In the last 18 months before the war Germany’s desires far outstripped its available resources.
Hello everyone and welcome to History of the Second World War Episode 80 - Germany Prepares for War Pt. 3 - Running on Fumes. This week a big thank you goes out to James and Bradley for the donation and to Johan, Jordan, and Edwin for choosing to support the podcast by becoming a member. Members get access to ad free versions of all of the podcast’s episodes plus special Member only episodes roughly every month. Head on over to historyofthesecondworldwar.com/members to find out more. As we move closer to the end of the pre-war content for the podcast, I thought this would be a good time to start talking about a Question and Answer episode. It will probably not happen until around mid year, but now is a great time to start getting questions in. I think the topic for these Q & A episodes will be anything pre-September 1, 1939, basically anything the podcast has or has not covered during the interwar period. The one exclusion for that will be events in the Soviet Union, which has been pushed until after the Polish Campaign. So send in those questions to email@example.com or any other method of contact. The sooner the questions come in the more I am able to organize them into reasonable groups, or even multiple episodes if required, which I think makes a better listening experience for everyone. Back to the history. Last episode we talked about the Second Four Year Plan, and how its long term investments in certain industries and its increase in government control interacted with the other pieces of German society like the industrial leaders and the military. During this episode we will focus on the 18 months before the war started in September 1939, roughly the period after the Anschluss in March 1938. This was a period of constant escalation due to two primary factors: The first was the escalating political tension around Europe, a shift that we covered in some detail during the Anschluss and Munich agreement episodes. This tension would not even after 1938, and would only increase during 1939. The second factor was the rearmament efforts that this tension ignited in other nations, particularly in France and Britain. As those nations, among others, increased their armament spending, Germany had to respond if it wanted to keep pace. But this was not always easy, and just because rearmament plans were expanded, and the desired number of planes, tanks, ships, and other items increased, did not always mean that those plans could be executed on. In fact, in many ways the story of these 18 months for Germany was a story of failure to meet their goals, and often failing to properly match the escalating efforts of those around them.
During our Anschluss episodes we discussed many of the effects that the Anschluss would have on Germany and Europe. for example, it would amplify Hitler’s prestige as he pushed for action and rightfully predicted that the Anschluss would not result in any action from other nations. It would also expand German territory for the first time. Along with these it would also have some important economic effects. One of the ways that it helped the German economic effort was by providing over 400,000 unemployed individuals that were able to join the German workforce that was straight up running out of bodies. Lack of workers had been a problem for some time in Germany as more and more money was poured into various efforts to increase economic output of various industries. By adding so many unemployed Austrians the problems were ameliorated. Another small benefit was the general addition of Austrian industry, which added about 8% to Germany’s existing industrial capacity. Both of these changes were important, especially on a longer term basis, but there was also one major short term benefit, and as always it came back to foreign exchange. Germany had, for some time, been desperate for foreign exchange to allow for more goods to be imported. When they absorbed Austria, they would also take control of its 782 million Reichsmarks worth of foreign exchange. This allowed for a level of foreign purchasing that Germany had not been capable of for years, and it provided a short term boost to the economy. But of course short term boosts have one problem, they are short term, the equivalent of finding some money in your couch, and it was not the kind of long term solution to Germany’s foreign exchange problems that the German rearmament efforts required.
As I mentioned in the introduction, 1938 would be a period of escalation and massive increases in the demands placed on the German economy. Hitler would order that the military massively increase in size, far beyond even what the German military leader had been planning or had really even wanted. This meant massive numbers of aircraft that would be ordered, including 7,000 Ju-88 bombers, which would require about half of the total production capacity of the Luftwaffe. These would be just a portion of over 21,000 aircraft that were being planned as part of the Luftwaffe that would be operational in 1942. The Army would also join the club by tripling their monthly demand for steel from 400,000 to 1.2 million tons to meet its laundry list of building programs. The army would not receive this amount of steel until 1942, and in fact for most of 1938 it would not even receive its 400,000 tons per month that it was previously requesting. The resources provided to the construction of static fortifications, primarily the Westwall complex on Germany’s Western border were also greatly increased. This was done specifically to help defend from possible French aggression while Germany was busy making more aggressive moves in Eastern Europe. The German Navy would also put in place massive new plans for expansion, aimed at both Britain and France. The Navy’s massive Plan Z would not be finally signed until January 1939, but as soon as it was put in place it would be given absolute priority over all other efforts, meaning that it would hamper other rearmament programs. We will discuss Plan Z in more detail next episode. Other areas of production were also investigated, to try and find a way to increase output, including the all important synthetics. But as more resources were put into some areas, other areas found themselves neglected. There were some serious shortcomings in other areas of armament production during this period. One interesting comparison comes from Wages of Destruction, with my history of podcasting the easiest way to pique my interest is to make comparisons between events during the First and Second World Wars. Adam Tooze makes a point of comparing explosives and gunpowder production in Germany in 1918 which were both over 13,000 tons per month, and the same goods in 1938 which were both less than 5,400 tons per month, less than half. While it is always difficult to make such comparisons, and there are so many factors on both sides to consider, we do know that the 1918 German economy was at the end of four years of war, a blockade of all imports courtesy of the Royal Navy, and multiple years of near famine in Germany. In 1938 Germany was in a different position, but even with all the changes to military technology they still needed explosives and gunpowder, and at much higher rates that what they were producing. The drastic gulf between desired results and actual results was well known, and so changes were demanded. In mid-July 1938 Goering would put in place an update to the Four Year Plan, called the New Military-Economic Production Plan. Its goal was to massively increase all armaments production in the following months, including diverting large quantities of steel to the Wehrmacht. During mid 1938 this allocation would be more than doubled from 325,000 tons per month to over 650,000 tons. This new Economic plan came with new methods to deal with any possible money problems. For several years the government had been using the system of mefo bills, which as a reminder, were a kind of IOU from the Mefo corporation which had been setup by the government. These IOUs were then accepted in all Reichsbanks, and they did have a redemption schedule but also provided interest to prevent their redemption until some point in the future. The problem was that even this method of essentially creating a secondary currency of exchange was running into challenges of scale. To allow for more spending the government began to authorize larger and larger Reich loans, basically debt spending by the government which would increase by about 30 percent during 1938. I feel like there has to be something said at this point for modern listeners. Speaking from early 2022, modern government deficit spend all the time, but during this period, and for a government that was at least ostensibly on the gold standard, such deficit spending was seen very differently. But there was really no other way to handle the fact that spending on the German military would increase by 70%, the money had to come from somewhere, and it would eventually just have to be created.
While the narrowing of focus on specific areas of the economy was having production consequences in other areas, it was also causing some problems around infrastructure and the general makeup of the economy. One of the very obvious areas that was being neglected, and would start to really show that neglect by late 1938, was the German railway system. The German rail system, or Reichsbahn, was crucial to the functioning not just of the German economy but to the plans of the Wehrmacht in times of war. But in late 1938 the Reichsbahn was worn down and desperately in need of repair and replacement. Keeping railcars on the rails was a growing problem, as maintenance requirements were consistently not met due to a shortage of material and personnel. As some cars became totally inoperable, delays began to pile up. Eventually freight that required rail transport began to simply not have transportation. For items that were not directly related to the military, marked very high priority by the government, or time sensitive the delays could stretch on and on. While many goods could not move around Germany, one thing that was moving around was labor. A very worrying trend was the movement of labor away from agricultural jobs and into urban areas and industrial jobs. Even though there were constant efforts to reduce inflation and to keep wages low, the allure of jobs outside of agriculture was almost irresistible for many rural German families, where the economic rewards for agriculture were also very low. This movement should have almost certainly have been expected, but the German government found itself unable to properly compensate to keep people in agriculture. The area hardest hit by these changes were among the rural laborers. This meant that many larger agriculture operations began to reduce some of the more labor intensive form of production, which meant straight up less food. There were also follow on effects to this movement of workers, especially among young workers out of agricultural jobs and into urban areas. More work began to fall on the women within the family, as the mail family members were working jobs that required more of their time. This then resulted in a drop in the rural birthrate, which was very worrying for long term Nazi population goals, which were predicated on robust population growth. In some rural areas the number of children born would drop by as much as 33 percent, with many families not feeling that the possible long term benefits of having children was worth the short term increase in work required by wives and mothers. These three trends, a reduction in spending on some infrastructure, a restructuring of the geography of German job creation, and a shift in the make up of rural families are interesting indicators of a shifting economy, in ways that were less obvious than the giant factory creation or how many tanks were being built.
While 1938 had seen military demands increasing, 1939 would then be no different. As they would develop over the course of the year the overall expenditure by the government would be more in the first 9 months of 1939 than it had been in all of 1938. Hitler would give a speech to the Reichstag on January 30th, one that we will refer back to several times over the coming months. It was a speech that was essentially trying to justify German actions up to that point, as well as a possible war in the future, and the increasing violence of anti-semitism in Germany. When speaking of the military and efforts to grow German military power Hitler would say “Ultimately, the economy of today’s empire stands and falls with foreign policy security. It is better to see this in good time than too late. I therefore consider it the supreme task of the National Socialist leadership to do everything humanly possible to strengthen our military strength. I build on the insight of the German people and especially on his memory.” He would also discuss the role of the German economy: “While the goal of our economic management in the first six years of our seizure of power was to bring all idle labor into some useful employment, it is the task in the years ahead to undertake a careful survey of our workforce, to regularize their use by one Rationalization and, above all, technically better organization of our working conditions with the same work effort to achieve increased benefits and thus also save labor for new additional productions.” Changes would be put in place over the following months, for example there would be a trimming back of civilian labour service which had been created as part of the 1933 job creation programs, in the hopes of freeing up some workers for other more important tasks. Those that were left in the program would then be reprioritized onto fewer projects, especially those more directly related to defense and industrial production. The result of this repriortization was that by the spring of 1939 about half of the total spent on all government construction around the nation was for the military, with another 20% allocated to industrial needs. Such focus on a small set of work meant that what was being sacrificed was the general standard of living among the German people. In previous years there had been a good amount of government assistance around housing creation and other programs, most of these were cut so that the labor and resources could be put into other objectives. Even with all of these changes, and with such a focus on only a small subset of programs, the goals of both the Four Year Plan and rearmament were still far out of reach, and by early 1939 they had simply ballooned outside of all German capabilities.
This brings us back to the problem of money. One of the primary goals of the financial planning and regulations of the German economy had been to contain inflation. Keeping inflation at a very low amount, as low as possible, made financing rearmament with available government capital more likely to succeed, but as spending continued to increase to try and meet new goals the inflationary pressures within the economy continued to increase. This was then counteracted by more and more forms of government regulations to keep prices and costs down, which then had the effect of making the overall German economy more and more inefficient. There was also just the problem of the government having enough money to do what they wanted to do. To try and make up for the cash problems a new system would be put in place in March 1939 called the New Finance Plan. This system basically required all German businesses to accept at least 40% of their payment in the form of tax credits. These could be used in future years, which was great for the businesses, but they provided no interest, so they had no protections against inflation. Most importantly they would only really be useful in a future where rearmament and government spending returned to a more sustainable level. As this would not happen in the following years, in reality these tax credits, which again made up almost half of entire government contract values, were basically just no interest loans to the German government that in the future it would never repay. One thing that would have helped some of these problems, and assisted in the foreign exchange problem that only got worse after the Munich agreement, was devaluation, but by the end of 1938 a devaluation of the German Reichmark on the international market was probably no longer possible. here is Adam Tooze again to explain “The argument in favour of devaluation rested on the assumption that there was a coherent system of German prices that was out of alignment with that prevailing in other countries, a problem that could be resolved by an adjustment in the external value of the Reichsmark. According to the Reichsbank, this was no longer realistic. For years the rates at which goods were exchanged with each other had not been determined by the anonymous and continuous workings of the market system, but by a series of ad hoc and inconsistent political decisions. The consequence was that for foreign trade purposes the Reichsmark now lacked any well-defined value.” So essentially, the Germans had been messing with their economy and its financial backing so much over the years that they could no longer even do one of the things that would have helped. The final change in the monetary structure of Germany would come in June 1939, when the restrictions that had previously been placed on the Reichsbank were removed and after June it could print as much money as was required. This had previously not been possible due to the German adherence to the gold standard, which had necessitated the Mefo bill and the New Finance Plan tax credits. Now that the government could just print as much money as it required it made up the 6 billion Reichsmarks deficit during 1939 at the money printer, resulting in the doubling of the amount in circulation by the start of the war. However, due to the lack of foreign exchange, and the fact that the external exchange rate to Reichsmarks was not altered, this money could not ever leave Germany.
No amount of money creation could solve the problem of foreign exchange, and the lack of ability to import goods. Essentially all the German government was doing was creating a domestic pool of funds to be moved around between the government, businesses, and German citizens. This meant that the trend continued of rearmament goals not being met by the various armed services. By the end of 1937 several of the goals put in place in 1936 had slipped into the future, for example the Army estimated that in 1936 its goals had slipped all the way out to April 1943 due to lack of progress. And this was even before the plans and goals expanded during 1938, with each area of the Wehrmacht still launching its own larger plans, without any real coordination or considerations around what might actually be possible. These plans were then even further derailed in early 1939 when it was decided that the Navy would be given absolute priority, which meant that the pre-existing shortfalls of resources in other areas became even more acute, causing the velocity of rearmament to once again plummet. When discussing rearmament it is often far easier to discuss large rearmament items: plans, tanks, U-Boats, battleships, because they are often built in very easily digestible numbers. Their construction was certainly important, but it was some of the smaller items that were just as important that would experience the pain of rearmament shortfalls. Simple items like rifle ammunition, mortar and artillery shells, and infrastructure items like barracks for troops. there was also a reduction in the manufacturing of infantry weapons, for example the MG-34 machine gun orders were cut in 1939 from 61,000 to just 13,000. All of these little reductions, shortfalls, or just efforts that would be cancelled would begin to add up. These reductions and failures came at precisely the wrong time for the German military, as at the same time that they were struggling to meet even the more realistic goals of 1936 its primary enemies around Europe were massively expanding their own rearmament efforts. New French and British building plans put in place in 1938 and 1939 demanded something in answer, but all that Germany could manage was a set of paper plans that, while impressive, were not being brought to reality. The only long term answer was seen as expansion, but with that no happening in early 1939, more diplomatic solutions were found where possible. For example a trade deal was signed with Romania, one of the few nations that would supply Germany with large quantities of oil. There was some level of intimidation involved in the conversations with Romania, and some promises of later benefits if a war started. It was a rocky road for the two nations, with Romania actually halting all oil exports due to a payment disagreement, eventually resulting in Germany agreeing to ship some new fighter planes to Romania in exchange for getting the flow started again. This was initially personally halted by Hitler, only to then later be agreed to by Goering. The overall tense situation between Germany and other nations that it either had trade agreements with or was seeking to sign trade agreements with, and the clear indications of how German rearmament was trending against that of other nations would push for action, and quickly. Later one of the driving factors behind German efforts to sign what would eventually become the Molotov-Ribbentrop pact was the possibility of it leading to an economic agreement. That trade agreement would not be signed until February 1940, at which point the Soviet Union became a critical supplier of a whole list of goods: animal feed, phosphates, asbestos, manganese, nickel, oil, and list went on and on. Just days before the start of the war Hitler would address Germany’s military leaders saying ‘We have nothing to lose; we have everything to gain. Because of our restrictions our economic situation is such that we can only hold out for a few more years. Goering can confirm this. We must act.’
However, just because the Germans might have been falling behind in the rearmament race, did not mean that starting the war in September 1939 would be at a point where the German military was in a good place. Some of the services were in a better state than others, the Luftwaffe was very strong when compared with its enemies, but even in this area there were some worrying problems like some of the failures of recent Luftwaffe projects like the heavy bomber project which would never make it to production. For the land forces, the Panzer IV was just starting to be available in reasonable numbers, and the army’s overall rearmament plan had been derailed by the demands of the other services. The Navy, well I will just refer to a quote from Admiral Raeder from September 3, 1939: ‘As far as the navy is concerned, it is…not at all adequately armed for the great struggle.’ These problems were not at all unknown to German leaders, both Nazi and military. They understood that there were challenges and that they still had a long way to go to meet the goals that in previous years they believed were essential to winning a way. But as so often happens, the scenario had changed, and the actions of other nations had forced their hand. Now, speaking from the perspective of the year 2022 to close out this episode, I feel it is necessary to address this very doom, gloom, and failure laden episode that has been the last few episodes. The German military, for all of its problems around its rearmament plans, would do very well for itself in the opening campaigns of the war. Poland, Norway, France, the Balkans, and beyond it seem like everywhere the German military wanted to attack and conquer it could and would. The reasons for this are of course varied, and we will spend a good part of the next several years unfolding them, but when it came to economics and rearmament it would prove a few things. The first and most important was that whatever problems the German economy had, and as much as that derailed their rearmament plans, they were still in 1939 quite far ahead of most other nations. Sure those other nations were improving and massively expanding their own efforts, but Germany’s first mover advantage was very real. The second was that the German military would be able to execute a set of very quick campaigns of victory, which from the perspective of trying to supply and expand that military was precisely what the German economy needed. This was because when the war started, all the money, time, and materials that had been spent on the factories under the Four Year Plan were just starting to bear any fruit, and those that had been dreamed up in 1939 were often just getting started at best and were at times still only on paper. They had been put into motion with the idea that they would be needed in 1943, and so they were far from being ready. What was available was capable of stockpiling supplies over a period of time, which would then be very quickly exhausted. Fortunately for the campaigns that had to be supported were also short, and would reach completion before that exhaustion came into effect. So to summarize, from an economic and industrial perspective, the reason that the early years of the war went so well fro the German military was not because it was prepared for a long drawn out war, but that it was prepared to support a series of military campaigns separated by period of rest, refit, and resupply. When the campaigns would shift in nature, and would not end as quickly, there would be problems, but those problems, campaigns, and their solutions are a story for another day. Thank you for listening and I hope you will join me next episode in which we will discuss the Kriegmarine, and how it was preparing for war.