Foreign Relations of the United States, 1949, Council of Foreign Ministers; Germany and Austria, Volume III

Department of Defense Files

Record of Teletype Conference Between the Department of the Army and the Office of the United States Military Governor for Germany

top secret
DA TT 2225
Subject: Trade Restrictions
Conferees

Washington , 13 May 1949.

Washington: (OASA)	Berlin: (CINCEUR)
Mr Harold Sheets, Dept Asst Sec Army (MC)	Mr L. Wilkinson (Econ Adviser)
Maj Gen Carter Magruder, OAS	Mr F. Hannaman (Spec Econ Adviser)
Brig Gen E. M. Brannon, JAG
Col W. G. Baker, Jr., CAD–EUR
Col C. F. Tischbein, MUN BD
Lt Col G. S. Chittick, CAD–EUR
Mai J. G. K. Miller, OAS
Maj T. W. Archer, CAD–EUR
Mr G. Dorr, OASA
Mr Paul Nitze, State
Mr Ed Martin, State
Mr J. Reinstein, State
Mr Malcolm McComb, ERP Gp

Washington:

DA–1

Voorhees to Wilkinson—Statement prepared by Mr Voorhees for Wilkinson.

Have just left long meeting with Secretary Acheson personally and his staff. Question presented as to 1–A and 1–B items is considered by Mr Acheson a most serious one. Of course this policy was one initiated by National Military Establishment. You should know that the present situation has already created genuine alarm here, including real danger that a breach may result in the dam against flow of strategic material to satellite areas resulting in other European Nations abandoning similar restrictions imposed at our request.

Have just learned that in Jessup–Malik conversations, Dr. Jessup stated in regard to removal of restrictions the following:

“We all wished to have all the physical impediments to communications, transportation and trade removed. We do not want to hold back on any one of them. I was sure that we all recognized that there would necessarily still be problems to be solved. When trade is resumed after an interval of more than a year, it would be inevitable in the commercial relations of any countries that such problems would exist that require solution. For exmaple, there was the fact that there were in existence two currencies and no rate of exchange had been established between these two currencies. We all knew that the question of currency reforms both on the Soviet side and on the side of the Western Powers had taken place. Currency was one of the questions to be considered as an item on the agenda of the CFM. Since there will be two currencies in existence when the trains and trucks and barges begin to move again, this problem of exchange is one of those which need to be solved. For our part, we shall be ready to approach the solution of this and any other detailed problems on the spot in a spirit of good will which we have no doubt will be reciprocal. Therefore, I would agree to the insertion of the word ‘all’.”¹

We concur here heartily in your position that the 1948 trade agreement² expired.

You will note that Dr. Jessup’s quoted statement furnishes support for such position and also that since this was not known to you at time of any previous statements by you, it furnishes entirely new material bearing upon interpretation of the agreement to lift the restrictions. Also implicit in it is the necessity for arranging new trade terms in new trade agreements which might take some time.

There is another point on which we are not yet entirely clear here which needs much further study, and that is extent to which Jessup–Malik agreement to remove restrictions imposed after March 1, 1948 leaves trade without other controls. On this point we have very considerable reservations. As to this I had understood and Bob ³ confirms this, that interzonal trade has always been conducted under supervision and subject to the exercise of control of appropriate Military Government or Bipartite authorities and trade agreement of 1948 was approved by military authorities. I would suggest therefore that it would be better not to make any statement indicating that trade is free of all controls because of Jessup–Malik statement.

In summary, our present thinking runs along the following lines as being best practical means of dealing with complex situation confronting our government and particularly will affect military security:

(1) It is our understanding that prior to March 1, 1948, Military Government in each of the zones controlled exports; therefore the continuance of controls is not of itself a violation.

(2) In our judgement, the 1948 trade agreement has lapsed and it is necessary to negotiate a new agreement. The non-reinstatement of 1948 agreement is in full consonance with Malik–Jessup talks.

(3) In the negotiation of any new trade agreement precautions must be taken in order to insure that 1–A and 1–B items are excluded or controlled and that we retain adequate procedures to police such an agreement.

On the other hand and consistent with the above, we believe that we should initiate and prosecute vigorously, efforts to resume trade with emphasis of course on items not on 1–A and 1–B lists and make, if necessary, interim arrangements immediately operative so that there can be no basis for charge that we are deliberately preventing trade.

(4) Shipments of goods under particular contracts made prior to expiration of 1948 trade agreement will no doubt require examination as to the facts and as to the legal considerations applicable. It is desirable to know what is involved, how much and especially whether deliveries will be made both ways and how payments will be made; that is East–West and West–East. Are Russians doing what they asked us to do?

We therefore would like to have you obtain as rapidly as possible data as to items and quantities remaining undelivered under existing contracts made pursuant to 1948 trade agreement. This might have an important bearing on policy if it confirms General Clay’s impression given this morning that quantities of 1–A items were very limited and if 1–B items were not too large.

I want to make clear that this problem is one which I believe was inherent in the situation and could not have been avoided under any circumstances if we were to get blockade lifted. Our present job is to get together on the soundest and best US position to deal with a dangerous situation. We are trying to give you every possible assistance and we, of course rely implicitly upon the effective cooperation which we know we will receive from you.

State would appreciate it if you would immediately inform your French colleague that this entire matter is under urgent review and that his government will be informed of the US position via our embassy in Paris.

(End DA–1)

Berlin:

DH–4

Reur DA–1 Para 4.

Re undelivered SovZone contracts Russians today showed us a list literally hundreds of pages long. If we are to screen these items against 1–A and 1–B lists it must be done by allied agency such as JEIA. We had originally planned to require each request for an export license to SovZone to be cleared by JEIA in this fashion. I still think this is most effective method rather than having Soviet authorities give us their total list and have us cross off the 1–A items.

While I believe Gen Clay’s estimate of number of 1–A contracts is correct, we can’t prove it, and will have to rely on Russian’s list if we are to give you an overall evaluation. Our procedures never provided for any compilation of details of interzonal contracts and the only way we would get them would be by scrutinizing export license applications which will later be made one by one. This won’t help you, so we’ll try to get Russian list.

(End RH–4)

DH–8

Reur DA–1, Para (4).

Russian order 56 states goods will be shipped against trade agreements. Therefore assume they will issue no export licenses if we refuse acknowledge existence agreement. They were relying on revival old trade agreement to provide clearing payments mechanism. We know of no goods shipments from SovZone to Bizone since end blockade.

(End DH–8)

DH–1

Russian position statement given us today follows:

The Soviet expert stated that in actual fact no measures have yet been taken on the part of the Western Occupation authorities in regard to the lifting of restrictions imposed by them on trade between the Western Zones and Eastern Germany and between Berlin and the Eastern Zone.

The Soviet Occupation authorities have already carried out such lifting by issuing the order of 9 May 1949 No. 56. The trade turnover has so far not been resumed although it is known that the main restrictions have been imposed by the Western Occupation authorities particularly in regard to trade. The Soviet expert considers this situation abnormal. In order to re-establish the trade between the Western Zones and the Eastern Zone as well as between Berlin and the Eastern Zone immediately, to which the Western Occupation authorities are bound by the obligations assumed by their governments, it is necessary to revive the validity of the Berlin agreement on trade turnover between the Soviet and US/British Zones, concluded in November 1947, but not carried out completely, and of other trade agreements the implementation of which was interrupted by imposed restrictions. In this connection the Soviet authorities do not demand a confirmation of all types of goods listed in the agreements. They propose that each party should submit its considerations in regard to those points in the agreement which are still of interest to them. The carrying out of obligations in accordance with such points must be guaranteed by military administrations who had accepted the former agreement and, in doing so, assumed the responsibility for their implementation. All restrictions imposed by the Western Occupation authorities on deliveries to the Soviet Zone of equipment manufactured in accordance with former agreements, as for example rolling mills, partially paid for on orders placed on 1 December 1947 and 5 December 1947 with the firms “Schleman” and “Demag,” electrical equipment for them on orders placed on 9 February 1948 etc., must be lifted immediately. Moreover, deliveries have not been completed of rolled metal, dyes, rubber goods etc., ordered on the basis of the Berlin agreement of November 1947. The Soviet Zone is still interested in a part of these deliveries. The Soviet expert entertains no doubts that there are goods ordered on the basis of the former agreement which could possibly interest the British and US Zones.

The Soviet expert proposes the following wording for a statement in respect of settlement of accounts based on former trade agreements, the validity of which should be revived;

“The Soviet expert proposes that the settlement of accounts on trade between the Soviet and Western Zones, pending the settlement of the currency problems by the Council of Foreign Ministers, should be carried out by way of including into a clearing account sums due to various parties, in prices specified in former trade agreements and contracts, or in prices changed by mutual consent. The final settlement of accounts will be made after the currency problem has been settled by the Council of Foreign Ministers. Settlement of accounts on trade between the Soviet and Western Sectors of Berlin to be made under the same conditions.”

The Soviet authorities accept with satisfaction the proposal made by the Western experts in regard to new trade agreements and the conclusion of new transactions. In this connection restrictions should be lifted in respect of transactions to be concluded between individual firms.

(End DH–1)

DH–2

Following is statement British propose to make at tomorrow’s meeting with Russians:

“We have carefully considered Mr. Vassilieffs’ proposals regarding the reestablishment of the interzonal trade agreement for 1948 which was concluded between the two German bodies. This trade agreement has been overtaken by time and events. By common consent it requires revision in order to take account of the passage of time. The changes in requirements in the two areas and the inescapable fact that there are now two different currencies.

There is nothing in the agreement reached between our govts as a result of the NY decisions which calls for the reestablishment of an agreement essential parts of which are by common consent unsuited to the existing conditions. The agreement calls for the lifting of restrictions imposed since 1 Mar 48. These restrictions have been lifted and there is no obstacle to the delivery to the Soviet Zone of items which were being purchased by that zone prior to 1 Mar 48, under the same procedures for interzonal permits which applied at that time. We appreciate that the Sov Zone authorities are desirous that the list of goods, materials and equipment which appeared on the agreement for 1948 should be reaffirmed as valid for trade exchange today and we are ready to inform the Germans specifically that this is the case, and that contracts made for these goods, materials and equipment will be furnished with interzonal trade permits at least to the extent of the quantities contemplated in the 1948 agreement. Provided of course that acceptable payments arrangements are made between the individual or firms concerned in the contract. We will also ask the German authorities in the Western Zones to get together immediately with the German authorities of the Soviet Zone to work out revisions of the old agreement on the basis of a new one which will operate to the mutual satisfaction of both areas.

As regards the establishment of a clearing agreement, we feel that this also is a matter which in the first case should be discussed between the German authorities of the two areas in order that payment arrangements should be facilitated to the maximum extent possible.”

Foreign Office is supporting British MG in this position.

(End DH–2)

Washington:

DA–2

Mr Murphy requests us to ask:

Can you give us an estimate of the tonnage of freight that has entered Berlin from the West Zones by German carriers (trucks, barges and railroad) since the lifting of blockade up to Thursday evening Berlin time?

(End DA–2)

Berlin:

DH–3

Reur DA–2

Will cable estimate tomorrow. I don’t have it

(End DH–3)

Washington:

DA–3

We assume that British are proposing their statement as a joint position of 3 Western Powers. What are your views on British statement in light of Mr. Voorhees’ statement in DA–1?

(End DA–3)

Berlin:

DH–5

Reur DA–3

Correct. British statement was for all three powers, but it won’t do in light of your remarks.

I shall recommend to Gen Clay that all export license applications for the SovZone be referred to JEIA for screening against 1–A and 1–B lists, and that they be automatically approved if not on such lists. As far as financial arrangements are concerned, we would leave it to West German seller to obtain what he considered satisfactory payment, with no stipulation regarding clearing account on other offset arrangements.

At same time we will notify Germans that they are to get in touch with SovZone Germans and work out new trade agreement, but with final approval of items to be included, reserved to MG. Terms of financial settlement, clearing account etc. to be held in suspense, as foreseen by Jessup–Malik talks.

You will of course recognize that we have now gone so far with Russians and public announcements that our reversal of form will really cause a furor. We’ll do our best to reverse gracefully.

Does above meet your views?

(End DH–5)

DH–6

Assume you are discussing this situation with British Embassy, since British authorities here will not be happy at reversal of form and may hold up agreement on common front.

(End DH–6)

Washington:

DA–5

We feel that proposal made by you is a form of procedure which meets point made in Voorhees’ message. Understand that this particular form of procedure was rejected by Clay at Frankfurt and that you feel it would have results then anticipated by Clay. Do you feel that taking aspects of Russian proposal as point of departure we could nevertheless get to it gracefully?

(End DA–5)

Berlin:

DH–9

Reur DA–5

Gen Clay felt this procedure violated N.Y. agreement by changing the Mar 1 procedure. Since 1 Mar procedure will not enable us handle 1–A and 1–B problem, and this problem now has priority. We’ll have to violate it and we might as well do it one way as another.

What do you mean, “Taking aspects of Russian proposal”?

(End DH–9)

Washington:

DA–6

Reur DH–9

We refer to the following excerpt from your statement of the Soviet proposal:

“In this connection the Soviet authorities do not demand a confirmation of all types of goods listed in the agreements. They propose that each party should submit its considerations in regard to those points in the agreement which are still of interest to them.”

(End DA–6)

Berlin:

DH–10

Reur DA–6

Russian remarks are all based on recognition that old trade agreement is still in force.

Since we won’t agree to this, we can’t go on to the point quoted in DA–6. We’ll just have to work it out here as best we can. Gen Clay ought to be up in a couple of hours and I’ll discuss with him. Have you anything more?

(End DH–10)

Washington:

DA–7

Further ref your DH–9

The Secretary of State does not consider that procedural controls over exports capable of being used to control 1–A and 1–B lists and to implement the provisions of an equitable new trade and payments agreement would violate the New York agreement.

(End DA–7)

[Here follows material on administration of the 1A and 1B lists.]

Washington:

DA–8

In light of necessity for revision in British proposal and question on part of Army as to use of particular JEIA procedure we believe that after some exploratory discussion of Russian proposal and financial aspects and expression of desire and confidence in ability to expedite resumption of trade you should state that you have not yet had an opportunity to receive an expression of your government’s views and adjourn further discussion until Saturday night or Sunday morning. Voorhees desires Draper’s views tomorrow morning and will then advise.

(End DA–8)

Berlin:

DH–11

Reur DA–8

Adjournment would have to be until Wednesday. Russian delegate going to Prague Saturday afternoon and Sunday. All of us will be in Frankfurt Monday and Tuesday.

(End DH–11)

Washington:

DA–9

Suggest rearrange schedule to proceed on Monday if Russians desire.

(End DA–9)

1. A memorandum of the Four-Power conversation in New York, May 4, from which this is an extract is in file 740.00119 Control (Germany)/3–1549.
2. Under reference here is the November 25, 1947 Trade Agreement between Bizone and the Soviet Zone of Germany. For an extract from this agreement, see Germany 1947–1949, pp. 483–485.
3. Robert D. Murphy.