662A.00/5–452: Telegram

No. 28
The United States High Commissioner for Germany (McCloy) to the Department of State1

secret

2658. Dept inform Defense. Ref Bonn sent Dept 2614, rptd London 711, Paris 832, Heidelberg 481.2 In view several important developments in connection FedRep defense contribution, are summarizing meeting Chancellor/HICOMers May 1 (part I), memo submitted by Chancellor to HICOMers3 (part II), conversation McCloy/Schaeffer/Binns (part III), and comments on fin charges to FedRep which Adenauer memo states were not taken into account by EB of TCC (part IV).

Part I.

1.
Rapporteur group had referred to May 1 HICOMers/Chancellor meeting Art 8 (A) parallel column text (payments by FedRep to satisfy claims for occupation damages shall not be chargeable against defense contribution that FedRep wld satisfy claims outside defense contribution). Chancellor requested this be deferred to Exec session to discuss general financial situation FedRep.
2.
Chancellor opened discussion Exec session saying FedRep in precarious financial positions, that cash situation endangered by large expenditures for occupation costs in Mar, and that Chancellor was seriously alarmed over unfavorable trend. He said Schaeffer had sent him a memo analyzing FedRep’s financial position, the cumulative effect of various contractual commitments on FY 1952/1953 position, and stating Schaeffer’s belief situation so alarming as to convince Schaeffer he cld not in good faith, be held responsible for disastrous financial position he was convinced wld develop.
3.
Adenauer said he recognized Schaeffer’s tendency to exaggerate, but in view of Schaeffer’s dire predictions, he had independent survey made which was then read to HICOMers. Adenauer remarked that although independent survey not as extreme as Schaeffer’s memo, it nevertheless essentially verified Schaeffer’s views.
4.
I said that we wld study the statement and discuss it with the Chancellor shortly. I felt that I cld not make a detailed reply but desire to call his attention to fact that while I was surprised in rate [Page 49]of expenditure in Mar, I nevertheless believe it did not represent any extravagances and was a consequence of the low rate of payments made in previous months. Mar expenditures for FY 1951/1952, including Mar, were within the occupation cost budget. FinMin had deluded itself if it believed that low rate of payments cld continue for prolonged period of time. I told the Chancellor all of the Allies have made substantial efforts to keep their costs down and to honor the commitment made by the ForMin. Adenauer said he did not want to question the justice of the Mar payments at this time but will investigate. However, even if these payments were justifiable, it did not alter the fact that the FedRep was approaching a dangerous financial condition. We concluded by requesting that the memo be given extremely limited distribution.

Part II.

1. Memo submitted by Chancellor contains two main points:

(a)
Occupation costs at rate DM 1.4 billion Mar (actual), DM 850 million (estimated) April and average DM 600 million in subsequent months to July 31 justified to FedRep by HICOM will result in deficits which cannot be covered without raising DM 1.5 credit ceiling with Central Bank. This is impossible because of inflationary result.
(b)
As result TCC hearing, FedRep was prepared to make defense contribution DM 11.25 billion, divided DM 10.2 billion for cost Ger contingents and Allied troop support costs; and DM 1.05 billion for other public expenditures of defense character. Allied positions and already agreed sections of general agmt and conventions wld mean additional burden of almost DM 2 billion in FY 1952/1953 over and above DM 11.25 contribution (occupation damages, resettlement of occupation evicted persons personal restitution, compensation of persecutees, exemptions from indirect taxation and high cigarette/coffee rations. (See part IV below for details.)

FedRep in agreeing to DM 11.25 billion contribution was not prepared to assume additional burdens and, in fact, cannot because econ capacity limitations.

2. Solutions offered are point (a) reduction occupation costs in pre-contractual period, modification conventions on points (b) and/or provision of foreign aid. Otherwise FedRep must apply to TCC for re-assessment on ground points under (b) not previously taken into consideration and that econ expansion is not meeting TCC expectations.

3. Fol are analyses current situation:

Point (a) examination of FedRep’s budgetary prospects indicates that if occupation costs are limited to DM 600 million monthly average [Page 50]for Apr–July period as agreed HICOM (see our 24304) Fed budget will at least balance and probably show surplus.

(DM million)

(Figures are in five columns entitled “April, May, June, July, total period April–July”)

Federal expenditures

(A)
Occupation costs: 850, 500, 550, 500, 2400.
(B)
Non-recognized OC: 28, 30, 30, 32, 120.
(C)
Other: 930, 978, 1050, 950, 3908.

Total: 1808, 1508, 1630, 1482, 6428.

(DM million)

Federal revenues

(A)
Federal taxes: 1170, 1310, 1360, 1230, 5070.
(B)
Shared taxes: 190, 150, 520, 190, 1050.
(C)
Other: 95, 106, 155, 126, 482.

Total: 1455, 1566, 2035, 1546, 6602.

Deficit (minus) or surplus (plus): Minus 353, plus 58, plus 405, plus 64, plus 174.

(Estimate assumes no change in tax or expenditure laws, revenues slightly lower than previous period and expenditures slightly higher). If govt bill changing FedRep income tax share to 40 percent from present 27 percent effective by June 1, revenues and surplus will be DM 300–350 million higher for period. In event large deficit arising (which is inconceivable given our present info) FedRep had Mar 31, DM 854 million left under credits ceiling 85 Central Bank (Apr 30, DM 485 million according to memo) and already planned to sell at least DM 150 million in coins to Central Bank before July 31.

Past history of special non-rediscountable treasury certificates (these do not fall under DM 1.5 billion credit ceiling) leads us believe even further funds could be made available through new issue in spite of argument in memo to effect that Central Bank having difficulty refunding those already outstanding.

4. Keystone of favorable outlook presented above is the matter of giving effect to our DM 600 million average monthly limitation beginning Apr 1. AgSec (52) 331 dated 8 April5 to Chancellor announcing limitation was phrased “issue payment documents” rather than actual expenditures as agreed HICOM (HICOM/M (52) 6 date 3 Apr5) and earlier HICOMEUCOM agmt (our 18786). This [Page 51]done to protect against FedRep delaying payment on bills at end of pre-contractual period so that payment wld have to [be] made under Allied defense costs. FedRep apparently believes, as indicated memo, that limitation does not apply to Apr expenditures up to 25th day when Federal accounts on 1951/1952 occupation budget close since orders for these payments presumably issued in Mar. Have already secured UK agreement that limitation agreed HICOM was for all expenditures from this or previous years budgets by Ger payment offices between Apr 1 and July 31. If Fr agreement received, HICOM can clear up FedRep misunderstanding and satisfy fears expressed in memo on pre-contractual period without giving away anything not already conceded.

Part III.

1. At meeting Schaeffer/McCloy/Binns May 2, we stated that we on our side are also very surprised at expenditure figure for Mar of DM 1 billion 460 million. We pointed out that liquidation or reduction of carryover in itself created a healthier situation and that we wld do everything in our power to keep occupation cost expenditure within the four months period Apr 1 to July 31 to total of DM 2.4 billion on an average monthly rate of DM 600 million regardless of fact that Apr expenditure amounted to DM 900 million. We pointed out that a carryover from the occupation period into defense period was politically much more difficult for us than carryover from one defense period to another defense period.

2. Min Schaeffer stated that when he gave his agreement to the Ger defense contribution of 850 DM million per month, he had done so on basis of his assumption that occupation costs wld be about DM 500 million per month and that he was justified in making that assumption because average expenditure in the past years had been at that rate and that an increase in troop strength wld be counter-balanced by economies. He had assumed that the carryover from the last occupation cost period wld be handled in the same way as in previous years and that there wld not be an accelerated liquidation. His agreement was further based on assumption that there wld be no additional expenditure of a defense nature outside the DM 850 million per month which are now contained in occupation costs budgets or in budgets for non-occupation costs. He thought that we now had only two alternatives:

a.
To accept the fact that there was no meeting of the minds at the time of the previous agreement on defense contribution and to reopen the discussion or,
b.
To invoke the clause that the FedRep can request aid if conditions do not permit her to fulfill the obligations.

[Page 52]

3. We pointed out that we cld not accept his contention that there had been no meeting of minds since we had emphasized at the time of the agreement that occupation costs wld probably be as high as DM 600 million per month and that the responsibility for his political difficulties rested on him because of his published statements, contrary to the info we had given him, that occupation costs wld be limited to DM 500 million per month.

In regard to second alternative FedRep cld, of course, request additional aid but we cld make no statement as to whether such a request wld be received favorably. We pointed out, however, that in our view situation not in accord with that envisaged in Adenauer/ForMin Lisbon agreement,7 since in that agmt FedRep cld request aid if FedRep ran into serious financial difficulties in defense period as result its defense contribution. Since defense period had not even commenced we cld offer Schaeffer no encouragement.

Part IV.

1. Comments on charges which memo states were not taken into account by TCC.

(a)
Occupation damages. FY 1953 DM 400 million. Total DM 1500 million. Understand State/Defense have agreed these charges not to be included as part Ger defense contribution. A major objective is to avoid payment dollars for liquidation occupation. Ger estimates being reviewed by forces.
(b)
Non-recognized OC. FY 1953 DM 450 million. Main category is resettlement charges for persons evicted from property taken over by Allied forces. Gers desire charge this against (a) Allied support costs or (b) global contribution. So far we have insisted neither possibility acceptable.
(c)
Restitution claims. FY 1953 DM 150 million. Total DM 1500 million. Preliminary check indicates figures conform Allied estimates. Charge spread over ten years.
(d)
Persecutee claims. FY 1953 DM 350 million. Total DM 3000–3500 million. Understand Laender scheduled to bear about 2/3 rd’s burden. Ten year spread.
(e)
Tax exemption and smuggling by forces. Imputed tax loss FY 1953 is DM 500 million. Not properly classifiable with (a)–(d).

2. Foregoing figures wld give actual FedRep burden not taken into account by TCC of about DM 1235 million. If defense period commences later than 30 June 1952, amount wld be correspondingly reduced; also defense burden itself wld be less than DM 11250 million.

3. While in our judgment prospective short-run fin position does not give rise to alarm, we are somewhat less sanguine in respect to entire FY 1952/1953. However, believe it too early to make any [Page 53]judgment now because of many variables including fact that any delay in ratification beyond June 30 will reduce defense contribution below DM 11250 million.

Danger in situation lies in fact that Schaeffer and memo essentially correct in stating that EB of TCC had not considered additional burdens enumerated above in assessing FedRep’s fin capacity (because FedRep had not agreed to assume all these obligations at time of TCC hearing FedRep had not brought all of them out). In view Adenauer’s alarm over situation and Schaeffer’s determination to obtain some relief it may become advisable for us to agree to some form of non-recognized occupation costs in defense contribution, probably in Allied share thereof. This might fend off likelihood of FedRep request for new TCC hearing, request for additional aid, or attempt by Schaeffer to get Chancellor to repudiate Lisbon agmt as bargaining device to reverse AHC/Chancellor’s agmts on claims, restitution: et cetera.

McCloy
  1. Repeated to Paris for Draper and to London and Heidelberg.
  2. Document 24.
  3. No copy of the memorandum has been found in Department of State files, but its contents are summarized in Part II below.
  4. Telegram 2430 reported that at a meeting on Apr. 16 Schaeffer had protested about the occupation expenditures for March which had risen to DM 1,368 million as compared to DM 577 million for the previous month. (762A.0221/4–1852)
  5. Not found in Department of State files.
  6. Not found in Department of State files.
  7. Telegram 1878 reported that at a meeting on Mar. 5 EUCOM and HICOG had agreed to limit U.S. occupation costs to DM 1020 million for the 4-month period beginning Apr. 1. (740.5/3–752)
  8. See footnote 2, Document 20.