the reparations problem again

The Reparations Problem AgainAuthor(s): Manuel GottliebSource: The Canadian Journal of Economics and Political Science / Revue canadienned'Economique et de Science politique, Vol. 16, No. 1 (Feb., 1950), pp. 22-41Published by: Wiley on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/137622 .

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THE REPARATIONS PROBLEM AGAIN

THE mishandled problem of reparations and inter-Allied war debts looms large in customary analyses of the wreckage of the European peace

settlement after World War I. The seminal source of trouble then was the insatiable appetite of the Versailles victors for "spoils," joined by the Shylock American insistence on repayment of war debts.

After World War 11 the war debt problem was gently erased, but repara- tionis proved even more troublesome. Although those powers which a generation before had moulded the Versailles Treaty were, under American leadership, comparatively tame in their reparations demands, the Soviets were not. This is readily understandable, since the German armies spent their destructive fury on Eastern and not on Western lands. The Soviet loss of life and resources in repelling German armies from the heart of Russia was truly colossal. The war wiped out hard-won advances (factories, inventories, power plants, residences, tractors) achieved since 1917 under la.sh and by dint of incredible austerity.' The Soviet economy was planned and, with its insistent commodity needs, could absorb immense quantities of manufactured goods. Despite bomb-smashed German citv centres and residences, German manpower remained, as well as powerful industrial facilities which operated uip to the closing months of the war. Any trained observer would expect the Soviets to demand maximum one-time drainage and continuing arrangements whereby some German industrial facilities would be worked by some German labour to produce goods and services for Eastern benefit. This was precisely the policy later carried out within the Soviet Zone of Germany which, if it was not "milked dry," was converted into a massive pumping station for current product reparations.2 A less self-regarding Soviet policy toward the leading "ex-enemy" country would have been astonishing in view of the substantive drainage from "liberated" satellite areas.

The disruptive effects of East-West reparations controversy were perhaps most clearly evidenced during the formative period of the Occupation when the issue of partition or unification lay in balance. The urge to partition was unusually strong since it was implicit in the occupation of Germany by zones, which itself grew out of the Allied strategy of a war on two fronts and a juncture of Eastern and Western armies within and not without Germany. The urge to partition was heightened by the divergent ideologies of the occupiers and by the unexpected Nazi policy of last-ditch resistance which isolated the national capital and dispersed the administrative machinery of national government and economic control. Opposed to this urge to partition lay

'Whereas screened property damage of Allied combatants other than the U.S.S.R. and Poland was estimated at $41 billion (according to unpublished papers of the 1945 Paris

reparations conference) property damage estimates for the Soviet Union and Poland run to

higher amounts. For official Soviet description, cf. Ministbre des Affaires Rtrang&res, Notes,

Documentaires et E-tudes, La Conference de Londres (Paris, Apr., 1948), pp. 20-9; N. A. Vozne-

sensky, Soviet Economy during the Second World War (New York, 1949), pp. 129 ff. 2Cf. W. Friedmann, The Allied Military Government of Germany (London, 1947), pp. 24 ff.,

138 ff., 183 ff., 240 ff.; J. Warburg, Germany-Bridge or Battleground (New York, 1948), pp. 51 ff.; for estimates on amounts and machinery of collection, cf. note 15 below.

22



The Reparations Problem Agaii 23

Allied arrangements which aimed at neutralizing Germany under joint East- West overlordship: the Control Council machinery, the internationalization of Germany's largest city and ex-capital (Berlin), the provision of a common military currency, the intent to establish central governmental departments.

The centrifugal tendencies were strong. Possibly they could have beenl offset by raising and distributing reparations from a single jointly-managed pool. Had this latter plan, which was favoured during the Yalta period, been carried out, a nucleus of common government, a working mechanism of custodianship and a positive stake in collaboration would have been generated. But it was found impossible at Potsdam to resolve within a common formula conflicting approaches to the problem. Europe and Germany were divided for reparations purposes by the military frontier which marked off the Eastern and Western orbits. The Soviets were privately to share with Poland broadly defined reparations withdrawals which they could extract from their Zone and from certain other specified sources. The Western powers were privately to share with the other Allied Powers, German and foreign assets located in territories under their control or influence. Claim to assets across the East-West frontier was specifically renounced.' She clear-cut partition which this settlement involved was obscured by loose commitment to a course of unified control which was outlined in terms of studied vagueness and characterized by contrast between declaration of pious intent and deliberate failure to confer authority.4 The reparations linkage between East and West was limited to a one-time delivery to the Soviets of a third of the Western- captured German fleet; 10 per cent of that plant equipment removed for reparations purposes as surplus to Germany's peacetime needs from the Western Zones; and another 15 per cent of removals on a vaguely specified reimbursable basis. Hope for the unification of Germany then rested on the slight possibility that East-West agreement could be obtained to a joint calcu-

3"Whatever the basic causes, the most striking indication to date of the flow of events toward partition is the Potsdam decision on reparations. Instead of treating Germany as a unit for reparations exactions, Russia is invited to collect her share from the eastern zone and the Western Powers from the western Zones. . . " (E. S. Mason, "Economic Relationships Among European Countries," Proceedings of the Academy of Political Science, XXI, 1946, p. 3). "The system that we have adopted (for reparations purposes) takes into account the same solid realities that were recognized in dividing Germany into Zones of armed occupation . . " (E. S. Pauley, Documents on American Foreign Relations, World Peace Foundation, 1948, vol. VIII, p. 223). Cf. also J. F. Byrnes, Speaking Frankly (New York, 1947), p. 83-"I concluded that the only way out of the situation was to persuade each country to satisfy its reparations claims out of its Zone." W. Cornides and H. Volle, Um Den Frieden mit Deutsch- land (Europa Archiv, 1948), p. 38-"Auf der Grundlage der in Potsdam beschlossenen getrenn- ten Behandlung der Besatzungszonen in der Reparationsfrage erwiesen sich alle anderen Vereinbarungen, Deutschland wirtschaftlich und politisch als eine Einheit zu behandeln, als illusorisch." S. Lubel, "The Shape of Peace" (Providence Journal Bulletin, Sept. 14, 1946)- "The extent to which the handling of reparations had produced the effects of an economic iron curtain splitting Europe in two is not generally appreciated." D. Ginsburg, The Future of German Reparations (National Planning Association, Pamphlet no. 5718, 1947), p. 25-

.... use of zonal boundaries to define reparations areas was surely an unqualified evil ... (and) the core of the problem."

4Absence of real intent to unify is perhaps best indicated by the failure to provide arrangements for the sharing of deficits which were clearly foreshadowed.



24 The Canadian Journal of Economtics and Political Science

lation of Germany's peacetime economic needs and to a resultant programme of dismantling whiclh would solve the reparations problems by eliminating their economnic basis within the Eastern as well as the Western Zones. When this hope could not be fulf'llled, the reparations linkage between East and West vanished. The partition of Germany for reparations purposes effectively sealed the zonal frontiers and set the moulds within which economic life would be organized. The treatment given the reparations problem at Potsdam thus transformed reparations from a possible force toward unification to a catalyst of partition.

In the second phase of the German peace settlement, which roughly com- mences with the breakdown of the Potsdam East-West reparations "linkage" in May, 1946 and ends with the Moscow Conference in March-April, 1947, the pre-Potsdam conflict over current product reparations was pursued in a different setting. Though Eastern and Western Germany were cleft by a reparations frontier, far-reaching ties of interest and commitment had been woven under the Control Council regime with its troublesome national capital, Berlin. Under this regime the uniformity of the key structural aspects of German economic and political life was maintained. The Left-Right antagonism within Germany was largely dormant and the trade unions aftd bourgeois- democratic parties of the Eastern and Western Zones were in the process of merging on an all-German basis.i MViany of the tasks of the peace settlement (such as denazification, demilitarization) had been given a real or spurious solution.6 The West had evinced loyalty to its Potsdam obligations by participating in the removal of German population from former German territories lying within the Eastern orbit. The Soviets had demonstrated adherence to these obligations by providing some leeway within their zonal regime for non-communist parties to compete in open elections for public favour. The spirit of the wartime alliance, although weakening, was still alive. Valuable experience in collaboration had been achieved. The effort to develop and carry out a plan of reparations based on dismantling had left as a residue a mass of agreed fact with respect to Germany's economic potential and a certain measure of agreement with respect to overall economic policy. The state structures of the governments shaped up in the Eastern and Western Zones were not too dissimilar.7

6Cf. J. Joesten, Germany: What Now (Chicago, 1948), pp. 90-113; Annals of the American Academy of Political and Social Science, Nov., 1948, pp. 20 ff.; "Ansktze einer Deutscher Representation" (Europa-Archiv, 1948, pp. 1143-8); "Report of the Military Governor (U.S.)" (Manpower, no. 32, pp. 11 ff.); no. 35, pp. 5 ff.; Die Arbeit (Soviet Zone trade union journal), Berlin, vol. I, pp. 2 ff., pp. 37 ff., pp. 137 ff., pp. 233 ff., pp. 329 ff.

6Cf. particularly, J. Frederick, "Peace Settlement with Germany-Political and Military" (Annals of the American Academy of Political and Social Science, May, 1948, passim); Fried- mann, Allied Mlilitary Government of Germany, pp. 110 ff.

7For general references to this evaluation of the Control Council regime, cf. notes 5, 6 above; R. H. Wells, "Interim Governments and Occupation Regimes' (Annals of the American Academy of Political and Social Science, May, 1948, pp. 83 ff.); Occupation of Germany, Policy and Progress (Department of State Publication no. 2785, 1947), pp. 13-24, pp. 25 ff. Con- cerning the Soviet Zone, composition of the early zonal administrations, the relatively open election of 1946, the role played by the C.D.U. leadership (Kaiser-Lemmer), Office of Military



T7he Reparations Probleni3 Again 25

Unresolved problems which blocked progress in the peace settlement were legion: the veto in Allied controls, the Oder-Neisse line, political structure of a unified Germany, control over the Ruhr and Soviet property seizures. But an impressive list of observers and participants have unambiguously included the reparations controversy among the few key causes of East-West stalemate in Germany and not a few have considered this controversy as pivotal.8 It cannot be considered accidental that East-West negotiations on the German question at London in December, 1947 broke down on precisely the reparations question.9 These considerations would appear to justify extended review of the reparations controversy even though it is freely admitted that the historic circumstances wThich once gave it practical importance have almost totally disappeared.

II

For purposes of this paper only cursory attention need be given the reparations controversy in its earlier phases. Necessarily there was little basis for judging the extent of German reparations potential that survived the destruction of war. This virtually precluded those clearcut guarantees, in terms

Government for Germany (U.S.), Government and Its Administration in the Soviet Zone of Germany (Berlin, 1947), pp. 8, 10, 12, 35 ff.; Joesten, Germany, pp. 86 ff., 105 ff., 136 ff.; P. Nettle, "Inside Russia's Germany" (New Republic, Aug. 2, 1948, pp. 15 ff.); Foreign Policy Report. ADr. 1. 1949. pp. 21 ff.

8Byrnes cited reparations and the Ruhr (Speaking Frankly, p. 194). Hynd, who served as British cabinet member in charge of German affairs, stated that "it has been the constant squabbles over the principles and distribution of reparations that have been the main occasion even if not the root cause of the divisions and disagreements that have held up so tragically a general solution of both the German and Austrian problems" (New Statesman and Nation, Nov. 22, 1947, p. 404). The trained American observer, Campbell, considered reparations the "decisive issue" (The United States in World Affairs, 1947/8, New York, 1948, pp. 70 ff.). E. S. Mason, who served as economic advisor to Marshall at the Moscow Conference, clearly defined reparations as the "one great and overriding difference" the resolution of which could possibly have provided the leverage and setting for the solution of other outstanding issues. Cf. Mason, "Reflections on the Moscow Conference" (International Organization, vol. I, 1947, pp. 483 ff.), and Foreign Policy Report, Nov. 1, 1947, p. 211. Ginsburg, who played an important role in developing American reparation policy in Berlin, stated that "reparations will probably be the central issue before the Moscow Conference" (cf. Ginsburg, The Future of German Reparations, pp. 48 ff.). Available materials on the Moscow Conference and on the preliminary work for it by the Control Council indicate the predominatirg role played by the reparations and related economic questions. Mosely, who served as advisor to the United States delegation at the Potsdam Conference, stated that "the problem of reparations was early recognized as holding the key to the success or failure of Allied cooperation" (Face to Face with Russia, Foreign Policy Association, Headline Series, no. 70, 1948, p. 9). The official British White Paper on the German question stated that "the main point of divergence between Soviet policy and that of the other Allies was the question of the economic unity of Germany . . . (and) the essence of the failure of the Four Powers to achieve economic unity lies, therefore, in a conflict between the Soviet Government's demands for reparations" (White Paper, Germany, no. 2, Oct. 11, 1948, Cmd. 7534, pp. 9 ff.).

9Cf. Campbell, The iJnited States in World Affairs, p. 459; Cornides and Volle, Um Den Frieden, pp. 28 ff., 42 ff. Marshall himself in his report on the London Conference described reparations as "the key issue" in the consideration of what he deemed "the heart of the problem-the harsh realities of the existing situation in Germany."



26 The Canadian Journal of Economnics and Political Science

of amount, arrangements, and time duration, which alone could have persuaded the Soviets to pool their Zone into some combined all-German operation. Promise of a liberal reparations policy or mere affirmation of willingness to give would manifestly be inadequate. The West in turn would feel reluctant to name a figure, however guarded, in the context of a settlement which contemplated the removal to Potsdam Germany of almost ten million persons formerly living outside its boundaries. Western reserve would logically be matched with Soviet extremism. Soviet reparations proposals were more curbed than those advanced by the Versailles victors under less aggravating circumstances. But the Soviet proposals evinced an unmistakable exaggera- tion of German reparations potential, an attitude of complacence to the problem of maintaining minimtLim German living standards, and a benign un- concern with the problem of transitional German foreign trade deficits.

Divergence in estimates of German reparation potential was joined by straight-out policy disagreement over the mode of its disposition. If there should be anv German reparations potential, the West under influence of the Morgenthau plan proposed that it be liquidated through plant dismantling in order to minimize German securitv risks. The Soviets were prepared to accept a limited dismantling programme aimed specifically at war industries but apparently shied away at Yalta and Potsdam from sole reliance on it. Under inducement of a small share in the proceeds they accepted dismantling for a settlement of reparations from the Western Zones though the scope of dismantling from their own Zone was not rigidly prescribed. Nevertheless, in the Control Council, the Soviets joined the Western Powers in calculating the peacetime equipment needs of the postwar German economy on an all-German basis and agreed to schedules of retained industrial capacity which, for the Eastern and Western Zones together, would have eliminated the industrial basis for current product reparations.'0 Extensive work was put into imple- mentation of this plan; some twenty inter-Allied commissions conducted what amounted to a small-scale census of German industrial facilities. Though agreed listings for dismantling purposes were comparatively few, listings for retained capacity were developed by the end of 1946 for most industries; and an immense apparatus of negotiation, research, valuation, and inspection had been set in motion."

Nevertheless, failure of this approach was indicated by the summer of 1946 and was clearly demonstrated by the end of the year. Soviet experimentation on an extended scale with dismantling through the spring of 1946 apparently yielded unpromising results. Dismantling was greatly resisted by the German community; it absorbed valuable economic energies; sabotage could not be eliminated; and apparently the equipment was found to be not very useful after trans-shipment. On the Allied side, the agreement was hard to apply and divergence was invited at every stage in an exceedingly complex barter transaction: the conduct of a census of German industry,

'0Cf. B. U. Ratchford and Wm. D. Ross, Berlin Reparations Assignment (Chapel Hill, 1947)> p. 185; Ginsburg, Future of German Reparations, p. 22.

"1On this unpublicized work, cf. Report of the Control Council to the Foreign Ministers (Berlin, 1947-hereafter cited as CFM Report), pts. IV, VII.



The Reparations Problem Again 27

agreement on productive capacities of thousands of individual plants, agreement on allowance for damage or loss evaluation, the provision of adequate guards to protect the condemned property against despoilment or looting. Agreement with respect to the mode of reimbursement of the 15 per cent share of Western Zone dismantling was never obtained.12 Finally, the security psychosis of the wartime period was lifting. German military potential was clearly broken by the prospect of prolonged occupation and measures of de- militari7ation which did not involve dismantling of non-armament plant. MassiVe dismantling of German industry was clearly not required to achieve security against renewed German aggression. Yet only massive dismantling on a scale calculated to wreck the German economy would yield appreciable reparations benefits to the Soviets. The feasibility of the Potsdam reparations plan and the Control Council agreements growing out of it were undermined by calculations of this kind. Bv the late spring of 1946 the Soviets had already begun to exploit in their Zone the current product reparations potential of industrial facilities listed for dismantling and by the summer of that year the still tentative "Level of Industry" dismantling plan was repudiated and a systematic programme of current product reparations was demanded. Formally the Anglo-American authorities insisted to the end on the need to dismantle any industrial capacity deemed truly surplus to the peace-time requirements of the German economy. In reality, the security motive wore exceedingly thin among key policy-making circles in Washington and London. Except for certain special categories, plant dismantling was no longer considered vital for security purposes and the right to current product reparations would have been readily waived so far as security interests were involved.

III

Seen in perspective, the principal task of Allied policy in the immediate postwar phase of the Occupation was to keep the Eastern and Western areas of Germany close together until the disappearance of the security psychosis and the increased acquaintance with German economic potential would permit satisfactory resolution of the reparations problem. If we are to understand why this problem was not resolved, we must commence with examination of the distributive aspects and dimensions of Soviet reparations demands. Up through Yalta and Potsdam there appeared to be little quarrel over distributive patterns. The Soviets had demanded 50 per cent of the total reparations take and there is evidence suggesting that this formula, modified by merger of the Polish and Soviet shares, was accepted by the Western Powers at Potsdam. This formula is consistent with criteria for distribution of reparations approved by America and registered in solemn governmental agreement. Though the American viewpoint appeared to change later in 1945, at no time was the Soviet distributional formula a theme of controversy, particularly since the latter-day Soviet formula was open-end, that is, involved insistence on Soviet receipt of a given magnitude in reparations and left open

"2Cf. Ginsburg, Future of German Reparations, pp. 28 ff., and the CFM Report, pt. IV.



28 7he Caniadian Journ1al of Economics and Political Science

the amount to be distributed to other parties.'3 The overall magnitude of Soviet reparations claims remained unchanged

from the opening days of the Yalta discussion through to the close of the London Conference. Through reiteration, this magnitude of $10 billion in 1938 values has become fairly uiotorious. Even during the Yalta period this amount of potential current product reparations was subject to offsets for reparation removals in the form of foreign assets, plant dismantling, and other reparations seizures. These offsets were significantly extended at the Moscow Conference to include the value of "other services" which would comprehend labour services rendered by prisoners-of-war and possibly the value of patents taken.14 Determination of the value of the offsets as they had been realized by the spring of 1947, including previous current product removals, is difficult owing to the leeway for adjustments, the valuation of service items, and other factors. However, conservative valuation of the offsets by 1948 would run to over $5 billion. At the time the only partial bargaining over offsets occurred, the Soviets appeared willing to allow liberal write-downs. Since no effort was ever made to whittle down the Soviet claim in this manner, a lower limit cannot be set. But it would appear not unreasonable to accept a target, for analysis purposes only, of $4 billion (1938) as the net amotunt of current product reparations which the Soviet claim involved.'5

"3See Byrnes, Speaking Frankly, p. 84 for implicit reference to the 50 per cent formula; Cordell Hull, The Memoirs of Cordell Hull (New York, 1948), vol. II, p. 1304 (for use of property destruction as the sole tandard); the agreed Yalta formula (Appendix A to Ratchford and Ross, Berlin Reparations Assignment, p. 202, para. 1 of Protocol). However by the time of the Paris Reparations Conferenlce (November, 1945) for the purpose of regulating the distribution of reparations controlled by the Western Zones, the United States with British support sponsored a distributional formula which laid great weight on military expenditures and thus automatically credited the United States with an appreciable reparations share. On the Paris Conference, cf. United States Economic Policy toward Germany (Department of State Publication 2630, 1946), pp. 21 ff.

14For the two forinulas, cf. Ratchford and Ross, Berlin Reparations Assignment, p. 202; and Cornides and Volle, Um Den Frieden, p. 26.

15The possible magnitude of the offsets ranges from an official (though unsupported) British estimate of $7 billion (Um Den Frieden, p. 35) to an official but unpublished United States (Berlin) estimate which ran up over $10 billion. For the single known instance of "bargaining" noted in the text, cf. Byrnes, Speaking Frankly, p. 83. For other published efforts at valuation see the review in the American Economic Review, 1948, pp. 924-32 by J. H. Furth; "Reparations-Claimed and Collected" (Facts about Occupied Germany, VI, June, 1947) by the American Association for a Democratic Germany; the famous Harmssen report, Reparationen, Sozialproduct, Lebensstandard: Versuch einer Wirtschaftsbilanz (Bremen, 1947). Current product reparations apparently ran between $250 to 400 million annually. Cf. Eduard Wolf "Aufwendungen fur die Besatzungmachte . . . in die Einzelnen Zonen" (Wirtschafts- probleme der Besatzungszonen, Berlin, 1948, published by the Deutsches Institut fur WVirt- schaftsforschung, pp. 120 ff.); Franz Seume, "Organizationsformen der Industric in der Sowjet- ischen Besatzungszone" (ibid., pp. 203-68); "Die Reparationsleistungen der Sovijetischen Besatzungszone Deutschlands" (Europa-Archiv, IV, Apr., 1949, pp. 2029-34). Our estimate is consistent with the 17 per cent of net industrial production for 1948 which the Soviet Zone German government officially admitted (see Die Wirtschaft, Sonderheft "Der Wirtschaftsplan 1949/50," Berlin, July, 1948, p. 28). Our estimate jibes with Polish data on reparations receipts valued at $20 and $40 millions for 1946 and 1947. Since the Polish share of German reparations flowing eastward was 15 per cent this would place the total current Soviet take at




The effective impact of this residual claim on the German economy would clearly depend upon the mode of its translation into current German commodity values and upon the reparations share that would be conjointly assigned to other Allied claimants. For purposes of this paper, one 1938 dollar has been equated with approximately 7 DM in 1948 German commodity values and other reparations claimants have been credited with 75 per cent of the Soviet- Polish share. The latter 75 per cent departs from the parity principle which the Soviets themselves offered. Under the Paris reparations agreement, the United States would be entitled to 28 per cent of any current product reparations moving westward. For present purposes this share may be allowed to lapse though technically it would accrue to other western claimants. Under these assumptions, the Soviet reparations proposals would have involved a total payment in current product reparations of $7 billion (1938) or a total commodity mass of about 50 billion DM (at 1948 values). This amount was not the probable nor the inevitable amount that would have come out of a reparations negotiation; but it is unlikely that the Soviets would have accepted a greater allowance for offsets or that the West would have contented itself with a smaller quota. In any case we have here a useful target figure around which to focus the discussion.

Clearly the effective impact on the German economy of current product withdrawals totalling 50 billion DM (1948) would depend upon the length of time over which the withdrawals would be spread and upon provisions for interest. In this respect, Soviet proposals were liberal. The device of interest, so greatly abused at Versailles, was implicitly waived from the start; and the ten-year repayment period demanded at Yalta was stretched out at the time of the Moscow Conference to twenty years, thus reducing the annual reparations drainage from 5 to 2.1 billion DM. A twenty-year period may be presumed, though in fact the Soviet proposal stipulated something less; and a twenty-five or thirty year pavment period would have embodied a number of concessions which could most advantageously have been extracted in suc- cession. Though stretching the period of payment would have violated an early wartime agreement with respect to the principle of early and prompt reparations payment, any period of payment not exceeding the so-called average life of a single generation would have constituted a vast improvement over reparations programming in the twenties.'6

The issues involved in judging the feasibility of a reparations programme of this magnitude may be grouped under issues of fact and issues of principle. Issues of the former kind primarily relate to assessment of structural changes in the German economy which resulted from the war and its aftermath, the

120 and 240 million current dollars during 1946 and 1947. Cf. Alexander Gerschenkron, "Russia's Trade in the Postwar Years" (Annals of the American Academy of Political and Social Science, May, 1949).

'6For the stretching of time-periods, cf. Cornides and Volle, Um Den Frieden, p. 26; Byrnes, Speaking Frankly, p. 26. Concerning the principle of "early and prompt" reparations payment, see the list of "principles on reparations" which were elaborated in the 1945 Moscow meeting of the Reparations Commission (J. Rueff, "Les Nouvelles Reparations Allemandes," Nouveaux Aspects du Problem Allemand, edited by P. Hartmann, Paris, 1947, pp. 195 ff.).



30 The Canadian Journal of Economics anzd Political Science

specific economic burdens which grew out of the Potsdam regime and the practice of maintaining large Occupation Forces within Germany, the ability to raise the requisite funds from internal revenue sources not otherwise mortgaged, and the ability of industrial output to regain its 1936 physical productivity levels. These issues are elsewhere surveyed by the author and for purposes of this paper may be disregarded."7 We are interested here in exploring the issues of principle.

Partly these concerned "legality." Anglo-American spokesmen were convinced that the Soviets had concluded a "bargain" at Potsdam to forswear current product reparations and in the language of Marshall they were not prepared to "sell the same horse twice." TIhe Soviets reminded the Americans of the obligations they had implicitly assumed with respect to current product reparations at Yalta and in any case insisted on their right to extract current product reparations from their Zone. As is the case when agreements are loose and overlapping, the doctrinal position of neither side in this famous "back-to-Yalta" controversy was unassailable.18 What manifestly was required was a fresh agreement which would resolve conflicting r;ghts and claims. The issue around which the possibility of a fresh agreement hinged concerned the German foreign deficit. This loomed large to troubled policy- makers in Western capitals both before and during the Occupation. At the outset of the Occupation, German commercial exports, except those that could be requisitioned by the military, would drop virtually to zero since the German economy would ftunction under conditions of simulated blockade. As commercial restrictions on German exports were relaxed and conditions were created for commercial trade with the outside world, a deficit clearly could be foreseen pending recovery to 1936 industrial and agricultural levels of output. The process of recovery would stimulate import requirements in order to replace depleted working capital, to restore working international balances, and to fill the feeding gaps involved in foodstuff underproduction. Export potential at best could not be expected to grow faster than overall output.

Even after prewar levels of domestic output had been reached, difficulties could be anticipated with the German foreign balance. A full survey of these difficulties and of their varied sources cannot be set forth in this paper, but the salient points may be indicated briefly. By the time of the First World War the German economy alreadv had been rendered unduly dependent upon sources of export revenue (including extensive foreign investments, key border territories, preemptive patent rights in new fields of industrv, shipping) which were wiped out at Versailles. The persistent foreign-balance deficits of the late twenties at least partially reflected a condition of structural strain. These

"For detailed discussion of these and related propositions, cf. a forthcoming paper by the author, "German Economic Potertial and Reparations," scheduled for publication in Social Research, 1950.

'8For an impassioned and detailed statement of the Western doctrinal position, cf. Gins- burg, Future of German Reparations, pp. 21 ff. There is no place here for tedious textual analysis that would expose the three layers of issues involved in the problem of "legalities" and the weaknesses in both the official Eastern and Western positions.



'The Reparations Problem Again 31

deficits were eliminated during the thirties but only under favourable circumstances of low raw material prices and with the aid of far-reaching state trading controls which America deemed obnoxious. Structural shifts induced by World War II in both the German and the world economy greatly strengthened these deficit tendencies. On the one hand, losses and damage arising out of the war impacted themselves more strongly on the German foreign balance than on overall domestic economic potential. The loss of the foodlands east of the Oder-Neisse, which cost Germany 25 per cent of her indigenous food supply, would directly increase aggregate food imports. The loss of Silesian and Saar coal mines cut away the sources from which German prewar coal exports emanated. Finally, all German oceanic shipping had been destroyed, German patent protection for some of her key export products was lost, and the balance of prices in world markets between raw produce and manufactured goods had shifted strongly in Germany's disfavour. These untoward develop- ments were matched bv a specific deterioration in Germany's external trading position caused by the loss of Germany's Balkan and Central European markets, the inability of Germany's main export customer, Western Europe, to provide a surplus of gold and convertible currencies with which Germany could finance an oldstanding unbalance in her overseas trade, and the aggra- vation of this unbalance due to enhanced dependence on American shipping, foodstuffs, and raw materials.'9

IV

The issue of the foreign deficit influenced the reparations controversy in two ways. In the first and less important way, the Anglo-American bloc insisted that repayment of the accrued import deficit should have continuing priority over use of German resources for the payment of current product reparations. In the early inter-Allied negotiations upon the "Level of Indus- try" plan, both England and America undertook to waive these reimbursement obligations by insisting on the non-retention within Germany of plant capacity earmarked for this purpose. "We cannot logically expect," said the British chancellor, "that there will be a surplus from which we can make claims for these retrospective charges." These deficits were implicitly put in the category of wartime expenses which carried over the termination of hostilities.20

When, however, the Soviets stepped up their reparations claims, the British-American bloc trotted out the foreign deficits experienced and in prospect and, like the tragical characters in a Euripidean tragedy, dressed in tattered rags and beggar costume, pleaded the urgency of the burden falling upon the British and American "taxpayers." At Moscow the request was made for "an equitable sharing among the Occupying Powers of the costs of occupation of Germany, past, present and future." The demand was further made that repayment of the accrued deficit and external occupation costs in turn should have "the first charge on Germany's foreign exchange resources after her essential needs have been met." Until these two liabilities were

9For details and an attempt at quantitative measurement, cf. paper referred to in note 17. 20Cf. United States Economic Policy toward Germany, p. 99.



32 The Canadian Journcal of Economics and Political Science

satisfied, "Germany shall not be called upon to make any reparation deliveries from current production." These demands were not only repeated at the London CFM Conference in November, 1947, but were incorporated in principle into the agreement for the merger of the British-American Zones. The amounts involved were not inappreciable. The accrued import deficit for the Western Zones up to and through 1947 ran to over a billion dollars. The estimated "external occupation costs" for supplies, materials, and foreign currency pay to the American Occupation Forces somewhat excee(led $1 billion for the fiscal year 1946; and a claim of $700 million was formally entered at the London CFM Conference. The Soviets did not reject some form of deferred-obligation status for accrued deficit expenses but clearlv maintained the principle of priority for reparations.21

The reimbursement claim for so-called "external occupation costs" can be most easily set aside. These costs are the foreign currency expenses incurred in the provision and maintenance of Occupation Forces. Plainly, the enormous combat armies which were concentrated on German soil at the end of hostilities were never completely demobilized. A large measure of cynicism would be required to charge to the German account the armament, aircraft, and other armed forces (numbering over 800,000 persons with attached services and personnel) which East and West found it convenient to station in Germany both for reasons of prestige and because Germany provided free billeting, miscellaneous services, camp ground, and some contribution to upkeep. The expenses for maintaining specialized militarv government personnel and supporting agencies were comparatively small and were offset by privileges and perquisites of rank and station, official and unofficial. Other Allied countries would gladly have "paid" in terms of "self-maintenance" for the onerous "duty" of stationing their military forces with governmental authority within German communities. In terms of international law, the claim for reimbursement of "external occupation costs" has slim footing. There has been no instance of recognition of such claim after World War I or in any of the peace treaties negotiated after World War II. A generalized "claim" of course carries over but it merges with the overall mass of other claims on Germany originating out of loss and expense occasioned by the war and its aftermath.22

There must be a similar writing down of the Anglo-American claims for high priority to repayment of the subsidies extended to the ailing zonal econ- omies under their control. The amount of the subsidies woul(d come into question since America and Britain made little attempt to requisition German industrial production (except for coal and timber) or to provide German

2"Cf. Die Deutsche Frage auf der Moskauer Konferenz der Aussenminister (issued by Europa- Archiv, July, 1917), p. 706; Cornides and Volle, Um Den Frieden, pp. 13 if., 95, 99; A Summary of Agreements and Disagreements on Germany (a United States compilation issued by O.M.G.U.S., Berlin, Feb. 15, 1948), pp. 132, 134, 227; the billion dollar estimate cited in the text is based upon official (though unpublished) studies made by the United States Army Headquarters in Frankfurt, Germany.

221t would be tedious to cite supporting references to the above argument which is based upon studies carried on by the author while serving in O.M.G.U.S. as United States repre-

sentative on a Control Council committee on occupation costs.




factories with raw materials to be processed for purposes of repayment of the imported foodstuffs. It is not unrelated that Anglo-American policy insisted that repayment be effected through so-called "normal commercial channels." Further, the maintenance of indigenous policies and arrangements which entailed or fostered disappearance from the official rationing system of undue quantities of foodstuffs and other essential supplies or which encouraged the partial wastage of these supplies through restoration of "free markets" is not unrelated to the question of honouring the reimbursement obligation. Undue scrutiny of the past would be undesirable and recognition should be given to some general obligations of Germany to repay deficits incurred in good faith and without malicious purpose. But for deficits incurred under a custodianship exercised with a jealous eye to prerogative by the occupying power concerned, priority in repayment could not be exacted from other allied partners.23 The process by which fighting Allied armies crushed German military resistance and established and wielded military government over an enemy state under conditions of quasi-armistice was continuous. Without subsidies, the economy of Germany would have disintegrated further and the possibilities for the satisfaction of external claims on Germany would to that extent be lessened. But without the prior loss of life and mobilization of fighting power the areas subsidized would never have been brought under Occupation control. The debtor is bankrupt; the claims are all of high standing but of divergent origin. There is no way out other than to wash the claims together and provide in some measure for their satisfaction out of a single reparation pool under common control.

The Anglo-American claim for high priority to reimburserment of their accrued deficit was probably intended primarily as a bargaining counter. For real concern was felt not with the past but with the then present and prospective deficit. Hence the West demanded that payment of current product reparations must be contingent upon reaching balance in the German foreign account. While there is an import deficit, current product reparations would be banned. In positive form this principle makes the financing of Germany's imports a "first charge" on export shipments. This principle was foreshadowed during the Yalta discussions; it dominated the sessions of the special

23lmplicit in the latterday ideology of the occupation was the thought that prerogative of rule was justified by incurment of expense, though this was more frequently stated in the converse: ''voice in administration" must be "commensurate with the share of the costs" or that the fact of deficit precluded parting with "authority" (cf. Herter Committee, Report on Germany, 80 Congress House, Feb. 28, 1948, p. 3; ACA Berlin, DECO P(46) 76, Annex C). On the policy of collecting the deficit through ordinary processes of commercial trade, see the warning of a congressional committee on the "unnatural pressure on German exports to compete at uneconomic and abnormal prices in the American market against American products" (Colmer Committee, Postwar Economic Policy and Planning, supplement to 11th Report 2737, 79 Congress, 2nd Session, p. 33). Candour would require the admission that the German deficit was large partly because the real desire to exact repayment was limited, partly because management was inept and in the case of the Ruhr blundering, partly because of failure to restrict inflationary conditions by some form of early bank closing or account-blockage, and partly because of a long-run policy interest in nursing along an institutional setting which entailed short-run wastage of resources.



34 The Canadian Journal of Economics and Political Science

Reparations Commission which met in Moscow in June, 1945; in ambiguous form it was incorporated into the Potsdam Agreement; and it was stubbornly upheld at all succeeding discussions of the German problem. Allegedly this "principle" grew out of the experience of reparations in the twenties: to wit, that reparations paid by Germany were in reality financed by American loans to Germany.24 Stated crudely, the principle is designed to avoid a process in which Anglo-American subsidies poured into Germany "at one end" will be fLnnelled out at the other. No cry or slogan was more popular in key policy- making American circles than this one. At the negotiating table or before congressional committees, and in a wide variety of forms the principle has been laid down that America will not "finance" the payment of reparations by Germany to the Soviet Union.25 It was in the magic and self-righteousness of this principle that American policy-makers overcame the dissenters within their midst and convinced themselves of the outrageousness of Soviet demands.26 One cannot say that the intellectual structure out of which this principle evolved was the decisive factor. There were underlying pressures and interest viewpoints which both conditioned that structure and which, in any case, would have found some channel by which to influence the fate of the peace settlement. But that intellectual structure was an important factor and we turn to examine its economic premises in our concluding section.

V

What relationship does exist between the foreign deficit and current product reparations? In what sense could it be maintained that payment of reparations would merely drain away any coexisting foreign assistance? A point

24See Henry Morgenthau, Jr., Germany Is Our Problem (New York, 1945), pp. 78 ff. Byrnes, Speaking Frankly, p. 28. Pauley was instructed to "oppose any reparation plan based upon the assumption that the United States or any other country will finance directly or indirectly aay reconstruction in Germany or reparation by Germany" (Edwin Pauley, "The Potsdam Program Means Security," Prevent World War III, 1947, pp. 39 ff.). See also Isadore Lubin's report, "Reparations Problems" (Proceedings of the Academy of Political Science, XXI, Jan., 1946, p. 64); the definitive formulation in United States Economic Policy toward Germany, p. 23; and J. Rueff, "Les Nouvelles Reparations Allemandes," p. 196 (Rueff was the French delegate on the Reparation Commission).

25For sample cries, cf. Bevin, House of Commons, Oct. 23, 1946; Colmer Committee, Postwar Economic Policy and Planning, supplement, p. 35; G. Stolper, German Realities (New York, 1948), p. 310; J. Warburg, Put Yourself in Marshall's Place (New York, 1948); Ginsburg, Future of German Reparations, pp. 36 ff.

21During the late fall months of 1946 General Clay and his principal economic advisers strongly advocated a compromise on current product reparations and the issue was closely contested within the American delegation at Moscow. See K. Galbraith, "Is There a German Policy?" (Fortune, 1946, p. 186). One reflection of Clay's stand was the famous United States "compromise" on current product reparations presented at a secret session of the Moscow Conference (cf. Ratchford and Ross, Berlin Reparations Assignment, p. 254; Die Deutsche Frage auf der Moskauer Konferenz, p. 712). The "compromise" was so doctored up with restrictive clauses that it did not even serve as a basis for negotiatioins. The compromise, in effect, would obtain Soviet assent to a sizeable reduction of plant dismantling committed in March, 1946 from 2,000, for example, to 800 plants, and would yield the Soviets in current reparations a dollar-for-dollar value of a small segment of the 1,200 "rescued" plants provided that certain highly restrictive conditions were fulfilled.



7The .Reparations Problen'i Again 35

of departure for the answer to these questions may be yielded by focussing upon a different but related question: under what conditions would the ability to transfer reparations in kind be measurably less than the ability to overcome an external deficit or achieve a positive surplus in the balance of payments? This question almost answers itself, since the experience of the past twenty years has afforded abundant demonstration of the coexistence of external strain with internal ease. A country with a high standard of living and an ample industrial potential may experience a stubborn foreign deficit owing to the disappearance or shrinkage in foreign export outlets or to the disorganization of world commercial structures. The ability of a country to provide reparations essentially depends upon the margin in its living standards, the elasticity of its industrial production, the existence of manpower and equipment reserves and local materials. The ability to overcome a foreign deficit depends upon initial balances of precious metals or liquid claims upon them, the sources for essential import items, export outlets, the amount and distribution of gold and dollar reserves through the trading system and the relative ease or difficulty with which these reserves may be pried loose. While reparations potential depends wholly upon internal productive power, the foreign balance will depend upon the willingness of the outside world to part with needed import items or with gold or dollars in exchange for the fruits of that productive power. It was this line of reasoning which Keynes expressed in a similar context by stating that "the annual surplus which German labor can produce for capital improvements at home is no measure, either theoretically or practically, of the annual tribute which she can pay abroad."27

The distinction between reparations potential and ability to overcome external deficits came to the foreground during the reparations discussion of the twenties under the guise of the so-called "transfer problem." During that period "reparations potential" was appraised in terms of the amount of revenue in local currency that could be raised through taxation for reparations purposes without causing undue monetary or fiscal strain. It was found possible to arrange under the Dawes Plan a schedule of payments extending over a forward five-year period within a given setting of fiscal and financial arrangements. No definite expectations could be entertained concerning the availability of foreign currency reserves required for the conversion or "transfer" of Reichs- mark reparations funds to foreign creditors. The privilege of conversion was made contingent upon the continuing adequacy of a foreign exchange surplus. Responsible practitioners agreed that the conditions requisite for the successful carrying through of the reparations levy within Germany were different in character from, though related in mechanism to, the conditions needed for purposes of "transfer."28 Resources are of course transferable between internal and foreign use. Under favourable hypothetical conditions this transfer may be effected without difficulty though usually with worsened terms of trade depending upon the income and price elasticity of demand for export and

27J. M. Keynes, The Economic Consequences of the Peace (New York, 1920), p. 208. 28Cf. any standard account of the reparations problem in the twenties, for example,

E. Dulles, "The Evolution of Reparation Ideas" (Facts and Factors in Economic History, Cambridge, 1932, pp. 568 ff.).



36 The Canadian Journal of Economtics and Political Scientce

import products, the export "multipliers," the flexibility of the pricing systems, and the relative extent of trade restrictions. But in the kind of world trading structure which was foreshadowed in the twenties and came to a head in the thirties, and given the concentration of German exports within Western Europe and the American resistance to increased importation, the problem of "transfer" became increasingly more important. As Keynes put it, waving aside the transfer problem tacitly applied "the theory of liquids to what is, if not a solid, at least a sticky mass with strong internal resistances."29

It is precisely this paradoxical coexistence of internal reparations potential and external foreign balance strain which is indicated in the postwar German case. Whereas recovery to 1936 levels of production readily could be foreseen-fairly rapid in industry, more slowly in agriculture-the prospects were limited for recovery to 1936 levels of exports which could directly or indirectly yield dollars, gold, or essential raw produce. German industrial potential- from which reparations would directly be paid-emerged from the war in a much stronger position than German ability to reach a foreign balance owing to the concentration on war damage and loss on key foreign trade items: coal mines and food lands, the confiscation of German liquid assets and shipping, the sundering of all export connexions and the general deterioration in Germany's international trading position. Perhaps the question was not whether a potential industrial surplus would be used for reparations or for exports; but for reparations or for internal consumption; or more realisticallv, whether it would be wasted in Occupation costs and Great Power rivalry.

The reality of the distinction implied between external strain and reparations potential is more clearly revealed if the principle of withholding reparations until the foreign account is balanced is further extended to its logical corollary, namely that current product reparations should be paid only in the form of a surplus of export proceeds over import costs. Though this corollary was only hinted at occasionally, it was rooted in the fundamental premises of American foreign economic policy. The policy of making reparations contingent upon reaching a foreign balance logically implies gauging the amount of eligible reparations by the existence of a surplus in the foreign balance. Precisely this policy was incorporated into the Anglo-American agreement for bizonal fusion.30 Yet the principle of paying reparations only in the form of a surplus of export proceeds (or gauging reparations ability to the ability to achieve an export surplus) is identical with the principle running through reparations policy in the twenties, namely of payment of reparations in the form of gold or convertible currencies. To the extent that the surplus of foreign currencies derived from export-import operations is a real one, the surplus must be reducible to some form of gold or into currencies convertible

29See the collection of studies on the "Transfer" problem in Readings in the Theory of International Trade (Blakiston Series, 1949), vol. IV, pp. 161-201; particularly p. 167.

30Under the Bizonal Fusion Agreement Category A subsidies were to be repaid out of a surplus of export proceeds over commercial imports (cf. Cornides and Volle, UJm Den Frieden, p. 95). The caginess of formulation involved in drawing the distinction noted in the text between the "contingency" principle and its corollary was clearly indicated in the final United States-British statement of principles presernted to the London 1947 Conference.



T he Reparations Problemt Again 37

with gold or dollars. This was realized by Stalin who countered pessimistic British-American fears deriving from the alleged "failure" of reparations in the twenties with the comment that "the root of the trouble the last time was that reparations were demanded in money ... (involving) the question of transferring the German mark into foreign currencies.... That was the rock upon which reparations broke down."'" To avert this breakdown it was solemnly agreed at Yalta that reparations after World War II should be paid in kind. Since America insisted on the adoption by postwar Germany of a hard-currency trading policy designed to preclude the accumulation of worth- less or frozen foreign currency credits,32 the principle of linking payment of reparations with achievement of foreign balance signified in substance the renunciation of the doctrine of payment of reparations in goods and insistence upon the payment of reparations in gold or dollars. Germany has no gold mines or dollar printing plants and the greater mass of the detachable monetary gold in the world has been drawn to America. The American position thus boiled down to a refusal to permit German workers to produce reparations goods for Soviet benefit until the American favourable balance of payments was reversed and a more smoothly working multilateral trading system developed.

Only under one set of circumstances would overcoming the German foreign deficit positively inhibit taking reparations. Assuming an elasticity of demand for German exports somewhat greater than unity (over a moderately long period)33 and a low mark exchange rate, German industrial exports could be squandered in European and world markets in such quantities that relatively low unit prices wotuld yield export proceeds great enough to pay for augmented import requirements. Since an appreciable part of German industrial output would be utilized in such an export drive-the 1936 per- centage was only 11 per cent-the unavailability of any reparations margin is apparent. If permitted by the Western Powers, this squandering process would in substance amount to levying of reparations tribute under commercial form. But the Western Powers are no more willing to encourage or permit this squandering process, aside from exports of coal, timber, and certain other raw materials, than they were during the twenties. Obviously German exportation of this magnitude would injure the productive organisms of her industrialized neighbouring states; the British export drive in overseas territories or with Eastern Europe would be endangered; and European leadership in the metallurgical, chemical, machinery, and equipment industries would clearly pass into German hands.

Western dislike of any engulfing movement of German exports was clearly

3"Byrnes, Speaking Frankly, p. 28. 32At first the principle involved trading on a strict "cash-basis" for individual transactions

and only in 1948 was the principle temporized to permit trade-agreements involving some form of mutual obligation to purchase and sell.

33In the current controversy now raging concerning the quantitative measurement of demand elasticity for exports, the author is inclined to favour the "optimist" position providing sufficient time is given for the full benefits of reduced prices to become effective (cf. Readings in Theory of International Trade, p. 548 ff.).



38 lTule Canadian Joutrnal of Economics and Political Science

expressed in Allied policy respecting German foreign trade patterns and in exchange-rate policy.34 The German mark rate was initially set in 1948 at a relatively high level and in the 1949 devaluation wave the mark exchange-rate was devalued by less than the sterling 30 per cent though the element of dollar strain in the German foreign account was fully comparable with that of the British.

Allied unwillingness to sponsor "unfair" German trade competition was matched by German unwillingness to adjust to a higher level of import pricing or to divert indigenous output into world markets at "dumping" prices. The tacit assumption of Allied-German policy with respect to elimination of the German trade deficit in the forties is strangely similar to the assumption underlying the analogous policy which prevailed during the twenties. Germany must pay in gold acquired through non-discriminatory trade at "fair" rates of exchange which do not permit "overloading" of export markets or disruption of "ordinary" trade patterns. By gradual and slow adjustments equilibrium might ultimately be obtained; but it is obvious that during the long transition period unused German reparations potential would run to waste. Hence the key underlying issue in the reparations controversy concerned the ability to devise conditions under which this reparations potential could be exploited without causing further impairment of external strain and without weakening German recuperative efforts.

The need for special conditions is manifest since reparations goods could be taken in such form as to weaken the momentum of German recovery, increase German import requirements, "use up" choice export items, or reduce external demand for German exports. German industrial recovery would be weakened unless reparations withdrawals were tapered over time or possibly delayed entirely until the process of industrial recovery was well-advanced. Recognition of this self-evident proposition was manifested by the Soviets in the closing phase of the reparations discussion.35

Corresponding forbearance cannot be said to characterize Soviet proposals with respect to the danger that reparations might increase import requirements. The Soviets claimed the right to take commodities in reparations without reimbursement for the element of imported supplies or materials which they contained or with the aid of which they were produced.36 The issue, however, was not debated and a strong claim could be made for the reimbursement en naturat or in free foreign exchange for the use of imports for reparations

34Concerning German foreign trade patterns, cf. discussion and references in my "Economic Potential" paper referred to in note 17 above. O.E.E.C. policy was built on the forced exportation at "administered" prices of coal products and timber. Most important of all, the German 30 cent mark rate was initially calculated on the crude basis of purchasing power parties without any consideration being given to the need for adjustment to worsened terms or the existence of J.E.I.A. data which clearly showed the hampering effects on German exportation of a 30 cent rate (the author here is drawing upon unpublished studies conducted while he was a staff economist in O.M.G.IJ.S., Berlin).

"5At London the Soviet offered to postpone a 10 per cent reparations quota until the German industrial output index reached 70 per cent onl a 1938 index basis. Cf. Cornides and Volle, Um Den Frieden, p. 31.

36Cf. O.M.G.U.S., Agreements and Disagreements on Germany, p. tt3.




purposes. For overall industrial output this element of reimbursement would not be large since the imported materials bill for industrial (non-food) finished goods output runs to about 10 per cent. The inclusion of some element of charge for food importation used to sustain reparations workers would fall into a more controversial category, since much of this importation would be needed in any case.

The problem of protecting Germany's commercial exports from being mortgaged away in reparations is not easily solved and is perhaps incapable of complete solution even if one rejects the purist contention that any effort to "'earmark non-competitive goods against the payment of the debt" cannot avail.37 Two separate though related requirements would appear to be involved. In the first place, the composition of the "reparations commodity bundle" should not impair the German ability to maintain exportation and satisfy essential home requirements. Secondly, that composition as applied to given countries should not impair the willingness of those countries to purchase German exports of a kind and to an extent which in fact they would have purchased.

Both requirements partly would be satisfied by the principle of a maximum diversification of the reparations commodity bundle with a view to avoiding undue strain on any single item or product group and to approximating the commodity make-up of that increment of real income which in fact is being extracted from the German economy. Further progress than this would involve untidy experimentation. In whatever year the reparations programme would start, some projection of reparation margin could be worked out upon the basis of projections of German production, commercial exportation, and home requirements. This "margin" would then be allocated into commodity brackets so as to minimize the impact upon the German economy. It is clear that annual programming of this kind would require overall frame- work agreement concerning starting points and a plan of secular change designed to avoid a freezing of some base-period pattern and to take account of growth requirements. If German industrial production remains at a low level, there would be little scope for arrangements leaving much to discretion. Rigid formulas would be required. But the main premise of any reparations settlement would consist of German industrial recovery to somewhere near prewar output levels. Thus eased by relative (internal) goods abundance, the purely objective difficulties involved in making the commodity exclusions and quotas would not appear unmanageable. Under the Dawes Plan it was found possible to arrange for a considerable mass of direct reparations purchases on German internal markets.38

37J. M. Keynes, A Revision of the Treaty (New York, 1922), p. 164. 38See the final report of the Agent-General for Reparations Payments, Bericht des General-

agenten fur Reparationszahlungen, Berlin, May 21, 1930, pp. 64 ff. For the five years closing Aug. 31, 1929, 42 per cent of 8 billion goldmarks were "transferred" by internal purchases on German commodity markets and corresponding deliveries in kind (Sachlieferungen); while another 9 per cent was utilized for expenditure in Germany to maintain the Occupation Forces in the Rhineland. An interesting development was the use made of construction contracts by which German construction and engineering firms undertook a considerable mass of investment and construction work (canals, entire factories, hydro-electric work, etc.).



40 The Canadian Journal of Economics and Political Science

A quite different set of problems would emerge in the endeavour to allocate among the recipient countries the "reparations bundle" so as to minimize impairment of foreign demand for German exports. This problem emerges since "Germany's reparations claimants are also her customers."'9 While receipt of reparations goods will tend to some degree to reduce the real demand for German exports, among the Eastern countries and primarily the Soviets the extent of this impairment may be deemed relatively slight. The ability of the Eastern countries to absorb manufactured and equipment goods is almost unlimited; the processes of industrialization, mechanization, urban- ization (and armament) which have been launched in those countries generate vast import requirements; and under pressure of constant "suppressed in- flation" market pressure is virtually non-existent. Under these circumstances the commercial trade of the Eastern countries would be governed primarily by the availability of export proceeds which receipt of reparations might tend to enlarge by improvement of export potential or the ability to concentrate upon favourite export items.

A similar assurance could not be entertained with respect to the degree of impairment of German export markets in the Western world. Here one would encounter direct market resistance and potent indirect effects. Even if care were taken to give recipient nations a bundle of reparations goods which would not impair German commercial exports directly, the receipt of reparations goods might displace commercial importation from other countries (for example, Britain). It would, moreover, be very difficult to draw a commodity line between "commercial exports" and "reparations goods" without making the latter category a mere dumping ground for what in late continental trade parlance are called "second-class" exports. The quantitative extent of the problem should not, of course, be exaggerated. Of the sixteen Western countries entitled to receipt of German reparations under the Paris reparation (1945) agreement, fourteen have been awarded minescule quotas which, under an overall reparations programme of the magnitude considered in this paper, would yield between one to seven million dollars annually. Great Britain and France together would receive the preponderant share (two-thirds) of German reparations goods moving westward.40 If special trade arrangements were made with France and Britain, given relatively full employment and

39Cf. Ginsburg, Future of German Reparations, p. 38. "Will Germany be able to give these nations reparations . . . and at the same time sell them enough to maintain a tolerable standard of life within Germany's own borders?" Ginsburg admitted that reparations from the so- called restricted industries (chiefly metal and equipment) would not impair German export markets. But his argument that export markets for light consumer goods would be weakened by reparations within that category is self-defeating since he admits that Western European nations "have never looked to Germany for textiles or clothing" and Russia "now or in the long run cannot be expected to offer a commercial market" for products of this category (p. 39). What then makes the conclusion "unmistakable" that "recurring reparations from the light peaceful industries would be, in all probability, at the expense of Germany's commercial exports from these industries." Yet Ginsburg's tract played an important role in "firming up" American reparations policy.

40Cf. United States Economic Policy toward Germany, p. 106 (assuming the United States share is washed away).




buoyant markets within these two countries, it is not excluded that unrequited reparations imports could be "absorbed" without extensive impairment of the German commercial position. In any case a German loss which is a British and French gain constitutes no net loss to the Western world. Admittedly, it would be difficult to devise the necessary trade agreements with Britain and France without freezing base-period relationships or forcing trade for a long forward period into a setting of bilateral trade agreements. All these problems would of course be resolved if the Western countries were to receive their German reparations in the form of a surplus of free foreign exchange. This would preserve a fond British-American principle for application to the area where the principle received the largest approbation and where its application would be most appropriate.

MANUEL GOTTLIEB Colgate UTniversity.

