The Great Depression in Germany () was a severe economic downturn during the late Weimar Republic and early years of Nazi Germany. As part of the global Great Depression of 1929 to 1939, it had profound effects on the nation both economically and politically. At its peak in 1932/33, Germany's unemployment rate hit 30%, with nearly six million unemployed. The economic crisis exacerbated the political weaknesses of the Weimar Republic. Germans lost faith in the centrist parties that had been in control of its governments and turned increasingly to the Communist Party of Germany (KPD) on the far left and the Nazi Party on the far right. The effects of the Great Depression played a significant role in Adolf Hitler's rise to power in 1933.
The depression hit Germany especially hard because it had become highly dependent on American loans during the second half of the 1920s. When American banks began calling in the loans after the Wall Street crash of late October 1929, it led to a major capital crisis in Germany. The government's fiscal and monetary problems were made worse by Germany's large World War I reparations debt. Chancellor Heinrich Brüning introduced a policy of austerity and deflation in an attempt to handle the twin crises. After the Reichstag rejected his initial proposals, he began ruling by decree, marking the start of the presidential cabinets that continued until the end of the Weimar Republic. Rather than improving Germany's economic situation, Brüning's deflationary measures made it worse. The two short-lived cabinets that followed Brüning's failed to halt either the economic slide or the rise of the Nazis. After Adolf Hitler became chancellor in 1933, he used public works projects, a massive rearmament program and deficit spending to return Germany to near full employment by 1939.
Background When the German Empire entered World War I in 1914, it was a technologically and industrially advanced country with an overall high standard of living. The enormous monetary and human costs of the war worsened Germany's economic situation dramatically. Its central bank, the Reichsbank, suspended convertibility of paper money to gold at the beginning of the war. Most of the costs of the war were covered by debt that the government expected to repay with reparations extracted from its enemies after a German victory. By 1918 Germany's national debt had reached 94% of its gross domestic product (GDP). Industrial production, which was severely affected by the Allied blockade of Germany, fell to 57% of its pre-war value and per capita GDP to 73% of the 1913 level.
Prior to 1923, unemployment remained mostly below 5% even as millions of demobilized soldiers returned to the workforce. Fear of social unrest led employers, with the support of the government, to accept high wage settlements (the Stinnes-Legien Agreement) even though it was known that inflation would likely follow the higher pay packages. The government turned primarily to the Reichsbank and the inflationary practice of printing money to cover its budget deficits. Most workers' real wages were significantly lower in January 1922 than they had been in 1913 due to the effects of inflation. In May 1921, the German economy received a major shock when the World War I Allies presented Germany with a reparations bill of 132 billion Reichsmarks, roughly equivalent to $400 billion in 2010 dollars. After France declared Germany in default in January 1923 and occupied the Ruhr, the government backed a policy of passive resistance. To underwrite the enormous losses of idled factories and mines and to pay jobless workers, it again resorted to printing money. The massive amount of new currency introduced into circulation caused the nation's already rising cost of living to explode into the unprecedented Weimar hyperinflation of 1923. The collapse of the Reichsmark's value made individuals' monetary savings all but worthless. The hyperinflation was quickly stopped by the introduction of the Rentenmark in November, but the experience left many Germans on both the left and the right bitter with the Weimar Republic and the capitalist economic system.
The period from 1924 to 1929 came to be known as the Golden Twenties in Germany. The economy improved along with its foreign relations, and civil unrest decreased. National income rose by 25% between 1925 and 1928. An essential basis for the stabilization was the restructuring of reparations through the 1924 Dawes Plan. It brought the Weimar Republic a significant inflow of American loans from both state funds and private investors. The money served as start-up financing for reparations and as an aid to economic revival. But while Germany's recognition of its reparations obligations promoted reintegration into the European state system and world markets, it also led to a strong dependence on American capital. Public anger continued over reparations payments, as shown in the failed 1929 referendum against the Young Plan. The Treaty of Versailles and its reparations demands played a significant role in Nazi propaganda during Adolf Hitler's rise to power.
Onset The worldwide Great Depression triggered by the Wall Street crash of late October 1929 hit Germany harder than any country except the United States. The key reason was that Germany had become so heavily dependent on American loans. The hyperinflation of 1923 had significantly reduced Germans' ability and desire to save. Due to the resulting shortage of domestic capital, Germany turned to foreign sources, primarily in the United States. Furthermore, of the 20.6 billion marks in foreign loans that came into Germany before 1931, roughly half were short term. When American banks began calling in the loans after the Wall Street crash, it caused a major capital crisis in Germany. German industry, which had still been investing in the first part of 1929, faced significant overcapacity as orders plummeted. Production shrank, workers were let go and some firms collapsed. A self-reinforcing downward spiral followed, with declining purchasing power leading to falling demand, falling production and more layoffs. The crisis also affected agriculture. By 1931/32, agricultural output had fallen to 62% of its 1928/29 level. Many small and mid-sized farms went into foreclosure.
Bank crisis and reparations
A second wave of loan recalls took place after the September 1930 Reichstag election in which the Nazi Party went from 12 to 107 seats and became the second strongest party in the German parliament. Then in May 1931, the Creditanstalt Bank of Vienna collapsed at the peak of the European banking crisis of 1931, sending economic shock waves into Germany. The Reichsbank lost 180 million marks in the first week of June and 540 million in the second. In July Germany's second largest bank, the Darmstädter und Nationalbank (Danat), became insolvent. The German government briefly closed all banks to avoid a run and infused the Reichsbank with 250 million marks. On 15 July 1931, the Reichsbank suspended the convertibility of the Reichsmark, effectively taking Germany off the gold standard. In an attempt to stabilize the world monetary system, U.S. President Herbert Hoover gained European agreement for a moratorium on payment of war reparations. The Lausanne Conference in June/July 1932 failed to find a permanent resolution to the reparations problem, and Germany did not resume payments.
Economic statistics In 1932, key indices of the German economy were down an average of 38% from 1928. Unemployment stood at 30%, with the number of unemployed pushing towards the six million mark. The average income of German workers, who had been the best paid in Europe coming into the depression, was at 62% of its 1928 level, although real income was still at 86% because deflation had brought consumer prices down to 67% of the 1928 mark. Hardest hit were workers in heavy industry and the building trades, along with 18 to 30 year olds. Sixty percent of university graduates were reported to be out of work, reflecting the high unemployment that also affected government and white-collar workers. Crime and suicides both increased. +Effects of the depression on the German economy(1928 = 100) 19291930193119321933Gross National Product10194796567Gross investment7760283341Industrial production10287695866Capital goods production10381614649Consumer goods production9791877474Consumer prices9891 -6767Private consumption10398846768Average income10194806263Real income1061071028684Stock prices (1924/26 = 100)134109815567Employment (in millions)17.916.514.412.513.4Unemployed (in millions)1.93.75.15.36.0Percent unemployed9.615.7243026 Germany had introduced a government program of unemployment insurance in 1927, the year when per capita GDP exceeded pre-war levels for the first time. Paid for equally by employers and employees, the insurance covered 26 weeks of unemployment, after which the unemployed had to rely on welfare at the local level. The system, funded to handle up to 1.4 million people, was overwhelmed by the massive increase in the number of unemployed after the depression began. At the start of 1929, it was covering 80% of the unemployed; by January 1932, that had sunk to 30%.
The financial distress of the unemployment insurance program caused the first significant political crisis of the depression era. The government of Hermann Müller of the Social Democratic Party (SPD) – a grand coalition that included parties stretching from the working-class SPD to the business-oriented German People's Party (DVP) – found it impossible to reach an agreement on who should bear the financial burden of stabilizing the system. The government resigned on 27 March 1930 and was replaced three days later by the first cabinet of Heinrich Brüning of the Centre Party. Müller's government was the last during the Weimar Republic to be based on parliamentary majorities. The three presidential cabinets that followed ruled largely without the Reichstag, using the emergency powers that the Weimar Constitution granted to the German president.
Government responses Heinrich Brüning and deflation
From the time of its formation, Brüning's government departed from parliamentary norms. Germany's president, Paul von Hindenburg, had made it clear when he appointed Brüning that his cabinet was to be built without regard to coalition ties. Made up of members of seven parties, the cabinet did not command a majority in the Reichstag. Lacking any ministers from left-of-center parties, it was considerably more conservative than the previous SPD-led Müller government. In his first statement to the Reichstag, Brüning announced a policy of governmental austerity and deflation. His budget proposal included a significant reduction in social services, higher consumption taxes and tariffs on agricultural goods. The austerity budget was meant to balance state expenditures with its falling revenues. At the same time, state-mandated wage and price cuts were to reduce production costs, which Brüning hoped would ensure a positive trade balance when coupled with reduced imports. Once the Allies had been convinced to end reparations and the depression had reached its low point, the mark would be devalued and put Germany in a leading position as the export market revived. Industry, labor and the classic economic thinking of the time all initially agreed that a policy of deflation, although painful at first, was the only way for Germany to fight its way out of the depression.