Problems with allocating funds for the budget, pages 74-75:
Contracting, pages 89-90Milch's plan changed daily. For example, the initial budgetary request from the Technical Office (Development, Testing, and Production) was 87.6 million RM, but this was doubled by the end of July. Colonel Wimmer estimated that 177.3 million RM would be needed in 1933 to produce 804 aircraft, including 234 front-line warplanes, 52 auxiliary bombers (carried on the books as Lufthansa aircraft), 88 trainers, 2 test models, and 480 civilian airplanes. The magnitude of the new program can be readily seen. Developmental costs in the July request were budgeted at 18.9 million RM, up 4.7 million from the original request, while procurement and factory preparation expenses rose from 66.1 million to 150.9 million RM. Wimmer remarked that the new funds would be approved by the end of July 1933, but the exact amount was still uncertain because of the tentative nature of his production projections. (7)
Even though sizable, the defense expenditures were carefully disguised. Of the original 30.0 million Reichsmarks requested for airframes only, only 5.4 million appeared in the official public budget, while the remaining 26.6 million was carried on the unemployment work program. Wimmer commented that the additional moneys requested would be recorded in the ratio of 1 to 5. In the developmental program a higher percentage of costs were publicly acknowledged; 10.2 million of the 18.9 million RM for 1933 only appeared in the public budget. (8)
(7)haushaltsplan-Gesamtprogramm 1933, C Nr. 1400/33 R, den 21.7.1933, von Rohden document (4376-680), BA/F.
(8)Ibid. The official budget for the RLM was listed at 78.3 million RM for 1933-34 and 210 million RM for 1934-35, although Milch asserted that it was in reality five times higher using the same formula cited here (Irving, Milch, p. 407)
General contracts were another common method used to finance the industry, although firms receiving state funds were not eligible for them. Aircraft contracts were modeled after the munitions contracts of the 1920s whereby the Ordnance Office guaranteed costs and 10 percent profit, plus an interest-free loan to cover the cost of the new buildings and equipment required. In return the company retained ownership of the newly constructed buildings, but the machinery belonged to the Reich and was leased to the firm, which agreed to maintain and replace it. (44) Advance payments on contracts were also made, normally a 3 percent architectural honorarium, paid once plans for expansion were drawn and accepted. But the most useful method was the immediate down payment of from 15 percent for large firms to 30 percent for small firms of the total cost of production project once the contract was let. Then in regular installments the manufacturer received a percentage of the contract until it was completed. This was of great assistance to most firms, since they did not have to borrow money while waiting for payment and could, in fact, finance needed expansion from ongoing contracts. Depreciation allowances, which averaged 4 but in some instances amounted to 25 percent of the cost of machinery, also provided a cushion for rapid expansion.
The most important form of subsidy was the "cost plus" contract. Until 1939 all aviation developmental work and most of the production series airplanes and engines were manufactured under cost plus contracts based on preliminary prices. The final price was arrived at during or after production by the RLM and the factory. The Technical Office recognized that the manufacturers often padded their bills with excessive labor, materials, and machinery costs, but it was assumed that the overcapacity created by the cost plus contracts would be useful in the even of full mobilization. (45)
Beginning in fiscal year 1936 conditions changed. Shortages of foreign exchange, sharp competition between the armed services for defense funds, and bulging domestic spending by the government dictated the need for greater economy. The monetary pinch affected the aircraft firms in many ways; some became parsimonious, others did not. As the Luftwaffe edged toward a firm-price policy, used effectively for some time with the auxiliary industries, direct funding of expansions replaced the cost plus contracts. The Luftwaffe's Economic Office eagerly tried to press the firms into line with comparative statistics, hoping to strengthen the industry through sharp criticism and a firm price-fixing policy which would make it more productive and competitive with foreign concerns. (46)
(44)Karl Nuss, "Einige Aspekts der Zusammenarbeit von Heereswaffenamt und Ruestungskonzernen vor dem zweiten Weltkrieg," Zeitschirft fuer Militargeschichte 4 (1965): 436-37.
(45)Hertel, "Die Beschaffung," p. 197: Obersting. Mix, "Ueber die Gerateentwicklung bei der Luftwaffe," Lw 103/63, DZ/MGFA.
(46)On firm price fixing, see Lt. Col. Ploch's memo to Generalmajor Volkmann, LC Nr. 11779/36 III Geh., Berlin, 12.Dez.1936, von Rohden document (4406-588), BA/F.