Chapter Ten

Economic Problems and the Coming of War

War came to Europe when the depression was passing; indeed, preparation for war gave a stimulus to the economy of a number of countries. Economic recovery brought its own problems; and we must now ask how far the new economic pressures of the late 1930s provided motives for states to go to war.

Britain, France, Italy and the Soviet Union

In the case of Britain, all the major economic influences were against war, and especially against war with Germany. The First World War had done irreparable damage to Britain's economic position, and there was every reason to believe that another major conflict would repeat the dose, probably with fatal results. Britain lived by imports of food and raw materials, which had to be paid for, mostly by exports or the provision of services. War meant that the import bill would go up, to sustain the war economy, while the ability to pay that bill would go down, because industry and services were directed to military purposes. It was correctly foreseen that within about a year of sustained war effort, Britain would no longer be able to pay for her imports. In the previous war, this crisis had been staved off by borrowing in the USA; but in the late 1930s this option appeared to be firmly closed. American neutrality legislation, put into permanent form in 1937, forbade altogether the export of implements of war to belligerent powers, and the export of other materials could not be financed by loans or credits. In addition, the Johnson Act (1934) forbade any government which had defaulted on its debts to the USA (which included Great Britain) to raise loans in that country. The door was not merely shut; it was locked and bolted.

To make military preparations for war also presented economic difficulties. There were budgetary restrictions on the amount of money allocated to the armed services; limited physical resources, in terms of factory space, equipment, and skilled manpower; and difficulties in meeting the bills for imports, because between 25 and 30 per cent of the cost of armaments lay in the price of imported raw materials. In addition to these constraints there was the wider question of the nature of the economy and how it was to be run. The British government wished to preserve a market economy, and to avoid forms of compulsion which would arouse the opposition of industrialists and dislocate normal business activity. Rapid rearmament, on the other hand, would be best achieved through a command economy, in which the government set priorities and gave orders. In Britain in the late 1930s, such a course was ruled out as both economically and politically unacceptable.

All this applied to war, and preparations for war, in general. When the question turned to war with Germany in particular, there were further economic reasons against it. Germany was an important market for British exports — the fifth in terms of value in 1938, just ahead of the USA.¹ As a result of the Anglo-German Payments Agreement of 1934, revised after the Anschluss with Austria in 1938 on favourable terms for Britain, this market was fairly stable; and Germany also took considerable amounts of British coal and textiles, offering an outlet for sectors of the economy that remained in depression. In late 1938 and early 1939, negotiations were in progress for a coal cartel, by which German and British producers would agree on a division of markets between them. The British government continued to believe, right up to 1939, in the importance of restoring Germany to her central place in the European trading system.

They believed, too, that German economic anxieties could and should be assuaged by offering guaranteed access to raw materials outside Europe. In 1937 and early in 1938, the British were willing to explore the possibilities of returning to Germany some of the colonies lost in 1919. They put this suggestion to France in April 1937, with the slightly embarrassing condition that the French would have to provide the major share of territory to be restored, because the Dominions would not budge from their mandates, and there were insuperable (though unexplained) reasons against the return of Tanganyika. The French were naturally sceptical about such proposals. In March 1938, Britain put to Germany a complicated proposal by which territory over a large part of central Africa (most of which did not belong to Britain) might be brought into a form of joint trusteeship, in which Germany could share — thus resuming her place as a colonial power without actually having any colonies. Such proposals were too thin to be taken seriously. Access to colonies could not meet German problems about raw materials, because the most important raw materials (coal, iron, petroleum, cotton) were hardly produced in colonies at all; the great exception was rubber, with 96 per cent of world production coming from colonial sources in 1936.² No one, however, proposed to cede Malaya to Germany. The proposals did not offer Germany very much. If in return she gave serious undertakings of good behaviour in central and eastern Europe, and accepted a limitation on armaments, these would be disproportionate concessions. However, it was significant that the British were willing to make even token economic moves to assure Germany of their goodwill; and they expected to get a response from the ‘sensible men’ in Berlin, notably Schacht, who himself took the question of colonies far more seriously than Hitler did.

In other respects, economic relations between the British and German governments during the 1930s were mainly good. The British recognised that the Anglo-German Payments Agreements of 1934 and 1938 provided Germany with foreign exchange which was used to finance rearmament, but still believed that the balance of advantage lay with Britain. In November 1937 an Austrian proposal for the abolition of exchange control by the Danubian states, aimed at diminishing German influence in the area, received a hostile reception from Chamberlain, who thought it would imperil the general settlement with Germany which was his ultimate goal. Only in May 1938 did the government begin to examine possible economic actions against Germany, setting up an Inter-Departmental Committee on South-East Europe for this purpose. The results were not great, though they did mark a change of emphasis in British policy: a loan to Turkey, credits to Greece and Rumania, and the purchase of 200,000 tonnes of Rumanian grain in October 1938. After the Munich agreement, British influence in much of south-eastern Europe inevitably collapsed, though in Rumania Britain and France kept up a successful economic defence against Germany for a prolonged period.

Despite these late changes, the general British position was that the economic interest of the country benefited from good relations with Germany, from restraint in rearmament, and from the avoidance of war. Only the threat of total German economic control over Europe was likely to change that assessment. Much the same was true of France. The stagnation of the French economy that was evident from April 1936 to April 1938 persisted for the next six months. Two further devaluations of the franc (July 1937 and May 1938) failed to have more than a fleeting effect on industrial production, which was held back by internal constraints, and mainly by trade union insistence on the forty-hour week. In November 1938, Daladier appointed Paul Reynaud as Minister of Finance, and embarked on a new economic policy. Credit was eased; and the forty-hour week was relaxed by means of exceptions for armaments industries and their suppliers, so that from October 1938 to June 1939 the average working week rose from 39.2 hours to 41.9, and in armaments factories it reached 50 or even 60 hours. In the same period, industrial production rose by 20 per cent, and unemployment fell by 10 per cent (to about 380,000). An attempted general strike against these measures in November 1938 was a failure. The upturn came belatedly, leaving France acutely conscious of industrial weakness in face of Germany — by the end of 1938 German steel production was almost four times greater than that of France.³ There was every reason in economic terms for France to avoid a confrontation with Germany, and to seek at least a breathing-space to allow economic recovery to develop.

France, like Britain, showed a growing tendency to dispute German economic predominance in eastern Europe, though only after the basis of French influence there had vanished almost beyond recall. In September 1936 there had been a Franco-Polish agreement for a French loan of 2,000 million francs, of which 800 millions were to be spent on French armaments; but by January 1938 practically none of these had been delivered, and the French government admitted to the Poles that it could not meet its commitments. The Czechoslovakian crisis brought French influence to a very low ebb; and it seemed reasonable to think that France had chosen to abandon eastern Europe to Germany. However, in 1939 this movement was checked, and France took up the cudgels in Rumania, with considerable success; though without changing its central premiss that on economic grounds it preferred to avoid, or at least postpone, a war with Germany.

France and Britain were both on the defensive, in economic as well as other terms. The position of Italy was in many ways different. Italian policy was expansionist, as its moves into Ethiopia (1935–36) and Albania (1939) showed; but only a part of the impulse behind this expansion was economic in nature, and even then more in theory than in practice. From 1935 onwards Mussolini talked a good deal about self-sufficiency, which would be based on an economic zone in Africa and the Balkans. But in fact little progress was made. There was little time or opportunity to explore the resources of Ethiopia; Libyan oil remained untapped; Albania offered limited possibilities; and Italian aspirations in Yugoslavia were kept firmly in check by Germany, which had taken control of much of Yugoslavian trade, and had no wish to see it disturbed. Italy made herself self-sufficient in wheat, and developed enough bauxite mining to secure an adequate supply of aluminium. Otherwise, she remained heavily dependent on imports, not least of oil and raw materials for the armaments industry.

There was some possibility of conquering or controlling sources of raw materials — there were minerals in the Balkans, and oil in the Middle East if Italy were to replace Britain as the predominant power there; and such ideas formed part of Mussolini's aspirations to become the principal Mediterranean power. But though the aspirations were there, the economic power to make them good was not. Steel production in 1938 was only 2.3 million tonnes, and coal a mere 1.5 million tonnes. Most imports were sea-borne, with (in 1939) about 80 per cent coming from outside the Mediterranean, and therefore subject to naval blockade. Italy imported 3–4 million tonnes of oil per year, by sea. Imports of coal came mostly from Germany, also by sea; though it was found in 1940 that some 12 million tonnes of coal could be moved in the year by rail, using lines through Austria and Switzerland.⁴ From a strictly economic point of view, Italy had some motive for expansion by war and conquest, but insufficient capacity to carry it out. In terms of profit, neutrality in the war that actually began in 1939 offered substantial advantages, with Italy being able to benefit from transit trade to Germany to avoid the Allied blockade, and with the belligerents seeking to buy Italian exports. Such simple calculations of profit and loss, however, did not come high on Mussolini's order of priorities; and when he went to war, it was not primarily for economic reasons.

The Soviet Union was in the paradoxical position of devoting a large part of its economic efforts to armaments, yet having the strongest economic reasons for remaining at peace. According to official Soviet figures, armament expenditure increased from 5.4 per cent of expenditure under the first Five-Year Plan to 26.4 per cent during the first three years of the third Plan.⁵ Soviet production of weapons (tanks, guns, and aircraft) reached high figures in the late 1930s, though the development of new types was held back by the purges and by Stalin's arbitrary decisions. At the same time, heavy industry had developed very rapidly, at the expense of agriculture and consumer goods, and it was in the process of being dispersed so that a proportion was beyond the Urals, far distant from any European attack. But this did not mean that the Soviet economy was prepared for war. Growth in the crucial iron and steel industry was painfully slow (only 3 per cent, 1938–41)⁶; and the processes of change were still under way. The immense economic and social dislocation wrought by collectivisation, industrialisation, and the purges had not yet been overcome. The Soviet Union needed a long period of peace to recuperate, and in economic terms there was no better indication of this than the price that Stalin was willing to pay for an agreement with Germany. The economic agreement signed with Germany late in 1939 was favourable to the Germans, and was executed more faithfully on the Soviet side than the German (see below,pp. 180–1, 341). Economic considerations combined with others to confirm the Soviet desire to keep out of war, except when Soviet territory was at stake (as in the Far East), or when a walk-over was expected (as with Finland).

Germany

The exception to this catalogue of states which for economic reasons would prefer to avoid war lay in Germany, less because the German economy was fully prepared for war (certainly general and prolonged war) than because Germany was going through a severe economic crisis, of which one possible solution was a war of conquest. The process was circular. The economic crisis itself was largely caused by the extreme pace of German rearmament. One way out would have been to slacken that pace; when that was rejected, Germany was in a position where she was arming in order to expand, and then had to expand in order to continue to arm. One belief was crucial, and totally at variance with all assumptions made in the liberal democracies: that war could be made to pay.

In the course of 1936, difficulties accumulated in the German economy. There was a problem of food supply, partly because restrictions on the import of animal fodder had resulted in the widespread slaughter of pigs and cattle in the winter of 1935–36. (This was the background to one of Goebbels's most famous remarks, on 17 January 1936, about guns and butter. His actual words may need to be recalled: ‘We can do well without butter, but we must have guns, because butter could not help us if we were to be attacked one day.’)⁷ The Germans had, in fact, gone short of butter and other dairy and pork products during that winter; and it was Hitler's intention to make good these shortages without cutting back on armaments — not to choose between the two. There was pressure on raw materials, which were important for the rearmament drive; and an increasing problem of securing foreign exchange to pay for imports whose cost could not be met by exports. At home, there was a shortage of labour in some sectors of the economy. All this, in the normal workings of supply and demand, meant pressure for prices to rise.

In these circumstances, Schacht (who since 1935 had combined the posts of Economics Minister and President of the Reichsbank, and been effectively in control of the German economy) recommended that the time had come for consolidation: to slow down the pace of rearmament and increase exports, allowing freer multilateral trade by relaxing the tight restrictions of his own New Plan. He received support in this from Colonel Georg Thomas, the head of the Economics and Armaments Section of the War Ministry, who favoured a slower, long-term programme of armaments in preparation for a long war; from the banks; and from the steel and coal industries, which wanted to get back to a wider trade system. Hitler would not accept such proposals, refusing to allow any pause in rearmament, and indeed seeking to accelerate it. In this he was supported by Goering and the Luftwaffe high command; important elements in the Nazi Party; industrialists in the sectors concerned with aircraft, motor cars, machine tools, and chemicals; and some members of the army high command.

In August 1936 Hitler intervened with a memorandum on the Four-Year Plan which he had drafted in person — a rare event.⁸ He restated his basic aims and principles. Germany was overpopulated, with neither the food nor the raw materials necessary for her needs. ‘The definitive solution lies in an extension of our living space, that is, an extension of the raw materials and food basis of our nation.’ But in the meantime various steps were necessary to tide Germany over until this definitive solution could be attained. At present, Germany could not afford enough imports to meet all her needs. It was impossible to increase exports to pay for more imports; and equally impossible to reduce imports, because to do so would hamper rearmament. It was therefore necessary to produce in Germany, at whatever cost, synthetic rubber and oil, and to mine German iron ore, even of poor quality, in order to release foreign exchange to pay for food and for those raw materials that could not be produced at home or in substitute form. Nearly four years of Nazi rule had gone by without making progress with such a programme. (The first synthetic oil contract had in fact been signed in December 1933, but Schacht had held it back, because he regarded the necessary investment as uneconomic.) Hitler concluded: ‘There has been time enough in four years to find out what we cannot do. Now we have to carry out what we can do. I thus set the following tasks: I. The German armed forces must be operational within four years. II. The German economy most be fit for war within four years.’

This was not in strict terms a plan for self-sufficiency. When Hitler announced the Four-Year Plan publicly at the Party Congress in September 1936, he carefully said that Germany must be independent of foreign countries for those materials that she could produce herself, either by chemical means or by mining; this would reserve foreign exchange for food and materials which could not be so produced. It was rather a policy of preparing for war, which alone could bring about the definitive solution set out in his memorandum, though not in his public speech. Goering was appointed Commissioner for the Four-Year Plan by a decree of 18 October 1936; and he defined the objects of the plan as being to increase self-sufficiency while continuing rearmament at a rapid pace. The production of synthetics was to be pursued, with the aim of meeting by 1939 all the oil needs of the mobilisation plan, 50 per cent of the rubber needs, 30 per cent of the textiles, and 33 per cent of the animal fats. Domestic production of iron ore in the Salzgitter area was to be increased, to meet 50 per cent of mobilisation needs by 1939.⁹ Food production was to be further improved, and controls over the movement of labour were tightened.

In October 1936 Goering set up an organisation to implement the plan, made up of six main divisions; though as so often in the Third Reich there was much friction and overlapping of responsibilities. Schacht remained as Economics Minister until November 1937, and continued to oppose the self-sufficiency aspects of the Four-Year Plan, with the support of business circles, the banks, and large parts of the steel industry. In particular he objected to the development of the Hermann Goering Iron and Steel Works, set up to exploit German iron ore, which he thought to be a wasteful and inefficient organisation. His struggle was unavailing, for Goering had Hitler's backing, as well as that of the industries which did well out of the plan, notably I. G. Farben in chemicals, which was heavily involved in the synthetics programme, and the aircraft firms. Schacht's value to the regime lay mainly in his reputation as an opponent of inflation at home, and his contacts abroad — as long as some co-operation was sought from foreign industries and banking, Schacht was useful. After he resigned from the Economics Ministry, Germany declined to take part in a world raw materials conference at Geneva, which Schacht had wished his government to attend: a co-operative approach to the problem of raw materials was thus openly ruled out. Schacht remained as President of the Reichsbank; but his successor as Minister of Economics, Walther Funk, was Goering's nominee. The struggle for control of the German economy, which had been going against Schacht from 1936, was finally decided.

Goering might say that, if the Führer wished it, two times two made five: but they did not. The proclamation of a plan and victory over its opponents did not mean that the facts of Germany's economic situation disappeared. The facts came home, even for the Luftwaffe, which Goering favoured, and for the synthetics programme, which was the centre-piece of the new policy. In 1937 and 1938 Germany was short of aluminium, steel, and labour to meet the various demands that were being made on the economy. At the end of 1936, the requirement of aluminium by aircraft manufacturers to meet the Luftwaffe's programmes was 4,500 tonnes per month, of which only half was available. In 1937 the three armed services together asked for 750,000 tonnes of steel per month, but received only 300,000. Steel production remained at the same level as 1936 (about 19.8 million tonnes a year), while demand went up, and no systematic order of priorities for its use was worked out. The same problem hit the synthetic oil programme, which in 1938 required 120,000 tonnes of steel per month for construction purposes; the actual allocation was 42,000 tonnes, though in February 1939 Goering undertook to bring the deliveries up to the level required. Synthetic oil also depended on coal, which was the basis of the process. In July 1938 it was estimated that 20,000–30,000 extra miners would be needed in the next three years, but in fact there was a shortage of labour in the coal-fields. This was part of a wider problem of manpower: in October 1938 the Economic and Armaments Office of the War Ministry estimated that by March 1939 Germany would be short of 600,000 workers in industry and 1 million in agriculture.¹⁰

Even for the Luftwaffe, production of aircraft fell back, though not by much; and monthly output did not reach the level of March 1937 again until May 1939. As for synthetic oil, it was recognised in July 1938 that production would meet only 20 per cent of needs by 1939, as against the original target of 100 per cent.¹¹ When, in October 1938, Hitler set out a new armaments programme which involved a fivefold increase in the size of the Luftwaffe, which would require the building of 47,500 aircraft by spring 1942, the resources to carry it out were simply not available — neither raw materials, steel, fuel, nor manpower. The fuel supply for the force envisaged would have used up 85 per cent of the total world production of aviation fuel. It was to that sort of directive that the divorce between the Nazi regime and economic reality led.

Even well short of this type of fantasy, however, Germany faced a serious economic problem, which may be summed up in terms of food, raw materials, and foreign exchange. Hitler's exposition of Germany's situation at the so-called Hossbach Conference on 5 November 1937 was largely about economics. Food consumption in Germany was increasing, which meant reliance on imports, often from overseas. There was a danger that any year might bring a food crisis that could not be met by the available foreign exchange. In the event of war, overseas sources of supply would be subject to British blockade. The only remedy, Hitler went on, lay in the acquisition of greater living space, starting with Czechoslovakia and Austria, which would provide food for between 5 and 6 million people, if the compulsory emigration of 2 million from Czechoslovakia and 1 million from Austria could be accomplished.

This was only a partial statement of the problem, omitting the question of raw materials and the strains imposed by rearmament. The proposed remedy was dubious, because neither Austria nor Czechoslovakia was a major food producer. Even in 1939, after absorbing Austria and Czechoslovakia, Germany remained dependent on imports for 20 per cent of its foodstuffs; and supplies from south-east Europe, under Germany's influence, could not meet all her needs. The raw material situation was worse. In 1939 Germany depended on imports for 33 per cent of her raw materials; and the proportion was much higher in particular cases — 66 per cent for oil, 70 per cent for copper, 85–90 per cent for rubber, and 99 per cent for aluminium. Roughly half of Germany's normal supplies of raw materials would be subject to Anglo-French naval blockade.

The foreign exchange position was getting steadily worse. In 1938 Germany's trade balance was unfavourable (imports totalled 6,051.7 million RM, against exports of 5,619.1 million). This was reversed in 1939 (exports 5,222.2 million; imports 4,796.5 million) but this still left many imports that had to be paid for in foreign exchange, which was running short. By September 1939, reserves of gold and foreign exchange amounted to only 500 million RM. The annexation of Austria and Czechoslovakia had brought some temporary easing of the problem (Austria had 305 million RM in reserves of gold and foreign exchange), but in the longer term they were a liability, because both needed imports from outside Germany, and both cut down their exports after the occupation in order to meet German demands.¹²

German supply problems: oil and iron ore

Under the terms of the Four-Year Plan, the production of synthetic materials and domestic German iron ore was meant to cope with such problems. The synthetics programme proved in the long run a remarkable success; but in the short term it failed to achieve the over-optimistic targets set for it in 1936. Self-sufficiency in oil within eighteen months was Hitler's aim in 1936; by 1937 the date was put off until 1940; and then it vanished into the future. Production reached 2.3 million tonnes in 1939, or approximately a quarter of estimated mobilisation needs; and 5.7 million tonnes in 1943, or about half Germany's supplies for that year. The programme was extremely expensive, demanding heavy capital investment, a big construction programme, and the use of 4 tonnes of coal and 8–10 tonnes of lignite to produce 1 tonne of oil.¹³ As for iron ore, German domestic production increased after 1936, but it was expensive and of poor quality, unsuitable for high-quality steel products. These two commodities, oil and iron ore, exemplified Germany's problems. In 1937 Germany imported oil from the sources given in Table 10.1,¹⁴ which shows that 65 per cent of Germany's oil imports came from the American hemisphere, a pattern which had also prevailed for the previous three years.

These sources would be immediately cut off in time of war by naval blockade. Middle East oil was under British control; the Soviet Union seemed likely to be among Germany's enemies. This left Rumania as the only significant source of oil not subject to blockade or enemy control. With synthetic production lagging, and demand rising, the importance of Rumanian oil was increased. Total Rumanian production in 1937 was 7.1 million tonnes; but most of this went to other markets.

The Germans therefore set themselves to increase their purchases of oil from Rumania, and to secure their source of supply by tightening their hold on the Rumanian economy. Their starting-point was unfavourable. German investment in Rumania in 1938 amounted to about 1 per cent of the total share capital; British and French to about 16 per cent. In the oil industry, British, French, Belgian, and Dutch capital totalled 45 per cent of investment, German a mere 0.2 per cent. Germany's only advantage was as a market for Rumanian exports; in 1938 Germany took 26.5 per cent of Rumanian exports, against 22.4 per cent going to Britain and France together. On the other hand, only 15 per cent of Rumanian oil exports went to Germany, against 25 per cent to Britain and France together. Moreover, the possession of oil, a highly saleable commodity, put Rumania in a stronger position than other countries of south-eastern Europe, which were much more dependent on the export of agricultural produce.¹⁵

In November 1938 Germany opened an economic offensive against Rumania, designed to secure a new trade agreement which would adapt the Rumanian economy to German needs, and secure a large increase in oil exports to Germany. The Rumanian government resisted, with encouragement from Britain, which set out in autumn 1938 to use economic weapons to obstruct German influence. In September 1938 an Anglo-Rumanian clearing agreement was signed, involving a devaluation of the Rumanian currency against sterling, leading to a sharp rise in Rumanian exports to Britain. In October, the British government agreed to buy 200,000 tonnes of Rumanian grain, despite opposition from the Treasury and the Board of Trade: the first occasion that Britain allowed political considerations to predominate in a deal of this kind. During the winter of 1938–39, the British were generally successful in blocking German efforts to increase imports of Rumanian oil. In March 1939, however, the situation changed. Germany occupied Czechoslovakia, and was able to apply heavy pressure on Rumania, leading to a trade agreement on 23 March which met nearly all their demands. From April to August 1939 Rumanian exports to Germany increased sharply, including a rise in the supply of oil.¹⁶

The British did not give up. They gave a political guarantee to Rumania in April 1939 (see below,p. 298) and made a new economic agreement in July, extending a credit of £5 million, and undertaking to buy another 200,000 tonnes of grain at the next harvest. When war broke out between Britain and Germany in September 1939, the British successfully bought up oil on the Rumanian market, to the detriment of Germany. In March 1940 Germany imported only 45,000 tonnes of oil from Rumania, while Britain took 130,000 tonnes, or nearly 44 per cent of Rumanian exports, to which France added a further 6 per cent. Germany responded with economic and political pressure, and a new German-Rumanian agreement in March 1940 put imports of oil up to 104,000 tonnes in April. Then on 27 May 1940 a further oil agreement, signed in the full flood of German military victory in western Europe, was highly favourable to Germany. By August, German imports of oil were up to 187,000 tonnes, and British down to 6,000 tonnes.¹⁷

The story is instructive. When the weapons used were economic, the conflict between Germany and Britain for Rumanian exports, and especially for oil, was evenly balanced. The definitive German success was brought about by military action, not in Rumania itself, which the Germans did not want to invade for fear of damage to the oil installations, but in the Low Countries and France. When Germany controlled almost the whole Continent, Rumania was in no position to hold out, and British purchasing power lost all effect. The Germans wanted secure access to a large share of Rumanian oil exports: the lesson of these events was that the only certain way to attain it was by force.

German imports of iron ore posed rather different problems, with a much lower proportion of the sources being subject to naval blockade or likely enemy control. In 1938 German imports were as shown in Table 10.2.¹⁸

In the event of war with Britain and France, Newfoundland, France, and French North Africa would become enemy territory, and their supplies cut off. During the Spanish Civil War, Germany put much effort into establishing a share in the control of mining companies in Spain; but this proved something of a blind alley. When the Civil War was over, General Franco proved resistant to German economic domination. A German trade delegation went to Spain in June 1939, but did not secure an economic agreement until December; and even this was immediately followed by economic agreements between Spain and France (January 1940) and Britain (March 1940). Between September 1939 and June 1940 the Anglo-French blockade curtailed all German trade with Spain, and in 1940 German imports of iron ore from Spain totalled only 1,000 tonnes. By the time a land route to Spain was opened up by the fall of France, Germany had other sources of iron ore at her disposal, and even at their maximum in 1942 German imports of Spanish ore did not attain pre-war levels.¹⁹

The key to German imports of iron ore lay not in Spain but in Sweden. Here, from August 1939, Germany held many advantages. After the Nazi-Soviet Pact of August 1939, German influence was predominant in the Baltic. When war began, the Swedish government undertook to maintain normal pre-war deliveries of iron ore to Germany, which would keep supplies at a high level, though not necessarily high enough to meet wartime demands. The British meanwhile disputed the German position by trying to buy up Swedish iron ore and by using their control over the oceanic trade routes to put pressure on the Swedish government. In terms of economic pressure, the balance as between Germany and Britain was only marginally in favour of Germany. The decisive push was given by German military action, not directly against Sweden, but by the German occupation of Norway in April–May 1940, which largely cut Sweden off from the outside world. Invasion of Sweden was unnecessary to give Germany effective control of Swedish exports. Finally, military victory in western Europe in May–June 1940 brought Germany physical control of the ore-fields of Lorraine and Luxemburg.

In both these cases, of oil and iron ore, Germany's shortage of raw materials and lack of foreign exchange with which to pay for imports was dealt with by conquest — not of the countries most involved (Rumania and Sweden), but of most of the rest of Europe, so that German predominance was firmly established.

In 1939, however, there was another solution available for problems of raw materials and food: a deal with the Soviet Union. The USSR possessed more of the commodities Germany needed than did the countries of southeast Europe; and communications with it could not be affected by naval blockade. In December 1938 the German government approached the Soviet government with a request for 300 million RM worth of raw materials and agricultural produce over the next two years, to be supplied in return for manufactured goods. In February 1939 the Soviets offered 200 million RM worth, and the talks were still going on when, on 20 May, Molotov stated that there would have to be a new political basis before they could go any further. The nature of the negotiation was changed, and the road opened to the Nazi-Soviet Pact of August.

The importance of Soviet economic resources to Germany grew plainer as the likelihood of war with the Western powers increased in the summer of 1939. War with Britain and France would mean that German imports from across the oceans would be cut off by naval blockade. In August 1939, the War Economy staff of the Wehrmacht pointed out forcibly that Germany could only be made secure against blockade through economic co-operation or amalgamation with the USSR.²⁰ There was thus a powerful economic incentive for Germany to come to an agreement with the Soviet Union in 1939. How long the Germans would remain content with co-operation rather than seizing control of Soviet resources was another matter.

War and economics in German policy

In sum, German policy had created a vicious circle. Hitler embarked on rapid rearmament, with the intention of gaining territory either by threat of force or by actual conquest. The rapid rearmament itself created a crisis of raw materials and foreign exchange, which made the acquisition of territory necessary to keep rearmament going. This circle might have been broken by accepting a pause in rearmament, but Hitler had no intention of taking that course. He was preparing for war, and had no intention of slowing down. But the evidence, carefully reviewed by Richard Overy and Ian Kershaw, does not indicate that the problems of the German economy actually drove Hitler into war in 1939. Economic growth had slowed down, but the economy remained basically stable, and there was no danger of unrest among the workforce. Hitler's basic motivation for going to war was political: ‘The final war crisis was a product of diplomatic and political forces largely detached from economic calculation.’²¹

Even so, there remained a link between economics and war, because Hitler maintained the long-term aim of resolving Germany's economic problems by territorial expansion — in simple terms, by conquest. And in the event, when the Germans went to war, they found that the successful use of force dealt with their immediate economic problems. They secured access to Rumanian oil and Swedish iron ore. They conquered the ore-fields of Lorraine. They captured stocks of all kinds of materials, including large quantities of oil. They gained control of a vast pool of manpower — already by August 1940 about a million foreigners were working in Germany. They dealt with their foreign exchange problem either by straightforward plunder or by compelling occupied countries to accept an overvaluation of the Reichsmark and by fixing their own prices for commodities. In France, for example, Germany levied occupation costs of 20 million RM per day, with the mark overvalued against the French franc by some 50 per cent in terms of the dollar exchange rate of each currency in June 1940; and the Germans were then able to pay for their imports from France without difficulty. At least in the short run, war was made to pay.

The great depression unsettled Europe, and set the great powers in pursuit of self-sufficiency. Recovery in the late 1930s did not restore harmony, and indeed produced its own difficulties in the form of widespread balance of payments problems. In most states, however, economic difficulties did not lead towards war. In France and Britain in particular, economic factors held back the pace of rearmament, and both these countries believed that war would be economically damaging. Much the same was true of Italy, where neutrality was likely to be more profitable than war. Only for Germany did it seem likely that war would pay in an economic sense; and then only on the assumption that the Nazi rearmament programme was to be pursued unchecked, and the balance of payments problems which it created should be resolved by force. The decisions which lay behind these assumptions were matters of politics rather than economics.

References

1. Central Statistical Office, Annual Abstract of Statistics, No. 88, 1938–1950 (London 1952), p. 213. Value of exports (produce and manufactures of Britain), 1938: to S. Africa, 39.5; Australia, 38.2; India, 33.8; Canada, 23.5; Germany, 20.6; Eire, 20.6; USA, 20.5 (figures in millions of pounds).

2. Bulletin of International News, vol. XIII, p. 846.

3. Alfred Sauvy, ‘L'évolution économique’, in René Rémond and Janine Bourdin (eds), Edouard Daladier, chef de gouvernement, avril 1938–septembre 1939 (Paris 1977), pp. 91–96.

4. Shepard B. Clough, The Economic History of Modern Italy (New York 1964), p. 261; MacGregor Knox, Mussolini Unleashed, 1939–1941 (Cambridge 1982), pp. 30–1. Militärgeschichtliches Forschungsamt, Germany and the Second World War, vol. III, The Mediterranean, South-East Europe and North Africa, 1939–1941 (Oxford 1995), pp. 25–7, 29–30.

5. M. Heller and A. Nekrich, L'Utopie au pouvoir: Histoire de l'URSS de 1917 à nos jours (Paris 1982), pp. 266–267.

6. Ibid., p. 266.

7. Quoted in David E. Kaiser, Economic Diplomacy and the Origins of the Second World War (Princeton 1980), p. 151.

8. Text, Documents on German Foreign Policy, series C, vol. V, No. 390; it was presented to Goering on 26 August 1936. Cf. Jeremy Noakes and Geoffrey Pridham (eds), Documents on Nazism, 1919–1945 (London 1974), pp. 401–10. See also the analyses in Richard Overy, War and Economy in the Third Reich (Oxford 1994), pp. 185–90, and the same author's The Dictators: Hitler's Germany, Stalin's Russia (London 2004), p. 414.

9. 9Edward L. Homze, Arming the Luftwaffe: the Reich Air Ministry and the German aircraft industry, 1919–39 (Lincoln, Nebraska 1976), p. 143; Overy, Dictators, pp. 415–16, 430–1.

10. Matthew Cooper, The German Air Force, 1933–1945 (London 1981), pp. 62–63; Philippe Marguerat, Le IIIe Reich et le pétrole roumain, 1938–1940 (Geneva 1977), pp. 96–8; Kaiser, Economic Diplomacy, p. 268.

11. Cooper, German Air Force, p. 76; Marguerat, Le IIIe Reich, pp. 18–19. The synthetic oil projections were prepared by Carl Krauch, formerly a director of I. G. Farben.

12. Marguerat, Le IIIe Reich, p. 157; Kaiser, Economic Diplomacy, pp. 268, 319; Cooper, German Air Force, p. 75.

13. Marguerat, Le IIIe Reich, pp. 18–19; Alan Milward, War, Economy and Society, 1939–1945 (London 1977), p. 178.

14. Marguerat, Le IIIe Reich, p. 19.

15. Marguerat, Le IIIe Reich, pp. 29–61, 73, 84.

16. Ibid., pp. 150–151.

17. Marguerat, Le IIIe Reich, pp. 168–177, 192–3, 200.

18. Martin Fritz, German Steel and Swedish Iron Ore, 1939–1945 (Göteborg 1974), p. 34.

19. K. J. Ruehl, ‘L'alliance à distance: les relations économiques germano-espagnoles de 1939 à 1945’, Revue d'histoire de la Deuxième Guerre Mondiale, 118 (April 1980), 86–87; Fritz, German Steel, pp. 51–2.

20. Militärgeschichtliches Forschungsamt, Germany and the Second World War, vol. I, The Build-up of German Aggression (Oxford 1990), p. 358.

21. Richard Overy, The Nazi Economic Recovery, 1932–1938 (Cambridge 1996), pp. 64–65, and the same author's War and Economy, pp. 212–26; cf. Kershaw, Hitler, vol. II, pp. 186–7.

The Role of Strategy and Armed Force

There is a close relationship between foreign policy and strategy. In principle, the two should be kept in line with one another, so that it is certain that an important interest in foreign policy can be sustained by force if necessary, and that the armed services are able to perform the tasks which foreign policy may impose upon them. If this alignment is not maintained, so that for example foreign policy commitments far exceed the military capacity to sustain them, or foreign policy demands offensive action of an army capable only of defence, then trouble follows. Moreover, armed strength was closely linked to economic capacity and public morale, so that ‘the yardstick of power had became a nation's ability to mobilise its whole economy and population for total war.’¹

In the case of states considering going to war, these matters assume a sharper and more crucial form. A state may be encouraged to resort to force by confidence in its armed strength and expectation of victory. Equally, the fear of defeat and destruction may often deter a country from risking war. In most circumstances, a precondition for war is that each side believes that it can win, or at least avoid defeat; though in desperate straits governments may decide that on certain issues their country must fight, and the armed forces must simply conform, whatever they think of the chances of success.

These issues had a powerful effect on international relations during the 1930s. The actions of states were frequently influenced by the condition of their armed forces and by calculations of the likely outcome of a conflict. The next two chapters examine the armed forces of the principal European powers, and the influence of strategic issues on foreign policy.

References

1. 1 Joseph Maiolo, ‘Armaments Competitions’, in Robert Boyce and Joseph Maiolo (eds), The Origins of World War Two: The Debate Continues (Basingstoke 2003), p. 290.