862.515/1–1249: Telegram

The Acting Secretary of State to the Embassy in the United Kingdom

us urgent

141.1 For Holmes. Ref Bohlen’s telephone call2 ActSecy handed to Brit Amb text memo given below. It was pointed out that while Bevin seemed to be concerned introduction Western mark might slam the door on a settlement we felt on the other hand that it would be viewed as proof of Western Govt’s determination to remain in Berlin, which might in turn make Sovs more willing to reassess the value of the blockade. Same memo addressed to Fr Govt was likewise furnished Fr Amb this afternoon.3 (For Paris: Please urge upon Schuman the considerations dealt with therein.)

“The US Govt has noted that progress is being made toward a joint reply to the Neutral Comite’s proposals to deal with the Berlin currency and trade problems but there are two issues outstanding to which the US attaches major importance.

The US Govt considers that its counter proposal designed to provide possible use of Sov currency in a split city, offers the only practical means under present circumstances of dealing with a situation of fact created by the illegal actions of the Sov Mil Authorities in Berlin. It is noted that an objection has been raised on the ground that it would not be acceptable to the Sovs. This Govt believes that whatever proposal is put forward or whatever amendment is made to the Neutral Comite’s report, each must be judged, irrespective of the degree of likely acceptance by the Sovs, from the standpoint of providing a workable solution which would not mean an abandonment by the Western nations of their rights and duties in Berlin.
As the Brit Govt is aware the three Western Govts have, since the Berlin case was placed before the SC on Sep 29, exercised great restraint and patience and refrained from taking measures which, in the opinion of this Govt are essential to protect not only the Western Allies’ position in Berlin but also to prevent an unjustified [Page 653] drain on the resources of the Western zones of Germany caused by the anomalous currency situation in Berlin. The Sov authorities in Berlin have on the other hand proceeded to take a series of measures which have resulted in a completely split admin of Berlin and have constantly sought to undermine the economy of the Western sectors regardless of the fact that the matter is still pending before the SC. As the Brit Govt will recall, the US has for some time believed that the situation in Berlin required the introduction of the Western B mark as the most practical means of defense. Anticipating some such necessity, it was clearly understood between the Western Powers that in accepting the proposal for a study by the neutral experts they must reserve the right to take such measures as are necessary to protect their position in Berlin. As will be seen from the fol explanation, the deteriorating economic situation in Berlin now requires prompt action which in the considered opinion of this Govt is essential and which will not further prejudice a damaging situation which is constantly being aggravated by arbitrary Sov measures.

Continuation for a period of more than six months of an improvised dual currency system in Western Berlin has brought about a steady and costly financial and economic deterioration. This calls imperatively for immediate introduction of the Western B mark as sole legal tender. This deterioration has been the result of certain basic weaknesses in the existing currency arrangements which can be remedied only through withdrawal of the de facto legal tender status of the East mark.

The absence of an effectively functioning banking and credit system is the most fundamental among the weaknesses of the present currency arrangements in Western Berlin. The Western Powers have no control over the supply of East marks. Therefore they are unable to assure to the banking institutions of Western Berlin a supply of currency in exchange for the rediscount of credit instruments. Hence the banks in Western Berlin have been forced to keep on hand currency to cover their entire East mark deposits. For this reason, they have been unable to extend East mark loans either to business firms or to the municipal authorities. Moreover, the Western Powers under this system have been unable to fill this gap by establishing a fully functioning banking and credit system based on the Western B mark. There have been occasional injections of Western B marks to meet emergency situations, but it has been the deliberate policy of the Western Powers to confine these injections only to cases of extreme urgency. These occasional injections have served to obscure the absence of an effective banking and currency system in Western Berlin. They have not provided a means whereby the banks can provide facilities essential to the life of the city. In fact, the banks in Western Berlin now operate as no more than safety deposit institutions.

The limited circulation of Western B marks, together with the explicit policy of making the East mark de facto legal tender, have made the East mark the prevailing currency for a great many transactions in Western Berlin. As a consequence, the Western Powers cannot control the supply of the currency which is greatly relied upon to serve the commercial and governmental operations of Western Berlin. [Page 654] Lacking such control, the Western Powers have been confronted with a drainage of essential supplies from the Western sectors given in exchange merely for East marks from the Sov Sector and Zone. This drainage of supplies has been costly not only to the Western zones of Germany, but particularly to the US Govt which is incurring a large part of the cost of feeding and clothing the residents of Western Berlin as well as of transporting these supplies by the air lift. The only means of coping with this difficulty is to deprive the East mark of its de facto legal tender status, and thus greatly lessen its acceptability in exchange for commodities available in Western Berlin.

Since the Western Powers have no control over the supply or future status of the East mark the people of the Western sectors have been reluctant to accept or hold this currency. Because of this reluctance, the East mark has fallen to a considerable discount in relation to the Western B mark, despite the partial legal tender status of the East mark. As a result of this fact, there has been widespread disorganization in the functioning of the economic life of Western Berlin, and in the effectiveness of the price control and rationing regulations for those sectors. Since the real value of earnings in Western Berlin depends on the division of these earnings as between East marks and Western B marks, labor unions have striven to secure a maximum proportion of wage payments in Western B marks. They have had varied success in accomplishing this purpose, with the result that there have widespread inequalties in pay for comparable work. This has produced serious unrest and dissatisfaction among the working population. It has also placed at a considerable disadvantage business firms which are unable to secure West marks in exchange for their products, particularly those firms which manufacture or distribute goods which are required to be sold for East marks.

Furthermore, the price control and rationing regulations have themselves been thrown into jeopardy under the present dual currency arrangements. It has been necessary to frame price regulations in terms of marks without distinguishing East marks from Western B marks. As a result, it has been possible for business firms to advance their effective prices as much as 300% without formal violation of price control regulations, merely by altering the proportion of West marks required in payment. This impairment of the price control regulations has also had a weakening effect on the rationing controls applied to the same commodities. There is a resultant dissipation of scarce supplies brought in at great cost. The freedom to choose the currency required in payment for goods and services has enabled business firms to conceal profit through accounting devices and thus to avoid taxation. The Magistrat is thereby deprived of important sources of revenue.

The Brit Govt has suggested that the difficulties now being experienced can be met through the expedient of altering the proportion of West marks required in payment of wages and taxes and in the purchase of rationed commodities. A measure of this nature would not itself increase the supply of Western B marks, nor remedy the existing deficiencies in the banking and credit system of Western Berlin. This suggestion is a recognition that the solution to the present difficulties in Western Berlin lies in expanding the use of Western B marks and concurrently diminishing the use of the East mark. The recognition [Page 655] implicit in this halfway measure merely emphasizes the need for eliminating completely the legal tender status of the East mark in Western Berlin.

In view of the foregoing the US Govt strongly urges that the Brit Govt give its consent to the introduction of the Western B mark as the sole legal tender for the Western sectors of Berlin by Jan 30 if by that date the Sovs have not accepted currency solution in Berlin which meets the minimum requirements of the Western Allies. In the event that agreement is not reached between the three Govts concerning the Western B mark the US Govt will be obliged to consider what measures it may be required to take to protect itself against the further drain on the resources of Western Ger to which it is at present contributing so heavily.”

  1. Repeated to Paris as 104 and Berlin as 49.
  2. The reference here has not been identified further. Apparently Bohlen had called Holmes to inform him of his meetings with the British and French Ambassadors.
  3. Memoranda of Bohlen’s conversations with Franks and Bonnet are in file 740.00119 Control (Germany)/1–1249.