ECA message files, lot 53 A 278, box 27, Frankfurt Toeca: Telegram

The United States High Commissioner for Germany (McCloy) to the Administrator for Economic Cooperation (Foster)1

secret
priority

Toeca 828. Ref: aDeptel 1006, rptd Bonn 66, Paris 877, London 870, August 8.2 b—Dept Repto 3895, Frankfort, rptd Repto 549, London [Page 1645] Repto 2, August 8.3 FinFed mtg held August 8, not 9. US chairman FinCom reviewed budgetary discussions and stated fol position:

(1)
Until change in Ger status occupation costs payment remains mandatory and has priority over all other Fed expenditures.
(2)
Feel that present level of occupation costs constitutes no excessive burden in consideration defense expenditure levels now being undertaken by allied govts. Although new troop assignment to Ger at FedRep request caused increase in occupation costs, it has necessitated substantially greater additional expense to allies. Therefore, allied govts are not considering additional foreign or local currency assistance or diversion of present assistance for purpose financing occupation costs.
(3)
In view magnitude defense expenditures undertaken by allies, future Ger defense contribution (though probably differently composed) must be higher than present level occupation costs to be satisfactory to other defense partners. Present tax revenue level must be increased appreciably and other appropriate economic control measures taken in order to preserve internal stability. Such measures cannot be planned and invoked too promptly.
(4)
To solve the current problem of short cast position FedRep must raise short-term loans to insure full payment of budgetary commitments during the interim period until new tax revenue can be raised.
(5)
Regarding fiscal policy measures, FinCom willing to supply any technical advice requested. FinCom concerned with certain factors reflected in draft 1951/52 budget especially large increases in non-occupation cost expenditures. FedRep has felt free to grant salary increases and higher social benefits at time when occupation costs have highest priority.
Failure to restore the 17 to 25 percent income tax rate cut of April, 1950 has resulted in revenue loss in excess of DM 1,000 million.
(6)
FedRep must realize gravity of failing to live up to present obligation to pay occupation costs in full. Eventuality wld have serious foreign repercussions and endanger present favorable German world position developed as [so?] soon after World War II. Implied Western World wld doubt sincerity of FedRep desire make contribution to western defense.
(7)
FinMin, if still unable to see way clear to mtg all budgetary commitments, shld lay issue before Chancellor for consideration of all internal and international facets.

In his answer, FinMin gave impression had expected allied financial assistance of major cut occupation costs. Stated that present FedRep burdens are relatively comparable to or greater than allied defense efforts. Referred to pamphlet his Ministry will publish which places present FedRep “defense contribution” at DM 13 billion including therein refugee welfare benefits and Berlin aid as well as occupation and related costs. Referred to Sonne report recommendation of substantial external aid to FedRep to solve refugee problem.4 Said allies [Page 1646] shld not over-assess Ger living standard by observation certain free-spending individuals. Claimed Ger taxes already world highest. Gave detailed exposition of “oppressive” nature present level of taxation. Claimed little more revenue can be raised, and income tax rate increase not possible. With tax increases impossible if FinMin were to go into deficit financing, inflation wld surely follow and Ger “defense capacity” wld be destroyed thereby.

FinMin implied several times doubt as to “good intentions” of allies in assessing Ger economic capacity, taxation level and in recommending inflationary deficit financing. Referred to hypothetical bargaining where both parties maintain unrealistic initial positions with intent to compromise later; claimed he preferred instead to discuss present problems realistically. As to priority of occupation costs, he emphasized FinCom must realize that equally disastrous repercussions wld result from non-payment other Fed expenditures such as social benefits. If FedRep finds itself unable to pay all commitments only realistic course is to confer with three allied govts to determine mutually which of all admittedly essential expenditures (including occupation costs) must be cut. He wld indeed present fiscal situation to Chancellor for decision but he did not see any ready solution. As to FinCom’s offer to give technical advice on tax and other fiscal matters, wld gladly have his staff examine FedRep’s fiscal policies with any allied technicians of “good intentions”.

We conclude FinMin is disappointed that FinCom offered no external solution to budget deficit and will present issue to Cabinet with view that Chancellor shld meet HICOM to obtain reduction occupation costs since he believes no internal solution is possible. This gives FedRep initiative and may give us more time to formulate firm tripartite position. Although FinMin gave assurance that no deficit financing source other than BDL credit is available we notice that of DM 196 million July indebtedness increase only DM 122.4 million came under BDL debt ceiling. Residual came from use immediate aid and other public agency funds. At this rate of BDL credit utilization (July 31: DM 1065.1 million) payment crisis might be delayed until Oct-Nov. FinMin’s administrative power to delay certain expenditures cld delay crisis further if that were considered tactically advantageous. Timing budgetary crisis, of course, dependent on accuracy estimate rate of occupation costs spending which yet fails to reach levels predicted by allied services and may continue so.

Reply Reftel a and other comment follows.

McCloy
  1. Repeated to Paris and London.
  2. Not printed. It asked for clarification on the status of the negotiations concerning the federal budget and occupation costs. (762A.0221/8–951)
  3. Supra.
  4. The report under reference has not been identified further.