By Eric Golson, Senior Teaching Fellow, School of Economics, University of Surrey. Originally published at VoxEU
Neutrality has long been viewed as impartiality in war. This column, part of the Vox debate on World War II, asserts that neutral states in the war were realist in approaching their defence to ensure their survival. Neutrals such as Portugal, Spain, Sweden, and Switzerland maintained independence by offering economic concessions to the belligerents to make up for their relative military weakness. Economic concessions took the form of merchandise trade, services, labour, and capital flows. Depending on their position and the changing fortunes of war, neutral countries could also extract concessions from the belligerents, if their situation permitted.
Dozens of European states adopted neutrality at the beginning of WWII, but by 1945 only Ireland, Portugal, Spain, Sweden, Switzerland, and Turkey remained independent or unaligned. Before the war, the traditionally neutral countries put their faith in collective security and did not rearm, despite the increasing militarisation in Europe after 1933. They believed that the League of Nations had removed the need for war by substituting a system of conflict prevention. This belief failed with the Munich Agreement in 1938 (Wylie 2002).
Geography still protected some countries such as Ireland and Turkey, for whom large bodies of water made direct invasion difficult. But Portugal, Spain, Sweden, and Switzerland were unable to provide a military defence against encirclement. They would surely have put up a significant fight but would still have lost if invaded by Britain or Germany. Like other neutral countries, they could not build armies capable of resisting a powerful attacking force.
While each case is different, the problem of maintaining neutrality in WWII had some general features. In order to remain independent, the neutrals had to combine military defence with making themselves economically useful to the belligerent. The economic concessions given by small states included trade in goods and materials, labour provision, and capital. These concessions proved sufficiently valuable for the belligerents to continue to respect the neutral’s independence, despite continued threats of invasion (Wylie 2002).
Merchandise Trade and Services
Each of the countries which remained neutral after June 1940 was able to assuage the belligerents’ political intransigence and maintain friendly relations by exporting various material goods to each of the belligerent groups: from Sweden, iron ore and ball-bearings; from Switzerland, watches, metal goods, and machinery; from Spain, food, iron ore, and wolfram; from Portugal, leather hides and wolfram (Golson 2011).
Swedish trade was particularly beneficial for the resource-strapped German Reich in military terms: iron ore, ball-bearings, and machine tools were used in the manufacture of German guns, tanks, and aircraft (Golson 2016). These goods were also needed by the Allies, particularly Britain, for the continued manufacture of aero-engines and machines. Despite its geographic location within the German sphere, the Swedish government allowed much-needed war materials to reach Britain illicitly (Golson 2012).
Beyond merchandise, the European neutrals provided a variety of services to the belligerent powers: Portugal provided the British with shipping services (Golson 2019); Sweden provided the Allies and Axis powers with diplomatic, shipping, and insurance services; the Swiss provided diplomatic, protecting-power, banking, and insurance services; and, although Spain was generally less service-oriented, it was still paid for providing shipping to the Allies and diplomatic representation to the Germans. The belligerents were ultimately net payers to the neutrals in most of these relationships, buying millions of pounds of neutral services they could not obtain from any other source (Golson 2011).
The economist Mancur Olson (1963) suggested that in wartime no one good would hold more value than another at the margin, the reason being the scope for belligerents to find substitutes for missing products. It is clear, however, that substitutes were not in fact easily available for all the neutral goods and services. Despite the efforts made in particular industries, substitutes were often more expensive or of lower quality.
This is shown by the case of Swedish steel for ball-bearings. In both the UK and Germany, ball-bearings made from domestic materials had much higher failure rates; this led to the grounding of many Royal Air Force planes when they were desperately needed (Golson 2012). In services, there was no easy substitute for Swiss diplomatic and protecting-power work during the war. It was efficient for the belligerents to obtain the goods and services available from the neutral countries through trade.
Of course, the engagement between the neutral and belligerent economies led to much controversy, including accusations that the Swedes and the Swiss were working for the German war effort.
A steady supply of labour is important for any war economy; too few workers or too few soldiers foretell an eventual battlefront defeat. During WWII, imported labour helped to sustain the economies of Germany and Great Britain. Germany used foreign voluntary and forced labour from occupied Europe to replace German workers sent to the fronts.
Neutral countries also contributed but to a smaller extent. Geographical constraints limited Portuguese, Swedish, Swiss, and Spanish labour participation in the war effort (Golson 2013). From beyond the North Sea, no significant numbers of Swedes could work in Germany or Great Britain. The Portuguese were even further away from the Germans, and although some Portuguese worked in the British shipping industry, their numbers were quite small.
Spain promised 100,000 workers to Germany during the early years of the war, but numbers peaked at less than 10,000. Switzerland’s proximity to Germany theoretically allowed more substantial labour transfers, but while the Swiss promised thousands of workers for German industry, only 1,800 were ever allowed to go (Golson 2014). The Swiss could not work in Britain to any large extent because they could not get through the blockade.
So, although Spanish and Swiss labour was initially expected to contribute to the German war effort, the outcome fell short. Promises though were many and the promise was useful in dissuading the Germans from invading.
Capital is the last key dimension: in two cases the numbers show substantial support of the belligerent by the neutral. Despite considerable transfer restrictions during the war, the neutrals accepted private transfers amounting to substantial flows. All belligerents severely restricted the transfer of funds to neutral countries, to prevent hot money flows and destabilisation.
In most of the neutral–belligerent relationships, these transfers benefitted the belligerents by 0.1% to 0.5% of GDP annually between 1940 and 1944. Exceptions were the larger annual Swedish–UK transfers averaging 0.8% of GDP and Portugal–UK at 1.1% during 1941–1944. Significant increases in transfers from Germany occurred in the last years of the war, as German defeat became more likely (Golson 2011).
The neutrals also allowed the Germans and British to accumulate large unpaid balances in order to placate the belligerents on whom they depended. Some smaller loans were settled with capital transfers. Portugal allowed Britain to run a clearing deficit, later converted into a loan, which at the end of the war amounted to 28.6% of Portuguese GDP (Golson 2019). Generally, Switzerland and Sweden allowed Germany to run clearing deficits; although the Swedish balance was largely paid off by the end of the war, the balance due to Switzerland amounted to nearly 10.7% of Swiss GDP in 1945 (Golson 2011).
Spain also provided clearing loans, on top of Civil-War debts already owed to Germany, but precise figures are not available. Various loans and short-term clearing agreements were provided, but capital account balances were sometimes settled in gold, particularly when the war was not going well for the debtor (Britain before 1941 and Germany after 1942). Thus both the Allied and Axis powers transferred gold to the neutrals to pay deficits (Bower 1997). The acceptance of German gold has become a point of controversy, given how much of it came from plundered central banks and murdered Jews.
No simple formula allows a country to isolate itself from the pressures and problems of the outside world. Neutrality as it existed up to WWII was largely a legal concept, dating back to the early 1600s when the first definition of non-participation in war was provided by Hugo Grotius. He argued: “from those who are at peace nothing should be taken except in case of extreme necessity, and subject to the restoration of its value.” In exchange, neutrals had to “show themselves impartial to either side in permitting transit, in furnishing supplies to his troops, and in not assisting those under siege” (Grotius 1646/1925). But Grotius’ conception of neutrality as impartiality could not withstand the extension of total warfare to all facets of state power.
In order to maintain their independence in WWII, neutrals had to make up for their relative military weakness by offering economic concessions to the belligerents. Despite their different starting points, the concessions by Portugal, Spain, Sweden, and Switzerland were similarly motivated. The media, politicians and lawyers have disparaged the version of neutrality that these states chose as no more than a convenient excuse for self-enrichment. For small states in a world at war, however, the defence of neutrality was complex; survival was everything.
See original post for references
Weak effort here. Isn’t it curious that the author excludes data from the United States until December 1941? Or afterwards for that matter because Portugal and Spain served as transfer points for the Rockefellers’ Standard Oil to fuel the Wehrmacht.
Lend-Lease was enacted in March 1941 but Cash-and-Carry was enacted November 1939, shortly after the German/USSR invasion of Poland.
Somehow Switzerland ended up with a veritable shitlode of gold after WW2, despite no mining activity.
How do you clean it up, make the taint go away?
You start by ‘re-striking’ older Swiss gold coins that pre-date WW2, ya see this 20 Franc coin from 1935 is definitely not made from Nazi payments to the Cantons, and then you branch out and due to demand from American investors in the 50’s and 60’s who are allowed to buy gold coins dated before 1933-but not after, you pull off a similar stunt with re-struck Austrian & Hungarian gold coins dated from 1908 to 1915 in a variety of sizes.
See how easy that was?
The Swiss put the pro in provenance.
They amassed some, er, skills while navigating the diplomatic neutrality seas.
Switzerland had an advantage – they controlled the Alpine tunnels. That meant controlling the power and communications lines through those tunnels as well as the tunnels themselves.
IIRC the Swiss were almost certainly guilty of processing the Nazis stolen loot and of finding profitable technically legal, but ethically defective, reasons for not returning survivors and refugees from the war; a concentration camp survivor or an inhabitant of a fire bombed city often lacks the proper documents and the resources to press their claims.
However, the Wehrmacht was parked right at their border in 1938-41 with completed plans for the invasion and conquest of Switzerland. Theoretically, maybe the Swiss Army could have held them from overrunning what was the planned national redoubt, but since that meant abandoning over a third of the country’s land along with more than that of its population at the start of the conflict, it would have been a costly victory at best.
After the Armistice with France, the Germans military was the best on the planet having defeated arguably the other two most advanced and powerful militaries after it. It also direct access to all these militarily much weaker, neutral countries. Like the writer said it was a narrow route to survival as an independent country. Throw some meat to the large hungry, hungry lions, and find a nice spot along a wall or in a cave to defend yourself just in case. Then pray and hope.
So I have no problem understanding why the neutral countries were so flexible, even unethical, in their actions; it was that or being conquered.
USA was not in any position where it had to make concessions to avoid getting attacked, it was too strong and too remote. It turned out the Japanese and Germans to their sorrow didn’t realize this, but the situation was quite different from that of small European countries that had no credible military defense.
I understand this post focus on economy, but neutral countries also let themselves get involved in purely military issues when they felt it necessary. Sweden let Germany ship troops from Norway to Finland, sent lots of intelligence to Britain after “generously” allowing the Germans to use Swedish telephone lines for communication with Norway and cracking the code they used. Later on allies even directed bombing raids on Germany from an apartment in southern Sweden. The general idea was the same, make yourself so useful that neither side would find it profitable to attack.
Franco, with his “Blue Division” on the eastern front was as “neutral” in WWII as Hitler had been toward his own counterrevolutionary insurrection, though with far less value to his sponsor and ally.
I hate these filthy Neutrals. With enemies you know where they stand but with Neutrals, who knows?
I used to share your sentiments until I realized that modern war is largely a result of an unjust (and thus insane) economic system.
And the Bible does say this:
Like one who takes a dog by the ears Is he who passes by and meddles with strife not belonging to him. Proverbs 26:17
besides prescribing what a just economic system might look like – which under no circumstances would include a government privileged usury cartel, our current banking model.
Neutral haters are typically warmongers, aren’t they?
Enjoy futurama eh?
“When I’m in command, every mission is a suicide mission.”
What about Ireland? This article is silent on Irish neutrality. The Irish traded with Britain, ignored many attacks upon their merchant fleet and bombing that “missed” Northern Ireland. 50,000 Irish citizens fought for Britain. Britain actively considered, and easily could have, invaded Ireland (again.)
This article is woefully incomplete without discussing Ireland.
Yes, de Valera did a reasonable (and very ruthless) job in keeping Ireland ‘neutral’ (he had little choice really), but then blew it at the end with his condolences to the German people on behalf of the death of Hitler. But he underestimated just how much Churchill loathed the Irish – Ireland got no credit for being so supportive (helping the navigation of aircraft, sending back Allied airmen while interning Germans, etc). In reality, an impoverished Ireland couldn’t have done any more even if it official declared war, as all it could do was send manpower and food to Britain, and supply intelligence to the US, which it did. Somehow or another countries like Switzerland and Sweden got away with it while Ireland generally didn’t – there is little doubt that the general hostility of Britain in particular to de Valera stance was at least partly responsible for Irelands economic travails into the 1950’s.
I remember a Welsh in law of mine who had been in the merchant marine speaking quite bitterly about Ireland ‘profiting from selling butter to England’ without doing anything else – I suspect that was a general view, although its never specified what Ireland could have done more apart from permit the use of airfields and ports, which would have had a minimal military benefit.
No mention of Finland? :)
They were not neutral.
They started neutral, but with the 10-year non-aggression pack, signed just as Germany is getting set to invade Poland (or at the very least grab the Free City of Danzig), Finland was put within the Soviet Sphere of influence which opened them up to later invasion by the Soviets. An invastion that didn’t go all that well, though the Soviet’s eventually won.
The Finish Concessions after the Soviet invasion were more in the way of a peace treaty, but it was their price for maintaining their Independence.
It is also interesting to note, that with the 10-year pact, Stalin supplied the Germans with raw materials to keep the German war economy going. Arguably, this was a “neutral” payoff to keep the Germans fighting the British in French. But the Soviets have come to considered as semi-allied to the Germans in the early stages of the war. Something that was played down later by the allies when they came to be on the same side.
It makes me laugh when you see all these folks saying how the Western writers ignore the contribution to the WW2, when those same folks ignore how the Soviets bought the Germans the rope that they were almost hanged with.
I know this is an article about economic history, but it still should have had a stronger factual historical base. Its main assumption is that every neutral in WW2 was afraid of being invaded by Germany: this is simply not true.
The fact that the Nazis wound up overrunning most of Europe has led people to assume that this was what was planned, but in fact it was mostly an accident. The German priorities were to finally deal with France, and then to reach an accommodation with Britain, enabling them to turn East, which was what they were primarily interested in. The invasion of Norway and Denmark in 1940, and that of Greece and Yugoslavia the following year, were improvised responses to the unexpected, not part of some plan. I’ve no doubt that OKW, as an efficient organisation, drew up contingency plans for action in other areas, but politically there’s no indication that the Nazis ever seriously considered military action against, say, Spain or Sweden, and indeed they didn’t really have the resources to occupy even more of Europe than they already did. For the most part, neutrality served them well, and even in the case of France (which they didn’t occupy fully until the end of 1942), they mostly wanted to loot the economic and manpower resources after an armistice. Spain is a particularly interesting case. The Germans had, after all, been partly responsible for bringing Franco to power, yet he refused to join the war on the Nazi side, and Hitler was unable to persuade him (he compared negotiating with Franco to having his teeth extracted). The Spaniards did, however, raise a volunteer unit to fight in Russia: the Division Azul.
Indeed Hitler couldn’t get along with Franco. Franco was from Galicia, and very much like Rajoy recently, someone who cannot be dragged to act if he doesn’t clearly see his benefit. Not like a mule, evasive like an eel.
Hitler invaded Norway mainly to ensure free shipping of iron from Sweden to Germany (just as Britain was willing to invade Norway to prevent this). There is every reason to believe he would have attacked Sweden as well had Sweden refused to sell iron, or at least the Swedish government had to work on that assumption.
There’s a great movie to be made of Norway’s movement of their entire physical gold reserves from Oslo to the west coast and then onto a ship bound for the UK and then to the USA for safety, when the Nazis came in without knocking.
I saw that bit how out of 53 tons of gold that went to “safety”, only 10 tons of gold coins returned to Norway – in 1957.
Simply because things didn’t go exactly as planned – the Nazi’s were pretty opportunistic with their invasions. They didn’t invade any country that was willing to lend them some troops: Bulgaria and Spain fall in this category. But they did march into Austria and Czechoslovakia, then invaded Poland, Denmark, Norway, Luxembourg, The Netherlands, Belgium, Yugoslavia, Greece, and Vichy France.
The only countries that remained independent in Europe who share an (eventual) border with Germany, and who didn’t at least proved them with troops (Spain and Bulgaria in particular fit in here), were Switzerland, Sweden, and Turkey, and some tiny little countries (Liechtenstein et al). Most of the other countries taken over (sans Iceland) were taken over by the Soviets after the Polish invasion as a secret protocol of the Soviet-German 10 year non-aggression pact. So in other words, with no disagreement by Germany.
It’s not a topic I’ve read much on but I’d always thought that it was Hitler who turned down Franco’s offer rather than vice versa – Hitler thought that Spain would end up being a drain on resources rather than a useful source, and he didn’t want to open up another front if the Allies invaded Spain. I thought the rivalry between Franco and Mussolini was another issue.
Spain after 3 years of civil war had almost turned to pre-industrial level and was in the midst of a political purge by Franco so Spain was focused on herself. Hitler was interested on Gibraltar but Franco refused to give free pass to a german army through Spain. Hitler had preemptive invasion plans fearing allies could land in Spain. The UK had plans to conquer the Canary Islands but were dismissed when it was clear Spain was going to be neutral.
After the war Spain suffered economic isolation (long autarky period) because was seen as a fascist country so Spain ended paying a price for neutrality.
Argentina was neutral but shipped large amounts of beef to Britain, for which the British were duly grateful. learned a lot about this topic from a fascinating interview on a recent (June 15) War Nerd podcast on Perón & Peronism.
But Argentina also provided a lot of protection to German banks and industries, such as Bayer. The British and USA were at odds on how to treat Argentina.
A more detailed view from the US point of view is found here: https://1997-2001.state.gov/regions/eur/rpt_9806_ng_argentina.pdf
i hope this is appropriate use of comments section, but would you have any more documents (especially by US government sources) about the situation in Argentina/South America during WW2? thanks – really appreciate you sharing this
Fascinating stuff – many thanks to you all.
I noted with interest the author’s comment about Sweden and ball bearings.
When US Intelligence was planning the raids on Schweinfurt in 1943, the RAF brass refused to participate.
The idea of sending unescorted heavy bombers to take out the ball bearing factories was seen as a hopeless mission. The Brits knew that whatever deficit in ball bearings resulted would be quickly filled by…Sweden.
I remember watching the episode of The World at War as a child (about 10 or 11 I think) about the Schweinfurt raids – I guess it stuck in my mind because my prize marble was a small ball bearing that reduced other kids marbles to glass dust. I remember vaguely wondering why it was that a round bit of steel was seen as an irreplaceable component of Tiger Tanks and Focke Wolfs (I was busy making airfix models of them at the time). It seemed to me to be a bit implausible. It seems I knew a little more than US strategic planners at the time.
The “belligerents” had all been very petty, pompous and incompetent. They had made slapdash agreements with one another to come to the aid of their allies. All of the old empires that had stolen the world blind for 100 years were failing. Including the British, most focused of them all. And Germany, the would-be empire, was yet to learn the limits of industrialization. The “empires” had to keep their overblown economies running. Vanity and frivolity became expensive. The belligerents were totally unprepared to go to war. They were just plain stupid. I’d like to think we are smarter now. But look what just happened to Evo Morales. He refused to sell the USA lithium and poof! he was gone. If we are “smarter” now it is by expedience and at the expense of democracy.
Let’s try an alternate “economic” analysis of WWII war materiel and the funds that flowed, not just to/from the neutrals but from the belligerents themselves.
A peek under the hood of a Wehrmacht truck would show a badge on the engine from: Ford Motor Company.
The aluminum for Luftwaffe planes? Alcoa.
The oil? Rockefeller.
And the funding? Chase Manhattan (Prescott Bush).
Did industrial titans from the West seize on, supply, and fund a two-bit right-wing nationalist with a silly mustache born in Austria so he would fight the “real” threat of Soviet Communism for them?
It was a combination of greed, fearing the “Bolshevik Menace” including unions and the New Deal, being squeeing fanbois for Hitler and the Nazis, with good buds Franco and Mussolini and their Fascism. Finally, hatred of the supposed “Jewish Conspiracy” and supported eugenics. (Simplified, the Germans got the eugenics fever from the Americans who got it from the British)
American corporations supported Francisco Franco’s Nationalists during Spain’s Civil War and the Nazis pretty much throughout the war. IBM even leased and maintained the record keeping adding and sorting machines needed for the Holocaust. Some of it right on the ground of Auschwitz. Profits.
Ibm helped come up with, and then made the machines to keep records of the concentration camp prisoners.
The numbers tattood on peoples arms were a code as to which grouping the people belonged. IBM… knew exactly what they were doing.
many of the american companies doing business with germany were doing business before the war, and ramped up production during the war, and sued for lost investment after the war… and won.
they were fascists when the term became hip in the thirties, they were industrialists who hater labor… that was their place in the world… on top. the story that these people “caved” to pressure of some sort, doesn’t sound right to me. Many industrialists in the us at ford,GM,ITT,standard oil, as well as the morgan and rockefeller syndicates were thinking that if germany won the war, they would be fine with that… after all fascists were their kind of people. They even created the international bank of settlements in the early thirties when they knew they needed a safe payment system.
Hingams book “the nazi -american money plot 1933-1949” was a good read when these things began to be declassified in the 1980’s.
The book “merchants of death” came out in 1934. It was trying to tell the story of how britian’s “vickers” and frances “schneider” armaments companies were in violation of the versailles treaty arming germany. These companies were also using other companies in ?austria,checkoslovakia.hungary? as “fronts” to distribute arms without it looking like they were the ones doing the selling.
Just like some americans did selling ball bearings from sweden during the war. After all americans were on the boards of these german giants like IG farben and others who had to “step aside” in title only while the war was going on.. to not be prosecuted…
too bad prescot bush didn’t get the memo to distance himself ,but he was the director of the “union banking corporation” who in 1942 had its assets confiscated by the alien property custodian for aiding the german war effort, that bank being a bank of the thyssen family.
Among so many other stories of american help to the german war effort… which culminated in post war legal battles to gain the patents of the dynamic german engineering and chemistry sector… 3M BASF among others….
I’m sorry, but didnt the same bagdes installed on soviet equipment? Except banks, they were also from US, but different companies?
I do not quite understand the question, but I will try. There are two levels in the war regarding manufacturing and resources like iron. The national governments, which had overall control of their war economy and then their businesses who often not care what their government wanted. They only wanted money. When we are talking about who is doing what and for what reason, we have to remember that even in the same country that there were competing interests. Interests that could change as the war progressed.
Often American companies would trade, sometimes illegally, with a country as Standard Oil did with the Spanish Nationalist or build, install, or maintain equipment like Ford Motor’s German factories, Standard Oil’s German refineries, IBM’s subsidiary’s tabulators to Germany, especially its civilian/military population statistics department, which I am too lazy to go look up right now.
When the United States officially went to war with Germany, all those American companies still worked for, and got paid by, the Germans. The only real change was the end of the physical shipment of items like parts, machinery, and oil. That was stopped. The employees did just kept on working. Indeed, the American companies were paid all through the war for their efforts supporting the German military.
Once war was declared United States’ federal government dictated that all supplies would go to the Allies including Russia even though a number of conservative American businessmen probably wanted not to do so. Most, but not all, of the equipment and supplies sent to the Soviet Union was items like trucks, jeeps, whole locomotives, food, as most of the Soviet Union’s manufacturing was going towards military equipment. Plenty of tanks, but too few trucks. So a German tank, driving on gasoline refined by Standard Oil and delivered on a Ford produced truck, might blow up a Ford truck that the American government ordered sent to the Soviet Union. And that same tank might be destroyed by supplies delivered by an American locomotive.
The Germans were supplied by the American corporations on their own initiative, while the Soviets were supplied by the United States government.
Unmentioned is how Switzerland supplied precision machinery and the like to Germany as a price of not being attacked. Didn’t stop the Germans trying to send in sabotage units which were caught. So, to lean on the Swiss, the allies bombed Switzerland about seventy times during the war – all of them “accidentally”
I read an account of the Swiss generals at the beginning of the war when the Germans had taken over Europe as they inspected the borders and it was like Switzerland had become an island with hostile shores – and those Swiss generals knew it. Sort of like like when the British generals were inspecting Dover after Dunkirk.
Interestingly, the majority (according to regular opinion polls) of Swedes want the country to remain neutral. The majority of politicians want to join NATO (to protect against Russian aggression (sic)). These days, Sweden regularly joins in NATO exercises and sends troops to help NATO missions. The Swedish media are full of anti-Putin, anti-Russia stories, very pro-Ukraine anti Assad etc. Every so often a russian military aircraft encroaches Swedish airspace, to great media fury, but such encroachments are dwarfed by the number of NATO airspace encroachments. Every so often there is a Russian submarine in a Swedish archipelago scare that always turns out to be false.
When Allende was overthrown in a US inspired coup, then prime minister Palme immediately denounced it. Yesterday, the current foreign minister could not even bring herself to utter the word coup.
Former prime minister Carl Bildt passed secrets to the CIA (proven fact) and is a member of the NATO Atlantic Council.
Swedish people may want to remain neutral, but the politicians have long proferred their rice bowls towards the other side of the Atlantic.