The United States Military Governor for Germany (Clay) to the Secretary of State

My Dear Mr. Secretary: You will recall that when you passed through Berlin24 we touched briefly on some of the financial difficulties standing in the way of our putting Germany on a self-sustaining basis. You asked me to attempt to summarize our problems for you.

Germany lost through reparations all her foreign balances and other external assets and her gold reserves. Fortunately the “disease and unrest” appropriations of the US and UK Governments provide food to maintain an above starvation diet in the combined US/UK Zones. These appropriations are not available, however, and in any [Page 916]case would not be adequate for other purposes. Yet Germany must have money to bring in raw materials so that the available power, the highly skilled labor, and the remaining industries can begin to produce for export and can begin to build up a profitable foreign trade, without which Germany can never become self-sustaining. Money for this purpose can come only from foreign loans or grants or from the little capital we can build up by initial exports literally squeezed from a bankrupt economy by the use of her meager stocks of remaining raw materials.

Germany can not present a sound credit risk to prospective lenders until she has demonstrated her ability to export. Credit has thus far of necessity been restricted to self-liquidating inventory advances, such as the $7.5 million advance for this purpose being made available by our R.F.C.

From past exports the combined US/UK Zones have produced a capital of approximately $100 million. This is a small capital fund with which to rebuild the economy of approximately one-half of Germany with a population of 40 millions. The fund is so small, indeed, that we must guard it most carefully lest it be lost or depleted and we be left without resources with which to procure our essential raw materials or to call upon in any emergency. This means that we can see these funds spent only when the expenditure will definitely stimulate an equal or greater amount of income from German exports. This is why we must spend this money niggardly and must insure that every export of goods and services from Germany be fully and promptly accounted for.

We face the great difficulty, however, that our Allies, who have suffered at the hands of Germany, are extremely reluctant to deal with Germany in any way that brings a net profit to Germany. It is difficult not to be sympathetic to this attitude, but we must realize that any transaction which brings a loss ostensibly to the US/UK Zones of Germany today does, in fact, bring that loss to the US/UK Governments instead and jeopardizes the success of our efforts to balance the economy. We here must take the unpopular position that at Potsdam and subsequently at the Paris Separations Conference firm determinations were made of the ability of Germany to provide reparations to Allied nations.25 She is not able to finance a continuing hidden reparations program in the form of concessions in international trade forced upon her by the Allied nations through the Occupying Powers.

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I cite the following instances:

The Netherlands and Belgian Governments are urging that Germany utilize the Ports of Rotterdam and Antwerp as her outlet to the sea and that Germany pay foreign exchange for this use, despite the fact that Bremen and Hamburg have adequate port facilities available without foreign exchange costs.
Czechoslovakia is insisting that she not be required to pay Germany for the use of the German railroads and port facilities. Despite the earlier agreements on reparations demands against Germany, it is now contended that Czechoslovakia should have the free use of German railroads, or in any event the use of German railroads at special reduced rates, as reparations.
UNRRA relief supplies to Czechoslovakia have transited Germany and freight charges have accrued to well over a million dollars, but UNRRA requires that these charges be offset against UNRRA’s much lesser charges for aid in the administration of the DP program in the U.S. Zone.
The Combined Zones today are trying desperately to increase the output of coal and to speed up industrial production in general in aid of an export program, handicapped by the use of the very young and the very old in manpower. Nevertheless, France, while demanding an increased allocation of available coal, is insisting on retaining young prisoners of war in France and upon recruiting for voluntary work in France those who might otherwise be returned to Germany. France is insisting, moreover, that when these workers are retained in France they should be permitted to send their earnings to their dependents in Germany instead of spending their money in France. It is understandable why France needs and feels entitled to this manpower. But France would not buy from Germany the Reichsmarks to pay these dependents; she would instead take French Francs from the workers and send to the dependents old German Reichsmarks left in France by the retreating German army. In other words, France would have the fruits of the labor, but Germany would pay a major part of the labor costs. This cost would be borne in substantial part by US/UK as long as we are subsidizing the German economy.

There is such a tremendous demand in Germany today for all the things she might otherwise sell abroad and there is such a competition between the domestic and the export market that only by the greatest urging and by a minute decentralization of ultimate responsibility can an export program be stimulated. The stimulation which we must offer is a continuing supply of food and a continuing supply of the raw materials required for further production after the existing raw materials move out of Germany in the form of finished goods. Monetary stimulations within Germany are of no help, for the goods the extra money would buy, no matter how soundly based or tightly controlled the money might be, are simply not available. No new German currency which we might introduce would serve as a full stimulation unless there were either goods immediately available for [Page 918]which that money could be spent or unless there were a sound political structure to inspire a confidence in the holder of the money that his government will make sure he will one day be able to buy at an agreed value the things he needs now, but which are not now available. No government can inspire that confidence until basic questions of the future economic and political structure of Germany have been resolved; until it is known what final reparations Germany must pay, what limits on production will be imposed, and with what debts and tax burdens she may be ladened.

I have tried to point out that Germany is bankrupt and that she cannot re-establish herself on a self-sustaining basis until her debts are once and for all reckoned and fixed in amount and she herself permitted to enter into trade relationships with other countries unhampered by the curse of her past political mistakes. I say this not out of sympathy for Germany and the German people but because of the necessity to reduce the present burden on the U.S. and U.K. economies. We have to recognize that it is not Germany who is paying the penalty today, but rather the taxpayers of the United States and Great Britain and that we can unburden ourselves of this expense only by returning Germany to a satisfactory trading position or by abandoning her to chaos.


Lucius D. Clay

General, U.S. Army
  1. On April 25, 1947.
  2. For the Report on the Tripartite Conference of Berlin, August 2, 1945, see Foreign Relations, The Conference of Berlin (The Potsdam Conference), 1945, vol. ii, p. 1499. For documentation on the Paris Reparations Conference, December 1945, see Foreign Relations, 1945, vol. iii, pp. 1275 ff. For additional documentation regarding the policy of the United States on reparations in 1947, see pp. 1104 ff.