Hitler’s peacetime rearmament programme involved huge costs of over 60bn Reichsmarks, with armaments expenditure expanding from 1 per cent of GDP in 1933 to 20 per cent in 1938. This not only defied the Treaty of Versailles, it also necessitated breaking the established rules of public finance.
Given the parlous state of the German economy in 1933, financing the plan in the normal way via taxation and borrowing was not feasible, particularly as the scale of rearmament had to be kept off the government’s books.
The solution was MeFo Bills – short-term, unofficial bonds for armaments manufacturers, named after a spurious ‘front’ company and backed by the Reichsbank – which would provide around half (10bn RM) of rearmament funding prior to 1936/37. By that time, such clandestine measures were aided by the general economic upturn, which provided further funds via taxation and regular government borrowing. In all, MeFo Bills would account for around 20 per cent of the total finance required by 1939, with another 10 per cent coming from extraordinary ‘Treasury Bills’.
Through such measures, Adolf Hitler swiftly created a sophisticated military machine that would overrun Poland in 1939 and thereby start WW2. Yet the economic consequences of rearmament are less well known. Nazi policies of autarky (self-sufficiency), deficit financing and creative accounting caused huge inflationary pressures, which by early 1939 had provoked a crisis, with the Reichsbank frantically borrowing and printing hundreds of millions of Reichmarks to try and balance its books.
It has been suggested that this inflationary crisis was one of the factors that drove Hitler into war in the autumn of 1939. Whatever the truth of that assertion, it certainly forced the Nazis into a strict micro-management of the German economy, through measures that included wage freezes and price controls, which in turn would be politically facilitated by the advent of war.
- Read more | Why did WW2 happen?
Answered by Roger Moorhouse, author of Berlin at War (Bodley Head, 2010)
This article first appeared in the September 2013 issue of BBC History Magazine
When Nazi Germany openly started re-armament in 1935, few should have been surprised as Hitler had made it very clear both in his speeches and in “Mein Kampf” that he would break the “unjust” terms of the Treaty of Versailles.
Hitler had made it plain what the basis of his foreign policy would be. He had clearly stated that he would :
undo what had been imposed on Germany by the Treaty of Versailles re-unite all Germans into one nation re-arm Germany “Mein Kampf” also clearly stated what he thought of east Europeans and the Jews. Both groups were the “untermenschen” – the sub-humans of Europe who had no place in the Europe Hitler dreamed of. Eastern Europe, in the mind of Hitler, would be where Germans would find the space to live – lebensraum – where they would use the land in a modern and productive manner, thus fulfilling the belief that Hitler held that all good Germans would work off the land and produce the food that the state would need.
Hitler saw Nazi Germany as being at the centre of Europe and as the great power of Europe, the nation needed a strong military. Throughout the 1920’s, Germany had been technically keeping to the terms of the Treaty of Versailles but in reality she had been bending the rules regarding training. Versialles had not stated that Germany could not train submarine crews abroad or that pilots for the banned German Air Force could train on civilian planes. Therefore, on paper Hitler inherited a weak military but this was not in reality the case. However, Hitler knew that publicly Nazi Germany was still seen within Europe as being held to the terms of Versailles and he was determined to openly break these terms and re-assert Germany’s right to control its own military.
In 1933, Hitler ordered his army generals to prepare to treble the size of the army to 300,000 men. He ordered the Air Ministry to plan to build 1,000 war planes. Military buildings such as barracks were built. He withdrew from the Geneva Disarmament Conference when the French refused to accept his plan that the French should disarm to the level of the Germans or that the Germans should re-arm to the level of the French. Either way, the two main powers of Europe would be balanced. Hitler knew that the French would not accept his plan and therefore when he withdrew from the conference, he was seen by some as the politician who had a more realistic approach to foreign policy and the French were seen as the nation that had caused Nazi Germany to withdraw.
For two years, the German military expanded in secret. By March 1935, Hitler felt strong enough to go public on Nazi Germany’s military expansion – which broke the terms of the Versailles Treaty. Europe learned that the Nazis had 2,500 war planes in its Luftwaffe and an army of 300,000 men in its Wehrmacht. Hitler felt confident enough to publicly announce that there would be compulsory military conscription in Nazi Germany and that the army would be increased to 550,000 men.
How did Europe react to this flagrant violation of Versailles?
Essentially, the French and British did nothing. Britain was still recovering from the Depression which had devastated her economy. She could not afford a conflict. The French preferred a defensive policy against a potential German threat and she spent time and money building the vast Maginot Line – a series of vast forts on the French and German border. The most Britain, France and Italy did (at this time, Italy did not view German as a potential ally as the above was pre-Abyssinia) was to form the Stresa Front which issued a protest against Hitler’s rearmament policy but did nothing else.
It seemed that Britain was even supporting Germany’s breaking of the Treaty of Versailles. This treaty had clearly stated what Germany’s navy should be – no submarines and only six warships over 10,000 tons. In June 1935 the Anglo-German Naval Agreement was signed. This allowed Germany to have one third of the tonnage of the British navy’s surface fleet (probably the largest in the world at this time) and an equal tonnage of submarines. Why did Britain agree that Nazi Germany could break the terms of Versailles?
This event saw the start of what was to be called appeasement. It was believed that Nazi Germany would develop her navy regardless and that an official agreement between Nazi Germany and Britain would do much to foster relations between both countries. There was also a feeling in some quarters in Britain, that the Treaty of Versailles had been too harsh on Germany and that the time was right to loosen the terms as time had moved on and Europe had to live together. It was felt that this approach would satisfy Hitler and that Europe would benefit from this approach as Nazi Germany would have no reason to be angered or feel cornered by the old terms of Versailles. Such an approach would do much to stabilise Europe and end the anger felt by Germans at the terms of Versailles. Above all else, if Nazi Germany kept the1935 Agreement, Britain would have a very good idea of the size of Germany’s navy as she would know how big her navy was and could work on a third of that figure equalling the German’s navy.
However, if this agreement served any purpose it was to confuse the British public. Only two months earlier, Britain had signed the Stresa Front which had condemned Germany’s military build up. Now, Britain was agreeing that Germany could do exactly what Britain had condemned !! It also showed Hitler that he could push Britain and get away with it. Were there other aspects of Versailles he could challenge ?