The next piece is based on a book that was the best thing I’d ever read on the Nazi economy. It was well-researched, fair-minded, and the author had thought through what his findings meant. It also had something to say about an obscure theoretical argument among American libertarians in 1940.
This essay began as a review of Adam Tooze’s The Wages of Destruction: The Making and Breaking of the Nazi Economy (Viking, 2007). It ran in Liberty, November 2007.
In 1940 libertarians Garet Garrett and Rose Wilder Lane had an argument about Nazism. Lane maintained that National Socialist Germany was not economically viable enough to sustain a war against the West, and that there was no need for a big American armaments program. Garrett was writing the Saturday Evening Post’s editorials, which opposed American intervention in the war but supported a massive armaments program — and conscription. He told Lane she might be right in the long run “that Nazism will wreck itself,” but that too much could happen in the short run. Earlier that year, France had fallen to the German army in a few weeks.
And in a reference to National Socialist economics, he wrote to Lane that Germany had “beaten everyone else at production in the last six years.”
In 1943, in The God of the Machine, Isabel Paterson made a detailed and radical argument for Lane’s proposition. Three years had gone by, and Germany was still in the war, but the Nazi economy was running on “storage batteries,” Paterson declared. It was using energy borrowed from the capitalist West. (So was Soviet Russia, she thought.) Germany had “inherited a technology…from its previous condition of comparative freedom. Germany also used every fraudulent device of currency inflation, huge loans obtained abroad and foreign credit — deliberate embezzlement over a period of twenty years — to get goods produced by the free economies.”
I kept this old dispute in mind while reading Adam Tooze’s new book, The Wages of Destruction, an 800-page history subtitled The Making and Breaking of the Nazi Economy. The account did not shake my conviction that Garrett had been essentially right: that it is quite possible to supply an army from an unfree economy and win a war. It is a mistake to argue that because the free market is the best system for peace that it is the best system for war. The free market is designed to satisfy individual wants, but a big, serious war demands the subordination of individual wants. War is a government program. Historically it has always been accompanied by home-front heavy-handedness. To argue that economic intervention during war is mistaken is to argue that war-making governments have been inattentive to their interests. Some of them may be, but to say that all of them have been all of the time is to stretch credulity.
Experience simply does not support the thesis that you need a free economy to win a war. Go back to 1941 and ask Poland or France.
But to show that Lane and Paterson were wrong, I have stated the question in an absolutist way. But turn down the amplitude a bit, and there is a valuable piece of the truth their argument. America in 1940 faced a decision about how deeply to involve itself as a supplier to Britain. In thinking about that decision, Americans needed to know that there wereweaknesses to the Nazi economy. Germany did run on its “storage batteries” to an important degree. It had used fraudulent devices. And the kind of economics it had — the kind of politics it had — limited its military reach.
Consider how Nazi Germany traded with the occupied countries of Holland, Belgium and France. The German war effort needed steel. Suppose it bought steel from a French producer under German military authority. It would send the French producer a check denominated in Reichsmarks. The French producer would present the check to the (occupied) Bank of France, which would create a deposit in French francs. The Bank of France would then send the check to the Reichsbank in Berlin, which added the amount to a running tab that was never settled.
That is not trade; it is looting made to look like trade. Historian Angelo Codevilla, in his 2000 book on wartime Switzerland, Between the Alps and a Hard Place (which I reviewed in Liberty, April 2001), described the same system in Germany’s purchases from Switzerland early in the war. In the Swiss case, it was tribute to keep the Germans out.
When Paterson said the Germans were running off their “batteries,” it was this sort of bloodsucking she had in mind. She thought of it as short-circuiting the flow of economic energy, of not renewing one’s capital. To be sure, the French steel company was not short-circuited. It could well make a profit in francs and invest them, or at least try to, in the economy that existed then. The company was not being plundered. But by forcing the Bank of France to pay in inflation money, France was.
Back to the beginning: In January 1933, at the bottom of the Depression, the Nazis took direction of the economy of Germany, which had huge numbers of idle workers and plant. Much more effectively than the American Democrats and their New Deal, the Nazis put that idle productive power to work. The Nazis used some make-work that some fans of the New Deal still perversely admire — such boldness! — but, Tooze says, the German WPAs took money away from the military and were scrapped within a couple of years. The Nazis were not New Dealers.
In Germany, Tooze says, the driving force as early as 1936 was preparation for war. In 1933 the military’s share of output in Germany was 1 percent. By the outbreak of war in 1939, the Nazis had increased it to 25 percent. Tooze calls that the “largest transfer of resources ever undertaken by a capitalist state in peacetime.” Production had increased, all the while the government was imposing “a system of ever more comprehensive bureaucratic control on the German economy and on German business.”
Fans of the free market may wonder how a laying-on of controls could increase production. Tooze doesn’t ask the question that way, but some answers can be distilled from his story. The Nazi government directed the economy entirely to military ends, which was simpler than for a multitude of private ends. And they didn’t do it without error. Tooze’s account has numerous cases of bad investments — the Ju-88 bomber, which didn’t carry enough bombs; the government tank plant in Austria, which produced hardly any tanks; and the V-2 rocket, which was a great achievement in technology and propaganda, but did little to affect the war.
State power had its advantages. In 1934, the German government repudiated the Dawes Loan, which it had undertaken in 1924 to reestablish the Reichsmark. The Nazis had portrayed the Dawes payments in its campaign posters as foreign chains on the German people. In a sense they were, and default was an immediate relief to the German economy. It also cut off Germany from British and American finance, which Hitler was happy to do.
A country’s economic tie to the world is through currency exchange, and by 1934 the Nazis’ policies had brought on a crisis in the foreign-exchange account. Germany was not earning enough foreign currency by exporting to pay for its imports. The market answer was to let the currency devalue, cheapening its exports and raising the price of its imports. The Nazi answer was currency controls: the state would provide foreign exchange only to those buying what the state wanted. The German shoe industry was not allowed import its customary amount of leather, and had to shrink. The textile industry was required to import less wool. Military contractors could import what they needed.
During the early years the Nazi government pressed the Jews to emigrate. But when emigrants sold their assets and were ready to leave, the Reichsbank wouldn’t convert their Reichsmarks into foreign exchange. It didn’t have foreign exchange for that purpose. For several years there were some financial loopholes, and some Jewish emigrants got some of their money out, but for the most part Jews had to choose between their stuff and their safety. Between March 1938 and September 1939, some 200,000 wisely chose safety — while, Tooze writes, “a rapacious German bureaucracy…stripped them of virtually all their material assets.”
By 1938 the Reichsbank was about broke. That was the year Hitler took Austria, a country much smaller than Germany but with an unlooted central bank. The Nazis drained it, which sustained the German government for a few months. But in late 1938 domestic investors refused to subscribe to a Reichsbank bond issue, and the regime had another financial crisis.
Hitler’s decision to go to war in September 1939 stemmed from his dream of an eastern empire. He reckoned Germany would have to fight for that against the Western powers. The country’s odds were none too good, but after 1939 they were not going to get better: the Nazis had revved up the German war machine as much as possible for a country officially at peace. France and Britain were trying to catch up. When they did, the odds for Germany would be worse. If America ever caught up — it was giving its military a piddling 2 percent of GDP — Hitler’s dream would be extinct. Hitler believed time was not on Germany’s side and, Tooze says, he was “essentially correct.”
One of the fascinating accounts in Tooze’s book is the conflict between Hitler and central banker Hjalmar Schacht, who was trying to maintain a fiscally solvent Nazi state. In early 1939, Tooze writes, Schacht’s Reichsbank assumed that Germany’s conquests were completed, having absorbed the German-speaking areas. The Reichsbank argued in a report to Hitler that Germany had to immediately cut back military spending for the sake of the nation’s economic health. “The politicization of Germany’s economic system was so far-reaching,” Tooze writes, “that it was virtually impossible to find reliable standards of valuation, whether for agricultural labor or any other commodity.” This is Ludwig von Mises’s point about the impossibility of economic calculation under socialism. The Nazi system wasn’t exactly socialism, but it was state intervention to such a degree that it created the same problem the socialists had. A few years earlier, the value of the Reichsmark might have been adjusted by a simple devaluation, but by 1939, the system of controls and permits was so extensive, Tooze writes, that “the Reichsmark now lacked any well-defined value.”
Hitler fired Schacht. He was not going to let an economist talk him out of his war.
Paterson was right, then, about some of the things she said. Nazi Germany had cheated creditors. It had stolen wealth. It had inherited wealth and spent it. And yet it would sustain a war longer than most people thought. “Nobody in 1939 expected Germany to be able to last as long as in World War I,” Tooze writes. Germany faced severe constraints on coal, oil, iron ore, rod iron, steel, copper, animal fodder, food, foreign exchange, gold and — most of all — people.
One way Hitler loosened those constraints was his August 1939 pact with Stalin. Under it, the Soviet Union supplied Germany with 74 percent of its phosphates, 65 percent of its chrome ore, 55 percent of its manganese, 40 percent of its nickel and 34 percent of its imported oil — these, in exchange for such manufactures as machine tools. The Russian trade helped Germany, but only so much. From the diaries of Gen. Georg Thomas and others, Tooze sketches out the Nazis’ economic calculus after the conquest of Poland. Germany had enough resources to defend against Britain and France for three years, as long as it did not go on the offensive. After three years, it would be outgunned.
Hitler would have none of that. The only answer was to go for broke and wager everything in an attack on France. In preparation, Germany was to run down its stocks of copper, which it used for shells and cartridges. It scrapped its plan to build a surface fleet for the Navy, diverting the remaining steel to airplanes and tanks. The attack was to use everything the Wehrmacht had. No divisions were held in reserve.
On paper, it was a long shot. But following Gen. Erich von Manstein’s brilliant battle plan, the Wehrmacht defeated the French in six weeks.
By the summer of 1940, Germany’s calculus had changed. It held the Netherlands, Belgium, France, Denmark, Norway, Austria, the Czech territory and most of Poland. It had enlisted as allies—satellites really—Slovakia, Hungary and Romania, and it was in a position to squeeze neutral Switzerland. It could trade with Finland, Sweden, Italy and Spain.
Seeing the Germans sweeping across France, the Romanians agreed to sell Germany the bulk of their oil. The capture of Norway gave Germany sea-borne access to the iron ore mined of northern Sweden, for which Germany would trade coal. Norway also had aluminum needed for aircraft. The Swiss traded precision instruments for German coal.
“If it had been possible to preserve activity at prewar levels, the German European block would have comprised an economy with a combined GDP greater than that of either the United States or the British Empire,” Tooze writes. But it wasn’t possible. Germany’s attitude toward its new satellites — and particularly toward the lands it had conquered — was predatory. To mobilize its army, it confiscated French trucks. The French dairies depended on trucks to move their milk. They also depended on fodder imported from America. The dairies folded, shrinking French output of milk, butter and cheese. French coal production fell because there weren’t enough trucks to move the coal, thereby shrinking the French production of steel. French production of nitrogen-based chemicals was used for explosives rather than fertilizer for French farms. And so on.
Among German enterprises were many counterexamples to Paterson’s claim that Nazi Germany was “living off its storage batteries.” Germans invested strongly in their industry during the war. Tooze’s book has a graph showing a great mountain of Reichmarks invested. But on a continental level, much of what Germany did was “living off its storage batteries.” One example of this was the “trading” system already described. Another aspect was labor. Germany was short of it, having drafted so many men into its army. To man German factories it conscripted men from occupied countries, and that weakened output there. So did the confiscation of all companies owned by Jews.
The French economy, writes Tooze, “collapsed in 1940, never to recover.” France and the Netherlands had an aircraft industry, and could have supplied Germany with many planes. They supplied only a few. Much of it, no doubt, was that the French and Dutch were not eager to do a fine job building Me-109s. But it was more than that. In the Nazi economy of rationing and permissions, non-Germans were at the end of the queue. And so the total military output in the occupied territories in 1943 was only 9.3% of the armament production available to Germany.
A number of historians have accepted John Kenneth Galbraith’s report in 1945 arguing that Germany might have beaten Russia had it mobilized women for war work as much as Britain had. Tooze dismisses this statement by the “celebrity economist” and the implication that the Nazis were too sentimental about women. The problem with the statistics on German women, he says, is that they didn’t include farm work. Around Berlin and other centers, German women did work in factories. In rural areas, they were working on farms while their husbands were at the front. Both sorts of work were part of the war effort.
In June 1941 Germany invaded the Soviet Union. Hitler’s decision to attack Russia was not based mainly on economics, but there was a kind of economic rationale for it. For ideological reasons, Hitler wanted a self-contained empire that could hold its own against Britain and America. The territory controlled by Germany at the beginning of 1941 was huge, but it was not self-sufficient in food, animal fodder or petroleum. The Ukraine and the Caucasus could remedy that. And anyway, Hitler hated the Bolsheviks, which he associated with the Jews.
The German plan was to best the Soviet government by the fall of 1941. Victory had to be quick, because Germany and its minor allies could not win a war of attrition. Like the invasion of France, nothing was held back. There were no reserves.
The fight began in June, to smashing success. But by October the lines of supply and powers of production had reached their limits. On the front, the troops were too far ahead of the rail lines. At home, the German economy could not make enough steel. It could not make enough airplanes. It could not finish the ersatz fuel plants and rubber plants. It could have, but did not, produce enough heavy coats and long underwear to keep the German soldiers warm. Finance aside, it could not mobilize enough stuff, and as soldiers died, it could not mobilize enough men. Ernst Udet, chief of procurement for the Luftwaffe, believed the war was lost and committed suicide on November 7, 1941, one month before the Japanese attack on Pearl Harbor. Walter Borbet, the industrialist who masterminded the mass production of the famous 88-mm anti-aircraft gun, sensed the doom and shot himself dead in January 1942.
In 1942, physicist Werner Heisenberg presented his proposal for Germany to develop an atomic bomb. Hitler rejected it. It would take too long and the Nazi economy could not afford it. Tooze says Hitler was right about that. Germany could not have done it.
By Tooze’s reckoning, the tide had turned against Germany even before America was officially in the war. And that means that Isabel Paterson and Rose Lane had a piece of truth in what they said about the weakness of Nazi Germany to fight a war. It was not as simple as they said, nor as absolute. Germany’s weakness was not that it was authoritarian as such. Soviet Russia was more economically authoritarian than Germany was, and it out-produced Germany in tanks. Germany’s problem was that its management of its occupied lands was so predatory as to be self-defeating. Tooze does not say Germany could have done differently and won. It did as it did. It was in a hurry, and it fed itself by plunder. When it failed to win quickly, it was cooked.
Tooze’s book also sheds some light on the economic ideology of the Nazis, whose official name was the National Socialist German Workers’ Party. The Nazis were not a pro-market party. Hitler despised bourgeois values. Tooze writes that Hitler “regarded the liberal ideology of progress through industry, hard work and free trade as nothing more than a lie spread by Jewish propagandists.” But when he came to power in January 1933, it was with the support of nationalist conservatives, represented by Paul von Hindenburg. A year into his regime, when an ailing Hindenburg was still in office, Hitler had to choose between a nationalist policy, which would please the military and its supporters, and a more socialist policy, which would please the supporters of Ernst Roehm, who was calling for a “second revolution.” In 1934 Hitler suppressed Roehm’s brownshirt paramilitary force, the SA, and had Roehm killed.
In the economy, the most distinctively National Socialist program, Tooze writes, was for the farmers, which constituted about a quarter of the German people. The Nazis envisioned a new order for the middle farmer, what in Russia would have been a “kulak.” This was the Erbhof, or hereditary farm. Erbhoefe could not be repossessed, pledged for a loan, or sold. They were to be owned only by men, and the line of inheritance was fixed in law to one male heir. All pre-existing debts were to be assumed by a state bank in exchange for a uniform property tax. The tax was to be levied on Erbhoefe whether they had had debts or not. All this, says Tooze, was supposed to liberate the German farmer from usury and economic uncertainty, but it also amounted to an “extraordinary intervention in the property rights of German peasants.” The system was put into effect, but it was unpopular and the Nazis had to bend some of the measures in practice.
One of the sweeteners was the new agricultural tariff. Under the Nazis, Tooze writes, prices for German farmers were “at least twice those prevailing on world markets.” Purchasing of farm output was taken over by the state, and by the late 1930s, Tooze writes, German agriculture “resembled less and less a market-driven industry and more and more a strange hybrid of private ownership and state planning.”
But what to call all this? Socialism? It was socialistic but also feudalistic. It made the farmer a serf in a way, just as collective farming in the Soviet Union made him a serf in a way. But not in the same way.
The Nazis created some state-owned companies, particularly under Hermann Goering. Early in their rule the Nazi state seized the Junkers aircraft works from its owner. They also seized all Jewish-owned companies. But generally they left the ownership of business alone.
Over the years, the Left has made much of the industrialists’ cooperation with Hitler, with the intimation that Nazism and capitalism are made of the same stuff. And they are not of the same stuff. “Nothing suggests that the leaders of German big business were filled with ideological ardor for National Socialism,” Tooze writes. But as in the United States, the Depression left business politically demoralized. Unlike the United States, in Germany it faced the possibility of a Communist government under which it would lose everything. And business in Germany, as elsewhere, was owned and operated by human beings who had opinions and ideologies distinct from their interests as owners. The German industrialists had gone through World War I and many were as nationalistic and resentful as the Nazis were.
The Nazis promised to make Germany strong. They promised to suppress the Communists and tame the trade unions. That sounded sort of like freedom for business, but really it was, Tooze says, “state interventionism… from the right.”
Business support came in different intensities. Least supportive was the export sector, which tended toward economic liberalism. Most supportive was the I.G. Farben chemicals combine, which had invested heavily in new technologies for synthetic oil and rubber, and was facing a total write-off. A gusher in Texas had wrecked the world oil market in the late 1920s, and by the 1930s rubber and the other world commodities were cheap. What I.G. Farben needed urgently was a tariff. “It was this need for political assistance that impelled IG to make contact with Hitler’s party,” Tooze writes.
I.G. Farben became the centerpiece of the Nazi program for economic autarky.
Recently, IBM and Ford Motor have been accused in popular histories of being willing collaborators with the Nazis — in IBM’s case because its technology was useful to the police, and in Ford’s case because of Henry Ford’s anti-interventionism and anti-Semitism. (For the accusations against Ford, see my review of Max Wallace’s The American Axis in the November 2003 Liberty.) Tooze discounts these “sensationalist claims,” noting that the largest U.S. investments in Germany — most of them from the 1920s — were by Standard Oil and General Motors, not IBM and Ford. The American-owned companies, he writes, tended to do well “the more they detached themselves from their foreign parents.” In any case, an operation in Germany became part of the Nazi economy no matter who owned it, and its Reichsmark earnings could not leave German Europe.
In all of Tooze’s large and detailed book, there is no mention of the common idea that Hitler was out to “take over the world.” No doubt Hitler would have tried it if he thought he could do it, but it was never remotely possible. Compared with its rivals, says Tooze, Germany had “an economy of modest resources.” It shipyards had built the Bismarck and the Graf Spee, but at the beginning of the war, in order to conserve steel, the naval program was reduced to submarines. Britain was not going to be invaded by submarines, nor was the United States. Perhaps if Germany had taken Russia it could have been a global contender, but probably not. It looted Russia more harshly than France, and left the place a ruin. Its plan in Russia was to starve the people there and resettle the land with Germans — on Erbhoefe.
A thought one could take from Tooze’s book — not a thought of his, explicitly anyway—is that America did not have to go to war with Germany in December 1941. By doing so it profoundly shaped the peace, much of it for good. But Germany had already reached its limit, because of the kind of economy it was. In that sense, Lane and Paterson were right.