Berlin-Moscow

ON THE WORLD TODAY

PAYMENT of reparations for war damage is the most urgent issue before the Moscow Conference. Three major questions are involved:

First, and most important, whether Germany’s reparation indemnity, agreed at Potsdam in August, 1945, can be discharged by the payment of fixed quantities of capital assets in the form of surplus machinery and equipment, or whether Germany shall also be required to pay as “recurring reparations” some portion of the current production of the factories she is permitted to retain. Second, whether the Level of Industry Plan (the plan of the Allied Control Council for reparations and the level of post-war German economy), agreed on at Berlin in March, 1946, shall be revised to permit Germany to retain greater industrial capacity.Third, the terms on which reparations in the form of labor shall be exacted from Germany, and the date on which more than 3.5 million German prisoners of war, still held by the Allied powers, shall be repatriated. Beyond the bare decision to take labor as reparations, no agreements of any kind have been reached.

The points in dispute

Yalta (February, 1945). —The major decisions on reparations for war damage during World War II began with the meetings between Roosevelt, Churchill, and Stalin at Yalta in February, 1945. The report of the Conference merely announced that the Big Three had “considered the question of the damage caused by Germany to the Allied Nations in this war, and recognized it as just that Germany be obliged to make compensation for this damage in kind to the greatest extent possible.”

There is no reference in the report to the amount of reparations; this was left to future consideration. But compensation, this time, was to be sought “in kind,” not in money. The lamentable experience following World War I had taught the Allies a lesson.

The Soviets proposed at Yalta that Germany should be required to pay a reparation indemnity of 20 billion dollars — half in the form of existing capital plant and equipment over a period of two years, plus German assets abroad; and half in the form of current production, over a period of ten years. Of the 20-billion-dollar total, the U.S.S.R. sought for itself 10 billion dollars.

The Soviet proposal was not accepted. In a secret protocol at Yalta Mr. Roosevelt simply agreed, first, to accept the 20-billion-dollar figure as a basis for future discussion; and, second, that reparations “in kind” meant reparations from three sources: (1) capital assets, (2) current industrial production, and (3) labor. This brief agreement is the origin of a controversy regarding the payment of reparations from current output that has survived every conference since Yalta, and now appears on the Moscow agenda.

Moscow (June, 1945). — At the Moscow meeting of the Allied Commission on Reparations, late in June, 1945, a satisfactory understanding was reached on seven of eight American-sponsored principles on which reparations should be based. No agreement was reached on Principle 8, the matter of payment for necessary imports. Ambassador Pauley, the American representative, sensibly insisted that no reparations should be taken from current production until commercial exports were sufficient to pay for the costs of imports. Once burned, twice shy; the experience following World War I was still too painful to be ignored.

Thus was born the famous “first-charge principle”: that the proceeds of exports from current production and stock shall be available, in the first place, to pay for imports.

Potsdam (August, 1945). —At Potsdam, differences were finally resolved by Soviet acceptance of the first-charge principle, under a settlement which placed reparations on a zonal basis. The division of Germany into zones for purposes of reparations is one of the tragic mistakes of the occupation period.

The Soviets had insisted on the right to take as “war booty” not merely property owned by the Wehrmacht but any German factories and machinery which had been engaged in war production. The United States replied with emphasis that no reparation settlement was possible if the U.S.S.R. remained free to remove additional unspecified capital as war booty.

The American delegation finally agreed that each occupying power should take whatever reparations it chose from its own zone, without express limitation as to character or amount. The Soviet accepted the first-charge principle with that concession. Under the zonal program it made no difference whether the Russians described what they took from their own zone as reparations or as war booty. Zonal reparations, therefore, nicely settled the warbooty question, but undermined the possibility of administering the country as a unit.

There is no reference in the Potsdam Agreement to the payment of reparations in the form of current production; but there is no prohibition in the Agreement against the taking of such reparations if necessary imports are first paid for. As a practical matter, however, it was understood that if the Agreement was observed, there could be no recurring reparations because Germany could not produce enough even to pay for her imports.

Paris (January, 1946). — On the invitation of the United States, the United Kingdom, and France, an eighteen-power Conference on Reparation was convened at Paris, at which the Western Allies established the principles and mechanism of the division of their share of German assets. The agreement arrived at by the Conference during November and December of 1945 was brought into force on January 14, 1946.

Representatives of twelve nations, including France, signed a resolution expressing the hope that reparations would be available from “German existing stocks, current production and services,” but the Conference did not make specific recommendation to that effect.

Berlin (March, 1946). — After Potsdam the fourpower Allied Control Council in Berlin was instructed to determine “the amount and character of the industrial capital equipment unnecessary for the German peace economy and therefore available for reparations.” The Level of Industry Plan was adopted on March 28, 1946. Economic disarmament was the dominant objective; reduction of German living standards to the European average and reparations were distinctly secondary.

It is a fact of key importance that under the Plan no industrial capacity was retained for the production of reparations from current industrial output. If such reparations should now be taken without revision of the Plan, it would keep German living standards below even 1932 depression levels.

Paris (July, 1946). — Less than four months later Mr. Molotoy told his colleagues in Paris — and the world — that although Germany had not yet reached the levels of production authorized by the Allied Control Council, “it should already now be admitted that the peaceful industries of Germany should be given an opportunity to develop on a wider scale” and that “we should not put obstacles in the way of an increase in the output of steel.”

This was to be done, however, only if “inter-AIIied control shall inevitably be established over Germany and over the Ruhr industries in particular.” In addition, Mr. Molotov renewed the demand for 10 billion dollars in reparations for the Soviet, including reparations from current production.

Mr. Byrnes’s answer was prompt and direct. He pointed out that the demand for 10 billion dollars of reparations had not been accepted at Yalta, had not been supported at Moscow, and had been rejected at Potsdam.

To the demand for reparations from current production Mr. Byrnes replied at Stuttgart on September 6, 1946. In fixing the levels of industry, he stated, no allowance was made for such reparations. “Obviously, higher levels of industry would have had to be fixed if reparations from current production were contemplated.” The existing levels, he felt, were sufficient only to enable the German people to become self-supporting at living standards approximating the European average.

The competing positions

The American position would appear to be that under the Potsdam program, including the first-charge principle and the Level of Industry Plan, recurring reparations are in practice excluded, since Germany will remain for some time in a deficit status. The British have concurred in this position.

The Soviets, having taken about a billion dollars of capital equipment from their zone, now seek an agreement from the Western Allies whereby, from all of Germany operating as an economic unit, the U.S.S.R. would be provided with a fixed amount of reparations from current industrial production, payable over a specified period. This request, if granted, would place the Western powers — as a practical matter over a period of years this would mean the United States — in the position of nearguarantors.

The Soviet legal position is based primarily on an implausible argument that reparations are not exports, so that dedication of the “proceeds of exports" to the payment of imports, in the first-charge principle, does not preclude the taking of reparations.

Recurring reparations offer the Soviet an excellent base for economic penetration into the western zones in Germany and an opportunity to share directly in the control of the Ruhr. Much could, of course, be done during a decade, through banking arrangements, trade and cartel arrangements, and the other paraphernalia of commercial intercourse, to establish in Western Germany a more sympathetic economic and political climate for Soviet ideas and policies.

But important as the political considerations may be, the economic are probably more important. The Soviets found less removable plant and equipment in their zone than they had expected. The cost of moving what they did find proved to be extremely high. And, most important, their need for large quantities of consumer goods and special items of machinery and equipment is even more urgent than they had anticipated before Potsdam.

Reparations from current production

American opposition to recurring reparations in a fixed amount is based in part on the fact that continued subsidies would probably be required if the principle of reparations from current production is conceded.

To survive at an average European standard of living, Germany must import for her own consumption substantial quantities of food as well as raw materials. The food problem has been markedly complicated by the Potsdam decision for the provisional transfer to Poland and the U.S.S.R. of about 25 per cent of the arable land of Germany, and to crowd into the remaining area the German population of the transferred areas and of Eastern and Southern Europe.

To pay for imports of food and minimum required quantities of raw materials, Germany must sell in foreign markets goods in the amount of at least 1.2 billion dollars. Germany’s reparation claimants are also her customers.

The United States is more than doubtful whether Germany, after emergency shortages are ended, would be able to give these nations reparations from current output of the value of, say, a billion dollars annually, and at the same time sell them enough to maintain a tolerable standard of living for its own people.

After the foreign trade problem is passed, there remains an equally difficult question whether Germany, in the relatively near future, could produce enough goods to meet an average annual exportreparations program of from 2 to 2.5 billion dollars. Even if adequate plant capacity were retained and raw materials were available, shortages of fuel, transportation, manpower, and food, and the lack of an acceptable currency would appear almost certain to hold Germany’s industrial production below the required levels.

The program proposed by the Soviets does not give priority even to German minimum requirements; annual payments are called for regardless of German living conditions. The Americans and the British want to give the German people an opportunity to prepare for reconstruction of their life on a peaceful and democratic basis. Subhuman living standards and moral regeneration are not compatible.

Possible bases for settlement

Reaffirmation of the Potsdam Agreement and the Level of Industry Plan is the fundamental American position and may well prevail. The United States is in a strong bargaining position. General Clay stopped reparation deliveries from the U.S. zone of Germany in May, 1946, when it became apparent that neither the U.S.S.R. nor France was prepared to join in operating Germany as an economic unit.

With the anticipated increase in the production of Ruhr steel and coal, and with the merger of the British and American zones in Germany, the rate of recovery will be accelerated. Moreover, Russia is deeply involved, with limited capital, in repairing the physical and human devastation within Russia. And in the Soviet zone of Germany, economic deterioration is already far advanced. Economic unification is at least as necessary for the U.S.S.R. as for the Western powers.

There is also room for an agreement that, if Germany should recover within the next few years to the point where she produced more than was reasonably required for her own support, at least a portion of the excess might be taken as reparations. This wmuld concede the principle of recurring reparations only in the event that Germany reached a self-sustaining basis.