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51 Speech delivered before Institute on the United States in World Affairs American University, Washington, D. C, ~ AMERICAN ECONOLIIC POLICY IN GERMANY American economic policy in Germany has two main purposes: to contribute to the political security and to the economic rehabilitation of Europe. These two purposes are not mutually contradictory. In general, People are the more inclined to be peaceful the better their economic situation. The Germans are no exception to this rule. During the prosperous years of the late 20's, German foreign policy was led by Minister Streseman who made important contributions to the restoration of friendly relations among the European powers. The Nazi regime came into power °nly wh en the depression of the early 30's had reduced the standard of living of the German people far below the level reached before the first world war. It is true, however, that economic rehabilitation alone might not be sufficient to prevent aggressive tendencies from again influencing German policy. Just before the outbreak of the second world war, Germany ^as reasonably prosperous, but the improvement of its economic situation did not lessen the aggressive tendencies of its government and of the major part of the population It would be a mistake, therefore, to concentrate all American efforts upon improving economic conditions in Germany, On the contrary, it might become necessary in some instances to adopt measures contrary to the economic interests of Germany in order to make impossible the revival of German war potential® The fundamental Problem confronting long-run American economic policy in Germany is to find the correct proportion in which stimulation and limitation of reconstruction in Germany must be blended. In recent weeks there has been much talk about the need for coordinating American assistance to Europe. While this need is extremely urgent, it would be a great mistake to assume that the American authorities s o far have been ignorant of that problem. Under the Bretton Woods Agreements Act the National Advisory Council was established to coordinate all international financial transactions of U. S. government agencies. The National Advisory Council not only instructs the American representatives in the International Monetary Fund and International Bank for Reconstruction and Development, but also advises the management of the Export-Import Bank of Washington and all other similar agencies. The Program for Germany is a part of the plans considered by the National Advisory Council and its member agencies. What has been lacking so far has been less coordination of policies among the American government agencies than full cooperation among the European countries, A basis for cooperation was laid some time ago when the Economic and Social Council of the United Nations established the Economic Commission for Europe, It remained for the historic Harvard speech of Secretary Marshall, however, to stimulate concrete action to that end0 It is exactly the influence of the German econorr^y upon the development of other European countries that makes the rehabilitation of Germany necessary from the point of view of the economic stability of the world. 52 Germany's neighbors, today more than ever before, are dependent upon commodities produced by Germany. Before the war, a]l European industries used large quantities of German machinery. Today such machinery is needed not only for repairing the damage done to the industries of Germany's neighbors during the war but also for developing those European countries that need further industrialization. Cutting off the supply of German machines has considerably delayed the rehabilitation of the victims of German aggression and thus the restoration of economic stability in all of Europe. Equally important for the other European nations are Gennan chemicals and textiles and especially German coal. On the other hand, Germany's neighbors wish to export to Germany certain commodities vhich are abundant in other parts of Europe and for which there is great need in Germany. They cannot afford to let Germany have thejr products, however, without receiving German goods in return. I f the Netherlands, for instance, could export to Germany its vegetable surplus in return for industrial imports from Germany, both the Netherlands' and the German economies would profit., In addition, the American economy would be freed from the obligation of advancing to the Netherlands the funds for importing American rather than German machinery and advancing to Germany the funds necessary for importing American rather than Netherlands foodstuffs. The Low Countries always have benefited by a large volume of transit traffic with the industrial districts of western Germany, The resumption of German industrial production will contribute substantially to the revival of the Netherlands' and Belgian pcrts and thus to the economic r e h a b i l i t a t i o n of those countries that form the core of democratic capitalism in continental Europe. In the short run, the main purpose of American economic policy is to prevent the German economy from suffering a complete breakdown. Vie must admit that after two years of occupation the danger of such a breakdown is not appreciably smaller than immediately after the end of the war. Three reasons contribute to the unsatisfactory progress of German rehabilitation. First, twelve years of Nazi rule, six years of war, and the repercussions of defeat and occupation have had a great psychological impact upon the German nation. The sense of responsibility and the desire for initiative have almost completely disappeared. The Germans work a s well as ever if they are told exactly what to do. But whenever they are asked to make decisions of their own, delays and uncertainties arise. The American occupation authorities are neither able nor willing to direct the German economy in every detd.l. They are not able to do so because of the severe limitations in personnel and means imposed upon the military administration in Germany, and they are not willing to do so because this would run counter to the political principle of re-education for democratic self-administration. The clumsiness of the German administrative machinery in evolving a system of economic policy is part of the price which must be paid if the occupation is to achieve political as well as economic purposes,, The second reason for tho present state of the German economy is the physical exhaustion of the population. For two years the average German has had to live upon a ration which at best reached 1,5'50 calories per day or about 3/h of the minimum acceptable to the United Nations Food and Agriculture Organization. Furthermore, the Germans lack housing as much as food. Floor space for the average German in the British zone of occupation, which includes the industrial heart of 53 Germany, is about 70 square feetc Other consumer goods are almost as scarce as food and housing and especially clothing and footwear present very difficult problems. A person vho is gravely undernourished as well as ill-housed and ill-dressed, cannot possibly perform the heavy work needed for the reconstruction of the German economyc A third reason for the slowness of economic progress is the scarcity of capital available for repairing the extensive war damage and for restocking inventories. The war has destroyed a large portion of Germany's fixed capital and exhausted the supply of most raw materials needed by German industry. Until Germany is able to accumulate new capital either by foreign credits or out of domestic savings, the German economy cannot hope to reach the level of its prewar output. The remedies for these ills are simple in principle but extremely complicated in their practical application. The German psychology can be -hanged only by a patient attempt at re-education which certainly cannot be completed within a few months or even a few years. The best we can hope for is to convince the Germans that cooperation with us is in their own interest, This objective is not easy to reach since the Germans have learned under the Nazi rule to distrust deeply all official declarations of benevolent sentiments. The lack of food and housing can be overcome only by an increase in imports, accompanied by an increase in domestic production. This apparently simple measure is rendered difficult, however, by the general scarcity of supplies all over the world, and by the obligation imposed upon the American authorities to contribute to the recovery not only of Germany but at least as much to that of the other European nations. Whatever supplies we send to Germany cannot be sent to one of our Allies. Before allocating a shipload of food we have to decide where the shipment would be best utilized and what nation should be deprived of some assistance in order to make possible help to another* The same dilemma confronts us in the case of capital assistance. The industrial system not only of Germany but also of most other European nations has been destroyed by the war, and the nations that have suffered from German invasion expect us to help reconstruct their economies before We he]p reconstruct German enterprises. Machinery and raw materials are extremely scarce and we are unable to satisfy all foreign demands in addition to the needs of our domestic economy. We have to weigh our own needs as well as the needs and the mcral claims of many other nations before we can decide to give help to Germany. The remedies for the ills of the German econony which we have discussed so far are not only clearly recognized by the Anerican authorities, but are also constantly applied in practice. Our program of re-education is being implemented by a steadily increasing extent of self-administration granted to the German population in the American and British zones occupation. At the local and state level there is almost complete autonomy subject only to the veto power of military government. At the zone level we have established a state council (Landerrat) through which the various state governments coordinate their policies. At the level of the combined American and British zones we have established quite recenta German Economic Council assisted by an executive committee and by a 5k staff under a number of executive directors. This council m i l act as the supreme agency in economic affairs and will have power to give binding directives to the state governments. It will consist of representatives of the German pooulation and will be entrusted not only with executing the economic oolicy of the occupation authorities but also with assisting in the formulation of the policies themselves. The occupation authorities will confine themselves largely to supervision and control. This program will remain far from perfect as long as similar German institutions are not established for all four zones of occupation so as to implement the Potsdam Agreement which provides for treating Germany as an economic unit. The American and British authorities have urged the other occupying povers to abide by the Potsdam Agreement and quite recently again expressed their hope that the other occupying powers would join in the bi-zonal arrangements. So far, this has not been done and therefore the American and British authorities have had no choice but to go ahead with establishing German self-administration at 3.east in their z ones of occupation. The problem of increasing the German, supplies of basic necessities has been pursued ever since the beginning of the occupation. In 19u5 and 3 9U6, the American and British armies spent hu^e sums for importing into their zones of occupation commodities needed for the prevention of disease and unrest among the population. In addition, they turned over large supplies of army surolus for the use of the German economy. In the calendar year of 19h6 alone the total amounts made available to the Germans were 360 million dollars in the American and 3^0 million dollars in the British zone. The British zone has a larger population than the American, In view of the grave economic difficulties from which the British people themselves have been suffering for the past several years, it would have been impossible for them to spend as much per capita as the Americans. In fact, the British, v:hose economic plight is due to German aggression, have again proved their sense of statesmanship as well as their economic foresight by diverting such a large amount of funds from their own use to that of their former enemies. Since January 1, 19U7, the importation of basic necessities into the combined American and Eritish zones—so-called Category A goods—has been financed equally by the United States and the United Kingdom. Under the bi-zonal agreement of December 2, 19 U6, the two zones are treated as an economic unit, and it is to be expected that the standard of living in the British zone will be raised to that of the American zone. In the short run this means that the United States will spend somewhat larger funds than would be necessary in order to supply only the American zone with basic necessities. In the long run, however, the arrangement will be to the benefit of the American public since the British zone not only has larger needs at present, but also a larger potential for future industrial production. In a few years the British zone, therefore, may be able to help to pay for the deficit of the American zone. The basic necessities to be imported under the bi-zonal agreement are not gifts presented to the German people. Germany will have to repay the sums advanced for such imports but only after it has reached a level of production sufficient to pay for current imports. That is to say, that the advances made by the American and British public for the importation of basic necessities will be re-paid after the balance of payments of the American and British zones of occupation has reached 55 equilibrium on current account, but before any other payments to other powers are made out of current production. In the first six months of 19U7 the imports into the combined zones of the so-called Category A goods, including 2.3 million tons of foodstuffs, will require 270 million dollars. This seems to be a very large sum but it is far from sufficient. If we want to enable Germany to reach its prewar level of production we must increase German food consumption from the present average of 1,550 calories daily to about 2,600 calories. Domestic food production in the American and British zones of occupation last year averaged about 1,000 calories per day for the non-farm population. We can hope to increase this production in due time to the prewar level of 1,300 calories and perhaps to a maximum of 1,600 calories. Even under the best conditions, however, production in the American and British zones would leave a food deficit of 1,000 calories daily per head of the non-farm population. Present imports provide for only about o00 calories daily per person* In the long run, therefore, food imports iar from being reduced will have to be increased substantially if our economic goals ar6 to be reached. The need for continued food imports is another reason for reviving German industry. Industrial goods must be produced in order to make possible exports that can be used for the payment of food imports and the Production of industrial goods, in turn, is tied to the raising of the consumption levels of the German worker. In comparison with the importation of Category A commodities, imports of materials needed by German industry — the so-called Category B goods — have remained almost insignificant. Most of these imports are made under credit arrangements whereby German manufacturers receive raw materials for processing, and then export a quantity of finished goods sufficient to pay for the cost of the imported raw materials. The most important transaction of that kind in the American zone was undertaken oy Military Government with the Commodity Credit Corporation and concerned 30 million dollars worth of American cotton. A second arrangement involving 20 million dollars worth of cotton at present is being negotiated with the Export-Import Bank of Washington and American cotton exporters. Smaller credits of a similar nature have been arranged with the U. S. Commercial Company, a subsidiary of the Reconstruction Finance Corporation; they concern raw materials for ceramics, glass, chemicals, toys, and construction materials industries. These arrangements are supplemented by the use of a fund accumulated by the joint Export-Import Agency of the American and British Military Government. This fund includes the proceeds of exports from the American and British zones of occupation in 19U5-U6, plus a sum made available to the United States and the United Kingdom by the Swedish Government out of German external assets in Sweden, surrendered to the United Nations under an agreement of July 19U6. The total fund is equal to around 100 million dollars and will provide means for importing such materials as ar e required for priming the pump of German industry. It is to be hoped that before this fund is used up, current exports will provide the amounts necessary to pay at least for the current imports of Category B goods. For 19l*7> total imports of these goods may reach about $300 million. This would be less than half of the amount needed for insuring a 56 normal level of economic activity in Germany, but it would be about three times the 19^6 volume of such imports. These Category B imports must include both materials for the export industries and for domestic German consumption. An increase in German production depends heavily upon the improvement in the supply of food, housing accommodations, and other consumer goods. Increased availability of such goods mode available to the Ruhr miners was instrumental in bringing about a rise in coal production by 20 per cent between the fall of 19h6 and the spring of 19h7, The recent food shortages which were experienced in the Ruhr as a result of lags in transportation of imported suppli.es, immediately resulted in a drop of coal output by almost 10 per cent. Imports of consumer goods actually may result in a larger production of exportable goods thai; the importation of the same amount of industrial raw materials. German exports so far have lagged even behind the small volume of Category B imports. In 19u6, coal from the Ruhr mines in the British zone was the only commodity that was exported in substantial quantities from either the American or British zones of Germany. These exports reached 13 million tons, valued at .;?117 million, but they were not sufficient to satisfy even the most urgent needs of other European nations. Between 1937 and 19h6, British coal exports dropped from 52 million tons to 9 million tons and German coal exports from hO million tons to 13 million. The increase in American coal exports made up for less than half of the deficit, and moreover, American coal, because of huge transportation costs, cannot be used economically in continental Europe. The coal famine was made worse by the decline in domestic coal production in most other European countries and by the fact that as a result of Polish-Russian agreements large parts of the Silesian coal production was deflected from Central Europe to the Soviet Union. German coal exports were kept even at their modest level only by drawing upon existing stocks and by curtailing allocations for German consumption. The German industrial system thus was prevented from utilizing even that part of its capacity that otherwise would have been available. This system led to such difficulties in the German industrial districts that by the end of 19U6 coal exports had to be drastically reduced. This reduction was in the interest of the economies of the rest of Europe as well as of Germany. Coal allocated to German industry can be used for producing exportable goods which have greater value and thus fetch higher prices than the coal itself. In Moscow, the American and British authorities concluded an agreement with France providing for a flexible ratio of coal exports to coal production. This agreement is based upon the assumption that daily output in Ruhr mines will reach about 250,000 tons daily by the beginning of July or 10 per cent more than the May average. On this basis, the combined American and British zones would receive a weekly coal allocation of 860,000 tons (including a small amount contributed by the Saar mines in the French zone) as compared to an average of 710,000 tons in 19ii6. Deducting the quantities set aside for shipments to the Russian zone and Berlin, this would leave an exportable quantity of around 250,000 tons weekly as compared to an average of 230,000 in I9I46. Any increase in output of the coal mines vail be divided in such a way that the German economy receives 80 per cent and foreign countries 20 per cent of the additional tonnage. I f , however, output increases 57 above 290,000 tons daily the allocation for exports vail rise gradually until any excess above 330,000 tons daily will be divided equally between domestic consumption and exports. The allocation of coal exports among the various European nations in turn is determined by the European Coal Organization which is to be integrated with the Economic Coiunission for Europe. An increase in output to the point where exports would take more than 20 per cent of total production does not seem Qikely this year. Even if only the expected minimum of 250,000 tons daily is reached, Germany as well as the other coal consuming countries will be far better °ff than they were in 19u6. Unless this minimum can be achieved, however, the coming year will witness a repetition of the disasters of the last winter when the lack of coal disrupted production and transportation in most European countries, Exports of commodities other than coal amounted to about §37 million m 19146. This compares with exports other than coal out of the area of the present Airerican and British zones of occupation totaling more than & U 2 billion in 1937. Thus the exportation of goods other than coal was about 3 per cent of prewar despite increases in the prices of most export commodities, Moreover, in 1937 those exports included mainly finished products while in 19h6 they consisted chiefly of lumber, hops, a nd other raw materials while the volume of industrial exports was negligible. In the first four months of 19^7, exports other than coal were larger than in the corresponding period of 19l& but were still below expectations, For the whole of 19U7 it was planned to increase the exportation of commodities other than coal from the American and British zones to about $250 million. The unprecedented hardships of the last winter combined with the difficulties in setting up an entirely new exPort organization, however, have delayed the start of the foreign trade Program by several months. German industrial production is somewhat higher than foreign trade figures seem to suggest. In November 19^6 the production index in the American zone of occupation stood at hU per cent of 1936, a year in which the German economy had about reached full employment on a peacetime basis. In the following months, production lagged on account of the coal crisis but in May this year the index had recovered to h5 per cent -and it is expected that this figure will be substantially exceeded by the fall of 19U7. We may expect to reach in 19h8 the prewar level in some important industries, provided that our import and export program progresses according to the present plans. In the British 2one of occupation industrial production is somewhat lower since the British zone includes mainly heavy industries which are severely restricted for reasons of military security, A large rise in production in heavy industries will imply changes in the so-called level-of-industry plan, which was adopted by the four occupying powers in the spring of I9I46 and which sets specific limits to the production of all industries that might be considered part of the German war potential. Under this plan Germany is forbidden to maintain certain industries, especially in the field of synthetic oil, snythetic rubber, synthetic ammonia, heavy machine tools, heavy textiles, radioactive materials, war chemicals, radio transmitters, and a number of 58 non-ferrous metals. Steel production for the current year is limited to 5 . 8 million tons, subject to review by the Allied Control Authority, and the consumption of non-ferrous materials is limited to fixed quantitieso The capacity of the chemical industry and of the engineering industries are to be substantially reduced; that of the machine tool industry, for instance, to ll.U per cent of the 1938 capacity. Production limits in actual figures are set for automobiles, railroad cars, agriculture machinery and precision instruments. Only mining aid light industries are to remain completely free from restrictions. Because of the low level of economic activity in Germany not even the limits set by the level-of-industry plan were reached in 1916 or in the first half of 19^7. If the coal situation improves, however, the expected increase in industrial production will render acute the problem of raising the limit, especially in the field of steel production. In 1937 Germany exported iron and steel products equal to 70 per cent of the tonnage that it is permitted to produce in the current year. Exports approaching the prewar level obviously would be possible only if that limit is substantially raised. Most occupying powers appear to feel that a level about twice as high as that set for the current year would be reasonable. It is to be hoped that this problem can be solved by agreement among the occupying powers, but if this proves impossible, the American and British authorities will have to decide whether or not to permit a unilateral increase in the level of industry in their zones of occupation. The problem of reparations also affects the German recovery. Under the Potsdam Agreement, Germany is supposed to pay reparations mainly by transferring existing capital goods. In practice this method has not been too successful. The removal of plants other than those that can be used only for war purposes is likely to damage the German economy more than it benefits the receiving countries. Moreover, the destruction of productive facilities encounters the passive resistance of German labor arid has a detrimental effect upon German industrial efficiency. The managers of German industries cannot make decisions about re-starting or developing their enterprises unless they are satisfied that their plants will not be dismantled and shipped abroad. On the other hand, the payment of reparations out of current production would be economically feasible only if we could e>pect Germany to produce exportable goods in excess of those needed for the payment for essential imports. As long as such a surplus does not develop the American and British treasuries have to finance the import surplus into their zones of occupation. If this import surplus were to be increased by using the proceeds of German exports for reparation payments rather than for the payment of imports, this would mean that the United States and the United Kingdom would in fact bear the burden of the reparations. From the point of view of American economic policy, the plan of paying reparations out of current production therefore has even more considerable drawbacks than the plan devised at Potsdam. In any case, a speedy agreement among the four occupying powers will be necessary in order to put an end to the present uncertainty which is an important factor in throttling the initiative of German entrepreneurs. Another step needed for reviving the German economy is the solution of the currency Droblem. At present the German currency can be used M virtually only for bu.yihg the official rations of food and consumers' goods. The German worker, therefore* is not induced to earn more money than he needs for that purpose* This means th.it he has no incentive for working harder and better. Currency reform, by making the German currency again a generally accepted means of payment, would be a valuable stimulus for increased labor efficiency. At the same time, it would contribute to eliminating black market transactions which today absorb a large part of the activities of the average German. Black market transactions are not only more profitable than honest work but also almost indispensable for supplementing the meager rations. An elimination of the black market, therefore, would also help to improve the labor situation. Furthermore, the present currency situation makes the pricing of imports and exports extremely difficult. German domestic prices have lost all contacts with world market prices since the Nazi regime deliberately attempted to isolate the German economy from the world market and imposed a rigid system of price control. Today this isolation is enhanced by the differences between German legal and black market prices, the legal prices being far below and the black market prices far above the world market level at the present military exchange rate. As long as currency reform has not taken place it is necessary to equate German and world market prices by means of conversion factors which are s et at different levels for different commodities. For instance, the conversion factor is 30 cents per mark for carbon brushes and 80 cents per mark for Pharmaceuticals. This means that carbon brushes which are valued in Germany at 100 marks on the basis of legal prices are quoted for export at ^30, while 100 marks worth of pharmaceuticals are quoted for export at ,$80. Such conversion factors can be set with relative ease for standard commodities, but it is very difficult to establish them for special goods in which German exports constitute a large part of the world market, for instance, optical goods and precision instruments. Currency reform followed by an adequate readjustment of domestic German prices would eliminate the need for such measures and make possible the restoration of foreign trade on the basis of uniform prices and exchange rates. Finally, the success of our economic policy in Germany would be facilitated by the economic unification of Germany, as contemplated by the Potsdam Agreement. The four zones of occupation are highly interdependent, Tho American and British zones, for instance, need foodstuffs.. Potash, and brown coal from the Russian zone and chemical raw materials from the French zone while much of their hard coal, steel products, and industrial consumers' goods have their markets in the areas of the other zones. As long as the fate of unification is undecided, all efforts toward economic reconstruction of the American and British zones will be hampered by uncertainties as to the developments in other zones. There will always be the risk of developing industries which later will be unable to compete with enterprises in other zones, and of neglecting the expansion of other industries that would find profitable markets in other zones. Unfortunately, the other occupying powers so far have not responded to the repeated American and British appeals toward a restoration of German economic unity. It is our sincere hope, however, that we ehall find a way to an agreement with the other occupying powers, which will result in a policy as beneficial for Germany as for the rest of the world.
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