Saturday, September 3, 2011

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.


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.


  1. Great post. Libertarians make too much of the supposed connections between fascism and Keynesianism. By and large, the various fascist regimes tended to be opportunistic regarding economic matters, sometimes to the extent of implementing contradictory policies.

    Indeed, Hitler was mostly uninterested in economic matters outside of warfare and simply squeezing conquered territories for goods and raw materials for use by German industry and consumers back in the Reich.

    Fascist ideology was also largely non-economistic, which was something fascists took pride in against the “vulgar materialism” of liberalism and Marxism.

  2. "By and large, the various fascist regimes tended to be opportunistic regarding economic matters"

    Yes, and curiously, sometimes they even adopted laissez faire!

    Mussolini originally pursued standard neoclassical laissez faire policies:

    "From 1922 to 1925, Mussolini's regime pursued a laissez-faire economic policy under the liberal finance minister Alberto De Stefani. De Stefani reduced taxes, regulations, and trade restrictions and allowed businesses to compete with one another. But his opposition to protectionism and business subsidies alienated some industrial leaders, and De Stefani was eventually forced to resign."

    (2) The Austro-fascism of the Dollfuss and Schuschnigg regime in Austria pursued classical deflationary neoclassical policies:

    “In tackling the economic crisis the Dollfuss-Schuschnigg dictatorship pursued harsh deflationary policies designed to balance the budget and stabilize the currency. The government’s program featured severe spending cuts, high interest rates, and frozen wages. ... In a sense the Christian Corporative regime demonstrated the viability of the Austrian state, but it did so at the cost of alienating a majority of the Austrian people. On the eve of Anschluss a third of the population was still out of work, while those fortunate enough to have jobs were bringing home paychecks considerably smaller than before the Great War.”

    Evan Burr Bukey, Hitler's Austria: Popular Sentiment in the Nazi Era, 1938-1945 (University of North Carolina Press, 2000), p. 17.

  3. Thank you for this informative and interesting post. It bolsters my already-strong admiration for Schacht, both as an economist and a public figure. Also, thank you for correcting my incorrect impression that rearmament began as soon as the Nazis took power.

    Regarding Mussolini's "liberal" period, I wonder whether you know of any literature about whether or how Mussolini may have been influenced by Pareto and Fisher. I recall that Pareto lent him support early on, while Fisher pursued a correspondence with him on policy matters. (I've never been able to make heads or tales of Mussolini).

  4. "It used to be thought that the German rearmament was the main driver of the recovery from 1933–1935."

    You should check the Wages of destruction by Adam Tooze.

    He makes it clear that rearmament already was the main driver of growth in this period. For example on page 65:

    "Between 1933 and 1935, the share of military spending in German national income rose from less than 1 per cent to close to 10 per cent" (This is all extensively backed up in the book by archival data)

    Tooze also regularly criticizes Overy´s conclusions in the end notes.