Dismantling the Reparations

Upon the conclusion of WWII, the Allies were faced with forming a reparations policy that would compensate victims of German aggression and eliminate German war potential, while balancing these concerns against the need to economically reconstruct the rest of Europe. Since Germany’s currency and financial system was all but defunct in the immediate post-war period, all reparations had to be taken either from Germany’s current industrial production or through the dismantling and allocation of its capital equipment, which included plants and machine tools. Reparations were also taken informally in the form of German POW labor, but the focus of this paper will be on goods and capital taken from Germany explicitly recognized by the Allies as “reparations.” In the Potsdam Agreement of July 1945, the Allies decided to split Germany up into occupation zones to facilitate the process of appropriating reparations. The British situation exhibited a unique problems, based largely upon the fact that the British occupation zone was the most industrialized zone of Germany. It contained the Ruhr, with all the coal mines and factories, and was the most export-oriented and trade-dependent zone. As a result, the British faced severe balance of payments problems in which its zone’s defunct economy could not afford to pay for its own necessary imports. The UK itself, laden with post-war debt, was in dire financial straits. Every dollar of reparations extracted from the zone could delay the zone’s attainment of economic self-sufficiency, and thus prolong its drain on British resources. In an attempt to ease the UK’s financial burden, the British and American zones of occupation fused in January 1947 into a bizone. This paper will examine the UK’s motivations for its reparations policy and how it balanced demilitarizing Germany with reviving the German economy. The strength of the

German economy allowed it to carry out a calamitous war, and reparations were one way of reducing this war-making capacity. In addition, the acquisition of reparations could help Britain start repairing its own capital stock. However, the large and highly industrialized German economy was crucial to the economy of the rest of Europe, and its recovery remained a high priority for British policymakers through the saga of reparations. Even more pressing was the problem of balance of payments, which proved to be a huge drain on Britain’s financial resources. Britain also found its occupation zone caught within the nascent stages of the Cold War, being played out largely the US and USSR. All these varying concerns played into the reparations questions of what to take, how much to take, and where to take it from. The unfolding of reparations sheds light upon Britain’s priorities regarding its occupation zone. The first stated purpose of the initial reparations plan, signed on 27 March 1946, was the “Elimination of the German war potential and the industrial disarmament of Germany.”1 This goal was to be accomplished by a variety of industry restrictions and prohibitions to lower the economic capacity of Germany as a whole. Reparations would be used to transfer industrial might from Germany to the Allies. Suppressing German industry was not only a security concern, but also promised to bolster British exports. Prior to WWII, Germany was one of the largest exporters to the world market. By aiding British industry while lowering German industrial capacity, Britain could hope to raise their export earnings. One estimation stated that if Germany and Japan’s exports were cut to one-half their pre-war level, and world trade in manufactures remained the same, Britain’s share of world trade would increase 20%

1

The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 3.

2

to about $400 million. Even accounting for Germany and Japan’s loss of importing power, Britain would still gain $340 million dollars.2 The Morgenthau plan, originally conceived by British and American policymakers in 1944, involved the complete deindustrialization of Germany with these considerations in mind. Its purpose was to eliminate German war potential and improve the position of other industrial nations’ economies by leveling German industry. Because this plan would have involved the mass starvation of millions of Germans, it was eventually discarded. However, the rest of this paper will continue to examine how much the attitude of the Morgenthau plan continued to inform British and American reparations policy. Though Britain could gain in export power from reparations reductions of Germany’s export industries, Britain still had reasons to be interested in reducing reparation payments as much as possible. The German populace required an essential amount of imports in order to survive, and due to their desolated economic condition, the Germans could not pay for these imports themselves. Thus, humanitarian concern compelled the British to fully subsidize the imports to avert the mass starvation of scores of German civilians. Providing food, the most crucial import to Germany, would require Britain to spend more of its dwindling foreign exchange since Britain could not domestically produce enough food to supply even its own populace. Thus, the average taxpaying British citizen would have to subsidize German imports until the British zone recovered, and reparations could only hinder recovery. Moreover, Germany’s low industrial capacity threatened to undermine their ability to deliver reparations from production. If the cost of humanitarian imports to Germany was greater than the amount of reparations that Britain could extract, Britain had every interest to reduce

2

MacDougall (March 1947), p. 92.

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reparations to both itself and the other allies for the sake of rebuilding the German economy to the point of self-sufficiency.

The Cold War The Cold War gave British policymakers yet another incentive to reduce reparations. The United States and Britain believed that an economically weak Germany was more likely to succumb to Communism. From the very first discussions regarding reparations, the US and UK tried to negotiate down the level of reparations while the Soviets tried to raise them. The USSR, who lost the most of the Allies during the war, wanted to use reparations from Germany to rebuild itself. In addition, the Soviets feared that Germany would be able to rebuild itself just as rapidly as it did before WWII, and militarily threaten the USSR again. At the Potsdam Conference, the USSR proposed a plan that allotted $10 billion to itself, $5 billion to the US, and $5 billion to Britain. The US and UK balked at the idea of extracting $20 billion from Germany, maintaining that such a sum was unfeasible. After days of haggling, the US suggested dividing Germany into separate occupation zones, from which each occupying power could draw their reparations. The USSR controlled the largest and most agricultural zone, whereas the British took control of the most industrial zone, including the Ruhr. The Soviets were also entitled to receive some reparations from the industrialized zones of Germany in addition to any reparations it could glean from its own zone. Though the US and UK never intended to carve up Germany, the boundaries established by this plan to manage reparations payments eventually hardened into the Iron Curtain of the Cold War. Soviet demands were incorporated in the March 1946 plan as part of the guiding principles, which included elimination of the German war potential and payment of

4

reparations to victims of German aggression. These pro-reparation statements were balanced against a restraining principle, supported by the US and UK, of “Retention in Germany, after payment of reparations, of sufficient resources to enable her to maintain herself without external assistance.”3 The British were adamant about making sure the reparations would not compromise Germany’s economic survival, and insisted upon some adjustments to the Potsdam Agreement, stipulating that “Germany will be treated as a single economic unit” and “That exports from Germany will be acceptable in the international market.”4 If the free movement of goods throughout Germany were obstructed, the British zone would suffer since it depended upon the food produced in Russia’s agricultural zone. The USSR’s failure to treat Germany as a “single economic unit” led Britain to deny reparations to the USSR. Part of the initial agreement of this plan was that the USSR would receive capital equipment and plant parts from Britain’s industrialized zone. In the early stages of reparations, there was an ongoing argument on whether reparations to USSR had priority over imports to the US and UK zones. The USSR wanted reparations, which it needed to rebuild itself, and the US and UK preferred to use Germany’s resources to fund imports, which Germany needed to in order to rebuild itself. The Russians failed to treat Germany as an economic whole, and Britain found itself subsidizing German imports. On 27 April 1946, the British decided that priority must be given to funding British imports to Germany rather than transporting German capital equipment to the Soviets. On 4 May 1946, Britain decided that the dismantling of plants for delivery as reparations would be suspended until the zone was self-sufficient. In addition, reparations from current production ended completely. Besides the fact that current production was dismally low in immediate post-war Germany, the British

3 4

The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 3. The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 3.

5

believed that “In the then state of Germany, it was obvious that reparations from current production could only be reparations at the expense of the British and American taxpayers.”5 Throughout the implementation of reparations, virtually none was taken from current production since it could be exported in exchange for vital imports. In 1946-7, the Americans refused to participate in the dismantling of plants due to concern over Germany’s economic health and balance-of-payments. On 12 March 1947, the US’ Truman doctrine was issued, committing American to halting the perceived Communist expansion in Europe. In June 1947, the US’ Marshall Plan was introduced to aid the economic reconstruction of Europe. Germany came to be seen not as a defeated and formerly dangerous fascist nation, but as a potential ally in the fight against Communism. The Morgenthau Plan mentality, which viewed Germany as a vanquished enemy, gave way to the Truman doctrine, which cast Germany as an essential ally in capitalist democracy. As much as the Soviets tried to extract reparations from the US and UK zones of occupations, the US and UK resisted. The US wanted to economically build Germany into a bulwark against the USSR.

Food, Coal, and Steel Even without Cold War concerns, Britain recognized the need to economically revive its zone early on. The costs of food imports into the occupation zone were so exorbitant that the UK could not expect to recover its losses from reparations without reviving the German economy. In October 1947, the British government stated the fundamental elements girding German industrial recovery: “The volume of industrial production in the British zone has only
5

“Statement by the Control Commission for Germany (British Element) Regarding Reparations from the Western Zones, Dismantling, and ERP” (24 September 1948), DGO, p. 331.

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increased from 33 per cent. to 34 per cent. of the 1936 figure. The factors which are preventing industrial recovery are lack of food, lack of coal, and lack of incentive.”6 In addition to coal and food, the recovery of the steel industry was also a prerequisite to German economic rehabilitation. Prior to the war, steel and steel related products were Germany’s largest export, followed by coal. Steel was needed to rebuild railroads and locomotives for food and coal transport. It was also required for the manufacture of mining tools and other industrial equipment. On the other hand, the steel industry was itself dependent upon coal. Coal from the Ruhr provided the power that drove not only the rest of German industry, but that of Britain and Europe as well. Food entered the equation as a restraint on both coal and steel production, since German miners and steelworkers could not work efficiently without sufficient rations. Balancing the mutual interdependence between food, coal, and steel proved to be a major concern in British reparations policy. Upon taking up administration of their zone, the British immediately endeavored to increase agricultural output. Lack of food was considered Germany’s most vital problem, and addressing this problem proved to be the largest drain on British resources. Prior to WWII, Germany could only supply 85% of its food requirements.7 The British zone’s decreased post-war exporting power and Russia’s failure to treat Germany as an economic whole thwarted the zone’s ability to procure food without foreign assistance. In 1946, Britain had to import two million tons of food to its zone, along with over 200,000 tons of seeds. Indicative of Britain’s huge humanitarian and financial responsibility, the UK had to subsidize 60% of Germany’s bread, the main source of calories for Germany at that time.8 Food imports for Germany was an unsustainable tax burden upon British citizens.
6

“Extracts from the Eighth Report from the House of Commons Select Committee on Estimates, Session 19467: British Expenditure in Germany” (20 October 1947), DGO, p. 250. 7 British Zone Review (19 September 1945), Vol. 1, No. 1, p. 3. 8 British Zone Review (15 February 1947), Vol. 1, No. 37, p. 17.

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Emphasizing the critical importance of food to the German economy as a whole, the British government said, “The import of food should, at the present stage, be given the highest priority. Food is the key to the whole problem of German economy. If the Germans can be fed adequately, the restoration of the output of coal and consumer goods will automatically follow.”9 The intuition underlying this statement was that “a miner cannot work if he does not eat.”10 The winter of 1947 provided robust evidence for this relationship, when rising coal production abruptly fell due to severe food shortages. For this reason, Britain raised the rations for coal miners’ families above that of the standard ration for normal families. Coal production was crucial not only for German economic recovery, but also for the recovery of the rest of war-torn Europe. During this time, coal was usually the main bottleneck of industrial production. Thus, Germany’s inability to quickly and efficiently produce coal represented a serious restraint on the rest of European industry. In addition, the average Germany family also needed to procure a minimum amount of coal simply to provide basic electricity and heating before any of it could be exported. Heating needs during the winter drew coal away from export or from other German industries because coal consumption during the coldest months reached 2,500 tons per day.11 Though the initial March 1946 reparations plan placed various restrictions on most German industries, coal was exempt. The plan said, “Coal production will be maximized as far as mining supplies and transport will allow.” Instead of setting a maximum limit, the plan called for a minimum coal production of 155,555,000 tons a year, of which 45,000,000 tons was to be arranged for export to reparations recipients. With this goal in mind, the Allies decided that “the necessary supplies and services to this end will be arranged to give the
9

“Extracts from the Eighth Report from the House of Commons Select Committee on Estimates, Session 19467: British Expenditure in Germany” (20 October 1947), DGO, p. 258. 10 British Zone Review (19 September 1945), Vol. 1, No. 1, p. 3. 11 British Zone Review (25 October 1947), Vol. 2, No. 5, p. 18.

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maximum production of coal.”12 Thus, the coal industry was given priority in terms of access to labor, steel, and transportation. When Britain took over the Ruhr, only twenty-two mines were functioning, producing a dismal 2,000 tons per day. Within months, the British managed to help boost production to 60,000 tons per day.13 Coal production surpassed 200,000 tons per day in December 1946,14 and exceeded 318,148 tons per day in December 1948.15 The US and UK bizonal government set a target of 423,212 tons daily for 1952-53, which was actually 10% greater than Germany’s pre-war coal production in 1936.16 If coal was the lifeblood of industry during mid-twentieth century, steel was the flesh and bones. However, the steel industry was one of the most restricted industries and most attractive targets for allocation under the initial reparations plan. After the fusion of the US and UK occupation zones, the bizonal government determined that steel was a requirement for a balanced economy, since “steel and steel products… are the most needed and, therefore, the most dependable trade commodities.”17 Coal provided power while steel furnished the mechanical framework for industrial production. Steel production was itself a constraint upon coal production. The locomotives and train tracks damaged by the war depended upon the steel industry’s recovery for its own repair. In recognition of the significance of transportation problems, the British government said, “It is difficult to see how it is going to be possible to move any extra coal which the miners may produce.”18 By the end of 1945, the German transportation system could only handle a monthly lift of 2,200,000 tons of coal.19 This was

12 13

The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 7. British Zone Review (26 July 1947), Vol. 2, No. 2, p. 23. 14 British Zone Review (31 January 1948), Vol. 2, No. 8, p. 10. 15 British Zone Review (19 February 1949), Vol. 2, No. 20, p. 23. 16 Statistical Handbook of Bizonal Recovery (1949), p. 12. 17 “Revised Plan for the Level of Industry in the Anglo-American Zones” (29 August 1947), DGO, p. 241. 18 “Extracts from the Eighth Report from the House of Commons Select Committee on Estimates, Session 19467: British Expenditure in Germany” (20 October 1947), DGO, p. 252-3. 19 British Zone Review (26 July 1947), Vol. 2, No. 2, p. 23.

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hardly adequate when the reparations plan called for a minimum monthly production of almost six time that amount - 13,000,000 tons. Thus, Britain’s effort to maximize coal output would be futile without a concurrent plan to raise the production of steel for rail repairs. In December 1946, the Military Governor for the British Zone announced a decision to reduce coal exports by 350,000 tons per four-week period, which meant more coal for Germany and less coal for Britain and other European countries.20 This was a 10% reduction from the original quantity of coal slated for export. In addition, any increase in the export of electricity would be accompanied by a further decrease in the export of coal. One purpose of this reduction was humanitarian – German public utilities needed more coal. The other reason was to make more coal available to the German steel industry “in order to hasten the repair of vitally needed transport… and to build up the supply of mining machinery to the coal industry.” Because of coal and steel’s mutual dependence, the British had to balance the needs of both industries to accelerate the integrated recovery of the Germany economy. It is important to note that Britain reduced coal exports to itself for the sake of German recovery. Steel, under the initial reparations plan, was a restricted industry but the maximum allowed steel capacity was gradually raised. Originally, Germany was supposed to produce 5.8 ingot tons of steel each year and full steel-producing capacity was to be fixed at 7.5 million ingot tons a year.21 Even then, the British wanted their zone to produce 11 million tons a year, and only lowered this amount as a compromise with the Soviets, who wanted to limit German production to only 3 million tons a year. By April 1949, the target level of steel production was raised to 11.1 million ingot tons a year in accordance with Britain’s original

20 21

British Zone Review (21 December 1946), Vol. 1, No. 33, p. 15. The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 4.

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intentions.22 By the time Germany recovered, steel and steel-related products was again one of Germany’s largest exports, second only to coal. Despite the objective of increasing German steel production, Britain still wanted to collect German steel plant parts as reparations to repair its own industries. The level of 11.1 million tons a year set in the April 1949 revision of the reparations plan was still much lower than Germany’s pre-war steel production, which reached 22 million tons a year.23 All plants not contributing to the 11.1 million tons per year production goal were considered surplus capacity, thus leaving numerous plants available for reparations. In all, German iron and steel plants accounted for 30 per cent of equipment allocated to recipient nations, amounting to about $30 million in reparations.24 As damaging as these allocations may seem, collections of steel plants had a minimal effect on German economic recovery. Germany had a much larger capital endowment in 1945 than in 1939, consisting mostly of war plants. Much of the industrial equipment made available for reparations were the war plants that Germany no longer needed for its peacetime industries. In fact, half of the industrial plants eventually removed for reparations were war plants. In addition, the general chaos in Germany following WWII left plants largely underutilized. When the two million slave workers employed during WWII in the British zone were released, the zone faced a severe labor shortage. As for displaced Germans that returned to Germany to work, housing and transport problems hindered their re-absorption by the steel industry.25 And as mentioned above, food shortages and lack of coal proved to be serious constraints on the German steel industry. Thus, many German steel plants had neither the
22

“Washington Three-power Meeting: Agreement on Prohibited and Limited Industries” (8 April 1949), DGO, p. 393. 23 The Economist (19 January 1946). 24 The Economist (10 June 1950). 25 British Zone Review (21 December 1946), Vol. 1, No. 33, p. 15.

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manpower nor the electricity to be productive. Though the target level of steel production had been raised to 11.1 million yearly tons in 1949, the German economy was not able to reach this goal until after 1953. Idle and deteriorating steel plants could be more productive to Britain or to other European reparations recipients. In Germany, capital equipment far exceeded the ready supply of labor necessary for efficient use of the plants, while much of the rest of Europe faced the opposite problem of too little capital. Thus, the policy for dismantling steel plants therefore concentrated on maximizing the marginal productivity of the plant parts across Europe by distributing capital to where it would be most effective. The British government asserted that “It was only after Anglo-American experts, concerned primarily with Germany’s recovery, had assessed the limits to which her labour and raw material resources would stretch that a revised list of surplus capital equipment available from Germany for reparations was published.”26 Indeed, the number of plants listed on the surplus list scheduled for dismantling and delivery “by no means reduced the capacity of German iron and steel industry to the 11 million tons level suggested by Britain.”27

Fusion of the US and UK Zones One of the most significant ways in which the US and UK tried to improve Germany’s economy occurred in January 1947, when the two governments fused their respective occupation zones into the bizone. Though ideas regarding integration of the zones were mentioned before, the immediate catalyst for the fusion was the British zone’s economic woes. At the time, Britain was spending $320 million a year on their occupation zone while
26 27

British Zone Review (19 March 1949), Vol. 2, No. 21, p. 1. British Zone Review (21 December 1946), Vol. 1, No. 33, p. 15.

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the US zone was running an export surplus. A British Parliamentary Committee assigned to examining this problem “recommended integration of the zones as a first requirement.”28 This was hardly the first time Britain had requested economic integration. Their original stipulation in the initial reparations plan was that Germany should be “treated as a single economic unit.” The British zone, because it was the most highly industrialized, depended upon trade for its necessities more than any other zone. Within the triple relationship of coal, steel, and food, food proved to be the major restraining factor in British zone. “Inadequate food supplies diminished coal output, which in its turn reduced steel production on which the mining industry relied, and after the drastic food rations cuts in March 1946, a rapid decline in [the British] zonal economy ensued.”29 To make matters worse, Britain was heavily indebted to the US as a result of WWII. Because the Britain’s distressed financial situation prevented it from being able to continually subsidizing imports to Germany, the British threatened to halt coal exports, using them instead to rebuild the zone’s industry. An interruption in the flow of coal threatened economic recovery in the rest of Europe, so the US responded quickly and proposed a merger. The fusion of the British and American zones served to speed up Germany's recovery by eliminating trade barriers while cutting Britain's costs of administering its zone. In the 2 December 1946 agreement between the two governments, the US and UK declared their commitment to the principle of economic unity.30 The agreement would remove barriers of trade between the two zones and the two governments would share administrative responsibilities while providing imports. Imports consisted of agricultural imports and industrial inputs, the cost of which was to be offset by exports from the zones. Any
28 29

British Zone Review (4 January 1947), Vol. 1, No. 34, pp. 1-2. British Zone Review (4 January 1947), Vol. 1, No. 34, p. 1. 30 “Agreement Between the Governments of the United Kingdom and the United States on the Economic Fusion of Their Respective Zones” (2 December 1946), DGO, pp. 195-201.

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outstanding costs uncovered by exports would be borne equally by each country. The pooling of resources and exploitation of each zone’s comparative advantage promised to relieve the occupation’s drain on Britain’s resources. In December of 1947, the Americans agreed to take upon an even greater financial responsibility for the bizone. Because it was previously determined that all exports would be paid for in dollars, and Britain’s dollar resources were seriously strained, Britain could no longer afford to pay for bizone imports. Thus, the UK, after making a series of payments and provisions of imports for the end of 1947 and for 1948, “the liability of the Government of the United Kingdom to supply Category A goods and services shall… be discharged.”31 Category A imports consisted of foods, fertilizers, and other goods associated with either reviving agriculture or providing basic necessities. Following this agreement, Britain was called upon to supply only about 7% of the foreign aid to the bizone.32 The US, with its superior economic strength, assumed greater financial responsibility and a correspondingly predominant status in the bizone.

The Decline of the Reparations Plan Of the stated goals of the initial reparations plan settled in March 1946, that of bolstering German self-sufficiency became increasingly important as other considerations, such as the industrial disarmament of Germany. The US and UK shrugged off or ignored Soviet demands that reparations be given priority. They started dismantling the initial reparations plan, which called for a number of restrictions and prohibitions on industries that could be useful in war and made numerous plants available for reparations. One problem
31 32

Treaty Series (1948), No. 4, Cmd. 7301, p. 2. Statistical Handbook of Bizonal Recovery (1949), p. 3.

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with this plan was social; a rapidly deindustrialized economy would result in huge unemployment and civil unrest. Even more pressing upon the UK government was correcting the balance of payments dilemma. In August 1947, the UK and US agreed on a Revised Plan for the Level of Industry, which loosened industry restrictions and raised permitted capacity levels.33 The revival of Germany’s metals, machinery, and chemicals industries, previously considered a security threat to the rest of Europe under the original reparations plan, came to be recognized as essential to an economically healthy Germany and Europe in the August 1947 reevaluation. The revision allowed a level for these industries that amounted to only a 5 to 10% reduction from the 1936 level. In addition, though most reparations were to be taken from the metals, machinery, and chemicals industries, the revision asserted that “it is impossible to provide a self-sustaining economy in the bizonal area without materially increasing the levels in these industries.” Thus, reparations had to be reduced or delayed to fill the needs of Germany’s economy. While the March 1946 plan called for a reduction of industry to about 50 to 55% of the pre-war level in 1938,34 the August 1947 revision called for an increase to 100% of the 1935.35 This amounted to a 29% reduction of 1938 levels of industry instead of 50 to 55%. The US and UK projected that by 1952, the revised plan would allow a per capita production capacity of 75% of 1936. In reality, the German economy surpassed the 1935 level by 1950. The Morgenthau mentality, which called for industrial disarmament and reduction of Germany to an agrarian economy, was expiring. In its place was a realization that a healthy German economy was in all of Europe’s interests. By 1951, the only industries that still faced
33 34

“Revised Plan for Level of Industry in the Anglo-American Zones” (29 August 1947), DGO, pp. 239-45. The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 8. 35 “Revised Plan for Level of Industry in the Anglo-American Zones” (29 August 1947), DGO, p. 240.

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significant restrictions were ones with direct war potential, such as chemicals, shipbuilding, and high-tech industries. Whereas the March 1946 plan listed 1,683 plants for reparations, that list had been reduced to 700 plants by April 1949 to allow for greater German industrial capacity.

Did Britain Win or Lose from Reparations? Figures in this section will be expressed in postwar prices, ranging between 1946 and 1949. There are certain limitations to these numbers, since it was during this period that both the US and UK devaluated their currency. The devaluations point to the underlying inaccuracies in exchange rates and price levels throughout international currencies at this time. Despite these distorting factors, financial statistics regarding British occupation zone unequivocally reveal that the costs far outweighed the benefits. In 1936, an average year for the pre-war German peacetime economy, the region that became the bizone was importing $1 billion and exporting $1.75 billion.36 The bizone area accounted for the bulk of Germany’s pre-war food imports. Though the initial March 1946 reparations plan heavily restricted the metal-related exporting industries, the plan still assumed that total exports from all of Germany would reach $2 billion in 1949, enough to pay for both imports and the costs of occupying Germany.37 However, by the end of 1946 Britain expected to have spent hundreds of millions of dollars on food imports to its zone alone, making up almost two-thirds of total imports. Compounding these costs was occupation expenditure, which equaled or exceeded expenditure on imports.

36

In 1947 prices. From “Revised Plan for Level of Industry in the Anglo-American Zones” (29 August 1947), DGO, p. 241. 37 The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 8.

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After the US/UK fusion in January 1947, the British and American governments estimated that they would have had to pay $1-1.25 billion in food imports to the bizone for the year 1947 out of an estimated $2 billion worth of total imports.38 Each government also agreed to pay $62.5 million to purchase imports of raw materials and industrial equipment to the bizone.39 Dismantling German plants and shipping them out as reparations while the US and UK imports industrial equipment would have been absurd, so the list of German plants available for allocation kept shrinking. Both the US and UK were still responsible for sharing the financial burden of providing for necessary imports of food-related goods. By October 1947, Britain had paid $348,244,107 to sustain the zone. Of $412 million worth of imports, the British zone could only afford to pay for $63 million of it by itself through exports and other forms of payment.40 In fact, German exports could only pay for less than 8% of its total imports. Given this balance of payments, the March 1946 plan turned out to be excessively optimistic. Whether the British and Americans had originally intended to comply with the plan or not, restrictions and reparations inevitably had to be reduced to repair Germany’s exporting power. After the amendment of the bizonal fusion agreement in December 1947, Britain was only liable to pay $70 million a year, which amounted to only 7% of total foreign aid to the bizone. By 1948, the bizone was reporting an export surplus of $271,110,531 over non-food imports.41 By February 1949, British military governors reported that export earnings were sufficient to pay for over 90% of food imports.42 And finally, on 1 October 1949, the US and UK transferred all assets of the Joint Export-Import Agency, the bureau responsible for the
38 39

“Revised Plan for Level of Industry in the Anglo-American Zones” (29 August 1947), DGO, p. 241. Report of Price, Waterhouse & Co. (1950), p. 3. 40 “Extracts from the Eighth Report from the House of Commons Select Committee on Estimates, Session 19467, British Expenditure in Germany” (20 October 1947), DGO, p. 250. 41 Report of Price, Waterhouse & Co. (1950), p. 4. 42 British Zone Review (19 March 1949), Vol. 2, No. 21, p. 11.

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bizone’s foreign trade, to the West German government. At that point, the Germans no longer needed US and UK foreign assistance to purchase their necessary imports. After paying for imports to their zone and for occupation costs, what did the British actually gain in the form of reparations to offset the costs? Under the reparations plan administered by the Inter-Allied Reparation Agency (IARA), there were two types of reparations. As explained before, reparations were not taken from current production for fear that it would hinder German industrial recovery. Thus, export revenue was used to pay for imports to Germany rather than allocated as reparations to other countries. Category A reparations consisted of German external assets and captured German supplies, and Category B reparations were industrial capital equipment, consisting mostly of plant parts, machine tools, and ships. For each of the two categories, every recipient government was allowed to “draft” a certain percentage of available reparations, with their percentages based upon how much they were damaged by Germany during the war. The June 1951, the IARA report revealed that, up to that point, Britain had drafted approximately $85 million in reparations from each category. Britain significantly underdrafted Category A reparations by drafting only 16.38% out of an entitlement of 28%.43 Britain also underdrafted in most subsets of Category B except for German merchant shipping. Of the 10,870,000 gross registered tonnage of ships the UK lost in WWII, the British managed to gain back 353,406 tons in reparations. The merchant shipping proved to be a major asset because 97% of the ships slated for allocation were already available by May 1946.44 The timing of the reparations was important because they were most helpful to recipient countries when received immediately after the war. The IARA asserted that,

43 44

IARA (1951), p. 20. IARA (1951), p. 23.

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Although the amount of industrial capital equipment received as reparation is small compared with the amount originally expected to be made available, it has made a substantial contribution to the post-war economic recovery of Member Governments. This contribution was frequently of particular importance because, in the immediate post-war period, much vital equipment delivered as reparation could not have been obtained from other sources, without a delay of several years.45 Because the damage caused by war left many countries with a lower capital endowment than their economy was geared for, reparations could help them recover some of their lost productivity. Plants that would otherwise have taken years to rebuild could immediately be assembled from German plant parts and begin manufacturing goods. However, most reparation deliveries were not as prompt as the IARA claimed. Allocations were not only reduced, but they were also delayed to allow German industrial recovery. Only 20 plants were made available by May 1946 out of 667 plants slated for dismantling, 490 of which were in the British zone. By the end of 1946, only 110 were available. This figure sluggishly raised to 244 by the end of 1947, and to 400 by the end of 1948.46 Allocations were delayed partly because the plants could not be dismantled fast enough and largely due to the fact that Britain wanted to maintain its zone’s industrial capacity. Some industries that were considered essential to German industrial recovery were completely eliminated from the list of available reparations. Inland water transport was slated for reparations, but in November 1947 “the Agency was informed that, owing to the heavy losses inflicted on German inland water transport during the war, it was unlikely that any would be made available as reparation.”47 The Final Report of the IARA in 1961 stated that Britain received $180 million of reparations. Because Britain was the second-largest recipient of reparations, right behind the

45 46

IARA (1951), Annex 20, p. 1. IARA (1951), p. 25. 47 IARA (1951), p. 24.

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US, some suggested that Britain excessively pursued reparation deliveries. “The purpose of further reparations appears to be purely to restrict German industrial power, at best for reasons of security, and at worst, to hamper German competition.”48 The British government maintained that “It is not the policy of His Majesty's Government to restrict Germany's ability to compete in world markets in the interests of British trade; and the Level of Industry Plan, which leaves intact many industries competitive with our own.”49 The evidence sides with the British government. The cost of imports to the zone far exceeded any competitive advantaged Britain could have gained through decreased German exports. German industrial revival was largely the result of American and British policies of reducing reparations. Though the original reparations plan aimed for a reduction of the German economy to 55% of its 1938 level, the plan was continually adjusted such that the German economy was able to recover to its 1936 level by 1950. Also, the $180 million Britain collected in reparations is substantially less the $5 billion Britain theoretically would have received under the Soviet plan, which the UK earnestly opposed. Compared to the several hundred million dollars Britain paid for imports, the $180 million received in reparations was mere trifle. Accelerating German economic recovery to the point of selfsufficiency by opposing reparations was the best thing Britain could do to recover its losses in administering the occupation zone. By 1951, most of Germany’s major reparation obligations had either been paid or cancelled. Afterwards, West Germany’s rehabilitated economy demonstrated vigorous growth, outpacing the UK’s own economy. The history of reparations reveals Britain’s role in restoring sound foundations for the German economy. The UK managed the triple
48 49

The Economist (10 June 1950). “Statement by the Control Commission for Germany (British Element) Regarding Reparations from the Western Zones, Dismantling, and ERP” (24 September 1948), DGO, p. 332.

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relationship between food, coal, and steel in its industrialized zone to maximize the rate of recovery despite a number of restrictions. The most notable hindrances were lack of food and the Soviets’ insistence on reparations and the disarming of Germany. The British spent their dwindling foreign exchange to supply its zone with imports while eliminating reparations deliveries to the USSR and loosening industrial restrictions. After the fusion with the US zone, the Americans largely took over the task of reviving the German economy, but could not have done so without the UK’s commitment to its zone in earlier years.

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Bibliography British Zone Review (1945-1949), Hamburg. Control Comission for Germany (British Element) (17 March 1946), The Plan for Reparations and the Level of Post-war German Economy, in Accordance with the Berlin Protocol, Berlin. The Economist (1945-1951), London: The Economist Newspaper Ltd. Germany (Territory Under Allied Occupation 1945-1955) Military Governor (1949), Statistical Handbook of Bizonal Recovery Programs for Fiscal Years 1948/49, 1949/50, 1952/53 and Summary of Economic Progress US/UK Occupied Areas of Germany. Great Britain, Treaty Series (1945-1951), London: HMSO. Great Britain House of Commons (1950), Report of Price, Waterhouse & Co. on the Accounts of the Joint Export-Import Agency for the Period 1st January, 1947, to 31st December, 1948, Cmd. 7978, Vol. xi, London: HMSO. Great Britain House of Commons (1951-52), Report of Price, Waterhouse & Co. on the Accounts of the Joint Export-Import Agency for the Period 1st January, 1949, to 30th September, 1949, Cmd. 8506, Vol. xxxi, London: HMSO. Great Britain House of Commons (1951-52), letter regarding the “Liquidation of J.E.I.A. and the Transfer of its Assets to the Federal Government,” 19 May 1952, Vol. xxxi, London: HMSO. Inter-Allied Reparation Agency (June 1951), Report of the Assembly of the Inter-Allied Reparation Agency to its Member Governments, Brussels. MacDougall, G. D. A. (March 1947), “Britain’s Foreign Trade Problem,” in The Economic Journal, Oxford: Blackwell Publishers. Mee, Charles L. (1975), Meeting at Potsdam, New York, NY: M. Evans & Company, Inc. Military Government Gazette: British Military Government Gazette (1945-1951), British Zone. Oppen, Beate Ruhm von (1955), Documents on Germany Under Occupation 1945-1954 (DGO), London: Oxford University Press

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