Nazi Germany's Financial Preparations for War

¶ … 1930's, Germany was plagued by unemployment and stagnant growth despite efforts by the administration to alleviate the country's economic difficulties. The economic liberalization of the banking system was one of few cautionary steps taken by administrations prior to Hitler to boost Germany's failing industries. This all changed following the Nazi rise to power; two notable banking acts passed in 1934 and 1936 effectively converted the banking system into Hitler's personal lender, allowing him to replace commercial borrowing with the various savings institutes that would allow him to re-build the German army.

In this period, wages were frozen and the armaments business boomed, while individuals suffered as wages were frozen at their pre-Hitler-era rate. Meanwhile, the government was able to continue to borrow money from Germany's isavings banks to contribute to the building of the military. A series of banking reforms had been started under Chancellor Papen that lead to a brief recovery in Germany's industry. The Nazis first gained prominence in the 1930 election when they increased their seats in the Reichstag from 12 to 107.

Their numbers in the Reichstag almost doubled in the election of July 1932. However, their numbers suffered in the second election of 1932, in November, garnering 33 per cent instead of 37 per cent of the vote and reducing their representation in the Reichstag from 230 to 196 seats (Hamilton, 1982; Childers, 1983). Further economic improvement could have cost the Nazis more, but few argue that the recovery could have been sustained: the instability of politics mirrored the instability of the economy.

Hitler began by attempting an ambitions expansion of credit in order to finance a programme of public works and rearmament. Many contend that Hitler came to power as the trade cycle in Germany appeared to be turning in a favourable direction, although others believe the 1932 recovery to have been small and not universal. Hitler was able to take over certain relief measures with which a beginning had been made by the two previous chancellors, von Schleicher and von Papen.

However, Hitler made it his priority to deal with the problem of unemployment, specifically by keeping salaries low. But Hitler made a much greater effort on the widest front to deal with unemployment. He outlined his first Four-Year plan in May of 1933. A law for the reduction of unemployment on 2 June soon followed this. This plan allowed the government to re-create demands for industry by buying munitions and other weaponry.

New public expenditures somewhat mirrored the Roosevelt administration; they included the issue of special employment-creation bills that appropriated unemployed workers to public works such as housing, roads, the development of agricultural and suburban settlement, river regulation, and public utilities. In addition to direct measures for creating employment such as these, there were also indirect measures that operated by stimulating private enterprise to undertake work which would involve increased employment. Infrastructure -related private expenditure was freed from taxes; such projects included the replacement and renewal of equipment in industry and agriculture.

Such concessions were extended later to apply to all capital expenditure. Income tax relief was even allowed for the employment of domestic servants -- these being treated as an addition to the taxpayer's family. However, the recovery did not resume in early 1933; only after dramatic changes were taken was it able to repair the damage to the political fabric caused by the social and political effects of extensive unemployment.

Many argue that the growth that started with prior administrations was a separate matter as the nature of the regimes was so different. Many argue that the future course of the German economy under elected governments would have limited the Nazis to a small but vocal minority, but it is harder to argue that it would have led to a rapid decline in Nazi support. Hitler was appointed chancellor at the end of January 1933, and immediately undertook an attempt to generate sustained economic recovery.

Critics abroad, not familiarizing themselves with other aspects of the German government, claimed that the approach taken by Germany was one to be admired or emulated. Policy differences between the Nazi government and that of prior administrations were predicated on the Nazi belief that they should raise money for armed conflict. These principals were embodied in Hitler's first Four-Year Plank which embodied many of the new measures and gave them visibility as a new policy direction (Guillebaud, 1939). Employment rose rapidly in 1933.

The new expenditures, however, must have taken time to have their full effects. The immediate recovery therefore was due to euphoria resulting from changed expectations when the Nazis took power. It was the result of anticipation and forcasting in addition to actual government activities. Hitler had been criticizing the deflationary policies of his predecessors because he saw them as too slowe paced. Borrowing from more socialist regimes, the commitment of the Nazis to full employment was well-known.

The Weimar Republic had done much to create a differentiated system of commercial banks, savings banks, co-operative banks, and special banks. The diversified banking institutions continued to flourish while concentration in commercial banking and regional specialization in other bank groups suppressed competition within the bank groups. Types of banks blurred, and competition between bank groups increased as traditional demarcation lines lost significance. The stability of the banking system depended on the Reichsbank, which acted as monetary authority and lender-of-last-resort.

However, this system, which mirrored the American Reserve Bank system, collapsed in the banking crisis of 1931. Because the privately run and publicly regulated central banking system collapsed, the responsibility for the stability of the banking system was transferred to the government. The Banking Law of 1934 reorganized the banking system as a monopolistic structure under strict government surveillance as a reaction to the banking crisis The Nazi seizure of power in January 1933 interrupted the banking reforms of the old Democratic system.

The future of the banking system rested in the hands of Nazi Ideologues. The Nazi Party programme of 1920 had requested the 'breaking of interest slavery' (Kuhnl, 1977: 161-8). Gottfried Feder, the author of that slogan, and other members of the Nazi movement pressured the government to implement the complete and permanent nationalization of banking. Feder argued that the savings banks represented a genuine 'national' tradition in banking, which contrasted with the 'internationalist' tendencies and the Jewish influence in commercial banking (Barkai, 1977; Hardach, 1984: 228-30).

The Hitler Government called Schacht, an old reformer, back to the Reichsbank in March 1933 because his expertise was needed. This happened to the chagrin of traditional Nazis like Feder who criticized the 'liberal-capitalistic' inclinations of his political opponent. Schacht enjoyed considerable prestige within the Nazi regime because his expertise and international reputation were essential. The Reichsbank became an instrument of government finance.

The privileges of the regional note-issuing banks were abolished in 1935 so as to centralize investments When Schacht criticized excessive military spending; he was removed from the Reichsbank in 1939 and replaced by the more docile Walther Funk. In the dispute over the future of the banking system that ensued in 1933-4, Schacht became the chief opponent of nationalization. By doing so, he convinced the Government that the commercial banks were indispensable for economic recovery and national strength.

The controversial issue of bank reform became the closed discussions of a Bank Inquiry in 1933. (Untersuchungsausschuss, 1933, 1934). Feder was the principal arguement for nationalization; he claimed the savings banks should become the core of a new national-socialist banking system that was to be based on public ownership. The majority of the Inquiry Commission decided to maintain the existing banking system; when Feder tried to rally political support for his plan he was excluded from the commission.

In October 1934 the Inquiry Commission submitted its final report together with a draft law on banking; This report asserted that the structure of the German banking system was sound. This Inquiry Commission put the blame for the banking crisis of 1931 on the international community; the Versailles dictate and insensate reparation claims had destroyed German capital formation and had led to an excessive influx of short-term credits.

Other causes included the preference of commercial banks for big business, the low liquidity of the banking system, and the great number of banks especially in the public sector. Foreign observers commented that the report seemed to be moderate. The Economist remarked on the final report of the Bank Inquiry Commission that ' Nazi plans and promises have been rejected or ignored by the Committee.

There is, however, a marked tendency towards closer state control and towards an increase in the power of the Reichsbank.' The draft law was approved and enacted by the Hitler Government in December 1934. This Banking Law acknowledged the differentiated banking system of commercial banks, special banks, savings banks, and co-operative banks. The transformation of savings banks into local universal banks, which began after the Bank Inquiry of 1908, was now legally sanctified in this bank.

Further Public control over the banking system was extended; it was exercised by the Reichsbank, the banking commissioner and a new bank control board (Aufsichtsamt fur das Kreditwesen). Some stability measures were implemented: new liquidity rules and reserve requirements were introduced to enhance the stability of the banking system. Competition in banking was suppressed; new banks or subsidiaries could only be established with government approval, and the government was entitled to fix interest rates and provision.

The Banking Law of 1934 reflected common elements in the administrations: it combined modern and conservative aspects. State supervision and liquidity rules were a necessary reaction to the banking crisis of 1931; if the State was expected to warrant the stability of the banking system, it argued that this institution needed some kind of political control. Several rules, which were introduced by the Banking Law of 1934, outlasted the Nazi era and are still to be found in Federal Republic of Germany. But these functional regulations were cast into a reactionary form.

The monopolistic tradition in banking, and the Nazi claim to supreme control, combined to create a stationary model of banking capable of providing cheap financing to military efforts. The Nazi regime confirmed its confidence in the existing differentiated German banking system a few years later, when it returned in 1936-7 the commercial banks which had come under public control during the banking crisis to private ownership in a rare case of liberalism. Nazi ideology, however, targeted bankers and bank managers of Jewish descent.

Traditional private banking firms whose owners were of Jewish origin were either dissolved, or taken over by non-Jewish owners; and prominent bank directors were compelled to retire (Barkai, 1987; Genschel, 1966). The powers and instruments which the Banking Law of 1934 conferred on the government were sufficient to subject the banking system to the Nazi economy. The Government sought to stimulate economic recovery with employment programs, but switched to military financing once the employment crisis was resolved. With the Four-Year Plan of 1936, however, Germany started to prepare for war.

A vast rearmament program and a systematic autarky policy transformed the German economy to one dominated by the military industrial sector. Although taxes were not substantial, deficits became a standing fixture in German fiscal policy. Government expenditure increased from RM 9 billion in 1933-4 to RM 33 billion in 1938-9, and the current deficit increased from RM 2 billion in 1933-4 to RM 15 billion in 1938-9 (Overy, 1982: 46). The government's share in expenditures in the net social product increased from 14 per cent in 1925-9 to 26 per cent in 1935-8 (Hoffmann et al., 1965: 108).

The armament boom created an altered investment cycle bubble, which benefited the corporate sector. Government deficit-spending created the illusion of considerable liquidity due to the number of loans available. Wages barely increased during the Nazi period, while profits were allowed to rise, with the intention to encourage investing activity. In 1938 total wages were 3 per cent lower and profits 105 per cent higher than in 1928 (Hoffmann et al., 1965: 506-9). Corporate savings were further enhanced by a limit on dividends.

Much of the increase in industrial capital from 1933 to 1938 was financed from retained earnings, which contributed RM 7 billion. New share issues, which resulted mainly from the investment programmes of the Four-Year Plan, were not placed on the capital market but were taken over by other corporations (Reinhard and von Zabern, 1942).