The ‘motorization of Germany’ turned out to be another false Nazi vision, as the diversion of resources to military production from the mid-1930s put a brake on the manufacture of cars, which began to level off and was in no way keeping pace with demand by 1938. The scheme by which workers, under the influence of a massive advertising campaign, parted with a portion of their wages each week to put towards buying a ‘Strength Through Joy car’ turned out to be no more than a means of getting them to put in more overtime so that they could contribute to the financing of rearmament. By the end of 1939, 270,000 people had lent 110 million Reichsmarks to the state in this way. In the end, no fewer than 340,000 people invested their money in the scheme. Not one of them ever got a Volkswagen in return. The factory was converted to war production in September 1939.51 The army itself considered that the expansion of motor vehicle manufacture was an essential precondition for the later rapid motorization of the armed forces. More generally, basic industries like iron and steel, manufacturing and engineering were to be given priority over the consumer goods industries because they would provide the basic infrastructure for rearmament. And getting Germans, especially German men, back to work would toughen them up and turn them from unemployed layabouts into potential fighters: hence it was more important to discipline them than to pay them well. From Hitler’s point of view, the camps and barracks in which young men toiled for wages below the benefit level in voluntary labour schemes that in reality were not voluntary at all were important not least because they trained them for the privations of a future war.52
More immediately, Hitler also wanted to get arms production under way again after the many years in which it had effectively been banned by the limitations imposed on Germany’s armed forces by the Peace Settlement of 1919. Addressing leading figures from the armed forces, the SA and the SS on 28 February 1934, Hitler said that it would be necessary in about eight years’ time to create ‘living-space for the surplus population’ in the East, because the economic recovery would by then have run out of steam. Since the ‘Western Powers would not let us do this . . . short, decisive blows to the West and then to the East could be necessary’. Rearmament thus had to be complete by 1942.53 There was a long way to go. In 1933 Germany was more or less without an air force, without capital ships, without tanks, without most basic items of military equipment, and restricted to an army of no more than 100,000 men. Already in early February 1933 Hitler set a programme of rearmament in motion, where possible disguised as job creation (the revamped Schleicher programme, he said on 9 February, ‘facilitates in the first place the disguising of work for the improvement of national defence. Particular stress must be laid on this concealment in the immediate future’).54 The army itself asked for 50 million Reichsmarks from the Schleicher programme to fund the initial phase of expansion, along lines it had already drafted in 1932, while the commissioner for aviation asked for just over 43 million. These sums were far too modest for Hitler, who thought that rearmament would require ‘billions’ of marks and had to be done as quickly as possible in order to get over the difficult period when Germany’s enemies began to realize what was going on before it had reached a stage where any serious German resistance to, say, a Polish invasion was possible. The military eventually convinced Hitler that more was not possible in the initial stage of rearmament. He ordered that priority in the allocation of resources from the economic recovery programme was to be given to the military, and he gave the armed forces control over their own rearmament budget in April 1933.55
The army drew up a register of 2,800 firms to which arms orders could be sent; in 1934 these accounted for over half of all iron and steel, engineering and motor vehicle production. The effects of the Depression included a massive under-utilization of productive capacity, so initial arms orders were in many cases just taking up the slack, and did not require major new investment. Investment in German industry in 1932 had been less than 17 per cent of its 1928 level, but it now began to increase, reaching just over 21 per cent in 1933, 40 per cent in 1934 and 63 per cent in 1935. Work began almost immediately in preparation for the creation of a German air force. In March 1934 a production schedule was drawn up aiming at 17,000 aircraft by 1939; many of these were disguised as passenger planes though intended for conversion to bombers when the time was ripe. Fifty-eight per cent of them were listed, somewhat implausibly, as ‘trainers’. By 1935 there were 72,000 workers employed in aircraft construction, compared to fewer than 4,000 at the beginning of 1933. Similarly, Krupps embarked on the large-scale production of what were coyly described as ‘agricultural tractors’ in July 1933; in reality they were tanks. In 1934, the Auto Union company launched another military vehicle production department, disguised in its accounts under the vague name of ‘Central Office’. In November 1933 the navy ordered over 41 million Reichsmarks’ worth of military equipment and another 70 million Reichsmarks’ worth of ships. Major firms such as Borsig, in Berlin, and the Bochumer Association, in Hanover, started up production of rifles and guns. All this had an immediate effect on employment. Already in January 1933 the Mauser rifle factory increased its workforce from 800 to 1,300; in the first four months of 1933, the Rhine Metal Company, which made howitzers and machine guns, took on 500 new workers too. Similar developments could be observed in hundreds of companies across Germany. All this feverish activity inevitably had a knock-on effect on industry more broadly, as iron and steel, engineering, coal and mining companies stepped up production and hired additional labour to cope with the new and rapidly rising demand from the arms and arms-related sector. By the end of 1934, the government, noting the reduction of unemployment figures to less than half the level at which they had been when it had taken office, suspended specific job-creation programmes. From now on, it did not need to rely on such measures to absorb the remaining German unemployed.56
Map 10. The Fall in Unemployment, 1930-38
The final step in the reduction of the unemployment figures was taken by the introduction of compulsory military service in May 1935. Already in October 1933, Hitler had asked the British Ambassador if his government would agree to a trebling of the size of the German army to 300,000; and the army itself soon took advantage of an international agreement signed on 11 December 1932 that proposed to replace the disarmament clauses of the Treaty of Versailles by a convention that gave Germany equal rights within a new system of international security. Massive recruitment drives in the course of 1934, initially launched to replace the drafting of thousands of troops into the newly formed German air force, resulted in an increase of the army’s strength to 240,000 by 1 October. But this was not enough. Hitler had already promised the army on 3 February 1933 that he would reintroduce conscription. Taking a proposed increase in the length of French military service as a pretext, Hitler made the formal announcement to the Reich Defence Council on 15 March, taking many of the officers present by surprise. From now on, all able-bodied, non-Jewish German men would have to serve for one year in the armed forces - extended to two in August 1936 - once they reached the age of eighteen and served the required six months in the Reich Labour Service. By 12 June 1936, the General Staff was estimating that the total personnel strength of the army stood at just over 793,000 men, including reservists and non-combatants; by the eve of the war, there were nearly three-quarters of a million men on active army service, and more than a million in the reserve. In the spring of 1935, too, the German government formally announced the existence of an air force (Luftwaffe), which by this time had 28,000 officers and men serving in it; by August 1939 this number had grown to 383,000.57 Naval rearmament began more slowly, initially based on plans drawn up in November 1932, but here as well, expansion eventually reached a headlong pace. There were 17,000 naval officers and seamen in service in 1933, an increase of only 2,000 on the previous year, but by the beginning of the war in 1939 the number had grown to almost 79,000.58 Taken together, these increases soaked up any remaining unemployment amongst the young. After 1936, Hitler
and the leading Nazis did not trouble to mention the ‘battle for work’ again; the fact that it had been won had long since been accepted by the overwhelming majority of the German people.59
I V
Germany’s government was in a parlous financial state when Hitler became Reich Chancellor in January 1933. More than three years of the most catastrophic economic depression in German history had forced his predecessors to cut back sharply on state expenditure. Bankruptcies, business failures and mass unemployment had led to a huge drop in the gross domestic product and a precipitate fall in tax revenues. This situation did not change overnight. In 1938, for example, state expenditure took up 35 per cent of national income. The 17,700 million Reichsmarks that came into the state’s coffers from taxation was only sufficient to cover little over half the money that the state actually spent - 30,000 million Reichsmarks in all. How did the regime manage to pay for its massive programme of rearmament and job creation? It could only pay for it by what it called ‘creative credit production.’ Such a policy was anathema to traditional economic managers in view of the danger of inflation that such a policy threatened to bring. Nobody wanted a repeat of the uncontrollable hyperinflation of 1923. The President of the Reichsbank, Hans Luther, was unsympathetic to the regime’s aim of deficit-financed rearmament. A high priest of monetary orthodoxy, he also had a political past, as a former Reich Chancellor. His concern to maintain the neutrality of the internationally guaranteed Reichsbank led him to protest to Hitler in person when brownshirts ran up the swastika over the bank building on 30 January 1933. All this made him an uncomfortable bedfellow for the Nazis. So Hitler replaced him in the middle of March 1933 with Hjalmar Schacht, the financial wizard who had been largely responsible for bringing the inflation under control at the end of 1923.60
Schacht was an anomalous figure in the leadership of the Third Reich. On official occasions, while other ministers appeared in jackboots and uniforms, Schacht stood out in his grey civilian suit, high white collar, shirt and tie, dark overcoat and bowler hat. His thin, somewhat unassuming physical presence and his rimless glasses lent him a slightly withdrawn, academic air which was equally at odds with the rough energy of other leading figures in the regime. Nor was his background in any way similar to theirs. Born in January 1877 into a family of modest means, he was christened Horace Greeley Hjalmar Schacht; his father had spent seven years in the United States and so admired the founder of the New York Herald Tribune and coiner of the phrase ‘Go west, young man’ that he named his son after him. ‘Hjalmar’, the name by which he was generally known in Germany, was a traditional name in the Hamburg and Schleswig-Holstein family from which his mother descended. Educated at a famous grammar school in Hamburg, he studied political economy under Lujo Brentano at Munich University, then, after gaining practical experience as a cub journalist, learned French in Paris and wrote a doctorate on British economics. Schacht’s background was thus both varied and cosmopolitan, and he went on to work with major economists and commentators of the Wilhelmine period such as Hans Delbrück and Gustav Schmoller. He gravitated naturally towards the National Liberal Party, and wrote for the Trade Treaty Association, which brought him into contact with Georg von Siemens, founder of the Deutsche Bank. Through this connection, he entered the real world of finance, and rose rapidly through the ranks. Schacht played a part in the economic management of the German war effort in 1914-18, but he was in no sense a right-wing nationalist, and indeed, if he is to be believed, he eventually separated from his first wife in 1938 because of her radical, pro-Nazi views. Schacht’s allegiance during the Weimar years lay rather with the Democrats.61
Schacht shot to fame towards the end of 1923 through his role as Commissioner for National Currency, a post to which he had been appointed by Hans Luther, at that time Finance Minister. He probably owed this preferment to the extensive connections in financial circles he had built up over the previous few years as director of a succession of major banks. His role in ending the hyperinflation brought him appointment as President of the Reichsbank after the previous incumbent died suddenly on 20 November 1923. Here he cemented his reputation as a financial miracle-worker by successfully maintaining the stability of the Rentenmark and then - to a chorus of disapproval from the far right - playing a key role in the renegotiation of reparations under the Young Plan. When early in 1930 the government renegotiated parts of the Plan that Schacht considered should have been retained, he resigned and went into temporary retirement. This suggested he had now moved to the nationalist far right politically; and indeed by this time, he had left the Democratic Party, though without transferring his allegiance anywhere else. Introduced to Hitler at a dinner-party thrown by Hermann Goring early in 1931, he was favourably impressed by the Nazi Leader. Like many other Establishment figures, he thought Hitler’s radicalism could be tamed by associating him with more conservative and more experienced figures such as himself.62
From Hitler’s point of view, Schacht was simply the best financial manager around. He needed him to provide the money for his rearmament programme, and to ensure that the rapid growth in state expenditure would not create any problems. Schacht did not even have to become a member of the Nazi Party. He later claimed, like many others, that he had accepted a position in the regime in order to prevent anything worse from happening. In fact, however, by this time Schacht’s political views had moved much closer to Hitler’s own. He may not have been a rabble-rousing apostle of violence, but he had certainly become enough of a radical nationalist to approve wholeheartedly of the regime’s primary aim of rearming Germany at maximum speed. By the end of May 1933 he had come up with an ingenious scheme for deficit financing. A Metallurgical Research Institute (Metallurgisches Forschungsinstitut), set up by four big companies with a capital of a million Reichsmarks, was authorized to issue so-called ‘Mefo bills’, which were guaranteed by the state and discounted by the Reichsbank. The bank in turn simply met the bills presented to it by printing banknotes. Fifty per cent of arms purchases by the military were made in these bills between 1934 and 1936. Since the Reichsbank covered the bills by printing money, the notes in circulation increased by 6,000 million by the end of March 1938, by which time about 12,000 million Mefo bills had been spent. Schacht was already worried about the inflationary effects of these measures, and he stopped the issue of Mefo bills in 1937, after which point tax vouchers and non-interest-bearing treasury notes were used instead. In the meantime, gross Reich debt had spiralled almost out of control. But neither Hitler nor his economic managers considered this very important. For deficit financing was only a short-term measure in their view; the debts would be paid by territorial expansion in the near enough future. And besides rapid rearmament, Hitler was busily taking other steps to ensure that this would not only be possible but would also, as he saw it, bring the maximum economic benefit.63
From the outset, Hitler wanted Germany to be economically self-sufficient. In preparation for the coming war, the German economy had to be freed from its dependence on foreign imports. Hitler had seen the effects of the Allied blockade of Germany in the First World War for himself: a malnourished and discontented population; arms production hamstrung by lack of basic raw materials. He did not want this to happen again. ‘Autarky’, the Nazi term for self-sufficiency, was a basic precept of Nazi economics from the early 1920s on. It took up a large part of the economic discussion, such as it was, in Hitler’s politico-autobiographical tract My Struggle. It was intimately connected with another basic idea of Nazi policy, that of the conquest of ‘living-space’ in Eastern Europe, which Hitler believed would secure food supplies for Germany’s urban population. Thus from the outset, Nazi policy focused on withdrawing trade from international markets and reorienting it towards countries, for example in South-eastern Europe, which one day would be part of the Nazi empire. Given the current depressed state of the world economy, Hitler told military leaders in early February 1933, it was pointless trying to boost exports; the only way to a lon
g-term, secure recovery of the German economy was through the conquest of ‘living-space’ in the East, and preparations for this now had to take priority over everything else.64
At home, the Third Reich pursued the objective of autarky in food supplies through the Reich Food Estate, promulgated on 13 September 1933. Headed by the ‘blood-and-soil’ ideologue Richard Walther Darré, now adorned with the title of Reich Farmers’ Leader, this was a characteristic Nazi organization, hierarchically structured on the basis of the leadership principle, with Farmers’ Leaders appointed at every level through to districts and localities. The idea, long advocated by farming lobbyists, was to unite producers, wholesalers, retailers and consumers in a single chain that would eliminate the exploitation of one by another and ensure a fair deal for all. Thus in the fishing industry, for example, fishermen, fish processors, fish wholesalers, fish distributors and fishmongers were organized into a single association run from Berlin, and the same was done for other branches of agriculture, from fruit farmers to grain producers. These elaborate structures were backed up by import agencies to protect the domestic producers of particular products, and enforced by sanctions including hefty fines and even imprisonment for contravention of the regulations. In this way, the whole national production and supply of foodstuffs could be controlled, prices fixed, and quantities and quotas determined in the interests of the producers. In some ways, the Reich Food Estate, which was intended to function as an independent corporation, was seen by Darré as the vehicle through which peasant farmers would strengthen their economic interests and claim their rightful place in the new Germany. It was also an imitation of the institutions of the Corporate State in Fascist Italy, binding together everybody in a particular area of society and the economy in a structure that, theoretically at least, would replace mutual antagonism with mutual co-operation and generate a sense of community through removing real and potential sources of conflict.65
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