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This pistol is one of just a couple surviving from a development project run by Walther in the mid to late 1930s. The goal was to produce a compact sidearm for pilots and officers using a more potent cartridge than the .32ACP or .380. To do this, Walther split the dimensional difference on case length and developed the 9x18mm cartridge, which would later be known as 9mm Police or 9mm Ultra. It used a standard .355 inch bullet, but split the ballistic difference between 9x17 Browning and 9x19 Parabellum.
The early developmental testing was done by simply chambering a PP for the new cartridge, but it proved a bit too powerful for the simple blowback action of the PP. So this was followed by the development of the pistol we have today, which integrated a short recoil, rotating barrel locking system to meet the demands of the new cartridge. By this time, however, it was 1939, and the importance of the project was dwarfed by the rapidly accumulating wartime production needs of the German military. The gun was dropped, although the cartridge would be reintroduced after the war.
For more information on the project, and all of Walther's other work, see "Walther: A German Legend" at Amazon: https://amzn.to/2K315lI