Private Investment in a Controlled Economy: Germany, 1933-1939 9780231888653

Table of contents :
Foreword
Preface
Contents
Tables
Abbreviations
I. Introduction
II. Private Investment and the Staatskonjunktur
III. The Basic Elements of the Nazi Control Mechanism
IV. The Financing of Private Investment from External Sources
V. The Financing of Private Investment from Internal Sources
VI. The Generation of Business Surpluses
VII. The Specific Investment Controls
VIII. Summary and Conclusion
Bibliography
Index

Citation preview

PRIVATE

INVESTMENT IN

A

CONTROLLED

ECONOMY

PRIVATE INVESTMENT IN A

CONTROLLED ECONOMY Germany, 1933-1939

BY S A M U E L L U R I E

I

947

COLUMBIA

UNIVERSITY New

York

PRESS

COPYRIGHT

1947

COLUMBIA

UNIVERSITY

PRESS,

NF.W

YORK

Foreign agent: Geoffrey C u m b e r l e g e , O x f o r d U n i v e r s i t y Press, A m e n House, L o n d o n , E . C . 4, E n g l a n d , a n d 32, N i c o l R o a d , B o m b a y , I n d i a MANUFACTURED

IN

THE

UNITED

STATES

OF

AMERICA

To My Son

FOREWORD

T H E standpoint of 1946, the Nazi system may appear as a bad dream which the world is struggling to put behind it while facing new nightmares, some of which may be even worse in their potentialities for destruction. Nevertheless, economists and others may still find, in the economic features of the Nazi system, interesting and instructive object lessons in the methods by which industry was directed into publicly desired channels, while remaining formally private. The whole array of pressures, by which the operators of industries were impelled to do what the State desired, doubtless included coercive pressures of many sorts which do not appear in the strictly economic records; but the story of the economic devices and financial mechanisms remains well worth examination. It is such an examination which Dr. Lurii has here undertaken. The dominant purpose of this system included economic recovery and the full utilization of the economic resources of the German nation, but not so much for its own sake as in the capacity of preparation for continental domination through military power. Improvement of the people's standard of living was at best an incidental by-product. This precludes any desire on the part of peace-loving democracies to copy the system. The huge volume of public expenditures was wanted as a means to the main objective of warlike potential rather than primarily as a means to "full employment." The system was governed by the desire to spend as much as possible, rather than as little as possible, for purposes other than meeting the individual needs of the people. If a peaceful democracy follows the method of enlarged public expenditures as a means to a high level of employment, the amounts will be determined and limited on principles entirely different from those which governed the Nazi allocation of resources. And the methods used for financing the private needs for industrial capital will be correspondingly different.

F R O M

viii

FOREWORD

Because the Nazis wanted to spend as much as possible for military purposes, they undertook to reserve for these purposes the whole supply of funds in the free investment market, plus funds from institutional savings and other managed sources which supplemented individual savings as these declined under pressure of taxes, high prices, and limited dividends. Here in the United States, we also shall presumably be putting institutional savings, such as social security reserves, at the disposal of the government. But in general, we shall undertake to finance public outlays as far as possible out of public revenues, and to tap the general capital market for borrowed funds as little as may be consistent with securing a high level of employment by seeing that idle funds are spent for one purpose or another. Because a high level of private consumption for the people at large was no part of the Nazis' dominant purpose, they were quite ready to finance industrial investment at the expense of the consumer, allowing prices high enough to furnish a surplus for this purpose, while seeing that this surplus was not divided and used for private consumption. Thus private industry got its capital without going in debt for it, and the private investors, who might otherwise have become its creditors, became creditors of government instead. We regard it as undesirable for industry to finance its expansion at consumers' expense, or to finance itself out of earnings except to the extent that its capital requirements exceed the funds seeking investment in the general capital markets. Thus the methods Dr. Lurie is here studying are not, for the most part, things %ve shall wish to imitate, except as some of their skilfully designed mechanisms may prove usable for radically different ends. In the main, their usefulness is of a different sort. W e do not understand our own scheme of things except in the light of comparison and contrast with schemes of different kinds. It is in this light that the Nazi system of controls is worth studying and may afford an enlightening background of comparison for our own differently oriented policies in the future. J. M.

New York December, 1946

CLARK

PREFACE

C

A P I T A L formation and investment occupy a strategic position in the operation of a national economy. T h e magnitude and structure of capital formation, and the nature of the investment channels into which the stream of generated capital is directed, will not only predetermine, at any given period of time, the future pattern of production and consumption but will also affect the level and distribution of national income. T h e field of the dynamics of savings and investment has been for some time a favorite hunting ground of business-cycle economists; while protagonists of variously motivated "plans" of economic reform have put control of investment in the foreground of their schemes of economic management. In fact, measures of investment control, of more or less comprehensive scope, appear to have become a prominent feature of many a "reconstructed" postwar economy. T h e idea of this study originated as a result of my association in 1942 with a project on Nazi economic controls sponsored by Duke University and conducted under the direction of Dr. Otto Nathan. A close study of the literature convinced me of a need for a special investigation devoted to the behavior of private investment in post-1933 Germany, a subject which seems to have received so far little attention on the part of students of Nazi economics. T h e evolution of the German economy after 1933 was characterized by an exceptionally high rate of expansion of industrial capacity; at the same time, the process of capital formation underwent a number of distinct changes, both qualitative and quantitative in nature. T h e interest of these developments from the point of view of economic analysis lies in the fact that they took place under conditions of an economy of a particular type; an economy in which a regime of private enterprise, while having been maintained in its essential features, was superimposed by a mechanism of government control, developed to an extent unparalleled in modern economic history.

X

PREFACE

This study covers the developments in the field of private investment and capital formation in Germany between 1933 and 1939, from the Nazi accession to power up to the outbreak of the second World War; in other words, what was—technically at least—the peacetime phase of the Nazi economy. T h e investigation has been centered primarily not upon the historical but the analytical aspects of the developments. It has been envisaged, in other words, as a case study in the more general problem of the economics of private investment under conditions of a controlled economy, even though it must be constantly borne in mind that the Nazi mechanism of economic control was basically conditioned by the ultimate ends of the regime and was accordingly geared to accomplish these goals. In acknowledging my indebtedness to all those who made this study possible, my gratitude goes, first of all, to the faculty of the Department of Economics of Columbia University, to whom I owe my training in economics; particularly to Professors James W . Angell, James C. Bonbright, Robert M. Haig, and Carter Goodrich. My thanks go to Dr. Otto Nathan to whom I owe the introduction into the intricacies and labyrinthine ramifications of the Nazi control mechanism. More directly, in connection with this book, I am under deep obligation to Professor J o h n Maurice Clark, with whom I first discussed my project and whose sympathetic interest encouraged me to undertake this study. Professor Clark followed this work at the various stages of its progress and greatly assisted me with invaluable advice and guidance. Grateful acknowledgment is due to Dr. Michael T . Florinsky who read part of the manuscript and made a number of helpful suggestions. I am also indebted to my friend and colleague Mr. Fred van Santen who contributed a great deal through stimulating criticism and discussion of a number of topics. I also wish to express my gratitude to Columbia University Press for its helpful cooperation and the care it has given to the publication of this book. My thanks go particularly to Miss Matilda L . Berg, who did a thorough and conscientious job in final editing, in improving the layout of the tables, and in the general preparation of the manuscript for print. Finally, I can only inadequately acknowledge the extent of my

xi

PREFACE

indebtedness to my wife, who not only actively assisted me in my work but whose patient and sympathetic understanding has been a source of encouragement and stimulation throughout the progress of the book. SAMUEL

Washington, D.C. November, 1946

LURIE

C O N T E N T S

FOREWORD

BY JOHN

MAURICE

CLARK

vii

PREFACE

I. II. III. IV. V.

ix

ABBREVIATIONS

a

INTRODUCTION

3

PRIVATE JUNKTUR THE BASIC MECHANISM

INVESTMENT ELEMENTS

THE

OF THE

NAZI

STAATSKONCONTROL

THE FINANCING FROM EXTERNAL

OF PRIVATE SOURCES

INVESTMENT

THE FINANCING FROM INTERNAL

OF PRIVATE SOURCES

INVESTMENT

THE

GENERATION

VII.

THE

SPECIFIC

SUMMARY

8

47

VI.

VIII.

AND

AND

OF BUSINESS

INVESTMENT CONCLUSION

74

SURPLUSES

CONTROLS

Hi 148 183 213

BIBLIOGRAPHY

225

INDEX

231

LIST

OF

TABLES

1.

Figures of Industrial Production, 1928-1932

2.

Summary of the Pre-Nazi Measures of Recovery, June, 1932, to January, 1933

3.

11

Appropriations under the Work Creation Campaign, 1933!934

4.

9

>9

Index Numbers of Production and National Income, 19261929

21

5.

Public Investment in Germany, 1933-1936

23

6.

Net Investment by Private Industry, 1932-1936

23

7.

Government Spending and National Income, 1933-1939

27

8.

Some Financial Data on Germany, 1933-1939

36

9.

Figures of Production and National Income, 1932-1939

38

10.

Investment and National Income, 1933-1938

38

11.

Movement of Certain Prices and Costs, 1933-1939

39

12.

Movement of Output and Sales in Certain Branches of Industry, 1932-1939

46

13.

Estimate of Individual Savings, 1933-1938

78

14.

Estimate of Institutional Savings, 1933-1938

79

15.

Supply Long-Term Capital by Private and Institutional Savers,of 1933-1938 Formation of Long-Term Capital by Savings, 1924-1929

80 81

16.

xvi

UST

OF

TABLES

17.

National Income and Volume of Savings, 1985-1938 and »936-!938 8»

18.

Elements of Capital Formation by Savings, 1924-1929 and '933-1938 82

19.

Flotation of Securities in the German Capital Market, 19331939

86

20.

Flotation of Securities in the German Capital Market, 1924»929 87

21.

Movement of Some Balance-Sheet Items of Banks

22.

Commercial 94

Movement of the Main Portfolio Items in Savings Banks and Insurance Institutions, 1932-1938

105

23.

Estimated Accumulation of Open Reserves, 1933-1939

125

24.

Estimated Accumulation of Hidden Reserves, 1933-1936

126

25.

Movement of Wholesale Prices of Industrial Raw Materials, Semifinished, and Finished Goods, 1932-1939

150

26.

Wages and Earnings in German Industry, 1932-1939

153

27. 28.

Movement of Payrolls and Gross Income in Industry, 1932- '55 1938 Depreciation Outlays in a Sample of German Corporations, 1938-1937 161

PRIVATE

INVESTMENT IN

CONTROLLED

A

ECONOMY

ABBREVIA

TIONS

IK.

Institut für Konjunkturforschung

JNöS.

Jahrbücher

JNSW.

Jahrbuch

RGB.

Reichsgesetzblatt

RKG.

Reichskreditgesellschaft

VJK.

Vierteljahreshefte

für Nationalökonomie der nationalsozialistischen

zur

und Statistik Wirtschaft

Konjunkturforschung

I INTRODUCTION

w h i c h had set in in the G e r m a n economy after 1933 was currently characterized by the Nazi economists as a "Staatskonjunktur," a term which can be approximately rendered as a state of business conditions essentially sustained by government-initiated economic activities. It will be shown later i n some detail that an outstanding feature of the Staatskonjunktur was a high level of investment. 1 T h r o u g h o u t the period under review, an exceptionally high and progressively increasing proportion of national resources was diverted into production for nonconsumption purposes. ' T H E STATE OF AFFAIRS

T h e policies of the Nazi government with regard to investment were dictated in the immediate sense by the goal of achieving a m a x i m u m military potential; the closer the economy approached the stage of full employment of resources the more apparent became the military objectives. Aside from this, a n u m b e r of other objectives were responsible for the shaping of government policies. Some of the earlier measures aimed more particularly at a speedy elimination of unemployment, or at a better utilization of excess capacity which had developed in certain industries as a result of the pre-Nazi investment boom. Other measures aimed at b u i l d i n g up special productive capacity for purposes of expansion of exports, which was sought not only as a temporary e x p e d i e n t motivated by the immediate needs of foreign exchange, b u t for longr u n policy considerations related to the expected expansion of G e r m a n "Lebensraum." Another, m u c h publicized, long-run objective was the achievement of a permanent state of f u l l employment or, to use the G e r m a n expression, a "crisis-proof" economy. 1 T h e term investment is used here in its widest interpretation; namely, as that part of the national income which is not destined for immediate consumption. Public investment, for instance, will include such items as civil and military construction, armaments, munitions and other military supplies.

4

INTRODUCTION

Cyclical fluctuations of privately motivated investment were to be eliminated by compensatory public investment, coupled with regulation of savings and investment in the economy. 2 T h e Nazi economic policy after 1933 implied an active effort of maximization and conservation of investment resources. It called for diversion into the nonconsumption type of output of as many resources as could be spared without impairing the operation of the economy. It required coordination of public and private investment activities in order to prevent wasteful competition and to avoid undesirable strains in the structure of prices and wages, and it posed, within the sector of private investment, the problem of most efficient allocation of resources among specific fields. T h e carrying out of these objectives was achieved by a network of controls superimposed upon the preexisting institutions and functional relationships of a privately operated economy. T h e national-socialist political philosophy vested the state with unlimited authority of intervention in economic affairs, whenever the interests of "State and Nation" were involved. Conflicts between privately motivated economic behavior and public interest were as a rule resolved by the state in a unilateral way, through the virtually unrestricted powers of coercion at its disposal; a ruthless use by the authorities of coercive means which overruled the free choice of the individual was a characteristic aspect of the Nazi economy. There is danger, however, in overemphasizing this coercive aspect to the extent of an oversimplification of the actual state of affairs. In fact, the economy included considerable areas in which individuals were left a wide range of discretion in their economic behavior; this was particularly true in the case of entrepreneurial decisions relating to production and investment. Coordination of public and private interests was obtained within these areas by means of controls of the indirect or "steering" type, that is, through influencing private economic behavior by appropriate incentives. 8 2 See Viktor Wrede, "Das Investitionsproblem," Jahrbuch der Nationalsozialistischen Wirtschaft (1937), pp. 548 ff.; Gerhard Mackenroth, "Deutsche Industriepolitik 1933," Jahrbücher für Nationalökonomie und Statistik, C X L (1934), m i . (Hereafter these periodicals will be referred to, respectively, as JNSW and JNöS.) > A plausible assumption would be that a further extension of the coercive controls

INTRODUCTION

5

T h e relationship between private business and government under the Nazi regime should be considered in this light. While innumerable official statements constantly proclaimed the principle of the final sanctioning authority of the state in economic affairs, state ownership of business was emphatically repudiated. T h e operation of entrepreneurial initiative was stressed as a basic element of the economic set-up, and the profit incentive was sanctioned as the energizing factor in the shaping of decisions by private enterprise. A government-controlled regulatory apparatus, which replaced the traditional price and market mechanism, was to bring about the necessary "synthesis" of private interests and considerations of state policy.4 The mainspring of the control mechanism was massive public spending, which became the primary driving force of the economy after 1933; private investment became under the Staatskonjunktur dependent to a major extent on public economic activities. This was supplemented by a network of controls covering the various stages of the investment process, which, according to the level of operation, may be subdivided into four groups. T h e first includes what may be called the basic controls which operated on the level of distribution of national income and sought to influence, in an over-all way, the processes of consumption, savings, and capital formation. The operation of these controls determined the part of national income made available for nonconsumption purposes. to the areas of free choice, or to put it differently, a curtailment of these areas, was considered undesirable. Such a course would be preferred, for instance, for reasons of political expediency, or because it was believed to be conducive to higher efficiency in private economic behavior. • T h e following comment made by a high Nazi official, in connection with the promulgation of the Law for the Regulation of Production and Distribution of Power (Energiewirtschaftsgesetz) in 1935, will illustrate this point: " T h e power economy will not be run by the state, but by (private) entrepreneurs acting under their own free and unrestricted responsibility from which . . . they are not absolved. T h e state limits itself to the function of control, which is of course all-inclusive. It further reserves the right of intervention, on the basis of specific legal provisions, in order to enforce the supremacy of considerations of public interest. . . . T h e Power Economy Law thus does not introduce a planned economy, but provides for a flexible set-up of relationships between private business and the authorities; within this framework, each entrepreneur will act in an independent way and according to his own judgment, as long as he does not infringe upon the basic (and) essential requirements of a superior interest." "Energiewirtschaft und Energiewirtschaftsgesetz," by Johannes Darge, Der Deutsche Volkswirt, X (Dec. io, 1935), 537.

6

INTRODUCTION

They also performed the function of preserving the stability of the price structure by maintaining a proper balance between the expanding investment sector and the rest of the economy. T h e next group of controls were applied on the financial level. Their role was to mobilize the necessary resources to finance public investment activities and regulate the allocation of funds between the public and private sectors. T o this category belong the measures of regulation of the capital and money markets, of the credit system, and of public and private finance. T h e financial controls were supplemented by controls on the "real" level; namely, the direct allocation of physical resources (raw materials and labor), under a system of priorities. Recourse to measures of this type was taken mostly in the later part of the period under consideration, as the problem of curtailing "nonessential" investment became particularly acute. There were, finally, the controls applied on the level of entrepreneurial decisions. Some of these were of coercive nature. T h e financing and carrying out of some government-sponsored investment projects was imposed on private enterprise under a compulsory procedure; conversely, in other branches of industry, restrictions were enforced in the form of so-called "investment bans." Most of the controls in this category were, however, of the "steering" type; private enterprise was guided into government-sponsored investment through the channels of normal entrepreneurial motivation. T h e various types of controls, while operating on different levels, were to a large extent interrelated and complementary. T h e achievement of particular objectives was generally obtained by a combination of them. T h e plan of work and organization of the material in the following chapters is in line with the analytical method of approach which has been adopted in this study. T h e various aspects of the economics of private investment and capital formation in Nazi Germany are analyzed in relation to the relevant controls. The general procedure has been to outline the conditions under which the controls were introduced; to describe the nature of government action and the aims which it pursued and, finally, to attempt an appraisal of the controls in terms of their effects. Preliminary to the analysis of the

INTRODUCTION

7

i n d i v i d u a l aspects of the d e v e l o p m e n t s in the field of c o n t r o l l e d i n v e s t m e n t a n d capital f o r m a t i o n , a general o u t l i n e is m a d e :

first,

of the N a z i e c o n o m i c policies w h i c h led to the establishment of t h e investment-based Staatskonjunktur;

second, of the basic elements

of the control m e c h a n i s m w h i c h g u i d e d the e v o l u t i o n of G e r m a n e c o n o m y b e t w e e n 1933 and 1939. 5 » It ¡3 felt that in a study of this kind, which is based primarily upon Nazi sources, two points should be cleared up in the beginning, namely, the accessibility and reliability of the basic material. As to the first, abundant material was available in the form of periodicals, monographs, studies, and legal texts, making it possible to piece together a fairly coherent picture. It is true that here and there a few blind spots remain, because of gaps in the bibliographical material; these do not impair, however, the consistency of the overall picture. T h e question of reliability has been dealt with by previous students of Nazi economics. (See C. W. Guillebaud, The Economic Recovery of Germany (London, 1939), Foreword, pp. v ff.; Sidney Merlin, "Trends in German Economic Controls since 1933," Q. /• Econ., LVII, Feb., 1943, 163.) It may be added in the present case that, assuming a reasonably critical approach, the basic information and statistical material show a sufficient consistency. It would seem that in those cases where concealment of information was considered necessary, the policy followed was one of withholding the relevant material rather than deliberate distortion.

II PRIVATE

INVESTMENT

STAA

AND

THE

TSKONJUNKTUR

"A S T A A T S K O N J U N K T U R , " wrote a high Nazi official in 1938, "is generated under the following conditions: massive government orders are placed with industry; grants of public credits and subsidies are made to private business; state guarantees are granted for credits taken up by private interests. Whether the motivation of such policies lies in elimination of unemployment, or achievement of self-sufficiency, or national rearmament, the effects upon the economy will be the same." 1 We shall outline in the following the economic policies of the Nazi government, which resulted in the establishment of the Staatskonjunktur. As a background for these developments, a brief outline will be made of the economic measures taken by the authorities in the period immediately preceding the Nazi accession to power.

THE ECONOMIC PRE-NAZI

MEASURES OF GOVERNMENT

THE

T h e seizure of political power by the Nazis, in January, 1933, found the German economy slightly past the worst of the severe depression which had set in in early 1931. Already in the second half of 1932, a number of indices pointed toward a recovery from the lows reached by the middle of that year. In its current semiannual review of business conditions, the report of the Reichskreditgesellschaft speaks of an "unmistakable turn for the better" during the second half of 1932. 2 The following table gives the movement of a few economic indices, from the peak of 1928-1929 1 Adolf Friedrichs, "Die Finanzierung der Staatskonjunktur," Bank Archiv, X X X V I I (Jan. 1, 1938), 142. 2 Reichskreditgesellschaft (Berlin), Report, Turn of 1932-33, pp. 2, 57. (Hereafter referred to as R K G . )

THE

STAATSKONJUNKTUR

9

up to March, 1933. Taking the monthly average of 1928 as a base = 100, the general index of industrial production (excluding foodstuffs) rose by the end of 1932 to 55.8 from a record low of 50.8 in August of that year; the index of producers' goods went up to 47.0 from a low of 43.3; the index of consumers' goods, to 79.3 from a low of 75.4, and that of consumers' goods of elastic demand, to 76.9 from a low of 67.9. (All these indices are net of price changes, and represent changes in physical production only.) 3 TABLE

1

Figures of Industrial Production, 1928—1932 (Monthly averages, 1928 = 100)

Year »9*9 »930 193' 1932 1st quarter 2d quarter 3d quarter 4th quarter 1933 1st quarter

Total Industrial Production *

Producers' Goods

Consumers' Goods

1014 87.1 68.5 52-9 54-3 52.0 56-9 54-7

103.2 »5-5 61.0 42.7 47-9 44-5 47-7 46.8

98-5 94-9 89-5 81.7 75-8 75-4 79-3 79»

Consumers' Goods of Elastic Demand 97.0 91.2 86.5 774 696 70.1 78-9 73-6

« Excluding foodstuffs. Source: Konjunkturstatistisches

Handbuch, 1936, pp. 52-53.

T h e signs of recovery were coincident with a large-scale program of economic rehabilitation, initiated in the middle of 1932. Isolated measures in the form of public works of a limited scope had been taken before; but not until the middle of 1932 was a comprehensive program of reemployment or "work creation" adopted by the government. T h e first action was taken in June, 1932, by the Brüning cabinet, and is known as the "Brüning Program." T h i s was followed by the "Papen Program" of the von Papen cabinet in September, 1932, and the "Sofort" (Immediate) Program launched in January, 1933, immediately before the Nazi seizure of power. T h e bulk of the measures contained in the three programs were 1 For the method of construction of German production indices, see Institut für Konjunkturforschung, Wochenbericht (German ed.), VIII (»935), 97 ff. (The Institut will hereafter be referred to as IK.)

io

THE

STAATSKONJUNKTUR

carried out after the "Revolution" of January, 1933. 4 Moreover, as some of their features were also incorporated in the Nazi Work Creation campaign, it appears useful to give a brief outline of these programs. T h e measures fall broadly under two categories: creation of employment by direct financing of public works, and stimulation of private enterprise by means of devices calculated to induce a revival of private initiative. The Brüning and Sofort programs concentrated on measures of public investment, while the Papen program leaned on measures of the second type. Direct financing and stimulation of consumption were used only to a minor extent; in so far as expansion of consumption was sought at all, this was expected to take place indirectly, as a result of increased employment. 5 Table 2 summarizes the measures taken under the programs. T h e measures of the classical "public works" type, which provided the bulk of the Brüning and Sofort programs require no particular comment. More interesting from our point of view are the "priming" devices of the Papen plan. These were in the form of largescale tax refunds, subsidies, and low-interest loans. T h e tax-refunding measures aimed essentially at increasing the liquidity of business without involving direct outlay of government funds. Technically, this took place by the issuing to business enterprises of so-called "tax remission certificates" (Steuergutscheine), representing a refund of certain specified taxes which fell due, and were actually paid, within the fiscal year 1932-1933." T h e holder of the certificates could use them in various ways: they were accepted for payment of all Reich taxes, up to 20 percent of the amount due; they could be readily converted into cash, as they were admitted as collateral against loans from commercial banks which, in turn, could use the certificates as collateral for * Most of the appropriations under the three programs were actually spent in 19331934 (see p. so, below). « See Table 2. • T h e refund measure applied to the turnover, business, real estate, and transportation taxes. Except for the latter, which was entirely refunded, the rate of refund was 40 percent. T h e reason for singling out these taxes for the remission privilege was that they represented a direct burden on production through their incidence on costs and price formation. T h e refund privilege did not cover such economically "neutral" taxes as personal and corporation income taxes.

THE

STAATSKONJUNKTUR

il

borrowing from the Reichsbank, up to 75 percent of their face value; finally, the certificates could be retained as investment by private investors and banks. In order to encourage such holdings TABLE 2

Summary of the Pre-Nazi Measures of Economic Recovery June, 19)2, to January, 193) Program

Appropriations for Investment by Public Bodies »

Bruiting Program (Work Creation Program I), Emergency Decree, June •4. «93*

RM 135 million works)

Paper Program (Work Creation Program II), Emergency Decree, Sept. 4, 193a

RM 182 million (public works)

Work Creation Program of the Reich Enterprises 1) Reichsbahn

2) Reich Post Office

Sofort (Immediate) Program Decrees, Dec. 15, 1932; Jan. 6, 28, 1933 Decree, Jan. 24, 1933

Other Measures

(public

RM 50 million 1) subsidies to house owners for remodeling and repairs; 2) issuing of tax certificates; 3) reemployment bonuses

RM 280 million (maintenance and new construction) RM 34 million (maintenance and new construction) RM 480 million works) b

(public

R M 50 million (subsidies to house owners, as under the Papen Plan)

a Most of these appropriations were related to civil works projects—construction of public buildings, roads, canals, railroad tracks, and soil conservation; out of a total of RM 1,111 appropriated under this heading, 934 millions were earmarked for this purpose. b This amount was increased by R M 100 million by a later appropriation of the Nazi government on July 13, 1933. Source: The figures are based on data in Gerhard Mackenroth, "Deutsche Industriepolitik, 1933," JNoS, CXL (1934), 54, and table on p. 66.

THE

18

STAATSKONJUNKTUR

— w h i c h correspondingly alleviated the financing task of the Reichsb a n k — t h e certificates were given an annual agio of 4 percent; that is, when turned in to the Reich treasury they were redeemable above par at a rate of 4 percent a year.7 Another feature of the Papen plan was a reemployment bonus. Business enterprises which expanded their payroll were granted a quarterly subsidy of R M 100 for each additional employee. T h e bonus was paid in tax remission certificates acceptable for payment of taxes in the following five years. Moreover, entrepreneurs who expanded employment either by hiring additional labor or by increasing the hours of work were authorized to apply wage rates below the legal minima. 8 T h e Papen plan thus sought to provide business with a double incentive; first, by increasing its liquidity through the mechanism of the tax certificates; second, by lowering costs of production through reemployment subsidies and wage cuts. T h e liquidity was to

finance

increased

the expanding production and invest-

ment induced by lowered costs. T o summarize, the pre-Nazi recovery programs represented an attempt to bring about economic recovery by devices ranging from public works to direct stimulation of private initiative." It is difficult to say to what extent the government action was responsible ? T h e operation actually converted part of the tax paid in by the business taxpayer into a forced Reich loan, which could either be held by the beneficiary or, if he chose to receive the refund in cash, by other investors such as, for instance, banks. As retention of the paper by the original beneficiary ran counter to the objective of the plan, the operation amounted, in the last analysis, to a grant by the government of a cash subsidy to business, which was financed by a Reich loan placed with the banks, or more generally, in the money market. T h e collateral privilege for lombard loans from the Reichsbank guaranteed automatic absorption of the loan. s Decrees of Sept. 4 and 5, 1932. T h e rate of wage cuts was made proportional to the increase in employment shown by the enterprise, a necessary condition being that the total wage payroll be increased. T h i s means that an elastic demand for labor was assumed by the authors of the measure. T h e fact that it met with a rather meager response raises an interesting point in economic theory; cf. an analysis of this measure, " W h y the Papen Plan of Economic Recovery Failed" by Gerhard Colm, in Social Research, I (1934), 90 ff. T h e wage provision met with considerable opposition on the part of labor, and was repealed by the Hitler government in April, 1934 (Decree of A p r i l 7, 1934). » T h e program was presented by the von Papen cabinet as the "last chance for the existing economic system to overcome the crisis by the means of private economy." Public works schemes were denounced as artificial measures whose effects could be at best only temporary (cf. Gerhard Colm, loc. cit.).

THE

ST A A TSK O \ ' J

UNKTUR

«3

for the slight improvement in economic activity referred to earlier. While a number of studies have been published on this subject, 10 it would seem that, given the shortness of the period involved, any conclusions could be only of a tentative and uncertain kind. It is quite possible, for instance, that investment-goods industries may have felt almost immediately the effect of public expenditures, even if only a relatively small part of the appropriations had been spent by the end of 1932. As to stimulation of private business under the Papen plan, the results failed to justify the expectations of its authors. 11 THE DEVELOPMENTS

AFTER

19))

Before these recovery measures could be expected to produce any significant results, the change of political regime of January, 1933, affected in a basic way the further evolution of the economy. In the literature devoted to the pre-war Nazi economy, it is customary to differentiate between two phases: that of reemployment, or "work creation" (Arbeitsbeschaffung) which covers the earlier period until about 1935, and that of rearmament. The latter period was also characterized by intensive development of domestic resources of raw materials, and an integration of German industry into the program of military preparedness under the so-called Four-Year Plan. While such a subdivision is probably more termi10 T h e reader may be referred to F. Wunderlich, "Das Wirtschaftsprogramme der Reichsregierung und die Notverordnung von 4 Sept. 1932," Soziale Praxis, X L I , 1 1 2 1 ; Gerhard Colm, "Why the Papen Plan for Industrial Recovery Failed," Social Research, I (1934), 90 ff.; Leo Grebler, "Work Creation in Germany," Int. Labor Rev., X X X V (March, April, 1937), 329 ff.; Kenyon E. Poole, German Financial Policies, 19)2-1939 (Cambridge, Mass., 1940), pp. 35 ff. 11 T h e original plan anticipated an issue of R M 1.5 billion under the tax-refund scheme, and R M 700 million in reemployment subsidies, a total of R M 2.2 billion. By Jan., 1933, the volume of tax certificates in circulation was R M 326 million; by the end of 1933, R M 1.2 billion; a peak of 1.362 million was reached by March, 1934, after which the circulation gradually fell off until final redemption in 1938 (Wirtschaft und Statistik, X V I I I , 1938, 790). Colm (loc. cit.) takes the view that the failure of the Papen Plan was due to the deflationary character of its price and wage policies. T h u s , in spite of the relief of business liquidity through the device of tax certificates, the priming effect could only be short-lived. This interpretation raises the entire issue of purchasing power vs. costs, in dealing with cyclical unemployment. In all fairness, it should be mentioned that the Papen experiment could hardly be considered as a satisfactory testing ground, given the extremely troubled political situation under which it took place.

14

THE

STAATSKONJUNKTUR

nological than real," it is a convenient device for organizing the material.

The Phase of Work Creation. The first action of the regime was to take over the economic programs of its predecessors. As was mentioned earlier, the bulk of the expenditures under these programs was made in 1933-1934. The Nazi government soon engaged in an active economic policy of its own. The principles of the new policy, as set forth in official declarations and comments of the economic press, amounted to the proposition that private initiative alone could not be relied upon to bring about economic recovery and that it was up to the public authorities to provide a full measure of stimulation by governmentinitiated "creation of work." The emphasis was on massive financing by the Reich and Reich agencies of public works; a secondary role, only, was assigned to private initiative. Public Investment. A first series of measures, the so-called Reinhardt Program, was adopted in the summer of 1933. The legal framework was provided by the "Laws to Reduce Unemployment" of June 1 and September 21, 1933, and supplementary decrees. The law of June 1, 1933, appropriated a total of one billion R M for financing the "creation of work" of various natures. The decree lists civil engineering projects, canal and river regulation works, construction and restoration of public buildings, expansion of public utilities, suburban and rural housing, residential and agricultural construction, and so on.13 A decree of June 28, 1933, provided, among other requirements, that the work to be financed should be beneficial to public interest; that entrepreneurial profits should be kept at a "reasonable" level, and that price rises should be checked. Certain provisions stressed the unemployment or "work creation" angle; namely, the requirements that the public works be as much as possible "labor-intensive"—that they absorb a high percentage of labor, and that the working week should not exceed forty hours." Besides direct financing by the Treasury, other projects were to be financed through the intermediary of Reich-controlled enter12 See note 46, below. is Reichsgesetzblatt, Pt. I, 323. (Hereafter referred to as RGB.) 1«/bid., Pt. I, 4S5. T h e last provision was lifted a year later, in June, 1954.

THE

STAATSKONJUNKTUR

»5

prises and agencies: the Reich Institute for Unemployment Insurance (the so-called "Reichsanstalt"), the Reichsbahn, the Reich Post Office, and a newly organized government corporation, the Reich Autostrades A.G. 1 5 T h e magnitude of the schemes financed by these agencies can be seen in T a b l e 3. T h e financing procedure was generally as follows: noninterestbearing loans were granted by the Reich, under corresponding appropriations, to provinces, communes, and other local public bodies, which acted as nominal "principals" (Träger) of the projects. T h e Reich took over the guarantee of principal and interest of the loan, while the public body involved was responsible for the amortization. T h i s was spread over periods ranging up to twenty-five years, according to the probable length of life of the investment. T h e works were carried out by private entrepreneurs under contracts with the public authority. 18 T h e main instrument of financing consisted of so-called "work creation bills" (Arbeitbeschaffungswechsel),17 which were drawn by the contractors on the authority which acted as "principal," endorsed by the drawees, and accepted by one of the banking institutions designated for that purpose. 18 Nominally, the bills matured in three months, but as a rule they were subject to twenty automatic renewals, which carried the actual maturity of the paper to five years. Redemption at maturity was guaranteed by the Reich, the guarantee being in i s T h e corporation was set up in 1933 to finance the construction of a net of motor speedways throughout the Reich. A total of 6,goo km. was planned at an outlay of R M 1400 million (a later revised estimate raised this amount to R M 6.500 million). 1 8 See Adolf Friedrichs, " D i e Finanzierung der Arbeitbeschaffung," Bank-Archiv, X X X I I I (Jan. 1, 1934), 133 ffApart from the extensive German literature on the subject of Nazi financing techniques, to which reference will be made from time to time, the reader is referred to C. W . Guillebaud, The Economic Recovery of Germany (1939), and K. E. Poole, German Financial Policies (1940). See also the chapters 011 financing in a recent study of the Nazi economy, The Nazi Economic System, by Otto Nathan, with the collaboration of Milton Fried (Durham, N.C., 1944). IT Other short-term financing instruments were the Reich treasury certificates (Reichschatzanweisungen), and employment certificates (Arbeitschatzanweisungen). T h e latter were deposited by the Reich with the Rcichsbank as a guarantee of redemption of the "work creation" bills. T h e Nazi government also continued the issue of tax remission certificates initiated under the Papen Program. is These were the Gesellschaft für Oeffentliche Arbeiten (Oeffa), the Deutsche Rentenbank Kreditanstalt, the Deutsche Bau- und Bodenbank, and the Deutsche Siedlungsbank. These institutions were entrusted with the distribution and management of the appropriated funds.

i6

THE

STAATSKONJUNKTUR

this case the equivalent of a collateral security behind an ordinary commercial bill. Adequate liquidity was provided by unlimited rediscount privilege with the Reichsbank, which made the bills a perfectly liquid short-term investment medium. 19 Incentives to Private Enterprise. While the primary emphasis of the "work creation" campaign was on public investment, measures were also taken to stimulate private initiative. These were in the form of subsidies, low-interest loans, fiscal concessions, and various other incentives to stimulate expansion of private investment. Subsidies (verlorene Zuschüsse) were granted for maintenance, repair, and reconstruction of buildings, both for residential and industrial purposes.20 Beneficiaries were to match the subsidies by outlays of their own funds; in the case of new construction the grant would cover 50 percent of the total cost, and in the case of repairs, 20 percent. T o facilitate the financing of the nonsubsidized portion, the government took over part of the interest burden. In addition to the subsidy, property owners were given interest bonification certificates {Zinsvergütungsscheine), amounting to 4 percent of the balance not covered by the grant; interest bonification was granted regardless of whether the financing was done by borrowing or out of own funds. A sum of R M 500 million was appropriated for subsidies of this type. 21 Encouragement of investment in equipment and machinery was sought by means of fiscal privileges, namely by tax exemption of 1» T h e mechanism of "work creation bills" was taken over by the Nazi government from the Sofort (Immediate) Program. T h e "work creation bill" was originally de vised as a means of circumventing the statutory limitation upon the open-market functions of the Reichsbank. By devising the bill in the form of technically "commercial" paper it was given access to the rediscount facilities of the Reichsbank. After the reform of 1933, which gave the Reichsbank open-market powers, the bill procedure was however maintained, presumably for the facilities which it offered to camouflage the short-term indebtedness of the Reich. Reich financial statements did not carry the bills among outstanding obligations, except for the year when they fell due. Oil the other hand, holdings of bills by the Reichsbank and private credit institutions were concealed by the fact that they were not shown separately, but included in the general item "commercial bills." 20 Subsidies were to be granted originally for purposes of residential building only, and they were currently referred to as such in the literature. However, the law of Sept. ai, 1933, extended the benefit of subsidies to industrial plants. See also "Deutsche Industriepolitik 1933," by Gerhard Mackenroth, /or. cit. p. 63. 21 Second Law to Reduce Unemployment, Sept. 21, 1933, Section 1 (RGB, Pt. 1, 651), and Decree of Oct. 2, 1933 ( R G B , 1, 717). This amount was in addition to R M 100 million of a similar appropriation under the Sofort Program. It has been estimated that so percent of the grants were made for reconstruction projects and 80 percent

THE STAATSKONJUNKTUR

17

certain types of equipment and plant. A similar measure was the cancellation of business tax arrears, provided that a corresponding amount be invested in purchase of equipment. 22 T h e fiscal concessions were specifically limited to purchases of replacement equipment. They were not applicable to purchases of equipment resulting in expansion of capacity, which meant that stimulation of new investment was not sought. Exceptions were provided for new investment "of exceptional importance for the economy," in cases where such investment presented definite military value or otherwise contributed to the rearmament effort. 23 The reserved attitude of the authorities towards investment in new capacity can be explained on several grounds. The relatively recent failure of the Papen measures indicated a reluctance on the part of business to expand its commitments for the time being, and this was presumably still fresh in the minds of the authorities; a considerable backlog of unused capacity existed in the industrial economy, following the "rationalization" boom of 1927-1929; " finally, it is possible that the encouragement of new investment was not considered desirable before adequate machinery had been set up for its qualitative steering. By the end of 1934 a tax concession of wider scope was enacted; it covered all acquisitions of plant and equipment, which were defined in the law as "short-lived economic goods." 25 It provided a highly effective incentive to expand industry purchases of new equipment, and was meant at the same time to stimulate German tool- and machine-building industries. It will be seen later that the concession of 1934 represented one of the key measures in the mechanism of investment control.28 In addition, a number of measures were enacted aiming at stimulation of specific industrial branches, particularly those which were strategically important to for repairs. Given the multiplication effect, this would result in a total outlay of about R M 2 billion (RKG, Report, First Half of 1934, p. 3). 22 Circular Instruction (Runderlass) of the Ministry of Finance, Nov. »1, 1933 (R/ichssteuerblatt, 1933, p. 1233). 23 Section 2 of the Law to Reduce Unemployment of J u n e 1, 1933 ( R G B , Pt. I, 324); also the Law on T a x Concessions, of July 15, 1933 (ibid., 491). For a description of "rationalization" in German industry of the post-stabilization period, see James W. Angell, The Recovery of Germany (New Haven, Conn., 193»), pp 78 and 82 ff. » Para. 6 of the Income T a x Act of Oct. 16, 1934 ( R G B , Pt. I, 1005). 2a See pp. 139 ff., below.

18

THE

STAATSKONJUNKTUR

the national military potential. The automobile industry was favored by grants of fiscal concessions to users of passenger cars and commercial rolling stock. The law of April 10, 1933, provided for exemption from motor vehicle taxes of all passenger cars registered after March 30, 1 9 3 3 . " Other concessions favored acquisition of trucks and commercial motor vehicles, which already enjoyed the fiscal benefits under the general privilege attached to replacement equipment, and later on, to purchases of "short-lived economic goods." 28 In the case of domestic mines and smelters of base metals (copper, lead and zinc), a system of subsidies and incentive premiums was put into effect in 1934, to compensate for the high cost of production of the domestically mined metals. These were devised in such a way as to guarantee an adequate return on all outlays in expanded capital investment, and were instrumental in promoting increased output of "domestic" metals.29 There are indications that a subsidy system was also used to promote German shipbuilding. 30 Measures Restricting Private Investment. It has been mentioned that the official policies under the Work Creation Program did not imply indiscriminate encouragement of all investment by private business. The reserved attitude towards new private investment was noted in connection with the earlier fiscal incentives. In addition, an active restrictive policy was pursued with regard to investment in certain fields. An enactment passed in July, 1933, authorized the Minister of Economics to prohibit, restrict, or make subject to his approval new investment in such branches as he chose to designate.31 Considerable use was made of this authority in imposing "investment bans" in a number of industries.32 A summary of the principal items in the Work Creation Program is given in Table 3. 27 Cesetz iiber Anderung des Kraft fahrzeugsteuergesetzes ( R G B , Pt. I, 192). 28 T h e combined fiscal concessions made acquisition of new motor cars extremely attractive, and resulted in a considerable expansion of the domestic automobile market. An authoritative estimate put the total resulting savings at some 70 percent of the purchase price. (See " T h e German Automobile Industry," I K , Weekly Reports, X (Feb. 24, 1937), 15. 2» See pp. 185 f f „ below. »0 Cf. Der Deutsche Volkswirt, V I I I (April 6, 1934), 1166. 31 Para. 5 of the Law on Compulsory Cartels (Gesetz uber die Errichtung von Zwangskartellen), of July 15, 1933 (RGB, Pt. I, 488). S2 For a detailed discussion of these measures, see pp. 200 ff., below.

Si

8

a gp

* »

«

O O S t^ 2 •a e

8,8 m so

•o e f Os s I

c o rt ia

rr \

0\ 1

c

o £ S a

on

H

s

•a « V•y e »

•g ra « •X t 2

'•n a 1 3 w s S te a a « g G ¡3 o '3 1?3" a

3 •o. S a O

ü

S

s

•3o û.

c •2

t-

o &

3 «J

•o c a S 3.758 Percentage of p u b l i c investment 33-9 * Includes communications.

'933

1929 2,670 1.823

'934

'9)5

2 «43

6,450»

1936 7,600»

2,209

793

>.«34 4.077

6,450

7.600

5,104

8*53

11,600

13^00

49-5

55-5

550

1.416

4493 12315 350

43-2

S o u r c e s : F o r 1928-34, Konjunkturstatistisches R K G . Report, Turn of 1937-38, p . 6 .

TABLE

Handbuch

(1936), p . 61; f o r 1935-36,

6

Net Investment by Private Industry, 1932-1936 (In Millions of RM) Industry: » Total investment Less depreciation Net investment b Utilities: Total investment c Less d e p r e c i a t i o n d Net i n v e s t m e n t b T o t a l net investment b

1928 2,615

-1.534

+ 1,081

— 1,320 — 881

+ 1,801

— —

220 300 80 961

'9)4

'9)5

—1.300

1,067 — 1,300

1.658 — 1,320

-

— »33

+

338

—

300

+ +

90 4*8

439

1,020

— 3°° + 7*°

m) 557

1932

743 200

290

— 300 —

100

— 300 10 —

-

843

—

»43

a Wirtschaft und Statistik, 1938, p . 30, q u o t e d i n t h e Statistisches Deutsche Reich (1938), p . 566.

1936 2,084

+ +

1

— +

500 320 180

+

94*

für

das

390

Jahrbuch

>3 îo 764

b T h e figures of n e t investment a r e those of a c t u a l investment in new e q u i p m e n t a n d machinery, exclusive of changes in inventories, c R K G , Report,

Tum

of 1937-38,

p . 6.

d Based u p o n a n estimate in VJK, X (1935-36), T e i l A, 429.

substantially behind normal requirements for replacement. N o t until 1935, when the gross industrial output approached the peak of 1928, does there appear a slight balance of net investment; this is, however, considerably below the level of 1928. T h e lag in private investment was not due to a shortage of financing funds. As the recovery progressed under the impact of public spending, a parallel improvement of liquidity of business took place, through deflation of inventories and replenishment of its

THE

*4

STAATSKONJUNKTUR

depreciation reserves. Replacement of depreciated equipment was generally delayed, and reserves accumulated in the form of idle balances.38 Of more importance, from the point of view of new investment, was the emergence, as a result of improved price and cost relationships in industry, of substantial operating profits the bulk of which was generally retained in the corporate reserves. The newly acquired liquidity was used to pay off corporate bank indebtedness or left in the form of liquid balances with banks. In some other cases, it was used by corporations to increase their portfolio investments, in the form of Reich paper or industrial equities. From 1935 on, there was a marked revival of the kind of industrial concentration and consolidation—the so-called "Konzernbildung" —that had been characteristic of the twenties.38 The fact that, on the whole, business had shown little inclination to expand its net investment was indicative of its cautious attitude towards the long-run prospects of the recovery.40 A restraining influence was also exercised by the existence of numerous areas of excess capacity.41 The public policies themselves did not favor indiscriminate expansion of investment. The emphasis of "work creation" on expansion of capital goods industries was noted earlier, while the secondary effects of public spending were guided in such 3

8 See, for example, R K G , Reports, First Half of 19)5, p. 4; First Half of 19)6, pp. 45 ff.; Turn of 19)6-17, pp. 54 ff.; see also VJK, X (1935-36), Teil A, 425. 1 a» Cf. the articles "Der jüngste Konzen trationsprozess" and "Die Konzernbewegung 1936-1939," in the Wirtschaftskurve (1939), Heft 2, 136 ff., 204; also the Economist, C X X I V (1936), 63. By Konzern the Germans designate a corporation with ramified holdings in subsidiary enterprises, which may or may not be related to its own field of activities. T h e "Konzern" movement which had been resumed in 1935, was characterized mainly by consolidations of the vertical kind, whereby big concerns absorbed through merger or control, a number of smaller companies that produced raw materials and supplies used by them. On the other hand, purely financial combines of the "holding" type, were formed, as a number of corporations branched out into other fields and invested in altogether alien undertakings. T h e second of the quoted articles in the Wirtschaftskurve mentions a number of consolidations of both types. 933-34 »934-35 1935-36 >936-37 >937-3» >938-39

Calendar Year >933 >934 >935 >936 >937 >938

National Income » 46-5 5 2 -7 58-7 64-9 72.6 79-7

"Extraordinary" Public Spending 8 -75

4-75 7-4° 9-75 >34° 25.00 c

1933-1939

b

Public Spending in Percent of National Income 5-9 9» 12.5 >5-3 18.5 31.0

» Wirtschaft und Statistik, X I X (1939), 705. T h e figures are f o r calendar years. T h e o v e r l a p p i n g of the periods f o r d a t a on n a t i o n a l i n c o m e a n d " e x t r a o r d i n a r y " p u b l i c s p e n d i n g makes f o r a certain consistent error in the c o m p u t a t i o n of the percentage ratios; it does not affect their relative position. >> T h e figures are for fiscal years a n d are those of the B a l o g h estimate (note 47, above) w h i c h also include the e x p e n d i t u r e s of " w o r k creation," e x c e p t f o r 1938-39 w h e r e the estimate by N a t h a n , based on later statistics, was considered more reliable, c A p p r o x i m a t e estimate. T h e discrepancy between the figures in the two estimates arises because B a l o g h includes e x p e n d i t u r e s u n d e r the r e e m p l o y m e n t p r o g r a m ; the considerable discrepancy f o r 1938-39 is p r o b a b l y d u e to the fact that Balogh's figures ( c o m p u t e d i n J a n u a r y , 1939) considerably underestimated the a c t u a l increase i n indebtedness. A l l o w i n g f o r the necessary adjustments, both sets of figures are reasonably d o s e . F o r the technical difficulties involved in an estimate of this k i n d , m a i n l y t h e difficulty of d r a w i n g a l i n e b e t w e e n " a r m a m e n t " and " n o n a r m a m e n t " e x p e n d i t u r e s in a n economy of t h e N a z i type, see N a t h a n , op. cit., p. 84. B o t h estimates are based u p o n official d e b t d a t a , a n d thus d o n o t include the increase i n short-term indebtedness of the R e i c h represented by the special bills, etc. (cf. note 19, above). Foreign estimates of the v o l u m e of this " s e c r e t " floating d e b t by 1939 vary between R M 20 billion (New York Times, Dec. 15, 1938, q u o t e d in P o o l e , op. cit., p. 153) a n d R M 16 b i l l i o n (Die Neue Weltbuhne, J a n . 5, 1939). I n a speech delivered by H i t l e r a t the o u t b r e a k of the w a r , the a m o u n t of e x p e n d i t u r e s o f the R e i c h u p to that date was p u t a t R M 90 b i l l i o n .

28

THE

STAATSKONJUNKTUR

The Four-Year Plan. By the end of 1936 the armament program was supplemented by an integration of the productive resources of the Reich in the plan of military preparedness. T h e new phase of economic policy was officially inaugurated by proclamation of the Four-Year Plan—sometimes referred to as "Second Four-Year Plan"—at the party congress in Nürnberg in September, 1936." T h e objective of the Plan, as officially announced, was to make Germany independent of imports of foreign foodstuffs and raw materials; to widen, in other words, the autarkic basis of the economy. T h i s applied to a number of basic raw materials, such as iron ore, base metals, oil, rubber, textiles, and certain food staples (in particular, fats which had been the traditional weak spot of the national food balance).49 T h e Plan made far-reaching claims upon the national productive resources. Agriculture was requested to step up production of key food staples ("to win the battle of agriculture"), and a concentrated effort was made to integrate private industry in the autarkic program of the Plan. T h i s implied not only an increased claim upon existing industrial facilities, but also expansion of capacity in certain key areas, such as generation and distribution of power and production of "domestic" raw materials. 60 In contrast with the Work Creation phase, where the stress was laid upon public investment, the investment tasks of the FourYear Plan were laid at the door of private business. Private enterprise was urged to take care of the realization of the investment projects and to provide the necessary financing means,51 while the functions of planning and coordination were taken over by the state. As a source of private financing, the authorities proposed to 4 8 An administrative and executive organ, the Office of the Four-Year Plan, was set up by the Decree of Oct. 18, 1936 ( R G B , Pt. I, 887). 4 9 See the statement by Hitler at the inauguration of the Plan (Das Gesamte Recht des Vierjahresplans, G r u p p e 1, p. 1); also the relevant parts of speech by Goering, in O c t , 1936, reported in Der Vierjahresplan, I (1937), 31 ff. According to some observers, the emphasis upon the autarkic goals was destined to camouflage the much wider scope of the Plan, which aimed at the establishment of a sort of economic general staff (Nathan, The Nazi Economic System, p. 43). For the organization of the Office and the subsequent coordination of its functions with the Ministry of Economics, see H. Nicklisch, Handwörterbuch der Betriebswirtschaft (2d ed., 1938), "Vierjahresplan," pp. 2 146 ff. so Cf. " D i e wirtschaftliche A u f g a b e , " by Walther F u n k , in Vierjahresplan, II (1938), 130. »1 See Nicklisch, loc. cit., p. 2150.

THE

STAATSKONJUNKTUR

«9

tap the liquid resources accumulated in corporate reserves. Further prospective sources were: 1) a limited resumption of corporate borrowing in the capital market, by a partial lifting of the embargo on private issues; 2) the taking up by industry of long-term bank credits; and 3) as an exceptional procedure, direct financial assistance by the state.52 T h e Plan marked a new phase in the official policies with regard to private investment. As long as the initiative of new investment was left with business, it remained primarily a function of normal entrepreneurial motivation. It was a function of the pattern of industry prices, costs and profits, of short- and long-run expectations as to market conditions, and of other factors—not excluding those of irrational nature—which normally shape business decisions in this respect. Clearly, even before the introduction of the Plan, the authorities were in a position to influence these decisions indirectly by means of controls affecting the underlying factors. Moreover, undesirable investment could be checked by means of restrictive controls, even though, barring individual exceptions, the authorities refrained from action of this kind. Under the Plan, private initiative was completely replaced by state planning, under which industry was assigned specific investment tasks. This posed the problem of coordination, the more so, as government-sponsored investment projects were as a rule motivated on extra-economic grounds." While some use was made of measures of compulsory investment, this was, however, the exception rather than the rule.54 The bulk of investment was carried out under agreements with the producers, which safeguarded the requirements of normal entrepreneurial motivation; the economics of the investment was adjusted in such a way as to achieve a reasonable rate of remuneration and adequate security of the invested capital." Under the conditions of the Nazi economy this was not 52 A statement made by Colonel Fritz Loeb, head of the Raw Materials Division of the Plan, mentions the following figures on the relative importance of these source«: self-financing, jo percent; flotation of bonds and stock, 50 percent; bank credit, 8 percent; public financing, 12 percent. os in most of these cases, the cost of production of the domestic raw materials was considerably above the world prices (RKG, Report, Turn of 1936-37, p. 4). " See pp. 184 ff., below. " Cf. the following statement by Colonel Loeb, the Nazi official referred to above:

3°

THE

STAATSKONJUNKTUR

impossible to attain, regardless of the "true" relationship between prices and costs. T h e techniques of control used to that effect will be discussed in a later chapter.58 As to the attitude of private business towards the taking up of the investment "tasks," we shall quote the following comment: The share of the state in the formulation of private investment policies is particularly important in those fields where lie the biggest investment tasks, namely, in the production of raw materials of domestic origin, of synthetic fuels, the building of workers' settlements, and so on. . . . [In these fields], the principal method of carrying out the necessary investment will not necessarily be direct financing by the state; private economy is, in many cases, willing to step in with its own means, provided— and this is the decisive factor—interest and amortization of the invested capital are guaranteed. While the remunerative aspect of such investment is less attractive than in other fields, it corresponds to a real need. Moreover, it is much more expedient for the state to influence the profit situation in these fields in such a way as to make it possible for the existing demand to be met by private enterprise, rather than to uncover other channels of demand.67 There is no direct statistical information concerning the volume of investment of this kind carried out under the Plan. According to available circumstantial evidence, this must have been very large.68 Some indication is provided by the volume of private flotations in the market, in view of the fact that such issues were, as a rule, reserved to Plan enterprises; these amounted, from 1937 to the end of 1939, to some R M 2 billion. As borrowing in the market accounted for only part of business financing needs, this "Against the objection that the planned expansion [of investment] is financially unfeasible it will be stated that the economic soundness [of the proposed investment] is either given in itself, or will be ensured by appropriate government measures; thereby justice will be done to the natural and just claims of economic practice." Der Vierjahresplan, I (1937), 3. 66 It will be noted that, in terms of investment control, what actually happened was not so much a change in policy as a shift in emphasis with respect to the factors involved. Instead of manipulating the appropriate controls (price structure, fiscal incentives, etc.) in order to influence private investment decisions, specific investment tasks were passed on to entrepreneurs, and then use was made of appropriate controls in order to make such investment possible on the terms of private enterprise. « VJK, XI (1936-37). TeU A, 64. After 1937, the German economic commentators seldom failed to make the point that the "tremendous" investment tasks of the Plan, added to the rearmament program, taxed to the utmost the productive resources of the Reich.

THE

STAATSKONJUNKTUR

3»

figure gives a conservative indication of the size of the investment.59 Financing under the Rearmament Phase. In financing the rearmament phase, the authorities displayed a great deal of ingenuity, developing several special types of short-term paper which were adapted to the particular conditions of the German credit market. A brief description of the various credit instruments is given below.60 T h e most important instrument of financing were the so-called "special bills" (Sonderwechsel). These replaced the earlier work creation bills, to which they were similar in many respects. T h e bills had a normal maturity of six months, were indefinitely renewable, and carried the privilege of unlimited rediscount with the Reichsbank; they were thus given automatic liquidity. Like the work creation bills, they were drawn by entrepreneurs engaged in government contracts, the drawees being this time the Reich or the Reich agencies which issued the armament orders. T h e bills were made, in other words, direct obligations of the Reich. T h e special bills were again presented by the authorities as a temporary expedient of "prefinancing," to be eventually withdrawn by redemption out of the current revenues of the Reich. Actually, their circulation was continuously expanded from 1935 up to 1938, when the issue of "special bills" was discontinued. 61 Beginning with the fiscal year 1938-1939 a new financing policy was proclaimed, officially justified by the argument that German industrial output had reached its capacity limits, and further ex59 See Table ig, on page 86. T h e above figure does not include a bond issue floated in 1938 for the financing of the Hermann Goering Werke, which was set up under the Four-Year-Plan as an iron and steel combine for the raining and utilization of domestic low-grade iron ore. Although it was financed to a considerable extent by private capital, nevertheless it was, properly speaking, a Reich enterprise. (Cf. pp. 197 If.) For a review of German public finance of the period, see League of Nations, Economic Intelligence Division, Money and Banking 1939 (Geneva, 1939). 01 According to a German source, the circulation of bills went up from R M 5,485 million in 1932 to R M 10,526 million in 1936 and 14,587 million in 1938. ( R K G , Report, Turn of 1938-39, p. 94.) It will be recalled that in the German statistics no differentiation was made between ordinary commercial bills and the various types of public bills (cf. note 19, above). T h e figures thus cover all the varieties of papeT coming under this denomination. As there is evidence that the volume of commercial bills remained stationary and even decreased over the period, the increase in circulation (approximately R M 9 billion) was due to the expansion of public bills.

3«

THE

STAATSKONJUNKTUR

pansion of short-term public credit threatened to result in dangerous inflationary strains. In the future, resources for financing public expenditures were to be derived, in principle, from taxation and long-term borrowing. 92 In the meantime a new instrument was devised for "intermediary" financing, namely, the delivery certificate (Lieferschatz). These certificates were to be issued in payment of public contracts exclusively by the Treasury; e> they were six months bills, carrying 3 percent interest; and, in contrast to the special bills, were not renewable, but redeemable at maturity out of budgetary revenues. While they were not eligible for rediscount, they could be used as collateral against advances from the Reichsbank (lombard loans) up to 75 percent of face value.84 T h e issuing of delivery certificates very soon outran the possibilities of redemption.® 5 T h e accelerated rearmament race which accompanied the political drives of 1938 was incompatible with a limitation of expenditures to regular budgetary resources. T h e »- See for example, " T h e Financing of Economic Reconstruction," by Finance Minister Schwerin von Krosick, in Der Vierjahresplan, Special Issue, Jan., 1939, p. 7; also R K G , Report, First Half of 19)8, p. 58. os As the previously used "special bills" could originate with any Reich agency which placed the contract, the confining of the issuing authority to the Treasury meant that the latter was given central control over the placement of public orders. T h e anti-expansionist features of the new paper, such as fixed maturity, withdrawal of the rediscount privilege, and centralization of issue, were interpreted at the time as a significant victory of the conservative elements over the "deficit spending" wing of the Nazi financial high command. T h e change in policy was ascribed by foreign economic observers to the influence of Schacht, who was credited with supporting "orthodox" financial practices and budgetary retrenchment, in opposition to the "monetary radicals" of the Nazi party. T h e latter were allegedly represented by Minister of Economics Funk, who eventually replaced Schacht as president of the Reichsbank (Poole, German Financial Policies, p. 145). How far this alleged conflict was real it is difficult to say. It does not square at any rate with Dr. Schacht's actual record in terms of the basic financial and banking policies of the T h i r d Reich, for the shaping of which he was mainly responsible. For instance, the Schacht-sponsored reform of the credit system, which provided the basic mechanism for the financing of Nazi deficit spending, could hardly be defended in terms of orthodox banking theory (see pp. 60 ff., below). 65 There was little reticence on the part of the Nazis to admit that the delivery certificates proved to be no more than another variety of short-term paper of the "pre-financing" type, and that their issuing was a way of "obtaining further shortterm advances from the money market" in order to "satisfy the demand for additional credit"; as a result, more certificates were issued than had been anticipated. (See R K G , Report, Turn of 19)8-39, p. 85.) About R M 3 billion in certificates were issued during the fiscal year 1938-1939, of which two thirds were taken over by the banks (Ibid., Middle of 1939, p. 45).

THE STAATSKONJUNKTUR

33

delivery certificate was scrapped one year after its introduction, and replaced in April, 1939, by a new financing scheme, the socalled "New Finance Plan" which was ushered in with the usual amount of official enthusiasm. Under the new plan, 40 percent of the amount due to business enterprises for their deliveries under public contracts was to be paid in "tax credit certificates" (not to be confused with the tax remission certificates of the Work Creation phase). T w o types of certificates were issued, so-called certificates I and II, in equal amounts. Type II were interest-bearing long-term certificates which were accepted in payment of Reich taxes at par plus accrued interest, thirty-seven months after their date of issue. Type I certificates—also accepted in payment of Reich taxes—carried a shorter maturity and were redeemable seven months after issue. These certificates carried no interest, but if held beyond maturity gave the holders certain fiscal privileges with regard to depreciation of their assets for purposes of computation of taxable income. Both certificates I and II could be used as a means of payment in business transactions between firms. They were negotiable in the open market, and could thus be acquired by business enterprises not only in payment of public contracts but also as an investment medium.*8 Aside from mobilization of future tax receipts, the objective of the Plan was to shift part of current financing of public orders to liquid business enterprises, through the incentive of the fiscal concession attached to the tax certificates; the transferability of the paper made it possible to mop up the liquid reserves of business, regardless of the distribution of the armament orders. This deflationary aspect of the new financing technique was offset by the currency privilege which the certificates had been given for interbusiness payments. The currency privilege, in spite of the limited area of the monetary function, actually amounted to a disguised inflation of the Reich monetary circulation.®7 An expansionist «8Cf. I K , Weekly Reports, X I I (1939), Supps., April 20, Aug. 1 1 , 1959; also R K G , Report, Middle of 1939, p. 45. A more detailed description of the tax certificates with particular reference to the "superdepreciation" privilege is given on pp. 14s ff. «' T h e latent inflationary character of the tax certificates was not ignored by the

34

THE

STAATSKONJUNKTUR

feature was also the possibility of using tax certificates as collateral against bank loans, even though these could not be rediscounted with the Reichsbank. 4 * A m o n g other points claimed in its favor, the Plan was expected to relieve the pressure of Reich borrowing in the capital market which was to be gradually restored to private borrowing, primarily for purposes of financing under the Four-Year Plan. 00 As to the long-term financing needs of the Reich, these were to be covered in the future by tapping institutional savings provided by savings banks, insurance companies, and similar agencies. 70 T h e " P l a n " proved to be short-lived, and the issue of tax certificates was abandoned shortly after the outbreak of the war. T h e reasons for the scrapping of the Plan are not clear. According to some sources, the tax certificates were none too popular with busifinancial authorities. " T h e method of tax certificates," comments the Institut fiir Konjunkturforschung, "does not relieve the responsible authorities of the necessity of keeping an eye upon the quantitative side of the problem." (Weekly Reports, Aug. 11, 1939.) T h e article further implies that a further tightening of control over prices and wages and a more stringent management of investment and consumption will be necessary. T h e increase in monetary circulation will thus be counteracted by imposing a "forced inactivity" on part of the monetary supply. 88 In order to check financing of the holding of the certificates by bank credit—• which would have clearly defeated one of the main objectives of the P l a n — a later r u l i n g declared that the pledging of the certificates as collateral for bank loans discontinued or "broke u p " the holding period which determined the rate of superdepreciation benefits (Der Deutsche Volkswirt, X I I I , 1626, 1665, quoting an interpretation of the administrative provisions of the Plan by Staatssekretär Reinhardt). 6 0 I K , Weekly Reports, Supp., Aug. 12, 1939, p. 2. As the change-over from "delive r y " to " t a x " certificates was, among other things, motivated by the inadequate supply of long-term capital for purposes of redemption, this reasoning is, to say the least, inconsistent. Consistency in argumentation was not, however, among the virtues which the Nazis themselves cared to claim. 70 Der Deutsche Volkswirt, X I V (Dec. 15, 1939), 308. T h i s type of financing procedure had been designated in the German literature as "hidden financing" (stille Finanzierung). From 1939 on, the long-term borrowing of the Reich was shifted to this basis, and no further public loans were floated, even after the outbreak of the war. T h e government confined itself to tapping the resources of savings and insurance institutions, through the intermediary of the so-called "Li-Loans," Wirtschafskurve, X X (1941),.55 ff. It will be shown elsewhere that as a matter of general policy the controls consistently sought to increase the rate of "automatic" formation of capital in the form of institutional and business savings, as against voluntary savings by individuals. Furthermore, as far as savings by individuals arc concerned, institutional investment (by savings banks, insurance companies, etc.) gained in importance vs. direct investment by savers. A detailed analysis of these shifts is made in Chap. IV.

THE STAA

TSKON]UNKTUR

35

71

ness. But it is also possible that with the outbreak of hostilities the anticipated scale of wartime financing outgrew the purpose and premises of operation of the Plan. T h e main instruments of wartime short-term financing were interest-bearing Treasury notes and Treasury bills, the latter carrying rediscount facilities with the Reichsbank. This paper was absorbed, for the most part, by the banking system. The Sources of Financing. The preceding outline of the various credit instruments relates to the formal aspect of financing. In view of the intimate relationship which existed between public spending and the financing of private investment, it is interesting to consider the nature of the sources out of which the funds for the financing of the "extraordinary" expenditures of the Reich had been derived. These sources can be ultimately reduced to: a) revenues from taxation and other sources, over and above the ordinary budget; b) increase in long- and short-term indebtedness of the Reich; and c) increase in monetary circulation, that is, expansion of the Reichsbank note issue.72 Some statistical data on these sources, based on official figures, are given in Table 8 on page 36. A complete statistical evaluation of the structure of the extraordinary financing of the Reich between 1933 and 1939 is beset with a number of difficulties. The line of separation between "civilian" and "armament" expenditures is quite artificial, being, in many cases, a matter of terminology. In the case of revenue from "other sources," little information is available concerning such income 71 T h e market price o£ the certificates went down at one time below par and had to be supported by government purchases. 72 T h e last source was of relatively minor importance. It became of some significance around 1938, and even then the increase in monetary circulation was chiefly d u e to the territorial expansion of the Reich. T h e reasons why the Nazis consistently avoided the " p r i n t i n g press" alternative of financing are mainly political. T h e monetary experience of 1 9 2 2 - 1 9 2 3 made the G e r m a n p u b l i c hypersensitive to potential inflationary dangers by expansion of currency issue (under the G e r m a n monetary practices, paper currency is the main medium of payment in ordinary transactions, the use of checks being limited chiefly to large business payments). One of the current claims of the Nazis was that their pledge of maintaining the " v a l u e " of the German monetary unit had been kept in the face of the wave of currency devaluations of the thirties. No matter how meaningless such a claim was, given the conditions of strictly controlled foreign exchange the argument certainly had a non-negligible propaganda value.

THE

36

STAATSKONJUNKTUR TABLE

8

Some Financial Data on Germany, (In Millions of RM) INDEBTEDNESS

Fiscal Year April 1March 31 193s ( e n d

Revenues from Taxation and Customs »

I N C R E A S E IN REICH

Long and Medium Term b

Short Term

of year)

>933-34 »934-35 >935-36 >936-37 >937-38 >938-39 Sept., 1939 (5 mo ) Total

6,846 8,223 9.654 11492 13.964 17,71a 9,800 d 77^9>

4'8 528 495 —516 - 38 4.21°

845 762 1,671 2,582 3.343 7,623 2.375 19,201

e

4,800 e 9.897

1933-1939

Reichsbank Note Circulation (End of Calendar Year) c 4.155 4.209 4461 4.833 5.348 .5.884 8,604

Increase in Note Circulation (in Calendar Year)

54 252 372 5'5 536 2,720 1,700 934 >935 >936 >937 >938

Total 3-2 5-7 7-5 9-o 10.0 12.0

Public >•7 3-5 4-9 54 6.1 7-9

Industrial .6 .8 1.0 1.4 1.8 2.1

Private (.Residential) •9 >4 1.6 2.2 2.1 2.0

According to these figures, the share of public orders fluctuated around 60 to 70 percent of the volume of total construction; which is probably close to the corresponding ratio of total public investment. " I K , Weekly Reports, X I I (1939). Supp., April 20, p. 4; also R K G , Report, Middle of >9)9> P- *• '« See the sections on wage controls in Chaps. I l l and VI. it T h e shift in the price relationship of investment and consumers' goods described earlier, may be considered as one of such controls. Given the rigidity of the monetary wage level—which was one of the basic premises of the Nazi economy—a rise in the price level of consumers' goods clearly meant a contraction in the volume of consumption in real terms. It will be noticed, moreover, that the rise was consistently higher in the case of agricultural consumers' goods of relatively inelastic demand which— again given the fixity of earnings—resulted in the absorption of a larger proportion of wage incomes by goods of this type. On the other hand, the effects which a shift in the price structure of this kind could normally be expected to have on the structure of production and investment in a " f r e e " market economy, were eliminated by means of appropriate controls. Production and investment in consumers' goods industries were checked by rationing of physical resources, or imposition of investment bans, while lower prices in the capital goods industries were compensated by decreased costs, or by appropriate incentives, such as guaranteed output or guaranteed profits.

THE

STAATSKONJUNKTUR

4i

T a b l e 9 shows that this policy became accentuated in the latter part of the period under review. W h i l e it is true that the movement of production of consumer goods is not necessarily identical with that of actual consumption, due to the incidence of such factors as depletion and replenishment of inventories, and shifts in foreign trade balances, it is, however, roughly indicative of the level of consumption in the e c o n o m y . " T h e Nazi commentators were at pains to disclaim that the consumption policies of the government implied a deterioration of the standard of living of the low-income groups. Various statistical studies of consumption published in the later part of the period attempted to prove that, by 1 9 3 7 - 1 9 3 8 , consumption of certain basic consumer items either was very close or in some cases above the level of 1 9 2 8 - 1 9 2 9 . 7 9 H o w realistically such statistical evidence reflected the actual state of affairs is difficult to tell. Because of the limited coverage of the available data, and the well known difficulties involved in statistical measurement of consumption, only limited value can be attached to over-all numerical comparisons of this kind. Nevertheless, it is generally admitted by students of the Nazi economy that, on the whole, the standard of consumption was maintained under the Nazi regime at a reasonable definitely above the depression level of 1932.

80

level,

T h e rate of im-

78 There are indications that huge stockpiles of consumers' goods were built up in Germany in connection with the war preparedness program. On the other hand, a study of consumption by the I K ( V J K , X I V , 1939-40, 25), notes that the balance of German exports over imports of consumers' goods underwent a considerable decline between 1929 and 1939, and implies that this represented a virtual addition to the domestic supply of consumers' goods. Clearly, this argument which was based on over-all figures cannot be accepted at face value. In this case, the decrease of the export surplus was an outcome of the falling off of both exports and imports. Apart from the problem of respective structure and valuation of the exported and imported consumers' goods, the very nature of international trade excludes an equivalence of these goods in terms of real consumption. A decrease in exports in itself does not necessarily mean that a corresponding volume of goods has been diverted into domestic consumption. 79 Cf. the various reports of the R K G since 1937 under the section: "Labor Incomes and Consumption"; also the article "Steigung des Einkommens und Verbrauches," in VJK, X I V (1939-40), 21 ff., particularly the table on p. 19. 8° Cf. a recent study by Otto Nathan, "Consumption in Germany during the Period of Rearmament," in Q.J. of Econ., LVI (May, 1942), 349-384. See also Chapter X I , "National Income, Consumption and Social Welfare," in The Structure of the Nazi Economy, by Maxine Y. Sweezy (Cambridge, Mass., 1941), pp. 195 ff.; also C. W. Guillebaud, The Economic Recovery of Germany, pp. 203 ff., 253-254.

4»

THE

STAATSKONJUNKTUR

provement of consumption standards after 1932 was far from comparable to the tremendous production effort achieved by the economy after 1933, as the major part of the increased productivity was systematically drained into nonconsumption channels. It would appear, however, that the authorities chose not to depress unduly the consumption standards of the low-income groups. This policy was probably inspired as much by a desire not to impair the efficiency of labor by deficient consumption as by considerations of political expediency. Private Investment under the Rearmament Phase. In contrast with the "work creation" phase, private investment by industry played a more active role in the later part of the period. An important factor in this revival was the "planned" private investment under the Four-Year Plan described earlier. There is also evidence to the effect that expansion of privately operated facilities for the production of armament and munitions was in most cases financed by private means, under special arrangements with the authorities. This type of investment, either imposed, sponsored, or otherwise influenced by the public authorities, dominated investment of the later phase. No direct statistical information is available concerning the volume of private investment beyond 1936 (for 1933-1936 see Table 6). A very rough estimate based on such scattered information as can be found in the literature would give for 1937-1939 the figure of R M 6 to 7 billion. 81 If one includes the figures for 1935 (the first year of the period which shows a positive balance of net investment), the volume of net industrial investment could be tentatively put at about R M 7.5 billion. As the capital market had been virtually taken over by the Reich, the financing of this investment was derived primarily Assuming that the level of net investment of 1936 (approximately R M 930 million) was maintained in the following years, this would give for the years 1937-1939 a total of some R M 2.5 billion in net investment outside of the Plan. If one adds the Plan investment which may be conservatively estimated at some R M 4 billion, the total figure for 1937-1939 appears at some R M 6.5 billion. T h e more drastic enforcement of restrictions on "non-essential" capacity in the later years was probably more than offset by the increase in armament investment. The figure of 6.5 billions may be thus considered as a rather conservative estimate. Total net investment by private industry (including public utilities) in the post-stabilization boom of 19241929 amounted to R M 7 4 billion. (Konjunkturstatistisches Handbuch, 1936.)

THE ST A A

TSKOMJUNKTUR

43

from internal sources—from accumulated business savings. Even with the relaxation of restrictions on private flotations under the Four-Year Plan, "outside" financing through the capital market and by bank credit remained of secondary importance. T h e center of gravity of business financing definitely shifted to the basis of internal capital formation, with private investment becoming emancipated from the capital market. T h e effect of this evolution was, among other things, to weaken considerably the role of the rate of interest as a strategic factor in entrepreneurial decisions, in the same way as the existence of other investment controls made largely inoperative the incidence of the market mechanism. 82 Restrictions on Private Investment. It has been seen that under the "work creation" phase the authorities refrained from a policy of indiscriminate encouragement of private investment. This "selective" policy was pursued in a more active form in the later phase of the period under review. Frequent use was made of restrictive controls, and further "bans" on investment were decreed under the law of 1933. 83 T h e emphasis was primarily upon restrictions on the "real" level, in the form of rationing of labor and raw materials, as a matter of conservation of resources. T h e latter objective was particularly stressed in connection with the investment "tasks" under the Plan, which came on top of the huge construction projects of military nature. T h e introduction of the Plan was accompanied by numerous new controls over the use of building materials and certain categories of skilled labor; these were tightened as time passed by, and the pressure of "essential" investment strained the available resources.84 A priority system was 82 Cf. pp. 158 ft., chap. VI. 83 A form of restrictive control was the withdrawing of fiscal privileges which had been previously granted as investment incentives. For instance, the tax exemption of new residential building which had been enacted as a "work creation" measure was repealed as soon as it was considered necessary to slow down new residential construction due to shortages of building materials and labor. ( R K G , German Economic Situation, p. 13.) si See pp. 55 ff. We quote the following statement from the official organ of the Four-Year Plan: "At this stage of full employment, a watchful economic policy should see to it that the productive forces of the country should not be overtaxed. . . . One of the tasks of the Four-Year Plan is to prevent the occurrence of such strains. . . . A ranking of investment projects is enforced [under the Plan], and when vital state investments are involved, these should be given the first place." Der Vierjahresplan, I ('937).'49-

44

THE

STAATSKONJUNKTUR

introduced in March, 1938, for use of structural steel in all private building projects above a certain volume, 85 and a contemporary comment made it clear that the priority principle was to be extended to the public construction projects themselves, according to a scale of urgency. 86 Particularly stringent measures were taken for the management on a priority basis, of labor in building trades, which proved to be the most troublesome bottleneck. 87 By the end of 1938, virtually all new investment was put under direct control. General commissioners (Generalbevolmachtigte) were appointed for the construction and machine building industries, in which the most critical shortages had developed by that time. 88 As their title implied, the commissioners were vested with discretionary powers of regulation in their respective fields; they were to "guide" available labor and materials into the most urgent tasks, and manage the over-all allocation of incoming orders on a priority and quota basis.89 With the outbreak of the war, a ban was imposed upon all new civilian construction in excess of a unit cost of R M 5,000, except for projects considered essential to the prosecution of the war. 00 One of the most obvious results of the government controls was to modify the structure of new investment in the economy. T h e effect of the controls, including those on the real level, of the inss D e c r e e c o n c e r n i n g t h e s t e e r i n g of c o n s u m p t i o n of steel in c o n s t r u c t i o n , of M a r c h 7. 1938 ( R e i c h s a n i e i g e r , N o . 55). 88 Der Vierjahresplan, I I (1938), 539. T h i s was a p p a r e n t l y m e a n t to check t h e orgy of m o n u m e n t a l b u i l d i n g i n w h i c h v a r i o u s Nazi o r g a n i z a t i o n s e n g a g e d by 1 9 3 7 1938, by s u b o r d i n a t i n g s u c h b u i l d i n g to t h e a r m a m e n t p r o g r a m . CI. R K G , Report, 19)8-39, p . 14; Report, Middle of 19)9, p. 2. 88 T h e v a l u e of n e w c o n s t r u c t i o n f o r 1939 was e s t i m a t e d by t h e l e a d e r of t h e E c o n o m i c G r o u p " C o n s t r u c t i o n , " at s o m e R M 30 billions; this was a l m o s t five t i m e s t h e figure of 1929. As to t h e m a c h i n e b u i l d i n g i n d u s t r y , e x t r e m e l y heavy claims o n its facilities w e r e m a d e by t h e r e t o o l i n g of t h e a r m a m e n t i n d u s t r i e s , t h e m e c h a n i z a t i o n of t h e R e i c h s w e h r , t h e e q u i p m e n t of e n t i r e l y n e w b r a n c h e s of p r o d u c t i o n u n d e r t h e F o u r - Y e a r P l a n , t h e m e c h a n i z a t i o n of a g r i c u l t u r e , etc. T h e i n d e x of t h e v a l u e of d o m e s t i c o r d e r s in this i n d u s t r y w e n t u p f r o m a m o n t h l y average of 24.5 in 1932 to 220.7 in A u g u s t , 1938, 1928 r= 100. (Cf. also " D e r M a s c h i n e n h u n g e r , " in Die Wirtschaftkurve, 1939, P- »9 ) 8» R K G , Report, 1939, p . 2. See also t h e q u o t e d article in Die Wirtschaftkurve, p p . 21 ff. a n d " D i e A u f t r a g s l e n k u n g , " ibid., 1939, p. 302. » » D e c r e e of O c t . 11, 1939, a m e n d e d o n F e b . 16, 1940 (R.A. N o . 44, Feb. 21, 1940). T h e p r o h i b i t i o n was s o m e w h a t r e l a x e d in A u g u s t , 1940, d u e to e m p l o y m e n t of w a r p r i s o n e r s ; see Der Deutsche Volkswirt, X I V (Aug. 30, 1940), 1742.

THE STAATSKONJUNKTUR

45

vestment bans and the "guided" investment under the Four-Year Plan, was to canalize the bulk of the new investment into certain favored branches. T h e shift of a major part of private financing to internal sources operated in the same sense. A n indirect indication of the distribution of new investment among the various branches of industry is provided by the shifts in the structure of industrial production. T a b l e 12 illustrates the movement of output and sales in a few key industries from 1932 to 1939; the figures for 1929 were added for the sake of comparison. T h e figures clearly show the lack of uniformity in the incidence of the Staatskonjunktur upon individual branches of the industrial economy. Steep advances from the level of 1932 were scored in steel, cement, coal, generation of power, machine building, and production of motor cars and trucks, while the advance was relatively moderate in textiles and other consumer goods such as shoes, paper, and so on. 91 T h e figures provide an additional illustration of the nature of the Nazi recovery which has been outlined earlier, namely, the strongly marked differential behavior of the investment and consumers' goods sectors, and reflect the familiar pattern of an armament-based economy. Clearly there is no necessary parallelism between the rate of expansion of production and that of investment. Even with greatly increased output, the rate of new investment will depend upon the extent of utilization of capacity at the start of the upward movement; it will be a function, in other words, of the margin of unused capacity available in the particular industry and this margin was quite unequally distributed between different industries. In spite of these limitations, it is believed that the figures of T a b l e 18 provide a reasonably accurate picture of the shifts which took place in the field of investment. 91 A certain spurt is noticcablc in the rate of output of textiles and shoes after 1938; this was probably stimulated by the equipment needs of the greatly expanded Reichswehr. »2 Substantial investment also took place in fields f o r which no statistical data are available. T h i s applied particularly to all types of "secret" investment of a military nature, as, for example, that related to the production of a i r c r a f t , naval and submarine craft, and the merchant marine.

a. VV e

e

S 3 O ?s «Ol N* M r^ tS °0 Iftoo ift — -^00 ^S *0 IO to

3 ti

C

2

ci

5 H

g "S «i »

•5 w v> O « -c Os 'S C Os O T Cl S 5 £ £ « 03 w 3 c« .feO h. 3 ~ S* ^ 3 O c«j E S o S

gs e n « S o- cu é ü S. ai O) oq oo «•"Ò t¿ o o M in «»• 0) MO - —-

> NMIO IO OO ^O M 9 n "" - «

i s

M O a> M 00 0ifî ci M

»ft

00 0 M O) O

to

Ifl "ft lû h. aò oô O - -

O fOf -ci 5o 0œ

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o > r-. h, ift »i) tfi o 1—4 Ò rf O oô X ò> O ^ o t- 00 •a O)

•a je

Ill THE

BASIC

ELEMENTS

CONTROL

OF

THE

NAZI

MECHANISM

F O L L O W I N G pages outline the primary controls which provided the setting for the operation of the economy under the Nazi regime; 1 namely, the controls of prices, labor and wages, credit and foreign exchange. In addition, a section of this chapter deals with the changes in the structure and functions of the entrepreneurial organizations in German industry, as a result of their integration in the pattern of a controlled economy. The description of the elements of the control mechanism will be made with particular reference to their bearing upon the economies of private investment. At this point only a brief outline will be made of the relationships involved; a more detailed analysis will be taken up at the proper place in later chapters.

THE

PRICE

CONTROL

The steering of the price mechanism was undertaken as one of the first tasks, the immediate objective being that of checking a potential inflationary movement under the impact of public spending. The curbing of undesirable strains in the structure of prices and costs was considered as a major policy objective, and the problem was approached not only in terms of the primary repercussions in industries which directly benefited from public orders, but also in terms of the latent secondary effects. T o use the slogan-like terminology of the contemporary economic literature, the goal was the achievement of a "Mengenkonjunktur," in contrast with the "Preiskonjunktur" of the "liberalistic era." This meant that in the coming upswing, the stress was to be primarily on increase of physical production, as against the development of a price boom; i For a comprehensive treatment of some of the controls discussed in this chapter the reader is referred to Nathan, The Nazi Economic System.

48

THE

NAZI

CONTROL

MECHANISM

the improvement of the profitability of private business was to result not from higher prices, but from decreased costs, as a result of the expanded output. 2 A vigorous action of wage stabilization was immediately undertaken by the government, 3 b u t the policy in the field of prices was of a more complex nature, and the term "price stabilization," which has been sometimes applied, is justifiable only within certain limits. It is true that an effort was made to maintain the stability of the general price level; an upward readjustment of prices was, however, tolerated and even encouraged in a great many cases. It may be assumed that, in such cases, the official attitude was dictated not only by the pressure of private interests, but by more basic policy considerations. Sustained profitability of industry, particularly in those branches where expansion of investment was actively encouraged, was considered a desirable development in itself. W h i l e the wage stabilization policy, combined with more efficient utilization of capacity, provided the latent conditions of improved profitability in a general way, action was taken in such cases also on the price side. 4 A "selective" price policy also offered the advantage of flexibility. It enabled the authorities to achieve a readjustment of certain strategic price relationships (for example, agricultural and manufactured goods; goods of elastic and inelastic demand), in order to produce desirable shifts in the structure of production, consumption and investment.® Finally, another factor in the upward readjustment of certain prices was the currently stated objective of elimination of unfair price cutting and other economically wasteful practices of cut-throat competition. 6 2 Cf. the following comment by the organ of the German Institute for Business Research: " W h e n the government of the Reich . . . took up in early 1933 the financing of 'work creation' by public credit, it attempted by prudent allocation of funds and price controls to develop a Mengenkonjunktur, i.e., a situation where the profitability of industry is raised primarily by a growing volume of sales, production, and employment, while the price level, and also the level of wages, remained possibly unchanged." VJK, I X (1934), T e i l A , 108. s Cf. pp. 56 ff., below. * A discussion of the role of government policies in the evolution of prices and costs in industry will be taken u p in a later chapter. & Cf. " T h e German Price Policy since 1933," I K , Weekly Reports, I X (1936), Supplement to the issue of Aug. 26, 1936; also note 77, page 40, above. • O n e finds in the contemporary German literature lengthy discussions as to the desirability of a policy of "just price" (Gerechte Preis), which would eliminate both

THE NAZI CONTROL

MECHANISM

49

Altogether, already the earlier phase of the price action makes it appear that the authorities intended to go beyond the immediate objective of checking inflationary pressures. While in Nazi economics the price mechanism was denied the function of automatically regulating the operation of the economy, its usefulness as a tool of conscious and deliberate steering was by no means overlooked. T h e possibility of effectively influencing through the price mechanism the basic processes of production, consumption, and investment, and, more generally, the distribution of the national income, was fully recognized. 7 T h e mechanism of price control was developed in a gradual way. T h e earlier action was limited largely to the more easily controllable "administered" prices, that is, prices set by cartels and similar trade agreements (gebundene Preise), and was carried out through the medium of the cartel organization of business. 8 Thus, price control of the earlier period had been associated with the parallel action of reorganization of the German cartel structure. T h e effectiveness of the cartels as price-regulatory bodies was enhanced by tightening up their sanctioning power over their members, extending the cartel structure of industry, and strengthening government the evils of unethical price cutting (Preisschleuderei), and the equally harmful effects of unscrupulous price profiteering (Preistreiberei). No indication was given, however, as to how the just price should be determined (see Theodor Becker, "Markt und Preis in gewerblichen Wirtschaft," in JNSW, 1935, pp. 180 ff.). T h e concept of "just price" appears to have found little appeal with business. A study made by the Reichskuratorium für Wirtschaft, pointing out the wide range of dispersion of costs between different enterprises, qualified this concept as an "unrealistic construction in the nature of an economic philosophical stone" (see also pp. 174 ff., below). A different version of the "just price" concept emerged a few years later in connection with the price policy under the Four-Year Plan. 1 T h e earlier literature stressed exclusively the anti-inflationary angle of the price action; the later comments, however, explicitly refer to the use of the price mechanism as a tool of control, in the sense outlined above. See "Deutsche Preispolitik und Wehrwirtschaft, Grundlagen der Deutschen Preispolitik," VJK, X I I I , Teil A (193&>939). 333 ffs While an office of Price Commissioner was established by the Brüning government as early as 1932, its functions were limited to supervision of retail prices for everyday necessities, and the scope of its intervention was restricted to trade margins in distribution. As a tool of effective price policy, it was of little value. T h e office was discontinued by the Nazi government, and its functions transferred to the Ministry of Economics. On the other hand, a basic attack on the problem of price control, namely at the point of production, would have required a complex administrative organization which was as yet not available. T h e authorities thus chose to make use of an existing mechanism which was equipped, at least potentially, to perform price-regulatory functions.

5®

THE NAZI

CONTROL

MECHANISM

9

influence within the cartels. As to the price control pursued through the medium of, and in cooperation with, the cartels, this was of a flexible kind. Price rises above the 1 9 3 2 - 1 9 3 3 level were generally favored; 10 on the other hand, brakes were applied as soon as prices tended to get out of line. 11 T h e earlier price action was fairly effective in the capital goods industries, as these were extensively organized, were based largely on domestic raw materials, and carried the bulk of public orders, for which direct control of prices on the basis of cost had been introduced at an early date. 12 Price regulation in the consumers' goods industries proved to be a more complex problem. T h e cartel organization was here less prevalent, while foreign raw materials played an important part in formation of prices. This sector was attacked in various ways. In a number of industries, price regulation was introduced through the mechanism of compulsory cartelization.13 For commodities based on foreign imports, a system of flexible prices was devised which was linked to the fluctuations of world prices; in addition, the supply and demand of the raw materials involved were made subject to regulation by special control bodies set up for that purpose.14 T h e price policy entered a new phase with the introduction of the Four-Year Plan. A contemporary comment defined as follows the new trend in the scope and functions of price control. " T h e » See below, pp. 69 ff. 10 A statistical study of price movements for the first six months following the cartel action lists 23 cases of price rises against three declines. The figures of the IK. show an average rise of the "administered" prices from 76.9 in April, 1933, to 79.9 in Oct., 1933; base: 1 9 2 8 = 100 (Weekly Reports, Supp., Aug. 22, 1934). 1 1 A decree passed in November, 1934, imposed compulsory registration with the Price Commissioner's office, which was reestablished in the fall of the same year, of all price agreements, price changes and formations of cartels, which had taken place after July, 1933. All "unjustified" price changes were made subject to investigation and eventual action by the authorities (Decree of Nov. 19, 1934, R G B , Pt. I, 1186). i 2 Cf. "German Price Policy since 1933," loc. cit. These industries also benefited most from improved utilization of capacity. In some cases, price reductions were obtained under pressure of the authorities; the price cuts, e.g., s)nthetic fertilizers (potash and nitrogen), cement and sheet glass, received extensive publicity in the literature. is According to the I K , all domestically produced raw materials and semifinished goods, and at least half of total production of industrial finished goods, were organized, by 1936, in cartels. T h e cartel organization covered some two thirds of total industrial output, against 40 percent in 1930. Weekly Reports, I X (Dec. 16, 1936), 103. " Ibid., X (Supp., June 2, 1937), 4; see also note 64, below.

THE NAZI CONTROL

MECHANISM

51

new situation arising in connection with the Second Four-Year Plan, makes it necessary to change from a policy of price supervision to a policy of price formation. In addition to the former objective of preventing inflationary price rises, there is a new problem of adjusting prices and price relationships to the aims and purposes of the Second Four-Year Plan." 15 A Reich Commissioner for Price Formation (Reichskommissar für Preisbildung) was appointed, whose functions, as defined by the law which established his office, were to enforce "economically just prices." 16 T h e Commissioner was given unlimited powers of intervention in the price system, and his jurisdiction was extended to all prices, in the widest interpretation of this term, except for wages and salaries. T h e price action under the Four-Year Plan was geared to the policy objectives of the later part of the period. These were, namely, stabilization of the price level in the face of the accelerated rate of public spending; stimulation of government-sponsored investment under the Plan; and the carrying out of the huge rearmament program, while preserving an acceptable standard of civilian consumption. A network of innumerable decrees, administrative rulings and other enactments set up a complex machinery of control to replace the operation of the automatic price and market mechanism. Price regulation was accompanied by parallel measures on the "real" level, in the form of control of production, marketing, and consumption. These included restriction of consumption of scarce raw materials; prohibitions and quota restrictions on production and consumption of finished goods based upon such raw materials; regulation of various phases of the marketing process (such as quota allocation of deliveries, control of storage and distribution). 17 T h e controls further extended to the productive facilities of industry, in the form of various investment restrictions on one hand, and measures of compulsory investment on the other. Aside from allocai&Ibid.,

X I (Jan. 12, 1938), 2; italics in the text. i» Law of Oct. 29, 1936 ( R G B , Pt. I, 1927). T h e "economically just price" carried in this case a different interpretation from the one attached to the earlier concept (see above). T h e term implied here a price (or price structure) which was instrumental in attaining the policy of objectives under the Plan. For a description of the techniques of control in the fields of production and marketing, the reader is referred to Nathan, op. cit., pp. 142 ff.

52

THE

NAZI

CONTROL

MECHANISM

tion and diversion of resources, an essential function of these controls was to support the price action by influencing the factors w h i c h determined the supply and demand of the commodities involved, in the same way that manipulation of the price mechanism was itself used as a tool of influencing production, consumption, and investment. A particularly highly developed set-up of controls of this type, which practically eliminated the last vestige of a free market, operated in the agricultural, or more precisely, the f o o d economy. In this sector, regulation of the price and market mechanism, the so-called Marktordnung, went further than in any other branch of the economy. 1 8 T h e price action under the Plan was inaugurated by a general "price stop," decreed by the Price Commissioner almost immediately after he took office. 19 Official statements made it clear, however, that the "stop" did not exclude a flexible management of the price structure; in other words, while stability of the price level remained the basic objective, the measure was not intended to freeze the price structure into a rigid pattern. Prices and price relationships were to be continually adjusted to the dynamic conditions of the economy, including the special requirements of the Four-Year Plan and the rearmament program. 20 As compared to the earlier period, the shift to the "price formation" principle resulted in a refinement of the techniques of control. In dealing with individual commodities, the setting of prices and margins was adapted to the particular economic condi18 T h e reasons why the agricultural sector had been subjected to the most complete form of government planning were related to the economic objectives of the regime. One of these was the improvement of national self-sufficiency in food; on the other hand, a basic premise of the anti-inflationary policy was absolute stability of the wage level. These considerations, which dominated the Nazi policies in the field of agriculture, worked in opposite directions. T h e first implied, among other things, relatively high prices of agricultural commodities as a stimulus for increased production. T h e second required that a close check be held upon the cost of food, in order not to impair the real purchasing power of the working population. T h e abolition of the free price mechanism and its replacement by a thoroughly planned agricultural economy, namely the "Marktordnung," was the solution of this dilemma. T h e food economy was organized for this purpose into a separate economic group, the "Reich Food Estate" (Reichsnährstand). i» Decree of Nov. 26, 1936 ( R G B , Pt. I, 955), frequently referred to in the literature as the "price stop" decree. 20 Cf. "Price Policy and Price Fluctuations," IK, Weekly Reports, X (Aug. 11, 1937), 70.

THE NAZI

CONTROL

MECHANISM

53

tions of the commodities involved. Such factors as the incidence of foreign-determined elements of cost, the rate of capacity utilization, the elasticity or inelasticity of demand, the nature of the distribution channels were taken into account. 21 T h e "price formation" principle implied a growing emphasis on cost of production, and as a further step in the control techniques, cost of production, from a datum in the problem, became a factor which was itself increasingly subjected to intervention. 22 T h e tightening of the supervision of privately administrated prices involved public intervention in cost formation within the cartels. 23 Direct cost control was also implied in the price policies adopted in connection with the " n e w " industries of domestic raw materials. T h e growth of the volume of armament contracts, which were generally based upon cost agreements, resulted in a corresponding extension of the area of direct cost control, while in those industries where costs were not directly controlled, an effort was made to generalize the use of standard cost accounting in order to put computation of costs, and consequently the setting of prices, on a uniform and objective basis. T h e price control policies had a vital bearing upon the evolution of private investment through the possibilities which they offered to affect the rate of profitability of individual branches of industry; their effectiveness was clearly in direct proportion to the extent of refinement of the control techniques, which made possible a more accurate adjustment of entrepreneurial margins. T h e relationship between profits and investment was in this case not of the classical kind whereby, in a free market economy, the level of profits will automatically regulate the flow of newly formed capital, and its allocation among individual investment fields. Under the conditions of a controlled economy such a relationship 2 1 For an outline of the techniques and various aspects of the price control under the Four-Year Plan, the reader is referred to Nathan, op. cit., pp. 23« ff. An authoritative source in the German literature is Wilhelm Rentrop, Preisibildung und Preisüberwachung in der gewerblichen Wirtschaft (Hamburg, 1937); a short and comprehensive description is given in the article "Wie arbeitet die Preisaufsicht," by Leonhard Miksch, in Die Wirtschaftskurve, X V I (1937), 253 ff. 22 Cf. Leonhard Miksch, "Vom Preisstop zur Kostenkontrolle," in Die Wirtschaftskurve, XVIII (1939), p. 248. Cf. also p. 170, below. 2» Cf. pp. 174 ff.

54

THE NAZI CONTROL

MECHANISM

was clearly inoperative, at least in terms of the automaticity of its operation. A more immediate link existed between generation of profits and investment due to the fact that the latter was mainly financed out of internal sources, that is, ultimately, out of accumulated profits. T h e management of profit margins through price control thus had a direct effect upon the possibilities of new investment. T h e relevant government policies will be considered in detail in a later chapter.24 CONTROL

OF LABOR

AND

WAGES

T h e ground for the economic controls was prepared by political action. T h e union organization of German labor was abolished and replaced by the so-called "Labor Front," defined in the contemporary literature as a "community of all those who perform creative work" (Gemeinschaft aller Schaffenden)." T h e structure of industrial relationships in the Third Reich, including wages, hours, conditions of work, hiring and firing procedures, and so on, was reshaped on the basis of what the Nazi commentatorá designated as the principle of "works community" (Betriebsgemeinschaft). 2 8 Control of Labor. Direct control of labor, that is, interference with the free movement of labor between enterprises and geographical regions, was introduced by degrees. T h e right of the government to manage labor allocation (Arbeitseinsatz) "in the interest of public welfare and the nation," was proclaimed as a basic principle of labor policy.27 The earlier control measures were primarily concerned with reduction of visible unemployment, by eliminating from the labor market certain categories of labor and by decongesting surplus labor areas.28 A more drastic step was 24 Cf. pp. 163 ff„ below. See "Arbeitsfront und Sozialpolitik," by Franz Mende, in JNSW (1937), p. 87. T h e "community" angle of the Labor Front was emphasized by the fact that both entrepreneurs and labor were statutory members of the Front. 2® T h e "Betriebsgemeinschaft" was to represent in each enterprise (Betrieb) the community of labor and management, which for the industrial economy as a whole was represented by the Labor Front. See "Die Regelung des Arbeitseinsatzes," by Dr. Friedrich Syrup, JNSW (1937), p. 37. T h e concept of Arbeitseinsatz is defined as "the task of placing German labor in the right employment positions," with the understanding that the decision as to what the "right" position was, ultimately lay with the organs of labor control, which were to act on grounds of considerations of public interest. 28 Law concerning the Regulation of Allocation of Labor (Gesetz iiber die Regelung 25

THE NAZI CONTROL

MECHANISM

55

taken in 1935 with the introduction of the so-called "work book" (Arbeitsbuch),

the holding of which was made compulsory for any

individual in the labor market, manual laborer and employee alike.29 T h e labor-book mechanism provided the authorities with an effective tool of management of the labor supply.30 As the economy moved into full employment, the scope of intervention in the labor market was gradually expanded. T h e controls were extended to all movement of labor between enterprises, by making the hiring of labor subject to sanction of the regional labor offices. This was first applied in certain skilled trades and extended to all categories of labor.31 It meant in effect that the control agencies, namely, the Reichsanstalt and its regional organs, were given authority to veto any expansion of employment in "nonessential" industries. A later measure, taken in anticipation of labor shortages under the Four-Year Plan, imposed preliminary filing des Arbeitseinsatzes), of May 15, 1934 ( R G B , Pt. I, 381) and Decree concerning the Distribution of Labor (Verordnung über die Verteilung von Arbeitskräften), of A u g . 10, 1934 (ibid., 786). On the basis of the first law, restrictions were imposed upon migration of labor to labor surplus regions, mainly b i g city areas, such as Berlin, H a m b u r g , Bremen. Migration of agricultural labor to urban areas ( L a n d f l u c h t ) was also checked, by denying employment in nonagricultural occupations to persons previously employed in agriculture. T h e second measure introduced priorities in reemployment for certain preferred age and dependency categories of labor, e.g., fathers of families. (Cf. Syrup, loc. cit., pp. 39-41.) T h e management of the allocation and distribution of German labor supply was assigned to the Reich Institute for Employment and Unemployment Insurance (Reichsanstalt f ü r Arbeitsvermittlung und Arbeitslosenversicherung, usually referred to in the literature as the Reichsanstalt). T h e Reichsanstalt, which was established in 1927 as a federal labor agency, thus became, under the Nazi regime, the organ of labor control. 2» L a w of Feb. 26, 1935 ( R G B , Pt. I, 311). T h e system was made compulsory as of Sept. 1, 1936. 30 T h e conditions under which the labor book was issued and used made it a sort of labor identification document which carried with it the right to employment. It also enabled the authorities to establish an inventory of the labor supply, as well as to keep track of the labor history of the individual employee. 3 1 A regulation issued in November, 1936, under the authority of the Four-Year Plan, made expansion of employment of skilled labor of the metal trade subject to approval of the regional labor offices. Priorities were set up for armament industries, production of domestic raw materials, export, and building of workers' settlements. (Second ordinance of Nov. 7, 1936; Reichsanzeiger, No. 262). Another regulation prohibited the use of code advertisements for labor of the metal and building trades (Sixth ordinance of the same date, ibid.). A more general measure was taken by a decree of March, 1938 (Reichsanzeiger, 1938, No. 51) which authorized the labor offices to put the hiring of any category of labor under their control. A decree passed in Sept., 1939, extended the procedure of preliminary approval by labor control authorities to all hiring of labor ( R G B , Pt. I, 1685).

56

THE

NAZI

CONTROL

MECHANISM

with regional labor offices of all new construction and civil engineering projects (Hoch- und Tiefbauvorhaben) which involved a wage outlay above a certain amount; 3 2 a direct check was thus provided upon absorption of building labor in new private construction. Particularly in its later phase, control of labor, as part of the mechanism of allocation and rationing (Bewirtschaftung) of physical resources, was an effective element of control of investment on the "real" level. Control of Wages. T h e wage action proceeded from the premise of stabilization of industrial labor costs in line with the antiinflationary policy. T h e key measure in this field was the famous Labor Regulation Act of 1934, which provided the legal framework of industrial relations in the T h i r d Reich. 33 T h i s enactment introduced the "leadership principle" in the relationships between employers and employees, and gave legal sanction to the scrapping of the " W e i m a r " system of collective agreements. T h e Weimar labor code was replaced by a system whereby hours, wages, and conditions of work were set by the management of each enterprise, under supervision of government-appointed officials in charge of labor, the so-called "labor trustees." 34 •2 Fourth ordinance under the Four-Year Plan, Nov. 7, 1936 (Rcichsanzeiger Nos. 262, 263). T h e procedure of compulsory registration applied to projects with a payroll in excess of R M 5,000 in the case of private concerns, and in excess of R M 25,000 in publicly sponsored construction. as Gesetz zur Ordnung der Nationalen Arbeit (Arbeitsordnungsgesetz, Jan. 20, 1934, R G B , Pt. I, 45). 34 T h e entrepreneur became the "leader" (Führer) of the enterprise, to whom the employees and labor force, or "the following" (Gefolgschaft), owed obedience and fidelity. Decisions of the "leader" in matters of internal management and conditions of employment were binding on "the following," who were given the right of appeal through a representative body, the so-called Confidence Board (Vertrauensrat), to the regional labor trustees (Treuhänder der Arbeit). T h e Reich territory was subdivided into 13 such regions. Government control of labor was exercised through the medium of the labor trustees. Their role was to issue "rules of guidance" (Richtlinien), to be applied by management in the setting up of so-called "works regulations" (Betriebsordnung), which defined the conditions of employment, including minima wage rates, in each enterprise. Labor trustees were empowered to decree, if necessary, minimum wage rates to apply in a given industry or group of enterprises (Section 3, of the Law). T h e legal text was deliberately vague as to the conditions under which intervention by labor trustees should take place; it merely states that minimum regulations should be issued whenever the necessity arises to protect the interests of employees of a given industry. T h e initiative of intervention was thus left with the labor officials.

THE NAZI CONTROL

MECHANISM

57

As a matter of basic policy, the labor trustees were instructed to follow prevailing wage and salary schedules. 35 An effort was, however, made to shift wage rates from time to performance or efficiency basis (Leistungsprinzip). T h e minimum wage schedules (Tarifordnungen) issued by the labor trustees introduced, whenever possible, task or price rates (Akkordlohn) which allowed for higher labor earnings without increasing the unit cost.36 T h e technique of minimum rates proved to be adequate for purposes of wage stabilization, in the earlier part of the period. While it was optional for management to set its wage rates above the minima, there was little inducement for such action, given the pressure of a backlog of unemployed labor. 37 With the appearance of labor shortages, a stricter control of wage rates was introduced, in addition to the tightening of restrictions upon mobility of labor described above. A decree of June, 1938, authorized labor trustees to impose, in addition to minimum rates, wage ceilings in those branches where shortages were particularly acute.38 T h e aim was to counteract the upward pressure of wages in certain skilled trades as a result of competitive bidding by employers. Immediately after the outbreak of the war, the ceiling system, administered by the labor trustees, was extended to all wages, salaries, and remunerations. 30 This followed by a few days the universal labor control measure, of September 1, 1939, referred to above. As will be seen from a table presented elsewhere, 40 the action of wage stabilization was extremely effective. Whether set by "enterprise regulations" or by "industry regulations" issued under the authority of the labor trustees, wage rates in German industry were practically frozen at the level of the last negotiated collective conFor a digest of the Law of Jan. io, 1954, see I K , Weekly Reports, VII, Supp. July 4, 1934; also the Int. Labor Rev., X X I X , No. 4 (April, 1934). 35 See VJK, I X (1934), Teil A, 108. 3« Cf. pp. 154 f f „ below. According to Nathan (op. cit., p. 186), there are reasons to believe that actual wages paid in some industries were below the officially published rates; this, of course, was not reflected in the official statistics. 38 Decree of June 25, 1938 (RGB, Pt. I. 691). '»Decree of Sept. 4, 1939, also known as the "War Economy Decree" (ibid., 1609), which put the economy of the Reich on a war footing. «0 Table 26, p. 153.

THE NAZI CONTROL

58

MECHANISM

tracts b e f o r e t h e l a b o r r e f o r m . T h e l e v e l of w a g e s w a s t h u s p e g g e d t h r o u g h o u t t h e K o n j u n k t u r at t h e d e p r e s s i o n rates of

1932-1933.

T h e w a g e s t a b i l i z a t i o n a c t i o n h a d a d i r e c t b e a r i n g u p o n t h e econ o m i c s of p r i v a t e i n v e s t m e n t t h r o u g h its effects u p o n p r o f i t a b i l i t y of i n d u s t r y . 4 1 CONTROL

OF

CREDIT

It has b e e n seen t h a t t h e w o r k c r e a t i o n c a m p a i g n was f i n a n c e d p r i m a r i l y b y s h o r t - t e r m p u b l i c c r e d i t . T h e h u g e v o l u m e of p u b l i c spending could not be

financed

b y i n c r e a s e d t a x a t i o n or l o n g - t e r m

b o r r o w i n g g i v e n t h e d e p r e s s e d state of t h e e c o n o m y , t h e l o w l e v e l of n a t i o n a l i n c o m e , a n d t h e v i r t u a l d r y i n g u p of c a p i t a l

forma-

tion. 4 2 O n t h e o t h e r h a n d , t h e d i s t u r b e d c o n d i t i o n s p r e v a i l i n g i n the m o n e y market and in commercial b a n k i n g m a d e the normal channels

of

short-term

financing

unavailable.43

The

financial

" p r i m i n g " of t h e r e c o v e r y was a c h i e v e d b y m o b i l i z i n g t h e c r e d i t g e n e r a t i n g p o w e r of t h e R e i c h s b a n k

through

the mechanism

of

t h e " w o r k - c r e a t i o n " bills. S t r i p p e d of its r o u n d a b o u t features, t h e b i l l s p r o c e d u r e c a m e d o w n to t h e central

bank

credit, with

the

financing

Reichsbank

of p u b l i c s p e n d i n g b y acting

as t h e

credit-

g e n e r a t i n g a g e n t f o r t h e R e i c h . 4 4 T h i s w a s also t r u e of t h e " s p e c i a l See pp. 15s ff., below. An increase of the burden of taxation would have run moreover, against the recovery policies under which stimulation of business was largely based upon tax relief. See pp. 92 ff. 4 4 T h e procedure has been designated as "pre-financing" (Vorfmanzierung)—financing of the increase in the economic activity by advance creation of public credit. Apparently making a virtue out of necessity, Nazi commentators were currently stressing the wisdom and courage of the authorities in abandoning the canons of orthodox theory for "constructive" public finance. T h e theory of "pre-financing" was fairly simple. It was perfectly sound to "pre-finance" expansion of production by public credit, as long as unemployed productive resources were available. As the mobilization of idle resources will result in additional output, this will neutralize the increased supply of credit, and no inflationary pressures need be feared. T h i s reasoning clearly implies a host of simplifying assumptions concerning the elasticity of total supply—assuming that one accepts this term as a workable concept — w h i c h makes its value in terms of application to actual conditions highly questionable. See, for instance, Keynes, General Theory of Employment, Interest and Money (New York, 1936), pp. 296 ff. Moreover, under the conditions of the Nazi recovery in which an increasing portion of the national output was diverted into nonconsumable goods, the increase in monetary income, as in any armament-based economy, inevitably outran the purchasable output. T h e multiplicity of anti-inflationary controls, which accompanied the Nazi deficit spending, shows that the Nazi economists did not put too much stock in the operation of their price theory. 41

42

THE

NAZI CONTROL

MECHANISM

59

bills" which, except for minor technical details, were of essentially similar nature and, to a large extent, of the other types of credit instruments of the later phase. Originally the burden of financing was borne entirely by the Reichsbank. W i t h the improved liquidity of the banking system, the banks were gradually introduced in the financing process, and took an active part in the absorption of the bills. It was mentioned earlier that the bills eventually came to be used as an investment m e d i u m not only by credit institutions b u t also by private investors, including business corporations. 45 W i t h the further progress of the K o n j u n k t u r , some of the issues were liquidated by repayment out of current budgetary revenues (taxation), or by longterm borrowing in the capital market. A "back-flow" mechanism was thus developed, the effect of which was to sterilize a substantial part of the central bank credit, and relieve accordingly the pressure u p o n the credit facilities of the Reichsbank. 4 8 T h e fact that the recovery was sustained by deficit spending through expansion of public credit resulted in some important repercussions in the structure of credit. T h r o u g h the mechanism of the "work creation" and "special" bills, business needs for operating funds were covered outside of the financing apparatus of commercial banking. 4 7 T r u e , the banks were not completely eliminated from the financing process. T h e unfreezing of the banking syst e m — i n itself a result of public deficit spending—soon p u t it in a position where it could and did share in the absorption of public short-term paper. It is clear, however, that the role of the banks in « As an example, according to data published by the Institut fur Konjunkturforschung, out of a total circulation (including private commercial bills) of R M 12,500 million by the middle of 1935, R M 3,800 million were held by the institutes of note issue (Notenbanken, mainly the Reichsbank); R M 1400 million by the Reichcontrolled banks; R M 2,900 million by private banks, including savings banks and cooperative credit associations, and the remaining R M 4,400 million by other investors, such as public and private insurance institutions, and industrial corporations (Weekly Reports, Supp., Aug. 22, 1935). T h e strengthening of the liquidity of business corporations, which resulted in extinguishing of bank debts and building u p of huge idle reserves, was in itself a potent factor in the process of sterilization. *i W e quote from the VJK, X I (1936-37), T e i l A , 380: " T h e considerable liquidity of business enterprises is, to a large extent, a consequence of the financing methods which have been applied in the course of the present business upswing: this has resulted in a situation, where an increasing proportion of (national) money capital formation takes place outside of the banking system."

6o

THE

NAZI

CONTROL

MECHANISM

the credit cycle became an essentially passive one, as their basic functions, those of selective allocation of credits and of risk bearing, were virtually eliminated. T h e qualitative control of the process of expansion of credit was determined outside of the banking system. A parallel development in the field of investment credit was the decline of the role of "outside" sources in the long-term financing of industry. T h e decline of the capital market as a source of financing has been mentioned elsewhere. In a similar way, bank investment credit, which traditionally held a prominent position in G e r m a n corporate finance, was virtually eliminated from the financing process.48 T a k e n together, these developments meant that deficit spending by expansion of public credit becamc the ultimate source of business financing. N o t only did public authorities take over the b u l k of short-term financing of business, b u t the supply of longterm investment capital was, in the last analysis, also largely derived from public spending through the channels of corporate reserves. T h e objectives of the Nazi credit controls were related to the developments outlined above. T h e i r primary function was to divert into public financing the various sources of capital formation. T h e y also aimed at reconstructing the credit mechanism in line with the functional changes in the field of credit brought about by the Staatskonjunktur,49 A detailed analysis of such controls as related more particularly to the steering of the capital market and See pp. 159 ff., below. T h a t these objectives were clearly recognized at an early stage can be seen from the following statement by the Committee for Investigation of the Banking System (Untersuchungsusschuss fiir das Bankwesen), a body which had been set up in 1933, for the purpose of formulating recommendations for a reform of the credit system (due allowance should be made for the phraseology of the Nazi pronouncements): " G e r m a n [national] socialism means that the development of the national economic life should not be left to itself, but that the state as the expression of the nation should be entrusted with the realization of certain economic tasks. . . . T h e new state is thus in need, to a much larger extent than the old one, of monetary means . . . [and it] must be in a position to command borrowing possibilities for the realization of its tasks. T h i s will be the situation only if the savings of the population are canalized and entrusted to the state. T h e setting up of a money and capital market corresponding to the needs of the national socialist state, should thus be the base of any new order." 48

48

THE NAZI CONTROL

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61

bank investment credit will be made in the following chapter. At this point, a brief summary is presented of the general measures of reorganization of the credit structure. A reform of the Reichsbank was carried out in October, 1933. 50 T h e credit-generating powers of this institution were considerably expanded: a) by lifting the statutory restriction upon its capacity to engage in open-market operations; b) by making practically inoperative the 40 percent minimum requirement of gold or gold exchange reserve; 51 c) by granting legal reserve capacity to Reichsbank holdings of "fixed interest securities" (festverzinsliche Wertpapieren) acquired in the open market. T h e new provisions meant in effect that all statutory limitations upon expansion of central bank credit (including note circulation) had been removed. In particular, the grant of reserve capacity to holdings of "fixed interest securities" provided for automatic expansion of the bank's creditgenerating power, enabling it to meet any claims by the government on its credit facilities. T h e act also integrated the Reichsbank into the machinery of economic control. By application of the "leadership principle," the president and members of the board of directors of the Reichsbank were to be appointed by the President of the Reich. T h e reform of 1933, which carried, to some extent, an emergency character, was given a definitive legal status in 1 9 3 9 . " A new enactment formally eliminated the statutory requirement of a metal and foreign exchange reserve against note issues. Any kind of earning assets carried by the Reichsbank, such as bills, government bonds, and other securities, was made eligible for the reserve function, while gold and foreign exchange were "admitted" as reserve, in addition to the legal paper reserve. T h e act also virtually abolished all limitation upon expansion of central bank credit; the setting up of a legal ceiling on such credit was left with the discretion of the Fiihrer and Chancellor of the Reich. Finally, it did completely away with the fiction of the parastatal character 00 Law of Oct. 27, 1933 (RGB, Pt. II, 827); see also the comments in Bank Archiv, X X X I I I , 19, 91. 51 This could be waived "under exceptional circumstances" by simple decision of the bank management. 62 T h e so-called "Reichsbank A c t " of June 1 5 , 1 9 3 9 ( R G B , Pt. 1 , 1 0 1 5 ) .

6*

THE NAZI CONTROL

MECHANISM

of the Reichsbank, by setting it up as a Reich agency, under the jurisdiction of the Department of Economics. 53 T h e reform of commercial banking was carried out by the Reich Credit Act of December, 1934." T h e objectives of this enactment, based upon the recommendations of the Banking Investigation Committee, were in the main: strengthening of public supervision and control of private banking; restrictions upon the establishment of new credit institutions and u p o n the exercise of the banking profession; safeguarding of adequate liquidity, and separation of the commercial and investment banking functions. 65 T h e Act of 1934 represented, to a large extent, a further step in regulatory legislation which had been initiated in 1931, following the banking crisis of that year. 56 T w o regulatory agencies were set up, the Reich Banking Office (Reichsamt fur das Bankwesen) and the Reich Banking Commissioner, and provided with discretionary authority of supervision of private credit institutions. 57 Aside from their specific functions of auditing, supervision, and control, the agencies were given blanket authority in setting u p "basic rules for the conduct of the banking business," the scope of this authority being limited only by the requirement that the "general policies [of the supervisory agencies] further public interest." 58 Various technical provisions dealt with the requirements of liquidity and safety. T h e provisions defined a minimum reserve 5 3 Prior to that, the law of Feb. 10, 1937 ( R G B , Pt. II, 47), abolished the last vestiges of international control in the management of the Reichsbank. " Reichsgesetz iiber das Kreditwesen, Dec. 5, 1934 (RGB, Pt. I, 1203). Some of its provisions were modified and revised by the law of Dec. 13, 1935 (ibid., 1456) and supplementary decrees taken in the following years. A full translation of the law of 1934 appeared in the Federal Reserve Bulletin, Jan., 1935. " C f . JNSW (1937), p. 57*. T h e report of the Investigating Committee stressed the point that past shortcomings of German banking were not due to any organic or institutional defects of the system, which " i n spite of its limitations and failures justified itself in operation," but to errors of judgment and mismanagement which could be eliminated by tightened regulation and control. T h i s disposed of the issue of nationalization which had been pressed for a time by some Nazi economic "theorists" represented by Feder. Cf. JNSW, loc. cit.; also A. Dauphin-Meunier, " L e Controle des banques en Allemagne," Revue d'Economie Politique, L (1936), 402 ff. 6« See pp. 92 ff. M T h i s organization followed the set-up which had been previously established by the Emergency Decree of Sept. 19, 1931. See Mildred Northrop, The Control Policies of the Reichsbank, (New York, 1938), pp. 213 ff. Sec. 9 of the Law.

THE NAZI CONTROL

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63

ratio and a maximum ratio of current liabilities to net capital assets, and limited the size of individual loans in relation to capital. A n interesting feature was the structure of the required minimum reserve against deposits. T h i s was to include a relatively small (10 percent) cash reserve, and a larger (30 percent) secondary reserve, in the form of negotiable commercial paper and other "lombard" paper (eligible as collateral against Reichsbank loans), including obligations of the Reich and provinces. By giving Reich issues legal reserve capacity against deposits, the technical machinery was set up for mobilization of bank-generated "secondary" credit into Reich financing. As to the measures which applied more particularly to regulation of the investment credit business of the banks these could be interpreted in several ways; first, in the sense of classical regulatory legislation destined to safeguard the stability of commercial banking against "misguided" policies on the part of management; 59 second, as a means of qualitative control of the banks' investment credit business; finally, as an indirect means of canalizing the long-term lending capacity of the banks into public issues. An analysis of the investment credit controls is taken up elsewhere in more detail. 80 It is clear that the key element in the structure of credit control was the flexible mechanism of central banking, created by the Reichsbank Act of 1933. T h e financing policies of the Nazi government were anchored in this mechanism in the course of the following years. As to the reform of commercial banking under the Act of 1934, its significance as a tool of credit control should not be overrated. T h e quantitative and qualitative regulation of the flow of credit in the economy was primarily determined by the government production, price, and fiscal controls which operated outside and independently of the banking system. T h e same controls were instrumental in bringing about the structural changes in the credit system outlined above. In the process of steering of »»It will be recalled that regulation of the investment business of commercial banking figured prominently in the bank reform legislation of the early thirties. Following the wave of banking crises of that period, which could be traced—at least in the sense of immediate causation—to an overexpansion in the field of long-term credit, an effort was made to confine commercial banking to its classical domain of "self-liquidating" credit. eoSee pp. 112 ff.

64

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MECHANISM

credit, and the evolution of German banking, nonbanking controls played a prominent if not preponderant role. CONTROL

OF FOREIGN

EXCHANGE

«1

Foreign exchange control was introduced in 1931, following the monetary and banking crisis of that year. 62 As the Nazis took over the control mechanism, they set out to tighten the existing restrictions. T h e control was extended to all dealings in foreign exhange, securities, commercial paper, property titles and rights, and other foreign claims of German nationals. A network of regulations covered in minute detail all aspects of the transactions involved, the effectiveness of the controls being enhanced by a system of stiff penalties. 63 T h i s was supplemented by the introduction in 1934 of a new system of control of foreign trade, under the socalled " N e w Plan" originated by Dr. Schacht. 64 According to an 8 1 For a treatment of this topic in the English literature see Howard S. Ellis, Exchange Control in Central Europe (Cambridge, Mass., 1941), Chap. IV (Germany). >- A n account of the conditions under which foreign exchange control was introduced in 1931 is given in Mildred Northrop, The Control Policies of the Reichsbank, pp. 319 ff. 6 3 T h e multiplicity of decrees and administrative rulings in this field made it necessary for the authorities periodically to overhaul and codify the regulatory legislation. T h e first compilation of this kind was the Law of Feb. 4, 1935 (Gesetz über die Devisenbewirtschaftung, R G B , Pt. I, 105), which consolidated some 15 laws and decrees issued to date. T h i s was followed by the "Decree or Rules of Guidance for Management of Foreign Exchange, of Dec. 19, 1936 (Verordnung, or Richtlinien, zur Devisenbewirtschaftung, R G B , Pt. I, 1021), a document of 48 pages, which gives the full text of all legislative enactments to date. A new u p to date compilation was made in 1938 with the Law of Dec. 12, 1938 (ibid., 1733). (For a detailed description of the administration of German foreign exchange control, see Carl Hermann Müller, Grundriss der Devisenbewirtschaftung (2d ed., Berlin, 1939)' m Until then, control of foreign exchange was mainly of a quantitative nature. Available exchange was allocated to importers under a quota system, while the transactions themselves remained free. Under the " P l a n , " the more or less automatic quota allocation of exchange was replaced by a system of individual permits to be secured by importers before the goods could be imported. T h e import transaction itself had to be approved before exchange would be allocated. Except for certain specified cases, exports were subject to a less stringent control; this was limited to declaration after shipment (Ellis, op. cit., pp. 217, 218). T h e administration of the Plan was carried out by a network of "supervisory agencies" (Uberuiachungstellen), each assigned the control of imports and exports of a particular commodity. T h e s e agencies supplemented the exchange control boards (Devisenbewirtschaftungstellen) organized on a regional basis. By 1939 there were 31 supervisory agencies and 29 exchange boards (Nathan, op. cit., p. 126). In terms of foreign trade policy, the Plan implied an extension of the system of

THE

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65

authoritative comment, the primary objective of the Plan was to adjust imports to the resources of foreign exchange derived from exports, with the implication that German foreign trade was to be put on a reciprocal and bilateral basis; another objective which was given a rather vague and comprehensive formulation was " t o put the management of imports, and foreign trade generally, on the basis of national requirements." 85 T h e actual application of the controls under the Plan shows that the last-mentioned objective was interpreted in such a way as to bring about far-reaching shifts in the structure and direction of German foreign trade. 68 T h e nature of the action in the field of foreign exchange makes it more than a mere amplification of the pre-Nazi measures. T h e control measures of 1931 carried an emergency character. T h e i r role was to prevent the depletion of national reserves of gold as foreign exchange and, more generally, to protect the domestic credit system against the effects of an unbalanced situation in international payments. T h e y were imposed in an economy otherwise largely free from government controls, and were mainly defensive weapons. In the Nazi economy, the functional scope of the controls was considerably widened. Not only did they enable the authorities to pursue an autonomous financial policy, sheltered from interaction of international money and capital markets, b u t they had a more basic function of isolating the domestic price structure from the impact of foreign-determined prices and costs. For that purpose they were supplemented and reinforced by parallel regulation of foreign trade, which integrated the exchanges between Germany and the outside world in the mechanism of economic control. 87 T h e clearings, compensation agreements a n d o t h e r bilateral devices. ( F o r the history of the trade policies under the P l a n , see Ellis, op. cit., pp. 213-221.) 8 5 See " C h a n g e s in t h e Direction of G e r m a n Foreign T r a d e , " I K , Weekly Reports, X (Nov. 17, 1937). 998 < B r o a d l y , the result of the operation of the New P l a n was: a) geographically, to shift t h e direction of t h e bulk of G e r m a n exports f r o m Western E u r o p e to overseas (mainly L a t i n America), while t h e direction of imports shifted distinctly to southeastern E u r o p e ; b) structurally, to modify the composition of the imports. A substantial relative decline of industrial (finished) consumer goods took place, accompanied by an increase of raw materials and capital goods. (Cf. " C h a n g e s in the Problems a n d Possibilities of G e r m a n Foreign T r a d e , " I K , Weekly Reports, X I I , 1 ff., in p a r t i c u l a r pp. 6-8 a n d table on p . 8; also Ellis, op. cit., pp. 245 ff., 275.) 87 W e q u o t e from I K , Weekly Reports the article (pp. 1-2) cited above (note 66): " I n addition to increasing domestic production, i m p o r t a n c e must b e accorded as be-

66

THE NAZI CONTROL

MECHANISM

importance of such integration will appear from the fact that foodstuffs and industrial raw materials accounted for a substantial part of German imports. T h e effectiveness of the corresponding control policies was correspondingly enhanced. 88 T h e r e are a number of points on which control of foreign exchange was related to the economics of control of private investment. It was clearly an important factor in the steering of the capital market, as the embargo on capital exports necessarily confined to domestic outlets the investment opportunities of newly formed capital. On the "real" level of control, the restrictive policy pursued with regard to foreign imports directly affected investment in industries based upon foreign raw materials (textiles, leather, luxury and similar industries). Conversely, the establishment of an "airtight" economy simplified considerably the problem of adjusting the price and cost economics of government-sponsored investment to the requirements of normally motivated private enterprise. T h e autarkic production under the Four-Year Plan opened up to private enterprise wide areas of remunerative investment. No such opportunities would have existed had the normal operation of the price and cost mechanism of an open economy been allowed a free course. INDUSTRIAL

ORGANIZATION

T h e description of the basic elements of the mechanism of economic control would be incomplete without giving a brief outline of the organization of the industrial economy. T h e basis of the orfore to all other methods which aim at holding down imports, without injuring domestic production possibilities. T h e management and, in part, the limitation of imports necessary for this purpose, have been effected in Germany in recent years by methods of income management and of consumption management, as well as by direct supervision of imports and by foreign exchange control. If the purchasing power available for consumption is held as stable as possible through a suitable wage, salary and dividend policy, imports of foodstuffs and of raw materials for the production of consumption goods can be limited in favor of better supplies for the capital investment goods industries. T h e setting up of a scale for import goods according to urgency works in the same direction." 8 8 T h e functions of the supervisory agencies were considerably widened later on to cover all transactions, both foreign and domestic, relative to the supply and demand of the commodities under their jurisdiction. They became the key organs for management and allocation of raw materials ( R o h s t o f f b e w i r t s c h a f t u n g ) , the role of which became increasingly important in the later stage of full employment.

THE

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67

ganization was provided by the extremely ramified network of the pre-Nazi entrepreneurial associations which was organized on a two-way pattern: territorial and functional." T h i s organizational framework was essentially maintained in an expanded, more systematized and streamlined form. 70 Its structure and functions, however, were adapted to the particular dualistic principle which characterized the relationships of government and business under the Nazi regime. T h e principle, it will be recalled, was one of state supervision and "guidance" superimposed upon normal operation of entrepreneurial initiative. In terms of their structure, the entrepreneurial organizations were given a status of quasi-autonomous and "self-governing" 8» T h e entrepreneurial bodies were of two types: the "chambers" (Gewerbekammern) which grouped enterprises of a given locality, and the "trade associations" (Fachverbände), composed of enterprises of the same economic branch. T h e local chambers were further grouped on higher territorial levels (regional and national), while the associations were similarly combined on several higher levels of functional similarity into "subgroups" and "groups." T h e top body on the territorial level was the German Congress of Industry and Commerce (Deutscher Industrie- und Handelstag)-, the top organ of the functional associations was the Central Committee of Entrepreneurial Associations (Zentralausschuss der Unternehmersverbände). As far as industry is concerned, the top functional organization was the Reichsverbänd der Deutschen Industrie, which represented the most powerful and well-organized sector of German business. For a history and description of the entrepreneurial associations in pre-Nazi Germany see Handwörterbuch der Staatswissenschaften, 4th ed., Jena, IV (1927), 1054 ff. (Gewerbekammem), and V I I I (19*8), 499 ff. (Unternehmervereine). 70 Both the functional and territorial organizations were expanded in a systematic way. T h e "chambers" were constituted on three levels, local, regional and national, corresponding to the political subdivisions of the Reich, the top organization being the Arbeitsgemeinschaft der Industrie- und Handelskammern. T h e pre-Nazi functional "associations" (Verbände) became "groups" (Gruppen) on several hierarchical levels. There were six main groups (Reichsgruppen) for industry, commerce, handicraft, banking, insurance and power. These were subdivided into "economic groups" (Wirtschaftgruppen), which were further subdivided into "trade groups" (Fachgruppen). T h e industrial economy, organized in the "Reichsgruppe Industrie," was the most powerful organization with 2g economic groups on a total of 44. A tightening up of the coordination between functional and territorial bodies took place in 1936 when the regional "groups" (Bezirkgruppen) were incorporated as subdivisions of the 18 economic chambers (Order of the Reich Minister of Economics of July 7, 1936; Reichsanzeiger No. 157). T h e effectiveness of the entire organization was enhanced by replacing voluntary affiliation by compulsory membership. For a detailed and authoritative account, the reader is referred to Eberhard Barth, "Der fachliche und regionale Aufbau der gewerblichen Wirtschaft," JNSW (1937), p. 262; an organizational chart for the Reichsgruppe Industrie is given on p. 278. See also " T h e Organization of German Economy," I K , Weekly Reports, Supp., March 1 1 , 1936, p. 4, chart.

68

THE NAZI CONTROL

MECHANISM

bodies, which became the official representatives of the pertinent economic interests; 11 the activities of these bodies were placed under the supervision of the respective economic authorities.72 The formal aspect of this supervision was the application of the "leadership principle" in the management set-up of these bodies. Elective officers were replaced by a hierarchy of appointed "leaders," each assisted by a council (Beirat) with advisory functions. The Reichappointed leaders on the top (Reich) level in turn appointed the leaders of the lower jurisdictional units.73 The dualistic principle was reflected in the functions of the entrepreneurial organizations. Their primary function was the furthering and defense of the interests of their members. Besides engaging in the usual activities of supply of business information and professional and expert advice to members,74 they acted as representatives and spokesmen of business interests. Through their channels, business conveyed to the authorities its responses, and presumably also initiated suggestions of its own as to particular government policies affecting business interests. The organizations J 1 Barth, loc. cit., p. 265. " A few words should be said here about the nature of the "economic authorities" to which reference is repeatedly made. On the basis of available information, it would seem that the functions of control on the Reich level were divided, according to the respective jurisdiction, between the ministries of Economics, Food, and Finance, and the Reichsbank. T h e most important functions of control were apparently held by the Ministry of Economics, but little information is available concerning the internal organization of this department. T h e executive apparatus also included a number of agencies in charge of specific phases of control. Some of these agencies—the commissioner for price formation, the supervisory agencies for raw materials, the Reichsanstalt and the labor trustees, the banking supervisory agencies—were mentioned earlier. It is not unreasonable to assume the existence of some sort of a supreme economic command which coordinated the policies of the various departments. No information on that point can be found in the German sources. It is probable that after October, 1936, coordinating functions of this sort were held by the office of the Four-Year Plan. " Law concerning the organic reconstruction of the German Economy, of Feb. 27, 1934 ( R G B , Pt. I, 185) and the executive Decrees of Nov. 27, 1934 (ibid., 1193) and Oct. 26, 1936 (ibid., 918); see also Barth, loc. cit., pp. 266 ft. Nathan (op. cit., p. 22) notes that practically the entire leadership of the national economic groups and trade groups had been carried over from the pre-Nazi set-up, and was composed of the same personalities who dominated the pre-Nazi organizations. •i An enumeration by Barth (loc. cit., p. 286) lists instruction in new technical methods, market information, fiscal advice, information on foreign trade and foreign exchange regulations, furthering of research and educational institutions, advice on military measures and anti-air defense, etc.

THE NAZI CONTROL

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69

provided an extremely effective mechanism whereby the respective interests of government and business could be brought together, cleared, and coordinated." O n the other hand, the entrepreneurial bodies operated as an extension of the administrative machinery of control. T h r o u g h their intermediary, the steering action was transmitted to each individual cell of the private economy and translated into business policies. For that purpose they were given administrative and also legislative authority; they could issue regulations and decrees which were binding on their members. 76 As auxiliary organs of control, the entrepreneurial bodies were instrumental in the administration of the conservation and allocation of raw materials, the adjustment of industry's production schedules to the government policies, the management of foreign trade and foreign exchange, the drive for increased efficiency and lowering of industrial costs, the introduction of standard methods of cost accounting. 77 T o some of the functional organizations of industry ("economic groups") was also delegated the authority to impose restrictions on new investment in their field, while in those branches where imposition of investment restrictions was under the authority of public agencies, the groups were given advisory capacity and acted as organs of preliminary investigation. 78 T h e pre-Nazi cartel organization was dealt with on a separate " T h e literature and official announcements a b o u n d in generalizations concerning the exercise of entrepreneurial initiative within the limits of the interests of the state, and "the achievement of a synthesis of freedom of [the entrepreneurial] creative spirit and duty to the Nation" (a speech by Hitler on M a y 1, 1933, on the organization of the industrial economy). As to the way in which such coordination was achieved, it is clear that generalizations on this point are either meaningless or misleading. T h e problem has to be considered in terms of individual cases, wherein the strength of the relative bargaining positions probably determined the issue. T h e jurisdictional power of the associations over their members included a system of sanctions enforced by so-called " H o n o r Courts" (Ehrengerichte) which were set up at the regional economic chambers. T h e sanctions included in order of gravity, warning, censure, fine and temporary or permanent suspension. Appeals against the rulings of these courts could be brought before the R e i c h Economic C o u r t (Ehrengericht der Deutschen Wirtschaft), which was the final instance. C f . the Erlass (order) concerning the procedure of Honor Courts, of Jan. 20, 1937 (Ministerialblatt fiir Wirtschaft, 1937, p. 38). " Becker, " M a r i a und Preisordnung in gewerblichen wirtschaft," JSSW

3'5-

T®

See pp. 307 ff.

(1935), p.

7°

THE NAZI CONTROL

MECHANISM

plane. T h e so-called "market regulatory functions" were specifically exempted from the jurisdiction of the functional "groups" and made the exclusive domain of cartels." Given the compulsory and inclusive character of the membership in the "economic groups," the grant of market regulatory functions to these bodies would have amounted in fact to a government-enforced reorganization of the industrial economy on rigidly monopolistic lines.80 Such a course was avoided. It was clearly inconsistent, on general grounds, with the principle of the Mengenkonjunktur ostensibly based on maximization of production. But it is more likely that the policy of confining the powers of monopolistic organization to the cartelized sector of industry—which it was within the power of the authorities to extend at will—was preferred as offering much greater flexibility. While the principle of the private and voluntary character of the cartels was generally maintained, the cartel organization was placed under public supervision. This was exercised through the intermediary of the respective groups to whom the cartels were eventually subordinated. Moreover, the authorities were given the powers of compulsory cartelization which enabled them to widen at will the area of cartel organization of industry. T w o important enactments dealing with regulation of cartels were passed in July, 1933. T h e "Law Modifying the Cartel Decree" of J u l y 15, 1933, was symptomatic of the new attitude of the authorities in this field. The law considerably relaxed the restric7» T h e "market regulatory functions" were administration of prices, setting of production quotas, and regulation of productive capacity, in so far as the latter was not under the jurisdiction of the Department of Economics. »0 Complete integration of the market regulatory functions into the sphere of activity of the functional organizations was carried out in the agricultural economy. T h e functional subdivisions of the Reich Food Estate were the so-called "market leagues" (Marktverbände), which were vertical combinations of producers, processors and distributors of a given agricultural commodity. These were organized on the national and provincial (Länder) levels in Central Associations (Hauptvereinigungen) and Economic Leagues (Wirtschaftsverbände), respectively. For instance, the Central Association for the Milk Economy was a national association of dairy farmers, milkprocessing plants, creameries, cheese factories, and dairy wholesalers and retailers; it included 21 Economic Leagues which represented the same vertical combination on the provincial level. This type of organization was duplicated for 10 agricultural staples and commodity groups—grain, milk, livestock, potatoes, eggs, horticulture, fish and derivatives, beets and sugar, breweries, and viticulture.

THÈ

NAZI

CONTROL

MECHANISM

71

tions on monopolistic organization of business introduced some ten years earlier by the famous "Decree against the Abuse of Economic Power" of 1923." A more comprehensive measure was the so-called "Law on Compulsory Cartels" (Zwangskartellengesetz),

passed on

the same date. This act vested the Reich Minister of Economics— and in the case of industries under the jurisdiction of the Reich Food Estate, the Minister of Food—with authority to combine enterprises for purposes of market regulation into compulsory cartels, syndicates, or other agreements." " T h e authorities were also given the power to incorporate any enterprise, or group of enterprises, into existing cartels, whenever such action "appeared to be justified by the interests of the enterprises involved or by the considerations of public welfare." 83 Article 5 of the Law contained the provision on "investment bans," whereby restrictions could be imposed under administrative procedure on new investment in any branch of the economy (whether cartelized or not). Other provisions of the law defined the public powers of supervision over the internal operation of the cartels. These enactments achieved two purposes. T h e y widened the scope of jurisdiction of the existing cartels over their members, and reinforced their position in the respective industries. On the other hand, they strengthened government influence within the in81 Decree of Nov. 2, 19*3, R G B , Pt. I, 487. According to the Decree of 19*3, proceedings by cartels against recalcitrant members, or outsiders under contractual agreement with a cartel, could be declared void by the Cartel Court if undue restraint of economic freedom of the party involved, or prejudice to public interest, could be proved. T h e Law of 1933 adopted the view that cartel sanctions against "unreliable" entrepreneur! and enterprises which "engage in socially undefendable price policies" are expressly recognized by the law. Moreover, the right of review of cartel agreements was transferred from the Cartel Court to the Ministry of Economics. T h e Cartel Court was completely abolished in February 1938, and its functions transferred to the Reich Economic Court (Decree of Feb. » 5 , 1 9 3 8 , ibid., S16). "

R G B , Pt. 1,488.

83 In fact, the procedure of compulsory cartelization was considered as a weapon to be applied only when voluntary agreements sponsored by the authorities failed to materialize. A provision of the law of July 15 specifies that before taking compulsory action, the Minister may recommend negotiations for voluntary combination, through the medium of official "Agreement Boards" (Einigungsstellen) to be established by the Department of Economics. Most of the new cartel agreements which had taken place during the so-called "cartelization wave" of 1933-1934, following the promulgation of the cartel law, were of the voluntary kind. A study made in December, 1933, lists 16 cases of compulsory action on a total of 49 new combinations (Gerhard Mackenroth "Deutsche Industriepolitik," loc. cit., p. (13; table, pp. 8IZ-S13).

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ternal management of the cartels, and its powers of intervention in the organization of industry. T h e devices of compulsory cartelization and investment "bans" were powerful instruments to that effect. Like the other entrepreneurial organizations, the cartels were integrated in the machinery of control. W e have noted that in the earlier stage of price control use was made of the priceregulatory facilities of the cartels; the latter continued to play an important role in price administration of the later phase. T h e cartel machinery was further used in connection with allocation of public contracts, raw material control, management of the production and capacity quotas, improvement of cost accounting techniques. 84 T h e activities of some of the cartels in the field of international agreements and allocation of export markets were also closely coordinated with the government policies in the field of foreign trade. 85 It is a fair assumption that within the limits of public supervision and restraint, the cartels made the most of their strengthened monopolistic position and increased effectiveness of their regulatory powers, in order to further their particular interests. In the setting of prices, allocation of production and investment quotas, administration of productive capacity and other regulatory activities, the cartels had ample opportunities to press the economic advantages of their members. 86 T h a t they did avail themselves of these opportunities can be inferred from references in the literature of the period to the "selfish" policies of the cartels, and from the efforts of the authorities to curb abusive practices. 87 In many 84 Carl Billich, "Vier Jahre National-Sozialistischer Kartellpolitik," Der Deutsche Volkswirt, X I (Sept. 24, 1937), 2526. 86 Becker, loc. cit., p. 324. 8 8 See Nathan, op. cit., pp. 78-79. 87 T h e order (Erlass) of the Minister of Economics of Nov. 12, 1936 (Ministerialblatt für Wirtschaft, 1936, p. 269) which defined the position of the cartels in the organization of the industrial economy found it necessary to specify: " T h e self-governi n g organization of business [i.e., the "groups" to w h i c h the cartels were subordinated by this enactment] will assume the responsibility to the effect that the activities of the market regulatory bodies keep in line with the economic policy of the Reich Government." T h e same decree sought to eliminate jurisdictional clashes and overlapping of fields between cartels and functionally related " g r o u p s " by expressly denying the groups, except by special authorization, any market regulatory activities while the

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MECHANISM

73

instances, however, the government policies themselves either directly favored or were coincident with the interests of the cartels. A case in point was the vigorous policy of curbing cut-throat competition (Preisschleuderei) against which the authorities took a consistently strong stand. In such cases, the regulatory and police activities of the cartels were recognized to be of constructive value, as they prevented dissipation of business assets through antieconomic competitive practices. It will be seen later that the procedure of compulsory cartelization and restriction of new investment under the law of July, 1933, offered some private interests a welcome opportunity to strengthen their monopolistic position by eliminating the pressure of outsiders.88 On the whole, as in the case of the other entrepreneurial organizations, the role and position of the cartels reflected the familiar pattern of the Nazi techniques of intervention in the private economy. T h e existing institution had been maintained, and its private economic character was modified by assigning to it additional regulatory functions of a public nature. Little information is available as to the way in which a balance was struck between the private and public aspects of the function of the cartels. It is reasonable to assume that this was achieved by compromise arrangements, in which the extent of concessions and gains to private interests varied from case to case. T h e deliberate vagueness and fluidity with which the rights and obligations of the cartels were defined under the Nazi set-up made the system flexible enough to adapt itself to the particular requirements of each individual case. cartels were enjoined to refrain from encroaching upon the functions of the groups. It also prohibited the holding of interlocking management positions in the cartels and groups. «8 See pp. 202 ff.

IV THE

FINANCING FROM GENERAL

OF

PRIVATE

EXTERNAL SOURCES

OF LONG-TERM

INVESTMENT SOURCES FINANCING

which feed the pool of money capital available for new investment, public and private, are: a) Individual savings, or the nonconsumed part of current monetary income retained by individual receivers. b) Institutional savings. These are represented primarily by the addition to the resources of private insurance institutions. T o these should be added the accruals to reserves of publicly managed social insurance schemes such as old age, sickness and accident, and unemployment insurance; c) Imports of foreign capital, which are, essentially, savings generated abroad. T h i s source was of little significance in the present case, as foreign export of capital to Germany practically stopped after 1931. d) Capital provided by commercial banks, in the form of mediumor long-term credits. As a rule, this source is more frequently made use of in government financing, especially in wartime and other emergencies when the needs of public borrowing outrun the rate of capital formation in the economy. Not infrequently, however, bank credit is used as a source of long-term capital by private borrowers. 1

T H E P R I M A R Y SOURCES

1 Whether bank-generated investment credit is actually a distinct source of long-term capital has been a much debated question. Attempts are not lacking in the economic literature to link this source to the general process of capital formation by savings or, more precisely, nonconsumption. T h e argument of "forced" savings which are automatically induced by injection of additional purchasing power created by the bank loan is of doubtful value. It is based upon an assumption of inelastic conditions of supply of consumers' goods, whereby any increase in monetary supply would inevitably translate itself in price rises, hence, in automatic restriction of consumption. T h i s is clearly inapplicable when idle factors of production are available (which is usually the case) and would be justified at best by the unrealistic assumption of theoretically " f u l l " employment of resources. It has been amply proved by the recent wartime ex-

FINANCING

FROM EXTERNAL

SOURCES

75

e) Corporate savings. In this case there is a direct and immediate link between the supply of and demand for capital funds as both supply and demand are localized within the same economic unit. The process is known as "financing from internal sources" or "selffinancing" ( S e l b s t - f i n a n z i e r u n g ) . FINANCING

THROUGH

THE CAPITAL

MARKET

The conventional picture of the capital market makes it a clearing place between suppliers and users of long-term capital. Savings generated by individual and institutional income receivers are collected by the financial machinery of the market and transferred to users of capital for investment purposes, who compete for the available funds. The money market whose main agency is the commercial banking system deals, on the other hand, in short-term funds. It is fed by temporarily idle funds of short-term lenders, while demands upon its facilities originate from borrowers whose need for capital is essentially for short-term financing purposes. It is hardly necessary to point out that this is an oversimplification of the actual state of affairs. Clearly, no such hard and fast distinction can be set up; what are essentially "long-term" funds (for example, savings) may be diverted into short-term investments by investors reluctant to engage in long-term commitments, while long-term investment, public or private, is currently financed by what is technically short-term capital. A substantial part of public investment under the Nazi regime was financed by short-term funds; on the other hand, bank investment credit played a prominent role in long-term financing of German industry, with a resulting interpénétration of the banking system agd the capital perience of many a country that, in twins of actual condition«, the stage of " f u l l " employment of resources is by no means as rigidly defined as the theoretical concept implies. A more plausible rationalization of the relationship would run on lines somewhat similar to those of the Nazi "pre-financing" theory, which had been outlined elsewhere (see note 44, Chap. III). The bank-generated credit may be considered as an anticipation of future savings which will eventually emerge as a result of the activities financed by this source, and will liquidate the loan. Thus, bank investment credit represents a transitional and temporary stage in the basic cycle of savings and investment, whose function is to make possible financing of new investment without the préexistence of savings. While this reverses the normal sequence in the operation of the savings-investment cycle, the latter remains essentially unchanged.

76

FINANCING

FROM EXTERNAL

SOURCES

market. These limitations, as to the concept and functions of the capital market, should be kept in mind in the following discussion. T H E S U P P L Y OF LONG-TERM C A P I T A L ,

I933-I938

An attempt will be made to evaluate the supply of funds in the German capital market. On the basis of the available statistical material, we shall take up the various sources of long-term funds which were made available through its channels during the period under review. While the figures given below are indicative of an order of magnitude rather than precise data, it is believed that the picture which will emerge is of sufficient accuracy for our purpose. 2 Individual Savings. T h e volume of individual savings is roughly represented by two items: the net increase in total savings deposits, that is, the net balance of credits over debits in savings banks and similar institutions; and the net increase in holdings of long-term securities by private individuals. T h e first item can be directly derived from existing statistical data. While no such statistical information is available concerning the second item, it can be measured indirectly by assuming a rough equivalence with "securities placed in open circulation" (in jreien Verkehr unterbrachte Effekten), which is currently given in German financial statistics. 3 2 No complete study of money capital formation is available in the German literature for 1933-1939. except partial estimates published from time to time by the Reich Statistical Institute and other agencies. In our computations, official statistical data were used as far as possible; where estimates were involved the figures have been checked, whenever possible, against different sources. s This item is derived as follows: T h e net value of new flotations is computed by deducting from the gross value of new domestic issues the volume of redemptions, amortizations, and retirements of all kinds. T h e resulting figure is then reduced by the accrual in security holdings by institutional investors, represented by additions to portfolios of savings and commercial banks, insurance institutions, and other financial agencies. Due allowance will have to be made for: a) purchases of German domestic issues by foreign investors, and b) purchases of securities abroad by German investors. T h e first will be subtracted from the "volume in open circulation." T h e second item represents savings which were withdrawn from the domestic capital market, and should be taken into consideration when measuring the total volume of individual savings of this category. An adjustment of this kind is unnecessary for 1933-1939, under the conditions of a "closed" capital market, but will have to be made for the period 1924-29, used in the following as a reference period (Table 16). T h e described procedure leaves out such savings as are invested in short-term paper or held in the form of demand deposits with commercial banks. It may be assumed, however, that over longer periods of time such holdings, which are essentially of a temporary nature, are eventually shifted into long-term securities.

FINANCING

FROM EXTERNAL

SOURCES

77

It will be noted that savings deposits usually correspond to savings of the lower income groups, while the increase in noninstitutional security holdings measures roughly the savings of the higher income groups which are largely derived from dividends, interests, and rent, and are, as a rule, directly invested by savers. T a b l e 13 gives an estimate of individual savings for 1933-1938. Institutional Holdings. T h e volume of institutional holdings will be measured by the increase in net assets of private and public insurance institutions, including publicly operated social insurance agencies. Table 14 gives the data for the leading German life insurance corporations and the two main social insurance funds, the Angestelltenversicherung (Reich agency for employees' insurance), and the Invalidenversicherung (Reich agency for workers' disability insurance). While there existed other public agencies of social insurance, e.g., the so-called Reichsknappschaftuersicherung (Workers' and Employees' Insurance fund), their "savings" are of minor significance. T h e figures thus cover practically the entire field of institutional savings for 1933-1938. T a b l e 15 consolidates the data of Tables 13 and 14 and summarizes the total supply of funds by individual and institutional savers for 1933-1938. An appraisal of the shifts which had taken place in the structure of capital formation after 1933 will be derived by comparing the figures of Table 15 with the corresponding data for the pre-Nazi business upswing of 1924-1929. A comparison of this kind presents considerable interest for our purpose. In both cases, the sustained expansion of economic activities and the consequent rise in national income were accompanied by a steep recovery of national savings from an exceptionally depressed level. 1 On the other hand, the generation and supply of savings were determined, in the first 4 T h e breakdown of the national savings mechanism during the hyperinflation of 1922-1923 resulted in a virtual drying up of the supply of funds in the capital market. A similar decline, although in less severe form, occurred in the depression years following the financial collapse of the summer of 1931. As an example, the combined assets of German savings banks dropped by the end of 1924 to 7.4 percent of the 1913 figure. For the period 1931-1932, total deposits with German savings banks by Dec. 51, 1932, were R M 1,157 million below the level

of June 30, 1931 (Untersuchung des Bankwesens, 1933, Part 2, pp. 152-153). The de-

pression resulted, in other words, not only in a drying up of savings of this category but in a substantial degree of dis-saving.

d « " 5 " E S S H

;

«Ô »ft tf) ^ ^ M

f»t© Q> >ñ ^ - . M M

t^ « M

O o> i t kC

I

s

*o

2

8 .s •> 3 .O

u to

5

•

Ì c

ù £

g ® > e g C " O — —

• s i i s > .s •S -o «

6 n « Cu

a

Í E

m m in c i ^ o — m M M o> « q o>

ot

o h>

O

S

G _ n

O

.2-5

2

3 H k. J3 ~

8

Ci

8-s

a X .S 3

00 o oo iT) »r 00 O OC 00 rb- Tf r » 01 - 01 oo w m to r - oo

S a i î i a bc fi T . 2 « {S %

:

2

S

!

3

-

I

2

£

i be a

o z
937-

-s ff Tiff ÁS3

3 « aí^

S O Ï j S - O . - . « . < e o < o > n ^ i < n ( S o< — oo -o*

o >

M o>

«

(O

o ^ h fû on í e •) Oi r * c i 1i •ö ... oí «q. t oo,

W J«

75 680 1,900 m8O 34*°

Percent of National -365 1.29 so8 3.04 3.60 4-55

Income

Source: "Statistics of National Income: Undistributed Earnings of Corporate Enterprise," Wirtschaft und Statistik, XVI (1936), 691; XVIII (1938), pp. s, 80«; XIX (1939), 7°5-

Using a different approach, an indication of the extent of formation of these reserves is provided by the rate of retention of corporate profits. According to official estimates, the percentage of net profits paid out in dividends underwent a steady decline. This shows an almost linear downward trend; from some 50 percent in 1934 the percentage decreased to 40 percent in 1935, to about 30 percent in 1936 and 25 percent in 1939. 10 The corresponding figures for 1938 and 1929 were respectively 66.6 and 75 percent. 11 Hidden Reserves. Direct statistical information is necessarily scarce, and the available data are incomplete and fragmentary. There is, however, abundant circumstantial evidence to the effect that hidden reserves played a prominent part in the generation of corporate savings after 1933, the main source being the "superdepreciation" techniques. 12 A tentative estimate was made by some 10 Wirtschaft und Statistik, "Studies on German National Income," XVIII (1938), 3, 804; XIX (1939), 705. T h e figures are based upon studies of corporation reports. 11 Ibid., XVIII (1938), 3. iz We quote the following passage from an analytical study of financial statements of German industrial corporations m a d e in 1936 by the Statistisches Reichsamt: "It is t r u e that a greater degree of utilization of the equipment implies increased depreciation. But considering the heavy rate of writing off of the depression years 1932-1933, t h e rise of the rates (in the following years) appears to be extraordinarily high. O n e must conclude that depreciation has been used, to a certain extent, as a means of

186

FINANCING

FROM INTERNAL

SOURCES

German sources, using the technique mentioned earlier; namely, by comparing depreciation figures reported by business concerns with estimated "normal" depreciation on the basis of existing assets. T h e following table gives the estimates for 1933-1936; no data are available for the following years. The estimates probably represent the lower limit of the actual figures. Not only are they necessarily incomplete, but they cover only one source of hidden reserves; among other sources that were equally active we may mention undervaluation of inventories and extraordinary writing-off. 13 T A B L E 24

Estimated Accumulation of Hidden Reserves, (In Millions of RM) Year '933 '934 '935 '936 Source: Die Nationale

Balance Sheet Depreciation (') 1,500 1,800 2,000 2.300

Estimated Normal Depreciation

I, 107. T h e first of these objectives was carried out by the enactment of compulsory dissolution, merger or change to a limited liability form (G.m.b.H.) of all incorporated companies with a share capital below R M 500,000; this involved the elimination of some so percent of the existing corporations. 83 Para. 70, Sec. 1, and Para. 84, Sec. 1, of the Law. T h e German corporate structure includes two managerial bodies: the "Aufsichtsrat," the policy-making body, roughly equivalent to the Board of Directors in American corporate structure, and the "Vorstand," an executive committee composed of high officers of the corporation in charge of various executive functions. 6 * Para. 103, Sec. j .

FINANCING

FROM INTERNAL

SOURCES

145

the extent of information to which stockholders were entitled lay exclusively with the Vorstand, which was thus given sole competence. T h e official reason for the change states, quite hopefully, that "under a purified economic philosophy [geläuterte WirtschaftsauQassung], no conflict need arise between stockholders and management on this matter." 65 These provisions strengthened, in a general way, the discretion of management in the conduct of affairs, and made management business policies virtually independent of the pressure of stockholders' interests. The Law introduced, in addition, a few changes more specifically related to financial management. T h e most important was the new set-up of allocation of jurisdictions over dividend and reserve policies. T h e setting u p of the yearly financial statement (Jahresabschlüss) was formally included within the sphere of "current management" and transferred to the jurisdiction of the managing bodies, the Vorstand and the Aufsichsrat. This arrangement, according to a contemporary comment, "gave management the widest discretion in the drawing u p of corporate balance sheets [Bilanzierungspolitik]"; in other words, complete control over corporations' policies in matters of depreciation, valuation, reserves and dividends. 86 T h e right of contesting or modifying the disposition of profits in the yearly statements was withdrawn from the general assembly. T h e competence of this body was limited to the disposal of the profits balance, as shown in the management statement, after all reserves deemed necessary by management had been set aside. No way was open to the general assembly—as was formerly the case, when the submitted statements showed the profits balance before reserves—to debate management reserve policies and eventually modify the proposed assignments to reserves. Management was thus given undisputed authority to retain as large a fraction of the net earnings as it saw fit. According to the quoted source: "Assuming that there is agreement [in policy] between the two managing bodies [the Vorstand and Aufsichtsrat], there are extensive possibilities under the [new] law for manage«6 Para. 112. 66 Erich Kosiol, "Der Jahresabschlüss Betriebswirtschaft, X I V (1937), «26.

der Aktiengesellschaft," Zeitschrift

für

146

FINANCING

FROM

INTERNAL

SOURCES

ment to limit drastically distribution of dividends. T h e s e possibilities will presumably be taken advantage of, given the considerable financial needs of corporations." 67 T h e competence of the general assembly over disposition of profits was further restricted by expressly limiting it to profits shown in the current business year. It was thus denied authority over the disposition of accumulated surpluses; this authority was again vested with the management. It is interesting to note the position taken by the new law in the matter of hidden reserves which had been a widely controversial topic ever since self-financing became a significant feature of German corporate finance. T h e increasing favor which accumulation of hidden reserves f o u n d with management of corporations was watched in many quarters with a great deal of apprehension, and legislative action was asked to curb their growth. T h e Act of 1937 not only failed to bear out the expectation of the reformists but, on the contrary, adopted a position of "benevolent neutrality" in this matter. A contemporary analysis of the relevant provisions of the law, made by a financial publication, notes that while prohibiting certain accounting practices, such as overvaluation of debts and writing-up of payables and other liabilities items, the new law implicitly sanctioned hidden reserves by endorsing the principle of "lowest value" in valuation of corporate assets, which had been upheld by current jurisdiction in this matter. T h e law also gave management full discretion in the valuation policy (Bewertungsfreiheit).ai T h i s clearly left the door wide open to financial manipulations leading to formation of hidden reserves. 99 In the light of the basic government policies with regard to selffinancing of business, the attitude taken by the new legislation in the matter of hidden reserves is hardly unexpected. It was fully 87 Ibid., p. 227. See also the comment upon the dividend and reserve provisions of the new law, in Der Deutsche Volhswirt, XII (May 27, 1938), 1678. T h e argument and conclusions—which are stated in more vehement terms, with an emphasis upon the resulting plight of the stockholder—are essentially similar to those quoted in the text. C8 Der Deutsche Volkswirt, XII (April 29, 1938), 1478. Cf. Kosiol, loc. cit., p. 264. A critique of the treatment of hidden reserves under the new law, in the Zeitschrift für Betriebswirtschaft sees in the new enactment an encouragement of "legalized falsification of balance sheets, which will result in a cancer-like decay of sound practices of balance-sheet accounting" (XIV, 1938, 115).

FLVAXCIS'G

FROM IXTERXAL

SOURCES

147

consistent with the other measures taken by the authorities in this field. Both, the "short-lived goods" tax concession of 1 9 3 3 - 1 9 3 7 and the grants of superdepreciation privileges under the " P l a n " of 1939, provide sufficient evidence to the effect that it was well within the intention of the authorities to favor diversion of corporate profits into hidden reserves.

VI THE

GENERATION COSTS

AND

OF

BUSINESS

PRICES IN GERMAN INDUSTRY IN TO THE GOVERNMENT CONTROLS

SURPLUSES RELATION

is a close relationship between profits and investment in a price-controlled "automatic" economy. At any given time, the rate of flow of capital into new investment will be influenced, among other things, by the absolute level of profits; while the relative level of profits in different branches in the economy will guide the allocation of new capital among these branches. T h e scope of the development of self-financing in the Nazi economy made for a more direct and immediate relationship between generation of profits and new investment. T h e formation of the self-financing reserves is based essentially upon generation of business profits. While open reserves represent formally recorded and nondistributed profits, hidden reserves originate from profits which have been concealed by artificial undervaluation of assets. In either case, the accumulation of self-financing reserves is, essentially, related to a high level of profitability of business. Thus, the role of the government controls in the process of self-financing was not confined to measures which merely steered preexisting profits into corporate reserves. It is also necessary to take into consideration the controls on the level of price formation, which affected the generation of the business profits themselves. In an economy governed by a reasonably free market mechanism — b y such a mechanism we understand one which, without being exempt from monopolistic elements, is substantially free from government interference—a development of corporate savings is contingent upon the existence of certain favorable price and cost relationships, either for the individual firm or for an industry as a whole. Such favorable conditions, of a differential nature, may be due either to market factors (existence of monopolistic advantages) or cost factors (such as high technological efficiency resulting in THERE

GENERATION

OF BUSINESS

SURPLUSES

149

the emergence of differential rent). This was substantially the situation in the self-financing of the post-stabilization period. T h e cartelized structure of German business favored the accumulation of reserves; particularly so in branches where monopolistic elements had been fairly strong, as in potash mining, the lignite industry, and heavy industry, generally. T h e development of self-financing takes on in the present case a different aspect. Not only were prices and price relationships, in the economy as a whole, governed by the over-all control mechanism, but, in a substantial sector of the industrial economy, formation of prices and costs was directly managed by the authorities, which meant that, directly or indirectly, generation of business profits was a function of the government controls. This chapter will be devoted to an analysis of the way in which the government policies affected the structure of industrial costs and prices and, consequently, the profitability of German industry. THE INCIDENCE

OF THE CONTROLS

UPON INDUSTRIAL

COSTS

It will be recalled that after 1933, the structure of costs and prices was conditioned by the principle of the so-called Mengenkonjunktur as against the Preiskonjunktur or "price upswing" of the conventional type.2 The implication of the Mengenkonjunktur, in terms of profitability of industry, was that with a generally stable price level, profits were to result primarily from decreased costs. We shall consider in the following the repercussions of government policies upon individual elements of industrial costs, namely raw materials, wages, and overhead or fixed charges. Our investigation will be conducted necessarily on a general level. The problem of costs will be considered for industry as a whole, making abstraction of particular cost situations, which may have prevailed in individual branches. A study of the latter type is clearly of little consequence from the point of view of the problem with which we are concerned here. Raw Materials. As an element of cost, raw materials presented a special situation for two reasons. First, a number of commodities which fall in this category undergo a preliminary manufacturing 1 See p. 124, above.

* Cf. p. 47.

150

GENERATION

OF BUSINESS

SURPLUSES

process, which means that, in many cases, raw materials are in themselves an end-product of industrial operations. T h i s applies not only to the obvious case of semifinished goods, but also to some key raw materials, as coal, lignite, electric power. In terms of cost and price relationships, such commodities present a twofold aspect; a cost aspect, as far as consumer industries are concerned, and a price aspect of their own, from the point of view of the industries engaged in their production. T h e price policy with regard to raw materials of this type—in so far as they were domestically produced —was likely to follow a compromise course, given the two-sided aspect of the economic interests involved. Another element in the price pattern of this sector was the fact that German industry was dependent, to a considerable extent, on foreign raw materials, whose prices were beyond the sphere of direct action by the authorities. T a b l e 25 illustrates the movement of prices of industrial raw materials, including semifinished goods as compared to finished goods, for 1932-1939; corresponding data for 1929 were added for purpose of comparison. In order to get a better picture of the relative movements, the figures were based upon 1933, the first year TABLE 25 Movement

of Wholesale Prices of Industrial finished, and Finished Goods, (*933

Year >929

'93* '933 >934 "935 >936 '937 •938

1939 (June)

Raw

Materials,

=100)

PRICES OF RAW MATERIALS AND SEMIFINISHED

FINISHED

COODS

GOODS

Determined at Home 132 101 100 101.8 101.7 102.1 102.1 101.7 101.7

Determined Abroad 196.5

98-5

100 108 109.7 118

'25

111.5 110

Semi-

All Prices («0

>49

100.5 100

>03-3

103.8 106.5 109 106.6 106.8

All Prices (b) 140 104.5 100 102.8 106 107.5 110.5 111.5 111.5

QUOTIENTS

(a) (b) 106.5 96

100 100.5 98

99

98.6

95-5 95-6

Source: I.K., Statistik des In- und Auslands, XIII (1938-39), 107; XIV (1939-40), 39. The original data based on 1913 were shifted to the base 1933-

GENERATION

OF BUSINESS

SURPLUSES

151

of the Nazi K o n j u n k t u r . In the case of raw materials, in addition to over-all prices, separate data are given for internally and foreignd e t e r m i n e d prices. T h e last c o l u m n contains a series of quotients of the corresponding price indices of raw materials and finished goods, w h i c h are intended to serve as a measure of the " p a r i t y " situation of raw materials vs. finished goods. It will be seen that the internally determined prices maintained themselves at a fairly stable level, some 2 percent above 1933, the cost aspect of this d e v e l o p m e n t — w h i c h apparently represents the compromise solution referred to a b o v e — b e i n g a stabilization of the share of domestic raw materials in industrial costs. T h e foreignd e t e r m i n e d prices, on the other hand, show a fluctuating pattern w h i c h reflects the price movements in the w o r l d raw material markets between 1932 and 1939. D u r i n g the earlier part of the period the rise was of moderate proportions. A f t e r 1935, the upward movem e n t accelerated, reaching by early 1937 a level more than 25 perc e n t above that of 1933. A slight reaction followed; caused by the s l u m p of w o r l d prices by the middle of 1937, it extended through 1939. T h e rise directly affected the cost structure of G e r m a n industry. A n authoritative estimate put the value of imported industrial raw materials at some R M 5.5 billion, or more than 10 percent of the value of the industrial output, and it is clear that even a moderate rise represented a by no means negligible factor in the cost structure. 3 A s a rule, the rise of foreign raw materials was compensated by a corresponding increase in the prices of manufactured goods. Regulatory legislation passed in 1934 based domestic prices of such goods u p o n those w h i c h had prevailed in the foreign markets at the time of the transaction. 4 T h i s principle was applied in the leather goods a n d textile industries, w h i c h were largely based u p o n foreign raw materials. In the leather industry, the decree of A p r i l 20, 1934, specified that price increases of imported raw materials could be incorporated i n the domestic prices. A corresponding increase in prices of semifinished leather goods was authorized, if such had 3 V]K, X I (193&-37), 380. * D e c r e e of Sept. 22, 1934 ( R G B , Pt. I, 843), a n d s u b s e q u e n t r u l i n g s of the M i n i s t r y of E c o n o m i c s , of O c t . 3, 1934, a n d J a n . 11, 1935 (Reichsanzetger N o . 233 a n d N o . 14, respectively).

152

GENERATION

OF BUSINESS

SURPLUSES

b e e n the usual practice of the trade (handelsüblich). 5 T h e price provisions of the T e x t i l e L a w of 1935 allowed for similar adjustments to price increases of imported textile staples; the price ceilings imposed on textile goods by this enactment were made subject to a corresponding revision. 8 T h e same policy was adopted under the Price Stop of 1936; 7 among other exemptions from the general freezing action, "compensatory" price adjustments were authorized for manufactured goods based upon imported raw materials. 8 L e t us consider now the relative movements of the over-all prices of raw materials and semifinished g o o d s — w h i c h include both internally and foreign-determined prices—on one hand, and of those of finished goods on the other. From 1934 to 1937 the two price series moved in a roughly parallel way, a situation which is reflected in the stability of the respective parity figures.9 In the earlier period, G e r m a n industry was favored by an exceptionally low price level of raw materials, and it will be noted that the parity situation was distinctly in its favor. 10 W h i l e this differential advantage had b e e n somewhat reduced by 1935, a favorable parity s i t u a t i o n — against 1929—was still maintained. It will be further noted that the 1937 price reaction of foreign raw materials was not accompanied by a similar decline of finished goods, leading to a sharp improvement of the parity situation. O n the whole, the movement of raw material prices in relation to the structure of industrial costs was either neutral or favorable. Correspondingly, in terms of its incidence upon profitability of industry, the latter was either not affected at all or affected in a favorable way. Wages. T h e point was frequently made by the Nazi economists that, in terms of the resulting shift in the distribution of national income, the wage stabilization policy was justified on grounds of 5 R G B , Pt. I, 318. Law of Dec. 6, 1935, the so-called "Spinnstoffgesctz" (RGB, Pt. I, 1411). 7 Cf. pp. 52 ff., above. » Cf. VJK, X I (1936-37). 380; also Nathan, The Nazi Economic System, pp. 210, 249 ff. 9 Cf. the figures in the "Quotients" column of T a b l e 25. See also, concerning the raw material aspect of industrial costs in the beginning of the period, VJK, X I (1936-37), 62. 1 0 T h i s would indicate that the compensatory price policy had been consistently pursued throughout the period of rising world prices. 8

GEXERATIOX

OF BUSINESS

SURPLUSES

153

p u b l i c interest. Diversion into profits of the largest possible part of the income generated by the m a n u f a c t u r i n g e c o n o m y was considered desirable as an efficient means of capital formation; especially, in view of the fact that a m a j o r part of such profits was retained as corporate savings. T h e g o v e r n m e n t w a g e policy was clearly an i m p o r t a n t factor in the d e v e l o p m e n t of profitability of industry. 1 1 T a b l e 26 gives the m o v e m e n t of wages and earnings in G e r m a n industry f r o m 1932 to 1939. T h e data o n rates relate to t w o representative categories of industrial l a b o r — s k i l l e d and unskilled m a l e l a b o r — a n d reflect the m o v e m e n t of o t h e r wage groups. T h e table also gives average weekly earnings of industrial labor, expressed in i n d e x numbers. TABLE

26

Wages and Earnings in German Industry,

1932-1939

WAC.F. RATF.S FOR MALE LABOR

A C T U A L EARNINGS

(IN PF. I'F.R IIOIIK)

(INDEX NUMBERS 1 9 3 3 = IOO)

Weekly Year

Skilled»

Unskilled

>929 '932

101.4

79-4 64.4

>933 •934 •93'»

7«-5 7«-3 7"-3

>93^

7"-3

'937 •93« '939 (April)

7«-5 78.8

62.2 62.2 62.2 62.3 62.5

79

62.7

81.6

62.3

"

Earnings

b

Average Hours per Week c

Average Eamii per Hour d

146.5

107.4

99» 100

96-5 100

110 114 118

'"3-5 106.3 107.5

109

124 128.5

108 110

" 5 117

136.2 102.5 too 106.4 107.1

" I K , Statistik des In- und Auslands, X I I I (1938-39), X I V (1939-40), 39. l' Ibid. T h e o r i g i n a l i n d i c e s w e r e s h i f t e d to t h e b a s e 1933 = 100. e considered as a n y t h i n g but a n artificial device whose statistical i n a d e q u a c y is obvious.

158

GENERATION

OF BUSINESS

SURPLUSES

of course, an over-all picture of the situation. In gauging the cost degression effect, it is necessary to bear in mind that the extent of improvement of the rate of utilization varied within a fairly wide range from industry to industry; it is necessary to take into consideration, in other words, the wide range of dispersion of individual industry data. Not only was there a wide discrepancy in the initial margins of idle capacity, but also in the extent to which individual branches of German industry shared in the Konjunktur. On either of these accounts, capital goods industries were particularly favored, as both the margin of expansion and subsequent improvement of the rate of utilization had been greater in these industries. T h e major part of the cost degression effect would seem to have been exercised in the earlier part of the period; in many industries of this group, the margin of unused capacity was virtually absorbed as early as 1937.21 So far, the overhead charges of industry were considered as a whole, under the assumption that these charges remained relatively stable, or increased only slightly, with the rise in output. Actually, the term "overhead charges" lumps together a number of cost elements whose behavior is not necessarily identical. W e shall take up separately the behavior of the two main elements of overhead costs, namely, interest charges and depreciation. Interest Charges. T h e increase in business activity after 1933 was accompanied by no corresponding expansion of private credit. T h e taking up of new credits by business was more than offset by liquidation of old indebtedness, with the result that the progress of the Staatskonjunktur was marked by "disindebtedness" (Entschuldigung) of the private economy. This was paralleled by a mounting public debt. " T h e shift in the burden of indebtedness," writes the Institut fur Konjunkturforschung, 2 1 T h e study of industrial capacity by the Institut fur Konjunkturforschung contains a few estimates of changes in the rate of utilization in certain industrial branches, from 1934 to 1937. In 1934, margins of idle capacity ranging from 45 to 50 percent of normal were available in the following industries: mining, iron, steel and metals, building and building materials, glass and ceramics. Considerably lower margins were present in textiles, clothing and shoes (40 percent), and food processing industries (30 percent). By the end of 1937, the margins were greatly reduced, and, in some cases, almost entirely absorbed in the capital goods industries; while in consumer goods industries only a small part of the 1934 margin (6 and 12 percent respectively for the two industry groups quoted above) had been absorbed.

GENERATION

OF BUSINESS SURPLUSES

159

is extremely significant from the point of view of the interest burden of industry. T h e public authorities took over part of this burden . . • which resulted in a basic shift in the national structure of credit. It is possible to say that the economic upswing, aside from the indispensable political premises, was affected by two things; not only did the stake take over the initiative in expanding its credit commitments, but it also burdened itself with interest charges, which otherwise would have hampered the revival of investment activities in industry.12 A n indication of the evolution of interest charges as an element of cost is given in the study of the Institut für Konjunkturforschung, referred to earlier. In German corporation reports, the item "interest charges" relates not to the gross amount of interest paid out on long and short indebtedness, but to the net balance of such payments over interest and other revenue received in turn by the corporation from its portfolio investments and participations, and it will be recalled that the liquidity position of industry resulted in a substantial expansion of corporate portfolio holdings. If total interest charges for the group of corporations analyzed by the Institut are expressed in index numbers on the basis of 1932, these establish themselves at 44 in 1935, at 45 in 1936, and 30 in 1937. T h e decline of interest charges is more accurately illustrated in terms of percentage relation to sales, due to the additional effect of the expanded volume of business. From 3.23 percent in »932, they dropped to .90 percent in 1935, .77 percent in 1936, and .40 percent in 1937." T h e figures reflect the twofold effect of the decrease in indebtedness and increase in portfolio holdings. While it is difficult to gauge the relative shares of the two factors, their over-all effect was that interest charges became an increasingly negligible element of industrial costs. T h e data of the quoted study do not extend beyond 1937, but according to later indications in the literature, the downward trend continued through the following years." In commenting upon these particular developments, the German economists stressed the point that the decline of interest 22 "Kreditstruktur und Staatskredit," VJK, XI (1936-37), Teil A, 304. 23 Cf. "Erträge und Kosten in der deutschen Industrie," IK, Wochenbericht; see note 14, above. 2* Cf. the study on the role of interest in the German war economy, "Der Zins im Kriege," by Heinrich Strathus, Bank Archiv (1939), pp. 5*0, 534 ff.

i6o

GENERATION

OF BUSINESS

SURPLUSES

charges was accompanied by a parallel increase in the tax burden of industry. 21 Thus, it was argued, the shift in the burden of indebtedness from the private to the public sector merely resulted in a shift in the structure of costs. A few words may be added concerning this argument. As the major component of the industry tax bill was the corporate income tax based on business profits, it is clear that charges arising from this source cannot be considered as costs; they are themselves a function of profitability of business and have no part in determining it. T h e thesis of a compensatory movement of the interest and fiscal charges is thus based upon a debatable procedure of matching two essentially different economic quantities. Numerical comparisons are clearly meaningless in terms of internal cost economics of the individual business enterprise. T a k i n g now the economy as a whole, the transfer of indebtedness from the private to the public sector implied more than a simple shift in charges of the kind described above. As a result of this process, specifically localized private interest charges were converted into a diffused and essentially mobile fiscal burden. T h e share of industry in this burden was conditioned by the general structure of taxation, but it is clear that there was no qualitative equivalence between the two types of charges. T h e structure and level of corporate taxation did play an essential role in the formation of self-financing reserves in German industry; this aspect was discussed earlier. 26 Depreciation. This accounts for a major part of overhead charges of industry. W e deal here with a cost element of a special kind. Considered as an economic cost in the proper sense of this term, depreciation is a deduction from gross income which corresponds to the waste by normal wear and tear of capital assets used in the production process; it usually includes an allowance for normal risks of obsolescence. T h e actual charges to depreciation may or may not correspond to this theoretical concept. They may be set below the normal rates, in which case the apparent or reported profits will be artificially exaggerated at the expense of failing to maintain intact the capital fund of the concern. O r they may exceed the normal rates, which would correspond to the practice of "superCf. " E n r a g e und Kosten," ioc. cit.; also the cost studies of the Institut fur Konjunkturforschung, quoted above. 2 9 Cf. pp. 129 ff.

GENERATION

OF BUSINESS

SURPLUSES

161

depreciation" described elsewhere. It was also seen that some depreciation charges may not appear at all in corporate statements, as in cases where newly acquired assets are charged to the profit and loss account and by-pass altogether the capital account. T h e charges on account of depreciation thus differ from other elements of cost by the fact that they are an outcome of variously motivated cost accounting procedures. There is frequently only a tenuous relationship between outlays shown under depreciation and depreciation cost proper, and the relationship which such outlays bear to business profits is not always of the obvious kind. High outlays on depreciation may be a source of operating losses or, on the contrary, an indication of concealed profits; while a low apparent level of depreciation may be due to an active policy of "hidden" reserves, or indicate, on the contrary, a weak financial position. 27 Some data concerning depreciation charges in German industry were presented in an earlier chapter. It was seen that for the industry as a whole, the total amount of depreciation charged against operating revenue was considerably in excess of normal requirements, which indicated an active policy of hidden reserves.28 A similar conclusion was derived from the analysis of depreciation data of corporate reports in the study by the Statistisches Reichsamt.29 T o complete the picture, we shall add a few data contained in the cost study of the Institut für Konjunkturforschung, quoted earlier. 30 T h e interest of these figures lies in the fact that they are given in percentage of gross sales, and thus provide a more pertinent picture of the depreciation policy followed by corporations with TABLE

Depreciation YEAR

1932 1935 1936 1937

28

Outlays in a Sample of German Corporations,

V O L U M E O F SALES

(19J2 — ¡00) 100 160 188 218

1932-1937

DEPRECIATION O U T L A Y S IN PERCENT OF SALES

Installations 3.26 3.14 5.36 5.20

Other Depreciations* 6.85 1.22 2.10 2.88

Total

Charges 10.11 4.36 746 8.08

« Special write-offs, including those of inventories and other assets. 2' Cf. B e n j a m i n G r a h a m and David L. D o d d , Security Analysis, New York 1934, C h a p . X X X I V , passim. See T a b l e 24. T h e available data were limited to the period 1933-36. 2» See note 12, C h a p . V. 30 Ik, Wochenbericht, I X (1936), 186; X (1937), 298.

i6a

GENERATION

OF BUSINESS

SURPLUSES

the increase of their volume of output and rate of capacity utilization. T h e figures of the table make possible certain interesting conclusions. As the 1935 figure of percentage depreciation maintained itself close to the level of 1932, depreciation charges of industry apparently moved parallel with the volume of sales. It will be recalled that in the earlier part of the period, the volume of new net investment in industry was insignificant, as total gross investment actually lagged behind replacement needs. 31 T h e increased v o l u m e of depreciation charges was thus applied to capital investment of practically unchanged value, which is indicative of a policy of "superdepreciation" or formation of hidden reserves. T h e figures show a steep increase in the following years, presumably in relation with the use of the depreciation privilege attached to purchases of "short-lived" assets; they reflect the accelerated write-off of the huge investments made by industry in such assets.32 Formation of hidden reserves is also apparent from the item " O t h e r depreciation" which covers the writing-off of inventories and other nonpermanent assets. W h i l e the high rate of the depression year 1932 is self-explanatory, the consistent rise of this item after 1935 had no other basis than a particularly " p r u d e n t " depreciation policy on the part of management. 3 * A s to the incidence of government controls with regard to the depreciation element of industrial costs, the role of the fiscal controls in the formation of hidden reserves was discussed elsewhere. In considering the incidence of the government policies, the special nature of depreciation charges will have to be taken into account. A s far as their "real cost" aspect is concerned, the official price policies consistently protected the depreciation charges of industry.' 1 In the carrying out of one of the major objectives of the Nazi price policies, namely the curbing of cutthroat, or below-cost, competition, the manipulation of the depreciation element of costs played 31 Sec Table 6. 32 See p. 140. 33 Cf. the comment by Wirtschaft und Statistik, quoted in note 12, Chap. IV, above; see also IK, Wochenbericht, X, 298. 3* In the words of a leading Nazi price economist, "normal depreciation charges are a necessary cost of production, which is to be recovered throughout the medium of the sales price." ("Die Anlagenabschreibungen in Wertumlauf der Betriebe," by

W. Hasenack, in Zeitschrift fiir BelriebswirUchaft, 1938, p. 122.)

GENERATION

OF BUSINESS SURPLUSES

163

3

an essential role. '' The tightening of the cartel organization of industry, and the consistent official opposition against all forms of "unethical" competition, clearly made possible a more liberal depreciation policy on the part of business. T h e policy of the price authorities in this respect was particularly apparent in those cases where prices were set on the basis of official cost schedules. The costing regulations provided for inclusion of "reasonable" (angemessene) depreciation charges, corresponding to normal wear and tear, or depletion of assets.88 These allowances were to be included, regardless of the book or fiscal depreciation status of the assets; they applied, in other words, also in those cases where the goods or services involved had been produced with written-off equipment.' 7 There is the other aspect of depreciation, namely that of being used in the sense of a formal or fictitious cost. The price policies related to this aspect of depreciation will be taken up later in this chapter.38 THE INCIDENCE

OF THE GOVERNMENT

PRICE AND PROFIT

POLICIES

We take now, as understood, the generally favorable conditions in the field of formation of industrial costs resulting from the corresponding controls. Our interest will be centered on the policies affecting the price mechanism, by way of which these potential conditions of profitability became effective in terms of actual emergence of profits. A general outline of the government price policies was made in an earlier chapter. The following will be confined to those aspects of the price policies which were specifically related to profitability of business. The Price Policies and the Profit Factor. T h e establishment of a centrally controlled price system to replace the automatic price and market mechanism necessarily implied the adoption by the authorities of some definite policies with regard to business profits. T h e 35

See note 86, below. 3« See Para. 3 of Circular No. 65-67 (April, 1937), for price formation in the textile industry; also Paras. 28 to 33, on depreciation of the L S d costing schedules, of Nov., 1938; reference to these costing regulations will be made later in this chapter. Para. 29 of the LSO (RGB, Pt. I, 1628); see also the analysis of the new regulations concerning the pricing on the basis of costs in the building industry, in Der Deutsche Volkswirt, XII (Feb. 25, 1938), 1025. 38 See pp. 179 if., below.

164

GENERATION

OF BUSINESS

SURPLUSES

scope of these policies, and their incidence upon price formation in the economy varied within a wide range. A n extreme case was the direct setting of profit margins to be included as an element of cost in the prices of commodities; in other cases, the intervention of the authorities involved regulation rather than direct setting of profit margins. 39 As the price control techniques evolved from a supervisory stage to the more active stage of price formation control, increasing emphasis was laid upon the cost of production aspect. There was correspondingly increasing intervention in the field of business profits. If we consider the functional aspects of profits in a controlled economy, there is first the "incentive" function, which makes profits, as the prime motor of entrepreneurial decisions, a strategic element of price. T h i s involves the definition, in the sense of a necessary cost, of some minimum rate compatible with "normal" entrepreneurial motivation. T o raise the rate of profit above this level would tend to encourage increased supply of the commodity involved; conversely, if it was considered desirable to curtail the supply of any particular commodity, the profit margin would be pressed down below this level. 40 In the Nazi economy, business profits presented another functional aspect which is of special importance from our point of view. Profits were considered as an efficient medium of capital formation, which in an economy oriented towards maximization of investment, implied, in principle, a policy of preferential treatment. "National socialism," states a German comment in 1937 in connection with the price policy inaugurated under the Four-Year Plan, recognizes the need for entrepreneurial savings in an economy based upon private initiative. If enterprises can maintain their liquidity and expand by the use of their own reserves, the economic authorities, including the central bank, are correspondingly discharged from the necessity of providing [investment] funds. T h e present-day German price policy does not aim at eliminating or reducing the profit margin. Its task^s of a more comprehensive and basic nature. Entrepreneurial 3

» T h e term "steering" should be interpreted here in the widest sense. For instance, a noninterventionist attitude with regard to profits in a given sector was in itself a definite policy by the discriminatory situation which it created. 543-

It is true that in the case of some business enterprises, above-average profit margins may have been due not so much to a deliberate policy on the part of the authorities as to a favorable bargaining position which enabled them to secure advantageous terms for the pricing of their products. «' See p. 170, below.

i66

GENERATION

OF BUSINESS

SURPLUSES

curtail "excessive" profits of the cartels, the sanctioning of a monopolistic price structure in a major sector of the industrial economy implied in itself a favorable, even if passive, policy with regard to business profits.44 T o summarize the nature of the relationship between the official price policies and generation of business profits, the chain of causal incidence between the two ran both ways. T h e level of profits was in some cases an outcome of price policies whose motivation had been only indirectly related to the profitability aspect. In other cases, profit margins were regulated in a deliberate way; instead of being determined by prices they became price determinants like any other elements of "necessary" costs. A high level of profits was, in the first case, a function of a favorable situation in terms of differential costs (for example, high technological efficiency), the government price policy assuming a passive role. In the second case, the high profitability of business was primarily due to a favorable price situation brought about by deliberate action of the authorities. W e shall concern ourselves primarily with policies of the second type; it will be borne in mind, however, that a line of demarcation cannot be drawn with certainty in all cases. Direct Regulation of Profits and Profit Margins. As a first measure of regulation, we shall mention the one which was taken in connection with the publicly financed projects under the Reinhardt Program. It will be recalled that one of the conditions under which loans and subsidies had been granted under the appropriations of June, 1933, was that entrepreneurial profits be maintained within "proper" (angemessene) limits, and unjustified price increases be checked. 45 N o indication was given as to the way in which the term "proper," as related to the level of profits, was to be interpreted. Neither is there any reference to be found as to the actual enforcement of the profit provision, and it is doubtful whether such enforcement did occur. A contemporary comment examines the problem of business profits from the point of view of practical administration of this provision. It breaks down (gross) business profits into following elements: a) interest on invested capital; b) risk premium; c) entrepreneurial wages; d) a reasonable « See pp. 173 ff.

« Para. 2 of the Law of June 1, 1933.

GENERATION

OF BUSINESS

SURPLUSES

167

allowance to take care of the "financial security" of the enterprise (accumulation of reserves); e) only after all foregoing components had been taken care of, the residual, if any, will represent the element of "pure profit," properly speaking, and according to the author, the requirements of a "reasonable" level could apply only to this residual. The other components raised a number of problems of their own, including the old controversial issue of whether interest charges should be considered as cost or income; in other words, whether or not interest should be considered as part of the gross profit margin. Finally, an obvious prerequisite was an "honest" reporting policy on the part of business enterprises, as there was the possibility of some corporations reducing their apparent profits by cost accounting manipulations.4* T o translate the requirements of the law into actual policies required an elaborate machinery of control, which was gradually developed in the course of the following years.41 With the shift of the control techniques to the basis of "price formation," regulation of business profits was integrated into the general functional objectives of the price action. It will be recalled that the price policies were governed by the principle of "economically justified price." This came to be interpreted as one based upon "economically justified" costs, that is, such cost elements as were recognized to be economically necessary and defensible for the particular industry (or firm) and the economy as a whole; this applied to cost elements and profits alike.48 The interpretation of this concept in « "Gewinn, nicht Profit," by Fritz Hühle, in Zeitschrift ür Betriebswirtschaft, X (>938). 694*" Beginning with the fall of 1936, the authorities engaged in a nation-wide campaign to improve cost accounting practices in business; this was conducted through the entrepreneurial organizations of industry. Instructions to that effect were issued to the Economic Groups by the Decree (Erlass) of Nov. is, 1936, relative to the coordination of the activities of these bodies with those of the cartels (see note 87, Chap. Ill) and which contained a number of suggestions on "raising the efficiency of the national productive apparatus." Supplementary instructions were issued a year later by the Decree of Nov. 11, 1937 (Ministerialblatt für Wirtschaft, 1937, p. »39). These carried standard cost schedules which placed comparisons of costs between different enterprises on a uniform basis. Particular emphasis was laid on standard procedures of computation of overhead. For a description of the standard techniques sponsored by the decree of 1936, cf. "Industrielle Leistungssteigerung und Förderung der Wirtschaftlichkeit in Rahmen des Vierjahresplanes," by Heinz Müllensiefen, in JNSW ('937). P- 289« The reader is referred to "Volkswirtschaftliche Grundsätze der Preisbildungspoli-

i68

GENERATION

OF BUSINESS

SURPLUSES

the case of profits was left with the price authorities whose competence was defined in deliberately broad terms. Profits and profit margins were to be set in such a way as "to enable the entrepreneur to conduct his business in an orderly manner and with greatest possible efficiency." 49 T h i s meant that a wide margin of flexibility was allowed in the application of the profit controls, and it was seen earlier that these were governed by a number of considerations which went beyond the purely private economic aspect of the pricing process. T u r n i n g now to specific aspects of the regulation of business profits, it will be necessary, first of all, to define the term "profits" itself. It is a complex quantity, in which the following three elements can be distinguished: a) "normal" profits corresponding to the normal or going rate of entrepreneurial returns, which would be roughly a measure of the minimum financial incentive required for entrepreneurial motivation; b) differential profits or rent which, given a uniform market price for a certain commodity, will emerge as a result of dispersion of costs in a group of productive units of varying efficiency; and, finally, c) all other "above-normal" profits (that is, other than differential rent) which may accrue as a result of a favorable price situation, whether the latter is due to a monopolistic situation or to any other cause. These three elements may be present to a various degree and, conversely, business profits may originate from one or several of the sources above. From what was said before it is clear that the profit policies of the authorities were not necessarily "aligned" at the level of normal entrepreneurial returns, as defined above. W h i l e the regulatory norm of "economically justified profits" could be, and in many cases was, interpreted in this sense, it also frequently implied a rate either below or above the normal level. In the latter case, the profit allowances sanctioned—whether explicitly or i m p l i c i t l y — by the authorities, included, in addition, one or both of the eletik im Vierjahresplan," by W. Meinhold, in JNoS, C L (1938), 568 ff. We quote from p. 587: "An 'economically justified price' comes about only when the relative shares of individual economic groups in the total price—as represented by the respective price elements—correspond to the value of the contribution (Leistung) of these groups to the economy as a whole." 938). >378.

•• Economist,

C X L (March 8, 1941), 309.

THE SPECIFIC

INVESTMENT

CONTROLS

199

developed chemical substitutes of natural raw materials (oil, rubber, textiles), whose economics of production labored under considerable handicaps. Because of the technological conditions of large-scale chemical synthesis, the production processes involved huge capital outlays in physical plant and equipment; while the fact that the processes were technologically immature resulted in a high rate of depreciation and obsolescence. The autarkic production program thus entailed the establishment of industries which presented an exceptionally high degree of capital intensity and were subject to more than average risk of obsolescence. Cost of production—at least in the evolutionary stage—was correspondingly burdened with a high rate of fixed costs, which weighed heavily upon the competitive position of the synthetic products, even though the possibility was not excluded that once the processes attained technological maturity the "new" products stood a good chance of meeting their natural prototypes on a competitive basis." While the authorities favored the establishment of the new industries on a private economic basis, industry was apparently prepared to undertake the investment only if a guaranteed pattern of prices and costs was provided by government action so as to ensure profitable operation. Thus, the normal sequence of causation of privately motivated investment was in this case reversed. Cost and price relationships—taking cost in its most general connotation, which also includes elements of profits and risks—were adjusted to investment decisions made beforehand, the public authorities assuming the cost of the adjustment. Public assistance took a variety of forms: subsidies, bounties, guarantees, compensatory duties, and consumption controls. Some of these devices were of the classical protectionist type, currently used to shelter high-cost domestic production against foreign competition. It is clear, however, that their effectiveness was considerably strengthened; the potentialities inherent in the operation of a controlled economy widened the scope of protection to an extent where the new industries were 67 The history of industrial chemistry of the last decades offers a number of precedents of this kind. We shall give as an example the establishment on a commercial basis after the first World War, of the synthetic nitrogen industry which gradually displaced the "natural" fertilizers.

200

THE SPECIFIC INVESTMENT

CONTROLS

put on an all-around guaranteed basis. T h e relevant policies were integrated in the general control mechanism, and could be formulated and carried out in terms of the economy taken as a whole. 58 T h e development of the autarkic industries at public cost was given official justification on grounds of their vital function in widening the raw materials basis of the economy. T h i s was probably true as far as immediate motivation was concerned. It is, however, safe to assume that the authorities were not unaware of the more permanent aspects of their policies. As the public guarantees covered manufacturing processes in an evolutionary stage which involved a costly period of technological development, the new industries were provided with unlimited "educational" opportunities—at public cost—pending their evolution to a self-sustained basis. T h e long-run aspect of these policies was to open up to private enterprise new areas of profitable activity and economic expansion. As to the economic cost to the community of the autarkic "infant industries," this could be justified in the long run by the social gain resulting from expanded production and employment based upon "valorization" of domestic resources. INVESTMENT

BANS

T h e term "investment bans" designated measures of prohibition or restriction of new investment, whereby the expansion of existing enterprises or the entry of new producers in the field were made subject to direct control. Next to the "embargo" on private securities, investment bans are probably the best-known of the Nazi investment controls. T h e legislative basis of the "bans" was a provision of the Law on Compulsory Cartels of 1933, which reads as follows: Whenever the particular requirements of a given branch warrants such action—and with due regard to the general interests of the economy, and public welfare—the Reich Minister of Economics may decree that within that [particular] branch the erection of new enterprises or the enlargement of productive capacity of existing enterprises shall be prohibited or made subject to his authorization. Under similar circum58 It is clear that the economics of the autarkic industries was also affected by the operation of controls of the "nonspecific" kind, such as the controls of foreign trade and foreign exchange, and the general financial and fiscal controls.

THE SPECIFIC INVESTMENT

CONTROLS

201

stances, he is also authorized to regulate the rate of utilization of existing firms.89 While the application of this provision is generally referred to in the literature as an investment ban (Investitionsverbot), a study of the decrees issued under its authority shows that the alternative form of conditional restriction provided by the law had been frequently used. New investment was not prohibited outright, but was made dependent upon approval by the authorities; this represented a more flexible regulatory device which made it possible to adapt the restrictive policies to individual cases.80 T h e restrictions were generally imposed on a temporary basis, with the terms of validity ranging from three months to two years. T h e y were, as a rule, extended and maintained throughout the period under review. A notice published by the Ministry of Economics in April, 1939, gives an enumeration of industries and trades in which investment restrictions were in force. 41 T h e notice listed 49 branches, distributed among industry (45 branches), merchandising (3 branches), and insurance (1 branch). T h i s shows that the investment ban device was of relatively limited application. A study of the list reveals that the affected branches were of an extremely varied nature, as to type of activity and relative importance. T h e decrees covered such widely divergent fields as manufacturing of watches, production of fertilizers, the cement industry, mailorder houses, and production of sawdust. T h e limited and economically heterogeneous area of application of the investment bans shows that this control was used with restraint and discrimination. It cannot be considered as a general or even very current means of 09

Sec. s, Para. 5 of the "Zwangskartellengesetz" of July 15, 1933 ( R G B , Pt. I, 488). In the case of industries engaged in processing agricultural raw materials, which were incorporated in the Reich Food Estate, regulation of investment was put under the jurisdiction of the top market-regulatory bodies. It will be recalled that agriculture had been subjected to a special regime of control and presented a different regulatory set-up (see note 80, Chap. III). 80 It is true that, even in cases of outright prohibition, the decrees usually carried a provision whereby exemption could be granted in individual cases, at the option of the Minister of Economics. "Bekanntmachung des Reichswirtschaftsministeriums," of April 14, 1939, in Ministerialblatt fur IVirtschaft, X X X I X (May 12, 1939), 323. Most of the prohibitions were enacted in 1933 and 1934, and extended by subsequent decrees.

THE SPECIFIC INVESTMENT

CONTROLS

investment control; its use seems to have been confined to individual cases for specific purposes. As reflected in their legislative origin, investment bans were first used in the regulation of cartels. They were also used as a direct means of eliminating new investment of the "undesirable" kind. 62 Finally, in a number of cases, they were devoid of any restrictive function and were used as a means of subjecting all new investment in a given branch to direct public control. T h e different functional aspects of the investment bans are considered in the following. The Investment Bans and, the Regulation of Cartels. T h e investment bans were closely related to the cartel-regulatory action, and more specifically, to the enforcement of compulsory cartelization. It has been pointed out by students of cartel organization of industry that one of its most troublesome aspects was the powerful incentive which cartelization provided for expansion of capacity. Not only are new firms tempted to enter the cartelized fields, either by joining the cartels or as outsiders, in order to share in the monopoly profits; " the members of the cartels themselves are under pressure to expand productive capacity, in order to put themselves in a better bargaining position in bidding for higher sales quotas. T h i s would be the case not only in periods of prosperity, but also in times of depression, as a means of protection by cartel members of their share of business in an eventual upswing. In either case, the result was the development of overinvestment and excess capacity, with disruptive effects upon costs, prices, and the structure of production and sales.61 Particularly acute conditions of the kind described above were bound to arise in the case of compulsory cartelization; that is, when producers of a given branch were forced by public action to join an existing cartel, or to form an all-industry cartel. T h e tightening 03 It is hardly necessary to point out that such direct restriction could only be in the nature of an additional control, which supplemented other controls of the indirect type. Measures of prohibition or restriction of investment were also taken in some branches outside of the Cartel L a w , under special enactments. •» New firms may find it more advantageous to operate outside of the cartel; they would thus take advantage of the price situation, while preserving their competitive freedom. 8 1 Cf. Robert Liefmann, Cartels, Concerns and Trusts (London, 1932), pp. 65 £E.

THE

SPECIFIC

INVESTMENT

CONTROLS

203

of the m o n o p o l i s t i c position of the cartel stimulated to an even greater e x t e n t e x p a n s i o n of capacity, w h i l e as a result of eliminat i o n of c o m p e t i t i o n , the h i g h e r costs r e s u l t i n g f r o m the all-around d e c l i n e of capacity utilization translated themselves i n rising prices. T h e described effects w e r e likely to b e of a c u m u l a t i v e k i n d ; compulsory cartelization tended to aggravate considerably the developm e n t of o v e r i n v e s t m e n t , excess capacity, rising prices, and inefficiency,

all the p h e n o m e n a w h i c h h a d b e e n present in a latent

stage in n o n c o m p u l s o r y cartels. 45 W h i l e c o m p u l s o r y cartels h a d b e e n set u p in some branches of G e r m a n industry b e f o r e , this was generally an exceptional proc e d u r e l i m i t e d to i n d i v i d u a l cases. 68 I n the N a z i economy compulsory cartelization b e c a m e a c u r r e n t regulatory tool. 87 T o p r o v i d e the authorities w i t h parallel powers of i n t e r v e n t i o n against potential o v e r e x p a n s i o n of capacity and other h a r m f u l effects in the cartelized b r a n c h e s was a logical corollary. It w i l l b e recalled that e n f o r c e m e n t of " o r d e r l y " conditions i n business was the keynote of p u b l i c policies, a n d that great stress was laid u p o n p r e v e n t i n g the waste of e c o n o m i c resources by " m i s g u i d e d " investment (Fehlinvestitionen).68

The

c o u p l i n g of

the

investment

w i t h the statutory g r a n t of powers of compulsory

ban

device

cartelization

s h o u l d be i n t e r p r e t e d i n this sense. 69 It is clear that p u b l i c e n f o r c e m e n t of restrictions o n n e w investm e n t , especially in the f o r m of e x c l u s i o n of n e w entries, resulted at the same time in an airtight p r o t e c t i o n of the monopolistic position of the e x i s t i n g firms. P u b l i c action of this k i n d was f r e q u e n t l y initiated

at

the d e m a n d

of cartel

interests w h e n

these

were

threatened by v i g o r o u s c o m p e t i t i o n o n the part of outsiders. It is p r o b a b l e that in such cases the a r g u m e n t s of excess capacity, over85 Ibid., pp. 68 ff., 220. Liefmann cites the case of the German potash industry, where a gigantic influx of investment capital of speculative nature took place following the government-decreed cartelization of 1910. According to Liefmann, the capitalization of this industry reached, some six years later, by 1916, the fantastic figure of twenty times the economically justified investment. U6 Compulsory cartelization of potash mines was enacted by the Reich government in 1910, in order to check conditions of anarchic price competition. Other compulsory cartels were set up during the first World W a r in the coal industry, production of yeast, etc. (Cf. ibid., pp. 215 fr.) 6 7 See pp. 49 ff., above. as Cf. "Kapazität als Wirtschaftsfaktor," Wirtschaftskurue, 1935-1936, p. 338.

Ibid.

20 4

THE SPECIFIC

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investment and unfair competition, had been stressed more than the actual situation would have warranted in order to shift the grounds for public intervention to considerations of "general" interest. A few examples will illustrate the application of the investment bans in connection with the cartel regulatory action. Let us take the case of the nitrogen and cyanamid industries, where prohibition of new investment was decreed in January, 1934 7 0 According to a contemporary comment, the measure was taken at the demand of the nitrogen cartel, in order to forestall a new investment project by a powerful outsider. Public intervention was claimed on several grounds. It was pointed out that the nitrogen industry suffered from excess capacity, with consequent low rate of capacity utilization. T h e establishment of outside capacity subject to no quota restrictions on the rate of output, it was claimed, would create an unfair competitive situation, the outside producer enjoying a favored cost position through full utilization of capacity, while taking at the same time advantage of the cartel prices. Public interest, it was further claimed, was involved not only by the fact that new investment in a branch already burdened with excess capacity would result in undesirable waste of capital resources; it was also vitally concerned to avoid disruption of the industry structure of prices.71 A similar situation seems to have motivated the imposition of a ban in the cement industry, 72 an industrial branch with a longstanding record of overinvestment, excess capacity, and cutthroat competition. 73 The ban was vociferously demanded by cartel info Decree of Jan. 24, 1934 (Reichsanzeiger, No. 22). "1 Kartell-Rundschau, X X X I I (1934). p. 119. '2 Decree of Feb. 17, 1934. The decree made establishment of new cement plants, resumption of operation in idle plants, and expansion of capacity of existing installations, subject to approval of the Minister of Economics. The law was extended by successive enactments through Dec. 31, 1939. 73 Several unsuccessful attempts at cartelization—both by private and public initiative—had been made before. The cartels were generally short-lived, and succumbed to the pressure of fierce outside competition and internal struggles for higher quotas. An investment ban was imposed in this industry in the first World War. A decree by the Reich government, of June 25, 1916, ordered prohibition of new capacity, as well as of acquisition of old plants by cement producers, and established the Reich Cement Office, a regulatory body for the cement industry. The ban was repealed in 1923. See "Die Deutsche Zementindustrie," by Hans Ilau, Wirtscliaftskurve, 1936, 158 ff.; also I.iefmann, op. cit., pp. 66, 218 ff.

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205

terests in order to put the industry on a sound competitive basis. We quote a contemporary comment of a trade paper: This [action] will eliminate the catastrophic practice of price cutting on the part of outsiders; by quoting below cartel prices, [the outsiders] secured a 100 percent utilization of their plants, with a resulting cost of production half as high as that of the cartel plants whose rate of utilization had recently dropped below 30 percent. The measure . . . will also prevent the dissolution of the existing cartels, and a relapse into a state of ruthless cut-throat competition.71 Another example was the glass-container industry (HohlglasIndustrie), where compulsory cartelization together with prohibition of new investment in automatic glass-blowing machinery were introduced in February, 1 9 3 4 . " Requests for such action were pressed by the German bottle cartel (Deutsche Flaschverkaufs G.m.b.H.), on grounds of "ruinous" competitive conditions in the industry. Aside from the familiar complaints of overinvestment, low rate of capacity utilization, and ruthless competition on the part of outsiders, which figured in the appeal for public intervention, 7 " there was added a new element of motivation. As the ban was to be limited to automatic machinery, it was argued that the measure would protect the smaller enterprises operating with mouth-blowing equipment, which would be thus given the opportunity to undergo a "slow economic readjustment." 77 T h e measure was thus linked to protection of small business and relief of technological unemployment. Examples of this kind, illustrating the cartel-regulatory aspect of a number of prohibitions enacted under the authority of the law of July, 1933, could be multiplied. We shall cite the bans in the rolled-wire products industry, 78 on erection of new zinc-rolling "* Bergwerk-Zeitung, Feb. s i , 1934, quoted in Kartell-Rundschau (1934), p. 183. 75 Decree of Feb. 15, 1934 (Reichsanzeiger, No. 40); extended by successive enactments through Dec. 3 1 , 1941. 7»Cf. Kartell-Rundschau, X X X I (1933), 841; X X X I I (1934), 186-187. See also "Drei J a h r e Marktordnung in der Hohlglasindustrie," in Der Deutsche Volkswirt, X I (May 28, 1937). 1713- According to the latter source, the rate of capacity utilization in this industry was 35 percent in 1932. " Kartell-Rundschau, X X X I I (1934), p. 187. 7 ® Decree of Oct. 7, 1933 (Reichsanzeiger, No. 237); extended by successive decrees through Sept. 30, 1940. For the motivation, see Kartell-Rundschau, X X X I (1933), p. 836.

so6

THE SPECIFIC INVESTMENT

CONTROLS

mills/* in the cigarette industry,"0 and in the graphic and printing trades.81 Public action was urged on grounds of excess capacity and disorganized competitive conditions in the branches involved. T o summarize the cartel regulatory aspect of the investment bans it would seem that the bans were, in such cases, primarily motivated on private economic grounds. It is true that the action was frequently justified on grounds of public interest, namely, the maintenance of "price and competition discipline," and the prevention of waste of resources through "misguided" overinvestment. T h e public interest aspect was, however, likely to be overplayed whenever a case for intervention was to be built up; it was not necessarily self-evident in all the cases in which it was invoked.82 As in other cases of public intervention in the cartel-regulatory field, the measures were likely to reflect a dual pattern of motivation." Clearly, no conclusions of a general nature can be made as to the nature of the adjustment reached between the private and public aspects of the problem of regulation. T h e balance of concessions and gains was probably a matter of each individual case, depending upon the strength of the respective bargaining positions. In some of the cases mentioned above, the nature of the quid pro quo arrangements could be directly traced; the grant of state protection in the form of investment bans was followed by price concessions on the part of industry. A substantial cut in prices of cement — a major procurement item in view of the amount of public construction during the period—was agreed upon by the cement inTB Decree of Feb. 24, 1934 (Reichsanzeiger, No. 48); extended by successive enactments through Dec. 31, 1939; see also Kartell-Rundschau, X X X I I (1934), p. 180. 8 0 Decree of A p r i l 19, 1934 (Reichsanzeiger, No. 93); extended by successive enactments through March 30, 1941. See also Kartell-Rundschau, X X X I I (1934), p. 283. si Decree of June 6, 1935. T h e prohibition was in this case of short duration, with the objective of "granting the trade a breathing spell during which to settle its organizational problems by self-governing methods" (Kartell-Rundschau, 1936, p. 832); see also Der Deutsche Volkswirt, I X (June 14, 1935), 1711. 8 2 It is clear, for instance, that the existence of excess, or more precisely, idle capacity in a given industrial branch does not in itself imply that new entries into the field should necessarily be considered as duplication of capacity and economic waste. Exclusion of new entries may, on the contrary, sanction the subsistence of inefficient concerns, whose "excess capacity" is nothing but originally '"misguided" investment. In such cases, the real economic waste will not be the establishment of n e w — a n d presumably more efficient—capacity, but the nonelimination of the existing inefficient one. ss See also p. 73, above,

THE SPECIFIC INVESTMENT

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207

dustry, as a counterpart (Gegenleistung) of the benefits derived from the imposition of the ban. M It is also probable that the lowering of prices of artificial fertilizers at the request of the price authorities was in the nature of a compensatory move motivated on the same grounds." Other compensatory arrangements probably took place, even though no information is available on this point. The Investment Bans and the Regulation of Private Investment. Regulation of investment by administrative action under the authority of the Cartel Law was also used as a tool of direct investment control." Imposition of the bans was variously motivated. Curtailment of investment in industries based upon imported raw materials was a logical extension of the restrictions on the rate of output of existing capacity in such industries. " T h e problem of investment control in this field," says a contemporary comment, "was to adjust industry to the available raw materials." 8T This motivation was apparently present in the case of the bans in the automobile tire industry,88 production of lead paints,89 and the manufacture of lead articles.'0 In the same category belong the investment restrictions in the textile industry, which were introduced, among other restrictive measures, by the Textile Decree of July, 1934.81 A novel feature was, in this case, the transfer of the control authority from the Ministry of Economics to the regional chambers of commerce and industry. A 1938 amendment of the Textile Law Ilau, " D i e Deutsche Zementindustrie," loc. cit., p. 167. 8' See note 12, C h a p . III. T h e interest of the authorities in lower prices of fertilizers was due to their incidence upon costs of production in agriculture, where the government policies were keynoted by a consistent pressure upon costs and prices. 8« See "Das Investitionsproblem," by Viktor Wrede, in JN6S (1937), p. 547. 87 R K G , Report, First Half of J9}5, p. 4. A restrictive control of new investment by industrial and merchandising establishments in the field of scarce raw materials was also administered by the relevant supervisory offices. C f . " D i e Wirtschaftskontrolle der Oberwachungsstellen," by Leonhard Miksch. in Wirtschaftskurve, 1937, pp. 13s ff. 88 Decree of July 18, 1934 (Reichsanzeiger, 1934, No. 166); extended through A u g . , 19358» Decree of July 30, 1934 (ibid.. No. J76); extended through Dec. 31, 1939. bo Decree of July 31, 1934 (ibid., No. 177); extended through D e c 31, 1939. I n addition to imposing curtailment of production (by compulsory restriction of the working week to a maximum of 36 hours, and prohibitions on increase of the labor force), the decree made all new investment in the textile industry dependent upon authorization by the Minister of Economics. (Para. 11, Sec. 2, of the "Fasentoffverordnung," July 19, 1934, R G B , Pt. I, 713; replaced later by Paras. 13 and 14 of the T e x t i l e L a w of Dec. 6, 1935, ibid., p. 1411).

So&

THE SPECIFIC INVESTMENT

CONTROLS

gave these bodies the authority of granting individual exemptions from the application of the ban, after consultation with the "functionally (fachlich) competent entrepreneurial organizations," by which were meant the pertinent economic groups.82 A similar decentralization of regulatory authority characterized the measure introduced a few years later in the steel and iron processing industries. All changes in capacity by new entries, expansion of existing installations, and reopening of idle plants were made subject to approval by the pertinent economic groups. Appeals against their decisions could be made to the Reichsgruppe Industrie, whose decisions were final.98 In some of the earlier measures, the bans were linked to certain social and political objectives. Protection of small retail trade—a well-known political slogan of the earlier era of the regime—was claimed in the ban upon establishment of new textile mail-order houses eventually extended to mail-order houses of all types; ** while the grounds of rehabilitating small business and preventing technological unemployment were offered as a justification of the restrictions applied in the cigarette industry 95 and manufacturing of cigars.*® It will be recalled that a similar argument was also given as one of the reasons for the imposition of a ban in the glasscontainer industry.97 Motivation of this kind lost a great deal of its meaning as the Konjunktur progressed; and the very fact that the restrictions continued in force shows that this was not the only motivation involved. It may be assumed that an additional consideration was the desire to divert scarce investment resources from »2 Fourth administrative decree to the T e x t i l e Law, of July 5, 1938 (ibid., p. 833). 9 3 "Decree to Insure a Planned Development of the Steel and Iron Processing Industries," of March 27, 1930. (Ministerialblatt für Wirtschaft, April 19, 1940, p. 139); see also "Investitionskontrolle durch Wirtschaftsgruppen," Der Deutsche Volkswirt, X I V (April 15, 1940), 95*. Decrees of July 4, 1934 (R.-A., 1937, No. 158) and May 20, 1937 (ibid., No. 115), respectively. In both cases, the " b a n " was of a conditional nature. Control of the establishment of new department stores, chain stores, and one-price stores (a variety of five-and-ten stores) was introduced by an earlier enactment, the "Law concerning the protection of retail trade" (Einzelhandelschutzgesetz), May 12, 1933 (RGB, Pt. I , 262).

»5 Decree of April 19, 1934 (Reichsanzeiger, 1934, No. 93). »« Law of July 28, 1933 ( R G B , Pt. I , 565); see also a comment in (>934). P- 183. 01 See above.

Kartell-Rundschau

THE SPECIFIC

INVESTMENT

CONTROLS

209

"nonessential" industries. In such cases, the direct bans supplemented the restrictive controls applied on the "real" level. 88 Finally, when, under the law of 1933, investment bans were applied in key industries or in productive branches of strategic importance, they should be considered as purely regulatory measures without any restrictive connotation. T h e y should be construed as a device which provided the authorities with direct control of capacity in the affected industries. T h i s was clearly the objective of an enactment issued in September, 1937, which put all investment in the iron and steel industries under administration control by the Minister of Economics. 88 T h e same applies to the bans in such strategically important branches as the oil industry (including production of gasoline, kerosene, lubricants, and fuel oil); 1 0 0 installations of oil storage (tanks, reservoirs and other facilities of a storage capacity of more than 500 cubic meters); 1 0 1 production of aluminum oxide, aluminum hydroxide, and aluminum metal; 1 0 2 production of magnesium metal, 105 and so on. W e shall also mention the investment provisions of the "Power Economy L a w " of 1935, a basic regulatory enactment in the field of generation and distribution of power. 104 A l l projects of expansion or shut-down of capacity by power producing and distributing concerns were to be filed with the Minister of Economics, who was given the authority to disallow such projects "if considerations of public welfare so required." T h e authorities could also require the maintenance in operation of power generating capacity and the installation of new power plants by private concerns, in the interests of national defense. 105 Investment Control in the Agricultural Industries. T h e agricultural industries, namely those engaged in processing of food and 88 Cf. pp. 43 ff. »9 "Decree to insure a planned development of the German iron industry," Sept. 16, 1937 (Reichsameiger, 1937, No. 216). T h e decree covered all types of investment in new installations and equipment in the iron and steel industries, such as blast furnaces, coke plants, steel mills, forges, presses and foundries.

100 Decree of Aug. 24, 1938 (Reichsanzeiger, 1938, No. 199). 101 Decree of J u n e 15, 1938 (ibid., No. 137).

102 Decree of May 8, 1939 (ibid., No. 106). 103 Decree of May 10, ig3g (ibid., No. 108). 104 Power Economy Law (Energiewirtschaftsgesetz), Dec. 105 Ibid., Para, 6.

13, 1935.

(RGB, Pt. I,

1451).

THE SPECIFIC INVESTMENT

CONTROLS

other agricultural raw materials fell under the particular jurisdiction of the "Reich Food Estate." T h e regulatory measures presented here a somewhat different aspect, due to the special nature of the machinery of economic control of the Estate.106 Direct investment control was imposed in all agricultural industries, while no such general measure had been taken for the rest of the industry. O n the other hand, the control authority was vested not with a government agency but with the "self-governing" market-regulatory organizations in the respective fields.107 As a rule, the authority was vested with the "central associations" (Hauptvereinigungen) which were vertical combinations, on the Reich level, of producers, processors, and distributors of a given agricultural staple, including all its derivatives, finished products, and by-products.108 A special provision of the constitutional decrees of these bodies gave the Hauptvereinigungen the sanctioning authority over all new investment by the industry-members of the combinations. All changes in capacity such as establishment of new enterprises, resumption of operation of idle enterprises and the enlargement of existing installations were made subject to approval. T h e decisions could be appealed under a prescribed procedure. 109 Control of investment in the agricultural industries should be considered primarily as part of the mechanism of "total" control which regulated the economic circuit of all agricultural commodities from the point of production of the raw material up to and including retail distribution to consumers. As a result, industrial production based on agricultural raw materials—which cor10« C f . n o t e 18. C h a p . I I I . i o t A b r i e f o u t l i n e of t h e s e o r g a n i z a t i o n s is g i v e n in n o t e 80, C h a p . I I I . F o r a det a i l e d d e s c r i p t i o n of t h e m a r k e t r e g u l a t o r y b o d i e s o f t h e E s t a t e , t h e r e a d e r is r e f e r r e d t o B e r n h a r d M e h r e n s , Die Marktordnung des Reichnahrstandes ( B e r l i n , 1938), p p . 18-32. 10» I n s o m e cases, t h e c o m p e t e n t a g e n c y w a s t h e m a r k e t c o m b i n a t i o n 011 t h e i m mediately lower territorial level, n a m e l y the relevant "economic league" ( W i r t s c h a j l s • verband). 10» C f . P a r a . 11 of t h e " D e c r e e c o n c e r n i n g t h e i n t e g r a t i o n of t h e G e r m a n l i v e s t o c k e c o n o m y " (Verordnung iiber den Zusammenschluss der deutschen Viehwirtschaft), F e b . «7, 1935 ( R G B , P t . I , 301); P a r a . 9 o f t h e o r g a n i z a t i o n a l d e c r e e of t h e m i l k e c o n o m y , A p r i l 17, 1936 (ibid., p . 374). T h e p r o v i s i o n s s p e c i f i e d t h a t a u t h o r i z a t i o n s o f n e w i n v e s t m e n t must b e g r a n t e d if t h e n e w i n v e s t m e n t w a s e c o n o m i c a l l y j u s t i f i e d , a n d t h a t t h e y should b e g r a n t e d , if t h e r e w a s n o d a n g e r of i m p a i r i n g t h e s i t u a t i o n of e x i s t i n g e n t e r p r i s e s , a n d o f o v e r c r o w d i n g o f t h e field.

THE SPECIFIC

INVESTMENT

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211

responded to the processing phase of the circuit—was submitted to a tighter form of control than the rest of the industry. Compulsory cartelization, supplemented by allocation of processing quotas, was introduced in all agricultural industries at an early stage of organization of the Estate.110 Control of investment was a logical extension of the mechanism of production control. The quota regulation of the rate of utilization of existing capacity was strengthened and made more effective by regulation of new capacity. As in nonagricultural industries, compulsory cartelization and regulation of capacity were eagerly sought by cartel interests. In the immediate motivation of their enactment we find the same arguments of overinvestment, low rate of capacity utilization, and cutthroat competition on the part of outsiders. This was the case of flour mills.111 of the starch industry,112 and of the margarine industry,113 where government action was sought in order to stabilize prices and outputs, and eliminate outside competition.1" We have n o I n fact, the building u p of the control machinery of the Estate usually began with the organization of the industrial stage, where the flow of goods was clearly t h e easiest to intercept. T h e definitive market-regulatory organization of the Estate in the form of three-stage vertical combinations, which integrated the entire economic circuit of the commodity involved, was usually preceded by a preliminary organizational phase, in which the processing industries were combined in compulsory cartels. T h i s provided the nucleus of the more complex three-stage form of organization. T h u s , the first step in the organization of the grain sector was compulsory cartelization of the flour mills, which were organized into an "Economic Association of W h e a t and Rye Flour Mills," by the decree of Nov. 5, 1933 (RGB, Pt. I, 810). T h i s was later on dissolved and incorporated into the "Central Association for the Grain Economy," organized in July, 1935. In the same way, organization of the milk sector started with the creation in Nov., 1933, of the "Economic Association of Milk Processors" (ibid., p. 810), which was eventually incorporated into the "Central Association of the Milk Economy" set u p in April, 1936. i n Mehrens, op. at., p. 70. Ibid., p. 150. u s Cf. Karl Brandt, The German Fat Plan (Stanford University Food Research Institute Studies, No. 6, 1938), p . 193. 114 We quote a passage from Brandt (op. cit., p. 170) which illustrates the attitude of German margarine industry towards government regulation: "Between the consumers cooperative factory of p a r a m o u n t capacity and the small trust-free factories, the [margarine] trust and the majority of the other existing factories decided that it was a minor evil to be p u t under a quota system, reduced sales and rigid state control. Quota system stops the competitive struggle for shares in the market and instead establishes allotments which become the basis for stable business. Moreover, the quota system and price stabilization seemed to offer opportunities to stabilize a favorable profit rate which would in general make up for increased overhead cost and the loss of production volume. It must not be forgotten that for a long time the margarine trust would have liked to organize the whole industry as a cartel b u t saw n o chance to do it. Now, 'Father State' did it."

212

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here again a case of overlapping of public and private aspects of regulation. Considered in terms of long-run policy objectives, the measures of investment control in the essential food industries were part of a more comprehensive policy aimed at a planned development of the national food resources. In fact, investment control in the agricultural industries was by no means confined to purely negative measures of the restrictive kind, and frequently involved promotion of investment in connection with the development of new food producing areas.1" u s As an example, investment control combined with management of production quotas served as a tool of a reorganization of the milk processing industries under the so-called " M i l k Plan." T h e processing capacity was adjusted to the new pattern of dairy farming developed under the Plan, both in a technological and geographical sense. While unnecessary or uneconomic capacity (in the sense of the Plan) was eliminated by quota restrictions, establishment of new creameries and cheese plants in the newly developed dairy farming areas was actively promoted by means of low-interest loans and subsidies (cf. Mehrens, op. cit., pp. 242 ff., 291).

Vili SUMMARY

AND

CONCLUSION

L E T US gather together the threads of our investigation and reconstruct an over-all picture of the developments analyzed in the preceding chapters. T h e case which has been considered here provided an illustration of a modern industrial economy of a particular type. T h e principle of production and investment in terms of private entrepreneurial motivation, and the corollary functional economic relationships had been essentially maintained. However, a statecontrolled regulatory apparatus superseded the operation of the traditional price and market mechanism. While uninhibited operation of a "free" price and market mechanism is hardly the case in any of the contemporary industrial economies, in the Nazi economy the elimination of the automatic regulatory function of this mechanism was virtually complete. T h e evolution of private investment in the pre-war phase of the Nazi economy was determined, first, by certain factors related to the military objectives of the regime. One of these was the dominant position assigned to nonconsumption type of output. T h e preferential status of the nonconsumption sector was reflected in the distinctly selective pattern of expansion of industrial capacity, the rate of expansion being in direct relation to the strategic position held by a given industry. This clearly favored the investment goods, or so-called "heavy" industries, and industries of the autarkic type. Another factor, closely related to the first, was a high level of public spending, which provided the energizing force behind the economic upswing. Its effect was to bring about a state of exceptional liquidity of business. As a result, not only was expansion of capacity heavily financed by internal reserves, but a largescale "disindebtedness" of industry took place. A third factor was the policy of stabilization of the price and wage level, a vital premise

2i4

SUMMARY

AND

CONCLUSION

for a workable operation of an economy in which increasing pressure had been exerted upon the price structure by a cumulative effect of the two factors mentioned before. T h e stability of the price level insured an undisturbed development of the Investitionskonjunktur. T h e effective "backflow" mechanism of the financial and fiscal controls which neutralized some of the income effect of public spending was in itself unable to prevent the appearance of a widening inflationary gap. T h e role of the price and wage stabilization controls was to keep in check the latent strains and pressures in the price structure. While these developments present a certain degree of similarity with the familiar pattern of a military economy operating under a system of wartime controls, the significance of this similarity should not be overrated. Clearly, the case of the German economy between 1933 and 1939 was more than that of a military economy operating in peacetime. The set-up of controls was not a temporary expedient designed to cope with a wartime emergency, but was part of an integrated system whose long-run goals went beyond the military phase. Likewise, the evolution of the economics of private investment in Nazi Germany was not exclusively or uniquely a function of its military and autarkic orientation. Other policy objectives, linked to the long-run economic policies of the regime, were superimposed upon and coordinated with the immediate objectives. As one of the developments of this type, we have the structural changes in generation and allocation of long-term capital. Government steering of capital formation brought about a slowing down of the rate of voluntary savings by individuals, and resulted in promoting formation of capital of institutional and compulsory kinds. T h e decline of savings in the low-income brackets was accompanied by a rise in institutional and compulsory savings out of these incomes (including the kind of forced savings which results from taxation of wages and salaries, and taxation of consumption). T h e decline of Effektensparen (the type of savings which, as a rule, are directly invested by higher income groups) was accompanied by a steep rise of corporate savings. T h e "deindividualization" of savings was accompanied by paral-

SUMMARY

AND

CONCLUSION

2'5

lei repercussions on the allocation side of the generated capital. T h e nature of institutional savings—whether of the voluntary or forced type—virtually restricted their field of application to public financing; in the Nazi economy, they became the main source of public deficit financing. The area of application of business savings was even more narrowly localized at the point of generation. An increasing portion of the newly formed capital was thus emerging in the form of what the Germans designated as zweckgebundene or "specifically earmarked" capital, in contrast with the essentially mobile capital originating from free savings. This aspect of capital formation points in an interesting direction. It will be recalled that one of the long-run objectives of the regime was the achievement of a "crisis-proof" economy by regulation of the national investment mechanism, which implied among other things the establishment of a controlled relationship between savings and investment. This was apparently to be achieved by a policy of "planned" savings. "Free" savings by individuals would be reduced to an unessential element of capital formation, whose functional significance in the investment process would be virtually eliminated. As to the "planned" savings of the specific type, their structure would be conditioned by the basic orientation of the economy, the desired pattern being achieved by means of appropriate controls—management of the price and fiscal structure, steering of consumption, and so on. T h e rise of self-financing to a position of a major factor in business financing should be considered in the light of the more general shifts described above. While self-financing of business is to some extent automatically associated with massive public spending, we deal here with a development of quite a different nature. Aside from its considerably wider scope, industrial self-financing was, in the present case, not a spontaneous process but a result of deliberate government policies. The restrictions upon distribution of corporate earnings, the liberal structure of corporate taxation, including the various fiscal incentives, and the strengthening of the management control of corporations were key factors in the accumulation of business savings. The process of accumulation was controlled both in its quantitative and qualitative aspects. That

2l6

SUMMARY

AND

CONCLUSION

the operation of the controls favored a localization of business savings in the armament and autarkic sectors was due to the general orientation of the economy, but it is clear that the steering techniques could be applied for any other purpose. T h e favoring of self-financing was justified on the grounds that having been denied access to the facilities of the capital market through the imposition of the embargo, industry was to be offered an alternative source of financing. It was seen, however, that the argument was by no means self-evident. T h e relationship between the repercussions of the self-financing controls and conditions in the capital market was of a circular kind. Retention of corporate earnings at the expense of dividends was responsible for the decline of the rate of Effektensparen, and consequent shrinkage of the supply of investible funds; while the liberal fiscal policies with regard to corporate profits could only result in a widening of the deficit margin of public spending to be covered by increased Reich borrowing. T h e operation of the self-financing controls thus tended to generate the very conditions which had been offered as a justification for their being adopted in the first place. T h e argument for self-financing also left out the alternative of financing by long-term bank credit. Assuming a shortage of available savings, it would seem that considerable use could have been made of "prefinancing" by bank credit, a traditional factor in German corporate finance. True, there were the "lessons" of the poststabilization industry loans. Given, however, the radically changed conditions in credit and banking after 1933 these could hardly have been considered as a serious objection. The structure of credit was established on a self-sustaining basis. Under the impact of the Staatskonjunktur, a high level of liquidity prevailed in the banking system to the extent of the appearance of substantial excess reserves; moreover, the flexible credit mechanism created by the reform of central banking made it possible to ensure automatic liquidity of any bank holdings of eligible long-term paper. The virtual elimination of bank credits from the investment picture was thus in direct contrast to the technical conditions in German banking, which had been exceptionally favorable for large-scale absorption of credits of this type.

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217

Both in the case of the capital market and bank credit, the neglect of the "outside" sources of financing appears then to have been not so much a matter of necessity dictated by the contingencies of the situation as one of a deliberate policy. T h e repercussions of this state of affairs are well known. In contrast with the usual pattern of an investment boom of the "liberalistic" era, expansion of investment occasioned no corresponding rise of private indebtedness. O n the contrary, the progress of the Investitionskonjunktur was accompanied by a deflation of bonded indebtedness of industry to a point where the interest charge element of industrial costs declined almost to the vanishing point. T h i s was paralleled by a steadily mounting burden of public debt. T h e placing of a major part of investment financing on the basis of internal savings implied a corollary proposition of a controlled and variable rate of profits, the level of profits in a given industry being conditioned by its self-financing needs, as sanctioned by the control authorities. High levels of profits would be allowed in industries where expansion of capacity was favored on particular grounds, while in other industries, the rate of profits would be kept at a lower level, and, if necessary, curtailed. T h e actual pattern of profits in German industry may have shown considerable deviations from this theoretical blueprint, depending upon the extent and effectiveness of the price formation controls, the existence of intra-industry differential profits, price rigidities created by the cartelized structure of industry, and individual cases of exceptionally high efficiency. T h e basic orientation of the government policies with regard to business profits is, however, substantially conveyed by this picture. T h u s , there is little point in speaking of a high or low level of profits in German industry, under the Nazi Konjunktur. T h e functional duality of profits in the Nazi economics of private investment must be borne in mind. As far as the incentive function of profits is concerned, entrepreneurial margins were generally protected within the requirements of the price stabilization policies. T h i s implied the setting up of some "normal" or "customary" rate compatible with the maintenance of a minimum entrepreneurial motivation. Aside from this, the structure of industrial prices in-

2l8

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CONCLUSION

eluded numerous areas where "super-profits" were considered to be justified by the self-financing needs of the enterprises involved. T h e rate of profits was, in such cases, an essentially variable quantity. Its level varied from industry to industry, depending upon the degree of preferential treatment which had been granted to accumulation of investment capital. This brings us to the more general problem of the relationship between prices and investment in a controlled economy of the Nazi type. While elimination of the automatic price mechanism meant that prices were shorn of their autonomous regulatory function, they retained, however, an important functional position as regulatory agents; management of the price structure—taking the term prices in its widest interpretation—was one of the most effective instruments of control. T h e relationship between prices and investment in the Nazi economy should be considered in this light. If one leaves out the cases of direct government interference with investment decisions of industry, these were still basically motivated by prevailing or anticipated patterns of cost and prices. Costs and prices, however, were not independent variables in the investment equation, but were deliberately adjusted in order to direct privately motivated investment into desirable channels. This applied particularly to government-sponsored investment of the "extra-economic" kind. The potentialities inherent in a managed structure of prices and costs put the authorities in a position to make such investment acceptable on the terms of private enterprise. A special case in price-investment relationships was the use of prices as direct agents of accumulation of investment capital through the technique of "financing by prices" (Preisfinanzierung), whereby controlled prices were made to include margins of "superprofits"—usually disguised as fictitious elements of cost in the form of depreciation allowances—in order to finance expansion of capacity. This technique provides an illustration of the extent to which the supply of investment capital could be controlled in the Nazi economy through the price system; the link between prices and generation of investment capital was in this case of the most direct and immediate kind. Another feature of the investment control mechanism was the

SUMMARY

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219

specific controls. These played a subordinate role, their function being confined largely to reinforcing the action of the controls of the general type. A rather moderate use was made of coercive measures. Imposition of compulsory investment was the exception rather than the rule, and in such cases an effort was. made to safeguard the private economic requirements of the enterprises involved. T h e positive controls were more generally in the form of special incentives designed to promote investment in certain favored areas. T h e y were especially used in connection with investment in the "synthetic" industries where, according to the case, they took the form of subsidies, bounties, compensatory duties, guarantees of cost and output and financial guarantees. T h e function of the controls was to safeguard the private economic aspect of the investment; they amounted in effect to an underwriting by the public authorities of all risks and costs inherent in the development to economic maturity of the new industries. It was shown that apart from the immediate military objectives, the long-run infant industry motivation played a definite role in these policies. A s to the specific controls of the negative kind, the most important were the investment bans which originated in the cartelregulatory legislation of 1933. T h e functional aspect of the bans was of a rather complex kind. A rather limited use was made of this control to divert investment resources from "unessential" productive branches, and the bans should be considered primarily as a cartel-regulatory device. T h e i r function as instruments of public policy was to curb overinvestment in industrial branches, the monopolistic position of which had been enhanced through compulsory cartelization and other protective measures destined to enforce "disciplined" competitive conditions; they were to prevent uneconomic duplication and waste of resources through "misg u i d e d " investment. It was seen that the actual application of the bans was frequently associated with sheltering private cartel interests from outside competition. It was frequently contended by the exponents of the national socialist economic philosophy that the operation of the economy after 1933 was based upon a particular state-enforced synthesis of privately motivated economic interests and the "superior" interests

220

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CONCLUSION

of public welfare. The relationship between government and private enterprise was defined in terms of this principle; the function and justification of the network of controls which replaced the market mechanism of the "liberalistic" era was to bring about a synthesis of this type. It is interesting at this point to formulate a general appraisal of the way in which the coordination of private and public interests was actually carried out in the particular case of private investment. We have seen that, as a matter of general policy, coercive measures played a relatively minor role, and that the carrying out of public objectives was done primarily through the channels of private economic motivation by means of controls of the steering type. The quantitative aspect of the "synthesis" of public and private motivation was a variable function. The function of the controls was not necessarily liipited to complying with the minimum requirements of entrepreneurial motivation. The carrying out of public policies was frequently associated with substantial benefits to the private interests involved, and in some areas considerations of private economic interest clearly dominated the picture. The operation of the controlled economy went a long way toward meeting the particular interests of German industry. We shall mention the virtual underwriting by the government of all private investment of the "eligible" kind, the large-scale transfer of the burden of indebtedness from the private to the public sector, the development at public cost of the privately operated "synthetic" industries, the strengthening of the monopolistic position of industrial cartels. That these benefits were quite unequally distributed among individual industries or, to put it differently, that the operation of the controls carried a deliberately discriminatory character, has been noted throughout our investigation. The extent to which any particular industry shared in the public largesses depended upon its strategic position; which, in turn, determined its bargaining power in claiming special advantage as a reward for its contribution to the national "effort." The possibility should not be excluded that other factors were also instrumental in securing government favors for particular private interests. One should not overlook, for instance, the possibility of manipulation of the control mechanism through

SUMMARY

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CONCLUSION

221

the political power commanded by certain economic groups; as illustrated in the well-known interpénétration of business interests and the high party command. Under the economic and political conditions of the Nazi regime, the concept of public interest clearly allowed of a fairly flexible interpretation, and the apparatus of economic control could be used to further the economic interests of private economic groups. A particularly favorable position was achieved by industries directly related to the rearmament and autarkic effort, wherein a preferential regime of controls was combined with a virtually unlimited public demand for their output. Although new investment was nominally financed by private means, the actual situation could be best described as "derived public financing." Through the mechanism of the price and financial controls, and the channels of corporate reserves, expansion of investment was actually financed by public funds. T h e mechanism operated in a smooth and efficient way. T h e progress of the rearmament and autarkic program was automatically accompanied by a cumulative growth of capacity. If one bears in mind the economics of Nazi public finance and the magnitude of the financing involved, it will appear that this amounted, in the last analysis, to the establishment of a continuous economic circuit, whereby a substantial portion of the national income was being drained off in the form of accrued capital investment of the industries involved. A leading factor in the rise of the Nazi party to political power was the appeal of its economic program. Ironically enough, one of the most politically effective appeals was the promise of economic rehabilitation of the middle classes, whose conditions had steadily deteriorated through the recurring crises of the post-war period. In the "New Order," the middle classes were offered a protected, state-guaranteed, economic status. In terms of its actual record, the controlled economy, while accelerating the process of concentration of business and the growth of giant industrial combines, resulted in a state of stagnation and decline in the sector of small business. As its field was chiefly localized in the less "essential" branches of production, it was small business that generally bore

2S2

SUMMARY

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CONCLUSION

the full brunt of the discriminatory nature of the controls. Moreover, in an economy which had been almost fanatically keyed to the principle of technological efficiency, the economies of size consistently operated against the smaller enterprise. T h i s state of affairs, which had been noted in the contemporary economic literature as one of the disturbing aspects of the Staatskonjunktur, was paralleled, on the financial side, by the functional decay of the small capitalist-investor, representative of the "financial middle class." Our investigation of the evolution of the capital market and of Nazi corporate finance has shown that the "euthanasia of the rentier," to use the Keynesian expression, made substantial headway in the Nazi economy. Of a more general appeal, and apparently strong enough to outweigh in the minds of wide layers of population the price of surrendering their political freedom, was the promise of economic security. T h e placing of the economy on a state-controlled basis was to bring about a regime of economic stability which the "liberalistic" set-up failed to provide. It is true that the Nazi regime succeeded in wiping out unemployment and maintaining a high level of production and employment, an achievement which was currently referred to by the apologists of the regime as an "economic miracle." T h i s achievement was essentially based upon an economic policy of the pumppriming kind, supplemented by an efficiently enforced system of controls. T h e political set-up simplified the problem of eliminating potential opposition on the part of those economic groups whose "selfish" claims would have interfered with the carrying out of the control policies. T h e problem of wages was solved by freezing the share of labor in the national income at a predetermined level of consumption. T h e share of agriculture was stabilized by a regimentation of the agricultural economy in the Reich Food Estate. Consumption was closely controlled, and kept down to a minimum politically acceptable level. Through a policy of drastic neutralization of the income and consumption effect of public spending, the top-heavy investment-based Konjunktur was held on an even keel. T h e stability of the system was, however, essentially short-lived. Its operation, which had been geared to maximization of the in-

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223

vestment sector, not only resulted in accumulation of armaments and munitions at an unprecedented scale, but also made for piling up of huge productive capacity. T h e latter development was in the nature of an automatic "by-product," reinvestment of internal reserves in accrued capacity being virtually the only outlet for the bulk of industry profits generated by the Konjunktur. On the other hand, the operation of the economy was associated with a high level of deficit spending and a mounting national debt, the "real" aspect of which was an increasing rate of transfer of resources to the investment sector. The latter process was obviously limited, in the long run, by the volume of available resources, in particular, the labor reserves. T h e dynamics of Nazi economics resulted in the generation of internal strains which grew in intensity with the progress of the Konjunktur. It resulted in an increasing pressure for expansion of the economic and political sphere of influence of the Nazi state, in order to widen the economic basis of the system. Sooner or later, the phase of recovery and rearmament was bound to be succeeded by a phase of economic and political expansion, if necessary, by the force of arms. The road of German aggression, which ultimately led the Nazi state to a catastrophic collapse, was traced long before the actual outbreak of the second World War. It was an inevitable stage in the dynamic evolution of the "New Economic Order."

BIBLIOGRAPHY

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Fezer, Hans. "Vom fiskalischen zum wirtschaftspolitischen Mineralölzoll." Der Deutsche Volkswirt, X (Dec. 6, 1935). Fischer, Otto. "Die fehlerhafte Kreditpolitik." Untersuchung des Bankwesens. Berlin, 1933. Part I, Vol. I. Friedrichs, Adolf. "Die Finanzierung der Arbeitsbeschaffung." BankArchiv, X X X I I I (i933-»934)"Die Finanzierung der 'Staatskonjunktur.' " Ibid., X X X V I I (Jan. 1, 1938). Funk, Waither. "Die wirtschaftliche Aufgabe." Der Vierjahresplan, II (>938). Gebhart. "Nachdenkendes zum Bilanzsteuerrecht." Deutsche Steuerzeitung, 1943. Glaeser, Martin G. O u t l i n e of Public Utility Economics. New York, 1927. Grebler, Leo. "Work Creation in Germany." International Labor Review, X X X V (March, April, 1937). Guillebaud, Claude William. T h e Economic Recovery of Germany. London, 1939. Halem, Ch. von. "Selbstkosten in der Preisbildung." Der Deutsche Volkswirt, X I (May 14, 1937). Hasenack, Wilhelm. "Die Anlagenabschreibungen im Wertumlauf der Betriebe u n d die Sicherung der Wirtschaft." Zeitschrift für Betriebswirtschaft, XV (1938). Huhle, Fritz. "Gewinn nicht Profit." Zeitschrift für Betriebswirtschaft, X (1933)Ilau, Hans. "Die deutsche Zementindustrie." Die Wirtschaftskurve, Institut f ü r Konjunkturforschung, Berlin. Konjunkturstatistisches H a n d b u c h . 1936. Statistik des In- und Auslands. H a m b u r g . Vierteljahreshefte zur Konjunkturforschung, Parts A and B. Weekly Reports. Wochenbericht. J a h r b u c h der nationalsozialistischen Wirtschaft. Stuttgart and Munich, 1935 and 1937. Jahrbücher für Nationalökonomie und Statistik. Jena. Kartell-Rundschau. Düsseldorf. Keiser, G ü n t h e r . "Strukturwandel der Bankbilanzen." Bank-Archiv (•939)Keiser, Günther, and B e r n h a r d Benning. "Kapitalbildung u n d Investitionen in der Deutschen Volkswirtschaft 1924 bis 1928." Vierteljahreshefte zur Konjunkturforschung. Special issue No. 22, 1931. Keynes, J o h n M. General T h e o r y of Employment, Interest and Money. New York, 1936.

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Kohler, Alfred. "Die neuen Vorschriften des Anleihestockrechts." Bank-Archiv, X X X V I I (Dec. 15, 1937). Kosiol, Erich. "Der Jahresabschluss der Aktiengesellschaft." Zeitschrift für Betriebswirtschaft, XIV (1937). Krosigk, Schwerin von. "Finanzierung des Wirtschaftsaufbaus." Der Deutsche Wirtschaftsaufbau. Berlin, January, 1939. Special edition of Der Vierjahresplan. Lampe, Hans. "Die Zusammensetzung des LSÖ Gewinns." Zeitschrift für Betriebswirtschaft, X V I I (1940). Lange, K. "Die Finanzierung neuer Anlagen." Der Vierjahresplan, I (»937)League of Nations, Economic Intelligence Division. Money and Banking' 1 939- Geneva. Levy, H e r m a n n . Industrial Germany. Cambridge, England, 1935. L i e f m a n n , Robert. Cartels, Concerns a n d Trusts. London, 1932. Mackenroth, Gerhard. "Bericht über den Vierjahresplan." Jahrbücher für Nationalökonomie und Statistik, C X L V I I I (1938). "Deutsche Industriepolitik 1933." Ibid., C X L (1934). Mahn, Kurt. "Die Kommende Steuerreform." Der Deutsche Volkswirt, VIII (June 29, 1934). "Die Reform der Reichssteuern." Ibid., IX (Oct. 26, 1934). "Fragen der Bilanzierungspolitik." Ibid. (Jan. 9, 1935). "Verbesserte Kreditüberwachung im Bankbetrieb." Ibid. (Aug. 9, 1935)Mehrens, Bernhard. Die M a r k t o r d n u n g des Reichsnährstandes. Berlin, 1938Meinhold, W . "Volkswirtschaftliche Grundsätze der Preisbildungspolitik im Vierjahresplan." Jahrbücher für Nationalökonomie und Statistik, CL (1938). "Die deutsche Kriegspreispolitik." Jahrbücher für Nationalökonomie und Statistik, C L I (1940). Mende, Franz. "Arbeitsfront u n d Sozialpolitik." Jahrbuch der nationalsozialistischen Wirtschaft, 1937. Merlin, Sidney. " T r e n d s in German Economic Controls since 1933." Quarterly Journal of Economics, L V I I (Feb., 1943). Miksch, Leonhard. "Die Wirtschaftskontrolle der Überwachungsstellen." Die Wirtschaftskurve, X V I (1937). "Gewinn als Ausgleichfaktor." Ibid. (1937). "Vom Preisstop zur Kostenkontrolle." Ibid., X V I I I (1939). " W i e arbeitet die Preisaufsicht." Ibid., XVI (1937). Moulton, H. G. "Commercial Banking and Capital Formation." Journal of Political Economy, XXVI (1918). Moulton, H . G., a n d Others. Capital Expansion, Employment and Economic Prosperity. Washington, D.C., 1940.

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INDEX Agricultural industries, investment control, 20m, 209-12; compulsory cartelization in, 211; see also Fertilizers; Food; Milk Agriculture, price level of consumers' goods, 39,40n; elimination of free market, 52; labor control, 55n; policies keynoted by pressure upon costs and prices, 52, 207«; market-regulatory organizations, "¡on, 210, 21m; Osthilfe, 118, 119 Aluminum industry, 181, 209 Arbeitseinsatz, 54 Arbeitsgemeinschaft der Industrie- und Handelskammern, 67n Armament phase of the economy, 25-46; Four-Year Plan, 13, 28-31, 43; periods of "work creation" and rearmament differentiated, 13; financing under, 31-35; sources of financing, 35-37; shift from reemployment to armament as a goal of policy, 25, 26n; expenditures, 26, table, 27; data of production, investment, and national income, 1932-39, 37-39; private investment under, 42-46; prices, 173, 178, 181; problem of differential profits, 178; positive controls used with projects, 185; favorable position achieved by industries related to, 221; see also War financing Aryanization procedure, 83n Aufsichtsrat, 144, 145 Austria, conversion and reequipment of industry, 190; enterprises taken over by the Reichswerke Hermann Goering, 198 Autarkic production program, 28, 139, 199, 200 Automobile industry, 181; concessions to, 18; tires, 207 Autostrades A. G., Reich, 15, ig Balance sheets, device of double, 130; management given jurisdiction, 145; "legalized falsification" of, 146« Ban on private issues, 107«; see also Embargo

Bank fur Industrie-Obligationen, 117, see also Industriebank Banking Commissioner, 62, 112, 113 Banking Investigation Committee, 62,9m Banking Supervisory Board, 112,113 Banking system, role in credit cycle, 58 ff.; statutory limitations upon expansion of central bank credit removed, 61; reform of Reichsbank, 61; of commercial banking, 62, 63; flexible mechanism of central banking, the key element in credit control, 63; financing by longterm bank credit, 74, 89-98, 112-21, 216 (see also Long-term financing); savings banks, 82, 101 f., 104, 105; the "big banks": 91, 93; rehabilitation under emergency legislation of 1931-32, 92; movement of balance sheet items of commercial banks, 93-96; investment credit under Four-Year Plan, 96; extent to which decline in private borrowing was compensated by financing of public debt, 97; twofold outlet after 1939: war financing and expansion throughout occupied territories, 98; Girozentralen, 10m, 104; Credit Act of 1934, 112 f.; reorientation of commercial, towards public financing, 117; bank investment credit and small business: the Industriebank, 117-21; Golddiskontobank, 131; credits in behalf of Austrian industry, 190; see also Investment credit; Reichsbank Base metals, investment in, 181, 185-87 Benck, W., quoted, 130« Bergius process, 19311 Betriebsgemeinschaft, 54 Betriebswirtschaft school, 14m, 17m; prominent exponents of, 142« Bonbright, James C., quoted, 122 n Bonds, government: as investments of insurance companies, 103-5; u s e °f excess business profits as outlet for, 132; diversion of market funds from private equities to, 134 Bonus, reemployment, 11

23*

INDEX

Bottle cartel, 205 Bourses, see Stock exchanges Brandt, Karl, quoted, s i in Braunkohle-Benzin A.G. (Brabag), 1931, >94" Brinkmann, Rudolf, quoted, 107 Bruning government, 9, 491 Briining Program, 9-13 Building industry, 43 f., 106, 17m Buna G.m.b.H., synthetic rubber operating concern, 1870 Business, private: relationship between government and: state ownership repudiated, 5; small business and bank investment credit: the Industriebank, 117-81; see also Entrepreneurs; Investment, private Business credits, contraction of, 95; types of lending covered, 96; see also Credit Business savings, nondistributed, 122-47; see also self-financing; Reserves Capacity, incentive for expansion by compulsory cartelization, 20s; excess, 2o6n; see also Investment; regulation of, in agricultural industries, 211 Capital, foreign, 74, 91 f., 95n; tax on increases of corporate capital to raise revenue, 136; specific, 165; "necessary," 171; "specifically earmarked," 215; changes in generation and allocation of, summarized, 214 f.; see also Long-term financing Capital formation, self financing (q.v.) as a functionally essential element of, 124 ft.; Nazi policies re, 135; profits as medium of, 164; place and extent of, as function of government price policies, 180 Capital goods, term, 2in; statistics, 21, 38; reason for promotion of industries, 22n; price control in, 50; see also Investment goods Capital market, use of short-term funds, 75; supply of long-term capital for new investment, 76-89; government controls, 98-121 (see entries under Controls); resources earmarked for Reich deficit financing, 110; effect of dividend limitation measure, 132, 133 Cartel Court, 7 i n Cartel Law, 71, 207; excerpt, 200 Cartels, pre-1933 organization, 69; placed

by the Nazi government under public supervision, 70, 163, 165; important enactments, 70 f.; compulsory cartelization, 71, 202, 211; Decree against Abuse of Economic Power, 71; application of investment bans in connection with cartel regulatory action, 71, 202-7, 219; opportunities to press advantages, 72, 220; curbs on abusive practices of, 72n; official policies re prices and profits, 166, 174, 180; protection against "outsiders" by strengthening of, 175, 220; cost cartels, 176; in agricultural industries, 211 Cartel structure, effectiveness of price control enhanced through medium of, and in cooperation with, 49 f., 72; accumulation of reserves favored by, 149 Cement industry, 204, 206 Central Associations, in agriculture, 7on, 210, 21 in Central Committee of Entrepreneurial Associations, 670 Chambers, entrepreneurial, 67n, 207 Chemical industry, share in financing of Zellwolle, 195 ff. Chemical substitutes of natural raw materials, 199; see also Synthetic industries Cigarettes and cigars, 206, 208 Civil engineering projects, dual function under "work creation," 25 Coal liquefaction process, 193™ Coal mines, Ruhr: group financing by, •94. '95 Commercial banks, see Banking system Commissioner for Price formation, see Price Commissioner Committee for Investigation of the Banking System, purpose and date of set-up, quoted, 6on Competition, "unethical," i8on; official opposition against, 162, 163, 175, 177 Compulsory investment, defined, 184; as control device, 191 f.; group financing (q.v.), 192 ff.; in connection with cartelization in the agricultural industries, 211 Confidence Board, 56n Congress of Industry and Commerce, German, 67 n Construction, data re new, 3gn; table, 4on; restrictions on materials and labor, 43

INDEX Consumer goods, price relationships of investment goods and, 38, 39. 4on; restrictive policy re industries, 40 Consumer industries, controls in, 50, 51 Consumption, level o f , and the Investitutionskon junk tur, 39-42; restrictive management, 40, 100; relationship to volu m e of savings, 83; study of labor budgets, ggn Contracts, subsidy, J 86; profitability guarantee, 187, 190 f. Controls, carrying out of objectives achieved by network o f , coercive powers of government, 4; indirect, or steering type, 4, 6; four groups into which divided, and their roles, 5 f.; entrepreneurial decisions influenced by, 6, 29, basic framework set up, then underwent changes and revisions, 20; steering of consumption with regard to its monetary and real aspects, 40; basic elements, 47-73; steering of the price mechanism, 47-54; cartels integrated in the machinery of, 49 f., 72, 202-7; measures of control of production, marketing, and consumption, 51; of labor and wages, 54-58; credit controls, 58-64, 112-21; foreign exchange control, 64-66; entrepreneurial organizations in the controlled economy, 66-73; used to further interests of private economic groups, 72, 221; in the capital market, 98-112; diversion of institutional savings, 101; regulation of savings-bank investments, 101 f.; insurance institutions, 102-5; restrictions on private financing, 104-12, 207-9; dividend restrictions, 107«, 127, 131-36, 140, 145, i6gn; controls in field of long-term bank credits, 112-21; credit control agencies armed with blanket authority of intervention, 113; of long-term bank credits, 115-17; in relation to selffinancing of business, 127, 130-47; structure of corporate taxation: taxation of income, 136-38; fiscal inducements to internal reinvestment of profits, 138-43; strengthening of management control of corporations, 14347; analysis of the effects upon costs and prices, and profitability of industry, 148-82 (see entries under Costs; Prices); effects upon industrial costs, 149-63; ef-

233 fects of the price and profit policies, 163-82; "exception clause" of the Nazi controls, 173; stimulation of industrial efficiency, 170, 172, 177, 191; specific investment controls, 183-212, 219; general, as compared with specific, 183; distinction between, and functions of, positive and negative, 184; nature and functions of the positive controls, 185-200 (summarized, 198, 219); subsidies, 185 ff.; R e i c h guarantees, 189-91; compulsory investment, 191-200; g r o u p financing: in synthetic oil, 192-95; in the Zellwolle Industry, 195-97; mixed financing, 197-98; stimulation of the "synthetic" and autarkic industries, 200; negative, investment bans, 200-212; in the agricultural industries, 209-12; discriminatory character: possible manipulation of the control mechanism to further private interest, 220; see also titles of entries under this heading, e.g., Labor; Prices; T a x a t i o n ; etc.

Corporate financing, see Depreciation; Investment, private; Reserves; Selffinancing Corporation Law of 1937, 136«; 143-47 Corporations, management control of, 143-47; restrictions on n u m b e r o f , 144 Correct price, see "Just" price Cost accounting, campaign to improve practices, i67n; system set up by L S Ó , i/>. >73 Cost cartels, 176 "Cost competition," curtailing of profit margin as means of enforcing, 170 Cost degression effect, 156 ff. Costs, movement of prices and, 1933-39, 3g; incidence of controls upon, 47, 14963; industrial prices a n d , in relation to government controls, 148 f.; raw materials, 149-52; wages, 152-56; overhead charges, 156-58; interest charges, 158-60; depreciation, 160-63; "economically justified," 167; standard schedules, 167n; " G u i d i n g principles for computation of prices on the basis of . . ." (LSO), 170-73 passim, 177, i82n; financing by prices based on, 181 f.; see also Prices Credit, controls, 58-64; role of the banking system, 58 f., 61, 63; deficit spend-

«34

INDEX

Credit (Continued) ing through expansion of public, 5g, 60; objectives and primary function of controls, 60; central bank, key element in Nazi structure of credit, 63; financing by, and control of, long-term bank credit, 74, 89-98, 111-21, 216; decline in demand for business credits, 95; requirements of safety and liquidity of bank credits, 115; bank investment credit and small business: the Industriebank, 117-21; mechanism of, for emergency war financing (q.v.): facilities provided, lion; grants to synthetic rubber industry, 187; credits in behalf of Austrian industry, igo Credit Act, 62, 63, 101; relevant provisions, 112 f.; extent of control value, 116 Credit committees, regional, 120 Currency, paper, expansion of, 35n Current account, 89; credits outstanding as advances on, 90 Cyanamid industry, 204 Cyclical fluctuations, elimination of, 4 Dairy farming, 2i2n; see also Milk Darge, Johannes, quoted, Dawes Plan, 118 Debt, see Indebtedness Deficit spending, controls accompanying, 58n, 5g; as ultimate source of business financing, 60 Delivery certificates, 32 Depreciation, allowances, defined, 1220; of short-lived goods, 139; as an element of cost, 160-63; t w o aspects of: real cost aspect, 162; as formal or fictitious cost: liberal fiscal policy with regard to, 163; approved rates in case of armament orders, 182; see also Equipment; Self-financing; Superdepreciation Depression, recovery from, 8-13, 21, 37 f., 58, 59; unsettled financial conditions following, 85; see also Work Creation Deutsche Erdol, A. G., 194n Deutsche Volkswirt, Der, excerpts, 1350, 18m Differential rent (profits), 173-79; in prices administered by cartels, 174; in the noncartelized sector, 176; official position, in regard to, 177

"Directives for Price Formation in Public Orders, (RPÖ), i73n Disarmament Conference, Germany's withdrawal, 25 Dividends, rate set up as ceiling, i6gn; restrictions on, 10771, 127, 131-36, 140; allocation to management of jurisdiction over policies, 145; recapitalization privilege, 127 ff., 133, 136 Duties, import, 188, 195, 196 Earnings, corporate, reserves derived from nondistributed, 122-47 ( s e e Reserves); labor, data on wages and earnings, 153 "Economically just," price, 51, 167, 170; profit, 170 Economic Association of Flour Mills, 21 in Economic Association of Milk Processors, 21 in "Economic authorities," nature of, 68« Economic Court, 69«, 7 m Economic leagues, yon, 20m Economic measures of the pre-Nazi governments, 8-13 Economics, Ministry of, 68n, 71, 101, 106, 107, 112, 120, 132, 186, 193, 195; powers conferred by Cartel Law, 200; actions in connection with investment bans, 201, 204»!, 2070, 209; transfer of investment control authority from, 207 Effektensparen, defined, 84; decline of, 214,216 Efficiency, controls to stimulate, 170, 172, '77. ' 9 ' Elektrowerke, ig4n Embargo (or ban) on private issues, 1070; as an investment control, 106, 107, 109 Employment, a state of full, as a goal, 3; priming devices to stimulate, 11 f.; work-creation (q.v.) policy, 14; Laws to Reduce Unemployment (Reinhardt Law), 14, 19, 139n; high level maintained, 222 Employment certificates, 150 Entrepreneurs, Nazi policies in regard to, 5; controls governing decisions, 6, 29, 184 ff.; projects under contracts with public authorities, 15; status under the "leadership principle" in labor relations, 56 f.; changes in structure and function of the entrepreneurial organi-

INDEX (see a i s o

zations after 1933, 66-73 Controls); self-financing from point of view of enterpreneurial motivation, 128-30; strengthening of corporate control by management, 143-47; incentive function of profits as an element of price, 164 Enterprises, regulation of profits and profit margins, 165,166 ft.; campaign to improve cost accounting practices, i67n; controls to stimulate or reward efficiency, 170, 17*, 177, 191 Equalization fund, 178 Equalization subsidy, 186 Equipment, incentives to investment in, 139 f., 14« f.; methods of writing off, 17971; see also Depreciation; Superdepreciation "Exception clause" in regulatory measures, 173 Excess capacity, 44, 2o6n Excess profits tax, 137, 138 Exports, need for expansion of, 3; shifts in composition of, 65«; favoring of, under the New Finance Plan, 142; wartime financing of, n o n Falkenhausen, von, quoted, 13271 Feder, Nazi economic theorist, 62n Fertilizers, 199«, 207 Finance, Ministry of, 68n Financial guarantees, see Guarantees Financing, procedure in work creation program, 14 f., 58; in the rearmament phase, 31-35; alleged conflict between Schacht and Nazi "monetary radicals," 3271; shift from long-term borrowing in the market to Li-Loans, 3471; sources, 35-37, 74; effect upon the economy, 3739; of private investment (q.v.) from external sources, 74-121; through the capital market, 75-89; by long-term bank credit, 89-98; controls of: in the capital market, 98-112; in the field of long-term bank credit, 1 1 2 - 2 1 ; "financing by prices," 180-82; mixed financing, 197 f. Fischer-Tropsch process, 19371, 194 Flour mills, cartelization, 211 Food, Ministry of, 68tj, 71 Food economy, autarkic goals, 28; elimination of free market, 52; relation to cost of living and wages, 5271; imports, 66; aim of a planned development of

»35

national food resources, 212; see also Agricultural industries Food Estate, 5271, 7071, s o m , n o , s u ; building up of control machinery of, 21171 Foreign capital, 74, 9571; cause and results of inflow, gi f. Foreign exchange controls, 64-66; preNazi measures, 64, 65; under the Schacht "New Plan," 64 f.; control of, related to private investment, 66 Four-Year Plan, objectives and role of private investment under, 13, 28-31,42,43, 45, 66, 139; price action under, 50 If., 180; labor control, 55; role of bank investment credit, «971, 96; relaxation of ban on private issues in connection with, 109; financing under the Plan, 111, 116; Industriebank expansion under, 119; investment outlet for reserves, provided by "tasks" under, 127; price and profit policies, 164, 180, 181; positive controls used with investment projects, 185, 187; guarantees described, 190 ff.; Reichswerke Hermann Goering {q.v.) set up, 197 Friedrichs, Adolf, quoted, 8 Funk, president of Reichsbank, 3271, 1 ion Gasoline, import duties, 195 Gebhardt Ministerialrat, on depreciation policies, 1827t General assembly, restrictions on competence of, 144, 145,146; see also Corporation Law; Stockholders German Congress of Industry and Commerce, 67 n German Institute for Business Research, quoted, 4871 "German price," principle of, 18671 Girozentralen, 104; function, loin Glanzstoff, Vereinigte, 195, 19671 Glass-container industry, 205,208 Golddiskontobank, 131 Government, Nazi, see Nazi government pre-Nazi: economic measures, 8-13 Grain economy, organization, 21 in Gross operating revenue, defined, 155 Group financing, as a compulsory investment device: function and organization, 192; technique applied to lignite mining industry, 192 f.; to synthetic oil, 194 f.; to Zellwolle, 195-97

236

INDEX

"Groups," Economic, hierarchical levels, 6 7 « ; elimination of clashes between cartels and, 7*n Guarantees, financial (Reich), use as control device, 189-gi; granted to synthetic rubber, 189; to Austrian armament industries, 190; to synthetic oil, 195; to Zellwolle, 196 "Guiding principles for computation of prices on the basis of costs . . ." see LSO Hasenack, W „ 14271; quoted, 16271 Hauptvereinigungen, 70n, 210 Hermann Goering Reichswerke, see Reichswerke . . . "Hidden financing," basis of wartime financing policy, 102 Hidden reserves, defined: distinguished from open reserves, 122; see also Reserves High-income groups, savings, 83, 214 Holding companies (Konzerne), 24n Honor Courts, 69» Hours of labor, 14, 56, 207*1 I.G. Dye Trust, 18771, 193«, ig47i, lgr,, ig6n Immediate (Sofort) Program, 9 - 1 3 , 1671 Import duties, 188, 195, 196 Imports, adjustment under the "New Plan," 64«, 65; important elements of, 66; duty on crude rubber, 188; on gasoline, 195; on natural textile staples, 196 Incentives to private enterprise, 4, 16-18, 186; see also Controls; Investment, private Income, corporate: taxation of, 127, 129 f., 136-38, 139, 142; gross, movement of payrolls and gross income compared, '55 national: comparative data: of production, investment and, 2 1 , 37 f.; of "extraordinary" expenditures and, 27; compared with volume of savings, 80, 8 1 ; share of capital formation in, 100; open reserves compared with, 124 f. Income groups, see under High income; Low income Incorporation, restrictions upon setting up of new incorporated concerns, 144

Indebtedness, shift of, from private to public sector, 158, 2 1 7 Individual, extent of freedom or coercion in economic behavior, 4 Industriebank (Bank fur IndustrieObligationen), supply of credit to small business, 1 1 7 ; functions, role, 1 1 8 - 2 1 ; financing of war contracts, 120 Industry, output and sales in certain key branches, 45; table, 46; changes in structure and functions of entrepreneurial organizations in, 66-73; restriction on financing in the market, 107 ff.; see also names of industries, e.g., Oil; Rubber; etc. Inflation, 33; danger through expansion of currency, 3571; price control as a means of checking, 47 Institute for Business Research, see under Institut fur Konjunkturforschung Institute for Employment and Unemployment Insurance (Reichsanstalt), 15, '9. 5 5 " Institut fur Konjunkturforschung, quoted, 2271, 3471, 5 1 , 65, 159; studies by, '54. ' 5 7 . ' 5 8 1 , »61 Insurance, Supervisory Office for Private, 108 Insurance institutions, as source of capital formation, 74; funds and their investment, with tables, 77-84; effect of reform of social insurance, 99; diversion of resources, 102-4, 1 0 5 ' ,c>8; relationship between the Reich and the social insurance agencies, 103-5 Insurance Law, 103 Interest, bonification certificates, 16; role of rate weakened, 43; accruals on savings, 830; high short-term rate, 8571; elimination of, as a regulatory factor, 88; foreign capital attracted by high rates, 9171; as an element of industrial costs, 158-60; " n e t " interest rate, 1 7 1 , 17271; rate on "necessary capital," '7' Intermediate financing, 8g; see Long-term financing Inveslitionskonjunktur, trend toward, 22, 38; level of consumption and, 3g-42; undisturbed development insured by price stability, 214; accompanied by deflation of private indebtedness, « 1 7 Investment, interpretation of the term.

INDEX j n , 6; Nazi policies and objectives, 3 ff., high level of, the outstanding feature of the Staalskonjunktur, 3; comparative data of production, national income and, with tables, s i , 37 f. compulsory, 184; defined, 191; as control device, 191 f.; group financing (q.v.), 192 if.; combined with cartelization in the agricultural industries, 2 1 1 private: dependence on public economic activities, 5; under the Staatskonjunktur, 8-46; behavior under the recovery programs of pre-1933 governments, 10-13 passim; subsidies and other incentives, 16-18; restrictive policies and measures, 18 f., 20, 43-46, 10412 (see also Controls); behavior of, under the "work creation" phase, 22-25; net investment, table, 23; responsibilities, and changed position, under FourYear Plan (q.v.), 28 ff.; data of production, investment, and national income, 1933-39, 37-39; the Investitionskonjunktur and the level of consumption, 39-42; behavior under the rearmament phase, 42-46 (see entries under Armament program; Military preparedness); bearing of price and profit controls upon economics of, 53, 58; control of foreign exchange related to, 66; financing (q.v.) from external sources, 74-121; financing from internal sources, 122-47; self-financing, 122-28; self-financing motivation and controls, 128-47; fiscal inducements to internal reinvestment of profits, 138-43; relationship between profits and, 148; generation of business surpluses instrumental in internal financing of, 148-82; specific controls, 183-212; measures of compulsory investment included among positive con trols, 184, 185; passive role in Reichswerke Hermann Goering, 198; investment bans, 200-212; over-all picture of. with conclusion, 213-23; factors related to military objectives, 213; long-run factors, 214 ff.; small business, 117 t., 221 public: meaning of term, 3m public spending, 5, 213; measures, of the pre1933 governments, 8-13 passim; of Nazi government from 1933; 14-16; share in recovery, 22, table, 23; see also Military

237

preparedness; Rearmament; Work Creation Investment bans, 200-212; measures designated by the term, legislative basis, 200; industries and trades in which restrictions were in force: limited application, 201; applied in connection with regulation of cartels, 202-7; 3 5 a direct investment control, 207-9; linked to social and political objectives, 208; in agricultural industries, 209-12; summary, 219 Investment goods, term, 2 i n ; statistics, 2 1 , 38; price relationships of consumers' goods and, 38, 39, 400; see also Capital goods Iron and steel, see Steel Jews, Aryanization procedure, 83*1 " J u s t " price, concept of, 48n, 174, 177*1; "economically just" pricc, 5 1 , 167, 170; profit, 167, 170 Keiser and Bcnniug, cited, 8811 Konjunktur, 114, 138, 223; diversion of resources into nonconsumption channels, 100; policies by which held on ail even keel, 222; see also Investitionskonjunktur; Staatskonjunktur Kontinentale Oel Gesellschaft, 11 in Konzem, term: formation of, 24 Labot, working hours, 14, 56, 207«; restriction of purchasing power of, 40; priority system, 43,44; control of, 54-56; unions replaced by Labor Front, 54; Reichsanstalt, one of the organs of control, 55; allocation and distribution of, 55, 184, 2tyjn; leadership principle in relations between management and, 56 t.; results of labor-budgets study, 99«; higher earnings as result of increased productivity, 154; see also Employment; Wages and salaries Labor, Minister of, 103 Labor-book mechanism, 55 Labor Front, defined, 54 Labor Regulation Act of 1934, 56 Labor trustees, 56 f. Law Concerning Capital Investment by Corporations, objectives and effects, '3> 35

INDEX

«S»

Law Concerning Distribution of Profits by Corporations (Loan-Reserve Act), ivjn,

tion of prices on the basis of costs . . ."), 170-73 passim, 177, 182«

iji

Law for the Regulation . . . of Power (Power Economy Law), 5*1, 209 Law Modifying the Cartel Decree, 70 Law on Compulsory Cartels (Cartel Law), 71, 207; excerpt, 100 Law on T a x Concessions, object and effects, 138-41 Laws to Reduce Unemployment (Reinhardt Law), 14, 19, 1391 Leadership principle, 143; in relations with labor, 56 f., application of, to Reichbank, 61; applied to entrepreneurial organizations, 68; Industriebank reorganized on lines of, 118 Lead paints and other articles, 207 Leather industry, 151 Liefmann, Robert, cited, 202 n, 203» L i f e insurance, see Insurance Lignite mining industry, group financing in, 192-94 Li-Loans, 34n Liquidity of bank investment credits, 115 Livestock economy, 2ion Loan reserve, 131, 135 Loan-Reserve Act, 10771, 131 Loans, Reich: taxes converted into, 1 1 » ; Li-Loans, 34n; to small business through Industriebank, n 8 f f . Loan Stock Act, 1070, 13m; see also Loan Reserve Act Loeb, Fritz, 29; quoted, 3on Long-term financing, general sources, 74; capital market a clearing place between suppliers and users of long-term funds, 75; relation to short-term financing, 75; supply of long-term capital, 7684; individual savings, 76 (tables, 78, 80, 81, 82); institutional holdings of securities, with tables, 77-84; outlets for long-term capital, 84-89; financing by long-term bank credit, 89-98; government controls, 98-121; controls in field of long-term bank credit, 112-21; bank investment credit and small business: the Industriebank, 117-21; summary and conclusion, 216 Low-income groups, consumption standards, 41; spending and savings, 83, 98, LSO ("Guiding principles for computa-

Machine building industry, 140, 141; restrictions in, 44 Mackenroth, Gerhard, quoted, 20 Magnesium metal, 209 Mail-order houses, 208 Management, labor relations, leadership principle in, 56-58; strengthening of corporate control by, 143-47; jurisdiction over hidden reserves, 13071; over general dividend and reserve policies, 145; emancipation from stockholders' control, 144; relation to general assembly, 144, 145, 146; organs in German corporate practice and their functions, '44«

Mansfield agreement, 186 Margarine industry, 211 Margins, profit, 164 passim; see also Profit Marketing process, controls, 51, 52 Market Leagues, 707» Market mechanism, see Price and market mechanism Market-regulatory organizations, agricultural, 7on, 210, 2 1 m Marktordnung, 52 Meinhold, W., quoted, i68n Mengenkonjunktur, 47, 70, 149, 157 Metals industry, 181, 209; regime of subsidies controlling investment, 185-87 Middle classes, offered a protected economic status, 221; fate of small capitalist investor, 222 Migration of labor, 55 Miksch, Leon hard, ci ted, 170H Military preparedness, investment policies dictated by military objectives, 3; integration of industry under program of, 13; incentives to industries important to, 17 {.; armament program (q.v.), 25-46; necessity for conservation of resources, 184; economy of 1933-39 not exclusively a function of military orientation, 214 Milk economy, 21071, 21 in; reorganization of processing industries, 2i2n Milk Economy, Central Association for the, 7071, 21 in Milk Plan, 21271 Mining, subsidies for relief and protection of, 185-87

INDEX Mitteldeutsche Stahlwerke, 1941 Mixed financing technique, 197 f. Monetary policies: expansion o( paper currency, "Monetary radicals" of Nazi party, 3»n Money market, see Short-term financing Monopolies, pricing, 174, 180; protection by investment bans, 203; position of cartels (q.v.) strengthened, 220 Mortgages, shifts in status as investments, 88, 102 f., 104 S.; restrictions upon issues, effect upon investment of savings banks, 101; embargo and supplementary decrees of 1938, 106; resumption of issues, 109 if.; see also Bonds Nathan, Dr., quoted, 133« Nazi government, policies with regard to investment, 3 ff.; unlimited authority of intervention in economic affairs: powers of coercion, 4; relationship between private business and, 5 Nazi party, monetary radicals of, 3sn; interpénétration of business interests and high party command, 221; factors in rise to political power, 2 2 1 - 2 3 "Necessary capital," 171 Negative controls, 1 8 4 , 2 0 0 - 2 1 2 ; see under Controls; Investment bans New Economic Order, economic status of middle classes, 221 New Finance Plan of 1 9 3 9 , 3 3 - 3 5 , n o , 111, 1 4 3 ^ 1 ; concessions favoring reinvestment of profits, 142 "New Plan" of 1934, for control of foreign trade, 64 f., 65n Nicklisch, H., 1420; cited, 187, 192 Nitrogen industry, iggn, 204 Northrop, Mildred, quoted, 90« Nuremberg racial laws, liquidation following, 83n Occupied territories, expansion of German industry throughout, 111, 198 Office of the Four-Year Plan, 28n Oil, synthetic, 190, 191, 193; production processes, 1931; group financing, 194 f. Oil industry, 11 in, 209 Open reserves, 122; see also Reserves Osthilf e, 118, 119 Output and sales in key industries, 193239, 45; table, 46 Overhead charges as an element of cost,

»39

1 5 6 - 6 3 ; interest charges, 1 5 8 - 6 0 ; depreciation, 1 6 0 - 6 3 Ownership and control of corporations, cleavage between, i29n

Papen Program, 9-13, 17; reasons for failure of, isn Payrolls, see Wages and salaries Physical resources, rationing of, 6, 44, 184 PfUchtgemeinschaft, described: function, ig2; operating subsidiary of, in lignite hydrogenation, 193; procedure followed in organization of, 1941 Positive controls, 1 8 4 , 1 8 5 - 2 0 0 ; see under Controls; Subsidies; Group financing; Guarantees Post Office, Reich, 12, 15, 19 Potash industry, 20371 Power Economy Law, 5n, 209 Power production and distribution, regulation of, 209 Pre-financing, theory of, 58n Preiskonjunktur, 47, 149 Press, financial: attitude towards dividend limitation, 1351 Price and market mechanism, traditional: replaced by control apparatus, 5, 51, 213; effect upon private investment if allowed free course, 66; policies governing controlled price system to replace, 163 ff.; automatic regulatory function eliminated, 213 Price Commissioner, 49«, 50«, 51, 52; decrees, 1 7 0 T I , i73n; quoted, 1 7 7 Prices, objectives and methods of control, 6 , 4 0 , 4 7 - 5 4 ; policies of Papen Program, 10, 13«; movement of prices and costs, >933-39- 39. 4°"; price cutting and price profiteering, 48; concept of the "just" price, 4 8 f t , 5 1 , 1 7 4 , i77n; control of, through medium of, and in cooperation with, the cartel structure (q.v.), 49 f., 72; under Four-Year Plan: 50 ff., 167, 169 ff.; "economically justified" prices and costs, 5 1 , 1 6 7 ; isolation of domestic, from impact of foreign prices and costs, 6 5 , i 8 6 n ; industrial costs and, in relation to government controls, 148 £.; industrial raw materials compared with finished goods, 1 5 0 - 5 2 ; price policies and depreciation, 162 f.; price policies and the profit factor, 1 6 3 - 6 6 ; two chains of causal incidence in terms

240

INDEX

Prices ( C o n t i n u e d ) of policies, 166; i n c i d e n c e of p r i c e a n d profit policies, 163-82 (see also entries under Profits); L S Ö ( c o m p u t a t i o n of prices o n basis of costs), 170-73 passim, 177, 182«; f a v o r i n g of cartels a n d disc o u r a g i n g " u n e t h i c a l " c o m p e t i t i o n , 175; d i f f e r e n t price policies l i n k e d w i t h sup e r d e p r e c i a t i o n , i 7 g n ; a c t i o n to relieve w a r t i m e pressure o n , 178; t e c h n i q u e of f i n a n c i n g by prices, 180-82; price concessions as a c o u n t e r p a r t of t h e " b a n s , " 206; stabilization of price structure s u m m a r i z e d , 214, 218; see also Costs Price stabilization, t e r m , 48 Price Stop, 52, 152 P r i m i n g devices of P a p e n P r o g r a m , 10 f., ign " P r i n c i p l e s f o r c o m p u t a t i o n of prices on t h e basis of costs . . . ," see L S O P r i n t i n g trades, 206 P r i o r i t y system i n allocation of r a w materials a n d l a b o r , 43 f., 184 P r i v a t e a n d p u b l i c m o t i v a t i o n , synthesis o f , 4, 5, 2 i g n Processing industries, a g r i c u l t u r a l , see A g r i c u l t u r a l industries P r o d u c e r s goods, t e r m , 2 i n ; statistics, 21, 38 P r o d u c t i o n , c o m p a r a t i v e d a t a of investm e n t , n a t i o n a l i n c o m e a n d , with tables, 21, 37 f.; control measures, 51 P r o f i t a b i l i t y g u a r a n t e e contracts, 187, 190 f. Profits, 5; m a n a g e m e n t of profit m a r g i n s t h r o u g h price controls, 163-182; effect u p o n i n v e s t m e n t , 53, 58; r e l a t i o n s h i p b e t w e e n i n v e s t m e n t a n d , 53, 148; retention o f , i n o p e n and h i d d e n reserves, 122-47 ( s e e entries under Reserves); t a x a t i o n of corporate, 1 2 7 , 1 2 9 f., 136-38, 142; a t t i t u d e of a u t h o r i t i e s towards, 138; fiscal i n d u c e m e n t s to i n t e r n a l rei n v e s t m e n t o f , 138-43; g e n e r a t i o n of business surpluses, 148-82; incidence of p r i c e a n d p r o f i t policies, 163-82; p r i c e policies a n d the profit f a c t o r , 163-66; f u n c t i o n a l aspects i n a price e c o n o m y a n d a c o n t r o l l e d e c o n o m y , 164; m e t h ods of i n f l u e n c i n g p r o f i t m a r g i n s , 164, 165; direct r e g u l a t i o n of profits a n d p r o f i t m a r g i n s , 166-69, 173, 175; elem e n t s of gross profits, 166; t e r m de-

fined: c o n s t i t u e n t elements, 168; n o r m a l rate, 169-73; c o n s t i t u e n t elements of the profit m a r g i n u n d e r t h e L S O , 171; rep l a c e m e n t of " c u s t o m a r y " b y "reasona b l e " level, 169; " e c o n o m i c a l l y justified," 170; a b o v e - n o r m a l : differential r e n t , 173-79; concealed: superdepreciation allowances, 179-82; o r i e n t a t i o n of policies w i t h regard to, summarized, 217; see also Costs; Prices P u b l i c s p e n d i n g , the p r i m a r y d r i v i n g force of the e c o n o m y , 5; h i g h level of, 213; see also Investment, p u b l i c : W o r k creation P u b l i c a n d p r i v a t e m o t i v a t i o n , synthesis o f , 4, 5, 7 , 2 1 9 f.

Q u o t a system i n a g r i c u l t u r a l industries, 811, 212« R a t i o n a l i z a t i o n , process o f , 90,92 R a t i o n i n g of l a b o r a n d physical resources as m e a n s of n e g a t i v e control, 6, 44, 184 R a w materials, intensive d e v e l o p m e n t of domestic resources, 13; a u t a r k i c goals, 28; controls o f , 43, 50, 51; imports of, 66; as a n e l e m e n t of cost, 149-52; price control of c o m m o d i t i e s based o n fore i g n , 169; domestic basis f o r synthetic r u b b e r , 187)1; steps t o w a r d emancipation f r o m f o r e i g n sources, 197; chemical substitutes, 199; f u n c t i o n of autarkic industries to w i d e n basis, 200; jurisdiction over processing of agricultural, 2 0 m , 210; a d j u s t m e n t of industry to a v a i l a b l e s u p p l y , one of the functions of i n v e s t m e n t control, 207 R a y o n , i 8 g n ; industry's share i n financing Z e l l w o l l e , 195 ff. R e a l estate, m o r t g a g e s o n , 106 R e a r m a m e n t , periods of W o r k Creation a n d , d i f f e r e n t i a t e d , 13; p r o d u c t i o n for, 25-46; see also A r m a m e n t program; War financing R e c a p i t a l i z a t i o n p r i v i l e g e , 127 f., 133, 136 R e c o v e r y p r o g r a m s of the pre-Nazi governments, 8-13; d o m i n a t e d by investm e n t activities, 2 1 , 3 7 f.; financial priming, 58, 59; see also W o r k creation R e e m p l o y m e n t , see W o r k creation R e i c h , f o r entries other than following,

INDEX see subject part of title, e.g., Post Office, Reich Reich Autostrada A.C., 1 5 , 1 9 R e i c h guarantees, use as control device, 189-91; granted to synthetic oil, 195, to Zellwolle, 196 Reichsanstalt, 15, ig, 55 Reichsbahn, 12, 15, 19 Reichsbank, 68n, l z o , 121; open-market functions, 16; as credit-generating agent, 58, 63, 93; reform of: powers exp a n d e d , 61; last international controls abolished, 6sn; given authority of intervention in capital and money market: actions following, 108; Golddiskontobank a subsidiary of, 1 3 m Reichsbank Act, 6 i n , 63 Reichsbank Committee, 108 Reichsgruppe Industrie, 67«, 208 Reichskuratorium f ü r Wirtschaft, 490, 174 n Reichsverband der deutschen Industrie, (yjn Reichswerke Hermann Goering, A.G., S i n , n o n ; financial structure, 197; expansion as holding concern, ig8 Reinhardt, Staatssekretär, 3411 R e i n h a r d t Program, 14, 19, 25, 138, 1391, 166 Reinhart, Friedrich, quoted, 95n Rent, differential, see Differential rent Replacements, extension of concessions for, 139 f. Reprivatization, defined, g$n Reserves, corporate: outlets of the accumulated, 127; business savings designated as accruals to, 122; open and hidden, defined and distinguished, 122: distinction between accumulation of, and use for new investment, i22n; accumulation: of open, 124, 129 f.; hidden, 125-27, 129 f.; self-financing controls, 127-47 (see also Controls); avoidance of public disclosure, 130; allocation to management of jurisdiction over policies, 145 f.; hidden reserves sanctioned by law, 146; relation of accumulation to high level of profitability, 148; see also Self-financing; Depreciation; Profits; Business Savings Restriction of investment, see Controls; Investment, private; Bans Retail trade, 208

241

Rheinmetall-Borsig, 181; quoted, 182 Risk element, 172 Reichskreditgesellschaft, quoted, 207 R P Ö ("Directives for Price Formation . . ."), 173»» R u b b e r , natural: import duty, 188 synthetic: subsidy technique, 187-89 Ruhr-Benzin A.G., 194

Salaries, relation to industrial payroll, 154, 1560; see also Wages Sales, depreciation outlays in percent of, 161; and output in key industries, 1932'939.45.46 Savings, of low-income groups, 83,98, 214; average, of labor, ggn; relationship between investment and, summarized, 214 ff. business, as source of capital formation, 75, 82; nondistributed, 122-147; consistent lag of reinvestment of, behind accumulation, 127; attitude of authorities towards business savings, 138, 215; See also Reserves; Self-financing individual, 74, 76, 82 f.; 214 (tables, 78, 80, 81, 82) institutional, 74, 77-84, 214 (with tables); effect of Nazi reform of social insurance, 99; controls favoring diversion of, 101-12; channeling o f , into Reich loans, 102-5 Savings banks, see Banking system Schacht, Hjalmar, policies, 3271; New Plan originated by, 64; quoted, 114 Schmalenbach, 142» Schmidt, F., i42n Second Four-Year Plan, 28; see Four-Year Plan "Secret" short-term debt, 36, 37 Self-financing, 75, gon, 99, 100; relationship between corporate, and embargo on private flotations, 109; defined, 122n; open and hidden reserves, 122-28; motivation, 128-30; controls (q.v.), 13047; relation to high level of profitability, 148; rise to position of major factor, summarized, 215 f. See Reserves; Business savings Shifts in structure of industrial production, 45, table, 46 Shipbuilding, 185 "Short-lived" goods, 139, 147

INDEX Short-term financing, under Reinhardt program, 15 f.; liabilities of German banks in form of foreign deposits, 92; rates of short term borrowing, gtn, 85n; financing of long-term investments by short-term bank credit, 91 S. Small business, and bank investment credit: the Industriebank, 117-21; full brunt of discriminatory controls generally borne by, 221 Soap industry, 178 Social insurance, see Insurance Sofort (Immediate) Program, 9-13, 16n; extension of, 19 Source material, accessibility and reliability, 7»» "Special bills," most important instrument of financing, 31, 32n, 59; absorption by banks, 59 Staatskonjunktur, defined: its outstanding feature, 3; conditions under which generated, 8; economic policies which resulted in the establishment of, 8-46 (.see also under Investment, private); lack of uniform repercussion in the industrial economy, 45; financing with tax. revenues, 82; progress marked by "disindebtedness," of private sector, 158; state of small business a disturbing aspect of, 221 Stability, economic; promise of, by Nazi party, 221; extent of success and of failure, 222 Standard of living of low-income groups, 4i Staple, synthetic, industry: investment in, 189; see Zellwolle Starch industry, 211 State ownership of business repudiated, 5 Statist, excerpt, 110« Statistisches Reichsamt, cited, I25n, 127«; study by, 154, 161 Steel industry, the Reichswerke Hermann Goering, 3 i n , n o n , 197 t.; iron and steel processing, 208, 209 Steering type of controls, 4,6; see Controls Stock exchanges, io8n; not upset by dividend limitation: quotations, 1932-37, >34" Stockholders, reserve policies largely beyond control of, 129, 131; pre-1937 jurisdiction, l j o n , 144; rights curtailed by Corporation Law, 144-46

Subsidies, under the W o r k Creation program, 16 f.; limited use as investment controls: 185; regime of, in domestic mines, 185; revised system, 186 f.; technique followed in synthetic rubber industry, 187-89 Superdepreciation, defined, i22n; privileges, 123, 142, 143, 147; main source of hidden reserves, 125; relationship between two types: linked with different pricing policies, i79n Superprofits, 173 ff.; see Profits Supervisory Office for Private Insurance, 108 Supply and demand, interaction of price control and factors determining, 52 Surpluses, see Profits; Reserves Synthesis of public and private motivation, 4, 5, 219 f. Synthetic industries, 219, 220; development to technological maturity of synthetic processes, 199; see also names of industries, e.g., Oil; R u b b e r ; Zellwolle, etc. Taxation, refunding of some business taxes, 10; exemptions, 17, 430, 137, 142; as a form of forced savings, 82; structure of corporate taxation: taxation of corporate income, 127, 129 t., 136-38, 142; taxation of income as factor in selffinancing, 129 f.; progressive capital stock tax linked to excess dividends, 135; tax on increases of corporate capital as revenue raising measure, 136; excess profits tax, 137, 138; T a x Concessions, 138-41; tax structure codified by Law of 1934, 139; corporate, increase in, vs. decline of interest charges, 160 T a x credit certificates, 33 f., 142 f. T a x remission certificates, 10, 130, 15n T e x t i l e industry, 151, 169, 207; attitude towards Zellwolle, 189, 196; share in its financing, 195 ff. T e x t i l e Law, 152, 169, 207 T r a d e associations, 67n Treasury, control over placement of public orders, 32n; the main instruments of Wartime short-term financing, 35 Treasury certificates, 15« Tschierschky, S., quoted, 1740 Unemployment, elimination of, 3, 14, 55n, 222; Laws to reduce (Reinhardt

INDEX Laws), 14, 19, 1391; insurance, the Reichanstalt, 15, 19, 551 relief, subsidies to mines as alternative, 185 Unions, labor, 54 Vereinigte Glanzstoff, 195, ig6n Vierteljahreshefte zur Konjunkturforschung, quoted, 30, 157 Vorstand, 144, 145 Wagemann, Ernst, quoted, l j s n Wages, policies of Papen Program, 11, 130; stabilization, 11, 57, 99, 100, 153, 214, 215; rates, 1932-39, 39; rigidity of wage level, 4on; control of, 40, 48, 5658; ceiling system: rates frozen, 57; as an element of cost, 152-56; importance of stabilization in development of profitability, 153; methods of concealing, wage increases, 15371; effect of Nazi reform of social insurance, 9g; relative movement of payrolls and industry revenue, 154-56; incidence of salaries in industrial payroll, 154, 1560 War Economy Decree, price provisions of, >73. ' 7 8 War financing, mechanism for financing of wartime industry and trade: facilities, izon; part taken by banks, 98;

243

activities following outbreak of war, 111; tasks of Industriebank, 120 Weimar labor agreements and code, 56 Wire products industry, 205 "Wirtschaftslage in Deutschland, Die," quoted, 154 Work book, 55 Work creation, pre-1933 programs, 9-13; of the Nazi government, 10, 14, 15, 19; phases of rearmament and, differentiated, 13; investment bans under the work creation phase, 18; appropriations, table, 19; effect upon the economy, 20-22; upon private investment, 22-25; shift to the rearmament phase: relationship of the two phases, 25, 26n; expenditures for armaments and, table, 27; bills of, 31, 58; financing of, 59 Works regulations, 560 Young Plan, u 8 n Zeitschrift für Betriebswirtschaft, 14m, 146ft Zellwolle, synthetic textile staple process of manufacture, 1891, 196n; group financing, 189, 190, 191,195-97; regional concerns established, 195« Zinc rolling mills, 205 Zwischenfinanzierung, see Intermediate financing