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Wartime finance and inflation The Reich could spend as much as it wanted. Since June 1939 the Reichsbank’s statutes allowed it to set the money supply at will. Its real constraint was the threat of inflation. That was a problem even for the Soviet Union, which recognized a stable monetary standard as a basic necessity for accounting and statistics. Inflation acted as a hidden tax across the population, dampened incentives for worker and entrepreneurial initiative, made coercion the only way to command production, encouraged consumers to work outside the system (through barter and the black market) and threatened to send the entire war economy into disarray with popular unrest and collapsing productivity. Military spending grew voraciously with every year. To compensate this the government had to lower costs on the military side. On the civilian side it had to suppress economic activity and the money supply and base at least some of its spending on actual revenue, of the prewar “safe funding” kind, from taxes and long-term debt/savings banks, and from occupation costs paid by other countries. Upon the outbreak of war Germany was already one of the most highly taxed states in Europe. Nonetheless the RFM proposed a tax hike. This was rejected in favor of a “silent system” of war financing (geraeuschlose Kriegsfinanzierung): consumer goods were rationed, leaving a volume of unspent private income which flowed into savings banks, from which the Reich could siphon funding. Investors were blocked from borrowing from the banks. Those who had capital of their own had nothing to spend it on besides government debt. This achieved exactly the same as a tax increase. However it was politically more palatable, preserving an appearance of normality in which there were even some wage increases on the expectation of postwar prosperity. Yet private income could also be hoarded or leak into the black market. The former was too rare to matter. The latter depended in large part on morale. On the first years of the war, the populace was calm and there was little black market activity. Consumer goods rationing also depended on labor and raw materials controls to regulate production and supply. Though the operation of such controls was haphazard it was “more surprising... that it functioned at all” and they succeeded in reallocating resources to the military sector.