CFM Files: Lot M–88: Box 93:
File—Germany Reparations II
The Special Adviser to the Secretary of State on
Reparations (Pauley) to the
Secretary of State
62
secret
Washington, November 13,
1947.
My Dear Mr. Secretary: On April 30, 1947, you
asked me as Special Advisor on Reparations, to submit to you a proposed
German reparations plan in anticipation of the Council of Foreign
Ministers meeting in London.
The objective of such a plan would be to facilitate a general settlement
of Central European problems, contemplating, among other [Page 714] things, unification of Germany. I have
worked, through my staff, in close association with the regular
divisions of the Department which have been considering these problems.
The consensus in the Department has been that bare economic unification
would be a delusion unless coupled with a great many other
considerations. I share that view.
I have explored the reparations question in all its aspects. I am
submitting a paper comprising a detailed discussion of the reparations
problem, and its economic and political implications. There is included
as an appendix a summary of pertinent statistical and economic data.
I am now convinced that a practical reparations offer alone could not
constitute a sufficient inducement to Soviet Russia to obtain agreement
to all the political and economic conditions which we believe necessary
for a European settlement. Nevertheless, I believe a definitive
reparations offer should be made at London, in association with other
inducements, to indicate our desire to abide by our past commitments and
to require the German economy to assist, to its practical maximum, in
the recovery of Europe including the recovery of Russia. I believe such
an offer is strategically essential to counter Russia’s current
offensive which is designed, I believe, to indicate to the world that
the United States is seeking selfish ends, even at the cost of war. I
have included in the attached documents a political discussion
developing this viewpoint and its implications.
After detailed consideration of many alternative reparations formulas, I
have returned to the proposal you made at Moscow in March, 1947.63
Bearing in mind the conditions you attached to that proposal, I have
suggested a means of meeting those conditions.
In brief, my proposal, which is expanded at length in the attached Paper,
provides for the grant to all reparations claimants of a reparations
credit, redeemable in finished and processed goods, equivalent to the
value of the capital installations the claimants would have received
from the Western Zones under the 1946 level of industry, but retained in
Germany under a new level of industry to be finally decided upon at
London. This level, I assume, is to be roughly equivalent to the 1947
bizonal level. The reparations credit is to be available only upon the
condition that reparations claimants furnish for the German economy
food, fuel, raw materials or acceptable equivalents required to enable
the German economy to produce the finished goods in question. If
necessary, the 15 per cent of Western Zone capital removals provided
under the terms of the Potsdam Agreement for the USSR and Poland in
exchange for reciprocal deliveries of specified commodities could be [Page 715] equated to a separate
reparations credit to be divided between the IARA countries and the USSR-Poland. It is suggested that
the reparations credit could be based upon the in-place value of the
capital equipment previously scheduled for removal but now to be
retained in Germany. I believe that a level of industry roughly
equivalent to the 1947 bizonal level could easily support such a
program. This reparations program, itself, would assist in activating
idle German capacity that would not otherwise be utilized. It would not
involve, of itself, expenditures by the United States. It is, therefore,
consistent with our major objectives.
It is recommended that despite interdepartmental commitments, there be a
new level of industry determination based upon whatever agreements are
made, whether among all four occupying powers, or only with Britain and
France.
Inasmuch as Soviet spokesmen have repeatedly gone on record as demanding
$10 billion in reparations, you might consider it desirable to accept a
formula by which past Soviet-Polish removals from Germany plus
reparations collectible in the future could be computed for the record,
at $10 billion. This, of course, would be predicated upon prior
agreement on the actual amount of future reparations for Russia and
Poland.
It is recommended that removals as reparations of all capital equipment
in excess of the new level of industry be promptly resumed and
completed.
It is implicit that the above plan and the negotiating variants suggested
in the attached paper are based upon the satisfaction of the
politico-economic conditions to be proposed as terms of a general
European settlement.
In my judgment, the forthcoming CFM
meeting will be one of transcendental significance. It will constitute
one of the Great Divides of American policy in this era. I am grateful
for the opportunity given me to advise you in this situation.
Respectfully,
[Annex]
Paper on German Reparations, Prepared by the
Special Adviser to the Secretary
of State on Reparations (Pauley)
secret
[Washington, November 17, 1947.]
I—Summary of Separations
Paper
Situation
At Moscow Secretary Marshall
agreed to consider equating once-for-all removals due each recipient
nation under the 1946 level of industry to current production, with
the reservation that any such [Page 716] plan must not increase the financial burden on the
American Government and should not interfere with the prospects of
Germany’s attaining an economic balance.
In the summer of 1946, at Paris, Russia made a demand for $10 billion
in reparations, mostly out of current production, a demand which she
had not voiced since Potsdam; the USSR indicated a desire to raise
the level of industry to make possible reparations out of current
production. The USSR is believed to have taken this position because
of disappointment with the economic benefits, to her, of capital
removals. Russia vigorously restated this position at Moscow in
March, 1947, and rejected the American argument that the Potsdam
Reparations formula had extinguished all previous Russian
reparations demands.
It can be assumed, for the sake of negotiations, that Russia’s
intransigent position on unification and reparations is due to a
desire to obtain the maximum amount of industrial and consumer goods
from Germany, to meet internal political prestige needs and to help
rebuild the Soviet industrial machine. The United States, therefore,
might advantageously propose a settlement which might make available
to the USSR the maximum amount of goods from Germany consistent with
the other imperatives of American policy, namely, economic
self-sufficiency for Germany at the earliest possible date, and the
economic recovery and political stability of Europe, especially of
Western Europe.
It is believed that no feasible reparations offer can be devised of
sufficient scope to induce Russia to agree to both the economic and
political conditions required by the United States for a general
settlement of Central European problems. Nevertheless, it is
manifest that we should attempt to gain acceptance of a reparations
settlement which will, as nearly as possible, accomplish our goals
of European recovery and the industrial disarmament of Germany. It
is psychologically important that the United States emphasize its
desire to require Germany to contribute, through reparations, to the
recovery of Europe, while also pointing out that the recovery of
Germany would be in itself a contribution to European recovery.
Capacity of Germany to Provide Reparations
The German economic situation is such as to preclude any program of
“pure” reparations out of current production regardless of any
further increases in the level of industry. Actual production is
restricted by shortages of (a) coal, (b) food, (c) transport, (d)
raw materials, (e) housing, and by dislocations in manpower and
management. Most of the shortages are in categories of which there
are world shortages. Almost all import requirements of the German
economy require dollars; German production cannot increase to major
[Page 717] proportions without
such imports because of the lack of indigenous resources. Economic
unification of Germany would only reduce to an unestablished extent,
but would not eliminate, the deficit in the German economy under
present circumstances. Any program of “pure” reparations out of
current production would thus be at the expense of the nation or
nations supporting the German deficit. Germany’s import
requirements, which will increase in proportion to increased
industrial production, include: food, petroleum products, rubber,
iron ore, copper, almost all other non-ferrous metals, cotton, wool,
hides, fertilizer, and basic chemicals.
There is no foreseeable possibility of a full restoration of
Germany’s prewar export markets, because of (a) increased indigenous
production in former market countries, (b) political antipathies and
fears resulting from war, (c) increased nationalism throughout
Europe, (d) shortage of dollars in Germany’s former markets, (e)
inability of former market countries to supply Germany with
Germany’s import needs such as food and raw materials, (f) current
political and economic orientation of Balkan and Eastern European
nations to the USSR; these countries were formerly dependent to a
major extent on Germany for their external trade.
At the same time it must be a major objective to give certainty to
the German economy so that, at the earliest possible date, the
German people, having made their contribution to the recovery of the
victim nations, can aim at the goal of national improvement in the
standard of living, and cooperation with other European nations in
the solution of continental economic problems.
Nature of Reparations Program
The United States is committed to the principles of Potsdam including
a reparations program. The United States has been one of the chief
protagonists of once-for-all removals both to reduce the German war
potential and to help raise the standard of living of the nations
against whom Germany waged war and occupied. It is to America’s
interest to support a reparations program, including a continuation
of capital removals, both to give support to democratic forces in
Western Europe and to discharge implied commitments to potential
reparations recipients for whom the United States was, by
implication, the spokesman and agent at Potsdam.
There is no economic prospect for the utilization of all standing
plant capacity now in Germany in the foreseeable future. Even
without the existing bottlenecks to increased production, much of
the standing equipment is autarchic, uneconomic in present relation
to transport and sources of raw materials, and geared to a wartime
instead of a peacetime economy. Most of this excess capacity was
built up during the period of preparation for aggression. Its
removal would [Page 718] not
interfere with Germany’s economic recovery, while its transfer to
other countries would aid in their rehabilitation and the
establishment of a more balanced economy in Europe. In the long run,
these removals would be a boon to German economic regrowth on a
sound and integrated basis.
A limited program of reparations out of current production, along the
lines of Secretary Marshall’s
Moscow proposal, could be so arranged as to be economically feasible
and consistent with German economic recovery. The reparations plan
proposed below would require claimant nations to provide food, fuel
or raw materials to the German economy as part payment for
manufactured goods to be received as reparations. Although most of
the raw material and fuel resources of Western Europe have already
been committed under the terms of the European Recovery Program,
some of these nations have food surpluses of a certain category
(such as eggs, vegetables, and fats) and others might be able to
obtain raw material or other commodities required by the German
economy which the countries in question would be willing to supply
to Germany in return for a greater quantity of manufactured goods
than they would otherwise be able to obtain by outright purchases
from Germany or imports from other areas.
Reparations Negotiations and Plan
It is recommended that the United States propose the following plans
and seek agreement or agree to the following conditions:
- A.
-
A program of limited reparations out of current
production, the total amount of which is to be equated
to the removal value of capital equipment scheduled to
be awarded as reparations under the 1946 Level of
Industry Plan, but to be retained in Germany under the
new level: Provided that each claimant country agrees to
supply in acceptable commodities (food, fuel, or raw
materials) a portion of the value of finished goods
delivered, the remainder of the value of which is to be
considered the reparations payment.
As a variant to this proposal, the Secretary might agree
to equate the value of current reparations credit to the
in-place value of the capital equipment in question.
This would increase the value by approximately 70 per
cent.
This program would be projected over a five-year period;
all “payments” of commodities would be delivered within
that period; the reparations deliveries would be
consummated within the shortest possible time, but not
necessarily within the five-year period.
- B.
- The percentage of the total “reparations credit” to be
allowed USSR–Poland would be as in the Potsdam Agreement. If
it is desired to make an additional concession on this
proposal, it is suggested that the 15 per cent of capital
removals provided in exchange for commodity deliveries be
divided equally between USSR–Poland and the IARA nations. Percentages for
the IARA nations would be
as in the Paris Agreement. The Potsdam provision for
“reciprocal deliveries” would be eliminated. The assent of
the IARA nations would be
required to make this arrangement.
- C.
- As an alternative, it might be proposed that there be a
resumption of the capital removals program on the above
percentage basis, without current reparations.
- D.
- Capital removals above the 1947 level of industry (or the
level suggested in “E” below) would be resumed to all
claimants.
- E.
- The level of industry would be reviewed, at a technical
level, in the light of economic unification, the type of
reparations program adopted and other current factors, by
representatives of the appropriate occupying powers.
- F.
- Inasmuch as Soviet spokesmen have repeatedly gone on
record as demanding $10 billion in reparations from Germany,
the internal political needs of the government of Soviet
Russia might be satisfied by a formula under which past
Soviet-Polish removals from Germany, as reparations
collectible in the future, could be computed, for the
record, at $10 billion, provided that agreement were first
reached as to the actual amount of future
reparations.
- G.
- Whatever reparations plan is agreed upon should constitute
a final settlement of all reparations claims by all
nations.
- H.
- The administration of Plan A would be left to the Allied
Control Council and its economic agencies, including the
determination of plants to be utilized for reparations work,
the types of finished goods to be available for reparations,
and the commodities to be considered acceptable in return
for finished goods.
- I.
- It is implicit that all of the above offers by the United
States would be contingent upon Soviet agreement to the
politico-economic conditions deemed essential for a German
settlement including political and economic
unification.
- J.
- If the USSR declines to accept any of our reparations
proposals and refuses a major settlement of German problems,
it is recommended that the United States resume immediate
capital reparations deliveries to the IARA nations but continue
indefinitely the suspension of deliveries to the USSR and
Poland.
[The remainder of this paper, covering fifty-five pages in the
typewritten source text, is not printed. It was arranged under the
following sub-headings: Political Observations, Level of Industry
and Economic Unification, Reparations Plan and Negotiations,
Negotiations with the USSR, First Chargé Principle, Reparations
Background, Present Status of the Reparations Program, Capital
Removals vs Current Production, Analysis of European Economic
Problems, Role of Coal, and Statistical Appendix.]
