740.00119 Control (Germany)/9–548: Telegram
The United States Political Adviser for Germany (Murphy) to the Embassy in the Soviet Union
482. Personal for Ambassador Smith, Eyes Only. Re urtel 363, September 2.1 We have noted carefully your opinion regarding Sokolovsky’s possible position regarding the bank of emission and the jurisdiction of the financial commission. You expressed the opinion that Sokolovsky will probably yield ground on this issue before letting Berlin discussions fail. We hope you are right. Thus far, Sokolovsky has not shown the slightest indication of yielding an inch in this respect nor has Soviet Financial Adviser sitting on the Finance Committee given any indication of willingness to make concession in this field.
You ask for brief estimate of Berlin views on this question and I quote the comment of the US Finance Adviser, Berlin, in which General Clay concurs:
“We obviously do not expect finance commission to control zonal activities of emission bank. Unless, however, we are to be completely in the hands of the emission bank, and therefore, of the SMA on money, credit, and budget matters in Berlin, we must have some means of supervising these activities. At the same time, we recognized that small comfort is derived from a control by the finance commission over the relations between Berlin and the emission bank since a Soviet vote could block any or all measures which the western members of the finance commission might consider imperative to protect the interests of the western sectors. Nevertheless, since the control to be provided by the finance commission will be the only control over the finances of the city and the only means of protecting the western sector [Page 1125] population from discriminatory acts by a Soviet dominated body, we should attempt to establish the power of the commission in clear terms.
“Our directive provides that the currency circulation in Berlin is to be regulated by the emission bank. This can be subject to the widest interpretation and appears thus far to be given the widest interpretation by the Soviets here. The power over all finances in Berlin is, therefore, given to the emission bank except as limited by the specific terms of any agreement by the four Military Governors or by the general control exercised by the finance commission. We shall, of course, try to have spelled out in the agreement here as many of the protective provisions as possible, but the fact remains that the ‘regulation’ and the implementation rests with the emission bank. The emission bank, it is true, must in accordance with the agreement, act through the credit institutions of Berlin. We have not so far established and may not be able to establish that the finance commission will have power of control over the credit institutions superior to that of the emission bank. We should like to envisage the finance commission as a superior voice in the financial and budgetary operations of Berlin. As such, it would control the credit policies of the credit institutions and the budget of the city. As such, it would likewise control the decisions of the emission bank in so far as these decisions affect the credit policy of the Berlin credit institutions, the availability of adequate funds to the Magistrat and other public organizations and the availability of adequate funds to the credit institutions to prevent these institutions from having to bow to Soviet demands under financial stress.
“We shall, of course, try to work into our agreement the terms of an agreement between the Stadtkontor and the emission bank whereby Berlin will be ensured sufficient bank notes initially to cover the liabilities of credit institutions after allowing for the value of their realizable assets and to cover a reasonable operating reserve; whereby loan and discount privileges for the Stadtkontor may be guaranteed by the emission bank on no less favorable terms, conditions, and amounts than are granted by the emission bank to member banks in the Soviet zone; and whereby the Berlin city administration may be allowed to borrow from the emission bank on no less favorable terms, conditions, and amounts than are the public administrations in the Soviet zone. Even with such an agreement, however, which is by no means certain, we could hardly expect satisfactory results if the implementation of the agreement is left merely to the Stadtkontor and the emission bank and the Magistrat and the emission bank. The pattern of Soviet control over individuals, enterprises, and public authorities through lavish or stringent money rationing, as the case suits their purpose, a pattern which they are already applying in their zone after monetary reform is well known. They have attempted to control the Berlin Magistrat by not allowing them free withdrawals from their bank accounts to which they are entitled under the law, and our ability to provide the Magistrat with western B marks has alone frustrated this effort.
“The directive provides that the Military Governors must safeguard the Soviet zonal currency circulation from disorganization. This will be the peg upon which the emission bank will hang all refusals of [Page 1126] adequate currency and credit to Berlin. Although control through the finance commission, which will be subject to Soviet veto would be weak indeed, it does provide a four-power body—in fact, the only four-power body where the problem may be aired and from which appeals can be justly and accurately made to the Military Governors and by them to govts. Without this control, even if in name only, we do not have any more than the Soviets offered on June 22 before instituting their currency reform law in Berlin. In fact, we should have less since we did then have the Berlin four-power Kommandatura.”
Sent Moscow personal for Ambassador Smith, Eyes Only 482, Dept 2242, Eyes Only for Secretary and Lovett, London 573, and Paris 588, Eyes Only for the Ambassadors.