A glimpse inside the forgotten world of Nazi art

Daniella Luxembourg slowly turns the pages of a catalogue of art from Germany in the 1930s. She reads the bald entries that record the fate of each painting or sculpture. "Burned... burned... location unknown... burned..." she intones in a slow, grim litany.

For the past few years, Luxembourg, one of the best-known figures in the international art market, has been on the track of the art that the Nazis tried to destroy. It represents some of the finest modern art of the early 20th century, of which Germany, in the days before Hitler, was a treasure-trove.

Economically, Germany in the years after the First World War - broken by the huge burden of war reparations - was in hyper-inflationary meltdown. But the Weimar Republic was an artistic hothouse. Berlin was the cultural crossroads of Europe, a place of unprecedented artistic - and sexual - freedom, where painting, music, design, theatre and literature thrived in a ferment of new styles of modernism, expressionism and atonality.

Collectors of art, many of them Jewish, bought extensively into Van Gogh, Cezanne, Picasso, Matisse, Kandinsky and Modigliani. They also encouraged the burgeoning of a new generation of German artists, many of whom had returned from the battlefields of the First World War with a profoundly altered view of humanity.

In an outraged nihilistic reaction against the barbarity of war, these young Germans painted the bloated profiteers and politicians of the bourgeoisie, the war widows who turned to prostitution, and the deformed and disabled survivors of the battlefield, of whom Germany had a staggering one million in those years. Their withering scrutiny found correlatives in the distorted shapes of expressionism or the scathing caricatures of verism and the Neue Sachlichkeit (new dispassion).

"The German artistic establishment, as embodied in the modern art division of the Berlin National Gallery, was extremely avant-garde in the Twenties and Thirties," says Luxembourg. But the same could not be said for their new political masters. The dominant figure of the era, Adolf Hitler, was a failed artist who had been twice rejected from the Vienna Academy of Fine Arts. His taste in art centred around sentimental landscapes and idealised representational figures, and he took a very dim view of the new trends, which he saw as a hall-of-mirrors freak show.

The new art offended him on every level. Its bright colours and distorted representations of form were an insult to the ordinary person's common-sense perceptions of the world. The use of colours not normally observed in nature - depicting "the meadows as blue, the sky as green, the clouds as sulphur-yellow, and so on" was, he said, the work of "degenerate cretins... who clearly suffer from defective vision".

Worse still, such art drew on Negro and Oceanic cultures, threatening the Nordic roots of German art and undermining racial purity. Where art should both reflect reality and celebrate beauty and strength, this modern art, Hitler and his acolytes thought, indulged the deformed, weak, ugly, sick and mad. It was "bolshevik culture", "Judeo-bolshevik art", "the art of half-breeds" and "creations of the syphilitic brain" - and symbolic of the moral and political decline of the times.

"Art was more important socially in the 20th century than ever before," says Luxembourg. "It was part of the political changes of the era, a liberation from the dogma and preconceived ideas of what went before. Art really mattered."

Hitler, in a perverse tribute to the cultural potency of art, instructed his Minister for Popular Enlightenment and Propaganda, Joseph Goebbels, to lead a purge of what they called decadent art. Jazz was vilified. The atonal music of Schoenberg was outlawed, as was that of Jewish composers such as Mahler and Mendelssohn. Foreign films only survived the ban because Hitler could not bear to lose his favourite, Mickey Mouse. Books unpalatable to Nazi ideology were infamously burned.

"The paintings of Paul Klee were compared to the art of retarded children and hung in mental asylums," says Luxembourg, standing in front of a Klee she has unearthed for her new exhibition, Lonely Prophets, now running at Agnew's Gallery in London.

The movement reached its nadir with an exhibition called Entartete Kunst (Degenerate Art). Some 15,997 paintings - the Nazis were obsessively methodical in their attention to detail - were removed from the walls of 100 German museums. The 730 "worst" - including works by Klee, Otto Dix, Max Beckmann, Emil Nolde, Käthe Kollwitz, George Grosz and Ernst Ludwig Kirchner - were selected for a public exhibition intended to hold them up to ridicule. The introduction to the exhibition told visitors: "All around us you see the monstrous offspring of insanity, impudence, ineptitude, and sheer degeneracy. What this exhibition offers inspires horror and disgust in us all."

The exhibition was a blockbuster. Three million Germans flocked to see it in Munich and 11 other cities throughout Germany and Austria. The work was set alongside huge captions mocking the artists and their creations for their "collapse of sensitivity to form and colour" or "racial and mental degeneration". It was divided thematically, with rooms devoted to "Insult to German Womanhood" or "Mockery of God".

That was not all. Actors were hired to incite the audience with derogatory remarks about the paintings. Beside each picture was a ticket stating the last dizzyingly inflationary price it commanded. By the Jewish artist Marc Chagall's painting, Rabbiner, was a sign: "Taxpayers, you should know how your money was spent". Fourteen Kandinsky canvases were deemed "crazy at any price", two of them hung sideways as if in proof. Jewish profiteers, it was implied, paid a worker's annual salary for this rubbish.

One contemporary reviewer wrote: "These artists should be tied to their paintings so as to provide every German with the opportunity of spitting in their faces; not just the artists but also the directors of the museums who in a period of massive unemployment stuffed great sums in the mouths of these horrors."

Luxembourg turns to a book that contains photographs of the original exhibition. A thickset working man stares goggled-eyed at a nude. Hermann Goering and his cronies laugh at an abstract statue. But there is more to this than philistinism. Paintings were juxtaposed with works by mental patients. Others were set alongside photographs of gross deformity in hospital patients. Degeneracy in art was associated with disease in body and mind.

Hitler's purification of the art world of all that was not "natural" was an ominous prefiguring of his purging of humanity, wiping away those who did not fit his ideal of racial perfection. And it worked. Entartete Kunst substantially altered the course of artistic development in the years that followed. "The artists were demoralised," says Luxembourg. "It stopped them from producing art. It was such a blow. Kirchner had 639 of his works confiscated." It was like confiscating his life. He committed suicide. "Max Beckmann, just before his big retrospective opened in New York in 1950, had a heart attack in Central Park; it was as if, psychologically, he couldn't arrive in this new place.

"Felix Nussbaum," she continues, stopping before an unnerving painting called The Wrestling Match, which has the queer perspective of nightmare about it, "died in a concentration camp, Auschwitz, in 1944. Many of these artists died soon after. Almost none produced any work of any significance afterwards." There are those who suggest that German culture has never fully recovered since.

The Nazis, however, were pragmatic in their disposal of this unwanted decadence. When the show was over in 1939, the Degenerate Art Commission ordered more than 1,000 paintings and almost 4,000 watercolours and drawings to be burned as part of a training exercise by the Berlin Fire Brigade. But that left 10,000 other works. "They only burned the things they thought were political dirt - or the things they thought were of no value on the international market," says Luxembourg. "It was deeply cynical."

The most valuable works the Nazis sold in Switzerland, at the Galerie Fischer in Lucerne, in one of the greatest dealer stampedes in art history. Most of the hundred or so pieces by Georges Braque, Chagall, Andre Derain, James Ensor, Paul Gauguin, Van Gogh, Modigliani, Matisse, Picasso, Nolde and Klee went to private American collectors.

As to the rest, it was lost in the chaos of post-war Europe. Much of it - including the single most valuable art loss, the Koenigs collection of Old Master drawings - is thought to be in Russia. But Luxembourg, whose 10 uncles and aunts were all murdered by the Nazis, has spent the past few years ferreting out 70 significant pieces by Kirchner, Rudolf Belling, Max Ernst, George Grosz and Christian Schad - including some that Hitler personally ordered banned - and persuading their owners to sell them.

"I have had an idea at the back of my head for a long time that this art was underrated and undervalued. So I started going round Europe," Luxembourg says. The majority of the pieces she found in Germany and Italy. "Now is a good time to sell," she concludes. "The market is thirsty for works of that quality." And decadence finally has its price.

Lonely Prophets: German Art from 1910 to 1930, Agnew's Gallery, London W1 (020-7290 9250), to 16 November