Forty Centuries of Wage and Price Controls

9

National Socialist Germany

To the modern observer the most striking characteristic of Nazi Germany’s wage and price controls is the iron rigidity of their enforcement and their elaborate nature by comparison with what the world had seen before and much that it has seen since. Both these characteristics are only fully explicable when they are examined in the context of the time and the system which imposed them. To the Nazis, wage and price controls were not an unpleasant cure for a temporary problem of inflation which could be dispensed with as soon as the system was able to function normally again, as they are to many democratically oriented policymakers today. They were an integral and permanent part of the collectivist economic system designed to last for the lifetime of the Reich. The tasks they performed were essential in Hitler’s whole game plan (enunciated in Mein Kampf) “to secure for the German people the soil . . . on which future generations of German peasant stock will be able to rear mighty sons. . . .”

In other words, from 1926,* Hitler had intended to build up Germany as a war economy—his aim was not to depend on any form of market-oriented economic order for this would never have allowed the Nazis to marshal the activities of the population towards the building up of the German war machine to the extent that only centrally directed planning could.

The common characteristic of all war economies in modern times has been the high proportion of the GNP consumed by the government. To finance these purchases, the government will invariably, in a war, choose the method of payment which imposes as little cost as possible upon itself. This usually means that in practice the government “prints money” to pay for its purchases and thereby runs a risk of inflation since productive resources are likely to be in a prolonged state of excess demand. To overcome this, rationing has frequently been the most favored means of resource allocation because this allows the government to effectively arrogate to itself those resources available that it wants for the war effort. All of these methods, wage and price controls, inflationary financing, and rationing, were pursued in Nazi Germany.

Although the Nazis went a great way to meet the problems that had occurred in the First World War, this did not prevent the classical weaknesses and side effects of wage and price controls occurring and worsening as time went on. As economic theory predicts, goods were withdrawn from the market, quality reductions occurred, black markets appeared and barter began to take the place of previously all-cash transactions.

However, one of the little known facets of Nazi economic totalitarianism which explains the speed with which the German economy responded to Nazi planning measures is that so much of the elaborate superstructure that the Nazis required for successful policy implementation was already existent and available for that use. More explicitly, the cartelization of the economy, state control of the banks, ownership of a sizable fraction of industry, regulation of many aspects of business activity, incorporation of labor into organized units with central control working closely with government and intervention in foreign trade— all existed before Hitler. And this had not come about by means of Nazi legislation. It had arisen under the social democrats who had held power since the birth of the ill-fated Weimar Republic. Two historical considerations bear acutely on our understanding of what happened under Hitler.

Firstly, some of this state control had come about as a result of deliberate policy design, for example, the legislation establishing organized mediation and shop councils which placed trade unions at the dead center of any industrial policy. Other controls came about by way of the exigencies of the short-term situation, for example, the nationalization of the banks after the 1931 banking crisis.

Secondly, the social democrats, however these levers of power had come to them in the first place, had never intended to use them in any way resembling the inhumanity of the Nazis. The problem was that the other side of the equation, how to ensure that nobody of evil intentions got into a position to use these controls, was not dealt with at the time.1

It is thus essential, if one wishes to understand what happened under the Nazis, to briefly review economic history under the Weimar Republic.

WEIMAR GERMANY’S GREAT INFLATION

The Great Inflation of post-World War I Germany was one of the most significant events of this century, since it was one of the main factors, and possibly the principal factor, that led to the rise of Adolph Hitler.

Currency in circulation rose from 6 billion marks in 1913 to 92,000,000,000,000,000 marks in November 1923.2 In his book, The Great Inflation: Germany 1919–1923, William Guttman tells how a cup of coffee rose in price from 5,000 marks to 8,000 marks while he was drinking it. A pair of shoes costing 12 marks in 1913 was selling for 32 trillion marks in November 1923.3

One of the most pointed commentaries on this social upheaval was written by the distinguished German author, Thomas Mann.

A severe inflation is the worst kind of revolution. The stern measures—currency restrictions, curtailed production, draconic taxes—that a government can and sometimes must take systematically are nothing by comparison. For there is neither system nor justice in the expropriation and redistribution of property resulting from inflation. A cynical ‘each man for himself’ becomes the rule of life. But only the most powerful, the most resourceful and unscrupulous, the hyenas of economic life, can come through unscathed. The great mass of those who put their trust in the traditional order, the innocent and unworldly, all those who do productive and useful work, but don’t know how to manipulate money, the elderly who hoped to live on what they earned in the past—all these are doomed to suffer. An experience of this kind poisons the morale of a nation.

A straight line runs from the madness of the German Inflation to the madness of the Third Reich. Just as the Germans saw their marks inflated into millions and billions and in the end bursting, so they were later to see their state inflated into ‘the Reich of all the Germans’, ‘the German Living Space’, ‘the New Europe’, and ‘the New World Order’, and so too they will see it burst. In those days the market woman who without batting an eyelash demanded a hundred million for an egg, lost the capacity for surprise. And nothing that has happened since has been insane or cruel enough to surprise her.

It was during the inflation that the Germans forgot how to rely on themselves as individuals and learned to expect everything from ‘polities’, from the ‘state’, from ‘destiny’. They learned to look on life as a wild adventure, the outcome of which depended not on their own effort but on sinister, mysterious forces. The millions who were then robbed of their wages and savings became the ‘masses’ with whom Dr. Goebbels was to operate.

Inflation is a tragedy that makes a whole people cynical, hardhearted and indifferent. Having been robbed, the Germans became a nation of robbers.4

After the worst of the inflation declined, Germany was still in severe economic difficulties. Germany relied heavily on exports to pay war reparations and was hit more seriously than most following the world slump of 1929. Although economic recovery from the defeat of the First World War had been remarkable, Germany was not as economically strong nor as politically mature as Britain, the U.S., or France. From 1929 unemployment rose rapidly, reaching 6 million in 1932 (the worst year of the world slump for both Germany and the U.S.). The surprising fact, however, was that the organized unions were so strong despite the slump. This resulted from ten years of legislation from 1918 which was intended to “enhance the unions’ scope, strength, and authority.”5 These laws included a system of mediation and arbitration whereby bargaining was between trade unions and employers or employers’ organizations; this system was sanctified in law as the most desirable and normal system of labor relations. The corollary of this practice was that company unions or independent associations of shop floor workers were excluded from recognition. Furthermore, individual workers were forbidden to make their own contracts with management and if they lost union membership they were not allowed to continue working in their jobs.

Official arbitration agencies tried to resolve points of dispute between employers and unions when agreements could not be reached. After a time the government involvement increased. It arrogated to itself the power to declare an agreement “generally binding” whereby an agreement made for one firm in a district could be extended, by decree, to all those in the district in the same industry. This immensely increased the power of the unions who would select the financially strongest firm in a district and use this one to set a standard which poorer employers were forced to accept. However, this still left instances where agreement was not reached and a dispute became protracted. To solve this problem, the government announced that the mediator could state his own decision and, providing one of the parties to the dispute accepted it, declare it to be the going wage. While this instrument was used only exceptionally at the start, it soon became the rule; large sectors of the Weimar Republic’s industry therefore came to acquire politically determined wages. Hence, by subterfuge rather than design, a crude kind of wage control came into existence and the government was inextricably entangled in many industrial wage conflicts.

The government apparatus also had a firm grip on the agricultural markets by the time Hitler came to power in January 1933. The world slump of 1929 meant that there was great pressure on agricultural prices which threatened to put many German farmers out of business. In particular, the rye farms of north and northeast Germany were badly hurt and very soon the government was committed to a tangled web of staggered import duties, import quotas, embargoes, government stockpiling, a government monopoly of corn, and a host of minor controls.

The slump of 1929 also severely weakened the German banking system. What caused its total collapse was, firstly, the massive increase in Nazi votes in the September 1930 elections which increased their representation in the Reichstag from 12 to 107 and, secondly, the Austrian banking crisis in 1931. These two events led to a massive withdrawal of foreign deposits from German banks and led to the collapse of one of the four largest banks. This in turn caused a panic throughout the whole German banking system and led to the government declaring a bank holiday that was only subsequently lifted over a period of several weeks. This “rescue” of the banking system then took the form of the government-controlled banks giving funds in exchange for newly-issued bank equity—the old equity being written down to a nominal value.

Thus, in the words of Gustav Stolper, “It is an historic fact that deserves close attention that the German banking system had thus been virtually nationalized by the Republican government on the very eve of the National Socialist revolution.”6

Another important feature of the German economy before the Nazis was the high degree of cartelization. When Chancellor Brüning began his severe deflation in 1930–31, the controls over the cartels were used as a major policy tool to lower prices. This was one more way in which government administration replaced the market before the Nazis achieved power.

THE NAZIS COME TO POWER

As we pointed out earlier, Nazi price control was more rigorous and elaborate than anything seen earlier in Germany or in any other nation.7

Germany had seen some degree of price administration in the latter days of the Weimar Republic. The Nazis drew upon this experience and also upon the price freeze enforced during the First World War. These two precedents conditioned many of the initial features of the policy followed from 1936.

There were essentially two identifiable periods of Nazi price control. The first, from 1933–36, was the period in which the administrative bureaucracy and enforcement mechanisms were still in their evolutionary stages. The second period was from 1936 onwards when a full-fledged framework embodying war economy regulations was in force in Nazi Germany. Although this apparatus was readily modified in the light of the exigencies imposed by the war, it remained, in conceptual terms, essentially the same until the downfall of the Reich.

In the first period, the powers available to the Reich Price Commissioner were used to the full and extended further on several occasions. Three decrees in 1934 made it illegal to increase prices or to change customary payment periods or discounts/credits. Punishment was an unlimited fine and/or a prison sentence. Further decrees in the same year compelled all cartels and trade associations to file full lists of their administered prices with the Price Commissioner.

In the case of prices which were not traditionally administered, the government fixed either maximum prices or maximum and minimum prices, although some of the less important prices were left to float. In certain areas, such as nonprecious metals, meats and sausages and textiles, the government decree demanded that prices be frozen at a preexisting level.

An earlier system of administration and supervision by several agencies was replaced, on December 14, 1936, by a single, centralized authority controlling all prices. However, prices still continued to rise and control was decentralized once more.

One great problem for the Nazis was the control of import prices. On September 22, 1934, a decree was issued which allowed increases in the prices of imported commodities or commodities containing imports whose prices could rise by the relevant weighted proportion. Nevertheless, this was not to prove to be a liberalization of price control, because it was also stated that in no case should the price of any imported commodity be higher than its price in any foreign market that day. Thus, it appears that the Nazis had to admit that even they could not suspend all the laws of economics.

The dividing line between the first and second phases of price control was marked by the creation of the New Office of Price Formation. This spawned a large number of local offices and increased the state price-fixing bureaucracy considerably. It also ushered in the concept of the “just price” for a commodity. This was defined as the price which served the following government objectives:

1) helped to build up the equipment necessary to the execution of the second Four-Year Plan;

2) helped to secure production of the so-called Four-Year Plan commodities;

3) contributed to the production of a sufficient quantity of consumer commodities.

The Reich Price Commissioner was the final arbiter of whether a price was “just.”8

It is interesting to note that a price was certainly not “just” if:

1) it would result in “cut-throat” competition;

2) it would yield an above normal profit to the producer.

(“Normal” was defined as the rate of return on long-term federal bonds.)

The “Price Stop” of November 26, 1936, froze all prices (both free and administered) at their October 17th levels. It was clearly a measure conceived in the light of experience from the First World War. It was retrospective and unannounced, thus preventing anticipation and consequent advance price raising. Besides freezing all prices, including credit terms, discounts, and so forth, at their prevailing levels, it also meant that the producers selling the same product at different prices found those prices frozen with the difference intact.

This mechanism, the price stop, was extremely effective in destroying the whole market system and price determination of production decisions. As such, the Nazis used it to centrally plan the economy with great effect. Punishment for evasion was an unlimited fine or prison sentence.

The price stop was followed by about seven thousand decrees directing the alteration of individual prices. Sometimes, these decrees permitted sought-after increases to businessmen; others compelled a reduction.

There were also decrees which fixed maximums and/or minimums and which fixed margins and rebates. The only items for which flexible prices were permitted were imports on which Germany was crucially dependent.

In order to control wages, the Nazis dealt with the comparatively powerful trade union movement very quickly after obtaining power. The annual May Day parade was usually a day of demonstrations by organized labor and socialist parties, but Dr. Goebbels’ sophisticated propaganda machine turned it into a day for Nazism. Goebbels read a proclamation in which he said that it would be a day to “affirm life’s values of courage, work, and national labor.”

On May 2, 1933, Hitler’s storm troopers closed all trade union offices, seized all union leaders, and formed the Deutsche Arbeitsfront (German Labor Front). This was to be a compulsory national labor organization, including all managers and professionals; it was a puppet, of course, of the Nazi Party. Wages were thus administered according to a national plan.9 They hardly rose from 1933. Workers now no longer had freedom of movement, although the slightest behaviorial deviation could cost a worker his or her job. Workers became “followers” and managers “leaders” in the official propaganda. Unemployment insurance still took 6 percent of the wage packet even after unemployment had been (officially) abolished. The Labor Front organized workplace oriented outings and holidays, sports, theater, and other approved forms of rest and recreation. In essence, the worker became a serf.

The system of rigid wage and price control continued, amended from time to time as the situation warranted, throughout the war. (It even remained in force for three years afterwards under the Allied Occupation.)

DID NAZI CONTROLS WORK?

More interesting, however, is the fact that even this rigid structure could not prevent all of the problems associated with wage and price controls that basic economic theory would predict.

When Hitler imposed the price stop in 1936, he froze the n-dimensional constellation of related prices in a unique and arbitrary historical pattern. For, while the underlying determinants of economic parameters (such as tastes, weather, time itself, the state of the war, foreign prices, and so forth) were all changing continually, the economy of Germany had been suspended. No longer did prices perform their crucial role as signals of discrepancies between supply and demand which would be corrected by entrepreneurs altering their plans to meet unforeseen needs. Yet, the Nazis needed to finance their impending war and for this they returned to the orthodox method of printing money. Horst Menderhausen (Assistant Chief of Price Control, U.S. Military Government of Germany, 1947–48) estimates that by 1947 currency in circulation in the four zones of Germany and Berlin was approximately ten times the amount that circulated in the Reich before Hitler imposed the price stop in 1936. In 1944 the increase from 1936 had been fivefold, whereas industrial production had only increased by 36 percent.10 The official price index rose by only 7 percent between 1936 and 1944. By comparison British prices rose 76 percent in the same period and by 22 percent between 1940 and 1944. However, there is good evidence to show that real prices doubled between 1937 and 1944, the difference being manifested, as usual, through product changes, quality reductions and black markets.

Product changes certainly occurred as the economy moved onto a war footing. This gave firms the chance to introduce new items and obtain better prices than they did for their previous line of goods. This was certainly one way in which firms raised prices even though it meant going through a cumbersome and bureaucratic price fixing procedure.

Quality reductions are an old and well-known method of raising prices in a time of controls. It was practiced by the rulers of England (and, indeed, of Egypt) in the production of coins from precious metals long before the Nazi era. The Nazis had explicitly banned quality reduction as an evasion of the original Price Stop decree, and it is perhaps a measure of how helpless they knew they were to enforce it that they proscribed such heavy penalties for violators who were caught.

The presence of a large black market in Nazi Germany is widely documented.11 It consisted mainly of transactions in finished products and prices varied from place to place. The existence of the black market is more evidence that men can never banish the marketplace entirely by planning; they can only make it unofficial. In Nazi Germany, as elsewhere, the black market played a crucial role in absorbing excess money. It appears that at times during the war years, prices were so high and such was the scarcity of goods that a fairly small volume of transactions would absorb a large amount of income.

Another variety of evasion of controls which appeared, as predicted, in Nazi Germany was bilateral exchange (barter). For the vast majority of transactions however, it was extremely inefficient in terms of search costs and price equilibration compared with money. Still, it was a method by which people could satisfy wants.

The crucial point is that, despite iron controls, inflation was not halted in Nazi Germany, just as we shall see it was not halted in the U.S.S.R.; it was simply changed in form. The government had sufficient power to enforce, for the most part, a ban on explicit price rises and hence these were replaced by longer queues for the product which was in deficient supply. The choice, if the money supply is expanded in excess of real output, is higher prices or larger queues. At least, the saving grace of the market is its subtle genius in reacting to a deficiency in such a way as to produce negative feedback and thereby bring forth greater output in the process.

In Nazi Germany all of the above evasions occurred because price rises, and hence greater output, were only being permitted in those industries where such a result concurred with the government’s sense of priorities. The market, by way of contrast, allows different hierarchies of values to contend concurrently.

Needless to say, even the reputed Nazi efficiency was not perfect and frequent miscoordinations of plans (what GIs called “SNAFUs”) prevailed. One example, recounted by Brittan and Lilley, is particularly revealing. A circular in 1943 said that tanks had priority over packing cases, but at that time dozens of completed tanks could not be dispatched—there were no packing cases because of a nail and screw shortage. The essential problem is dealt with in detail by Walter Eucken. In 1948, he wrote:

In the centrally administered economy, there is quite another relationship between needs and supplies. The tension between the two finds no effective expression in the markets. Demand and supply for iron, coal, and all other goods does not originate with different independent economic individuals, each with his own plans. Rather, the fixing of needs and the direction of production, is in a single hand. The planning authorities consequently proceed by first fixing the requirements for coal, bread, houses, and so on, and then adjusting the productive process to these needs by their aggregate valuations and production orders. But they do not have to proceed like this. They can also proceed subsequently by altering the consumption side of the equation, which is then adjusted to the production side. Allocations of textile goods can suddenly be cut or the construction of a new factory halted. Consumers cannot control the central administration. All economic power is concentrated in the central administration, which is thus itself subject to no controlling mechanism.

Perhaps this may be regarded as a weak point in the centrally administered economy. In fact, it is only a weak point if the maximum satisfaction of needs is regarded as the purpose of production.12

At the end of the war, an authoritative critique of the Third Reich’s economic policy was given by Herman Goering (who was responsible, among other things, for economic planning) while a prisoner of war in 1946. He told the war correspondent, Henry J. Taylor, that

Your America is doing many things in the economic field which we found out caused us so much trouble. You are trying to control people’s wages and prices—people’s work. If you do that you must control people’s lives. And no country can do that partway. I tried it and failed. Nor can any country do it all the way either. I tried that too and it failed. You are no better planners than we. I should think your economists would read what happened here. . . .

Will it be as it always has been that countries will not learn from the mistakes of others and will continue to make the mistakes of others all over again and again?13

Finally, it is instructive to note that price control in Germany was not ended until 1948, and even then it was done without the consent of the Allied Military Government. Professor Ludwig Erhard, the West German Economics Minister (and future chancellor), made the announcement on a Sunday, precisely because the allied bureaucracy was at home and the measure could have the desired effect before they could get together and tell each other that it could not be done. This, of course, was the beginning of the German economic “miracle.”

FOOTNOTES

1. See F. A. Hayek’s classic chapter, “Why the Worst Get on Top,” in his book, The Road to Serfdom (Chicago: University of Chicago Press, 1967).

2. Michael Jefferson, et. al., Inflation (London: John Calder, 1977) p. 44.

3. William Guttmann and Patricia Meehan, The Great Inflation: Germany, 1919–1923 (Hampshire, England: Saxon House, 1975) p. 61.

4. Michael Jefferson, op. cit., p. 166. This article by Thomas Mann was published under the title “The Witches Sabbath” in Encounter, February 1975.

5. G. Stolper, The German Economy: 1870 to the Present (London: Weidenfield and Nicholson, 1966).

6. Ibid.

7. According to The Nazi Economic System, by Otto Nathan (Durham, N. C.: Duke University Press, 1944, p. 216), “Price control was the entering wedge and before long it became one of the basic instruments of total economic control. The entrepreneur continued to be the owner . . . but the cost accounting system which was imposed upon him, in connection with price control, enabled the government to supervise and control minute aspects of the enterprise and every single move the entrepreneur made.”

8. The Commissioner of Price Formation was described as an official who no longer merely watched over prices. “He was supreme arbiter. He made and unmade them.” One of the holders of this office wrote in 1940 that “If the government wants to establish prices it can succeed only if the price-setting agency secures supreme power. No doubt such an objective will not be welcomed by many; but power is necessary if one wants to maintain the price level as stable as possible.” See Otto Nathan, op. cit., p. 225 and p. 236.

9. The Law Regulating National Labor was enacted on January 20, 1934. Wages were determined by labor trustees, appointed by the Nazi-controlled Labor Front. Hitler was quite clear about his plans to keep wages low. “It has been the iron principle of National Socialist leadership,” he announced, “. . . not to permit any rise in the hourly wage rates but to raise income solely by increase in performance.” See William Shirer, The Rise and Fall of the Third Reich (New York: Simon and Schuster, 1960) p. 263.

10. Stolper, op. cit., p. 142 and p. 162.

11. See, for instance, H. Menderhausen, “Prices, Money and Distribution of Goods in Post-War Germany,” American Economic Review, June 1949; and Samuel Brittan and Peter Lilley, The Delusion of Incomes Policy, Chapter 4, “Totalitarian Incomes Policies” (London: Temple Smith, 1977).

12. Walter Eucken, “Theory of the Centrally Administered Economy,” Economica, May 1948.

13. Quoted in F. A. Harper, Stand-by Controls (Irvington-on-Hudson, N. Y.: Foundation for Economic Education, 1953) p. 20.

* Fascist Italy had already moved toward government control over the economy as soon as Benito Mussolini was installed as Prime Minister and “Duce” in 1922.

On April 3, 1926, the Rocco Law of Corporations was promulgated under which 22 “Corporazione” were established to be presided over by Mussolini. The Labor Charter of April 21,1927, included a section (Article IX) which specifically allowed the government to intervene in all economic affairs. “State intervention in economic production,” it declared, “takes place only when private initiative is lacking or insufficient, or when the state’s political interests are at stake. Such intervention may take the form of controls, encouragement or direct management.” See Shephard Clough and Salvatore Saladino, A History of Modern Italy (New York: Columbia University Press, 1968) p. 467.

The provisions of this law were soon put into effect in an attempt to stem the tide of the worldwide depression. Despite rigid price-fixing backed by a totalitarian regime, Italian prices and wages steadily declined and many businesses collapsed as the unemployment rolls swelled. Although the economy still floundered, government controls did have at least one major result—they gave Mussolini almost absolute control over the labor movement and slightly less control over industry.