Building Socialism: The German Economy in 1920

Building Socialism: The German Economy in 1920
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Excerpts from German Industrialization: 1850-1940, Alexander Gerschenkron (Berlin: UB Press, 1966)

Introduction

The new socialist government in Germany faced immense economic challenges. Though there had been less destruction of capital assets than in Italy, France, or Russia, the war caused systematic distortions in the economy and near its end led to chronic underinvestment in consumer-oriented industries. The previous government also took out enormous loans from the middle-classes, and the new, socialist state had to decide whether it was going to honor these. In the hopes of preserving its alliance with the National-Social Association, the ruling Social-Democratic coalition initially avoided any talk of default.

A state of de facto industrial chaos existed during the first few months of 1920. To cement their control over the domestic economy, the social-democrats nationalized the big vertically-integrated corporations, including Siemens, Thyssen, Krupp, M.A.N., and AEG. The Kriegsgesellschaften were also nationalized, and continued to perform their previous service: organizing the procurement of raw-materials for the big corporations. With the business tycoons fleeing Germany or sitting in prisons, a battle for leadership of the commanding heights of the company commenced between the worker’s councils and the trade unions. The old social-democratic leadership, clustered around Wels and Haase, favored the latter; though the unions were still under some level of suspicion by many socialist activists, most of their leadership were ousted in late 1919 by mid-level functionaries who had worked throughout the war to undermine their bosses. Reforms were passed democratizing the unions and attempting to win the workers over to their cause.

Nonetheless, in large sections of industry, most notably the chemical and electronic sectors, workers chose to elect trade union officials who were loyal to the council movement. As a consequence, a large number of unions effectively dissolved or were rendered powerless. A mixture of council and union delegates sat on the new Kriegsgesellschaften and the other planning boards of the national economy, which had been inherited from the wartime years. As a whole, these were in a fairly weak position due to mass purges of the reactionary officials and reduced state capacity.

The government confronted its first real economic crisis in the summer, when it became clear that many of the big, vertically-integrated corporations were no longer turning a profit. Prices began to deflate across the entire economy. Middle-class skepticism, bourgeois capital flight, and wartime chaos threatened to lead to a full-blown demand crisis. With a banking and financial sector still under construction, the government chose to conduct its first systematic socialization drive. A new provision in the constitution allowed for the expropriation of all industries with over 25 employees, and a series of decrees were passed incentivizing workers to “take up their historic duty”. The quick socialization of vast sectors of the economy was tremendously disruptive, but it also introduced - in the form of greater worker incomes - a surge of consumer spending which propped up the big firms. It also, however, cut into the profitability of many of the industries, particularly smaller firms with higher levels of proportional labor costs. The crisis of demand turned into a crisis of investment, prompting the Council of People’s Commissars to pass an emergency measure requiring a set level of profits in each firm to be reinvested.

Through the hectic months of civil war, trade with the socialist and social-democratic governments in Sweden, Denmark, Russia, Italy and the Netherlands provided crucial support for the national economy. Munitions factories in particular benefited from trade with Italy and Socialist France, while large quantities of coal continued to be sent to Sweden, Denmark, the Netherlands, and Switzerland. Russia was a crucial source of foodstuffs. By the end of 1920, Germany’s total exports exceeded those of any year in the war, despite stagnating output in many major industries. The Socialist republic also became an important middleman for the trade of goods between the Soviet Union and the other socialist states in Europe: the dockworker’s unions of Lubeck, Kiel, and Rostock grew wealthy enough to help pay for expansions of port facilities, even while Hamburg struggled under the weight of an Anglo-American embargo.

Enterprise Structure in the New Socialist Economy

By the time that Luxemburg’s revolutionary government came to power in October 1920, the socialist economy had already begun an internal and self-directed process of differentiation. At least five major types of enterprise structure existed. Firstly, there were the massive, vertically-integrated corporations, the successors of Krupp, Thyssen, and other titans of heavy industries engaged in mass production. These were dominated by the trade unions and began to engage in a kind of syndical planning. They were concentrated in Silesia, the Ruhr Valley, and Northeastern Westphalia. Secondly, there were the large modern industries of the “second industrial revolution”, which produced chemicals, electronics, pharmaceuticals, engines, and advanced machinery. In these, the worker’s councils successfully seized power, and the firms slowly took on a more federated and decentralized structure. Some of them began to resemble trusts (in which profits were pooled and divided between independent firms) rather than unitary businesses. Technically speaking, these enterprises were still owned by the state, but they tended to be more resistant to centralized planning.

Thirdly, a form of confederal cooperativism, negotiated among many small and medium-sized collectivized firms, emerged in the old heartlands of the German industrial mittelstand. Before the war, Saxony, Baden-Wurttemberg, the Rhineland, and Southwestern Westphalia were home to numerous small businesses employing between 30 and 200 people. In these areas, the production process was frequently distributed between numerous actors, with the overall industrial landscape defined by relations of deep dependency due to the exchange of made-to-order assets. An unusually high proportion of industrial enterprises were dedicated to consumer goods (particularly textile) production. Heavy-industrial factories found a market niche through creating extremely specialized products and maintaining flexibility in production. In contrast to the vertically-integrated industries in Brandenburg, Silesia, and the Ruhr Valley, many elements of the production process were delegated to outside contracting agencies.

These small, decentralized industrial landscapes anticipated their socialist-confederal successors. During the Wilhelmine era, informal social networks and regional governments acted to coordinate the exchange of goods. In many cases, each individual business did not have a “competitor” in the market due to their degree of specialization. Trade associations frequently functioned as “specialization cartels” which eliminated production redundancies which might lead to overcapacity. As a consequence, market mechanisms already played a smaller part in price-setting than they did in traditional capitalism.

Over the summer and autumn, a wave of collectivization in the decentralized regions followed the socialization provisions. Saxony Wurttemberg-Baden, and the Rhineland had perhaps the densest network of interstitial institutions in all of Europe, and Stuttgart, Leipzig, and Chemnitz were strongholds of Luxemburgist RWF (Revolutionary Worker’s Front) organizing. Most of the small specialized firms fell bloodlessly into the hands of the workers. Educated bureaucrats previously employed by trade associations were incorporated into subcommittees of regional councils, which became a vital center for extrafirm enterprise governance. The social networks that undergirded decentralized industrialization were quickly formalized through the regional councils, and small, worker-controlled businesses entered into “confederal agreements” with their counterparts. At first, these were simply formal acknowledgements of their de facto commitment to cooperation, but over the course of Luxemburg’s government, they were recognized as a distinctive form of enterprise organization and accrued additional powers. These will be discussed more later; over time, the confederations became a key institution of the Central European economy, combining planning, worker’s governance, as well as some internal market mechanisms.

The fourth form of enterprise was the consumer cooperative. These were particularly prominent in the sectors of food and banking. Cooperative savings banks and credit unions were already widespread before the war, particularly in the decentralized industrial regions with a high proportion of small and medium-sized firms. These institutions primarily served the local bourgeoisie; after the first socialization drive, they went on a capital strike, causing a temporary crisis of investment in the new confederal cooperatives until the Commissariat of Finance decreed the that the banks would be transferred into the hands of the regional councils. Eventually, these banks would serve as the basis for a regional public banking system, though they continued to be run on a quasi-cooperative basis, and prominent worker-stakeholders shared power with state governments. They gained a renewed prominence by 1921, when public finance became one of the “pillars” of economic planning.

In contrast to the credit unions, the food cooperatives were mostly a product of wartime exigencies, and tended to have a more proletarian and urban membership. The largest food cooperatives were not located in the decentralized regions of Saxony, Baden-Wurttemberg, or Thuringia, but in the large industrial cities of Berlin and Hamburg. In concert with the worker’s councils, most of the coops were converted into public institutions during the first months of the civil war, with special privileges for members, while others chose to formally affiliate with the modern firms controlled by the worker’s councils. Food cooperatives remained very popular after the revolution, and their presence multiplied throughout the rest of the country during 1920.

The remaining enterprises were remnant capitalist firms, typically employing under 25 workers. These were concentrated in the rural hinterlands of Germany, such as Pomerania, Posen, and East Prussia. They tended to be either agricultural or professional in character. Legal and consulting firms, mid-sized peasant holdings, and other small businesses in the service sector comprised most of the capitalist economy. The capitalist sector employed a sizable portion of workers, though it constituted a smaller share of the overall economy since the average business was poorer and less capital-intensive than their collectivized counterparts.

Almost all socialist politicians and activists viewed the capitalist sector as a potential reactionary fifth column. Though most of the urban firms went untouched during the first year of the socialist republic, the old agricultural sector came under immediate assault. A sweeping land reform broke up the estates of the Prussian Junkers and forced many mid-sized holdings to give up land. After she came into power, Luxemburg held off on immediate collectivization, instead opting to first weaken the agricultural sector through importing vast quantities of Russian grain. This was facilitated by the November Konigsberg agreements, in which Germany pledged to provide the Soviet Union with industrial secrets, engineering assistance, and specialized agricultural machinery in return for the right to purchase any grain surpluses over the next two years. The truly vast social upheaval that followed, in which plunging prices of foodstuffs prompted millions of agricultural laborers to stream into the cities, was memorably captured by Walter Ruttman’s 1925 film, The Great Flight.

The Coming Upheaval

In 1921, on the eve of the first “Age of Socialist Construction”, market relations were diminished but still intact. They still served an important role in coordinating exchange between different sectors of the economy. Ironically, the sweeping cartelization of the wartime years likely displaced market relations to a greater extent than any of the initial measures of the socialist government. Despite the relative weakness of markets as a disciplining force, the central government at first exercised little control over the direction of the national economy. Neither “democratically planned statism” nor Italian-style “mixed market socialism”, the German economy was in the unique position of having both weak markets and a weak state.

At the commanding heights of the economy were the worker’s representatives elected through trade union and council elections. These individuals possessed de facto control over the nation’s largest firms. They jointly engaged in informal, non-institutionalized cooperative bargaining to make determinations about their own enterprises and to set the prices of key industrial goods. One scholar described this crystallizing economic structure as a “cooperative mixed economy coordinated through non-state networks of worker’s representatives”. The frequently secretive nature of these negotiations prompted fears of a new elite emerging, particularly among those anxious about the vast powers accumulated by the trade union bureaucrats in charge of German heavy industry. Upon assuming the chairmanship of the new government in October, Luxemburg vowed to “subordinate the economy to the worker-councils” and “subordinate the state to society”. Thus began the first real drive toward the “democratic planning” of the economy.

In the first month of assuming power, the new government unilaterally defaulted on all wartime loans, created a unitary maximum income for all industries, introduced legislation to expand, empower, and reform the wartime planning boards, and passed a slate of new mandatory collectivization laws targeting urban service industries. This was merely a prelude to a vast and systematic reorganization of the key institutions of the German economy. Taken together, the initial decrees indicated that Luxemburg intended to make good on her promise to “annihilate the last vestiges of extractive-exploitative Wilhelmine capitalism, and begin the construction of the socialist economy.” For the loyalist German mittelstand who had reluctantly consented to partake in the socialist experiment, the new direction of the government constituted an assault on its very existence.

The dizzying pace of socialist advance would only heighten in the coming years, and it would leave German society transformed beyond recognition. Even so, the 19th-century heritage of geographically dispersed, state-directed “late industrialization” would continue to shape the structure of the economy. The diverse regional industrial orders of Germany, a product of uneven and combined development, persisted throughout the process of socialist construction. Whether this has been a blessing or a curse is a matter of individual judgement: what some denounce as a “confused patchwork of excessively bureaucratized overlapping fiefdoms” others applaud as a “laboratory of plural and mutually supporting socialist industrial modernities.”