Ah. That's interesting that you've interpreted it that way.

I'd always heard it as: German war. Propaganda machine. Such before has never been seen.

With the implication that the war was Germany's fault. That propaganda was being pumped out by both sides. And that the war was on a scale and of a type never seen before.

I would definitely also argue towards Esoteric_Beige_Chimp's interpretation of the verse, because Germany's Propaganda in the First World War wasn't that extreme compared to others. If I remember correctly, they were less extreme in many fields, for example motion picture (which I on one occasion analysed, but mainly for the british side, which was more harsh). After writing my B.A. thesis in history on Allied WWII Propaganda, I would say that the British Propaganda did more harm than the German one, at the very least in the aftermath of the war, when the so-called "Dolchstoßlegende" (I think it's commonly translated with "stab-in-the-back-myth") was invented. It basically said that the germans only lost the war because of deserters back home and allied (mainly british) propaganda, which supposedly told lies to German soldiers to weaken their morale and demonised Germany in all other countries. And while Germany did actually commit some atrocities, the british propaganda actually exaggerated others or invented lies.

Bottom line: Germany, along with most other countries at war, used propaganda. It became especially popular in 1918, when everything was worth trying to break the stalemate. But all in all, I would argue that German propaganda wasnt anything special, its British counterpart has a more important role in history. As for your initial questions: It wasnt totally new to warfare by any means, there have been propaganda leaflets in the 30-year-war, but never before was it on a scale like in WWI. As with many things, WWI set a new record with this. Its direct impact is incredibly hard to measure, because there isnt really anyone left to ask and the few sources that remain rarely talk about it. But I would argue that it had some effect on morale in some cases. Most of my knowledge on the effect of propaganda draws from WWII, though.

I can go a bit into detail on the course that this set for WWII if you care to hear it.

As for sources, a good overview on the british side is set by: TAYLOR, Philip Meadows: British Propaganda in the Twentieth Century. Selling Democracy, Edinbourgh 1999. For the German side, I can recommend: BREMM, Klaus-Jürgen: Propaganda im Ersten Weltkrieg, Darmstadt 2013. And a good overview for propaganda in a broader sense than history would be: JOWETT, Garth S. und O'DONNELL, Victoria: Propaganda and Persuasion, Thousand Oaks 2006.

P.S.: Sorry for the probably awful formating, but I'm only on my smartphone for the next days.

Edit: Looked up some more sources and extended my answer.