To Arms

by Hew Strachan

  In this respect the KRA proved a false dawn. Germany circumvented both of its immediate crises—that of raw materials and that of munitions output. The compromise which the KRA embodied worked for the time being. But it did so without forcing a conclusion between two rival economic philosophies—that of collectivism and that of free enterprise. It therefore postponed any final resolution of the dilemma as to which government agency was to direct Germany’s economic mobilization—Prussia’s War Ministry or the Reich’s Interior Ministry. And implicit in this tension was the continuing lack of an industry ministry for Germany as a whole.

  The absence of overall co-ordination was played out in sharpening relations between the War Ministry and the manufacturers. The ministry’s policy of proliferating orders did not include concentrating contracts for specific types of munitions with particular firms, and thus industry complained of a lack of continuity. The War Ministry, for its part, found that a rapid increase in the number of contractors in 1914 resulted in a loss of price control. When, early in 1915, it began to exercise greater direction, the representatives of heavy industry squealed.184 In April 1915 a long-term plan for the development of the war economy centralized army orders, and tightened controls over exports and imports. The Kriegsgesellschaften were treated increasingly as representatives of the central authorities rather than of independent companies.185 Industry responded that it could only maximize its productivity if it were free to do so; the army saw control as the only means to eliminate waste. Some soldiers, like Bauer, may have had close relationships with some firms, like Krupp. But ultimately the objectives of the army were the waging of war while those of industry were the maximization of profit. Conflict was more likely than collusion.

  Domestically, therefore, the establishment of the KRA proved a less dazzling triumph than its initial success promised. Internationally also, the consequences of Rathenau’s efforts turned out to be rather mixed. His pre-war notion of a Central European economic bloc, based on Germany and Austria-Hungary, was pressed into a quasi-existence by the enforced dependence generated by the war. The pooling of raw materials, and their distribution according to the needs of war-related industries, seemed likely to achieve their greatest efficiencies through economies of scale. Thus, the most readily available device for giving Mitteleuropa practical effect was the extension of the principles of the KRA from Germany into the Habsburg empire. But in both objectives—the establishment of a common trading area and the direction of their industries towards a common goal—the Central Powers were disappointed.

  Again, initial success raised expectations of more. Austria-Hungary was critically dependent on Germany for trade even before the outbreak of war. Of its annual imports of 22.6 million tons, 16.5 million were derived from Germany or transshipped through Germany from the harbours of northern Europe. The Habsburg empire, for all its size, was effectively landlocked: only 11 per cent of its imports and 13 per cent of its exports were seaborne.186 Its principal port, Trieste, was at the end of a maritime cul-de-sac, and easily blockaded. Once war was declared, Italy remained a southern conduit for Mediterranean trade, but after May 1915 even this route was closed. Therefore, Germany’s economic controls—and particularly its curb on exports in anticipation of Britain’s blockade—had an immediate effect on Austria-Hungary. Transshipments routed to Austria via Holland and Germany ceased. Austria-Hungary was similarly unmindful of its ally in the application of comparable laws, which, although less significant, checked the movement of goods via Italy or Trieste to Germany. At a conference in Berlin on 24 September 1914 the two powers moved swiftly to re-establish unrestricted trade across their mutual frontier, and in particular to restore the movement of transshipments. Germany insisted, however, that the goods it exported to its ally must not be for the purposes of speculation but must be consigned to the war administration. Germany’s co-operation in securing raw materials for the Austro-Hungarian war effort was conditional on its ally establishing an organization comparable to the KRA.187

  The trading agreement of 24 September, therefore, pointed forward to the creation of a joint Austro-German economic organization. However, in practice the exploitation of occupied areas produced friction, not collaboration. Talk of a customs union, developed in 1915, foundered, not least over the issue of Poland. Germany was prepared to let Vienna control Poland—the so-called ‘Austro-Polish solution’—but on condition that Austria-Hungary was in its turn subordinated to Berlin. Caught increasingly in the thicket of war aims, immediate economic co-operation was confined to the procurement of only a few raw materials. In August 1915 Germany assumed responsibility for the entire rubber supply of the Central Powers. In January 1916 Austria-Hungary did the same for textiles and leather. The two powers also avoided competing against each other for food imports. But there was no reduction in tariffs in order to stimulate trade.188 By late 1915 evidence that Austria was pursuing its own economic objectives in eastern Europe, including covert trade with Russia, soured the relationship yet further.189

  Austria-Hungary’s industrial mobilization was, therefore, accomplished much more independently of Germany than either the empire’s comparative economic backwardness or its relative military unpreparedness suggested was probable. The process was facilitated by the experience of the economic consequences of mobilization in the Balkan crisis. The emergency war law of 1912 gave almost unlimited powers to the joint War Ministry in the event of hostilities. Although drafted to enable the requisitioning of transport, supplies, billets, and manpower in the area of operations, its remit extended to the whole empire. Entire businesses engaged in the production of war-related material were eligible to be taken over by the army; their employees became liable to military law and were subject to the army’s direction. What concerned most commentators were the implications for civil liberties. Workers as well as soldiers were conscripted. The war could become the means to enable ‘unlimited internal reaction’ against irridentist nationalists.190 In economic terms, however, the significance of the act was that it enshrined the principles of collectivism and state control from the war’s outset.

  The war, therefore, transformed the joint War Ministry from an agency responsible for the army’s budget and for the procurement of weapons into a surrogate economic ministry for the empire as a whole. Eleven new departments were grafted onto its existing fifteen. More importantly, a war supervision office (Kriegsüberwachungsamt—significantly translated by the liberal Josef Redlich as war surveillance office) was created by the supreme army command (AOK) and the ministry. Although administered and chaired by a general, its meetings were attended by representatives of the ministries of finance, the interior, trade, justice, transport, and foreign affairs. But the war supervision office did not evolve into a supreme direction for the dual monarchy’s war economy. From the outset Hungary refused to recognize its authority. Its remit was thus confined to Austria and Bosnia-Herzogovina. Furthermore, a decree of 10 October, following the spirit of the Austro-German agreement of the previous month, empowered the Austrian Ministry of Trade to take charge of the supply of raw materials and the organization of production. Thus economic authority, even within Austria alone, was divided. Many decisions taken by the war supervision office were no more than the basis for further negotiation both within Austria and with Hungary.191

  Business response to the establishment—at least in theory—of state control was less hostile than any dogma about the virtues of capitalism might have suggested. Army contractors before the war had already bound themselves to holding raw material stocks sufficient to be able to increase their deliveries two- or threefold on mobilization. In other words, security of orders and of resources could offset loss of economic freedom. A similar response was evident when the 1912 law was applied. Those firms put under military administration knew they were assured of raw materials and of labour, that strikes would be curbed, and that their businesses would remain in operation.192

  The danger that confronted the Austro-Hungarian
war economy seemed to be less that of opposition to collectivism and more the loss of entrepreneurial flair. Of the three forms of military administration, one involved ownership by the army and another management by it (the third left the owner in situ). The soldiers who ran these firms tended to be reservists, unfit for active service, and more interested in the discipline of the labour force than in the processes of production.193 Under the decree of 10 October 1914 the business activity of Austria was divided into two heads. Those businesses dependent on imports or exports, that used ships or were in shipping, that needed their paths eased by foreign negotiations, were put under the commercial policy section of the Trade Ministry. The ethos here was that of self-administration. Those that were reliant on domestically produced raw materials, including the iron and metal industries, chemicals, and coal-mining, were incorporated in the industrial section of the ministry. Here the influence of the army was more evident. Central direction prevailed: industry was a milch-cow whose output could be regulated by order, and whose principal sectors were treated as support services, not as independent businesses.

  The principal device for the management of industry, modelled on Germany’s Kriegsgesellschaften, were the Centrals (Zentralen). The name was indicative of their function—to centralize raw materials within a particular industrial sector. The first three, created in October and November 1914, covered cotton, wool, and metal. But further progress was slow. Many did not come into existence until 1916 and 1917, including those for petroleum and for rubber. Chemicals proved to be too diverse to be centralized at all. Oxen were governed by five Centrals—those for leather, meat, bones, fats, and fodder.194 Nor was the Central a consistently applied model. War associations were formed of all enterprises producing the same commodity; some Centrals provided services rather than goods. Ultimately ninety-one Centrals were created.

  The key distinction between the Centrals and the Kriegsgesellschaften was that the Austrian system did not rest on government guarantees. The Austrian minister of finance argued that it was in an industry’s own interest to organize its supply of raw materials, and that consequently it could be left to invest in its own Central. The share capital of the Centrals was generated by the particular industry and by the investment banks. Thus, the pre-war role of the major Viennese banks in Austrian industrialization was perpetuated during the war itself. The interest rate was limited to 5 or 6 per cent; any profits above this were transferred either to the Central’s reserves or to the state. The ostensible collectivism of the army’s control provided a forceful contrast with this degree of potential self-government on the part of individual industries: the ministers of war and trade had no more than a power of veto within the Centrals.

  However, the fact that the Centrals were more truly private companies than were their equivalents in Germany made it harder for them to extend their authority, particularly in the matter of monopolizing imports. It also made them vulnerable, albeit with little justification, to accusations of profiteering. But the real limitation on their powers of control was the refusal of Hungary to co-operate. Initially the Centrals functioned in both segments of the empire, but from the beginning of 1915 Hungary broke away to create its own parallel structure. In Austrian eyes Hungary was using the Centrals to further the cause of its own industrial development, not that of the war economy. When, in 1917, the War Ministry finally endeavoured to rationalize its demands on the iron industry by creating dumps in Vienna, Graz, Cracow, and Budapest, the obstructionism of the Hungarian trade minister delayed the establishment of the last until too late in 1918 to be of any value.195

  Administrative complications, even if evidence of major issues—of Magyar particularism against imperial unity, or state centralization against the spirit of free enterprise—played no more than a small part in the fall in productivity evident in 1914. On mobilization the army’s pre-war contracts overloaded existing firms while failing to draw in new; the delay in creating Centrals and imposing their monopoly status made raw materials scarcer and more expensive. But the decline in output was too deep, too quick in its impact and too brief in its duration, to have been the result simply of managerial confusion. Iron-ore output in 1914 fell 25 per cent from that of 1913, and the wholesale iron trade in August 1914 ran at 72 per cent below its August 1913 level.196 High interest charges after the 1912 mobilization were already causing stagnation in the economy; mobilization pushed it into recession. Loss of labour was the immediate precipitant. The northern Bohemia metal manufacturing industries, which had employed 24,887 workers in 1912, retained only 9,706 in August 1914. Between August and December 1914 25 per cent of miners were drafted into the army. Those businesses not secured by army contracts were left short of hands, transport, and raw materials. In Austria in 1914 15,154 businesses closed, and 211,677 workers were laid off.197

  Crucial to the resumption of output was a recovery in coal production. Coal yields in 1914 declined—by 6 per cent in the case of bituminous coal, 13 per cent in the case of lignite, and 25 per cent in the case of pit coal. Behind these figures lay further fuel problems. First, Austria-Hungary was strong in lignite but short of coking coal: in 1913 it had imported 12 million tons of coal.198 Most of this came from Germany. To limit its dependence on its ally, the army maintained production in the conquered regions of southern Poland, but the Germans claimed that the area was theirs.199 Moreover, gains in one direction were effectively eliminated by losses in another. Austria-Hungary produced nearly 2 million tons of oil before the war. However, its fields were in Galicia and fell victim to the Russian advance: production in the second half of 1914 was 68 per cent below that of the first half. When the Russians retreated in May 1915 they destroyed the wells, and the total output for 1915 was 54 per cent of 1914’s.200

  Interacting with fuel shortages were the problems of transport. Landlocked, with its heavy industry concentrated in Bohemia and Moravia, and with the Danube of little use as an alternative, the Austro-Hungarian economy was critically dependent on its railways. On mobilization the army took over the entire network, and then bent its efforts towards concentrating its rolling stock in Galicia. Much was lost in the subsequent retreat, including 15,000 freight cars, or more than the total production for 1915. By June 1915 only eighty-six locomotives had been added to the 12,000 available in August 1914. By now the system was having to sustain armies at three extremities of the empire. Furthermore, the performance of the railways was not as efficient as it had been. The copper fire-boxes were taken for munitions production and replaced with iron boxes, which could not generate so much pressure. Thus, loads fell. The loss of skilled labour, through military service and natural wastage, was not made up: at any one time 5,000 locomotives were under repair. Shortage of rolling stock meant that even where coal was mined it could not be moved. In December 1914 only 20 to 30 per cent of the cars required to move lignite from Bohemia were available; in the first quarter of 1915 the coal-mining areas got only two-thirds of the rolling stock they needed. The cycle of fuel shortage and railway bottlenecks was thus a circular one.

  The fact that production recovered in 1915–16 was a reflection of an improvement in the transport position. The output of cars, which had totalled 3,500 in 1914, reached 12,000 in 1915 and 18,000 in 1916; in 1915 Germany lent its ally 4,786 captured trucks. In the first three months of 1916, of 685,887 wagons due to collect coal 641,165 actually arrived.201 Coal production, already recovering in 1915, in 1916 exceeded its 1913 output by 8 per cent in the case of bituminous coal and 5 per cent in that of pit coal; lignite still lagged by 16 per cent. With its supply of coal sufficiently restored, and with the consolidation of labour accomplished by the closure of non-essential industries, ferrous metal production also began to recover in 1915. By 1916 Austria was producing 3.9 million tons of iron ore (as against 3.43 million in 1913), 1.9 million tons of pig iron (1.63 million in 1913), and 2.75 million tons of steel (1.84 million in 1913).202

  As in Germany, the war made viable previously uneconomic sources o
f tungsten (mined in Bohemia) and nickel (from Salzburg). Manganese production fell in 1914 but by November 1915 had risen to 77 tons per day. Austria-Hungary’s domestic output of copper increased from 4,052 tons in 1913 to 6,528 in 1915. A combination of tight controls, requisitioning, and overseas purchases made 36,227 tons available for military purposes that year. Output rose again in 1916, to 7,774 tons, and the total from all sources to 44,698, but increased munitions production meant that, whereas in 1915 the army’s needs were frequently met in full, in 1916 they were satisfied only 65 per cent of the time. Austria’s ability to use iron, aluminium, and zinc as substitutes for copper was dependent on German co-operation. In 1915 Austria-Hungary hoped to get 1,639 tons of refined zinc each month from Germany, not least because the latter had access to Belgium’s supply, but in fact it received only 670 tons. Co-operation was better in the case of aluminium, partly because Austria produced bauxite which Germany processed, and partly because both allies had an interest in controlling the prices set by the Swiss.203

  Broadly speaking, the picture was one of industrial recovery in 1915 and 1916. In Hungary the industrial workforce as a whole rose by 12 per cent, and in the war-related industries by 30 or 40 per cent.204 Particular sectors of the chemical industry grew with remarkable rapidity: Austria-Hungary produced 20,000 tonnes of nitrogen per annum in 1914, but with German co-operation added the equivalent of a further 40,000 tonnes through the production of 200,000 tonnes of calcium cyanamide.205 In 1914 four firms produced shells; in 1916 forty-seven did so.