In 1936 Germany began to seriously prepare for a future conflict, and almost immediately began to run into some economic problems.
Hello everyone and welcome to History of the Second World War Episode 78 - Germany Prepares for War Pt. 1 - Challenges. This week a big thank you goes out to Simon, Paul, and Matt for their support by becoming a member, they get access to ad-free versions of all of the podcasts episodes plus special Member only episodes roughly every month, head on over to historyofthesecondworldwar.com/members to find out more. I would also like to thank listener Jens, whose name I hope I am pronouncing correctly, for the donation. Over the next 7 episodes we will be focusing on topics around Germany in the time between the Anschluss and the start of the war. The first three will be mostly focused on economic discussions, which would be absolutely critical as Germany prepared for the military confrontation that Hitler and others were planning to create. As with all of these episodes revolving around the German economy, I would like to give a shoutout to Adam Tooze and his work The Wages of Destruction: The Making and Breaking of the Nazi Economy. I highly recommend it. Then the second three episodes will focus on the German preparations among the Luftwafe, Kriegsmarine, and their land forces. Then the seventh episode will be dedicated to the events of Kristallnacht. When looking at the German economy in the back half of the 1930s, the dominant factor is absolutely rearmament. Spending on the military, both directly in the form of armament manufacture, and indirectly in the form of transportation and other infrastructure, would be the driving factor behind almost all economic decisions in Germany. To put things in perspective, by 1938 the spending by the Wehrmacht, in the forms of the purchase of goods and the usage of services, accounted for about 80 percent of the German economy. This was felt to be absolutely necessary as other nations were also increasing their spending, with France and Britain massively expanding their own rearmament efforts starting in that year. These new rearmament efforts were almost entirely in response to german efforts that had started earlier in the 1930s, so really Germany had nobody to blame but itself. The continued expansion of the rearmament campaigns caused some serious problems, because the German efforts required not just a huge percentage of the domestic production of just about every kind of commodity, they also required imported goods, especially for items that were simply unobtainable in Germany, rubber and oil being at the top of that list. Because of the need for these imports, and the drastic reduction of exports, Germany would have some serious foreign currency issues that they would have to solve. There were actions that the government could take to delay the problem, and to reduce its impact, but if German spending continued along the path that it was on in 1938 there was only one possible solution, expansion. In this episode we will chat about the economic situation in Germany before 1936, which would be the year that a new Four Year Plan would be introduced by the German government. The plan was necessitated by, and in answer to, various shortcomings that were very apparent within the German rearmament efforts by 1935, when they had only barely gotten going.
The various rearmament efforts of the 1930s never occurred in a vacuum, they interacted with one another and with international events. 1935 and 1936 were years where events began to quickly shift in many ways. Italy would invade Ethiophia, the Spanish Civil War would begin, events would escalate in China, and Germany would begin open rearmament. This period of increased tension would eventually prompt Britain and France to also begin to increase their military spending. The Soviet Union would also during this entire period be seen as a major threat, with efforts to modernize the Soviet economy proceeding at a worrying pace, at least if you were another nation in Europe. All of these events would feed off of one another to create a kind of feedback loop. When Germany announced its rearmament their most likely enemies were about as military week as they had been since 1918, but then as those other nations began to increase their spending due to German spending, then Germany felt like they needed to spend more. Germany spending more would then prompt others to increase their spending, and up up up it went and where it would stop nobody knew. This would cause for a bit of confusing history, becuase if you look at almost every nation in Europe that was joining in on this rearmament frenzy, there were a series of rearmament plans that were constantly escalating, starting out on an annual basis, before even changing almost month to month. Of course the amount of money and material involved in these efforts were not just bein created by a Star Trek replicator, and every time adjustments were made additional funding had to be found to purchase the material and to pay for more hours for the workers in the factories. Each nation woul dhandle such challenges differently, in Germany would thing was almost always an accurate statement: Hitler did not care at all about the details. Hitler was always of the opinion that the economy as a concept existed strictly as a tool to be wielded by the leaders of the nation and towards that nations goals. In the case of Germany in the 1930s he therefore believed that the economy simply existed as a thing to allow for military expansion and conquest. This would become very evident in any private conversations about the economy after about mid-1936, at which point in time he clearly believed he was preparing the nation for war. If that was the economy path of choice, then there were some changes that hard to be made to the German economy. The first was general autarky, or a general self sufficiency in as many raw materials as possible, which would prevent Germany’s eventual enemy from being able to take advantage of the holes in the German supply chain. The second was that large portions of the German economy would need to begin to shift over to the arms industries, and into rearmament associated directions. The third, and the ways in which those things would be possible, would be through greater control by the govenrment. This increase in government control of the German economy would be an important theme throughout the last years before the war. This control was not just used to determine what was produced, and the prices that were charge dfor them, but more critically was used to decide how to allocate and use the resources that were constrained in the economy, with the government using its power to decide how limited resources were allocated, and how crucial imports were used. Many of these efforts around increasing government control of the rearming economies, were a very common trend among nations at this time. For example we discussed the French economy several episodes ago, who would proceed with rearmament in a more free market structure, a different choice than the path Germany would pursue, but one that was felt to give the French economy the best chance of success. In London different choices would be made, which we will discuss in a future episode. For Germany, the Second Four Year Plan, announced in 1936, would be the final decisive shift towards these choices, and away from the free market system that had been used in Germany since the end of the First World War. This would be the next in a series of rearmament efforts made by the German government and military during the interwar period. During the 1920s they had to be a bit more covert with their efforts, and during that time it was more about laying the groundwork for future expansion, and not the expansion itself, but they believed that at some point in the future the restrictions placed on the German military by the Versailles treaties would be removed, and they would be ready. In its most simple form these preparations were just paper plans, but there were far more complex projects as well, like the secret testing and production done on various military technologies in Russia during the 1920s. Many of these efforts were eventually formalized under an Economics Staff, which was created in the Reichswehr in 1926. In the early 1930 another set of plans were made, with new plans to begin to expand the Reichswehr beyond its Versailles limts, all of the planning being done before Hitler came to power, which if anything just accelerated the plans. However, the pre-Hitler plans were mostly just superseded by much more lofty rearmament schems, but they do show that there was a planning history within the German military for the day when rearmament began, and it was not something that only occurred after Hitler took power in 1933. It would be the Nazi government that would put those plans into action, throwing off the restrictions of Versailles just a few years after coming to power.
The decision about when a war was expected to begin was critical when making choices about rearmament, and in this area the German leaders would make a critical mistake. Everything we discuss in these German rearmament episodes will be decisions based on the idea that war was inevitable in the near future, but it would probably not happen until the early 1940s. For much of the 1930s 1943 was seen by Hitler as the last possible year to start the war because it would be at that point that the Western Democracies would begin to decisively overtake German efforts. Guessing the start time of the war was critical because during the early years of rearmament often the most important thing that money and time was being invested in was not the military equipment itself, but all of the infrastructure around rearmament. Facilities, working training, development of new processes and material, optimizing production lines, and other more general economic infrastructure were all important. Or as R.J. Overy would say in War and Economy in the Third Reich “Indirect rearmament between 1936 and 1939 was in many ways more important than the direct production of military equipment because it was designed to expand the productive economy and trained labour force for the very much larger military programmes ordered by Hitler for the 1940s.” This made decisive the date of the war important, even years in advance, because that would dictate when it was best to switch all resources directly to armament production. The fact that the war then started in 1939 presented an interesting problem for Germany, because even though Germany was the one that would casue the events that would result in the war, they were doing so before its own rearmament efforts were complete. This was not unknown to German leaders, far from it, and we will certainly discuss this later this year in more detail during the episodes on the invasion of Poland, but from an economic and rearmament perspective, the invasion of Poland was a risk, a risk taken in the belief that the WEstern nations were simply too unprepared militarily, and would not fully commit to the defense of Poland. It was a risk based on the calculations that the response from London and Paris would look more like the Munich Crisis, and less like a total war. Obviously those calculations would, in September 1939, prove to be incorrect. This left the German rearmament machine in a position where it could provide support for short campaigns where material could be stockpiled over a period of time, and then stock rapidly ran down over a few weeks of intense operations, but it was not capable of long campaigns that would become the hallmark of the later years of the war. The German economy would eventually get there, and would shift into the kind of total war mentality that was required, and would also have access to the kinds of raw materials needed to make it a reality, but that would all take several years. Not all of this should or could be blamed on the decision made by the government or military, and this series of episodes will be primarily concerned with the simply fact that Germany in the late 1930s did not have the resources or production capacity to meet its very lofty military requirements. It could produce a lot of weapons, and it would, but those resource problems, within the confines of Germany as it existed in say early 1939 would become a serious problem, and there was not way to overcome them without launching into efforts of geographic expansion.
While the German economy of 1939 would have its own set of problems, it was only where it was becuase so many other problems with which Germany had entered the 1930s had been solved. During the decade, Germany was coming out of the effects of the Great Depression, just like every other nation, and there were a large number of people who were unemployed. Unemployment was a major topic of out episodes around Germany in the early 1930s and the transition from the Weimar Republic to the Hitler-led Nazi dictatorship. When the Nazi government took power they would in place programs that had already been mostly outlined and were about to be implemented by the previous governments, with these programs primarily being work creation efforts. The goal was simply to get as many people as possible to work as quickly as possible through a series of public work programs, but they were not completely successful, for reasons that are a bit too complicated to get into here, but you can refer back to episode 28 where we spent an entire episode just on the work programs put in place after 1933. The conversations about the Nazi government and unemployment are complicated by the political stances it took on some issues. For example the relationship between women and the workplace, where official government policy was always designed to try and move more women back into the traditional family oriented role. In that case it was employment and economic policy coming up against population policy, with government incentives created to get more people married and to get them to create more babies. This would actually end up being too popular, and the benefits were later reduced becasue too many people were taking advantage of them, which was good, I guess. During these and other efforts the Nazi government work work closely with many industrialists and leaders within the German economy. The idea wa that it was more important to get the economy to recover as quickly as possible by whatever could be done immediately, with the topic of government control and proper Nazi policies being put on th elist of future concerns. This would prove to be somewhat successful, and the overall living standards in Germany would improve along with overal economic health, although the living standards would quickly stop increasing out of concern that they would causing increased inflation. During this time business leaders worked closely with the government, with many of those leaders having been active supporters of the destruction of the Weimar system of parliamentary democracy. They were rewarded for this support by an increase in overall business assets and most importantly governmental protections against any worker actions. One of the topics that I have found quite interesting when reading about German rearmament efforts compared with those of other nations, particularly France and Britain, and something I had not previously considered, is that due to how the Nazi party took power, and then their actions after they took power, there is never any real discussion about workers n Germany during this period. In other nations the Socialist and Communist parties, or other more moderate leftists, and not been so thoroughly destroyed like they were in Germany, and an important part of the rearmament process in those nations was to maintain the relationships between the government, the business leaders, and the workers. In general the workers were willing to make some wage and hour sacrifices, but only up to a cetain point, which was the same with business owners and profits, and so there was a constant tug of war that was often eventually resolved only be increased government control and action in favor of the employers. By 1936, that control already completely existed in Germany, and there was almost no concern about any working class action or about worker relations. The working class had already been robbed of any agency during the first years of Nazi rule, and so when it came time for plans to be put in place to move into full rearmament there were some concerns about general popular sentiment, to be countered by the propaganda arm of the government, but there was nothing like the conversations about workers like there would be in London and Paris. This relationship between the various groups within society, and the position of workers and their political and societal power, is important to remember both now as we discuss events in Germany, but then almost in a few months when we have similar conversations about British rearmament efforts.
For the Germans, the point of conversation that would have to be constantly revisited was the relationship between rearmament efforts and imported materials. In April 1936 Hermann Goering was put in the position of Special Commission for Foreign Exchange and Raw Materials. As a reminder, foreign exchange is all of the currency, gold, or other items that can be exchanged with other nations to pay for imports. In this new position Goering was given a tremendous amount of power, which in the following years he would fully take advantage of to enrich himself, but from the start the goal was clear, to ensure that military preparations conintued without being hindered by raw material issues.. Precisely what those preparations were, and specifically the numbers of items that were necessary would constantly shift over time. The mid-1930s were a period when the definition and composition of Wehrmacht units, Luftwaffe air squadrons, and every other military unit was constantly in flux, just as in every other nation. For example, the role of the tank in the future Wehrmacht was a point very much up for discussion during these years, which of course caused other discussions about what made the ideal tank and what German industry should design and build. Along with this the German General Staff was beginning to shift their operational plans based on future expected capabilities, including that of armored units. After about mid-1935 plans for future campaigns began to resemble pre-First World War large scale offensives, utilizing new technology to move even faster and deliver the kinds of knockout blows that had eluded the previous generation. Within those operations men like General Beck, or most famously Heinz Guderian, disagreed on the specifics of how armored units should be grouped and concentrated, but they did not disagree on their existence. This episode is certainly not the place to untangle the web of pre-war German armor doctrine, but how tanks would be grouped and used did have serious ramifications on the tanks that would be built. The plans as of April 1936 were to have 41 total army divisions, 36 infantry, 3 armored, 1 mountain, and a cavalry brigade, all of which needed to be ready for operations in 1939. This number would be increased to a strength of 78 divisions in time fo war with additional reserve divisions activated. Along with the flashy items required to make this a reality, like tanks, of which each armored division would have about 1,800, there were also all of the other things that would need to be built for each division. For example, each infantry division required over 500 trucks, 390 smaller vehicles, and about 400 motorcycles, and even with these numbers horses were still heavily used in transport and artillery hauling. However, the armor vehicles that would need to be built would be just a tiny portion of the total planned German rearmament spending. During the initial estimations during 1936 the plan was for these vehicles to only be about 5 percent of total spending, massively outweighed by more traditional weapons like infantry arms, artillery, and just ammunition which would take up a third of the budget. German vehicles were even lower on the spending list than German fortification efforts, primarily on the Westwall fortification system, which was planned to take about 8.7% of spending during the four years after 1936. But, just to emphasize again, all of these numbers were very much in flux, and constantly expanding so rapidly that it is hard to draw too many conclusions from any single snapshot. Just a few months after those numbers I just provided, the plans for the Wehrmacht expanded and included several additional fully motorized infantry divisions, while at the same time the exact composition of armored divisions was reworked and their tank complements were increased by 500. This type of flux would continue, with the overriding mandate being to have the Wehrmacht ready for a war within four years, but the division of what ready meant continued to change. To support these efforts in September 1936 a public announcement was made by Hitler that the economy would be geared entirely to rearmament, an announcement that would have consequences. To move the economy over to rearmament, and then to make enough equipment to support an army of roughly 4 million men over the span of four years would mean that the number of factories nad other pieces of the German industry dedicatd to armaments would have to be massively expanded. Existing facilities would have to be updated and switched over to arms production, new factories would certainly have to be built. This would also require the training of a huge new workforce, altering the balance of employment within Germany. All of this was completely accomplishable, but there was a nagging question, after all those changes were made, after all those men were equipped, what happened then? Industry could switch back to consumer goods, but then a large amount of money would have been wasted, but if they were to stay focused on arms production they had to be doing something, they could not just have production capacity sitting dile. That is, unless the rearmament campaigns continued, in greater numbers and into the future almost indefinitely. But to support such continued production, the only possible recourse was war, there simply would not be the money or resources to continue any other way. There was also the fact that the best time to go to war is immediately after rearmament is complete, any delay just gives your enemies time to catch up and provides time for the items that were just built to be outclassed. Among the German General Staff the situation was clear, with one memorandum stating that “Shortly after completion of the rearmament phase the Wehrmacht must be employed, otherwise there must be a reduction in demands or in the level of war readiness.” The cor problem though, at least from the economic perspective was how to make rearmament happen in the first place, and for that the problem was one of money.
The money problem was specifically a problem when it came to foreign exchange, which was exacerbated by the fact that Germany had never devalued their currency from its position on the gold standard. Refusing to devalue made German exports very expensive and unattractive, but it made imports seems quite cheap, and it also contained inflation. If you remember these issues were the same concerns that caused France to refuse to devalue for so long during the 1930s, before eventually in the summer of 1936 Leon Blum, as the leader of the Popular Front government, would finally implement a policy of devaluation, something that was long overdue for the French economy. But critically, within the push for the French devaluation there were agreements with both the British and American governments that when the devaluation occurred, there would not be any economic retaliation by the other nations. This devaluation allowed for the French economy to in many ways rejoin an international economy that had moved after the problems of the Great Depression. There were some within Germany that had been pushing for similar actions by Germany. Goering would commission some German economic experts to evaluate the German economy and deliver their recommentations on what should be done in the future to ensure continued growth and the ability to meet rearmament requirements. He was particularly interested in the ongoing issues with foreign exhange and the balance of payments issues that German rearmament was causing. One of the recommendations that would be made out of this effort, was that Germany essentially do what the French and done, which was to devalue their currency to improve exports, and then loosen up some of the strict structures of foreign exchange availability that had been implemented by the government to ensure what imports were available were being funnelled into the rearmament efforts. But there was a problem with this plan, if the German government wanted to proceed with devaluation, they would need to gain the support from at least Britain and France to ensure they did not take protectionary actions against German goods. Even in 1936, so befor the Anschluss or Munich, relations between Germany and those other nations were not what they had once been. To try and ensure support from those nations the report recommended some actions that might have to be taken to gain acceptance from London and Paris. These estimations, mostly for German domestic political changes were not very well founded. While realtions had deteriorated by 1936, it is likely that any economic discussion between Germany and the other nations would have been likely to succeed, or at the very least every nation would have come into the discussions wanting them to succeed. Instead the contents of the report were more based on what the author wanted the German government to do, with the author being then Oberbuergermeister of Leipzig Carl Goerdeler who wanted several important policy decisions of the previous years to be reversed, particulary around the German government’s relations with the Church and German Jews. Goerdeler would go on to participate in various plots against Hitler, including the events of July 1944 for which he was executed. In some ways none of this mattered though, because while discussions were still ongoing, and even with the leaders of the Reichbank in favor of devaluation, the likelihood of devaluation was always quite low. There were two problems, first that the French decided to devalue as I mentioned earlier, which made a German devaluation less impactful, and second because if Germany devalued then it was almost certain that there would have to be some at least temporary spending cuts, especially on armaments, while the economy recalibrated and German exports started to flow again. Eventually the decision around devaluation and the course of the German economy would bubble all the way up to Hitler. In his eventual statement, he would make it clear that economic policy was far from his most serious concern, saying “The nation does not live for the economy, for economic leaders, or for economic or financial theories; on the contrary, it is finance and the economy, economic leaders and theories, which all owe unqualified service in this struggle for the self-assertion of our nation.” The general thrust of Hitler’s opinion was that raising exports was not the answer to Germany’s problems, and so devaluation was pointless because its greatest impact would be to make German goods more competitive on the international market. He would then go on to state that “The job of the Ministry of Economic Affairs is simply to set the national economic tasks; private industry has to fulfil them . . . Either German industry will grasp the new economic tasks, or else it will show itself incapable of surviving any longer in this modern age”. Goering’s inteprestation of all of this, supported by some of the words that Hitler would use in his full statement, was that the economy from that point forward, which was in September 1936 should proceed as if a war were always just around the corner. TThat meant that no sacrifice from the people was too high, no demand from the government unwarranted if the results were the goals being met. And so the German economy would continue doing what it had been doing, with rearmament monopolizing any available foreign exchange, and the rest of the economy making due with what was left. Government control was tightened, for example Goering would eventually order that all private property that could be used for exchange, so for example francs or pounds, or gold, would be confiscated by the government for its use. With the decision not to devalue, or to make any real changes to the export situation, the only option was to double down and find a way to use the available resources as efficiently as possible, resulting in the Second Four Year Plan, which we will discuss next episode.