GERMANY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP78-01617A001500120001-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 152
• Document Creation Date: January 4, 2017
• Document Release Date: April 18, 2013
• Sequence Number: 1
• Publication Date: December 9, 1949
• Content Type: REPORT

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COPY NO. _
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GERMANY
SR-20
Published 9 December 1949
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CENTRAL INTELLIGENCE AGENCY
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arbECLASSIFIED
Class. CHANGED TO: TS C eteatEt
DDA Meno, 4 Apr 77
Auth: DDA RED. 77/1783
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WARNING
This document contains information affecting the na-
tional defense of the United States within the meaning
of the Espionage Act, 50 U.S.C.. 31 and 32, as amended.
Its transmission or the revelation of Its contents in any
manner to an unauthorized person is prohibited by law.
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GERMANY
TABLE OF CONTENTS
SUMMARY
CHAPTER I?POLITICAL SITUATION
Page
1. GENESIS OF THE PRESENT POLITICAL SYSTEM I - 1
2. PRESENT GOVERNMENTAL STRUCTURE . I - 4
3. POLITICAL PARTIES AND CURRENT ISSUES . I - 5
a. Soviet Zone I - 5
b. UK Zone I- 7
c. French Zone I - 9
d. US Zone 1-10
4. OTHER INFLUENTIAL GROUPS . I - 14
5. THE BERLIN SITUATION I - 16
CHAPTER II?ECONOMIC SITUATION
1. GENESIS OF THE PRESENT ECONOMIC SYSTEM . II - 1
2. DESCRIPTION OF THE PRESENT ECONOMIC SYSTEM . II - 2
a. Agriculture II - 2
b. Natural Resources . II - 6
c. Industry II - 12
d. Financial II - 21
e. International TradeII - 30
3. .
?CONOMIC STABILITY . II - 34
a. Western Zones . II - 34
b. Soviet Zone II - 35
CHAPTER III?MILITARY SITUATION
1. ORIGIN OF THE PRESENT MILITARY SITUATION
2. STRENGTH AND DISPOSITION OF ARMED FORCES
CHAPTER IV?STRATEGIC CONSIDERATIONS AFFECTING US SECURITY
1. GENERAL
2. POLITICAL FACTORS ........
3. ECONOMIC FACTORS ........
4. MILITARY FACTORS ........
CHAPTER V?PROBABLE FUTURE DEVELOPMENTS AFFECTING US SECURITY
APPENDIX A?Terrain and Climate
APPENDIX B?Significant Communications Facilities
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IV- 1
IV- 2
IV- 3
IV- 4
V - 1
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S (.; 1-C T
APPENDIX C?Population Statistics and Characteristics
APPENDIX D?Significant Biographical Data
APPENDIX E?Chronology
MAPS:
Germany?Principal Roads and Railroads
Germany?Principal Industries
Germany?Production of Fuels
Germany?Production of Metallic Ores
Germany?Production of Non-Metallic Ores
Berlin
Germany?Occupation Zones, Air Corridors
r?i
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CT
SUMMARY
After the establishment of the German Em-
pire in 1871 by Bismarck, Prussian influence
and Prussian bureaucratic methods perme-
ated the rest of Germany, centralization of the
government was heightened, and federalistic
elements were correspondingly weakened.
This development was interrupted only
slightly by defeat in the first World War and
the establishment of the more liberal but
ephemeral Weimar Republic. Under Nazi
control the unitary or totalitarian principle
of the state reached its apotheosis. Total de-
feat in the second World War left the Ger-
mans powerless to decide their own immediate
fate, but it has not materially weakened their
attachment to the strongly centralist and na-
tionalist principles to which they have been
accustomed under a variety of regimes.
The objective of Allied occupation policy in
the Potsdam Agreement was to encourage the
political reconstruction of Germany along de-
centralized federalistic lines, but the division
of the country into four zones created a pat-
tern of conflicting ideologies which ultimately
crystallized into the present split between the
Soviet Zone and the three united western
zones. Potsdam political principles were not
applied uniformly by the four powers, and the
development of German political parties was
largely a reflection of the ambitions of the in-
dividual occupying powers. In the Soviet
Zone the Communist Party (SED), although
numerically the weakest, enjoyed a dominant
position by virtue of Soviet military support.
In the French Zone the occupying power fa-
vored the German particularist parties which
have always opposed a close union with the
German Reich. Only in the US and UK Zones
were political parties permitted a more nearly
normal development, although here again
subordination to the authority of the occupy-
ing power resulted in an avoidance of respon-
sibility on the part of German political lead-
ers and a general apathy on the part of the
electorate. In the three western zones the
Communist Party (KPD), in addition to being
under close surveillance by the authorities,
has failed to attract any substantial support
and is therefore a negligible factor except for
its rather limited subversive potentialities.
Conversely in the Soviet Zone, opposition par-
ties have existed only upon the sufferance of
the Soviet military authorities, and their
ranks have been repeatedly purged of ele-
ments considered dangerous to Communist
control. Consequently, to the regret of all
Germans, the country has been split into
Communist and non-Communist controlled
areas.
Quadripartite control of Germany through
the Allied Control Council in Berlin was
never successfully implemented because of the
obstructive attitude of the USSR and, to a
lesser extent, of France. In March 1948 the
Council ceased to function on a quadripartite
basis when the Soviet representative withdrew
on the ground that the steps taken by the US
and the UK to reorganize and strengthen the
political machinery of the Bizone constituted
an infraction of the Potsdam Agreement.
The USSR thereupon reorganized and acti-
vated the German Economic Commission
(DWK) for the Soviet Zone by conferring
upon it extensive powers over the zonal econ-
omy and by staffing it with reliable German
Communist leaders. The police powers of the
German Administration of the Interior (GAI)
were placed upon a more effective basis, and
the exploitation of such popular front agen-
cies as the People's Congress (Volkskongress)
and the People's Council (Volksrat) for prop-
aganda purposes was greatly increased. The
Note: The intelligence organizations of the Departments of the Navy and the Air Force have
concurred in this report. The Department of the Army has concurred in this report
with the exception of Chapter II on which it had no comment. For dissents by the
Department of State, see Enclosures A and B following Page V-3. The report contains
Information available to CIA as of 1 September 1949.
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Soviet Zone was thereby provided with the
framework for an eastern German state.
In western Germany, as a result of the Lon-
don Agreements of 1 June 1948, a parliamen-
tary council, which convened at Bonn early in
September 1948, drew up a basic law, in lieu
of a formal constitution, for the new western
German Federal Republic. The Federal Re-
public includes all three west German occu-
pation zones and replaces the bizonal eco-
nomic control mechanisms established in June
1947. After the formal approval of the Bonn
Constitution on 23 May 1949, elections were
held throughout west Germany on 14 August,
and the new government was formally estab-
lished in September 1949. On 21 September,
Military Government came to an official end,
and supreme authority in western Germany
was assumed by the Allied High Commission,
composed of a civilian High Commissioner
from each of the western occupation powers.
By the establishment of a unified but federal-
istic west German Government, and with the
spheres of Allied and German responsibility
delimited in an Occupation Statute, the West-
ern Powers hope to advance German political
maturity and stability and economic recovery
as part of the general program for reviving
and strengthening Western Europe.
The emergence of Berlin as the principal
point of tension between the USSR and the
western Allies has greatly modified the char-
acter of the government of that city. The So-
viet blockade, begun in June 1948, was count-
ered by the US/UK airlift for the supply of the
western sectors from 26 June 1948 to 30 Sep-
tember 1949. The breakup of quadripartite
control, which followed the institution of the
blockade and airlift, resulted ultimately in a
complete division in the city administration.
This division was climaxed by the establish-
ment of a Soviet-controlled east Magistrat,
and the election of a new SPD-dominated west
Magistrat five days afterward on 5 December
1948. The western-sector city government, al-
though handicapped by straitened finances
and the gradual paralysis of west Berlin's eco-
nomic life, has nevertheless continued to pro-
vide effective government. On 12 May, pre-
sumably as a result of the success of the air-
lift and the firm resistance of the Western
Powers and the west Berlin population to So-
viet pressure tactics, the USSR lifted the
blockade. After the Paris CFM meeting in
May and June 1949, the military authorities
of all four powers were directed to discuss the
normalization of city services. To date, how-
ever, little has been achieved by these discus-
sions, and Berlin remains substantially as it
was before the CFM, although the once acute
East-West tension has been eased consider-
ably.
Economically, the damage to the vast indus-
trial complex of prewar Germany left a void
in central Europe of the utmost significance to
US interests. For many years the German
system was so closely integrated with the
economies of other European countries that
its impairment and dislocation has thrown the
old order of things badly out of balance and
forced an uneconomic reorientation of Euro-
pean trade, commerce, and industry. The
countries of Western Europe have had per-
force to depend upon the US, in the absence of
their former German markets or sources of
supply, as the only nation capable of supply-
ing required goods. The economies of East-
ern Europe, on the other hand, are under the
domination of the USSR, which operates on
entirely different principles, as a consequence
of which economic activity is directed toward
attainment of political objectives rather than
toward maximizing incomes. Consequently,
Germany has become a land across which nor-
mal travel and trade are very difficult.
From the outset of the occupation the Allied
powers pursued divergent economic as well as
political policies in Germany. The USSR me-
thodically stripped the Soviet Zone not only
of its war potential but also of a good deal of
its industrial capacity by a rigorous policy of
reparations, dismantling, exports of raw ma-
terials and consumer goods on the Soviet ac-
count, expropriations, and confiscations.
What remained in the zone was not sufficient
to meet the minimum needs of the population,
which has been exploited systematically for
the benefit of the occupying power. The
USSR later reversed this policy and built up
basic industries, while private enterprise was
consistently discouraged if not eliminated in
many fields. Most of the production was sent
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to the USSR as reparations. State-owned en-
terprises receive heavy subsidies from the Ger-
man Laender under Soviet direction, and their
uneconomical operation is a heavy drain upon
the zonal economy. Soviet land reform dis-
organized zonal agriculture and produced se-
rious food crises in what was once a surplus
agricultural region in prewar Germany.
Nevertheless, the USSR has maintained an in-
dustrial production level satisfactory for its
own purposes, compensating for shortages and
other production difficulties by intensifying
the exploitation of German labor. Since the
good harvest of 1948, the USSR has been able
to increase considerably the basic ration as
well as the amounts of food flowing into the
state-owned "free shops." The Allied counter-
blockade established in July 1948 aggravated
internal difficulties somewhat and compelled
the USSR to postpone integration of the So-
viet Zone economy with the satellite region
until the Zone could occupy a stronger eco-
nomic position to support Soviet policies. In-
dustrial expansion under the Two-Year Plan
of the German Economic Commission (DWK)
of the Soviet Zone is expected to effect im-
provement in the zonal economy, in conjunc-
tion with increasing trade with the countries
of Eastern Europe.
In the western zones France, in the past,
followed an economic policy somewhat similar
to that of the USSR although on a less im-
pressive scale. The French occupation forces
lived off the land, and French expropriation
of German industry was carried on in a vari-
ety of ways. Consequently, economic recovery
in the French Zone lagged far behind that of
the Bizone and only substantial assistance un-
der the European Recovery Program averted
an almost total collapse. Under the terms of
the trizonal merger, signed 18 October 1948,
France began to align its policies with those of
the US and the UK in the interest of an over-
all rehabilitation of western German industry
and agriculture. Basic rations for the normal
consumer were substantially increased, occu-
pation costs adjusted to relieve the financial
burden on the German Laender, and the ex-
port-import trade of the zone gradually inte-
grated with that of the Bizone.
Upon the US has fallen most of the burden
of reactivating the western German economy.
War damage and the disruption of transpor-
tation facilities had brought industry almost
to a standstill at the beginning of the occu-
pation. The influx of displaced persons in-
creased the population 25 percent and created
a critical food problem with which the de-
pleted agricultural resources of western Ger-
many could not cope. Heavy imports of food
and essential raw materials were required to
keep the economy operating on a bare sub-
sistence level. Despite these efforts, little im-
provement was effected during the first three
years of the occupation. Export trade had
practically disappeared, money had lost value,
and barter became the principal means of
commercial intercourse. Under such condi-
tions, key industries could not be rehabili-
tated, and most consumer goods were unpro-
curable except in the black market. German
discontent as a result of this economic stag-
nation and the punitive policies of the Allies
culminated in a series of protest strikes and
demonstrations in 1947 and early 1948. The
June 1948 currency reform furnished the Ger-
mans with an incentive to cooperate in raising
the general level of their economy in line with
the European Recovery Program, under the
stimulus of considerable ECA assistance.
Greater economic responsibility was accorded
the Germans, and the next nine months wit-
nessed a marked increase in industrial pro-
ductivity, export trade, and domestic sales.
The general shortage of investment funds,
which also resulted from currency reform, be-
gan after March 1949, however, to result in a
temporary stagnation of the west German
economy.
In its present relatively helpless condition
Germany presents no military threat to the
US, although the extent to which the war
spirit has been chastened by defeat or by the
postwar Allied policies of denazification and
demilitarization is problematical. The coun-
try still possesses considerable war potentials
in manpower, natural resources (principally
coal) , production facilities, and the technical
skill and ability that can be utilized in war
preparations by such a power as the USSR if
bent on military aggression. As the major
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point of contact between the policies and
physical forces of the US and the USSR, Ger-
many plays an important role in the East-
West struggle and is of utmost strategic sig-
nificance to the US. Although the European
aid program appears to have given the west-
ern Allies the advantage in the "cold war" for
Europe, the remoteness of the US from the
scene of ideological conflict, the propinquity
of Soviet military power, and the still un-
settled political and economic condition of
Western Europe make uncertain the outcome
of the struggle between democracy and Com-
munism. So far the German people have
shown no disposition to welcome Communism
or the reappearance of a dictatorship, this
time controlled from Moscow. The presence
of strong nationalistic elements hostile to oc-
cupation policies and confident of coming to
an eventual arrangement with the USSR poses
more of a threat to democratic institutions in
western Germany than does any actual dan-
ger from Communist infiltration.
While it is improbable that the USSR will
resort to war as a result of conditions in Ber-
lin or elsewhere in Germany, the USSR has
375,000 troops stationed on German soil, or
nearly twice the number maintained in Ger-
many by the western Allies. Moreover, the
Soviet Zone has organized a police force, in-
cluding para-military police, to supplement
the strength of the Red Army in the event of
hostilities.
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CHAPTER I
POLITICAL SITUATION
L Genesis of the Present Political System.
Total defeat in 1945 left Germany a political
vacuum. With the destruction of the Nazi
state, few vestiges of the former highly cen-
tralized autocratic German Government were
allowed to survive. Instead, Allied decen-
tralization policies were directed toward de-
veloping loCal and state governments in the
different zones of occupation. Deriving their
powers from the occupying authorities, these
governments reflected to a great degree the
political objectives of the local occupying na-
tions in their respective spheres of influence,
rather than the historic German political sys-
tem.
This system was initiated by Bismarck, who
welded the independent German kingdoms
and principalities into union with Prussia in
1871, largely as a result of the Franco-
Prussian War. This union was by no means
one of equals, because Prussia preserved its
semi-feudal, militaristic, and autocratic gov-
ernmental system intact and extended these
features to the other German states, which
were compelled to acknowledge Prussian pri-
macy in what became the Empire or Second
Reich. The constitution of the Second Reich
was constructed in such a manner that no
measure objectionable to the Prussian Gov-
ernment could ever become law. This con-
stitution did not express the popular will, but
was a grant from the rulers of the various
states to the Hohenzollern King of Prussia as
Emperor and War Lord of a united Germany.
In addition, the Imperial Chancellor was not
responsible to the popularly elected German
Parliament (Reichstag), but to the Emperor.
As Minister-President of Prussia and Presi-
dent of the upper house or Bundesrat, the
Chancellor also greatly influenced parliamen-
tary actions. Furthermore, Prussia exercised
an absolute veto in the Bundesrat upon any
constitutional change, another barrier to the
development of liberalism or democracy in
Germany.
Because of the nature of Bismarck's politi-
cal system, inevitable conflicts developed
which could not be resolved by parliamentary
or democratic means. The dominance of the
Prussian Army and the Junker class caused
much discontent, but the Iron Chancellor pur-
sued a repressive course toward all opposition
elements, such as the Socialists, the Catholics,
the trade unionists, and the proletariat. The
Prussian Junkers and the great industrialists,
which were the chief groups for providing
and selecting the personnel of the officers'
corps, worked in close alliance to control the
machinery of government, the press, and the
pulpit. They also carefully supervised and
strictly regulated the educational system in
their own interests. The vast bureaucracy
resulting from such close control of all phases
of German life became a paternalistic type
of government. Bismarck's determined op-
position to any extension of parliamentary
government in Germany deprived political
parties of all responsibility for the policy of
the state and reduced them to the inferior
status of pressure groups.
Bismarck's disappearance from the scene
in 1890 did not alter the basic trends within
the state. In fact, these were accelerated in
Note: The intelligence organizations of the Departments of the Army, Navy, and the Air Force
have concurred in this report. For a dissent by the Department of State see Enclosure A,
following page V-3. The report contains information available to CIA as of 1 Septem-
ber 1949. The Summary and Chapter II "Economic Situation" are in preparation and
will be distributed, when completed, to holders of this report with appropriate nota-
tion of agency action.
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some respects, particularly with regard to
Pan-Germanism, militarism, industrial ex-
pansion, and imperial rivalries over trade and
colonies. The new Kaiser, Wilhelm II, was
young, rash, and egotistic. By his opposition
to infringement of his royal privileges or those
of the militaristic class which surrounded
him, Bismarckian inflexibility of purpose was
replaced by royal instability, with vastly im-
portant consequences for Germany both at
home and abroad. The Kaiser's early liberal
impulses proved superficial, and the monar-
chical-feudal character of German society was
little affected by political agitation for reform
despite the rapid growth of trade unionism,
which became more a manifestation of dis-
content than an effective agency for improv-
ing the condition of the masses. The Social-
ists achieved few real gains through their own
efforts before the first World War. The only
effective part of their program was that bor-
rowed by Bismarck, such as the Sickness In-
surance Law, the Accident Insurance Law
and the Old Age Pension Act, which were
adapted to the purposes of the Prussian State.
The power of the industrialists, the influence
of the military circles in which the Kaiser
moved, and the fascination of an aggressive
foreign policy that would satisfy the national
desire for expansion dominated the political
situation and ultimately brought Germany
into conflict with every European power that
stood in its way. To overcome by military
force the encirclement of Germany by hostile
powers became the avowed objective of im-
perial policy and led directly to the first World
War.
The immediate cause of the war was Ger-
many's support of Austrian pretensions in the
Balkans in the face of rival Russian aspira-
tions. France and Belgium were invaded as
preventive measures, and in the general con-
flict that ensued all parties and classes in
Germany supported the Imperial Govern-
ment, the Socialists joining with the Junkers
in voting the necessary war measures. As the
German military position deteriorated, dis-
illusionment and unrest threatened the sta-
bility of the political system to such a degree
that it was held together only by the military
dictatorship established by Generals Hinden-
burg and Ludendorff in 1916. Ministers and
civil officials were appointed or dismissed
according to the requirements of military
policy, and repression of civil liberties became
complete despite the emergence of a demo-
cratic coalition in the Reichstag. This coali-
tion, however, was powerless to exercise the
slightest influence on the course of events and
merely voiced cautious disapproval of unpop-
ular measures. So passive and futile was the
opposition to the military clique that, when
total collapse was imminent in 1918 in the
closing days of the war, it was the German
High Command which suddenly turned the
imperial system into a parliamentary democ-
racy in the hope of appeasing the Allies and
gaining a "soft" peace based on President Wil-
son's Fourteen Points. In the face of unex-
pectedly severe Allied terms and a rapidly de-
teriorating political situation within Ger-
many, Ludendorff resigned, the Kaiser abdi-
cated, and the militarists surrendered their
political power. With the monarchy over-
thrown by revolution, the onus of making
peace fell upon the provisional Social Demo-
cratic Government headed by Friedrich Ebert.
The period between the announcement of
the Republic and the attainment of relative
political stability was marked by Communist
uprisings in the major German urban areas.
The German masses, however, were unpre-
pared for a social revolution on the Soviet
model. The Communist-led "Spartacists"
and their following were ruthlessly liquidated
by the Socialist authorities with the assistance
of the Free Corps, roving bands of former
military personnel and riffraff. The Free
Corps units were supported and financed by
the big industrialists and the army for the
purpose of liquidating opposition to the mili-
tarist-industrialist clique fighting for control
of the Weimar Republic. From these Free
Corps came the rank and file of the National-
ist movement, which furnished Hitler with
the nucleus for his Nazi Party.
The German Republic had its basis in the
constitution drawn up by the National Con-
stituent Assembly at Weimar and put into
effect in August 1919. It turned the old Em-
pire, formally at least, into a fully democratic,
federalistic state. The President was elected
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by a popular plebiscite, while the Reichstag,
to which the Chancellor and the Ministers
were responsible, was chosen on the basis of
universal suffrage. The old particularism of
the states, now called Laender, was greatly
reduced by the widened scope of Reich legis-
lation. The predominance of Prussia was
greatly reduced by changing the old
Bundesrat into a Reichsrat of limited powers.
All the basic democratic rights, such as free-
dom of speech and freedom from arbitrary
arrest were secured in the Weimar Constitu-
tion. A provision was inserted, however, in
Article 48 which enabled the authorities to
suspend these constitutional guarantees in
times of national stress or peril.
The Weimar Republic endured many vicis-
situdes before its extinction at the hands of
the Nazis. The German party system, from
lack of experience and responsibility in gov-
ernment, was unable to provide the leadership
necessary to carry the country through the
stormy postwar period. Parties representing
outmoded interests could not obtain clear ma-
jorities in the Reichstag, and party leaders
were forced to manipulate combinations or
coalitions of uncooperative and unstable
groups which were constantly dissolving and
reforming at every governmental crisis. The
Republic was harassed not only by war debts,
postwar inflation and instability, but also by
the odium of having ratified the Treaty of
Versailles, to which the nationalists attributed
all the ills afflicting Germany. This situa-
tion was fully exploited by the Right, which
included the landowners, the industrialists,
and the militarists, who were attempting to
regain their old mastery over the state.
Although the Weimar Government was
strong enough to suppress the various
putsches instigated by its enemies, including
the abortive attempt by Hitler in 1923, it was
forced to compromise with reactionary ele-
ments in order to survive. Powerful indus-
trial combines multiplied with direct assist-
ance from the state; liberal subsidies were
granted to the big landowners; no effort was
made to suppress the many para-military or-
ganizations which were rapidly rehabilitating
the Reichswehr system in violation of the
terms of the Treaty of Versailles. Relative
prosperity was temporarily restored by the
Dawes Plan, regulating the reparations ques-
tion, and by huge loans from the United
States for reconstruction. Political conces-
sions were also obtained from the Allies, such
as German admission to the League of Nations
and the withdrawal of the Allied Commission
on control of German armaments. By such
means the Republic was able to survive until
the world-wide depression of 1929-30.
A succession of Cabinets (Bruening, Papen,
Schleicher) ruling (1929-32) by decree with-
out parliamentary support proved unequal to
the task of solving the economic crisis. The
German middle classes, on which a parliamen-
tary democracy would normally have relied
for support, and, to a lesser extent, the work-
ing classes now succumbed to the pressure of
world conditions while foreign trade and
loans dwindled rapidly, production dropped,
wages declined, and employment fell off
sharply. The government was unable to
check the economic landslide, unemployment
swelled the ranks of reactionary forces inimi-
cal to the Republic, and extreme nationalists
of the Hugenburg-Hitler type redoubled their
propaganda attacks on the Weimar regime.
In the 1930 elections the Nazis, who in 1928
had secured only 12 seats in the Reichstag
with 810,000 votes, were supported by over 6
million voters and increased their representa-
tion to 107 members, second only in size to the
Social Democrats. The Communists, more-
over, assisted the Nazis in provoking disorders
to hamper the government's efforts at recov-
ery. As conditions grew steadily worse, the
Nazis swept the 1932 elections and emerged
as the strongest party in the Reichstag.
After an interval of palace intrigue, the aged
President von Hindenburg was induced to ap-
point Hitler Chancellor in January 1933.
Hitler lost no time in converting Germany
into a totalitarian state. The Reichstag fire of
February 28 furnished a pretext for liquidat-
ing the opposition. A month later the Reich-
stag surrendered its powers through the "En-
abling Act" which conferred supreme power on
the Cabinet; henceforward Hitler ruled by de-
cree and the Reichstag was merely summoned
with the rest of the populace as an audience for
his harangues. In 1934 Hitler succeeded
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Hindenburg as head of the state. The army
took a personal oath Of allegiance to him,
and the Reich Ministers followed suit a little
later.
In May 1933 the trade-union movement was
broken and absorbed by the German Labor
Front, an all-embracing Nazi organization of
employers and employees, financed by com-
pulsory contributions. In July 1933 the Na-
tional Socialist Party was proclaimed the sole
legal political party in Germany. Local gov-
ernment in both the Laender and the munici-
palities was severely circumscribed and all
officials became appointive with little purpose
but to apply Nazi law within their areas.
Police powers were also transferred from the
states to the Reich, and a vast network of
secret police was spread over all of Germany.
The Elite Guard or Schutzstaff el (SS) served
with the secret state police (Gestapo), the
Security Service (SD), and the Criminal
Police (Kripo) of the Head Office of the
Reich for Security (RSHA) to safeguard the
Nazi state, acquiring in the process an in-
famous record. These agencies were most
active and merciless in the extermination of
German Jews and in the operation of concen-
tration camps where mass murder and torture
were practiced. The SS also had its own mili-
tary organization separate from the regular
army, and by 1939, it numbered 240,000 men,
all fanatics dedicated to the Fuehrer's pur-
poses.
Since 1871 the German people have been
increasingly indoctrinated with nationalism.
As Prussian influence and the Prussian
bureaucracy became implanted in the rest of
Germany, centralization of the government
was heightened and federalistic elements cor-
respondingly weakened. Successive defeats
in two world wars have given rise among cer-
tain elements to federalist and anti-nation-
alist tendencies, which have found support in
the policies of the western occupation powers.
Centralism and nationalism remain nonethe-
less predominant in the outlook of the aver-
age German and will become increasingly ac-
tive forces as control over their own destiny
is returned to the Germans.
2. Present Governmental Structure.
The present political situation in Germany
stems largely from the departure by the USSR
from its limited wartime cooperation with the
Western Powers. Pursuing an aggressive
foreign policy, the USSR interpreted the Pots-
dam Agreement in a manner designed to fur-
ther its efforts to gain control of Germany,
and in successive CFM meetings the USSR
proved adamant in its demands. Allied
protocols on the occupation and control ma-
chinery for Germany were derived from the
agreements among the occupying powers and
provided for a Germany temporarily divided
into four zones, each occupied and governed
by one of the four powers: the US, UK, USSR,
and France. In addition, it was agreed that
the USSR and Poland should administer the
area east of the Oder-Neisse Rivers. This has
resulted in the complete separation of the
area from post-World War II Germany.* An
Allied Control Authority (ACA) was estab-
lished at Berlin as a quadripartite governing
body exercising suprazonal command. It
was organized as three main functional
bodies: (a) an Allied Control Council (ACC)
consisting of the senior representatives of the
occupation powers; (b) a Coordinating Com-
mittee, composed of the Deputy Military Gov-
ernors of the zones; and (c) a Control Staff
divided into 12 categories (Directorates), each
with quadripartite representation. The Com-
manders-in-Chief in their respective zones
were given executive, legislative, and judicial
authority limited only by agreed policies of
the four Powers. Unanimous decisions were
required for measures affecting all of Ger-
many.
Berlin was constituted a special interna-
tional political district and divided into four
sectors of occupation, each Power having au-
thority in its own area, except in city-wide
matters which were under the control of an
Allied Kommandatura.
Potsdam political principles were not ap-
plied uniformly by the four Powers. The
principles proved liable to such a variety of
? The so-called Polish Administration now in-
corporated into Poland is not considered an integral
part of Germany in this report.
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SECRET 1-5
interpretations that unanimity of action was
generally impossible. Consequently, exami-
nation of the manner in which the political
principles of Potsdam were carried out re-
quires an analysis of each zone separately.
The USSR sought a highly centralized ad-
ministration susceptible to control directly or
indirectly from Moscow and staffed with
chosen personnel believed loyal to Soviet con-
cepts. The UK has favored a federal union
capable of providing an effective central ad-
ministration without destroying the local
autonomy of the Laender. British supervi-
sion was undertaken by its own Civil Service,
and the UK, therefore, selected Germans for
local administrative posts primarily for their
efficiency rather than on the basis of their
former party affiliations. France, with a pro-
found distrust of all things German, desired
the maximum degree of decentralization, pref-
erably a loose confederation of small states on
the pre-Bismarcician model; therefore, Ger-
man assistance was relied upon to a relatively
minor extent. The US, on the other hand,
undertook from the lowest level the construc-
tion of local governments aimed at an even-
tual federal state similar to that sought by
the UK, but without centralized planning
and regulatory features. Because of a
sweeping denazification program, the US ex-
perienced great difficulty in selecting and re-
taining competent German administrators,
although conferring considerable freedom and
authority upon those chosen in an effort to
acquaint the Germans with the rudimentary
processes of democratic government.
3. Political Parties and Current Issues.
Permission and encouragement for the cre-
ation of "democratic" political parties accom-
panied the building of appointive administra-
tions. Soviet organizational efforts exceeded
all others in an almost frantic desire to place
Communist candidates in the most advan-
tageous position regardless of their actual
political importance or weight. US faith in
the efficacy of free elections put the US Zone
second in respect to the amount of organiza-
tional activity permitted the Germans. The
UK did not retard the growth of parties but
offered no substantial encouragement in spite
of sympathies with the Socialist movement in
Germany. The French, distrusting any Ger-
man political development, offered no positive
assistance but merely abstained from sup-
pressing any political elements not deemed
dangerous. Nevertheless, certain relation-
ships or similarities in party names and plat-
forms appeared in all four zones. German
leadership was for the most part under the
influence of the local occupation authorities
whose divergent political objectives have been
the cause of much favoritism and discrimina-
tion among German political parties.
Four major political groupings appeared
throughout Germany during the first six
months of the occupation. They were the
Social Democratic Party (SPD), representing
for the most part the old trade-union move-
ment of the Second Reich and the Republic;
the Christian Democratic Union (CDU),
which succeeded the old moderate conserva-
tive Centrist and People's Parties; the Liberal
Democratic Party, or LDP, now the Free Dem-
ocratic Party or FDP, an independent bloc
slightly to the right of the CDU; and the
Communist Party (KPD), a wholly Moscow-
directed body that has exerted an influence
out of proportion to its small size by means
of superior organization and guidance as well
as overt Soviet support. Minor splinter par-
ties also developed. For the most part these
rightist and nationalist groups still lack co-
hesion, but are gaining in strength and in-
fluence.
a. Soviet Zone.
The USSR has regarded the Soviet Zone
as the stronghold from which Communism
would spread over all Germany and as an
exploitable source of industrial production.
Soviet efforts to make the zone firmly Com-
munist, as well as Soviet economic policies,
have alienated the Germans in all zones so
thoroughly that there is slight chance under
present conditions that Communism will at-
tract significant strength in Germany.
Since 1945 Soviet efforts to create a Com-
munist-controlled regime for domination of
the Soviet Zone and to neutralize general Ger-
man hostility to the USSR have consisted of a
series of measures which have all failed in
their basic purpose of building up a control
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1-6 SECRET
system capable of surviving in the absence of
direct Soviet support. The earliest move was
the Antifa System (anti-Fascist Front), con-
sisting of coalitions of the four major parties
(the CDU, SPD, LDP, and KPD) at all gov-
ernmental levels in the Lae&ler, with the pur-
pose of promoting jointly the "democratic"
recovery of eastern Germany. Close Soviet
control and manipulation of the IUD into a
dominant position soon caused the non-Com-
munist parties to lose interest.
The second phase of Soviet political policy
was the creation of the Socialist Unity Party
(SED), which was the prelude to the era of
the "mass organizations" approach. Because
of the KPD's inability to win the support of
the working classes, the SMA forced the SPD
in Soviet-controlled territory to merge with
the KPD to form the SED. For the KPD this
merger had three main effects: (1) it removed
a rival for the support of the working classes;
(2) by superimposing the Communist Party
structure upon the SPD organization, the
KPD acquired control of the largest party in
the Soviet Zone; and (3) it opened the KPD
organization itself to the infiltration of hos-
tile Socialist elements and resulted in consid-
erable decrease in party loyalty to the USSR.
The SMA ensured predominance of the SED
in the Soviet Zone by providing it with every
possible benefit while denying the CDU and
LDP all but the most rudimentary propa-
ganda and organizational facilities. Despite
such methods and a carefully staged election,
however, the newly formed SED was able to
gain a bare 51 percent majority of the vote
in Land and local elections in October 1946
only by including "Front" organization bal-
lots and manipulating election totals. A
CDU-LDP coalition was forbidden, and in
some areas where the opposition had managed
to elect officials, they were soon rendered in-
effectual by SMA action in conferring greater
power on local SED functionaries, who were
placed in key positions in the local govern-
ments.
In addition to the SED, the SMA took con-
siderable pains to build up a system of mass
organizations to serve as support for the SED.
Women were organized in the Frauen Bund,
labor in the Free German Trade Union
League, youth in the Free German Youth and
other groups. These mass organizations, in-
tended primarily as propaganda vehicles to
promote various programs of the SMA and
to regiment various social groups under SED
control were unable to attract genuine public
support. During 1948 and 1949 most of them
gradually dwindled in importance, except for
the Free German Youth and possibly the Free
German Trade Union League, while the SMA
directed SED interest in other directions.
In the latter part of 1947, the KPD-SED
having proved its inability to win over the
working class and petty bourgeois in appre-
ciable numbers, the SMA directed its tactics
toward enlisting for the SED the support of
German nationalism throughout Germany.
The first manifestation of these new tactics
was the People's Congress (Volkskongress),
the revival under a new name of the defunct
Antifa System. The main propaganda of the
Volkskongress, however, was centered on
withdrawal of all occupation forces and the
creation of a unified "democratic" national
German government. In addition several
small pseudo-nationalistic parties were set up
by German collaborators and in 1949, a Com-
munist-inspired political movement called the
National Front was organized under the lead-
ership of the SED. The bankruptcy of Soviet
policy designed to win German support was
highlighted by the outcome of zonal-wide elec-
tions for the Volkskongress in May 1949, in
which the announced opposition vote was one-
third of the total polled vote, even after sev-
eral days of manipulation of election figures
by SMA representatives. A second blow to
the SMA was the west German elections in
August, which resulted in a high turn-out of
the electorate and a further decrease in west-
ern KPD strength in spite of an energetic
campaign in the Soviet-controlled press. SED
and Soviet reaction to the formation of the
Federal Republic has consisted mainly of
vituperative propaganda with negligible effect
In western Germany. In the Soviet Zone it-
self, preparation for the formalization as a
government of the existing administrative
and pseudo-parliamentary agencies has con-
tinued at an accelerated pace. The USSR is
not expected to risk new elections, however,
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SECRET 1-7
before it is assured that the outcome will be
more in harmony with Soviet desires than
in past elections.
As a further result of the failure of the
Communist-controlled SED to gain popular
support, the USSR began in the late summer
of 1948 to push the creation of a control
mechanism to supplement party controls, in
the hope that this mechanism might eventu-
ally be capable of replacing the Red Army in
maintaining the Communist regime. The
control mechanism itself is divided into politi-
cal-police controls, and a highly centralized
economic agency. Through the Communist
element in the SED and the German Admin-
istration of the Interior (GM), the USSR has
created, at least on paper, a political system
with front organizations designed to organize
the population thoroughly, and a centralized
police administration modeled on that of the
Third Reich.
Basic control is exercised theoretically
through the all-pervasive influence of the SED,
although Soviet security personnel are infil-
trated throughout the control mechanism and
local Soviet commanders have considerable
authority.
The German Economic Commission (DWK)
established in the summer of 1947 and acti-
vated in February 1948 has been highly cen-
tralized with direct vertical control over all
zonal production, except for the Soviet Cor-
porations (SAG's). Economic powers have
been removed from the jurisdiction of the
Land governments and given to the DWK.
The GAI and the DWK control respectively
all police activity and all functions of the
zonal economy. These agencies are super-
vised directly by the SMA. In addition the
SED covers directly or indirectly all political
activity throughout the zone, and through
the party structure can influence SED per-
sonnel, who occupy all key positions within
the two executive agencies; the SED is also
directly supervised by the SMA either from
Karlshorst or through local Laeneler SMA's.
At present the USSR keeps these control
organizations almost entirely separated, ex-
cept for high-level coordination by the SMA
or the politburo of the SED. By continuing
this policy, the USSR can better insure con-
trol and prevent the development of an in-
tegrated German state which might develop
strong independent tendencies.
Because of the hostility of the German pop-
ulation to Communism and the USSR, it is
estimated that the USSR will require a police
control mechanism two or three times its
present size of 100,000 ''' in order to police the
Soviet Zone adequately in the absence of So-
viet troops. The reliability of such a police
force would be doubtful in the event of a So-
viet troop withdrawal, because of nationalistic
and anti-Soviet tendencies already becoming
evident throughout the present control mech-
anism. The principal problem of the USSR
is to find enough "loyal" Germans for ade-
quate staffing of this mechanism.
b. UK Zone.
Since the UK Zone is the most highly in-
dustrialized area of Germany, with a long tra-
dition of socialist trade unionism in connec-
tion with its industrial development, the UK
has been faced with a number of politico-
economic problems. Had there been any
great degree of postwar economic stability,
the growth of a socialist political body from
workers' cells and union nuclei might have
been comparatively simple; but the stagna-
tion of industry and the consequent paralysis
of trade union functions seriously hindered
such a development. Moreover, the presence
of a Labor Government in the UK, and the
impatience of left-wing politicians at home
with the slow implementation of their the-
ories by the occupation authorities, had a pro-
nounced effect upon UK occupation policies
in Germany. It was inevitable, in spite of
efforts to maintain the appearance of im-
partiality, that the Social Democratic group
in the UK Zone would be the choice of an
important segment of the UK Government be-
cause of supposed similarities to the British
Labor Party.
In the UK Zone the two major parties in
western Germany first developed, as well as
a galaxy of splinter parties of varying political
coloration. The SPD and the CDU were al-
lowed to organize their party structures on a
? I.D. Dept. of Army estimate for 1 September
1949.
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zonal basis and soon extended their de facto
authority to the less disciplined organizations
in the French and US Zones. In addition to
the SPD and CDU, the KPD has been most
active in the UK Zone. Attracted by the ex-
tensive industrial complex and large concen-
trations of urban population, the KPD has
been carrying on a continuous but fruitless
campaign to wrest control of German labor
from the SPD. KPD strength has continu-
ally declined, as the party has been obliged
to endorse the unpopular policies of the USSR
in eastern Germany and to conform to every
twist in the party line. In addition, numer-
ous right-wing parties are constantly appear-
ing on the scene, merging with others of sim-
ilar nature, or fading away. The German
Party (DP) appears at present the most likely
of these groups to achieve any lasting success.
In the UK Zone, acceptable and vigorous
leaders emerged from the political wreckage
sooner than in the others. Two of these
leaders, Kurt Schumacher of the Social Dem-
ocrats and Konrad Adenauer of the Christian
Democrats, served as rallying points for their
followers throughout Germany and made UK
Zone politics, almost a matter of personalities.
When elections were finally organized and
approved in the UK Zone, the complex elec-
toral procedures laid down confused the Ger-
mans thoroughly. Under electoral regula-
tions, an advantage was granted to the strong-
est party in any locality, and while the system
may have been intended to reduce the tend-
ency of German parties to "splinter," it op-
erated considerably to the advantage of the
British-favored SPD in a close contest with
the CDU. Neither was able to gain a clear-
cut victory in the 1947 Land elections. The
SPD obtained a majority in Schleswig-Hol-
stein, but only a plurality in Lower Saxony.
In the largest west German Land, North
Rhine-Westphalia, the CDU gained a plu-
rality.
In the national elections of August 1949 for
the Federal Bundestag (lower house) the CDU
received a plurality in North Rhine West-
phalia and Schleswig-Holstein, while in Lower
Saxony and Hamburg the SPD won a plu-
rality. In all Laender the struggle between
the CDU and SPD was relatively close. The
Free Democrats made substantial gains, as
well as local parties of varying political com-
plexion. The KPD continued its downward
trend, losing strength in all Laender. Be-
cause of the complex electoral law, party
representation in the Bundestag did not al-
ways conform to the party's percentage of
the polled vote, the smaller parties being
somewhat handicapped. On a Laender basis
party representation from the UK Zone is the
following:
North Rhine-
Westphalia
Lower
Saxony
Schleswig-
Holstein
Hamburg
Total
Christian Democratic
43
12
8
3
66
Union
Social Democratic Party
37
24
8
6
75
Free Democratic Party
10
5
2
2
19
Communist Party
9
1
10
German Party
12
3
1
16
Independents
1
1
Center Party
10
10
South Schleswig
1
1
Association
German Rightist Party
5
5
Total
109
?
58
?
23
_
13
203
With the US-UK bizonal merger, the active
interest of the US in German economic condi-
tions lessened the attraction of socialism.
German workers could expect better living
conditions as a matter of course, thus impair-
ing the appeal of labor unions, which now oc-
cupied a somewhat anomalous position. The
unions could obtain nothing substantial for
the workers because they were powerless to
enforce their demands against MG authority.
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CD
British advocacy of industrial socialization
was put aside, out of deference to the US po-
sition. The creation of the International Au-
thority for the Ruhr not only practically
removed the Ruhr from German governmental
control, but also effectively blocked SPD hopes
for socialization, at least for the predictable
future. This situation has possibilities from
which the CDU or some other yet unorganized
political group may yet profit.
c. French Zone.
Security has been the key to French be-
havior in all matters relating to German poli-
tics. Two major points are distinguishable
in France's policy toward Germany as a whole:
the first aims to prevent Germany from again
waging war against France; the second seeks
to prevent any international action in respect
to Germany that might precipitate a war with
the USSR.
Politically, therefore, the French opposed
any unification of the four zones of Germany
without strict Allied control for an indefinite
period; they opposed the withdrawal of Allied
troops or even a relaxation of Allied controls,
without definite tripartite or quadripartite
agreement; they insisted that Allied troops
continue to occupy certain key points for an
indefinite time; they opposed the creation of
a centralized government in Germany, pre-
ferring a weak federation of the states.
On the economic side, the French insisted
on the Allies' retaining control of the Ruhr.
Their purpose was to insure that Ruhr coal
production is regulated in the interests of
French industry, and to prevent the revival
of a German heavy industry which would be
in competition with the French economy or
dangerous to French security.
As a result of US and UK determination to
create a relatively stable political and eco-
nomft regime in western Germany, however,
the French were obliged to modify their po-
sition. Beginning with the tripartite London
Decisions of June 1948 the French were per-
suaded through a series of tripartite confer-
ences into agreeing to the economic and po-
litical merger of the French Zone with the Bi-
zone to form a trizonal area with a German
government of some degree of autonomy.
The French have not been in a position to
exert any substantial influence in Germany
since 1933, and their capabilities are unlikely
to change naturally in the future. For this
reason, the French insisted, in tripartite con-
ferences, on the maximum amount of long-
term controls over western Germany that they
could obtain from the US and UK. Since the
various tripartite control organizations, such
as JAR and the Military Security Board, were
set up, the French have been attempting to
gauge whether the US and UK intend to ful-
fill these agreements in spirit or in the letter,
and can be expected to object strenuously if
the US and UK use the newly formed High
Commission for functions which the French
would prefer to assign to one of the other
control organizations. Any trend toward al-
lowing the various control boards to atrophy
from lack of use will also arouse considerable
protest on the part of the French.
French policy in Germany was almost com-
pletely negative during the period between
the end of the war and the tripartite London
Conference of June 1948. The political par-
ties were kept on a localized basis as much as
possible, and contacts with party organiza-
tions in the other three zones were discour-
aged, if not forbidden. The German admin-
istrations for the area were also relatively
isolated and directly controlled by the French
authorities. The predominantly Catholic
CDU and the SPD were the only parties of
any significance to develop; the CDU exhibited
some separatist tendencies, and the SPD was
relatively weak. As a result, relatively little
German apposition to the French developed.
Communist strength has been particularly
weak in the French Zone.
Following the tripartite London Conference
of 1948, the French gradually relaxed their
controls and allowed the political parties and
labor unions to strengthen their ties with
similar organizations in the bizonal area. The
SPD is now allowed to operate with relative
freedom under the guidance of the Party Di-
rectorate in Hannover, and the CDU has
passed under the titular leadership of Aden-
suer. The labor unions are in process of
merging with their bizonal counterparts. In
the national elections for the Bundesrat the
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CDU led in all Laender of the French Zone,
followed by the SPD, KPD, and the Samtn-
lung Zur Tat, a new political party of dubious
character.
In Bundestag seats, the outcome was the
following:
cept in such industrial areas as Frankfurt and
Munich.
Despite pre-election prophecies of German
political apathy because of public pre-occupa-
tion with the daily struggle for existence, a
high percentage of eligible voters went to the
Baden
Wuerttemberg-
Hohenzollern
Rhineland-
Palatinate
Total
Christian Democratic
7
7
13
27
Union
Social Democratic
3
2
7
12
Party
Free Democratic
2
1
4
7
Party
Communist Party
1
1
Total
12
10
25
47
d. US Zone.
The strict implementation of the denazifi-
cation program in the US Zone made initial
political organization there especially difficult.
Many non-Nazis were either too far to the left
or else were stigmatized by their connection
with the discredited Weimar regime. Al-
though acceptable leaders were difficult to
find, the four major parties (the SPD, CDU,
LDP, and KPD) proceeded with their organ-
ization as soon as MG permission was granted.
Such leaders as came forward became in-
volved in bitter inter- or intra-party feuds.
The Germans accepted their major parties
largely on the grounds of class and religious
preferences. In the Landtag elections of
1946-47, the CDU with Church support showed
great strength in the Catholic rural regions
of the south, while in the northwest and in
urban or industrialized areas the SPD took
the lead. In the US Zone at large the CDU
(or Christian Social Union as the party is
known in Bavaria, where it obtained a major-
ity position) achieved a slight superiority at
the polls over the SPD. The few particularist
organizations drew some strength from right-
wing Liberal or Free Democratic groups, but
these had no strong leaders and were at that
time so weak that no real alteration in the
general political picture resulted. The Com-
munists made a remarkably poor showing ex-
polls in these elections, the first under the
occupation. There was surprisingly little
abuse of the electoral privilege, although lack
of familiarity with the new procedures may
account for the absence of corruption or
manipulation of the electoral machinery to
date. Political leadership assumed respon-
sibility for the creation of Land and local gov-
ernments, and the struggle for positions at
the top has gone on, although limited by con-
sideration of the shadow nature of the au-
thority conferred and the possible blame which
might, at some future time, be attached to
such collaboration with the Occupying Powers.
Blocs, cliques, and coalitions were formed;
and while much of the maneuvering was di-
rected at personal advancement, the public in-
terest was not entirely neglected, and the best
available men were generally retained in office.
The constitutions adopted on the Laender
level reflect the ingrained German predilection
for granting extensive power to leaders.
US guidance was confined largely to insuring
that such controversial issues as socialilation
be given individual consideration by the voters,
and that directives of Military Government
be obeyed.
In the recent elections for the Bundestag
the relative positions of the political parties
did not change greatly except for a consider-
able loss of strength in the Bavarian CSU.
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Bundestag representation from the US Zone
is as follows:
Christian Democratic/ Bremen Bavaria
of economics, finance, transport, communica-
tions, food and agriculture, and the civil serv-
Wuerttemberg-
Baden Hesse Total
Christian Social Union
1
24
12
9
46
Social Democratic Party
3
18
10
13
44
Free Democratic Party
7
7
12
26
Communist Party
2
2
4
German Party
1
1
Independents
2
2
Bavarian Party
17
17
Economic Reconstruction
12
12
Party
Total
5
78
33
36
152
Western Zonal Mergers and the West Ger-
man State.
Because of quadripartite failure to imple-
ment the Potsdam Agreement in treating Ger-
many as a single economic unit the US on 20
July 1946 proposed an economic fusion of its
zone with all or any other zones. As a result,
the US and UK effected an economic union
of their two zones on 1 January 1947, the
USSR and France having rejected the proposal
with respect to their zones. The bizonal area
was supervised by the Bipartite Board, con-
sisting of the US and UK Military Governors,
and the Bipartite Control Office, consisting of
their deputies and representatives. The Ger-
man agencies in the new administration were
the Executive Joint Committees, each of which
consisted of eight German representatives,
one from each of the Laender in the two zones.
By the spring of 1947, a reorganization of these
German agencies became necessary in order
to eliminate weaknesses which had developed
in the course of their operation. There was
a serious lack of coordination among the com-
mittees and an absence of popular representa-
tion which resulted in political antagonism
and parliamentary hostility. An agreement
was therefore concluded on 29 May 1947 estab-
lishing a bizonal organization on a representa-
tive basis and giving it considerable additional
powers.
A Bizonal Economic Council was created
and charged with the responsibility of direct-
ing the economic reconstruction of the two
zones subject to the approval of the Bipartite
Board. The function of the Council was to
adopt and promulgate ordinances in the fields
ice management of bizonal department per-
sonnel. Members of the Council were selected
by the Landtage of the various Laender on the
basis of one to each 750,000 population, thus
giving the Council fifty-two members. In
addition to the Council, an Executive Com-
mittee was created, composed of one repre-
sentative from each Land appointed by the
Land Government, to propose and make
recommendations on ordinances to be adopted
by departments which took the place of the
Executive Joint Committees. These directors
operated under the immediate supervision of
the Executive Committee but were responsible
to the Economic Council for the management
of their departments. Ordinances adopted
by the Council and approved by the Bipartite
Board were superior to any other German
legislative enactment and binding upon all the
Laender.
In actual practice, the performance of the
Bizonal Economic Council proved disappoint-
ing. No single party in it had a clear ma-
jority, and most of its time was occupied with
political maneuvering between the SPD and
the CDU. Moreover, the Council had a tend-
ency to be preoccupied with legislation outside
its immediate province and unacceptable,
therefore, to Military Government. Sectional
conflicts developed to such an extent that the
Laender frequently defied the authority of the
Council or ignored its recommendations.
Consequently, the necessity for strengthening
the economic structure and broadening the
political basis of the Bizonal Economic Council
led to its reorganization on 9 February 1948.
The membership was doubled; each Land was
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I42 SECRET
given at least two representatives; a Laender-
rat or upper chamber was created and given
coordinate power in legislation; the Executive
Directors became in essence a Cabinet work-
ing under a chairman, and other agencies
such as a Bank Deutscher Laender and a Ger-
man high court were established. Closer in-
tegration of the functions of government was
expected to improve the peaceful productivity
of western Germany and to leave as much
responsibility as possible for this purpose to
the Germans.
Before the new organization had an op-
portunity to prove its effectiveness, the critical
economic situation in western Germany as
well as the obstructive attitude of the USSR
following the failure of the London Confer-
ence of Foreign Ministers in December 1947
to consider the German question as a whole,
caused the western Allies to consider on a tri-
partite basis the question of supplanting the
administrative framework in western Ger-
many with a provisional government, which
could be brought into relation with the demo-
cratic countries of Western Europe as a part
of the general program of European economic
rehabilitation. To this end a tripartite con-
ference was held in London in February and
March 1948, in which the Benelux countries
were invited to participate, for the purpose of
discussing the rebuilding of western Germany
and the creation of an international authority
for the Ruhr. In order to make a closer study
of such matters as the setting up of the tri-
partite machinery, the coordination of eco-
nomic affairs between the Bizone and the
French Zone, foreign trade, and the future
political organization of western Germany,
working parties were established on the Mili-
tary Government level in Germany, and re-
ported their findings to the Tripartite Con-
ference when it reconvened in London on 20
April 1948. In the meantime the USSR had
taken strong exception to the policy of the
western Allies as it related to a western Ger-
man government, in consequence of which
Marshal Sokolovsky walked out of the Allied
Control Council in Berlin on 20 March 1948
alleging that unilateral western Allied action
ended quadripartite control of Germany.
On 1 June 1948, the Tripartite Conference
adopted a series of recommendations, known
as the London agreements or decisions, deal-
ing with various phases of the German ques-
tion. Among other things, the Military Gov-
ernors were authorized to call a joint meeting
of the Ministers President of the eleven west-
ern German Laender and instruct them to
convene by 1 September a constituent assem-
bly that would. prepare a democratic consti-
tution for ratification by the participating
Laender. The joint meeting was delayed by
the implementation of currency reform in
western Germany, and by the action of the
French Assembly in approving by a narrow
margin the London decisions with reserva-
tions designed to safeguard French security
interests with respect to the Ruhr. German
reaction to the London decisions was distinctly
unfavorable, the consensus of all parties
being that the proposed government would
have the effect of irreparably splitting the
country into Communist and non-Communist-
controlled areas and that economic rehabilita-
tion should precede attempts at political re-
construction. These views were reflected by
the Ministers President at the joint meeting
with the Military Governors on 1 July 1948,
at which time the Germans were presented
with the Allied proposals regarding: (a) the
preparation of a German constitution; (b) a
possible adjustment of Laender boundaries to
meet the requirements of territorial repre-
sentation; and (c) the details of a contem-
plated Occupation Statute defining the powers
of German self-government and delimiting the
spheres of Military Government control.
The Ministers President considered the
Allied proposals at a series of conferences at
which considerable opposition to their accept-
ance developed, and then submitted a series
of counter-proposals on 15 July 1948. Most
of the German delegates wanted a federal gov-
ernment which would leave an opening for
eventual reunion with the eastern Laender.
They also emphasized the desirability of main-
taining the provisional character of the new
regime and opposed the use of the terms "gov-
ernment" and "constitution" lest the USSR
react unfavorably and take retaliatory meas-
ures that would destroy all possibility of an
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0
0
ultimate unification of Germany. The Mili-
tary Governors were prepared to meet the
German objections to the extent that they
did not infringe upon the London agreements,
and at another joint meeting on 26 July with
the Military Governors, the Ministers Presi-
dent agreed to accept this arrangement and
proceed with the preliminaries incident to
the calling of a constitutional convention.
The Landtage of the eleven western Laender
then went ahead with the election of repre-
sentatives to the temporary assembly, which
met on 3 September to draft a constitution
along the lines laid down in the London agree-
ments. These called for the establishment of
a governmental structure of the federal type
to be ratified upon completion by a referendum
requiring approval by two thirds of the
Laender.
The Bonn Parliamentary Council, consist-
ing of 65 delegates under the presidency of
Konrad Adenauer, debated constitutional
questions for nine months before reaching
agreement after many deadlocks and subse-
quent compromises between the strong cen-
tralistic tendencies of the SPD and the federal-
istic principles of the CDU. A constitution, or
basic law, of 146 articles was adopted 10 May
1949 following receipt from the western Mili-
tary Governors of an Occupation Statute de-
limiting respective spheres of authority be-
tween a German government and the Occupy-
ing Powers. Ratification was quickly ob-
tained from the Landtage of all Laender ex-
cept Bavaria, where strong separatist tend-
encies prevail, and the constitution was pro-
mulgated at Bonn on 23 May 1949. It pro-
vides for a Federal President elected by a
Federal Convention but having little power,
a Federal Chancellor or Prime Minister to
head the Federal Administration, and a Par-
liament of two houses - a Bundestag popularly
elected and representing the people and a
Bundesrat or Council chosen by the Laender
and having limited veto power over legislation
initiated by the Bundestag. All powers are
carefully divided between the Federal Gov-
ernment and the individual Laender. Al-
though federal laws are binding on the states,
and the Federal government has supervision
over their execution, in most instances such
execution depends on the states, which thereby
also retain decisive authority. The Bonn con-
stitution closely parallels that of the Weimar
Republic in many respects and retains the
provision for emergency legislation by which
the federal President can legislate by decree
in the event of a serious controversy or dis-
agreement with Parliament.
On 14 August 1949 elections for the Bunde-
stag were held throughout western Germany.
Voting generally followed the pre-Nazi pattern
and although no party won sufficient seats to
form a government, the election was in gen-
eral a conservative and right-wing victory.
The CDU won the largest number of seats,
followed by the SPD, the FDP, and various
smaller parties. The Communists continued
their downward trend and failed to carry an
electoral district, but as a result of the
working of the electoral law were able to win
some seats on the Land lists. The basic issue
in the elections appears to have been that of
a relatively free enterprise system versus a
socialist planned economy. The manifest
difficulties of the Labor Government in the
UK and a relatively sterile campaign approach
on the part of the SPD appear to have been
the main reasons for SPD failure to make a
more substantial showing. Party representa-
tion in the Bundestag is as follows:
Christian Democratic/Christian
Total seats
in Bundestag
Socialist Union
139
Social Democratic Party
131
Free Democratic Party
52
Communist Party
15
Bavarian Party
17
German Party
17
German Rightist Party
5
South Schleswig Association
1
Economic Reconstruction Party
12
Center Party
10
Independents
3
Total
402
On 7 September 1949, the Burtdesversam-
mlung, composed of members of the Bunde-
stag and an equal number selected by the
Landtage, met at Bonn and on the twelfth
elected Theodor Heuss President of the Fed-
eration. Following Heuss's election, the
Bunclesversammlung was dissolved and the
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Bundestag met to consider nominations for
the post of Federal Chancellor. On 15 Sep-
tember Adenauer's nomination was confirmed
by 202 votes of a possible 402, a majority of
one vote. The coalition which Adenauer
formed consists of the CDU/CSU, the FDP
and the German Party. The coalition has a
scant working majority and is unlikely to
function very effectively because of conflicts
between its components. The principal prob-
lem involved will be the reconciliation of cen-
tralist and federalist viewpoints, an obstacle
which in the long run is likely to wreck the
present coalition.
4. Other Influential Groups.
The most significant development outside
the political arena has been the growth of
trade unions in the various zones of occupa-
tion.
In the Soviet Zone the USSR permitted the
trade unions to organize soon after the fall
of Berlin, expecting that the labor movement
would go Communist. Trade unionists and
organizers were given considerable assistance,
whenever possible. The outcome, however,
was that almost all unions were controlled
by the Socialists, and in spite of Soviet pres-
sure, Communist influence was either slight
or non-existent. To remedy this situation
and to centralize control of the unions in the
hands of a small minority, the FDGB (Free
German Federation of Trade Unions) was
created and superimposed on the existing
union structure. This organization quickly
assumed, chiefly through pressure exerted by
the Soviets, the powers which had formerly
belonged to the individual unions. Coupled
with this step, the USSR also used the forced
merger of the SPD and 1CPD, forming the
SED, to break what little power the former
SPD union functionaries had been able to
retain. Membership in some member unions
of the FDGB was obligatory for all recipients
of wages, salaries, and fees. The final step in
stripping the unions of their power was the
dissolution of the works councils, on the pre-
text that their functions were unnecessary in
view of the existence of the FDGB. The re-
sult was the creation of a tightly knit, highly
centralized, and pro-Soviet trade union
bureaucracy, controlling an apathetic or hos-
tile rank and file.
Unlike western zone trade unions, which by
comparison began only recently to operate on
a zonal basis, the FDGB has been the zonal
trade union authority since the early days of
the occupation. Composed of nineteen con-
stituent unions representing the various trades
and professions organized vertically, its total
membership in the Soviet Zone is about four
million, roughly two-thirds of the total trade
unionists in the whole of Germany. The
functions of the FDGB far exceed those of
normal labor organizations, so that represen-
tation of workers' interests is of minor impor-
tance. In addition to functioning as social
security agencies, political and educational
organizations, cultural and welfare bodies, the
member trade unions have become an integral
part of Soviet administration and assist in
the preparation and execution of laws. Soviet
benevolence, in the form of supplementary
food and consumer goods allotments to union
members, has been designed to enhance the
prestige and popularity of the FDGB, but with
slight success.
In the western zones, trade union activities
have followed a different pattern in each zone,
reflecting generally the occupation policies of
the respective military governments.
In the French Zone, unions developed slowly.
Organizationally, the various unions never de-
veloped beyond Land level, because of the
French insistence on decentralization. Cer-
tain leaders gained considerable prominence
and could, to a limited extent, exercise a zonal-
wide influence. Since contact with union
organizations in other zones was discouraged
and the industrial complex of the zone is
slight, and because French MG has continu-
ally interfered in union? affairs, the French
Zone unions remained weak and ineffectual
until trizonal fusion became imminent.
In the US Zone, union organization was
encouraged on a local level. Early in the oc-
cupation, works councils were formed and
local unions organized. These local unions
in turn expanded on a Land basis, but no
centralized zonal headquarters developed, be-
cause of the US policy of encouraging the
unions to develop from the lowest level, rather
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SECRET 145
than vertically from the top. Until after
currency reform in June 1948, wages and, to
a lesser extent, prices were held down. Cur-
rency reform, however, practically emptied
union treasuries. As a result, it was not until
the fall of 1948 that the unions were in a
position to bargain with management success-
fully. From the time of the bizonal merger
in December 1946, the unions in the US Zone
began to work closely with their counterparts
in the UK Zone, and a Bizonal Trade Union
Directorate was formed. The merging of the
western German unions, however, really began
only with the coming of trizonal fusion and
the decision to form a West German govern-
ment.
In the UK Zone, trade union developments
followed a more considered pattern than in
the other western zones. UK MG strongly
encouraged union development under Social-
ist influence and encouraged the rapid creation
of a centralized trade union structure as a
mechanism for exerting some control over
the unions and preventing Communist ex-
ploitation of the postwar chaos. As a result,
the German Trade Union Federation (DGB)
became the zonal organization, and repre-
sented the various member trade unions. UK
Zone unions are the most powerful in western
Germany, and will continue to be the dominant
element in the west German trade union
movement.
During the late spring and early summer of
1949, the organizational preparation for the
merger of the trizonal trade unions progressed
along lines parallel to the completion of tri-
zonal fusion and the establishment of the new
Federal Republic. Formal meetings for the
purpose of completing the merger and creat-
ing an over-all west German trade union
organization are scheduled for October 1949,
and are expected to accomplish their purpose
with little difficulty.
The trade union movement in Berlin reflects
on a small scale East-West division of
Germany. The Soviet-sponsored FDGB, as
originally organized and controlled, was never
acceptable in Berlin to the three Western
Powers represented in the Berlin Kommanda-
tura. The electoral methods devised by the
SMA to insure the attainment and retention
of Communist leadership in the FDGB evoked
repeated but vain protests on the part of the
western Allies. Before the latter moved into
Berlin to occupy their sectors, the USSR had
already set up a trade union organization for
Greater Berlin, subordinated to the Soviet
Zone FDGB by a series of interlocking director-
ships. As Communist control tightened in
the Soviet Sector, the original Socialist func-
tionaries were weeded out and replaced by
Communist and pro-Soviet personnel. The
western sector branch of the FDGB, however,
remained Socialist.
After having absorbed control of the east
sector unions, the SED, through its repre-
sentatives in the FDGB of Greater Berlin, at-
tempted with considerable success to insinuate
pro-Communists into the western sector
FDGB bureaucracy. This policy was resisted
by the Socialist leadership of the local mem-
ber unions, but despite considerable internal
bickering, no final split in the Greater Berlin
FDGB occurred until May 1948. At that time,
the Socialist leaders of the local unions, with
the support of the western Military Govern-
ments, created the UGO (Independent Trade
Union Opposition), in which all the hitherto
latent opposition to the Communist FDGB
leadership now crystallized.
Since the end of May 1948, when the UGO
walked out of the Berlin FDGB, the Berlin
trade union movement has been split along
East-West lines. The UGO developed within
the Communist-controlled FDGB and advo-
cated an impartial stand on the East-West
struggle over Berlin. When the FDGB city
convention refused to recognize UGO dele-
gates, almost all trade unions in the western
sectors rebelled and set up their own trade
union organization. Since the split, the West-
ern Powers have protected and supplied UGO,
while the USSR assisted the FDGB. UGO re-
tained the character of an opposition group
within the FDGB until 14 August 1948 when
the eighteen trade unions affiliated with the
organization decided to change the name to
the Independent Trade Union Organization
of Greater Berlin and become autonomous.
The Berlin UGO now claims to be legal suc-
cessor to the Berlin FDGB because of the
subserviency of the latter to Soviet control.
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UGO's financial position, impaired by currency
reform, has been strengthened by credit grants
from Military Government, thus assuring UGO
independence in competition with the Soviet-
subsidized FDGB.
5. The Berlin Situation.
Following the breakup of the Allied Control
Council on 20 March 1948, the USSR system-
atically accelerated its efforts to consolidate
its grip on eastern Germany. New Soviet
moves were made toward gaining unilateral
control of Berlin, and an intensive propaganda
campaign was waged to confuse the issues
and shift the onus to the Western Powers.
Progressively tighter restrictions were placed
on communications, transport and commerce,
aimed at cutting off Berlin's western sectors,
from all contact with western Germany and
Western Europe. These restrictions culmina-
ted on 24 June 1948 in the stopping by the
SMA of all rail traffic into Berlin from the
west, thus marking the start of the Berlin
blockade.
Simultaneously, the Soviet authorities re-
lentlessly harried the prowestem city govern-
ment by unilaterally carrying out splits in the
city police, the food and labor administra-
tions, and public utilities departments. A
"Democratic bloc," composed of various Soviet
tools and front organizations, was created as
the nucleus for a new city government to be
set up after the expected withdrawal from
Berlin of the Western Powers. Although the
Allies did not withdraw, the growing split in
the administration of the city affairs was
finalized on 30 November 1948 by the setting
up of a "rump" government in the eastern
sector, under a Lord Mayor appointed by the
SMA. Five days later, free city assembly elec-
tions in the western sectors resulted in a
sweeping victory for the SPD. While the new
city government, an SPD-dominated coalition
of all the anti-Communist parties, no longer
attempts to assert authority over the eastern
sector, it provides effective and stable govern-
ment for West Berlin.
The immediate pretext for the imposition
of the Berlin blockade was the issuance on 23
June 1948 of the new west mark in the city
by the Western Powers. The US/UK airlift
for the supply of the western sectors began
three days later, expanding gradually until it
carried a daily average load of well over 7,000
tons, sufficient to maintain an adequate food
ration and limited industrial production. On
1 July, the Soviet Military Commandant re-
fused to participate any longer in the meetings
of the four-power Allied Kommandatura. As
a result, the body continued merely as the
supreme organ in Berlin of the three Western
Powers. The USSR thereafter maintained
that all Berlin is an integral part of the Soviet
Zone, with Soviet Zone currency the sole legal
medium of exchange for the entire city.
Throughout the blockade, the economy of
the western sectors of Berlin deteriorated
steadily. The decline in industrial produc-
tion could not be arrested without normal
transportation to the west, although some
firms managed to survive through barter trade
with Soviet Zone enterprises. Thousands of
marginal or unessential businesses were forced
to close down because of the acute shortages
of fuel, electric power, and raw materials, and
the rising cost of production, thus adding a
serious unemployment problem to the burdens
of the western city government. The economy
and the municipal finances of the western sec-
tors were in great part sustained at survival
level by extensive loans from western Ger-
many, which will eventually have to be re-
paid.
The financial problems arising out of the
dual currency situation in west Berlin and the
insufficiency of the west mark supply led on
20 March 1949 to the establishment of the
west mark as the sole legal currency in the
western sectors, together with an increase in
the circulation of west marks in the city.
Inability to solve the currency question on
terms mutually satisfactory to the Western
Powers and the USSR has been the chief factor
in the failure so far to arrive at a compromise
solution of the Berlin problem both on the
quadripartite CFM level and in the United
Nations.
In retaliation for the Soviet blockade of
Berlin, the US and UK on 26 July 1948 sus-
pended all railway traffic between the Bizone
and the Soviet Zone, and subsequently all rail
traffic originating in or transiting the Soviet
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!Th
Zone, as well as interzonal highway and barge
traffic. This counterblockade intensified pro-
duction difficulties in the Soviet Zone and
disorganized attempts there to achieve a
planned economy. The resources of the satel-
lite areas proved insufficient to compensate for
the loss of East-West trade. In an attempt
to regain the initiative by reestablishing con-
tact with the Western Powers and at the same
time relax East-West tension, the USSR agreed
to a simultaneous lifting on 12 May 1949 of
all restrictions on traffic imposed since 1
March 1948, and a return to the situation
then existing.
As a? result of the Paris Conference of For-
eign Ministers in May and June 1949, which
did not itself achieve any definitive agreement
on the divided city, the Berlin representatives
of the four occupation powers were directed to
confer periodically in an endeavor to bring
about a normalization of conditions in Berlin.
It was specifically stressed by the Western
Powers that such meetings would in no sense
constitute a renewal of the four-power Allied
Kommandatura. Up to date, the meetings
have produced agreement only on the recog-
nition by both sides of each other's postal
stamps for interzonal mailing purposes, and
on a proposal that non-political experts from
both east and west Berlin should meet to
attempt a normalization of the city's public
services, such as gas, electric light, and sewage.
Despite the relative normalization of rail,
highway, and canal traffic between Berlin and
western Germany since May 1949 (except for
the period of slightly over a month when the
strike of the western sector ran workers
paralyzed all rail traffic around Berlin), the
economy of the western sectors has continued
to deteriorate. The inability of western Berlin
manufacturers to compete with the lower
prices of producers in west Germany or of
Soviet Zone producers is the chief cause of
this continued decline, which has manifested
itself in growing unemployment and plant
shut-downs.
This economic paralysis has been paralleled
by the increasingly unhealthy condition of the
western sector municipal finances, resulting
from the sharp rise in expenditures especially
for relief to the unemployed and to firms
damaged by the blockade, during a time when
tax revenues could no longer be increased.
The precarious finances of the Magistrat led
the western occupation powers to insist upon
a balanced city budget, which remains de-
pendent in large part, however, on loans and
subsidies from western Germany and the US.
Now that the new Federal Republic is operat-
ing, demands are increasing among Berlin
officials and the west German SPD that Berlin
be frankly recognized as a deficit area requir-
ing new and greater subsidies. The Federal
Government is expected to provide continued
aid to Berlin, although probably not to the ex-
tent desired by the Magistrat, but Bonn will
demand closer supervision over city expendi-
tures than the west Germans have previously
exercised.
With the establishment of the Federal Re-
public, the demand by the Magistrat and the
SPD that Berlin be formally included as the
twelfth Land is likely to intensify. The con-
servative Government of the Republic may
be expected to resist or evade this demand,
even if the western occupation powers lift their
opposition to it, because inclusion of Berlin
would involve greater Socialist representation
in the Bundestag, and because it would be
likely to evoke a very unfavorable Soviet reac-
tion.
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CHAPTER II
ECONOMIC SITUATION
1. Genesis of the Present Economic System.
The prewar economic system of Nazi Ger-
many was the result of the same detailed
planning and foresight that made the Ger-
man military machine such an effective
weapon of aggression. Private enterprise in
name only, it was subject to a very large
measure of central governmental control.
The economy was so ordered as to afford maxi-
mum support of the military machine. Ger-
many possessed great aptitude for develop-
ment along scientific, technical, and indus-
trial lines. This, together with the fact that
the Allies in 1919 after the defeat and dis-
persal of the German army left the German
productive capacity virtually intact, made it a
relatively simple matter for the Germans to
regain and even to surpass pre-1914 levels of
production and national income. It was thus
possible for their military organization to be-
come more menacing to international security
than ever before.
Situated in the middle of Europe, with few
natural resources, a soil depleted by genera-
tions of intensive cultivation, and with lim-
ited access to the sea, Germany in the course
of time surmounted these handicaps and be-
came a highly industralized economy, in
which foreign trade played an important part.
Organizational weaknesses exposed by the
first World War, such as the failure to foresee
and prepare for a war of attrition based on an
economic blockade of the country, were cor-
rected to a large extent during the subsequent
years of peace. In 1939 Germany was a
highly coordinated, completely integrated
state, self-sufficient to the point of being able
to launch and sustain another world conflict
of far greater magnitude than the first.
The Germans compensated to a remarkable
extent for the paucity of their natural re-
sources by development of synthetic substi-
tutes and by building up stockpiles of essen-
tial materials. Also through various exchange
controls and by pursuing calculated trade
policies, Germany managed to exert pressures
on the economic life of many smaller coun-
tries, involving them in long-term commit-
ments and increasing their dependence upon
the Reich as a market for exports and a major
source of imports. Where this was imprac-
tical, the Germans were able to exercise im-
portant economic controls in rival countries
over prices, production, and distribution of
various commodities in world markets
through the formation of international car-
tels. The manipulation of world trade and
world resources by German industry through
cartel arrangements not only strengthened
Germany's ability to make war, but weakened
the defensive position of its potential rivals by
limiting or reducing their supply of certain
strategic commodities. French aluminum
production, for example, was curtailed by an
agreement which resulted in the export of
bauxite ore to Germany, which in turn sold
finished aluminum to France. This arrange-
ment seriously handicapped the French upon
the outbreak of war in 1939.
Long before 1932 much of German industry
and trade was organized into various cartels
which proved to be most convenient to the
Nazis for the task of mobilizing and "ration-
alizing" industry for war. German business
as a whole was grouped in fully representative
trade associations, which had developed joint
bodies on a national scale. There were five
such bodies (Spitzenverbande)?f or industry,
trade, power, banking, and insurance. After
1933 the Nazis kept the traditional form of
these associations but made membership com-
pulsory and introduced the "leadership" prin-
ciple: appointment from above in place of
election from below, with the Minister of
Economics in supreme control. Although
prevented by statute from engaging in price-
fixing and other monopolistic practices, which
were left to cartels, the association in many
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instances was identical as to membership with
the cartel. Cooperation between the two was
directed by law, the object being to "remove
the obstructions and difficulties caused by
multiplicity of industrial organizations" and
to "establish a comprehensive, tight and uni-
form organization" instead.
Agriculture was also unified and centralized
under the Nazi regime by the formation of the
Reich Food Estate (Reichsnahrstand) with
powers of internal administration that ex-
tended to price-fixing and marketing. The
Administrative Department pushed agrarian
improvements through the media of Regional
and District Peasant Bodies and controlled
distribution through Marketing Boards.
Farmers were persuaded to introduce or aug-
ment crops that would reduce the deficiency
in domestic food production. The high costs
involved were offset by high prices and special
Reich subsidies. The Food Estate had com-
plete authority over every phase of Hitler's
battle for agrarian self-sufficiency, including
farm resettlement, mechanization of farms,
and land reclamation, and it operated the ra-
tioning system which had been put into effect
several years before the outbreak of the war.
Such absolute control over the national
economy enabled the authorities to shift en-
tire plants, as well as large segments of labor
and the agricultural population, according to
the demands of a specific industry or a specific
government policy. Throughout the war the
Nazi government maintained the German
economy at a remarkably high production
level, despite blockade, damage from the air,
and difficulties that arose over distribution
and supply as Hitler's armies spread over most
of Europe.
Central control of the economy by the Reich
government terminated abruptly with the de-
feat of the German military forces. There-
after, economic controls, policies, and proce-
dures prevailing in the four zones of occupa-
tion were uniform only to the extent that
agreements were reached in the ACC.
Although in the early months of occupation
some measure of uniformity prevailed, gen-
erally economic policies pursued in the zones
have varied in accordance with differences in
the economic philosophies and interests of the
several occupying powers. This has caused a
cleavage, widened with the passage of time, in
developments in the western zones and the
Soviet zone. In the western zones, for ex-
ample, control of industry tended to revert to
private owners under local German authority
and free-market determination of prices has
been restored for nearly all commodities. In
the Soviet zone, socialization of various indus-
tries has been effected and Soviet-owned or
controlled firms have been created, while
prices are still generally controlled by German
authorities in the zone as directed by Soviet
Military Government authorities.
Uniform economic policies in the US-UK
zones were assured with the economic merger
of the two in January 1947. The gradual
merger of the French Zone with the "Bizonal"
area beginning in October 1948 tended to
make western Germany an economic unit.
The merger was not completed until the west-
ern German Government was established in
September 1949.
2. Description of the Present Economic Situa-
tion.
a. Agriculture.
One of the most critical hindrances to Ger-
many's postwar recovery was the insufficiency
of food to supply the needs of the population,
despite heavy relief imports. The German
agricultural economy, even after Hitler initi-
ated his agrarian "production battle" in 1934,
has been unable to increase to any appreciable
extent the area under cultivation, 60 percent
of the total area already being improved farm-
land. Although Nazi land reform, farm re-
settlement, and land reclamation projects pro-
vided a larger percentage of small farms than
formerly, there was not a significant increase
in cultivated land because of the large areas
taken over for airfields and other military in-
stallations. Poor soil forced more extensive
use of natural and artificial fertilizers, but
during the war years a shortage of fertilizers
reduced the productivity of German farm-
lands.
Improved farming methods and govern-
mental subsidies, plus rigorous control of the
distribution, consumption, and stockpiling of
food and fodder supplies, enabled Germany to
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achieve wartime self-sufficiency by 1938 in
wheat, vegetables, and dairy products other
than butter. Bread and potatoes formed the
basis of the normal diet, and 65 percent was
supplied by the eastern area. However, the
total indigenous food supply to all of Germany
was only 85 percent of total consumption.
Vegetable oils and feed for livestock remained
the weak points in the wartime agricultural
economy. Only 48 percent of required table
fats (butter, lard, margarine) and 7.5 percent
of necessary technical fats for industrial pur-
poses could be produced from sources within
the nation. Western Germany as now con-
stituted, cannot supply more than 50-60 per-
cent of its food requirements.
The hectarage, estimated production, and
imports of principal crops in the Bizone are
as follows:
farm products once again came to be released
for distribution through regular channels.
The French Zone, smallest of the four, has
felt the food shortage more keenly than the
rest, despite heavy imports. The official daily
ration in 1947 averaged only about 1,200 calo-
ries for the normal consumer, but usually less
than this amount was available. A good 1948
harvest improved the food situation, although
French requisitions continued to limit
amounts consumed by the population. Total
daily food consumption by the non-farm popu-
lation in the French Zone is now estimated to
be around 2,300 calories.
Because of the influx of expellees, refugees,
and repatriates, the Bizone is now very
densely populated, the population having in-
creased 25 percent since 1939. At the same
time, food production for the area in 1948
HECTARAGE
PRODUCTION
(Metric Tons)
IMPORTS
1938/39 I
1948/49
1938
1948/49
1947
i 1948
Bread Grains
2,414,000
2,138,000
5,584,000
4,518,000 4,334,300
6,326,000
Total Grains
4,376,000
3,651,000
10,260,000
7,419,000
Potatoes
951,000
1,019,000
17,492,000
19,055,000 26,800
347,500
Sugar Beets
148,000
146,000
4,770,000
' 4,348,000 53,700
634,900
(sugar)
(sugar)
Fodder Pulses
77,000
93,000
157,000
134,000 58,800
102,900
In the postwar period in all zones, almost
all farms suffered from lack of fertilizers,
seeds, tools, fuel, and spare parts for mechan-
ical equipment. Despite these production dif-
ficulties the relative advantages enjoyed by
the farming population with respect to avail-
able food supplies increased the ill-will of ur-
ban workers toward the authorities respon-
sible for the rationing system and toward
refugees whose presence was an added strain
on .the food supply. Farmers also tended to
withhold delivery of their assigned food quo-
tas, and thrived on black market trading. Ur-
ban workers, unable to satisfy their demands
through legal channels, went directly to the
farmers to trade their services or possessions
for food. This situation greatly improved
after the currency reform in June 1948, when
was 10-15 percent less than prewar. Cat-
tle numbers in the bizonal area in Decem-
ber 1948 were 2 percent larger than the year
before, but 15 percent below the 1936-38 aver-
age. Efforts to reduce fodder crops in order
to produce more food for direct human con-
sumption were successfully resisted by Ger-
man farmers, and increased fodder crop hec-
tarage in 1949 improved the livestock situa-
tion considerably, with a consequent improve-
ment in the meat, fat, and milk ration.
During 1936-38 average food production in
the bizonal area provided approximately 1,450
calories daily per person for the non-farm
population. Average non-farm consumption
in these years was about 2,900 calories per
person daily in the bizonal area. In the first
half of 1949 the average non-farm consump-
tion in the Bizone was around 2,450 calories,
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which was about 600 calories more than the
official ration of 1,850 calories for the normal
consumer. Estimates of the 1949 harvest for
western Germany, including the French Zone,
indicate that the breadgrain crop is substan-
tially above that of 1948 because of a 20 per-
cent larger yield per hectare. The total bread-
grain production was 5.88 million tons, and
with imports of 2.5 million tons assures the
food supply of the Federal Republic and west-
ern Berlin. The potato crop, however, was
reduced about 20 percent by drought, which
also affected other root crops such as sugar
beets and fodder beets.
Under the European Recovery Program,
western German economic plans call for full
land reform, the adoption of various scientific
measures, increased production of fertilizers,
and imports of food and other agricultural
supplies. The German diet has been recently
supplemented by an increased use of fish.
The small fishing fleet is being repaired and
rebuilt to authorized capacity as rapidly as
shortages of materials and fishing equipment
will allow.
The Soviet Zone has the largest land area
and is the most important zone agriculturally.
The zone possesses 35 percent of the total
arable land which accounted for 40 percent of
prewar breadgrain and potato crops, and half
the number of sheep in Germany as now de-
fined. Much of the land reform which the
Moscow Conference directed should be fin-
ished in 1947 was accomplished in the 1945
initial denazification procedure. The power
of the large estate owners was eradicated by
expropriation with compensation of all farms
over 100 hectares (247 acres), and more than
2 million hectares of land were distributed be-
tween the time of occupation and March 1947.
Ruthless implementation of this policy cre-
ated new problems, however, and only 25 per-
cent of the crop land was producing at normal
capacity in the spring of 1947 while the rest
was producing far below normal or not at all.
GRAIN AREA, YIELDS, AND PRODUCTION SOVIET ZONE OF GERMANY FOR PREWAR,
1948 and 19491
Crop
Area (1000 hectares)
Yield (centners per
hectare)
Production (1000 metric
tons)
Prewar
Average
1948
1949
Prewar
Average
1948
1949
Prewar
Average
1948
1949
Wheat
Rye
Barley
Oats
TOTAL
633
1,214
460
741
474
1,290
250
562
500 24.6
1,280 17.1
300 22.4
600 21.5
19.8
14.2
16.5
14.2
20.0 1,554
14.0 2,078
16.0 1,029
14.0 1,590
939
1,830
412
795
1,000
1,792
480
840
3,048
2,476
2,680
6,251
3,976
4,112
'Estimated.
LIVESTOCK NUMBERS IN THE SOVIET ZONE OF GERMANY AS OF 3 DECEMBER
for 1938, 1945, 1946, 1947 and 1948 (In 1000 head)
ITEM
1938
1945
19461
1947
1948
Horses
810
590
620
650
665
Cattle
3,644
2,401
2,500
2,783
2,879
Hogs
5,689
1,179
1,900
2,074
2,617
Sheep and Goats
2,438
1,272
1,600
1,758
2,121
Poultry
21,251
5,947
8,000
13,451
15,764
Estimated.
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Poor harvests in 1947 resulted in severe food
shortages throughout the Soviet Zone in the
spring of 1948. The shortages were met in
part by imports from the USSR and the satel-
lite states. Because of increased hectarage
and fertilizer allocations, as well as better
weather, the 1948 crop was 25 percent larger
than the 1947 crop, and resulted in a consid-
erable improvement in the food situation, even
though the USSR continued to requisition
scarce items for the Red Army and for export.
Although it is difficult to determine quanti-
tatively the average food consumption in the
Soviet Zone, recent estimates indicate that the
non-farm population in 1948-49 was consum-
ing around 2,300 calories daily. The meat and
fat situation has failed to show material im-
provement; and fish, sugar, and ersatz prod-
ucts continue to be substituted on the meat
and fat ration. Peasants' mutual aid associa-
tions are now organized along collective lines,
and further land reform in this direction is
reported in prospect.
Prewar Germany utilized tremendous quan-
tities of commercial fertilizers, and as a result
produced very high yields per unit of area on
relatively poor soils. Intensive cultivation
during the war to obtain maximum food sup-
plies further depleted the soil and increased
Germany's dependence on artificial fertilizers.
Before the war Germany was the principal
nitrogen producing country of the world. Of
its production, which exceeded 700,000 tons
for the crop year 1938-39, 70 percent was uti-
lized by agriculture, 16 percent by industry,
and the remainder exported. Output was re-
duced about 50 percent by war damage and
other causes, and efforts on the part of the US
and UK to provide fertilizer imports in order
to restore food production to the highest pos-
sible level were circumscribed by the world-
wide need for fertilizers, particularly nitro-
gen. By the end of 1948 nitrogen fertilizer
production was back to normal and produc-
tion almost doubled in 1949.
The bulk (61 percent) of the enormous Ger-
man potash deposits, estimated at 20 billion
tons, lie in the Soviet Zone. Thirty-six per-
L. of the German deposits are in the Bizone
where requirements in 1946 exceeded produc-
tion by 40 percent. Because the barriers in
the way of interzonal trade have operated to
prevent the western zones from obtaining
substantial amounts of potash from the So-
viet Zone, bizonal resources have been inten-
sively exploited. Potash production in the
UK Zone, where the principal west German
mines are located, amounted in 1948 to 2.41
million metric tons of crude potassium salts.
This rate of output was increased nearly 50
percent in the first six months of 1949, which
was in excess of requirements and left a small
surplus for export.
Because of the general economic disloca-
tion, German agriculture was able to obtain
less than half its estimated fertilizer require-
ments in 1946 and crop yields were 20 percent
lower than in prewar years. The Bizone
could meet only 37 percent of its potash needs,
and 34 percent and 12 percent respectively of
its nitrogen and phosphate requirements.*
The situation failed to improve in 1947 when
bad weather was also a factor in retarding
crop production. It was impossible to come
within 35 percent of achieving the 1,550 calo-
rie ration level for the normal consumer from
indigenous food production, and this necessi-
tated the import of 4.4 million tons of food at
a cost of approximately $600 million. In east-
ern Germany potash requirements were ex-
ceeded by 7 percent, but in the other cate-
gories the Soviet Zone was worse off than the
western zones, obtaining only 22 percent of
estimated nitrogen needs and 5 percent of re-
quired phosphates. The situation for all Ger-
many improved considerably in 1948 because
of larger fertilizer allocations and better
weather conditions. Although eastern Ger-
many can still produce food surpluses, the
prospect for western Germany's becoming self-
sustaining remains poor in view of the in-
creased population and limited farming area.
Prewar production of potash in the Soviet
Zone was over a million tons annually. In
1946, the SMA quota for the zone was 800,000
tons, with production at least 20 percent un-
der this figure because of war damage, power
shortages, transportation difficulties, and So-
? In the first six months of 1949, the supply in-
creased to 122 percent of potash needs and 89 and
95 percent respectively of nitrogen and phosphate
requirements.
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viet mine dismantling. Actual production in
1948 was 917,000 tons, of which 60 percent was
applied to agriculture and industry in the So-
viet Zone and the rest taken for reparations
or export.
b. Natural Resources.
(1) Coal.
Germany's most important raw material is
coal. In prewar Europe, the UK alone sur-
passed Germany's production and export of
hard coal (Steinkohle), two thirds of which
came from the industrial Ruhr at the rate of
about 10 million tons a month. All kinds of
hard coal, containing from 5 to 40 percent
volatile matter, are produced, i.e., anthracite,
semi-bituminous, bituminous coals of coking
and non-coking type, gas and long-flame coals.
Over two-thirds of the coal mined in the Ruhr
is suitable for coking. The coke ovens not
only supply the iron and steel industry but
are the source of a whole series of by-products
important to the chemical and other indus-
tries. Brown coal, of which Germany pos-
sesses vast resources, has a high moisture con-
tent, and in fuel value nine tons of brown coal
is considered the equivalent of two tons of
hard coal. It is suitable chiefly for power
generation and briquette manufacture.
Three-fourths of the important hard coal
reserves, estimated in 1944 at 288 billion met-
ric tons, are concentrated in the Ruhr, where
the coal is found in several seams, one above
the other, at depths of 1,300 to 2,600 feet, thus
enabling many coal beds to be worked from a
single shaft. Most of the remainder is found
in Upper and Lower Silesia, the Saar, and near
Aachen and in Lower Saxony. Of the total
reserves of brown coal and lignite, approxi-
mately one-third is located along the lower
Rhine near Cologne in the British Zone. Im-
portant deposits are found in the Soviet Zone,
in the vicinity of Leipzig and east of Berlin
on the Oder River. France has integrated the
Saar mining region into the French economic
system. The Silesian area?containing about
25 percent of the reserves of brown coal and
lignite?is, with the consent of the western
Allies, under Polish administration until a
German peace treaty is signed. Because of
the Soviet-Polish attitude toward the Oder-
11-6
Neisse boundary, quadripartite agreement on
the return of Silesia is unlikely. As a result
of the war, Germany will have lost one-fourth
of its brown coal reserves but not more than
15 percent of its hard coal.
The recovery program for Germany has de-
pended upon the availability of coal and steel,
hence Allied efforts have been concentrated
on overcoming the formidable handicaps en-
countered in the mines such as reduced ca-
pacity from war damage, inadequate or un-
skilled labor, and changes in management re-
sulting from decartelizations and denazifica-
tion procedures. Hard-coal production in the
Bizone in 1946 was 55 percent of the amount
dug in 1936; in 1947 it was 65 percent, and in
1948, 79 percent of the prewar figure. Brown
coal output, on the other hand, has surpassed
? prewar levels, with the Soviet Zone producing
the major share. Ruhr output has fluctuated
with the individual miner as he has been af-
fected by such considerations as the food sup-
ply, lack of clothing, consumers' goods and
housing, the temporary abandonment of the
trend toward socialization of the mines, and
the political activities of trade union and
works councils under the influence of Commu-
nist propaganda.
Whereas in 1935, German output of coal per
man per day averaged 1.57 tons (as against
4.52 for the US) , the present 1949 output in
the Ruhr is about 1 ton per man. Until re-
cently output per man was very much lower.
To overcome this situation steps were taken
by quadripartite agreement to increase
miner's pay by 20 percent, to improve living
conditions by granting special housing and
repair priorities and to place greater man-
agerial responsibility on German shoulders.
Recruiting and incentive programs, featuring
extra food-ration allotments, also produced
favorable results. But the postwar daily pro-
duction remained far below the hard-coal tar-
? In 1913 independent coal mines controlled over
50 percent of the coal resources, but by 1940 only 10
percent remained in independent hands. During
the war this small percentage was further reduced
by incorporation of some of the remaining inde-
pendent mines into the Ruhr steel combines.
France and the Benelux countries also have a finan-
cial stake in German coal mines.
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COAL PRODUCTION IN THE RUHR DISTRICT
o
1936
1946 1947
1948
INCREASE IN
1948 OUTPUT
OVER 1947
1948 PER-
CENTAGE
OF 1936
(in million metric tons)
(tons)
(%)
Coal
116.96 53.95
71.12
87.0
15.9
22.4
74.4
Coke
27.79 9.04
13.24
19.0
5.7
43.2
68.2
Coal briquette
4.41 1.90
2.18
3.0
0.8
36.2
67.3
Lignite
52.92 48.17
54.73
60.7
6.0
10.9
114.7
Lignite briquette
11.30 10.5
11.59
12.6
1.0
8.8
111.6
Workers Employed
284,100 320,200
390,800
409,200
18,400
5.8
44.0
get of 350,000 tons daily until September 1948,
when the release of hoarded goods brought
about by the currency conversion, the effects
of the better food situation, and the larger
number of coal miners employed, began to be
felt. Average daily production reached 335,-
000 tons in the first half of 1949, and increased
allocations to German industry brought about
a marked improvement in the general eco-
nomic situation. Of the coal mined, German
industry receives about 50 percent, of which
the iron and steel industry receives about one-
fourth. The railways receive about 10 per-
cent, domestic consumers about 6 percent, and
the occupation forces about 4 percent. An-
other 10 percent is consumed by the collieries,
and the rest, approximately 20 percent, is ex-
ported. France receives about 35 percent of
these exports.
(2) Timber.
Slightly over a quarter (27.5 percent) of
prewar Germany was covered by forest, which
yielded timber as well as material for paper,
wood-fiber cellulose, and other products. De-
spite a highly advanced system of reforesta-
tion, Germany's prewar wood supply was in-
sufficient for its needs.
Germany emerged from the war with its for-
ests relatively undamaged. About 40 percent
of the forest area is in the US Zone, 30 percent
in the Soviet Zone, and the rest divided
equally between the French and UK Zones.
An acute timber famine exists in all Zones
despite greatly increased felling. Loss of East
Prussia and the territory east of the Oder re-
duced the forest area of Germany by 25 per-
cent. Present Germany has a forest area of
23.6 million acres, of which 19.5 million acres
are commercial forests. The commercial for-
ests are estimated to be growing annually 6.8
billion board feet of timber in trees of more
than 2.75 inches in diameter. Norway spruce
is the most common tree in the Bizone, and
spruce forests cover 40 percent of the forest
area. Scotch pine covers 26 percent and
beach forests 21 percent of the area. Spruce
and pine furnish the ordinary construction
timbers and most of the common lumber used
in Germany. The total cut in 1947-49 was
7.5 billion board feet, which was greater than
normal growth, and indicated a serious de-
pletion of forest resources. At this rate of
cutting, it is estimated that sawlog-size trees
will be gone in eight years. Consequently,
the occupation authorities have ordered a pro-
gressive decrease in the cut and are also re-
ducing timber exports in an effort to preserve
the productive capacity of the remaining Ger-
man forests.
(3) Petroleum.
Germany has small petroleum resources.
Eight fields in the Hanover region produced
about 550,000 tons in 1938, no more than eight
percent of prewar requirements. Their chief
importance, however, lay in their yield of
valuable light oils from which lubricants are
derived. Present consumption of lubricants
in the bizonal area is approximately covered
by domestic production. A sudden or general
increase of industrial activity, however, may
cause a bottleneck in lubricants. Refineries
in the UK Zone, where the only important oil
fields are located, supply present restricted ci-
vilian needs in all three western zones. These
plants are to be rehabilitated and modernized
for refining Venezuelan and Arabian crudes.
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In 1948 the refineries processed 738,904 tons
of petroleum, of which 276,000 tons were im-
ported from Venezuela and the Near East.
Domestic oil production in 1948 was 626,810
tons from 28 oil fields. Bizonal consumption
of POL products in 1949 is estimated at 2.7
million tons, which will require a continuation
of the strict licensing control of petroleum
supplies.
The manufacture of synthetic gasoline,
amounting to 2 million tons in 1938, was pro-
hibited by the occupying powers in 1945 be-
cause of its war potential as well as its ex-
pense, one ton of liquid fuel requiring 15 to
20 tons of brown coal. Two of the six west
German Fischer-Tropsch plants were main-
tained in operation, however, in order to re-
duce the cost of petroleum imports. In the
spring of 1949 all facilities were ordered re-
moved in conformity with the agreement on
Prohibited and Restricted Industries. Pro-
ducing nearly at capacity, Soviet Zone syn-
thetic plants (such as the Leunawerke near
Merseburg) for extracting gasoline and diesel
oil from lignite and coal supplied about 14
percent of Germany's liquid fuel needs during
the early war years. War damage and dis-
mantling reduced this capacity from 2.27 mil-
lion tons to approximately 1.1 million tons in
1948. The USSR has acquired the plants for
the Soviet economy and is reported to have
produced about 450,000 tons of gasoline and
200,000 tons of diesel fuel in 1948. Produc-
tion and distribution of the estimated civilian
requirements of gasoline, oil, and lubricants
for 1949 will call for utilization of all undam-
aged and salvageable equipment in the west-
ern zones, and may require all refinery equip-
ment in western Germany, so that no surplus
has been scheduled for reparations.
(4) Iron.
The insufficiency of domestic iron ore was
one of the most serious of all raw-material
problems hampering the economic progress of
Nazi Germany. The principal German iron
ore deposits are in the Siegerland, Lahn-Dill,
Salzgitter, and Bavarian districts. Reserves
of first-grade ore were estimated in 1938 at
350 million tons and of second-grade ore at
300 million tons. Most of these deposits are
small, widely scattered, and frequently remote
from coal fields.
German ore is lean, averaging less than 45
percent iron after treatment as compared to
Swedish ore which ranges from 58 to 72 per-
cent iron content or Spanish, 48 to 58 percent.
Furthermore, German ore, unlike the low-
grade minette ores of Lorraine, is not self-
fluxing and requires expensive treatment for
removal of silica and other impurities. Never-
theless, physical lack of plants to treat domes-
tic low-grade ores was a national weakness in
1939, since Germany was dependent upon im-
ports of foreign ores for two-thirds of its an-
nual prewar consumption of 33 million tons.
Sweden furnished almost 50 percent of these
imports and France 25 percent. The phos-
phate derived from Swedish ores is an impor-
tant source of fertilizer. In contrast to short
supplies of iron, Germany had abundant coal
resources, production of coking coal in pre-
war years being sufficient not only to meet all
domestic requirements but also to provide an
exportable surplus which helped pay for iron
ore imports. German iron ore production in
1948 was 6.5 million tons or nearly double
that of 1947 and 12 percent greater than the
1936 output. Germany was also deficient in
ferro-alloys and alloy materials, such as
nickel, molybdenum, chrome, and tungsten,
all essential to the manufacture of high-grade
alloy steel. Chrome was obtained mainly
from Turkey, tungsten from the Iberian Pen-
insula, and nickel and molybdenum from
Scandinavia.
(5) Aluminum.
Although German deposits were negligible,
providing less than 25,000 tons of ore an-
nually compared to imports of over 1 million
tons, Germany, before the war, ranked first
among the nations of the world in the ca-
pacity of its aluminum industry. Most of the
bauxite ore obtained during the war came
from Hungary and southeastern Europe, and,
after 1940, large quantities were imported
from France. During the war, annual alu-
minum consumption rose to a peak of around
470,000 tons of metal, with German plants
producing about 65 percent of this amount.
Many aluminum plants were destroyed in the
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course of the Allied invasion; others were
dismantled and removed as reparations. Al-
though production of primary aluminum (vir-
gin ingots from bauxite) was originally
banned by Allied agreement and imports were
limited to 30,000 tons of metal a year, or about
one-tenth the annual consumption rate for
1939-44, production of aluminum up to 85,000
tons annually is allowed under the PRI agree-
ment. Aluminum production in 1948 from
both primary and secondary sources was 42,-
000 tons in the Bizone. The French Zone has
one aluminum plant with an annual capacity
of 35,000 tons. Requirements for the Soviet
Zone, which is dependent mainly on Hungary
for bauxite, were stated at 60,000 tons in 1948,
of which about 60 percent was estimated as
available.
(6) Zinc and Lead.
A decade ago Germany was next to the
United States and Belgium in the world smel-
ter production of zinc and was able to supply
about two-thirds of its annual consumption
of 225,000 tons from indigenous ore. It shared
with Yugoslavia first place among European
producers of lead, although consumption was
about three times the annual output of Ger-
man mines. The chief sources of lead and
zinc are in Upper Silesia, the Harz Mountains,
and along the Rhine River, about 165,000 tons
of zinc and 80,000 tons of lead being obtained
annually from these deposits. Because zinc
predominates two to one in the ore, Germany
during the war relied heavily upon lead con-
centrates imported from Yugoslavia. Bizonal
smelter production of zinc and lead in 1948
was only 40 percent of what it had been in
1936. Soviet Zone production in 1948 was ap-
proximately the following: recast zinc-1,298
tons; lead concentrates-741.1 tons; lead and
lead alloys-11,922 tons.* (Germany's large
Silesian zinc mines have been given to Poland
by the USSR.)
(7) Copper.
Shortage of copper contributed materially
to Germany's military defeat. During the
war the use of copper was confined to the
* 1946 Soviet Zone zinc production was 14,000 tons
and lead 6,566 tons.
manufacture of aircraft and to other essen-
tial military purposes, while aluminum was
substituted for it in all commercial and do-
mestic uses. The amount of copper mined in
Germany has remained stable during the last
30 years, and production could not be essen-
tially advanced either in the prewar years or
during the war. The estimated annual mine
output of finished copper was 25,000 tons, and
the total refinery capacity about 300,000 tons.
The copper industry was an important ele-
ment in the national economy, and Germany
was able to compete successfully in world
markets in semi-manufactured and finished
copper products, of which about 100,000 tons
a year were exported. The proceeds in for-
eign exchange gained in this manner were
sufficient not only to cover the import of cop-
per ores, concentrates, and scrap (totalling
about 260,000 tons annually) but to leave a
substantial surplus for the import of other
goods from abroad.
The German copper industry passed largely
under Soviet control. More than 50 percent
of the copper products plants and nearly all
the large smelters and refineries are located
in the Soviet Zone, where 90 percent of the
copper is mined, most of it in the Mansfeld
district of Saxony-Anhalt. Production in
1948 was 24,000 tons of copper, mainly from
1.3 percent ore. Because Mansfeld ores are
sub-marginal, mining in the past was eco-
nomically possible only with state subsidies,
which have been continued by the Soviets and
charged to the Land Government of Saxony-
Anhalt. With the price of copper fixed at RM
735 per ton in 1948, production costs were RM
8,000 per ton, and the yearly subsidy was esti-
mated at RM 52 million, the deficit being made
up by Land subsidies.* The USSR has re-
fused to permit an increase in the price of
copper and is reported to have shipped large
quantities to the Soviet Union, which have
been credited to German reparations at the
low price supported by subsidies. Ore produc-
tion in 1946 was 371,000 tons, or about 40 per-
cent of what it had been before the war. The
USSR is striving to reach the prewar level and
* The world price of copper was RM 1,300 per
ton in 1948.
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has embarked upon an extensive program of
mine renovation and enlargement; the output
per miner, however, is still below the prewar
average. Copper production in western Ger-
many in 1949 is expected to reach 120,000 tons,
of which two thirds is electrolytic and the rest
fire-refined.
(8) Tin.
Since the Middle Ages tin has been mined
in Germany from small low-grade deposits in
the Erzgebirge, peacetime production averag-
ing about 150 tons per year, 1,000 tons during
the war. The average annual consumption
in prewar years, however, was about 14,000
tons. The deficiency was partly filled by ore
imported from Portugal, Spain, Bolivia, and
the Netherlands East Indies and reduced in
German smelters; in addition, some tin metal
imports were required.
Germany was among the largest continen-
tal consumers and smelters of tin, with an
annual smelter output of approximately 5,000
tons. In March 1946 the Allied Control Coun-
cil set the permissible level of the German tin
industry at one half the 1938 rate and allowed
an annual maximum consumption of 8,000
tons.
(9) Vanadium.
An essential component of high-speed steel
tools and other high-tensile, heat-resistant
steel products, vanadium was the one alloying
element found in Germany in quantities
nearly sufficient for war needs. When nickel
and chromium became very scarce early in the
war, vanadium was widely substituted in their
place. Three sources were available: vana-
dium-bearing slags from Norway, minette
(low-grade) iron ores, and recovery from the
Bayer aluminum process. By far the most
important was the minette ore of Luxembourg
and Belgium, which, before the war, enabled
Germany to meet its annual requirements of
about 15,000 tons. Vanadium production
from iron-ore slags has been forbidden in Ger-
many since the war under the Level of Indus-
try Agreement.
(10) Magnesium.
Until 1942 Germany was the world's lead-
ing producer of magnesium accounting in
1940 for nearly 60 percent of the world sup-
ply of 36,500 tons. Magnesium output in-
creased enormously during the war, and was
used extensively in airplanes, incendiaries,
rocket launchers, flares, and tracers.
Following the surrender, primary magne-
sium production was banned by the Allies for
an indefinite period, but is being produced in
the Soviet Zone at the rate of 500 tons per
month.
(11) Graphite.
All the economically important graphite
mines are located in southeast Bavaria, with
small deposits in Silesia and Thuringia which
yield an inferior grade of ore. The Bavarian
deposits have been mined for centuries, but
modern mining did not begin until the first
World War. Small holdings were then con-
solidated into a few strong companies which,
in 1938, were merged into the Graphitwerke
Kropfmuehl A.G., the dominating group in
the industry until the collapse in 1945. An-
nual production of all grades was approxi-
mately 30,000 metric tons of raw graphite;
finished graphite about 8 to 10,000 metric
tons.
The high melting point of graphite and its
resistance to burning in air make graphite in-
dustrially useful as a refractory agent in cru-
cibles and foundry facings.
(12) Beryllium.
Germany pioneered in the production of al-
loys from this rare metallic element, particu-
larly in connection with beryllium-copper al-
loys and later on as a replacement for molyb-
denum and tungsten in the production of
steel. Since 1934 a single plant at Frankfurt-
am-Main has been the only producer of beryl-
lium metal and oxide in Germany, the total
output during the war amounting to 18.8 met-
ric tons of oxide and 4.1 metric tons of metal.
Ore supply originally came from Brazil; after
1940 Scandinavian, Portuguese and Italian
stocks were obtained. An Italian firm near
Turin was under German control until the ex-
pulsion of the Nazi armies, and the entire out-
put was shipped to Germany. German prog-
ress in atomic bomb development was halted
by the surrender, and as part of the industrial
disarmament program for Germany, the pro-
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duction of materials of primary importance
in atomic research, such as beryllium, has
been prohibited.
(13) Uranium.
Since September 1945 the USSR has been
exploiting the uranium deposits of the Erzge-
birge area on both sides of the Czechoslo-
vakian border of Saxony. These workings are
said to be shallow, consisting of crude, timber-
lined shafts, from the base of which workers
tunnel to follow the vein of ore. Necessary
electrical energy is furnished by high tension
installations removed to this area from other
parts of the Soviet Zone. Some 100,000 Ger-
mans have been drafted from the Soviet Zone
and forced to work in the mines under heavy
guard. Soviet mining methods are primitive;
working conditions are bad, and accidents are
frequent. Old ore dumps are also being
worked over for uranium, and the Soviet au-
thorities are carrying away such zinc and co-
balt ores as have been salvaged. The entire
area is sealed off by Soviet military forces, and
no one is allowed to enter or leave without
special authorization from the administrative
headquarters of the district at Aue. The cost
of these mining operations is borne by the
Land Government of Saxony.
According to Soviet reports, Erzgebirge
uranium ore is of very high quality, believed
to be the best in the world, and very easy to
mine. German technical opinion has it, on
the contrary, that the very fact that the USSR
is mining pitchblende from such a poor source
is an indication of a lack of better sources on
which to concentrate. The yield of uranium
ore from Saxony pitchblende deposits never
amounted to more than 10 tons annually, the
mines having been worked chiefly for cobalt
and bismuth ores employed in the Saxony
blue-dye industry. Total uranium reserves in
the Erzgebirge area (German and Czech) are
estimated to be about 600 tons U302 (uranium
oxide). The USSR is believed to be exploiting
this source at the rate of about 50 to 80 tons
per year.
(14) Pyrites.
Sulphuric acid, the most important inor-
ganic chemical used in industry, is prepared
mainly from pyrites, of which Germany has
limited deposits in Westphalia and Bavaria.
Before the war these furnished less than 40
percent of the annual domestic requirement
of one million tons, the rest being imported
chiefly from Norway and Spain. Sulphuric
acid was produced in 66 plants located in three
major areas; Westphalia, Bavaria, and Sax-
ony. Much of the plant capacity was war
damaged or dismantled, particularly in the
Soviet Zone, where a shortage of sulphuric
acid has been one of the principal limiting
factors in the zonal economy. Bizonal pro-
duction of pyrites in 1948 was 383,000 tons,
while sulphuric acid production was 821,000
tons, or about 80 percent of what it was in
1936. The Soviet Zone produced 68,000 tons
of pyrites in 1948 and imported 133,700 tons.
Sulphuric acid production was 151,000 tons or
about 50 percent of requirements.
(15) Potash.
Enormous reserves of potash, estimated at
20 billion tons, enabled Germany before the
war to supply 65 percent of the world's total
potash salts. Potash is prepared in various
forms, the chloride and sulphate being used
principally in the manufacture of fertilizers,
the sulphate in the manufacture of glass, the
carbonate in the manufacture of soap and
glass, the chlorate in the manufacture of
matches and explosives, the nitrate in the
preparation of gunpowder, glass, enamels, and
fertilizers, the cyanide in metallurgy, and
caustic potash which is used in soapmaking,
textile processes, and manufacture of potash
chemicals. Mine owners at an early date
combined to regulate production and main-
tain prices through a cartel known as the
Deutsches Kalisyndikat, which confined op-
erations to 30 or 40 of the lower cost mines
on a quota basis and closed down the remain-
ing 200 shafts, which were maintained, how-
ever, in a standby condition. Germany domi-
nated world trade, except for the period of the
first World War, through international cartel
agreements to partition markets and stabilize
prices. Loss of foreign markets in the second
World War was offset by more intensive use of
potash for domestic agricultural and indus-
trial purposes. Wartime sales for the six-year
1939-44 period averaged 1.7 million tons K20
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annually, of which 70 percent went to agri-
culture, 3.5 percent to industry, and 18.5 per-
cent for export, with a small amount left un-
distributed. Potash production in 1948 in the
Bizone was 510,000 tons (K20 content) and in
the Soviet Zone 917,000 tons, of which 180,000
tons were taken for reparations and 238,000
tons for export.
(16) Salt.
The basic raw material of the important al-
kali chemicals is common salt, of which Ger-
many ranked first for many years among
world producers and exporters. The average
prewar output was 3 million tons, of which
800,000 tons worth RM 10 million were ex-
ported. About 82 percent of the salt was dis-
posed of through two syndicates, the larger of
which was an association of big potash com-
panies that also mined salt. The principal
salt works in the US Zone total 10, in the UK
Zone 28, in the Soviet Zone 23, and in the
French Zone 6. Salt mining was resumed in
the bizonal area in 1946 and quickly brought
to prewar production levels.
Despite the abundance of alkali raw mate-
rials, the chemical industry operated at such
a low level until 1948 that the production of
caustic soda and soda ash was insufficient to
meet demands. Consequently there was a se-
rious shortage of soap, detergents, and other
cleansing agents, while industries such as tex-
tiles, glass, paper, and rubber were also seri-
ously affected. The largest caustic soda plant
in Germany was at Bitterfeld, now in the So-
viet Zone, which produced 32 percent of the
prewar total. Dismantling and inadequate
fuel supplies affected the capacity of this
plant, and only 110,000 tons were manufac-
tured in 1948. Output of caustic soda in
western Germany reached 155,000 tons in
1948, an increase of 80 percent over the pre-
ceding year. Production of soda ash in 1936
was 726,000 tons, with the largest plant at
Bernberg, now in the Soviet Zone, with an an-
nual capacity of 410,000 tons. In 1948 Soviet
Zone production was only 82,000 tons. Soda
ash production in western Germany was 377,-
200 tons, or slightly in excess of the 1936 out-
put for that area.
c. Industry.
The chaotic condition into which Germany
was plunged by total defeat and the collapse
of its industrial system is in sharp contrast
to the stability, efficiency, and high degree of
organization characteristic of German econ-i
omy in the past. The disaster was the more
spectacular because of the complexity of the
preponderantly industrial economy which was
geared to war production, but readjustment
was not made less difficult by the disappear-
ance of a sizable section (war goods) of an in-
dustrial complex that provided a livelihood
for millions of Germans. Efforts of the west-
ern Allies to get Germany back on a produc-
tion level approximating that of 1936 were
handicapped by the fact that the entire eco-
nomic structure was so badly warped and dis-
turbed by the stresses of the intervening
twelve years as to prevent its functioning on
any but a low level, and then only with con-
siderable outside assistance. The situation
was further aggravated by the lack of struc-
tural economic unity resulting from the divi-
sion of Germany into the four separate po-
litical and economic administrations, with a
fortuitous distribution of resources and with-
out an effective coordinating authority. Re-
gional specialization and economic inter-
dependency, carried to great lengths by the
Nazis in order to maximize production, also
accentuated the troubles arising from the sep-
aration of the country into sharply delineated
zones of occupation. Moreover, the failure to
effect currency reform during the period 1945
to June 1948, led to universal hoarding of
goods, and thus the potential ability of Ger-
many (all zones) to contribute to its own re-
covery was not realized.
Other important factors contributing to the
continuance of the economic slump were the
reparations, demilitarization, decartelization,
and denazification programs of the Occupa-
tion Powers which: (1) closed and dismantled
plants; (2) prohibited the production of war-
potential materials formerly important to do-
mestic industry and to the export market; (3)
partially decentralized and destroyed long-
established operational methods of whole in-
dustries; and (4) removed managerial talent
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from the once closely integrated industrial ma-
chine.
Before the currency conversion in June 1948,
the bizonal production level was only one-half
of the estimated 1936 level. Between June
1948 and July 1949 the combination of cur-
rency conversion and Allied (chiefly US) aid
brought production up 60 percent in Bizonia
or to about 88 percent of Bizonia's estimated
1936 level.
The French Zone has a different economic
structure and lacks industrial concentration.
Agriculture is the principal occupation, the
total value of agricultural products being
about twice the total value of industrial prod-
ucts ($50 million to $28 million in June
1949). Agricultural yields in 1949 were only
70 percent of prewar, and great efforts have
been required to improve the poor postwar food
situation, in consequence of which the aver-
age consumer ration has been increased from
1,700 calories to 2,000 calories in the past year.
Because of substantial imports of raw ma-
terials under the ECA program, there has been
a marked increase in industrial activity. The
official index of industrial production (1936-
100) in the third quarter of 1949 was 85, com-
pared to 81 in the second quarter, or a 70 per-
cent increase over the corresponding period in
1948. Nevertheless, there is serious unem-
ployment, arising mainly from lack of raw
materials in several basic industries, and the
financial picture is marred by the prospect of
continuing budgetary deficits. Budgets are
expected to be brought into better balance,
however, by the release of counterpart funds
for investment purposes. The 1949/50 invest-
ment program calls for an expenditure of DM
716 million, 41 percent of which is from coun-
terpart funds and 20 percent from public
subsidies.
The Soviet Zone possessed an industrial ca-
pacity at the end of the war sufficient for most
requirements, but Soviet dismantling and rep-
arations policies soon reduced it to a point
below the minimum needs of the population.
Later, the USSR reversed its policy of stripping
the Soviet Zone of industrial capacity and built
up basic industries in order to meet quotas
established under the Two-Year Plan. Most
of the production was sent to the USSR. The
Two-Year Plan, adopted in June 1948 set tar-
gets for 1949 and 1950 by which over-all pro-
duction was to increase at the end of the period
to 81 percent of that of 1936. This represented
an increase of 20 percent over the 1948 level
and 35 percent over 1945. Soviet Zone total
production in 1947 was approximately RM 10
billion (based on 1944 prices); the 1948 level
was to be increased 10 percent over this, but
shortages and other bottlenecks prevented tar-
gets from being reached in all major fields
except coal. Costs of production remain high,
although productivity of labor has been in-
creased by the introduction of the Hennecke
and other labor speed-up or worker incentive
systems. Because Soviet methods of comput-
ing values are open to question, and official
quotas are frequently changed, fulfillment of
the Two-Year Plan is problematical, although
Soviet Zone production has improved in many
respects since the lifting of the counterblock-
ade in May 1949 and the restoration of west-
ern German sources of supply for critical
items.
Outstanding individual industries are
treated separately in the remainder of the sec-
tion.
(1) Electric Power.
Prewar Germany was the most powerful in-
dustrial nation in Europe, ranking first in
world production of brown coal, second in steel
and electric power, and third in the output of
hard coal. German industry was 85 percent
dependent on electric power, and German
power stations had a higher installed capacity
and a higher output than those of any other
European country. In normal times Germany
produced annually about 24 billion kilowatt
hours, but the Nazi rearmament program in-
creased this to 40 billion kwh in 1936 and to
68 billion in 1943, which was the wartime peak
production. A network of transmission lines,
18,000 miles in length, connected the generat-
ing plants in a vast grid, normally assuring
supply of power to all industrial areas. Be-
cause of the enormous war potential of this in-
dustry, Germany's electrical generating capac-
ity was drastically reduced under the Level of
Industry Agreement. About 40 percent of
electrical capacity was in industrial plants,
many of which were in the war-potential class
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and were scheduled for removal together with
such generating plants as were considered sur-
plus to revised industrial needs.
In 1948 electric power output was 18 billion
kwh. Brown coal plants generate 41 percent
of Germany's power output, hard coal plants
35 percent, and water power 14 percent, while
gas, wood, and oil provide the rest. Practically
all of Germany's hydro plants are located in
the US Zone, which has little coal and must
depend on coal imports from the Ruhr to
operate its thermal stations. During the low
hydro winter season, or in periods of prolonged
drought, these thermal stations supply much
of the zone's electrical power.
Of a total capacity of 10 million kilowatts
of plant installed in what is now the bizonal
area, only about 17 percent was available for
service at the surrender. War damage, inade-
quate maintenance, shortage of fuel and essen-
tial replacements, and dispersal of personnel
were the principal causes of the almost total
breakdown of the once great German electric
power system. Some of these difficulties have
now been overcome, but shortages of fuel,
transport, and materials still constitute serious
handicaps to complete restoration of normal
services for both industry and private consum-
ers. Allocation of materials, like steel, ce-
ment, bricks, earthen conduits, and insulators
were only 15 percent of requirements, while
deliveries of coal generally did not exceed 60
percent of minimum needs. Nevertheless, by
July 1947 nearly 46 percent of the plant capac-
ity was back in operation. The rate of im-
provement has since .become very slow owing
to lack of repair materials.
The electrical supply situation is satisfac-
tory for present needs. Replacement of worn
or obsolete equipment and construction of ad-
ditional power plants are delayed, however,
by the lack of available capital. Consequently,
generating capacity increased less than 10 per-
cent in 1948 and 1949. In order to assure an
equable distribution of available supplies of
current, rationing of electric power for domes-
tic and commercial purposes is maintained,
and a priority list was established for power
supply. Executive control of the industry was
transferred to the Germans on 1 January 1947,
but responsibility for the determination of the
level of industry, reparations, and exports was
retained by MG. Estimated power require-
ments over the next four years for a self-sus-
taining German economy are 16 million kilo-
watts of plant, or almost twice the amount
of power now available. Although the electric
power industry has high priority for invest-
ment purposes, the stringency of bank credit
has interfered with plans for expanding plant
capacity and building new power plants. As
of June 1949, DM 110 million has been made
available from GARIOA counterpart funds for
a number of special power projects, but further
grants are contingent upon German ability to
provide funds from their own resources for
this as well as for other investment needs.
Electric power output in the Soviet Zone in-
creased 7.7 percent to 7.9 billion kwh in the
first six months of 1949 over the last six
months of 1948. This fell short of the planned
quota for power production largely because of
the embargo on spare parts and machinery
from western Germany. With the restoration
of normal sources of supply, power output is
expected to improve somewhat. Power break-
downs are frequent, however, and the supply
remains inadequate to industrial needs with-
out further extension of plants and facilities,
for which available funds are also short.
(2) Electrical Equipment.
Up to 1945, production, research, and de-
velopment of German electrical equipment
were in the hands of two large corporations?
the Allgemeine Elektricitats Gesellschaft
(AEG) and Siemens und Halske?which
turned out equipment for generating, trans-
mitting, distributing, and utilizing electrical
energy principally for power, heating, and
lighting, and manufactured radio and tele-
phone equipment as well as aviation instru-
ments, radar, and other electronic devices.
While German progress in the field of elec-
tronics during the war did not match that of
the Allies, German electronic scientists made
substantial contributions to Nazi military
power. Many of these developments would
still constitute a menace to international
peace and security in irresponsible or un-
friendly hands. Production of German elec-
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trical equipment was therefore limited by
quadripartite agreement to 30-50 percent of
prewar capacity; while scientific research was
restricted to the exploration of new principles,
and their application to military purposes was
prohibited.
Since the electrical equipment industry was
concentrated for the most part in Berlin,* it
suffered heavy war damage and then fell into
the hands of the USSR at the time of the oc-
cupation. The largest electronics plant, which
was located in the UK sector of Berlin, was
completely dismantled by the Soviet officials
during their occupation of the city before the
establishment of quadripartite control. So-
viet economic penetration of this field has been
greater than in any other, and Soviet AG's
now control 80 percent of the industry. The
USSR is steadily increasing the production of
plants manufacturing electronics equipment
and has been building up the huge Siemens
works at Arnstadt in Thuringia, where a large
number of German scientists and technicians
have been assembled for research on electronic
devices, particularly radio equipment for
guided missiles and television, transmitters
for remote control of aircraft. Estimated
production of electrical equipment for indus-
trial uses in the Soviet Zone is 67 percent of
what it was before the war, while in the bizonal
area (1948) it is 120 percent and in the French
Zone 61 percent.
(3) Iron and Steel.
In prewar Germany the two great coal fields
of the Ruhr and Saar in the west and Silesia
in the east represented by far the principal
German iron and steel producing areas. The
Ruhr district, situated at the focal point of
an excellent water transportation system,
easily accessible to the great minette ore fields
of Lorraine, and overlying enormous high-
grade coal deposits, has for years been one of
the greatest steel producing regions of the
world. In 1936 the Ruhr accounted for 70 per-
cent, the Saar for 12 percent, and all other
? The total value of all electrical equipment pro-
duced in 1936 was RM 1.5 billion, of which about
one-half was produced in Berlin and one-third in
the bizonal area.
areas including Silesia * for 18 percent of the
total German steel output. This regional con-
centration was matched by the formation of a
cartel of eight companies, controlling 95 per-
cent of Ruhr steel production. During the
war, the steel capacity available to Germany
was doubled by the absorption of plants and
mines in occupied countries.
German rearmament involved a tremendous
program of economic self-sufficiency, particu-
larly in steel. Since the German steel indus-
try was concentrated close to the frontiers
and thus vulnerable to air attack, the Reich in
1937 began mining domestic low-grade ores
for new steel plants erected in the center of
Germany. The Hermann Goering Works, a
government corporation, was formed to mine
ore and build and operate steel works and
coke ovens. Salzgitter ores (?30 percent Fe,
high phosphorous) because of the difficulty in
removing impurities, were uneconomical, but
the Nazi self-sufficiency plan called for a pro-
duction of 21 million tons, of which 15 million
were to be treated in the Hermann Goering
Works. This total was never attained, since
the acquisition of the Lorraine ore fields in
1940 relieved Germany of the strained iron ore
situation and gave a sufficient supply to meet
all war purposes-60 million tons of 30 per-
cent iron content from which 18 million tons
of pig iron were made. The Germans then
lost interest in the Salzgitter works, which at
present consist of eight blast furnaces with an
annual capacity of a million tons of pig, and
six Bessemer converters with an annual capac-
ity of nearly a million tons of steel.
At the close of the war, the Lorraine fields
reverted to France, which also acquired the
Saar, while Poland took Silesia. There was
thus left to Germany the vast steel productive
capacity in the Ruhr which had, however,
limited ore resources of poor quality. The
iron and steel industry had, moreover, come to
a complete standstill. Considerable war dam-
age had been sustained; the highly compli-
cated industrial structure was badly disor-
? Silesia, together with northern, eastern, and
central Germany-11.2 percent: Siegerland and
Hesse Nassau-2.2 percent: Saxony-3.1 percent:
Southern Germany and Bavarian Palatinate-1.9
percent. Total-18.6 percent.
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ganized, and transportation facilities in the
coal fields were totally disrupted. It was sev-
eral months before production could be re-
sumed. Meanwhile, agreement had been
reached at Potsdam on the destruction of Ger-
many's war potential, and steel was the yard-
stick against which German peacetime indus-
trial productivity was to be measured. A sub-
stantial amount was essential for a reasonable
recovery program, and under the March 1949
Prohibited and Restricted Industries Agree-
ment, steel production in the bizonal area was
set at 11.1 million tons.
Continued shortages of coal and electric
power were serious handicaps to increased
bizonal steel production, which in 1947 totalled
only 2,460,000 tons and 5,750,000 tons in 1948.
Transportation bottlenecks interfered with the
movement of coal and ore to the plants and
with the distribution of the semi-finished
product. Labor was also a problem because
of the absence of skilled workers, the general
inefficiency resulting from the lack of food,
and the large percentage of workers of ad-
vanced age. Substantial imports of Swedish
iron ore and increased coal allocations, how-
ever, raised the output of bizonal German steel
in the first half of 1949 to approximately 4.2
million tons; but further improvement is lim-
ited by the difficulties mentioned above. In
line with US-UK policy, management of the
industry in the Bizone is now very largely in
German hands, but many, steel works have
been dismantled or allocated for dismantling
on reparations account to the dismay of the
Germans who oppose further progress in this
direction because of the crippling effect at a
time when extraordinary efforts are neces-
sary to revive the entire German economy.
The French Zone is receiving imports of
steel on reparations account from the bizonal
area, and the French expect by 1951 to be
producing about three times as much steel in
their zone as the present 100,000-ton output
which will still be hardly sufficient for local
needs. Since German industries in the French
Zone are geared for export to France, steel
products have been given a low priority in con-
trast to other materials needed more urgently
by the French economy. Security considera-
tions have also influenced the French toward
11-16
keeping postwar German steel production at
the lowest possible level, and they were reluc-
tant to approve any advance in the Potsdam
total of 5.8 million tons for Germany as a
whole. It has been estimated that, on the
basis of a population of 70 million, Germany
will require 14 million tons of steel annually
to meet the minimum needs of its economy, a
figure which the French feel is at least 40
percent too high.
The most important deficit of Soviet Zone
industry has been iron and steel, and it has
held down replacements or renewals in all
industrial fields. Before the war the Soviet
Zone produced 2 million tons of steel annually;
present production is 250,000 tons a year, and
the minimum requirements are 1,200,000 tons.
Soviet removals of steel-producing facilities
have cut capacity to 27,000 tons a month. Im-
ports from the western zones were inadequate,
and these were absorbed to a great extent by
the Soviet AG's, leaving the socialized indus-
tries of the La,ender to operate on far less than
the minimum requisite stocks. Following the
blockade of Berlin, steel deliveries from the
Ruhr ceased altogether, except for a certain
amount of clandestine traffic, and the Soviet
Zone had to depend upon imports from the
USSR and the Satellites and work began on
reconstruction of dismantling plants. Al-
though Silesia, an important steel-producing
area, has passed under the control of Poland,
the USSR has had difficulty in obtaining steel
from that source because Soviet Zone goods
offered intexchange were unsatisfactory. The
USSR wants a larger share of the iron and
steel products of the Ruhr, and this need has
been responsible for much Soviet propaganda
in behalf of German political and economic
unification. It has also inspired Soviet de-
mands that German steel production be uti-
lized entirely for the rehabilitation of Ger-
many.
(4) Machinery Industry.
Under this heading are included all indus-
trial machinery, electrical machinery and ap-
paratus, prime movers, machine tools, con-
struction and mining machinery, automotive
equipment, locomotives, and ships. In pre-
war years Germany's contribution to the
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world's supply of machinery was of great im-
portance, in general paralleling that of Great
Britain. Excluding Great Britain, Ger-
many's production was greater than that of
all the rest of Europe. The machinery in-
dustry, probably more than any other branch
of German industry, made possible the supply
of military materiel for Germany. During
the war years production of machinery more
than doubled in quantity while industry as
a whole increased only about a third. Total
production of machinery during the year 1938
was about 5 million metric tons. Production
in the various zones was about as follows:
Berlin, 14 percent; US and UK Zones, 47 per-
cent; French Zone, 18 percent; and Soviet
Zone and areas under Soviet control, 21
percent.
Machinery production capacity in Ger-
many at the close of the war was far in ex-
cess of that of peacetime requirements and
therefore many plants were scheduled for dis-
mantling while production was limited by
quadripartite agreement. Production of var-
ious categories of machinery, which has been
increasing slowly since the cessation of hostil-
ities, is currently about 40 percent of 1936.
During prewar years German exports of
machinery varied between one-fourth and
one-seventh of the quantity produced, and
Germany supplied about 25 to 30 percent of
world imports. Imports into Germany were
comparatively very small. Categories of
which large tonnages were exported included
metal-working machine tools, textile and ag-
ricultural machinery, internal combustion
engines, locomotives, steam turbines, electri-
cal machinery, and apparatus. Germany
supplied about 70 percent of European re-
quirements of machine tools of which about
25 percent went to the USSR. Germany pro-
duced about 20 percent of the world supply
of electrical goods, and German exports ex-
ceeded those of either the United States or
the United Kingdom. In many other cate-
gories of machinery Germany was also the
principal supplier to the European markets.
(5) Rubber.
Prewar Germany had the largest rubber in-
dustry in continental Europe, importing
100,000 tons of natural rubber in 1937, out of
which was manufactured a wide range of
articles from hose and belting to rubber shoes
and automobile tires. It not only sufficed
for domestic needs but allowed for an export
of about 6,000 tons. The chief center of the
rubber industry was Hanover, now in the UK
Zone, which is manufacturing tires at about
75 percent of prewar levels and exporting a
small amount of processed rubber. Since no
synthetic rubber is produced in the US Zone,
tires have been imported from the US to keep
motor vehicles operating at about one-third
the prewar volume of traffic.
As late as 1937 the only German production
of synthetic rubber was in an experimental
plant at Leverkusen. Under the four-year
plan of that year, however, construction of
three large plants was commenced at Schko-
pau (near Leipzig), Hills, and Ludwigshafen.
Later a fourth plant at Auschwitz, Poland,
was built but only partly operated before the
end of the war. After further expansion, the
plant at Schkopau, with an annual capacity
of 72,000 metric tons, was the largest in Ger-
many. The ultimate planned capacity of the
four plants was 192,000 tons per year, or
about twice Germany's prewar consumption
of natural rubber. This large capacity was
necessitated by cessation of imports and ex-
haustion of stocks of crude rubber. The bulk
of the synthetic rubber output went to the
Wehrmacht for tires.
Although the Potsdam Agreement provided
for the elimination of all industrial facilities
for the manufacture of synthetic rubber, the
critical shortage of this material resulted in
the temporary retention of three buna plants,
which produced 45,000 tons of synthetic rub-
ber in 1946. The Schkopau plant, now in the
Soviet Zone, was operating in 1947 at a rate
of about 42,000 tons per year, but partial dis-
mantling reduced the capacity to 17,000 tons
in 1948 and 27,000 tons (planned) for 1949.
The only other German plant in operation
was the one at Hills in the British Zone, with
a capacity of 10,000 tons per year. The lat-
ter ceased production in early 1948. The
French closed the huge I. G. Farben buna
factory at Ludwigshafen and made it avail-
able for reparations because the coal neces-
sary to produce one ton of buna will produce
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five tons of nitrogenous fertilizers having live
times the value. Except for a few elementary
processes, manufacture of synthetic rubber
was placed on the prohibited list in the 31
March 1949 agreement.
(6) Chemicals.
Germany possesses large natural reserves
of most of the basic raw materials needed to
produce the multitude of chemical products
essential to a modern industrial economy.
Coal, limestone, salt, potash, and wood are
abundant within the country, but most of
the sulphur and pyrites has to be imported.
Before the war Germany was the largest
producer and second largest exporter of
chemical nitrogen. The prewar output of
about 700,000 tons per year was nearly one-
third of the total world production, and of
that quantity nearly 100,000 tons were ex-
ported. Present policy is to limit German
production of nitrogen to its own needs, but
because of coal shortages, war damage, and
dismantled plants, the country is actually on
an import basis.
Three-fourths of Germany's prewar nitro-
gen was produced by the Haber process in the
form of synthetic ammonia. Since this is
basic to the manufacture of high explosives,
the restoration of German nitrogen manufac-
turing facilities has been retarded by Allied
concern for the high war potential of the in-
dustry. Moreover, quadripartite policy with
regard to Germany has been to limit its nitro-
gen production to its own consumption, thus
further delaying reconstruction, since 80 per-
cent of the nitrogen was produced in ten
plants, all of which sustained severe war
damage.
Eastern Germany has comparatively few
fertilizer plants. Assuming full operation of
these, annual nitrogen production in the So-
viet Zone would be about 100,000 tons. Pro-
duction capacity for phosphate fertilizers is
30,000 tons P205 (phosphoric acid) yearly,
but actual production in 1946 was only 9,000
tons. Most Soviet Zone phosphate factories
are not working because of the lack of raw
phosphates. Imports are possible under bar-
ter trade agreements; even so, it would not
suffice to meet the annual requirements of
50,000 tons P205. Furthermore, the Soviets
have taken considerable amounts of nitrogen
and phosphate as reparations, leaving most
of the fertilizer needs of their zone to be met
from indigenous potash deposits.
Germany was the largest producer and ex-
porter of dyes before the war. Prewar (1936)
production of dyes and organic chemicals
amounted to RM 499 million. The volume of
exports averaged about 33,000 tons per year
and ranged in value from RM 200 million to
RM 336 million. The present limitation of
RM 58 million on exports of dyes is not being
attained owing to dislocations of the formerly
highly integrated industry, shortages of raw
materials, and lack of overseas sales organiza-
tions and credits.
The former large production and exports of
pharmaceuticals, plastics, and synthetic or-
ganic chemicals has also almost disappeared
because the erection of zonal barriers inter-
rupted production processes in this formerly
highly integrated industry, and, in addition,
because of limitations on production imposed
by the occupation authorities, 40 percent in
the case of chemical raw materials, 80 per-
cent in dyes and pharmaceuticals, and 70
percent in other chemical products. Export
targets in chemicals are unlikely to be
reached before 1949.
Possessing only small resources in petro-
leum, Germany built up a huge calcium car-
bide industry to provide acetylene as an alter-
nate material for its synthetic rubber and
plastics industries, and for certain other syn-
thetic organic chemicals, all of which would
be based on petroleum were it available in
sufficient quantity, as well as to provide acety-
lene for its metal working industries. Of
world production amounting to over 1,800,000
tons of calcium carbide in 1939, Germany pro-
duced about 1,000,000 tons.. Dismantling of
plants and shortages of coal and electricity
had reduced the output in 1946 to 30,000 tons
in the Soviet Zone and 304,000 tons in west-
ern Germany. By 1949 annual production
had recovered in the Soviet Zone to 381,000
tons and in the Bizone to 385,000 tons.
Before the war, soda ash, caustic soda, sul-
phuric acid, and chlorine were also manufac-
tured in quantities sufficient not only for do-
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mestic needs but for a substantial export
trade. Chemicals accounted for 7 percent of
the total value of all products manufactured
in Germany in 1936, or RM 2.2 billion, of
which nearly 30 percent was exported. The
industry was dominated by I. G. Farben, the
largest chemical firm in the world, which pro-
duced 100 percent of Germany's wartime re-
quirements of synthetic rubber, 98 percent of
its dyestuff s, 75 percent of its chemical nitro-
gen, 61 percent of its calcium carbide, 55 per-
cent of its pharmaceuticals, and 46 percent
of its chlorine, as well as a great variety of
other chemical products such as plastics and
X-ray film. This vast concern ceased to exist
after the surrender, and a large number of
its plants were immediately dismantled or
allocated for reparations. Although revival
of the dyestuff industry has been marked
since currency reform, production of dye-
stuffs in 1949 was only 25 percent of that in
1936. Production in 1949-50 is expected to
rise from 11,500 tons to 25,000 tons, with ex-
ports increasing to 7,000 tons, of which about
half will be shipped to the Soviet Zone.
In the chemical field, coal is the most im-
portant raw material, and the small alloca-
tion of coal to the German chemical industry
was the main reason for its low production
rate until late in 1948. There also have been
difficulties in obtaining imported raw mate-
rials such as sulfur and pyrites, borax, iodine,
camphor, vegetable drugs, and medicinal
herbs. Furthermore, the various I. G. Far-
ben plants,* although located in . different
parts of Germany, were nevertheless highly
integrated, and consequently the necessary
interchange of semi-finished products and in-
termediates between the Soviet Zone and the
western zones, and vice versa, now so difficult,
further complicated matters. Dismantling of
plants, as well as decartelization and denazi-
fication procedures connected with the disso-
lution of I. G. Farben, have also retarded
recovery in the chemical industry, which was
? Distribution of I. G. Farben properties is as fol-
lows: Soviet Zone 58.5 percent, Bizonia 21.5 percent,
French Zone 20 percent. In the US Zone '77 of the
199 I. G. Farben installations have already been
liquidated; in the Soviet Zone 86 out of 201, although
all important plants are now Soviet-owned.
one of the most complex in Germany. Re-
covery in the US Zone, where 20 percent of
the plants are located, was retarded by a total
dependence upon the other zones for raw
materials such as coal, pyrites, and synthetic
ammonia. It was not until well into 1946
that the industry could be reactivated to any
great extent. Fuel and power shortages were
especially acute, the severe winter of 1946-47
causing a temporary shutdown of the entire
chemical industry. In 1947 Bizone produc-
tion was only 45 percent of the 1936 level, but
with more coal and power available in 1948
it increased to 70 percent and in the first
quarter of 1949 to 78 percent.
The greatest concentration of chemical
plants occurs in the UK Zone, which has 35
percent of the total, but production in 1947
was only 40 percent of prewar levels. Chemi-
cal plants in the Soviet Zone, which has 28
percent of the total, suffered severely from
war damage and then from sporadic Soviet
dismantlings, so that chemical output has
lagged considerably behind postwar objec-
tives. The Soviet Zone industry has been
further handicapped by the loss of raw mate-
rials attributable to the counterblockade of
Berlin. Thousands of German chemists and
technicians have also been taken to Russia
to work on scientific projects and on erection
and operation of plants for the USSR. The
chemical industry in the French Zone, with
11 percent of the plants, has shown irregular
production trends.
(7) Textiles.
Before the war (1937) Germany's consump-
tion of all kinds of fibers was estimated at
969,000 tons, of which new and reclaimed do-
mestic fibers accounted for 29 percent, im-
ported raw cotton for 35 percent, and imports
of wool, jute, flax, and hemp for the rest. Al-
though the textile industry for the most part
was not extensively damaged, recovery has
been much slower than in other industrial
fields because of the excessive dependence
upon the import of raw materials such as cot-
ton and wool, and the difficulty of obtaining
chemicals for the manufacture of artificial
fibers of the rayon type. The Level of Indus-
try Plan allowed for the processing of 665,000
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tons of raw material (185,000 tons of artificial
fiber and 480,000 tons of natural fiber), but
production in 1948 had not reached one-half
of this figure, except in synthetic fibers, which
is now 50 percent above prewar levels. In or-
der to revive the cotton spinning industry in
the US Zone and to furnish employment for
thousands of idle workers, the US Government
has imported large quantities of raw cotton
under the disease and unrest program.* Of
the 152,000 bales of US cotton shipped to Ger-
many in 1946, more than one-half was utilized
for the processing of textiles for re-export to
provide foreign exchange for payment of the
cotton. The British have also imported raw
wool and Egyptian and East Indian cotton
into their zone under a similar program, and
hemp has been obtained from Italy for the
manufacture of rope and binder twine.
The German textile industry was centered
in what is now the Soviet Zone. Because
? most of the spinning and weaving mills are
located in the Soviet Zone, the west German
textile industry is faced with a difficult equip-
ment problem and is dependent upon im-
ported machinery to effect an appreciable im-
provement over present production levels.
While Soviet Zone machinery is sufficient to
supply the needs of the population, lack of
raw materials has forced the industry to run
considerably below normal capacity. Soviet
Zone raw cotton imports from .the USSR
dropped from 22,000 tons in 1947 to 7,000 tons
in 1948, and only a slight increase in textile
output was possible, mostly in artificial fibers.
Actual production in 1949 is not expected to
exceed 4 kilograms of material per head. Ar-
tificial fiber production in the Soviet Zone in
1948 was 40,000 tons, and the Two Year Plan
calls for 90,000 tons by 1950, to achieve which
will necessitate the building of several cellu-
lose factories.
Under ECA it is planned to raise the con-
sumption of textile raw materials in western
Germany. In 1948 it amounted to 271,000
tons, or about 6.5 kg per head, and in 1949 it
is expected to reach 409,000 tons, or 9.7 kg per
head. Cost of these imports will rise from
$86 million to $140 million. Artificial fiber
* See page 11-30-31 on International Trade.
production in 1948 was approximately 100,000
tons. At present, the Bizone has 3.9 million
running spindles, the French Zone 0.7 million,
and the Soviet Zone about 2 million. In all
zones obsolescence of equipment is a great
handicap to further progress in the textile
industry.
(8) Other Industries.
It would be hard to find an industry in Ger-
many today which is not handicapped by
shortages of material. Wood-working has
been unable to procure the right type of lum-
ber, glue, metal findings, or finishing mate-
rials. Furniture supplied for German civilian
use was generally unfinished because of the
shortage of shellac. Although Germany was
a large manufacturer of leather goods, it im-
ported a large part of the hides and skins pre-
pared in tanneries. Leather output in 1948
was only 49 percent of prewar production, but
the import of 63,000 tons of hides under the
ECA program, in addition to the 20,000 tons
from the domestic slaughter of cattle, permit-
ted the manufacture of 2.7 million pairs of
shoes monthly, which is still far short of rea-
sonable requirements. The scarcity of pulp-
wood has handicapped the paper industry and
restricted the publication of books, magazines,
newspapers, and writing material. Ceramics
has always been an important German indus-
try, and an abundance of fine clays is avail-
able, but production until recently has been
limited by the relatively large amount of coal
required per unit of finished ware. The opti-
cal industry has been decentralized, and re-
covery has been retarded by the difficulties
in the way of interzonal trade. Cameras
are manufactured in the US Zone, but optical
glass, lenses, and shutters must be obtained
from the French and Soviet Zones. There is
a ready international market for German op-
tical products, and a percentage of cameras is
set aside to pay for Germany's large import
bill.
The need for building material was acute
because of war damage. A system of licens-
ing and control was instituted in order to as-
sure an equable distribution of such materials
and to prevent their utilization for non-essen-
tial purposes. Cement production was limited
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o
to 8 million tons annually, but the rate of pro-
duction was insufficient to reach this level.
Glass and lumber were difficult to obtain and
the production of bricks was not more than 10
percent of prewar capacity. Consequently,
the production of building materials did not
reach one-third of the prewar output. Fol-
lowing currency reform, however, employment
increased in all the building material produc-
ing industries, and in the building industry it-
self. In October 1948, brick production was
five times the average production in 1947, and
cement production was 93 percent of the aver-
age production in 1936. Increased building
costs and lack of investment capital have
hampered the reconstruction program, and
housing conditions remain bad. Except for
makeshift repairs, progress is retarded by the
factors limiting German economic recovery in
general.
d. Financial.
(1) Banking.
During the period when Germany was pre-
paring for and prosecuting the last war, the
German private banking system through pur-
chase of government obligations supplied the
bulk of credit needs of government agencies
and financed construction in the war indus-
tries. The large German banks financed the
INDEX OF INDUSTRIAL PRODUCTION BY MAJOR INDUSTRY GROUPS
BIZONAL AREA
1936 = 100
Period
All Indus-
try Groups
"A
o
u
Building
Materials
to
nil
c.)
...;-.
, :)
.o
0
Paper and
Pulp
0)
5
cd
a)
a
Textiles
to
(12
Electricity
and Gas
Iron and
Steel
Mining (ex-
cluding Coal)
1947
1st
39
61
42
44
30 37
29
94
86
24
71
Half
1947
2nd
43
72
41
51
33 31
32
83
99
29
86
Half
1948
1st
48
77
45
59
37 42
44
66
103
32
99
Qtr.
1948
2nd
51
74
59
54
41 36
41
53
110
30
93
Qtr.
1948
3rd
66
82
N. A.
66
60 56
59
60
115
44
111
Qtr.
1948
4th
76
86
N. A.
75
67 65
67
72
135
55
114
Qtr.
1949
1st
83
90
N.A.
83
81 71
81
81
142
60
121
Qtr.
o
1949
2nd
85
88
N. A.
85
84 73
88
82
131
60
124
Qtr.
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German cartels, syndicates, and trusts, and
they also exercised, through interlocking di-
rectorates, considerable influence over the
greater part of the German monopolistic
groupings such as I. G. Farbenindustrie, Sie-
mens & Halske, Krupp, Rhein-Metall-Borsig,
and others. The Third Reich in turn exer-
cised extremely wide powers in supervision of
banking, concerning itself especially with the
dismissal and appointment of the higher
banking officials.
In its broad outlines this institutional con-
trol system had been established well before
the advent of the Third Reich, but the degree
of control over industry and the concentration
of this control in the large Berlin banks
(Grossbanken) were accentuated during the
1929-1939 period. Among some 650 commer-
cial banks in Germany, the six Grossbanken
(Deutsche Bank, Dresdner Bank, Commerz
Bank, Berliner Handelgesellschaft, Reichs-
kreditgesellschaft, and Bank der Deutschen
Arbeit) accounted for 55 percent of total as-
sets and 59 percent of total deposits in 1938.
The Reichsbank, with a network of over 500
branches, served as the main bank of note-
issue and as the fiscal agent for the Reich.
At the beginning of the occupation existing
economic controls and financial machinery in
Germany was preserved and utilized, as far as
was consistent with occupation policies. This
included the maintenance by local authorities
of such anti-inflationary measures and other
economic controls as had been established by
German law, and, in the western zones, the
continued functioning of most of the banks.
Branch banks were permitted to retain a re-
porting and policy relationship with main of-
fices in their own Laender, but this relation-
ship was not allowed to cross Land or zonal
boundaries. The Reichsbank discontinued its
former function of issuing bank notes and as-
sumed the functions of a commercial bank.
In addition, Military Government in the west-
ern zones employed the Reichsbank as its fis-
cal agent, as a supervisor of certain bank ac-
tivities in each zone, and as a medium for
transmitting and administering certain Mili-
tary Government financial laws.
At Potsdam in 1945 the Occupying Powers
agreed to eliminate excessive concentration of
power in the banking systems and to estab-
lish a uniform policy with regard to currency
and banking. Implementation of the agree-
ment on currency and banking, however, was
delayed by lack of agreement on other essen-
tial matters. The Western Powers, therefore,
followed an interim policy of liquidating the
central boards of German banking monopolies
and decentralizing them to the Land level.
The USSR regarded these steps as partial
measures and regarded the desire of the US,
UK, and France to couple the elimination of
excessive concentration of economic power in
banking with the creation of central banking
machinery as an attempt to delay a decision
on German monopolies, in order to preserve
them. Inability to reach agreement on such
fundamental issues hampered the orderly ex-
tension of credit, contributed to inflation, and
retarded economic recovery.
In the British Zone of Occupation the bank-
ing system was, with few exceptions, permit-
ted to remain substantially unchanged pend-
ing quadripartite agreement on the future
system to be adopted for the whole of Ger-
many. Decentralization of banking without
some form of centralized control was not, in
the British view, a satisfactory solution of the
problem and was not in accordance with ac-
cepted principles of economic unity. The
USSR, on the other hand, closed all German
banks in existence at the time of the capitula-
tion, seized all assets, and stopped payment on
old obligations of the German credit system.
The USSR then established provincial, city,
and regional banks of Laender and Provinzen
Governments, employing new personnel and
thereby solving the problem of denazification.
In order to restore the economy, the newly es-
tablished banks granted long-term credits for
the revival of industry and the needs of agri-
culture. All stock exchange transactions are
forbidden Soviet Zone banks, which are also
not allowed to deal in securities issued before
the capitulation of Germany.
In the French Zone of Occupation, German
banks were authorized to continue function-
ing with the exception of the branches of the
Bank der Deutschen Arbeit which had close
affiliations with the Nazi Party. Branches of
banks whose main offices were situated out-
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0
side the French Zone had to sever their con-
nections with the main offices. The Reichs-
bank established two offices, one in the North
and one in the South, to supervise the Reichs-
bank's branches; and a supervisory board for
the French Zone was set up at Speyer. Sub-
sequently the French authorities cooperated
with the German authorities in the implemen-
tation of measures which should result in a
situation similar to that which exists in the
US Zone: i.e., the liquidation of the Reichs-
bank, the creation of three Laender Central
Banks, and the liquidation of the former
branch bank system, which will be replaced
by banks with branches exclusively in the
Land in which their main office is located.
In November 1945 US Military Government
proposed to German Land finance officials the
establishment of a basic Land central banking
organization which could be coordinated on a
zonal basis and later integrated with any sub-
sequent banking plan for Germany as a whole.
The Germans were reluctant to cooperate in
such a decentralization scheme, and little ac-
tion was taken on the US proposals. Finally,
in December 1946, legislation acceptable to US
Military Government was enacted and became
effective in all three Laender on 1 January
1947. When Bremen was established as the
fourth Land in the US Zone on 21 January
1947, the Reichsbank district lines were ad-
justed to follow the political boundaries, and
the new system was extended to include
Bremen.
This law created a State Central Bank in
each Land of the US Zone to take the place of
former Reichsbank branches, and to function
as bankers' banks similar to the US Federal
Reserve Banks. In the absence of a uniform
quadripartite agreement on currency and debt
problems for Germany as a whole, the State
Central Banks could not be granted the right
of issue. For the same reason it was not pos-
sible to liquidate. the Reichsbank entirely.
The new State Central Banks were assigned
the Reichsbank's current assets as well as the
greater part of its liabilities. The Military
Government appointed a Trustee in each
Land to administer the Reichsbank's remain-
ing assets and liabilities, the latter consisting
mainly of accounts which had been blocked
for political reasons by the Military Govern-
ment. To facilitate an eventual liquidation
of the Reichsbank on a zonal basis, a General
Trustee for the Reichsbank was also appointed
for the entire US Zone.
The great commercial banks also resisted
Military Government efforts to decentralize
their economic power. Therefore, Military
Government Law No. 57 was promulgated on
6 May 1947. It provided for the appointment
by each Land government of an independent
and disinterested custodian for the Deutsche
Bank, Dresdner Bank, and Commerz Bank, to
manage and administer the property of these
banks ' within the respective states. The
names of the banks were changed, and the in-
fluence of present officials and shareholders on
the management was eliminated. Adminis-
trative regulations cut off the "giro system"
(a system for the inter-bank transfer of
funds) of the banks beyond state boundaries
and forced all clearings of more than
RM 100,000 to be carried out through the
Land Central Bank system. Contrary to the
fears of German officials, the law did not
weaken public confidence in the banking sys-
tem. There was no run on the banks, no in-
crease in withdrawals, and no attempt to
transfer funds to other zones.
The financial reforms imposed by the occu-
pying powers on the western zones in June
1948 completely altered certain aspects of the
banking situation in those areas.
The cancellation of the Reich debt and the
conversion of other debts in June 1948 by the
western Allies reduced deposit liabilities by 90
percent but wiped out entirely 80 to 90 per-
cent of the assets of the commercial and sav-
ings banks. The structure of bank assets was
then rebuilt. The State Central Banks cred-
ited the banks with amounts equal to 15 per-
cent of their total (converted) deposit and
savings accounts. The banks also were allot-
ted "Ausgleichsforderungen" (claims against
the State bearing 3 percent interest) to the
extent that remaining assets proved insuffi-
cient to cover their liabilities including "ap-
propriate capital" to be determined by the
Bank Control Authority.
The banking system in the western zones
was unified in June 1948 by the creation of
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the Bank of German States, which acts as a
depository of State Central Banks' required re-
serves. After the repudiation of Reich obliga-
tions, State Central Banks were credited with
an amount equal to 30 percent of their (con-
verted) deposit liabilities and their holdings of
small notes and coins.
Banks in all three western zones were
brought under reserve requirements similar
to those already prevailing in the US Zone.
Against current accounts State Central Banks
are required to keep reserves of 12 to 30 per-
cent with the Bank of German States, while
for other banks (including Post Cheque Of-
fices and Postal Savings Banks) reserve re-
quirements are 8 to 20 percent. Reserve re-
quirements against deposits and savings were
established at 4 to 10 percent.
Until the June reforms, the banking struc-
ture in Berlin under occupation resembled
that of the Soviet Zone in that all pre-occupa-
tion institutions (excepting the Volksbank, an
urban credit cooperative) were closed and all
pre-occupation bank accounts blocked. Only
four banking institutions operated in the So-
viet Sector, two of them municipally owned.
These two, the Berliner Stadt Kontor and the
Sparkasse der Stadt Berlin, were created after
the Soviet occupation of the city and before
quadripartite government was established.
Only the Stadt Kontor was authorized to
make loans at the beginning of the occupa-
tion, and these were limited to short-term
credits. More recently this bank has been
authorized to extend both municipal and pri-
vate long-term credits, but it is not permitted
to make loans to other banks. All interzonal
cashless transfers in the Soviet Zone and Ber-
lin are cleared through the Stadt Kontor, but
only transfers in payment for goods may be
made with the Soviet Zone and Berlin. Of
the two other financial institutions, the Post-
scheckamt provides only postal giro or clear-
ing services, while the Volksbank, which was
authorized to reopen in December 1945, sup-
plies the normal services of an urban coopera-
tive system.
In the Soviet sector following currency re-
form the Deutsche Emissions- und Giro-bank
was converted on 20 July 1948 into the
Deutsche Notenbank (German Currency
Bank), which was given the right to issue cur-
rency and to perform commercial banking
functions. All bank deposits, which had been
blocked up to 60 percent after currency re-
forms were transferred to the Notenbank to
provide it with loans fuhds and to insure cen-
tralized control over all commercial banking
in the Zone. The chief customers of the No-
tenbank are the Soviet Zone central adminis-
trative organizations, the Soviet corporations
(AG's), and the Soviet commercial companies.
An additional function of the Notenbank is
the financing of reparations from current pro-
duction and other exclusively Soviet interests
in eastern Germany. Other firms must ob-
tain operating funds either from their Soviet
enterprises or from cooperatives. The Invest-
ment Bank under the Control of the DWK re-
mains the main agency for granting long-
term credit, and as such exercises a powerful
influence in shaping the economic develop-
ment of the zone in conformity with Commu-
nist purposes. The Garantie und Kreditbank
is the dominant institution controlling foreign
trade and foreign exchange transactions in
the Soviet Zone.
(2) Currency.
The printing and issue of Reichsmark cur-
rency which ceased during the last weeks of
the war was not resumed. At the end of the
war there were about 60 billion Reichsmarks
and about 10 billion (some estimates run as
high as 20 billion) Occupation Marks, com-
pared to RM 10.5 billion in 1938, in circula-
tion in Germany. Most of the Occupation
Marks represented an excess issued by the
USSR early in 1945 under an agreement
among the Occupying Powers to use a single
form of occupation currency, the Allied Mili-
tary Mark. This large supply of money, cou-
pled with a low level of production of goods,
resulted in an increasing tendency among the
German population to refuse the Reichsmark
in business transactions and the payment of
debt and to demand other forms of compensa-
tion. By 1946 the Reichsmark would pur-
chase rationed goods, but little else.
Since currency reform was basic to the so-
lution of Germany's economic ills, the occu-
pying powers sought agreement on concerted
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measures for all four zones. The Allied Con-
trol Council agreed on the issuance of a single
currency, for the whole of Germany, to be
known as the Deutsche Mark. Adoption of
the plan on a quadripartite basis was blocked,
however, by the failure of the US and Soviet
delegates in ACC to agree on a site for print-
ing the new currency. Whereas the US in-
sisted on having it printed in Berlin under
close quadripartite supervision, the USSR
wanted part of the total amount printed at
Leipzig, an arrangement which the US be-
lieved would result in further unregulated is-
suances of currency detrimental not only to
the German economy but to the US financial
position in Germany.
The apparent unwillingness of Soviet au-
thorities to cooperate in reviving the German
economy and the pressing necessity of such a
revival in the western zones to the success of
the Marshall Plan finally impelled the western
Allies to break the currency reform impasse.
The western Military Government authorities,
therefore, proceeded jointly in the three west-
ern zones* with a currency conversion and re-
lated financial reforms by three laws promul-
gated within one week, that ending 26 June
1948.
The first law introduced a new Deutsche
Mark and provided for the conversion of the
old coins and currency?Reichsmarks, Ron-
tenmarks, and Allied Military Government
notes?into "Deutsche Marks" at the rate of
10 RM to 1 DM. The second law established
the Bank of the German States as the Bank
of Issue and introduced reserve requirements
for all banks. The third, or Conversion Law,
announced the all-important conversion rate
of 10 to 1 for bank accounts, private liabili-
ties of all kinds, insurance policies, and the
like. A comprehensive tax reform was also
introduced. The thorny question of the dis-
position of obligations of the old Reich was
settled by voiding them. Fiscal and bank-
ing features of the reforms are discussed un-
der appropriate headings elsewhere.
* Reforms instituted in the western sectors of Ber-
lin are treated above: see page 1-16-17. Discussion
of the currency reform in the Soviet Zone is found
on page 11-26.
Other important features of the currency
reform may be summarized as follows. All
old currency was turned in. Each inhabit-
ant of the western zones was allowed to ex-
change 60 RM for 60 DM, and business en-
terprises were granted a special allowance of
60 DM for each employee in order to provide
cash for immediate needs. (Subsequently
bank accounts were debited 540 RM, the dif-
ference between the 60 RM surrendered and
the 600 RM required for exchange of 60 DM.)
Reichsmarks surrendered in excess of 60 RM
were credited to bank accounts. These ac-
counts (which included both surrendered
cash and old credit balances on deposit) were
divided equally into two types?"Free" and
"Fixed" accounts. Their RM value was con-
verted to DM value at a rate of 10 to 1. The
"Free" accounts were made immediately
available for withdrawals; the "Fixed" ac-
counts were blocked until October 1948. At
that time it was decided (over the protests
of German financial authorities) to unblock
20 percent of each of the "Fixed" accounts,
to destroy 70 percent, and temporarily to con-
tinue blocking the remaining 10 percent.
Salaries and wages were made payable in
DM on the old RM scale (and wage increases
up to 15 percent were authorized). This
stipulation put businesses under pressure to
sell hoarded stocks of goods in order to main-
tain a liquid position. The bank accounts
of public authorities were rendered void; pub-
lic expenditures were to be met out of cur-
rent receipts. Prices of a wide range of con-
sumer goods were decontrolled, with the ex-
ception of most foodstuffs and raw materials.
Clothes rationing was also reintroduced.
The imposition of these reforms, was dam-
aging to certain laboring and business groups.
The reforms were, however, a necessary prel-
ude to recovery as soon became manifest in
the disappearance of black markets, the re-
appearance of goods in shops and markets, a
decline in unemployment, and a sharp in-
crease in production. It was plain that the
western Allies had planned for an eventual
level of Deutsche Mark prices much higher
than the prewar Reichsmark price level,
since the present note issue limit is equivalent
to DM 220 per capita against RM 86 per
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capita in 1933. The increase would seem to
be justified, however, both because world
prices have increased considerably in the in-
tervening period and because the German
people apparently want to hold a large pro-
portion of their assets in liquid form. West-
ern Allies were concerned, however, by the
possibility that the October release of 20 per-
cent of the blocked accounts would set off a
wave of price increases, and further the dis-
parity between wages and prices. Should
such a development be attended by renewed
hoarding and labor disturbance, the conse-
quent decline in production would tend to
cancel the economic improvement brought
about by the June 1948 reforms.
Soviet authorities were quick to counter
the conversion in the western zones with a
currency reform applicable to the Soviet
Zone, including the Soviet Sector of Berlin.
The conversion in the Soviet Zone was re-
markable in that although low income groups
in the zone received somewhat more favor-
able treatment by its terms than these groups
received in the western zones, publicly owned
enterprises and Soviet owned corporations
were excluded from conversion requirements.
Thus the reduction in the volume of cur-
rency was not so drastic as in the western
zones.
The first 70 RM turned in by an individual
were converted at a 1 to 1 ratio, without being
debited to bank accounts. A ratio of 10 to 1
was established for the conversion of the next
RM 5,000. For sums in excess of RM 5,000
no conversion was permitted individuals until
investigation proved that the sums had been
lawfully acquired. Cash holdings of firms,
organizations, and institutions were ex-
changed at 10 to 1. Current accounts were
converted at 10 to 1 for the first RM 5,000;
amounts in excess of RM 5,000 were subject
to proof of legitimacy. A 1 to 1 conversion
rate was allowed for funds of public authori-
ties and accounts of publicly-owned enter-
prises. For funds of the State-owned insur-
ance corporations the conversion rate was
5 to 1, and of the social insurance institutes
was 2 to 1. Earnings of war profiteers,
profits derived from speculations, and ac-
counts of war and Fascist criminals were con-
fiscated.
Savings deposits received special treatment.
The conversion rate was 1 to 1 for deposits
up to RM 100; 5 to 1 up to RM 1,000; and
10 to 1 from RM 1,001 to 5,000. Accounts in
excess of 5,000 were subject to proof of
legitimacy.
Debentures were issued in place of current
reserves and savings deposits established be-
fore 9 May 1945 at a conversion rate of 10 to 1,
provided that balances in excess of RM 3,000
could be proved legitimate.
No change was authorized in wages, sal-
aries, and taxes. The reform did not affect
internal and foreign public debts, and the lia-
bilities of closed banks were also unaffected.
The differences in the financial reforms of
the western zones and of the Soviet Zone have
brought about a difficult financial situation
in Berlin, where dual currency and banking
systems exist as well as separate budgets for
the German municipal governments of the
eastern and western sectors. The failure (to
date) of negotiators of the Western Powers
and the USSR to reach agreement on finan-
cial matters in Berlin, however, is sympto-
matic of the continuing basic disagreement
on the control of Germany and Germany's
future role in Europe.
(3) Government Finance.
In the sphere of financial policy in Ger-
many the Allied Control Authority was faced
with the problem of reorganizing the reve-
nues and expenditures of German budgets to
insure not only the reconstruction of a peace-
ful economy but also the fulfillment of repa-
ration claims, occupation costs, and other
obligations imposed on Germany under the
terms of the surrender.
During the war and the years immediately
preceding it, the German budgets were ad-
justed to satisfy the military program of the
Reich. Expenditures for the period of the
war were approximately 650 billion Reichs-
marks, of which 600 billion were devoted di-
rectly or indirectly to war expenses. Of this
expenditure not more than one-third was cov-
ered by tax and other ordinary forms of reve-
nue. The greater part of the remainder was
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financed by an issue of public debt of approxi-
mately 400 billion Reichsmarks, equal to 31
times the indebtedness at the beginning of
the Nazi regime and five times the prewar na-
tional income of Germany. Of this issue only
a small part was sold to the public, the bulk
being distributed to various credit institu-
tions. The Reich indebtedness was further
expanded as a result of war damages and
compensation for other war losses until the
total Reich debt was around RM 900 billion.
At the end of the war there was little pros-
pect of this debt being serviced. During the
first three years of occupation all national
debt service charges were omitted from gov-
ernment budgets. Upon repudiation of such
debts in June 1948 all service charges on
Reich debt were eliminated in western zonal
governments for the future.
Following the surrender of Germany in
May 1945, regular governmental expenditures
dropped sharply. As has been stated, pay-
ments of interest on the Reich public debt
were suspended, and those on the debt of lower
governmental units were generally discon-
tinued. Outlays for war production, as well
as for maintenance of the Military Services,
were terminated; payments on account of war
damage claims, pensions, relief grants, and
other war expenditures were either eliminated
or severely restricted by Military Government.
Officials and employees of the former Reich
who were not required for essential functions
taken over by the Laender were removed from
the payrolls; and certain functions, such as
the political police, were eliminated. On the
other hand, large extraordinary governmental
expenditures occurred. They included occu-
pation costs, care of displaced persons, and
general relief. Total extraordinary expendi-
tures (occupation costs, expenditures for dis-
placed persons, refugees and expellees, prison-
ers of war, interment camps, port costs in
Bremen, contribution to Land Central Banks,
and the like) have constituted over a third of
the total expenditures of Laender govern-
ments.
In order to provide the funds required for
the fiscal operations of the Laender govern-
ments, a reorganization of the German tax
system was necessary. Formerly, the prin-
cipal revenue producing taxes were levied by
the Reich but were collected by the States, the
Reich returning a share to the States, which in
turn passed on a proportion to the Communes.
Yearly budgets were approved by Laender
governments but had to be submitted to the
Reich Finance Minister whose final approval
was essential in the case of long-term loans,
utilization of reserves, and the acquisition,
sale or mortgage of estate property of the prov-
ince. Thus the Reich tax administration was
highly decentralized for operating purposes
but closely controlled as to policy by central
offices. After the capitulation, the former
Reich financial mechanism ceased to function,
and the Reich budget ceased to exist.
One of the first tasks confronting the oc-
cupying forces, therefore, was to devise interim
expedients for utilizing the decentralized rem-
nants of the former administrative machinery.
At an early date, the tax powers of the former
Reich were vested in the individual Laender,
so that existing tax offices continued to col-
lect Reich taxes under the jurisdiction of sepa-
rate Land Ministries of Fnance. These reve-
nues were made available for local as well as
Land purposes. At the same time all special
tax favors granted the Nazis and their follow-
ers in existing legislation were removed, and
discriminatory taxes against Jews and other
racial minorities abolished.
The low level of production, trade, and in-
come of the immediate postwar period resulted
in a precipitant drop of 60 percent in Land tax
collections for the fiscal year 1945 in the US
Zone. At the same time, in spite of the sharp
reduction in incomes, inflationary pressures
created by the years of deficit war-financing
remained as a threat to the already shattered
economy. To reduce the dangers of inflation,
as well as to provide larger government reve-
nues to meet rising costs, the ACC in February,
May, and June 1946 revised and drastically in-
creased the rate schedules for most types of
taxes.
As a result of these measures, German tax
collections in all zones, which averaged RM
10.1 billion annually in the years 1933-1937,
amounted to RM 21 billion during the fiscal
year 1946-47. Compared to RM 1.8 billion col-
lected in 1945 in the four Laender of the US
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Zone, collection in 1946-47 amounted to RM
4.6 billion, of which 78 percent was income,
property and transportation taxes, and 22 per-
cent customs and excises. Tax collections in
the combined US-UK Zones for 1946-47 were
RM 10.8 billion as against RM 5.7 billion for
the previous year, an increase of 90 percent.
Despite heavy expenditures requirements in-
cluding substantial occupation costs, and in
contrast with virtually all neighboring coun-
tries, budgets of all western zones were brought
approximately into balance by 1947. This
feat was accomplished only by omission of all
national debt-service charges from the budg-
ets. The repudiation of the Reich debt in
June 1948 relieved western zonal governments
of all such charges in the future. The chief
inflationary pressure prior to currency reform
came from the excessive volume of currency
and deposits created during the war and not
from the current spending of German govern-
ments. While tax increases have been heavy,
particularly in view of low production, only
limited recognition was given in German cir-
cles to the fact that German taxes during the
war were 30 percent lower than those of most
countries, and that only the incidence of these
burdens and their allocation among social and
economic groups can be altered.
The tax situation of the Laender in the west-
ern zones was drastically altered by the finan-
cial reforms of June 1948. Under the new sys-
tem, income and wage taxes were reduced
about one-half, and the tobacco tax was re-
duced about one-third. Inheritance and cor-
poration taxes were altered without a prob-
able change in yields, and a capital transac-
tion tax was re-imposed. A heavy coffee tax
was also imposed. In addition, the Laender
were authorized to levy additional taxes, in-
cluding surcharges on the scheduled taxes.
On balance the new system will result in a
shift to heavier dependence upon indirect, re-
gressive types of taxes and to less dependence
upon income taxes.
Although currency reform accomplished
most of its major objectives, one of the chief
remaining threats to financial stability is un-
balanced public budgets. Deficit public spend-
ing has resulted in a net addition to the money
supply already sufficiently large to exert con-
siderable inflationary pressure on the economy.
Public budgets at all levels are experiencing
difficulty in adjusting their expenditures to re-
duced revenues. The budget of the Bizonal
Economic Administration for the fiscal year
1948-49 was balanced at 408 million marks, a
100 million mark increase over the previous
fiscal year, but almost 200 million marks lower
than the precurrency reform estimates for the
current fiscal year. Although the 1949-50
budget is balanced, it is by no means certain
that expenditures will be covered. The bizonal
budget depends for its revenues mainly on the
statutory contributions of the German Post
(100 million marks) and the German Railways
(174 million marks). The financial condition
of these agencies is such that considerable dif-
ficulty will be experienced in making these
funds available. In addition, the Bizonal Eco-
nomic Administration is required to provide
funds to finance the support of Berlin. The de-
velopment of the Laender budgets since cur-
rency reform has shown that deficits of dan-
gerous magnitude must be expected in a num-
ber of Laender unless drastic measures are ap-
plied. Cash balances have dropped by almost
one-half, and tax revenues have shrunk
rapidly, while payrolls have continued to ex-
pand. Laender encountering the most troubles
are those such as Schleswig Holstein which
bear the brunt of heavy occupation costs or of
large expenses for refugees and evacuees. No
action has been taken on the problem of
equalizing such burdens.
By the spring of 1949 the progress of western
German recovery showed signs of slowing
down. Further improvement appeared to be
hampered by lack of capital for long-term in-
vestment. The shortage of loan funds forced
the banks into a cautious lending policy, inter-
est rates were high, and the principal method
of financing the needs of industrial and busi-
ness enterprises was the unorthodox one of
discounting three month trade bills. Despite
Military Government pressure to develop a
long-term investment program, little was ac-
complished because of inadequate savings and
German disinclination to provide capital from
German sources by taxation. To control de-
flationary tendencies in an economy (which
is potentially inflationary) and to remove
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some of the more dangerous production bottle-
necks, Military Government established a
credit of one billion west marks for emergency
investment purposes, of which DM 220 million
were earmarked for the expansion of the elec-
tric power plant program in order to reduce
the bizonal power shortage. Military Govern-
ment efforts also resulted in the passage by
the Bizonal Economic Council on 20 April
1949 of an acceptable tax reform law retroac-
tive 1 January 1949, devised to encourage both
saving and investment. Nevertheless, the
Germans continued to rely heavily on the fu-
ture availability of foreign capital plus ECA
counterpart funds and to minimize both the
necessity and possibility of developing internal
sources of investment funds. The German
authorities were advised, however, that Mili-
tary Government would not permit more than
DM 2 billion to be drawn from counterpart
funds for capital investment purposes and that
the remaining DM 6 billion required for the
1949/50 program must come from public budg-
ets and private sources.
In the Soviet Zone a zonal budget which has
replaced the five Laender budgets is prepared
under the close supervision and direction of
the SMA. Income generally exceeds expendi-
tures by a considerable amount. About half
the current revenue is transferred to the Ger-
man Central Finance Administration which
provides a great variety of subsidies for the
support of the zonal economy. It covers the
deficits incurred by the coal mining and other
industries, maintains a ceiling on prices, pri-
marily for state-owned enterprises, prevents
price increases for foodstuffs, liquidates the
debts of expropriated concerns, finances repa-
rations and export deliveries, and provides for
the reconstruction of factories. All this re-
quires a very heavy tax levy. The five Laender
budgets for the fiscal Srear 1947-48 anticipated
a total revenue of RM 8.5 billion with total ex-
penditures placed at RM 8.3 billion. Actual
collection amounted to RM 8.9 billion, princi-
pally in consumers' taxes which accounted for
46 percent of total revenues compared to 17
percent from this source in the UK Zone and
22 percent in the US Zone. The zonal budget
for 1948/49 was approximately the same as for
the preceding fiscal year, but tax collections
were RM 9.2 billion, or nearly 5 percent greater
than in 1947. This would indicate a general
increase in industrial production, especially
as the turnover tax remained at an occupa-
tion period high, and reflects Soviet efforts to
obtain maximum benefits from the zonal econ-
omy. It is doubtful, however, if this high tax
rate can be maintained in 1949 in face of the
production difficulties occasioned by the cessa-
tion of East-West trade following the imposi-
tion of the counterblockade in July 1948 and
the financial difficulties caused by currency
reform.
(4) Reparations.
The plan for reparations and level of post-
war German economy adopted by the Allied
Control Council in March 1946 was based on
the Potsdam Agreement providing for German
unity. The objectives of the plan were:
(a) the elimination of the German indus-
trial war potential;
(b) the provision of reparations out of Ger-
many's capital equipment for victims of Nazi
aggression; and yet to
(c) leave within Germany necessary plants
and equipment to permit rebuilding of a via-
ble, peaceful economy.
Because of Soviet intransigence little could
be accomplished toward the objectives of the
plan on a quadripartite level; therefore, the
US and UK Zones of Germany were fused for
economic purposes in January 1947. On the
basis of industrial capacity scheduled to be
retained under the Reparations Plan of March
1946, it soon became evident that the Bizonal
area could not become self-sustaining, and in
August 1947 the US and UK announced a re-
vised level of industry for their zones of Ger-
many, to approximate the level of industry
prevailing in 1936, an increase of about one-
third over the level contemplated in the origi-
nal plan. In October 1947, the US and UK
announced a list of 683 plants and part plants
which were surplus to the new industry level
and therefore available for reparations.
Reports of US Congressional Committees on
the desperate situation of the German econ-
omy and pending legislation for the European
Recovery Program brought increased agita-
tion for cessation of reparations deliveries. It
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was feared that the elimination through repa-
rations of equipment which could be of help
to the economic recovery of Germany would
undermine the recovery program. Further,
the US Congress objected to reparation deliv-
eries to the USSR of materials which assist in
the development of war power.
Before its 1947 Christmas recess the Con-
gress passed the Foreign Aid Bill without spe-
cific restrictions in the matter of reparations,
but made clear that the question of plant
removals would receive detailed consideration
by the next session of Congress.
The breakdown of the Allied Control Coun-
cil following the walk-out of the USSR in
March 1948 eliminated all possibility of four-
power agreement on reparations matters. In
April 1948 all deliveries from the US Zone to
the East were halted "pending clarification of
certain issues." At the same time, the US
Technical Mission, under cover of secrecy,
went into western Germany to study disman-
tling and the reparations program as they
related to European Economic Recovery and
the development of the Soviet war potential.
After ERP came into being, the US took the
position that it was desirable to re-examine
certain portions of the reparation lists with a
view to determining the extent to which some
of the plants might better serve the needs of
European recovery if left in Germany than if
removed and re-erected elsewhere. A survey
of the situation was consequently undertaken
late in 1948 by a committee of US steel ex-
perts; meantime dismantling on a limited
scale went forward in the French and US
Zones.
The report of the Humphrey Committee be-
came the basis of negotiations at London early
in 1949 that resulted in the signing of an
agreement on 31 March on Prohibited and Re-
stricted Industries, under which it was agreed
to retain in the German economy all but 9 of
the 168 plants scheduled for dismantling but
listed by the Committee as essential to the
recovery program. Restrictions were placed
on the production of ball bearings, primary
aluminum, chlorine, and a few other products.
Steel capacity was limited to 11.1 million tons
per year, and all remaining capacity was to be
allocated to IARA for distribution among its
members. The synthetic rubber and fuel in-
dustries were placed on the prohibited list, and
all except a few of their installations ordered
removed. Seven shipyards were also ordered
removed, and German shipbuilding was re-
stricted to the capacity that remained, subject
to certain other limitations on the possible
size and speed of the vessels to be built. The
provisions are subject to review not later than
1952.
e. International Trade.
Before World War II a large foreign trade
was one of the contributing factors to Ger-
many's position as the most industrially pow-
erful nation in continental Europe. Con-
versely, German exports and imports were of
great importance to European economy. In
1936, for example, 11.4 percent of Germany's
total industrial production was exported. Of
total industrial exports, 75 percent came from
the mining, metal-working, and chemical in-
dustries and only 25 percent from consumers'
goods industries. About 16 percent of the
total value of hard-coal output was exported,
23 percent of the machine tools, and about 25
percent of the output of chemicals. At the
same time Germany was dependent on im-
ports for a large part of its food supply and
industrial raw material needs.
In normal prewar times Germany was one
of the two major links (the other being the
UK) in the pattern of trade and trade settle-
ments in Europe. In contrast to the UK,
which had a large import surplus from Eu-
rope, Germany had a large surplus of exports
to most other European countries. These
countries were able to settle their German ac-
counts with pounds sterling, receipt of which
allowed Germany, in turn, to maintain a large
surplus of imports from overseas suppliers of
raw materials. The world-wide depression
and the Nazi rearmament program altered
this situation, and Germany developed a sys-
tem of administrative controls involving bar-
ter trade, import-export quotas, multiple ex-
change rates, and export subsidies, for the
purpose of attaining planned trade objectives.
Owing to the shortage of foreign exchange,
the import program was restricted to essen-
tial foodstuffs, raw materials, and other com-
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modities essential to the military program.
Total value of foreign trade declined from
RM 27 billion in 1929 to RM 10.6 billion in
1938. Although the major part of Germany's
exports went to the industrialized countries of
Europe, Germany was the most important
source of supply of manufactured goods for
central and eastern European countries.
From the outset of the postwar period the
revival of the foreign trade of Germany, so
essential to the recovery and maintenance of
internal economic stability, encountered great
difficulties. The business community of no
other European country was so completely
isolated from the rest of the world, and no
other country dependent upon foreign mar-
kets and supplies was equally handicapped in
its facilities for carrying on foreign trade.
The whole complicated institutional system
required for sales abroad disappeared to be
replaced by the cuinbersome postwar foreign
trade administration, over which a series of
Military Government controls was imposed.
This change further retarded trade recovery.
The Potsdam agreement provided for the
creation of a central German administrative
department for foreign trade. On 15 August
1945, a quadripartite Export-Import Sub-
Committee was created, and an interim plan
was developed in line with the provision of
the Potsdam agreement that imports were to
be restricted to goods necessary for minimum
standards of consumption and production.
Implementation of the plan was, however, left
to the respective zone commanders.
The difficulties of quadripartite discussion
finally led the Military Governments to for-
eign trade planning on a unilateral basis.
During 1946 it became apparent that neither
the US nor the UK Zone would become self-
sustaining without a concerted effort to stimu-
late exports and simplify trade procedures.
The Byrnes-Bevin agreement, dated 4 Decem-
ber 1946, provided for the economic integra-
tion of the US and UK Zones (the French and
Soviet Governments having declined to par-
ticipate) and for the creation by 1 January
1947 of a Joint Export-Import Agency (JEIA).
O This agency was charged with the collection
of proceeds from export sales and the billing
and accounting for all exports and imports,
in addition to planning the foreign trade pro-
gram and supervision of trade relations with
other countries. Finally, on 18 October 1948,
the French Military Governor signed an agree-
ment with the US and British Military Gov-
ernors, to merge the foreign trade of the US,
British, and French Zones of Occupation in
Germany.
(1) Bizone.
Before the war, steel, metal goods, machin-
ery, and chemicals constituted about two-
thirds of the exports of the Bizone. Because
of restrictions on war-potential capacity and
shortages of power, manpower, and transport,
such formerly important export items as ma-
chine tools, roller bearings, and heavy ma-
chinery generally have not been produced in
large quantities. Hence, the character of the
Bizone's postwar exports, limited as they have
been chiefly to raw materials, has thus far
borne little resemblance to the prewar pat-
tern.
The European Recovery Program assumes
the ultimate achievement of an export surplus
to the other participating countries. The ex-
tent of the increase in importance of manu-
factured goods in the export program is evi-
dent: "coal, timber, and scrap" declines from
57 percent of total exports in 1948-49 to 31
percent in 1951-52, the compensating increase
being in the manufacturing fields, chiefly ma-
chinery and equipment. The Bizone is ex-
pected to supply the need in ERP countries
for a wide range of replacement and mainte-
nance parts for German machinery, espe-
cially agricultural, food-processing, and min-
ing machinery.
The extent of the progress necessary if the
Bizone is to balance its foreign payments ac-
counts by 1952 without extraordinary outside
assistance is indicated in the following figures.
For the fiscal year 1948-49 the Bizone relied
upon outside assistance to cover a current ac-
count deficit in its balance of payments of
$1,041 million, of which $404 million repre-
sented ECA grants and the balance the occu-
pying powers' (chiefly US) "GARIOA" appro-
priations (for the prevention of "disease and
unrest") for food, fertilizer, seeds, and petro-
leum products. ECA estimates for 1949-50 a
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current account deficit of $892.5 million of
which about $476 million is to be met by
GARIOA appropriations and $302.5 million by
ECA grants.
On 1 May 1948 a long step was taken toward
normal foreign trade transactions. On that
date a conversion rate of 1 RM---30 cents was
established for German currency, consonant
with the currency reform effected internally
shortly thereafter. Under the early quadri-
partite agreement to maintain the 1936 price
freeze instituted by Hitler, the German price
structure had come to bear no reasonable re-
lation to world market prices. Since JEIA
had complete control of foreign trade, the
problem of pricing exports was handled by ad-
ministrative decision. German firms offering
to JEIA goods for export were paid in German
currency at the domestic ceiling price and
TETA sold the goods abroad for dollars at as
favorable a price as possible. This arrange-
ment discouraged exports in two ways: (1)
there was no price inducement for Germans to
offer goods for export; and (2) most potential
foreign buyers, being short of dollars, tended
to limit their purchases from the Bizone. The
pricing of imports was handled in a similar
way. JEIA paid the world market price in
dollars and charged the German importer the
internal ceiling price in German currency.
Since the new conversion rate was established
in May 1948 the isolation of German internal
prices from world prices has largely ended.
Since 1 May 1948, the conversion rate of one
mark to 30 cents has applied to all exports
except coal and to all imports except staple
foodstuffs. In the case of exports, however,
if the price obtained and converted into marks
at the 30-cent rate fell short of the domestic
ceiling prices, the difference was paid by JEIA
as a subsidy to the exporter.
On 1 December 1948, JEIA controls were
reduced to a minimum under new regulations
permitting German businessmen to deal di-
rectly with foreign buyers or sellers without
going through JEIA. Although considerable
leakage of foreign exchange is believed to have
resulted from the relaxation of JEIA controls,
there is no doubt as to the stimulating effect
of the simplified procedure on the Bizone's
export trade. With the establishment of the
west German government, trade control and
export license functions were transferred to
agencies of the federal and Laender govern-
ments under the nominal supervision of the
High Commissioners.
Reflecting the rapid industrial progress of
the Bizone since June 1948, and also the im-
proved export procedures, exports increased
from $91 million in the first quarter of 1948,
to $265.8 million in the first quarter of 1949.
Of total imports of $387 million during the
first three months of 1949, $142.5 million were
financed with the proceeds of exports, $135.3
million by US/UK appropriations, $109 mil-
lion by ECA funds.
(2) French Zone.
The present French Zone is poor in basic
raw materials and resources as compared to
the Bizone. Before the war the area now
comprising the French Zone paid for needed
imports of grain, coal, steel, cotton, hides, and
various other industrial raw materials by ex-
porting agricultural products (wine, tobacco,
meat, potatoes, fresh fruit, and vegetables)
and manufactured goods (chemicals, shoes,
textiles, and time pieces). The area also had
a large timber industry, and exported lumber
and wood products. Trade was chiefly with
the area now included in the Bizone.
Although the postwar agriculture and in-
dustry of the French Zone suffered from direct
war damage and reparations, one of the chief
causes of its stagnation was the disruption of
its trade and the consequent lack of raw
materials.
Since the war, more than half the total ex-
ports have gone to France, whose needs have
been the paramount consideration in deter-
mining the character of this trade. In return
for exports of lumber needed for French re-
construction, and some food, needed in the
Saar, the Zone has received Saar coal and food
imports from the US, paid for by France.
Food, coal, and potash fertilizer have been ob-
tained from the Bizone in return for lumber,
small amounts of meat and tobacco, potatoes,
and nitrogen fertilizer. Nevertheless, food im-
ports have been barely sufficient to ward off
starvation, and coal has had to be diverted to
non-industrial uses.
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?bee
In contrast to the Bizone, the French Zone
did not have the benefit of substantial assist-
ance from the occupying power, and has suf-
fered in addition from occupation troops "liv-
ing off the land." In 1946, total exports from
the French Zone were $60 million, three times
the value of exports from the US Zone over a
longer period of time. All but a small propor-
tion, probably less than 20 percent, of this
trade went to France. Certain plants worked
exclusively for the so-calldd export program
and were accorded preferential treatment in
the supply of power, coal, and raw materials as
well as in the allocation of cigarettes and food.
Exports continued to increase and reached
$106 million in 1947, of which $88 million went
to France. The largest zonal exports to
France consisted of lumber and lumber prod-
ucts, and constituted 38 percent of the total.
Imports amounted to $13 million, of which 37
percent came from the US, mostly in food-
stuffs. Rising world prices for imports turned
this favorable trade balance into a deficit of
1948. In the first six months of 1948, bizonal
receipts from the French Zone were RM 54.6
million, while deliveries from the Bizone were
RM 196.3 million.
During 1948 steps were taken to integrate
the foreign trade of the French Zone with that
of the Bizone through the JEIA, culminating
in a fusion with the Bizone on 18 October. As
a result it became necessary to provide direct
outside assistance. For the fiscal year 1948-
49, ECA grants to the French Zone amounted
to about $100 million, to cover expected dollar
deficits. ECA estimates dollar aid require-
ments for 1949-50 at $115 million.
Even under the most optimistic assumptions
as to production and distribution of indige-
nous food supplies, imports of breadgrains will
continue to be needed to supply about one-
half of the bread ration and one-fourth of the
total caloric intake of the population. Manu-
facturing industries, however, are expected by
the last year of the ERP to have recovered suf-
ficiently to provide a net export surplus to
Western Europe.
(3) Soviet Zone.
The USSR consistently blocked agreement
on quadripartite allocation of foreign exports
from Germany and veiled the export transac-
tions of the Soviet Zone in secrecy. Lists of
commodities to be exchanged are published,
but little information is given about the actual
volume or value of the trade. The USSR is
always the principal beneficiary of such for-
eign-exchange proceeds as are realized from
Soviet Zone exports. This does not include
reparations which constitute the largest part
of goods removed from the country. In 1948
and 1949 the Soviet Zone concluded trade
agreements with a number of foreign coun-
tries, including Belgium, the Netherlands,
Sweden, and Poland. The export-import deals
negotiated within the framework of these
agreements are largely handled by the Soviet-
established German Central Administration
for Foreign Trade, the purpose of which, as
stated by the USSR, is to stimulate the expan-
sion of export trade, particularly toward the
Soviet Union, Poland, and the Danubian states.
Outside of these trade agreements a relatively
large share of German export trade is con-
ducted through a number of Soviet-controlled
export companies, with the compensation
goods or foreign exchange proceeds benefiting
the Soviet rather than the German economy.
The principal items of export are potash,
which the Soviet Zone possesses in abundance,
timber, scrap iron, machinery, and chemicals.
Chief imports since the lifting of the counter-
blockade in May 1949 are raw materials in-
cluding cotton, wool, machinery and parts,
semi-finished steel products and chemicals for
state-owned enterprises producing for the So-
viet account.
Although the USSR planned an ambitious
foreign trade development program for the
Soviet Zone in 1948, fulfillment was seriously
curtailed by the imposition of the Western
Powers' counterblockade and by the ensuing
production difficulties arising from shortages
of vital materials previously obtained from the
western zones. It was the intention of the
USSR to channel the great bulk of Soviet Zone
trade eastward, but the satellite countries
proved unable or unwilling to exchange com-
modities with the Soviet Zone in the quanti-
ties or types required by the zonal economy.
Consequently, an unfavorable balance-of-
trade developed, with imports exceeding ex-
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ports (excluding reparations payments) by a
considerable amount, and the USSR contrib-
uting heavily for the first time from its own
stocks to maintain the faltering economy of
the zone. Zonal imports for 1948 were
RM 356.2 million, of which the USSR contrib-
uted RM 88.2 million; and exports were only
RM 274.2 million, of which RM 40.5 million
went to the USSR. Although this trade was
considerably in excess of the total 1947 foreign
trade, its distribution is significant in view of
the East-West controversy. Less than one-
fourth of the imports were from Western
Europe, and exports to that area were corre-
spondingly small. Imports in the first quar-
ter of 1949 appeared to have increased about
50 percent over the 1948 rate, while exports in-
creased over 95 percent.
In 1948 the Soviet Zone sent about RM 104
million worth of goods to the Bizone and re-
ceived from that area about 140 million ELM
worth. Much of this was raw material and
about 85 percent of it was shipped before Au-
gust when the counterblockade went into
effect.
3. Economic Stability
a. Western Zones.
During the first two years of Occupation,
conflicting Allied policies served only to
deepen the confusion and uncertainty which
their material assistance was intended to cor-
rect. In view of the low levels of production
attained, the worthlessness of the currency as
a measure of relative values, and the low level
of foreign trade, only strict rationing of neces-
sities and stringent price, wage and rationing
controls prevented the economies of the sev-
eral zones from deteriorating.
The Soviet action in breaking up the Allied
Control Council on 20 March 1948 may have
put a permanent end to quadripartite efforts
to forge an economic entity of Germany;
nevertheless, it released the western zones
from the baneful effects of Soviet tactics ob-
structive to economic recovery. The western
Allies countered the Soviet action by moves
aimed at increasing production in the western
zones, beginning with the currency conversion
in June. This step alone resulted in the re-
lease of hoarded goods and in a steady in-
crease in production in the western zones. A
level approximately 88 percent of 1936, at-
tained in May 1949, was maintained during
the summer months.
Important among the factors which obscure
the outlook for further recovery in the west-
ern zones is the question of future control of
the area containing most of the steel indus-
tries and hard coal deposits?the Ruhr. The
US and UK decided on 10 November 1948 to
give temporary management of Ruhr indus-
tries back to the Germans. This decision al-
lows German trustees to operate the indus-
tries until the new German Government in
the western zones acts to socialize them or to
return them to private ownership. The de-
cision was made in the belief that increased
production would result, that this in turn
would relieve US and UK taxpayers of occu-
pation cost burdens, and that it would ensure
a maximum contribution from western Ger-
many to recovery in Western Europe. French
concern regarding a too rapid revival of Ger-
man industry was partially allayed by a six-
power agreement reached 28 December 1948,
establishing an International Authority for
the Ruhr with power to control minimum ex-
port allocations of coal, coke, and steel from
the area. The agreement was signed and
went into effect on 28 April 1949 amid German
fears that the area was permanently lost to
the German economy.
Numerous other factors cloud the economic
future of the western zones. To the extent
that the area continues to be cut off from the
foodstuffs, raw materials, and manufactures
of eastern Germany, it must remain the more
dependent upon foreign trade. The prospects
for the attainment of prewar levels in trade
with eastern Europe are not bright. Trade
with the West, although contingent upon the
continued success of the ERP, will probably
improve.
Further increases in production in the west-
ern zones is being hampered by an inadequate
investment program and by the unsettling ef-
fects of the necessity for reorganization of
the tax system and division of responsibilities
between the lower levels of government and
the new central government. New capital
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4.)
goods are badly needed, but foreign investors
are reluctant and the internal economy is not
able to provide funds necessary for the pur-
chase. Labor unrest, strikes, and a reduction
in the productivity of labor are encouraged
by the need for further tax reform, broad-scale
domestic readjustments in prices and wages,
and a reduction in occupation costs.
Factors favorable to improvement in the
economic situation are the continuing ERP
aid to western Germany and to Western
Europe and the fear of Soviet expansion, a
fear which strengthens morale in the western
zones and is conducive to German support of
Allied efforts to improve economic conditions.
Germany also possesses a reservoir of highly
skilled labor, great technical skill and ingenu-
ity, and a will to dominance in all fields which
should assist in overcoming the obstacles now
hampering economic recovery.
b. Soviet Zone.
Despite the Soviet currency reform in June
1948, production in the Soviet Zone declined
in subsequent months. The decline there was
in part attributable to Soviet removals with-
out compensation of both current output and
plant equipment. In part also the Soviet
blockade of Berlin was responsible, since in re-
taliation for the blockade the western Allies
promptly embargoed the shipment of goods
from the western zones to the Soviet Zone.
With the lifting of the counterblockade in
May 1949, there was a revival of industrial
output, although it is doubtful if quotas un-
der the Two-Year Plan can be met in view of
continuing shortages. The full restoration of
interzonal trade relations may see further im-
provement in eastern German economic con-
ditions. There is slight indication, however,
that further improvement in general produc-
tion levels will improve the general public's
consumption standards. Gains will be regis-
tered only in those industries and for those
groups favored by SMA. The area as pres-
ently bounded is not self-sufficient in food-
stuffs. The area, moreover, normally im-
ported coal and manufactures from western
Germany and elsewhere. The satellite coun-
tries are not able to provide substitute sup-
plies, because their surpluses (except for Pol-
ish coal) are channeled to the USSR or are
traded within the Soviet orbit. There is evi-
dence that this economic outlook gives less
concern to the SMA than the development of
governmental organization and controls simi-
lar to those of the Soviet Union.
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C
CHAPTER III
MILITARY SITUATION
1. Origin of the Present Military Situation.
The 1939 German Army was created from
the entire economic, political, and psychologi-
cal resources of the German people by an
authoritarian government which devoted a
large part of the national energies both to
the study and to the application of the science
of war. By complete and scientific control,
the nation was coordinated for the purpose of
aggressive warfare. Furthermore, the mili-
tary tradition was deeply ingrained in the
character of a people accustomed by a rigid
caste system to servile obedience to the voice
of authority and fanatically predisposed to
follow strong nationalist leaders in peace as
well as in war.
The basis of the German military system
was compulsory military training, introduced
by Prussia in 1814, and adopted by other Ger-
man states. After the unification of Germany
in 1871 compulsory military training was de-
creed for the entire Reich. As a result of this
system, the Second Reich could put 3 million
trained troops into the field in 1914 simultane-
ously on two fronts. Conscription was for-
bidden by the Treaty of Versailles, and the
size of the army was limited to 100,000 troops
enlisted for a period of 12 years, an arrange-
ment designed to prevent the creation of a
large reserve of trained men. Germany evaded
this stipulation, however, by using the small
army as an officers' training corps, while
various paramilitary organizations, such as
State Police units, athletic clubs, and other
groups, furnished many Germans with basic
military training using weapons borrowed
from the army.
The German economy was left physically
intact by World War I, and the war potential
of industrial plants was expanded concur-
rently with the development of the new Reichs-
wehr. German technical research in military
weapons, aircraft, submarines, and naval craft
went on apace in neighboring countries such
as the Netherlands, Switzerland, and Russia,
where facilities were either made available to
the Germans or allowed to come under German
control in the period preceding 1933.
The old army administrative organization
was also preserved after 1918, making it a
relatively simple matter for the Nazis to under-
take the remilitarization of Germany openly
after Hitler's advent to power. The peacetime
German Army was based on the division of
the country into 8 corps areas, each self-con-
tained and capable of handling all military
matters within its jurisdiction. After the
Polish campaign of 1939 two new corps areas
were created in the annexed eastern territory.
In 1935 the Nazis reintroduced ?conscription
with one year of active service for which able-
bodied Germans between the ages of 18 and
45 became liable after which a soldier passed
into the active reserve until the age of 35, and
then became a member of the Landwehr (Re-
serve) until the age of 45.
In four years under this system the German
Army was expanded from 7 divisions to a total
of 51 divisions plus corps troops. The new
German Army consisted of 36 infantry and
motorized divisions, three infantry divisions
in the Austrian and Sudeten areas, five Pan-
zer (armored) divisions, four light divisions,
and three mountain divisions. Before mobi-
lization in the fall of 1939 the German Army
numbered 700,000 men with a trained reserve
of more than three million.
The German Navy was developed much later
than the army, and although equally efficient,
was by no means as powerful. In every re-
spect the navy was subordinated to land re-
quirements and considerations. German sub-
marines conducted a devastating campaign in
both World Wars. The principal strategic
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value of the German surface fleet, however, was
to contain important elements of the British
fleet. After the first World War the German
Navy was drastically reduced in size, the High
Seas Fleet being surrendered to the Allies and
eventually scuttled by its crews, while the con-
struction and maintenance of submarines was
prohibited. Germany subsequently circum-
vented treaty limitations on the size of naval
vessels by building commerce raiders popu-
larly known as pocket battleships, which were
high-speed armored cruisers armed with 11-
inch guns and which exceeded the limit of
10,000 tons. In 1935 Great Britain agreed to
allow the Germans to build to a level of 35 per-
cent of the British fleet, with the right, within
this total limitation, to submarine tonnage
equal to that of the British.
The German Air Force (Luftwaffe), on the
other hand, was organized in 1935 and ad-
ministered independently of either the army
or the navy. Its three functional branches
were air tactical units, anti-aircraft artillery,
and air signal troops. Under the air tactical
units were included parachute and airborne
troops, air engineers, air medical units, and
a number of special divisions formed in 1943
of air force personnel for service as regular
fighting troops. This division of responsibility
resulted in a high degree of mobility among
the flying units and was responsible for much
of the early success of the German Air Force
during the war.
Because of the high degree of mobility and
mechanization achieved in the entire German
Army by 1939, Germany could initiate a war
of movement. It quickly overran Poland
(1939), most of Western Europe (1940), and
a good part of Russia, the Balkans and North
Africa (1941-42). As the war expanded in
scope, however, mounting casualties and in-
creased commitments obliged the Mined
Forces to reach into both the younger and
older age groups for replacements. "Total
mobilization" was carried out in the spring of
1943 after Stalingrad, and physical standards
for military service were lowered drastically.
Even the Hitler Youth was called up as auxil-
iaries. The final months of the war saw Ger-
many scraping the bottom of the manpower
barrel as almost the entire population, regard-
less of age or sex, was drafted into some form
of service in a desperate effort to avert the
impending collapse. By the end of the war
the German military machine had disinte-
grated, and steps were immediately taken by
the Allies to insure that it would remain that
way.
2. Strength and Disposition of Armed Forces
The Potsdam Agreement provided for the
complete disarmament and demilitarization
of Germany and the elimination or control of
all German industry that could be used for
military production. To these ends it was
directed that:
All German land, naval, and air forces, the
SS., the S.A., S.D., and Gestapo, with all
their organizations, staffs, and institutions,
including the general staff, the officers'
corps, reserve corps, military schools, war
veterans' organizations, and all other mili-
tary and quasi-military organizations, to-
gether with all clubs and associations which
serve to keep alive the military tradition
in Germany, shall be completely and finally
abolished in such manner as permanently
to prevent the revival or reorganization of
German militarism and Nazism.
All arms, ammunition and implements of
war and all specialized facilities for their
production shall be held at the disposal of
the Allies or destroyed. The maintenance
and production of all aircraft and all arms,
ammunition and implements of war shall
be prevented.
To carry out Allied objectives and to insure
compliance with Potsdam policies, Germany
was divided into four zones of occupation with
an Allied army in each zone. In practice, all
phases of German life were under the abso-
lute control of the military commander in
each zone. Matters affecting Germany as a
whole were decided jointly by the four Allied
Commanders-in-Chief, who formed the Allied
Control Council in Berlin. Theoretically,
this Council was also charged with the respon-
sibility of insuring a uniform application of
Allied policy in the four zones. The entire
cost of the occupation was to be bone by the
German people pending the unification of the
country and the withdrawal of the Allied
forces. In the US Zone, headquarters for the
US Commander-in-Chief were set up at
Frankfurt-am-Main, and US troops were guar
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tered throughout the three Laender and later
in the Bremen Enclave.
Western Allied forces in Germany are not
under a unified command. As of 1 September
1949, the US had 80,000 Army personnel sta-
tioned in Germany as the Army of Occupa-
tion. In addition, a German police force of
41,700 men has been formed and armed under
US supervision. Occupation ground forces
in the UK Zone numbered 78,400, of which
21,400 were Belgian, Danish, and Norwegian.
The British also maintain a German police
force of 41,930 men. In the French Zone,
there were 48,000 ground troops and a French
Gendarmerie of 54 men. German police in
the French Zone total 7,490.
US Air Force combat strength is composed
essentially of three F-80 jet fighter squadrons,
three F-47 conventional fighter squadrons,
and a small number of light bombers, recon-
naissance, and other special purpose aircraft.
In the UK Zone, the Royal Air Force had as
of 15 September 1949 three Vampire jet
fighter squadrons, two conventional fighter
squadrons, one reconnaissance squadron, and
four light bomber squadrons. On the same
date, the French in their zone maintained two
F-47 conventional fighter squadrons, one of
which, presently in transitional training, is
expected to return to Germany equipped with
jet fighters, and two reconnaissance squad-
The Soviet forces represent the largest and
most formidable force in Germany and are
under unified command. As of 1 September
1949, they consisted of four rifle, eight tank,
and ten mechanized divisions, a total of
355,000 army and SMA troops, in addition to
which there were 20,000 political police (MVD
troops) and 3,000 naval troops. The Soviet
Air Force in Germany, represented chiefly by
the 16th Air Army, was estimated on 15 Sep-
tember 1949 at 30,000 men and 1,300 to 1,400
aircraft, including 800 conventional fighters,
400 to 500 light and attack bombers, and 60
to 70 reconnaissance aircraft. The total of
all Soviet troops is thus approximately 408,000
men.
Besides its own forces, the USSR is expand-
ing the German police organization of the So-
viet Zone. The central German police agency
is the German Administration of the Interior,
which has the following executive organs:
a. The paramilitary German police, com-
posed of the Border Police and the Bereit-
schaf ten or Kasernierte (barracked) Police.
Army Intelligence Division estimates of 1 Sep-
tember 1949 place the strength of the Border
Police at 12,000 and the Bereitschaf ten at
15,000. Reports that the paramilitary police
are now being trained and equipped with
heavy weapons, including mortars, artillery,
and armored vehicles have increased rapidly
?
since August 1949, but are as yet not definitely
confirmed.
b. Although the present ratio of the Ord-
nungspolizei (regular police) to the popula-
tion is not known, total German police
strength, including the paramilitary police
and the political/criminal police, is estimated
at 100,000 as of 1 September 1949. In rela-
tion to the German population of the Soviet
Zone, the ratio is about 1:178. The Soviet
Zone police are drawn for the most part from
prisoners-of-war held within the USSR and
the graduates of the Antif a schools. The
long-term reliability of such personnel to the
USSR is questionable, despite the intensive
Communist indoctrination they have received.
Key positions in the Soviet Zone police are
held by veteran German Communists.
Former German officer and enlisted person-
nel held captive in the USSR have been sub-
jected to political indoctrination, placed in
labor battalions, given Soviet training for ad-
ministrative posts and police work, and in
some instances organized into combat police
units. While such groups do not constitute
an army in the accepted sense of the term,
they might be valuable in a paramilitary ca-
pacity if no conflict with German loyalty were
involved. The USSR has retained a large
number of German prisoners chiefly for their
labor, which they perform over wide areas of
the USSR, and also to serve in whatever re-
gime the USSR may eventually establish in
Germany. The long-term fidelity of such per-
sonnel to the USSR is doubtful.
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At the end of the war, Germany (including
Austria) had approximately 8,200,000 men *
under arms, all of whom the Allies immedi-
ately demobilized. Since 1945, these veterans
have had no training, and many have passed
into over-age categories. There are no reli-
able records on current fitness or age groups,
yet on the basis of population statistics, west-
ern Germany has a reservoir of approximately
four million able-bodied men capable of mili-
tary service and eastern Germany approxi-
mately two million. German manpower in
? Estimated gross mobilization 17,900,000
killed 2,750,000
disabled and discharged 1,050,000
prisoners 12,900,000
escaped apprehension .. 500,000
hospital pool 700,000
CI
the past has proved itself docile, obedient, in-
telligent and courageous; and German armies
have been the best on the Eurasian continent
from a military point of view.
An estimated one to two million former Ger-
man soldiers have not returned to Germany.
With the exception of about one hundred
thousand who have voluntarily remained in
France and other Western European countries
as paid laborers, these are in the USSR and
the satellite states. Of the total holdings of
German PW in these countries, estimated at
over 3 million at the end of the war, around
960,000 have been repatriated so far. It is
believed that no more than 240,000 can be ex-
pected to return home. The rest are either
dead or will be retained indefinitely to per-
form labor service
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CHAPTER IV
STRATEGIC CONSIDERATIONS AFFECTING US SECURITY
1. General.
As the major point of contact between the
policies and physical forces of the US and the
USSR, Germany plays an important role in
the East-West struggle in Europe. Because
of its geographic location, because it is in-
capable of self-defense, and because it is not
as yet formally committed to either side, Ger-
many is of utmost strategic significance to the
US.
Germany is the most important point at
which the westward expansion of Communism
can be contained physically. At present it is
subjected to diametrically opposed policies
based on the ideological differences between
the US on one hand and the USSR on the
O other. It will continue to be the scene of this
East-West battle for the predictable future.
In this cold war the mass of German people
are on the side of the US, not from any great
admiration for American ideals or institutions,
but from abhorrence of Communism and fear
of Soviet political objectives. Foreign occupa-
tion, the disappearance of the German Army,
the disorganization following total defeat, and
the removal of much of the national war po-
tential have reduced the Germans to the sta-
tus of relatively powerless observers in this
struggle to determine their ultimate destiny.
Under present conditions, it is doubtful that
the Germans would render effective support to
one side or the other in the event of actual
conflict with the exception of providing
trained military manpower. Whether or not
they would be willing to take an active part
in such a war is problematical at this time, al-
though a considerable number of Germans
have indicated their willingness to defend
their country against the Soviets. On the
other hand the Germans are determined to re-
gain as much of their former territory as con-
ditions will allow, and few Germans, given the
opportunity, would hesitate to play off the US
against the USSR in an endeavor to achieve
unification on their own terms. Although
Germany possesses trained manpower, tech-
nical ability, and a considerable residue of in-
dustrial potential, it is unlikely that western
Germany can at present, afford the US effec-
tive support in case the present East-West
conflict cannot be resolved peacefully.
The success of the US policy of containing
the USSR within its present sphere of expan-
sion is conditioned to a large extent upon a
revived and strengthened western European
economy. Western Germany is expected to
make a considerable contribution to European
recovery if its levels of production can be
raised to approximately the levels of 1936.
With adequate supplies of food and raw mate-
rials, it is hoped that this goal will be attained
by 1952. As long as manufactured goods re-
mained a relatively small part of bizonal ex-
ports which were principally coal and coke,
timber and scrap, these contributions to Euro-
pean recovery exerted a depressing effect upon
the internal western German economy. As
production of consumer goods revives and the
standard of living increases, western Germany
can make a sounder contribution to European
markets and to the more economic use of
European resources.
The cost to the US of putting the western
German economy on a viable basis is great,
but the only alternative is to maintain the
population on a minimum relief standard of
living as long as the US occupation lasts.
While $416 million were allocated to the Bi-
zone and $92 million to the French Zone in
the, first year of the ECA program (1948-49),
the output of consumer goods increased sub-
stantially, as did exports in this category, but
the increase was far short of satisfying do-
mestic requirements, and the standard of liv-
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Ing although improved is still far from
normal.
German reaction to the ECA program was
mixed. There was some fear that it might
facilitate a permanent split between eastern
and western Germany. Even now the Social-
ist elements among the population, who polled
29 percent of the popular vote in the recent
elections in western Germany, are concerned
lest too great an orientation toward the US
would result in an abandonment of socialist
reforms and a planned economy. Some right-
wing elements feel that US aid is being ma-
nipulated to their disadvantage. In general,
however, Germans accept the program with
mental reservations, and its ultimate success
depends upon the degree of cooperation which
improving conditions or lack of them may in-
spire.
The question of western Germany's posi-
tion in the contemplated Western European
defense system has so far not been subject
to formal discussions among the Western
Allies. The policies of the Western European
powers, notably France and the Benelux coun-
tries, based as they are upon fear of a re-
surgence of German military aggression, pre-
clude the remilitarization of Germany or its
integration into any such system in the near
future.
2. Political Factors.
The reconstruction of the German political
system along democratic lines has been ini-
tiated by the Western Allies. The Germans
themselves have been lukewarm or passively
receptive to the program laid down for their
political guidance. Many German leaders
continue to be apprehensive of being stigma-
tized as "collaborators" for supporting a sys-
tem imposed upon the people by their con-
querors. New leaders of marked ability have
not appeared, and German political parties
have been content to wrangle among them-
selves for the privilege, of holding office while
holding the Western Powers responsible for
the economic rehabilitation of the country.
Inability of the Western Allies to agree upon
implementation of major policies, as well as
passive resistance on the part of German offi-
cials to Allied occupation policies considered
harmful or unfair to German interests, has
been consistently exploited to the detriment
of US prestige, both by Communist and ultra-
rightist propaganda. In eastern Germany,
dissatisfaction with Communist rule continues
to exist. As the Communist control mecha-
nism tightens its grasp on the population,
however, present hostility to the USSR and its
German collaborators will ultimately become
apathetic acceptance of the status quo.
Germany is not unified and it has no cen-
tral government. The regimes in both east-
ern and western Germany will remain gen-
erally stable, apart from possible personnel
changes. There is no likelihood that these
governments will be overthrown in eastern
or western Germany by revolution or by vio-
lence from a domestic source. Nationalistic
elements are yet in the nebulous stage of de-
velopment, and in western Germany subver-
sive elements such as the Communists are too
weak and ineffective to constitute a threat.
The west German government is, of neces-
sity, obliged to cooperate generally with the
US, because of its dependence on US military
and economic support. The Germans, how-
ever, will not allow this dependence .to inter-
fere with attempts to attain long-range goals
such as autonomy and German unification.
The Federal Government is sure to press for
admittance into various European organiza-
tions of a non-military nature and ultimately
for admittance to the NAP. In addition, the
government will consistently circumvent or
ignore Allied controls where they are felt to
be harmful to German interests.
The withdrawal of the Western occupation
forces would not be welcomed by most Ger-
mans under present circumstances. If they
were freed from outside bressure or interfer-
ence in internal affairs, they would at present
be less able to maintain a stable form of gov-
ernment. A premature withdrawal would,
moreover, serve to increase the power of the
Communist party in western Germany. The
existence of the present western German Gov-
ernment might ultimately be jeopardized by
the attitude of nationalistic elements seeking
to achieve their objectives through collusion
with the USSR. It is unlikely that the USSR
would withdraw all troops from the Soviet
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Zone until Communist control of eastern Ger-
many had been perfected.
In view of Soviet policies and geographic
proximity a limit to US occupation of western
Germany cannot be foreseen. Much is de-
pendent upon the establishment of a viable
economy, and Germany has a long way yet to
go in that direction. Once this is assured,
however, it is possible that the Federal Gov-
ernment may successfully resist Soviet efforts
at domination provided strong US military,
political, and economic support continues to
be available, and that Germany does not de-
velop a type of reaction leading to a revival
of militarism or an orientation toward the
USSR.
3. Economic Factors.
German recovery will require years to over-
come the effects of war damage and the gen-
eral dislocation to life and property. For the
indefinite future it will be necessary to supply
western Germany annually with $3 billion
worth of food and raw materials, for which
only partial payment can be obtained from
exports. More than a third of this amount
will be required for foodstuffs, because indig-
enous food supplies are sufficient for less than
half the population. 'Western Germany will
be unable to maintain minimum ration re-
quirements unless there is a surplus of com-
modities for export. The German economy
will have great difficulty in producing for ex-
port and at the same time satisfying the de-
mands of the domestic market. Efforts to
raise the level of German industry to the point
where it will provide the volume of foreign
trade necessary to balance the required im-
port program are hampered by Western Euro-
pean fears of again placing German industrial
potential in a predominant position on the
continent. A more immediate bar to indus-
trial expansion as well to the reconstruction
of war-damaged areas is the absence of capital
for long-term investment. Lack of repair and
replacement parts, shortages of electric power,
and inefficient methods of operation resulting
in high production costs are other impedi-
ments to rapid economic recovery, in conse-
quence of which no important industrial tar-
gets were met in 1948. The transportation
system has been restored to about 70 percent
of the prewar volume of traffic, which allows
for present needs but not for the major recon-
struction necessary for a progressive expan-
sion of industrial output. Foreign trade is
hampered by the inaccessibility of former mar-
kets and sources of supply, while the absence
of a merchant marine is another source of
weakness in the restoration of the western
German economy. Although the beneficial
effects of currency reform have by no means
spent themselves, industrial production must
expand rapidly to prevent the development of
another inflationary cycle. Enough money is
in circulation to create an effective demand
for the limited quantity of consumer goods,
and this strong internal demand exerts a re-
tarding influence on west German exports.
The Ruhr is the keystone of the German
economic system, and its future development
under IAR also holds the key to European
strength and stability. Apart from enormous
reserves of high-grade hard coal, the Ruhr is
deficient in all other resources and requires a
steady flow of raw material imports in order
to keep its industries operating. Strategi-
cally, however, the possession of this highly
integrated industrial area is of major impor-
tance in any military plan for the control or
defense of Europe. Formerly the arsenal of
Western Europe, the Ruhr has been with-
drawn from German control and placed under
international authority for the purpose of pre-
venting a resurgence of German military ag-
gression by allocating coal and steel exports
according to the needs of a peacetime econ-
omy. Removal of this area from German
sovereignty has caused widespread national-
istic repercussions and raised fears that the
controls may be the means of eliminating Ger-
many as a future competitor in world markets.
The USSR wants to participate in control
of the Ruhr (1) to prevent it from playing its
important role in strengthening Western
Europe's economic and military position and
(2) to give the Soviet orbit the benefit of its
production, also for military and economic
purposes. The USSR undertook to block or
defeat all US efforts at reconstituting the Ger-
man economy on a unified basis and de-
nounced the US for refusing to acquiesce in
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Soviet proposals that would have reduced Ger-
many to the status of a satellite country. So-
viet reparations demands have been an im-
portant weapon in preventing unification ex-
cept on terms unacceptable to Western demo-
cratic interests. The Soviet attitude of delay
and obstruction may be based in part on the
assumption that the continued drain on US
resources will hasten the anticipated economic
collapse of the US and bring about the with-
drawal of US forces from Europe. Every US
step taken to improve the economic position
of Germany as well as of Western Europe has
been opposed by the USSR because such steps
would strengthen US influence in Europe and
check the expansion of Soviet power.
The rigorous Soviet policy of stripping the
Soviet Zone for the benefit of the USSR has
left eastern Germany in a poor economic con-
dition. The alienation of a substantial part
of the territory to Poland further weakened
the economic potential of the area. What was
once a surplus food region is now barely self-
sustaining, while Soviet land reform has dis-.
couraged farmers and has resulted in poor
harvests as compared to prewar years. Ex-
cept for enormous potash deposits and exten-
sive reserves of brown coal, the Soviet Zone is
an economic deficit area dependent upon raw-
material imports for the maintenance of its
industries. Formerly, Western Europe and
the western zones of Germany were the prin-
cipal sources of supply, but the USSR reversed
this trend in an effort to orient the Soviet
Zone toward the satellite economies. This
policy served only to aggravate an already
serious situation. Neglect of the transporta-
tion system has reduced Soviet Zone railroads
to a very low level of operating efficiency.
Most of the canals have been rehabilitated,
however, and a substantial part of the volume
of freight traffic is water-borne. The high-
ways are in poor condition, and motor vehicle
transport is handicapped by lack of repair
parts and shortages of gasoline and lubricants.
Although the USSR has maintained the east-
ern German synthetic gasoline and synthetic
rubber industries at about 50 percent of pre-
war capacity, the bulk of these supplies is
stockpiled for the Red Army or shipped as
reparations to the Satellites and the USSR;
little is diverted to the German economy.
Other war-potential industries, mainly those
manufacturing radar and electronic equip-
ment, aircraft parts, tank parts, military ve-
hicles, anti-aircraft guns, and ammunition;
are operated to capacity on raw materials
supplied mostly from sources under Soviet
control. The output of consumer goods is far
below the needs of the eastern German popu-
lation.
Strategically, eastern Germany is being
utilized as a source of manpower, technical
and scientific equipment, raw materials, and
finished goods for the USSR, and secondarily
as a point of departure for a possible westward
expansion of the USSR should that become
feasible. A pattern of Communist-dominated
control has been established for the area
which is so widely divergent from that estab-
lished under democratic auspices in western
Germany that unification of the two sections
is no longer feasible except on terms prejudi-
cial to US interests. Although an eastern
German state has been established, its sta-
bility is guaranteed only by the presence of
the Red Army, while the limitations placed
upon economic development by Soviet policies
and practices have left the area too weak and
exhausted to stand alone. Until the USSR
reverses these policies and practices, there is
little likelihood of much substantial improve-
ment in the present situation and consider-
able danger of further deterioration.
4. Military Factors.
Germany has been completely disarmed un-
der the Potsdam Agreement. The western
zones possess no indigenous military or naval
forces and no paramilitary forces of signifi-
cance. In the Soviet Zone a para-military po-
lice force is being organized, primarily to in-
sure internal Communist control, but with
aggressive military potentialities depending
upon the ultimate size, training, character,
and indoctrination of the force recruited by
the USSR. Its reliability at present is ques-
tionable, and the USSR, aside from satellite
objections to a rearmed Germany, cannot af-
ford to maintain a large armed force that one
day may turn against it. Industrial war po-
tential in western Germany has been partially
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destroyed, and what remains could not be
realized quickly in the event of war. In east-
ern Germany a large amount of industrial war
potential was dismantled and shipped intact
to the USSR along with the trained staffs to
operate it. The remainder is employed to ca-
pacity in turning out war material on the So-
viet account. The USSR also single-tracked
all railway lines running east and west across
the Soviet Zone as a defensive measure and
dismantled much additional trackage. As a
result, rail movement across eastern Germany
is by no means adequate for large troop con-
centrations.
On the other hand, the rail systems of west-
ern Germany have been restored without con-
cern for strategic implications, and, while far
from efficient, are adequate for normal pur-
poses. Restoration of the highway system
has also proceeded further in the western
zones than in the Soviet Zone, but in both
areas motor vehicle transport is scanty, in
poor condition, and dependent upon imports
for at least 75 percent of requirements for
POL supplies and spare parts. The Germans
maintain no air force, military or commercial,
but former Reich landing fields and airdromes
in both eastern and western Germany have
been rebuilt and expanded by the occupation
forces in each zone. During the second World
War the German canal system moved about
30 percent of all freight, thus releasing the
railways and highways for military purposes;
this would be impossible under present cir-
cumstances.
There are no effective natural barriers in
either western or eastern Germany to impede
the movement of armies in the event of war or
provide points at which local resistance could
be organized for any length of time. Neither
would any large-scale resistance movement
materialize to hamper the operations of an in-
vader. Strategically, the trizonal area offers
a land mass scarcely 200 miles in width be-
tween Western Europe and the frontier of the
Soviet Zone behind which lie the armies of the
USSR and its satellites. The defense of west-
ern Germany would present almost insuper-
able difficulty to the US, while its invasion
could be accomplished with little trouble by
the USSR.
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CHAPTER V
PROBABLE FUTURE DEVELOPMENTS AFFECTING US SECURITY
Germany must be considered as an area of
potential military action, not only because of
the continuing possibility of an East-West
war, but also because of the large occupation
forces employed by the USSR in the Soviet
Zone. Army units in the Soviet Zone are at
about 70 percent of personnel strength, and
100 percent of equipment. Air units are esti-
mated at about 80-90 percent of equipment
and approximately the same percentage for
personnel. Troop strength was increased by
approximately 60,000 men in the spring of
1949, but no significant changes have occurred
in troop dispositions. The proportion of re-
cruits in the units in Germany is higher than
it has been in the past. Morale is not es-
pecially good, however, and desertions from
the Soviet Army over the Soviet Zone frontier
occur at a rather high rate. It is the practice
of the USSR to change its units frequently in
order to prevent ideological contamination
from too extended exposure to western cul-
ture. Such constant troop movements are
somewhat misleading and afford a cover for a
possible rapid concentration which might not
be properly evaluated in the event of un-
announced overt hostilities by the USSR.
There has been no perceptible build-up of ar-
mor or supplies by the USSR, nor have the
Soviets taken certain other measures which
would normally indicate preparations for a
military offensive.
Present Soviet policy appears to be directed
towards avoiding international incidents in-
volving a risk of war. Soviet establishment
of an "All German" government formalizes
the existing split in Germany and represents
a Soviet attempt to counter the attraction of
the West German Republic as a focal point of
German hopes for unity. To enhance the ap-
peal of the East German State, the USSR will
probably give it the appearance of more in-
dependence than the West has given the West
German State. The USSR will attempt to
utilize the "All German" government to in-
crease Soviet influence in all Germany, timing
its actions to exploit the political rivalries and
economic conditions in west Germany.
Inasmuch as developments in Germany
have revealed to the USSR the low appeal of
Communism to the Germans, the Soviets have,
for the time being, probably resigned them-
selves to the fact that Soviet domination of
all of Germany is a remote possibility. They
have doubtless decided to adopt the long-
range view of accomplishing their aim
through eventual dissatisfaction of the west-
ern Germans with the occupation powers,
their Government and anticipated economic
reverses. The Soviets hope that this dissatis-
faction will result in civil unrest and eventual
ascent to power of Communists or nationalist
elements favoring a unified Germany oriented
toward the USSR. So far, Soviet propaganda
assaults on US objectives in western Germany
have had very limited success. The subver-
sive influence of the German Communist Party
(KPD) in western Germany has also been
very slight. At present, Berlin constitutes
the most exposed and vulnerable spot against
which Soviet military and economic pressure
can be brought. Soviet efforts to force the
Western Allies out of Berlin, or at least to
make their occupation of its western sectors
a nominal one, by extending Communist con-
trol over the economic life of the city have so
far been unsuccessful, but the threat to world
peace and US security remains.
Before any consideration can be given to
the inclusion of Germany into a Western Eu-
ropean defense system, the western occupa-
tion powers wish to create in that country
those conditions which would make it a relia-
ble ally, thoroughly indoctrinated and prac-
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V-2 SECRET
tieing the concepts of Western democracy.
In seeking to create a peaceful and democratic
Germany on the ruins of the Nazi Reich, the
Western Allies are confronted with persistent
authoritarian forces within the country. Pro-
vided there is no war, it may in time be possi-
ble to accomplish this objective with ample
moral and material assistance from the
United States and an improvement in the
mutual relationship between Germany and
her Western European neighbors whose ap-
proach to the problem has hitherto been con-
ditioned by distrust of Germany based on bit-
ter experience in the past.
While every effort is being made by the
Western Allies to rehabilitate Germany with
a view to letting it take its place among other
European nations, the USSR has pursued a
policy of exploitation in its zone which has
turned the population against it. It is be-
lieved, therefore, that the German people are
inclined to support the United States which
has pursued a more constructive and benefi-
cial policy in their eyes. However, the possi-
bility of a change in this western orientation
of the German people and a future alignment
of a unified and independent Germany with
the USSR must not be disregarded as a possi-
bility. Failure of the Federal Republic, dis-
illusionment with the Western Powers, and
hopes of greater advantages from the Soviet
Union may eventually cause such a switch in
German thinking.
In the present cold war for control of Ger-
many, the USSR has the advantage of a more
thorough control of its occupation area. Po-
litically and economically the Germans in the
Soviet Zone have been forced into the Com-
munist pattern to the point where transition
to a satellite state has been a relatively simple
process. The security of this state remains
contingent upon adequate Soviet military and
police support. Under these conditions diver-
sity of policy or expressed opinion in the So-
viet Zone is not to be expected. German re-
sistance will remain ineffective. The US, on
the other hand, does not have sole control of
western Germany, which it shares not only
with the UK and France, but to a considerable
extent with the Germans, who have been
given wide authority in many matters.
Clashes between US policy and that of the UK
and France are frequent, while the Germans
repeatedly display a strong tendency not to
cooperate either among themselves or with
the occupying powers.
In the western zones, where the democratic
principle allows for a wide divergence of views,
constructive efforts are subject to disagree-
ment among the Allies, potential resistance
by the German government, strikes and dem-
onstrations on the part of discontented Ger-
man workers, and lack of a definite plan or
decision with regard to the ultimate place of
Germany in the community of nations. Af-
ter considerable delay and difficulty, a consti-
tution for a west German state was formu-
lated in line with the London decisions of
June 1948. Although not completely satisfac-
tory either to the Germans or to the Western
Allies and highly offensive to the USSR, the
new west German government organized in
September 1949 may be expected to achieve a
greater degree of stability and progress than
has hitherto been possible under the condi-
tions of the Occupation. Nevertheless, fric-
tion between the new federal government and
the High Commission over differences of in-
terpretation of the Occupation Statute and
the Basic Law is inevitable and will cause Ger-
man dissatisfaction with occupation policies.
This will benefit Communist and nationalist
elements at the expense of political leaders
who favor cooperation with the Western
Powers. ,
Given time, the US may succeed through
the North Atlantic Treaty, the OEEC, and
other agencies in building up a degree of po-
litical and economic stability in Western Eu-
rope which would make it increasingly im-
politic for the USSR to contemplate using
military force to achieve its ultimate objec-
tives. In such a program Germany holds po-
tentially a key position, which it may ulti-
mately realize in a developing system of Euro-
pean cooperation or union. There is danger,
however, that already existing anti-demo-
cratic and nationalist tendencies will be
strengthened. As it is, the Germans feel no
particular responsibility for the second World
War, and their attitude toward the occupation
is one of tolerance rather than of cooperation.
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Against generous US economic assistance are
set such policies considered harmful to long-
term German interests as the Ruhr decisions,
the restrictions on trade and industry, and
the program of dismantlings. Such policies
have fostered German suspicions, exploited by
Soviet propaganda, that the UK and France
intend to eliminate Germany completely as a
future competitor for world markets. Even
the 31 March 1949 Allied agreement on pro-
hibited and restricted industries, by denying
exemption to such key industries as synthetic
fuel and rubber, has failed to overcome Ger-
man suspicion on this controversial point.
These views dampen enthusiasm for western
doctrines and encourage revival of national-
istic hopes. A progressive weakening of US
support would spell disaster, and another in-
flationary cycle in western Germany would
undo much of the good accomplished since
currency reform. So far, the western Ger-
mans have shown no desire to welcome Com-
munism as a way of life. This would not,
however, deter them from reaching a rap-
prochement with the USSR if such a course
appeared to be expedient.
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ENCLOSURE A
DISSENT OF THE INTELLIGENCE ORGANIZATION, DEPARTMENT OF STATE
OIR dissents because, although SR-20 ap-
pears to be accurate in the details covered, the
report does not present an adequate picture
of the situation in present day Germany.
The report is not focused on and does not ade-
quately discuss certain decisive political prob-
lems and tendencies in Germany today.
The following factors, among others, are
not at all or not adequately discussed: The
basic differences, in the political, social, and
economic structure of East and West Ger-
many (for example: semi-socialist system and
trend toward "People's Democracy" on the one
side, free enterprise and parliamentary de-
mocracy on the other) ; the political effects
of the fundamental social, and economic
changes in East Germany (for example; na-
tionalization, agrarian reform, elimination of
the old ruling groups) ; the political position
and policy of the West German Government
(for example: social basis, stability, proposed
legislation, bargaining position toward West-
ern Powers); the relationships between the
major political parties (for example: socialist
opposition; left-wing tendencies in the CDU) ;
the political role of business (for example: the
political aspiration of the Ruhr industries, em-
ployers' associations and their influence) ; the
tendencies toward East-West cooperation and
integration (for example: the pro-Eastern po-
tential in Western Germany, function of new
nationalism). OIR believes in consequence
that the text does not convey a sound under-
standing of the situation in Germany.
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L. E I
ENCLOSURE B
DISSENT OF THE INTELLIGENCE ORGANIZATION, DEPARTMENT OF STATE
Chapter II and Summary*
The organization for Research and Intelli-
gence in the Department of State dissents
from SR-20 (Chapter 2 and Summary) be-
cause it considers the report an inadequate
picture of the present German economic situa-
tion even though the data given in the report
appear generally accurate.
Many important current issues such as the
Ruhr problem, foreign trade prospects, trade
between western and eastern Germany, fiscal
and financial policies, investment needs, the
effects of ERP on the German economy, are
either omitted entirely or discussed inade-
quately. The two year plan for the Soviet
Zone as well as a number of other important
issues are mentioned in the summary but not
developed in the body of the report.
Although the report purports to be up-to-
date as of September 1, 1949, many facts and
figures lag behind that date. For example,
the application beginning in May 1949, of the
exchange rate DM 1?$0.30 to imports of food-
stuffs, and the resulting problem of food sub-
sidies is omitted. Other important events,
such as the devaluation of the mark and the
new decisions on dismantling have been
omitted because they occurred after Septem-
ber 1. These events are of such far-reaching
importance that an adequate picture of the
German economy cannot be given unless the
deadline is extended to include them.
In relation to matters that the report does
include, focus and emphasis are often dis-
torted, in that the relative space given to
various subjects is frequently out of proportion
with their relative importance.
The conclusion is that SR-20 (Chapter 2
and Summary) does not enable the reader to
obtain a reasonable and adequate impression
of the present economic state of Germany.
? Chapter II and the Summary were issued after the publication of the remainder of
the report and were therefore reviewed separately by the IAC agencies.
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0
APPENDIX A ?
TERRAIN AND CLIMATE
1. Terrain and Drainage.
The terrain of Germany is of two major
types. The northern part of the country is a
broad, undulating lowland that extends from
the North Sea eastward into Poland and the
USSR. Most of it is below 300 feet in eleva-
tion and aimoit all is under 600 feet. The
southern two-thirds of Germany is an upland
area with varied relief that rises to 5,000 feet
in places. The uplands consist of a complex
arrangement of mountain blocks and inter-
vening depressions. In the extreme south,
Germany includes some of the northern
ranges of the Alps. The highest peak is the
Zugspitze (9,720 feet).
The major rivers of Germany flow north-
ward to the North Sea or the Baltic Sea. The
only exception is the Danube, which flows
eastward to the Black Sea. In spite of its
length (560 miles from its source to Passau on
the Austrian frontier), the Danube is not as
Important for navigation as are the other
large German rivers. Transportation on the
Danube is limited mainly to small barges.
The river systems crossing the northern
plain, named from west to east, are the Rhine,
the Ems, the Weser, the Elbe, and the Oder.
The Rhine is the most important waterway of
Europe and the great unifying feature of
western Germany. With its three great trib-
utaries?the Main, the Neckar, and the Mo-
selle?it drains a large area. Between Basel
and Lauterbourg, the Rhine forms the fron-
tier between France and Germany; from Basel
to Bingen it flows northward through the rift
valley between the Vosges Mountains and the
Black Forest (Schwarzwald); from Bingen to
Bonn it cuts across the highlands in a deep
0 gorge; and below Bonn the river enters the
North German Plain. The mouth of the
Rhine, however, is in the Netherlands. The
meanders of the Rhine below Bonn were
straightened out and the entire river was reg-
ularized in the 19th century both to protect
the cultivated lands and to improve naviga-
tion.
Of the north-flowing rivers, only the Oder
River drains into the Baltic Sea. It is the
principal waterway of eastern Germany. The
Weser, Ems, and Elbe flow into the North Sea.
Neither the Ems nor the Weser is comparable
as a traffic artery with the Elbe, which is navi-
gable for barges as far upstream as Aussig in
Bohemia. Levees and embankments are nec-
essary along the lower courses of all four riv-
ers to minimize the effect of floods. Egress to
the sea can be insured only by constant
dredging of the shallow tidal estuaries, by the
maintenance of dykes, channels or ship ca-
nals, and by the construction of breakwaters
to prevent longshore drifting from blocking
the deepwater harbors.
a. The North German Plain.
The North German Plain, despite its low re-
lief, contains a variety of land forms and types
of economic development. In the west, it in-
cludes the Lower Rhine Plain, and the Mun-
ster and Cologne (KOln) lowlands, which ex-
tend like bays into the Rhine Highlands. The
Munster Bay is an area of low relief and fer-
tile soils that make it one of the most produc-
tive agricultural sections of Germany. Co-
logne Bay, though less productive, is well
above the German average. The nearly fiat
Lower Rhine Plain merges imperceptibly into
the Rhine Delta of the Netherlands. It is
noted particularly for its dairy industries.
Within the western section of the North
German Plain are some of the most important
Industrial regions of Germany. The Ruhr
coal fields, by far the most important in Ger-
many, lie along the northern margin of the
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Middle Rhine Highlands, and the industrial
Ruhr Region extends northward onto the
plains and supports a practically continuous
urban belt from the Rhine River eastward
through Essen to Dortmund. Important but
smaller industrial areas surround Cologne and
Aachen.
Along the North Sea, the coast from Emden
to the Danish border is low and sandy, and is
protected from the open sea by the Frisian
Islands that lie parallel to the coast and are
separated from it by stretches of tidal mud
and sand. The Ems, Weser, and Elbe flow
through broad, shallow estuaries to reach the
North Sea. Hamburg and Bremen, the most
important two ports of Germany, are located
up the estuaries respectively of the Elbe and
Weser, fax from the sea.
The Baltic coast, east of the Danish penin-
sula, is not protected by a chain of offshore
islands. The river mouths, especially along
the east Baltic coast, are exposed to longshore
currents, and sand bars have formed land-
locked, fresh water harbors or Haifa. South
of, and roughly parallel to the Baltic coast
from Denmark through East Prussia is a zone
of low sand and gravel hills intermixed with
small lakes. Inland from this zone is a belt
of lower land that was once the valley of a
large river system that flowed westward to the
North Sea. Today, the western end of this
valley is occupied by the Elbe River, whereas
farther east the drainage has .been' diverted
northward to the Baltic Sea.
South of the old valley is a second zone of
hills with poorly drained depressions that ex-
tends southeast from the North Sea to Silesia
and Poland. The western end of this zone is
heath that occupies much of the land between
the Ems and Weser rivers. East of the Elbe,
the areas of heath or moor are somewhat
smaller and are separated by valleys.
On the south, the North German Plain
merges into the Foreland of the German High-
lands. The Foreland is an area of better
drainage, fertile soils, and mineral deposits,
which make it one of the most productive and
densely populated parts of Germany. Han-
nover, Magdeburg, and Breslau are all located
along the northern margin of the Foreland
near extensive deposits of brown coal and salt.
b. The German Highlands.
South of the Foreland are the German
Highlands. This complex area consists of a
number of diverse features?basins, valleys,
plateaus, and mountains?which may be clas-
sified according to location into three general
groups: (1) the Western Uplands; (2) the
Central and Eastern Basins and Uplands; and
(3) a Middle Area that rises gradually from
north to south.
(1) The Western Uplands.
The northernmost of the western upland
areas is the Middle Rhine Highland. This is
divided into eastern and western plateau areas
by the Rhine River, which from Bingen to
Bonn flows through the narrow Rhine Gorge.
The plateau to the west of the river is bleak,
moor-covered, and sparsely populated. The
plateau is separated from the forest-covered
area to the south by the Moselle River, which
flows from the French border to Koblenz on
the Rhine. The Palatinate Hills farther south
are more dissected and merge into the Saar
Basin in the west. This basin, famous for its
coal deposits and industrial development, is
also an area of forested hills and cultivated
valleys.
East of the river, the Middle Rhine High-
lands begin immediately to the south of the
Ruhr Industrial Region. Along the northern
fringes of the highlands and in the valleys are
areas of considerable industrial importance
and medium-sized cities such as Solingen,
Remscheid, and Siegen. The eastern uplands
are less bleak than the plateau west of the
Rhine. The highest elevations and steepest
slopes occur in the northwest.
The eastern highlands are interrupted on
the south by the lower Main Valley, which in-
cludes the important city of Frankfurt, and
by the Neckar, which joins the Rhine at
Mannheim. Both the Main and the Neckar
valleys lead to the Middle Rhine Plain, a broad
lowland area of fertile soils and wide river ter-
races that are intensively cultivated. In the
past, its main significance has been agricul-
tural and commercial, but with the develop-
ment of Ludwigshafen and Mannheim, the
Rhine Valley has also become important in-
dustrially.
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South of the Main is the Odenwald and
south of the Neckar the higher and more
scenic Schwarzwald. The highlands continue
southward to the Swiss border.
(2) The Central and Eastern Basins and
Uplands.
The Eastern Uplands include the Sudeten
Mountains, the Ore Mountains (Erzgebirge),
and the Bohemian Forest, which together
form a rim of highlands around the Bohemian
Basin of Czechoslovakia. To the north, the
Erzgebirge open into Saxon Uplands. The
valleys of these mountains and uplands were
industrialized at an early date because of lo-
cal ore deposits. Today Chemnitz is the heart
of the modern industrial activity.
Between the Erzgebirge and Sudeten moun-
tains is the Elbe Gorge, which forms the gate-
way from Germany to the Bohemian Basin.
Dresden controls the entrance to this gate-
way. The Sudeten Mountains are heavily
wooded and sparsely populated but along the
northern foothills is an area of fertile soil,
high crop yields, and denser population. The
Bohemian Forest, the mountains along the
western border of Czechoslovakia, is continued
to the northwest as the Thuringian Forest.
Apart from their timber supply and attrac-
tions for summer resorting, these forested
mountain areas are of little economic impor-
tance.
North of the Thuringian Forest is the
Thuringian Basin which is drained by the
Saale River. It is an area of specialized in-
dustries and crafts that had their origin in
the Middle Ages. Salt deposits in the north
and lignite in the west are the basis of the
modern industry of the area. Although the
rougher lands in the basin are wooded, much
of the area is in pasture or under cultivation.
Within the basin is an east-west string of
small cities of cultural and industrial signifi-
cance. Among these are Eisenach, Gotha, Er-
furt, and Weimar.
The isolated block of the Harz Mountains
lies to the north of the Thuringian Basin and
is completely surrounded by lowlands. The
main lines of communication in Central Ger-
many circle the mountains. Only a few mi-
nor routes cut across this barrier.
(3) The Middle Area.
Midway between the two areas of diverse
highlands is a broad area of low relief that
slopes upwards to the Jura Uplands in the
south, continues to the Alpine Foreland, and
finally reaches the high elevations of the Alps.
The northernmost section is essentially the
basin of the upper Weser River and its tribu-
taries. The landscape is varied and includes
forested mountains, mountain meadows, and
broad river valleys with prosperous farms.
Separated from the northern area by old
volcanic mountains is a depression that in-
cludes the upper basins of the Main and
Neckar rivers. Here the relief is varied and
includes ridges, broad valleys, and low escarp-
ments. Nurnberg, the most important city
of the depression, is favorably located at a
break in one of the escarpments that affords
an easy route between the Main and Danube
valleys. Stuttgart, which ranks second to
Nurnberg in importance, is also a center of
modern industry. The depression, however,
is primarily an area of small homesteads,
fields, pastures, apple orchards, and pine for-
ests.
To the south, the depression ends abruptly
at the Jura Uplands, a series of north-facing,
limestone escarpments that stand out like
walls. The forested escarpments reach eleva-
tions of 1,200 feet in the north and many of
them are the sites of ancient castles. The
Jura Uplands dip gently to the south toward
the Danube River. The soils of much of the
upland have been stripped of their forest
cover, are of inferior quality, and support only
a scattered population, except in the river
valleys.
Beyond the Danube River, the Alpine Fore-
land rises gradually to the base of the Ba-
varian Alps. The northern part of the fore-
land is hilly and fertile. Elongated lakes are
found in the central part of the upland, and
extensive moors in the higher lands to the
south. The Iller, Lech, Isar, and Inn rivers,
which rise in the Alps, flow through broad
and, in many cases, swampy valleys. Munich,
the capital of Bavaria, is a transportation cen-
ter located at a point where East-West routes
cross the Isar River.
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Rising above the foreland on the south are
the true Alps, high limestone ridges that are
snow-covered most of the year. Picturesque
villages, Alpine lakes, and mountains combine
to make the area particularly attractive to
tourists. Valleys cut deeply into the moun-
tains and provide routes of communication
with the Inn Valley and from there to Italy
via the Brenner Pass.
2. Climate.
The climate of Germany is transitional be-
tween marine and continental. In western
and northern Germany the climate is moder-
ated somewhat by nearness to the Atlantic
Ocean and North Sea. To the east, summer
and winter temperatures become progres-
sively more extreme and rainfall lower. Ger-
many also lies in the path of eastward-moving
storm fronts, which bring rapid changes in
temperature and heavy rains. The influence
of the storms is more pronounced in the west
than in the east.
January mean temperatures average 32? F
or lower in eastern Germany and in the higher
elevations to the south, and 32? F or higher
in the west and northwest. When winds, as-
sociated with the advance of a polar front,
blow from the east or northeast, minimum
temperatures below 0? F may be experienced.
July means vary from 57? F to 67? F, being
higher in the east and south than in the west
and northwest. The number of days with
frost varies from lows of under 60 in the Rhine
Gorge area and 60 to 80 in western and north-
western Germany to over 120 in the mountain
areas in the south. Most of southern Ger-
many (where elevations of 1,000 to 3,000 feet
prevail) and east central Germany have 100 to
120 days of frost. Consequently, the growing
season is longest in the west and northwest
and shortest in the south and east.
Freezing temperatures produce ice condi-
tions less frequently on western than on east-
ern rivers. For example, the Rhine has an
average of 15 days with ice at Mainz and 13 at
ln, whereas the Elbe has 30 days at Magde-
burg and the Oder has 43 days at Frankfurt-
an-der-Oder. Coastal navigation on the North
Sea is seldom hampered by ice for more than
one or two days a year, although severe cold
spells may cause sea ice that lasts for a week
or more. The Kaiser Wilhelm Canal is af-
fected for ten days a year on the average.
Navigation on the Baltic coast may be stopped
for continuous periods from one to two
months.
Precipitation in the plains of north Ger-
many varies from 20 to 30 inches, with the
higher precipitation in the west. In the high-
est mountain areas to the south, however, the
rainfall averages over 60 inches a year. Rain-
fall is usually adequate at all seasons. A
slight maximum occurs in mid-summer, and
is more pronounced in the east than in the
west. In general, the amount of precipita-
tion varies little from year to year, the aver-
age departure from normal being about 12
percent for Berlin. The number of days on
which snow falls varies from less than 30 in
the west and northwest to over 50 in the ex-
treme east and the high mountains of the
south.
The cloudiest season is winter, and Decem-
ber is the cloudiest month everywhere, except
on the highest mountains. In December,
about 8/10 of the sky is covered on an average.
Even in the summer months, cloudiness aver-
ages about 6/10. Fog occurs most frequently
along the North Sea coast, with an average of
about 50 foggy days per year. Fogginess is
more prevalent in mid-winter in the north,
and in the fall in the rest of Germany. In
industrial towns, where the air is contami-
nated by smoke and fumes, as in the Ruhr re-
gion, the fogs are heaviest. Throughout Ger-
many visibility is highest in summer, when it
may be expected to exceed six miles on more
than half the days. Visibility is lowest dur-
ing January, February, and March.
In Germany, winds blow most frequently
from the southwest and least frequently from
the southeast. Wind intensity is greater near
the coast than inland. The windiest season is
winter along the coast, and early spring far-
ther inland. Summer is a season of light
winds, and September has the highest per-
centage of calm. Weather unfavorable for
flying is most frequent in the winter but even
then flying is possible more than half the
time. At air terminals the unfavorable
weather conditions most likely to interrupt
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flying are visibility of less than 21/2 miles and
ceilings lower than 1,000 feet. Between ter-
minals, unfavorable weather conditions likely
to interfere with air traffic are storm fronts,
layers of dense clouds, and severe icing and
turbulence at flight levels.
Winter also has the least favorable weather
for ground transportation. In January and
February the average road traffic for the
whole country decreases by approximately 15
to 20 percent.
Although the German climate is not espe-
cially pleasant, it is conducive to human
health and efficiency. Current studies place
the climate of Germany in the highest "hu-
man efficiency" category.
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APPENDIX B
SIGNIFICANT COMMUNICATIONS FACILITIES
1. Harbors.
Before the war Germany had 25 ports which
handled over 100,000,000 tons of shipping an-
nually. The largest of these, and one of the
largest in Europe, was Hamburg, which ac-
counted for approximately 40 percent of Ger-
man shipping activities in 1937. Bremen was
Germany's second port, although the volume
of ocean traffic passing through it was only
about a third of Hamburg's. These two ports
and their subsidiaries dealt with all the long-
distance passenger trade and most of the deep-
sea cargo vessels. The Baltic ports had a
much more restricted type of traffic concerned
primarily with short-sea cargo vessels trading
to the Baltic countries and with a limited pas-
senger service represented mainly by train-
ferry service to Denmark and Sweden. Coast-
wise traffic, by both tramp and liner, was well-
developed in prewar Germany, serving the
ports of each coast and forming a connection
between the two through the Kiel Canal. The
coastwise trade in 1937 constituted about one
quarter of all shipping entries.
The trade of Bremen and Hamburg was dis-
tributed over a great range of commodities
and countries. Bremen's position west of
Hamburg gave it a slight advantage in being
closer to the Ruhr industrial district and more
convenient to trans-Atlantic passenger traf-
fic. Bremen imported more cotton, nearly as
much wool, and a great deal more iron ore,
and it exported much more coal. Bremen was
not only the largest cotton-importing port in
Germany but through its well-organized cot-
ton exchange it supplied the textile industries
of a number of central European countries.
Essentially a railway port, Bremen's tonnage
of railway freight was not far below that of
Hamburg.* Both Bremen and Hamburg were
? Seagoing traffic at Hamburg during 1948 was '7.9
million tons or only 37 percent of the 1936 figure of
21.4 million tons.
important industrial centers, with extensive
shipbuilding facilities, drydocks, and related
industries, all of which were almost totally
destroyed by bombing during the war. The
port facilities were completely wrecked not
only from Allied air attacks but from German
scorched-earth tactics in rendering the ports
useless for Allied invasion operations.
When US forces took control of the ports in
the Bremen Enclave in April 1945, the basins
were filled with wreckage; docks and ware-
houses had been destroyed, and railways and
canals were inoperable. In addition, the har-
bor basins and the Weser estuary had been
mined extensively by the Germans. All navi-
gational lights and other aids to navigation
had been destroyed by the German Navy just
prior to the entry of the Allied forces, and
dredging during the war had been sadly neg-
lected. Moreover, the organizations which
had conducted and controlled engineering and
maintenance work in the rivers and ports, and
operated water transportation with all its
correlated activities, had disappeared.
The Bremen Civil Port Authority, a German
organization, was reconstituted and charged
with the actual operation of ports and water-
ways in the Enclave under US control. By
September 1945 the area had been cleared of
mines, and navy salvage groups began the
work of removing sunken vessels and other
obstacles to navigation. Although Bremen
was finally opened to ships of small tonnage
on 11 September 1945, the tonnage of cargo
discharged did not reach any proportions un-
til January 1946, when UNRRA shipments to
Czechoslovakia were diverted to that port. By
April 1946 the canal system connecting
Bremen with southern Germany had been
repaired to such an extent that water traffic
was again possible between the Enclave and
the US Zone.
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In 1945 the Allies designated Bremen and
Bremerhaven as ports for the US Zone and
set up Bremen and the surrounding area as
the "Bremen Enclave" under US occupation
and MG policy. In December 1945 the area
was placed under British MG policy while re-
taining US occupation and MG personnel. In
January 1947 the Enclave reverted to US con-
trol and was created as the fourth Land of the
US Zone. In order to keep occupation costs
at as low a figure as possible and to prevent
the drain of US currency from JEIA funds to
pay transportation charges from non-German
areas, shipping for the bizonal occupation
forces and for the general economy of western
Germany have passed through the ports of
Bremen or Hamburg.
Both the Dutch and Belgian governments
have objected to this diversion of US-UK trade
exclusively to German ports, arguing that
shorter ocean routes to Rotterdam and Ant-
werp, and natural barge routes from these
ports to western and southern Germany via
the Rhine and the canal system, mean cheaper
shipping costs as compared with the more
northerly German ports. Rail connections
are also shorter, and these natural advantages
in the past caused a good proportion of Ger-
man traffic to flow through Low Country ports
despite the attractive rail rates and heavy
port subsidies offered by the Reich. An in-
formal understanding was reached by all gov-
ernments concerned to route a certain propor-
tion of German imports and exports through
Low Country ports. Nothing came of it, how-
ever, because of MG objections to the accumu-
lation of debts in Germany in favor of other
nations, as these obligations might become an
additional liability of the Occupying Govern-
ments, which are already bearing the major
share of occupation costs. After further ne-
gotiation, however, the Low Country Port
Agreement was signed at Frankfurt 24 Sep-
tember 1948 and put into effect in November.
It permits German IWT and coaster craft to
enter Benelux ports and waterways, foreign
craft to utilize the German IWT system, and
establishes a Central Booking Office in Rot-
terdam to quote rates for the Rhine shipment
of Bizonal imports.
2. Inland Waterways.
Germany has led in the development of in-
land waterways, the physical geography of
the country facilitating this development.
The Rhine is unequalled among European
rivers in facilities for an enormous carrying
trade, and it provides the heavy industries of
the Ruhr with the great advantage of very
low transportation costs for ore and coal. In
the North German Plain, the Elbe and the
Oder follow courses which favor the movement
of cargoes toward the chief centers of industry
and population. A number of large canals
link the great rivers to form a comprehensive
network. The total length of canals and
rivers which can be used for inland naviga-
tion is 8,000 miles, of which 4,600 miles are of
major importance, including 1,500 miles of
canals. Most of the principal waterways ad-
mit barges with a carrying capacity of 1,000
tons, and the whole network carried 133 mil-
lion tons Cif cargo in 1937, which was 27 per-
cent of the freight moved by German railways
that year.
During the war a considerable proportion
of civilian goods was shifted from rail to water
to clear the railroads for military purposes,
and water-borne tonnage increased to 30 per-
cent. This was made possible by the excel-
lent canal system linking all parts of Germany
with the North and Baltic Seas, and by the
opening in 1938 of the Rothensee ship-lift on
the great Mittelland Canal, which provided
the necessary link for large barges between
the Rhine, the Ruhr, Berlin, and the Oder.
The state took control of inland waterways in
1921, and in 1935 the Reichs Transport Group
for Inland Shipping (R.V.B.) was organized
to advise the Government and to represent all
shippers and enterprises concerned with in-
land navigation. So well organized was the
system by 1939 that Germany's war purposes
were far better served than had been the case
in 1914.
As a result of the war, the channels were
blocked with the debris of fallen bridges and
sunken tugboats and barges. The canals, in
addition, sustained extensive damage to locks
and banks, which impeded their restoration
to a greater extent than the physical obstacles
in their channels. As a result, the main
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waterways were closed until the spring of 1946
and their traffic capacity reduced to 25 per-
cent of normal for the next three years.
About 75 percent of inland waterways are now
open to traffic but on many the restrictions
are such that the volume of traffic is far below
the prewar level. It is unlikely that prewar
traffic potential and efficiency on inland
waterways will be regained before 1955.
Inland navigation affords an important
means of relief to the over-taxed German rail-
way system. As much freight as possible has
been diverted to German waterways, which
carried 31 percent of the total tonnage in
1946 compared to 27 percent before the war,
although the volume of this tonnage was only
20 percent of what it was under normal con-
ditions. Terrific handicaps had to be over-
come in the replacement, repair, and upkeep
of the inland waterway fleet of tugs and
barges, which severely taxed the facilities of
the badly damaged shipyards. Of the prewar
tugs and barges about three-fourths re-
mained, and 60 percent of these had to be
raised and repaired before being put back into
service. The tonnage in operation declined in
1947 because the production of materials was
insufficient to keep pace with current repair
requirements. Many of the vessels, apart
from war damage, were over-age; and increase
in the total fleet on a scale to meet future
traffic requirements called for larger amounts
of material than could be made available for
this purpose. Despite these drawbacks, a to-
tal of 48,720,000 M.T. was loaded and dis-
charged on bizonal waterways in 1948, a 41
percent increase over 1947, although far
short of the 62.6 million tons carried in 1938.
3. Railways.
The outstanding feature of Germany's
transportation system, in peace as in war, was
its dependence on railroads. The country was
rich in coal and iron, but lacking in rubber
and oil. The distribution of German natural
resources depended on rail and water move-
ment rather than air and motor transport.
In the course of a century, Germany had de-
veloped an extensive railway and canal net-
work, which was constructed not only for
peacetime needs but for the requirements of
war. Although the Third Reich undertook
the motorization of Germany by constructing
an elaborate system of superhighways and
airfields, its main reliance continued to be
placed on railroads and canals. Occupying a
central position in the European continent,
German rail lines connected with the systems
of eight other countries, a connection which
favored both the operation of through train
services and the movement of trade across the
frontiers. By 1939 Germany was adequately
prepared for a land war based on internal lines
of communication. Despite later develop-
ments in aviation, and the use that could be
made of conquered resources, Germany was
unable to employ air transportation to the
fullest extent, except in emergencies.
The present railway system is substantially
the same one as that of 1914, totaling about
35,000 miles of tracks. As a consequence of
that war, Germany lost about 4,000 miles of
railway, and since then comparatively little
new building has been undertaken. Only
four hundred miles of track was laid in twenty
years and most of this duplicated existing sec-
tions. The main emphasis, apart from im-
proved train operation and design resulting in
increased speeds, shifted from construction to
policy and was marked by the gradual dis-
appearance of state and private railways, and
the emergence of the centralized Reichsbahn.
Under the Dawes Plan of 1924 a new national
railway system was organized as an autono-
mous entity called the Deutsche Reichsbahn-
Gesellschaft, the purpose being to mortgage
the railway network in order to secure its
earnings for the partial payment of repara-
tions. This scheme came to an end in 1932,
but the autonomous character of the organiza-
tion was continued and more lines were ab-
sorbed into the national system until 1937,
when the Nazis achieved the final absorption
of the railways. Less than six percent of the
lines then remained independent of the
Reichsbahn, which was highly organized and
scientifically operated for the purpose of de-
veloping the state both economically and stra-
tegically. The head of this organization, a
Cabinet Minister, controlled all means of
transportation in the Reich. The railways
employed 839,000 persons in 1939 and were
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financially sound, operating costs being lower
than elsewhere in Europe, with the traffic
fairly heavy and well distributed.
At the time of the capitulation, transport
in Germany was at a complete standstill, and
the Allies were faced with a tremendous re-
covery program. Wrecked rolling stock and
equipment, bombed or blown out bridges and
track, blocked 90 percent of the railway lines
in the Combined Zones. Over 2,600 bridges,
large and small, had been blown up, all the
Rhine crossings as well as those of the Weser
and Elbe were down, as were all crossings in
the Ruhr area. Few yards were workable and
most of them were filled with bombed or
burnt-out rolling stock. Workshops and en-
gine sheds were badly damaged, in some cases
totally destroyed. No record is available of
the destruction of locomotives and rolling
stock, which have been most difficult, if not
impossible to replace. It is estimated that 59
percent of the steam locomotives, 41 percent
of the electric locomotives, 37 percent of the
passenger cars, and 38 percent of the goods
wagons were lost or completely put out of
service as a result of war action. Neighbor-
ing countries have also seized or retained
rolling stock in good condition. The number
of serviceable goods wagons in the Combined
Zones declined from 232,000 in May 1946 to
179,000 in May 1947. This situation improved
slowly in 1948 until there were 247,854 freight
cars and 8,206 locomotives available for serv-
ice by December, a number considered ade-
quate for the immediate demands upon the
Transportation System.
The main contribution of the Bizone has
been the restoration of facilities for inter-
national transit traffic, both passenger and
freight, thus permitting the movement of such
important commodities as coal from Germany
into Poland, Belgium, and other war-ravaged
areas. Within a year of the surrender, 97
percent of the 13,000 kilometers of main-line
track in the US Zone was again in operation,
and 90 percent of the rail bridges had been re-
paired. By dint of overcrowding, more pas-
sengers were being moved than before the
war, and the average length of haul per pas-
senger is about twice what it was in 1936.
Freight haulage in the US Zone has recovered
to only 73 percent of normal, and little further
improvement may be expected until there are
more locomotives, cars, and a greater effi-
ciency of coal consumption. The Germans al-
lowed normal replacement standards to lapse
during the war, and a large amount of the
serviceable stock was over-age and in poor
condition because of the lack of necessary re-
pair materials; consequently the railroads use
an unnecessarily large amount of coal, at the
expense of industrial consumption.
Despite the fact that the railways were
given priority in obtaining materials needed
for their rehabilitation, German industry has
functioned at such a low level that it was dif-
ficult to procure the necessary supplies. The
amount of the machine tools supplied to the
repair shops have been inadequate so far, and
essential raw materials like rubber, leather,
and asbestos have been difficult to procure.
Nearby countries like Belgium and Czecho-
slovakia possess ample facilities for both the
manufacture and repair of rolling stocks, but
Germany lacked the requisite foreign ex-
change to obtain such equipment abroad until
ECA provided funds to build 17,000 freight
cars outside Germany and 3,000 in the Bizone
by 1 January 1949. It is estimated that 5,000
new locomotives and 200,000 new goods wag-
ons are required before German railways can
operate at a level sufficient to maintain the
over-all economy, and this does not allow for
the replacement of rails, switchpoints, and
signal equipment which have deteriorated to
the point where train movements are hazard-
ous. Financially the position of the Reichs-
bahn is unsound, because currency reform in-
creased operating costs, and decreased volume
of passenger traffic. Inadequate rates caused
an operating deficit of 160,000 D.M. by the
end of 1948. During the first quarter of 1949
operating revenue continued to decline and
no funds were available for major repair and
reconstruction. Railway personnel is re-
cruited largely from the prewar Reichsbahn,
except for the officials who were dismissed
under denazification laws.
Today there are 42,330 kilometers of service-
able first-line track in operation in all Ger-
many, of which 58 percent is located in the
bizonal area, 30 percent in the Soviet Zone,
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and 12 percent in the French Zone. Service-
able equipment is distributed among the zones
in about the same proportion, although dis-
mantlings in the Soviet Zone, particularly the
removal of track and rolling stock for ship-
ment to Russia, have seriously crippled trans-
port facilities in eastern Germany. In 1946
approximately 188 million tons of freight and
nearly 2 billion passengers were carried on
German railroads. Freight traffic in 1948 in-
creased to 276.5 million tons and passenger
traffic to 3 billion passengers. Railroads in
the 3 Western Zones carried about 70 percent
of the freight and 45 percent of the pas-
sengers. Restrictions imposed on rail ship-
ments between Berlin and the Western Zones
after 1 April 1948 by the USSR greatly re-
duced the volume of traffic, which ceased al-
together on 24 June 1948 when the USSR in-
stituted a blockade of the city. Following the
counterblockade imposed by the Western Al-
lies on 24 July 1948, all rail traffic between
the Soviet Zone and the Western Zones was
suspended until 12 May 1949 when the block-
ade was lifted and normal intercourse re-
sumed. Restoration of all transport facili-
ties in all four zones has been very slow, par-
ticularly with regard to locomotives and roll-
ing stock, because of material shortages.
4. Roads.
German roads were slow to assume impor-
tance in the national economy. They had a
haphazard local development and were not
designed for long-distance traffic. The best
main roads were generally equal to the high-
est European standards, but on the average,
German roads compared unfavorably with
those of France and England, being fewer in
number per unit of population and having
narrower, poorer surfaces. During the winter
months, snow, ice, and fog reduced the move-
ment of road traffic as much as 20 percent.
German roads deteriorated badly during
the first World War and continued to deterio-
rate for some years thereafter despite spo-
radic efforts to improve them sufficiently to
accommodate an increasing volume of motor
traffic. Not until the advent of the Nazis did
road construction become an important phase
of government policy, of which the auto-
bahnen scheme was the outstanding aspect.
This was the most imposing engineering proj-
ect undertaken by the Nazis, calling for 4,500
miles of super-highway, of which about 65
percent had been completed by 1939. The
autobahnen system comprised a grid consist-
ing of six principal highways, two running
across the country from north to south, three
from east to west, and one from the northwest
to the southeast (Hamburg to Breslau via
Berlin). The new highways began and ended
at strategic points on the frontiers and served
directly all the important industrial areas and
regional administrative centers. Cities and
other built-up areas were detoured so that
high-speed long-distance traffic might avoid
congested streets. About 91 percent of all
autobahnen surfacing consisted of concrete.
Numerous bridges were built to carry the
autobahnen over railways, secondary roads,
canals, rivers, and other obstructions to
through traffic.
National road administration was unified
for the first time in 1934 with the creation of
a supreme department of road construction
and maintenance. All state and municipal
rights in road building or planning were abol-
ished, and complete authority was given to an
Inspector-General of Roads in the Ministry of
Transport. Although the number of motor
vehicles in Germany tripled in the years be-
tween 1934 and 1938, this still represented
only 1 vehicle to every 44 persons, compared
with 1 to 19 in Great Britain and France.*
Despite Nazi efforts to motorize the country,
German motor transport, when war came,
was still in its initial stages and carried only
about 3 percent of the freight carried annually
by the railways.
In the closing stages of World War II re-
treating German armies carried out road dem-
olitions designed to hinder the Allied ad-
vance. At the commencement of the occupa-
tion the highways were in a chaotic condition,
and many of the routes were impassable as a
result of blown-out bridges. Highway trans-
port was old, war damaged, and completely
? 64,422 motor vehicles were produced in the Bi-
zone in 1948 (29,942 passenger cars, 27,951 trucks,
5,662 tractors, rest miscellaneous). This was about
55 percent of 1936 production.
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disorganized. Only 60 percent of the vehicles
had escaped destruction and could be put back
into service. Other transport agencies were
in worse shape, however, and until the rail-
roads and inland waterways could be brought
back into operation, a disproportionate bur-
den had to be borne by road vehicles. Once
this was accomplished, it was decided to con-
fine commercial highway traffic to short-haul
freight and passenger service that could not
be carried by water or rail, a restriction made
necessary by Germany's inability to pay for
large imports of gasoline, lubricants, rubber
tires, and spare parts. Moreover, the supply
of road-making materials, especially asphalt,
has been so short that only one-third of even
the military road network could be main-
tained. By July 1947 some 15 percent of the
damaged highway bridges had been perma-
nently repaired and 68 percent had been tem-
porarily put into service pending replacement
by permanent structures. All but a very small
mileage of the total highway system was open
to traffic by January 1949, although only 25
percent of it was in good repair. Although
systematic reconstruction of the highway net-
work was delayed to some extent by financial
stringency in 1948, labor and materials were
available in sufficient quantities, and consider-
able progress was made in restoring the road
system to its normal traffic capacity. Lack
of funds for long-term capital investment is
the principal obstacle in the way of further
rehabilitation of the entire German transport
complex.
5. Telecommunications.
Prior to the war Germany maintained one
of the most complete communications systems
in the world. All postal, telephone, and tele-
graph services were provided by a govern-
mental agency known as the Reichspost,
which functioned as a department of national
government headed by a Cabinet Minister.
In addition to providing an extensive postal
banking system, the Reichspost operated the
largest commercial motorbus system in Ger-
many, consisting of more than 5,000 lines.
Since the occupation, Reichspost participa-
tion in commercial transportation has been
sharply reduced. The Reichspost was also
active in radio services, operating all public
broadcast transmission facilities, engaging ac-
tively in research and development, and act-
ing as the licensing agency for other radio
services. This phase of communications has
been removed from Reichspost control and
placed under Land broadcasting corporations
established by the Laenderrat. Reichspost
participation in this field is limited to the pro-
vision of wire and cable facilities, and the col-
lection of radio receiver fees. These steps
were taken in conformance with MG policy for
general economic decentralization where prac-
ticable.
During the war the efficiency and grade of
Reichspost services deteriorated rapidly as
trained personnel was drafted into the army
and equipment suffered heavy damage from
Allied bombings. Conditions were such that
the cessation of all services was ordered on
VE-Day. Rehabilitation was at once under-
taken, however, and by the end of 1945 all
important services had been restored within
the US Zone. Since the economic merger of
the US-UK Zones on 1 January 1947, all
Reichspost services rendered prior to the oc-
cupation have been re-instituted within the
bizonal area. Major postal and telecommuni-
cations services have also been re-established
interzonally with the French and Soviet Zones
and the City of Berlin. By May 1947 more
than 70 percent of the telephones and approxi-
mately 98 percent of the prewar telephone
central offices had been restored to service in
the US Zone. Rehabilitation of long-distance
cable facilities has progressed as rapidly as
materials have become available, but are still
inadequate for current requirements. All
long-distance communications facilities were
transferred to the Reichspost on 1 October
1947, including those employed by the occu-
pational forces, and full responsibility for the
provision of bizonal telecommunications serv-
ices was assumed by German bizonal agencies.
International telecommunications involve a
variety of complications, mostly of a financial
nature, and it was not until January 1947 that
quadripartite approval in principle was
reached on the re-establishment of these serv-
ices. Through special arrangements, both in-
ternational telephone and telegraph services
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were established in the US-UK Zones on .1
April 1947, and are now available to the US
and all countries in the Western Hemisphere
as well as to all Western European nations
with the exception of Spain and Portugal.
There are no restrictions on incoming calls
or messages, but only those German residents
of the US-UK Zones who are engaged in busi-
ness activities beneficial to the economic re-
covery of Germany are licensed by JEIA to
initiate international traffic payable in Reichs-
marks. The consummation of business deals
or contracts is not permitted, however, nor is
the discussion of Germany's external assets
allowed.
In most respects, the Deutsche Post shares
the difficulties and shortages common to the
whole of the bizonal economy. By far the
greatest shortage at present is textiles, re-
quired principally for the manufacture of tele-
phone instrument and switchboard cords.
Procurement of other essential material has
improved partially as a result of ERP aid. As
construction materials and labor became in-
creasingly available during the last quarter
of 1948 the program of permanent reconstruc-
tion of communication facilities made sub-
stantial progress The vast extent of war
damage, as well as the cumulative normal de-
preciation of the war years, remains a limiting
factor, however, and by the beginning of 1949
communications plant facilities?both build-
ing space and technical equipment?were still
much more limited than those in use before
the war. At the same time, domestic tele-
graph, telephone, and postal service volume
were three times greater than prewar volumes.
Personnel efficiency is much greater since
currency reform, and service quality has
therefore shown improvement more rapidly
than the rate reflected merely by rehabilita-
tion of equipment. Although there were 7
percent fewer telephones in 1948 than in 1937,
domestic long distance telephone traffic origi-
nating in the three western zones was 162 per-
cent of the 1937 volume, and quarterly reve-
nues for 1948 were 43 percent above quarterly
revenues for 1938.
6. Civil Aviation.
Civil aviation in Germany, which lacks as
yet a unified national status and which func-
tions under zonal control of four foreign oc-
cupying powers, has necessarily followed a
pattern of development prescribed by these
powers. The Potsdam Agreement provides
only that Germany's war potential should be
eliminated and made no specific reference to
civil air activity. Prescription of an over-all
civil air pattern to apply uniformly to the four
occupied zones, however, has been thwarted
by cleavage among the occupying powers,
leading to partition, and consequent unbal-
anced development of civil aviation in Ger-
many.
The Western Powers have consistently sup-
ported adoption of a policy designed to open
German air space to controlled world air com-
merce and to develop civil aviation in Ger-
many within the limits imposed by the Pots-
dam Agreement; the USSR, equally consist-
ently, has blocked all efforts toward four-
power agreement on either count, unilaterally
construing the Potsdam Agreement as pre-
cluding any phase of national civil air activity.
Inevitably, the schism between Western and
Eastern ideology has led to zonal partition of
German civil air endeavors to conform to the
opposing ideals, producing unbalance in the
development of civil aviation in Germany as
a whole.
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APPENDIX C
POPULATION STATISTICS AND CHARACTERISTICS
As a result of the war there have been vio-
lent dislocations of the total population and
profound disruption in the conditions of liv-
ing and employment in postwar Germany.
Total defeat, with its terrific war casualties,
amounting to 4 million killed and approxi-
mately 1.5 million still held outside Germany
as prisoners of war (January 1949), shattered
the former social fabric and crippled every
phase of the national economy. Despite these
losses and the continued retention by the
USSR of a large number of prisoners, the
population has actually increased with the ac-
quisition of roughly 10 million refugees, in-
cluding 2 to 3 million "Volksdeutsche" from
neighboring countries. On a land area 24
percent smaller than in 1936, Germany is sup-
porting 20 percent more people. Every war
has produced its homeless refugees, but never
before in modern history has there been such
an extensive organized transfer of population
as that provided for in Article XIII of the
Potsdam Agreement. Acute shortages in
many of the essentials of living and corre-
spondingly limited opportunities for employ-
ment, the assimilation of refugees and ex-
pellees into the German community are
among the more formidable problems facing
the German people today.
The German population grew rapidly in the
prewar years, practically doubling between the
establishment of the Empire in 1871 and the
outbreak of World War II. After the advent
of the Nazis, with their program of special
incentives to propagation and their policy of
annexing contiguous territories containing a
high percentage of German inhabitants, the
Increase was even more spectacular. In the
old Reich the increase was 4 percent between
1933 and 1939, while the population of Greater
Germany, so-called, which included Austria,
the Sudetenland, and the Saar, had grown 20
percent. The density of population was de-
termined by the distribution of natural re-
sources, the heaviest concentrations of inhabi-
tants occurring along the southern and east-
ern borders: in the Ruhr, along the Rhine,
and in Silesia. A population belt of lesser
density stretched along the northern coast,
with its large ports surrounded by agricultural
areas reclaimed from the sea over a long pe-
riod of time by dykes and drainage canals, as
in Holland. The central plain of Germany,
which has few resources and a poor soil, had a
relatively sparse population, except for the
big industrial cities.
The industrialization of Germany caused
an immense growth of its cities and towns.
Urban population quadrupled while the popu-
lation as a whole was doubling in numbers,
and 65 percent of the people were living in
cities by 1939. The movement from farm to
industry was accelerated during the Nazi re-
gime, which saw a 10.6 percent occupational
decline in agriculture and an 8.6 percent
growth in industrial employment. The great-
DENSITY OF POPULATION IN FOUR ZONES
Area in
sq. km.
Population
1946
Persons
per sq. km.
1939 I 1946
British Zone
97,714
22,303,042
203
228
French Zone
42,814
5,939,807
145
139
Soviet Zone
107,805
17,313,581
141
161
Soviet Zone
108,689
20,493,964
180
189
Including Berlin
United States Zone
107,461
17,174,367
133
160
TOTAL
356,678
65,911,180
168
185
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est occupational change in this period was a
34.2 percent increase in the number of public
servants, who constituted the enormous
bureaucracy essential to the functioning of
authoritarian government in preparation for
total war. After the war, however, the trend
to the cities was sharply reversed. Urban
population declined 14 percent and rural areas
gained 29 percent as war damage and hunger
forced people to abandon their wrecked homes
in search of food, shelter, and employment in
the country. A considerable part of this
postwar gain in rural population derives from
the occupation policy of settling refugees and
expellees on farms, where they contribute
little to agricultural productivity and are
merely a burden upon the farmer.
In line with postwar developments, the
population of the city of Berlin has decreased
26.4 percent. In Germany, as a whole, the
only one of the four occupation areas to show
a decrease has been the French Zone, the
population having fallen off 4.3 percent, which
may be accounted for in part by the transfer
of a great many Germans to the Saar to work
in the coal mines. On the other hand, the
US Zone has shown the greatest percentage of
Increase with 20.5, the Soviet Zone is next with
13.7, and the UK Zone third with 12.7. One
of the most significant features of the present
situation is the great disproportion between
males and females in all four zones and in
Berlin. In all of Germany there are 8 million
more women than men, with the most extreme
disproportion occurring in the Soviet Zone,
where women are 76 percent more numerous
than men. This situation arises in part from
the Soviet policy of deporting great numbers
of German workers to Russia and in part from
Soviet retention of German prisoners of war.
The disproportion for all of Germany is 24
percent. If all the prisoners of war outside
Germany were returned, it would do much to
restore a normal economic potential to the
country and a more normal pattern to family
and community life.
The population problem for Germany would
appear to be that of a largely industrialized
people living in a much smaller area than for-
merly but in greater numbers, a disproportion-
ate number of females, and several million
new people difficult to assimilate. Greatly
decreased industrialization and the impossi-
bility of adding appreciably to the farm popu-
lation make it very difficult to fmd gainful
employment or to produce food enough to sup-
port everybody. This in turn is relevant to
another serious condition in Germany?the
great decrease in the number of able-bodied
persons capable of earning their own living
and of contributing to the economy of the
country. While in the long run it may be
possible to absorb the expellees and redress the
imbalance of the sexes, the lack of material
facilities needed to maintain the population
will require more outside assistance than any
so far undertaken for the revival of the Ger-
man economy.
The population of Germany is more mixed
racially than that of any other country in
central Europe and probably on the whole
continent. This is not surprising in view of
Germany's extent and central position and
the geographically ill-defined nature of the
national frontiers, as well as of the fact that
it was settled by a number of tribes and has
been the scene of various migrations. The
racial or ethnic character of the German
people results chiefly from an age-long inter-
mixture of Nordic and Alpine stocks, with the
former prevailing in the northern and west-
ern areas, and the latter in the southern re-
gion along the Rhine and the Danube. East
of the Oder, definitely Slav types appear,
broad-faced and broad-headed. In central
Germany there is a very mixed population.
Racial differentiations at best are blurred or
obscure, and the sharpest divergence among
peoples in various parts of Germany occurs in
the matter of dialect. Phonetic differences
are most apparent between northern and
southern areas, with the speech of the former
retaining the old Saxon characteristics (Low
German), while the latter underwent consid-
erable modification into High German. Each
area in turn contains a number of dialects
which differ markedly from each other.
These differences have been much reduced in
recent years by mass culture media,* while
? Pronunciation, for example, was standardized in
1.898 by Theodor Siebs, whose treatise on the subject
was widely used in the schools, on the stage, by
radio announcers, etc.
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the ethnic problem was clarified, officially any-
how, by the Nazis, who imposed upon their
countrymen the myth of a single superior
Teutonic race, undefiled by alien mixtures of
any sort.
In the hands of the Nazis the theory of
creed of the Master race became an important
political weapon. A class-conscious society
servilely obedient to the voice of authority
facilitated the ready acceptance of this doc-
trine at home. The effect on German youth
was particularly deplorable, and it shaped
to a considerable extent Nazi policy both at
home and abroad. Some of the consequences
were the anti-Semitic laws depriving German
Jews of their rights and resulting ultimately in
their practical extinction, sterilization of the
unfit, "mercy killings" of the aged and infirm,
special incentives to Aryan youths to propa-
gate ad libitum, and a profound hostility to the
Christian religion.
In 1933 there were 40 million Evangelical
Protestants in the old Reich, 21 million Catho-
lics, and about 500,000 Jews. In 1946 there
were 40 million Protestants, 24 million Catho-
lics, and a negligible number of Jews, probably
less than 50,000. While there is no clear-cut
geographical distribution of the three main
religious creeds?Roman Catholic, Lutheran,
and Calvinist?the provinces of the north
German plain from Schleswig-Holstein to East
Prussia have very large Protestant majorities,
although Oldenburg and Hesse have substan-
tial Catholic minorities. Both to the west and
east of the northern plain?in the Rhineland
and in Westphalia as in Silesia?there are
Catholic majorities; while in the south, Ba-
varia is overwhelmingly Catholic, Baden some-
what less so, and Wuerttemberg is Protestant.
The development of Protestantism in Germany
since the Reformation has very largely been
under secular control, first of the territorial
Princes, then of the Laender, , and after 1871
of the Reich as well. Under the Weimar Re-
public the Laender continued to maintain im-
portant rights of supervision over the Evan-
gelical churches, especially over the adminis-
tration of their finances, and to give the aid
of civil power in the collection of church
taxes.* The Roman Catholic Church, on the
other hand, successfully resisted secular in-
terference with its affairs despite the efforts of
Bismarck to force upon German Catholics the
same cultural uniformity to which all other
Germans had to submit. Under Wilhelm II,
as well as under the Weimar Republic, the
Catholic Church was left alone and grew in
prosperity and numbers. The political in-
fluence of the Center (Catholic) Party and of
the Christian trade unions also continued to
grow. The rise of the Social-Democratic Party
after 1871, with its definitely anti-religious
propaganda, alienated many of the working
class from both churches. Only the Catholic
Church was able to retain a hold over the in-
dustrial masses in certain strongly Catholic
districts like the Ruhr and Upper Silesia
through Christian trade unions and social and
religious organizations.
The Nazi religious program aimed at the
creation of a single German National Church
on a strictly racial-nationalist basis. The fig-
ure of Christ was to be retained but in the
guise of an heroic Nordic leader, done to
death by the Jews and misinterpreted by an-
other Jew, St. Paul. The historic close con-
nection between church and state facilitated
Nazi control of the Evangelical churches,
which were quickly converted into instruments
of the Nazi ideology despite the resistance of
many Protestant pastors, mostly of the
"Confessional" wing.** The Catholic Church
proved more awkward to handle, but unre-
lenting pressure, both political and economic,
as well as campaigns of intimidation and vio-
lence, greatly circumscribed Catholic activi-
ties. By suppressing all religious youth or-
ganizations, absorbing all German children
into the Hitler Jugend, and substituting "un-
denominational" for confessional schools, the
Nazis undertook to lay the foundation of their
German National Church. The outbreak of
the war intensified the persecution of both
Protestants and Catholics, and the concen-
tration camps were filled with people who
chose to remain loyal to their religious beliefs.
_
? 256 million marks were collected by state taxa-
tion for all Churches In 1937.
?? Organized in 1934 by Martin Niemoller to op-
pose Nazi attempts to unify the GEC by means of
false doctrine, force, etc.
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C
APPENDIX D
SIGNIFICANT BIOGRAPHICAL DATA
ADENAUER, KONRAD
Konrad Adenauer. Age 73. The first
Chancellor of the new German Federal Re-
public, Adenauer's political power is rooted in
his position as chairman of the Christian
Democratic Union (CDU) in the British Zone,
which makes him in effect the leader of the
largest party in western Germany. Ade-
nauer's Catholic, bureaucratic background,
and his administrative career under the Wei-
mar Republic explain his strong conservative
tendencies. Although a strong proponent of
a federated Germany within a future feder-
ated Europe, Adenauer has become increas-
ingly critical of certain policies of the western
occupation powers, and notably that of dis-
mantling. As can be expected, he is strongly
anti-Marxist, and opposed to any national-
ization of industry, for which reason he has
been adamantly against political partnership
with the Social Democratic Party (SPD). De-
spite his western orientation, Adenauer will,
in relations between western Germany and
the Soviet Zone, avoid any policy which in
his estimation would imperil the ultimate re-
unification of Germany.
ARNOLD, KARL
Karl Arnold. Age 48. Minister-President
of North Rhine-Westphalia, the largest Land
in west Germany, and President of the west
German Bundesrat, Arnold is the leader of
the left wing of the Christian Democratic
Union (CDU) and is, next to Adenauer, the
most prominent figure in that party. Before
1933, Arnold was a functionary in the German
Christian labor unions, and since 1945 has
represented a much more progressive social
and economic stand than that officially
adopted by his party. Arnold would not be
adverse to political coalition with the Social
Democratic Party (SPD), nor to a modified
socialization program. He is a proponent of
European federation and of German coopera-
tion with the west, but is also a staunch de-
fender of German national interests, as his
campaign against the west German border rec-
tifications early in 1949 testifies. Arnold is
regarded by the supporters of the federalistic
principle as the chief centralist within the
CDU.
EISLER, GERHART
Gerhart Eisler. Age 52. Active in Com-
munist Party movement since 1919 and, to-
gether with Ulbricht, probably one of the more
influential German Communists in eastern
Germany today. His Communist activity has
been spread over a number of European coun-
tries including Austria, Denmark, Czecho-
slovakia, Spain, and France. In Spain he
fought with the Loyalists in the International
Brigade. Offered a haven from a French con-
centration camp in the United States, Eisler
soon became one of the key Communist agents
in the Western Hemisphere. In 1947 Eisler
was indicted and convicted in the US for pass-
port fraud and contempt of Congress. After
his escape from the United States on the
Polish liner "Batory" in May 1949 and his
subsequent release by a British extradition
court, Eisler was welcomed in the Soviet Zone
of Germany, where he immediately joined the
SED, and assumed his duties as a member of
the People's Council. Shortly afterwards he
was appointed chief of the Information Di-
vision of the Soviet Zone Central Administra-
tion. As a Communist of long standing who
has withstood the acid test of Western capital-
istic influence, Eisler enjoys the complete con-
fidence of the Soviet Communist Party and is
often photographed with such top Soviet offi-
cials in Germany as Ambassador Semenov.
He and Walter Ulbricht (q.v.) are the most
influential theoreticians of the Marxist-Lenin-
ist school in eastern Germany today.
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FISCHER, KURT
Kurt Fischer. Age 49. Fischer, one of the
old-line Moscow-trained German Communists,
has since July 1948 been the chief of the Ger-
man Administration of the Interior (GM) of
the Soviet Zone. He is at present one of the
key men in the Soviet control mechanism, in
a position which is rapidly becoming the most
powerful in the entire Soviet Zone. Fischer
is a fanatical and ruthless Communist who
has rendered yeoman service to the SMA in
his present position, and also earlier as Minis-
ter of the Interior in Land Saxony. Although
Fischer's relations with the Socialist Unity
Party (SED) hierarchy have on occasion been
cool, there is no doubt as to his unswerving
loyalty to the USSR.
GROTEWOHL, OITO
Otto Grotewohl. Age 54. Co-chairman of
the Socialist Unity Party. Grotewohl was ex-
pelled from the Social Democratic Party in
April 1946 because of his activities with the
SED. Now Prime Minister of the new German
Democratic Republic, he has consistently
followed the Moscow line. He has been in the
Social Democratic movement since 1910, repre-
sented the SPD in the Reichstag, and held the
post of Minister of Interior and Justice in the
Brunswick Government for several years. He
remained in Germany and was arrested a num-
ber of times between 1933-1945. In 1945 he
became chairman of the SPD central com-
mittee and then led the SPD in the National
Front movement of the left wing parties in
Berlin. Upon the formation of the Com-
munist-sponsored Peoples Council, Grotewohl
was elected to its presidium. Since the war
he has made several trips to Moscow and has
visited Belgrade, Budapest, Prague, and War-
saw. He is said to have received Soviet citizen-
ship and the rank of major in the Red Army.
REUSS, THEODOR
Theodor Heuss. Age 65. Heuss was elected
first President of the German Federal Repub-
lic on 12 September 1949. Prior to becoming
Federal President, he was Chairman of the
Free Democratic Party (FDP) in western Ger-
many. A liberal journalist by profession,
Heuss was also a Reichstag deputy for seven
years prior to 1933, and has served as a Land-
tag delegate in Wuerttemberg-Baden since
1946. Heuss considers his primary function
as Federal President to be that of an arbiter
between the various conflicting elements in
the Bundestag. He inclines toward the left
wing of the FDP and opposes both unre-
strained nationalism and extreme federalism.
Heuss is strongly anti-Communist and anti-
Soviet, and wholeheartedly in favor of Ger-
many's equal participation in a United States
of Europe.
KOEHLER, ERICH
Erich Koehler. Age 57. Elected president
of the Bundestag (Lower House) of the Ger-
man Federal Republic. As president of the
Bizonal Economic Council, he showed himself
to be an excellent mediator and administrator,
although his political perception and under-
standing of social and economic issues have
been questioned. While he devoted most of
his time to business activities until 1945, he
had been active as a member of the National
Executive of the German People's Party until
1933. As member of the Hesse Constituent
Assembly and chairman of the administrative
council of the Hesse Provincial Central Bank
Koehler won the respect of all with whom he
came into contact. His ability to mediate and
arbitrate frequently has served as a buffer be-
tween his own party, the CDU, and the SPD,
as well as between Military Government and
the Germans.
OLLENHAUER, ERICH
Erich 011enhauer. Age 48. 011enhauer is
Vice-Chairman of the Social Democratic Party
(SPD) in west Germany and unofficial leader
of the SPD minority in the new Bundestag.
Active ever since 1920 in the SPD, 011enhauer
is considered one of the most astute and well-
balanced machine politicians in Germany
today, although he lacks the outstanding ora-
torical abilities of his party chief, Dr. Schu-
macher. 011enhauer, a "right-wing" Social
Democrat, enjoys Schumacher's full confi-
dence and is expected to assume the chairman-
ship of the SPD whenever Schumacher is no
longer able to continue in that post.
PIECK, WILHELM
Wilhelm Pieck. Age 73. As co-chairman
of the Socialist Unity Party (SED) he is the
"grand old man" of German Communism.
Born in Guben, Brandenburg, and apprenticed
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as a wood-worker, Pieck has been active in
union and Marxist circles since the start of
the century. He was one of the original mem-
bers of the German Communist Party founded
by Rosa Luxemburg and Karl Liebknecht.
Prominent in all the social turmoil of the
twenties, Pieck was forced to leave Germany
for the USSR in 1933. A member of the ex-
ecutive of the Comintern, he was one of the
founders of the Free Germany Committee
(NKFD) in 1943 and has been influential in
its subsequent development. He consistently
follows the Moscow party line. Because of his
prestige as leader of the SED, Pieck is one of
the best known political figures in Germany to-
day. Although recently he has appeared to
be developing into a figurehead for younger
elements of the party because of his age and
poor health, he is reported to be even now a
restraining influence on the more violent party
members. Pieck also retains his value as a
symbol for German Communism and as such
will continue to be exploited by the Soviets.
RAU, HEINRICH
Heinrich Rau. Age 50. Chairman of the
German Economic Commission (DWK) of the
Soviet Zone, Rau has been an active Com-
munist ever since the founding of the Sparta-
cus League in 1919. After Hitler's advent to
power, he was for several years an agricultural
economist in Moscow, and fought later with
the First International Brigade in the Spanish
Civil War. Rau, as a completely dependable
tool of Moscow, has the full support of Walter
Ulbricht in his present position, despite the
reported desire of certain "nationalist" SED
circles to bring about his downfall. Rau is
one of the ablest and most successful Com-
munist economic administrators, and is
largely responsible for the development of the
current Two-Year Plan for the expansion of
the Soviet Zone economy. Holding the high-
est administrative position in the Soviet Zone,
Rau would probably be one of the key figures
in any separate East German State.
SCHMID, KARL
Karl Schmid. Age 53. Vice-President of
the Bundestag, former Deputy State-President
and Minister of Justice of Wuerttemberg-
Hohenzollern, and Chairman of the Social
Democratic Party (SPD) in that Land, Schmid
is the only outstanding politician from the
French Zone on the west German scene today.
With his legal and academic background, he
was highly influential in shaping the Bonn
Constitution, and is almost certain to prove
the most prominent SPD speaker in the new
Bundestag. Schmid's advocacy of European
federation and of cordial Franco-German co-
operation is understandable in view of his own
French and German descent. Although he
was the German Military Administrator of
Lille, France, during World War II, Schmid
was not subject to reproach for any actions
of his during this time, but actually won
praise for his Francophile attitude. Despite
repeated rumors of his being a French tool and
at odds with the SPD leadership, his independ-
ence and his good standing within his own
party do not appear open to question.
SCHUMACHER, KURT
Kurt Schumacher. Age 54. Chairman of
the Central Committee of the Social Demo-
cratic Party (SPD) and one of the most in-
fluential politicians in Germany, Schumacher
has made of his party the most firmly anti-
Communist and anti-Soviet political unit in
Germany today.
Of a bourgeois academic background, he ad-
vocates a socialistic national state including
the territory east of the Oder. An extraordi-
narily able speaker despite infirmities from
World War I and his ten years in a concentra-
tion camp, Schumacher, although opposed by
many leaders of his party, has practical and
undisputed control of the western SPD, as well
as a strong influence on surviving SPD ele-
ments in Soviet-controlled territory. Al-
though critical of certain US-UK Zone do-
mestic policies, he has cooperated in opposing
Communist infiltration and in supporting the
Marshall Plan. The main bone of contention
between Schumacher and the SMA is over the
readmittance of an independent SPD in the
Soviet Zone. Although Schumacher's physi-
cal condition has long been poor, it has not
caused him to relax his control over the party
and his political activity may well continue
for a long time to come.
ULBRICHT, WALTER
Walter Ulbricht. Age 56. As leader of the
Moscow-trained wing of the Socialist Unity
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D-4 SECRET
Party (BED) and trusted agent of the Krem-
lin, Ulbricht is the most powerful German
figure in the Soviet Zone of Germany. Origi-
nally a Leipzig wood-worker, he has been an
active Communist since 1919. Before 1933,
Ulbricht was a member of the Central Execu-
tive Committee of the German Communist
Party and Secretary of the Berlin District
organization. Later he was one of the Com-
munist "brain trust" in Madrid during the
Spanish Civil War. He helped form the Free
Germany Committee in July 1943 and later
returned to Germany with the Red Army.
Active in various Soviet-inspired organizations,
Ulbricht concerns himself with practically
every aspect of administration in the Soviet
Zone. His principal contribution to Soviet
Zone politics has been: (1) ardent sponsorship
of the merger to form the SED; (2) the Antifa
Bloc Policy; and (3) energetic support of
Soviet policies directed at creation of a police
state in the Soviet Zone.
SE C RET
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C,
APPENDIX E
CHRONOLOGY
1870 Franco-Prussian War: Napoleon III surrenders at Sedan (September 2) and
France yields Alsace-Lorraine and large indemnity in peace treaty.
1871 German Empire established, the constitution coming into effect 1 January and
King William of Prussia crowned Emperor at Versailles on 18 January.
1890 Resignation of Bismarck as Chancellor (18 March); Wilhelm II takes over direc-
tion of German foreign and domestic policy.
1900-14 Growing tension between the Triple Alliance and the Entente over trade, arma-
ments, colonies, etc.; Germany gives Austria free hand in the Balkans (1908),
thus angering Russia and reversing Bismarck policy of friendly relations on
the East.
1914 Assassination of Archduke Francis Ferdinand by Servian nationalists at Serajevo
(28 June); Austrian ultimatum to Serbia (23 July) followed by Russian mobiliza-
tion; Germany invades France via Belgium (3 August) bringing Great Britain
into war; German army stopped at the Marne (9 September).
1917 Germany declares unrestricted submarine warfare (31 January); US breaks off
diplomatic relations with Germany (3 February) and declares war (6 April).
1918 Treaty of Brest-Litovsk (3 March), Russia withdraws from war and German
troops occupy Ukraine. Allies break German western front (8 August) ; Luden-
dorf asks for armistice (29 September) ; revolution breaks out in Germany (29 Oc-
tober); the Kaiser abdicates, a Republic proclaimed with Ebert as Chancellor;
Allied armistice terms accepted (11 November).
1919 Treaty of Versailles (22 June) disarms Germany, deprives it of 27,275 square miles
of territory, and imposes heavy but unspecified reparations. Election of Na-
tional Assembly (19 January) ; adoption of Weimar constitution (31 July) pro-
viding republican form of government. Communist uprisings in Berlin, Bavaria,
and elsewhere crushed by the Free Corps.
1919-24 Period of rampant inflation as Germany seeks to evade payment of reparations,
French occupy the Ruhr (January 1923) ; nationalist reaction grows, republican
leaders assassinated by young reactionaries; attempted Munich beer hall putsch
(8 November 1923) of Bavarian nationalists under Adolf Hitler dispersed by the
Reich swehr.
1925-29 Period of relative economic stability; Dawes and Young Plans regulate repara-
tions question; large loans from US employed to revive German prosperity; Ger-
many joins League of Nations, and Stresemann as Chancellor wins political
concessions from Allies but not enough to satisfy Hitler-Hugenberg nationalists
who flourish on denunciation of Treaty of Versailles.
1930-32 Period of severe economic depression; emergence of Nazis as strongest party in
Reichstag as hard times swell nationalist ranks; failure of unconstitutional
efforts of Hindenburg to solve problems by appointment of "non-political" au-
thoritarian cabinets.
1933 President von Hindenburg forced to appoint Hitler as Chancellor (30 January);
Reichstag fire (28 February) inaugurates Nazi reign of terror; Reichstag "En-
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abling Act" (23 March) confers supreme power on Cabinet (Hitler); decree-law
(14 July) suppresses all political parties except the National-Socialist. Goering
organizes the Gestapo to enforce compliance with Nazi regime.
1934 Trade unions abolished and replaced by German Labor Front under Nazi control
(20 January). Blood purge (30 June) of von Roehm, Schleicher, and other
dissidents within the Nazi regime, thus consolidating personal power of Hitler.
1936 Rhineland reoccupied and remilitarized (March). German military units sup-
port Franco rebellion in Spain. German-Italian Pact establishes Rome-Berlin
Axis (25 October). Anti-Comintern Pact signed with Japan (26 November).
Italy adheres (6 November 1937).
1938 Annexation of Austria (11-12 March). Munich Pact (30 September) gives
French and British acquiescence to Hitler's acquisition of the Sudetenland from
Czechoslovakia.
1939 German troops occupy rest of Czechoslovakia, which becomes a German pro-
tectorate (14-15 March). Rome-Berlin Axis consolidated when Italy and Ger-
many sign 10-year military pact (22 May). Germany and Russia sign 10-year
mutual non-aggression pact (24 August). German army invades Poland (1
September); England and France declare war (3 September).
1940 End of Sitzkrieg or "cold war" when German army invades Norway (8 April) ;
Germans overrun Belgium and the Netherlands (10 May) and invade France;
Paris occupied (15 June) and armistice signed by France (22 June). Italy joins
Germany in the war (10 June).
1941 Germany invades Russia (22 June) without declaration of war. Following
Japanese attack on Pearl Harbor (7 December), Germany declares war on US
(11 December).
1942 German armies invade North Africa but fail to drive the British out of Egypt.
US-UK invasion of North Africa (7 November) under command of General
Dwight D. Eisenhower.
1943 German army surrenders at Stalingrad (2 February) ; beginning of German
retreat from Russia. Surrender of German North African forces in Tunis (12
May). Allies invade Sicily (11 July) and mainland of Italy (3 September).
Italy signs armistice with Allies (8 September) and declares war on Germany
(13 October).
1944 Allied invasion of Normandy (D-Day, 6 June); liberation of Paris (23 August) ;
attempted assassination of Hitler at army headquarters (19 July) ; US forces
reach German soil (23 September); Russians take Warsaw (2 October); Battle
of the Bulge (17-27 December), last German counter-offensive of the war.
1945 Big Three Conference at Yalta (3-11 February) decrees unconditional surrender
for Germany and punishment of Nazi war criminals; Allied forces breach Sieg-
fried Line defenses (14 February); US Military Government setup at Frankfurt-
am-Main (30 March); Russian troops reach Berlin (26 April); suicide of Adolf
Hitler and his mistress (30 April); German military forces surrender uncon-
ditionally to the Allies (6 May) ; Potsdam Conference (17 July ? 2 August) outlines
terms for Germany, reducing it to 3rd rate power incapable of making war. Ger-
many divided into 4 zones of occupation with joint occupation of Berlin, and
Allied Control Council set up in Berlin to coordinate administrative functions
and carry out occupation objectives.
1946 Level of Industry Plan (March) disarms Germany industrially by setting post-
war limits to economic recovery. First free municipal elections since 1933
held (26 May) in 38 cities in US Zone, won by CDU. Berlin municipal elections
(20 October) won by SPD, Communists getting less than 20 percent of vote.
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Nuremberg War Crimes Trial verdict (1 October) against 22 Nazi leaders; Goer-
ing and 11 associates sentenced to death, Schacht and von Papen acquitted.
1947 Failure of Council of Foreign Ministers at Moscow (March) and at London
0 (December) to agree on German peace treaty. US and UK Zones combined
economically (1 January).
1948
January Serious food shortages in western Germany cause widespread protest strikes and
demonstrations and decline in industrial production. Ruhr declared an emer-
gency area and placed on special rations. Meeting of London Conference on
German affairs.
February Reorganization and strengthening of Bizonal Economic Council (6 February).
March German central administrations in Soviet Zone subordinated to reorganized and
expanded German Economic Commission (DWK) to be strongly centralized
agency staffed by SED under SMA control.
Meeting of Soviet-sponsored People's Congress in Berlin to agitate for German
unity on Communist terms (18 March).
Breakup of Allied Control Council in Berlin, end of quadripartite government
for Germany (20 March).
April USSR imposes restrictions on rail traffic to Berlin after US-UK reject Soviet
unilateral inspection of freight (1 April).
Soviet restrictions extended to barge traffic (20 April).
May Soviet Half Year Plan adopted to raise production 10 percent in Zone in last six
months 1948; Two Year Economic Plan being worked out. Shrinkage of East-
West trade causing concern to SMA. Poor food situation in western Germany
occasions new outbreak of protest strikes and demonstrations.
June London Agreement on provisional western German government (1 June).
Currency reform in western Germany (18 June).
USSR suspends all passenger traffic between western and eastern zones (19
June).
Western currency reform extended to Berlin (22 June).
New Soviet currency introduced in Berlin (23 June).
USSR suspends all passenger and freight traffic into Berlin because of technical
difficulties (24 June).
US-UK airlift started (26 June).
July Breakup of Allied Kommandatura, and of quadripartite Control of Berlin (1
July).
Imposition of the Western Power counter-blockade cutting off all interzonal
trade with the Soviet Zone (24 July).
August-
September Moscow-Berlin talks. Reference of the Berlin dispute to the United Nations.
September Meeting of Parliamentary Council of western German states at Bonn to draft
constitution for a provisional western German government (3 September).
Communist-inspired mob forces Berlin city assembly to vacate city hall in Soviet
sector (7 September). Split in city administration continually widened by dis-
missal of officials on political grounds by both eastern and western sector ad-
ministrations.
November Tightening of credit restrictions by Bizonal banks in order to check dangerous
inflationary tendencies and curb rising prices that are endangering the wage
structure.
Final split of Berlin municipal government after Communist "rump" assembly
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sets up "legal" government for eastern sector of city and Friedrich Ebert is
appointed Oberbuergermeister by the SMA (30 November).
December Western sector elections for Berlin Magistrat with SPD obtaining 65 percent of
the vote. Elections not permitted in eastern sector (5 December).
First reading of the draft constitution (basic law) completed by the Bonn Par-
liamentary Council (10 December).
Six-power agreement reached at London establishing an International Authority
of the Ruhr to supervise German coal and steel production. Hostile reaction in
Germany to the loss of this vital area (28 December).
1949
January First session of new western sector Berlin Magistrat with Communists not present.
Election of Ernst Reuter as Lord Mayor and Otto Suhr as chairman of the as-
sembly, both SPD (19 January).
Second reading of the draft basic law at Bonn. Text contains many major
points of disagreement but door left open for further interparty negotiations
(19 January).
SED political party convention held in east sector of Berlin emphasizes German
unity theme and foreshadows reactivation of Antif a bloc of "democratic" parties
(purged of reactionary elements) as a possible basis for a future east German
State (25 January).
February Main Committee of Bonn Parliamentary Council finishes third and final reading
of basic law, large areas of disagreement still remain (10 February).
Committee of Neutral Experts appointed by President Juan Bramuglia of UN
Security Council to consider solution of Berlin currency problem concludes
sessions after adopting a non-committal report (11 February), following US
dissent from earlier conclusions and Soviet rejection of US counter-proposals.
March The three western Military Governors present a delegation from the Bonn
Parliamentary Council with a memorandum outlining the objections of the
Occupying Powers to deviations from the London decisions in the draft of the
basic law, principally those regarding finance powers, police, and centralized
federal authority (2 March). Five-man inter-party committee appointed to
reshape draft constitution according to "suggestions" in memorandum.
Committee of Neutral Experts notifies UN Security Council that it has failed to
work out an independent solution of the Berlin currency dispute (16 March).
The Committee was appointed 30 November 1948 in response to the US note of
29 September 1948 requesting UN consideration of the critical Berlin situation
created by unilateral Soviet actions.
Soviet Zone People's Council (Volksrat) approves draft constitution for "all Ger-
many", subject to plebiscite to be held in May (18-19 March). Western Zone
German leaders invited to discuss unity question with Soviet Zone Germans at
Brunswick on (8 April) but invitation is rejected.
SPD party conference rejects Bonn basic law draft because of its extreme federal-
istic character (20 March).
Currency change-over in western sectors of Berlin makes D-mark sole legal
currency and outlaws Soviet Zone east mark except for limited uses over a re-
stricted period of time (20 March).
Military Governors state that German counter-proposals of 16 March to Military
Governors' Memorandum of 2 March are unsatisfactory (25 March). Stalemate
at Bonn continues.
Agreement on Prohibited and Restricted Industries signed at London (31 March)
provides for removal of certain key industries such as synthetic fuel and rubber
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SECRET E-5
and limits production in such categories as steel, ball bearings, aluminum, etc.
April Western Allied Foreign Ministers Conference at Washington reaches agreement
on German questions (8 April).
Text of Occupation Statute proclaimed by Military Governors (10 April).
Conference of Military Governors and Bonn Parliamentary Council delegates
reach compromise agreement on basic law (25 April).
Tass (USSR) News Agency despatch reveals Jessup-Malik negotiations regard-
ing Berlin dispute and possible Soviet lifting of blockade (25 April).
Representatives of three Western Powers and Benelux countries sign the agree-
ment establishing the International Authority of the Ruhr (28 April).
May Official four-power announcement of lifting of Berlin blockade on 12 May and
holding of CFM on 23 May (5 May).
Bonn Parliamentary Council gives final approval to the basic law by a vote of
53-12. In the Soviet Zone results of zonal elections for the Volkskongress indicate
considerable popular dissatisfaction with the Communist regime. Berlin rail-
road workers start strike against Soviet-controlled Reichsbahn Administration.
June Strike of Berlin railroad workers ends (28 June), as western commandants oblige
the union to accept settlement proposed by the Reichsbahn. The Paris CFM
ends (20 June) with little progress toward agreement on German problems.
August In national west German elections the conservative and right-wing parties win
a substantial majority in the Bundestag, and interparty squabbles begin. The
economy of the western sectors of Berlin reaches an alarming point of deteriora-
tion.
September The Bundesversammlung meets in Bonn (7 September) to deliberate on choice
of a Federal president. Theodor Heuss, chairman of the Free Democratic Party,
is elected Federal President (12 September) and the nomination of Konrad
Adenauer, leader of the CDU, as Federal Chancellor, is approved by the Bundestag
(15 September). Adenauer announces his cabinet (20 September), and Federal
government officially comes into existence.
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PROVISIONAL
10
12
SECRET
14
16
18
20
10851
Liibec
Demmin
BREMEI ENCLAVE
(Port o. rican Zone
of Occuo. or.
53
51
Htiinover
r -
?,
49.
49
47
;;:?v
=
47
10
12
14
16
18
GERMANY
PRINCIPAL RAILROADS
AND ROADS-1948
(Including dismantled railroads in the Soviet Zone)
RAILROADS (All Zones)
Double-track (all lines)
Single-track (selected connecting lines, 'only)
DISMANTLED RAILROADS IN THE SOVIET ZONE
Single-track; formerly double-track
Double-track; completely. dismantled
Single-track; completely dismantled
SOURCES .OF RAILROAD INFORMATION
RAILROAD SITUATION MAP 1:800,000 Headquarters European Cominand, Office of
the Chief Engineer, Military Division, Intelligence Branch; Revised January 1948.
ID, Department of the Army, Washington, D. C., (Data as of March 1949).
ROADS, 1948
Autobahn ,?
Through route, 1st class
Through route, 2nd clas
(Selected)
International boundary, 1937
Boundary of zone ofl occupation or administration, 1949
- I
++44++++ +
WESTERN ZONES:
SOVIET ZONE:
?
MAJOR TERRAIN REGIONS
Plains, Lowlands
Hilly uplands, Plateaus
Low mountains
Rugged mountains
BASE: GERMANY AND ITS APPROACHES 1:1,500,000 National Geographic Society,
Washington, D. C., July 1944
SCALE 1:2,000,000
25 50 75
100 125
WAS
0 25 50 I 75100 125
111Mnii /111MINOMI
KILOMETERS.
SECRET
10851 Map. Division, CIA, 11-49
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U. S. GPO?S
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PROVISIONAL
FALSTER/
.....??????????
BUCHT
?????n.
FEHMARN
? A,IECKI.ENBURGER
9U0-1T
GERMANY
PRODUCTION OF
METALLIC ORES*
10055
(BY DISTRICTS-1937)
Mineral Total Production (metric tons)
IRON 2,758,900
MAbIGANESE 208,700
ZINC 165,000
LEAD 78,900
COPPER 27,200
NICKEL 900
1011111MA
()Bremerhaven
...7BREMEN Marburg
ENCLAVE
(American)
Peioe Bezirk
52v400 (Pet
35 600(Mn)
Composite Ore Deposit Outline
Mineral District (Bezirk)
(arbitrarily defined for statistical purposes)
"Mineral District") ("Bezirk")
(officially used in the compilation of statistics)
Statistics included with those of Woldecle.Sauerland.
Statistics included with those of Mansfeld.
Statistics included with those of Boyerisch.Erzgebirgischer und
Schwarzwald Beark.
NOTE: 1. Production totals above and on map represent metallic content of
ore only; they are derived from official statistics.
2. Production figures on map are given in metric tons. Deposits with no
production figures given either are not exploited or have only a negligible
output.
"Aor production of mineral fuels (by districts-1937 and lova) see map /0054, for
production of non-metallic minerals (by districts?I937)see map (0056.
--"*."...-???-??? INTERNATIONAL BOUNDARY 1937
On OCCUPATION ZONE BOUNDARY 1947
CITIES' . Capital ? Primary te Secondary
20 40 60 80 100
Wesergebir s Bezir
fiesiusgl\
a DORTMUND 0
o c0Hu Z r
"Rechtsrheinischer kelz")irk'
? Krefeld. is,q --..... \,..r?
f 0.0 Hog .-1C-?
/ JA? . Glacelobach 12, .9:,
un
n, , ? ,..,0 44q? q
nneyat t),,, %IR\ -.4, e.,,,
0
KOLN
13,400(Pb) 336O'(
?
Salgittererellezirk
1,800(Mn)
Flarzer Bezirk
64,600(Fe)
1,200(Mn)
32,100(Pb)
43,500(Zn)
rs KASSEL
?WaffACASalZffarld Bezirk
55,300(Fel
1,500(Mn)
degeOand-Wieder Bezirk
601,600(Fe)
144,300(Mn)
Rheinischer Bezir
100(Cu)
Vogelsbe er Be kk
141,500(Fel'4 IJio
2,700(Mn) 0.
_11\i?ingi ch-Sachsiscittgr113ezir
jjkNassauisch-Obechessischer BOrk??19cSJ(Fe)
(Lae Ad Dill) Dkin
FRANKFURT,./-300,800 (Fe) .t.J?
5,800 (Mn)
Flansrack-Taunus
Trier Lindener Mark
44,700(Fe)
Linksrheinischer Bezirk,. 27,200(Mn)
14,200(Pb)
2,900(Zn) RE NC ky.therigshafen ? ANNHEIM
FH
Osaarbriocken e Heidelb
/Th
1(//
7.S. Karlsruhe/
.pfRurft..? /
ICE
if I
I
/
/ (9?
1
erisc ,Erzgebtrglicheri
dlSohviii?zWald-t-.Beiirk
,%-1;600(Pbr
8,300)25)
?
L iegnitz
("Oberschlesischer Bezirk"01.111155151.5
n"Frankenstein Bezirk"
7177:460000((zPnb))
900 (Nil
erischer Bezirk
V957;45E11
Wartternbergisch-Ba
159,700(F
1.6??(Mr$
10055 Map Branch. CIA, 8-48
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U.S. GPO?S
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PROVISIONAL
LOLLAND
10056
GERMANY
PRODUCTION OF NON -
METALLIC MINERALS*
'MSCki.ENSURGER
(I?remerhaven
HANNOVERISG ER BEZIRK
POTASH '466,500
SAL 163,800
Osnakfiuck
?eKIEDERRHEINISCHER BEZIRK
POTASH 60,200
4Manster ?
?Li Bielefe
(figure includes Suddeutscher Bezirk) Z
"HAN_LIO_VERISCHER BE
_,...?.....?
ve, GELSENKIRCHE
.c.,0 ? L N.,-..,
.7 Reclilinghause
DORTMUND
? Krefeld ?..1.) ... C1. 6N)
DUISBURG, ?. BOCHU
? Hagen
SSELDORFa,
WUPPERTAL
tinge)? ? Remscheid
Brandenbu
Total Production (in metric tons)
POTASH 1,968,400
SALT 2,757,200
GYPSUM 1,657,000
? FLUORSPAR 140,900
? BARYTES 457,300
PYRITES 395,900
? MAGNESITE 22,100
Probable extent of potash and salt deposit.
Mineral District Generalized (officially used in the
compilation of statistics),
"Mineral District" (arbitrarily defined for statistical purposes),
NOTE: I. Production figures given on map are In metric tons. Deposits with no
production figures are not exploited or have only a negligible output.
2. Produchon figures for barytes, fluorspar and gypsum are not available
by districts.
`For production of mineral fuels (by districts-1037 and 1944) see map 10054; for
production of metallic ores (by districts-1937) see map 10055.
INTERNATIONAL BOUNDARY 1937
- OCCUPATION ZONE BOUNDARY 1947
CITIES. Capital 0 Primary et Secondary
20 40 60 00 100
MILES
MAGDEBURGER BEZIRK
POTASH 155,150
SALT 1,112,300 0 A
"HESaSSIER-B
HAL 18
?LEIPZIG
NORD HAUSE ?HALLE
POTASH 62,500
SALT 46,900
?
Jahrgang1938 Heft. LII.
'The Motxf lvduotneu,British Basic dhb no ForeignR di sa
ty
EconomiL Warfare, 1944
LOCAdON
au,00tha, Jusfus Perthes 1926 (Map)
2. LydnopIannung inn P IdeUtsclren`tridustrre
rseburg:1931-3. ,
ThOriygey.Aelav der
Johann Justu%
Perthedbd'erg'"'inrcharr' ro
' 1940719
CHEMNITZ
ISCHES GEBIET"
Zwickau
ES, BEZIRK''
eDarmsradt
Ludwigshafen ?77.M.NNHEIM
?
FRENCH
A Heidelberg
? SaarbrOcken
"ODENWALDER BEZIRK"
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WISEL-11-E 09.1
CENTRAL INTELLIGENCE AGENCY
GERMANY (SR-20)
Chapter II and Summary
Published 1 March 1950
NOTICE TO HOLDERS OF CIA REPORT ON GERMANY (SR-20)
The Summary, Chapter II, and a revised Table of Contents for SR-20 are forwarded here-
with for inclusion with the remainder of the report previously distributed. The original Table
of Contents may be destroyed.
ft./ COPY
Document No. 0 0 1
NO CHANGE in Class.
grucussuIED
r IS Class. CHANGED TOs TS II C
e MIA Memo, 4 Apr 77
Autht ODA RIG. 77/1743
11111,1"Pnis
Dates 0 1 FEis Ick7q Sys 0 4 q ,
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C,
STAT
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E
DISSEMINATION NOTICE
1. This copy of this publication is for the information and use of the recipient
designated on the front cover and of individuals under the jurisdiction of the recipient's
office who require the information for the performance of their official duties. Further
dissemination elsewhere in the department to other offices which require the informa-
tion for the performance of official duties may be authorized by the following:
a. Special Assistant to the Secretary of State for Research and Intelligence, for
the Department of State
b. Director of Intelligence, GS, USA, for the Department of the Army
c. Chief, Naval Intelligence, for the Department of the Navy
d. Director of Intelligence, USAF, for the Department of the Air Force
e. Director of Security and Intelligence, AEC, for the Atomic Energy Com-
mission
f. Deputy Director for Intelligence, Joint Staff, for the Joint Staff
g. Assistant Director for ' Collection and Dissemination, CIA, for any other
Department or Agency
2. This copy may be either retained or destroyed by burning in accordance with
applicable security regulations, or returned to the Central Intelligence Agency by
arrangement with the Office of Collection and Dissemination, CIA.
DISTRIBUTION:
Office of the President
National Security Council
National Security Resources Board
Department of State
Office of Secretary of Defense
Department of the Army
Department of the Navy
Department of the Air Force
Joint Chiefs of Staff
Atomic Energy Commission
Research and Development Board
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I2 ?...?Sb MI J.
SR-20
GERMANY
TABLE OF CONTENTS
SUMMARY
CHAPTER I?POLITICAL SITUATION
Page
1. GENESIS OF THE PRESENT POLITICAL SYSTEM I - 1
2. PRESENT GOVERNMENTAL STRUCTURE I - 4
3. POLITICAL PARTIES AND CURRENT ISSUES I - 5
a. Soviet Zone I - 5
b. UK Zone I- 7
c. French Zone I - 9
d. US Zone 1-10
4. OTHER INFLUENTIAL GROUPS I - 14
5. THE BERLIN SITUATION I - 16
CHAPTER II?ECONOMIC SITUATION
1. GENESIS OF THE PRESENT ECONOMIC SYSTEM II - 1
2. DESCRIPTION OF THE PRESENT ECONOMIC SYSTEM II - 2
a. Agriculture II - 2
b. Natural Resources II - 6
c. Industry II - 12
U. Financial II - 21
e. International Trade II - 30
3. ECONOMIC STABILITY II - 34
a. Western Zones II - 34
b. Soviet Zone - 35
CHAPTER III?MILITARY SITUATION
1. ORIGIN OF THE PRESENT MILITARY SITUATION
2. STRENGTH AND DISPOSITION OF ARMED FORCES
CHAPTER IV?STRATEGIC CONSIDERATIONS AFFECTING US SECURITY
1. GENERAL
2. POLITICAL FACTORS
3. ECONOMIC FACTORS
4. MILITARY FACTORS
CHAPTER V?PROBABLE FUTURE DEVELOPMENTS AFFECTING US SECURITY
APPENDIX A?Terrain and Climate
APPENDIX B-.--Significant Communications Facilities
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III- 1
III- 2
IV - 1
IV- 2
Iv- 3
IV- 4
V - 1
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k;u It .th
APPENDIX C?Population Statistics and Characteristics
APPENDIX D?Significant Biographical Data
APPENDIX E?Chronology
MAPS:
Germany?Principal Roads and Railroads
Germany?Principal Industries
Germany?Production of Fuels
Germany?Production of Metallic Ores
Germany?Production of Non-Metallic Ores
Berlin
Germany?Occupation Zones, Air Corridors
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MI Le St MI 1
ENCLOSURE B
DISSENT OF THE INTELLIGENCE ORGANIZATION, DEPARTMENT OF STATE
Chapter II and Summary*
The organization for Research and Intelli-
gence in the Department of State dissents
from SR-20 (Chapter 2 and Summary) be-
cause it considers the report an inadequate
picture of the present German economic situa-
tion even though the data given in the report
appear generally accurate.
Many important current issues such as the
Ruhr problem, foreign trade prospects, trade
between western and eastern Germany, fiscal
and financial policies, investment needs, the
effects of ERP on the German economy, are
either omitted entirely or discussed inade-
quately. The two year plan for the Soviet
Zone as well as a number of other important
issues are mentioned in the summary but not
developed in the body of the report.
Although the report purports to be up-to-
date as of September 1, 1949, many facts and
figures lag behind that date. For example,
the application beginning in May 1949, of the
exchange rate DM 1?$0.30 to imports of food-
stuffs, and the resulting problem of food sub-
sidies is omitted. Other important events,
such as the devaluation of the mark and the
new decisions on dismantling have been
omitted because they occurred after Septem-
ber 1. These events are of such far-reaching
importance that an adequate picture of the
German economy cannot be given unless the
deadline is extended to include them.
In relation to matters that the report does
include, focus and emphasis are often dis-
torted, in that the relative space given to
various subjects is frequently out of proportion
with their relative importance.
The conclusion is that SR-20 (Chapter 2
and Summary) does not enable the reader to
obtain a reasonable and adequate impression
of the present economic state of Germany.
* Chapter II and the Summary were issued after the publication of the remainder of
the report and were therefore reviewed separately by the IAC agencies.
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SE,U11.1.1'
SUMMARY
After the establishment of the German Em-
pire in 1871 by Bismarck, Prussian influence
and Prussian bureaucratic methods perme-
ated the rest of Germany, centralization of the
government was heightened, and federalistic
elements were correspondingly weakened.
This development was interrupted only
slightly by defeat in the first World War and
the establishment of the more liberal but
ephemeral Weimar Republic. Under Nazi
control the unitary or totalitarian principle
of the state reached its apotheosis. Total de-
feat in the second World War left the Ger-
mans powerless to decide their own immediate
fate, but it has not materially weakened their
attachment to the strongly centralist and na-
tionalist principles to which they have been
accustomed under a variety of regimes.
The objective of Allied occupation policy in
the Potsdam Agreement was to encourage the
political reconstruction of Germany along de-
centralized federalistic lines, but the division
of the country into four zones created a pat-
tern of conflicting ideologies which ultimately
crystallized into the present split between the
Soviet Zone and the three united western
zones. Potsdam political principles were not
applied uniformly by the four powers, and the
development of German political parties was
largely a reflection of the ambitions of the in-
dividual occupying powers. In the Soviet
Zone the Communist Party (SED), although
numerically the weakest, enjoyed a dominant
position by virtue of Soviet military support.
In the French Zone the occupying power f a-
vored the German particularist parties which
have always opposed a close union with the
German Reich. Only in the US and UK Zones
were political parties permitted a more nearly
normal development, although here again
subordination to the authority of the occupy-
ing power resulted in an avoidance of respon-
sibility on the part of German political lead-
ers and a general apathy on the part of the
electorate. In the three western zones the
Communist Party (KPD), in addition to being
under close surveillance by the authorities,
has failed to attract any substantial support
and is therefore a negligible factor except for
its rather limited subversive potentialities.
Conversely in the Soviet Zone, opposition par-
ties have existed only upon the sufferance of
the Soviet military authorities, and their
ranks have been repeatedly purged of ele-
ments considered dangerous to Communist
control. Consequently, to the regret of all
Germans, the country has been split into
Communist and non-Communist controlled
areas.
Quadripartite control of Germany through
the Allied Control Council in Berlin was
never successfully implemented because of the
obstructive attitude of the USSR and, to a
lesser extent, of France. In March 1948 the
Council ceased to function on a quadripartite
basis when the Soviet representative withdrew
on the ground that the steps taken by the US
and the UK to reorganize and strengthen the
political machinery of the Bizone constituted
an infraction of the Potsdam Agreement.
The USSR thereupon reorganized and acti-
vated the German Economic Commission
(DWK) for the Soviet Zone by conferring
upon it extensive powers over the zonal econ-
omy and by staffing it with reliable German
Communist leaders. The police powers of the
German Administration of the Interior (GAI)
were placed upon a more effective basis, and
the exploitation of such popular front agen-
cies as the People's Congress (Volkskongress)
and the People's Council (Volksrat) for prop-
aganda purposes was greatly increased. The
Note: The intelligence organizations of the Departments of the Navy and the Air Force have
concurred in this report. The Department of the Army has concurred in this report
with the exception of Chapter II on which it had no comment. For dissents by the
Department of State, see Enclosures A andB following Page V-3. The report contains
information available to CIA as of 1 September 1949.
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.N.;
Soviet Zone was thereby provided with the
framework for an eastern German state.
In western Germany, as a result of the Lon-
don Agreements of 1 June 1948, a parliamen-
tary council, which convened at Bonn early in
September 1948, drew up a basic law, in lieu
of a formal constitution, for the new western
German Federal Republic. The Federal Re-
public includes all three west German occu-
pation zones and replaces the bizonal eco-
nomic control mechanisms established in June
1947. After the formal approval of the Bonn
Constitution on 23 May 1949, elections were
held throughout west Germany on 14 August,
and the new government was formally estab-
lished in September 1949. On 21 September,
Military Government came to an official end,
and supreme authority in western Germany
was assumed by the Allied High Commission,
composed of a civilian High Commissioner
from each of the western occupation powers.
By the establishment of a unified but federal-
istic west German Government, and with the
spheres of Allied and German responsibility
delimited in an Occupation Statute, the West-
ern Powers hope to advance German political
maturity and stability and economic recovery
as part of the general program for reviving
and strengthening Western Europe.
The emergence of Berlin as the principal
point of tension between the USSR and the
western Allies has greatly modified the char-
acter of the government of that city. The So-
viet blockade, begun in June 1948, was count-
ered by the US/UK airlift for the supply of the
western sectors from 26 June 1948 to 30 Sep-
tember 1949. The breakup of quadripartite
control, which followed the institution of the
blockade and airlift, resulted ultimately in a
complete division in the city administration.
This division was climaxed by the establish-
ment of a Soviet-controlled east Magistrat,
and the election of a new SPD-dominated west
Magistrat five days afterward on 5 December
1948. The western-sector city government, al-
though handicapped by straitened finances
and the gradual paralysis of west Berlin's eco-
nomic life, has nevertheless continued to pro-
vide effective government. On 12 May, pre-
sumably as a result of the success of the air-
lift and the firm resistance of the Western
Powers and the west Berlin population to So-
viet pressure tactics, the USSR lifted the
blockade. After the Paris CFM meeting in
May and June 1949, the military authorities
of all four powers were directed to discuss the
normalization of city services. To date, how-
ever, little has been achieved by these discus-
sions, and Berlin remains substantially as it
was before the CFM, although the once acute
East-West tension has been eased consider-
ably.
Economically, the damage to the vast indus-
trial complex of prewar Germany left a void
in central Europe of the utmost significance to
US interests. For many years the German
system was so closely integrated with the
economies of other European countries that
its impairment and dislocation has thrown the
old order of things badly out of balance and
forced an uneconomic reorientation of Euro-
pean trade, commerce, and industry. The
countries of Western Europe have had per-
force to depend upon the US, in the absence of
their former German markets or sources of
supply, as the only nation capable of supply-
ing required goods. The economies of East-
ern Europe, on the other hand, are under the
domination of the USSR, which operates on
entirely different principles, as a consequence
of which economic activity is directed toward
attainment of political objectives rather than
toward maximizing incomes. Consequently,
Germany has become a land across which nor-
mal travel and trade are very difficult.
From the outset of the occupation the Allied
powers pursued divergent economic as well as
political policies in Germany. The USSR me-
thodically stripped the Soviet Zone not only
of its war potential but also of a good deal of
its industrial capacity by a rigorous policy of
reparations, dismantling, exports of raw ma-
terials and consumer goods on the Soviet ac-
count, expropriations, and confiscations.
What remained in the zone was not sufficient
to meet the minimum needs of the population,
which has been exploited systematically for
the benefit of the occupying power. The
USSR later reversed this policy and built up
basic industries, while private enterprise was
consistently discouraged if not eliminated in
many fields. Most of the production was sent
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to the USSR as reparations. State-owned en-
terprises receive heavy subsidies from the Ger-
man Laender under Soviet direction, and their
uneconomical operation is a heavy drain upon
the zonal economy. Soviet land reform dis-
organized zonal agriculture and produced se-
rious food crises in what was once a surplus
agricultural region in prewar Germany.
Nevertheless, the USSR has maintained an in-
dustrial production level satisfactory for its
own purposes, compensating for shortages and
other production difficulties by intensifying
the exploitation of German labor. Since the
good harvest of 1948, the USSR has been able
to increase considerably the basic ration as
well as the amounts of food flowing into the
state-owned "free shops." The Allied counter-
blockade established in July 1948 aggravated
internal difficulties somewhat and compelled
the USSR to postpone integration of the So-
viet Zone economy with the satellite region
until the Zone could occupy a stronger eco-
nomic position to support Soviet policies. In-
dustrial expansion under the Two-Year Plan
of the German Economic Commission (DWK)
of the Soviet Zone is expected to effect im-
provement in the zonal economy, in conjunc-
tion with increasing trade with the countries
of Eastern Europe.
In the western zones France, in the past,
followed an economic policy somewhat similar
to that of the USSR although mi a less im-
pressive scale. The French occupation forces
lived off the land, and French expropriation
of German industry was carried on in a vari-
ety of ways. Consequently, economic recovery
in the French Zone lagged far behind that of
the Bizone and only substantial assistance un-
der the European Recovery Program averted
an almost total collapse. Under the terms of
the trizonal merger, signed 18 October 1948,
France began to align its policies with those of
the US and the UK in the interest of an over-
all rehabilitation of western German ,industry
and agriculture. Basic rations for the normal
consumer were substantially increased, occu-
pation costs adjusted to relieve the financial
burden on the German Laender, and the ex-
port-import trade of the zone gradually inte-
grated with that of the Bizone.
Upon the US has fallen most of the burden
of reactivating the western German economy.
War damage and the disruption of transpor-
tation facilities had brought industry almost
to a standstill at the beginning of the occu-
pation. The influx of displaced persons in-
creased the population 25 percent and created
a critical food problem with which the de-
pleted agricultural resources of western Ger-
many could not cope. Heavy imports of food
and essential raw materials were required to
keep the economy operating on a bare sub-
sistence level. Despite these efforts, little im-
provement was effected during the first three
years of the occupation. Export trade had
practically disappeared, money had lost value,
and barter became the principal means of
commercial intercourse. Under such condi-
tions, key industries could not be rehabili-
tated, and most consumer goods were unpro-
curable except in the black market. German
discontent as a result of this economic stag-
nation and the punitive policies of the Allies
culminated in a series of protest strikes and
demonstrations in 1947 and early 1948. The
June 1948 currency reform furnished the Ger-
mans with an incentive to cooperate in raising
the general level of their economy in line with
the European Recovery Program, under the
stimulus of considerable ECA assistance.
Greater economic responsibility was accorded
the Germans, and the next nine months wit-
nessed a marked increase in industrial pro-
ductivity, export trade, and domestic sales.
The general shortage of investment funds,
which also resulted from currency reform, be-
gan after March 1949, however, to result in a
temporary stagnation of the west German
economy.
In its present relatively helpless condition
Germany presents no military threat to the
US, although the extent to which the war
spirit has been chastened by defeat or by the
postwar Allied policies of denazification and
demilitarization is problematical. The coun-
try still possesses considerable war potentials
in manpower, natural resources (principally
coal) , production facilities, and the technical
skill and ability that can be utilized in war
preparations by such a power as the USSR if
bent on military aggression. As the major
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point of contact between the policies and
physical forces of the US and the USSR, Ger-
many plays an important role in the East-
West struggle and is of utmost strategic sig-
nificance to the US. Although the European
aid program appears to have given the west-
ern Allies the advantage in the "cold war" for
Europe, the remoteness of the US from the
scene of ideological conflict, the propinquity
of Soviet military power, and the still un-
settled political and economic condition of
Western Europe make uncertain the outcome
of the struggle between democracy and Com-
munism. So far the German people have
shown no disposition to welcome Communism
or the reappearance of a dictatorship, this
time controlled from Moscow. The presence
of strong nationalistic elements hostile to oc-
cupation policies and confident of coming to
an eventual arrangement with the USSR poses
more of a threat to democratic institutions in
western Germany than does any actual dan-
ger from Communist infiltration.
While it is improbable that the USSR will
resort to war as a result of conditions in Ber-
lin or elsewhere in Germany, the USSR has
375,000 troops stationed on German soil, or
nearly twice the number maintained in Ger-
many by the western Allies. Moreover, the
Soviet Zone has organized a police force, in-
cluding para-military police, to supplement
the strength of the Red Army in the event of
hostilities.
In
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CHAPTER II
ECONOMIC SITUATION
1. Genesis of the Present Economic System.
The prewar economic system of Nazi Ger-
many was the result of the same detailed
planning and foresight that made the Ger-
man military machine such an effective
weapon of aggression. Private enterprise in
name only, it was subject to a very large
measure of central governmental control.
The economy was so ordered as to afford maxi-
mum support of the military machine. Ger-
many possessed great aptitude for develop-
ment along scientific, technical, and indus-
trial lines. This, together with the fact that
the Allies in 1919 after the defeat and dis-
persal of the German army left the German
productive capacity virtually intact, made it a
relatively simple matter for the Germans to
regain and even to surpass pre-1914 levels of
production and national income. It was thus
possible for their military organization to be-
come more menacing to international security
than ever before.
Situated in the middle of Europe, with few
natural resources, a soil depleted by genera-
tions of intensive cultivation, and with lim-
ited access to the sea, Germany in the course
of time surmounted these handicaps and be-
came a highly industralized economy, in
which foreign trade played an important part.
Organizational weaknesses exposed by the
first World War, such as the failure to foresee
and prepare for a war of attrition based on an
economic blockade of the country, were cor-
rected to a large extent during the subsequent
years of peace. In 1939 Germany was a
highly coordinated, completely integrated
state, self-sufficient to the point of being able
to launch and sustain another world conflict
of far greater magnitude than the first.
The Germans compensated to a remarkable
extent for the paucity of their natural re-
sources by development of synthetic substi-
tutes and by building up stockpiles of essen-
tial materials. Also through various exchange
controls and by pursuing calculated trade
policies, Germany managed to exert pressures
on the economic life of many smaller coun-
tries, involving them in long-term commit-
ments and increasing their dependence upon
the Reich as a market for exports and a major
source of imports. Where this was imprac-
tical, the Germans were able to exercise im-
portant economic controls in rival countries
over prices, production, and distribution of
various commodities in world markets
through the formation of international car-
tels. The manipulation of world trade and
world resources by German industry through
cartel arrangements not only strengthened
Germany's ability to make war, but weakened
the defensive position of its potential rivals by
limiting or reducing their supply of certain
strategic commodities. French aluminum
production, for example, was curtailed by an
agreement which resulted in the export of
bauxite ore to Germany, which in turn sold
finished aluminum to France. This arrange-
ment seriously handicapped the French upon
the outbreak of war in 1939.
Long before 1932 much of German industry
and trade was organized into various cartels
which proved to be most convenient to the
Nazis for the task of mobilizing and "ration-
alizing" industry for war. German business
as a whole was grouped in fully representative
trade associations, which had developed joint
bodies on a national scale. There were five
such bodies (Spitzenverboncle)?for industry,
trade, power, banking, and insurance. After
1933 the Nazis kept the traditional form of
these associations but made membership com-
pulsory and introduced the "leadership" prin-
ciple: appointment from above in place of
election from below, with the Minister of
Economics in supreme control. Although
prevented by statute from engaging in price-
fixing and other monopolistic practices, which
were left to cartels, the association in many
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instances was identical as to membership with
the cartel. Cooperation between the two was
directed by law, the object being to "remove
the obstructions and difficulties caused by
multiplicity of industrial organizations" and
to "establish a comprehensive, tight and uni-
form organization" instead.
Agriculture was also unified and centralized
under the Nazi regime by the formation of the
Reich Food Estate (Reichentihrstand) with
powers of internal administration that ex-
tended to price-fixing and marketing. The
Administrative Department pushed agrarian
improvements through the media of Regional
and District Peasant Bodies and controlled
distribution through Marketing Boards.
Farmers were persuaded to introduce or aug-
ment crops that would reduce the deficiency
in domestic food production. The high costs
involved were offset by high prices and special
Reich subsidies. The Food Estate had com-
plete authority over every phase of Hitler's
battle for agrarian self-sufficiency, including
farm resettlement, mechanization of farms,
and land reclamation, and it operated the ra-
tioning system which had been put into effect
several years before the outbreak of the war.
Such absolute control over the national
economy enabled the authorities to shift en-
tire plants, as well as large segments of labor
and the agricultural population, according to
the demands of a specific industry or a specific
government policy. Throughout the war the
Nazi government maintained the German
economy at a remarkably high production
level, despite blockade, damage from the air,
and difficulties that arose over distribution
and supply as Hitler's armies spread over most
of Europe.
Central control of the economy by the Reich
government terminated abruptly with the de-
feat of the German military forces. There-
after, economic controls, policies, and proce-
dures prevailing in the four zones of occupa-
tion were uniform only to the extent that
agreements were reached in the ACC.
Although in the early months of occupation
some measure of uniformity prevailed, gen-
erally economic policies pursued in the zones
have varied in accordance with differences in
the economic philosophies and interests of the
several occupying powers. This has caused a
cleavage, widened with the passage of time, in
developments in the western zones and the
Soviet zone. In the western zones, for ex-
ample, control of industry tended to revert to
private owners under local German authority
and free-market determination of prices has
been restored for nearly all commodities. In
the Soviet zone, socialization of various indus-
tries has been effected and Soviet-owned or
controlled firms have been created, while
prices are still generally controlled by German
authorities in the zone as directed by Soviet
Military Government authorities.
Uniform economic policies in the US-UK
zones were assured with the economic merger
of the two in January 1947. The gradual
merger of the French Zone with the "Bizonal"
area beginning in October 1948 tended to
make western Germany an economic unit.
The merger was not completed until the west-
ern German Government was established in
September 1949.
2. Description of the Present Economic Situa-
tion.
a. Agriculture.
One of the most critical hindrances to Ger-
many's postwar recovery was the insufficiency
of food to supply the needs of the population,
despite heavy relief imports. The German
agricultural economy, even after Hitler initi-
ated his agrarian "production battle" in 1934,
has been unable to increase to any appreciable
extent the area under cultivation, 60 percent
of the total area already being improved farm-
land. Although Nazi land reform, farm re-
settlement, and land reclamation projects pro-
vided a larger percentage of small farms than
formerly, there was not a significant increase
in cultivated land because of the large areas
taken over for airfields and other military in-
stallations. Poor soil forced more extensive
use of natural and artificial fertilizers, but
during the war years a shortage of fertilizers
reduced the productivity of German farm-
lands.
Improved farming methods and govern-
mental subsidies, plus rigorous control of the
distribution, consumption, and stockpiling of
food and fodder supplies, enabled Germany to
1.1-2 SECRET
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6BuktET
achieve wartime self-sufficiency by 1938 in
wheat, vegetables, and dairy products other
than butter. Bread and potatoes formed the
basis of the normal diet, and 65 percent was
supplied by the eastern area. However, the
total indigenous food supply to all of Germany
was only 85 percent of total consumption.
Vegetable oils and feed for livestock remained
the weak points in the wartime agricultural
economy. Only 48 percent of required table
fats (butter, lard, margarine) and 7.5 percent
of necessary technical fats for industrial pur-
poses could be produced from sources within
the nation. Western Germany as now con-
stituted, cannot supply more than 50-60 per-
cent of its food requirements.
The hectarage, estimated production, and
imports of principal crops in the Bizone are
as follows:
farm products once again came to be released
for distribution through regular channels.
The French Zone, smallest of the four, has
felt the food shortage more keenly than the
rest, despite heavy imports. The official daily
ration in 1947 averaged only about 1,200 calo-
ries for the normal consumer, but usually less
than this amount was available. A good 1948
harvest improved the food situation, although
French requisitions continued to limit
amounts consumed by the population. Total
daily food consumption by the non-farm popu-
lation in the French Zone is now estimated to
be around 2,300 calories.
Because of the influx of expellees, refugees,
and repatriates, the Bizone is now very
densely populated, the population having in-
creased 25 percent since 1939. At the same
time, food production for the area in 1948
HECTARAGE
PRODUCTION
(Metric Tons)
IMPORTS
1938/39 1
1948/49
1938 1
1948/49
1947
I 1948
Bread Grains
2,414,000
2,138,000
5,584,000.
4,518,000 4,334,300
6,326,000
Total Grains
4,376,000
3,651,000
10,260,000
7,419,000
Potatoes
951,000
1,019,000
17,492,000
19,055,000 26,800
347,500
Sugar Beets
148,000
146,000
4,770,000
4,348,000 53,700
634,900
(sugar)
(sugar)
Fodder Pulses
77,000
93,000
157,000
134,000 58,800
102,900
In the postwar period in all zones, almost
all farms suffered from lack of fertilizers,
seeds, tools, fuel, and spare parts for mechan-
ical equipment. Despite these production dif-
ficulties the relative advantages enjoyed by
the farming population with respect to avail-
able food supplies increased the of ur-
ban workers toward the authorities respon-
sible for the rationing system and toward
refugees whose presence was an added strain
on the food supply. Farmers also tended to
withhold .delivery of their assigned food quo-
tas, and thrived on black market trading. Ur-
ban workers, unable to satisfy their demands
through legal channels, went directly to the
farmers to trade their services or possessions
for food. This situation greatly improved
after the currency reform in June 1948, when
was 10-15 percent less than prewar. Cat-
tle numbers in the bizonal area in Decem-
ber 1948 were 2 percent larger than the year
before, but 15 percent below the 1936-38 aver-
age. Efforts to reduce fodder crops in order
to produce more food for direct human con-
sumption were successfully resisted by Ger-
man farmers, and increased fodder crop hec-
tarage in 1949 improved the livestock situa-
tion considerably, with a consequent improve-
ment in the meat, fat, and milk ration.
During 1936-38 average food production in
the bizonal area provided approximately 1,450
calories daily per person for the non-farm
population. Average non-farm consumption
in these years was about 2,900 calories per
person daily in the bizonal area. In the first
half of 1949 the average non-farm consump-
tion in the Bizone was around 2,450 calories,
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which was about 600 calories more than the
official ration of 1,850 calories for the normal
consumer. Estimates of the 1949 harvest for
western Germany, including the French Zone,
indicate that the breadgrain crop is substan-
tially above that of 1948 because of a 20 per-
cent larger yield per hectare. The total bread-
grain production was 5.88 million tons, and
with imports of 2.5 million tons assures the
food supply of the Federal Republic and west-
ern Berlin. The potato crop, however, was
reduced about 20 percent by drought, which
also affected other root crops such as sugar
beets and fodder beets.
Under the European Recovery Program,
western German economic plans call for full
land reform, the adoption of various scientific
measures, increased production of fertilizers,
and imports of food and other agricultural
supplies. The German diet has been recently
supplemented by an increased use of fish.
The small fishing fleet is being repaired and
rebuilt to authorized capacity as rapidly as
shortages of materials and fishing equipment
will allow.
The Soviet Zone has the largest land area
and is the most important zone agriculturally.
The zone possesses 35 percent of the total
arable land which accounted for 40 percent of
prewar breadgrain and potato crops, and half
the number of sheep in Germany as now de-
fined. Much of the land reform which the
Moscow Conference directed should be fin-
ished in 1947 was accomplished in the 1945
initial denazification procedure. The power
of the large estate owners was eradicated by
expropriation with compensation of all farms
over 100 hectares (247 acres), and more than
2 million hectares of land were distributed be-
tween the time of occupation and March 1947.
Ruthless implementation of this policy cre-
ated new problems, however, and only 25 per-
cent of the crop land was producing at normal
capacity in the spring of 1947 while the rest
was producing far below normal or not at all.
GRAIN AREA, YIELDS, AND PRODUCTION SOVIET ZONE OF GERMANY FOR PREWAR,
1948 and 1949
Crop
Area (1000 hectares)
Yield (centners per
hectare)
Production (1000 metric
tons)
Prewar
Average
1948
1949
Prewar
Average
1948
1949
Prewar
Average
1948
1949
Wheat
Rye
Barley
Oats
TOTAL
633
1,214
460
741
474
1,290
250
562
500 24.6
1,280 17.1
300 22.4
600 21.5
19.8
14.2
16.5
14.2
20.0 1,554
14.0 2,078
16.0 1,029
14.0 1,590
939
1,830
412
795
1,000
1,792
480
840
3,048
2,476
2,680
6,251
3,976
4,112
'Estimated.
LIVESTOCK NUMBERS IN THE SOVIET ZONE OF GERMANY AS OF 3 DECEMBER
for 1938, 1945, 1946, 1947 and 1948 (In 1000 head)
ITEM
1938
1945
1946'
1947
1948
Horses
810
590
620
650
665
Cattle
3,644
2,401
2,500
2,783
2,879
Hogs
5,689
1,179
1,900
2,074
2,617
Sheep and Goats
2,438
1,272
1,600
1,758
2,121
Poultry
21,251
5,947
8,000
13,451
15,764
'Estimated.
11-4
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Poor harvests in 1947 resulted in severe food
shortages throughout the Soviet Zone in the
spring of 1948. The shortages were met in
part by imports from the USSR and the satel-
lite states. Because of increased hectarage
and fertilizer allocations, as well as better
weather, the 1948 crop was 25 percent larger
than the 1947 crop, and resulted in a consid-
erable improvement in the food situation, even
though the USSR continued to requisition
scarce items for the Red Army and for export.
Although it is difficult to determine quanti-
tatively the average food consumption in the
Soviet Zone, recent estimates indicate that the
non-farm population in 1948-49 was consum-
ing around 2,300 calories daily. The meat and
fat situation has failed to show material im-
provement; and fish, sugar, and ersatz prod-
ucts continue to be substituted on the meat
and fat ration. Peasants' mutual aid associa-
tions are now organized along collective lines,
and further land reform in this direction is
reported in prospect.
Prewar Germany utilized tremendous quan-
tities of commercial fertilizers, and as a result
produced very high yields per unit of area on
relatively poor soils. Intensive cultivation
during the war to obtain maximum food sup-
plies further depleted the soil and increased
Germany's dependence on artificial fertilizers.
Before the war Germany was the principal
nitrogen producing country of the world. Of
its production, which exceeded 700,000 tons
for the crop year 1938-39, 70 percent was uti-
lized by agriculture, 16 percent by industry, ?
and the remainder exported. Output was re-
duced about 50 percent by war damage and
other causes, and efforts on the part of the US
and UK to provide fertilizer imports in order
to restore food production to the highest pos-
sible level were circumscribed by the world-
wide need for fertilizers, particularly nitro-
gen. By the end of 1948 nitrogen fertilizer
production was back to normal and produc-
tion almost doubled in 1949.
The bulk (61 percent) of the enormous Ger-
man potash deposits, estimated at 20 billion
tons, lie in the Soviet Zone. Thirty-six per-
cent of the German deposits are in the Bizone
where requirements in 1946 exceeded produc-
tion by 40 percent. Because the barriers in
the way of interzonal trade have operated to
prevent the western zones from obtaining
substantial amounts of potash from the So-
viet Zone, bizonal resources have been inten-
sively exploited. Potash production in the
UK Zone, where the principal west German
mines are located, amounted in 1948 to 2.41
million metric tons of crude potassium salts.
This rate of output was increased nearly 50
percent in the first six months of 1949, which
was in excess of requirements and left a small
surplus for export.
Because of the general economic disloca-
tion, German agriculture was able to obtain
less than half its estimated fertilizer require-
ments in 1946 and crop yields were 20 percent
lower than in prewar years. The Bizone
could meet only 37 percent of its potash needs,
and 34 percent and 12 percent respectively of
its nitrogen and phosphate requirements.
The situation failed to improve in 1947 when
bad weather was also a factor in retarding
crop production. It was impossible to come
within 35 percent of achieving the 1,550 calo-
rie ration level for the normal consumer from
indigenous food production, and this necessi-
tated the import of 4.4 million tons of food at
a cost of approximately $600 million. In east-
em Germany potash requirements were ex-
ceeded by 7 percent, but in the other cate-
gories the Soviet Zone was worse off than the
western zones, obtaining only 22 percent of
estimated nitrogen needs and 5 percent of re-
quired phosphates. The situation for all Ger-
many improved considerably in 1948 because
of larger fertilizer allocations and better
weather conditions. Although eastern Ger-
many can still produce food surpluses, the
prospect for western Germany's becoming self-
sustaining remains poor in view of the in-
creased population and limited farming area.
Prewar production of potash in the Soviet
Zone was over a million tons annually. In
1946, the SMA quota for the zone was 800,000
tons, with production at least 20 percent un-
der this figure because of war damage, power
shortages, transportation difficulties, and So-
? In the first Mx months of 1949, the supply in-
creased to 122 percent of potash needs and 89 and
95 percent respectively of nitrogen and phosphate
requirements.
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viet mine dismantling. Actual production in
1948 was 917,000 tons, of which 60 percent was
applied to agriculture and industry in the So-
viet Zone and the rest taken for reparations
or export.
b. Natural Resources.
(1) Coal.
Germany's most important raw material is
coal. In prewar Europe, the UK alone sur-
passed Germany's production and export of
hard coal (Steinkohle), two thirds of which
came from the industrial Ruhr at the rate of
about 10 million tons a month. All kinds of
hard coal, containing from 5 to 40 percent
volatile matter, are produced, i.e., anthracite,
semi-bituminous, bituminous coals of coking
and non-coking type, gas and long-flame coals.
Over two-thirds of the coal mined in the Ruhr
is suitable for coking. The coke ovens not
only supply the iron and steel industry but
are the source of a whole series of by-products
important to the chemical and other indus-
tries. Brown coal, of which Germany pos-
sesses vast resources, has a high moisture con-
tent, and in fuel value nine tons of brown coal
is considered the equivalent of two tons of
hard coal. It is suitable chiefly for power
generation and briquette manufacture.
Three-fourths of the important hard coal
reserves, estimated in 1944 at 288 billion met-
ric tons, are concentrated in the Ruhr, where
the coal is found in several seams, one above
the other, at depths of 1,300 to 2,600 feet, thus
enabling many coal beds to be worked from a
single shaft. Most of the remainder is found
in Upper and Lower Silesia, the Saar, and near
Aachen and in Lower Saxony. Of the total
reserves of brown coal and lignite, approxi-
mately one-third is located along the lower
Rhine near Cologne in the British Zone. Im-
portant deposits are found in the Soviet Zone,
in the vicinity of Leipzig and east of Berlin
on the Oder River. France has integrated the
Saar mining region into the French economic
system. The Silesian area?containing about
25 percent of the reserves of brown coal and
lignite?is, with the consent of the western
Allies, under Polish administration until a
German peace treaty is signed. Because of
the Soviet-Polish attitude toward the Oder-
11-6
Neisse boundary, quadripartite agreement on
the return of Silesia is unlikely. As a result
of the war, Germany will have lost one-fourth
of its brown coal reserves but not more than
15 percent of its hard coal.
The recovery program for Germany has de-
pended upon the availability of coal and steel,
hence Allied efforts have been concentrated
on overcoming the formidable handicaps en-
countered in the mines such as reduced ca-
pacity from war damage, inadequate or un-
skilled labor, and changes in management re-
sulting from decartelization* and denazifica-
tion procedures. Hard-coal production in the
Bizone in 1946 was 55 percent of the amount
dug in 1936; in 1947 it was 65 percent, and in
1948, 79 percent of the prewar figure. Brown
coal output, on the other hand, has surpassed
prewar levels, with the Soviet Zone producing
the major share. Ruhr output has fluctuated
with the individual miner as he has been af-
fected by such considerations as the food sup-
ply, lack of clothing, consumers' goods and
housing, the temporary abandonment of the
trend toward socialization of the mines, and
the political activities of trade union and
works councils under the influence of Commu-
nist propaganda.
Whereas in 1935, German output of coal per
man per day averaged 1.57 tons (as against
4.52 for the US), the present 1949 output in
the Ruhr is about 1 ton per man. Until re-
cently output per man was very much lower.
To overcome this situation steps were taken
by quadripartite agreement to increase
miner's pay by 20 percent, to improve living
conditions by granting special housing and
repair priorities and to place greater man-
agerial responsibility on German shoulders.
Recruiting and incentive programs, featuring
extra food-ration allotments, also produced
favorable results. But the postwar daily pro-
duction remained far below the hard-coal tar-
* In 1913 independent coal mines controlled over
50 percent of the coal resources, but by 1940 only 10
percent remained in independent hands. During
the war this small percentage was further reduced
by incorporation of some of the remaining inde-
pendent mines into the Ruhr steel combines.
France and the Benelux countries also have a finan-
cial stake in German coal mines.
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a.Wel-C.ET
o
COAL PRODUCTION IN THE RUHR DISTRICT
1936
1946 1947
1948
INCREASE IN
1948 OUTPUT
OVER 1947
1948 PER-
CENTAGE
OF 1936
(in, million metric tons)
(tons)
(%)
Coal
116.96 53.95
71.12
87.0
15.9
22.4
74.4
Coke
27.79 9.04
13.24
19.0
5.7
43.2
68.2
Coal briquette
4.41 1.90
2.18
3.0
0.8
36.2
67.3
Lignite
52.92 48.17
54.73
60.7
6.0
10.9
114.7
Lignite briquette
11.30 10.5
11.59
12.6
1.0
8.8
111.6
Workers Employed
284,100 320,200
390,800
409,200
18,400
5.8
44.0
get of 350,000 tons daily until September 1948,
when the release of hoarded goods brought
about by the currency conversion, the effects
of the better food situation, and the larger
number of coal miners employed, began to be
felt. Average daily production reached 335,-
000 tons in the first half of 1949, and increased
allocations to German industry brought about
a marked improvement in the general eco-
nomic situation. Of the coal mined, German
industry receives about 50 percent, of which
the iron and steel industry receives about one-
fourth. The railways receive about 10 per-
cent, domestic consumers about 6 percent, and
the occupation forces about 4 percent. An-
other 10 percent is consumed by the collieries,
and the rest, approximately 20 percent, is ex-
ported. France receives about 35 percent of
these exports.
(2) Timber.
Slightly over a quarter (27.5 percent) of
prewar Germany was covered by forest, which
yielded timber as well as material for paper,
wood-fiber cellulose, and other products. De-
spite a highly advanced system of reforesta-
tion, Germany's prewar wood supply was in-
sufficient for its needs.
Germany emerged from the war with its for-
ests relatively undamaged. About 40 percent
of the forest area is in the US Zone, 30 percent
in the Soviet Zone, and the rest divided
equally between the French and UK Zones.
An acute timber famine exists in all Zones
despite greatly increased felling. Loss of East
Prussia and the territory east of the Oder re-
duced the forest area of Germany by 25 per-
cent. Present Germany has a forest area of
23.6 million acres, of which 19.5 million acres
are commercial forests. The commercial for-
ests are estimated to be growing annually 6.8
billion board feet of timber in trees of more
than 2.75 inches in diameter. Norway spruce
is the most common tree in the Bizone, and
spruce forests cover 40 percent of the forest
area. Scotch pine covers 26 percent and
beach forests 21 percent of the area. Spruce
and pine furnish the ordinary construction
timbers and most of the common lumber used
in Germany. The total cut in 1947-49 was
7.5 billion board feet, which was greater than
normal growth, and indicated a serious de-
pletion of forest resources. At this rate of
cutting, it is estimated that sawlog-size trees
will be gone in eight years. Consequently,
the occupation authorities have ordered a pro-
gressive decrease in the cut and are also re-
ducing timber exports in an effort to preserve
the productive capacity of the remaining Ger-
man forests.
(3) Petroleum.
Germany has small petroleum resources.
Eight fields in the Hanover region produced
about 550,000 tons in 1938, no more than eight
percent of prewar requirements. Their chief
importance, however, lay in their yield of
valuable light oils from which lubricants are
derived. Present consumption of lubricants
in the bizonal area is approximately covered
by domestic production. A sudden or general
increase of industrial activity, however, may
cause a bottleneck in lubricants. Refineries
in the UK Zone, where the only important oil
fields are located, supply present restricted ci-
vilian needs in all three western zones. These
plants are to be rehabilitated and modernized
for refining Venezuelan and Arabian crudes.
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In 1948 the refineries processed 738,904 tons
of petroleum, of which 276,000 tons were im-
ported from Venezuela and the Near East.
Domestic oil production in 1948 was 626;810
tons from 28 oil fields. Bizonal consumption
of POL products in 1949 is estimated at 2.7
million tons, which will require a continuation
of the strict licensing control of petroleum
supplies.
The manufacture of synthetic gasoline,
amounting to 2 million tons in 1938, was pro-
hibited by the occupying powers in 1945 be-
cause of its war potential as well as its ex-
pense, one ton of liquid fuel requiring 15 to
20 tons of brown coal. Two of the six west
German Fischer-Tropsch plants were main-
tained in operation, however, in order to re-
duce the cost of petroleum imports. In the
spring of 1949 all facilities were ordered re-
moved in conformity with the agreement bn
Prohibited and Restricted Industries. Pro-
ducing nearly at capacity, Soviet Zone syn-
thetic plants (such as the Leunawerke near
Merseburg) for extracting gasoline and diesel
oil from lignite and coal supplied about 14
percent of Germany's liquid fuel needs during
the early war years. War damage and dis-
mantling reduced this capacity from 2.27 mil-
lion tons to approximately 1.1 million tons in
1948. The USSR has acquired the plants for
the Soviet economy and is reported to have
produced about 450,000 tons of gasoline and
200,000 tons of diesel fuel in 1948. Produc-
tion and distribution of the estimated civilian
requirements of gasoline, oil, and lubricants
for 1949 will call for utilization of all undam-
aged and salvageable equipment in the west-
ern zones, and may require all refinery equip-
ment in western Germany, so that no surplus
has been scheduled for reparations.
(4) Iron.
The insufficiency of domestic iron ore was
one of the most serious of all raw-material
problems hampering the economic progress of
Nazi Germany. The principal German iron
ore deposits are in the Siegerland, Lahn-Dill,
Salzgitter, and Bavarian districts. Reserves
of first-grade ore were estimated in 1938 at
350 million tons and of second-grade ore at
300 million tons. Most of these deposits are
small, widely scattered, and frequently remote
from coal fields.
German ore is lean, averaging less than 45
percent iron after treatment as compared to
Swedish ore which ranges from 58 to 72 per-
cent iron content or Spanish, 48 to 58 percent.
Furthermore, German ore, unlike the low-
grade minette ores of Lorraine, is not self-
fluxing and requires expensive treatment for
removal of silica and other impurities. Never-
theless, physical lack of plants to treat domes-
tic low-grade ores was a national weakness in
1939, since Germany was dependent upon im-
ports of foreign ores for two-thirds of its an-
nual prewar consumption of 33 million tons.
Sweden furnished almost 50 percent of these
imports and France 25 percent. The phos-
phate derived from Swedish ores is an impor-
tant source of fertilizer. In contrast to short
supplies of iron, Germany had abundant coal
resources, production of coking coal in pre-
war years being sufficient not only to meet all
domestic requirements but also to provide an
exportable surplus which helped pay for iron
ore imports. German iron ore production in
1948 was 6.5 million tons or nearly double
that of 1947 and 12 percent greater than the
1936 output. Germany was also deficient in
ferro-alloys and alloy materials, such as
nickel, molybdenum, chrome, and tungsten,
all essential to the manufacture of high-grade
alloy steel. Chrome was obtained mainly
from Turkey, tungsten from the Iberian Pen-
insula, and nickel and molybdenum from
Scandinavia.
(5) Aluminum.
Although German deposits were negligible,
providing less than 25,000 tons of ore an-
nually compared to imports of over 1 million
tons, Germany, before the war, ranked first
among the nations of the world in the ca-
pacity of its aluminum industry. Most of the
bauxite ore obtained during the war came
from Hungary and southeastern Europe, and,
after 1940, large quantities were imported
from France. During the war, annual alu-
minum consumption rose to a peak of around
470,000 tons of metal, with German plants
producing about 65 percent of this amount.
Many aluminum plants were destroyed in the
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?..; It M. 'E
course of the Allied invasion; others were
dismantled and removed as reparations. Al-
though production of primary aluminum (vir-
gin ingots from bauxite) was originally
banned by Allied agreement and imports were
limited to 30,000 tons of metal a year, or about
one-tenth the annual consumption rate for
1939-44, production of aluminum up to 85,000
tons annually is allowed under the PRI agree-
ment. Aluminum production in 1948 from
both primary and secondary sources was 42,-
000 tons in the Bizone. The French Zone has
one aluminum plant with an annual capacity
of 35,000 tons. Requirements for the Soviet
Zone, which is dependent mainly on Hungary
for bauxite, were stated at 60,000 tons in 1948,
of which about 60 percent was estimated as
available.
(6) Zinc and Lead.
A decade ago Germany was next to the
United States and Belgium in the world smel-
ter production of zinc and was able to supply
about two-thirds of its annual consumption
of 225,000 tons from indigenous ore. It shared
with Yugoslavia first place among European
producers of lead, although consumption was
about three times the annual output of Ger-
man mines. The chief sources of lead and
zinc are in Upper Silesia, the Harz Mountains,
and along the Rhine River, about 165,000 tons
of zinc and 80,000 tons of lead being obtained
annually from these deposits. Because zinc
predominates two to one in the ore, Germany
during the war relied heavily upon lead con-
centrates imported from Yugoslavia. Bizonal
smelter production of zinc and lead in 1948
was only 40 percent of what it had been in
1936. Soviet Zone production in 1948 was ap-
proximately the following: recast zinc-1,298
tons; lead concentrates-741.1 tons; lead and
lead alloys-11,922 tons.* (Germany's large
Silesian zinc mines have been given to Poland
by the USSR.)
(7) Copper.
Shortage of copper contributed materially
to Germany's military defeat. During the
war the use of copper was confined to the
? 1946 Soviet Zone zinc production was 14,000 tons
and lead 6,566 tons.
?
manufacture of aircraft and to other essen-
tial military purposes, while aluminum was
substituted for it in all commercial and do-
mestic uses. The amount of copper mined in
Germany has remained stable during the last
30 years, and production could not be essen-
tially advanced either in the prewar years or
during the war. The estimated annual mine
output of finished copper was 25,000 tons, and
the total refinery capacity about 300,000 tons.
The copper industry was an important ele-
ment in the national economy, and Germany
was able to compete successfully in world
markets in semi-manufactured and finished
copper products, of which about 100,000 tons
a year were exported. The proceeds in for-
eign exchange gained in this manner were
sufficient not only to cover the import of cop-
per ores, concentrates, and scrap (totalling
about 260,000 tons annually) but to leave a
substantial surplus for the import of other
goods from abroad.
The German copper industry passed largely
under Soviet control. More than 50 percent
of the copper products plants and nearly all
the large smelters and refineries are located
in the Soviet Zone, where 90 percent of the
copper is mined, most of it in the Mansfeld
district of Saxony-Anhalt. Production in
1948 was 24,000 tons of copper, mainly from
1.3 percent ore. Because Mansfeld ores are
sub-marginal, mining in the past was eco-
nomically possible only with state subsidies,
which have been continued by the Soviets and
charged to the Land Government of Saxony-
Anhalt. With the price of copper fixed at RM
735 per ton in 1948, production costs were RM
8,000 per ton, and the yearly subsidy was esti-
mated at RM 52 million, the deficit being made
up by Land subsidies.* The USSR has re-
fused to permit an increase in the price of
copper and is reported to have shipped large
quantities to the Soviet Union, which have
been credited to German reparations at the
low price supported by subsidies. Ore produc-
tion in 1946 was 371,000 tons, or about 40 per-
cent of what it had been before the war. The
USSR is striving to reach the prewar level and
? The world price of copper was RM 1,300 per
ton in 1948.
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has embarked upon an extensive program of
mine renovation and enlargement; the output
per miner, however, is still below the prewar
average. Copper production in western Ger-
many in 1949 is expected to reach 120,000 tons,
of which two thirds is electrolytic and the rest
fire-refined.
(8) Tin.
Since the Middle Ages tin has been mined
in Germany from small low-grade deposits in
the Erzgebirge, peacetime production averag-
ing about 150 tons per year, 1,000 tons during
the war. The average annual consumption
in prewar years, however, was about 14,000
tpns. The deficiency was partly filled by ore
imported from Portugal, Spain, Bolivia, and
the Netherlands East Indies and reduced in
German smelters; in addition, some tin metal
imports were required.
Germany was among the largest continen-
tal consumers and smelters of tin, with an
annual smelter output of approximately 5,000
tons. In March 1946 the Allied Control Coun-
cil set the permissible level of the German tin
industry at one half the 1938 rate and allowed
an annual maximum consumption of 8,000
tons.
(9) Vanadium.
An essential component of high-speed steel
tools and other high-tensile, heat-resistant
steel products, vanadium was the one alloying
element found in Germany in quantities
nearly sufficient for war needs. When nickel
and chromium became very scarce early in the
war, vanadium was widely substituted in their
place. Three sources were available: vana-
dium-bearing slags from Norway, minette
(low-grade) iron ores, and recovery from the
Bayer aluminum process. By far the most
important was the minette ore of Luxembourg
and Belgium, which, before the war, enabled
Germany to meet its annual requirements of
about 15,000 tons. Vanadium production
from iron-ore slags has been forbidden in Ger-
many since the war under the Level of Indus-
try Agreement.
(10) Magnesium.
Until 1942 Germany was the world's lead-
ing producer of magnesium accounting in
1940 for nearly 60 percent of the world sup-
ply of 36,500 tons. Magnesium output in-.
creased enormously during the war, and was
used extensively in airplanes, incendiaries,
rocket launchers, flares, and tracers.
Following the surrender, primary magne-
sium production was banned by the Allies for
an indefinite period, but is being produced in
the Soviet Zone at the rate of 500 tons per
month.
(11) Graphite.
All the economically important graphite
mines are located in southeast Bavaria, with
small deposits in Silesia and Thuringia which
yield an inferior grade of ore. The Bavarian
deposits have been mined for centuries, but
modern mining did not begin until the first
World War. Small holdings were then con-
solidated into a few strong companies which,
in 1938, were merged into the Graphitwerke
Kropfmuehl A.G., the dominating group in
the industry until the collapse in 1945. An-
nual production of all grades was approxi-
mately 30,000 metric tons of raw graphite;
? finished graphite about 8 to 10,000 metric
tons.
The high melting point of graphite and its
resistance to burning in air make graphite in-
dustrially useful as a refractory agent in cru-
cibles and foundry facings.
(12) Beryllium.
Germany pioneered in the production of al-
loys from this rare metallic element, particu-
larly in connection with beryllium-copper al-
loys and later on as a replacement for molyb-
denum and tungsten in the production of
steel. Since 1935 a single plant at Frankfurt-
am-Main has been the only producer of beryl-
lium metal and oxide in Germany, the total
output during the war amounting to 18.8 met-
ric tons of oxide and 4.1 metric tons of metal.
Ore supply originally came from Brazil; after
1940 Scandinavian, Portuguese and Italian
stocks were obtained. An Italian firm near
Turin was under German control until the ex-
pulsion of the Nazi armies, and the entire out-
put was shipped to Germany. German prog-
ress in atomic bomb development was halted
by the surrender, and as part of the industrial
disarmament program for Germany, the pro-
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duction of materials of primary importance
in atomic research, such as beryllium, has
been prohibited.
(13) Uranium.
Since September 1945 the USSR has been
exploiting the uranium deposits of the Erzge-
birge area on both sides of the Czechoslo-
vakian border of Saxony. These workings are
said to be shallow, consisting of crude, timber-
lined shafts, from the base of which workers
tunnel to follow the vein of ore. Necessary
electrical energy is furnished by high tension
installations removed to this area from other
parts of the Soviet Zone. Some 100,000 Ger-
mans have been drafted from the Soviet Zone
and forced to work in the mines under heavy
guard. Soviet mining methods are primitive;
working conditions are bad, and accidents are
frequent. Old ore dumps are also being
worked over for uranium, and the Soviet au-
thorities are carrying away such zinc and co-
balt ores as have been salvaged. The entire
area is sealed off by Soviet military forces, and
no one is allowed to enter or leave without
special authorization from the administrative
headquarters of the district at Aue. The cost
of these mining operations is borne by the
Land Government of Saxony.
According to Soviet reports, Erzgebirge
uranium ore is of very high quality, believed
to be the best in the world, and very easy to
mine. German technical opinion has it, on
the contrary, that the very fact that the USSR
is mining pitchblende from such a poor source
is an indication of a lack of better sources on
which to concentrate. The yield of uranium
ore from Saxony pitchblende deposits never
amounted to more than 10 tons annually, the
mines having been worked chiefly for cobalt
and bismuth ores employed in the Saxony
blue-dye industry. Total uranium reserves in
the Erzgebirge area (German and Czech) are
estimated to be about 600 tons U202 (uranium
oxide). The USSR is believed to be exploiting
this source at the rate of about 50 to 80 tons
per year.
(14) Pyrites.
Sulphuric acid, the most important inor-
ganic chemical used in industry, is prepared
mainly from pyrites, of which Germany has
limited deposits in Westphalia and Bavaria.
Before the war these furnished less than 40
percent of the annual domestic requirement
of one million tons, the rest being imported
chiefly from Norway and Spain. Sulphuric
acid was produced in 66 plants located in three
major areas; Westphalia, Bavaria, and Sax-
ony. Much of the plant capacity was war
damaged or dismantled, particularly in the
Soviet Zone, where a shortage of sulphuric
acid has been one of the principal limiting
factors in the zonal economy. Bizonal pro-
duction of pyrites in 1948 was 383,000 tons,
while sulphuric acid production was 821,000
tons, or about 80 percent of what it was in
1936. The Soviet Zone produced 68,000 tons
of pyrites in 1948 and imported 133,700 tons.
Sulphuric acid production was 151,000 tons or
about 50 percent of requirements.
(15) Potash.
Enormous reserves of potash, estimated at
20 billion tons, enabled Germany before the
war to supply 65 percent of the world's total
potash salts. Potash is prepared in various
forms, the chloride and sulphate being used
principally in the manufacture of fertilizers,
the sulphate in the manufacture of glass, the
carbonate in the manufacture of soap and
glass, the chlorate in the manufacture of
matches and explosives, the nitrate in the
preparation of gunpowder, glass, enamels, and
fertilizers, the cyanide in metallurgy, and
caustic potash which is used in soapmaking,
textile processes, and manufacture of potash
chemicals. Mine owners at an early date
combined to regulate production and main-
tain prices through a cartel known as the
Deutsches Kalisyndikat, which confined op-
erations to 30 or 40 of the lower cost mines
on a quota basis and closed down the remain-
ing 200 shafts, which were maintained, how-
ever, in a standby condition. Germany domi-
nated world trade, except for the period of the
first World War, through international cartel
agreements to partition markets and stabilize
prices Loss of foreign markets in the second
World War was offset by more intensive use of
potash for domestic agricultural and indus-
trial purposes. Wartime sales for the six-year
1939-44 period averaged 1.7 million tons K20
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annually, of which 70 percent went to agri-
culture, 3.5 percent to industry, and 18.5 per-
cent for export, with a small amount left un-
distributed. Potash production in 1948 in the
Bizone was 510,000 tons (K20 content) and in
the Soviet Zone 917,000 tons, of which 180,000
tons were taken for reparations and 238,000
tons for export.
(16) Salt.
The basic raw material of the important al-
kali chemicals is common salt, of which Ger-
many ranked first for many years among
world producers and exporters. The average
prewar output was 3 million tons, of which
800,000 tons worth RM 10 million were ex-
ported. About 82 percent of the salt was dis-
posed of through two syndicates, the larger of
which was an association of big potash com-
panies that also mined salt. The principal
salt works in the US Zone total 10, in the UK
Zone 28, in the Soviet Zone 23, and in the
French Zone 6. Salt mining was resumed in
the bizonal area in 1946 and quickly brought
to prewar production levels.
Despite the abundance of alkali raw mate-
rials, the chemical industry operated at such
a low level until 1948 that the production of
caustic soda and soda ash was insufficient to
meet demands. Consequently there was a se-
rious shortage of soap, detergents, and other
cleansing agents, while industries such as tex-
tiles, glass, paper, and rubber were also seri-
ously affected. The largest caustic soda plant
in Germany was at Bitterfeld, now in the So-
viet Zone, which produced 32 percent of the
prewar total. Dismantling and inadequate
fuel supplies affected the capacity of this
plant, and only 110,000 tons were manufac-
tured in 1948. Output of caustic soda in
western Germany reached 155,000 tons in
1948, an increase of 80 percent over the pre-
ceding year. Production of soda ash in 1936
was 726,000 tons, with the largest plant at
Bernberg, now in the Soviet Zone, with an an-
nual capacity of 410,000 tons. In 1948 Soviet
Zone production was only 82,000 tons. Soda
ash production in western Germany was 377,-
200 tons, or slightly in excess of the 1936 out-
put for that area.
11-12
C. Industry.
The chaotic condition into which Germany
was plunged by total defeat and the collapse
of its industrial system is in sharp contrast
to the stability, efficiency, and high degree of
organization characteristic of German econ-
omy in the past. The disaster was the more
spectacular because of the complexity of the
preponderantly industrial economy which was
geared to war production, but readjustment
was not made less difficult by the disappear-
ance of a sizable section (war goods) of an in-
dustrial complex that provided a livelihood
for millions of Germans. Efforts of the west-
ern Allies to get Germany back on a produc-
tion level approximating that of 1936 were
handicapped by the fact that the entire eco-
nomic structure was so badly warped and dis-
turbed by the stresses of the intervening
twelve years as to prevent its functioning on
any but a low level, and then only with con-
siderable outside assistance. The situation
was further aggravated by the lack of struc-
tural economic unity resulting from the divi-
sion of Germany into the four separate po-
litical and economic administrations, with a
fortuitous distribution of resources and with-
out an effective coordinating authority. Re-
gional specialization and economic inter-
dependency, carried to great lengths by the
Nazis in order to maximize production, also
accentuated the troubles arising from the sep-
aration of the country into sharply delineated
zones of occupation. Moreover, the failure to
effect currency reform during the period 1945
to June 1948, led to universal hoarding of
goods, and thus the potential ability of Ger-
many (all zones) to contribute to its own re-
covery was not realized.
Other important factors contributing to the
continuance of the economic slump were the
reparations, demilitarization, decartelization,
and denazification programs of the Occupa-
tion Powers which: (1) closed and dismantled
plants; (2) prohibited the production of war-
potential materials formerly important to do-
mestic industry and to the export market; (3)
partially decentralized and destroyed long-
established operational methods of whole in-
dustries; and (4) removed managerial talent
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from the once closely integrated industrial ma-
chine.
Before the currency conversion in June 1948,
the bizonal production level was only one-half
of the estimated 1936 level. Between June
1948 and July 1949 the combination of cur-
rency conversion and Allied (chiefly US) aid
brought production up 60 percent in Bizonia
or to about 88 percent of Bizonia's estimated
1936 level.
The French Zone has a different economic
structure and lacks industrial concentration.
Agriculture is the principal occupation, the
total value of agricultural products being
about twice the total value of industrial prod-
ucts ($50 million to $28 million in June
1949). Agricultural yields in 1949 were only
70 percent of prewar, and great efforts have
been required to improve the poor postwar food
situation, in consequence of which the aver-
age consumer ration has been increased from
1,700 calories to 2,000 calories in the past year.
Because of substantial imports of raw ma-
terials under the ECA program, there has been
a marked increase in industrial activity. The
official index of industrial production (1936 ?
100) in the third quarter of 1949 was 85, com-
pared to 81 in the second quarter, or a 70 per-
cent increase over the corresponding period in
1948. Nevertheless, there is serious unem-
ployment, arising mainly from lack of raw
materials in several basic industries, and the
financial picture is marred by the prospect of
continuing budgetary deficits. Budgets are
expected to be brought into better balance,
however, by the release of counterpart funds
for investment purposes. The 1949/50 invest-
ment program calls for an expenditure of DM
716 million, 41 percent of which is from coun-
terpart funds and 20 percent from public
subsidies.
The Soviet Zone possessed an industrial ca-
pacity at the end of the war sufficient for most
requirements, but Soviet dismantling and rep-
arations policies soon reduced it to a point
below the minimum needs of the population.
Later, the USSR reversed its policy of stripping
the Soviet Zone of industrial capacity and built
up basic industries in order to meet quotas
established under the Two-Year Plan. Most
of the production was sent to the USSR. The
Two-Year Plan, adopted in June 1948 set tar-
gets for 1949 and 1950 by which over-all pro-
duction was to increase at the end of the period
to 81 percent of that of 1936. This represented
an increase of 20 percent over the 1948 level
and 35 percent over 1945. Soviet Zone total
production in 1947 was approximately RM 10
billion (based on 1944 prices) ; the 1948 level
was to be increased 10 percent over this, but
shortages and other bottlenecks prevented tar-
gets from being reached in all major fields
except coal. Costs of production remain high,
although productivity of labor has been in-
creased by the introduction of the Hennecke
and other labor speed-up or worker incentive
systems. Because Soviet methods of comput-
ing values are open to question, and official
quotas are frequently changed, fulfillment of
the Two-Year Plan is problematical, although
Soviet Zone production has improved in many
respects since the lifting of the counterblock-
ade in May 1949 and the restoration of west-
ern German sources of supply for critical
items.
Outstanding individual industries are
treated separately in the remainder of the sec-
tion.
(1) Electric Power.
Prewar Germany was the most powerful in-
dustrial nation in Europe, ranking first in
world production of brown coal, second in steel
and electric power, and third in the output of
hard coal. German industry was 85 percent
dependent on electric power, and German
power stations had a higher installed capacity
and a higher output than those of any other
European country. In normal times Germany
produced annually about 24 billion kilowatt
hours, but the Nazi rearmament program in-
creased this to 40 billion kwh in 1936 and to
68 billion in 1943, which was the wartime peak
production. A network of transmission lines,
18,000 miles in length, connected the generat-
ing plants in a vast grid, normally assuring
supply of power to all industrial areas. Be-
cause of the enormous war potential of this in-
dustry, Germany's electrical generating capac-
ity was drastically reduced under the Level of
Industry Agreement. About 40 percent of
electrical capacity was in industrial plants,
many of which were in the war-potential class
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and were scheduled for removal together with
such generating plants as were considered sur-
plus to revised industrial needs.
In 1948 electric power output was 18 billion
kwh. Brown coal plants generate 41 percent
of Germany's power output, hard coal plants
35 percent, and water power 14 percent, while
gas, wood, and oil provide the rest. Practically
all of Germany's hydro plants are located in
the US Zone, which has little coal and must
depend on coal imports from the Ruhr to
operate its thermal stations. During the low
hydro winter season, or in periods of prolonged
drought, these thermal stations supply much
of the zone's electrical power.
Of a total capacity of 10 million kilowatts
of plant installed in what is now the bizonal
area, only about 17 percent was available for
service at the surrender. War damage, inade-
quate maintenance, shortage of fuel and essen-
tial replacements, and dispersal of personnel
were the principal causes of the almost total
breakdown of the once great German electric
power system. Some of these difficulties have
now been overcome, but shortages of fuel,
transport, and materials still constitute serious
handicaps to complete restoration of normal
services for both industry and private consum-
ers. Allocation of materials, like steel, ce-
ment, bricks, earthen conduits, and insulators
were only 15 percent of requirements, while
deliveries of coal generally did not exceed 60
percent of minimum needs. Nevertheless, by
July 1947 nearly 46 percent of the plant capac-
ity was back in operation. The rate of im-
provement has since become very slow owing
to lack of repair materials.
The electrical supply situation is satisfac-
tory for present needs. Replacement of worn
or obsolete equipment and construction of ad-
ditional power plants are delayed, however,
by the lack of available capital. Consequently,
generating capacity increased less than 10 per-
cent in 1948 and 1949. In order to assure an
equable distribution of available supplies of
current, rationing of electric power for domes-
tic and commercial purposes is maintained,
and a priority list was established for power
supply. Executive control of the industry was
transferred to the Germans on 1 January 1947,
but responsibility for the determination of the
level of industry, reparations, and exports was
retained by MG. Estimated power require-
ments over the next four years for a self-sus-
taining German economy are 16 million kilo-
watts of plant, or almost twice the amount
of power now available. Although the electric
power industry has high priority for invest-
ment purposes, the stringency of bank credit
has interfered with plans for expanding plant
capacity and building new power plants. As
of June 1949, DM 110 million has been made
available from GARIOA counterpart funds for
a number of special power projects, but further
grants are contingent upon German ability to
provide funds from their own resources for
this as well as for other investment needs.
Electric power output in the Soviet Zone in-
creased 7.7 percent to 7.9 billion kwh in the
first six months of 1949 over the last six
months of 1948. This fell short of the planned
quota for power production largely because of
the embargo on spare parts and machinery
from western Germany. With the restoration
of normal sources of supply, power output is
expected to improve somewhat. Power break-
downs are frequent, however, and the supply
remains inadequate to industrial needs with-
out further extension of plants and facilities,
for which available funds are also short.
(2) Electrical Equipment.
Up to 1945, production, research, and de-
velopment of German electrical equipment
were in the hands of two large corporations?
the Allgemeine Elektricitats Gesellschaft
(AEG) and Siemens und Halske?which
turned out equipment for generating, trans-
mitting, distributing, and utilizing electrical
energy principally for power, heating, and
lighting, and manufactured radio and tele-
phone equipment as well as aviation instru-
ments, radar, and other electronic devices.
While German progress in the field of elec-
tronics during the war did not match that of
the Allies, German electronic scientists made
substantial contributions to Nazi military
power. Many of these developments would
still constitute a menace to international
peace and security in irresponsible or un-
friendly hands. Production of German elec-
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trical equipment was therefore limited by
quadripartite agreement to 30-50 percent of
prewar capacity; while scientific research was
restricted to the exploration of new principles,
and their application to military purposes was
prohibited.
Since the electrical equipment industry was
concentrated for the most part in Berlin,* it
suffered heavy war damage and then fell into
the hands of the USSR at the time of the oc-
cupation. The largest electronics plant, which
was located in the UK sector of Berlin, was
completely dismantled by the Soviet officials
during their occupation of the city before the
establishment of quadripartite control. So-
viet economic penetration of this field has been
greater than in any other, and Soviet AG's
now control 80 percent of the industry. The
USSR is steadily increasing the production of
plants manufacturing electronics equipment
and has been building up the huge Siemens
works at Arnstadt in Thuringia, where a large
number of German scientists and technicians
have been assembled for research on electronic
devices, particularly radio equipment for
guided missiles and television, transmitters
for remote control of aircraft. Estimated
production of electrical equipment for indus-
trial uses in the Soviet Zone is 67 percent of
what it was before the war, while in the bizonal
area (1948) it is 120 percent and in the French
Zone 61 percent.
(3) Iron and Steel.
In prewar Germany the two great coal fields
of the Ruhr and Saar in the west and Silesia
in the east represented by far the principal
German iron and steel producing areas. The
Ruhr district, situated at the focal point of
an excellent water transportation system,
easily accessible to the great minette ore fields
of Lorraine, and overlying enormous high-
grade coal deposits, has for years been one of
the greatest steel producing regions of the
world. In 1936 the Ruhr accounted for 70 per-
cent, the Saar for 12 percent, and all other
? The total value of all electrical equipment pro-
duced in 1936 was RM 1.5 billion, of which about
one-half was produced in Berlin and one-third in
the bizonal area.
areas including Silesia * for 18 percent of the
total German steel output. This regional con-
centration was matched by the formation of a
cartel of eight companies, controlling 95 per-
cent of Ruhr steel production. During the
war, the steel capacity available to Germany
was doubled by the absorption of plants and
mines in occupied countries.
German rearmament involved a tremendous
program of economic self-sufficiency, particu-
larly in steel. Since the German steel indus-
try was coricentrated close to the frontiers
and thus vulnerable to air attack, the Reich in
1937 began mining domestic low-grade ores
for new steel plants erected in the center of
Germany. The Hermann Goering Works, a
government corporation, was formed to mine
ore and build and operate steel works and
coke ovens. Salzgitter ores (? 30 percent Pe,
high phosphorous) because of the difficulty in
removing impurities, were uneconomical, but
the Nazi self-sufficiency plan called for a pro-
duction of 21 million tons, of which 15 million
were to be treated in the Hermann Goering
Works. This total was never attained, since
the acquisition of the Lorraine ore fields in
1940 relieved Germany of the strained iron ore
situation and gave a sufficient supply to meet
all war purposes-60 million tons of 30 per-
cent iron content from which 18 million tons
of pig iron were made. The Germans then
lost interest in the Salzgitter works, which at
present consist of eight blast furnaces with an
annual capacity of a million tons of pig, and
six Bessemer converters with an annual capac-
ity of nearly a million tons of steel.
At the close of the war, the Lorraine fields
reverted to France, which also acquired the
Saar, while Poland took Silesia. There was
thus left to Germany the vast steel productive
*capacity in the Ruhr which had, however,
limited ore resources of poor quality. The
iron and steel industry had, moreover, come to
a complete standstill. Considerable war dam-
age had been sustained; the highly compli-
cated industrial structure was badly disor-
? Silesia, together with northern, eastern, and
central Germany-11.2 percent: Siegerland and
Hesse Nassau-2.2 percent: Saxony-3.1 percent:
Southern Germany and Bavarian Palatinate-1.9
percent. Total-18.6 percent.
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ganized, and transportation facilities in the
coal fields were totally disrupted. It was sev-
eral months before production could be re-
sumed. Meanwhile, agreement had been
reached at Potsdam on the destruction of Ger-
many's war potential, and steel was the yard-
stick against which German peacetime indus-
trial productivity was to be measured. A sub-
stantial amount was essential for a reasonable
recovery program, and under the March 1949
Prohibited and Restricted Industries Agree-
ment, steel production in the bizonal area was
set at 11.1 million tons.
Continued shortages of coal and electric
power were serious handicaps to increased
bizonal steel production, which in 1947 totalled
only 2,460,000 tons and 5,750,000 tons in 1948.
Transportation bottlenecks interfered with the
movement of coal and ore to the plants and
with the distribution of the semi-finished
product. Labor was also a problem because
of the absence of skilled workers, the general
inefficiency resulting from the lack of food,
and the large percentage of workers of ad-
vanced age. Substantial imports of Swedish
iron ore and increased coal allocations, how-
ever, raised the output of bizonal German steel
in the first half of 1949 to approximately 4.2
million tons; but further improvement is lim-
ited by the difficulties mentioned above. In
line with US-UK policy, management of the
industry in the Bizone is now very largely in
German hands, but many steel works have
been dismantled or allocated for dismantling
on reparations account to the dismay of the
Germans who oppose further progress in this
direction because of the crippling effect at a
time when extraordinary efforts are neces-
sary to revive the entire German economy.
The French Zone is receiving imports of0
steel on reparations account from the bizonal
area, and the French expect by 1951 to be
producing about three times as much steel in
their zone as the present 100,000-ton output
which will still be hardly sufficient for local
needs. Since German industries in the French
Zone are geared for export to France, steel
products have been given a low priority in con-
trast to other materials needed more urgently
by the French economy. Security considera-
tions have also influenced the French toward
11-16
keeping postwar German steel production at
the lowest possible level, and they were reluc-
tant to approve any advance in the Potsdam
total of 5.8 million tons for Germany as a
whole. It has been estimated that, on the
basis of a population of 70 million, Germany
will require 14 million tons of steel annually
to meet the minimum needs of its economy, a
figure which the French feel is at least 40
percent too high.
The most important deficit of Soviet Zone
industry has been iron and steel, and it has
held down replacements or renewals in all
industrial fields. Before the war the Soviet
Zone produced 2 million tons of steel annually;
present production is 250,000 tons a year, and
the minimum requirements are 1,200,000 tons.
Soviet removals of steel-producing facilities
have cut capacity to 27,000 tons a month. Im-
ports from the western zones were inadequate,
and these were absorbed to a great extent by
the Soviet AG's, leaving the socialized indus-
tries of the La,ender to operate on far less than
the minimum requisite stocks. Following the
blockade of Berlin, steel deliveries from the
Ruhr ceased altogether, except for a certain
amount of clandestine traffic, and the Soviet
Zone had to depend upon imports from the
USSR and the Satellites and work began on
reconstruction of dismantling plants. Al-
though Silesia, an important steel-producing
area, has passed under the control of Poland,
the USSR has had difficulty in obtaining steel
from that source because Soviet Zone goods
offered in exchange were unsatisfactory. The
USSR wants a larger share of the iron and
steel products of the Ruhr, and this need has
been responsible for much Soviet propaganda
in behalf of German political and economic
unification. It has also inspired Soviet de-
mands that German steel production be uti-
lized entirely for the rehabilitation of Ger-
many.
(4) Machinery Industry.
Under this heading are included all indus-
trial machinery, electrical machinery and ap-
paratus, prime movers, machine tools, con-
struction and mining machinery, automotive
equipment, locomotives, and ships. In pre-
war years Germany's contribution to the
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ti le LI L 1
world's supply of machinery was of great im-
portance, in general paralleling that of Great
Britain. Excluding Great Britain, Ger-
many's production was greater than that of
all the rest of Europe. The machinery in-
dustry, probably more than any other branch
of German industry, made possible the supply
of military materiel for Germany. During
the war years production of machinery more
than doubled in quantity while industry as
a whole increased only about a third. Total
production of machinery during the year 1938
was about 5 million metric tons. Production
in the various zones was about as follows:
Berlin, 14 percent; US and UK Zones, 47 per-
cent; French Zone, 18 percent; and Soviet
Zone and areas under Soviet control, 21
percent.
Machinery production capacity in Ger-
many at the close of the war was far in ex-
cess of that of peacetime requirements and
therefore many plants were scheduled for dis-
mantling while production was limited by
quadripartite agreement. Production of var-
ious categories of machinery, which has been
increasing slowly since the cessation of hostil-
ities, is currently about 40 percent of 1936.
During prewar years German exports of
machinery varied between one-fourth and
one-seventh of the quantity produced, and
Germany supplied about 25 to 30 percent of
world imports. Imports into Germany were
comparatively very small. Categories of
which large tonnages were exported included
metal-working machine tools, textile and ag-
ricultural machinery, internal combustion
engines, locomotives, steam turbines, electri-
cal machinery, and apparatus. Germany
supplied about 70 percent of European re-
quirements of machine tools of which about
25 percent went to the USSR. Germany pro-
duced about 20 percent of the world supply
of electrical goods, and German exports ex-
ceeded those of either the United States or
the United Kingdom. In many other cate-
gories of machinery Germany was also the
principal supplier to the European markets.
(5) Rubber.
Prewar Germany had the largest rubber in-
dustry in continental Europe, importing
100,000 tons of natural rubber in 1937, out of
which was manufactured a wide range of
articles from hose and belting to rubber shoes
and automobile tires. It not only sufficed
for domestic needs but allowed for an export
of about 6,000 tons. The chief center of the
rubber industry was Hanover, now in the UK
Zone, which is manufacturing tires at about
75 percent of prewar levels and exporting a
small amount of processed rubber. Since no
synthetic rubber is produced in the US Zone,
tires have been imported from the US to keep
motor vehicles operating at about one-third
the prewar volume of traffic.
As late as 1937 the only German production
of synthetic rubber was in an experimental
plant at Leverkusen. Under the four-year
plan of that year, however, construction of
three large plants was commenced at Schko-
pau (near Leipzig), Hills, and Ludwigshafen.
Later a fourth plant at Auschwitz, Poland,
was built but only partly operated before the
end of the war. After further expansion, the
plant at Schkopau, with an annual capacity
of 72,000 metric tons, was the largest in Ger-
many. The ultimate planned capacity of the
four plants was 192,000 tons per year, or
about twice Germany's prewar consumption
of natural rubber. This large capacity was
necessitated by cessation of imports and ex-
haustion of stocks of crude rubber. The bulk
of the synthetic rubber output went to the
Wehrmacht for tires.
Although the Potsdam Agreement provided
for the elimination of all industrial facilities
for the manufacture of synthetic rubber, the
critical shortage of this material resulted in
the temporary retention of three buna plants,
which produced 45,000 tons of synthetic rub-
ber in 1946. The Schkopau plant, now in the
Soviet Zone, was operating in 1947 at a rate
of about 42,000 tons per year, but partial dis-
mantling reduced the capacity to 17,000 tons
in 1948 and 27,000 tons (planned) for 1949.
The only other German plant in operation
was the one at Hills in the British Zone, with
a capacity of 10,000 tons per year. The lat-
ter ceased production in early 1948. The
French closed the huge I. G. Farben buna
factory at Ludwigshafen and made it avail-
able for reparations because the coal neces-
sary to produce one ton of buna will produce
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five tons of nitrogenous fertilizers having five
times the value. Except for a few elementary
processes, manufacture of synthetic rubber
was placed on the prohibited list in the 31
March 1949 agreement.
(6) Chemicals.
Germany possesses large natural reserves
of most of the basic raw materials needed to
produce the multitude of chemical products
essential to a modern industrial economy.
Coal, limestone, salt, potash, and wood are
abundant within the country, but most of
the sulphur and pyrites has to be imported.
Before the war Germany was the largest
producer and second largest exporter of
chemical nitrogen. The prewar output of
about 700,000 tons per year was nearly one-
third of the total world production, and of
that quantity nearly 100,000 tons were ex-
ported. Present policy is to limit German
production of nitrogen to its own needs, but
because of coal shortages, war damage, and
dismantled plants, the country is actually on
an import basis.
Three-fourths of Germany's prewar nitro-
gen was produced by the Haber process in the
form of synthetic ammonia. Since this is
basic to the manufacture of high explosives,
the restoration of German nitrogen manufac-
turing facilities has been retarded by Allied
concern for the high war potential of the in-
dustry. Moreover, quadripartite policy with
regard to Germany has been to limit its nitro-
gen production to its own consumption, thus
further delaying reconstruction, since 80 per-
cent of the nitrogen was produced in ten
plants, all of which sustained severe war
damage.
Eastern Germany has comparatively few
fertilizer plants. Assuming full operation of
these, annual nitrogen production in the So-
viet Zone would be about 100,000 tons. Pro-
duction capacity for phosphate fertilizers is
30,000 tons P205 (phosphoric acid) yearly,
but actual production in 1946 was only 9,000
tons. Most Soviet Zone phosphate factories
are not working because of the lack of raw
phosphates. Imports are possible under bar-
ter trade agreements; even so, it would not
suffice to meet the annual requirements of
50,000 tons P205. Furthermore, the Soviets
have taken considerable amounts of nitrogen
and phosphate as reparations, leaving most
of the fertilizer needs of their zone to be met
from indigenous potash deposits.
Germany was the largest producer and ex-
porter of dyes before the war. Prewar (1936)
production of dyes and organic chemicals
amounted to RM 499 million. The volume of
exports averaged about 33,000 tons per year
and ranged in value from RM 200 million to
RM 336 million. The present limitation of
RM 58 million on exports of dyes is not being
attained owing to. dislocations of the formerly
highly integrated industry, shortages of raw
materials, and lack of overseas sales organiza-
tions and credits.
The former large production and exports of
pharmaceuticals, plastics, and synthetic or-
ganic chemicals has also almost disappeared
because the erection of zonal barriers inter-
rupted production processes in this formerly
highly integrated industry, and, in addition,
because of limitations on production imposed
by the occupation authorities, 40 percent in
the case of chemical raw materials, 80 per-
cent in dyes and pharmaceuticals, and 70
percent in other chemical products. Export
targets in chemicals are unlikely to be
reached before 1949.
Possessing only small resources in petro-
leum, Germany built up a huge calcium car-
bide industry to provide acetylene as an alter-
nate material for its synthetic rubber and
plastics industries, and for certain other syn-
thetic organic chemicals, all of which would
be based on petroleum were it available in
sufficient quantity, as well as to provide acety-
lene for its metal working industries. Of
world production amounting to over 1,800,000
tons of calcium carbide in 1939, Germany pro-
duced about 1,000,000 tons. Dismantling of
plants and shortages of coal and electricity
had reduced the output in 1946 to 30,000 tons
in the Soviet Zone and 304,000 tons in west-
ern Germany. By 1949 annual production
had recovered in the Soviet Zone to 381,000
tons and in the Bizone to 385,000 tons.
Before the war, soda ash, caustic soda, sul-
phuric acid, and chlorine were also manufac-
tured in quantities sufficient not only for do-
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mestic needs but for a substantial export
trade. Chemicals accounted for 7 percent of
the total value of all products manufactured
in Germany in 1936, or RM 2.2 billion, of
which nearly 30 percent was exported. The
industry was dominated by I. G. Farben, the
largest chemical firm in the world, which pro-
duced 100 percent of Germany's wartime re-
quirements of synthetic rubber, 98 percent of
its dyestuffs, 75 percent of its chemical nitro-
gen, 61 percent of its calcium carbide, 55 per-
cent of its pharmaceuticals, and 46 percent
of its chlorine, as well as a great variety of
other chemical products such as plastics and
X-ray film. This vast concern ceased to exist
after the surrender, and a large number of
its plants were immediately dismantled or
allocated for reparations. Although revival
of the dyestuff industry has been marked
since currency reform, production of dye-
stuffs in 1949 was only 25 percent of that in
1936. Production in 1949-50 is expected to
rise from 11,500 tons to 25,000 tons, with ex-
ports increasing to 7,000 tons, of which about
half will be shipped to the Soviet Zone.
In the chemical field, coal is the most im-
portant raw material, and the small alloca-
tion of coal to the German chemical industry
was the main reason for its low production
rate until late in 1948. There also have been
difficulties in obtaining imported raw mate-
rials such as sulfur and pyrites, borax, iodine,
camphor, vegetable drugs, and medicinal
herbs. Furthermore, the various I. G. Far-
ben plants,* although located in different
parts of Germany, were nevertheless highly
integrated, and consequently the necessary
interchange of semi-finished products and in-
termediates between the Soviet Zone and the
western zones, and vice versa, now so difficult,
further complicated matters. Dismantling of
plants, as well as decartelization and denazi-
fication procedures connected with the disso-
lution of I. G. Farben, have also retarded
recovery in the chemical industry, which was
* Distribution of I. G. Farben properties is as fol-
lows: Soviet Zone 68.5 percent, Bizonia 21.5 percent,
French Zone 20 percent. In the US Zone 77 of the
199 I. G. Farben installations have already been
liquidated; in the Soviet Zone 86 out of 201, although
all important plants are now Soviet-owned.
one of the most complex in Germany. Re-
covery in the US Zone, where 20 percent of
the plants are located, was retarded by a total
dependence upon the other zones for raw
materials such as coal, pyrites, and synthetic
ammonia. It was not until well into 1946
that the industry could be reactivated to any
great extent. Fuel and power shortages were
especially acute, the severe winter of 1946-47
causing a temporary shutdown of the entire
chemical industry. In 1947 Bizone produc-
tion was only 45 percent of the 1936 level, but
with more coal and power available in 1948
it increased to 70 percent and in the first
quarter of 1949 to 78 percent.
The greatest concentration of chemical
plants occurs in the UK Zone, which has 35
percent of the total, but production in 1947
was only 40 percent of prewar levels. Chemi-
cal plants in the Soviet Zone, which has 28
percent of the total, suffered severely from
war damage and then from sporadic Soviet
dismantlings, so that chemical output has
lagged considerably behind postwar objec-
tives. The Soviet Zone industry has been
further handicapped by the loss of raw mate-
rials attributable to the counterblockade of
Berlin. Thousands of German chemists and
technicians have also been taken to Russia
to work on scientific projects and on erection
and operation of plants for the USSR. The
chemical industry in the French Zone, with
11 percent of the plants, has shown irregular
production trends.
(7) Textiles.
Before the war (1937) Germany's consump-
tion of all kinds of fibers was estimated at
969,000 tons; of which new and reclaimed do-
mestic fibers accounted for 29 percent, im-
ported raw cotton for 35 percent, and imports
of wool, jute, flax, and hemp for the rest. Al-
though the textile industry for the most part
was not extensively damaged, recovery has
been much slower than in other industrial
fields because of the excessive dependence
upon the import of raw materials such as cot-
ton and wool, and the difficulty of obtaining
chemicals for the manufacture of artificial
fibers of the rayon type. The Level of Indus-
try Plan allowed for the processing of 665,000
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tons of raw material (185,000 tons of artificial
fiber and 480,000 tons of natural fiber), but
production in 1948 had not reached one-half
of this figure, except in synthetic fibers, which
is now 50 percent above prewar levels. In or-
der to revive the cotton spinning industry in
the US Zone and to furnish employment for
thousands of idle workers, the US Government
has imported large quantities of raw cotton
under the disease and unrest program.* Of
the 152,000 bales of US cotton shipped to Ger-
many in 1946, more than one-half was utilized
for the processing of textiles for re-export to
provide foreign exchange for payment of the
cotton. The British have also imported raw
wool and Egyptian and East Indian cotton
into their zone under a similar program, and
hemp has been obtained from Italy for the
manufacture of rope and binder twine.
The German textile industry was centered
in what is now the Soviet Zone. Because
most of the spinning and weaving mills are
located in the Soviet Zone, the west German
textile industry is faced with a difficult equip-
ment problem and is dependent upon im-
ported machinery to effect an appreciable im-
provement over present production levels.
While Soviet Zone machinery is sufficient to
supply the needs of the population, lack of
raw materials has forced the industry to run
considerably below normal capacity. Soviet
Zone raw cotton imports from the USSR
dropped from 22,000 tons in 1947 to 7,000 tons
in 1948, and only a slight increase in textile
output was possible, mostly in artificial fibers.
Actual production in 1949 is not expected to
exceed 4 kilograms of material per head. Ar-
tificial fiber production in the Soviet Zone in
1948 was 40,000 tons, and the Two Year Plan
calls for 90,000 tons by 1950, to achieve which
will necessitate the building of several cellu-
lose factories.
Under ECA it is planned to raise the con-
sumption of textile raw materials in western
Germany. In 1948 it amounted to 271,000
tons, or about 6.5 kg per head, and in 1949 it
is expected to reach 409,000 tons, or 9.7 kg per
head. Cost of these imports will rise from
$86 million to $140 million. Artificial fiber
See page 11-30-31 on International Trade.
11-20
production in 1948 was approximately 100,000
tons. At present, the Bizone has 3.9 million
running spindles, the French Zone 0.7 million,
and the Soviet Zone about 2 million. In all
zones obsolescence of equipment is a great
handicap to further progress in the textile
industry.
(8) Other Industries.
It would be hard to find an industry in Ger-
many today which is not handicapped by
shortages of material. Wood-working has
been unable to procure the right type of lum-
ber, glue, metal findings, or finishing mate-
rials. Furniture supplied for German civilian
use was generally unfinished because of the
shortage of shellac. Although Germany was
a large manufacturer of leather goods, it im-
ported a large part of the hides and skins pre-
pared in tanneries. Leather output in 1948
was only 49 percent of prewar production, but
the import of 63,000 tons of hides under the
ECA program, in addition to the 20,000 tons
from the domestic slaughter of cattle, permit-
ted the manufacture of 2.7 million pairs of
shoes monthly, which is still far short of rea-
sonable requirements. The scarcity of pulp-
wood has handicapped the paper industry and
restricted the publication of books, magazines,
newspapers, and writing material. Ceramics
has always been an important German indus-
try, and an abundance of fine clays is avail-
able, but production until recently has been
limited by the relatively large amount of coal
required per unit of finished ware. The opti-
cal industry has been decentralized, and re-
covery has been retarded by the difficulties
in the way of interzonal trade. Cameras
are manufactured in the US Zone, but optical
glass, lenses, and shutters must be obtained
from the French and Soviet Zones. There is
a ready international market for German op-
tical products, and a percentage of cameras is
set aside to pay for Germany's large import
bill.
The need for building material was acute
because of war damage. A system of licens-
ing and control was instituted in order to as-
sure an equable distribution of such materials
and to prevent their utilization for non-essen-
tial purposes. Cement production was limited
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(Th
to 8 million tons annually, but the rate of pro-
duction was insufficient to reach this level.
Glass and lumber were difficult to obtain and
the production of bricks was not more than 10
percent of prewar capacity. Consequently,
the production of building materials did not
reach one-third of the prewar output. Fol-
lowing currency reform, however, employment
increased in all the building material produc-
ing industries, and in the building industry it-
self. In October 1948, brick production was
five times the average production in 1947, and
cement production was 93 percent of the aver-
age production in 1936. Increased building
costs and lack of investment capital have
hampered the reconstruction program, and
housing conditions remain bad. Except for
makeshift repairs, progress is retarded by the
factors limiting German economic recovery in
general.
d. Financial.
(1) Banking.
During the period when Germany was pre-
paring for and prosecuting the last war, tie
German private banking system through pur-
chase of government obligations supplied the
bulk of credit needs of government agencies
and financed construction in the war indus-
tries. The large German banks financed the
INDEX OF INDUSTRIAL PRODUCTION BY MAJOR INDUSTRY GROUPS
BIZONAL AREA
1936 = 100
Period
All Indus-
try Groups
71:3
o
C.)
in
be id
?E t,
Ts cp
0 5,
PI A
Chemicals
Paper and
Pulp
$-.
C)
:iCa
ca
a)
1-1
Textiles
ua
1
ca
M
Electricity
and Gas
Iron and
Steel
Mining (ex-
cluding Coal)
1947
1st
39
61
42
44
30
37
29
94
86
24
71
Half
1947
2nd
43
72
41
51
33
31
32
83
99
29
86
Half
1948
1st
48
77
45
59
37
42
44
66
103
32
99
Qtr.
1948
2nd
51
74
59
54
41
36
41
53
110
30
93
Qtr.
1948
3rd
66
82
N. A.
66
60
56
59
60
115
44
111
Qtr.
1948
4th
76
86
N. A.
75
67
65
67
72
135
55
114
Qtr.
1949
1st
83
90
N.A.
83
81
71
81
81
142
60
121
Qtr.
1949
2nd
85
88
N. A.
85
84
73
88
82
131
60
124
Qtr.
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German cartels, syndicates, and trusts, and
they also exercised, through interlocking di-
rectorates, considerable influence over the
greater part of the German monopolistic
groupings such as I. G. Farbenindustrie, Sie-
mens & Halske, Krupp, Rhein-Metall-Borsig,
and others. The Third Reich in turn exer-
cised extremely wide powers in supervision of
banking, concerning itself especially with the
dismissal and appointment of the higher
banking officials.
In its broad outlines this institutional con-
trol system had been established well before
the advent of the Third Reich, but the degree
of control over industry and the concentration
of this control in the large Berlin banks
(Grossbanken) were accentuated during the
1929-1939 period. Among some 650 commer-
cial banks in Germany, the six Grossbanken
(Deutsche Bank, Dresdner Bank, Commerz
Bank, Berliner Handelgesellschaft, Reichs-
kreditgesellschaft, and Bank der Deutschen
Arbeit) accounted for 55 percent of .total as-
sets and 59 percent of total deposits in 1938.
The Reichsbank, with a network of over 500
branches, served as the main bank of note-
issue and as the fiscal agent for the Reich.
At the beginning of the occupation existing
economic controls and financial machinery in
Germany was preserved and utilized, as far as
was consistent with occupation policies. This
included the maintenance by local authorities
of such anti-inflationary measures and other
economic controls as had been established by
German law, and, in the western zones, the
continued functioning of most of the banks.
Branch banks were permitted to retain a re-
porting and policy relationship with main of-
fices in their own Laender, but this relation-
ship was not allowed to cross Land or zonal
boundaries. The Reichsbank discontinued its
former function of issuing bank notes and as-
sumed the functions of a commercial bank.
In addition, Military Government in the west-
ern zones employed the Reichsbank as its fis-
cal agent, as a supervisor of certain bank ac-
tivities in each zone, and as a medium for
transmitting and administering certain Mili-
tary Government financial laws.
At Potsdam in 1945 the Occupying Powers
agreed to eliminate excessive concentration of
power in the banking systems and to estab-
lish a uniform policy with regard to currency
and banking. Implementation of the agree-
ment on currency and banking, however, was
delayed by lack of agreement on other essen-
tial matters. The Western Powers, therefore,
followed an interim policy of liquidating the
central boards of German banking monopolies
and decentralizing them to the Land level.
The USSR regarded these steps as partial
measures and regarded the desire of the US,
UK, and France to couple the elimination of
excessive concentration of economic power in
banking with the creation of central banking
machinery as an attempt to delay a decision
on German monopolies, in order to preserve
them. Inability to reach agreement on such
fundamental issues hampered the orderly ex-
tension of credit, contributed to inflation, and
retarded economic recovery.
In the British Zone of Occupation the bank-
ing system was, with few exceptions, permit-
ted to remain substantially unchanged pend-
ing quadripartite agreement on the future
system to be adopted for the whole of Ger-
many. Decentralization of banking without
some form of centralized control was not, in
the British view, a satisfactory solution of the
problem and was not in accordance with ac-
cepted principles of economic unity. The
USSR, on the other hand, closed all German
banks in existence at the time of the capitula-
tion, seized all assets, and stopped payment on
old obligations of the German credit system.
The USSR then established provincial, city,
and regional banks of Laender and Provinzen
Governments, employing new personnel and
thereby solving the problem of denazification.
In order to restore the economy, the newly es-
tablished banks granted long-term credits for
the revival of industry and the needs of agri-
culture. All stock exchange transactions are
forbidden Soviet Zone banks, which are also
not allowed to deal in securities issued before
the capitulation of Germany.
In the French Zone of Occupation, German
banks were authorized to continue function-
ing with the exception of the branches of the
Bank der Deutschen Arbeit which had close
affiliations with the Nazi Party. Branches of
banks whose main offices were situated out-
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side the French Zone had to sever their con-
nections with the main offices. The Reichs-
bank established two offices, one in the North
and one in the South, to supervise the Reichs-
bank's branches; and a supervisory board for
the French Zone was set up at Speyer. Sub-
sequently the French authorities cooperated
with the German authorities in the implemen-
tation of measures which should result in a
situation similar to that which exists in the
US Zone: i.e., the liquidation of the Reichs-
bank, the creation of three Laender Central
Banks, and the liquidation of the former
branch bank system, which will be replaced
by banks with branches exclusively in the
Land in which their main office is located.
In November 1945 US Military Government
proposed to German Land finance officials the
establishment of a basic Land central banking
organization which could be coordinated on a
zonal basis and later integrated with any sub-
sequent banking plan for Germany as a whole.
The Germans were reluctant to cooperate in
such a decentralization scheme, and little ac-
tion was taken on the US proposals. Finally,
in December 1946, legislation acceptable to US
Military Government was enacted and became
effective in all three Laender on 1 January
1947. When Bremen was established as the
fourth Land in the US Zone on 21 January
1947, the Reichsbank district lines were ad-
justed to follow the political boundaries, and
the new system was extended to include
Bremen.
This law created a State Central Bank in
each Land of the US Zone to take the place of
former Reichsbank branches, and to function
as bankers' banks similar to the US Federal
Reserve Banks. In the absence of a uniform
quadripartite agreement on currency and debt
problems for Germany as a whole, the State
Central Banks could not be granted the right
of issue. For the same reason it was not pos-
sible to liquidate the Reichsbank entirely.
The new State Central Banks were assigned
the Reichsbank's current assets as well as the
greater part of its liabilities. The Military
Government appointed a Trustee in each
Land to administer the Reichsbank's remain-
ing assets and liabilities, the latter consisting
mainly of accounts which had been blocked
for political reasons by the Military Govern-
ment. To facilitate an eventual liquidation
of the Reichsbank on a zonal basis, a General
Trustee for the Reichsbank was also appointed
for the entire US Zone.
The great commercial banks also resisted
Military Government efforts to decentralize
their economic power. Therefore, Military
Government Law No. 57 was promulgated on
6 May 1947. It provided for the appointment
by each Land government of an independent
and disinterested custodian for the Deutsche
Bank, Dresdner Bank, and Commerz Bank, to
manage and administer the property of these
banks within the respective states. The
names of the banks were changed, and the in-
fluence of present officials and shareholders on
the management was eliminated. Adminis-
trative regulations cut off the "giro system"
(a system for the inter-bank transfer of
funds) of the banks beyond state boundaries
and forced all clearings of more than
RM 100,000 to be carried out through the
Land Central Bank system. Contrary to the
fears of German officials, the law did not
weaken public confidence in the banking sys-
tem. There was no run on the banks, no in-
crease in withdrawals, and no attempt to
transfer funds to other zones.
The financial reforms imposed by the occu-
pying powers on the western zones in June
1948 completely altered certain aspects of the
banking situation in those areas.
The cancellation of the Reich debt and the
conversion of other debts in June 1948 by the
western Allies reduced deposit liabilities by 90
percent but wiped out entirely 80 to 90 per-
cent of the assets of the commercial and sav-
ings banks. The structure of bank assets was
then rebuilt. The State Central Banks cred-
ited the banks with amounts equal to 15 per-
cent of their total (converted) deposit and
savings accounts. The banks also were allot-
ted "Ausgleichsforderungen" (claims against
the State bearing 3 percent interest) to the
extent that remaining assets proved insuffi-
cient to cover their liabilities including "ap-
propriate capital" to be determined by the
Bank Control Authority.
The banking system in the western zones
was unified in June 1948 by the creation of
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the Bank of German States, which acts as a
depository of State Central Banks' required re-
serves. After the repudiation of Reich obliga-
tions, State Central Banks were credited with
an amount equal to 30 percent of their (con-
verted) deposit liabilities and their holdings of
small notes and coins.
Banks in all three western zones were
brought under reserve requirements similar
to those already prevailing in the US Zone.
Against current accounts State Central Banks
are required to keep reserves of 12 to 30 per-
cent with the Bank of German States, while
for other banks (including Post Cheque Of-
fices and Postal Savings Banks) reserve re-
quirements are 8 to 20 percent. Reserve re-
quirements against deposits and savings were
established at 4 to 10 percent.
Until the June reforms, the banking struc-
ture in Berlin under occupation resembled
that of the Soviet Zone in that all pre-occupa-
tion institutions (excepting the Volksbank, an
urban credit cooperative) were closed and all
pre-occupation bank accounts blocked. Only
four banking institutions operated in the So-
viet Sector, two of them municipally owned.
These two, the Berliner Stadt Kontor and the
Sparkasse der Stadt Berlin, were created after
the Soviet occupation of the city and before
quadripartite government was established.
Only the Stadt Kontor was authorized to
make loans at the beginning of the occupa-
tion, and these were limited to short-term
credits. More recently this bank has been
authorized to extend both municipal and pri-
vate long-term credits, but it is not permitted
to make loans to other banks. All interzonal
cashless transfers in the Soviet Zone and Ber-
lin are cleared through the Stadt Kontor, but
only transfers in payment for goods may be
made with the Soviet Zone and Berlin. Of
the two other financial institutions, the Post-
scheckamt provides only postal giro or clear-
ing services, while the Volksbank, which was
authorized to reopen in December 1945, sup-
plies the normal services of an urban coopera-
tive system.
In the Soviet sector following currency re-
form the Deutsche Emissions- und Giro-bank
was converted on 20 July 1948 into the
Deutsche Notenbank (German Currency
Bank), which was given the right to issue cur-
rency and to perform commercial banking
functions. All bank deposits, which had been
blocked up to 60 percent after currency re-
forms were transferred to the Notenbank to
provide it with loans funds and to insure cen-
tralized control over all commercial banking
in the Zone. The chief customers of the No-
tenbank are the Soviet Zone central adminis-
trative organizations, the Soviet corporations
(AG's), and the Soviet commercial companies.
An additional function of the Notenbank is
the financing of reparations from current pro-
duction and other exclusively Soviet interests
in eastern Germany. Other firms must ob-
tain operating funds either from their Soviet
enterprises or from cooperatives. The Invest-
ment Bank under the Control of the DWK re-
mains the main agency for granting long-
term credit, and as such exercises a powerful
influence in shaping the economic develop-
ment of the zone in conformity with Commu-
nist purposes. The Garantie und Kreditbank
is the dominant institution controlling foreign
trade and foreign exchange transactions in
the Soviet Zone.
(2) Currency.
The printing and issue of Reichsmark cur-
rency which ceased during the last weeks of
the war was not resumed. At the end of the
war there were about 60 billion Reichsmarks
and about 10 billion (some estimates run as
high as 20 billion) Occupation Marks, com-
pared to RM 10.5 billion in 1938, in circula-
tion in Germany. Most of the Occupation
Marks represented an excess issued by the
USSR early in 1945 under an agreement
among the Occupying Powers to use a single
form of occupation currency, the Allied Mili-
tary Mark. This large supply of money, cou-
pled with a low level of production of goods,
resulted in an increasing tendency among the
German population to refuse the Reichsmark
in business transactions and the payment of
debt and to demand other forms of compensa-
tion. By 1946 the Reichsmark would pur-
chase rationed goods, but little else.
Since currency reform was basic to the so-
lution of Germany's economic ills, the occu-
pying powers sought agreement on concerted
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a xi u ss MI
measures for all four zones. The Allied Con-
trol Council agreed on the issuance of a single
currency, for the whole of Germany, to be
known as the Deutsche Mark. Adoption of
the plan on a quadripartite basis was blocked,
however, by the failure of the US and Soviet
delegates in ACC to agree on a site for print-
ing the new currency. Whereas the US in-
sisted on having it printed in Berlin under
close quadripartite supervision, the USSR
wanted part of the total amount printed at
Leipzig, an arrangement which the US be-
lieved would result in further unregulated is-
suances of currency detrimental not only to
the German economy but to the US financial
position in Germany.
The apparent unwillingness of Soviet au-
thorities to cooperate in reviving the German
economy and the pressing necessity of such a
revival in the western zones to the success of
the Marshall Plan finally impelled the western
Allies to break the currency reform impasse.
The western Military Government authorities,
therefore, proceeded jointly in the three west-
ern zones with a currency conversion and re-
lated financial reforms by three laws promul-
gated within one week, that ending 26 June
1948.
The first law introduced a new Deutsche
Mark and provided for the conversion of the
old coins and currency?Reichsmarks, Ron-
tenmarks, and Allied Military Government
notes?into "Deutsche Marks" at the rate of
10 RM to 1 DM. The second law established
the Bank of the German States as the Bank
of Issue and introduced reserve requirements
for all banks. The third, or Conversion Law,
announced the all-important conversion rate
of 10 to 1 for bank accounts, private liabili-
ties of all kinds, insurance policies, and the
like. A comprehensive tax reform was also
introduced. The thorny question of the dis-
position of obligations of the old Reich was
settled by voiding them. Fiscal and bank-
ing features of the reforms are discussed un-
der appropriate headings elsewhere.
? Reforms instituted in the western sectors of Ber-
lin are treated above: see page 1-16-17. Discussion
of the currency reform in the Soviet Zone is found
on page 11-26.
Other important features of the currency
reform may be summarized as follows. All
old currency was turned in. Each inhabit-
ant of the western zonet was allowed to ex-
change 60 RM for 60 DM, and business en-
terprises were granted a special allowance of
60 DM for each employee in order to provide
cash for immediate needs. (Subsequently
bank accounts were debited 540 RM, the dif-
ference between the 60 RM surrendered and
the 600 RM required for exchange of 60 DM.)
Reichsmarks surrendered in excess of 60 RM
were credited to bank accounts. These ac-
counts (which included both surrendered
cash and old credit balances on deposit) were
divided equally into two types?"Free" and
"Fixed" accounts. Their RM value was con-
verted to DM value at a rate of 10 to 1. The
"Free" accounts were made immediately
available for withdrawals; the "Fixed" ac-
counts were blocked until October 1948. At
that time it was decided (over the protests
of German financial authorities) to unblock
20 percent of each of the "Fixed" accounts,
to destroy 70 percent, and temporarily to con-
tinue blocking the remaining 10 percent.
Salaries and wages were made payable in
DM on the old RM scale (and wage increases
up to 15 percent were authorized). This
stipulation put businesses under pressure to
sell hoarded stocks of goods in order to main-
tain a liquid position. The bank accounts
of public authorities were rendered void; pub-
lic expenditures were to be met out of cur-
rent receipts. Prices of a wide range of con-
sumer goods were decontrolled, with the ex-
ception of most foodstuffs and raw materials.
Clothes rationing was also reintroduced.
The imposition of these reforms, was dam-
aging to certain laboring and business groups.
The reforms were, however, a necessary prel-
ude to recovery as soon became manifest in
the disappearance of black markets, the re-
appearance of goods in shops and markets, a
decline in unemployment, and a sharp in-
crease in production. It was plain that the
western Allies had planned for an eventual
level of Deutsche Mark prices much higher
than the prewar Reichsmark price level,
since the present note issue limit is equivalent
to DM 220 per capita against RM 86 per
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capita in 1933. The increase would seem to
be justified, however, both because world
prices have increased considerably in the in-
tervening period and because the German
people apparently want to hold a large pro-
portion of their assets in liquid form. West-
ern Allies were concerned, however, by the
possibility that the October release of 20 per-
cent of the blocked accounts would set off a
wave of price increases, and further the dis-
parity between wages and prices. Should
such a development be attended by renewed
hoarding and labor disturbance, the conse-
quent decline in production would tend to
cancel the economic improvement brought
about by the June 1948 reforms.
Soviet authorities were quick to counter
the conversion in the western zones with a
currency reform applicable to the Soviet
Zone, including the Soviet Sector of Berlin.
The conversion in the Soviet Zone was re-
markable in that although low income groups
in the zone received somewhat more favor-
able treatment by its terms than these groups
received in the western zones, publicly owned
enterprises and Soviet owned corporations
were excluded from conversion requirements.
Thus the reduction in the volume of cur-
rency was not so drastic as in the western
zones.
The first 70 RM turned in by an individual
were converted at a 1 to 1 ratio, without being
debited to bank accounts. A ratio of 10 to 1
was established for the conversion of the next
RM 5,000. For sums in excess of RM 5,000
no conversion was permitted individuals until
investigation proved that the sums had been
lawfully acquired. Cash holdings of firms,
organizations, and institutions were ex-
changed at 10 to 1. Current accounts were
converted at 10 to 1 for the first RM 5,000;
amounts in excess of RM 5,000 were subject
to proof of legitimacy. A 1 to 1 conversion
rate was allowed for funds of public authori-
ties and accounts of publicly-owned enter-
prises. For funds of the State-owned insur-
ance corporations the conversion rate was
5 to 1, and of the social insurance institutes
was 2 to 1. Earnings of war profiteers,
profits derived from speculations, and ac-
counts of war and Fascist criminals were con-
fiscated.
Savings deposits received special treatment.
The conversion rate was 1 to 1 for deposits
up to RM 100; 5 to 1 up to RM 1,000; and
10 to 1 from RM 1,001 to 5,000. Accounts in
excess of 5,000 were subject to proof of
legitimacy.
Debentures were issued in place of current
reserves and savings deposits established be-
fore 9 May 1945 at a conversion rate of 10 to 1,
provided that balances in excess of RM 3,000
could be proved legitimate.
No change was authorized in wages, sal-
aries, and taxes. The reform did not affect
internal and foreign public debts, and the lia-
bilities of closed banks were also unaffected.
The differences in the financial reforms of
the western zones and of the Soviet Zone have
brought about a difficult financial situation
in Berlin, where dual currency and banking
systems exist as well as separate budgets for
the German municipal governments of the
eastern and western sectors. The failure (to
date) of negotiators of the Western Powers
and the USSR to reach agreement on finan-
cial matters in Berlin, however, is sympto-
matic of the continuing basic disagreement
on the control of Germany and Germany's
future role in Europe.
(3) Government Finance.
In the sphere of financial policy in Ger-
many the Allied Control Authority was faced
with the problem of reorganizing the reve-
nues and expenditures of German budgets to
insure not only the reconstruction of a peace-
ful economy but also the fulfillment of repa-
ration claims, occupation costs, and other
obligations imposed on Germany under the
terms of the surrender.
During the war and the years immediately
preceding it, the German budgets were ad-
justed to satisfy the military program of the
Reich. Expenditures for the period of the
war were approximately 650 billion Reichs-
marks, of which 600 billion were devoted di-
rectly or indirectly to war expenses. Of this
expenditure not more than one-third was cov-
ered by tax and other ordinary forms of reve-
nue. The greater part of the remainder was
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financed by an issue of public debt of approxi-
mately 400 billion Reichsmarks, equal to 31
times the indebtedness at the beginning of
the Nazi regime and five times the prewar na-
tional income of Germany. Of this issue only
a small part was sold to the public, the bulk
being distributed to various credit institu-
tions. The Reich indebtedness was further
expanded as a result of war damages and
compensation for other war losses until the
total Reich debt was around RM 900 billion.
At the end of the war there was little pros-
pect of this debt being serviced. During the
first three years of occupation all national
debt service charges were omitted from gov-
ernment budgets. Upon repudiation of such
debts in June 1948 all service charges on
Reich debt were eliminated in western zonal
governments for the future.
Following the surrender of Germany in
May 1945, regular governmental expenditures
dropped sharply. As has been stated, pay-
ments of interest on the Reich public debt
were suspended, and those on the debt of lower
governmental units were generally discon-
tinued. Outlays for war production, as well
as for maintenance of the Military Services,
were terminated; payments on account of war
damage claims, pensions, relief grants, and
other war expenditures were either eliminated
or severely restricted by Military Government.
Officials and employees of the former Reich
who were not required for essential functions
taken over by the Laender were removed from
the payrolls; and certain functions, such as
the political police, were eliminated. On the
other hand, large extraordinary governmental
expenditures occurred. They included occu-
pation costs, care of displaced persons, and
general relief. Total extraordinary expendi-
tures (occupation costs, expenditures for dis-
placed persons, refugees and expellees, prison-
ers of war, interment camps, port costs in
Bremen, contribution to Land Central Banks,
and the like) have constituted over a third of
the total expenditures of Laender govern-
ments.
In order to provide the funds required for
the fiscal operations of the Laender govern-
ments, a reorganization of the German tax
system was necessary. Formerly, the prin-
cipal revenue producing taxes were levied by
the Reich but were collected by the States, the
Reich returning a share to the States, which in
turn passed on a proportion to the Communes.
Yearly budgets were approved by Laender
governments but had to be submitted to the
Reich Finance Minister whose final approval
was essential in the case of long-term loans,
utilization of reserves, and the acquisition,
sale or mortgage of estate property of the prov-
ince. Thus the Reich tax administration was
highly decentralized for operating purposes
but closely controlled as to policy by central
offices. After the capitulation, the former
Reich financial mechanism ceased to function,
and the Reich budget ceased to exist.
One of the first tasks confronting the oc-
cupying forces, therefore, was to devise interim
expedients for utilizing the decentralized rem-
nants of the former administrative machinery.
At an early date, the tax powers of the former
Reich were vested in the individual Laender,
so that existing tax offices continued to col-
lect Reich taxes under the jurisdiction of sepa-
rate Land Ministries of Fnance. These reve-
nues were made available for local as well as
Land purposes. At the same time all special
tax favors granted the Nazis and their follow-
ers in existing legislation were removed, and
discriminatory taxes against Jews and other
racial minorities abolished.
The low level of production, trade, and in-
come of the immediate postwar period resulted
in a precipitant drop of 60 percent in Land tax
collections for the fiscal year 1945 in the US
Zone. At the same time, in spite of the sharp
reduction in incomes, inflationary pressures
created by the years of deficit war-financing
remained as a threat to the already shattered
economy. To reduce the dangers of inflation,
as well as to provide larger government reve-
nues to meet rising costs, the ACC in February,
May, and June 1.946 revised and drastically in-
creased the rate schedules for most types of
taxes.
As a result of these measures, German tax
collections in all zones, which averaged RM
10.1 billion annually in the years 1933-1937,
amounted to RM 21 billion during the fiscal
year 1946-47. Compared to RM 1.8 billion col-
lected in 1945 in the four Laender of the US
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Zone, collection in 1946-47 amounted to RM
4.6 billion, of which 78 percent was income,
property and transportation taxes, and 22 per-
cent customs and excises. Tax collections in
the combined US-UK Zones for 1946-47 were
RM 10.8 billion as against RM 5.7 billion for
the previous year, an increase of 90 percent.
Despite heavy expenditures requirements in-
cluding substantial occupation costs, and in
contrast with virtually all neighboring coun-
tries, budgets of all western zones were brought
approximately into balance by 1947. This
feat was accomplished only by omission of all
national debt-service charges from the budg-
ets. The repudiation of the Reich debt in
June 1948 relieved western zonal governments
of all such charges in the future. The chief
inflationary pressure prior to currency reform
came from the excessive volume of currency
and deposits created during the war and not
from the current spending of German govern-
ments. While tax increases have been heavy,
particularly in view of low production, only
limited recognition was given in German cir-
cles to the fact that German taxes during the
war were 30 percent lower than those of most
countries, and that only the incidence of these
burdens and their allocation among social and
economic groups can be altered.
The tax situation of the Laender in the west-
ern zones was drastically altered by the finan-
cial reforms of June 1948. Under the new sys-
tem, income and wage taxes were reduced
about one-half, and the tobacco tax was re-
duced about one-third. Inheritance and cor-
poration taxes were altered without a prob-
able change in yields, and a capital transac-
tion tax was re-imposed. A heavy coffee tax
was also imposed. In addition, the Laender
were authorized to levy additional taxes, in-
cluding surcharges on the scheduled taxes.
On balance the new system will result in a
shift to heavier dependence upon indirect, re-
gressive types of taxes and to less dependence
upon income taxes.
Although currency reform accomplished
most of its major objectives, one of the chief
remaining threats to financial stability is un-
balanced public budgets. Deficit public spend-
ing has resulted in a net addition to the money
supply already sufficiently large to exert con-
siderable inflationary pressure on the economy.
Public budgets at all levels are experiencing
difficulty in adjusting their expenditures to re-
duced revenues. The budget of the Bizonal
Economic Administration for the fiscal year
1948-49 was balanced at 408 million marks, a
100 million mark increase over the previous
fiscal year, but almost 200 million marks lower
than the precurrency reform estimates for the
current fiscal year. Although the 1949-50
budget is balanced, it is by no means certain
that expenditures will be covered. The bizonal
budget depends for its revenues mainly on the
statutory contributions of the German Post
(100 million marks) and the German Railways
(174 million marks) . The financial condition
of these agencies is such that considerable dif-
ficulty will be experienced in making these
funds available. In addition, the Bizonal Eco-
nomic Administration is required to provide
funds to finance the support of Berlin. The de-
velopment of the Laender budgets since cur-
rency reform has shown that deficits of dan-
gerous magnitude must be expected in a num-
ber of Laender unless drastic measures are ap-
plied. Cash balances have dropped by almost
one-half, and tax revenues have shrunk
rapidly, while payrolls have continued to ex-
pand. Laender encountering the most troubles
are those such as Schleswig Holstein which
bear the brunt of heavy occupation costs or of
large expenses for refugees and evacuees. No
action has been taken on the problem of
equalizing such burdens.
By the spring of 1949 the progress of western
German recovery showed signs of slowing
down. Further improvement appeared to be
hampered by lack of capital for long-term in-
vestment. The shortage of loan funds forced
the banks into a cautious lending policy, inter-
est rates were high, and the principal method
of financing the needs of industrial and busi-
ness enterprises was the unorthodox one of
discounting three month trade bills. Despite
Military Government pressure to develop a
long-term investment program, little was ac-
complished because of inadequate savings and
German disinclination to provide capital from
German sources by taxation. To control de-
flationary tendencies in an economy (which
is potentially inflationary) and to remove
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some of the more dangerous production bottle-
necks, Military Government established a
credit of one billion west marks for emergency
investment purposes, of which DM 220 million
were earmarked for the expansion of the elec-
tric power plant program in order to reduce
the bizonal power shortage. Military Govern-
ment efforts also resulted in the passage by
the Bizonal Economic Council on 20 April
1949 of an acceptable tax reform law retroac-
tive 1 January 1949, devised to encourage both
saving and investment. Nevertheless, the
Germans continued to rely heavily on the fu-
ture availability of foreign capital plus ECA
counterpart funds and to minimize both the
necessity and possibility of developing internal
sources of investment funds. The German
authorities were advised, however, that Mili-
tary Government would not permit more than
DM 2 billion to be drawn from counterpart
funds for capital investment purposes and that
the remaining DM 6 billion required for the
1949/50 program must come from public budg-
ets and private sources.
In the Soviet Zone a zonal budget which has
replaced the five Laetuier budgets is prepared
under the close supervision and direction of
the SMA. Income generally exceeds expendi-
tures by a considerable amount. About half
the current revenue is transferred to the Ger-
man Central Finance Administration which
provides a great variety of subsidies for the
support of the zonal economy. It covers the
deficits incurred by the coal mining and other
industries, maintains a ceiling on prices, pri-
marily for state-owned enterprises, prevents
price increases for foodstuffs, liquidates the
debts of expropriated concerns, finances repa-
rations and export deliveries, and provides for
the reconstruction of factories. All this re-
quires a very heavy tax levy. The five Laender
budgets for the fiscal year 1947-48 anticipated
a total revenue of RM 8.5 billion with total ex-
penditures placed at RM 8.3 billion. Actual
collection amounted to RM 8.9 billion, princi-
pally in consumers' taxes which accounted for
46 percent of total revenues compared to 17
percent from this source in the UK Zone and
22 percent in the US Zone. The zonal budget
for 1948/49 was approximately the same as for
the preceding fiscal year, but tax collections
were RM 9.2 billion, or nearly 5 percent greater
than in 1947. This would indicate a general
increase in industrial production, especially
as the turnover tax remained at an occupa-
tion period high, and reflects Soviet efforts to
obtain maximum benefits from the zonal econ-
omy. It is doubtful, however, if this high tax
rate can be maintained in 1949 in face of the
production difficulties occasioned by the cessa-
tion of East-West trade following the imposi-
tion of the counterblockade in July 1948 and
the financial difficulties caused by currency
reform.
(4) Reparations.
The plan for reparations and level of post-
war German economy adopted by the Allied
Control Council in March 1946 was based on
the Potsdam Agreement providing for German
unity. The objectives of the plan were:
(a) the elimination of the German indus-
trial war potential;
(b) the provision of reparations out of Ger-
many's capital equipment for victims of Nazi
aggression; and yet to
(c) leave within Germany necessary plants
and equipment to permit rebuilding of a via-
ble, peaceful economy.
Because of Soviet intransigence little could
be accomplished toward the objectives of the
plan on a quadripartite level; therefore, the
US and UK Zones of Germany were fused for
economic purposes in January 1947. On the
basis of industrial capacity scheduled to be
retained under the Reparations Plan of March
1946, it soon became evident that the Bizonal
area could not become self-sustaining, and in
August 1947 the US and UK announced a re-
vised level of industry for their zones of Ger-
many, to approximate the level of industry
prevailing in 1936, an increase of about one-
third over the level contemplated in the origi-
nal plan. In October 1947, the US and UK
announced a list of 683 plants and part plants
which were surplus to the new industry level
and therefore available for reparations.
Reports of US Congressional Committees on
the desperate situation of the German econ-
omy and pending legislation for the European
Recovery Program brought increased agita-
tion for cessation of reparations deliveries. It
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was feared that the elimination through repa-
rations of equipment which could be of help
to the economic recovery of Germany would
undermine the recovery program. Further,
the US Congress objected to reparation deliv-
eries to the USSR of materials which assist in
the development of war power.
Before its 1947 Christmas recess the Con-
gress passed the Foreign Aid Bill without spe-
cific restrictions in the matter of reparations,
but made clear that the question of plant
removals would receive detailed consideration
by the next session of Congress.
The breakdown of the Allied Control Coun-
cil following the walk-out of the USSR in
March 1948 eliminated all possibility of f our-
power agreement on reparations matters. In
April 1948 all deliveries from the US Zone to
the East were halted "pending clarification of
certain issues." At the same time, the US
Technical Mission, under cover of secrecy,
went into western Germany to study disman-
tling and the reparations program as they
related to European Economic Recovery and
the development of the Soviet war potential.
After ERP came into being, the US took the
position that it was desirable to re-examine
certain portions of the reparation lists with a
view to determining the extent to which some
of the plants might better serve the needs of
European recovery if left in Germany than if
removed and re-erected elsewhere. A survey
of the situation was consequently undertaken
late in 1948 by a committee of US steel ex-
perts; meantime dismantling on a limited
scale went forward in the French and US
Zones.
The report of the Humphrey Committee be-
came the basis of negotiations at London early
in 1949 that resulted in the signing of an
agreement on 31 March on Prohibited and Re-
stricted Industries, under which it was agreed
to retain in the German economy all but 9 of
the 168 plants scheduled for dismantling but
listed by the Committee as essential to the
recovery program. Restrictions were placed
on the production of ball bearings, primary
aluminum, chlorine, and a few other products.
Steel capacity was limited to 11.1 million tons
per year, and all remaining capacity was to be
allocated to IARA for distribution among its
members. The synthetic rubber and fuel in-
dustries were placed on the prohibited list, and
all except a few of their installations ordered
removed. Seven shipyards were also ordered
removed, and German shipbuilding was re-
stricted to the capacity that remained, subject
to certain other limitations on the possible
size and speed of the vessels to be built. The
provisions are subject to review not later than
1952.
e. International Trade.
Before World War II a large foreign trade
was one of the contributing factors to Ger-
many's position as the most industrially pow-
erful nation in continental Europe. Con-
versely, German exports and imports were of
great importance to European economy. In
1936, for example, 11.4 percent of Germany's
total industrial production was exported. Of
total industrial exports, 75 percent came from
the mining, metal-working, and chemical in-
dustries and only 25 percent from consumers'
goods industries. About 16 percent of the
total value of hard-coal output was exported,
23 percent of the machine tools, and about 25
percent of the output of chemicals. At the
same time Germany was dependent on im-
ports for a large part of its food supply and
industrial raw material needs.
In normal prewar times Germany was one
of the two major links (the other being the
UK) in the pattern of trade and trade settle-
ments in Europe. In contrast to the UK,
which had a large import surplus from Eu-
rope, Germany had a large surplus of exports
to most other European countries. These
countries were able to settle their German ac-
counts with pounds sterling, receipt of which
allowed Germany, in turn, to maintain a large
surplus of imports from overseas suppliers of
raw materials. The world-wide depression
and the Nazi rearmament program altered
this situation, and Germany developed a sys-
tem of administrative controls involving bar-
ter trade, import-export quotas, multiple ex-
change rates, and export subsidies, for the
purpose of attaining planned trade objectives.
Owing to the shortage of foreign exchange,
the import program was restricted to essen-
tial foodstuffs, raw materials, and other com-
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modities essential to the military program.
Total value of foreign trade declined from
RM 27 billion in 1929 to RM 10.6 billion in
1938. Although the major part of Germany's
exports went to the industrialized countries of
Europe, Germany was the most important
source of supply of manufactured goods for
central and eastern European countries.
From the outset of the postwar period the
revival of the foreign trade of Germany, so
essential to the recovery and maintenance of
internal economic stability, encountered great
difficulties. The business community of no
other European country was so completely
isolated from the rest of the world, and no
other country dependent upon foreign mar-
kets and supplies was equally handicapped in
its facilities for carrying on foreign trade.
The whole complicated institutional system
required for sales abroad disappeared to be
replaced by the cumbersome postwar foreign
trade administration, over which a series of
Military Government controls was imposed.
This change further retarded trade recovery.
The Potsdam agreement provided for the
creation of a central German administrative
department for foreign trade. On 15 August
1945, a quadripartite Export-Import Sub-
Committee was created, and an interim plan
was developed in line with the provision of
the Potsdam agreement that imports were to
be restricted to goods necessary for minimum
standards of consumption and production.
Implementation of the plan was, however, left
to the respective zone commanders.
The difficulties of quadripartite discussion
finally led the Military Governments to for-
eign trade planning on a unilateral basis.
During 1946 it became apparent that neither
the US nor the UK Zone would become self-
sustaining without a concerted effort to stimu-
late exports and simplify trade procedures.
The Byrnes-Bevin agreement, dated 4 Decem-
ber 1946, provided for the economic integra-
tion of the US and UK Zones (the French and
Soviet Governments having declined to par-
ticipate) and for the creation by 1 January
1947 of a Joint Export-Import Agency (JEIA).
This agency was charged with the collection
of proceeds from export sales and the billing
and accounting for all exports and imports,
in addition to planning the foreign trade pro-
gram and supervision of trade relations with
other countries. Finally, on 18 October 1948,
the French Military Governor signed an agree-
ment with the US and British Military Gov-
ernors, to merge the foreign trade of the US,
British, and French Zones of Occupation in
Germany.
(1) Bizone.
Before the war, steel, metal goods, machin-
ery, and chemicals constituted about two-
thirds of the exports of the Bizone. Because
of restrictions on war-potential capacity and
shortages of power, manpower, and transport,
such formerly important export items as ma-
chine tools, roller bearings, and heavy ma-
chinery generally have not been produced in
large quantities. Hence, the character of the
Bizone's postwar exports, limited as they have
been chiefly to raw materials, has thus far
borne little resemblance to the prewar pat-
tern.
The European Recovery Program assumes
the ultimate achievement of an export surplus
to the other participating countries. The ex-
tent of the increase in importance of manu-
factured goods in the export program is evi-
dent: "coal, timber, and scrap" declines from
57 percent of total exports in 1948-49 to 31
percent in 1951-52, the compensating increase
being in the manufacturing fields, chiefly ma-
chinery and equipment. The Bizone is ex-
pected to supply the need in ERP countries
for a wide range of replacement and mainte-
nance parts for German machinery, espe-
cially agricultural, food-processing, and min-
ing machinery.
The extent of the progress necessary if the
Bizone is to balance its foreign payments ac-
counts by 1952 without extraordinary outside
assistance is indicated in the following figures.
For the fiscal year 1948-49 the Bizone relied
upon outside assistance to cover a current ac-
count deficit in its balance of payments of
$1,041 million, of which $404 million repre-
sented ECA grants and the balance the occu-
pying powers' (chiefly US) "GARIOA" appro-
priations (for the prevention of "disease and
unrest") for food, fertilizer, seeds, and petro-
leum products. ECA estimates for 1949-50 a
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current account deficit of $892.5 million of
which about $476 million is to be met by
GARIOA appropriations and $302.5 million by
ECA grants.
On 1 May 1948 a long step was taken toward
normal foreign trade transactions. On that
date a conversion rate of 1 RM=30 cents was
established for German currency, consonant
with the currency reform effected internally
shortly thereafter. Under the early quadri-
partite agreement to maintain the 1936 price
freeze instituted by Hitler, the German price
structure had come to bear no reasonable re-
lation to world market prices. Since JEIA
had complete control of foreign trade, the
problem of pricing exports was handled by ad-
ministrative decision. German firms offering
to JEIA goods for export were paid in German
currency at the domestic ceiling price and
JEIA sold the goods abroad for dollars at as
favorable a price as possible. This arrange-
ment discouraged exports in two ways: (1)
there was no price inducement for Germans to
offer goods for export; and (2) most potential
foreign buyers, being short of dollars, tended
to limit their purchases from the Bizone. The
pricing of imports was handled in a similar
way. JEIA paid the world market price in
dollars and charged the German importer the
internal ceiling price in German currency.
Since the new conversion rate was established
in May 1948 the isolation of German internal
prices from world prices has largely ended.
Since 1 May 1948, the conversion rate of one
mark to 30 cents has applied to all exports
except coal and to all imports except staple
foodstuffs. In the case of exports, however,
if the price obtained and converted into marks
at the 30-cent rate fell short of the domestic
ceiling prices, the difference was paid by JEIA
as a subsidy to the exporter.
On 1 December 1948, JEIA controls were
reduced to a minimum under new regulations
permitting German businessmen to deal di-
rectly with foreign buyers or sellers without
going through JEIA. Although considerable
leakage of foreign exchange is believed to have
resulted from the relaxation of JEIA controls,
there is no doubt as to the stimulating effect
of the simplified procedure on the Bizone's
export trade. With the establishment of the
west German government, trade control and
export license functions were transferred to
agencies of the federal and Laender govern-
ments under the nominal supervision of the
High Commissioners.
Reflecting the rapid industrial progress of
the Bizone since June 1948, and also the im-
proved export procedures, exports increased
from $91 million in the first quarter of 1948,
to $265.8 million in the first quarter of 1949.
Of total imports of $387 million during the
first three months of 1949, $142.5 million were
financed with the proceeds of exports, $135.3
million by US/UK appropriations, $109 mil-
lion by ECA funds.
(2) French Zone.
The present French Zone is poor in basic
raw materials and resources as compared to
the Bizone. Before the war the area now
comprising the French Zone paid for needed
imports of grain, coal, steel, cotton, hides, and
various other industrial raw materials by ex-
porting agricultural products (wine, tobacco,
meat, potatoes, fresh fruit, and vegetables)
and manufactured goods (chemicals, shoes,
textiles, and time pieces). The area also had
a large timber industry, and exported lumber
and wood products. Trade was chiefly with
the area now included in the Bizone.
Although the postwar agriculture and in-
dustry of the French Zone suffered from direct
war damage and reparations, one of the chief
causes of its stagnation was the disruption of
its trade and the consequent lack of raw
materials.
Since the war, more than half the total ex-
ports have gone to France, whose needs have
been the paramount consideration in deter-
mining the character of this trade. In return
for exports of lumber needed for French re-
construction, and some food, needed in the
Saar, the Zone has received Saar coal and food
imports from the US, paid for by France.
Food, coal, and potash fertilizer have been ob-
tained from the Bizone in return for lumber,
small amounts of meat and tobacco, potatoes,
and nitrogen fertilizer. Nevertheless, food im-
ports have been barely sufficient to ward off
starvation, and coal has had to be diverted to
non-industrial uses.
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btiUtt ti
In contrast to the Bizone, the French Zone
did not have the benefit of substantial assist-
ance from the occupying power, and has suf-
fered in addition from occupation troops "liv-
ing off the land." In 1946, total exports from
the French Zone were $60 million, three times
the value of exports from the US Zone over a
longer period of time. All but a small propor-
tion, probably less than 20 percent, of this
trade went to France. Certain plants worked
exclusively for the so-called export program
and were accorded preferential treatment in
the supply of power, coal, and raw materials as
well as in the allocation of cigarettes and food.
Exports continued to increase and reached
$106 million in 1947, of which $88 million went
to France. The largest zonal exports to
France consisted of lumber and lumber prod-
ucts, and constituted 38 percent of the total.
Imports amounted to $13 million, of which 37
percent came from the US, mostly in food-
stuffs. Rising world prices for imports turned
this favorable trade balance into a deficit of
1948. In the first six months of 1948, bizonal
receipts from the French Zone were RM 54.6
million, while deliveries from the Bizone were
RM 196.3 million.
During 1948 steps were taken to integrate
the foreign trade of the French Zone with that
of the Bizone through the JEIA, culminating
in a fusion with the Bizone on 18 October. As
a result it became necessary to provide direct
outside assistance. For the fiscal year 1948-
49, ECA grants to the French Zone amounted
to about $100 million, to cover expected dollar
deficits. ECA estimates dollar aid require-
ments for 1949-50 at $115 million.
Even under the most optimistic assumptions
as to production and distribution of indige-
nous food supplies, imports of breadgrains will
continue to be needed to supply about one-
half of the bread ration and one-fourth of the
total caloric intake of the population. Manu-
facturing industries, however, are expected by
the last year of the ERP to have recovered suf-
ficiently to provide a net export surplus to
Western Europe.
(3) Soviet Zone.
The USSR consistently blocked agreement
on quadripartite allocation of foreign exports
from Germany and veiled the export transac-
tions of the Soviet Zone in secrecy. Lists of
commodities to be exchanged are published,
but little information is given about the actual
volume or value of the trade. The USSR is
always the principal beneficiary of such for-
eign-exchange proceeds as are realized from
Soviet Zone exports. This does not include
reparations which constitute the largest part
of goods removed from the country. In 1948
and 1949 the Soviet Zone concluded trade
agreements with a number of foreign coun-
tries, including Belgium, the Netherlands,
Sweden, and Poland. The export-import deals
negotiated within the framework of these
agreements are largely handled by the Soviet-
established German Central Administration
for Foreign Trade, the purpose of which, as
stated by the USSR, is to stimulate the expan-
sion of export trade, particularly toward the
Soviet Union, Poland, and the Danubian states.
Outside of these trade agreements a relatively
large share of German export trade is con-
ducted through a number of Soviet-controlled
export companies, with the compensation
goods or foreign exchange proceeds benefiting
the Soviet rather than the German economy.
The principal items of export are potash,
which the Soviet Zone possesses in abundance,
timber, scrap iron, machinery, and chemicals.
Chief imports since the lifting of the counter-
blockade in May 1949 are raw materials in-
cluding cotton, wool, machinery and parts,
semi-finished steel products and chemicals for
state-owned enterprises producing for the So-
viet account.
Although the USSR planned an ambitious
foreign trade development program for the
Soviet Zone in 1948, fulfillment was seriously
curtailed by the imposition of the Western
Powers' counterblockade and by the ensuing
production difficulties arising from shortages
of vital materials previously obtained from the
western zones. It was the intention of the
USSR to channel the great bulk of Soviet Zone
trade eastward, but the satellite countries
proved unable or unwilling to exchange com-
modities with the Soviet Zone in the quanti-
ties or types required by the zonal economy.
Consequently, an unfavorable balance-of-
trade developed, with imports exceeding ex-
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ports (excluding reparations payments) by a
considerable amount, and the USSR contrib-
uting heavily for the first time from its own
stocks to maintain the faltering economy of
the zone. Zonal imports for 1948 were
RM 356.2 million, of which the USSR contrib-
uted RM 88.2 million; and exports were only
RM 274.2 million, of which RM 40.5 million
went to the USSR. Although this trade was
considerably in excess of the total 1947 foreign
trade, its distribution is significant in view of
the East-West controversy. Less than one-
fourth of the imports were from Western
Europe, and exports to that area were corre-
spondingly small. Imports in the first quar-
ter of 1949 appeared to have increased about
50 percent over the 1948 rate, while exports in-
creased over 95 percent.
In 1948 the Soviet Zone sent about RM 104
million worth of goods to the Bizone and re-
ceived from that area about 140 million ELM
worth. Much of this was raw material and
about 85 percent of it was shipped before Au-
gust when the counterblockade went into
effect.
3. Economic Stability
a. Western Zones.
During the first two years of Occupation,
conflicting Allied policies served only to
deepen the confusion and uncertainty which
their material assistance was intended to cor-
rect. In view of the low levels of production
attained, the worthlessness of the currency as
a measure of relative values, and the low level
of foreign trade, only strict rationing of neces-
sities and stringent price, wage and rationing
controls prevented the economies of the sev-
eral zones from deteriorating.
The Soviet action in breaking up the Allied
Control Council on 20 March 1948 may have
put a permanent end to quadripartite efforts
to forge an economic entity of Germany;
nevertheless, it released the western zones
from the baneful effects of Soviet tactics ob-
structive to economic recovery. The western
Allies countered the Soviet action by moves
aimed at increasing production in the western
zones, beginning with the currency conversion
in June. This step alone resulted in the re-
lease of hoarded goods and in a steady in-
crease in production in the western zones. A
level approximately 88 percent of 1936, at-
tained in May 1949, was maintained during
the summer months.
Important among the factors which obscure
the outlook for further recovery in the west-
ern zones is the question of future control of
the area containing most of the steel indus-
tries and hard coal deposits?the Ruhr. The
US and UK decided on 10 November 1948 to
give temporary management of Ruhr indus-
tries back to the Germans. This decision al-
lows German trustees to operate the indus-
tries until the new German Government in
the western zones acts to socialize them or to
return them to private ownership. The de-
cision was made in the belief that increased
production would result, that this in turn
would relieve US and UK taxpayers of occu-
pation cost burdens, and that it would ensure
a maximum contribution from western Ger-
many to recovery in Western Europe. French
concern regarding a too rapid revival of Ger-
man industry was partially allayed by a six-
power agreement reached 28 December 1948,
establishing an International Authority for
the Ruhr with power to control minimum ex-
port allocations of coal, coke, and steel from
the area. The agreement was signed and
went into effect on 28 April 1949 amid German
fears that the area was permanently lost to
the German economy.
Numerous other factors cloud the econoniic
future of the western zones. To the extent
that the area continues to be cut off from the
foodstuffs, raw materials, and manufactures
of eastern Germany, it must remain the more
dependent upon foreign trade. The prospects
for the attainment of prewar levels in trade
with eastern Europe are not bright. Trade
with the West, although contingent upon the
continued success of the ERP, will probably
improve.
Further increases in production in the west-
ern zones is being hampered by an inadequate
investment program and by the unsettling ef-
fects of the necessity for reorganization of
the tax system and division of responsibilities
between the lower levels of government and
the new central government. New capital
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goods are badly needed, but foreign investors
are reluctant and the internal economy is not
able to provide funds necessary for the pur-
chase. Labor unrest, strikes, and a reduction
in the productivity of labor are encouraged
by the need for further tax reform, broad-scale
domestic readjustments in prices and wages,
and a reduction in occupation costs.
Factors favorable to improvement in the
economic situation are the continuing ERP
aid to western Germany and to Western
Europe and the fear of Soviet expansion, a
fear which strengthens morale in the western
zones and is conducive to German support of
Allied efforts to improve economic conditions.
Germany also possesses a reservoir of highly
skilled labor, great technical skill and ingenu-
ity, and a will to dominance in all fields which
should assist in overcoming the obstacles now
hampering economic recovery.
b. Soviet Zone.
Despite the Soviet currency reform in June
1948, production in the Soviet Zone declined
in subsequent months. The decline there was
in part attributable to Soviet removals with-
out compensation of both current output and
plant equipment. In part also the Soviet
blockade of Berlin was responsible, since in re-
taliation for the blockade the western Allies
promptly embargoed the shipment of goods
from the western zones to the Soviet Zone.
With the lifting of the counterblockade in
May 1949, there was a revival of industrial
output, although it is doubtful if quotas un-
der the Two-Year Plan can be met in view of
continuing shortages. The full restoration of
interzonal trade relations may see further im-
provement in eastern German economic con-
ditions. There is slight indication, however,
that further improvement in general produc-
tion levels will improve the general public's
consumption standards. Gains will be regis-
tered only in those industries and for those
groups favored by SMA. The area as pres-
ently bounded is not self-sufficient in food-
stuffs. The area, moreover, normally im-
ported coal and manufactures from western
Germany and elsewhere. The satellite coun-
tries are not able to provide substitute sup-
plies, because their surpluses (except for Pol-
ish coal) are channeled to the USSR or are
traded within the Soviet orbit. There is evi-
dence that this economic outlook gives less
concern to the SMA than the development of
governmental organization and controls simi-
lar to those of the Soviet Union.
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