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Title Name:
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In September 1936, France responded in kind. The Blum government
approved a 14 billion franc programme of rearmament
– the largest in
France
’s history. Even with the devaluation taking effect, this strained
France
’s financial situation.
15
In February 1937, Blum announced a
‘pause’
of the Popular Front
’s social insurance and work-creation policies.
16
But even
these cutbacks in non-military spending were insuf
ficient to convince the
fiscally orthodox Ministry of Finance to devote enough resources to put
French rearmament on pace with the German.
17
In the course of 1937 the
instability of the franc and continued domestic struggles put paid to the
Popular Front experiment.
But even in Germany political will alone was not enough to underwrite
rearmament. Having opted against devaluation in 1937 the Third Reich found
itself having to introduce comprehensive rationing of iron, steel and non-
ferrous metals to cope with the shortfall in foreign exchange and to redirect
production toward exports. Around Schacht and his cohorts, the hope that
the Third Reich might be directed back toward a path of
fiscal conservatism
revived. In early 1938 the off-the-books
financing mechanisms were wound
up. An attempt was made to shift to a more conventional mode of
financing
using bonds. After a series of smaller trial runs, 5.5 billion Reichsmarks were
issued in 1938, far more debt than the Reich had ever previously sold in
peacetime. But once more this consolidation was undone by the aggression
of Hitler
’s foreign policy which now reached out for Germany’s neighbours
to the east:
first Austria and then the Sudetenland. The resulting war scare
had the effect of precipitating a further shocking acceleration of both imme-
diate spending and medium-term armaments planning. In Nazi Germany by
1938
, even though it was nominally at peace, military spending was surging
to 17 per cent of national income and beyond.
18
At this level of spending, with Germany at full employment the problem
that British economists would later dub the
‘inflationary gap’ became acute.
The question of state
finance was no longer a technical matter for the
Treasury but was manifestly intertwined with every other area of social
and economic life. The government
’s borrowing requirement was so large
15
Steiner, Triumph of the Dark, p. 275.
16
Robert Frankenstein, Le Prix du Réarmement Français,
1935–1939 (Paris: Publications de la
Sorbonne, 1982), p. 82.
17
L. D. Schwarz,
‘Searching for Recovery: Unbalanced Budgets, Deflation and Rearma-
ment in France during the 1930s
’, in W. R. Garside, ed., Capitalism in Crisis: International
Responses to the Great Depression
(New York: St. Martin
’s Press, 1993), pp. 96–113.
18
Mark Harrison,
‘Resource Mobilization for World War II: The USA, UK, USSR and
Germany, 1938
–1945’, Economic History Review 41:2 (1988), 171–92 (p. 184).
a d a m t o o z e a n d j a m e s r . m a r t i n
36
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Chapter No.: 1
Title Name:
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that it was on a par with the total
flow of private business investment. Both
government spending and investment had to be
financed from the same
common pool of
‘social saving’ – the portion of national income that
remained after consumption by households and regular government spend-
ing. Whatever the channel through which these funds were tapped, whether
it was through savings accounts, retained corporate pro
fits, taxation, the stock
market, the bond market or over-the-counter investments by insurance or
pension funds, the trade-off could not be escaped
– private investment and
military spending came out of the same pool. The basic problem of economic
government was how to balance these competing claims on national
resource. From 1936 onwards Germany
’s advanced government statistical
service and economic advisory staffs had been compiling more and more
sophisticated estimates of this all-important balance.
19
But unlike in Britain
and the USA there was no space for open controversy about national eco-
nomic policy in the Third Reich and their inside in
fluence on government
was limited. At the highest level, on the part of Hitler and his intimate circle it
was far from obvious that there was any interest in achieving a balance. When
in January 1939 Hjalmar Schacht tried to rally the Reichsbank directorate
against the excessive demands on the economy, they were forcibly retired.
Decision-making processes in the Third Reich were famously incoherent. But
there was no mistaking the direction of Hitler
’s restless, dynamic drive to
international confrontation. It was the struggle to square that aggression with
the available resources that resulted in incoherence, not the other way
around. In 1938 to make room for further arms spending private share issues
and mortgage lending were drastically curtailed, but that was not enough to
save the last bond issue of the year that was an embarrassing
flop. As
Germany
’s foreign exchange reserves depleted, in early 1939 there was no
option but to shift steel rations away from military orders toward exports. To
take pressure off the capital markets, a novel
financing scheme was intro-
duced under which government suppliers were paid not in cash but in tax
credits, but the resulting cash
flow squeeze drove contractors to borrow on
overdraft from their banks. The force of the macroeconomic constraint could
not be escaped through better organization. The root cause of the imbalance
was strategic not technical and Hitler showed no desire to de-escalate the
international situation;
first he gave top priority to German naval expansion,
then he occupied Prague and set course for confrontation over Poland.
19
Adam J. Tooze, Statistics and the German State,
1900–1945: The Making of Modern
Economic Knowledge
(Cambridge University Press, 2001).
The economics of the war with Nazi Germany
37