SWNCC 303 File: Telegram
The Director of the Office of Military Government of the United States for Germany (Clay) to the Chief of the Civil Affairs Division, War Department (Echols)
priority
[Received May 24.]
CC 5635. Personal for Echols. Conclusions of Goldsmith, Colm, Dodge8 et al. study of inflation and measures to restore financial stability in Germany now received. These conclusions extend well [Page 557] beyond interim measures contemplated in JCS 1067.9 This study was requested as present extent of Reich debt reflected in bank deposits and circulation of currency threatens us with inflation beyond our powers to control at almost any time.
In general the conclusions call for a program three steps. The first step would create a new currency and reduce existing monetary claims and obligations in the ratio of ten present marks to one new mark. It calls for cancellation of existing Reich debt but sufficient amounts of a new debt issue would be assumed by Germany as a whole and allocated to banks, insurance organizations, credit co-operatives, etc. To enable them to meet their reduced obligations roughly speaking, the new debt would be about Germany’s prewar debt.
The second step is designed to make the devaluation of currency more equitable to Germany as a whole by imposing mortgages on real estate, plant equipment and inventories in amounts of 50%. Title to these mortgages would be placed in war loss equalization fund which would issue certificates payable as the mortgages are paid off over a long period of time, and would be issued to those people who had suffered losses as a result of war damage and reduction of monetary claims. Certificates representing claims will have an ultimate value depending on the extent and nature of the claims recognized, and receipts from assets of the fund available for redemption. This would of course establish specific budgetary limit to the recognition of claims and would undoubtedly make the devaluation of currency more acceptable to the majority of the population. There would of course be resentment by landowners. However, ownership of real estate should not in itself confer an exceptionally privileged position in any program designed to prevent inflation.
The third step is a progressive capital levy on individuals net worth remaining after taking steps one and two, rates to be determined by total amount of wealth and by increase in war years. This levy ranging from 10 to 90%, would be paid over in a period of 10 years into the war loss equalization fund. An exemption limit would be established which would leave a substantial majority unaffected by the levy.
Other measures deemed essential but not included in the first three steps would limit occupation costs to be paid by Germany to all four powers, require the organization of a central agency of issue and control of currency, and certain technical adjustments in correcting prices and wage levels and tax returns. It further visualizes establishing an international exchange rate for the new mark at around 25 cents.
Our experts believe first step of plan and as much of additional measures as can be agreed upon should be effected this fall. They [Page 558] visualize at least 1 year for completion of step two and perhaps 3 years for completion of step three.
I fully agree in the equity of the plan and in its desirability as a whole. Step one is essential and of immediate urgency. The present availability of currency in Germany is not only making it impossible to hold the line in price and wage control, but is also a severe deterrent to encouraging labor to work and to bringing farm produce and other products into the markets. It is also evidence that the introduction of this measure without steps two or three would make it unpopular with the large majority of the population which would feel that it was bearing undue share of the devaluation load in relationship to the owners of substantial capital to include real estate. On the other hand, the imposition of these measures by military dictate is not entirely consistent with our desire to have responsibility for such measures taken by the German people through their officials. Nor is it entirely consistent with the provisions of JCS 1067 limiting our own actions to those necessary to protect the occupation forces and prohibiting us from measures designed basically to rehabilitate German economy. Nevertheless, we must recognize JCS 1067 did not visualize present conditions in Germany under which 1 year after surrender there exists no responsible German machinery and hence full responsibility for Germany’s financial structure rests on Allied Occupying Powers. The question of whether or not any newly established or democratically elected German Govt could long survive if it had to initiate such measures should be recognized. We have placed the plan in the hands of the financial experts of the other three occupying powers for their study and consideration, although we have not as yet formally presented the plan as the recommendation of the US delegation.
It is certain that any measures to control inflation to be fully effective must be part of a comprehensive program as interim and ad hoc measures taken throughout Europe have everywhere proved completely ineffective. The plan is drastic as no halfway measures promise success. In view of the urgency of the matter, your comments by cable are requested at earliest date and if possible prior to 1st June, as it is believed most essential for our formal proposals to be placed into the quadripartite machine by that date so that some reaction may be obtained prior to 15th June meeting of Council of Foreign Ministers. Manifestly, common currency control is one of major problems in treatment of Germany as an economic unit and is almost certain to rise in any extended discussion of the German problem.10
- OMGUS, Special Report; A Plan for the Liquidation of War Finances and the Financial Rehabilitation of Germany, May 20, 1946. The principal authors of the report were Raymond M. Goldsmith, Director, Division of Planning, War Production Board; Gerhard Colm, Assistant Chief, Fiscal Division, Bureau of the Budget; and Joseph M. Dodge, Director, Financial Division, OMGUS.↩
- See footnote 83, p. 539.↩
- Consideration of the Goldsmith, Colm, Dodge Financial Plan was referred to the State–War–Navy Coordinating Committee. After discussion in that body and approval by the Secretaries of State, War, and Navy, the Plan was accepted in August as the basis for the American position in quadripartite Control Council negotiations (SWNCC 303 file).↩