SINCE 1947, the United States has sought to strengthen the economy of West Germany, and gave the initial impetus to recovery by granting aid on a large scale. But Germany herself had to do the rest. The German people had experienced the worst defeat in their country's history, but they brought their industriousness, their talent for organization and their scientific skill to bear to dig themselves out of the ruins and regain what they had lost in wealth and in international good will. The result was what has often been called the "German miracle." Germany's recovery, in turn, has had a beneficial effect on the economic development of her trading partners. By opening her doors to imports from the countries in the Organization for European Economic Coöperation, by making foreign exchange available for German travel abroad, and by resuming the service on her large foreign debt, Germany has indirectly made a substantial contribution to the recovery of other European nations. Health, it appears, is as contagious as disease.

An economically strong Germany is now called upon to participate in the political and military rebuilding of Western Europe. After the Paris agreements of October 1954 had been ratified by all nations concerned, the occupation régime was terminated. Germany joined the new Western European Union and NATO as a sovereign Power, with the responsibility of participating in the common defense. She will have to create an army of 500,000 men and build small air and naval units.

Building an army will have an impact on the maintenance of internal and external balance and on the rate and pattern of German economic growth. To date the Federal Republic of Germany has been able to concentrate on producing consumption and capital goods for the domestic market and for export. Now it will have to shoulder the burdens of armament, as have other nations since the Korean war. These burdens are to be assumed at a time when Germany's industrial plant and labor force are nearly fully employed. It is important for Germany's new partners to estimate as accurately as possible the effect that this will have on the German economy.

II

After the currency reform of 1948, the German economy went through two phases. The first, ending in 1951, was one of rapid if uneven expansion, characterized by the progressive utilization of existing industrial capacity. New investment was considerable even then, and was channeled primarily into the restoration of ruined capital equipment. In the second phase, after 1951, industrial capacity was expanded beyond prewar levels. The supply of labor was not a limiting factor in either phase.

A third now appears to be under way. The increases in gross national product (G.N.P.)--7 percent in 1953 and 8 percent in 1954--were achieved not only by an increase in investment at an annual rate of 10 to 15 percent, but also and most importantly by adding 1,800,000 workers to the labor force in 1953 and 1954. The growth in recent years is to be attributed to an increase in employment (and longer working hours), rather than to higher productivity from increased investment. In 1954, however, Germany's labor force was virtually fully employed, except for seasonal unemployment during the winter months. By the end of the year, capacity in numerous industries, such as construction, iron and steel, and coal mining, had approached, or even reached, full utilization. Taking these factors into account, we must assume that the rate of growth of the gross national product--i.e. the rate at which consumption and investment expand--would slow down, even disregarding the impact of rearmament.

Virtually full employment of the German economy, consequently, is the basic problem with which Germany will have to cope in the future. The burdens of rearmament will intensify it. They are twofold. First, the men drafted into the army will be withdrawn from production, thus further slowing down the rate of growth. Secondly, resources of labor and capital that otherwise would have been allocated to production for nonmilitary consumption and investment must be used for the establishment and maintenance of the army--barracks must be built or restored, uniforms and light weapons produced, the young men fed, and so forth. While this change in the pattern of production will not involve a decrease in the gross national product, it will obviously cut down the amount of goods and services available for nonmilitary consumption and investment. The Germans, to use a familiar phrase, will have guns, but less butter than otherwise.

But these general trends do not give a picture of the quantitative impact that rearmament may actually have on the German economy in the period ending in 1960, when the army build-up will have been completed. As a first step toward a forecast, we may attempt to estimate how the economy would develop under conditions of full employment, disregarding the effect of rearmament. A rough recomputation of the gross national product in 1954, eliminating the part that may be attributed to the increase in the labor force, suggests that, under conditions of constant employment, it would have risen only by about 5 percent over 1953, rather than by 8 percent. On the basis of this 5 percent rate, gross national product, which in 1954 amounted to 145 billion Deutsche marks, would, other things being equal, rise to 194.3 billion in 1960. The annual increment over 1954 during the six-year period (1955 to 1960) would average 8.2 billion or 5.7 per cent.[i]

The slowing down in the rate of growth due to virtually full employment can be seen more clearly if it is contrasted with the 1954 rate, which was associated with the absorption into the economy of unemployed manpower. At the 1954 rate of growth of 8 percent over 1953, the product would have risen to 230 billion D-marks in 1960. During this period the annual increment over 1954 would have averaged 14.2 billion D-marks or 9.8 percent, as compared with the estimate of 8.2 billion or 5.7 percent.

The losses in production due to the drafting of men into the army will not be felt at once. No one can guess what postponements might result from a Four-Power Conference, but in any case there will be a delay while laws governing rearmament are passed[ii] and the framework of commissioned and noncommissioned officers is set up. Men will probably not be drafted before 1957. Assuming a three-year period of army build-up, the full strength of 500,000 would be reached by the end of 1959. The production losses caused by withholding these men from industry may be estimated at 725,000,000 D-marks in 1957, 2.2 billion in 1958, 3.6 billion in 1959, and 4.3 billion in 1960 and thereafter.[iii]

Our projections for G.N.P. under conditions of virtually full employment will have to be revised downward by these amounts. Taking production losses into account, it would be 190 billion D-marks in 1960 rather than 194.3 billion; the annual increment, as compared with 1954, would average 7.5 billion D-marks rather than 8.2 billion; and the average percentage increase would be 5.2 rather than 5.7.

To assess the impact on nonmilitary consumption and investment of a shift of resources of labor and capital to the production of military goods, account must be taken of the fact that the German economy has already had to support the armies of the Allied occupying Powers. These armies have been maintained, to a large extent, by German payments which were spent by the Allies on German goods and services; these expenditures have reduced the amount of goods available for nonmilitary consumption and investment. After sovereignty has been restored to Germany, these payments of occupation costs will gradually cease, and the Allies will have to support their armies stationed in Germany. German nonmilitary consumption and investment will consequently suffer cutbacks only to the extent that the forthcoming outlays for equipping and maintaining a German army exceed the former occupation costs for maintaining Allied armies.

Germany has had the contractual obligation to pay occupation costs at an annual rate of 7.2 billion D-marks, but in reality only in the neighborhood of 6 billion appears to have been spent in recent years. High German officials, on the other hand, have placed German annual rearmament expenditures at 9 billion D-marks, and this is the amount provided for by the Ministry of Finance in the budget for 1955-56. This figure is considerably below the more than 12 billion that Germany was to contribute to the now defunct E.D.C., but the 9 billion is the "maximum amount" that, in the view of the Ministry of Finance, Germany is able to afford. It is expected that United States aid will make a rather substantial contribution, and, equally important, that Germany will accumulate appropriated but unspent funds until the army build-up gains momentum in 1958-59. Subtracting the occupation costs actually spent from the prospective German rearmament expenditure, the net rearmament outlay would be of the order of some 3 billion D-marks annually.

Unlike the production losses due to the draft, this outlay of 3 billion D-marks will not actually decrease the gross national product, but it will certainly decrease the amount available for nonmilitary consumption and investment. Putting it another way, the net rearmament outlay decreases by 3 billion the annual increments that could otherwise be used for this purpose; the increment would be 4.5 billion yearly rather than 7.5 billion. If these 4.5 billion were to go entirely into private (rather than public) consumption and into investment, they could still in the aggregate expand under conditions of rearmament. In 1954, private consumption (consumer expenditures on goods and services) plus investment (gross fixed asset formation) rose by 9.2 billion D-marks over 1953. Consequently, under rearmament, the increase in the amount available for nonmilitary consumption and investment would be on the average about one-half as high as that in 1954. This, however, is a highly important conclusion, since it implies that, while rearming, Germany may be able to have not only guns but also a moderate, if significant, increase in butter as well.

III

These estimates will certainly require revision in the light of developments. "Other things" assumed to be equal can change greatly in times that are as uncertain politically as ours. In the foregoing projections, certain broad assumptions have been made and only certain variables introduced; other factors (such as prices, and the rates of investment and of labor productivity) have been assumed constant. It should be noted in particular that the conclusions could be quite different if the rate of growth, due to recent and future investment, were to be significantly higher than the basic assumed rate of 5 percent. Changes in the size and speed of Germany's rearmament effort would also make a difference. If the national product were to grow at a faster rate (for example, by 6 to 7 percent, as projected by the Minister of Economic Affairs, Ludwig Erhard, for 1955), there would be of course more butter; on the other hand, if the army were to be built up in, say, two years, and even more importantly, if the annual defense contribution were considerably larger than assumed here (say, more than 12 billion, as forecast for E.D.C.), there would be less.

Finally, German economic policy during the rearmament period may considerably alter the indicated trends. Germany expects, of course, to compensate for some of the adverse influences that virtually full employment, intensified by the rearmament effort, would have on economic growth and on the margin available for an expansion of nonmilitary consumption and investment. She hopes, for example, to tap additional labor supplies and to compensate for manpower losses by raising output per man through increased "intensive" fixed investment. To the extent that she succeeds in these respects, especially in solving the labor problem, the economic growth would of course be accelerated.

IV

The most serious problem expected to arise from rearmament is a shortage of manpower. However, as we have noted, it will not spring up overnight. Assuming a gradual build-up of military manpower between 1957 and 1959, the average drain might be 83,000 in 1957, 250,000 in 1958, 417,000 in 1959, and 500,000 in 1960 and thereafter.

Little is to be gained from the reservoir of unemployed. This may seem a surprising assertion, since average unemployment in 1954 (1,220,000 or about 7.5 percent of the average employed population) was relatively high. But average figures are deceptive because they are greatly affected by the seasonal lay-offs during the winter months in the building industry; construction is playing an important part in Germany's postwar economy and there is still much rebuilding to be done. Owing to these lay-offs, general unemployment in December 1954 was as high as 1,288,000 (an increase of 466,000 over September). But in view of the fact that men out of work in the building trade during the winter months cannot be shifted to other trades (or cannot be simply drafted into an army, for that matter), the rate of unemployment before the winter months is more significant for our considerations. The unemployed in September numbered some 820,000, equivalent to 4.6 percent of the employed labor force; a rate of 5 percent or less is considered by international standards as representing virtual full employment.

The German Minister of Labor has estimated that of these 820,000, some 400,000 represent unemployable men and women (owing to age, immobility of labor, and so forth) and 200,000 are out of work owing to shifts between jobs and other temporary influences; this would leave a reserve of only some 220,000 for an expansion of the active labor force. Moreover, partly because of somewhat improved economic conditions in the Soviet Zone, the net inflow of "immigrants" from East Germany (not all of whom are employable) subsided in 1954. On the basis of present evidence, East Germany no longer represents an important source of labor for West German industry, but this might possibly be altered if, for example, the West German wage level were to rise markedly. Finally and presumably most important, the number of young persons entering employment for the first time (which increased each year between 1951 and 1954) will begin to decline in the current year. It will decrease significantly in 1956, and will continue to decline until 1960. This year, 920,000 young people of both sexes will graduate from school, but by 1960 the number will have decreased to 580,000. Against these figures should, of course, be set the totals of men and women dropping out of the labor force, but the statistics are not readily available.

While it is difficult to gauge the impact on German industry of the progressive withdrawal (or withholding) of labor from production, there is general agreement that by 1958-59 labor shortages, especially of skilled labor, will become acute. Shortages of skilled labor have made themselves felt in the past, especially in the building industry, and it is on this industry that rearmament will initially make the greatest demands. One of the effects of the tighter labor market is, of course, the growing bargaining power of the workers. There was a wave of wage increases in the summer of 1954; and pressure is currently being brought to bear by the labor unions for further increases. Raises have already been granted in the building industry (6 to 8 percent) and in coal mining (9.5 percent). The outcome of wage negotiations may well determine Germany's future cost and price structure.

To counter inflationary pressures that may develop as a result of labor shortages, Germany expects to stretch her labor reserves to the limit by resettling East German refugees from predominantly agricultural areas, where they cannot be productively employed, to the industrial centers, and, more importantly, by drawing more women into the labor force. Female labor has played an increasingly important rôle in West German industry, and it is hoped that, possibly by offering stronger incentives, more women (not now registered as unemployed) may be drawn from the homes to gainful employment. The number of working women has increased by almost 6,000,000 from 1939 (when the female population was about 20,000,000) to 1953 (when it was almost 26,000,000). While male employment went up 23 percent during this period, female employment grew by 41 percent, the uneven growth being due in part to the changed sex composition of the population (a result of war losses) and the greater responsibilities that women had to shoulder in order to support families. The draft may create new responsibilities of this nature, and women may be willing to respond, as they have in other countries; marriages may also be postponed, thus keeping women in the labor force longer.

A further source of manpower for industry may be the importing of Italian labor. The proposal, originally made in a speech by the German Minister of Economic Affairs, was discussed by him and Signor Vanoni, Italian Minister of Finance, during conferences held in Bonn in December last. At that time it was agreed that a mixed Italo-German committee should meet in mid-January to examine the possibilities for the employment of Italian workers in Germany. It was reported later that no full agreement had been reached on the matter in the German Cabinet, and that the meeting of the committee had been postponed. The idea is of course resisted by the German labor unions, while the German Minister of Labor has cautioned that the country should resort to importing labor only after all available resources of German labor have been tapped. Some German economists have commented that bringing in Italian labor would not alone solve the problem, since these workers would increase consumer demand in other sectors of the economy, such as housing. But so did the influx of workers from East Germany, while the over-all effect of their migration has been extremely beneficial; they added more to production than they consumed. From a supranational point of view, the importation of Italian labor may benefit both the German and the Italian economies. If part of the Italian unemployed, who numbered about 1,800,000 in 1954, could be put to work in West Germany, Italian expenditures on relief would decrease, and as a result of workers' remittances Italy's balance of payments might be considerably improved.

However, neither increased female labor nor imported Italian labor would meet the need for skilled laborers, who are of extreme importance for Germany's highly specialized industries. In order to overcome this obstacle, there seems to be a need to increase labor productivity by better planning, improved production methods and increased investment. "Intensive" investment, aimed at raising productivity of manpower already employed, should, it is held, replace "extensive" investment, aimed at providing productive employment for additional manpower. Under the pressure of labor shortages and possibly wage increases, German industry is likely to take this course. Coal mining and the iron and steel industry appear to deserve special attention; there seems to have been no substantial increase in productivity over the prewar period in the latter industry, while in coal mining there has been a sharp drop in productivity. But in view of the expected lower rate of growth in the national product, even the expected "intensive" investment may be possible only at the cost of inroads on consumption or nonindustrial investment. Such a policy might require a good deal of persuasion, since maintenance of the present high level in publicly-financed investment, especially in home construction, is close to the German heart.

V

The rather rapid comeback of the German Federal Republic in world markets has been partially attributed, especially since the Korean war, to the absence of the burden of armaments. The advantage that this gave to German foreign trade has often been deplored, especially by British traders. Reasoning in the same way, German industrialists have shown little enthusiasm about a rearmament prosperity which may prove to be fleeting. They have regained footholds in foreign markets and appear reluctant to convert plant to arms production, possibly at the expense of their capacity to export.

It has therefore been suggested by German governmental economists that the Federal Republic should attempt to leave its export potential intact by importing arms, to the largest possible extent, from countries that have already converted their industries to arms production. Such nations would seem to have considerable cost advantages in arms production as compared with Germany, which would still have to go through the process of conversion. Germany, on the other hand--as is suggested by her strong competitive position in world markets--appears to have cost advantages in many lines of export goods. Generally speaking, it would therefore seem advantageous for Germany to convert her export industries to war production to the least possible extent, to maintain thereby a high level of production for export, and to import war matériel instead. If such a policy of importing rather than producing arms were to be followed, Germany would trade imports of arms for current exports at favorable terms, or possibly she would trade such imports for accumulated exchange reserves representing the fruits of earlier production. The latter alternative might be quite feasible in view of Germany's very substantial reserves of gold and foreign exchange.

While buying arms abroad would add to Germany's current import requirements, the increase might be less than would be the decrease in exports under a program of converting industries to armament production. The net result would be to minimize the possible adverse impact of rearmament on the German balance of payments, as expressed in a decline in current-account surpluses. On the other hand, a decline in those surpluses might be considered a desirable development. In recent years they have been the largest single factor tending to increase the German supply of money; and they have drained other nations of gold and dollars. Much thought has been given both by Germany and the O.E.E.C. to the problem of modifying the extreme degree to which Germany has become a creditor.

Germany would of course herself produce those army goods in the manufacture of which she excels, such as optical instruments, and she may wish to make uniforms, for example, which would stimulate the textile industry. She may also resume producing such goods as ball bearings, at which she has excelled in the past but which she was not allowed to produce under the Allied arms curb.[iv] The promise of United States offshore orders might be an incentive for making certain things that an army needs. Such orders have been a substantial source of dollars for other nations, but Germany to date has received only a relatively small amount of them--15,000,000 to 20,000,000 within recent years. United States-aid dollars could be spent, in part, for orders placed with German manufacturers for equipping German forces or those of other NATO members. Consequently, Germany may wish to follow a selective policy, resuming, for example, the production of ball bearings for export under offshore procurement programs (as well as for domestic consumption and general export), while importing, say, jet planes from Britain.

American equipment for the initial outfitting of Germany's forthcoming army has reportedly been stored on both sides of the Atlantic, ready to be delivered immediately when German rearmament gets under way. However, while it has been paid for by Congressional appropriations, no decision appears to have been reached in this country as to whether such equipment, as well as further aid, will be made available on a basis of straight grants or under some sort of lend-lease arrangement, with a settlement to follow at a later date. Since the United States contribution to the German army will presumably be large, the choice of methods may have a considerable effect not only on Germany's budgetary outlays but also on her balance of payments in future years. To date, as already stated, German officials (in making a budgetary provision of 9 billion D-marks) appear to be operating under the assumption that Germany will not have to pay precious dollars for the United States contribution.

A substantial source of dollar receipts has been the so-called "troop dollar," i.e. money that United States soldiers stationed in Germany spend out of their own pay. It will probably not decline. The U.S. soldiers' pay is not financed by occupation costs, and according to official statements, the number of United States troops stationed in Germany will not be reduced when the occupation régime ends. These spendings amounted in 1953 to the large sum of $235,000,000 (equivalent to about one-fourth of German exports of goods and services to the dollar area in that year) and appear to have been running at the same rate in 1954.

Termination of the occupation régime may, however, entail substantial dollar outlays by United States military establishments. Allied authorities, as already stated, have been spending out of occupation costs some 6 billion D-marks annually, but it would be sanguine to assume that the dollar equivalent of this amount (1.4 billion dollars) will be available henceforth to bolster Germany's balance of payments. In the first place, of the 9 billion D-marks to be appropriated for rearmament in 1955-56, 3.2 billion ($760,000,000) will go to the Allies as "stationing costs" in monthly diminishing ratios (from 500,000,000 D-marks to 200,000,000); and certain provisions for stationing costs may also be made in future years. The Paris treaties stipulate that Germany must share the expense of maintaining troops of the partner states in her area for 12 months after the treaties go into effect. In the treaties, Germany recognizes, however, the need of common defense against aggression and therefore expresses her fundamental willingness to negotiate arrangements for the maintenance of other troops in her area after that first year. In the second place and presumably most importantly, Allied expenditures on German goods and services have probably passed their peak, because the chief investments for maintaining Allied forces have already been made. Dollar receipts by Germany resulting from the ending of the occupation régime may nonetheless prove to be rather substantial.

Summing up, Germany, by following a well-considered selective policy of reconversion, could minimize the possible adverse impact that rearmament may have on her present current-account surpluses. She may even be aided by the receipt of offshore orders, and by manufacturing goods for export that she has not been able to produce under the Allied curbs. She will certainly continue to receive troop dollars. In addition, she may earn substantial amounts of dollars subsequent to the gradual decline of her payments for "stationing." Since other NATO members received armament aid on a grant basis for their arms build-up after Korea, it may not be unrealistic to expect that Germany will be treated likewise. Consequently, it is quite possible that Germany's over-all balance of payments will not deteriorate, especially considering the benefits to be reaped from the removal of Allied controls and the achieving of national sovereignty.

VI

There remains the question of inflation. Increased pressure as a result of rearmament must be expected on Germany's already strained resources, and the problem should therefore not be taken lightly. However, as we have seen, much can be done by Germany to lessen the new strain. If the Federal Republic succeeds in replenishing its labor force or increasing productivity by intensive investment, the influences retarding economic growth may be minimized, upward pressures on wages owing to labor shortages reduced, and the threat of an inflationary spiral avoided. Moreover, the pressure of rearmament on Germany's resources of capital and labor can be further lessened by a well-considered policy of importing rather than reconverting--i.e. shifting available resources of capital and labor to arms production. Finally, Germany, despite the requirements of rearmament, wishes to maintain free competition as much as possible among armament manufacturers, and to keep away from the now detested "dirigist" policies of the controlled Nazi economy. No "war economy within the economy" is to emerge. Aversion to this is also one of the reasons why Germany opposed the French--sponsored plan for a European armament pool. The plan has now apparently been abandoned.

Inflation will nonetheless remain a possibility in Germany, as in any country engaged in rearmament. Arms production creates income and demand, but does not increase proportionately the supply of purchasable goods. Germans are highly conscious of the dangers; within a generation they have lived through two disruptive inflations induced by rearmament and war. To avoid inflationary pressures, the redundant purchasing power must be either taxed away or absorbed by long-term loans. Rather than financing the rearmament effort by borrowing from the banking system, the German Government therefore expects to finance it by taxation and long-term borrowings based on genuine savings. There is danger, however, that Germany may attempt too many things at the same time. She wishes not only to finance the rearmament effort without inflation, but also to maintain a high level of investment in such projects as housing, to reduce interest rates, and to lower taxes further. All this may not be simultaneously possible, and a compromise may have to be struck.

In the fiscal year ended last March, the German Government was able, by an unusual combination of circumstances, to finance both its ordinary budget and its capital budget through tax revenues. Having assumed that the E.D.C. would come into being in fiscal 1954-55, it had provided in its ordinary budget 9 billion D-marks for occupation costs and rearmament. But when only 7.2 billion for occupation costs were required, it became possible to apply the remainder of 1.8 billion to the capital budget. This will not be possible in the current fiscal year 1955-56, when the full amount of 9 billion D-marks provided for this year will be fully utilized, or earmarked for rearmament and stationing costs. The government expects to finance the 1955-56 capital budget by a long-term loan of 1.5 billion D-marks. This loan, however, is not to be floated earlier than in February 1956, so as to give preference to industry in tapping available funds, and also to test the tone of the capital market.

Notwithstanding, competition will develop in the capital market in the longer run as between government, industry and other borrowers; and the government may find it difficult, when rearmament gains momentum, to pursue successfully its policy of lowering the interest level. As regards the distribution among borrowers of the funds available in the market, the government appears to have considerable powers; most new capital issues require government approval.

The German Government has been criticized by foreign observers on the grounds that, on the verge of rearmament, taxes have been lowered by the so-called "great tax reform," which became effective in January 1955. According to an official estimate, the reform will save individual and corporate taxpayers 3.2 billion D-marks annually. The measure was adopted partly on the ground that it would increase the net disposable income of individuals in the medium and high-income-tax brackets--whose propensity to save is believed to be high--and that this, in turn, would contribute to a revival of the market for industrial shares and obligations. If this should prove to be true, a lowering of taxes and the undertaking of a rearmament effort (which will not gain momentum until 1958-59) may not necessarily prove incompatible with a balanced economy. As pointed out earlier, considerable "intensive investment" will be required in order to increase productivity and thus lessen the effects of the prospective labor shortage, which appears to be the most pressing problem of the rearmament effort. However, tax policy may have to be revised when the rearmament effort gains momentum.

VII

For the second time within a generation the German economy will be called upon to engage in a major rearmament effort. Twenty years ago, in March 1935, Hitler abrogated the clauses of the Versailles Treaty that had limited German armament. Within four and a half years, Hitler's Reich built up a war machine capable of waging aggressive war. All German economic resources were devoted to the effort. To cope with strong inflationary pressures, the Nazi state resorted to direct controls, notably the freezing of prices (the so-called "price stop") and of wages. Governmental decrees, vigorously enforced, replaced the laws of economics, with the result that both prices and wages were kept remarkably stable.

However, one basic economic condition greatly assisted Germany in these respects, at least in the early stages of rearmament: at the outset there were considerable idle resources of capital and labor to be drawn upon. Before starting rearmament, there were still some 2,000,000 unemployed (2,400,000 in August 1934 and 1,700,000 one year later); this was in addition to an undetermined number of men and women who had been put to work at quasi-productive activities just to take them off the streets. Consequently, the rearmament effort, in its early stages, led to an over-all, if uneven, economic growth.

The economic environment of the forthcoming rearmament effort will therefore be quite different from that in the thirties, and will pose different economic problems. But in view of the fact that the rearmament effort is likely to be moderate and to extend over a period of years, the economic problems can be taken in stride. They will have to be solved, not by a mass of controls and legalized violence as in the Nazi state, but by well-considered economic and fiscal policies and happy compromises between conflicting policy objectives.

[i] These and all other subsequent estimates of G.N.P. are at constant 1954 prices.

[ii] The most important of these are a law for setting up cadre units; a defense law as a basis for compulsory military service; a pension law for the future regulars of the new army; a new military penal code; a legal basis for the Supreme Command; a law on the authorization of arms production under Article 26 of the Basic Law (the constitution); a law concerning refusal to serve in the army; a law concerning the supply of goods and services to the armed forces; and a law on the procurement of land for military purposes.

[iii] These figures have been calculated on the basis of estimates on the army build-up (83,000 in 1957, 250,000 in 1958, 417,000 in 1959, and 500,000 in 1960 and thereafter) and of computations of the average output per worker (G.N.P. divided by average working force) in the years 1953 and 1954; average annual output per worker in these years was 8,685 D-marks.

[iv] Allied production curbs will be removed when Germany becomes a sovereign nation. Hence, certain branches of the machinery, electrical and chemical industries, as well as the plants specializing in the production of ball bearings, will no longer be subject to restrictions; moreover, commercial air lines will be able to resume operations. However, by a declaration which is part of the Paris agreements, Germany undertook to manufacture neither atomic, biological nor chemical weapons (the so-called A-B-C weapons), nor long-distance and guided missiles, warships (with the exception of smaller ships for defense purposes), and bomber aircraft for strategic purposes.

You are reading a free article.

Subscribe to Foreign Affairs to get unlimited access.

  • Paywall-free reading of new articles and a century of archives
  • Unlock access to iOS/Android apps to save editions for offline reading
  • Six issues a year in print, online, and audio editions
Subscribe Now
  • H. J. DERNBURG, Economist at the Federal Reserve Bank of New York; author of many financial articles and reports
  • More By H. J. Dernburg