[R-G] [BillTottenWeblog] Nazism and the German Economic Miracle

[Bill Totten]

by Henry C K Liu

Asia Times Online (May 24 2005)

This is Part Ten of a series by Henry C K Liu entitled World Order,
Failed States and Terrorism. Click here for previous parts:
http://atimes.com/atimes/others/world-order.html


The term "social market economy" was coined by one of German chancellor
Ludwig Erhard's close associates, economist Alfred Mueller-Armack, who
served as secretary of state at the Economics Ministry in Bonn from 1958
to 1963. Mueller-Armack defined social market economy as combining
market freedom with social equity, with a vigilant regulatory regime to
create an equitable framework for free market processes. The success of
the social market economy made the Federal Republic of Germany the
dominant component in the European Union. Focusing on the social aspect,
Erhard himself shied away from praising free markets. He felt that
social rules of the market-economy game must be adhered to as a
precondition in order to prevent unbridled pursuit of profit from
gaining the upper hand.

Erhard's concept of a socially responsive regulated market economy was
based on a fusion of the Bismarck legacy of social welfare and US New
Deal ideology of demand management through full employment, price
control, state subsidies, anti-trust regulations, state control of
monetary stability, et cetera. It was aided by the infusion of foreign
capital through the Marshall Plan. It proved to be effective for rapid
and strong recovery of the West German economy via guaranteed access to
the huge US market during the Cold War, culminating in the postwar
economic miracle (Wirtschaftswunder).

Yet Erhard's program bore a close resemblance to the early economic
strategy of the Third Reich. The main difference was that while the
Third Reich's program was one of economic nationalism, the Erhard
program was subservient to US geopolitical interests in the context of
the Cold War. By relying on US capital and US markets, chancellors
Konrad Adenauer and Erhard accepted the delay of German independence
from US domination for more than half a century. In contrast, Nazi
economic policy aimed at the reconstruction of the German economy
without the need for foreign capital, as a program for total and
immediate national independence.


Hitler's economic miracle

The Nazis came to power in Germany in 1933, at a time when its economy
was in total collapse, with ruinous war-reparation obligations and zero
prospects for foreign investment or credit. Yet through an independent
monetary policy of sovereign credit and a full-employment public-works
program, the Third Reich was able to turn a bankrupt Germany, stripped
of overseas colonies it could exploit, into the strongest economy in
Europe within four years, even before armament spending began. In fact,
German economic recovery preceded and later enabled German rearmament,
in contrast to the US economy, where constitutional roadblocks placed by
the US Supreme Court on the New Deal delayed economic recovery until US
entry to World War Two put the US market economy on a war footing. While
this observation is not an endorsement for Nazi philosophy, the
effectiveness of German economic policy in this period, some of which
had been started during the last phase of the Weimar Republic, is
undeniable.

There were major differences between the German situation in 1933 and
that in 1945. Not having been a battlefield in World War One, Germany in
1933 was not physically in ruins, as it was in 1945. What lay in ruins
was its political and economic institutions. But in 1933, Germany not
only did not have the benefit of the Marshall Plan, it was saddled with
ruinous war reparations and an inoperative credit rating. What Germany
had in 1933 was full sovereignty through which the Third Reich was able
to adopt policies of economic nationalism to full effectiveness. In
1945, Germany was deprived of sovereign power and national policies had
to be adjusted to comply with US and Soviet geopolitical intentions.
Economically, the dependence on foreign investments and credit forced
West Germany into an export economy at the mercy of its main market: the
United States.

After two and a half decades of economic reform toward neo-liberal
market economy, China is still unable to accomplish in economic
reconstruction what Nazi Germany managed in four years after coming to
power, that is, full employment with a vibrant economy financed with
sovereign credit without the need to export, which would challenge that
of Britain, the then superpower. This is because China made the mistake
of relying on foreign investment instead of using its own sovereign
credit. The penalty for China is that it has to export the resultant
wealth to pay for the foreign capital it did not need in the first
place. The result after more than two decades is that while China has
become a creditor to the US to the tune of nearing China's own gross
domestic product (GDP), it continues to have to beg the US for
investment capital.

The period between World Wars One and Two, like no other period in
modern European economic history, saw the success of centrally planned
economies in Germany and the Soviet Union, two major states. The United
States as the dominant victor of World War Two was determined to
perpetuate its hegemony by suppressing national planning everywhere to
prevent the emergence of economic nationalism and socialism. It promoted
global market capitalism and neo-liberal free trade to keep all other
economies subservient to the US economy. It is the economic basis of the
Pax Americana.


Stalin's New Economic Policy

In the Soviet Union, Josef Stalin's planned economy had followed the New
Economic Policy (NEP) of 1921 to 1928. NEP was in essence a mixed market
economy; the main part of the market was in state possession (banks,
industries, foreign trade, et cetera), while the peripheral part was
owned by collective or private entrepreneurs. NEP, while successful, did
not give the Soviet economy sufficient growth in the capital-goods
sectors (that is coal, steel and electricity, transportation, heavy
industry, et cetera), nor did it provide adequate food for the urban
population even as the middle peasantry managed to feed itself. To
overcome such structural obstacles and to combat general economic
backwardness inherited from centuries of Czarist rule, Stalin introduced
central planning as a strategy of national survival.

Starting from 1928, the Soviet economy was put under a system of
planning whereby all modes of production were socialized and foreign
trade was de-emphasized in favor of an autarkic system of domestic
demand and supply. The irony was that Soviet central planning adopted
much of its effective techniques from successful US experience. It was a
system of planning focused solely on unit end-results while
externalizing social costs. The key distinction was that the Soviets
rejected and bypassed the corporate structure and replaced shareholders
with state ownership. Stalin brought about "revolution from above". Its
main features were: strengthening of political dictatorship in the name
of the proletariat (equivalent to enhancing management authority in the
US in the name of shareholders), collectivizing kulak peasants
(equivalent to agri-business development in the US), emergency measure
authority (equivalent to government bailouts and regulations in the US),
introduction of a five-year plan structure (adopted from US corporate
strategic planning) and rapid expansion of urban labor force (equivalent
to urbanization in the US), and tight state control over agriculture
(equivalent to farm subsidy programs in the US), heavy industry
(equivalent to defense contracts in the US) and finance (equivalent to
central banking in the US). Between 1934 and 1936 the Soviet economy
achieved a spectacular economic growth rate that continued despite
political purges of Trotskyites between 1936 and 1938. Economic growth
was unfortunately interrupted by war in 1941. German invasion of the
Union of Soviet Socialist Republics was not independent of apprehension
of continued Soviet economic success.

Propaganda works. It worked in the USSR, in Nazi Germany, in imperial
Japan and in the capitalist US, each to instill in the general public an
acceptance of its system as being the suitable one if not the best,
despite visible shortcomings. It helped achieve optimal effectiveness
and stability in the overall economy in all these countries.

Nazi Germany provided another example of successful inter-war economic
planning. One of the main differences between the Nazi and the Soviet
economic systems was that the Nazis' was a mixed economy with strict
state control while the Soviets' was a state-owned economy. Furthermore,
being heavily influenced by the ideas of Walter Rathenau (1867-1922),
German economic planners did not seek to build anew with revolutionary
zeal as the Russians did, but rather to reform, molding the existing
form of decentralized capitalism into a more effective centralized
system with massive combines to support national aims.


The Rathenau factor

Rathenau, German industrialist, social theorist, and statesman, was the
son of Emil Rathenau (1838-1915), founder of the gigantic German public
utilities company Allgemeine Elektrizitaetsgesellschaft (AEG). He
directed the distribution of raw materials in World War One and became
minister of reconstruction (1921) and later foreign minister (1922) of
the Weimar Republic. He represented Germany at the Cannes and Genoa
reparations conferences and negotiated the Treaty of Rapallo in which
Germany accorded the USSR de jure recognition, the first such
recognition extended to the new Soviet government. The two signatories
mutually canceled all prewar and war debts and renounced war claims.
Particularly advantageous to Germany was the inclusion of a
most-favored-nation clause and of extensive free-trade agreements. The
treaty enabled the German army, through secret agreements, to produce
and perfect in the USSR weapons forbidden by the Treaty of Versailles. A
Jew, Rathenau was assassinated in 1922 by anti-Semitic nationalist
fanatics who opposed his attempts to fulfill war-reparation obligations
to the Western victors. A strong nationalist who played an important
role in Germany's war efforts in World War One, Rathenau was also a
strong proponent of postwar international cooperation and his diplomatic
initiatives played a key role in breaking Germany's postwar diplomatic
isolation.

In his writings, Rathenau criticized free-market capitalism and argued
that technological change and industrialization were pushing
civilization toward a stage of high mechanization, in which the human
soul would be under threat. In an attempt to find an alternative to
laissez-faire capitalism that did not involve state socialism and
Marxism, Rathenau proposed a decentralized, democratic social order, in
which the workers would have more control over production and the state
would exert more control over the economy. His translated works include
In Days to Come (1921) and The New Society (1921). Despite his great
contribution to the German economy, Rathenau epitomized the living
target of Adolf Hitler's accusation of internationalist Jewish treachery
that betrayed the German nation. Hitler's rejection of the loyal
nationalist support of the German Jews played an undeniable role in his
own defeat. Jewish contribution to the flowering of German economy,
culture and civilization had been the strongest in any European nation.
Nazi persecution of the Jews was a strategic error more fundamental than
the Nazi invasion of the USSR. The emigration of German Jews to the
West, particularly to the US, played a critical role in the defeat of
Germany in World War Two. It is a lesson that the Arab nation in
general, and Palestinians in particular, have yet to learn.


The economic power of full employment

>From the very outset of his rule, Hitler, whose main short-term goal was
the economic revival of Germany with the help of German nationalist
bankers and industrialists, won popular support of the nation. Hitler
adopted an aggressive full-employment campaign. Between January 1933 and
July 1935 the number of employed Germans rose by a half, from 11.7
million to 16.9 million. More than five million new jobs paying living
wages were created. Unemployment was banished from the German economy
and the entire nation was productively engaged in reconstruction.
Inflation was brought under control by wage freeze and price control.
Besides this, taking into account the lessons learned during 1914 to
1918, Hitler aimed at creating an economy that would be independent from
foreign capital and supply, and be well protected from another blockade
and economic war. For Germans, all of the above was proof that Hitler
was the one who had not only brought Germany out of economic depression
but would take it directly to prosperity with new pride. German popular
trust in the Fuehrer rose dramatically.

In September 1936, British economist John Maynard Keynes, whose ideas
had been credited as behind US president Franklin Roosevelt's New Deal,
prepared a preface for the German translation of his book, The General
Theory of Employment, Interest and Money. Addressing a readership of
German economists, Keynes wrote: "The theory of aggregate production,
which is the point of the following book, nevertheless can be much
easier adapted to the conditions of a totalitarian state, than ... under
conditions of free competition and a large degree of laissez-faire. This
is one of the reasons that [justify] the fact that I call my theory a
general theory. Although I have, after all, worked it out with a view to
the conditions prevailing in the Anglo-Saxon countries where a large
degree of laissez-faire still prevails, nevertheless it remains
applicable to situations in which state management is more pronounced."
Keynes clearly understood that the greater the degree of state control
over any economy, the easier it would be for the government to manage
the levers of monetary and fiscal policy to manipulate macroeconomic
aggregates of total output, total employment, and the general price and
wage levels for purposes of moving the overall economy into directions
more to the economic-policy analyst's liking.

The radical Spartacists in Germany regrouped themselves as the Communist
Party in 1920. They continued their opposition to the liberal government
of the Weimar Republic. From 1923 to 1929, the Communists always
obtained about ten percent of the seats in the Reichstag. Unlike elitist
Italian Fascism, Nazism had a high regard for the German peasant. Unlike
Fascist Italy, Nazi Germany, while imposing sweeping government control
over all aspects of the economy, was not a corporate state.

In four short years, Hitler's Germany was able to turn a Germany ravaged
by defeat in war and left in a state national malaise by the liberal
policies of the Weimar Republic, with a bankrupt economy weighted down
by heavy foreign war debt and the total unavailability of new foreign
capital, into the strongest economy and military power in Europe. How
did Germany do it? The centerpiece was Germany's Work Creation Program
of 1933 to 1936, which preceded its rearmament program. Neo-liberal
economists everywhere seven decades later have yet to acknowledge that
employment is all that counts and living wages are the key to national
prosperity. Any economic policy that does not lead to full employment is
self-deceivingly counterproductive, and any policy that permits
international wage arbitrage is treasonous. German economic policies
between 1930 and 1932 were brutally deflationary, which showed total
indifference to high unemployment, and in 1933 Hitler was elected
chancellor out of the socio-economic chaos.

The financing of Nazi economic-recovery programs drew upon sovereign
credit creation techniques already experimented prior to Hitler's
appointment as chancellor. What changed after 1933 was the government's
willingness to create massive short-term sovereign credit and the its
firm commitment to retire in full the debt created by that credit.
Short-term sovereign credit was important to change the general climate
of distrust on government credit. The quick rollover of short-term
government notes created popular trust within months in German sovereign
credit domestically.

Hitler told German industrialists in May 1933 that economic recovery
required action by both the state and the private sector. The
government's role was limited to encouraging private-sector investment,
mainly through tax incentives. He expressed willingness to provide
substantial public funding only for highway projects, not for industry.
Investment was unlikely if consumers had no money to spend or were
afraid because of job insecurity to spend money to buy products
produced, and Hitler understood that workers needed decent income to
become healthy consumers. Thus full employment was the kick-start point
of the economic cycle. To combat traditional German fear of the social
consequences of appearing better off than their neighbors, Nazi
propaganda would psychologically stimulate the economy by developing a
lust for life among consumers.

Hitler stressed on May 31 1933, that the Reich budget must be balanced.
A balanced budget meant reducing expenditures on social programs,
because Hitler intended to reduce business taxes to promote needed
private investment. To avoid reducing social programs, a large work
program without deficit spending had to be financed outside of the Reich
budget. Hitler resorted to "pre-financing"
(Vorfinanzierung) by means of "work-creation bills"
(Arbeitsbeschaffungswechseln), a classic response of using monetary
measures to deal with a fiscal dilemma.

Under the scheme of "pre-financing" with work-creation bills, the Reich
Finance Ministry distributed these WCBs (three months, renewable up to
five years) to participating credit institutions and public agencies.
Contractors and suppliers who required cash to participate in
work-creation projects drew bills against the agency ordering the work
or the appropriate credit institutions. These credit institutions then
accepted (assumed liability for payment of) the bills, which, now
treated as commercial paper, could rediscount the bills at the
Reichsbank (central bank). The entire process of drawing, accepting and
discounting WCBs provided the cash necessary to pay the contractors and
suppliers. The experience of successful rollover every three months
quickly established credit worthiness. The Reich Treasury undertook to
redeem these bills, one-fifth of the total every year, between 1934 and
1938, as the economy and tax receipts recovered. As security for the
bills, the Reich Treasury deposited with the credit institutions a
corresponding amount of tax vouchers (Steuergutscheine) or other
securities. As the Treasury redeemed WCBs, the tax vouchers were to be
returned to the Treasury. Hitler increased the money supply in the
German economy by creating special money for employment.

In the US Banking Panic of 1907, J P Morgan (1837-1913) did in essence
the same thing. He strong-armed US banks to agree to settle accounts
among themselves with clearinghouse certificates he issued rather than
cash and thus illegally increased the money supply without involving the
government, and ended up owning a much larger share of the financial
sector paid for with his own paper, ironically with the gratitude of the
government. The difference was that the economic benefit went to Morgan
personally rather than to the nation as in Nazi Germany and the private
money was used to save the banks rather than to save the unemployed.

Nazi economic experts understood that sovereign credit creation for
purposes of job creation posed no inflationary threat and that it would
be a far more responsible policy than the conservative approach of tax
increases and welfare cuts to balance government budgets. The idiotic
policy of monetary restraint and social-spending reduction to balance
government budgets in order to pay foreign debts is still being
advocated by the International Monetary Fund (IMF) in debtor nations
around the world - except for the United States, the world's largest
debtor nation, which uses dollar hegemony as an escape hatch or, more to
the point, escape hedge. Redeeming WCBs did burden the 1934-39 Reich
budget, but the decline in Reich expenditure for welfare support and
other tax subsidies as a result of full employment recovery more than
offset the redemption payments. The surplus was then used to reduce
public debt and taxes further.

There were legal, political and institutional restrictions unique to
Germany on the scope of the Reichsbank that virtually dictated resources
to WCBs as a way of putting six million unemployed Germans back to work.
But the principle of WCBs can be applied to the US or China or any other
country today to combat unacceptably high levels of unemployment. Alas,
this common-sense approach is faced with firm opposition rationalized by
obscure theories of inflation in most countries. The real reason is that
the banking sector can reap excess profit by treating high unemployment
as an externality in the economy that translates high unemployment and
low wages directly into corporate profits. The profit from high
unemployment is kept in private hands, while the cost of high
unemployment is socialized as government expenditure.

In 1933, Hitler sought to reassure Germany's business leadership that
Nazi rule was consistent with the preservation of the free-market
system, because he needed the support of the industrialists. He could
buy that support by keeping wages down during the recovery, but any
rigorous effort to curb prices and profits would alienate the business
community and slow down economic recovery. Instead, Hitler sought to
restore profitability to German business through reduced unit cost
achieved by increasing output and sales volume, rather than through a
general increase in prices (Mengenkonjunktur, niche Preiskonjunktur -
output boom, not price boom). Adoption of "performance wage"
(Leistungslohn - payment on a price-rate basis) increased labor
productivity, thereby driving costs down and profit up. Some upward
price movements were permitted to adjust price relationships between
agricultural and manufactured products and between goods with elastic
and inelastic demands, also to prevent price wars and below-cost
dumping. These principles of "output boom, not price boom" and
"performance wage" could also work in combating inflation today in many
economies generally and China specifically.

Hitler saved the German farmers from their heavy debt burden through
relief programs and through subsidized farm prices. The stable farm
income came at the expenses of the middlemen institutions, but Hitler
sustained popular support by the provision of living income to
consumers. Had Nazi Germany been a member of the World Trade
Organization (WTO), this option would have been foreclosed to it. Hitler
sought price stability only in sectors critical to the national economy
and to the ultimate goal of rearmament. Germany had no overall price
policy until the 1936 Four Year Plan, which concentrated economic
authority in the hands of Hermann Goering for war production and put an
end to regulated free-market policies.

Business managers generally make investment and employment decisions
based on their judgment of the prospect for new orders. The difference
between German economic recovery under Hitler and US economic stagnation
under Roosevelt in the 1930s was the degree of uncertainty for new
orders for goods. Hitler made it clear that after 1936, a major
rearmament program would make heavy demand on German durable-goods and
capital-goods industries without the need to export. With that
assurance, German industry could plan expansion with confidence.
Roosevelt was unable to provide such "confidence" to industry and had to
rely on anemic market forces until after the Japanese attack on Pearl
Harbor, Hawaii.

_____

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