This was Germany's stated policy for many years before the War. Hitler announced his withdrawal from the League of Nations in 1933 and an intention to rearm, and specifically repudiated Versailles in 1935:
On March 16, 1935, Adolf Hitler announced that he would rearm Germany in violation of the Treaty of Versailles. Hitler revealed that Germany had begun to construct an air force, and unveiled plans to reinstitute conscription and create a German army of more than half a million men. Britain, France, Italy, and the League of Nations all issued statements condemning Hitler’s decision, but did little else to penalize Germany.
Prior to that point, Germany prepared for rearmament covertly, with factories and facilities in the Netherlands, Sweden and the Soviet Union. This wasn't that much of a secret; foreign intelligence services had a reasonably good idea of what Germany was doing. Nor was it any secret that the Allies of the First World War were bitterly unhappy with the huge casualties of that conflict, and by the 1930s they were impoverished by Depression. Britain and France had very early after Versailles been willing to occupy parts of Germany to ensure compliance with the Treaty, but by the 1930s they no longer were.
So, for example, in 1923, French and Belgian forces had occupied the Ruhr to gain German compliance with financial aspects of the Versailles Treaty. By the 1930s, there was no appetite for anything like that. The 1930s brought a series of actions by Hitler sometimes referred to as "Appeasement Crises", where he took some new action and Britain and France were forced to reckon with the question "How do we respond". They consistently chose the path of negotiation over confrontation, up until the invasion of Poland in 1939.
So it's not that "they didn't know" -- its that the political forces didn't support doing anything about Germany's evident plans:
French intelligence warned civilian and military leaders that the priorities of the new regime were rearmament and the militarization of German society in preparation for a war of conquest. This essentially accurate appreciation of the situation inside Germany had little impact on the course of French foreign policy. At this juncture French society was preoccupied with worsening economic crisis and pacifist sentiment had reached its inter-war zenith. The nationalfocus was inward and domestic concerns took priority over the external threat from Germany. Finally, France was in a position of relative isolation and could garner no support for a policy offirmness from its erstwhile allies, Great Britain and the United States. This combination of national introspection and diplomatic isolation deterred a succession of governments from taking determined steps to meet the Nazi challenge in 1933
Sources:
Hitler's Rearmament of Germany
SWEDEN AND CLANDESTINE GERMAN REARMAMENT TECHNOLOGY
The Credibility of Power: Assessing Threats during the "Appeasement" Crises of the 1930s
Germany withdraws from League of Nations, disarmament pact [1933]
French Intelligence and Hitler's Rise to Power
Thank you very much for the thorough response.
To add to the great response from u/amp1212
Germany also negotiated and signed some favorable treaties such as The Anglo-German Naval Agreement of 1935
It was a naval agreement between the United Kingdom and Germany regulating the size of the Kriegsmarine in relation to the Royal Navy. The Anglo-German Naval Agreement fixed a ratio whereby the total tonnage of the Kriegsmarine was to be 35% of the total tonnage of the Royal Navy on a permanent basis. This treaty was presented and signed by the UK without consulting France or Italy (Mussolini was on the fence still at this point, being courted by both side)
On the surface this would appear to put a cap on how much the Germans could build (even though the Treay of Versailles already dictated terms) but as the Royal Navy was the largest in the world - the 35% ratio allowed the Germans to build well beyond the limits set by the Treaty of Versailles and so was one more ‘clever’ way for the Germans to rearm and rebuild their military