Emil Lederer, Who Pays for German Armament? (1938)

Emil Lederer’s journal article explains German rearmament through the distribution of real resources rather than the apparent ingenuity of Nazi finance. Its three sections move from an assessment of wages and living standards, through the mechanisms transferring income and capital to military production, to the limits threatened by the second four-year plan. The central claim is that workers finance armament through consumption deliberately held below the level that economic recovery would otherwise permit. Financial stability therefore does not demonstrate either an economic miracle or an absence of exploitation.

German armament has been financed almost entirely by a systematic and far-reaching exploitation of the workers, and to this extent it is “sound.”

The qualification makes economic feasibility distinct from social legitimacy. Lederer argues that depressed wages, inherited from the crisis and maintained as employment expanded, released resources for the state. Inflation was not necessary to extract this contribution: the regime could suppress the wage increases ordinarily associated with recovery. His question is consequently not simply who lends money to the government, but whose foregone consumption makes military production possible.

Section I establishes the disparity between recovery in output and recovery in labor income. With approximately the same number employed, aggregate workers’ and employees’ income fell from 46 billion marks in 1928 to 35 billion in 1936. Industrial production roughly doubled between 1932 and 1936, while aggregate labor income increased by only 34.6 percent. Yet official cost-of-living figures seemed to show real earnings returning close to their previous peak. Lederer challenges that result by examining what the indices omit: shop prices exceeding legal prices, deterioration in goods, and food production diverted toward military consumption or wartime reserves. Aggregate consumption figures cannot establish civilian welfare without accounting for quality and destination.

His alternative estimate—a fall of at least 20 percent in average living standards—depends on an assumed correction for concealed price increases and declining quality, rather than on a directly observed comprehensive index. The comparison with Britain supplies a further counterfactual: British real wages rose during recovery, whereas German wages remained depressed despite comparable production growth. What matters is not only the loss against 1929, but the additional income German labor might have received had rising demand for workers been allowed to affect wages.

Section II explains how that suppressed income becomes purchasing power for armament. Lederer identifies three channels: increased taxation of profits enlarged by low wages, reduced direct military costs, and savings released by diminished demand for private investment. Growing production and falling unemployment also increased revenues and reduced relief expenditure. Together, additional tax receipts and unemployment-subsidy savings provided 15.5 billion marks over four years. State orders sustain demand where restricted household consumption would otherwise obstruct expansion.

In Germany public works—in this case armament—are the “consumers” of this part of industrial production which under a normal prosperity would go either into wages or into additional investment for private industry.

This formulation joins distribution to effective demand. Extra profits are not simply funds waiting to be appropriated: military orders help create the profits that taxation then captures. In Lederer’s illustrative calculation, if wages are 20 percent below their free-market level and wages and salaries constitute half of national income, the state can command 10 percent of national income without raising prices. Wage restraint, curtailed food imports, foreign-exchange controls, agricultural regulation, and military raw-material imports consequently form an interdependent system rather than separate policies.

The discussion of borrowing extends the argument from current income to capital allocation. Domestic debt interest redistributes income rather than draining the nation’s income abroad. The important distinction is whether public borrowing mobilizes savings that would otherwise remain unused or displaces productive private investment. In the latter case, the real loss occurs when resources are diverted, not when interest subsequently falls due. Low mass consumption reduces both the need and the opportunity for civilian investment, making savings available for armament. Moreover, private firms’ investment and output cannot automatically be classified as civilian: military orders circulate through subcontracting relationships that ordinary statistics do not distinguish.

And there is no reason why this process should not be continued indefinitely, as long as consumption can be kept down.

The condition is decisive. Lederer rejects predictions of inevitable collapse based merely on accumulated debt or short maturities, since the state can control refinancing and channel savings. He likewise rejects “hidden inflation” as an adequate description of the mechanism already operating. These financial appearances obscure the daily transfer of resources from wage earners to the military economy.

Section III identifies a different danger. The second four-year plan extends rearmament into an attempt to reorganize economic and social life for total war, including costly substitutes for imported raw materials. Such projects may require more resources than depressed wages and curtailed private investment can release. Further military expansion would then encroach on an already restricted civilian sector, producing rising prices and pressure for higher wages. Schacht’s departure appears as evidence of conflict over these limits, not proof that previous financing had been inexplicable.

But there is no mystery in its functioning, nor will there be any mystery in its breakdown.

The article’s lasting conceptual contribution is its separation of monetary arrangements from their material and distributive foundations. Neither stable prices nor expanding employment establish improved welfare; nor does the form of public debt reveal who bears armament’s costs. Lederer locates those costs in labor’s lost consumption and civilian investment foregone, while making future instability contingent on military ambitions exceeding available resources.