have hesitated to finance war in the traditional manner, using higher taxes and public loans at the expense of radically reduced private consumption. However, the political objectives of rearmament had economic implications besides increased employment, which will be discussed below. The Financing of Works Projects Statistical data support the assumption that the liquidation of unemployment was an autonomous economic objective alongside military preparations. Expenditure on non-military employment projects exceeded rearmament expenses in 1933 and remained approximately equal to them within the overall summary of the first two years. In 1933, 3.1 billion reichsmarks were spent on housing and road-development projects executed by municipal authorities, as against 0.7-1.9 billion (according to varying estimates) spent on rearmament. The total for two years, until the end of 1934, was 5 billion on non-military public works as against 6 billion on rearmament and the army. The combined expenditure reduced the 1932 average of 5.6 million registered unemployed to 4.8 in 1933 and 2.7 in 1934 1 . This does not mean that the Nazis accorded priority to civil employment projects during these years and that rearmament as a political objective surfaced only later. On the contrary, the preparation for war was Hitler's primary project, and his orders were to direct allocations for job creation accordingly. This order was not carried out at once because during the first few years the army could not absorb larger sums for technical reasons and because it lacked manpower. Alert to the urgency of unemployment relief, the Nazis immediately launched public works projects, projects that had in part been planned by previous governments. Toward the end of 1934 the centre of gravity finally passed to military expenditure. This state of affairs is unequivocally confirmed by Hitler's utterances on employment and rearmament immediately after his appointment as a chancellor. As early as February 8th, at a government-level meeting in the chancellor's office, Hitler rejected a proposal (presented by the transport minister) to allocate a certain sum for the construction of a dam in Upper Silesia, arguing that for the coming five years all available money should go into rearmament: 'The next five years must be devoted to the rearmament of the German people. Every public plan for the creation of jobs has to be judged from the point of view whether it is necessary for the rearmament of the German people. This thought must remain in the foreground, always and everywhere.' Hitler's position at this meeting was supported by Goering and Blomberg, minister for the armed forces. The minister of labour agreed with Hitler's argument but thought 'that besides the goals of defence policy, there are other valuable economic tasks, which should not be neglected.' At the conclusion of the meeting it was decided to postpone construction of the dam for the time being 2 . On the following day, February 9, 1933, at a session of the government committee for employment affairs, Hitler once again stated his point of view: 'Absolute priority to be given to the interests of defence while public orders are distributed.... He could accept the limited resources demanded by the Armed Forces Ministry at the time only from the point of view that faster rearmament was impossible during the coming year.... Allocations for the Immediate Program should also be determined in this spirit. In the battle against unemployment the appropriate auxiliary remedy was public works ordered by the state. The five-hundred-million plan was the largest of its kind and especially suitable to serve rearmament interests; it allowed for the camouflage of defence projects in the best possible manner. In the near future this camouflage would be of particular value.' 3 It was eminently clear that Hitler's primary goal was rearmament, to which employment projects were subordinate. He acknowledged the importance of liquidating unemployment as such, but understood that rearmament projects would also create jobs. This view was demonstrated in his talk to Rauschning in August 1932: 'I can achieve just as much by rearmament as by the construction of houses and by settlement. I can also give the unemployed more money to meet their needs. Thus I create purchasing power and increase the circulation of money.' 4 Public works financed by deficit spending were not invented by the Nazis. As we have already seen, the theoretical foundations for such a policy were established in previous years, and the Papen and Schleicher governments had begun to prepare practical plans in this spirit. The Nazi rulers appropriated both the theoretical propositions and the ready-made plans, but they implemented them with a degree of decisiveness and to an extent that exceeded all forecasts. The Bruening government had already announced a one-billion-reichsmark plan for additional public works in 1930 5 . But it was never even initiated, since the realisation of the plan, like some later ones, depended on loans from abroad; no one even thought of financing public works by deficit spending through the offices of the Reichsbank. The notion of such a loan under prevailing international conditions was utterly unrealistic. Though a special company was founded to this end, nothing ever came of it. The special committee appointed for this purpose (the Braun Committee), also made the granting of an international loan a condition for the extension of credit to government-initiated public works, which for the same reason never material 6 . The first move toward deficit spending on employment projects was announced by the Papen government in September 1932 through one of its emergency decrees 7 . The Papen plan was to promote employment primarily in the private sector: initially only three hundred million out of two billion planned for the first year was to go into public works. The bulk of the money was earmarked for the private sector in the form of tax reductions and employment premiums. A proposal was made to give employers 'tax-credit notes' representing 40 to 100 percent of the taxes due, to be utilised in the payment of taxes in subsequent years - that is, as tax discounts for the future. As these 'notes' were immediately discountable by the Reichsbank at a very low discount rate, they were actually liquid assets that increased the money supply. In addition employers received an annual bonus of four hundred reichsmarks (also in the form of tax-credit notes) for every new employee. As a special bonus employers who hired new workers were permitted to lower wages beneath the legal tariff, a proposal that made the trade unions reject the entire Papen plan at once, whereas employers on the whole tended to endorse it 8 . However, the RDI opposed any projects of public works as a matter of principle, stated in a declaration they had settled upon on August 17, 1923 9 . As it turned out, under then-prevailing economic conditions these tax discounts were not a sufficiently attractive incentive for private enterprises. Employers did not utilise this opening and did not hire additional workers; the allocated sums were not spent. In consequence the head of the Reichsbank, Hans Luther, and the minister of finance Schwerin von Krosigk, agreed to add five hundred million reichsmarks to the public works allocation 10 . The first significant move toward public works financed by the Reichsbank came with the Immediate Program launched by the Schleicher government. The plan's author, Guenther Gereke, was employment commissioner in this government and remained in office for a few months in Hitler's first government. According to his plan, five million reichsmarks was allocated at once to public works, to which another one hundred million was added after Hitler's take-over. The project was financed by bills drawn on fictitious companies, extendable without a deadline and at once discountable by the Reichsbank, thereby providing a basis for an immediate increase in the money supply. This was a special technique of deficit spending devised in keeping with Reichsbank statutes, which permitted the forwarding of credit to the government only in return for 'ordinary commercial bills' for a period that did not exceed three months. This procedure became a precedent for preliminary financing by Mefo-bills, a technique that Schacht subsequently turned into the main instrument for deficit spending. The Gereke Plan is of interest in the present context not only because it represents the first serious move toward deficit spending on a relatively large project of government-initiated public works but also on account of its origins. Its outline was worked out by Guenther Gereke in the summer of 1932 while he was chairman of the Verband Deutscher Landgemeinden (Association of German Rural Communities), which officially adopted the plan in August1932; Gereke was also a Reichstag delegate on behalf of the DNVP. His plan was composed in close co-operation with Ludwig Herpel, the editor of a right-wing periodical, and according to another source, with Werner Sombart's active participation 11 . The Gereke Plan was brought to Schleicher's attention by a veteran officer of the right-wing Stahlhelm, who tried to recruit wider support for the plan, even among trade unions and Social Democrats 12 . This once again confirms Friedlaender-Prechtl's claim, mentioned above, that all plans for job creation through public works and deficit spending were supported mainly by right-wing circles. Heinrich Draeger's research association and its followers supported the Gereke Plan enthusiastically; they devoted a special issue of the periodical Wirtschafts-Wende , edited by Friedlaender-Prechtl, to a discussion of it. On the other hand, business circles, which had received the Papen Plan favourably, sharply opposed the Gereke Plan because of its emphasis on public works and inflationary financing 13 . The Nazis admitted that among all available plans this was the best one, but attributed its merits to their own influence. Bernhard Koehler claimed that whatever was good in this plan the authors had adopted from Nazi sources: they had learned from Strasser's Reichstag speech of May 10, 1932, and Ludwig Herpel, who had once been a member of the party, was influenced by Gottfried Feder. Beyond that, according to Koehler, the plan was too modest and would at best only partially relieve unemployment 14 . After they attained power the Nazis left Gereke in his post until March 1933. In his own memoirs Gereke claimed that he was dismissed because he refused Hitler's request to join the party. According to Gereke, Hitler argued that the liquidation of unemployment had to be 'our own feat' and therefore Gereke had to join the party. When he refused, he was dismissed by means of a fabricated trial in which he was accused of embezzling some of Hindenburg's election funds in 1932. In the fifties Gereke moved from West to East Germany, where he was received with high regard. There he wrote his memoirs, a task in which he was aided by the East German historian Eberhard Czichon, who 'edited' his work 15 . We see therefore that when the Nazis took power they found two ready-made public works projects, plus the necessary legal arrangements for their financing. Work plans for the execution of specific projects were also available, mainly from municipalities where lack of funds had compelled postponement of numerous plans, but also from post-office and railway agencies. Their implementation could begin without delay. With regard to the Papen Plan, some changes were made at once: money allocated for activation of the private sector was redirected to government-initiated public works, to be carried out by public authorities. In April 1933 this was put into effect through modification of the respective law, which stopped the issue of tax-credit notes for the employment of additional workers and instead allocated the money to public works mainly through community agencies 16 . During the first months of 1933 the Nazis added large-scale works projects to those they had found waiting. The first Reinhardt Plan (named after Fritz Reinhardt, the first Nazi Staatssekretaer at the Ministry of Finance) allocated one billion reichsmarks to public works. It was financed by means of treasury notes discounted by the Reichsbank, that is, by the undisguised printing of money 17 . In September the second Reinhardt Plan added another five hundred million reichsmarks, aimed principally at the construction of housing. The money was allocated for additions to and renovation of residential and commercial building, on condition that the owners invested matching sums from their own resources 18 . Alongside these projects for immediate creation of jobs through public works, the Nazis encouraged investment and consumption in preferred branches of the private sector, in particular by abolishing the tax on motor vehicles 19 and by tax exemption for the renewal of industrial equipment 20 . Jointly these projects came to another two billion reichsmarks, which was spent on employment projects for state-owned companies like the post office and the railways. Out of a total of 350 million reichsmarks allocated for the construction of motorways ( Reichsautobahnen ), only 166 million had been spent by the end of 1934 21 . The projects described here actually include almost the whole range of non-military employment projects launched between 1933 and 1936. Of the twenty-eight billion reichsmarks that represented the total of additional annual state expenditures during these years as compared to 1932, only 5.5 billion were devoted to civil employment projects (see appendix, table 4). Mof this sum was spent during the first two years; beginning at the end of 1934, deficit spending went almost exclusively on rearmament. To finance rearmament, the government and the Reichsbank (under Schacht) initiated the creation of a special company with a one-million-reichsmark equity, the Metallurgische Forschungsgesellschaft m.b.H (MEFO, Metallurgic Research Company, Ltd.) in August 1933. As owners of the company, each of the four leading enterprises in Germany's metal industry (Krupp, Siemens, Rheinmetall, and Gutehoffnungshuette) signed up for 250,000 reichsmarks' worth of share capital. Representatives of the Reichsbank and the War Ministry were members of the company's managing board. Rearmament orders were paid for, by whatever agency had issued the order, in bills for a period of three months, extendable for up to five years. The bills were endorsed by the said company, which accounts for their name, Mefo-Wechsel (Mefo-bills). The absolute secrecy of this arrangement was preserved until after the war. The fictitious character of the company is obvious from the fact that, on the basis of one million reichsmarks' share capital, the company endorsed a total of twelve billion reichsmarks until the end of 1937. The Reichsbank discounted these bills on presentation, thus immediately increasing the current money supply. Although until the war only 20 percent of the total rearmament expenditure was financed in this manner, it made up 50 percent of the total expenditure on military orders during the initial years 22 . This system of preliminary financing by means of bills had a double purpose: first, it circumvented Reichsbank statutes, which permitted only limited financing of government expenses in the form of a loan but allowed for the inclusion of short-term commercial bills as legal coverage of the currency; second, it served to keep the scope of rearmament secret, at least until 1934, when even the publication of data concerning the national budget was stopped. As mentioned above, Schacht had already voiced his opposition to monetary experiments in 1932. Now he feared the psychological impact that publication of the true dimensions of rearmament might have on the population. He must have realised that the economic effect of Mefo-bills was not less inflationary than any other form of money issued from the printing press, but he accorded considerable importance to possible psychological effects. At a meeting of the Supreme Economic Council on September 20, 1933, Schacht announced that he was prepared to forward any required amount but not to name figures and that it was of great importance to prevent talk about 'theories and billions' in public 23 . This economic council was appointed by Hitler at the beginning of 1933 but was convened only a few times, merely in order to listen to speeches. In the light of all this, it is rather difficult to agree with Burton Klein, who argues that Schacht was ultraconservative and that the Nazis' whole economic policy, including their shying away from more massive rearmament, suffered from exaggerated fears of inflation 24 . Schacht and his Nazi masters were not wanting in fiscal adventurism; they conducted a policy of deficit spending that was unprecedented in peacetime economies. It is nevertheless true that their fear of inflation was deeply embedded and partly determined the means by which they carried out deficit spending. Among these was the special form of preliminary financing through bill that were to be paid off (as claimed at the time) by budgetary surpluses in coming years. However, in 1939, when the first Mefo-bill came due for payment, the Third Reich was caught up in hectic rearmament efforts, and the Mefo-bills were simply exchanged for ordinary treasury notes. After the war Schacht claimed that this 'violation of the agreement' was the last straw that made him resign from the Reichsbank 25 while Schwerin von Krosigk, who was minister of finance at the time, said that this arrangement had been agreed upon from the outset 26 . It really makes no difference, either in theory or in practice: Mefo-bills or any other bills issued to finance employment were merely paper money printed by the Reichsbank. Even the fact that in general only a third of Mefo-bills were presented to the Reichsbank for discount did not change their character as a principal means for deficit spending and increasing the money supply: among the asset portfolios of banks they served as secondary reserves. Nevertheless, the technique appears to have achieved its aim of concealing the scope of rearmament and deficit spending 27 . Between 1933 and 1936, 9.5 billion reichsmarks' worth of Mefo-bills, representing more than 85 percent of the Reichsbanks' direct money supply for deficit financing and rearmament, was issued. References: Chapter 4 1. Fischer, Deutsche Wirtschaftspolitik , p. 108. 2. BA, R 43/II, 536, Ministerbesprechung vom 8. February 1933. 3. Ibid., Sitzung des Ausschusses der Reichsregierung fuer Arbeitsbeschaffung vom 9. February 1933. 4. H. Rauschning, Gespraeche mit Hitler , 1932–1934 (New York, 1940), p. 27. 5. K. Schiller, Arbeitsbeschaffung und Finanzordnung in Deutschland (Berlin, 1936), pp. 48f. 6. Ibid., p. 52. 7. Verordnung des Reichspraesidenten zur Belebung der Wirtschaft, vom 4. September 1932, RGB1. I, p. 425. 8. Petzina, 'Hauptprobleme,' p. 23. 9. BA, Nachlass Silverberg, no. 223, pp. 184f. 10.Interview with Schwerin von Krosigk, June 1974. 11.Czichon. Wer verhalf Hitler , pp. 31f. 12.Draeger-Materialsammlung. 13.Petzina, 'Hauptprobleme,' p. 26. 14.B. Koehler, 'Wwollen das Recht auf Arbeit,' Arbeitertum , Jan. 15, 1933. 15.Gere, Ich war koeniglich-preussischer Landrat , p. 158. 16.Schiller, Arbeitsbeschaffung , p. 57. 17.Gesetz zur Verminderung der Arbeitslosigkeit vom 1. June 1933, RGB1. I, p. 323. 18.Gesetz zur Verminderung der Arbeitslosigkeit vom 21. September 1933, RGB1. I, p. 651. 19.Gesetz zur Aenderung des Kraftfahrzeugsteuergesetzes vom 10. April 1933, RGB1. I, p. 192. 20.Gesetz zur Verminderung der Arbeitslosigkeit vom 1. June 1933, Abschnitt II, Steuerfreiheit fuer Ersatzbeschaffungen, RGB1, I, p. 323. 21.Schiller, Arbeitsbeschaffung, p. 155. 22.Fischer, Deutsche Wirtschaftspolitik , pp. 86, 102. 23.HF, K. V. Krogmann diaries, 11/K4, pp. 19f. 24.Klein, Germany's Preparations for War , p. 8f. 25.H. Schacht, Account Settled. 26.L. v. Schwerin v. Krosigk, Es geschah in Deutschland: Menschenbilder unseres Jahrhunderts , 3d ed. (Tuebingen und Stuttgart, 1952), p. 191. 27.Erbe, Die nationalsozialistische Wirtschaftspolitik , p. 54.