Lessons from the Great Depression: Economic Policy in Nazi Germany - "Socialist" or "Capitalist?"

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8 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and Other Egghead Stuff sees few economic lessons to be learned from Nazi Germany other than what not to do, but a closer look at 1930's policy can settle contemporary debates about the degree to which the Nazis were either "socialist" or "capitalist."

Today much debate surrounds whether Nazi Germany was a capitalist or socialist economy. The modern-day Left accuses Nazi Germany of being a free market capitalist system gone to extremes whose corporate greed inevitably exploded in a disastrous world war. The modern-day Right points to the Nazi Party’s name itself (NSDAP or National Socialist German Workers Party) and centralized control of economic life by the government.

If we accept the main tenets of socialism as 1) government ownership of the means of production, 2) government central planning of economic activity, 3) price and distribution controls, and 4) a redistributive welfare state, then historical observation concludes that Germany was an unusual mix of a little capitalism, some mercantilism (aka. crony capitalism), a great deal of economic fascism, and a great degree of socialism and central planning. For example private property still existed in Germany which could be construed as capitalism, but firms had little control over how they disposed of their assets, those decisions being dictated by the State (ie. economic fascism).

I. GERMANY DURING THE GREAT DEPRESSION

Before we analyze the capitalist and socialist aspects of the 1930’s German economy, it’s helpful to review quickly the country’s disposition in late 1932 when the Nazi Party gained political power.

Germany suffered disproportionately from other European countries during the Great Depression. The German banking system had never found its footing after World War I and the Weimar Republic hyperinflation, and the country’s economy was stunted by the burden of heavy reparations payments to the Allies. As a consequence of the war the Allies had also commandeered large swaths of largely industrial German territory making it even more difficult for the country to earn the money needed to pay reparations.

Moreover, Germany had been subjected to the inflationary-then-deflationary British gold-exchange standard that had been foisted upon most of the European continent. When Austria’s largest bank—the KreditAnstaldt—failed and spread bank panics throughout Austria and Germany, the combination of bank failures and reversal of the jerry-rigged gold-exchange standard triggered a painful deflation that fermented bankruptcies and mass unemployment.

Note: To read more about the effects of the British gold-exchange standard’s impacts on Germany and continental Europe, read the COCEA’s column at:

http://www.cautiouseconomics.com/2018/11/the-great-depression-03.html

By some measures unemployment reached over 30% by the early 1930’s, and the depression paved the way for the Nazi Party to gain a plurality of seats in the Reichstag with Adolf Hitler obtaining the Chancellorship in January of 1933.

By the time the Nazis obtained power in late 1932 the economy had just bottomed out. Germany’s decision to stop paying reparations that same year helped, but high unemployment and anemic growth remained. So the Nazis immediately embarked on an aggressive economic program to reduce unemployment and spur economic growth geared primarily towards autarky (economic self-sufficiency) and remilitarization.

II. UNEMPLOYMENT

Once the Nazi economic plan was implemented, unemployment declined rapidly. From 1932 to 1937 the unemployment rate fell from over 30% to full employment with jobless rolls of 8 million falling to only 500,000.

At first glance this would seem to suggest an unequivocal policy success. But a closer inspection shows that while some of the job gains came through stimulation of private hiring, most of it was the result of government work programs and a calculated reduction of the labor force, often through coercion.

Under the Nazis the government ordered the Reichsbank to engage in aggressive money creation which the State then used to embark on large-scale spending plans for remilitarization and public works programs. By 1936 over two million people were employed by the State building the autobahn, working on electrification projects, and constructing homes and buildings. Thus government work programs can be credited for contributing to approximately 27% of unemployment reduction.

Pay was generally very low and working conditions very poor. The projects were designed to be inefficient and labor-intensive to employ more workers. Private labor unions were abolished and replaced by the government National Labor Front which kept wages low to benefit the State. Spies were planted among the workers and those complaining of pay or poor working conditions usually found themselves arrested and sent to concentration camps.

Also to counter central bank inflation, the Nazis implemented extensive price controls which took the form of price ceilings for workers (ie. a “maximum wage”). While wage floors, or setting worker pay above the free market clearing level, created mass unemployment and labor surpluses in the United States, the opposite policy of wage ceilings created labor shortages in Germany.

However the labor shortage came at a cost to workers who were being paid less than they would have made in a full employment scenario where the free market dictated the equilibrium wage. Wage floors were also a boon to many private employers who could pay less than market wages, but those same firms then had to deal with price ceilings on the products they sold.

So while the employment of 27% of the jobless workforce might be viewed as successful, it can hardly be considered a policy that created extensive market-wage private employment, and conditions for workers—who lived and worked within an enclosed secret police state—were very poor.

The Nazis also provided incentives for women to leave the workforce which artificially lowered the unemployment rate. The State believed women should be at home producing racially pure Aryan babies, not out at work. So the government provided tax incentives as well as generous loans for mortgages, furniture, and household goods that would be forgiven if women had children and stayed at home. For each child a family had, one-quarter of the government loan would be forgiven. Effectively families could receive free housing and household goods from the State by simply having four or more blond, blue-eyed children. In the final analysis these programs removed an estimated 500,000 women from the workforce or another 6.7% of the jobless ranks.

On the involuntary side, large-scale military conscription removed another one million from the workforce. This can be estimated as effectively reducing the jobless rolls by another 13.3%.

And then the Nazis forcibly removed “social undesirables” from not only the workforce, but also society at large. Jews were famously rounded up and thrown into ghettos and concentration camps. During the 1930’s recovery an estimated 600,000 German Jews were removed from the workforce in this manner, and an uncounted number of Gypsies, Freemasons, Marxists, and other undesirables disappeared as well. If we use the low total of 600,000 (which is surely higher when adding other groups to the Jewish subtotal) another 8% of the jobless rolls were removed in this manner.

So outside of stimulated private employment, Nazi policies of government work programs, military conscription, and removing women and social undesirables from the workforce were responsible for at least 55% of the reduction in the unemployment rate—hardly a model of voluntary private sector civilian employment. Much of the remaining private sector job creation was done through below-market wage mandates.

III. AUTARKY

Hitler believed (correctly) that Germany had been defeated in World War I in part by the British naval blockade that prevented food and other critical goods from entering the country. Therefore to eliminate this vulnerability he launched a program of economic autarky to make Germany self-sufficient in the event war were to break out again (plans for invading neighboring countries were drawn up as early as 1935). Combined with the worldwide atmosphere of trade protectionism that had been launched by the American Smoot-Hawley Tariff, Germany raised few suspicions since it looked like just one more European country retaliating against overseas duties.

Of course autarky negates the sizable economic benefits derived from the international division of labor and comparative advantage, so autarky predictably resulted in greater scarcity of normally imported goods. Domestic substitutes, to the extent they could be made, were of lower quality and expensive to produce. And Germany simply wasn’t rich in certain natural resources like petroleum and rubber. Those two raw materials in particular would be critical in conducting a future war so the Nazis planned to obtain them through invasion and conquest. But in the 1930’s the immediate economic effect of autarky policy was a significant sacrifice in the well-being and living standards of German citizens.

Herman Göhring, who was tasked with implementing autarky from 1936 through World War II, advised Allied occupational interrogators that their attempts to control prices and centrally plan postwar Germany’s economy would fail to benefit German citizens just as he had failed:

“Your America is doing many things in the economic field which we found out caused us so much trouble. You are trying to control peoples’ wages and prices—peoples’ work. If you do that you must control peoples’ lives. And no country can do that part way. I tried and it failed. Nor can any country do it all the way either. I tried that too and it failed. You are no better planners than we. I should think your economists would read what happened here.”

-Hermann Göhring interview with Henry Taylor in 1946

One more aspect of autarky was winners and losers in industry. The landed aristocratic classes, agriculturists, and industrialists in materials like steel and iron were all for State policies of self-sufficiency. They wanted to be protected from imports.

However manufacturers whose products—such as electronics, optics, and automobiles—were perceived as being of high quality on the world market were losers since trade barriers choked off their markets. So central state planning produced its own lists of corporate winners and losers. Between protectionism and wage controls, some German industries profited handsomely from Nazi economic policies (mercantilism) while others suffered.

IV. LIVING STANDARDS, TAXES, AND CITIZEN WELFARE

Aggressive moneyprinting at the Reichsbank was sure to spur inflation. As we mentioned earlier the State quickly imposed price controls to quell price pressures, but the price ceilings led to chronic shortages of consumer goods. This was not a problem in the eyes of the Nazis since their primary goals were full employment, autarky, and rearmament, not consumer well-being. One telling statistic is that while overall production rose 75% from 1932 to 1938 (on the surface a roaring success), production in capital and military goods rose 109% but production of consumer goods only rose 32%, reflecting the poor improvements in the living standards of everyday Germans.

Certainly many more Germans who had been jobless were working, but government direction of production towards its goals of self-sufficiency and militarization led to meager gains for German households.

The Nazis created an extensive welfare state (the National Socialist People’s Welfare or NSV) which abolished all private charity and made the government the sole deliverer of welfare services. Provisions included old age pensions, unemployment insurance, health insurance, rent subsidies, and more. The Nazis viewed the programs as an instrument of social engineering where the State would choose who could and couldn’t receive benefits.

To pay for all these ambitious schemes, the Nazis relied not only on the Reichsbank’s inflation, they also raised taxes and made rates more progressive. In the mid-1930’s the Nazis implemented automatic withholding of income taxes—nearly a decade before the U.S. government began the same practice. Indeed economic historians believe American New Dealers not only got the idea of automatic withholding from Nazi Germany, but that many New Deal programs for government mobilization of civilian employment, inflation, and wage and price controls were inspired by what was viewed at the time as Germany’s successful model.

The average marginal tax rate for the top 1% of earners was hiked from approximately 14% in 1932 to about 37% before the outbreak of World War II (source: Bartels, “Top Incomes in Germany: 1871-2013). However these statistics are somewhat misleading since the Nazis also imposed a 100% tax rate on “social undesirables” by simply confiscating all their property after they were arrested and carted away to labor and concentration camps.

Of course Jewish estates and businesses were among those seized, and since many German Jews were very wealthy one could view the Nazi policy as a progressive 100% tax on the assets (and income streams of those assets) of the economic elite—to the extent that they were Jews.

V. THE FINAL ANALYSIS

So as we return to the “capitalist or socialist” debate over Nazi Germany, the conclusion is that while it doesn’t fit neatly into either model, 1930’s Germany was a mix of some capitalism, some mercantilism, a large degree of socialism, and a huge dose of central planning.

Germany was highly successful in reducing unemployment, but over half the reduction was the result of government-paid works programs, military conscription, and removing large numbers of women, Jews, and social undesirables from the workforce—none of which have anything to do with private sector employment.

Production was ramped up sharply by government decree, but primarily for the purpose of building up the military and preparing the country for war with little improvement in living standards for the average citizen (save the previously jobless ones). Protectionism and wage and price controls further exacerbated the consumer welfare problem for the benefit of the State and certain connected industries.

The State increased taxation, made the code more progressive, abolished private charity, created a large welfare state that subsidized whatever the Nazis considered socially desirable behavior, and used protectionist policies in an attempt to achieve national economic self-sufficiency.

In the end, the National Socialist German Workers Party may not have been very good to workers, but it was highly interventionist and redistributionist, engaged in massive central planning, preserved private property, and its policies benefited several connected industries while hurting others. But its primary beneficiaries were the military and the State.

Note: The Economics Correspondent credits Professors Thomas Hall and J. David Ferguson of Miami (Ohio) University and their book “The Great Depression: An International Disaster of Perverse Economic Policies” for much of the material in this article.