The president on January 15, 1934, sent Congress a message stating that “the time has come for a more certain determination of the gold value of the American dollar.” This, he wrote, would “bring some greater degree of stability to foreign exchange rates.”22 That was a U-turn for the Roosevelt Administration, which less than year before had fought stabilized exchange rates at the London Economic Conference. Politicians, though, have never been known as paragons of consistency. An additional reason for the administration’s change in position was that it wanted to lock in the lower dollar value, which was helping American exports. Officials were also fearful that the country’s trading partners would start pushing the price of gold around to get their own competitive trade advantage. Morgenthau asked New York Fed Chairman George Harrison to check with Montagu Norman to see if he were interested in fixing the price of gold. The British were not interested in a long-term set price, but agreed to a temporary one.
Two weeks later, Congress passed, by a huge majority, the Gold Reserve Act, and the following day the president officially fixed the price from $20.67 to $35 an ounce, an increase of 69%. That became the standard world price. It also automatically increased the fixed value of U.S. gold reserves by $2 billion, as it did for other institutions holding bullion. With the U.S. once again on the gold standard, the Federal Reserve also bought and sold the metal at $35 an ounce to other central banks around the world. One result was a massive inflow of gold into the U.S., which was also stimulated by growing war threats in Europe. In the next four years, the value of the gold in the vaults of the New York Federal Reserve tripled, reaching $12 billion.23 As anyone could have predicted, the production of gold around the world also soared, especially in the Soviet Union, where output went up nearly tenfold between 1923 and 1934.24
Jacob Viner, a conservative economist from the University of Chicago and a strong believer in a balanced budget, was Morgenthau’s first economic advisor at the Treasury. The professor, though, didn’t enjoy working in Washington and suggested in June 1934 that Harry Dexter White, a Harvard graduate then teaching at Lawrence College in Wisconsin, join him in Washington to work on monetary and banking legislation. Morgenthau grew to depend greatly on White and trusted his judgments on economic questions, an area where Morgenthau was weak.
White was born in Boston of parents who had emigrated from Lithuania, which, at the time, was part of the Russian empire. After army service in World War I, he studied economics at Stanford before going to Harvard. He joined the Treasury Department staff in June 1934 and in November was named head of the department of research and statistics. The following year he went to Britain, where he met with John Maynard Keynes, who was impressed by him. The time in Europe expanded White’s expertise and established his credentials as Morgenthau’s closest advisor. White rose in rank to become director of monetary research and eventually assistant secretary. Morgenthau’s son, in a family biography, described him as “short-termed and arrogant” as well as “meticulously civil to anyone in a position to afford him access to the powerful.”25
The legality of raising the price of gold was challenged in court in a case that eventually reached the Supreme Court. The New Deal at the time had lost several cases in the court, so the decision was not a sure thing. Finally on February 18, 1935, the Supreme Court sided with the administration largely on legal, rather than economic, grounds, with a 5 to 4 ruling. Top government officials received the news in the White House cabinet room and celebrated for an hour. Morgenthau reported in his diary that Roosevelt was “very natural, laughing and smiling practically all the time.”26
Just as Professor Warren had predicted, the American economy was soon on the mend, although it was a slow recovery. The U.S. gross national product grew from $58.7 billion in 1932, Herbert Hoover’s last year in office, to $83.8 billion in 1936, the last year of Roosevelt’s first term. That’s better than 6% annual growth. During that same period unemployment fell from about 24% to 17%. It was a good start, but more still needed to be done.
Morgenthau bought gold on the international market to keep the price from falling below $35, picking up $385 million in 1933, $1.9 billion in 1935, and $1.1 billion in 1936. Professor Warren wanted him to push the price even higher, but the Treasury Secretary refused largely because it would be too costly to maintain a higher price in world markets. Warren returned to teaching at Cornell, but he had made his mark. As economic historian Liaquat Ahamed has written, “Breaking with the dead hand of the gold standard was the key to economic revival.”27
Chapter Five
HERMANN GÖRING GRABS CONTROL
At the Nazi’s annual September rally in Nuremberg, Hitler liked to announce with great fanfare a big and bold new national goal to mobilize the country for the following year. He wanted to set out a new economic target at the 1936 meeting. In a break from what he had done since taking power three years earlier, Hitler did not look to Hjalmar Schacht to manage the new plan this time. The Führer had grown tired of his top economist’s haranguing lectures and reluctance to follow orders. Hitler instead turned to Hermann Göring, a trusted Alter Kämpfer (Old Fighter), who had been at his side since 1922. Hitler’s move marked the beginning of the end for Hjalmar Horace Greeley Schacht.1
The son of a military officer who also served as governor of Germany’s colony in Southwest Africa, Göring grew up in a small, rundown castle near Nuremberg before attending a military school at age twelve and going on to a military college. An ace pilot in World War I, he shot down twenty-two enemy planes and earned the German air force’s highest honor, the Pour le Mérite award, also known as the Blauer Max (Blue Max). He was the last commander of the Red Baron’s famous squadron. Following the war, Göring bounced around aimlessly in a variety of jobs that drew on his air force experience. He barnstormed as a stunt pilot, worked for the Dutch aircraft company Fokker, flew for a Swedish airline, and sold parachutes. Along the way, he married the Swedish baroness Carin von Kantzow.2
The flying ace eventually wandered into politics, joining the Nazi party only two years after it was founded. For a while he was Hitler’s bodyguard and also headed the Sturmabteilung or SA, the party’s private army. During the aborted Munich putsch in November 1923, Göring was shot in the groin. Two Jewish women gave him emergency first aid, and then his wife, doctor, and a Nazi Storm Trooper hustled him out of Germany before he could be arrested. He recuperated in Innsbruck, Austria, but his wound had become badly infected, and as part of the treatment he received daily morphine shots. That led to a drug addiction that plagued him on and off for the rest of his life. In Sweden in 1925, Göring was hospitalized in a drug withdrawal clinic and later in an asylum for the criminally insane, but he recovered, and two years later returned to Germany during a political amnesty. He went back to selling parachutes, and later spent more time in a Swedish drug clinic.3
Göring eventually returned to Munich, where he elbowed his way into a high position on the list of Nazi candidates for the Reichstag. That gave him one of only twelve Nazi seats. He then moved to Berlin and after years of living in poverty finally had some money in his pocket thanks to his legislative salary and sideline jobs for Lufthansa and Fritz Thyssen, the steel magnate. The smooth-talking and flamboyant Göring was more debonair than the normal Nazi goons and became known as the “salon Nazi.” His aristocratic wife, Carin, was a good hostess. Göring was a dynamic speaker, perhaps the second best in the party after Hitler. His obviously excessive hail-fellow-well-met style was very popular in the early years with the German public.
With Hitler and Göring working in tandem, the Nazi party grew quickly. Göring was leader of the party group in the legislature and was elected Reichstag President in 1932 after a Nazi surge in popularity. When Hitler came to power the following year, Göring received three top posts in the Führer’s first cabinet: Minister Without Portfolio, Prussian Minister of the Interior, and Reich’s Commissioner for Aviation. He remained a pilot at heart, and he spent lavishly to expand the Germa
n air force. During the Night of the Long Knives in June 1934 that purged the party of Ernst Röhm and his followers, Göring and Heinrich Himmler, the head of the SS, directed the operation with brutal efficiency.4
As a young high-flying pilot, he had been slim and athletic, but now his weight ballooned until he was obscenely obese. The U.S. ambassador’s daughter in Berlin in the early 1930s described him as “three times the size of an ordinary man.” Göring collected art, jewelry, rare stones, and precious metals, not because he recognized their beauty or history, but because they symbolized his success. He built an elaborate estate northeast of Berlin called Carinhall after his first wife, who died in October 1931. He stocked it with exotic animals, the bigger the better. He also hunted. Göring personally enriched himself more than any other Third Reich leader. Schacht described Hitler as “immoral,” but called Göring “amoral.”5
Göring’s overriding ambition was to bring Hitler to power, and his long-term objective was to eventually succeed him as Führer. In 1933 when he had his first real taste of power as Prussian Minister of the Interior, he told the police, “Shoot first and inquire afterwards. If you make mistakes, I will protect you.6
He knew nothing of economics or banking, but had an innate sense of power and recognized the importance of Germany’s financial success in achieving the party’s political and military goals. Starting in the spring of 1935, he began challenging Schacht for control of the economy. Unlike the stiff Reichsbank president, Göring played to the crowds. In May of that year, he gave a speech in Hamburg promoting the rearmament program and arguing that the country should sacrifice butter for guns. Said the rotund minister to an adoring crowd, “What does butter do but make us fat?” Those in the hall roared.7
Hitler soon began giving Göring special economic assignments. The first was to settle a dispute between Schacht and the minister of agriculture over the amount of scarce foreign currency or gold that could be spent buying food in the international markets. In March 1936, Göring began calling himself the Inspector-General of the Petroleum Industry, and Hitler named him Fuel Commissar. Schacht complained to Hitler that Nazi leaders were shipping money abroad to finance their own private and party activities despite his strict monetary controls, which forced the central bank to buy currency abroad. Propaganda Minister Joseph Goebbels, for example, was spending wildly. Schacht first learned of this when foreign central banks such as that of the Netherlands started shipping Reichsmark back to Germany and demanding that they be exchanged for convertible currencies or gold. In a rash move that showed the central banker’s political naiveté, Schacht told Hitler that someone else should handle foreign currency issues and suggested Göring. In April 1936, the air minister was named commissioner for foreign exchange, but that later included all raw materials, including gold, although the Reichbank still controlled how the gold was valued. Göring was now steadily expanding his authority into fields that Schacht had previously controlled.
After publishing Mein Kampf in 1925 and dictating the secret second book in 1928, Adolf Hitler rarely put this thoughts or plans down in writing, preferring to give oral orders that left no footprints. On August 26, 1936, however, the Führer called Hermann Göring to his Berghof retreat near Berchtesgaden in the Bavarian Alps and presented him with a thirteen-page memorandum that he had written during the summer. The Nazi leader had by then consolidated his power and was ready to launch a new diplomatic and military offensive. Only the year before, the German Ministry of Defense had been renamed the Ministry of War, a change in nomenclature that foreign diplomats noted with concern. Hitler instructed his secretary to make only three copies of his report: one for himself, one for War Minister General Blomberg, and one for Hermann Göring. The memo outlined the Führer’s plan to go to war no later than 1940 and established a four-year agenda to get Germany ready to fight major conflicts.8
The preface was entitled “The Political Situation.” In it, Hitler dismissed the western democracies because they were “ideologically split,” adding that the real danger to Germany now was Marxism, which “through its victory in Russia has established one of the greatest empires as a base for its future operations.” Hitler acknowledged the importance of gold in his war plans, but then dismissed it: “There is no guarantee during war of realizing the transformation of even gold into raw materials.” The clear implication was that Germany quickly had to become self-sufficient in the production of war goods.
Following that political preface, Hitler’s set out five conclusions. The first four: Germany must achieve economic self-sufficiency; foreign currency must be saved for necessities that can be fulfilled only by imports; Germany must be self-sufficient in fuel within 18 months; and mass production of synthetic rubber had to be achieved in the same time frame. Hitler’s final and most categorical conclusion: “The question of production costs of those raw materials is also of no importance.”
The Führer then ordered that within four years Germany had to reach annual production targets for three vital products that would be needed to wage war: 80,000 tons of rubber, three million tons of petroleum, and thirty million tons of iron ore.
The Führer concluded the report with two direct orders:
• The German military must be ready for war within four years.
• The German economy must be mobilized for war within four years on the same deadline.9
The overall objective of the Four Year Plan was the same as that of the Schachtian system of autarky. The only significant differences were the scope of Hitler’s objectives and the speed with which the goals were to be achieved. The targets were unrealistic and showed his lack of experience in economics and business. That was not unusual since he was regularly unrealistic in dealing with such topics, considering them as matters that could be accomplished purely by German willpower. Hitler knew that Schacht would have insisted that the goals were impossible to reach, which is why the new job was going to Göring. Stolen gold became more important than ever, since bullion could be a stopgap way to finance the ambitious goals and deadlines, and the price of gold was now quite high, thanks to the American price increases.
After meeting with Hitler in Bavaria, Göring returned to Berlin, where he told a few people about his meeting at Berchtesgaden, saying, “Never have I been so impressed by the strength of the Führer, by his logic, and by the boldness of his ideas, which he placed before me at that interview. There will be consternation abroad, but the Führer’s instructions will be steadfastly carried out.”10
Two days later, Göring called a meeting of the cabinet’s executive committee known as the Kleine Ministerrat, which was made up of eleven top officials, including Schacht and Blomberg. Göring read parts of the secret memorandum, but did not hand out copies. He said that war with the Soviet Union was now “unavoidable” and added glowingly that “through the genius of the Führer in a short time seemingly unbelievable things are going to take place.”
On September 2, Hitler called in Schacht and told him that he would be giving a major speech on economics at the upcoming party meeting. He didn’t provide any details, but said he wanted to make sure that Germany would not be dependent on any country for imports.11
Schacht was terrified by the developments, knowing that they would have a major, negative, impact on the economy. Worse still, he had not even been consulted. His immediate reaction was to call General Georg Thomas, the top economist at the War Ministry, and ask him to inform his boss General Blomberg. Schacht also requested that the general warn Hitler about the dangers the plan raised. He figured that the military commander was now the only person who could stop Hitler, adding in a letter to the general, “If we now shout out abroad our decision to make ourselves economically independent, then we cut our own throats.”
Blomberg simply brushed Schacht off, writing, “I realize fully that you are right, Herr Schacht, but you know I am quite convinced that the Führer will find a way out of all our troubles.” The dispirited banker answered, “God grant tha
t your faith is justified.”12
At the Nuremberg Party Festival on September 9, Hitler announced the Four Year Plan. He said bluntly that the goal was to make Germany “wholly independent of other countries in all those materials which German capacity, our chemistry, our machine industry, and our mining industry can produce at home.”13 There was widespread popular and press support for Hitler’s goals. Germans of his generation would never forget the hardships caused by the Allied blockade in the Great War, and the general public was happy to hear that it was not going to be dependent on outsiders. German industrial leaders strongly favored autarky. I.G. Farben had for years wanted to make synthetic fuel in large quantities from the country’s plentiful brown coal. Now it had the chance.14
Hitler commissioned Göring to direct the ambitious project to make Germany ready for war in four years. Schacht was still the president of the Reichsbank, Minister of Economics, and Plenipotentiary for War Economy, but he no longer directed the Nazi economy. That power was now in Göring’s hands, and he was going to take the Schachtian system to its logical conclusion. The central banker who had initially championed the policy suddenly did not agree with it and went public with his criticism even to an American publication. In an article in Foreign Affairs magazine in January 1937, Schacht wrote, “I should like to make perfectly clear that autarky, whether natural or produced artificially, cannot possibly be an idea. It is opposed to the general principles of civilization. Autarky means isolation from the rest of the world.”15
Göring quickly grabbed the steering wheel of the nation’s economy, and was not going to let go. Either directly or indirectly he now set the nation’s economic policy. One of his first steps was to issue an order outlawing price increases. Germany was rapidly moving toward a wartime economy. Schacht still had all his titles, but Göring now really ran the Nazi economy. The banker claimed that after he left the Ministry of Economics, he rarely saw the Führer.16
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