Proto-Keynesians in the Last Years of Weimar Republic Germany

It is well known that the Great Depression hit Weimar Republic Germany particularly hard. There was severe unemployment, and the wage and price deflation was also severe, as can be seen in these graphs (with data from Mitchell 1992):

Moreover, the wage and price deflation did not bring about a rapid or effective recovery. Austerity policies clearly failed in the Weimar Republic, and a number of German businessmen, bureaucrats, journalists, and unorthodox economists were driven to advocate the only real policy solution that had not been tried: namely, unemployment relief and stimulus of the economy by large-scale deficit spending and public works programs.

Proto-Keynesian ideas were already being advocated in Germany before 1933 by the following people:

(1) Wilhelm Grotkopp (a business journalist) and Heinrich Drädger (a businessman) through the organisation they created in November 1931 called the Studiengesellschaft fur Geldund Kreditwirtschaft (Society for the Study of Money and Credit).
Both Grotkopp and Drädger held PhDs in economics, and advocated countercyclical fiscal policy in various meetings of their society in 1931 and 1932 and in writings for the public (Garvy 1975: 398).

(2) Wladimir S. Woytinsky (a statistician of the German Trade Union Federation).
Wladimir S. Woytinsky had been a Russian Bolshevik and then Menshevik who had fled to Germany in 1922. In 1931, Woytinsky published a paper in a German trade union journal supporting a credit-financed public works program for Germany (Garvy 1975: 399). This paper was called “Aktive Weltwirtschaftspolitik” (Arbeit 6 [June] 1931). In 1931 and 1932 Woytinsky continued a public campaign thorough the media to support his proposals, and he enlisted the support of Fritz Tarnow (who had already endorsed expansionary spending in a book) and Fritz Baade (head of a government agency for agricultural marketing). The plan was dubbed the “WTB Plan” (from the initials of Woytinsky, Tarnow and Baade).

(3) Ernst Wagemann (the head of both the Reich’s Statistical Office and the Institute of Business Cycle Research).
In 1932, Ernst Wagemann advocated a plan for reducing unemployment by deficit-financed public works programs in a book called Geld- und Kredit Reform (Berlin, 1932).

(4) Wilhelm Lautenbach (an official in the Ministry of Economics).
Wilhelm Lautenbach had in September 1931 advised the Weimar government to use bank credit for public works programs to relieve unemployment in a memorandum called “Moglichkeiten einer Konjunkturbelebung durch Investition und Kreditausweitung” (Opportunities for Economic Recovery through Investment and Credit Expansion).

These proposals to use fiscal stimulus and public works received varying degrees of support from other intellectuals in Germany such as Adolph Lowe, Emil Lederer, Werner Sombart, F. Baade, and G. Colm (Garvy 1975: 398).

In particular, the deficit-financed public works proposals of W. S. Woytinsky are interesting, and deserve further analysis.

Woytinsky had even corresponded with Keynes in December 1931, and requested that Keynes participate in an international trade union committee which Woytinsky thought would endorse his ideas (though the Board of the International Labour Federation failed to endorse or examine Woytinsky’s plan: see Garvy 1975: 400).

Keynes replied that his spoken German was not good enough and he was too busy to be involved in this endeavour (Garvy 1975: 401). A modified version of Woytinsky’s plan was later formally adopted by the German Trade Union Federation in April 1932 (Garvy 1975: 401), but, astonishingly, the German Social Democrats and their prominent Marxist intellectual Rudolf Hilferding refused to give Woytinsky’s plan any support (Garvy 1975: 401).

One can only marvel at how stunningly worthless the German Social Democrats were during the last years of the Weimar Republic in Germany, in that they shunned the only real economic policy that could have rapidly ended the Great Depression. A similar state of affairs occurred in Britain, where the British Labour party endorsed Neoclassical austerity and also shunned Keynesian policies to end the Great Depression in Britain.

In a meeting between Wladimir S. Woytinsky and the German Social Democrats in August 1932 in which Woytinsky’s plans for public works programs were discussed, the monumentally stupid Marxist Rudolf Hilferding rejected Woytinsky’s ideas to end unemployment by public works, because, he maintained, this was not a Marxist policy (Berman 2006: 114).

Wladimir S. Woytinsky later wrote an account of the meeting in his autobiography:

“The [sc. WTB] Plan gained more and more popularity in the nation [sc. in 1932], but the S-D party remained adamant and refused to use the slogan of public works in the Reichstag election campaign in July, 1932. It preferred to stick to Brüning’s guns — defense of the currency. The results of the election were catastrophic for the Republic. The Nazis gained more than one third of all the votes and 230 seats out of the Reichstag’s 568. The new Reichstag had a clear anti-republican majority of Nazis and Communists and was unable to form a republican government. All parties began to brace themselves for a new appeal to the voters.

Leipart called me to his office. ‘The party,’ he told me, ‘has agreed to meet with us to discuss the plan of public works. There will be forty party representatives and as many from the labor unions. Will you prepare our case for the conference?’

I asked Gerhard Colm, a scholar of national reputation, not connected with the labor movement, to be our reporter. The party named [sc. Rudolf] Hilferding as its spokesman. I was slated to open the panel discussion with a rebuttal of Hilferding’s arguments.

The conference was held in a large room in the Reichstag building. Everyone sat around a horseshoe-shaped table covered with green cloth. Wells occupied the chair, with the union people at his right and the Reichstag members at his left. Red in the face, he opened the discussion grimly. ‘It is time to end this silly dispute. Inflation-deflation, public works ... I do not know what. . . . This non-sense must be stopped.’

Colm spoke in an academic way, developing a theory that since has become commonplace. The price level and volume of economic activities can be regulated by monetary and credit measures. Public works is the best, and politically the most expedient, approach to the problem.

Hilferding was the next speaker. ‘Colm and Woytinsky,’ he said, ‘are questioning the very foundations of our program, Marx’s theory of labor value. Our program rests on the conviction that labor, and labor alone, creates value. Prices deviate from labor values under the impact of the interplay of supply and demand. Depressions result from the anarchy of the capitalist system. Either they come to an end or they must lead to the collapse of this system. If Colm and Woytinsky think they can mitigate a depression by public works, they are merely showing that they are not Marxists.’

My first thought was that Hilferding could not have taken that nonsense seriously. Obviously, he had a limitless contempt for his listeners and did not condescend to argue before them but appealed to the cliches in their brains. A score of deputies listened to him as to an oracle. Wells sat motionless in his armchair, his eyes closed and his head sunk on his breast. Hilferding ended with an appeal to the party to rise united to the defense of a sound currency and Marxism.

I began my rebuttal. ‘The flood of unemployment is rising, the people are at the end of their patience. The workers, holding us responsible for their misery, are deserting the party to join the Communists and Nazis. We are losing ground. There is no time to waste. Something must be done before it is too late. Our plan has nothing to do with any particular value theory. Any party can execute it. And it will be executed. The only question is whether we take the initiative or leave it to our enemies. It is not true — ’

I felt that I was gaining the audience, but suddenly a deafening noise came from the head of the table. Wells was pounding the desk with both fists and shouting, ‘Shut up! I will not permit — ’

‘You will not permit what?’ I asked in consternation.

‘You said it is not true.’ If what Hilferding said is not true he must be a liar! I will not permit — ’

Hell broke out, a dozen people shouting. Wells fell back into his chair, with closed eyes and his head sunk on his breast, sound asleep. Leipart asked me to continue, but the effect of my speech was completely lost. I elaborated the technical and financial aspects of the Plan. Nobody listened — for the union people this was old stuff and the Reichstag deputies did not care. After a few remarks from both sides, Leipart put the ADGB plan to a vote. All the representatives of the unions raised their hands in favor of it, all the representatives of the party except Baade voted ‘nay.’

The break between the party and the unions was complete.” (Woytinsky 1961: 470–472).

So, at this meeting, the Social Democratic party doomed itself to continuing electoral disaster, and revealed itself to be in the grip of deranged Marxists, who, urged on by Hilferding, were united in the defence of “sound currency [!] and Marxism.”

In contrast, the left-wing of the Nazi Party led by Gregor Strasser supported a large-scale public works program called the “emergency program” in May 1932, when Strasser had given his famous “Work and Bread” speech in the Reichstag. Here we must remember that the actual name of the Nazi party was the “National Socialist German Workers’ Party” (Nationalsozialistische Deutsche Arbeiterpartei or NSDAP), and it did have a real anti-capitalist wing around Gregor Strasser called the Strasserites, who were purged in the Night of the Long Knives (29 June 1934).

The endorsement by Gregor Strasser of a proto-Keynesian policy to end unemployment in Germany in May 1932 was surely one factor in the electoral success of the Nazi party in July 1932, when the party won 37.3% of the vote in the Reichstag elections.

Of course, it is well known that when Hitler became chancellor of Germany in 1933, he began to enact large-scale deficit spending which financed public works programs, civilian spending and rearmament.

Years later, the Post Keynesian economist Joan Robinson – in an article in 1972 – pointed out the following:

“I do not regard the Keynesian revolution as a great intellectual triumph. On the contrary, it was a tragedy because it came so late. Hitler had already found how to cure unemployment before Keynes had finished explaining why it occurred.” (Robinson 1972: 8).

However, Joan Robinson was not quite right here, because the inspiration for these policies, as we have seen, did not originally come from the Nazis, but from German businessmen, bureaucrats, journalists, unorthodox economists and from Wladimir S. Woytinsky, who had been, before coming to Germany, a literal Russian Bolshevik and Menshevik in the Soviet Union.

The Nazi deficits from 1933 were hidden and kept secret by means of special bills called Öffa bills and MEFO bills which were redeemable at the Reichsbank for reserves by German banks. The most important of these bills was the MEFO bill, issued by a dummy company called the Metallurgische Forschungsgesellschaft, m.b.H. (MEFO). For an extended discussion of MEFO bills and Hjalmar Schacht’s ingenious controls on foreign exchange and trade, see here.

The real lesson here is that the sheer catastrophe of the Great Depression in Germany forced original thinkers to the only solution left that could actually work: large-scale deficit spending and public works programs.

As I outlined in a previous post on pre-1938 fascist Austria here, history ran a most fascinating experiment for us from 1933 to 1939: in Austria, the clerical fascists pursued austerity with wage and price deflation from 1934 to 1937, partly under advice from Ludwig von Mises, while in Germany from 1933 the National Socialist government of Hitler implemented deficit-financed stimulus and public works programs and other highly effective economic interventions (such as restrictions on imports and rationing of foreign exchange to overcome balance of payments problems). Germany rapidly recovered from the Great Depression.

The best way to illustrate this is simply by looking at a graph of both Austrian and German unemployment from 1928 (with German unemployment rate from Mitchell 1992: p. 160 and 163, B2, and Austrian unemployment from Stiefel 1979: 29):

This speaks for itself.

BIBLIOGRAPHY
Berman, Sheri. 2006. The Primacy of Politics: Social Democracy and the Making of Europe’s Twentieth Century. Cambridge University Press, Cambridge.

Garvy, George. 1975. “Keynes and the Economic Activists of Pre-Hitler Germany,” Journal of Political Economy 83.2: 391–405.

Mitchell, Brian R. 1992. International Historical Statistics: Europe 1750–1988 (3rd edn.). Stockton Press, New York.

Robinson, Joan. 1972. “The Second Crisis of Economic Theory,” The American Economic Review 62.1–2: 1–10, at p. 8

Stiefel, Dieter. 1979. Arbeitslosigkeit: soziale, politische und wirtschaftliche Auswirkungen – am Beispiel Österreichs 1918–1938. Duncker & Humblot, Berlin.

Woytinsky, Wladimir S. 1961. Stormy Passage: A Personal History through Two Russian Revolutions to Democracy and Freedom: 1905–1960. Vanguard Press, New York.

What Hoover Should have Done in 1931

The tired and idiotic meme that Hoover tried a properly designed Keynesian stimulus in 1931 and 1932, and that this allegedly should have stopped the Great Depression continues to permeate the minds of various Austrians.

Robert P. Murphy quotes from his book The Politically Incorrect Guide to the Great Depression and the New Deal (2009) in a recent blog post:

“As with the evaluation of Hoover’s high-wages policy, his high-federal-budget policy can be usefully contrasted with the depression occurring at the end of Woodrow Wilson’s watch. With the conclusion of World War I, the U.S. government slashed its budget from $18.5 billion in FY 1919 down to $6.4 billion one year later. As the U.S. economy entered a depression at the turn of the decade, receipts fell. The Wilson Administration responded by cutting spending even more, down to $5.0 billion in FY 1921 and then following with a single-year slash of 34 percent, down to $3.3 billion in FY 1922. (Because of the fiscal/calendar year mismatch, it is debatable whether Wilson or Harding should be associated with the FY 1922 budget.)

So how do the two strategies stack up? We already know that Hoover faced 20+ percent unemployment after the second full year of his Keynesian stimulus policies. Wilson/Harding, on the other hand, was Krugman’s worst nightmare, taking the axe to federal spending in a way that would have given even Ron Paul the willies, and during a depression to boot! Yet as we already know, unemployment peaked at 11.7 percent in 1921, then began falling sharply. The depression was over for Harding, at the corresponding point when a desperate Hoover had decided to (try to) rein in his massive budget deficits” (Murphy 2009: 49).

Some basic facts should be stated first:

(1) In fiscal year 1930, Hoover actually ran a federal budget surplus, not a deficit. Federal policy was contractionary in this fiscal year.

(2) The Federal Reserve raised the discount rate in 1931.

(3) In fiscal year 1933, total federal spending was cut in relation to fiscal year 1932. Hoover introduced the Revenue Act of 1932 (June 6) which increased taxes across the board and applied to fiscal year 1932 and subsequent years. These were contractionary measures, and these two policies are the very antithesis of Keynesianism stimulus.

Murphy declares that Hoover engaged in “Keynesian stimulus policies.” If by this he means that the effect of federal government fiscal policy was weakly expansionary in 1931 and 1932 relative to the collapse of GNP, this is true enough. In 1931, for example, it is well known that fiscal policy was expansionary: one of the stimulative measures (passed over Hoover’s objections, however) included the Veterans’ Bonus Bill. The budget may have expanded demand by 2% of GNP in 1931 more than the 1929 budget, but this was not large relative to the collapse of GNP, which is the key (Temin 1989: 27–28). In 1931, GNP collapsed by 16.11% relative to its level in 1930, from $91.2 billion to $76.5 billion.

If by these words he means that Hoover engaged in the type of proper stimulative Keynesian fiscal expansion designed to halt the depression to restore growth, he is wrong, and contemptibly wrong.

In fiscal years 1931 and 1932, Hoover did indeed raise federal spending (especially in 1932), but it was woefully inadequate. In no sense do these miserable increases compared to the scale of the GDP collapse contradict Keynesian economics. Once you factor in state and local austerity and surpluses total federal spending increases was reduced.

In order to stimulate an economy back to its growth path and potential GDP, one has to do the following:

(1) calculate potential GDP and estimate how severely GDP is likely to collapse by,
(2) estimate the Keynesian multiplier and
(3) then design fiscal policy to expand demand by tax cuts and/or appropriate level of discretionary spending increases to hit potential GDP via the multiplier.

In 1931, US GDP collapsed by $14.7 billion dollars, in a debt deflationary spiral with bank failures and a collapse in consumption, employment and investment. If we assume a multiplier of 4 (which is very high), then Hoover’s federal spending increase of $257 million dollars in fiscal year 1931 might have generated at most $1.028 billion of GDP in fiscal year 1931 (the effect of state and local fiscal policy reduced this, however).

But GDP fell by $14.7 billion dollars, and it is the height of idiocy to seriously argue that Hoover’s increase in spending in fiscal year 1931 could have prevented the depression, to offset such a catastrophic fall in GDP. It could never have done any such thing.

To stop the downturn, Hoover needed to do the following:

(1) spend an additional $3.675 billion in fiscal year 1931 in stimulus;

(2) Hoover needed to at least stop fiscal contraction by states and local government, so some bailout of them was necessary to make (1) work.

He did no such thing. Not even close. $257 million dollars is not $3.675 billion. Hoover’s federal fiscal expansion was 6.9% of the sum required.

Of course, if Hoover had quickly stabilised the banking system in 1931, the GNP collapse would have been significantly reduced as well, and the scale of the needed stimulus would have been reduced too.

There is an easy empirical way to demonstrate that a Keynesian stimulus failed and that, moreover, something is wrong with Keynesian theory:

(1) in an economy experiencing a recession, calculate potential GDP, estimate the Keynesian multiplier and
(2) design fiscal policy to expand demand by tax cuts and/or appropriate level of discretionary spending increases to hit potential GDP via the multiplier, and if
(3) the stimulus is implemented and
(4) GNP continues to collapse, then you have empirical evidence that your stimulus failed, and that there are problems with your theory.

If in 1931, Hoover had designed a fiscal policy that stimulated the economy by an additional $3.675 billion, and US GNP had simply continued to collapse, then this would have been a failed stimulus. It would provide strong empirical evidence against Keynesian theory.

However, no such thing was ever done. Keynesianism did not fail, because Hoover never tried a proper Keynesian stimulus. Hoover’s fiscal policy in 1931 and 1932 was weak and feeble fiscal expansion, woefully inadequate.


BIBLIOGRAPHY

Murphy, Robert. P. 2009. The Politically Incorrect Guide to the Great Depression and the New Deal, Regnery Publishing, Inc. Washington, DC.

Temin, P. 1989. Lessons from the Great Depression, MIT Press, Cambridge, Mass.

Steve Keen on Fiscal Stimulus

A rather brief little comment here from Steve Keen, but still worth emphasising:

(1) a great deal of the deficits in many nations are just automatic stabilizers: the result of the collapse in tax revenues and rise in unemployment; in this sense, the rise in public debt is just a symptom of the private sector malaise.

(2) the Eurozone is a badly designed neoclassical disaster. We should not be surprised if it breaks up.

Austrians on Public Works and Fiscal Stimulus

I have recently seen this post by Mario Rizzo here:

Mario Rizzo, “The Infrastructure Death Rattle,” November 6, 2011.

Rizzo makes a curious comment in his opposition to Obama’s mild stimulus plan:

“The case for infrastructure spending must be made on the value of what is to be built or repaired and the efficiency with which that is done, not on the number of jobs that may be created. Frederic Bastiat made this point in the middle of the nineteenth century.”

This suggests that Rizzo is not completely opposed to the idea of public works spending, despite his criticisms.

It strikes me that two rather well known Austrian economists can be regarded as having endorsed or at least acknowledged the usefulness of fiscal stimulus and public works in a depression: Hayek and Ludwig Lachmann. Here one should always be aware of the diversity in opinion that does characterise the Austrian school, with its different strands.

Lachmann most notably had this to say about Keynesian stimulus during depression:

“Policies based on Keynesian macro-economic recipes might have succeeded (had they then been tried) in 1932 and did succeed in 1940 because it so happened that at the bottom of the Great Depression as well as during the Second World War all sectors of the economy were equally affected. In 1932 any kind of additional spending on whatever kind of goods would have had a favourable effect on incomes because there was unemployment everywhere, as well as idle capital equipment and surplus stocks of raw materials. During the war the situation was exactly the opposite, but precisely for this reason the same recipes, but with opposite sign, applied. With millions of men and women in the armed forces everything, not merely labour, was scarce and any reduction in demand anywhere welcome.” (Lachmann 1973: 50).

Lachmann’s point here is also that Keynesian polices to contract demand, the other side of fiscal stimulus, worked in the Second World War.

Hayek’s limited support for public works in severe downturns can be seen here:

“To return, however, to the specific problem of preventing what I have called the secondary depression caused by the deflation which a crisis is likely to induce. Although it is clear that such a deflation, which does no good and only harm, ought to be prevented, it is not easy to see how this can be done without producing further misdirections of labour. In general it is probably true to say that an equilibrium position will be most effectively approached if consumers’ demand is prevented from falling substantially by providing employment through public works at relatively low wages so that workers will wish to move as soon as they can to other and better paid occupations, and not by directly stimulating particular kinds of investment or similar kinds of public expenditure which will draw labour into jobs they will expect to be permanent but which must cease as the source of the expenditure dries up.” (Hayek 1978: 210–212).

“Even though there are many concerns about organizing public works ad hoc during a depression, everything speaks in favour of having public agencies perform during a depression whatever investment activities need to be carried out in any case and can possibly be postposed until then. It is the timing of these expenses that presents a problem, since funds are often extremely hard to raise in the midst of a severe depression and the accumulation of reserves in good times generally faces the objections mentioned above. There is little question that in times of general unemployment the state must intervene to mitigate genuine hardship either by disbursing unemployment compensation or, as in earlier times, by legislation to help the poor.” (Hayek 1999 [1937]: 184).

I have also pointed out before that a number of the early first and second generation Austrians were Progressive liberals and sympathetic to Fabian socialism, such as Eugen von Philippovich von Philippsberg and Friedrich von Wieser.

It is a great pity that the modern Austrian school under the spell of Mises, Rothbard and Hoppe fails to think more carefully about its own historical diversity.

BIBLIOGRAPHY

Hayek, F. A. von. 1978. New Studies in Philosophy, Politics, Economics, and the History of Ideas, Routledge & Kegan Paul, London.

Hayek, F. A. von. 1999. “The Gold Problem” (trans. G. Heinz), in S. Kresge (ed.), The Collected Works of F. A. Hayek. Volume 5. Good Money, Part 1. The New World, Routledge, London. 169–185.

Lachmann, L. M. 1973. Macro-economic Thinking and the Market Economy: An Essay on the Neglect of the Micro-Foundations and its Consequences, Institute of Economic Affairs.

Fiscal Stimulus in Germany 1933–1936

I hesitate to discuss a subject that will no doubt provoke any amount of contemptibly ignorant comments below. The criminal insanity, genocide and war crimes of Nazi Germany had nothing to do with the general principle of fiscal stimulus as a means of stimulating a capitalist economy shocked by depression. A discussion of the plain facts about Nazi Germany’s recovery from the depression is in no sense an endorsement of fascism.

In essence, the economic history of Nazi Germany in the 1930s can be divided into two periods:

(1) The period from 1933–1936;
(2) The transformation and militarisation of the German economy after 1936 by the Nazis and the intensification of a state-planned and autarkic system.

The two periods should be distinguished. There are a number of points to be made about the use of fiscal stimulus, especially with respect to the first period:

(1) The evidence that Germany’s recovery from the depression must be ascribed to fiscal stimulus is proved to my mind in the careful study of Raymond L. Cohn (1992). Hitler’s first Four Year Plan with its programs of fiscal stimulus and public works were a continuation on a much larger and effective scale of the policy that had already been begun by the non-Nazi politicians Brüning and Papen. In fact, the mastermind behind the financing of the recovery from 1933–1936 was Weimar Republic bureaucrat Hjalmar Schacht. It used to be thought that the German rearmament was the main driver of the recovery from 1933–1935. We now know that this is false:

“Orthodox economists will maintain that the first German ‘miracle’ was simply the result of increased military spending. In fact, however, there was comparatively little increase in German military spending until after 1936.” (Turgeon 1996: 122–122, n. 1).

“A detailed study of rearmament expenditure shows that it was much less important in the early years of recovery than the critics of the 1930s supposed. But it can also be shown that from 1936 onwards rearmament did assume a much greater significance, with a high level of expenditure, a general restructuring of the economy for waging war and the deliberate restraining of consumer expenditure. The key years of economic recovery from 1932 to 1935 were years of relatively low military expenditure. From 1932–3 to 1934–5 the aggregate figure of secret budget expenditure for military purposes was 3.4 billion marks. To this should be added a figure of 2.1 billion for the special armaments bills used to finance the build-up of military industries and infrastructure. Total government expenditure over the same period was 31 billion marks.” (Overy 1996: 44).

The fiscal stimulus employed from 1933–1935 had as its major component a large public works program, which stimulated the economy and significantly reduced unemployment. In fact, the Nazi government did not even introduce conscription until March 1935, long after unemployment had begun its rapid fall. In 1933, 43.8% of the industrial workforce was unemployed. By 1935, it had fallen to 16.2%, and in 1936 to 12%. By 1938, it was 3.2% (Bairoch 1993: 12).

This fact is very similar to the experience of Japan’s recovery in the 1930s, which was also engineered by public works spending. It is also interesting that both countries turned to large military spending in 1936 as they were both increasingly dominated by overt militarists who eliminated the civilian politicians who opposed them: in the case of Japan, this was Takahashi Korekiyo (murdered by army officers on February 26, 1936) and in Germany’s case Hjalmar Schacht (dismissed from office in 1937). It curious that Schacht’s opposition to Hitler’s rearmament program in 1936 provoked one of those rare scenes when Hitler was openly opposed by one of his ministers and the dictator even lost control, an incident which is related by Albert Speer in his memoir:

“Some time around 1936 Schacht had come to the salon of the Berghof to report. We guests were seated on the adjacent terrace and the large window of the salon was wide open. Hitler was shouting at his Finance Minister, evidently in extreme excitement. We heard Schacht replying firmly in a loud voice. The dialogue grew increasingly heated on both sides, and then ceased abruptly. Furious, Hitler came out on the terrace and ranted on about this disobliging, limited minister who was holding up the rearmament program.” (Speer 1995: 152).

(2) Germany’s increased spending in 1933–1936 was financed not only by deficit spending, but also by direct creation of money by the Reichsbank in the form of financial assets called the “work creation bills” (Arbeitsbeschaffungswechseln; see Silverman 1998: 29–31) and “Mefo bills” that functioned as a means of payment:

As president of the Reichsbank during the 1930s, Schacht provided financing for work-creation programs which, in combination with rearmament, eliminated German unemployment. Schacht’s methods of financing the work-creation program were ingenious. He used special notes called Mefo bills, which were a direct obligation of neither the government nor the central bank. Thus Schacht achieved the general purpose of putting the unemployed to work while avoiding the appearance of increasing the national debt. From the beginning he seems to have recognised that once full employment attained in 1938, with measured unemployment at 0.01 percent, Schacht called for a halt to deficit financing, including Mefo bills. He recommended tax increases if there was to be continued spending on rearmament. A member of the Reichsbank directory, Emil Puhl, testified: “It was understood at the beginning that Mefo-financing could be used only to the point where full employment and full production were achieved”. In a courageous letter to Hitler on January 7, 1939, Schacht wrote that the Reichsbank would no longer use Mefo bills or other forms of deficit spending to finance armament or other public expenditures. Legend has it that as Hitler read Schacht’s letter, he muttered, “This is treason”. Thereupon Hitler dismissed Schacht as president of the Reichsbank. Schacht later participated in an attempted coup against Hitler; he was imprisoned by the Gestapo, held in custody after the war by the British and Americans, tried and found not guilty at Nuremburg, and freed from internment in September 1948. (Dillard 1984: 118–119).

(3) While it is true that German unemployment was lowered to some extent by removing women, bachelors and teenagers from the labour force (Bairoch 1993: 12), this was merely a Nazi trick and was hardly a necessary policy choice. An alternative German government using fiscal stimulus could easily have designed their programs to provide jobs for both women and youth who were ready and willing to work. At any rate, the groups removed from the labour force represented only 3% of the industrial workforce in 1935 (Bairoch 1993: 12).


There is no doubt that the recovery in Germany from 1933-1935 must be attributed to fiscal stimulus, which had as a major component public works programs. The turn to outright militarism and autarky only came in 1936, and the success of social and infrastructure spending by fiscal stimulus was demonstrated clearly from 1933-1935.

The tragedy, of course, is that the Germans could have elected a Social Democratic government in 1933, which could have done the same thing, perhaps on an even larger scale, but as a peaceful, responsible government that never caused the worst war probably in all of human history.


BIBLIOGRAPHY

Bairoch, P. 1993. Economics and World History: Myths and Paradoxes, Harvester Wheatsheaf, New York and London.

Carr, W. 1991. A History of Germany, 1815–1990 (4th edn.), E. Arnold, London and New York.

Cohn, R. L. 1992. “Fiscal Policy in Germany during the Great Depression,”Explorations in Economic History 29: 318–342.

Dillard, D. 1984. “The Influence of Keynesian thought on German Economic Policy,” in Policy Consequences of John Maynard Keynes, M.E. Sharpe, Armonk, N.Y. 116–127.

Overy, R. J. 1996. The Nazi Economic Recovery, 1932–1938 (2nd edn.), Cambridge University Press, Cambridge.

Silverman, D. P. 1998. Hitler’s Economy: Nazi Work Creation Programs, 1933–1936, Harvard University Press, Cambridge, Mass. and London.

Speer, A. 1995. Inside the Third Reich (trans. R. and C. Winston), Phoenix, London.

Turgeon, L. 1996. Bastard Keynesianism: The Evolution of Economic Thinking and Policymaking since World War II, Greenwood Press, Westport, Conn. and London.