Fiscal policy in Germany during the Great Depression

EXPLORATIONS

IN ECONOMIC

29, 318-342

HISTORY

(1992)

Fiscal Policy in Germany during the Grkat Depression* L.

RAYMOND

COHN

Illinois State University The state of German fiscal policy during the Great Depression is investigated using the concept of the high employment budget. Fiscal policies followed by preNazi governments, even those in office during 1932, were found to have been consistently restrictive. Only after Hitler assumed power in early 1933 did fiscal policy move toward expansion, almost totally through increases in government expenditures. In contrast to the United States and Britain, fiscal policies undertaken by the Nazis helped to promote a quick and complete economic recovery from the Great Depression in Germany. o 1~ Academic press, IIIC.

Studies of the United States and Britain during the 1930s have shown that fiscal policy played little role in stopping the downturn and starting to promote the recovery from the Great Depression. A major conclusion of these studies is that fiscal policy showed no tendency to become expansionary over the course of the economic downturn and economic recovery. The seminal article in this literature was by Brown (1956). He concluded that, for the United States, “(f)iscal policy . . . seems to have been an unsuccessful recovery device in the ‘thirties--not because it did not work, but because it was not tried.” ’ Brown’s methods were refined by Peppers (1973) but the conclusion did not change. A similar study was done for Great Britain by Middleton (1981). He found that the British budget was consistently restrictive from 1929 through 1936, though it became more restrictive during the downturn and less restrictive during the recovery; in fact, significant expansion did not result from fiscal policy until 1939. Though criticized, Middleton’s work has led to the judgment * The author is Associate Professor of Economics at Illinois State University. He wishes to thank Knut Borchardt, Albrecht Ritschi, Neil Skaggs, Peter Temin, and Richard Tilly for helpful comments on a working paper which served as a basis for this article. The author also thanks two anonymous referees for helpful comments on an earlier draft of this paper. Particular thanks go to Claude Herion and Paul Brown for research assistance. AU conclusions and remaining mistakes are those of the author. 1 The quotation is from Brown (1956, pp. 863 and 866). 318 0014-4983/92

$5.00

Copyright 0 1992 by Academic Press, Inc. AU rights of reproduction in any form reserved.

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that fiscal policy in Britain, as in the United States, did not play a positive role in trying to stop the downturn or promote the recovery.2 This article determines the state of fiscal policy during the 1930s in another important country, Germany. The state of fiscal policy is found by estimating the high employment budget in a manner similar to that used by Peppers and Middleton. The case of Germany is especially interesting because the German economy recovered rapidly from theGreat Depression. The quick German recovery served to solidify Hitler’s hold on political power and ushered the world into the horrors of World War II. In contrast, neither Britain nor the United States achieved a complete recovery before World War II. Great Britain enjoyed economic ,growth after 1932 but had little success in reducing unemployment. Both real GNP and industrial production had surpassed their 1929 peak by 1938, yet unemployment remained stubbornly high; some 13% of the labor force was still unemployed in 1938.3 The United States experienced somewhat worse conditions than Great Britain. Real GNP in 1938 was below its 1929 level and unemployment, which had been 25% in 1933, was still 19% in 193fL4 On the other hand, as will be detailed in the next section, even though the downturn in Germany was as severe as in the United States, full employment had been reached by late 1936. While the conclusion that fiscal policy was not expansionary in the United States and Britain is not surprising given their incomplete recoveries, a more interesting and important question is whether fiscal policy contributed to the much quicker and more complete recovery that occllrred in Germany during the 1930s. Determining the state of fiscal policy’in 1930s Germany is also’ important given the recent book by Temin (1989). Temin proposes that a change in expectations was the key factor leading to the start of the economic recoveryfrom the Great Depression. For expectations about policy to change, there had to be a fundamental change in the state of macroeconomic policies. Temin, however, places a good deal of emphasis on the change in expectations being important in starting to turn an economy toward, expansion before the effects of the poficy change were felt. Examining fiscal policy in a country where recovery oo&red will then add to our knowledge of which factors were most important in explaining the recovery.

2 Criticisms of Middleton were made in Broadberry (1984). Middleton (1984) replied in the same issue. In his recent book, Temin (1989, p. 126) agrees that fiscal policy did not piay a positive role in Britain during the 1930s. 3 The numerical @tires for Britain are from Mitchell (1978, Tables B2, IX, and II). 4 The numerical figures for the United States are from the U.S. Department of Commerce (1975, Series D85 and F3). The year 1938 is not the best year to use for comparison for the United States since it was a depression year. Either 1937 or 1939 would make the U.S. recovery look better; however, the difference would not be very large.

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TABLE 1 The German Economy, 1925-1938

Year

Nominal NNP (bn RM)

Real NNP (1928 Prices)

1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938

67.3 65.5 80.5 84.0 79.5 71.8 58.5 50.8 56.8 64.6 72.0 78.9 87.9 98.0

71.2 71.3 82.1 84.0 78.9 76.1 67.9 66.2 74.8 81.9 90.6 99.4 109.8 122.1

Industrial production (1928 = 100)

Unemployment (millions) 0.6 2.0 1.4 1.4 1.8 3.1 4.5 5.6 4.8 2.7 2.2 1.6 0.9 0.4

100 100 87 70 58 66 83 96 107 117 122

Source. Columns (1, 2): Hoffmann (1965, Tables 248, 249, pp. 826-828). Columns (3, 4): Overy (1982, Tables IV, V, pp. 20, 29) except for unemployment in 1925-1927 which is from Konjunktur-Statistisches Handbuch 1933 (1933, Table 17, p. 15).

THE GERMAN

ECONOMY:

1925-l

938

The Great Depression severely affected Germany. The German economy had been in pretty good shape in the middle and late 1920s after having recovered from the major problems of the early 1920s. As detailed by the figures in Table 1, economic activity in Germany reached a cyclical peak during the 1925 to 1928 period (ignoring 1926). When the full force of the worldwide Great Depression hit Germany in the summer of 1931, however, the economy collapsed.5 Between 1928 and 1932, real NNP fell by 20%, industrial production declined by over 40%, and unemployment rose from about 1% million to about 6 million (during part of 1932). From March 1930 to May 1932, the Brtining government was in power while the economy deteriorated. Two successor governments then ruled until January of 1933. While the economy flattened out during 1932, no recovery was apparent until early 1933.(j The recovery started about or soon after the time that Hitler assumed power in late January 1933. Under Hitler the German economy recovered at a striking pace (Table 1). Real NNP rose from 66 to 122 billion RM (in 1928 prices) between 1932 and ’ See Guillebaud (1939, p. 21). This book contains a good analysis of the course of the depression in Germany. Also see the discussion of unemployment between 1925 and 1928 in Keese (1967, p. 38). 6 This statement is based on the work of Henning (1973).

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1938. An index of industrial production rose from 58 in 1932 to 122 in 1938. Both of these indices surpassedtheir 1928 levels fairly quickly, real NNP in 1935 and industrial production in 1936. Unemployment fell from a high of almost 6 million in 1932 to less than 1% million by late 1936 and to about 400,000 by 1938. By late 1936 or early 1937 full employment had probably been reached; indeed, as just noted, in terms of real NW, industrial production, and unemployment, the German economy was in better shape in 1938 than in 1927 or 1928. The reasons for the quick and complete German recovery have never been adequately explained. Much of the attention has centered on the roles played by the various governments. In modern terms a government actively affects the macroeconomic state of the economy through its Ascal and monetary policies7 It is well known that the B&ring government followed a contractionary fiscal policy and the Reichsbank followed a contractionary monetary policy between 1930and 1932. Given the existing gold standard, these types of policy were the prescribed medicine, but they certainly led to a deepening of the depression.’ Indeed, Borchardt (1982) has argued that Keynesian-type policies of the necessarysizewould have been virtually impossible to introduce before 1932 given the contemporary state of German politics and economic thought..’ Some speculation exists that by 1932, the contractionary medicine had worked its cure and set the basis for recovery. The role that the German government played in the recovery is more uncertain. Expansionary fiscal actions were started by Papen after he assumed power in late May 1932 and expanded somewhat by Schleicher after he took office in December 1932. The positive effect of these policies on the economy appears, however, to have been limited. Accordingly, I-Ienning (1973), Guillebaud (1939, p. 31) and Temin (1989, pp. 101-102) all claim that no real recovery had started as a result of the Papen and Schleicher policies as late as the end of 1932, though the downturn had st0pped.l’ ’ As noted above in the text, Temin (1989) has recently argued that the most important aspect in starting recovery was for the government to do something to fundamentaIly change expectations along with the change in policy. This possibility will be addressed later. * For a discussion of the effects of fiscal and monetary policies on deepening the depression, see Sommariva and Tulho (1986, pp. 178-191). Guillebaud (1939, pp. 23-24) discusses the constraints faced by the government that argued against devaluation, the other possible choice. Keese (1967, pp. 40-42) emphasizes that the actual goal of the restrictive policies was to try to reduce or eliminate reparation payments. 9 Rorchardt essentially argues that the worseningcrisis Ied to the political climate becoming more favorable for expansionary policies by 1932. Others argue that expansionary pohcies became possible in 1932 because the goal of eliminating reparations payments had been achieved. For example, see Hardach (1980, pp. 45-47). ” In Guillebaud’s words (1939;~. 31), “there was no question of a real recovery in the Iate months of 1932, but rather a cessation of the vicious spiral of cumulative contraction and deflation which had dominated the economic life of Germany during the past three

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The extent to which the recovery was due to changed economic policies on the part of the Nazis is not clear. The fact that recovery was not very evident until after Hitler assumed power could be explained two ways. First, the Nazis may have instituted a change in policy. Indeed, it is frequently assumed that the Nazi government greatly expanded the previous expansionary fiscal policies and hastened the recovery. Second, the recovery could have resulted from the move to expansion instituted under Papen. Due to the usual macroeconomic lags, the effects of these previous policies may not have shown up until well into 1933.” This paper, by estimating the state of fiscal policy in a manner similar to Peppers and Middleton, will show that the policies followed by the Nazis were the key to the recovery, i.e., that a continuation of the Papen/Schleicher policies at the same level would not have led to recovery though they were important in stopping the downturn. PREVIOUS EXPLANATIONS OF THE STATE OF FISCAL POLICY A number of researchers have attempted to analyze the state of fiscal policy under the Nazis and its role in the recovery. Many of these explanations have pointed to specific government spending programs and simply assumed these led to an expansionary fiscal policy.” One policy first examined was rearmament spending on the part of Hitler’s government. While originally thought to be the key to the recovery, many researchers now concede that large-scale rearmament spending did not begin until 1935.13 Other authors have pointed to greatly expanded spending on public works programs, to tax cuts, and to subsidies for firms that raised their capital expenditures. A recent “key factor” that has been advanced by Overy (1975) is government actions that were designed to stimulate automobile production and road building. Overy’s study is typical of many of this type in that the German recovery is seen as being due to some “spark” rather than to generally expansionary macroeconomic policies. The problem with all these approaches is that they assume something not yet shown, that fiscal policy was indeed expansionary. years.” More recently, Henning (1973, Table 2, p. 143) has shown that the first month that industrial work-hours exceeded the figure 12 months earlier was March 1933. On the basis of this and other evidence, he concludes that the Papen plan merely prevented a further downswing. ” A third possibility-that recovery was caused by consumption increasing in response to the lower price level resulting from the Brfining government’s deflationary policies-+zan safely be ruled out. Consumption spending increased relatively little during the recovery. See Overy (1982, pp. 32-33) and Keese (1967, pp. 48-49). ” For example, see Carr (1972), Shirer (1960, p. 259) Overy (1982), and Ryder (1973, pp. 345-346). While not all these works fully analyze the state of fiscal policy, they all approach the question of the recovery by investigating specific government spending programs. I3 Overy (1982, pp. 46-51).

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Many authors have attempted to determine the state of fiscal policy in Germany by examining the state of the government’s budget. The first major attempt at actually doing this was by Klein (1959, pp. 3-27). His figures show that while government spending increased rapidly, so also did tax receipts. The overall deficit was small, exceeding 1 billion RM only in 1936. Klein thus concludes that large-scale deficit spending was not followed by the Nazis and thus could not have been the cause of the recovery. In his opinion, the recovery was due ‘to the fact that “pubhc expenditures were increased rapidly enough to result in substantial gains in total output and employment” (pp. 7-10). Economically, Klein’s argument is very questionable. Approximately equal increases in both government spending and in taxes would tend to work in opposite directions and lead to little overall effect on aggregate demand. While equal increases in both spending and taxes is sometimes thought to be subject to a multiplier of unity, it is unlikely that such a balanced budget multiplier heid for the 1930s in Germany.‘4 Two recent attempts have been made at explaining the recovery through examining the state of fiscal policy. Overy (1982, pp. B-38) investigated the four usual components of aggregate demand. He emphasized that the Nazis kept the growth rate of consumption low, a policy accomplished by keeping tax rates relatively high and by other means. Furthermore, exports had little chance of being increased in the worldwide protectionist environment, even had the Nazis desired to take this approach. The components of aggregate demand that grew, therefore, were government spending and investment. As the latter was stimulated and somewhat controlIed by the Nazi government, the “central feature of Nazi, policy was . . . a programme of government spending and public investment designed to stimulate demand and expand income” (p. 41). In more traditional economic terms, the Nazis followed an expansionary fiscal policy by increasing government spending but not changing tax rates. Using data that were not available to Klein, Overy presents estimates of Nazi government expenditures and revenues that show a Gontinual deficit. Before 1936, the money was spent in a variety of different areas-construction, transportation, work creation, and rearmament-and rearmament was not of major importance. Overy hesitates to label the Nazi spending policies as Keynesian because of other policies employed by the Nazis that served to reduce the value of the multiplier and to control wages, prices, and interest rates.” While the exact terminology can be I4 The existence of a balanced budget multiplier asstrmes that taxpayers lower +eir savings to partially ptiy ‘their taxes, a hypothesis that is very unu?rtain in general and especially so for the depressed 1930s. In any case, most discussions af the German recovery relate not to any ,balanced budget effect but to the more usual ty$e of &pa,twionary fiscal pplicy. ” For an estimate of the value of the multiplier in Germany during ihe 1930s, see Erbe (1958).

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argued, Overy points to expansionary fiscal policy as the key to the recovery. The other recent study of the German recovery has been done by James (1986). He uses data comparable to that used by Overy but indicates that budget deficits existed before the Nazis assumed power. While the Nazi government continued to run deficits, the deficits were not increased; fiscal policy, therefore, was not made any more expansionary by the Nazis. In James’ words (1986, p. 344, “most of Nazi economics was highly conventional: there was insistence that budgets should not be too unbalanced, high tax rate were maintained, and saving was encouraged.” James (1986, p. 371) describes what happend to the state of the budget as follows: “though government spending rose continually under the Third Reich it remained approximately constant as a share of National Product. . . . On the revenue side, tax rates barely changed from the levels of the Brtining years.” James’ figures show large increases in both tax revenues and in government spending. To James the budget deficit was essentially constant as a percentage of GNP from at least 1932 (and perhaps 1928) onward; therefore, fiscal policy was not made more expansionary by the Nazis. On a theoretical basis, the analysis by Overy is to be preferred to those of James and Klein. Both of the latter authors confuse what happened to actual tax revenues and government spending with the state of fiscal policy. Fiscal policy involves planned changes in spending or tax rates; these changes will in turn affect the level of real GNP in the economy and thus the actual level of government spending and tax revenues. In the case of Germany, the Nazi government may have followed a course of expansionary fiscal policy by increasing spending while keeping tax rates constant. This type of fiscal policy would lead to an increase in the level of GNP in the economy, which then increased actual tax revenues. An expansionary fiscal policy may have been followed but this fact would not be readily apparent from an examination of the actual government budget. From a theoretical point of view, therefore, James and Klein analyzed fiscal policy incorrectly. Overy’s analysis is much better; the available evidence indicates that an expansionary fiscal policy may have been followed. Overy’s analysis is, however, not complete enough to allow us to conclude with confidence that planned deficits were actually undertaken or that they were sufficiently large to explain the economic recovery. The widely accepted method of determining whether or not fiscal policy is expansionary is to formulate the high employment budget.16 Simply, this budget tells us what government expenditures and tax revenues would I6 For more on the high employment budget, see de Leeuw and Holloway (1983). This budget is sometimes referred to as the full employment budget or the cyclically adjusted budget.

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be if the economy were at high or full employment. By determining the budget at full employment each year, the differential effect of the state of the economy on the state of the budget is removed. In a depression, tax revenues fall because incomes fall; a budget that would be in balance at full employment would be in deficit in a depression. Similarly, as the economy starts to recover from a depression, tax revenues automatically rise along with incomes. It is this effect of the economy on the tax side of the budget that led Over-y to arrive at a different conclusion than James from an examination of similar data. The size of the high employment budget deficit or surplus each year then tells us whether fiscal policy was expansionary or restrictive.‘7 Changes in the size of the high employment budget tell us whether fiscal policy is being made more or less expansionary. Both Peppers and Middleton use the concept of the high employment budget in their work, Overy, on the other hand, does not provide any estimates of the high employment budget; his conclusion that fiscal policy was the major reason for the recovery must then be viewed as tentative. Alternative methods of measuring fiscal stimulus have often been suggested instead of the use of a high employment budget. First, if the balanced budget theorem is believed, then an increase in government revenues does not lead to a dollar-for-dollar decreasein aggregate demand because part of the higher taxes are paid by reducing savings and imports. In this case,full employment revenues should be adjusted by the marginal propensities to consume and to import;’ in fact, exactly this approach was taken by Brown (1956) in his work and was part of the basis for Broadberry’s criticisms (1984) of Middleton’s resnlts.l* Peppers (1973) rejects Brown’s use of a balanced budget idea and Middleton ‘(1984) similarly rejects Broadberry’s criticisms. Both authors argue that reliance should not be placed on a concept so theoretically uncertain and one for which there is no empirical evidence of its relevance for the 1930s.The second alternative approach is to use a macroeconomic model of the economy. From the model, an estimate of how much GNP would h.avechanged can be determined, first with a government sector included and then ~tith the government sector excluded.” The residual between the two models can I7 An expansionary fiscal policy may not, of course, have a major effect on real NNP; for example, if the economy was near full employment, the expansionary fiscal policy would mainly raise prices and interest rates. Essentially, expansionary fiscal policy Shifts the aggregate demand curve to the right; the effect on real NNP depends on the shape of the hggregate supply curve as well as how far the aggregate demand curve &its. At least for the 1933 to 1936 period, however, the German economy was below full employment and thus an expansionary fiscal policy would’ have contributed to the recovery. I8 Broadberry (1984) uses the term “fiscal leverage” to refer to the possible differing impact of different types of spending on GNP. ‘* For an example of a study using this approach, see Pryor (1979).

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then be viewed as being due to the impact of including government expenditures and taxes in the model, i.e., the effect of fiscal operations. This method requires more empirical information concerning the economy, something particularly troublesome for Germany, and places great reliance on the structure of the particular model used. Use of either of these alternative measures of fiscal stimulus has been rejected in this paper in favor of the use of the simpler and more traditional high employment budget. CALCULATING

A HIGH EMPLOYMENT

BUDGET

The following four steps must be undertaken in order to calculate a high employment budget .u) The first step is to estimate high employment GNP, which requires information as to when the economy was at high or full employment. Second, in general, government spending on goo& and services is affected little by changes in the level of GNP in the economy; most of the cyclical effect usually falls on government transfer payments and government revenues. For this reason high employment budgets usually compare data on government spending on goods and services with that for net revenues (which equals government revenues minus transfer payments); thus, the second step is to express the budget in this format. The third step is to break down government revenues and transfer payments into those that vary and those that do not vary over the course of the business cycle. The figures that vary over the business cycle are then adjusted to an estimate of what they would be at high employment GNP. Fourth, the high employment level of net revenues is compared to government spending to determine the size of the high employment deficit or surplus. The resulting figure is then expressed as a percentage of high employment GNP. The first step, calculating high employment GNP for Germany, depends on determining when the economy was at full employment. As shown in Table 1, economic activity reached a cyclical peak in the 1925 to 1928 period (ignoring 1926). Unemployment was about 1.4 million in both 1927 and 1928, higher than in 1925. On the other hand, real GNP seems to be at the top of its cycle in 1927 or 1928. Full employment was again certainly reached in 1937. Thus, full employment GNP is estimated by interpolation between the 1927 and 1937 real GNP figures assuming a z” The steps listed here generally follow those in de Leeuw and Holloway (1983, pp. 2627). One major decision that must be made in calculating a high employment budget is whether government at all levels should be analyzed or only the central government. The Nazi government made spending decisions directly only for the central government, yet all levels of government spending affect the overall state of fiscal policy. Ideally, high employment budgets that are calculated at both levels would yield the most information and data for both levels are used in this paper.

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constant growth rate.21 This simple approach assumes that the depression did not affect the level of high employment GNP. While prolonged depression could shift resources into lower productivity sectors, and thus could have depressed the 1937 GNP used for interpolation, the effect on our results is small. Estimations made using a somewhat higher growth rate give virtually identical findings concerning the changes in the high employment budget. The approach used here also assumes that full employment GNP increased at a constant rate. While a production function approach might provide better estimates of full employment GNP, more data are needed in this approach. So it is standard to assume a constant growth rate in full employment GNP.22 Undertaking this simple procedure to estimate high employment GNP also assumes that Germany actually had reached full employment by 1937 and that this concept still had its normal meaning in the conditions of 1930s Germany. In a recent article, Silverman (1988) has strongly questioned the accuracy of German unemployment statistics after Hitler assumed power. Silverman provides a sound argument for not believing the unemployment figures for 1933 and 1934, which show an incredible decline in unemployment. He does not, however, investigate the issue of interest for this paper, whether Germany had achieved full employment by 1937. In fact, Silverman (1988, pp. 202-203) implies that after rearmament spending began in earnest in 1934 or 1935, unemployment. actually did fall rapidly. The high employment budget figures presented below do test depend on the questionable unemployment figures for 1933 and 1934, only on when the economy again reached full employment; thus, Silverman’s findings do not directly affect the analysis here. One may also wonder whether the concept of achieving full employment has any meaning for 1930s Germany given the Nazi policies of removing women, Jews, etc., from ,the labor force. If these policies. totally changed the meaning of full employment by reducing the size of the labor force, then the growth of empEoym&rlnt under the Nazis should have been slow. Employment figures given by Hoffmann provide a crude test of this possibility. Hoffman (1965, Table 7, p. 36) shows that total employment increased about 28% between 1925 and 1939, while it uuxeased 25% between 1895/99 and .1910/13, a period of comparable length. Finally, since the determmation of full employment cannot be. certain, high employment budgets were ‘I The resuhing high employment GNP figures in real terms were then converted into nominal terms for use in calculating the surplus as a percentage of GNP. While 1927 GNP is used as a starting value, the results reported in the paper do not fundamentally change if GNP in 1928 or 1925 is used. While the German econamy was n,ot at full employment during any of these years, the economy was sufficiently close so thrit virtually no error is introduced info the analysis by using the 1927-1937 growth rate. ” The assumption of a constant growth rate is used by both Middleton (1981) and Peppers (1973).

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also calculated for reaching full employment in 1938 and 1939. While these budgets are not reported, they are very similar to those that are reported. Overall, it seems likely that any problems with the unemployment figures or the concept of full employment have at most very minor effects on the analysis in this paper. The second step in constructing a high employment budget is important only to the extent that transfers vary over the course of the business cycle. It is likely that few transfers were variable in Germany during this period since transfers were primarily composed of interest on the public debt, social security payments, and subsidies. Thus, the assumption is made in this article that all transfers were fixed, which allows us to arrive at the same answers by comparing either total government expenditures with full employment revenues or government purchases of goods and services with full employment net revenues.= The third step, dividing revenues into fixed and variable categories, is more difficult since the German revenue data are frequently divided into only a few categories. Where it is possible to do so, the assumption is made that property tax revenues are fixed, other tax revenues are variable, while other types of revenues are placed into the fixed or variable category depending on the revenue. Additionally, to further investigate the consequences of this problem, high employment budgets can be estimated assuming first that only some revenues are variable and then assuming that all revenues are variable. As will be seen, none of the trends in the estimates of the high employment budget are significantly affected by the small number of categories of revenues. The third step is completed by estimating full employment net revenues from actual net revenues. This estimation is made by multiplying actual net variable revenues by the ratio of full employment NNP to actual NNP. As is well known, this procedure assumes unit elasticity of variable taxes with respect to GNP.24 While this assumption has been shown to be inaccurate for other countries, it may be more accurate for Germany. For example, between 1930 and 1932, nominal GNP fell 29%, while nominal tax receipts declined 2630%, depending on the level of government (see Tables 1, 2, and 3). A number of taxes were raised, however, between 1930 and 1932, leading to the conclusion that the actual elasticity was greater than unity. Despite this possibility, a unitary elasticity will be used in this paper. The effect of doing so will be to bias full employment tax receipts downward and to make fiscal policy appear more expansionary than it actually was, especially during the worst depression years. As it is shown later that z This assumption was made by Brown (1956, p. 862) in his work on the United States. Peppers (1973, p. 199) did not make this assumption in his reworking of Brown’s analysis, but came to the same conclusion as Brown. 24 See the discussion in Peppers (1973, pp. 197-198).

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FISCAL POLICY IN 1930s GERMANY TABLE 2 Reich Government Budget, 1927-1938, James and Andic-Veverka/Overy (Million RM) James Year 1927/8 192819 1929/30 1930/l 193112 193213 193314 1934/5 1935/6 193617 193718 1938/g

Expenditures 11,263 13,238 13,357 13,881 12251 9903 -

Figures

Andic-Veverka/Gvery

Revenues

Deficit

Expenditures

Revenues

11,103 12,851 13,759 13,953 11,910 9979 -

160 387 -402 -72 341 -76 -

11,912 8867 10,507 15,064 17,157 21,199 24,527 29,309

9849 7881 8341 9750 11,027 12,992 15,665 19,581

Deficit .2063 986 2166 5314 6130 8207 8862 9728

Sources, Columns (1, 2): James (1986, Tables II, XXXV, pp. 52, 374). The Reich expenditures and revenues given by James were added to his figures for social insurance expenditures and revenues to obtain the figures presented. Column (3) is the difference between column (1) and column (2). Column (4): Andic and Veverka (1964, Table A.7, p, 245). The calendar year figures given in Andic and Veverka have been adjusted to fiscal years and estimates of Mefo expenditures presented in Overy (1979, p. 113) have been added. The Mefo expenditure of 2.14 billion RM given for the 1933/4 and 1934/5 tiscaf years was divided between the two fiscal years with 90% of it being allocated to the 1934/S fiscal year. Column (5): Overy (1982, Table XII, p. 46) and the sources cited there. Column (6) is the difference between column (4) and column (5).

fiscal policy was not expansionary during these years, the effect on the results of assuming a unit elasticity appears to be minor. Having finished the first three steps, the fourth step in calculating a high employment budget is straightforward. THE GERMAN

BUDGET

DATA

Budget data for the central government and for government at all levels for Germany have been presented by a number of other researchers. To be most useful in constructing a high employment budget, expenditure and revenue figures should be comprehensive and the revenue figures should be presented so that they can be divided; into fixed and variable components. Four authors present budget estimates that provide a starting point. Overy (1982, p. 46) and Hoffmann (1965,, p, 34) present budget data for the central government starting in 1932. James (1986, pp. 52, 374) presents data for all levels of government over the entire period starting in 1926; data for the central government can be separated out from his figures for the 1926-1933 period. Finally, Hoffmann (1965, pp.

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TABLE 3 Government Budget, 1927-1938, Hoffmann Figures (Million

RM)

Year

Government consumption purchases of goods and services

Transfer payments

Government revenues

Public saving”

1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938

8683 9728 9707 9455 8254 7316 8632 10,785 13,743 17,426 18,500 25,607

6934 8199 8343 9276 8199 6747 6759 5735 5496 5242 4967 5120

17,057 18,698 18,875 18,761 16,877 14,030 15,131 16,453 18,092 20,333 24,105 28,732

1440 771 825 30 424 -33 -260 -67 - 1147 - 2335 638 - 1995

a Column (3) minus the sum of columns (1) and (2). Public Saving in this context is equal to the budget surplus plus some government investment purchases of goods and services. See the text for additional explanation. Source. Hoffmann (1965, Table 232, pp. 804-805).

804-805) and Keese (1967, p. 47) present data for all levels of government over the entire period. None of these existing estimates are completely suited to the purpose of constructing a high employment budget because of problems that primarily concern the budget data available for the Nazi period. Problems exist with the data available for both expenditures and revenues. The expenditure data for the Nazi period are incomplete on a number of counts. The Nazis did not publish their budgets. Though these were published after World War II, the figures had not been audited at the time of the expenditure. In particular, it is thought that some spending on public works and rearmament was never fully recorded. Both Hoffmann (1965, pp. 719, 806) and Andic and Veverka (1964, pp. 232-233) provide discussions of this issue, and both present budget estimates designed to partially account for this problem. For our purposes, this problem can be partially accounted for by ensuring that the government spending series used for the Nazi period includes the largest category of missing expenditures, the rearmament spending financed off-budget through the use of the so-called Mefo-bills. The Mefo (Metallurgische Forschungsgesellschaft) was an institution set up by the Nazi government that purchased armaments and paid for them by issuing interest-bearing billsZ 25 For discussion of the workings of the Mefo-bill system, see the following sources: James

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The Nazis used this method because there was a legal ceiling on the amount of Reich treasury bills that could be discounted by the Reichsbank. Bills issued by the Mefo were not subject to this legal limit; thus, the Mefo system provided a method for the Nazis to engage in additional spending that did not force them to raise taxes or change the legal ceiling on Reichsbank ‘discounting. While the workings of the Mefo-bill system are well understood, not all authors have included estimates of the size of these expenditures in their government spending figures. One accepted source for German government expenditures is Andic and Veverka ‘(1964), but their figures do not include any estimate of Mefo-bill-financed spending. Overy’s figures are taken directly from Andic and Veverka and thus are not directly suitable for our purposes. James’ estimates are more suitable as he adjusts the Andic and Veverka estimates to include the Mefo-bill spending. Hoffmann and Keese construct their expenditure estimates separately from those provided by Andic and Veverka but explicitly include an adjustment for the Mefo-bill spending. Ensuring that expenditures are adjusted for the Mefo-bill-financed spending will improve the accuracy of the existing expenditure figures. No perfect solution for the problem of incomplete expenditure data exists, however, since the records are not extant that would allow a totally accurate series on Nazi expenditures to be constructed. As noted, Hoffmann and Andic and Veverka adjust the Nazi figures to the extent possible.26Even so, both Hoffmann and Keese note that their final measures of government spending do not include government spending on some types of nonmilitary public net investment. While it is generally accepted that the Nazi budget figures are not completely accurate, it is also hkely that they may not be as biased as are the unemployment figures investigated by Silverman (1988). For political reasons, Hitler had strong incentives to show results in reducing unemployment,, whether the reduction was actual or not. These political pressures were not as.strong for the budget, which as noted was not published. While no firm conchrsion is possible, it seemsthat the budget figures presented by Hoffmann and the Mefo adjusted ones based on Andic and Veverka may be fairly @curate. Problems also exist when the available revenue series are examined. The desired revenue figures would encompassall types of revenue ireceived by the government, including revenues from basic taxes, direct Rayments (1986, pp. 373,377), Hoffman; (1965, pp. 46-47), Overy (1982, p. 45), and Lampert (1985, pp. 105-106). 26 Hoffmann (1965, p. 806) says the foilawing in discussing his budget figures: ‘The reliability of these estimates suffer somewhat beginning in 1934 because the government budget was no longer completely public.” Then he describes the adjustments he made in the official figures to arrive at his estimates; the tone of this discussion indicates that he feels the resulting figures are reasonably accurate.

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for government services, contributions to unemployment and other social insurance funds, government investment revenues, etc. The most complete revenue figures are those provided for all levels of government by Hoffmann and by Keese, both of whom include estimates of all categories of revenues. On the other hand, the revenue figures provided by Overy and by Hoffmann for the central government for this period include data only on tax revenues and customs receipts and ignore other sources of revenue.27 The revenue figures used by James for all levels of government are explicitly labeled as “Tax Revenue” (though customs receipts are included) and thus also ignore the many other sources of government revenue that are included by Hoffmann. One problem with constructing a high employment budget is then that no complete series exists on central government revenues during the Nazi period, The problems with the available expenditure and revenue figures mean that no totally accurate budget figures exist on which to base estimates for the Nazi period of a high-employment budget for either the central government or for government at all levels. Consistent, if not totally comprehensive, revenue and expenditure estimates can, however, be generated. The figures used in this paper to construct a high employment budget for the central government are presented in Table 2 and those used for all levels of government are presented in Table 3. For the central government, the revenue and expenditure estimates used for the 1927 through 1932 period are taken directly from James (1986, p. 5~2)~~For the 1932 through 1938 period, the revenue and expenditure estimates are based on those presented by Overy (1982, Table 12, p. 46), but with two adjustments.29 First, the Mefo-bill-financed spending was added to the expenditure estimates. The second adjustment was that contributions to ” Overy’s source for these figures is Lurie (1947, p. 36), though the same figures appear in Guillebaud (1939, p. 281) and in League of Nations (1940, p. 255). The original source for these revenue figures is a 1938 report by the Reichskreditgesellschaft cited by Guillebaud. zg Both social insurance receipts and social insurance expenditures given by James are included in the expenditure and revenue estimates presented in Table 2. The entire amount listed for these categories was added to the figures for the central government based on the information in Andic and Veverka (1964, Table A.29, p, 271) that the central government accounted for 100% of ah social insurance expenditures. ” The expenditure figures presented in Table 2 were taken directly from Andic and Veverka (1964, Table A.9, p. 245) with the adjustments noted in the text. The author has been unable to determine the source for the expenditure figures presented by Overy in his Table 12. He lists Andic and Veverka as the source but no such figures appear in their article. Furthermore, the expenditure figure of 8.9 billion RM given by Over-y for the 1933/4 fiscal year appears to be much too small. Andic and Veverka give figures of 9.4 billion RM for 1933 and 12.9 billion RM for 1934. Hoftinann (1965, p. 34) also provides data for the central government. His data were not used for the central government because other data presented by him are being used for all levels of government. More information is therefore gained by using data constructed in a different manner. Using Hoffmann’s data for the central government would not change the basic results of the paper.

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unemployment insurance, taken from Hoffmann (1965, Table 230, pp. 800-801), were added to the revenue estimates3’ Even so, the resulting “budget” based on the Andic-Veverka/Overy figures (AV/O) shows large deficits illustrating the lack of complete information on government revenues. For ail levels of government, the revenue and expenditure estimates presented (Table 3) are taken directly from Hoffmann (1965, pp. 804805).31Hoffmann’s estimates are chosen in preference to those of Keese becauseHoffmann provides a more complete discussionof his procedures. Similarly, the expenditure estimates given by Andic and Veverka are not used because they did not provide revenue estimates. It will be recalled, however, that Hoffmann’s estimates do not include spending on nor@litary public net investment.32 In view of the latter problem, Hoffmann labels the difference between revenues and expenditures as Public Saving, not as the budget surplus. In fact, Public Saving is equal to the budget surplus plus the spending on the deleted nonmilitary public net investment. Given that spending on the deleted categories increased at a faster rate during the 1930s than did overall government spending, estimates of the high employment budget calcualted from Hoffmann’s Public Saving measure would underestimate the growth of the deficit during the Nazi period.33Hoffmann’s figures, therefore, provide a lower bound on the growth of the high employment deficit for all levels of government. M Hoffmann lists these receipts separately from the basic.tax revenues. The total amount of these receipts presented by Hoffmann was included with the central government revenms as these receipts are generally counted as part of the social insurance program. As the value of these receipts is relatively small, whether all, part, or none of them are included as central government receipts has minimal ,effects on the results of this paper. 31 James (1986) also presents expenditure and tax data for all levels of government but only through 1932. ” The estimates presented by Keese are similarly incomplete. See his discussion (1967, p. 46). In light of all these problems, the following procedure could be attempted. The most complete series for all levels of government appear to be the Mefo-bill-adjusted expenditures based on the work of Andic and Veverka and the revenue figures given by Hoffman. These series could be used to calculate a high employment budget. The results obtained from this approach are not reported in the paper because of possible inconsistencies that could occur due to differences in the procedures used to construct the two series. A high employment budget generated in the manner suggested here, however, yields results that do not differ in any important way from those reported in Table 5 of the paper. Similarly, a high employment budget based solely on Keese’s figures yields virtually identical results to those reported in Table 5 of the paper. fi Hoffmann (1965, p. 791). The extent of the undeiestimate is not clear. In an earlier chapter, Hoffmann (pp. 24-26) says that the increase’in public investment was the most meaningful aspect of Nazi economic policy, but here he is including military spending (about 80% of the total) as part of public investment. It should again be emphasized that Hoffmann’s figures reproduced in Table 3 in the text do explicitly indude estimates for military spen&ng, both that.given in the budgets and that financed off-budget through the Mefo-bills. Thus, the public net investment excluded from Table 3 includes only some nonmilitary expendi-

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While no totally accurate determination of the exact size of the high employment budget can be made, the different sources of data should allow the basic trend in the high employment budget to be determined. Most emphasis in analyzing the results will then be placed on changes in the size of the high employment budgets. The actual sizes of the budgets estimated and their effects on the German economy will be discussed only to the extent necessary to provide the reader with an appreciation for the size of the fiscal stimulus provided by the Nazi programs. All the problems with the German budget data may also lead some to question the accuracy of the results, even if only changes are emphasized. While all researchers agree that the German data are not completely accurate for the period under the Nazis, this fact has not prevented the use of these data to try to explain the state of fiscal policy in the 1930s. The contribution of this paper is that a proper measure of fiscal stimulus is estimated from these data. GERMAN FISCAL POLICY: 1927-l 938 Two high employment “budgets” are calculated, one for the central government using James’ and the AV/O data sources and one for all levels of government using Hoffmann’s public savings estimates. Estimates of the size of the high employment surplus for Germany for the period 1927 to 1938 are shown in Table 4; thus, a negative entry represents a deficit. The estimates from James’ and the AV/O data are for fiscal years starting April 1 of the year indicated, while those from Hoffmann’s data are for calendar years. Due to the lack of complete revenue data, the AV/O estimates are biased downward, and, due to the lack of complete expenditure data, the Hoffmann estimates are biased upward after 1932. To partially account for the bias, yearly changes in the size of the high employment surplus are calculated and most of the following analytical remarks center on these estimates. These estimates are presented in Table 5, which also includes changes over longer time periods. A positive (negative) change represents an increase (decrease) in the full employment surplus and thus indicates that fiscal policy became more restrictive (expansionary) during the year. Changes in the yearly high employment budget would exhibit a significant bias only if the missing data followed a strong trend over time. As was discussed above, the Hoffmann estimates in Table 4 do not account for the increasing percentage of government spending going to nonmilitary public investment; thus, the changes reported in Table 5 for the Hoffmann estimates may be too small for the tures. Hoffmann (1965, Table 63, p. 148) presents evidence that spending on public net investment as a percentage of total government purchases increased from 7% in the 19301934 period to 11% in the 1935-1938 period. No yearly figures are presented, however, that would allow construction of a more accurate expenditure series.

335

FISCAL POLICY IN 1930s GERMANY TABLE 4 High Employment “Budgets”, 1927-1938 (Surplus as Percentage of Full Employment NNP) Central government Year”

James

1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938

-0.20 -0.36 2.07 3.00 4.94 6.06 -

AV/O

lb

-2.36 1.94 -0.52 - 4.62 -5.93 - 8.73 -9.80 -9.93

All government AV/O

Zb

-2.35 -

3.33 0.52 -3.85 -5.48 -8.49 -9.80 -9.93

Hoffmann 1’

Hoffmann 2

1.79 1.04 2.89 3.46 6.96 7.18 4.86 3.96 1.38 -1.20 0.73 - 1.68

1.79 1.05 3.15 3.95 8.14 8.33 5.91 4.65 1.76 -1.00 0.73 -1.68

’ Fiscal years for James and Andic-Veverka/Overy starting April 1 of year indicated., Calendar year for Hoffmann. For the fiscal year figures, the high employment GNP used was interpolated from the calendar year figures. b Andic-Veverka/Overy 1 assumes custom revenues and property tax revenues are fixed while other tax revenues are variable, while Andic-Veverka/Overy 2 assumes all three are variable. ’ Hoffmaun 1 divides revenues into lixed and variable components, while Hoffmann 2 assumes all revenues are variable. Source. Columns (l-3): Calculated from data in Table 2. Columns (4, 5): Calculated from data in Table 3.

period after 1932. As no evidence of any trend in the missing data is apparent for the James and AV/O estimates, the changes reported in these series in Table 5 should be quite accurate. The state of fiscal policy indicated is clear. Without exception, fiscal policy became more restrictive each year from 1929 through 1932. Almost without exception, fiscal policy became more expansionary every year starting in 1933. A major conclusion of this paper is then that fiscal policy did not turn toward expansion until Hitler came to power. Consider first the period before 1932. The results indicate that a large increase in the high employment surplus occurred in 1929; even at this early date the move toward restrictive policy is quite apparent, During 1930 the B&-ring government raised a number of taxes while during 1931 salaries of public officials were reduced three times as was the amount of public investment.34 The effect of these deflationary policies is clearIy evident in the estimates in Tables 4 and 5. For the central government, 34 Hardach (1980, p. 43).

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TABLE 5 Changes in the High Employment “Budgets”,

1927-1938

Central government AV/O

1’

Yea?

James

1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938

-0.16 +2.43 +0.93 +1.94 +1.12 -

-2.46 -4.10 - 1.31 -2.80 - 1.07 -0.13

+6.42

+ 4.30

Change 1928-1932 Change 1929-1932 Change 1932-1934 Change 1932-1936

-

-

All government AV/O

2

-

Hoffmann Id

-

Hoffmamr 2d

-

-2.81 - 4.37 - 1.63 -3.01 -1.31 -0.13

-0.75 + 1.85 +0.57 +3.50 +0.22 -2.32 -0.90 -2.58 -2.58 +1.93 -2.41

- 0.74 +2.10 +o.so +4.19 +0.19 - 2.42 - 1.26 -2.89 -2.76 +I.73 -2.41

+5.68

+6.14

+7.28

+4.29

+5.1f?

+3.99

-

-

-

-6.56

-7.18

- 3.22

-3.68

-

- 10.67

- 11.82

-8.38

-9.33

’ A negative (positive) value in the table means that fiscal policy was made more expansionary (restrictive) during that year. b Fiscal years for James and Andic-Veverka/Overy starting April 1 of year indicated. Calendar year for Hoffmann. ’ Andic-Veverka/Overy 1 assumes custom revenues and property tax revenues are fixed while other tax revenues are variable, while Andic-Veverka/Overy 2 assumes all three are variable. d Hoffmann 1 divides revenues into fixed and variable components, while Hoffmann 2 assumes all revenues are variable. Source. Differences in figures given in Table 4.

the high employment budget calculated from James’ figures moves strongly toward surplus in 1930 and 1931. A comparison of the AV/O figure for 1932 with their 1928 figure yields a similar result, as does an examination of the high employment budgets for all levels of government based on Hoffmann’s public savings figures. In fact, the pattern and size of changes in Hoffmann’s figures in the period before 1932 is virtually identical to that shown by James’ and the AV/O figures. The policies followed by the Brtining government during 1930 and 1931 clearly made fiscal policy more restrictive. During 1932 the Papen and Schleicher governments instituted some

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employment programs and provided some tax credits.35 A number of researchers have speculated that the recovery that occurred during 1933 was the result of expansion resulting from the policies adopted before the Nazis assumed power.36 The estimates presented here directly contradict this speculation. While these programs appear to have slowed the rate at which fiscal policy was becoming more restrictive, they did not change the state of fiscal policy toward expansion. During 1932, the high employment budget was more restrictive than it had been in 1931; a clear reversal of direction is not apparent until the 1933 figures. Thus, the change in the direction of fiscal policy was not due to policies adopted before the Nazis assumedpower. This fact is most clearly shown by James’ figures, which are for German fiscal years running from April P through March 31. The figure for 1932 (for the 1932/33 fiscal year) then encompassesthe time period from a few months before the policy change instituted by the Papen government that assumed office in late May 1932 to a few months after the Nazis assumed power. The fact that the 1932 figure is less expansionary than the 1931 figure in James’ estimates leads to the conclusion that the policy change instituted by Papen and .expanded by Schleicher was not strong enough to fundamentally change the direction of fiscal policy towards expansion. Note that the presence of lags in the effects of macroeconomic policies is not relevant to this conclusion. The full employment budget tells us the current state of fiscal policy and thars allows us to directly conclude whether or not current ‘policy was expansionary. For Germany, the evidence clearly points ta the conchtsion that the rate at which fiscal policy was being made mare restrictive was slowing but that fiscal policy was not changed toward expansion (or lessrestriction) by the Papen/Schleicher policies. Thus, if these governments had stayed in office and continued their policies at the same level, ,economic recovery would not have occurred as a result of their fiscal program.37 A clear change in the state of fiscal policy is’ apparent starting in 1933, coinciding with Hitler’s assumption of political power in late January of that year. The figures indicate that the policies adopted by the Nazis were of a size sufficient to move the high employment budgets for both the central government and. for all levels of government toward expansion. Given the downward bias to the AV/O, figures in Table 4, government fiscal policy was almost certainly still restrictive overall. The movement, however, was clearly toward less restriction. Fiscal policy was made more 3s Hardach (1980, pp.. 47-48). 36 For example, see Hardach (1980, p. 59), and Guillebaud (1939, p. 45). ” Recovery could perhaps have occurred for another reason, such as an increase in consumption spending reflecting the lower price levei. Even so, until the Papen and Scbleicber programs had been substantially expanded, the German budget was not going to contribute to any recovery.

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expansionary mainly by increases in government spending. The Nazis greatly expanded the level of government spending through the Reinhardt plan of June 1933. Subsequent spending policies designed to promote employment and, beginning in 1935, for rearmament served to continually expand the level of government spending through the late 1930s and led to fiscal policy becoming more and more expansionary. Much of the increased spending was financed through the use of the Mefo-bills, illustrating the importance of including estimates of the size of these in the expenditure series.38 On the other hand, the Nazis did very little in terms of reducing tax rates. In September 1933, some minor tax rate reductions were implemented, but later the Nazis increased tax rates. Overall, changes in tax rates contributed little to the state of fiscal policy.3g Though the Nazis’ policies were clearly expansionary due to the huge increases in government expenditures,, they could have adopted policies that would have made fiscal policy even more expansionary. The change in the state of fiscal policy in 1933 contributed to the German economic recovery from the Great Depression. In fact, as early as 1934 or 1935, the Nazis had made central government fiscal policy more expansionary than its 1928 level (see Table 4). From James’ figures, the full employment surplus increased by 3.99% of full employment NNP between 1929 and 1932. The AV/O figures show that it decreased by more than this figure by 1934. The conclusion for all levels of government derived from Hoffmamr’s figures is similar, though the timing is a little later. If Briining’s contractionary policies are conceded to have depressed the economy in 1930 and 1931, then Hitler’s expansionary policies of equal or larger size over a similar period of time must have promoted recovery. Indeed, as rearmament spending became important, fiscal policy became more and more expansionary as shown by the continuing huge negative movements in the high employment budget. Throughout the 1930s the Nazi fiscal policies must have continually served to expand the German economy. This conclusion is further supported by the likelihood that, under the Nazis, the changes in government expenditures are more likely to have been understated than are the changes in government revenues, a factor that would understate the move toward expansion shown in the Table 5 estimates. 38 The 2140 million RM Mefo-bill spending Overy lists as the combined total for the 1933/4 and 1934/S fiscal years was divided between the two fiscal years with 90% of it being allocated to the 1934/5 fiscal year. See the source note to Table 2. James allocates the entire amount to the 1934/35 fiscal year. If James’ procedure had been followed, then the changes in the high employment surplus listed for 1933/4 in Table 5 using the AV/O figures would have been only -2.18 and -2.51 for the two estimates. The clear change observed in the direction of fiscal policy in 1933134 does not then depend on the procedure used to allocate the Mefo-bill spending in the early years of the recovery. 39 For a discussion of early Nazi economic policies, see Silverman (1988). For information on the increases in tax rates, see Hardach (1980, p. 64).

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A comparison of the fiscal policy experience in Germany with that in Britain illustrates the magnitude of the changes under the Nazis. The full employment surplus in Britain increased by 3.8% of full employment income between 1929 and 1933, then decreased by 4.2% between 1933 and 1937.40 In Britain it took about 4 years to offset the restrictive movement that occurred up to 1933. Yet even during 1937 Britain had not achieved full recovery, something that Germany had accomplished by late 1936* In Germany the restrictive movement that occurred up to 1932’was offset, if not exceeded, by 1934. By 1936, fiscal policy was substantially more expansionary than ,it had’ been in 1928. The budget was almost certainly in a high employment deficit (as distinct from moving in that direction) as early as 1935 and real GNP in that year reached a value larger than irs previous high in 1928. In contrast, the British high employment budget was not in deficit until 1938. The quicker and larger moves to actual expansionary fiscal policies in Germany are then an important reason why the German recovery was more rapid and more complete than in other countries. A couple of factors serve to qualify the above conclusion, especially as to the importance of fiscal policy during the early years of economic recovery. First, interest rates declined during 1933 and 1934, something that would be unexpected if fiscal policy was the only tool used to promote recovery.41 Some other factor, such as monetary policy or a change in expectations, must have also been important during these years. Second, during 1933 the full employment surplus in Germany declined by about 2-3% of full emplo’yment GNP but the budget ended up in surplus. Yet the economy underwent a rapid recovery dnring that year (Table. 1). The size of the recovery seems much too large to be fully explained by the change that occurred in fiscal policy. As further evidence, note that the full.employment surplus in the United States declined by 1.76% in 1934, yet fiscal policy is not commonly given much credit for the growth of theU.S. economy during that year.42 The fiscal policy changes that occurred in Germany would be consistent with a slower recovery than that co&manly thought to have occurred. Given the work of Silverman (1988) showing that actual unemployment in Germany declined slower than shown by the official figures, it is possible that the speed of the German recovery during 1933 has been previously overstated. DISCUSSION This paper has shown that fiscal policy in Germany, as measured by the high employment surplus concept, was restrictive through 1932 but 4o Micldleton (1981, Table 5, p. 280). 41 Evidence of substantial declines in interest rates is given by Guillebaud and Sommariva and Tullio (1986, pp. X6-172). u Peppers (1973, Table 2, p. 201).

(1939, p. 54)

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turned toward expansion once the Nazis assumed power. The new spending policies instituted in 1932 by the Papen and Schleicher governments did not succeed during the course of 1932 in changing the direction of a fundamentally restrictive fiscal policy. The Nazi policies led to a drastic expansion of the previous programs and were of a size sufficient to change the state of fiscal policy and contribute to the economic recovery. In 1933, for the first year since 1928, the high employment budget showed a clear change toward fiscal policy becoming more expansionary (or less restrictive). Though it is unclear exactly how much credit expansionary fiscal policy should be given for promoting economic recovery during the first few years of the Nazi era, policy became more and more expansionary. By 1935 or 1936, it was significantly increasing aggregate demand. The conclusions in this paper are then closest to the ideas proposed by Overy (1982). As he has proposed, fiscal policy was made more expansionary by the Nazis and did contribute to the economic recovery. Yet, in contrast to Overy, it is suggested here that fiscal policy may not have been the only reason for the recovery during the first few years. Temin (1989) has recently emphasized the importance of a change in ’ expectations arising from the change in policy in leading to the beginnings of economic recovery from the Great Depression. In many countries, expectations changed when an economy left the gold standard and/or new administrations came to power. In Temin’s view, the change in expectations was a necessary precondition for recovery, but the change in expectations was certainly not a sufficient condition for economic recovery.43 In addition, a fundamental change had to occur in the state of the country’s macroeconomic policies at the same time as the change in expectations. Temin claims, however, that recovery began as a result of the change in expectations before the effects of the policy change were felt. In view of Temin’s hypothesis, the findings of this paper could be interpreted two ways. First, they confirm that policy did indeed fundamentally change and thus they confirm part of Temin’s hypothesis. Second, the change in policy that occurred was found to be immediate. It is thus possible that recovery occurred strictly as a consequence of the changed policy, i.e., expansionary forces resulting from the change in expectations may not be needed. When other countries are examined, the critical role of expansionary macroeconomic policies in promoting recovery is apparent. Neither Britain nor the United States instituted a fundamental change in macroeconomic 43 Temin (1989). See page 104 for his brief discussion of British recovery policies and pages 101-103 for his discussion of the German recovery. On page 103, Temin says: “. . a change in policy regime was sufficient to turn the corner, although not to promote full recovery.”

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IN 1930s GERMANY

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policies during such a short period of time as did Germany, even though both countries experienced a change in expectations. Britain went off the gold standard in 1931 but its fiscal policy did not shift toward expansion until 1934 and its monetary policy was only mildly expansionary. In turn, the British recovery was slow and incomplete. The United States went off the gold standard in 1933 but neither its fiscal policy nor its monetary policy changed significantly toward expansion. Thus, the U.S. recovery was also slow and incomplete. In Germany, the assumption of power by the Nazis led to a widespread change in expectations among the German populace. But at the same time, fiscal policy turned toward expansion. Whether the change in expectations contributed to the early recovery in Germany is simply not clear, but it is apparent that the Nazis instituted a fundamental and quick change in the state of fiscal policy. We are at present lacking a casewhere policy became more expansionary but where no change in expectations occurred; results from studying such a case would contribute greatly to an investigation of the importance of a change in expectations in promoting recovery. The rapid German economic recovery helped the Nazis to consolidate their political position, a fact that had such terrible consequencesfor the world. The Nazis may have had little understanding of macroeconomics and almost certainly did not know what exactly they were doing. This point is of interest but is of no importance in determining whether the policies followed by the Nazis were successfulin causing recovery in the economy. This paper has provided clear evidence’ that their fiscal pohcies were indeed effective and deserve a good deal of credit for .expiaining the successfuland quick German recovery from the Great Depression. REFERENCES Andic, Suphan, and Veverka, Jindrich (1964), “The Growth of Government Expenditure in Germany since the Unification.” Finanzarchiv 23, 169-278. Borchardt , Knut (1982)) Wachstum, Krisen, Handlungsspielrtiume der Wirtschaftspolitik. Gottingen. Pp. 165-182. Broadberry, S. N. (19&t), “Fiscal Policy in Britain During the 1930s.” Economic History Review 37, 95-102. Brown, E. Cary (1956), “Fiscal Policy in the Thirties: A Reappraisal.” American Economic Review 46, 857-879. Carr, William (1972), Arms, Autarky, and Aggression. New York: Norton. de Leeuw, Frank, and Holloway, Thomas M. (1983), “Cyclicat Adjustment of the Federal Budget and Federal Debt.” Survey of Current Business 63, 25-40. Erbe, Rene (19%X), Die Nationalsozialistische Wirtschafspolitik 1933-1939 im Lichte der Modemen Theorie. Zurich. Guihebaud, C. W. (1939), The Economic Recovery of Germany. London: Macmillan & Co. Hardach, Karl (1980), The Political Economy of Germany in the Twentieth Century. Berkeley: Univ. of California Press. Henning, Friedrich-Wilhelm (1973), “Die zeitliche Einordnung der Ueberwindung der Wei-

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twirtschaftskrise in Deutschland.” In Harald Winkel (Ed.), Finanz-und wirtschaftspolitische Fragen der Zwischenkriedgsreit. Berlin. Pp. 135-173. Hoffmann, Walther G. (1965), Das Wachstum der Deutschen Wirtschaft seit der mitte des 19. Jahrhunderts. Berlin. James, Harold (1986), The German Slump: Politics and Economics, 1924-1936. Oxford: Oxford Univ. Press. Keese, Dietmar (1967), Die volkswirtschaftlichen GesamtgriiSen fir das Deutsche Reich in den Jahren 1925-1936.” In Werner Conze and Hans Raupach (Eds.), Die Staats- und Wirrschaftskrise des Deutschen Reichs 1929133. Stuttgart. Pp. 35-81. Klein, Burton H. (1959), Germany’s Economic Preparations for War. Cambridge: Harvard Univ. Press. Konjunktur-Statistisches Handbuch 1933 (1933). Berlin: Institut fiir Konjunkturforschung. Lampert, Vcm Heinz (1985), “Die Wirtschafts- und Sozialpolitik im Dritten Reich.” Jahrb&her fiir Nationaltikonomie und Statistik UN), 101-120. League of Nations (1941), Statistical Yearbook, 1939-40. Lurie, Samuel (1947), Private Znvestment in a Controlled Economy: Germany 1933-1939. New York. Middleton, Roger (1981), “The Constant Employment Budget Balance and British Budgetary Policy, 1929-39.” Economic History Review 34, 266-286. Middleton, Roger (1984), “The Measurement of Fiscal Influence in Britain in the 1930s.” Economic History Review 37, 103-106. Mitchell, B. R. (1978), European Historical Statistics, 1750-1970. New York: Columbia Univ. Press. Abridged Edition. Overy, R. J. (1975), “Cars, Roads, and Economic Recovery in Germany, 1932-8.” Economic History Review 28, 466-483. Overy, R. J. (1979), “The German Motorisierung and Rearmament: A Reply.” Economic History Review 32, 107-113. Overy, R. J. (1982), The Nazi Economic Recovery, 1932-1938. London: Macmillan. Peppers, Larry (1973), “Full Employment Surplus Analysis and Structural Change: The 1930’s.” Explorations in Economic History 10, 197-210. Pryor, Z. P. (1979), “Czechoslovak Fiscal Policies in the Great Depression.” Economic History Review 32, 128-140. Ryder, A. J. (1973), Twentieth Century Germany: From Bismarck to Brandt. New York: Columbia Univ. Press. Shirer, William L. (1960), The Rt%e and Fall of the Third Reich. New York: Simon & Schuster. Silverman, Dan P. (1988), “National Socialist Economics: The Wirtschafrswunder Reconsidered.” In Barry Eichengreen and T. J. Hatton (Eds.), Znterwar Unemployment in Znternational Perspective. Boston: Kluwer Academic Publishers. Pp. 185-220. Sommariva, Andrea, and Tullio, Giuseppe (1986), German Macroeconomic History, 18801979. London. Temin, Peter (1989), Lessons from the Great Depression. Cambridge: The MIT Press. U.S. Department of Commerce, Bureau of the Census (197.Q Historical Statistics of the United States, Colonial Times io 1970. Washington.