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Tuesday, September 12, 2006

Nazi Privatization in the 1930s

This post on "The Origins of the Term "Privatization"" based upon a Journal of Economic Perspectives article by Germa Bel called "The Coining of "Privatization" and Germany's National Socialist Party" (Summer 2006) [author web page link] elicited quite a response from Jane Galt and others (e.g. see Jane's comments on her site and in comments to the post).

As the article was being discussed in comments, the discussion drifted to the characteristics of Nazi Privatization. The author of the paper left a comment to clarify that:

I am the author of the article published in Journal of Economic Perspectives. The article in JEP does not contain an analysis of Nazi Privatization. It was not its purpose. For those of you interested in this analysis, here you will find a longer paper, which is currently under peers revision in a journal within the economic history field. http://www.ub.es/graap/nazi.pdf

Comments very welcome ( gbel@ub.edu )
Thanks for your attention.

Here's the introduction and conclusion to the paper which, as far as I'm concerned, answers Jane Galt's question about why we would be interested in tracing the term privatization to its origins:

Against the Mainstream: Nazi Privatization in 1930s Germany, by Germa Bel: I. Introduction Privatization of large parts of the public sector has been one of the defining policies of the last quarter of the twentieth century. The privatizations in Chile and the United Kingdom, implemented beginning in the 1970s and 1980s, are usually considered the first privatization policies in modern history (e.g. Yergin and Stanislaw, 1998, p.115). A few researchers find earlier instances. Some economic analyses of privatization (e.g. Megginson, 2005, p. 15) identify partial sales of state-owned firms implemented in Adenauer’s Germany in the late 1950s and early 1960s as the first large-scale privatization program, and others argue that, although confined to just one sector, the denationalization of steel and coal in the United Kingdom during the early 1950s should be considered the first privatization (e.g. Burk, 1988; Megginson and Netter, 2003, p. 31).

None of the contemporary economic analyses of privatization takes into account an earlier and important experience: the privatization policy applied by the Germany’s National Socialist Party (Nazi Party). The lack of reference to this early privatization experience in the modern literature on privatization is consistent with its invisibility in either the recent literature on the Germany economy in the twentieth century (e.g. Braun, 2003) or the history of Germany’s publicly owned enterprise (e.g. Wengenroth, 2000). Occasionally, some authors mention the re-privatization of banks with no additional comment or analysis (e.g. Barkai, 1990, p. 216; James, 1995, p. 291). Other works, like Hardach (1980, p. 66) and Buchheim and Scherner (2005, p. 17), mention the sale of state ownership in Nazi Germany only to support the idea that the Nazi government opposed widespread state ownership of firms. However, they do not carry out any analysis of these privatizations.

It is a fact that the government of the National Socialist Party sold off public ownership in several state-owned firms in the middle of the 1930s. The firms belonged to a wide range of sectors: steel, mining, banking, local public utilities, shipyard, ship-lines, railways, etc. In addition to this, delivery of some public services produced by public administrations prior to the 1930s, especially social services and services related to work, was transferred to the private sector, mainly to several organizations within the Nazi Party. In the 1930s and 1940s, many academic analyses of the Nazi Economic Policy commented the privatization policies in Germany (e.g. Poole, 1939; 2 Guillebaud, 1939; Stolper, 1940; Sweezy, 1941; Merlin, 1943; Neumann, 1942, 1944; Nathan, 1944a; Schweitzer, 1946; Lurie,1947).[1]

Most of the enterprises transferred to the private sector at the Federal level had come into public hands in response to the economic consequences of the Great Depression. Many scholars have pointed out that the Great Depression spurred state ownership in Western capitalist countries (e.g. Aharoni, 1986, pp. 72 and ff.; Clifton, Comín and Díaz Fuentes, 2003, p. 16; Megginson, 2005, pp. 9-10), and Germany was no exception. Germany, however, was alone in developing a policy of privatization in the 1930s. Hence, a central question remains: Why did the Nazi regime depart from the mainstream on state ownership of firms?[2] Why did Germany’s government transfer firms and public functions to the private sector while the other Western countries did not so?

Answering these questions requires an analysis on the objectives of Nazi privatization. While some of the analyses in the 1930s and 1940s are valuable, their authors lacked the theories, concepts and tools needed to complete the analysis. Recent economic literature has shown the multiplicity of objectives usually targeted by privatization policies (Vickers and Yarrow, 1988, 1991) and the general and widespread priority of financial objectives within the larger framework of multiple and coexisting objectives (Yarrow, 1999). In addition, modern theoretical developments have provided valuable insights into the motives of politicians choosing between public ownership and privatization (Shleifer and Vishny, 1994) and the consequences of each option on political rent seeking, through either excess employment or corruption and financial support (Hart, Shleifer and Vishny, 1997). Also, the theoretical literature has provided interesting results concerning the use of privatization to obtain political support (e.g. Perotti, 1995; and Biais and Perotti, 2002).

With the analysis of privatization in Nazi Germany this paper seeks to fill a hole in the economic literature. On one hand, I extensively document the course of privatization in the period from the Nazi take over of government until 1937.[3] These limits are sensible because all the relevant reprivatization operations had been concluded before the end of 1937. Some of the privatization operations explained in this paper have not been previously noticed in the literature. On the other hand, analyzing the Nazi privatization with the tools of modern theories and concepts allows us to conclude that the objectives pursued by the Nazi government were multiple. Of particular relevance were increased political support and, especially, a combination of increased revenue and expenditure relief to the German Treasury. In short, these motives are quite similar to those that have driven privatization policies in most of the EU countries.[4] The rest of the paper is organized as follows. First, I document the Nazi privatization policy, and I compare its quantitative relevance to that of more recent privatizations. Then, I discuss the analyses of Nazi privatization in the economic literature of the late 1930s and 1940s. After this, I analyze the objectives of privatization policy in Nazi Germany. Finally, I conclude.

...[body of paper]

VII. Conclusions Although modern economic literature usually fails to notice it, the Nazi government in 1930s Germany undertook a wide scale privatization policy. The government sold public ownership in several state-owned firms in different sectors. In addition to this, delivery of some public services previously produced by the public sector was transferred to the private sector, mainly to organizations within the Nazi Party.

Ideological motivations do not explain Nazi privatization. On the contrary, political motivations were important. The Nazi government may have used privatization as a tool to improve its relationship with big industrialists and to increase their support for Nazi policies. Privatization was also likely used to enhance more general political support to Nazi party. Finally, financial motivations did play a central role in Nazi privatization. The proceeds from privatization in 1934-37 had relevant fiscal significance: Not less than 1.37 per cent of total fiscal revenues were obtained from selling shares in public firms. Moreover, the government avoided including a huge expenditure in the budget by using outside-of-the-budget tools to finance the public services franchised to Nazi organizations.

Nazi economic policy in the middle thirties was against the mainstream in several dimensions. The huge increase in public expenditure programs was unique, as was the increase in the armament programs, and together they heavily constrained the budget. To finance this exceptional expenditure, exceptional policies were put in place. Privatization was just one among them. It was systematically implemented in a period in which no other country did so, and this drove Nazi policy against the mainstream, which flowed against privatization of state ownership or public services until the last quarter of the twentieth century.

1 Other less academic works from this period, with essay characteristics, also comment on the privatization in Nazi Germany [e.g. Reimann (1939) and Heiden (1944)].
2 A recurring question in the literature on Nazi Economic Policy is why the Nazis refrained of implementing a policy of wide-scale nationalization of private firms [See Buchheim and Scherner (2005) for a recent example]. Indeed, this question is interesting since Nazi official economic program and Nazis electoral manifestos regularly included this proposal. However, it is not a central concern of this paper. Although it is worthwhile noticing that by avoiding largescale nationalization, the Nazi government joined the mainstream in Western capitalist countries, which were, in the 1930s, more prone to intervention through regulation and fiscal policy. As explained in Megginson (2005, p. 10), nationalization of private firms was not a relevant policy in Western capitalist countries after the worst phase of the Great Depression was over.
3 Choosing this period is also very useful because this permits avoiding confusion between privatization and the aryanization process. As explained by James (2001, p. 38-51), after 1936-37 there was an intensification of the aryanization process, in what was a “state-driven aryanization.” Many of the largest Jewish-owned businesses had survived until 1938. The anti-Jewish apogee was reached in November 1938, in the pogrom of the so-called Reichskristallnacht. In addition, analyzing Nazi privatization until 1937 permits avoiding confusion with the business processes put forward after the annexation of successive territories, beginning with Austria in 1938.
4 Mention has to be made to the fact that the general orientation of the Nazi economic policy was the opposite one to the EU countries in the late 1990s. Whereas modern privatization in the EU has been parallel to liberalization policies, in Nazi Germany privatization was applied within a framework of increasing control of the state over the whole economy through regulation and political interference.

Update: From comments, here's the author of the paper:

Hi again,

Many thanks... One of the objectives of the long paper is to show that contemporary authors saw this policy as a privatization policy, no matter how each one of them evaluated it. The only way to show this is ‘second hand’ references.

[The] Other objective is to try to find as much information as possible on the privatization operations. In this sense, main sources used are:

Der Deustche Volkswirt. Weekly magazine widely seen as the official speaker for the Ministry of Economics in the Reich

Reichs-Kredit-Gesellschaft reports. This was a Reich owned bank that published the most complete official reports on German Economy in the period.

Any scholar interested in Nazi Economy would consider this first hand sources, particularly when original files are so scarce.

Incidentally, two of the privatization operations found in Der Deustche Volkswirt had not been previously noticed in the literature. The (admitedly incomplete) estimation on the privatization revenues is, to my knowledge new in the literature.

With respect to the analysis of the objectives of Nazi Privatization with contemporary tools, theories and concepts, it is logically of first hand, since there is not [a] modern analysis of Nazi Privatization.

Conclusions are in the paper, so I do not go again into them. The main point is that Privatization and Regulation are substitutive tools to control markets. Nazis did strictly regulate and privatize, so that they could keep control. European experience in the last two decades has been much the same.


    Posted by on Tuesday, September 12, 2006 at 05:54 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (6)


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