The Vampire Economy

Chapter IX

INDUSTRIAL INVESTMENT POLICIES

“Not even from Krupp would Goering take ‘no’ for an
answer.”

BACKED by the General Staff of the army, Nazi bureaucrats have been able to embark upon schemes which compel the most powerful leaders of business and finance to undertake projects which they consider both risky and unprofitable. The building-up of German war economy takes precedence over everything, including the opinions of private capitalists and their scientific research staffs. The hasty preparation for war, made necessary by the foreign policy of the fascist powers, has left no time for their leaders to consider what might happen in the more distant future; they have had to prepare for possible immediate emergencies. The viewpoint of private investors and industrialists who think of the ultimate safety and soundness of investments has been disregarded.

This is particularly true of the big industrialists who earned huge profits from the armament boom and who have large amounts of capital to invest. Their liquid funds do not escape the attention of State commissars, who are searching for means to finance new State-sponsored plants.

To illustrate the point, let us consider the case of Herr Krupp von Bohlen und Halbach, head of the Krupp concern, Europe’s largest armament works. The Krupp properties are as much a family affair as the Ford Motor Company. The Krupp family was, and still is, the leader of Germany’s industrial aristocracy. The elder Krupp was a personal friend of the Kaiser. His heir, Krupp von Bohlen und Halbach, enjoyed undiminished respect under the Weimar Republic. The Fuehrer, in turn, paid his respects to Krupp soon after coming to power. On the eve of the famous purge in June, 1934, before ordering the execution of his own closest friends, Hitler consulted Krupp von Bohlen und Halbach at Villa Huegel, the latter’s family residence near Essen.

Krupp’s firm profited more from the armament boom than any other industrial enterprise in Germany. Yet even Herr Krupp is grumbling because he is no longer the absolute master he used to be.

This is reflected in the investment policies which the Krupp concern pursues—or, rather, is compelled to pursue. In common with all big industrial concerns in Germany, Krupp wants to make financial preparations for the time when the armament boom will slow down and when it may once more be difficult to find enough profitable work for his plants. He therefore sought to put aside reserves against an uncertain future and to avoid risky investments. But here he ran counter to the policies of the regime. In such a clash between the totalitarian State and private business, Krupp was bound to lose, in spite of his name and political connections.

In 1936 Goering’s Four-Year Plan Commission intimated to the Krupp concern that it was planned to erect a new plant for large-scale production of synthetic rubber, or “Buna,” extracted largely from coal and lime. The Commission further suggested that Krupp might finance this project out of his enormous armament profits, adding it to the manifold interests of his concern. After having spent considerable time in investigating the probable costs of production and the commercial possibilities of synthetic rubber, the research department of the Krupp concern answered the Government’s proposal with an emphatic refusal.

But not even from Krupp would Goering take no for an answer. A few weeks after its negative reply, the Krupp firm was summarily informed that, on a given date, a meeting would be held of the founders of a new company—Buna G.m.b.H. At the meeting arrangements would be made for the financing of a plant to produce Buna. The Krupp concern was directed to send a representative with authority to assume a share in financing the project. There was no room for argument as to the merits of the idea, certainly none for rejection of it. The matter had been decided in Goering’s office, and Krupp was left only the choice of a representative. At his leisure he might calculate to what extent his liquid assets would be reduced after his firm had subscribed its share to the synthetic rubber project.

Even Krupp can no longer insist on his formerly unchallenged independence when the all-powerful Party “requests” sacrifices in the “interests of the community.” He cannot fight singlehanded against the ruling Party. It is necessary to understand this political background in order to appreciate the story of how Krupp came to the rescue of a bankrupt relative in Austria.

There is a branch of the Krupp family in Austria, owners of the Berndorfer Metallwarenfabrik Arthur Krupp A.G., a large machine-tool plant. This enterprise did not prosper under the Austrian Republic, partly because of the general decline of Austrian industry and partly on account of the personality of the Austrian Krupp, who preferred the leisurely, extravagant life of the old aristocracy to that of an active businessman. While Austria was still independent, the Austrian Krupp had approached his German relative for financial assistance. After thorough investigation, Krupp turned down the request, believing neither in the ability of his Austrian relative nor in the wisdom of the investment. However, the owner of the Berndorf factory was no fool; before and during the days of Austria’s “deliverance” he cultivated Nazi leaders at drinking parties. When Anschluss had become a fact, his bankrupt company was recommended as one deserving aid “in the national interest.” The available subsidy funds proved insufficient, so the Party approached Krupp, suggesting that his family interests, as well as national interests, demanded the rescue of his relative. Krupp had to make the investment, whatever his misgivings.

Other private concerns and trusts had similar experiences. Among them was I. G. Farbenindustrie, which maintains a synthetic gasoline plant in Leuna, where new methods of producing gasoline from coal are tried under varying conditions, and large-scale experiments conducted, in a constant effort to find means of reducing production costs and of testing theory in practice. The chemical trust was reluctant to make further large investments in the production of synthetic gasoline before all the practical aspects had been thoroughly explored. They did not want to build new plants unless they could be sure that the new product would be able to compete successfully on the world market and would not have to rely permanently on State subsidies. According to reliable sources, this stage had not been reached when the State notified the chemical trust and all other owners of soft-coal mines in central Germany that they must finance the establishment of “Brabag,” or Braunkohlen-Benzin A.G., with two large plants at Boehlen and Magdeburg, each with a capacity of 170,000 tons of synthetic gasoline yearly.

Nor were Fritz Thyssen and his Stahlverein, the largest steel trust in Europe, given any consideration when, in 1939, Goering established a new mining and steel concern and decided that important properties of the Stahlverein should be incorporated in this new enterprise, to be known as the Hermann Goering Reich Iron Works.

All private iron and steel concerns in the Reich had declined to finance new plants for extracting iron from low-grade domestic ore. Thereupon Herr Keppler, Hitler’s former economic adviser and a personal antagonist of the former “financial wizard,” Schacht, was placed in charge of the exploitation of Germany’s mineral resources. He was full of wonderful schemes for opening up new sources for the raw materials so badly needed in Germany. Iron deposits in Franconia and Baden (particularly Salzgitter) had been neglected because the iron content of this ore was less than 25 per cent and smelting of ore with an iron content of less than 30 per cent has been regarded as uneconomical. The iron and steel companies were unanimous in advising the government “experts” that the costs of production would be prohibitive and that too great an investment would be required. Furthermore, this ore could not be used in existing German furnaces because of its excessively high content of silicic acid. If the same smelting process were to be used as for other ore, this would necessitate greatly increased consumption of coke, and expensive technical changes in the furnaces, with the result that costs of production would be considerably increased. Hence new furnaces would have to be constructed.

All this scientific advice was disregarded and Goering’s office announced to the iron and steel masters that the Hermann Goering Reich Iron Works was to be founded. New furnaces were designed to cope with the low-grade ore. British and American experts were hired. Goering had enough foreign currency at his disposal to buy the experience and technical assistance of H. A. Brassert & Company of Chicago, which had subsidiaries in Europe. This American firm made available the best technique for smelting iron from low-grade ore. Mr. Brassert, the American expert, is an international figure, of German stock, born in England and naturalized in the United States. Most of his experience has been in the American steel industry.

The new iron and steel plants are being erected in great haste. The big industrialists who had provided Hitler with funds in the days when they thought that he would remain their willing puppet could not avoid contributing to the new project of which they disapproved. The State, however, generously arranged to supply the major portion of the necessary liquid capital.

The total capital is 400 million marks, of which 270 millions are represented by common stock, the majority of which is held by the State. A minority share of the common stock was presumably given to owners of mines taken over by the State. The remaining 130 million are preferred stock without voting rights. Of these, 10 million are allotted to (i.e. have to be subscribed by) the Reich’s Group of German Artisans (on the theory that artisans such as plumbers, etc., are interested in an increased supply of iron and steel), and 95 million are allotted to the member firms of all industrial groups interested in the iron and steel supply. Each such firm has had to subscribe to 50 marks of these preferred shares for each worker employed by them as of July 31, 1938—that is, a firm employing 1,000 workmen must subscribe to 50,000 marks, etc. The remaining 25 million have been offered for public subscription.

The Alpine Montanwerke, Austria’s most important iron and steel concern, was a subsidiary of the Stahlverein, which counted on enjoying a virtual monopoly in Austria after the Anschluss. But Party leaders and the War Economic Council demanded that new iron and steel mills be erected in Austria, where they would be less exposed to air raids from France than the steel trust’s plants in the Ruhr district. The Stahlverein hesitated to expand its Austrian subsidiary beyond regional requirements, the more so as such a venture did not promise to be very successful financially, because of competitive disadvantages resulting from geographical conditions. What was the result of this hesitation? The State, through the Hermann Goering Reich Iron Works, simply assumed control of the Alpine Montanwerke and proceeded to establish a new production center in Linz on the Danube.

The construction of gigantic new foundries in Salzgitter and Linz (in former Austria) will greatly increase Germany’s production of iron and steel. After the completion of the “greater production program” in 1942 or 1943, an estimated 21 million tons of domestic ore will yield approximately seven million tons of iron and steel. This will be a substantial addition to Germany’s present supply of about 21 million tons of iron ore, imported primarily from Scandinavia, France and Spain.

The rise of German iron-ore production is quite impressive: from 6.37 million tons in 1929 and 2.59 million tons in 1933 to 7.57 million tons in 1937 and 11.15 million tons in 1938 (including the Saar district). In 1938, domestic iron-ore production surpassed imports of iron ore. This fact, however, is misleading. The quality of German iron ore has greatly declined, so that in 1938 the share of iron produced from German ores amounted to only 22 per cent of the total iron production. Die Wirtschaftskurve emphasized the difficulty of producing iron from German ore—not merely as a result of the low iron content, but also because of its chemical composition. “It is probable that at present crude iron and semimanufactured iron products can be bought at a price which is below costs of production—” despite the fact that German iron and steel prices are kept on a relatively high level by the German iron and steel syndicates. If consumption remains at the present rate, iron produced from domestic ore should constitute close to 60 per cent of total production in 1942-43, as against 19.0 per cent in 1937. If, however, the demand for iron should continue to expand, and imports should be allowed to continue at approximately the present levels, the share of production from domestic ore would increase to only about 45 per cent of the total. It is doubtful whether this goal will ever be reached.

A number of factories in Ostmark—formerly Austria—Were incorporated into the Hermann Goering Reich Iron Works. These factories—for the mass production of automobiles, machinery, freight cars, etc.—had been expropriated from “non-Aryans” and are of considerable military importance.

There are other enterprises where investments are too risky or undesirable for private capital. Consequently, State institutions, having large liquid funds at their disposal, helped to finance such undertakings. The projected plant for the mass production of a cheap “people’s automobile” (Volkswagen) is such an undertaking. The idea of the new automobile plant is supposed to have originated with Adolf Hitler himself, who has a penchant for spectacular, monumental projects.

In 1935, at a time when butter and meat rations were at a low level, Hitler promised every citizen an automobile. He wanted a car cheaper than the Ford, a factory larger than Ford’s Detroit plant or the Russian Gorki plant. The German automobile manufacturers—Opel, Daimler-Benz and others—were consulted and displayed no enthusiasm. They advised Hitler that there would be no market for such a car—the workers and middle classes could not afford to buy and maintain even the cheapest automobile. Gasoline in Germany is about five times the world market price. Repairs cannot be made without using scarce materials which cost several times more than they would on the world market. Therefore the maintenance of a car is three to four times more expensive than in the United States. The “people’s automobile” will compete with the Opel and the German-built Ford cars. Thus the scarcity of raw materials and skilled labor will increase, while the new State-sponsored factory is privileged at the expense of the privately owned automobile factories.

Daimler-Benz A. G., one of the largest corporations in the automobile industry, stated in its annual report for 1938:

“Production in the automobile industry does not depend on the demands of the public. The limitations inherent in supplies of raw materials, spare parts and labor are decisive.”

The objections of private manufacturers to the new automobile plant were overruled. The War Economic Council voted for the project, not merely to please the Fuehrer, but to increase Germany’s capacity for the production of armored cars, trucks, etc.

An effort will be made to imitate Ford’s mass production methods. Some technical details on the projected automobile may be of interest: the weight will be 650 kilograms (1,170 pounds); it is to be capable of carrying four to five passengers, and it will be equipped with a 24 h.p. motor; the consumption of gasoline is supposed to be six to seven litres (a litre is approximately a quart) for each hundred kilometers (about 62½ miles). It is doubtful, however, whether the new car will be as good as it is promised, especially in view of the fact that it will have to be built largely with ersatz. Yet the new mass production automobile has a good chance of successful competition with other low-priced cars, especially those on the markets of southern and southeastern Europe.

The construction of the new factory was started in 1938 in Fallersleben, after the establishment in 1937 of the “Gesellschaft zur Foerderung des deutschen Volkswagens” (Society for the Promotion of the German People’s Automobile), with a capital of 50 million marks. The capital is being raised partly by the Labor Front and partly by individual weekly subscriptions of five marks as advance installments on a car. The Fuehrer’s hope that hundreds of thousands would respond eagerly have not been realized. Boys and girls were therefore enlisted and entitled to sign the contracts providing for a monthly payment of five marks each. The car is to be delivered in four or five years, but only to those who have paid the installments without fail for about three years. No provision has been made for reimbursing those who will have paid a part or even the greater part of the installments but may have had to interrupt their payments because of the loss of their jobs or for other unforeseen reasons, although in a few exceptional cases eighty per cent of the money already paid may be returned. There are no definite arrangements as to the time of delivery. “The important question of the time of delivery has not yet been cleared up,” said Die Deutsche Volkswirtschaft of August 3, 1938, in a semiofficial statement after the propaganda campaign for the purchase of these cars had been initiated.

The new car will be extremely cheap compared to other automobiles. It is to cost 990 marks (about $240) and is supposed to be delivered after 750 marks have been paid on account. Yet even this cheap price—especially considering the high costs of maintenance of an automobile—is beyond the means of both workers and the overwhelming majority of the middle classes. Strong pressure on the part of the Party, especially upon State employees, has succeeded in obtaining a considerable number of subscriptions. However, though it had been hoped to obtain half a million subscriptions, the total number received by February 17, 1939, amounted, according to an official statement, to only 170,000. This would mean a weekly payment of 850,000 marks, and more, because subscribers sometimes pledged themselves to pay at a higher rate.

Public opinion has been skeptical as to whether the cars would ever be delivered, either because the State would not fulfill its contract or because the buyers would be unable to complete their payments. Among the better paid bureaucrats and employees, however, the projected “people’s automobile” has become popular.

This and other such projects of the Four-Year Plan Commission do not reveal the full scope of State interference in industrial investments. In many other industries, State and Army commissars have insisted upon rapid extension of plant capacity and increased production, the construction of dugouts as shelters in case of air raids, etc. At the insistence of the commissars, out-of-date machinery, discarded in order to reduce production costs, has been put back in operation in industries producing scarce products.

Because of work on the fortifications, demands for cement in western Germany have increased to such an extent that, according to 1938 plans, the cement industry, previously suffering from overexpansion, was to increase its production from eighteen to twenty-four million tons per year.

Private concerns are reluctant to enlarge their plants, merely to meet temporary demands for fortifications and other emergency needs. They have sought to avoid the heavy expenditure involved in building up an industrial reserve capacity needed only in the event of war.

The Frankfurter Zeitung of February 1, 1939, carried this concealed threat to any industrialist who might object to extension of plant capacity to meet the State’s emergency demands:

“In several branches of industry, subject to emergency State orders, industrial firms have no choice but to adapt their productive capacity accordingly, unless they wish to run the risk that new independent factories—backed by authoritative State customers—will arise. They will become uncomfortable competitors when demand declines. If new factories must be erected for emergencies to meet the present increase in demand, it will mean that expenditures will be much greater in the long run. If the methods of planned economy are to be applied anywhere at all, they must be applied in this industry.”

Many foreign observers, who do not know the inside picture, wonder why German industrialists should be dissatisfied notwithstanding increased production and greater profits. A special source of dissatisfaction springs directly from this increased production. Industrialists who produce urgently needed materials must speed up production, often more than is economically sound.

“… The optimum scale of output (i.e., the most favourable relationship between expenditure and receipts) is reached before activity is fully up to the level of capacity … That rising costs have already made their appearance in a number of branches of the production goods industries is shown in the balance sheets … e.g., in the mining industry at the middle of 1938. As early as then the necessity was felt to increase depreciation allowances (owing to the over-employment of machinery) and to make additions to plant, while the need was already urgent for extra labouring power which was either not available at all or could only be obtained in comparatively inefficient forms….

“Business is therefore now confronted … by the opposing movements of increased costs and on the other side relatively shrinking returns—lower prices in the home market, losses on the export trade, etc.” 1

A machine which runs day and night at top speed will depreciate much more quickly than one that operates at a normal speed, one shift a day. Additional replacements and renewal of technical equipment are necessary in order to avoid a shrinkage of industrial capital.

Increased production and sales should enable the industrial enterprise to accumulate sufficient liquid funds for the renewal and even extension of the plant. This is however, mere theory. In practice, there are many obstacles to the reinvestment of capital.

The Dyckerhoff Portland Zement Werke, A. G., one of the largest cement concerns, stressed the rapid depreciation of machinery, as a result of too much production, in its report for 1938:

“The depreciation rates established by the tax authorities are not in accord with economic necessities. The value of plant installations largely depends on whether machinery runs day and night throughout the year or whether sufficient time has been allowed for renovation and repairs.”

The London Statist, in its issue of May 13, 1939, called the “overstrain” of human beings and of machines the most serious feature of Nazi economy. It said:

“Food shortage and signs of inflation are not the most serious indications of the excessive strain to which the Reich’s national economy has been subjected during the last few years.

“Much more serious is the overworking of men and machines which is probably without precedent in peacetime…. This overstrain … merely additional evidence of the well-known fact that in the course of her gigantic rearmament effort Germany has exhausted those very resources in man-power and industrial capital which normally would be considered the ‘iron reserve’ to be drawn upon in case of war…. Industrial machinery is exposed likewise (like workers) to abnormal and excessive strain. Not only is the wear and tear of machinery in general appalling, but in the building industry concrete mixers and other machines operated in some instances without stop and adequate repairs for 24 hours are being quickly ruined…. The normal depreciation rates have proved utterly inadequate under present conditions.”

In 1938, about 44.5 per cent more “capital construction” was produced than in 1929, yet “replacements” were less than in 1929. These figures indicate more production, more depreciation of machines, and less replacements.

GERMAN CAPITAL CONSTRUCTION” 2
(In million marks)

	Total	New Construction	Replacements
1929	12,800	5,850	6,950
1933	5,060	. . . .	5,060
1934	8,185	2,360	5,825
1935	11,600	5,600	6,000
1936	13,800	7,500	6,200
1937	16,000	9,500	6,500
1938 (estimate)	18,500	11,700	6,800

“Normal Replacements”: 5,800 million marks.

A considerable part of the liquid funds of all companies is requisitioned by the State either for the financing of State-sponsored industrial projects, or as tax payments. The latter have risen to such an extent that many industrial enterprises have had to reduce their reinvestments.

At the end of the first Four-Year Plan period the tax bill of German business had increased enormously. Even the large firms, which had to finance new armament factories, were not exempt.

Typical tax bills of German concerns are as follows:

	Taxes paid:
	1934-35	1937-38	1934-35	1937-38
	(in thousand marks)		(in per cent of net profits)
Gute Hoffnungshuette (heavy industry)	4,130	16,500	80.9	343.7
Kloeckner (heavy industry)	43,733	79,198	85.7	165.0
Mannesmann (heavy industry)	6,624	22,643	194.8	205.8
Daimler-Benz (auto industry)	4,191	22,758	102.2	1083.7
I. G. Farbenindustrie (chemical industry)	41,400	125,100	81.1	229.1
Zellstoff-Fabrik Waldhof (textile industry)	2,893	9,439	144.6	393.3
Bremer Wollkaemmerei textile industry	1,309	3,439	77.0	286.6

 

The annual report of the Dresdner Bank for 1937-38 complained:

“The additional tax payment has completely wiped out the additional gross income. Added expenses, especially for personnel and social purposes, had to be financed by other means. They have been covered by a reduction in the contributions to the pension fund and the official reserve fund amounting to one million marks each.”

Vereinigte Glanzstoffwerke A. G. is the largest manufacturer of artificial silk in Germany. The tax bill of this company rose 578 per cent within three years (1935-38), the number of employees, 35 per cent. The State received 180 per cent more than was distributed to the shareholders in dividends.

Many German concerns are afraid to reveal large liquid reserves because it might mean an invitation to the tax collector. The experience of one of the most important German textile concerns, the Kammgarnspinnerei Stoehr A. G. in Leipzig, is a case in point. Stoehr had pursued a cautious financial policy, preparing for an eventual recession. In 1938, the firm had considerable liquid funds at its disposal—1.2 million marks in bank deposits. In August the authorities took action. The Price Commissar came to the conclusion that certain price decrees had been violated. A “penalty” of 1.5 million marks was imposed on Stoehr, obviously on the basis that there must be more liquid assets where such considerable cash reserves existed.

The fact that there have been so many additions to the nation’s industrial plant makes it appear that there is a genuine industrial prosperity. But often these investments are made merely to replace machinery which is unsuitable for production with ersatz. The rubber goods manufacturers, for example, were compelled to find money for extensive new equipment, because Buna—synthetic rubber—is much harder than natural rubber. Therefore heavier machinery had to be built to replace what was obsolete.

Will these new investments pay or must they be written off immediately? In this connection a Nazi magazine, Die Deutsche Volkswirtschaft, stated:

“We have to consider that the risks in the rubber industry are at present very high…. We must anticipate that these risks will be higher in the future, as the manufacture of Buna will certainly result in losses.”

Most textile manufacturers have had to buy new machinery in order to work with German cotton and wool ersatz. According to the official figures on new investments and production of capital goods, Germany’s industrial capital has increased greatly. But these reports do not indicate the amount of “capital goods” used for armaments; they say nothing about the extent to which machinery must be replaced so that ersatz may be used.

The boom in many German industries indicates that the whole industrial structure is undergoing a rapid transformation at the hands of the State in order to meet present emergency situations and in preparation for a future wartime economy. New factories arise for the satisfaction of special demands, springing from unforeseen raw material shortages. No one knows how long such emergencies will last. Industrialists, therefore, feel that they should be prepared for future losses and the probability that much machinery will soon have to be renewed or may, in a relatively short time, become obsolete. Consequently they try to recover the money spent on new plant investments as rapidly as possible. This is often impossible, because the State has so many investment schemes of its own. It has created new technical difficulties which can be overcome only through new investments.

The Krupp concern summarized the effects of its “forced” production boom and its anxieties about the future in its annual report for 1937-1938 (dated March 1939): 3

“The tempestuous upward development of the German economy during the past few years has forced us to use our plant to its fullest capacity and to wring the ultimate from our factories. So far it has still been possible to overcome the difficulties of obtaining sufficient manpower and the necessary materials. The increase in turnover thus achieved was rendered possible by extensive overtime and double shifts …

“In a number of plants earnings no longer kept step with the increase in turnover as reserve capacity was called into use to a point where production costs were adversely affected. Earnings were furthermore affected unfavorably by lower profits from foreign sales and the lesser yield of coal, the latter due to well-known causes. In the production of iron and steel the increased use of domestic raw materials involved large additional expense. If we were nevertheless able during the fiscal year to attain satisfactory results, this is due less to the increase in turnover than to the mechanization of our plant. However, the trend toward increasing cost of production continues. We will have to make increased efforts to combat it. This will require considerable means during the years to come.

“The fact that the new issue market continued to be pre-empted by the Government necessitated most careful handling of our finances. We sought to devote reserves for depreciation and net profits to renewal of plant. The excessive strain on our production plant caused depreciation at an extraordinary rate, necessitating more extensive renewal….

“For the current fiscal year we have a large backlog of orders which safeguards full employment of our plant for many months. We therefore hope to be able again to obtain satisfactory results. It is true that we have to reckon with heavy additional expense, resulting especially from the still-continuing fall in export proceeds, from the increased use of German ore, from the decreasing yield of coal and from the increase in corporate tax rates.…”

Private firms cannot sue the Government for not paying armament bills. In April, 1939, German building firms were surprised by a Government decree announcing that all German contractors had to accept forty per cent of the payments due for armaments in two types of “Tax Certificates”: type A, which can be used to pay taxes six months after their issue; type B, to pay taxes at 112 per cent of their face value after three years. Building contractors tried in vain to pay their own raw material suppliers with these “Tax Certificates.”

Private business in Germany still has its own investment plans. Whether they can be put into practice or will be profitable depends much more on decisions of the Government than on circumstances under the control of the capitalist. Long-term investments, in the nature of things, involve a certain element of speculation.

“The question of whether newly invested capital will be productive can only be answered in the future. Certain reserves must be maintained in order to finance a possible transformation of the economy to a peacetime basis.” 4

The investment plans of the industrialists must not conflict with Government decisions and policies. But what the next decisions of the Government will be is largely unpredictable. There is no plan which prescribes what a manufacturer should produce and invest.

Most acts of State interference in investments and output are negative in character. To make new investments or to increase productive capacity is forbidden in many industries. In nearly all branches of industry the erection of new factories or the establishment of new firms is proscribed. Most State agencies and commissars start functioning by issuing prohibitions. One is forbidden much more often than permitted. A workshop cannot be closed without a special permit. However, it is permissible to change from the production of one article to another, although this is often of little practical importance, for if State offices do not grant the necessary supplies of raw materials or labor to produce the new product, then the right to increase production or make changes is worth very little.

There are two general principles which guide the State offices in making decisions on investments: military interests and the “interests of the Party.” Often the decisions are dictated by a sudden shortage of raw materials or demands for a huge quantity of military equipment—unforeseen and at complete variance with previously planned schemes and projects.

The individual manufacturer seeks to protect his own interests against decisions of State agencies or commissars. To further them, he tries to exert pressure, individually, through Party connections, through group or estate organizations and—last but not least—through personal friends among the State bureaucrats.

The absence of hard and fast rules has its advantages. It serves to avoid schematic generalizations and additional bureaucracy. However, the laws of competition are no longer in effect. There are so many institutions and offices, representing group or particular Party interests, interfering and planning, that confusion concerning the plans of the various State agencies is the inevitable result, and an ever-recurring doubt as to what is allowed or forbidden whenever a new investment is to be made.

Unforeseen changes in State regulations often force industrialists to change their investment plans. This can perhaps be illustrated best by the experience of a big German firm with a famous trade name.

World-wide advertising has made Kaffee Haag, a caffeine-free coffee, a name familiar to nearly everyone. This German firm has spent large sums on research in analyzing foods and in studying methods of production with a view to improving the taste and quality of its product and decreasing costs. For years this company had investigated the possibilities of producing denicotinized cigarettes which would satisfy the smoker. After extensive research, a factory was started. New decrees on construction and equipment added to production costs. Other decrees affecting the distribution of tobacco and sales of cigarettes made it impossible to obtain the necessary raw materials and sales quotas in quantities sufficient to make the enterprise profitable. Finally Kaffee Haag had to abandon its plans, which had been based on mass production. Work on the half-finished plant was stopped. The funds originally set aside for this project were invested in a factory making newsprint.

The Schultheiss Brewery, one of the largest in Germany, sought to invest its considerable liquid funds in fashionable restaurants, bars and similar luxury establishments in Berlin. With this aim in mind, the concern entered upon a program involving considerable building and construction work. Then new decrees were issued forbidding the use of iron, steel, cement, etc., for new projects without special certificates, which Schultheiss was unable to obtain. The capital already expended went to waste and the firm had to look for other fields of investment.

No longer is it possible for a concern having large resources at its disposal to construct a new factory in order to drive a competitor out of the market. This would all too evidently be sheer waste of capital, unless technical improvements could be introduced which would lower the cost of production or increase the productivity of labor.

The author is reminded of a visit he made to the Ford Motor Company in Detroit in the summer of 1938. The vast potentialities of this truly gigantic organization were mostly unrealized. Yet an immense building was under construction, a factory for the mass production of automobile bodies. When this plant starts operating, Ford will cease buying bodies from independent manufacturers. No reply was forthcoming to the question as to what would happen then to the independent producers of bodies and their factories. There was also no answer to another question—does the Ford Motor Company intend to remain faithful to Henry Ford’s original policy of reducing the price until sales have increased so much that all machinery is working at full capacity? The author was promised an answer in writing to these and other questions. The written reply said only that no answer could be given.5

In Nazi Germany, Ford would not be allowed to build a new body plant when other body plants were idle or not completely in use. Insofar as such government interference avoids waste of capital, it may be regarded as progressive. However, a genuine national investment board to plan Germany’s investments does not exist. New investments are planned only from the point of view of military necessity. Without war the new investments planned by the State will, to a large extent, also be a waste of capital.

The flow of capital is no longer regulated by a capital market which directs it into industries that are particularly profitable. The State has supplanted the capital market. It compels private capitalists to make investments in a future wartime economy and creates economic conditions which cause old investments to decline in value. Thus the State makes drastic preparation for a still greater scarcity of raw materials and labor supply—all this in the expectation that wartime economy is not far off.

A visitor to the new industrial districts in central Germany is impressed by the many gigantic establishments. He does not see that simultaneously industrial life in other parts of the country is decaying. The new factories do not signify a genuine development of the country’s productive forces, but an intensified one-sided growth of certain branches of production at the expense of other industries. Thus heavy industry—important for wartime economy—continues to increase disproportionately within the economy as a whole. Funds for renewal of technical equipment in industries not directly involved in the production of armaments are insufficient, because the maintenance of factories which do not satisfy the most urgent needs of a wartime economy has become relatively unimportant. For reasons of military strategy many plants in frontier districts have had to close down. The Frankfurter Zeitung of September 11, 1938, carried this account of the decay of industrial life in Germany’s eastern districts.

“Idle factories—near the Polish border—were not reopened. The workers emigrated to prosperous industrial districts. Towns like Kuestrin and Landsberg in Silesia lost 15,000 to 20,000 workers, and in some small provincial towns the populations had declined ten to twenty per cent in recent years…. The list of industrial losses in the frontier district is moving indeed. Three big machine-tool plants in Landsberg, Kuestrin and Schwiebus, with over a thousand workers each, have disappeared. Also two enamel factories in Kuestrin and Reppen. Six out of eleven lignite mines east of the River Oder have been closed. The seventeen shoe factories have completely disappeared. The same is true of the factories manufacturing musical instruments and tobacco products, in the Frankfurt (Oder) and Schwerin districts. The number of workers in the textile industry in Landsberg declined from 3,000 to 2,000…. Efficient young workers emigrate because they have no opportunities in their home provinces. In certain respects the frontier district is similar to a colonial country exporting men and raw materials.”

Even sectors of German economy which are most essential to national well-being, particularly in wartime, have experienced a deterioration in their technical equipment. The State has pre-empted the capital market for rearmament purposes to such an extent that for years the State-owned railway system, Germany’s most important means of transportation, was unable to raise funds for maintenance and repairs.

A confidential report on the technical condition of German railway equipment vividly portrays a process which never before had been witnessed in German railroad history, except during the World War.

“Most of the rolling stock is in need of repair. The condition of the locomotives is worse than it has ever been. The larger yards are congested, because there is a lack of shunting engines to clear them. In certain districts the State railway is compelled to work with oil-burning engines borrowed from private companies. Locomotives stand about in the repair shops, because there are no raw materials with which to repair them properly. Formerly, axle bearings, piston rods, crank pins, coupling pins and bolts were lined with a mixture of lead, tin and antimony, but all available stocks of these metals were put at the disposal of the shipyards, because the Third Reich is rearming at sea as quickly as possible. Good bearings are even removed from locomotives and trucks and they are relined with substitute metal. This substitute is a mixture of brass, copper and lead; it is hard and brittle and ‘eats’ oil; when pressure is increased it breaks, and if the lubricant used is an inferior one, the bearings become hot and ‘grab.’ There is also a shortage of good lubricating oil. When bearings have been lined with substitute metal, the locomotives are compelled to reduce speed on the curves, and the working speed generally is reduced. In order to overcome the disadvantage of poor lubricating oil and inferior bearings, the bearings are no longer made airtight, and the result is that the axles, etc., whip and destroy the bearings.”

During the winter of 1938-39 the accuracy of this confidential report was confirmed by many official Nazi reports. In the News Service of the Reich Railway Company the following statement appeared:

“There were congestions at freight stations resulting in temporary traffic tie-ups.6 Cars were overworked. Open freight cars became particularly scarce, making severe measures necessary in order to have any available.”

Compared with 1928, traffic in 1939 had increased by 10 per cent, but the rolling stock had decreased by no less than 4,000 locomotives and 80,000 cars. As an inevitable result, the safety of transportation was affected.7 The Anschluss with Austria and with the Sudetenland increased traffic difficulties.8

THE DECLINE OF RAILWAY EQUIPMENT IN GERMANY9

	At the end of
	1929	1931	1938
			Old Reich	Greater Germany*
Number of locomotives	25,017	23,066	22,172	25,206
Number of freight cars	660,112	647,097	577,060	629,693
Number of passenger cars	68,248	70,428	61,309	c68,942

(*Includes Austria and Sudetenland)

GOODS TRANSPORTED
(Monthly Average, in thousand, tons)

			1929	1932	1938	Greater Germany
			36,334	20,170	37,305	44,000 (Jan.-March)

 

These figures were commented on by the German Institute for German Business Research itself as follows:

“The demands made on the rolling stock last fall were so great that it seemed questionable whether the Reichsbahn [Reich’s Railways] could take care of any further increase in transportation. This question was justified especially by the fact that the increase in performances last year could only be attained by utilization of all resources. The increase in transportation and the rising frequency of special problems had led temporarily to a great overburdening which had unfavorable effects on the operation of the railways. A penetrating examination of the present situation shows that the difficulties of assuring business a sufficient amount of loading room have not been completely overcome….

“The Reichsbahn must reckon in the coming autumn—the seasonal peak—once again with a number of special problems…. The new demands will at first be all the more difficult to overcome since also in the past year … it was not possible to increase the available freight room to any great extent.” 10

Funds for renewal of railway equipment were made available only when transportation difficulties called forth protests from many industries and alarmed the Army leaders. Because the Government was unable to provide sufficient funds, it was compelled to satisfy the financial demands of the railroads at the expense of other branches of the economy. Investment plans for these industries were thereby disrupted.

In a country where all State activities are dedicated to war preparations and where the armament program has resulted in a scarcity of raw materials and capital funds, industrialists seek a refuge for their surplus funds in fields of investment which are unproductive and even unprofitable but whose comparative safety renders them more attractive than State-recommended investments.

In their almost panic-stricken search for safe investment opportunities, many German capitalists resort to the purchase of real estate, the value of which cannot depreciate as a result of inflation. This also explains the prosperity of certain speculative and luxury trades; for example, the paradox that Germany, notwithstanding all the emphasis placed on sacrifices in the national interest, is one of the few countries where the jewelry business is flourishing. Even cheap trinkets find a ready market at a good profit. The “Aryan” proprietor of the largest jewelry store in Berlin, a Mr. Markgraf, was arrested by the Gestapo under suspicion of having smuggled jewels into the country. He had been selling more than he could legally have obtained. Thus Germany, the country with the greatest scarcity of foreign currency and gold, is importing jewels to meet the demand of people who prefer diamonds and platinum to State loans.

The Government is unable to create conditions which make the investment policies of the State sufficiently attractive to capitalists. A few concerns may obtain such extensive privileges that they feel the totalitarian State has brought them prosperity—largely at the expense of other industries and enterprises. However, even they must modify their investment plans in accordance with the decisions of government agencies, because the absolute power of the State exacts compliance. Private initiative has not been completely suppressed, but it impels industrialists and investors in directions which run counter to the desires of the State.