Like many other nations at the time, Germany suffered the economic effects of the Great Depression, with unemployment soaring after the Wall Street crash of 1929. When Adolf Hitler became Chancellor of Germany in 1933, he introduced policies aimed at improving the economy. The changes included privatization of state-owned industries, tariffs, and an attempt to achieve autarky (national economic self-sufficiency). Weekly earnings increased by 19% in real terms from 1933 to 1939, but this was largely due to employees working longer hours, while the hourly wage rates remained close to the lowest levels reached during the Great Depression. Reduced foreign trade would mean rationing of consumer goods like poultry, fruit, and clothing for many Germans.
The Nazis believed in war as the primary engine of human progress, and argued that the purpose of a country's economy should be to enable that country to fight and win wars of expansion. As such, almost immediately after coming to power, they embarked on a vast program of military rearmament, which quickly dwarfed civilian investment. During the 1930s, Nazi Germany increased its military spending faster than any other state in peacetime, and the military eventually came to represent the majority of the German economy in the 1940s.Evans, Richard J., The Third Reich at War (New York: Penguin, 2008), p. 333. This was funded mainly through deficit financing before the war, and the Nazis expected to cover their debt by plundering the wealth of conquered nations during and after the war. Such plunder did occur, but its results fell far short of Nazi expectations. The Nazi economy has been described as by several scholars. Overall, according to historian Richard Overy, the Nazi war economy was a mixed economy that combined free markets with central planning; Overy describes it as being somewhere in between the communist economy of the Soviet Union and the market economy of the United States.
The Nazi government developed a partnership with leading German business interests, who supported the goals of the regime and its war effort in exchange for advantageous contracts, subsidies, and the suppression of the trade union movement. Cartels and monopolies were encouraged at the expense of small businesses, even though the Nazis had received considerable electoral support from small business owners.
Nazi Germany maintained a supply of slave labor, composed of prisoners and concentration camp inmates, which was greatly expanded after the beginning of World War II. In Poland alone, some five million people were used as slave labor throughout the war. Among the slave laborers in the occupied territories, hundreds of thousands were used by leading German corporations including Thyssen, Krupp, IG Farben, Bosch, Blaupunkt, Daimler-Benz, Demag, Henschel, Junkers, Messerschmitt, Siemens, and Volkswagen, as well as the Dutch corporation Philips. By 1944, slave labor made up one-quarter of Germany's entire civilian work force, and the majority of German factories had a contingent of prisoners.
Pre-war: 1933–1939 Recovery and rearmament
The Nazis came to power in the midst of the Great Depression. The unemployment rate at that point in time was close to 30%. At first, the new Nazi government continued the economic policies introduced by the government of Kurt von Schleicher in 1932 to combat the effects of the Depression. Hitler appointed Hjalmar Schacht, a former member of the German Democratic Party, as President of the Reichsbank in 1933 and Minister of Economics in 1934. The policies he inherited included large public works programs supported by deficit spending—such as the construction of the Autobahn network—to stimulate the economy and reduce unemployment.Tooze, "The Wages of Destruction," 2007. Print. These were programs that were planned to be undertaken by the Weimar Republic during conservative Paul von Hindenburg's presidency, and which the Nazis appropriated as their own after coming to power.W. Dick; A. Lichtenberg (4 August 2012). "The myth of Hitler's role in building the German autobahn". Deutsche Welle. Retrieved 4 August 2012. Hjalmar Schacht created a scheme for deficit financing, in which capital projects were paid for with the issuance of promissory notes called Mefo bills, which could be traded by companies with each other. Schacht was one of the few finance ministers at the time to take advantage of the end of the gold standard to increase deficit spending. This was particularly useful in allowing Germany to rearm because the Mefo bills were not Reichsmarks and did not appear in the federal budget, so they helped conceal rearmament. When the notes were presented for payment, the Reichsbank printed money. This proved inadequate in 1938, when a large share of Mefo's five-year promissory notes fell due, so the government employed "highly dubious methods" where "banks were forced to buy government bonds, and the government took money from savings accounts and insurance companies" in order to pay the holders of Mefo bills, due mainly to a serious government cash shortage.Martin Kitchen, A History of Modern Germany 1800–2000, Maden, MA, Blackwell Publishing, 2006, p. 284 Meanwhile, Schacht's administration achieved a rapid decline in the unemployment rate, the largest of any country during the Great Depression. By 1938, unemployment was practically extinct. Price controls kept inflation in check but also squeezed out small farmers.Evans, Richard J. "Business, Politics, and War." The Third Reich in Power. New York: Penguin, 2006. 392. Print The government also introduced rent and wage controls.
The main economic priority of the Nazi government, which set it apart from previous German governments, was to rearm and rebuild Germany's military in preparation for an eventual war to conquer () in the East. Thus, at the beginning of his rule, Hitler said that "the future of Germany depends exclusively and only on the reconstruction of the Wehrmacht. All other tasks must cede precedence to the task of rearmament" and "in case of conflict between the demands of the Wehrmacht and demands for other purposes, the interests of the Wehrmacht must in every case have priority." This policy was implemented immediately, with military expenditures quickly growing far larger than the civilian work-creation programs. As early as June 1933, military spending for the year was budgeted to be three times larger than the spending on all civilian work-creation measures in 1932 and 1933 combined. Nazi Germany increased its military spending faster than any other state in peacetime, with the share of military spending rising from 1 percent to 10 percent of national income in the first two years of the regime alone. Eventually, it reached as high as 75 percent by 1944.
The first financial package for rearmament was adopted by the Nazi government in June 1933, and it was extremely ambitious. Schacht approved a figure of (equivalent to in ), to be spent on military buildup over eight years. By comparison, the entire national income of Germany in 1933 was (equivalent to in ), so the government was not merely proposing to increase military spending, but to make military production the primary focus of the national economy. Earlier in April, the cabinet had already agreed to release the military from the normal processes of budgetary oversight. Germany's international treaty obligations would not allow such extensive rearmament, so Hitler withdrew from the Geneva disarmament talks and from the League of Nations in October 1933. The German government feared that this might provoke immediate war with France at the time, but it did not. Still, the fear that war might come before Germany was prepared for it served to create a sense of urgency and reinforced the rearmament program.
The army and the navy prepared to quickly expand their capacity and manpower. Plans were made to secretly build an air force, and the army prepared to introduce conscription within two years and grow to 300,000 soldiers by 1937 (both were in violation of the Treaty of Versailles). At first, the navy did not benefit much from these rearmament plans, because Hitler wished to fight a land war in Europe and even hoped to make an alliance with the British Empire whereby the British would retain control of the seas. However, at the insistence of Admiral Erich Raeder, an expansion of the navy was also approved in 1934. This included the projected construction of 8 battleships (Versailles permitted 6), 3 aircraft carriers, 8 cruisers (Versailles permitted 6), 48 destroyers (Versailles permitted 12), and 72 submarines (completely banned by the treaty). The unprecedented size of the military budget was impossible to hide from foreign observers. When Hitler was asked for an explanation, he claimed that Germany was "engaged only in essential maintenance and renewal expenditure."
The enormous military buildup was financed to a large extent through deficit spending, including Mefo bills. Between 1933 and 1939 the total revenue of the German government amounted to , equivalent to in . Meanwhile, government expenditure (up to 60% of which consisted of rearmament costs) exceeded , equivalent to in , thus causing a huge deficit and rising national debt (reaching in 1939, equivalent to in ).H.P. Willmott World War II, p. 18. Joseph Goebbels, who otherwise mocked the government's financial experts as narrow-minded misers, expressed concern in his diary about the exploding deficit.Götz Aly, Hitler’s Beneficiaries: Plunder, Racial War, and the Nazi Welfare State, New York, Metropolitan Books, 2007, p. 39 The main concern was that the deficit could lead to high inflation. The government avoided inflation by keeping wages low, which they were able to do because the Nazis "destroyed the labor movement and instituted a reign of terror in the workplace." Hitler and his economic team expected that the upcoming territorial expansion would provide the means of repaying the soaring national debt, by using the wealth and manpower of conquered nations.
In general, the Nazi government continued the policies of previous German governments towards private and public enterprises. Little changed in the relationship between business and government in the early 1930s, as the Nazis tried to use existing industry to meet their goals of military buildup and autarky. There was no interference by the state in private industry as long as business leaders were willing to cooperate, but some uncooperative industrialists in areas important for the future war effort, such as aircraft manufacturer Hugo Junkers, were removed from their positions.
An elaborate bureaucracy was created to regulate imports of raw materials and finished goods with the intention of eliminating foreign competition in the German marketplace and improving the nation's balance of payments. The Nazis encouraged the development of synthetic replacements for materials such as oil and textiles. As the market was experiencing a glut and prices for petroleum were low, the Nazi government made a profit-sharing agreement with IG Farben in 1933, guaranteeing them a 5 percent return on capital invested in their synthetic oil plant at Leuna. Any profits in excess of that amount would be turned over to the Reich. By 1936, Farben regretted making the deal, as the excess profits by then being generated had to be given to the government.