1938: Rearmament

World Unrest.

The year 1938, which witnessed the rise of Germany to a position of political and military dominance in Europe, the continuance of civil war in Spain, and the further advance of Japan's armed forces in China, was marked by increasing tension and mounting armaments throughout the world. Although a general European war was narrowly averted in September, the settlement reached at Munich brought no relaxation in military preparations. On the contrary, each new approach toward appeasement in Europe was accompanied by additional 'rearmament' programs. Less than a fortnight after Prime Minister Chamberlain and Chancellor Hitler signed their joint statement at Munich, expressing the 'desire of our two peoples never to go to war with one another again,' both Governments had announced measures for redoubling their armament efforts. The non-aggression agreement concluded by France and Germany on Dec. 6 in Paris was followed by the increase of Germany's standing army from 14 to 18 army corps and by a sharp increase in France's military budget. Similarly, the ratification of an Anglo-Italian accord on Nov. 16 was accompanied by the announcement from London that the British Government would be compelled to borrow additional sums to cover the sharp rise anticipated in the next year's defense budget.

The impact of events in Europe and the Far East was felt around the world; and before the end of 1938 world armament expenditures had reached a new peak, more than four times the level of pre-war expenditure.

Rising Cost of Armaments.

Military expenditures began to rise about 1932, increasing by approximately $5,000,000,000 in the next three years. During the next three years the total world armament bill rose sharply from $8,700,000,000 in 1935 to more than $17,800,000,000 in 1938. Nearly 80 per cent of this unprecedented increase was due to the rearmament programs of the seven great Powers. The relative size and rate of this increase is shown by comparison with the pre-war armament race. During the ten years before the war, the military expenditures of the same great Powers rose from about $1,500,000,000 to just over $2,400,000,000 — a relatively 'modest' increase of about 60 per cent. While the pre-war arms race was accompanied by symptoms of financial strain, it did not act as a major inflationary force nor did it perceptibly alter the established structure of the great capitalist democracies. The distinctive feature of the current rearmament race is the extent to which it has interfered with normal economic trends and has already begun to transform the structure of those states which have so far avoided the extreme forms of state control found under Fascism and Communism.

Economic and Financial Aspects.

The economic effects of the rapid acceleration of arms expenditure were visible in both the democracies and the totalitarian states. One obvious result of this diversion of capital and savings into non-productive armaments was seen in the abnormal expansion of heavy industry to a point well beyond normal peace time requirements. In Great Britain and France, as well as Germany, Italy, and Japan, this diversion of capital tended to raise prices, stimulate industrial activity and provide employment in the construction and metallurgical industries. No government, however, was able to pay for rearmament out of savings or current income from taxes. While the totalitarian states were apparently able to impose a higher level of forced savings on their peoples than were the democracies, both alike were confronted with unbalanced budgets, mounting deficits and the prospect of continued deficit financing.

These economic and financial aspects of rearmament stood out sharply among other major developments recorded during the year.

Germany.

In the course of 1938 Germany increased its standing army from 42 to 51 divisions and placed nearly a million men under arms. A decisive factor in the balance of power during the Czechoslovakian crisis in September was Germany's reputed superiority in the air. While it may be doubted that Germany actually possessed as many as 10,000 airplanes, military experts agreed that the National Socialist régime had created the most powerful air force in Western Europe and raised the productive capacity of its aircraft industry to exceed that of any other European power. Because of the secrecy surrounding every phase of rearmament in Germany, the cost of this program is unknown. No official budget has been published since the fiscal year ending March 1935. On the basis of certain known factors, and taking account of probable concealed borrowing, foreign observers estimated that Germany must have spent $4,000,000,000 on rearmament during the year, and somewhere between $12,000,000,000 and $16,000,000,000 during the past three years.

Italy.

Italy also carried forward its vast armament program in 1938. Like Germany, the full cost of the program was not revealed to the Italian people or the outside world. The Italian army was raised to a strength of over 600,000 men during the September crisis. The air force has been nearly doubled in the past four years, and the navy has undertaken a building program which will almost equal France's fleet in 1941.

Both of these totalitarian states faced serious economic and military problems during 1938 as a result of their dependence on raw materials from abroad and their shortage of foreign exchange. Autarchy had not solved the problem of finding sufficient foodstuffs or raw materials to meet the needs of Germany or Italy even in time of peace.

Japan.

The cost of Japan's military campaign in China was reflected not only in increasing expenditures and a mounting public debt, but also in a profound dislocation of the Japanese national economy. Supplementary budgets were introduced in rapid succession during 1937 and appropriations for 1938 raised the total outlay to over 6,000,000,000 yen. If the full amounts appropriated for war purposes were actually spent during the fiscal year 1938, the military budget would represent about 72 per cent of the total authorized expenditure, and 46 per cent of Japan's estimated national income (about 13,000,000,000 yen).

Economically, Japan faced a dilemma even more acute than Germany and Italy, and was virtually forced to transform its economic structure to meet the needs of a war economy. Japan was particularly hard pressed to find the necessary foreign exchange to pay for imports; it had virtually exhausted its gold reserves, and faced the prospect of continued borrowing.

Soviet Union.

Even before the Soviet Union embarked on its intensive rearmament drive in 1935, Soviet economy was profoundly influenced by the requirements of national defense. Under the first and second Five-Year Plans, the resources of the Government were concentrated on development of heavy and defense industry, while production of much-needed consumers' goods was allowed to lag. The backwardness of the country made this emphasis on heavy industry essential, but the hope of Soviet leaders that once the nation was equipped with adequate industrial facilities it could turn its attention to consumption goods was not realized. When the third Five-Year Plan was announced in January 1938, the world armament race was in full swing, and the Stalin government was compelled to concentrate on speeding up production of essential raw materials and expanding heavy industry. The armament budget for 1938 actually represented nearly 40 per cent of the total national income.

Great Britain.

Great Britain, though slow to start its rearmament program, outstripped the other democratic states during 1938. Once the program was fully launched, expenditures jumped from £122,200,000 in 1935-36 to £319,600,000 for the year 1938-39, an increase of approximately 160 per cent in the space of three years. The bulk of this huge fund was spent on warship and airplane construction, capital investment in munitions plants, 'shadow' factories and ordnance depots, and heavy purchases of war materials. In 1938-39 the British budget, rather than take the easy path of unlimited deficit financing for rearmament, presented the country with the heaviest tax increases since the World War. While Great Britain has not yet been forced to resort to conscription, Prime Minister Chamberlain, Sir Thomas Inskip, and others warned the House of Commons that such plans have been prepared by the Government.

France.

France's rearmament program, while less costly than Britain's, probably dominated the economic and financial position of the nation to an even greater extent. Armament expenditures were doubled between 1934 and 1938, rising from 11,400,000,000 francs to over 26,000,000,000. The largest part of this increase was spent on capital investments in armament plants and airplane factories or on construction of war materials — airplanes, naval vessels, army ordnance and munitions.

United States.

In the United States, increased armament expenditure for 1938 was further accelerated by the Munich settlement. Total defense expenditures approximately doubled during the past six years, rising from $499,000,000 in 1934 to $1,065,000,000 in 1938-39. Thus the rate of increase has been almost as rapid in this country as in France, and only slightly less than in Great Britain. On May 17, 1938, President Roosevelt signed the naval expansion bill authorizing construction of 46 new warships and 26 auxiliaries at an estimated cost of $1,156,000,000, and providing a 20 per cent increase in the authorized strength of the navy. Supplementary army and navy appropriations adopted by the 75th Congress carried total national defense expenditures well over a billion dollars for the first time since the World War. About one-third of this sum will be spent on construction of new warships and airplanes, purchase of ordnance equipment, expansion of naval and air bases, and strengthening of seacoast defenses. As the year drew to a close, the Roosevelt Administration was completing work on the most extensive national defense plans in peacetime history. (A program calling for an additional $552,000,000 was presented to Congress Jan. 12, 1939.)