Foreign Relations of the United States, 1948, Germany and Austria, Volume II

740.00119 Control (Germany)/2–148: Telegram

The United States Political Adviser for Germany (Murphy) to the Secretary of State

secret

Berlin, February 1, 1948—1 p. m.

258. Personal for Saltzman and Hickerson Eyes Only. At the end of today’s meeting the Control Council¹ went into executive session to consider the US currency reform proposal.² Marshal Sokolovsky read a prepared statement starting off with the remark that the US proposal was unacceptable to the Soviet delegation. He said that the Soviet delegation considers it necessary:

(1) That the Allied Control Council adopt a resolution condemning plans for separatist currency reform on a zonal basis and also prohibiting publication of stories in the press on this subject;

(2) That ACC take a decision to establish a German central finance administration and central bank of issue;

(3) That present US proposal is only part of the total fiscal and monetary reform program now pending in the Finance Directorate and it cannot be carried out in part. As Finance Directorate has been working on plan for long time it should now be required to complete its work;

(4) In order to safeguard the currency and protect working classes in Germany an extraordinary property tax should be enacted. Sokolovsky stated that at Moscow Council Foreign Ministers session³ it was pointed out that monetary reform should be accompanied by an extraordinary property tax.

(5) For purpose of reaching agreement, Sokolovsky said, it is considered possible to authorize the printing of currency in Berlin under quadripartite supervision but the Saatsdruckerei should be isolated from the US sector (thus abandoning prior Soviet insistence on printing in Leipzig as well as Berlin).

Koenig for French delegation stated agreement in principle to US proposal adding that if discussion is carried much further he would have to propose certain conditions of technical character.

Robertson for UK delegation accepted US proposal in principle and added remarks described as of a subsidiary nature. UK might be in agreement with some of Sokolovsky’s remarks but he appeared to make quite definite one condition; namely, that condition precedent to currency reform should be establishment of central German finance department. As CFM debated this without success how could ACC succeed where CFM has failed. It would also be difficult to have one central department established divorced from all other German central government machinery. UK regards financial reform as something urgent and overdue. Robertson pointed out that merely to tell Finance Directorate to hurry up and produce proposal is not enough to deal with matter properly. ACC should decide on something like US proposal here and now.

Clay stated that further comment seemed superfluous. US proposal submitted on theory it contained points on which all were agreed. Apparently it is unacceptable. Under ACC rule where agreement is not possible zone commanders must proceed as they see fit. Clay stated he would study the question in this light and be prepared to advise his colleagues at next meeting of action US proposes to take.

Sokolovsky replied that it seemed to him that Clay might just as well have not submitted his ultimatum proposal and to have done as he wishes. Clay is member of ACC having same rights us others. Why should his proposal have such an ultimatum form without taking consideration of other points of view? USSR cannot understand Clay’s “ultimatum, he said. Sokolovsky added that at last meeting he listened attentively and said he would study US proposal. He did this and considers that Soviet statement made today merits just as much attention. Of course, he said, if General Clay’s statement had a different purpose that is another matter. In that case he should have warned ACC that US would stand on its position and carry out a separatist monetary reform according to its wishes.

Clay replied that as Soviet delegation had stated US proposal is unacceptable it could not be stated that US had issued an ultimatum. Sokolovsky stated as a condition that study could only be made if no zonal action was contemplated. It is the Soviet delegation that is issuing an ultimatum. Under original agreement that leaves only alternative to zone commanders to proceed independently in absence of ACC agreement.

Sokolovsky replied that Clay’s remarks merely confirmed first impression that Clay had made up his mind to carry out separate monetary reform. Sokolovsky’s statement, he said, did not reject US proposal and Soviet statement proves that USSR approaches quadripartite monetary reform with the utmost seriousness. USSR willing to make great concession as formerly it insisted on printing currency in both Leipzig and Berlin. While Soviet delegation very much desires uniform monetary reform evidently this is not US delegation’s taste and latter obviously wishes to carry out reform on unilateral basis.

Sokolovsky stated further that CFM took decision in Moscow and expected ACC to establish the five central German departments⁴ Therefore, CFM has nothing more to do with this, having given the necessary authorization. Soviet delegation made its proposal to establish central finance administration and bank of issue because it is not possible to carry out currency reform without these agencies. Finance Directorate has already come to agreement on creation of central German bank of issue. While currency is being printed in Berlin, Sokolovsky said, Finance Directorate could agree all these questions and no time would be lost. Sokolovsky requested finance advisers to give an opinion as to how long printing would take in Berlin and stated that he did not connect the creation of a central German Government or other central German departments with the present proposal as a condition. If there was a real desire to do so we could coordinate US and USSR proposals without difficulty. If my colleagues would have enough patience, Sokolovsky said, I would go through the US proposal point by point and it would be evident that US proposal is acceptable with some exceptions but we must insist that Soviet proposal be studied.

Robertson pointed out that at CFM Moscow there was agreement to set up central German agencies but subject to overriding condition of establishment of German economic unity and apparently that would be a long time in coming. French and US agreed with Robertson.

In reply to question whether USSR considered as a sine qua non the establishment of a central finance department, Sokolovsky refused to give further explanation. He asked that further study be given both proposals, adding that he would circulate Soviet delegation proposal in writing.

Clay stated that Soviet proposal not clear and pointed out that currency reform has now been debated for the past two years. In the meantime, German financial situation had gotten steadily worse. Present US proposal was taken from previously agreed directorate papers and is not essentially an American proposal. Clay stated that he hesitated to take step to break off quadripartite negotiations to reform currency. US however unwilling to continue with financial conditions existing in US Zone. In a final effort to prevent collapse of quadripartite negotiation Clay stated one more proposal. He suggested Finance Directorate should sit in executive session from now until next ACC meeting taking Soviet paper, French and British observations and US proposal and report to ACC in executive session at next meeting as to what Finance Directorate are able to agree or disagree. Then ACC would decide definitely whether there is or is not to be quadripartite monetary reform. French delegation accepted. Soviet delegation accepted stating that twenty days should be necessary but all delegations finally agreed that Finance Directorate report should be considered at February 10 meeting.

Session closed with Sokolovsky’s statement that he believed that new printed money is already in Clay’s pocket and made a further reference to General Marshall’s London statement on this subject.

There was a certain amount of sentiment on the part of US, UK and French delegations to break off negotiations on this subject at end of today’s session but as it did not seem to make much difference from an operational point of view it was considered more prudent to permit an additional ten days consideration of the question.

Murphy

1. This was the 78th Meeting of the Allied Control Council for Germany. The regular transactions of the meetings were reported upon in telegrams 261, 262, and 265, February 2, from Berlin, none printed (740.00119 Control (Germany)/2–248). Topics discussed included a draft law for compulsory social insurance, the restriction and control of potentially dangerous personnel of the former German armed forces, and a proposed Soviet plan for the liquidation of German war potential.

2. In a letter of January 29, 1948, to Jacob D. Beam, Chief of the Division of Central European Affairs, not printed, Ambassador Murphy outlined the financial reform plan presented by General Clay to his colleagues on the Allied Control Council at the 77th Meeting, January 20:

   • “1. Currency reform for Germany will be established at an early date.
   • “2. Area in which Staatsdrukerei Berlin is located will be removed from US Sector and placed under four-power guard and control.
   • “3. Reich debt shall be declared null and void.
   • “4. Monetary Commission shall be under Finance Directorate.
   • “5. Commission will be charged with preparation and issuance of currency and conversion of bank accounts as outlined in paper.
   • “6. Distribution of currency in amounts decided by Inter-Allied Currency Commission will be made through Central or Land Banks of respective zones. These banks will be required to surrender old currency within sixty days (with 10% of amounts issued). Amounts will be held by occupying powers at ratio of 10:1.
   • “7. Except as provided, no new money will be issued or distributed except by authority of the Control Council.
   • “8. Matter is to be kept confidential and is to be handled by the Control Council and not by Directorate.” (740.00119 Control (Germany)/1–2948)

3. The Reference here is the Fourth Session of the Council of Foreign Ministers, March 6—April 20, 1947. Documentation on the session is presented in Foreign Relations, 1947, Volume II, chapter II.
4. For the Council of Foreign Ministers decision with respect to the form and scope of the provisional political organization of Germany, including the establishment of central administrative agencies, see document CFM (47) (M) 121, April 11, 1947, ibid., p. 436.