ALLIED policy in Germany still is formally governed by the Potsdam agreement, though every day that passes increases the doubt whether this agreement can and will be implemented. Why is this the case, and what can we do about it? The danger of a breakdown of Four Power collaboration in Germany is so alarming that our examination of the alternatives still open to the United States should be stated in the most factual terms.

The principal economic provisions of the Potsdam agreement were as follows:

(1) Germany west of the Oder-Neisse line was to be treated as an economic unit. To this end, common economic policies would be established in the various zones and an "equitable distribution of essential commodities" arranged among these zones. Central economic agencies would be established to administer transport, finance, foreign trade, communications and industry.

(2) Reparations were to be collected by the removal of plant and equipment from Germany and by the appropriation of German external assets. The claims of the U.S.S.R. and Poland would be met by removals from the eastern zone, together with a share from the west. The claims of the western Allies would be satisfied by removals from the three western zones.

(3) German productive capacity was to be reduced, by means of reparations transfers and destruction, to a level no higher than sufficient to yield a standard of living in Germany equal to the average of other European countries, exclusive of the United Kingdom and the U.S.S.R.

The decision to partition Germany for the purpose of reparations collections seriously contradicted the decision to treat Germany as an economic unit and sounded an ominous warning of events to follow. It was not made clear at Potsdam whether reparations claims would be satisfied by capital removals or whether payment could also be expected from current output. At American insistence, the payment for necessary German imports was made a first charge on German exports from current output. Obviously, if Germany is de-industrialized to the extent proposed at Potsdam, and the "first charge" principle is followed, Germany cannot pay reparations out of current output. But it is by no means clear that this fact is recognized by all the claimants to reparations.

The Potsdam agreement is likewise ambiguous as to whether, once de-industrialization is accomplished, Germany will be allowed to recover. The Department of State announced on December 12, 1945, that "the United States intends, ultimately in coöperation with its Allies, to permit the German people under a peaceful democratic government of their own choice to develop their own resources and to work toward a higher standard of living subject only to such restrictions designed to prevent production of armaments as may be laid down in the peace settlement." However, there is no indication that our Allies would agree to a policy of permitting German recovery. In fact, if we may judge from the Russian reaction to the American proposal for a German disarmament treaty, which contemplated a control of German military capabilities by other means than permanent de-industrialization, such a policy is completely unacceptable.

Meanwhile, in conformity with the Potsdam directive, the Allied Control Council announced on March 28 of this year the levels of industrial capacity and output to be permitted Germany, according to major industrial categories. The production of all finished military items is, of course, prohibited. In addition, it is proposed that a sizable list of militarily-important industries, including synthetic oil, rubber and ammonia, aluminum, magnesium, ball bearings and many others, be eliminated. However, it is provided that "Facilities for the production of synthetic gasoline and oil, synthetic ammonia and synthetic rubber, and of ball and taper roller bearings, will be temporarily retained to meet domestic requirements until the necessary imports are available and can be paid for." Installed capacity for a second group of industries, including iron and steel, chemicals, machine manufacturing and engineering, and transport engineering, will be drastically reduced. The production of steel ingots is to be reduced to 5,800,-000 tons as compared with a prewar capacity of about 25,000,000 tons. Finally, for a third group of industries, including coal, potash, many building materials, light manufactures and consumer goods, no reduction in capacity is proposed. Here the objective is stated in terms either of expected output or of the greatest output that can be achieved.

The negotiations to determine allowable levels of German capacity and output proved very difficult and took two months longer than foreseen by the Potsdam agreement. As far as the American negotiators were concerned, the procedure was essentially the bargaining of a drastic reduction of steel capacity, opposed principally by the British, against a lenient treatment for consumer goods industries, opposed by the Russians and the French. The Control Council has estimated that the effect of what was eventually agreed upon would be to reduce the level of industry (excluding building and building materials) to about 50 or 55 percent of 1938 capacity. The standard of living contemplated would fall somewhat below that attained in Germany in 1932, at the bottom of the depression.

Assuming the destruction and removal of plant and equipment as planned, could the German economy, operating as an economic unit, provide the German people with the standard of living envisaged at Potsdam? This necessarily is a highly speculative question. From an economic point of view, the most serious considerations are whether the drastically reduced heavy industrial capacity is adequate to maintain the estimated production of consumer goods, coal and light manufactures, together with the desired level of construction; and whether the German economy could develop the exports (estimated at three billion marks, in 1936 prices) required to pay for necessary imports. While one hesitates to answer these questions affirmatively, one cannot say, on the other hand, that the attainment of the goals foreseen is impossible.


If it could be assumed that Germany is to be treated as an economic unit and that no further handicaps are to be imposed on her recovery, a strong case can be advanced for the removal of plant and equipment as laid down in the Potsdam agreement. But the treatment of Germany as an economic unit would require a determination of her western frontiers, the removal of barriers to trade and movement among the zones, and the establishment of central economic agencies for the administration of national services and policies.

The most effective arguments against de-industrialization come from those impressed with the consequences that a loss of German output would have for the economic recovery of Europe. There is substantial merit to these arguments. It needs to be borne in mind, however, that, 1, the adverse effect of this de-industrialization program alone on European recovery is usually grossly exaggerated; 2, de-industrialization represents a decision to collect reparations from capital equipment rather than from current output, which can only be applauded; 3, the program of plant and equipment removal is clearly a necessary condition to an acceptance by Russia of a unified administration of Germany. These conclusions need to be elaborated.

In the first place, the removal of plant and equipment has little or nothing to do with the present desperately low standard of living in Germany, nor would it be likely -- granted a unified treatment of Germany -- to have any appreciable effect on the standard of living within the next two or three years. The food situation, in Germany as elsewhere, is determined by the size of the 1945 harvest and by existing stocks. This situation will substantially improve with the 1946 harvest, and only with this harvest. Adequate provision has been made for the continued output of such fertilizers as are produced in Germany, and shortages of agricultural equipment are not likely to limit German agricultural output seriously. The under-maintenance of German lands in wartime, the break-up of estates in the east and, above all, a continued stoppage of interchange among the zones, may well injure food production and distribution; but none of these influences is attributable to the policies announced at Potsdam.

The production of other civilian goods in Germany and the rest of Europe will for some time be limited by the scarcity of coal and the inadequacy of transport facilities. True, if more Ruhr coal were allocated to Germany and less to other countries, output in Germany could increase, though at the expense of output elsewhere. Coal and transport lacking, the existence in Germany of plant and equipment in perfect condition cannot assure output.

The de-industrialization program is not likely to reduce German output seriously in the immediate future, nor would it represent, if American views were followed, an insuperable obstacle to the reëstablishment of a prosperous Germany 15 or 20 years hence. A modern economy has very great recuperative power if it is not handicapped seriously and continuously for political reasons. The impact of the Potsdam program on German output would be felt primarily, then, in an intermediate period.

Although the transfer of plant and equipment from Germany would undoubtedly decrease output in Germany more than it increased output elsewhere in Europe, this effect can also be easily exaggerated. Moreover, there are some compensating advantages. Germany's capacity in certain basic industries was expanded for war purposes beyond anything she could possibly utilize effectively in peacetime. The number of German machine tools, estimated at 2 million, exceeded even that of the United States. The only time during the period between the wars when Germany's iron and steel capacity was fully utilized was in the years when she was most actively preparing for war. In heavy engineering and in other basic industries, her capacity was of little peacetime utility. Large transfers from these and other industries could take place without seriously affecting her economic health. Furthermore, many of her plants were placed in uneconomic locations as part of her military program or so as to disperse them to reduce their vulnerability to attack; the Hermann Goering steel works may be taken as an example. The transference of such facilities to other countries need not involve a serious loss of efficiency from the European point of view.

Finally, even if European output is decreased as a result of such transfers, there is something to be said for accepting it if in the long run it leads to a better balance between industry and agriculture in Europe outside of Germany. After all, not only was the German economy heavily industrialized by the impact of war and preparations for war, but industry in the countries occupied by Germany was substantially reduced by the removal of equipment to Germany and by destruction and extensive deterioration.

Nevertheless, when all this and more has been said, it must be recognized that the removal of plant and equipment from Germany beyond what can be effectively used elsewhere represents a loss to European as well as to German output and will retard the recovery of the Continent as a whole. The transit trade of Belgium and Holland will be substantially injured, and these and other countries will lose accustomed markets in Germany and accustomed sources of supply. The effect of the German de-industrialization policy on European recovery may often be exaggerated, but it is real. However, other considerations need also to be taken into account.

The de-industrialization program represents a decision to collect reparations from capital equipment rather than from current output. While Potsdam is silent on the subject of reparations from current output following the period of capital removals, an application of the first charge principle, mentioned above, will effectively preclude further reparations collections after 1948. Withdrawals were limited in time as well as by volume, on the entirely reasonable hypothesis that a short and sharp period of exactions is preferable to one stretching into the distant future.

Moreover, it seems safe to say that if the decision at Potsdam had been to take reparations from current output rather than in the form of capital removals, very little if any reparations would in fact have been collected. With coal and food shortages and transport difficulties drastically limiting German output, relief shipments into the country would probably exceed net exports from current output. As the Germany economy recovered, a Four-Power administration would be faced continually with the problem of assuring German exports sufficient to cover necessary imports (and perhaps occupation costs) before reparations claims could be met. A task less conducive to the maintenance of tolerable relations among the occupying Powers can hardly be imagined.

Finally, the de-industrialization of western Germany is clearly a necessary condition to Soviet Russia's participation in the Potsdam policy of administering Germany as an economic unit. Soviet Russia and Poland have a claim to 25 percent of the plant and equipment made available by removals from the western zones. Obviously, Soviet Russia would consider the maintenance in western Germany of large industrial capacity adapted to war purposes as a menace to her security. A failure to carry out the program of plant removals as specified in the March 28 decision of the Allied Control Council could lead only to a partition of Germany and the absorption of the area east of the Elbe into the Russian security zone.

There is more than a suspicion, of course, that this will happen in any case. The western Powers must decide whether they can afford to carry out the program of plant removals without first having made sure of the implementation of the economic provisions of the Potsdam agreement which are designed to accomplish the treatment of Germany as an economic unit. This decision must certainly take into account the probable effects which a failure to implement the provisions would have on an eventual German settlement and, with respect to such a settlement, on the position of the western Powers.


Although the Potsdam agreement included provisions for common economic policies in the various zones, the equitable distribution of commodities among the zones and the establishment of central economic agencies, they have not been carried out pending the settlement of Germany's western frontier. French unwillingness to participate in a central economic administration for Germany before some agreement has been reached on the issue of political separations and the international economic administration of the Ruhr and Rhineland has been the immediate stumbling block; but it also is reported that the U.S.S.R. seeks to postpone the establishment of common economic policies until reparations transfers have been completed.

In the meantime, economic and political activities are proceeding in the different zones in very different directions and at a very unequal pace. In the Russian zone, there has been an extensive nationalization of such industry as remains; the authorities have insisted on a united front in political parties and trade unions; and they have imposed systematic and comprehensive land reforms. In the British zone, the coal mines have been nationalized, revolutionary movements have been discouraged and a beginning has been made at building up the Social-Democratic Party. The Americans, by all accounts, have pursued a more drastic policy of de-Nazification than is favored elsewhere; they have carried through a program of local elections; and their economic policy seems to have been essentially negative.

To some extent the differences in development have been due to differences in the avowed intentions of the occupying authorities. To a much greater extent, however, they seem to have resulted from the emergence of local forces that could count on the approval of the occupying authorities. Whatever the reason, the fact is that objective differences of great importance are discernible in the economic and political development in the various zones and that these cannot help making the imposition of common policies and the establishment of a central economic administration more difficult. No one can say how long the application of common political and economic policies can be postponed without making partition inevitable. It may be that the reintegration of Germany on a basis mutually acceptable to the four Powers has already become impossible. If it is to be attempted with any hope of success it cannot be postponed, in the author's opinion, until 1948.

Today and for the immediate future Germany presents a serious problem in relief. In addition to maintaining troops there, the western Allies are saddled with the burden of importing into their respective zones the minimum quantity of food necessary to prevent starvation. This continuing burden can be lessened only when Germany has developed an export from current output sufficient to pay for necessary imports. Even on the assumption of a unified Germany living at a lower standard than that of 1932, the Allied Control Council estimates that 1.5 billion marks (1936 value) of imports of food and fodder will be required annually. As long as commerce among the zones is seriously restricted, the import requirements of the western zones in food and other indispensable consumer goods are apt to be larger.

After the last war, German reparations were financed extensively by American loans. This time, we had hoped that by making payments for necessary imports a first charge on exports we could avoid shouldering the burden. However, if there are no exports -- or only very small ones -- the payment for necessary imports becomes a first charge on the occupying Powers. So far as the western zones are concerned, this means, in effect, the United States. Britain and France borrow from the United States to finance their external obligations; and these are increased by commitments in Germany which can be lessened only as her economic recovery permits her to increase domestic production and develop an export trade. The failure to reintegrate Germany's economy handicaps her recovery more immediately than the plant removals do. The longer this continues, the larger the problem of German relief will become and the greater will be the direct and indirect financial burden to the United States.

These considerations lead to the conclusion that to permit the removal of plant and equipment from western Germany before the other economic provisions of the Potsdam agreement are given effect would be a tragic mistake. The fundamental assumption underlying the Control Council's calculation of allowable industrial capacity is that "Germany will be treated as a single economic unit." Delay in establishing a central economic administration and common economic policies measurably increases the chances of a partition of Germany between east and west. If meantime the plant and equipment on which the western zones must rely for necessary exports have been removed or destroyed, the western Powers, and principally the United States, will face a relief problem in Germany of long duration.

The Potsdam de-industrialization program can be justified on the assumption that the German economy is operated as a unit, and on that assumption only.


The State Department has several times since Potsdam indicated the kind of policy toward Germany which it favors. On December 12, 1945, the Secretary of State, looking beyond the de-industrialization program scheduled for completion in 1948, said he considered that "the German people will during this period recover control over their economy subject to such residual limitations as the occupying powers decide to impose." And he added: "These limitations, which will be determined by agreement among the occupying Powers, should, in the opinion of this Government, be designed solely to prevent German rearmament and not to restrict or reduce the German standard of living."

Assuming that, concurrently with de-industrialization, the German economy were integrated within newly defined frontiers, the next steps would be gradually to transfer governmental functions to German agencies and to remove barriers to economic recovery. The withdrawal of occupation forces from Germany would presumably coincide with the recognition of an independent German government acceptable to the Allied Powers. From then on, as indicated by the draft of a German Disarmament Treaty made public by Secretary Byrnes in Paris on April 27, 1946, the resumption of German military preparations would be prevented by a system of Four-Power inspection and control of imports. Subject to the provisions of the Treaty, Germany would function as an independent nation dominated neither by east nor west. Any violation of it would provoke Four-Power military intervention.

The policy of the American Government regarding Germany is evidently part of a larger policy looking toward a general settlement in Europe as a whole. In its view, the best prospect for peace in Europe and in the world seems to lie in the survival of a substantial number of neutral and independent countries. Probably American efforts to bring about this kind of settlement in Europe -- and in Germany in particular -- are foredoomed to failure. The provisions of the Potsdam agreement that constitute a first step in that direction, namely the provisions designed to treat Germany as an economic unit, have never been implemented; and further delay can only increase the difficulties of Four-Power collaboration.

If the American policy fails, what alternative would then be open to us?

The difficulty is not any inadequacy in the program to accomplish what every Allied document since Yalta has alleged to be the objective of Allied policy in Germany, namely, to prevent the reëmergence of a military, aggressive Germany. A long step toward that objective had already been accomplished by the catastrophic character of the German defeat; and the system of inspection and import controls proposed in the German Disarmament Treaty would be quite adequate to prevent Germany's development of atomic or other weapons of war.

Our policy in Germany and elsewhere in Europe seems to be failing because the other Powers, or at least certain of them, do not conceive that the essential problem is to disarm Germany and keep her disarmed. As they see it, the problem is how to make use of Germany and the former German satellites or at least how to prevent her and them from being used by potential enemies. Germany could make war on Russia with any chance of success only as an ally of western Powers. This Russia knows, and it is shaping her policy toward Germany. Germany would be likely to make war in the west only with the approval and support of Russia. This we must take into account in shaping our policy toward Germany.

When we face the problem of Germany in this manner we see that there are three possible ways in which any one of the occupying Powers might promote its security objectives. One would be to bring into existence a German Government subservient to and under the control of that Power. This solution would be excessively difficult to accomplish within the context of Four-Power occupation and administration. Another would be to make and keep Germany so weak as to be of no use to potential enemy Powers. In addition to requiring permanent occupation, in which, presumably, other Powers would share, this would occasion serious social and economic dislocations and would awaken humanitarian opposition. The third and simplest solution would be partition, which presumably would assure control by each of the interested Powers over at least a part of Germany. There is some evidence that the U.S.S.R., Britain and France have considered this as increasingly probable and that they have shaped political and economic developments in their respective zones toward such an eventuality. Their calculations have no doubt been strongly influenced by estimates that American presence and influence in Europe are temporary phenomena on which a long-run policy cannot, or need not, be based. Certainly many aspects of our policy since V-E Day both at home and abroad could be interpreted to support that conclusion.

If partition is the solution, the Potsdam policy on reparations and de-industrialization clearly becomes inapplicable. Some plant and equipment might be transferred from the western zones to the western Allied nations, but the amounts would have to be severely limited. Partition would obviously intensify and confirm the split in Europe between east and west. American policy in Germany would have to become a part of a larger policy toward western Europe, probably designed actively to support a western bloc. Doubtless this would involve an attempt to integrate the three western zones of Germany into a single economy, which would depend heavily for its existence on the export of industrial products. How such an economy could be articulated with the economies of western Europe and the world raises problems which have scarcely begun to be considered and which cannot be discussed here.

There is no doubt in the author's mind that, granted the division of Germany and of Europe, the interests of the United States would require that it adopt a positive policy in western Europe, including considerable participation in its affairs and much assistance to individual countries. In the absence of active American participation and support, the U.S.S.R. might well fall heir to Germany. Britain and France, either singly or together, might attempt vigorously to hold certain German areas. Whether over any long stretch of time any part of Germany could be immunized against an active, nationalist Communist movement, armed with the effective slogan of a united Germany, seems rather doubtful.

In the course of time such a development in Germany would no doubt overcome the reluctance of the American people and Congress to adopt a policy which could be termed one of "foreign intervention." The foreign policy which they would then sponsor could hardly fail to be anti-Russian. How much support the United States could by then expect to find in other countries would depend upon developments in western Europe and in eastern Asia which cannot now be foreseen. In the author's view, it will be difficult to avoid this chain of development unless the forces now working for the partition of Germany are checked. Obviously this would involve a reorientation of the policies of the Great Powers not only there but in other parts of the world as well.

As these lines are written, the policy agreed upon at Potsdam is in a condition of complete stalemate. American representatives have taken the position that reparation removals cannot begin until the conditions necessary to the treatment of Germany as an economic unit have been established. The French refuse to cooperate in a central economic administration until the question of the Rhur and the Rhineland is settled. The Russians are reported to favor a postponement of centralized control until reparations transfers are made. Under these circumstances, policy in Germany passes out of the hands of the Allied Control Commission and into the hands of the Council of Foreign Ministers. Face to face with all the implications of a partition of Germany, the four Governments may recoil and agree on an implementation of the Potsdam agreement. If so, this would mark an important step toward the eventual emergence of an independent Germany, with beneficial results throughout central Europe. If not, it may be presumed that the final seal has been placed on the division of Europe between east and west.

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  • EDWARD S. MASON, Professor of Economics at Harvard University; recently a member of the Board of Analysis, OSS
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