Foreign Affairs: 100 Years
The Future of History
Can Liberal Democracy Survive the Decline of the Middle Class?
TO get "reparations" is to get something for nothing, and, unless an economy is threatened with immediate underemployment, they are as welcome to a state as to an individual. British and French experience has, however, shown that to be profitable they must be carefully chosen and absorbed. The utmost profit from reparations can be obtained only if the government responsible for their collection can chop and change its plans as circumstances change, can afford to be internationally selfish in addition to being domestically ruthless, and is also engaged in a drastic scheme for industrialization. The United States can do and be none of these things, the U.S.S.R. is and does them all.
Only the Germans and the Russians have so far managed to absorb large-scale reparations successfully. Both have been influenced exclusively by considerations of gain with little concern for the welfare of the vanquished. Since the end of the Second World War the Russians have hardly been confined by the Three-Power Agreements of Yalta and Potsdam. Whatever the intentions, the words of the Agreements were often ambiguous; and in matters on which the protocols were silent, such as the acquisition of capital within Germany, the Russians took silence as approval, while the Western Powers took it as prohibition. In fact the Russians were concerned with acquisition of German goods and services, while the Americans and British were primarily interested in depriving Germany of them in order to weaken her strategically. On July 9, 1946, Molotov declared in Paris that the reason "Allied and Soviet troops are at present in Germany [is] . . . to ensure reparation deliveries." No American diplomat would have put it like that.
Like a child long deprived of chocolate, the first Soviet "dismantlers" flung themselves on all the available tidbits. They were part of the Red Army itself, and had performed similar tasks in "liberated" Poland, Czechoslovakia and Manchuria. Since, according to international law, the taking of war booty is legitimate, these early pickings were labelled "military trophies," and the captors were called trophy teams. This was a convenient means of keeping such items out of the reparation account.
What the Russians consider choice morsels Americans regard as commonplaces. These early removals ranged from telephone exchanges to railroad signalling equipment, from public conveniences to private necessities. Relatively few industrial installations were at first affected. The trophy teams indicated their desires, and Russian soldiers proceeded to carry them into effect, often very unskilfully. Inadequate packing and transport caused the destruction and subsequent abandonment of much of this material; it was sometimes left on the spot, sometimes abandoned in sidings, often just heaped together at a collection point. The resultant wastage was hair-raising to the Germans and the Western personnel. As late as 1947 the traces of these early depredations scarred the countryside, particularly around railroad tracks and sidings. In addition, there were, of course, the private trophy expeditions which Russian soldiers, like their Western allies, conducted for their own benefit, and these were more efficient.
By June 1945 the organized collection of reparations was getting under way. The chief targets at first were coal mine installations, railway repair shops and highly developed technical plants like Zeiss at Jena, Ohrenstein and Koppel (locomotives) at Potsdam and the great electrical works of AEG and Siemens-Halske. Power stations were another favorite target. This was the richest period of the harvest. The Soviet Reparations Agency would choose a factory or installation, and either Russian soldiers or, later, German workmen would dismantle it, after a security cordon had been thrown round it and the previous owners and managers had been chased off the premises. The owner's first reaction was to complain to the Soviet Military Government, which had publicly set itself the task of reviving the German economy. Usually nothing could be done; the dismantling teams were independent organizations under the direct control of Moscow, whose commands had absolute priority. Occasionally, the occupation authorities put up a fight over some vital power station. There was long distance telephoning, voluminous argument, a series of contrary decisions. At Magdeburg a power station was partially dismantled, partially restored, further dismantled, further restored, finally disembowelled and left to rust on the spot. Usually, however, only a few weeks passed between the arrival of the ominous surveyors in Russian uniform and the departure of the last wagonload of machines for Frankfurt-on-Oder and Brest-Litovsk en route to the U.S.S.R.
Gradually the process of dismantling became more selective. After spring of 1946 Soviet reparations had to be confined to the Soviet zone of occupation. General Clay had ordered a cease-delivery in the U. S. zone, as had the British shortly thereafter. Dismantling had to be fitted into an overall scheme of reparations, including delivery from current production, expropriation of works in Germany and export of German output on Soviet account. In autumn 1946 the rate of dismantling decreased and a number of works originally scheduled for dismantling were taken off the list. Thereafter dismantling served only to supplement other forms of reparation. Thus railway lines continued to be taken up and removed, according to directives from Moscow during 1946, and again in August 1947 and July 1948. Similarly, railway repair shops and agricultural machinery plants continued to be raided; often after the original dismantling had partially been made good out of stock, the same unit was dismantled again. Another industry which suffered heavily was wood processing; almost 85 percent of the industry was removed in some provinces.
The total value of dismantled plants has been estimated at about 1.6 billion dollars (prewar value); this includes the partial dismantling of Soviet corporations which took place during 1948-1949. Up to June 1948 some 1,225 plants were totally or partially dismantled, a few of them repeatedly. This is almost one-third of the total value of movable industrial capacity in the Soviet zone in 1939; in view of wartime damage and increased postwar investment costs, the dismantled value would be almost twice as high in terms of present prices, and the proportion of dismantled to total capacity would be 20 percent higher. The value of all this to the Russian economy was probably far less, but must still have been considerable.
Reparations from current output were threefold: removal of stocks, food and agricultural products, and industrial production. Stocks were taken only at the beginning, and consisted of reserves of coal, chemicals and such manufactured goods as tires, vehicles and clothing. Later such stocks as were taken were usually requisitioned for further processing on reparations account instead of being directly removed. Reparations from food were an additional burden to the parasitic occupation army, which was exclusively fed from German resources. Cattle were at first removed in large quantities. Refined sugar, which is a staple Eastern zone product, was both removed to Russia and exported to Switzerland and other hard-currency countries; the main sugar-producing province, Saxony-Anhalt, delivered about 185,000 tons of sugar for reparations up to the end of 1946. Another important item was raw spirits, of which some 1,650,000 gallons had been delivered by the same date. The most damaging item was distilled alcohol or schnapps; the Russians encouraged production in order to increase reparation deliveries, and the German authorities also encouraged production because the tax on alcohol was the main source of revenue for the provincial governments. Thus, at a time of great food shortage, both potatoes--the staple diet--and grains were diverted from the ration to the taverns and the Soviet export market. Visitors to the Leipzig fair noticed that the famous Auerbach Keller restaurant had been taken over by the Soviet national travel organization, Intourist, and offered delicacies from German produce at exorbitant prices in dollars, Swiss francs and Swedish kroner. It was said that even the caviar was German. Other currencies would be accepted only after the manager had obtained permission, and learned the rate of exchange, on the telephone from Berlin.
The carefully-nurtured forests were hacked down to provide timber for reparations and reëxport. Nearly $600,000,000 worth of raw timber alone was taken by the end of 1947. But the biggest item was reparations from industrial production. Orders were placed direct with individual factories, or with the reparations department of the provincial government. Prices were strictly based on 1936 levels and thus took no account of increased costs, or of the fact that, where raw material was not available and was not supplied by the Russians, it had to be obtained by the manufacturer at exorbitant prices in the black market. It was officially estimated in 1948 that nationalized undertakings working on reparation orders were regularly showing a deficit ranging from 25 to 40 percent and had to be subsidized accordingly. Nor was there any question of reparation orders not being carried out; failure to meet demands meant an indictment for economic sabotage. Raw materials were sometimes supplied by the Russians, as in the case of textiles and natural rubber, but usually had to be found by the Germans, either from stocks or from the meager imports obtained against export surpluses under the bilateral trade agreements of the zone with Sweden, Holland, Belgium and some Eastern European countries, such as Jugoslavia and Hungary.
These reparations first came into prominence in the early part of 1946. The Russians found that the output of the Soviet zone could be taken more cheaply, more quickly and more efficiently if the factories were left where they were. In addition, the substitution of reparations from current output for reparations by dismantling made good propaganda; on January 4, 1947, Marshal Sokolovsky stated that the decision to take reparations from the output of local industry was intended to give employment to German workers and resources. Such reparations continued to be taken on a very large scale during 1947 and 1948; after the publication of the Two Year Plan in July 1948, Soviet demands were reduced; and during 1949 the exigencies of the political campaign for German unity caused a further reduction. In January 1950 it was officially announced that only 7 percent of German output still went for reparations.
Two main classes of goods were taken, investment goods (machinery, vehicles, ships and heavy electrical motors) for the U.S.S.R., and consumer goods (particularly household and office equipment, chemicals, china and leather goods) for reëxport on Russian account. In a world chronically short of consumer goods, the Soviet trading caucus, established at Berlin to push the export of reparations, did brisk business. There was no question of dumping; on the contrary, prices were usually in dollars and on the high side. The Swiss, who bought brown coal, and the Belgians, who bought over a million tons of steel scrap, had difficulty in keeping the Russians to current world prices. Since the zonal authorities also attempted somewhat belatedly to boost exports, the Russians acting for the Soviet Union competed against the Russians acting on behalf of the zone; often there was competition a few doors away in the same goods from the same factory. In order to exploit sympathy for the Germans, the Soviet reparation authorities attempted to disguise the fact that the goods they sold were for Russian profit by employing some German salesmen and by conducting business through German puppet firms like Texta. Even some of the potash purchased by the British Board of Trade in 1948 and delivered during the Berlin blockade was sold on Russian, and not, as it seemed, on German account. Taking into consideration the current deficit of the firms supplying reparations, between 2 and 2.5 billion dollars worth of goods were taken at prewar dollar valuation up to 1949.
In connection with this form of reparations, it must be remembered that the transport of all these goods placed a heavy strain on the depleted German railroad system. Locomotives, known as "brigade" locomotives, were requisitioned for Russian use and freight cars were ordered for particular journeys at 48 hours' notice; they were usually, but not always, returned. (Very often the Poles took off a few cars for their own use on the return journey.) It is not surprising that the railroad system, dismantled, requisitioned, incapable of current repairs, had been on the verge of complete breakdown ever since the war. It takes up to nine hours to travel from Berlin to Dresden; it used to take three and a half before the war. Altogether some 6,000 kilometers of track have been dismantled out of a total of 19,000 kilometers; 1,200 locomotives--the biggest and best--requisitioned out of 5,500 capable of running. During 1946 and 1947 an average of 9,000 to 11,000 freight cars were daily made available for the use of the Russians out of a total zonal pool of 60,000.
The so-called Soviet Corporations, or SAG, were 200 of the biggest works expropriated in the summer of 1946 from "monopoly capitalists and Nazis," and spirited into Russian hands on the grounds that the power over production which they represented was greater than any Germans--even "democratic'" ones--ought to have. At the end of 1946, 73 were returned to German hands after partial dismantling, and in 1950, 24 more. The production of the SAG is mostly destined for the U.S.S.R. or for export on Russian account, the exports being handled by the same state-trading monopolies which export German-produced goods--Rasno, Technoexport, Promexport, Exportlion, etc., some of which have had offices in the United States and which act for the Soviet Ministry of Foreign Trade in foreign countries. Roughly a quarter of the production of the SAG goes to the German economy, chiefly in goods such as brown coal, potash, artificial rubber and some electrical supplies and power. Raw materials used by the SAG, on the other hand, are largely supplied by the German economy. The net total value of SAG production up to the end of 1948, excluding the amount returned to the German economy, was about $950,000,000.
Clearly the intention to expropriate German assets and exploit them on Russian account was taken before the end of the war, for some of the most modern and important plants were spared dismantling altogether. Thus the vast synthetic gasoline and oil refinery of Leuna in Saxony-Anhalt largely escaped in spite of the Four-Power ban on synthetic gasoline production in Germany. It has become a Russian concern. Similarly coal mines, metal smelting plants and potash mines were taken over. The big artificial rubber (Buna) factory at Schkopau became a unit of SAG, and at the opposite end of the scale, so did the famous Meissen porcelain works. The organization of the Russian works was based at first on the individual factory under the general control of the SAG holding company in Berlin-Weissensee, but later various factories were lumped together in both vertical and horizontal combines. These in turn were controlled by a trust for all combines in a particular industry, such as chemicals or textiles. The SAG today are a replica in miniature of the industrial trusts in the Soviet Union, and at present are being reorganized under their control. The Russians promised that these plants would eventually be handed over to the Germans, but they apparently will not be without at least partial dismantling.
In order to facilitate Soviet control over her economic empire in Germany and ensure complete independence from the German economy, a number of auxiliary organizations have been set up. There is the Garantie und Kredit Bank, a Soviet institution which finances reparations by making the necessary capital available to the SAG and to the trading monopolies. It operates with a small founding capital, but its assets are considerable. Further the Russians have formed their own transport company, the Derutra (German-Russian Transport Company), which handles all reparations and reparation export contracts, and in addition has a stranglehold over the North Sea harbor facilities of Wismar, Rostock and Stralsund. In addition the Derutra operates a lucrative transport business between East and West Europe on its own account by means of its control on road and rail facilities. Another example is the Derunapht, originally a German-controlled gasoline import company. This Russian company owns much storage space and facilities, controls the distribution of gasoline in the Soviet zone, and blackmailed the provincial governments during 1947 into handing over the entire network of gasoline and oil retail pumps and service stations.
Much of Russia's reparations has been disguised. The profitable black market in cigarettes was cornered by the Russians; Rasno made its own cigarettes at Dresden and sold them at exorbitant prices, especially for the Western D Mark during the blockade. Ossobtorg, one of the Russian trading monopolies, has bought a large quantity of personal valuables, china, jewelry and works of art, in return for cash and cigarettes. Moreover, individual barter deals with the Western zones have been encouraged by the Russians acting through German middlemen; surgical equipment, specialized machinery and scarce raw materials have been purchased in the West by Soviet agents, who could dispose either of ready cash or promise compensation deliveries out of German production in the East. The Russians have also become real property owners on a large scale. Apart from the houses they have requisitioned for occupation, they have bought property in Eastern and Western Germany and in Berlin through German middlemen. In Berlin, they have acquired an astonishingly high proportion of property in the Western sectors, for political more than for economic purposes.
Reparations in the form of labor, specifically mentioned at Yalta and indirectly confirmed at Potsdam, fall into two categories: services compulsorily performed in Germany, and those performed in the Soviet Union. Since much of the labor employed in SAG and in factories working on reparations might normally have been unemployed under prevailing conditions, it cannot be counted as a total loss to the German economy. This, however, does not apply to the skilled workers, the scientists and technicians who worked for these firms, for the Red Army and for other special Russian agencies. The most significant factor with regard to reparations from labor were the snap Russian demands on the German labor exchanges for specific tasks; since these had to be fulfilled at any cost, German labor programs had, if necessary, to be postponed or scrapped. Russian demands reached unprecedented heights when the exploitation of the uranium mines in Saxony got into its stride. Shortage of machines and absence of rational mining processes were to be overcome by labor, more labor and still more labor. As many as 80,000 workmen were employed in the half-disused silver and radium mines at one time during the peak period in summer 1947. Conditions were frightful, and the natural reluctance of workmen to volunteer for the good cause of Soviet militarism resulted in compulsory registration and direction, first for anti-Communists, illegal border-crossers and sentenced criminals, then for mere non-Communists, finally for anybody who could be combed out of industry, save for those employed in such essential work as being a Communist Party official. Since remuneration was small, food insufficient and welfare projects nonexistent, this quasi-slave labor must be counted as reparation.
So must the removal of workers to the U.S.S.R. A feeble attempt at voluntary recruitment, chiefly among the miserable refugees from Poland and Rumania, was a complete failure and compulsion was resorted to. At first workers attached to a dismantled factory were shipped off to Russia; some signed contracts under pressure coupled with financial inducements, others presumably signed contracts after being taken away. Later recruitment developed into a series of swoops, of which the biggest was Operation Ossawakim in autumn 1947, when about 10,000 workers, mostly skilled, were shipped to the East. Though their conditions in Russia are reported to be tough, they are comfortable compared to the political internees who were transferred from the reopened concentration camps in the Soviet zone to Russia to swell the millions of slave laborers. Some 8,000 to 12,000 internees have been thus removed to make themselves "socially useful;" they are mostly ex-Social-Democrats and economically anti-Russian survivals like independent shopkeepers and medium-sized farmers. Altogether 30,000 men with and without families have been deported, including 3,000 technicians, among them physicists and engineers of international reputation. Apart from internees, few of those transferred to Russia appear actually to have been kidnapped; the semblance of free contract has been preserved. All this is, of course, additional to the work of the 1,000,000-odd prisoners of war in Russian hands at the beginning of 1946.
The vast octopus of Soviet reparations has made necessary a distinctive system of finance in Eastern Germany. Soviet holdings of German currency spring from three sources: the capture of liquid assets belonging to the Reichsbank and the liquidated semi-private banks, the contributions out of the provincial budgets in the zone, and direct earnings. The most important item was the provincial contribution; direct earnings were at best only a side line, and the release of confiscated assets was to some extent limited by the need to preserve a semblance of control over inflation. During 1946 and 1947 the annual contribution of the provinces was just over 50 percent of their consolidated receipts; 5 billion RM in 1946, 5.2 billion in 1947 and 4.2 billion in 1948, out of gross receipts of 7.9, 8.5 and 8.7 billion RM respectively. This enormous sum was raised mostly from indirect taxation on cigarettes, schnapps and other consumption goods, and was spent partly in financing the occupation itself. Above all it provided the means for the reverse payments for reparations: wages, SAG deficits, production orders and dismantling costs. Much of the available assets has not yet been spent. At the end of 1947 some 5 to 7 billion RM were estimated still to be held in reserve, and since the falling-off in Soviet demands after 1948 the reserve is now estimated at about 2 to 4 billion. The value of Soviet assets was greatly increased at the time of the Eastern "currency reform" in June 1948, when they were converted at par while private and some semi-official holdings were revalued at anything up to 10 to I. This was part of the process of facilitating the flow of reparations by reducing local demand while extending Russian purchasing facilities. It was made easier by the fact that the East German credit mechanism has not been allowed to develop since the war beyond the level of the crudest possible banking system.
A word must be said of the effect of all this on the German economy. Dismantling is a long-term loss on a vast scale; it will be many years, even under conditions favorable for expansion, before the removed installations can be replaced. The loss through reparations from current production, particularly in terms of foreign exchange and therefore of the balance of payments, is also considerable, but it is counteracted by a stimulation of production which may ultimately benefit the Germany economy. If the SAG are ever handed back to the Germans they will be a valuable item in industrial output, but as we have seen, their return seems unlikely at present. The financial policy and the Soviet black market will have adverse long-term effects on the prosperity of the individuals of the Soviet zone and of the zonal economy as a whole. But, in spite of great privations, the economic position of the zone has reached a level of industrial production roughly equivalent to 78 percent of 1936, and this level is likely to remain even for a time. In the spring of 1950, it was announced that the Russians valued reparations up to the end of 1951 at just over 3 billion dollars, and that a sum just below that figure still remained to be paid during the next 15 years. This was described as a generous reduction of the Yalta figure of 10 billion dollars. Bearing in mind the obvious undervaluation of payments it also meant a bleak future for this region. Psychologically, the decrease of Soviet demands means an increase in the zone's prosperity. In fact the economic crisis of the zone has come and gone, leaving it weak but breathing. In the West, on the other hand, the abandonment of reparations cannot be shown to affect prosperity to any important extent. Present prosperity there has its drawbacks, such as largescale unemployment, and the economic test will come when American aid is exhausted. It is not impossible that the Eastern zone, in spite of Soviet reparations demands, may point derisive fingers at the pampered economy of Western Germany.
Two sets of conclusions can be drawn. From the narrow economic angle Soviet reparations have been a great success for the U.S.S.R. They have been an essential part of the Soviet plan for domestic reconstruction, and have been viewed by the Russians exclusively in this light. Since, in the last resort, the Soviet authority responsible for reparations policy is at the same time responsible for nearly everything else, the exaction of reparations has been characterized by maximum flexibility coupled with untrammelled ruthlessness. There is no magic which distinguishes Soviet success in extracting reparations from Germany from Western failure, unless there is magic in the commonplace that if you really want something very much, you put it ahead of other things.
The Russians have had to make political sacrifices for their reparations. They have sacrificed Allied good will, they have sacrificed the German Communist Party, and they have alienated German public opinion. For four years economic objectives have dominated politics in the Soviet zone, and only now that reparations have greatly diminished can the Russians cast their eyes on Western Germany and pursue a policy which has any chance of furthering Russian influence there.