The United States High Commissioner for Germany (McCloy) to the Acting Secretary of State
2473. Eyes Only for Murphy.
Subject is German conversion factor. Three allied financial advisers had long conference last night with German Vice Chancellor and [Page 453]Economic and Finance Ministers following full German Cabinet meeting. Germans explained that they had had fullest intention of adopting 23.8 rate originally indicated but after consulting leading German exporters, industrialists and bankers, came to conclusion that above rate would so adversely affect their exports as to cause possible serious unemployment. Consequently feared consequences of first act of new government being to take an impractical and ultimately unpopular step in fixing too high a rate. Therefore, Cabinet decided reaction [reduction?] to 22½ absolutely imperative and hope High Commission would agree. Germans pointed out this realization that fixing rate at 4.44 marks to the dollar would cause rise in cost of living with all its serious consequences, especially in light of additional cost of American wheat unless import price of wheat subsidized at either importers or consumers level. Further stated German budget could not stand impact of furnishing such subsidy. Therefore expected utilize for such subsidy purposes requisite portion of counterpart profit of 1.11 marks per dollar of ECA and GARIOA funds resulting from reduction from 3.33 to 4.44 marks per dollar. Financial advisers pointed out they considered highly improbable we would permit such application counterpart windfall. On basis this advice by financial advisers, Germans stated that if disapproval proposed conversion rate predicated on above indicated use of counterpart marks they would withdraw this stipulation, thus leaving two separate specific questions of which conversion rate the first and most urgent as they wish announce rate soonest possible moment. Germans also indicated they attach great public importance to being permitted have rate announcement made as first act of new German Government assented to by High Commission. I plan to permit this as I feel even though subject is reserved power we should make it clear the responsibility is primarily that of government. We think practically impossible demonstrate 23.8 rate correct and 22.5 rate wrong. Therefore predicated on your today’s cable 16511 and our own best judgment will inform other two High Commissioners that we agree to latter rate if Germans persist with no stipulations and likewise with no approval expressed or implied as to use of ECA counterpart. In fact will indicate to them and Germans that we will probably disapprove their contemplated use ECA counterpart when they raise that as separate later proposal. Contemplate final advice to Germans which hope can be by 2000 today will be in form of assent by High Commission to rate determined by German Government in contradistinction to rate fixed by High Commission or separately assented to by High Commissioners. For your information, think British share our views and French will probably assent to [Page 454]25 percent reduction but may want to try add stipulation that all subsidies toward preventing rise in living cost regardless of source of subsidies must cease by end of this year. French financial adviser indicated this due to their fear of German dumping. We think unwise attach any stipulations to assent as apprehensive of repercussions therefrom on High Commission if proposed rate should prove impractical and require change since Germans might well endeavor attribute part of failure to High Commission’s qualified assent. Since proposed new rate is within range of percentages outlined in my yesterday’s cable and authorized in your today’s cable 1651 I will act as indicated in this cable.2