No, they wouldn't have known about a Holocaust that hadn't happened yet. They would, however, have been aware of a violent, racist dictatorship on their doorstep. You'd only find it 'harmless' if you fancied one on your own doorstep. believe me, German Jews, the disabled, Roma, other ethnic minorities, etc found it anything but 'harmless'.
The British public would not have found it harmless or something to smile over either - only a few months later, we were chasing fascists out of the East End.
Given that history proved the British public right (fascists were, thankfully, never a significant force, here) and the Royal family very, very wrong, I think the least the Royal family can do is admit it and move on with dignity.
To pretend that the Sun is at fault here rather than the Royal family's gross lack of judgement (the Queen Mother and Edward VIII, obviously, not the current Queen who was too young to have understood the import of what she was doing) is an insult to all those people who died defending King and Country from the fascists.