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

Department of Defense Files

The Department of the Army to the United States Military Governor for Germany (Clay), at Berlin

top secret
priority

Washington, January 4, 1949.

WAR 82237. Personal to Clay from SAOUS. State [and] Army propose that initial position of US representatives concerting reply to neutral committee be substantially that in Paragraph 5 of State 4792 repeated to Berlin as 2026.¹

In view British French comments thus far, US minimum position is now proposed:

A. Immediate tripartite agreement on currency changeover in west sectors by 30 January.

B. Contingent on British French agreement to A above, US would reluctantly agree to a reply to neutral committee set forth in following paragraphs providing neutrals are informed simultaneously of early prospect of currency changeover in view continuing deterioration of financial situation in Berlin.

“Objective of Western Powers is to restore unified municipal administration and full quadripartite control in whole Berlin. This was fundamental promise [premise?] August 30 Directive.² However, Soviets after having already resorted to illegal instrument of blockade, have since made further attempts to establish their domination over Berlin by splitting municipal administration, boycotting duly-held municipal elections of December 5, and creating illegal city government in Soviet Sector purporting to claim jurisdiction over whole city.

Until reunification city administration and restoration full quadripartite control is attained, no reliance can be placed upon administration Berlin currency and trade matters through German bodies exercising jurisdiction in whole of city or through specialized quadripartite agencies. Most serious difficulties arise in any case in attempting to contrive voting provisions in such bodies, as illustrated by neutral committee tentative recommendations.³ In bodies operating by majority vote, dominance inevitably conferred on 1 side or other, and provisions for periodic alternation of deciding voice can scarcely be regarded as acceptable solution by either side. On other hand, in bodies operating by unanimous vote, action can be frustrated by unilateral veto, and it is fundamental point that in most currency and trade matters action is necessary to sustain economic life Western Berlin while inaction would stifle Berlin economy. This, for example, neutral committee’s proposals for voting power in board directors Berlin Branch Bank of Emission clearly give 5–3 preponderance to Soviet-dominated directors, while positive intervention by quadripartite financial commission or sub-commission could be frustrated at will by Soviet veto. Proposed periodic alternation in balance of voting power in Berlin board of trade could only lead to jockeying for advantage by side having temporary dominance, and again matters reserved to financial commission or sub-commission could become subject appropriate action if Soviet refrained from exercising veto.

It is therefore imperative Western Powers obtain advance agreement with Soviets upon operating standards for currency and trade which will be to maximum extent self-operative and sufficiently concrete so that their breach will be clear and demonstrable. Where such standards are dependent upon ascertainment facts, Western Powers believe fact-finding function should be entrusted to neutral commission to be named by members of SC not parties to Berlin dispute.

Neutral committee report provides entirely inadequate safeguards to economy Western Berlin in form concrete operating standards to be embodied in advance agreement. Certain major inadequacies follow:

1. No provision in terms of initial currency changeover for remedying inequities which would arise from fact that terms of last summer’s Soviet currency reform were more favorable to mark holders than Western reform. A notable instance is proposal to convert B-mark savings deposits at 1:1 although these were derived from a 10:1 conversion under Western reform whereas comparable deposits were converted at much more favorable ratios under Soviet reform.

2. Obscure and inadequate provisions for reassignment of banking assets and liabilities among new sectoral institutions, and absence of any provisions for restoring solvency of financial institutions (which was undermined by provisions of currency reforms) through supplying them with cash or rediscountable securities. Even existing B-mark cash holdings of banks are denied exchange into eastmarks.

3. Relating future currency supply of Berlin to fluctuations in currency circulation in Soviet Zone. No reason believe initial base is equitable (especially in view of 1 and 2 above), permissible expansion bears no direct relation to Berlin’s legitimate needs, and necessary reliance upon Soviet statistics concerning currency developments in zone would be most hazardous.

4. Further limitation of currency supply through insistence upon ‘eligible paper’. Soviet veto in banking sub-commission could frustrate initial establishment of eligible paper categories and unless these could be established in unchallengeable concrete form administration by loaded board of directors of Berlin Branch could deprive Western banks access to rediscounts.

5. Enforced adoption in Berlin of price, wage, tax, and currency circulation regulations prevailing in Soviet Zone. Most of these regulations are obnoxious in principle and in detail to Western administrative concepts.

6. Enforced reliance of Western (as well as Eastern) Magistrat upon banking facilities of Berlin Branch of German Bank of Emission, and required use of same institution as clearing agency for external payments of Western sectors. These prescriptions seem unnecessary, and these functions for the Western sectors could better be performed by Western Stadtkontor.

7. Necessity for quadripartite approval for external trade agreements, in absence of which trade would be allowed to proceed only under hampering restrictions (and possibly not at all during alternating periods of Soviet dominance in Berlin board of trade).

8. In particular, necessity for quadripartite agreement upon volume of food, fuel, and power imports, and upon extent to which such imports should take form of aid (i.e. remain uncompensated by exports). Western Powers have consistently asserted right to import without restriction goods in these categories, and should have right to seek payment in form of exports from their sectors when this is feasible, without necessity of Soviet concurrence.

9. Limitations upon disposition by Western Powers of local currency proceeds from uncompensated imports. Again Western Powers have previously insisted on free disposition of such proceeds. The severity of neutral experts proposed limitations depends largely upon how broadly category of “occupation expenses” is interpreted, but in any case appears no justification for proposed blocking of unexpended proceeds at end each year.

10. Stipulation that eastmark-westmark exchange rate must remain 1:1 for trade purposes. Whatever justification might be alleged for this rate under present circumstances, it is obviously unreasonable to freeze it at that level in face of likely future fluctuations in purchasing power of 2 currencies. Given trade pricing formulae proposed by neutral experts (which are themselves deficient), it is clear that if eastmark should suffer a relatively great depreciation, maintenance of artificial 1:1 exchange rate would impose heavy and entirely unjustifiable sacrifices upon Western zones in their trade with Berlin.

11. Absence of provision regarding amount of occupation costs to be included in municipal budget, this being left for subsequent quadripartite agreement.

Foregoing comments touch upon only few of more basic defects in committee’s proposals. There are large number of additional technical objections on matters of detail, some of which are nonetheless of crucial importance (e.g. absence of provision for automatic replacement worn-out notes, or for provision currency supply in needed denominations). Exhaustive listing of technical objections to particular proposals formulated by committee would serve no useful purpose since, in view Western Powers, these proposals do not provide basis for equitable and workable settlement under present conditions of split city administration in Berlin.

In absence of reunification city administration and restoration full quadripartite control, Western Powers believe only possible basis for settlement is clear recognition that de facto Western sectors are and should remain under sole administrative control of Western Powers, and that Soviets should seek appropriate protection their legitimate economic interests not through participation in administration currency and trade in Western sectors but rather through establishment appropriate operating standards in initial agreement and appropriate controls in the Soviet sector and zone over economic intercourse between those areas and Western Berlin. Committee has expressed its interest in making recommendations which would not ‘prejudice question of future arrangements concerning unified city administration which might be agreed upon by 4 powers.’ However, inescapably arrangements for currency and trade based upon reunification must be approached de novo according to circumstances at the time, and committees attempt to straddle present political dilemma must be judged unsuccessful.

Equitable and workable settlement regarding currency and trade giving appropriate recognition to de facto circumstance of split city might take following lines:⁴

1. With respect to initial currency changeover, allocation of an agreed block amount of eastmark currency to Western Berlin to be distributed there at discretion of Western Powers. This allotment should be sufficient not only to exchange all B marks in circulation Western Berlin (including those held by banks) on 1 to 1 basis, but also to provide banks with adequate cash reserves against their depositions (including new deposits to be created to compensate for relatively rigorous deposit writedowns undertaken last June in Western currency reform). In view present and prospective conditions in Berlin, very high cash reserves against deposits would no doubt be required, but amount required for this purpose would still not be very large relative to initial currency issue.

2. With respect to further supply of eastmark currency for Western Berlin, Western Stadtkontor should be established as central bank for that area and appropriate agreement be obtained as to supplies of fresh currency (in addition to facilities for exchange of worn out currency) to be provided that bank by German bank of emission. Agreement should provide free access to fresh supplies currency in appropriate denominations, against notes of Western Stadtkontor guaranteed by the Western Magistrat of Berlin, subject only to provision that bank of emission could refuse further deliveries (but not of course exchange of worn out notes) whenever a duly designated neutral commission had rendered judgment that effective price-wage level in Western Berlin was exceeding by agreed margin the comparable level in Soviet sector and zone. Price-wage level agreed as more reasonable criterion for currency needs than ratios of currency circulation to initial base, and also in view known Soviet reticence concerning currency developments in their zone, considered as much more ascertainable factor. It would be necessary, however, to agree upon directive to neutral commission giving guidance as to nature its calculations (for example providing that it should give appropriate weight to free market as well as official prices and wages), and conferring upon it authority to make on-spot investigations in both Western sectors and in Soviet sector and zone.

It is submitted that only legitimate Soviet interest in how Western Berlin’s currency and credit system is operated is to assure no disproportionate inflation which would cause supplies to be drained off from Soviet sector and zone (and simultaneously increase amount free spending power of persons in the Soviet controlled areas). However, Soviets could probably secure full protection against this potential threat by enforcing controls in Soviet sectors and zone over movement of goods between those areas and Berlin. Would not be necessary, of course, for Soviets to forbid such traffic, but only to assure that it resulted in 2-way net balance. Still, if Western Berlin followed completely different monetary policy from that in the Soviet sector and zone so that level of prices and wages in Western Berlin greatly surpassed that in Soviet area, suggested Soviet controls might conceivably be subjected to irresistible pressure. This possibility considered remote, especially since if blockade lifted and satisfactory basis for trade established (see below) supply situation in Western Berlin should be as in Soviet dominated areas. Nonetheless Western Powers prepared make concession mentioned above to assuage possible Soviet fears.

With these protections, there appears no valid Soviet interest in character or administration of detailed provisions regarding currency, credit, prices, wages, and taxes in Western Berlin.

3. With respect to importation of relief supplies and external trade of Western Berlin (including its trade with Soviet sector and zone), Western Powers should be accorded unrestricted right to regulate such matters in their sectors as well as external payments in connection therewith and disposition of local currency counterpart of uncompensated imports. All goods should have free transit rights in both directions between Western Berlin and the Western zones along agreed communication paths. Right of Soviets to exercise in their sector and zone controls over economic intercourse between those areas and Western Berlin provide them adequate protection against persons in Soviet sector and zone making unwarranted use of free transit facilities available Western Berlin.

4. With respect to budgetary problems of Western Magistrat, including payment occupation costs, these matters too should be recognized as under exclusive jurisdiction of Western Powers. There appears no legitimate Soviet interest in these matters which would not be protected by limitation on total currency supply to Western Berlin and Soviet control over economic intercourse between Western Berlin and Soviet sector and zone as provided above.”

Your comments are requested to be in Washington on 5th to permit dispatch of final guidance on 5th to London.⁵

Knapp arriving London Thursday morning. Request Warner join him there Thursday morning if possible. He should be prepared with exposition of financial deterioration due to failure to changeover currency. Please repeat comments to London for info Knapp.

We consider here that vital step now is to get British French agreement to introduction in Western sectors of B mark having full legal tender status in Western zones and that this agreement should be definite and for a specific date. In addition to general and detailed comments please advise whether in your opinion the suggested plan would provide an acceptable modus vivendi.

[ Draper ]

1. Not printed; paragraph 5 stated that the Technical Committee’s Report was not workable since its fundamental premise, a unified Berlin, no longer existed. (740.00119 Control (Germany)/12–2948)
2. The text of the August 30 Directive to the Military Governors in Berlin is printed in Foreign Relations, 1948, vol. ii, p. 1086.
3. Regarding the technical committee’s preliminary draft recommendations, see editorial note, p. 643.
4. In WARX 82308, January 5, to London, not printed, the following phrase was added at this point: “always contingent on lifting of blockade upon acceptance of any neutrals proposal on this subject.” (Department of Defense files)
5. In CC 7310, January 5, from Berlin, not printed, Clay replied that he had no comments to make on the maximum and minimum positions outlined in this telegram. (Department of Defense files)