How the Nazis created an econo

The economic miracle was the rapid transformation of Germany's economy, leading to near-zero unemployment and a powerful military, meticulously engineered by Hjalmar Schacht using unorthodox methods, ultimately contributing to the outbreak of World War II.

Germany in 1933 vs. 1939 #

• 1933: Berlin heavily affected by the Great Depression, 30% unemployment, widespread soup kitchens.
• 1939 (Hitler's Birthday): Near 0% unemployment, no soup kitchens, powerful new army with modern equipment built from scratch in six years.
• The transformation was considered an "economic miracle" despite Germany's limited raw materials.
• This miracle was engineered by Hjalmar Schacht, nicknamed the "Dark Wizard of International Finance."

Hjalmar Schacht's Background and Early Career #

• Son of a German merchant and Danish baroness, born in Schleswig-Holstein in 1877.
• Successful academic career, Ph.D. in economics from Kiel University.
• Rose through the ranks of Dresdner Bank, becoming its vice-director.
• Nationalist, briefly served as a financial consultant to German forces in Belgium during WWI.
• WWI showed Germany's weakness due to lack of natural resources and Allied naval blockade.
• Food shortages led to German rebellion and the end of Imperial Germany.

The Weimar Republic and Hyperinflation (1918-1923) #

• Schacht returned to banking, dipped into politics as a founding member of the center-left German Democratic Party (later absorbed into the German People's Party).
• Weimar Hyperinflation (1923): German money became worthless due to excessive money creation.
• Causes of Hyperinflation:
  • Balance of Payments Crisis: Reichsbank ran out of foreign exchange reserves.
    • Treaty of Versailles reduced export earnings (British seized merchant fleet, French/Belgian occupation of Ruhr, workers' protests).
    • Increased import needs due to territorial losses.
    • Reparations payments (2.5% of German GDP) rapidly depleted reserves.
  • Massive War Debt: Kaiser financed WWI by borrowing from citizens, leaving the Weimar Republic with huge debt.
• Limited Solutions:
  • Export more (slow).
  • Default on reparations (not an option with Allied armies nearby).
  • Radically cut imports (disastrous for industry, hard to control private citizens/firms).
  • Extreme austerity or defaulting on war debt (politically unfeasible).
• Government's Choice: Print money to buy gold for reparations and pay workers not making products.
• Consequences of Printing Money: Rapid decline in currency value, increased cost of imports, rising prices for basic goods, hyperinflation.
• Hyperinflation kept unemployment low but wiped out German savings and pensions.
• Germans, unhappy, elected a new government in 1923, bringing Schacht to fix the economy.

Schacht's Solution to Hyperinflation (1923) #

• Prepared for a new currency to remove zeros.
• Hyperinflation already wiped out domestic debt.
• Main issue remaining: Balance of payments crisis caused by reparations.
• Negotiated the Dawes Plan: Reduced reparation payments until Germany's economy recovered.
• With reduced debt and reparations, no reason to print money, so inflation fell.
• Economic stabilization attracted foreign investment, leading to the "Golden Age of Weimar."

Return of Economic Troubles (Late 1920s - Early 1930s) #

• As Germany recovered, reparation payments increased.
• Foreign investments and booming exports initially managed the balance of payments.
• 1929 US Stock Market Collapse:
  • Wall Street loans to Germany ended abruptly.
  • German exports collapsed due to US and UK protectionism.
• Weimar Germany faced another massive balance of payments crisis.
• Printing money was not an option (hyperinflation memories).
• Increasing exports was not an option (protectionism).
• Schacht failed to get a good deal on reparations and resigned as Reichsbank president in 1930.
• The next Weimar government intentionally crashed the economy.

Engineered Depression and Rise of Nazism #

• Method: Harsh austerity, raising taxes, cutting spending to make people poor and reduce imports, freeing reserves for reparations/debt.
• Consequences: Massive unemployment and poverty, leading to soup kitchen lines.
• Political Impact: Impoverished voters turned to radical parties (Communists, Nazis).
• Schacht appeared at a far-right rally in 1931, criticizing Weimar's reparation policies.
• 1932: Weimar negotiated a 90% reduction of reparation debt (Lausanne Conference) and planned work creation programs.
• **Despite improvements, it was "too little, too late."
• Nazis became the largest party in 1932, transforming Germany into a dictatorship.
• Hitler appointed Schacht to fix the economy again.

Schacht's Economic Miracle (1933-1936) - Nazi Era #

• Three Challenges:
  1. Get Germans back to work.
  2. Build a massive army (desired by Hitler).
  3. Solve the balance of payments problem (400 million marks foreign exchange loss annually due to imports and debt servicing while exports were only 4.8 billion Reichsmarks).
• Achieved rapid economic recovery, massive army buildup, no inflation, and no balance of payments crisis.
• Comparison to US: US also performed well, and German rearmament was eventually eclipsed, but Schacht's achievement was a "miracle" given Germany's resource scarcity and history of crises.

Schacht's Eight Unorthodox Economic Tools #

1. Hidden Deficit Spending (Neuer Plan):
   • Similar to FDR's New Deal initially (public works).
   • In reality, civilian spending quickly replaced by massive military spending.
   • Myefo Bills: Shell company (Metallurgical Gesellschaft) issued debt certificates (Myefo Bills) to industries for military orders; Reichsbank guaranteed these bills. This hid military spending and massive government borrowing.
2. Dual Wage Controls:
   • Outlawed labor unions and replaced them with the German Labor Front, which prevented wage rises.
   • Wages remained stagnant despite economic growth.
3. Price Controls:
   • Gradually introduced "price formation" controls on categories with big price hikes (e.g., textiles, seafood).
   • Outlawed price increases, replacing inflation with shortages.
4. Quotas:
   • Bureaucrats determined allocation of strategic resources (steel, coal) to essential sectors.
5. Selective Debt Default:
   • Announced Germany would default on foreign debts (US, UK, Netherlands, Switzerland) in 1934.
   • Backtracked partially, making deals with Netherlands, Switzerland, UK for favorable trade in exchange for debt payments.
   • Did not make a deal with the US, as US protectionism lessened their leverage.
6. Capital Controls:
   • German importers needed Reichsbank approval for foreign exchange to buy products abroad.
7. Subsidizing Exporters:
   • To counter American/British currency devaluations and maintain German export competitiveness without devaluing the Reichsmark (due to inflation fears).
8. Personal Capital Controls (on Jewish Emigration):
   • To prevent depletion of Reichsbank's foreign exchange reserves if Jews, with an estimated 8 billion Reichsmarks in wealth, emigrated and converted assets.
   • Allowed emigrants to take only about 50,000 Reichsmarks in assets.

Consequences of Schacht's Policies #

• Massive reduction of German freedom.
• Bureaucracy decided wages, prices, resource allocation, and imports.
• Schacht, a former liberal, likely saw these tools as a "necessary evil."
• Once the German economy was fully activated, resources (steel, labor, foreign exchange) became the limiting factor for military expansion.
• Squeezing Civilian Sector (from 1935):
  • Limited cotton, wool, leather imports to save foreign currency, leading to clothing shortages and price controls.
  • Reduced local government budgets and steel quotas for civilian construction (e.g., housing), making more steel available for the military but worsening housing shortages.
• Economic System: Not communism (businesses maintained ownership) but radical state control over business operations. Businesses that defied the state faced severe consequences (e.g., Hugo Junkers, Fritz Thyssen).

Schacht's Downfall (1935-1945) #

• 1935: Nazis officially announced rearmament, making Schacht's secret financial tricks less critical. Allied rearmament meant Germany needed to act quickly.
• Hitler vs. Schacht: Both wanted rearmament, but Schacht wanted to restore pre-war glory; Hitler believed total war with the US was inevitable and required a "total war economy."
• 1936: Hitler's Four-Year Plan:
  • Make Germany's army "strongest needed for total war."
  • Achieve self-sufficiency to avoid WWI-style blockade.
  • Undermined Schacht's authority by appointing Hermann Göring as plenipotentiary, overseeing economy, defense, and agriculture.
  • Göring pushed the war economy using Schacht's tools more aggressively.
• Schacht voiced concerns about overheating the economy but was ignored.
• 1937: Schacht resigned as Economy Minister but remained Reichsbank president.
• Continued Efforts to Solve Balance of Payments:
  • Intimidated smaller Eastern European nations (e.g., Romania) for cheaper oil.
  • Oversaw seizure of Austrian foreign exchange reserves and natural resources (iron ore) during the 1938 Anschluss.
• 1939: Hitler relieved Schacht from Reichsbank presidency, clearing the way for further military spending and extensive import controls.
• Schacht remained a "minister without duties" until 1944.
• 1944: Arrested by Gestapo for alleged role in assassination plot against Hitler, spent rest of war in a concentration camp.
• Post-War:
  • Freed by Allies, stood trial at Nuremberg (found not guilty of war crimes).
  • Sentenced to eight years hard labor by a German De-nazification court, released 1948.
  • Founded his own bank, wrote "The Magic of Money," served as financial consultant for several countries.
  • Died in 1970 at age 93.

Conclusion on Nazi War Economy #

• Pushed further by Göring and Albert Speer (Hitler's architect, later Economy Minister).
• Relied on plundered foreign resources, forced labor, slave labor, and terror.
• Ultimately, the Nazi war economy was out-produced by Allied powers (British, Soviets, Americans).
• The "economic miracle" enabled the killing of millions.
• Warning against oppressive policies being adopted by nations in hostile blocs to maximize output.
• Schacht, in helping the Nazis, saw his country destroyed.

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Summary #

Hjalmar Schacht, nicknamed the "Dark Wizard of International Finance," meticulously engineered Germany's economic revival under the Nazis through eight unorthodox policies. These included hidden deficit spending for rearmament, wage and price controls, rationing through quotas, selective debt defaults, capital controls, export subsidies, and personal capital controls affecting Jewish emigration. While Schacht, a former liberal, implemented these tools as a "necessary evil" to restore Germany's pre-war glory, Hitler's ambition for total war and the Four-Year Plan eventually led to Schacht's marginalization and removal. Despite Schacht's efforts to manage Germany's resource limitations and balance of payments, the Nazi war economy increasingly relied on plunder and forced labor, ultimately being outproduced by the Allies. The episode serves as a cautionary tale about the dangers of aligning with aggressive powers, as Schacht himself ended up in a concentration camp and witnessed Germany's destruction.