Author: Tomasz Blusiewicz

Economics of the Third Reich and Western Economic Thought

Draft: do not cite

1. Introduction

The swift and successful economic recovery in Germany after the Great Depression was a

phenomenon that was noticed and frequently referred to by observers in Germany and abroad. Among

economists and scholars who were experts in this field, roughly two groups can be distinguished. The

first group argued that the quasi-totalitarian character of the Nazi state rendered any purely economic

analysis inapplicable1. They believed that the strict state controls imposed on the operation of market

mechanisms made the economy virtually invulnerable to the classic problems associated with deficit

finance and rearmament-driven output boom such as inflation, upward wage pressures, consumer

goods shortages or inflexible production structure. This group was generally in majority and especially so

throughout the duration of the Second World War. The second group, which began to question that

position after the war, subscribed to a different view2. Those scholars argued that the means of recovery

applied after 1933 had reached their limits by 1938 and that there were serious challenges ahead of the

German economy such as massive inflationary overhang, capital-deprived private markets or labor and

resources shortages, to mention just a few. The price, wage or mobility controls introduced by the Nazis

were perceived by them as inefficient and unable to prevent the basic macroeconomic mechanisms

1 The major representatives of this group, with numerous caveats, were: Gustav Stolper, Maxine Sweezy, Otto Nathan, Jurgen Kuczynski, Martin Wolfe.2 This group includes scholars such as: Burton Klein, Samuel Lurie, Tim Mason or Adam Tooze. C. W. Guillebaud and Kenyon Poole, more hesitantly, expressed a similar view before the war.

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from kicking in at some point in the near future. They also considered the pre-1939 economy of the

Third Reich as similar enough to Western economies to enable the application of standard economic

tools of analysis of the time.

The binary division presented above is a gross, but useful simplification. I would like to use it as a

preliminary scheme to begin the examination of how Western economists evaluated the performance of

the German economy between 1933 and 1939, how they reacted to numerous economic innovations

introduced by the Nazis and whether these innovations were considered to pose a challenge for the

macroeconomic theory of the time. I argue that both the experimental nature of economic policies in

Germany between 1933 and 1939 and the way it penetrated and influenced Western economic thought

were important moments in its history. I also suggest that the revisionist group of economists developed

a more nuanced and accurate picture and that it facilitated a debate about possible theoretical

implications of the case in question.

There were several features of the Nazi economy that posed theoretical problems for Western

economists which then gave birth to a series of controversies. On the most fundamental level, the

question was whether the Nazi economy could be treated as a market economy at all and whether the

post-1933 means of recovery were Keynesian and if yes - to what extent 3. Depending on the answers,

issues such as, for example, the extent to which deficit finance was a feasible long-term policy or the

effectiveness of anti-inflationary control tended to be among the most frequently debated topics. I

attempt to show that both the unprecedented nature of the Nazi economic policy and its (at least

initially) surprising outcomes, served as a platform to question some of the tenets of neoclassical

economics4, even if they were not sufficient on their own to decisively undermine them.

3 This controversy was to some extent sparked by Keynes himself, who in his preface to the German translation of The General Theory suggested that his policy prescriptions might be implemented more effectively by a totalitarian state than in Anglo-Saxon democracies. Keynes, John M., Allgemeine Theorie der Beschäftigung, des Rinses und des Geldes. (Munich and Leipzig: Duncker and Humblot, 1936).4 In particular, the equilibrium approaches to money neutrality, budget deficit and public debt that were dominant before the Great Depression. More details in Section 2.

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2. Historical Background

The period between the Sudetenland Crisis and the Anschluss of Austria was a period of

international tensions unseen in Europe since The Great War. Some scholars also identified this moment

as a key turning point in the economic history of the Third Reich. They argued that it was the last

moment when macroeconomic stability could have been reestablished in Germany5. Because it did not

happen, the only way for the Nazi leadership to avoid either inflation or radical financial austerity was to

push for a full scale war economy and eventually for war itself. Leaving political considerations aside,

this period also saw an escalation of the conflict between the Reichsbank and Adolf Hitler. The officials

of the Reichsbank claimed that an additional volume of deficit funding and monetary expansion would

certainly result in offsetting an uncontrollable inflationary spiral which would in turn ruin all the progress

won until then6. The Reichsbank lost this struggle, its president Hjalmar Schacht was dismissed and the

Nazi leadership continued the expansionary financial policies on an even greater scale in 19397.

As a matter of fact, the official price index in Germany grew only by 1 percent in 1939 and the

developments predicted by the Reichsbank did not take place8. This situation sparked a debate among

5 For instance: Tim Mason and Richard Overy. Also: The Economist’s Berlin correspondent in his article “Reich Finance and the Reichsbank”, The Economist, 8 July 1939, 15.6 Reichsbank’s memorandum addressed to Hitler from 7 January 1937, drafted by Schacht and Schwerin von Krosigk, pronounced: “The currency is threatened to a critical extent by the reckless policy of expenditure on the part of pubic authorities. The unlimited increase in Government expenditure defeats every attempt to balance the budget, brings the national finances to the verges of bankruptcy despite an immense tightening of the taxation screw, and as a result is ruining the Central Bank and the currency. There exists no recipe, no system of financial or money technique – be they never so ingenious or well thought-out – there is no organization of measure of control sufficiently powerful to check the devastating effects on currency of a policy of unrestricted spending. No Central Bank is capable of maintaining the currency against an inflationist spending policy on the part of the State.” As reprinted in: Hjalmar Schacht, My First Seventy-Six Years; Autobiography (London: Wingate, 1955), 365.Furthermore, Schacht’s anti-inflationary was “widely applauded in Britain” where observers also expressed worries about inflation. See: “Drifting towards Inflation”, The Economist, 29 July 1939, 1.7 Schacht had been trying to resign from his by then figurehead position earlier, “but his reputation as the savior of Germany from inflation [was] a very valuable asset of the Nazi government.” The Economist also predicted that after his dismissal from the Ministry of Economics, “it will seem to foreign financial centers that the last links connecting German finances with sanity and soundness have been broken”.“Dr. Schacht retires”, The Economist, 4 December 1937, 16-17.8 As it was observed by The Economist, all relevant figures nominally indicated that “Germany, in short, is already deep in inflationary finance”, but the price indices did not move.“Germany after Schacht”, The Economist, 28 January, 1939, 2.

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economists: how does one explain the fact that a 22 percent expansion in monetary base in 1938 9, to a

large extent sponsored by the Nazi printing presses coupled with a failure to float bonds on the open

market, did not give birth to any loss in the purchasing power of the Reichsmark? Foreign observers

wrote about a financial miracle “accomplished by means of mysterious conjuring tricks”10 performed by

Schacht and called him a magician11. Some were overawed with Nazi market control measures and

spoke of subjugation of economic laws to the machinery of modern state12. Others interpreted this

policy as a mere delay tactics while the most perceptive ones saw a military conflict looming on the

horizon13. All of them were right to some extent. However, producing a ‘correct’ explanation of the

developments in question is a secondary aim of this essay. The primary goal is to look how the debate as

a whole was both a reflection of contemporaneous trends in economic thought and what role it played

in preparing the ground for the Keynesian ascendency after the war.

It most general terms, the debate about the sustainability of the post-1933 German recovery was

coterminous with the gradual decline of the gold standard system, both as a theory and a practice, up

until its eventual collapse14. Parallel to it was the increasingly more determined attack on the tenets of

traditional financial and monetary practices, which the German case was perceived by some to prove

mistaken. Publication of The General Theory by John Maynard Keynes in 193615 was an important

moment in this context, after which many economists began to ask whether its principles had been

applied in Germany and to what extent. The Great Depression’s impact on economic thought was

revolutionary and the German recovery contributed to this paradigm shift in at least two ways. Within

9 Richard Overy, The Nazi Economic Recovery, 1932-1938, (New York: Cambridge University Press, 1996), 32-33. 10 “Dr. Schacht’s Apologia”, The Economist, 24 April 1937, 18.11 Norbert Muhlen, Schacht: Hitler's Magician, the Life and Loans of Dr. Hjalmar Schacht, (New York: Alliance Book Corporation, 1939).12 The Economist often championed the view that the German economic success was a political rather than economic achievement: “Nazi control extends to all branches of economic life. Strikes are prohibited by legislation and wage rates, for most part, remain frozen at the level of the Depression of 1932.” “Nazi Economic Policy”, The Economist, 31 July, 1937, 5.13 “Germany after Schacht”, The Economist, 28 January, 1939, 2; “Germany’s finances”, The Economist, 26 August 1939, 21-22.14 Hjalmar Schacht, due to the entirely different policies he applied in 1923 and 1933, was a symbolic embodiment of this transition: “Schacht the High Priest of orthodoxy converted into Schacht the Witch Doctor of expansionism.” “Germany after Schacht”, The Economist, 28 January, 1939, 2.15 John Maynard Keynes, The General Theory of Employment, Interest and Money (London: Macmillan, 1936).

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the Keynesian strand of the debate, it was sometimes seen as a more radical yet commensurate method

of ‘priming-the-pump’ and state-activated stimulus that helped to combat the slump. Secondly, it also

played a role in reshaping the way that economists thought about state planning and market control,

which then moved to the center of public discourse in Europe after the war. In both ways, the Nazi

experiment was another element that in its own convoluted way contributed to the then seemingly

ultimate eclipse of classical liberalism and laissez-faireism, both in its liberal-democratic political branch

and the original, free-market oriented economic core.

3. The initial reactions

The conditions of both access to reliable information and expression of ideas in Germany were

gradually worsening in the 1930s. However, they had never reached anything similar to the information

blockade practiced in the Soviet Union at the time. In fact, it was still possible for both domestic and

foreign scholars to get a sense of the direction in which the economy was heading and to publish their

findings either at home (if they were not explicitly anti-state) or abroad. There were regular statistical

publications issued by the Reich’s Statistical Office or by the Institut fur Konjunkturforschung as well as

the Reports of the Reichskreditgessellschaft. The academic environment and various professional

periodicals were functioning alongside state propaganda efforts. Doubts about the credibility of official

statistics and about the independence of respective institutions began to proliferate especially after the

introduction of the Four Year Plan in 1936, but in general the deformative impact of the Nazi state on

information quality and accessibility should not be exaggerated, nor should it be completely neglected.

Writing in December 1938, the University of Cambridge economist C.W. Guillebaud went further. He

claimed that “the deliberate manipulation of official statistics would be an administrative impossibility in

Germany, where the whole economic system is based on the existence of accurate quantitative data.” 16

16 C. W. Guillebaud, The Economic Recovery of Germany from 1933 to the Incorporation of Austria in March 1938, (London: Macmillan, 1939), Foreword, VI.

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With the advantage of hindsight, such a view might seem an exaggeration. Maxine Sweezy, an American

economist writing in Cambridge for the Harvard Studies in Monopoly and Competition, was more careful

and spoke about “fairly reliable [statistics] if used carefully and critically.” 17 Nonetheless, the mere fact

that a British economist was inclined to think in such terms in 1938 is indicative that the problem of

sources and information in general was not a significant one for contemporary authors, not mentioning

those who wrote after the war.

Guillebaud’s study The Economic Recovery of Germany: From 1933 to the Incorporation of Austria in

March 1938 was actually the first in-depth analysis that appeared in Western literature. The author was

under a strong impression of the post-1933 progress and underscored “the contrast […] between the

economic stability and comparative well-being of Germany, and the poverty of Russia, or the fluctuation

and unemployment of Britain, France and the United States.”18 Guillebaud was also optimistic about the

prospect of the German economy in 1938: “… the hope of still better times to come can be held up

before the eyes of the German worker with a considerable measure of probability that it will be

realized.”19 On a theoretical level, he pointed to an article by Richard F. Kahn in the Economic Journal in

193120 as an anticipation of the deficit financing mechanism subsequently applied by the Nazis:

“…the creation of money cannot produce an inflationary rise in the general level of prices, with all its attendant evils, so long as there is an abundant amount of idle resources and unused productive capacity available. […] It is true that there are two conditions which must be fulfilled in order that this general proposition may be valid: there must be substantial stability of the level of efficiency wages, and the process of money creation must not be accompanied by the export of capital on a large scale, i.e. by a flight from currency. But in Germany both these conditions have in fact been satisfied as a result of direct state intervention.”21

At the same time, Guillebaud dismissed the importance of German economic thought behind the birth

of the new system. In fact, he doubted any purposeful reliance of National Socialism on economic theory

17 Maxine Y. Sweezy, The Structure of the Nazi Economy, (Cambridge: Harvard University Press, 1941), 6.18 Guillebaud, The Economic Recovery of Germany from 1933 to the Incorporation of Austria in March 1938, 269. 19 Ibid., 269.20 R. F. Kahn, "The Relation of Home Investment to Unemployment," The Economic Journal 41, no. 162 (June, 1931), pp. 173-198.21 Guillebaud, The Economic Recovery of Germany from 1933 to the Incorporation of Austria in March 1938, 215.

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in general22. “Since the appearance of Keynes’ General Theory, many Germans have tried to rationalize

their official policy by reference to his theories. Independently (in whole or part) of Mr. Keynes, German

economic writers, such as Richter Althschaffer, Nahmer, Gruning, Fohl and others, have developed

theories on somewhat similar lines.”23 However, “there is no evidence to show that the original policy

was influenced at all by abstract theories.”24 Guillebaud pointed to Gottfried Feder as the only

“theoretician” who might have in some way influenced Nazi policies, but his leftist agenda was

sidetracked and remained largely irrelevant after the Machtergreifung of 1933.

Guillebaud was aware of the opinion shared by many observers that “the pace [of recovery] is

too hot to last, and Germany is on the verge of a catastrophic collapse.”25 He refrained from a clear

verdict and admitted that “many […] problems are new in the sense that there is no precedent or

historical analogy in the past which can serve as a guide to current policy.”26 Nonetheless, he believed

that certain macroeconomic laws could not be held in abeyance indefinitely. There were two inevitable

outcomes of excessive deficit financing and which one of them would follow was a matter of policy. “If

the volume of investment outruns the amount of saving which the public as a whole can be induced […]

then either an income and price inflation must result, or, if prices and wages are kept down by state

intervention, scarcities must ensue leading to the formation of queues and eventual rationing of

consumption.”27 Therefore, if inflation is avoided and the system of price and wage control works as

efficiently as before, shortages must follow due to full employment, high aggregate purchasing power

and the shift to war economy at the expense of consumer economy. In the final analysis however, the

Cambridge economist remained optimistic: “So far as the reasonably near future is concerned, and

22 He was more than justified in his skepticism. Hitler reportedly remarked on one occasion: “the basic feature of our economic theory is that we have no theory at all.” Quoted in: Hans-Joachim Braun, The German Economy in the Twentieth Century (New York: Routledge, 1990), 78.23 Guillebaud, The Economic Recovery of Germany from 1933 to the Incorporation of Austria in March 1938, 215.24 Ibid., 215.25 Ibid., 267.26 Ibid., 267.27 Ibid., 271.

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assuming the absence of war, it would seem more probable that the German economy will grow

stronger than that it will collapse or decline.”28

Several months later, Harvard University Press published another in-depth study entitled

German Financial Policies 1932-1939 by Kenyon E. Poole, Professor of Economics at Brown University.

Poole focused explicitly on investigating the “mechanisms involved in achieving full employment

through state spending” and their implications to throw light on the hitherto general debate about “the

relative virtues of inflationary and deflationary measures as a means of attacking the unemployment

problem.”29 However, accurate knowledge about the financial part of the equation was not where the

problem was: “the important thing to ask is not whether the volume of money (M plus M’) is greater,

but rather what is the new relation between MV plus M’V’ and the volume of goods coming to

market.”30 What was much difficult to establish than the scale of monetary expansion was both how the

new liquidity affected the velocity of money and to what sectors of the real economy it was channeled.

To answer these questions, it was necessary to look at the state mechanism of control of capital

accumulation and to what usage that capital was put. In other words, to answer the question about the

possibility of inflation, reliance on economic theory alone was not sufficient. There was no question that

the means of deficit finance applied were inflationary in principle, but it was impossible to determine

when and how strongly this fact was going to manifest itself. “In our discussion of prices we shall see

that only with the greatest difficulty, and with limited success, was the urge to higher prices resisted by

means of laws and decrees.”31 Poole’s conclusion was thus that it was the tenuous grip of state control

that held inflation in check rather than “any newly discovered deviation from the usual phenomena of a

normal recovery”32.

28 Ibid., 27. A similar view was at the time expressed by The Economist as well: “Judged by the results to date, [the German recovery] has been a remarkably successful policy.” In: “Germany after Schacht”, The Economist, 28 January, 1939, 2.29 Kenyon Edwards Poole, German Financial Policies, 1932-1939, (Cambridge: Harvard University Press, 1939), Preface.30 Ibid., 80.31 Ibid., 80.32 Ibid., 81.

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Poole was of an opinion that the effectiveness of price controls, among which wage freeze and

limitations on the volume of consumer credit were of major importance, was a matter of confidence

rather than either economic theory or state policy. He evoked the experience of the 1923 hyperinflation

to explain the underlying logic of that phenomenon.

“For with the present German psychology money in circulation is an important indicator of the danger of inflation. It is for this reason that official commentators have minimized the importance of whatever increase in Reichsbank notes has taken place, pointing out that some rise in money in circulation is to be expected with reviving business activity.33

The success of price control measures was rooted not merely in the allocation of the newly produced

liquidity in the state-controlled armament sector and not in the potentially inflationary consumer sector,

but in the creation of confidence among all market participants that the Mark was not going to lose its

value no matter what happened.

In the final analysis, Poole believed that the scope of the Nazi market-manipulative strategy was

constrained in some way by economic laws, in which he differed from later wartime authors. That

strategy was extremely effective until “the rise in money in circulation had not reached sufficiently great

proportions to furnish a basis for fears concentrating the possibility of currency inflation. The

tremendous rise in that year [1938] cannot, however, be ignored. This […] constitutes a radical change in

the situation.”34 The problem for an economist was to predict when that constraint was going to be

reached. Furthermore, because there were so many non-economic, or in Poole’s words – extraneous,

factors at play, he concluded that “we are likely to remain for some time in the dark with respect to the

precise worth of public works as an instrument for stimulating a continuing form a private investment; a

multitude of extraneous factors prevent the attainment of laboratory conditions.”35

4. The wartime consensus

33 Ibid., 87.34 Ibid., 164.35 Ibid., 260.

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German Economy 1870-1940 was the first comprehensive study of the German / Nazi economic

history which appeared after the outbreak of war. It was written by an Austrian economist Gustav

Stolper who immigrated to the US in the 1930s and published his work there. The book can be

summarized as a tale of ascendancy of the German state over what Goering called “the so-called free

economic forces”36 with the grand finale in 1933. Stolper emphasized the ideological distinction

between ‘creative’ and ‘rapacious’ capital: schaffendes and raffendes Kapital. “Creative capital is

essentially industrial capital; rapacious capital is finance and trade capital. The rapacious capital, so the

National Socialist saga goes, has conquered all the power in modern society and subjected the people to

interest slavery.”37 This distinction was used by the Nazis to argue that the employment of new liquidity

was overwhelmingly productive in nature; the increased output will more than compensate for it and

therefore there was no source from which inflation could emerge. According to Stolper, this distinction

was merely a rhetoric device used to disguise the real cause behind keeping inflation in check – the

power of state control.

The question of the possibility of inflation was not an economic one from Stolper’s perspective.

“Year after year passed and no sign of immediate financial weakness or imminent threat of uncontrolled

inflation became visible. Was it a miracle? Were the men who devised and conducted this policy

magicians, as they were depicted in so many newspaper and magazine articles?” 38 These articles were,

he held, propaganda pieces in support of the mechanism of confidence boosting that Kenyon Poole

dedicated so much attention in his study. “As a matter of fact, there is nothing miraculous about the

German achievements of the last five years as far as economics and finance and concerned, and there is

not even much essentially new in the chief features of this policy.”39 Stolper pointed to the multiple

36 Martin Wolfe, "The Development of Nazi Monetary Policy," The Journal of Economic History 15, no. 4 (Dec., 1955), 29.37 Gustav Stolper, German Economy, 1870-1940 : Issues and Trends (New York: Reynal & Hitchcock, 1940), 236.38 Ibid., 256.39 Ibid., 256.

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precedents of price and wage control measures used in Imperial Germany and during World War I that

had paved the way for the Nazis.

A similar perspective is developed by H.W. Singer in his review of German economic periodicals.

Singer concluded that price controls were stressed like no other aspect of the German war economy. For

example, the Price Commissioner Joseph Wagner attributed “the German collapse in 1918 to insufficient

price control and he “admonishe[d] everybody to avoid making the same mistake twice” 40. Major-

General Thomas, Chief of the Economic Department of the German General Staff, criticized the “concept

of the 1914-18 War [which used] the price offered as an inducement to increased efficiency”41.

In the final analysis, Stolper saw no economic limits to the Nazi version of totalitarianism. He

thought that only the leadership’s own mistakes could bring down the entire system, a system which

“can be maintained indefinitely provided only the Government refrains from exaggerating its adventure

and the people remain ready to endure a complete deprivation of individual liberty.”42

In 1941, another comprehensive study of the Nazi economy was published by Harvard University

Press. The Structure of the Nazi Economy by Maxine Sweezy, a young economist at Vassar College,

appeared in the fourth volume of Harvard Studies in Monopoly and Competition. Sweezy’s argument is

perhaps the most radical voice from the group of scholars who believed that the German economy after

1933 had nothing to do with a market economy and that it was fully run by the state. In his introductory

discussion of the balance between aggregate consumption and savings in the Nazi economy, Sweezy

underlined “the specific totalitarian character of the German recovery, for the policy of abnormally low

wages could not have been carried through in a modern democratic country.”43 The price-stop decree of

November 1936, which prohibited all increases above the level of October 17, 1936 was identified by

him as the turning point after which any application of theoretical tools of economic analysis was futile.

40 H. W. Singer, "The German War Economy in the Light of German Economic Periodicals," The Economic Journal, no. 200 (December, 1940), 541.41 Ibid., 541.42 Stolper, German Economy, 1870-1940 : Issues and Trends, 271.43 Maxine Y. Sweezy, The Structure of the Nazi Economy, 20.

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In fact, a conscious rejection of economic theory as such was one of the tenets of Nazi policy.

“Economic literature in German periodicals is fairly unanimous in praising price policy for being realistic

rather than for attempting to achieve theoretical goals set up by equilibrium theory.”44 German

economists were in agreement that “[f]ree competition and price as a principle of organizing the

economy is finished, the principle of ‘performance competition’ should be set up as a basis of price

regulation [and] efforts to control prices and economic life should be made as flexible as possible.” 45 The

rejection of the equilibrium [between output, prices and wages] theory was perceived by some German

and foreign observers not only as a policy guide, but also a theoretical challenge to it. Was not the

German economy in 1938 and 1939 proof that certain outcomes predicted as impossible or

unsustainable by that theory were in fact achievable? Sweezy did not subscribe to this view. He wrote

that, while “increased note circulation has been looked upon by some investigators as a sure sign of an

unhealthy financial situation”, in fact the “expansion of note circulation ceases to have much

significance when prices and wages are regulated, the government has a monopoly of the capital

market, and propaganda has created considerable enthusiasm on the part of individual savers for

government loans.”46 Such a development, Sweezy was convinced, had no theoretical limits and

shortages of resources and consumption goods could be avoided by means of regimentation.

A similar view, with several caveats, was expressed by Otto Nathan in an article entitled Nazi

War Finance and Banking. Nathan began his analysis from the premise that all governments (at the

time) to some degree interfered with the price structure within a given economy and that prices

themselves could be understood as a form of indirect regulation47. What happened in Germany was a

replacement of the mechanism of indirect, parametric control with a direct, command one. In

consequence, “an increase in the public debt or changes in the balance sheets of banks have lost much

44 Ibid., 103.45 Ibid., 103.46 Ibid., 138.47 Otto Nathan, Nazi War Finance and Banking (New York: National Bureau of Economic Research, 1944), 3-4.

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of the importance usually attached to them. While they still register performances in the economy, they

no longer operated as major barometers and guides to the government.” 48 The predictions of the

imminent collapse of the Nazi economy made by some contemporaries, either in 1938/39 or in 1944,

were a result of misunderstanding the radically different nature of that economy. Nonetheless, Nathan

did believe that the case in question had important theoretical implications and that the Nazi success in

preventing inflation “indicates that the money and credit system of a complex modern economy can be

subjected to much greater strains than has hitherto been generally believed.”49

5. Postwar revisionism

The general view on the totalitarian (and hence inaccessible to economic theory) nature of the

Nazi economy shared by Stolper, Sweezy and Nathan emerges as the dominant position in

historiography and economic literature during the Second World War50. The first voices that began to

question the general outlook of the majority of the economists discussed above and represented these

authors appeared after the war. Two factors were instrumental in facilitating this shift. The first one was

the end of the war itself. The Nazi economy became, so to speak, an immobile target which could be

studied without taking into consideration the various limiting wartime conditions: support of the Allied

cause, ideological bias, emotional involvement in the war effort, etc. The second and the more direct

48 Ibid., 66.49 Ibid., 40.50 One of the most vivid summaries of this view has been expressed by Jürgen Kuczynski, a German Marxist economist who emigrated to the US in 1936, in his wartime book Germany: Economic and Labor Conditions under Fascism: “From the first day of Fascist government, German financial institutions, the big and small banks, the savings banks, the Reichsbank, the budget, even the social insurance system, were used as a means of increasing the war effort. Their dual task was to help finance the production of armaments, and the ‘de-finance’ consumption: to take money away from butter and direct it toward the guns. […] The less money people have, the less they can buy; the less is needed from the consumption goods and industries, and the more becomes available for the Fascists war effort. If people spend money on a ‘people’s automobile’ not yet produced, they cannot buy food or clothing; if they spend their money on railway fares, travelling with the Strength through Joy organization, they cannot spend it on consumption goods; if people put their money in the savings banks and of one makes it difficult for them to take the money out again, then they cannot spend it on themselves.”Jürgen Kuczynski, Germany: Economic and Labour Conditions Under Fascism, (New York: International Publishers, 1945), 82.

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factor was the publication by the US Strategic Bombing Survey of a report entitled The Effects of

Strategic Bombing on the German Economy in 194551. The report was not concerned with military issues

exclusively as the title suggests; it was a detailed study of the German war economy as well. Its general

conclusions can be summarized as follows. The mobilization of all national resources for military

purposes was not nearly as extensive as it had been thought in the West. If there was a total war

economy in Germany, one could speak of it only after the summer of 1944 when it was already too late

to make a difference. While this interpretation is, with variations, accepted by a vast majority of

historians today, it is easy to imagine why it was a surprise for contemporaries and how it flew in the

face of the ominous image of the superefficient German war machinery that surpassed anything that a

democracy could hope to muster.

Nicholas Kaldor was the first scholar who took the findings of the US Strategic Bombing Survey

seriously. Already in 1945, he wrote an article in which he called for a reinterpretation of the Nazi war

effort. The Cambridge economist focused mainly on finding out exactly how much of economic potential

was devoted to production of the war materiel, but he also offered several more general insights. He

argued that the aggregate real consumption in Germany was not restricted until 1942, “and even then it

remained a higher proportion of the pre-war level than that of Britain, until 1944” 52. In explicit

opposition to some of the authors discussed earlier, Kaldor wrote: “It would be a mistake to conclude

from this analysis that the German war economy provides any evidence of the inefficiency of ‘planned’

or ‘controlled’ economies. Its failures were due to the absence of planning and coordinated control, and

not to any abandonment of a laissez-faire system.”53 It follows that the Reich’s economy was neither

totalitarian nor efficient. In fact it had at least some elements of a laissez-faire system, at least according

to Kaldor. A parallel interpretation was put forward by John Kenneth Galbraith, who wrote in 1945 in

51 Bombing Survey United States Strategic, The Effects of Strategic Bombing on the German War Economy, (Washington: Overall Economic Effects Division, 1945).52 Nicholas Kaldor, "The German War Economy," The Review of Economic Studies 13, no. 1 (1945), 44.53 Ibid., 52.

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Fortune about “the inherent inefficiencies of dictatorship” and the failure to mobilize the German

economy in contrast to the US economy – “the inherent efficiencies of freedom“ 54. Unfortunately, this

path of analysis was not pursued further by Kaldor and Galbraith, probably due to lack of sufficient

evidence, but it was a harbinger of the future challenges to the hitherto dominant orthodoxy.

The argument that was merely hinted at by Kaldor was picked up by Burton Klein. Klein was a

graduate student at Harvard during and immediately after the war and he briefly worked with the US

Strategic Bombing Survey and John Kenneth Galbraith, who was also involved in the project. In 1948, he

published an article in The American Economic Review entitled Germany’s Preparation for War: a Re-

examination. There were two theses that Klein sought to revisit. The first one concerned the issue of

deficit financing of the post-1933 recovery and its novel character. Klein argued that the scale of deficit

finance that took place in Germany in 1933 and 1939 was greatly exaggerated and that large scale public

borrowing was not undertaken at all. “When the recent wartime experience of the United States and

Britain is considered, the German methods of finance appear extremely conservative in comparison. […]

[A]lthough total government expenditures increased from 15 billion RM in 1933 to 39 billion RM in

1938, more than four-fifths of the funds expended during this period was raised by taxation.”55 In the

United States, for instance, one-half of government expenditures were deficit financed between 1932

and 1936. “The 29 billion RM increase in the deficit offered no problem since national income had

increased by 75 per cent and tax receipts had doubled.”56 Klein’s thesis was in direct opposition to the

vast majority of earlier writings. Not only were the Nazi methods of deficit financing not unprecedented,

but they were actually meager compared to similar policies pursued in the United States.

54 John K. Galbraith, “German Economy was Badly Run.” Fortune, December 1945.55 Burton Klein, "Germany's Preparation for War: A Re-Examination", The American Economic Review , 38, no. 1 (March, 1948), 60-61.56 Ibid., 61.

15

The second strand of Klein’s argument attacked the notion that the Nazi leadership in principle

rejected theoretical economic considerations in their policy decisions. In fact, he turned this argument

on its head and claimed that:

The explanation of Germany's failure to prepare on a much larger scale is essentially a financial one. The German leaders simply did not at this time understand the elementary economic lesson that ‘a nation can finance everything which can be produced.’ As will be shown, financing a higher level of war expenditures by raising already high tax rates was not regarded as expedient. And procuring additional funds by borrowing, would, it was thought, destroy confidence in the currency and lead to inflation. This fear of inflation, as we have seen, weighed heavily in the policy decisions of the whole decade: it was an important consideration in the decision of the Bruning government against devaluation and coincidentally in the adoption of the policy of forced deflation; it led to the retention of this policy after the inflationary argument was, from an economic standpoint, no longer valid; it prevented the Nazis from reducing taxes when their primary aim was a speedy recovery. It is not surprising, therefore, that financial considerations impeded rearmament.57

There are two aspects of Klein’s thesis that are worth emphasizing. The first is his conviction that the

wartime mobilization experience, in all combatant countries, shows that there is no theoretical

counterargument to the possibility of national pre-financing of “everything which can be produced” 58.

One could, and many economists did, disagree with Klein’s radical postulate, but what is interesting is

the fact that a Harvard educated economist could think this way in 1948. Twenty years earlier, before

the Great Depression and under the firm grip of the gold standard and conservative tenants of finance,

such a thesis would have been no less than unthinkable.

The second is the fact that Klein called for a reevaluation of the role that the fear of inflation

played in strategic decision making and the strong evidence he put forward in its support. In a book that

grew out of his article and research, Germany Economic Preparations for War (1959), he came to a

conclusion that the concept of lightning war (Blitzkrieg) - a short, successful offensive which required

only limited economic mobilization in contrast to the sacrifices required by a total war - had to be

understood in the light of financial considerations59. In other words, it was precisely because the Nazis

57 Burton Klein, Germany's Preparation for War: A Re-Examination, 73.58 This phrase (“a nation can finance everything which can be produced”) was used by Otto Nathan in his essay from 1944. He argued that the Nazi leadership did believe in such a possibility.59 Burton H. Klein, Germany's Economic Preparations for War, (Cambridge: Harvard University Press, 1959), 24-28.

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were hesitant to reject the conservative tenets of finance that Schacht so staunchly defended, the

Blitzkrieg doctrine was developed as a realistic means to secure the Reich’s international ambitions. In

support of this claim, Klein pointed to the order issued by Hitler in November 1938, at the height of the

conflict with the Reichsbank over the scope of monetary expansion, telling the Wehrmacht to curtail its

unnecessary expenditures. Richard Overy argued that because of this decision, the amount of the most

urgent war supplies like munitions or explosives available was enough only for a month’s fighting and

was a key factor which prevented Germany from attacking France in November 1939 as had been

planned.60 Leaving the military aspect aside, it is worth mentioning that the economists’ debate about

the problems of deficit finance and inflation in the Third Reich had many other non-theoretical

implications as well; in fact, it soon became the focal point of contention in the well-known and still

ongoing debate about the origins of the Second World War61.

Klein’s argument was taken over and pushed to its logical extreme by the British historian

Timothy Mason, first in a series of essays in the 1960s and then in two books in the 1970s: The Working

Class and the National Community (1975) and Social Policy in the Third Reich (1977). His arguments were

multilayered and were subsequently modified, but they can be summarized as follows. Mason thought

that National Socialism had never been widely popular among the German workers and that the Nazi

grip on power relied on maintaining a high standard of living, employment and wages security and

various privileges as a means of maintaining social peace and quiet. As the economy was on the verge of

overheating in 1938 and 1939, such a policy could no longer be pursued. The only way of maintaining

the rearmament-driven output expansion and avoiding the financial and employment contraction was

to introduce even more strict means of social and economic control, including mobility and job choice

restrictions - eventually introduced to full extent in September 1939. However, such measures required

60 Richard Overy, War and Economy in the Third Reich (Oxford : Oxford University Press, 1994), 216.61 For example, see: Gordon Martel, The Origins of the Second World War Reconsidered : A.J.P. Taylor and the Historians, (New York: Routledge, 1999).

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a justification and only war was a sufficiently serious pretext. Thus Mason reenacted a version of a social

imperialist argument that was already in place as one of the interpretations of the origins of the First

World War. Flucht nach vorn, as the phrase was coined, was a way to address domestic problems and

these domestic problems were rooted in the unsustainable pace with which the recovery had been

achieved after 1933. Mason’s work was primarily concerned with social and political issues rather than

with economics, but he was sympathetic to Schacht’s predictions of imminent inflation in 1939 and he

provided new evidence to support this point of view. He concluded that: “The Third Reich was the first

modern state to face many new problems raised by permanent full employment and was totally unfitted

to solve them.”62

5. Keynesian or totalitarian? Conclusion

A big question that was repeatedly posed from varying perspectives was whether the post-1933

recovery in Germany was an example of Keynesian policy or not. Despite some nominal similarities

expressed in such indicators as the growing share of public sector in GNP or the marked preference for

employment rather than price stability, most economists pointed out that it was oriented toward

industrial expansion and militarization and not toward boosting consumer demand as Keynes

prescribed. This orientation was used to explain the rather disappointing value of the Keynesian

multiplier of spending to income, which was estimate to be 1.5: 32.6 billion RM marks spent and 52.7

billion RM of income63. In Joseph Schumpeter’s analysis, such an outcome was a result of the

government’s move away from additive spending - with the multiplier effect expected in consequence

of higher demand - to substitutive spending where the resources where diverted away from the

consumer sector and invested in projects where little or no multiplier effect was to be achieved like

62 Timothy W. Mason, Nazism, Fascism and the Working Class (Cambridge: Cambridge University Press, 1995), 49.63 René Erbe, Die Nationalsozialistische Wirtschaftspolitik 1933-1939 Im Lichte Der Modernen Theorie, (Zurich: Polygraphischer Verlag, 1958), 132.

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military equipment.64 This fact was also used to explain why inflationary pressures were so slow to

develop. According to Arthur Schweitzer, the Nazi leadership “deliberately created ‘un-Keynesian’

conditions”:

The reduction of interest rates was a result of direct actions on the part of the state and was not significantly related to the liquidity-creating effect of the new money. The rise in consumer purchasing power was deliberately retarded by pegging rates at the level of depression. […] Neither Schacht nor the generals were interested in seeing the flow of new money was used to finance an increased production of consumer goods.” 65

It is indicative that, even though the general consensus was that the Nazi policies were non- or un-

Keynesian, this frame of reference was so ubiquitous in the discussion of the topic already in the 1930s.

As mentioned by Guillebaud, since the appearance of Keynes’ General Theory, even “the Germans have

tried to rationalize their official policy by reference to his theories”66.

Some economists, however, remained unconvinced that the Nazi economic experiment was in

any sense worth studying other than as an example of a path than should not be followed under any

circumstances. Such a position was, for example, voiced by Martin Wolfe in an article which appeared in

The Journal of Economic History in 1955. Wolfe was concerned with the superficial similarity of the Nazi

economic system with what one normally calls a free market democracy. Especially the presence of

monetary institutions such as the Reichsbank “is one of the reasons fascism still is viewed by some as ‘a

controlled and managed capitalism’.”67 With the immense destruction and loss of life still so painfully

visible in the European landscape in the 1950s, one could rest assured that both entire nations and

specialists in the field would be able to see through this misleading surface of parallels. However, Wolfe

was worried and predicted “that in some future employment crisis the argument that fascist monetary

policy ‘worked’ might prove attractive to persons who do not understand what it was or what it

signified.”68 How one could act against such a development? Wolfe offered an interesting insight that

64 Joseph Alois Schumpeter, Business Cycles : A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, (New York: McGraw-Hill Book Company, 1939).65 Arthur Schweitzer, Big Business in the Third Reich (Bloomington: Indiana University Press, 1964), 459.66 Guillebaud, The Economic Recovery of Germany from 1933 to the Incorporation of Austria in March 1938, 215.67 Wolfe, The Development of Nazi Monetary Policy, 401.68 Ibid., 401.

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was overlooked by many earlier authors. He argued that the way the Nazis set up the monetary system

in the Third Reich “proves that it was precisely here that they were attacking the very heart of

capitalism. The main ingredients of Nazi monetary policy were consistently directed toward stripping

money of its ‘Mephistophelian tyranny’ […] to make it a passive instrument.” 69 By drawing a connection

between Nazi populist anti-finance ideology and their actual policy, Wolfe put forward a

counterargument against some Marxist thinkers who held that even if the Nazis paid lip service to

popular anti-banker and anti-finance sentiments, they were in alliance with both bankers and

industrialists, an alliance which eventually led to the ultimate stage of capitalism – imperialistic war70.

The influence of the Nazi economic experiment, its early successes and later disastrous

consequences, on Western economic thought cannot be in any sense measured or captured in precise

terms. Nonetheless, the vagueness of concepts and causal relationships in question should not prevent

one from noticing the intensified commotion among Western economists in their attempts to

understand what was actually happening in the Third Reich. It is helpful, even if it is a simplification, to

think of this influence in three stages. A typical initial reaction, particularly pronounced in Guillebaud’s

Economic Recovery of Germany, involved a mixture of surprise and quiet admiration. Especially in Britain

and France, there was a tendency to look at the German case as a reference in explaining what had been

missed in the recovery packages applied in those countries. Next, after the outbreak of hostilities and

possibility under the impact of Axis military advances, economists began to speak of a totalitarian

system that managed to completely subjugate the free forces of economic activity for the sake of a

super-efficient war machine. The best example of this trend is Maxine Sweezy’s Structure of the Nazi

Economy. Finally, a more nuanced approach began to prevail after the challenge posed by the findings of

US Bombings Survey and Klein’s argument in his 1948 article. This shift facilitated the opportunity for

69 Ibid., 401.70 For example, see: David Abraham, The Collapse of the Weimar Republic : Political Economy and Crisis, (New York: Holmes & Meier, 1986).Also the writings of East Germans historians such as Eberhard Czichon and Dietrich Eichholtz.

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such economists as, for example, Lionel Robbins71 to ponder how the post-Depression recovery and

wartime total mobilization experience revisited several tenets of the neoclassical theory and what new

perspectives and alleys of research were opened as a result.

The character of the influence of the Nazi economics on Western Economic Thought is perhaps best

expressed by the word ‘challenge’ rather than such terms as ‘lesson’, ‘refutation’ or ‘case study’. This

challenge is represented by the contentious debate about the degree of sustainability of the deficit-

finance driven fiscal expansion and in the analysis of Schacht’s and Reichsbanks’ inflation warnings.

Again, three stages can be distinguished here: ‘miracle’, ‘total-control’ and ‘middle ground’ positions.

While the initial view that the way the recovery was financed and sustained for such a long period of

time proved that the traditional precepts of sound finance (and money neutrality) were incorrect was

not voiced outside of Germany by serious scholars, the subsequent view that the avoidance of inflation

was merely a function of strict state controls has also been proven to be mistaken. Scholars such as

Klein, Mason and Adam Tooze72 have subsequently shown that there were massive inflationary tensions

within the economy and that frantic pace of rearmament after 1938 and the outbreak of war in 1939

can be understood as a way to address them. This historical debate was parallel to a key economic

implication which had been initially merely hinted at by some economists (e.g. Guillebaud, see page 7)

and which became more pronounced with the decline and collapse of the Soviet Union. Namely, even

the most radical measures of inflation control such as permanently fixed prices have their limitations in

the long-run and they will eventually produce a distorted structure of incentives that can lead to various

imbalances such as consumer shortages. Alongside this realization, nontrivial weight began to be

attached to psychological aspects of collective trust in the value of currency, which sometimes can be

more decisive, as Kenyon Poole argued, than the predictions of the quantitative theory of money. This

71 See: Lionel Robbins, The Economic Problem in Peace and War (London: Macmillan, 1947), 33-34.72 J. A. Tooze, The Wages of Destruction : The Making and Breaking of the Nazi Economy (London: Allen Lane, 2006).

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was also a novel development and can be interpreted as a harbinger of the future ascent of behavioral

economics.

It is undeniable that many features of the Nazi economy rendered it so unique that they prohibit

drawing more universal implications for economic theory. It is also undeniable that the level of

individual and institutional economic freedom, gradually diminishing in the 1930s, present in that

economy, makes it unthinkable to look for any kind of hypothetical emulation in a democratic society.

Nonetheless, the Nazi economic experiment in a pervert, but strong sense fits into the framework of the

large scale trends and shifts in economic thought of the twentieth century. Even though most thinkers,

including Schumpeter, described the post-1933 German recovery as un-Keynesian, the very fact that

they thought that it was a good frame of reference signifies of the kind of intellectual climate in the

post-Depression world and the role that Germany played in shaping its discourse. This climate of

experimentation was even more pronounced in the debates about the optimal level of state

intervention and planning after the war. As it was expressed by Eric Hobsbawm: The Second World War

was a “war of reformers, partly because not even the most confident capitalist power could hope to win

a long war without abandoning ‘business as usual’ […]”73 attitude. One can only wonder why the German

contribution to the ultimate defeat of that attitude had to express itself in the horrific way it ultimately

did.

73 Eric J. Hobsbawm, The Age of Extremes : A History of the World, 1914-1991, (New York: Vintage Books, 1996), 169.

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Bibliography

Secondary Literature

Abraham, David. The Collapse of the Weimar Republic : Political Economy and Crisis. New York: Holmes & Meier, 1986.

Braun, Hans-Joachim. The German Economy in the Twentieth Century. New York: Routledge, 1990.

Erbe, René. Die Nationalsozialistische Wirtschaftspolitik 1933-1939 Im Lichte Der Modernen Theorie. Zurich: Polygraphischer Verlag, 1958.

Guillebaud, C. W. The Economic Recovery of Germany from 1933 to the Incorporation of Austria in March 1938. London: Macmillan, 1939.

Hobsbawm, Eric J. The Age of Extremes : A History of the World, 1914-1991. New York: Vintage Books, 1996.

Keynes, John Maynard. The General Theory of Employment, Interest and Money. London: Macmillan, 1936.

Keynes, John Maynard. Allgemeine Theorie der Beschäftigung, des Rinses und des Geldes. Munich and Leipzig: Duncker and Humblot, 1936.

Klein, Burton H. Germany's Economic Preparations for War. Cambridge: Harvard University Press, 1959.

Kuczynski, Jürgen. Germany: Economic and Labour Conditions Under Fascism. New York: International Publishers, 1945.

Martel Gordon, ed. The Origins of the Second World War Reconsidered : A.J.P. Taylor and the Historians. New York: Routledge, 1999

Mason, Timothy W. Nazism, Fascism and the Working Class. Cambridge: Cambridge University Press, 1995.

Muhlen, Norbert. Schacht: Hitler's Magician, the Life and Loans of Dr. Hjalmar Schacht. New York: Alliance Book Corporation, 1939.

Nathan, Otto. Nazi War Finance and Banking. New York: Financial Research Program, National Bureau of Economic Research, 1944.

Overy, Richard. The Nazi Economic Recovery, 1932-1938. Cambridge: Cambridge University Press, 1996.

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———. War and Economy in the Third Reich. Oxford: Oxford University Press, 1994.

Poole, Kenyon Edwards. German Financial Policies, 1932-1939. Cambridge: Harvard University Press, 1939.

Robbins, Lionel. The Economic Problem in Peace and War. London: Macmillan, 1947.

Schacht, Hjalmar. My First Seventy-Six Years; Autobiography. London: Wingate, 1955.

Schumpeter, Joseph Alois. Business Cycles : A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. New York: McGraw-Hill Book Company, 1939.

Schweitzer, Arthur. Big Business in the Third Reich. Bloomington: Indiana University Press, 1964.

Stolper, Gustav. German Economy, 1870-1940 : Issues and Trends. New York: Reynal & Hitchcock, 1940.

Sweezy, Maxine. The Structure of the Nazi Economy. Cambridge: Harvard University Press, 1941.

Tooze, Adam. The Wages of Destruction : The Making and Breaking of the Nazi Economy. London: Allen Lane, 2006.

United States Strategic, Bombing Survey. The Effects of Strategic Bombing on the German War Economy. Washington: Overall Economic Effects Division, 1945.

Journal Articles

Kahn, R. F. "The Relation of Home Investment to Unemployment." The Economic Journal 41, no. 162 (June, 1931): pp. 173-198.

Kaldor, Nicholas. "The German War Economy." The Review of Economic Studies 13, no. 1 (1945): pp. 33-52.

Klein, Burton. "Germany's Preparation for War: A Re-Examination." The American Economic Review 38, no. 1 (Mar., 1948a): pp. 56-77.

Singer, H. W. "The German War Economy in the Light of German Economic Periodicals." The Economic Journal 50, no. 200 (Dec., 1940): pp. 534-546.

Wolfe, Martin. "The Development of Nazi Monetary Policy." The Journal of Economic History 15, no. 4 (Dec., 1955): pp. 392-402.

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Press Articles

“Dr. Schacht’s Apologia”, The Economist, 24 April 1937, 18.

“Nazi Economic Policy”, The Economist, 31 July, 1937, 5-6.

“Dr. Schacht retires”, The Economist, 4 December 1937, 16-17.

“Germany after Schacht”, The Economist, 28 January, 1939, 2.

“Reich Finance and the Reichsbank”, The Economist, 8 July 1939, 15.

“Drifting towards Inflation”, The Economist, 29 July 1939, 1.

“Germany’s finances”, The Economist, 26 August 1939, 21-22.

John K. Galbraith, “German Economy was Badly Run.” Fortune, December 1945.

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