740.00119 (Potsdam)/7–3145

No. 863
Report by the Economic Subcommittee
top secret

Report of the Economic Sub-Committee to the Foreign Secretaries

We have considered the proposals in a memorandum by the United States Delegation on the Economic Principles to govern the treatment of Germany in the initial control period,2 together with the Annex dealing with reparations.3

We have unanimously agreed to recommend the adoption of the Economic Principles set out in the attached clauses for incorporation in the proposed Agreement.4

On one matter, which relates both to the Economic Principles and to Reparations, we have to report that agreement has not been reached.

The U. K. and U. S. representatives consider that it is essential that such necessary imports into Germany as are approved by the Governments controlling Germany shall constitute a first charge against exports from Germany whether of capital equipment or current production and stocks of goods. They therefore recommend the adoption of the text attached hereto as Annex II for incorporation in the Agreement on Economic Principles. The Soviet Representatives do not accept this principle and express the view that reparation deliveries should have priority and that imports into Germany, should, if necessary, be confined to the amount that can be paid for by exports from Germany after reparation schedules have been met.

The U. K. and U. S. representatives point out that the provisions of paragraph 18 (to the effect that it shall be the general principle, that in the absence of special reasons to the contrary, each of the zones of occupation, including the Greater Berlin area, will draw its supplies, so far as practicable, from the areas in Germany on which it had drawn before the war) apply to the territory of Germany as it existed on December 31, 1937 whether or not any part of such territory is administered by or ceded to another State.

The Soviet representatives think that any decision on this point at the present time is premature, pending a decision by the Conference on the future boundaries of Germany.

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The U. K. and U. S. representatives point out that5 there are two matters in addition to those mentioned in paragraph 13 on which a common policy is essential in the treatment of Germany as a single economic unit:

(1)
Uniform method of treatment6 of the German civilian population;
(2)
Subject to normal regulations, free circulation of nationals of U. K., U. S., U. S. S. R. and France in all zones by land and air.

The Soviet representatives take the position that these two points, while having economic significance, have a wider political application, and that they should therefore not be considered by the Economic Sub-Committee.7

The Allied Commission on Reparations has agreed on seven basic principles. The Sub-Committee recommend that these principles (Annex 18) should be accepted.

The Allied Commission on Reparations failed to reach agreement9 on the underscored last clause of an eighth principle:

“After payment of reparations, enough resources must be left to enable the German people to subsist without external assistance. In working out the economic balance of Germany, the necessary means must be provided for payment of imports approved by the Governments concerned before reparation deliveries are made.”10

As stated above, the Sub-Committee have been unable to reach agreement on this point.11

. . . . . . . . . . . . . .

[Attachment]
Proposed Agreement on the Political and Economic Principles To Govern the Treatment of Germany in the Initial Control Period

Text as Submitted to the Foreign Secretaries by Economic Subcommittee

Economic Principles

10.
In order to eliminate Germany’s war potential, the production of arms, ammunition and implements of war as well as all types of [Page 797]aircraft and sea-going ships shall be prohibited and prevented. Production of metals, chemicals, machinery and other items that are directly necessary to a war economy shall be rigidly controlled and restricted to Germany’s approved post-war peacetime needs to meet the objectives stated in Paragraph 14. Productive capacity not needed for permitted production shall be destroyed, or shall be removed in accordance with the reparations plan recommended by the Allied Commission on Reparations and approved by the Governments concerned.
11.
At the earliest practicable date, the German economy shall be decentralized for the purpose of eliminating the present excessive concentration of economic power as exemplified in particular by cartels, syndicates, trusts and other monopolistic arrangements. Notwithstanding this, however, and for the purpose of achieving the objectives set forth herein, certain forms of central administrative machinery, particularly in the fields of Finance, Transportation and Communications, shall be maintained or restored.
12.
In organizing the German economy, primary emphasis shall be given to the development of agriculture and peaceful domestic industries.
13.
During the period of occupation Germany shall be treated as a single economic unit. To this end common policies shall be established in regard to:
(a)
mining and industrial production and allocation;
(b)
agriculture, forestry and fishing;
(c)
wages, prices and rationing;
(d)
import and export programs for Germany as a whole;
(e)
currency, central taxation and customs;
(f)
reparation and removal of industrial war potential.12
In applying these policies account shall be taken, where appropriate, of varying local conditions.
14.
Allied controls shall be imposed upon the German economy but only to the extent necessary:
(a)
to carry out programs of industrial disarmament and demilitarization, of reparations, and of approved exports and imports.
(b)
to assure the production and maintenance of goods and services required to meet the needs of the occupying forces and displaced persons in Germany and essential to maintain in Germany average living standards not exceeding the average of the standards of living of European countries. (European countries means all European countries excluding U. K. and U. S. S. R.).
(c)
to ensure in the manner determined by the Control Council the equitable distribution of essential commodities between the several zones so as to produce a balanced economy throughout Germany and reduce the need for imports.
(d)
to control German industry and all economic and financial international transactions, including exports and imports, with the aim of preventing Germany from developing a war potential and of achieving the other objectives named herein. For the same purpose no grant of credit to Germany or Germans by any foreign persons or Governments shall be permitted except with the approval of the Control Council.13
(e)
to control all German public or private scientific bodies, research and experimental institutions, laboratories, et cetera connected with economic activities.
15.
In the imposition and maintenance of economic controls established by the Control Council, German administrative machinery shall be created and the German authorities shall be required to the fullest extent practicable to proclaim and assume administration of such controls. Thus it should be brought home to the German people that the responsibility for the administration of such controls and any breakdown in these controls will rest with themselves. Any German controls which may run counter to the objectives of occupation will be prohibited.
16.
The principles and conditions governing the exaction of reparations from Germany are set forth in Annex I to this agreement.
17.
Measures shall be promptly taken:
(a)
to effect essential repair of transport;
(b)
to enlarge coal production;
(c)
to maximize agriculture output; and
(d)
to effect emergency repair of housing and essential utilities.
18.
In securing the objective mentioned in paragraph 14 (c) it shall be the general principle that, in the absence of special reasons to the contrary, each of the zones of occupation, including the Greater Berlin Area, will draw its supplies so far as practicable from the areas in Germany on which it had drawn before the war.
[Page 799]
[Annex I]

[Editor’s Note.-—This paper is identical with attachment 1 to document No. 894.]

[Annex II]

19. The Control Council shall formulate as soon as possible a program of minimum required imports for Germany as a whole. Such a program shall include provision for equitable inter-zonal distribution of supplies available within Germany, so as to minimize the net deficit for, and imports into, Germany as a whole. Responsibility for the procurement and financing of approved imports for Germany as a whole shall be shared on a basis to be negotiated in the Control Council. Reimbursement for all net advanced [advances?] made for approved imports into Germany shall be a first charge against the proceeds of both exports of capital equipment and of current production and stocks of goods from Germany.

  1. So dated in an “Index of Attachments to Summary of the Negotiations in the Economic Sub-Committee” (file No. 740.00119 (Potsdam)/7–3145), but not considered by the Foreign Ministers until July 21 (see ante, p. 187).
  2. document No. 852.
  3. document No. 894.
  4. In a draft of this report found in the Frankfurt USPolAd Files, this paragraph has the following additional words: “On Economic Principles”.
  5. The first ten words of this sentence do not appear in the draft referred to in footnote 4, supra.
  6. The draft referred to in footnote 4, ante, reads: “Uniform treatment”.
  7. In the draft referred to in footnote 4, ante, this paragraph reads as follows:

    “The Sub-Committee consider that these points, while having economic significance, have a wider political application. They therefore refer these points for consideration by the Foreign Secretaries.”

  8. Annex i is identical with attachment 1 to document No. 894.
  9. See documents Nos. 375 and 376, printed in vol. i , and document No. 894, post.
  10. The passage here printed in italics was underscored in the original.
  11. For the paragraphs omitted here, see document No. 902.
  12. The copy of this document in the Pauley Files has the following interpolation at this point: “(g) finance, transportation, & communications.” This copy also has the following marginal note opposite paragraph 13: “Molotov amendment”.
  13. The copy of this document in the Pauley Files has the following marginal note at this point: “If Plan II [is adopted], Rewrite last sentence of 14 d) to read: ‘Except with the approval of the Control Council or except when determined by the Government concerned to be required for the payment of necessary imports, no grant of credit to Germany or Germans by any foreign persons or governments shall be permitted.’ “The same revision is recommended in a separate paper in the Pauley Files entitled “U. S. Proposal”, dated July 25, and in document No. 864.