Foreign Relations of the United States: Diplomatic Papers, Conferences at Malta and Yalta, 1945

862.50/11–1144

The Acting Secretary of State (Stettinius) to the President ¹

Washington, November 11, 1944.

Memorandum for the President

Subject: Economic Treatment of Germany

As agreed in our conversation yesterday afternoon, I am sending to you herewith, as you requested in your memorandum to the Secretary of October 20,² a draft copy of a memorandum on the economic treatment of Germany. You will note as I promised, it is only seven pages. I wish, however, to call particular attention to Section 3, beginning on page 5 which, I am sure, you will wish to study with great care.

If this draft does not accurately set forth your views, perhaps you will let us talk to you again in order that the memorandum may be redone in accordance with your desires.

As I stated yesterday, it is rather important that we give the European Advisory Commission our views on this matter promptly since the treatment of Germany must be coordinated with our British and Russian allies.

E R Stettinius, Jr.

[Attachment]

secret

Washington, November 10, 1944.

Draft

Memorandum for the President

There are presented in the following paragraphs the recommendations of the Department of State for American policy with regard to economic treatment of Germany:

1. Urgency of Tripartite Agreement

It is essential that economic policies with respect to Germany be directed toward the central aim of disarming Germany and keeping her disarmed through an effective international security organization. To achieve this aim, preliminary agreement is necessary among the United States, Great Britain and the Soviet Union on certain basic policies governing economic treatment of Germany.

The matter is urgent because present British, Russian and American attitudes on the question show major divergencies which, if allowed to persist, would begin to be reflected in widely different policies at an early stage in the occupation of Germany. Such differences, in turn, would lay the basis for new European rivalries and endanger the effectiveness of an international security organization. Without effective security organization, no economic program alone can be relied upon to keep Germany disarmed. It is of urgent importance, therefore, that a substantial measure of agreement be obtained in advance on economic policies toward Germany, and that such policies be so framed as to remove this potential source of new European rivalries.

Complete identity of methods and objectives in the several zones of occupation is unnecessary and unattainable; it is essential, however, in the economic as in other fields, that the policies carried out in each zone be such as to facilitate a solution of the German problem in a fashion which is acceptable to all major powers and to Germany’s neighbors.

The need for such compatibility of policies has been accepted in principle by the three powers. It is probable, therefore, that existing divergences in attitude concerning economic treatment of Germany can be progressively narrowed through discussion and negotiation, if the subject is taken up promptly.

2. Present Tendencies of British and Russian Policy

Policies with respect to economic treatment of Germany are not definitely fixed but will progressively crystallize over a period of years. Moreover, our knowledge of the present tendencies of British and Russian policy is largely inferential, owing to the absence, so far, of any official discussion of these questions. Nevertheless, available information is sufficient to reveal certain general tendencies of policy which should be taken into account in determining our own course of action.

In the economic field, the principal differences between present British and Russian attitudes are as follows:

a) The Russians apparently intend to go much farther than the British in removing industrial executives and large landowners from their present positions of control.

b) The British are more interested in restraining future German competition with British exports than in collecting large reparation. The Russians apparently wish to extract from the German economy, as reparation, the largest practicable contribution to Russian reconstruction and industrial development, and this contribution, although including labor services and transfers of existing capital equipment, is expected to come largely from current German production.

British policy envisages the retention, during the occupation period, of as large a part of the existing organization and structure of the German economy as is compatible with the destruction of the Nazi regime. The main elements of the present machinery of economic control would, so far as conditions permit, be held together after eliminating their discriminatory, Nazi feature; the existing executive and managerial personnel of private industry would continue in their positions, after removal of active Nazis who had held governmental or party posts. The aims of this policy are to prevent economic breakdown and to preserve a situation in which control over the economy can be exercised.

One important British objective in controlling the German economy is to limit German competition with British exports. In relation to this objective Britain’s interest as a reparation claimant is distinctly secondary. Britain’s program for accomplishing this objective is, however, moderate and restrained, relying primarily upon controls rather than upon basic economic impairment of Germany. There have been no proposals, even from the “hard peace” group, for elimination of German heavy industry, since Britain would necessarily have to bear the chief onus for enforcement of such a policy. Apart from specialized facilities for the manufacture of land and naval armament and all types of aircraft, the British are apparently considering dismantling of productive facilities in only a few other industries, such as synthetic oil and rubber. Destruction of a few such industries would neither significantly weaken the German economy nor lengthen appreciably the time required for war preparation if enforcement of disarmament broke down. Such destruction would, however, restore the German market for important British products. Britain is also prepared to support a program of restitution and of reparation in kind, confined to a specified list of export commodities, but is justifiably interested in preventing Germany from getting a head start, through reparation, in export markets of crucial importance to the British.

Britain appears to envisage a continuation of certain indirect controls over the German economy, primarily through exports and imports, beyond the period of military government. Such controls, although proposed partly as a means of enforcing disarmament, are also desired as a method of regulating German competition. A leading British industrialist has suggested that in the long run this problem of restraining German competition might best be handled through cartel-type arrangements with German industry on terms which would assure British goods a larger share of common markets than before the war but would still leave Germany sufficient export opportunities to meet her essential requirements.

Russian policy seems to envisage removal from positions of control of most industrialists and large landowners. The legal basis for such action is provided in the Russian declaration that Germans who employed Russian labor are war criminals. This will open the way for designation of new managers to operate under direction of the occupation authority. While the British look to the retention of much of the existing organization and personnel as a means of exercising control over the German economy, the Soviet Union intends to effect its control by selection of new German personnel for managerial posts in industry. Both powers apparently intend to exercise comprehensive control over the German economy.

One major Russian objective of economic control will be energetic exploitation of the German economy for Russian reconstruction and development. Russia has no economic interest in restraining German competition. Although reparation will be collected in part through transfer to Russia of usable German capital equipment and through labor services, Russian semi-official statements have indicated that Russia intends to rely primarily on reparation from current production. Russia would doubtless join in a policy of destroying specialized facilities for the manufacture of armaments (including all aircraft) and would perhaps consent to carrying this policy somewhat farther—to synthetic oil and rubber, for example. It is pretty clear, however, that sweeping deindustrialization would be regarded by Russia as incompatible with her interest in Germany as a source of supply of industrial goods.

It is apparent that these divergent tendencies of policy could result in markedly different economic developments in the British and Russian zones of occupation.

a) The Russian zone—a food surplus area, with little bomb damage, and under energetic Russian exploitation—might have relatively moderate unemployment and tolerable food conditions. The British zone—a food deficit area, with extensive bomb damage, and with limited markets—might have much unemployment, and very bad conditions of food and shelter.

b) The Russian zone might witness a sweeping out of present economic ruling groups; in the British zone these groups might be largely retained in positions of control.

It is difficult to foresee the final results of these divergent tendencies, but it is clear that they seriously endanger long-run cooperation between Britain and the U. S. S. R.

In addition to the basic interest of both countries in sustaining cooperation, certain economic factors are present which increase the prospects for adoption of compatible policies.

First, there appears to be agreement on important points of economic policy.

a) Both Britain and Russia favor exercise of extensive responsibility by the occupation authorities for control of the German economy.

b) Both countries seem to oppose sweeping deindustrialization of Germany. Agreement could probably be reached on a program of industrial dismantling—to include specialized facilities for production of munitions and aircraft and, perhaps, a few synthetic materials.

In the second place, both countries have an important interest in maintaining inter-zonal movement of goods during the occupation period. The British zone is heavily deficient in foodstuffs, and the industries of the Russian zone can be operated only at a reduced level without imports of basic industrial materials, notably coal and steel.

3. United States Policy toward Economic Treatment of Germany

The foregoing analysis of present tendencies in British and Russian policies has important implications for American policy toward economic treatment of Germany. In addition to thorough disarmament, it is essential that we strive for such an orientation of the German economy as will remove the danger of new rivalries from this source. Sustained enforcement of disarmament depends upon the avoidance of such rivalries.

A program of sweeping deindustrialization does not provide an adequate basis for sustained international security cooperation, nor does it provide a satisfactory alternative to such cooperation. A program designed to impose lasting restraint on Germany’s industrial exports to Western markets also involves the danger of generating serious, new rivalries in Europe and of weakening the basis for international security cooperation.

In the Department’s view, our long-term objectives with respect to economic treatment of Germany must be (1) abolition of German self-sufficiency, and (2) elimination of German economic domination over Europe. These two objectives conform to the general economic foreign policy of the United States. More important, however, it is only through the kind of orientation of the German economy which is envisaged in these objectives that the basis for international security organization can be protected.

These two objectives are closely related. Abolition of self-sufficiency requires the removal of all protection and subsidies to high-cost domestic production. Elimination of German economic domination over Europe requires the prohibition of all discriminatory trade controls, clearing agreements and international cartel arrangements.

The basic objectives can be carried out only gradually, and in short-run they will have to be qualified to conform to the immediate requirements of the occuption and transition period. Their adoption, even over the longer term, will be dependent upon our general success in achieving world trade expansion under liberal conditions of trade.

It is recommended that in discussion with the British and Russians, we should adopt the policies given below as a basis for agreed action during the period of Allied control.

a) We shall be obliged to go along with the British and Russians in accepting large responsibilities for the guidance and reorientation of German economic life. It is altogether unlikely that a “hands off” policy would be accepted and adhered to by all three powers. Consequently, we must be prepared to take all possible steps in the initial phases of occupation to prevent development of a chaotically unmanageable economic situation, since this is a prerequisite to the exercise of effective economic control.

b) Economic disarmament should include prohibition of the manufacture of land and naval armament and all types of aircraft; destruction of specialized facilities used for the manufacture of these items; and establishment of permanent or semi-permanent controls to detect surreptitious preparation for rearmament and stockpiling of key materials. Decisions regarding the synthetic oil and rubber industries should only be taken as part of an agreed, general program for abolishing German self-sufficiency.

c) With respect to treatment of the German population, we should favor, in the initial period, the lowest standards of health, diet and shelter compatible with the prevention of disease and disorder. This standard should be maintained until it is agreed that political tendencies within Germany justify some relaxation; the needs of liberated countries should, in any event, receive priority.

d) We should favor the conversion of the remainder of German industry to peacetime purposes, including particularly the production of reparation goods required to effect a large, early contribution to the rehabilitation of liberated countries. Reparation in kind should include any types of manufactured goods that claimant countries desire and Germany is fitted to produce. In addition to restitution of looted property, liberated countries may receive—us reparation—such German capital equipment as they can promptly put to effective use in the initial period of rehabilitation. We should favor a short program of heavy reparation payments, derived largely from current German production. Reparation should not be allowed to provide a pretext for building up German productive power as a means of increasing her “capacity to pay”.

e) We should advocate the establishment of machinery to assure inter-zonal movement of foodstuffs, industrial materials and finished goods, in order to foster production for reparation and to prevent large inter-zonal disparities in diet and employment.

f) We should attempt to reach agreement with Britain and Russia regarding policies for the control of large industrial firms and the elimination of Nazis from positions of influence. We should advocate a policy more drastic than the British now favor, but less drastic than Russia might be inclined to apply.

1. Signed original.
2. Ante, pp. 158–159.