In the mid-1930s...Germany faced a critical decision. More? Or less?

Adam Tooze, a British historian, has written a marvelous book on the Nazi economy, The Wages of Destruction. He shows that, far from illustrating the success of intelligent central planning, the German economy of the Third Reich was a disaster. The National Socialists - or "Nazis" - had their plans for Germany.

They were determined to put them into practice, regardless of what the Germans may have wanted for themselves. They fiddled with one sector after another. When one fix failed to produce the desired results, actually bringing unintended and undesired consequences, they tried to fix the fix with a new fix.

Most of these fixes involved spending money - if not on actual output, then on bureaucracies that regulated output. And most of them were directed towards a goal that only a demagogue politician or a lame economist would find attractive - making Germany self-sufficient. Imports cost money, they reasoned. Besides, trade forced a nation to behave. Neither was attractive to the Nazis.

Like America in the 2000s, by the mid-1930s Germany had already spent too much money - with the military as its biggest single expense. It faced enemies much more real and dangerous than America's 'terrorist' adversaries. And under Adolph Hitler's leadership it had decided to invest heavily in armaments.

This created a sense of purpose for many people and a source of 'demand' that got people working again. Germany was still a relatively poor country, with a standard of living only about half the US equivalent. An autoworker in Munich, for example, could not expect anywhere near the same lifestyle as one in Detroit.

Henry Ford paid his workers so well they were able to afford large houses with hot and cold running water and electricity. They could buy automobiles too...which gave a huge boost to America's heavy industry. When war began, the US could fairly quickly convert its auto factories to production of jeeps, tanks and trucks. Germany could not.

In Germany, automobiles were still a luxury item. Few people owned them; certainly not the people who made them. Military orders made up for the lack of demand from the civilian population.

In this regard, many economists looked at Germany and labeled the rearmament program - from an economic standpoint - as a central planning success story. It 'put people back to work.' It 'got the economy moving again.'

More stuff was being produced. 'More' worked! From all over Europe, people came to admire the revival in Germany. American Congressmen praised Hitler. So did many magazine editors and other leaders in France and Britain too.

Besides, compared to what was going on in Russia, Japan and Italy... Germany looked positively benign, if not a perfect role model. Stalin was purging or starving his enemies - millions of them.

Benito Mussolini had invaded Abyssinia and was busily massacring the locals. The Japanese were beginning their bloody war against the Chinese. Hitler may have sounded mad from time to time, and he may have murdered many of his rivals on the 'night of the long knives,' but now - by 1935 - he was beginning to sound reasonable, at least in comparison.

But vast spending on the military brought problems for the Nazi leadership. The German economy was still recovering from the destruction of WWI, the loss of the Ruhr heavy industrial area, the Great Depression and the reparations payments.

While other economies had been forced off the gold standard, Germany held to its strong mark policies. It lacked the raw materials needed to build heavy military equipment and the fuel needed to power a modern economy and modern war machine.

Those could only be bought with foreign currencies, which it could earn by trade, or by drawing down its own hard currency reserves of gold.

By 1936, it was clear that the government would run out of money in just a few months. The Nazi leadership had already 'fixed' the farm sector - with various jury rigs and many unintended consequences.

The market system had largely been replaced by a system of bureaucratic meddles and price controls which, naturally and predictably, led to shortages that had to be reconciled by rationing.

Now, this same sort of meddling was causing shortages in the manufacturing sector too. If something were not done, the whole rearmament effort could come to a halt.

Germany was not rich enough to be able to afford guns and butter - at least not on the scale promised by the Nazi Party. And with their spreading system of bureaucratic management, neither the guns nor butter were likely to last long.

At the time, Mr. Hitler was lucky to have at least one economist with a clearer head than most of his other advisors and henchmen. Carl Friedrich Goerdeler came from a tough, conservative Prussian family. He was smart.

He was a good organizer. He was persuasive. Goerdeler seemed like a decent sort, too. After all, in 1933, as mayor of Leipzig, he refused to enforce the national boycott against Jewish businesses and ordered the police to release several Jews who had been taken hostage by the S.A.

Goerdeler may not have been impressed with Adolf Hitler in every respect. Still, as late as 1936 he believed the Fuhrer was an "enlightened dictator" and that if he could only explain to him what was going on, he might be led to make the right choice. He saw readily that you can't continue to spend more than you earn; Germany would have to adjust its priorities. 'More' would no longer work.

While he knew Hitler was dead-set on military expansion, Goerdeler urged the Fuhrer to forget the whole thing. Germany could not afford both guns and butter, he argued, and the German people would be better off with butter.

Devalue the mark, he urged. Abandon the program of breakneck re-militarization. Come to terms with England, France and America. Drop the hard-line anti-Jewish claptrap. In short, become a civilized nation with a market economy, rather than a centrally-planned war economy.

He wanted to take this message to Hitler personally, to talk to him, to try to persuade him. But his friends talked him out of it. Hitler had put Hermann Goring into a position as his chief economic advisor. But Goring was very unlike Helmut Schacht at the central bank, who was also calling for a more 'normal' free market economy.

Goring was a central planner...and a Nazi...through and through. So, Goerdeler prepared a memo for Hitler and passed it to Goring. The latter annotated it before passing it to the Fuhrer, marking critical passages "nonsense!" Instead of embracing Goerdeler's plan, Hitler came up with his own 4-Year Plan, released in 1936.

It rejected a free-market economy altogether. Instead, Germany would have a war economy, in which all economic and financial decisions were subordinate to the interests of the military.

Like today's neo-cons, Hitler told his followers that Germany was in a fight for its very survival. Therefore, the laws that applied to normal societies - including the laws of economics - no longer applied to Germany:

"The nation does not live for the economy, for economic leaders, or for economic or financial theories; on the contrary, it is finance and the economy, economic leaders and theories, which all owe unqualified service in this struggle for the self-assertion of our nation."

In the age-old battle between force and persuasion...civilization and barbarianism...the market and politics...central planning and individual planning...the winner was clear. Germany had gone over to the dark side. Hitler had chosen more military spending...more central planning...and more war.

Politics was triumphant. War was inevitable. And Carl Goedeler was soon history. He began to conspire against Adolph Hitler...including the attempt to kill him in 1944. For his trouble, Goedeler was hung in 1945.

Regards,

Bill Bonner
for The Daily Reckoning Australia