Hitler’s Economic Program (2)

346px-Hjalmar_SchachtBy itself, budget deficit (even a large one in absolute terms) is not really such a big deal. After all, these days just about every developed nation (with a notable exception of Germany) – the United States, China, Japan, France, Great Britain, Italy, Spain, etc. – runs a substantial budget deficit and has already accumulated an impressive national debt.

These deficits are not considered a major problem, because it is believed that government spending increases gross domestic product (market value of all the final goods and services produced annually in the country in question). In other words, fuels economic growth.

Which in a law-abiding country (and the Nazi Germany was very much so – Gestapo and Kripo took good care of that) automatically increases government tax revenue, enabling the latter to pay off public debt.

Provided, of course, that the latter (and budget deficit) stays within “common economic sense”. Which in the Third Reich was not the case – Adolf Hitler’s Mission was to win the existential war, not to keep the government books in balance. When the very existence of the nation was at stake, who cared about the damn financial accounts? Hitler and the Nazis obviously did not – and justifiably so.

As borrowings on international financial markets (now-standard means of financing government budget deficits), getting loans from foreign banks, printing money, and (God forbid) defaulting on its domestic debt were out of the question, Adolf Hitler had to resort to other ways and means of paying off massive government debts. Alas, to mostly criminal ones.

The obvious benevolent source of funds (successfully used in Italy by Il Duce) was large-scale privatization. Unfortunately, it was just about the only legitimate one – all other ones were very much criminal (if not outright murderous).

Despite all his hysterics about “the existential Jewish threat”, “racial war”, etc., one of the key reasons behind Hitler’s Judenrein project was a purely financial one. The fundamental objective of this project was to physically deport Jews somewhere outside Germany (and subsequently German-controlled territories) robbing them of all their valuables.

Which could then be used for either direct financing of German economic recovery or for paying off government debt accumulated by runaway deficit financing of economic growth.

There was another – far more sinister – idea that was actually implemented, believe it or not. Force Jews to lend money and other valuables to the Nazi government and then… kill them. A very common method used by the organized crime characters to deal with creditors. Which made Nazi state a very much criminal organization (in some ways not unlike the proverbial Mafia).

Like just about all other Nazi crimes, this one was a monumental blunder. It is a well-established fact that Jews are the most efficient and productive nation by far (in terms of creating aggregate value – financial, functional and emotional).

Which Jewish (forced) immigrants from Germany proved beyond the reasonable doubt in Palestine in the 1930s, performing an economic miracle quite comparable to (and in many ways more impressive than) the one performed by the Nazis in Germany at the same time.

Consequently, Germany would have been far better off using its Jews (and then the Jews on German-occupied territories as well) to generate financial, functional and emotional value than robbing, deporting and murdering them.

Especially given the fact that even the diehard Nazis knew that the tales about the “fabulous riches of the Jews” were just that – fairy tales. In reality, valuables taken from the Jews essentially at gunpoint (i.e. proceeds from armed robberies of the latter) were not nearly enough to pay off the mammoth national debt accumulated by the Nazis through their economic revival and rearmament programs (let alone wartime military spending).

Nazis desperately needed another source – and they quickly found it (most likely, it was known to them all along). Making someone else pay off their debts. This “someone else” included not only population of German-occupied territories (i.e. essentially German colonies in Europe) but also their allies – Italy, Romania, Bulgaria, Hungary, Slovakia and Croatia.

I will cover these crimes (and these were crimes indeed) in sufficient detail in the chapter devoted to Hitler’s crimes. In this section I will only touch a few key points.

Financial exploitation of occupied territories was mostly simple and straightforward (although Nazis did employ some highly creative financial schemes).

First, grab as many valuables as possible; sell them in the open market (domestic or international) and use the proceeds to pay off government debt. Second, exchange government bonds for land, buildings, other real estate or shares in businesses in German-occupied territories (i.e. colonies).

Third, force the population of newly-acquired colonies to work essentially for food, clothing and shelter; import products (foodstuffs mostly) into Germany; print money to pay off government debt and then use these products to “cover” printed money (thus balancing demand with supply and putting a firm check on inflation).

Financial exploitation of German allies was far more subtle and creative but was surprisingly explicit. Nazi message to their allies was cut and dry, plain and simple, loud and clear:

“We save you from being conquered and destroyed by the Bolsheviks and you must in return pay us with your money and with the blood of your soldiers”

As Nazis did not view their occupied territories in Western Europe as colonies (the latter was reserved to occupied territories in the East), their message to the citizens of France, Benelux countries, Denmark, Norway and Greece was essentially the same (sans “blood of your soldiers”).

However, even in these transactions (let alone in ones with neutral nations – also critically important for the Nazis), Hitler and his government had to solve one no less critical problem – catastrophic lack of foreign currency.

It is estimated that for its foreign trade to function properly, the country in question had to have sufficient reserves of foreign currency for six months. In 1933-34 Germany often had the reserves for six days. Making foreign trade work under such constraints was a genuine miracle.

The ways to deal with this potentially crippling problem, were obvious. Establish tight import controls (all imports had to be approved by a special government agency). Institute tight foreign exchange controls so that no individual or organization could take precious foreign currency out of the country over a very small limit.

Convince foreign vendors to sell their goods for Reichsmarks – and then use proceeds to buy German goods (thus fueling economic growth in the Reich). Develop and sign extensive barter agreements with foreign nations, essentially exchanging their goods for the German ones.

This was Hitler’s economic program in a nutshell. However, to make it and thus his Quantensprung – his economic miracle – a reality, he needed someone who would become his “economic tsar”, the “Führer of German economy”. Someone who would take responsibility for reviving the German economy, eliminating unemployment, getting Germany out of Great Depression and implementing a gargantuan rearmament program.

Fortunately for Adolf Hitler and Germany, there was exactly such a man in the Reich. Hjalmar Horace Greeley Schacht – a 56-year old (a very senior citizen by the standards of youngish Nazi leadership) prominent economist, banker and politician (in 1918 he was one of the founders of the centrist German Democratic Party (it was dissolved in 1930, way before Hitler came to power).

Hjalmar Schacht had impeccable credentials for this job. A half-German, half-Danish aristocrat (his mother was Baroness Constanze Justine Sophie von Eggers), he studied political science (among other subjects) at universities of Munich, Leipzig, Berlin and Paris before finally earning a Ph. D. in economics at a University of Kiel.

His doctorate thesis was on mercantilism – national economic policy designed to maximize the exports of a nation. A very appropriate topic for Germany in 1933 which desperately needed to earn (or at least conserve) foreign currency.

In addition to extensive banking experience in Germany (he rose to the position of a deputy director at Dresdner Bank – then one of the largest German banks), and in government service (he was the Banking Commissioner for Occupied Belgium and subsequently the currency commissioner in Weimar Republic), he had extensive – and very high-level – connections in international finance.

Which included the famous American banker J. P. Morgan, as well as U.S. president Theodore Roosevelt. And the Governor of the Bank of England, Montagu Norman, was so close to the Schacht family that he was godfather to one of Schacht’s grandchildren.

After his economic policies helped battle German hyperinflation and stabilize the German mark, Schacht was appointed president of the Reichsbank at the requests of then-President Friedrich Ebert and then-Chancellor Gustav Stresemann.

Like Adolf Hitler, Schacht was firmly committed to restoring German power and glory and making again a global political, economic and military superpower. By 1930, he became convinced that Weimar Republic would never be able to achieve this all-important objective and began slowly but surely drifting towards the Nazis (who in his opinion would – if they ever come in power in Germany).

Although he never officially joined the Nazi party, Schacht helped to raise funds for the Nazis. After the July 1932 elections, in which the NSDAP won more than a third of the seats, Schacht was one of those who organized a petition of industrial leaders requesting that president Hindenburg appoint Hitler as Chancellor.

On March 17th, 1933 (even before the Enabling Act gave him essentially absolute power in Germany), Adolf Hitler re-appointed Schacht as Reichsbank president (on March 7th, 1930 the latter resigned from this position over disagreement with then-Chancellor over payment of war reparations).

But it was obviously not enough. To make Schacht the genuine “Führer of German Economy” (in full accord with all-important Führerprinzip), Hitler had to make the banker Reich Minister of Economics as well.

And, of course provide him with the necessary support. Which would become possible only after crushing the opposition to the Nazis, transforming the Weimar Republic into a centralized Führerstaat and developing and implementing a mighty and omnipresent propaganda system.


Hitler’s Economic Program (1)

IMG_0258One of the many common misconceptions about Adolf Hitler is that he knew next to nothing about economics. In reality, he knew enough to (a) understand the “Mussolini Blueprint” – successful economic reforms implemented by Il Duce; (2) figure out how to adapt this blueprint to very different situation in Germany; (3) hire the best individual to the position of the “economic Führer” of the Third Reich; (4) control the latter and provide him with the necessary support; and (5) replace him with the more appropriate one once the initial Mission was accomplished.

Eliminating unemployment (i.e. bringing the German workforce to the state of full employment) was the most fundamental need and demand of German citizens. And, therefore, it became Hitler’s top priority, his job #1.

One did not have to have a Ph. D. in economics (facts, logic and common sense were enough) to figure out that the only way to quickly reduce (and subsequently eliminate) unemployment in Germany in 1933 was by massive government spending. Primarily on civilian projects.

For a very simple reason – although radical expansion of German armed forces and of the armaments industry were (obviously) highly efficient ways to radically reduce unemployment, in spring of 1933 Hitler (and Germany) were still not strong enough politically and economically to openly violate the terms of the Treaty of Versailles.

Hence the bulk of massive government spending had to go into construction (expansion of public and residential building), transportation (building roads and increasing production of motor vehicles), land reclamation (creating additional agricultural land) and reforestation.

As the Reich government did not have (and will not have) the financial resources needed to underwrite such a massive public spending program, it had to take the road of deficit financing.

The hyperinflation of 1921-23 was still fresh in German (and Hitler’s) memories so covering the budget deficit by printing money was, obviously, out of the question. So was borrowing abroad.

German economic recovery (the so-called “Golden Era” of the Weimar Republic) in 1924-29 was financed by loans provided by American banks through the Dawes Plan (adopted in 1924) and the Young Plan (adopted in August of 1929).

However, after these banks have been hurt (and hurt severely) by the Wall Street Crash of October 24th, 1929 and subsequent Great Depression, they predictably withdrew their loans to German companies (and to Germany in general). Which immediately sent German economy into a tailspin creating severe problems that Adolf Hitler now had to fix.

Hence, the Nazi government had to restrict itself only to domestic sources of funds for covering the inevitably massive budget deficits. The other three were (obviously) borrowing from banks, corporations and individuals. Ideally in a form of government bonds (interest-bearing securities) that could be used as “parallel currencies” until they mature and will be repaid in full from the state budget.

There was no need to create a specific incentive for German businesses to invest in these government bonds – the budget will simply pay them with the latter for the jobs done for the government.

Because these bonds were designed as the essentially “industrial currency” (a very common instrument to finance rapid economic growth), the business in question will be able to pay its suppliers or creditors with this “currency” and so on.

Borrowing from individuals was a different matter entirely. To motivate Germans to invest into government bonds, Hitler had to first make them trust the German government with their money. Not a small feat after hyperinflation, Great Depression and other economic calamities.

And then to carefully managing consumption, making sure that (a) German households consume enough goods and services for a comfortable lifestyle; and (b) still have enough disposable income to invest into government bonds.

The latter essentially meant making certain items simply inaccessible to the majority of Germans so that they had nothing to spend a certain share of their income on other than investing into government bonds (i.e. on savings). And, of course, conducting a massive propaganda campaign promoting savings and investments.

Obviously, managing consumption required tight control over wages and prices (making Nazi Germany not exactly a market economy). This control was needed anyway – to avoid inflation (the word that scared Germans more than Count Dracula and Frankenstein monster combined).

Now the trillion-Reichsmark (literally) question was how on Earth Hitler’s government would be able to pay off these gargantuan debts once they come due (and sooner or later they obviously will).


“The Mussolini Blueprint” for Adolf Hitler

Benito_Mussolini_coloredHitler considered “Il Duce” – Benito Mussolini – one of his role models (actually, the most influential one). His highly successful “March on Rome” became an inspiration for the (pathetic) Beer Hall Putsch. And Hitler’s economic policies and reforms followed the “blueprint” derived from also highly successful economic policies of “Il Duce”.

Italy and Germany shared a common economic problem – insufficient strategic resources. To rectify this problem, Mussolini’ embarked on intensive development of all available domestic sources (Hitler would add to that development of whole industries that would produce substitute products).

And pursued aggressive commercial foreign policies – securing bilateral raw material trade agreements (essentially barter-style), and strategic colonization (Lebensraum Italian-style).

Although a disciple of the French Marxist Georges Sorel and the main leader of the Italian Socialist Party in his early years, Mussolini abandoned the theory of class struggle for class collaboration.

To facilitate transition from the former to the latter, Il Duce’s government intervened directly (on as needed basis) to create a collaboration between the industrialists, the workers and the state (making the two former essentially the servants of the latter).

Collaboration based on the fundamental principle of corporatism. Which called for the structuring of the whole society as a system of corporate groups – agricultural, labor, military, scientific, or guild associations – on the basis of their common interests.

Which will (in theory) create a powerful synergy between these groups – with each group performs its designated function flawlessly, society will function harmoniously – like a human body (corpus) from which its name derives.

Adolf Hitler structured his Führerstaat in much the same way, only replaced corporatism with national-socialism (which is actually not that much different from the former).

Mussolini ultimately banned all trade union except the fascist ones – and Hitler did the same, replacing all German trade unions with just one – German Labor Front (DAF). Il Duce made both strikes and lock-outs illegal – and so did Hitler.

Mussolini declared autarky (self-sufficiency in all key economic resources) as his long-term strategic objective – and so did Hitler a decade later. Mussolini embarked on an ambitious public spending program financed by runaway budget a deficit – and Hitler would pursue practically identical economic and financial policies.

Mussolini spent Italy into a structural deficit that grew exponentially – and so did Hitler. In Mussolini’s first year as Prime Minister in 1922, Italy’s national debt stood at 93 billion lire. By 1934, it rose to 148,646,000,000 lire (i.e. increased by half). Hitler’s numbers were even more astounding – in 1939 its national debt reached 150% of Gross Domestic Product of Germany.

Mussolini’s spending on the public sector, schools and infrastructure was lavish (to put it mildly). He instituted a program of public works hitherto unrivaled in modern Europe. The program that was eclipsed only by the Nazi one.

Mussolini’s administration devoted 400 million lire from the state budget for school construction between 1922 and 1942, compared to only 60 million lire between 1862 and 1922. Which was not a surprise at all as Mussolini “in his previous life” was a schoolteacher.

Bridges, canals and roads were built, hospitals and schools, railway stations and orphanages were erected; swamps were drained and land reclaimed, forests were planted and universities were endowed.

As for the scope and spending on social welfare programs, Italian fascism compared favorably with the more advanced European nations and in some respect was more progressive (although not nearly as progressive as its Nazi counterpart). When New York city politician Grover Aloysius Whalen asked Mussolini about the meaning behind Italian fascism in 1939, the reply was: “It is like your New Deal! [only much better]”.

By 1925, the Italian government had embarked upon an elaborate welfare program that included food supplementary assistance, infant care, maternity assistance, general healthcare, wage supplements, paid vacations, unemployment benefits, illness insurance, occupational disease insurance, general family assistance, public housing and old age and disability insurance.

A decade later Adolf Hitler would follow this blueprint almost to a ‘T’.

To finance these programs, Italy’s first Fascist government implemented a large-scale privatization policy between 1922 and 1925. And so did Adolf Hitler – ten years later.

The conclusion is obvious: Adolf Hitler pretty much followed in the footsteps of another dictator – Benito Amilcare Andrea Mussolini. Which was a smart decision – why “reinvent the wheel” if one can copy (adapting when necessary) proven solutions that work? Hitler did exactly that – and in many way became much, much more successful than his role model.

Hence it is not a surprise at all that Hitler was an admirer of Mussolini almost from the get-go (interestingly enough, Churchill was, too). Il Duce, however, did not even like Hitler at first. Even years later, Mussolini openly expressed his frustrations with Hitler’s actions and policies (before the latter proved to be very successful, of course).

Their first meeting together in 1934 was particularly icy. Mussolini listened to Hitler talk at length without saying much (this would become characteristic of just about their meetings) and afterwards wrote Hitler off as essentially insane.

He believed Hitler’s ideas of race and the existence of superior races were batty, and dismissed them out of hand. After their first meeting, Mussolini remarked dismissively, “He’s just a garrulous monk.”

However, the invasion of Ethiopia undertaken by Mussolini in 1935 (and unconditionally supported by Adolf Hitler) and especially the Spanish Civil war where German and Italian volunteers fought on the Nationalist side brought them closer together.

And when Wehrmacht had to come to the aid of the Italian Army in Yugoslavia, Greece and especially in North Africa, Mussolini became almost completely dependent on Hitler. And thus had no other choice but to radically warm up to the latter.

Whatever faults the two may have taken with each other (and there were some), the rescue of Mussolini from the hotel he was imprisoned at in 1943 showed that Hitler genuinely considered Mussolini a friend. And the feeling was mutual; when the German commandos freed him, Mussolini commented, “I knew my friend Adolf Hitler would not desert me.”

After Mussolini was rescued by the Germans, the relationship became a lot more one-sided. The Germans occupied the northern and central sections of Italy (with the Allies controlling the south and Sicily) and Mussolini was installed as the head of the so-called “Italian Social Republic”.

However, he was little more than a German puppet and he knew it. So by this point, it was Hitler and the SS who were calling the shots on any substantial matter of policy in the parts of Italy that were still controlled by the Fascists. It was a fulfillment of Mussolini’s worst fear in the truest sense: becoming a mere lackey of the Germans.


Hitler’s Achievements in 1933-39 (4)

IMG_0449To properly understand and evaluate (functionally, of course) Hitler’s rearmament program, one must acknowledge and accept the irrefutable fact that it was an unavoidable necessity (as was the priority of guns over butter.

With all his unquestionable economic and financial brilliance, Dr. Hjalmar Schacht (one of the fathers of German economic miracle – together with Adolf Hitler, of course) could not understand a simple and pretty much evident political truth.

That Germany (his Germany) was facing the genuinely existential Bolshevist threat and rather sooner than later will have to fight a genuinely existential war (i.e. for its very existence) with the Bolshevist Soviet Union. Whether it wanted it or not (most Germans didn’t) and whether it liked it or not (ditto).

And that (consequently) rearmament had to be given priority over the welfare of Germans. In other words, Adolf Hitler as the Führer of Germany (and thus responsible for all of its citizens) had to first and foremost make sure that Germany can win this existential war (and thus save itself from being conquered and destroyed by the Bolshevist hordes).

With welfare of Germans (other than being saved from this existential threat) having the secondary priority. Let alone sound economic policies. In the end, victory in this existential war was not everything – it was the only thing that really mattered.

True, Adolf Hitler planned (and prepared for) a brutal colonial war – Drang nach Osten. But it did not matter – he had to fight and win the war with the Bolshevist Soviet Union (Lebensraum or no Lebensraum).

For a very simple reason – the “Red Tamerlane” Joseph Stalin was totally committed to his own colonial war (conquering and colonizing the whole world – a far more ambitious project than Hitler’s). The war that Bolsheviks started to prepare for in 1918 – right after they got absolute power in Russia (and 15 years before Adolf Hitler became the Führer of Germany).

Hence the war with the Soviet Union was inevitable (again, Lebensraum or no Lebensraum). And the only way to win that war (given the total and absolute superiority of the latter in material and human resources) was to destroy sufficient chunk of Soviet armed forces and to occupy sufficient Soviet territory to force the Soviet leader (whoever he might be at that time) to accept peace on German terms. Which would obviously include doing away with the existential Bolshevist threat for good.

To achieve this victory, Adolf Hitler had to develop and implement an enormous (gargantuan even) rearmament program. Which should have taken into account that neither Britain nor France would agree with Germany becoming a dominant power in Europe and a global economic, political and military superpower (the inevitable result of German victory over the Soviet Union).

Which meant that the war with France and Britain was inevitable as well. And, by the way, that’s exactly what happened in 1939. It was Britain and France that declared war on Germany (not the other way around) and thus transformed a short-term military conflict between two neighboring nations into a full-fledged global war (thus World War started on September 3rd, not the 1st, of 1939).

Britain and France did not have to declare war on Germany after the latter invaded Poland. The Polish–British Common Defense Pact only stated that

“.. in the event of any action which clearly threatened Polish independence, and which the Polish Government accordingly considered it vital to resist with their national forces, His Majesty’s Government would feel themselves bound at once to lend the Polish Government all support in their power. They have given the Polish Government an assurance to this effect.”

This statement was sufficiently vague (it was deliberately made that way by British Foreign Office) to NOT require Great Britain to declare war on the aggressor (the French guarantees were vague as well).

But Nazi Germany (Lebensraum or no Lebensraum) had no choice but to invade and occupy Poland. For the only way to save itself from being conquered and destroyed by the Bolshevist hordes was to launch a devastating pre-emptive strike (blitzkrieg-style). Which, obviously, required a common border with the Soviet Union – the border that could be established only by occupying the “buffer state”. Poland.

Likewise, it had no other choice but to occupy the whole Czechoslovakia. For another simple reason – to prepare for and fight the blitzkrieg with the Soviet Union, it needed all industrial capacity it could lay their hands on.

And Czechoslovakia had by far the most powerful (and thus the most valuable and lucrative) armaments industry in Eastern Europe – and one of the most valuable in whole Europe.