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Dismantling the Reparations

Upon the conclusion of WWII, the Allies were faced with forming a reparations policy

that would compensate victims of German aggression and eliminate German war potential,

while balancing these concerns against the need to economically reconstruct the rest of

Europe. Since Germany’s currency and financial system was all but defunct in the immediate

post-war period, all reparations had to be taken either from Germany’s current industrial

production or through the dismantling and allocation of its capital equipment, which included

plants and machine tools. Reparations were also taken informally in the form of German

POW labor, but the focus of this paper will be on goods and capital taken from Germany

explicitly recognized by the Allies as “reparations.”

In the Potsdam Agreement of July 1945, the Allies decided to split Germany up into

occupation zones to facilitate the process of appropriating reparations. The British situation

exhibited a unique problems, based largely upon the fact that the British occupation zone was

the most industrialized zone of Germany. It contained the Ruhr, with all the coal mines and

factories, and was the most export-oriented and trade-dependent zone. As a result, the British

faced severe balance of payments problems in which its zone’s defunct economy could not

afford to pay for its own necessary imports. The UK itself, laden with post-war debt, was in

dire financial straits. Every dollar of reparations extracted from the zone could delay the

zone’s attainment of economic self-sufficiency, and thus prolong its drain on British

resources. In an attempt to ease the UK’s financial burden, the British and American zones of

occupation fused in January 1947 into a bizone.

This paper will examine the UK’s motivations for its reparations policy and how it

balanced demilitarizing Germany with reviving the German economy. The strength of the
German economy allowed it to carry out a calamitous war, and reparations were one way of

reducing this war-making capacity. In addition, the acquisition of reparations could help

Britain start repairing its own capital stock. However, the large and highly industrialized

German economy was crucial to the economy of the rest of Europe, and its recovery remained

a high priority for British policymakers through the saga of reparations. Even more pressing

was the problem of balance of payments, which proved to be a huge drain on Britain’s

financial resources. Britain also found its occupation zone caught within the nascent stages of

the Cold War, being played out largely the US and USSR. All these varying concerns played

into the reparations questions of what to take, how much to take, and where to take it from.

The unfolding of reparations sheds light upon Britain’s priorities regarding its occupation

zone.

The first stated purpose of the initial reparations plan, signed on 27 March 1946, was

the “Elimination of the German war potential and the industrial disarmament of Germany.”1

This goal was to be accomplished by a variety of industry restrictions and prohibitions to

lower the economic capacity of Germany as a whole. Reparations would be used to transfer

industrial might from Germany to the Allies. Suppressing German industry was not only a

security concern, but also promised to bolster British exports. Prior to WWII, Germany was

one of the largest exporters to the world market. By aiding British industry while lowering

German industrial capacity, Britain could hope to raise their export earnings. One estimation

stated that if Germany and Japan’s exports were cut to one-half their pre-war level, and world

trade in manufactures remained the same, Britain’s share of world trade would increase 20%

1
The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 3.

2
to about $400 million. Even accounting for Germany and Japan’s loss of importing power,

Britain would still gain $340 million dollars.2

The Morgenthau plan, originally conceived by British and American policymakers in

1944, involved the complete deindustrialization of Germany with these considerations in

mind. Its purpose was to eliminate German war potential and improve the position of other

industrial nations’ economies by leveling German industry. Because this plan would have

involved the mass starvation of millions of Germans, it was eventually discarded. However,

the rest of this paper will continue to examine how much the attitude of the Morgenthau plan

continued to inform British and American reparations policy.

Though Britain could gain in export power from reparations reductions of Germany’s

export industries, Britain still had reasons to be interested in reducing reparation payments as

much as possible. The German populace required an essential amount of imports in order to

survive, and due to their desolated economic condition, the Germans could not pay for these

imports themselves. Thus, humanitarian concern compelled the British to fully subsidize the

imports to avert the mass starvation of scores of German civilians. Providing food, the most

crucial import to Germany, would require Britain to spend more of its dwindling foreign

exchange since Britain could not domestically produce enough food to supply even its own

populace. Thus, the average taxpaying British citizen would have to subsidize German

imports until the British zone recovered, and reparations could only hinder recovery.

Moreover, Germany’s low industrial capacity threatened to undermine their ability to deliver

reparations from production. If the cost of humanitarian imports to Germany was greater than

the amount of reparations that Britain could extract, Britain had every interest to reduce

2
MacDougall (March 1947), p. 92.

3
reparations to both itself and the other allies for the sake of rebuilding the German economy

to the point of self-sufficiency.

The Cold War

The Cold War gave British policymakers yet another incentive to reduce reparations.

The United States and Britain believed that an economically weak Germany was more likely

to succumb to Communism. From the very first discussions regarding reparations, the US

and UK tried to negotiate down the level of reparations while the Soviets tried to raise them.

The USSR, who lost the most of the Allies during the war, wanted to use reparations from

Germany to rebuild itself. In addition, the Soviets feared that Germany would be able to

rebuild itself just as rapidly as it did before WWII, and militarily threaten the USSR again. At

the Potsdam Conference, the USSR proposed a plan that allotted $10 billion to itself, $5

billion to the US, and $5 billion to Britain. The US and UK balked at the idea of extracting

$20 billion from Germany, maintaining that such a sum was unfeasible. After days of

haggling, the US suggested dividing Germany into separate occupation zones, from which

each occupying power could draw their reparations. The USSR controlled the largest and

most agricultural zone, whereas the British took control of the most industrial zone, including

the Ruhr. The Soviets were also entitled to receive some reparations from the industrialized

zones of Germany in addition to any reparations it could glean from its own zone. Though

the US and UK never intended to carve up Germany, the boundaries established by this plan

to manage reparations payments eventually hardened into the Iron Curtain of the Cold War.

Soviet demands were incorporated in the March 1946 plan as part of the guiding

principles, which included elimination of the German war potential and payment of

4
reparations to victims of German aggression. These pro-reparation statements were balanced

against a restraining principle, supported by the US and UK, of “Retention in Germany, after

payment of reparations, of sufficient resources to enable her to maintain herself without

external assistance.”3 The British were adamant about making sure the reparations would not

compromise Germany’s economic survival, and insisted upon some adjustments to the

Potsdam Agreement, stipulating that “Germany will be treated as a single economic unit” and

“That exports from Germany will be acceptable in the international market.”4 If the free

movement of goods throughout Germany were obstructed, the British zone would suffer since

it depended upon the food produced in Russia’s agricultural zone. The USSR’s failure to treat

Germany as a “single economic unit” led Britain to deny reparations to the USSR.

Part of the initial agreement of this plan was that the USSR would receive capital

equipment and plant parts from Britain’s industrialized zone. In the early stages of

reparations, there was an ongoing argument on whether reparations to USSR had priority over

imports to the US and UK zones. The USSR wanted reparations, which it needed to rebuild

itself, and the US and UK preferred to use Germany’s resources to fund imports, which

Germany needed to in order to rebuild itself. The Russians failed to treat Germany as an

economic whole, and Britain found itself subsidizing German imports. On 27 April 1946, the

British decided that priority must be given to funding British imports to Germany rather than

transporting German capital equipment to the Soviets. On 4 May 1946, Britain decided that

the dismantling of plants for delivery as reparations would be suspended until the zone was

self-sufficient. In addition, reparations from current production ended completely. Besides

the fact that current production was dismally low in immediate post-war Germany, the British

3
The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 3.
4
The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 3.

5
believed that “In the then state of Germany, it was obvious that reparations from current

production could only be reparations at the expense of the British and American taxpayers.”5

Throughout the implementation of reparations, virtually none was taken from current

production since it could be exported in exchange for vital imports. In 1946-7, the Americans

refused to participate in the dismantling of plants due to concern over Germany’s economic

health and balance-of-payments.

On 12 March 1947, the US’ Truman doctrine was issued, committing American to

halting the perceived Communist expansion in Europe. In June 1947, the US’ Marshall Plan

was introduced to aid the economic reconstruction of Europe. Germany came to be seen not

as a defeated and formerly dangerous fascist nation, but as a potential ally in the fight against

Communism. The Morgenthau Plan mentality, which viewed Germany as a vanquished

enemy, gave way to the Truman doctrine, which cast Germany as an essential ally in capitalist

democracy. As much as the Soviets tried to extract reparations from the US and UK zones of

occupations, the US and UK resisted. The US wanted to economically build Germany into a

bulwark against the USSR.

Food, Coal, and Steel

Even without Cold War concerns, Britain recognized the need to economically revive

its zone early on. The costs of food imports into the occupation zone were so exorbitant that

the UK could not expect to recover its losses from reparations without reviving the German

economy. In October 1947, the British government stated the fundamental elements girding

German industrial recovery: “The volume of industrial production in the British zone has only

5
“Statement by the Control Commission for Germany (British Element) Regarding Reparations from the
Western Zones, Dismantling, and ERP” (24 September 1948), DGO, p. 331.

6
increased from 33 per cent. to 34 per cent. of the 1936 figure. The factors which are

preventing industrial recovery are lack of food, lack of coal, and lack of incentive.”6 In

addition to coal and food, the recovery of the steel industry was also a prerequisite to German

economic rehabilitation. Prior to the war, steel and steel related products were Germany’s

largest export, followed by coal. Steel was needed to rebuild railroads and locomotives for

food and coal transport. It was also required for the manufacture of mining tools and other

industrial equipment. On the other hand, the steel industry was itself dependent upon coal.

Coal from the Ruhr provided the power that drove not only the rest of German industry, but

that of Britain and Europe as well. Food entered the equation as a restraint on both coal and

steel production, since German miners and steelworkers could not work efficiently without

sufficient rations. Balancing the mutual interdependence between food, coal, and steel proved

to be a major concern in British reparations policy.

Upon taking up administration of their zone, the British immediately endeavored to

increase agricultural output. Lack of food was considered Germany’s most vital problem, and

addressing this problem proved to be the largest drain on British resources. Prior to WWII,

Germany could only supply 85% of its food requirements.7 The British zone’s decreased

post-war exporting power and Russia’s failure to treat Germany as an economic whole

thwarted the zone’s ability to procure food without foreign assistance. In 1946, Britain had to

import two million tons of food to its zone, along with over 200,000 tons of seeds. Indicative

of Britain’s huge humanitarian and financial responsibility, the UK had to subsidize 60% of

Germany’s bread, the main source of calories for Germany at that time.8 Food imports for

Germany was an unsustainable tax burden upon British citizens.


6
“Extracts from the Eighth Report from the House of Commons Select Committee on Estimates, Session 1946-
7: British Expenditure in Germany” (20 October 1947), DGO, p. 250.
7
British Zone Review (19 September 1945), Vol. 1, No. 1, p. 3.
8
British Zone Review (15 February 1947), Vol. 1, No. 37, p. 17.

7
Emphasizing the critical importance of food to the German economy as a whole, the

British government said, “The import of food should, at the present stage, be given the highest

priority. Food is the key to the whole problem of German economy. If the Germans can be

fed adequately, the restoration of the output of coal and consumer goods will automatically

follow.”9 The intuition underlying this statement was that “a miner cannot work if he does not

eat.”10 The winter of 1947 provided robust evidence for this relationship, when rising coal

production abruptly fell due to severe food shortages. For this reason, Britain raised the

rations for coal miners’ families above that of the standard ration for normal families.

Coal production was crucial not only for German economic recovery, but also for the

recovery of the rest of war-torn Europe. During this time, coal was usually the main

bottleneck of industrial production. Thus, Germany’s inability to quickly and efficiently

produce coal represented a serious restraint on the rest of European industry. In addition, the

average Germany family also needed to procure a minimum amount of coal simply to provide

basic electricity and heating before any of it could be exported. Heating needs during the

winter drew coal away from export or from other German industries because coal

consumption during the coldest months reached 2,500 tons per day.11

Though the initial March 1946 reparations plan placed various restrictions on most

German industries, coal was exempt. The plan said, “Coal production will be maximized as

far as mining supplies and transport will allow.” Instead of setting a maximum limit, the plan

called for a minimum coal production of 155,555,000 tons a year, of which 45,000,000 tons

was to be arranged for export to reparations recipients. With this goal in mind, the Allies

decided that “the necessary supplies and services to this end will be arranged to give the
9
“Extracts from the Eighth Report from the House of Commons Select Committee on Estimates, Session 1946-
7: British Expenditure in Germany” (20 October 1947), DGO, p. 258.
10
British Zone Review (19 September 1945), Vol. 1, No. 1, p. 3.
11
British Zone Review (25 October 1947), Vol. 2, No. 5, p. 18.

8
maximum production of coal.”12 Thus, the coal industry was given priority in terms of access

to labor, steel, and transportation. When Britain took over the Ruhr, only twenty-two mines

were functioning, producing a dismal 2,000 tons per day. Within months, the British managed

to help boost production to 60,000 tons per day.13 Coal production surpassed 200,000 tons per

day in December 1946,14 and exceeded 318,148 tons per day in December 1948.15 The US

and UK bizonal government set a target of 423,212 tons daily for 1952-53, which was

actually 10% greater than Germany’s pre-war coal production in 1936.16

If coal was the lifeblood of industry during mid-twentieth century, steel was the flesh

and bones. However, the steel industry was one of the most restricted industries and most

attractive targets for allocation under the initial reparations plan. After the fusion of the US

and UK occupation zones, the bizonal government determined that steel was a requirement

for a balanced economy, since “steel and steel products… are the most needed and, therefore,

the most dependable trade commodities.”17 Coal provided power while steel furnished the

mechanical framework for industrial production. Steel production was itself a constraint upon

coal production. The locomotives and train tracks damaged by the war depended upon the

steel industry’s recovery for its own repair. In recognition of the significance of transportation

problems, the British government said, “It is difficult to see how it is going to be possible to

move any extra coal which the miners may produce.”18 By the end of 1945, the German

transportation system could only handle a monthly lift of 2,200,000 tons of coal.19 This was

12
The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 7.
13
British Zone Review (26 July 1947), Vol. 2, No. 2, p. 23.
14
British Zone Review (31 January 1948), Vol. 2, No. 8, p. 10.
15
British Zone Review (19 February 1949), Vol. 2, No. 20, p. 23.
16
Statistical Handbook of Bizonal Recovery (1949), p. 12.
17
“Revised Plan for the Level of Industry in the Anglo-American Zones” (29 August 1947), DGO, p. 241.
18
“Extracts from the Eighth Report from the House of Commons Select Committee on Estimates, Session 1946-
7: British Expenditure in Germany” (20 October 1947), DGO, p. 252-3.
19
British Zone Review (26 July 1947), Vol. 2, No. 2, p. 23.

9
hardly adequate when the reparations plan called for a minimum monthly production of

almost six time that amount - 13,000,000 tons. Thus, Britain’s effort to maximize coal output

would be futile without a concurrent plan to raise the production of steel for rail repairs.

In December 1946, the Military Governor for the British Zone announced a decision

to reduce coal exports by 350,000 tons per four-week period, which meant more coal for

Germany and less coal for Britain and other European countries.20 This was a 10% reduction

from the original quantity of coal slated for export. In addition, any increase in the export of

electricity would be accompanied by a further decrease in the export of coal. One purpose of

this reduction was humanitarian – German public utilities needed more coal. The other reason

was to make more coal available to the German steel industry “in order to hasten the repair of

vitally needed transport… and to build up the supply of mining machinery to the coal

industry.” Because of coal and steel’s mutual dependence, the British had to balance the

needs of both industries to accelerate the integrated recovery of the Germany economy. It is

important to note that Britain reduced coal exports to itself for the sake of German recovery.

Steel, under the initial reparations plan, was a restricted industry but the maximum

allowed steel capacity was gradually raised. Originally, Germany was supposed to produce

5.8 ingot tons of steel each year and full steel-producing capacity was to be fixed at 7.5

million ingot tons a year.21 Even then, the British wanted their zone to produce 11 million

tons a year, and only lowered this amount as a compromise with the Soviets, who wanted to

limit German production to only 3 million tons a year. By April 1949, the target level of steel

production was raised to 11.1 million ingot tons a year in accordance with Britain’s original

20
British Zone Review (21 December 1946), Vol. 1, No. 33, p. 15.
21
The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 4.

10
intentions.22 By the time Germany recovered, steel and steel-related products was again one

of Germany’s largest exports, second only to coal.

Despite the objective of increasing German steel production, Britain still wanted to

collect German steel plant parts as reparations to repair its own industries. The level of 11.1

million tons a year set in the April 1949 revision of the reparations plan was still much lower

than Germany’s pre-war steel production, which reached 22 million tons a year.23 All plants

not contributing to the 11.1 million tons per year production goal were considered surplus

capacity, thus leaving numerous plants available for reparations. In all, German iron and steel

plants accounted for 30 per cent of equipment allocated to recipient nations, amounting to

about $30 million in reparations.24

As damaging as these allocations may seem, collections of steel plants had a minimal

effect on German economic recovery. Germany had a much larger capital endowment in 1945

than in 1939, consisting mostly of war plants. Much of the industrial equipment made

available for reparations were the war plants that Germany no longer needed for its peacetime

industries. In fact, half of the industrial plants eventually removed for reparations were war

plants. In addition, the general chaos in Germany following WWII left plants largely under-

utilized. When the two million slave workers employed during WWII in the British zone

were released, the zone faced a severe labor shortage. As for displaced Germans that returned

to Germany to work, housing and transport problems hindered their re-absorption by the steel

industry.25 And as mentioned above, food shortages and lack of coal proved to be serious

constraints on the German steel industry. Thus, many German steel plants had neither the

22
“Washington Three-power Meeting: Agreement on Prohibited and Limited Industries” (8 April 1949), DGO, p.
393.
23
The Economist (19 January 1946).
24
The Economist (10 June 1950).
25
British Zone Review (21 December 1946), Vol. 1, No. 33, p. 15.

11
manpower nor the electricity to be productive. Though the target level of steel production had

been raised to 11.1 million yearly tons in 1949, the German economy was not able to reach

this goal until after 1953.

Idle and deteriorating steel plants could be more productive to Britain or to other

European reparations recipients. In Germany, capital equipment far exceeded the ready

supply of labor necessary for efficient use of the plants, while much of the rest of Europe

faced the opposite problem of too little capital. Thus, the policy for dismantling steel plants

therefore concentrated on maximizing the marginal productivity of the plant parts across

Europe by distributing capital to where it would be most effective. The British government

asserted that “It was only after Anglo-American experts, concerned primarily with Germany’s

recovery, had assessed the limits to which her labour and raw material resources would stretch

that a revised list of surplus capital equipment available from Germany for reparations was

published.”26 Indeed, the number of plants listed on the surplus list scheduled for dismantling

and delivery “by no means reduced the capacity of German iron and steel industry to the 11

million tons level suggested by Britain.”27

Fusion of the US and UK Zones

One of the most significant ways in which the US and UK tried to improve Germany’s

economy occurred in January 1947, when the two governments fused their respective

occupation zones into the bizone. Though ideas regarding integration of the zones were

mentioned before, the immediate catalyst for the fusion was the British zone’s economic

woes. At the time, Britain was spending $320 million a year on their occupation zone while

26
British Zone Review (19 March 1949), Vol. 2, No. 21, p. 1.
27
British Zone Review (21 December 1946), Vol. 1, No. 33, p. 15.

12
the US zone was running an export surplus. A British Parliamentary Committee assigned to

examining this problem “recommended integration of the zones as a first requirement.”28

This was hardly the first time Britain had requested economic integration. Their

original stipulation in the initial reparations plan was that Germany should be “treated as a

single economic unit.” The British zone, because it was the most highly industrialized,

depended upon trade for its necessities more than any other zone. Within the triple

relationship of coal, steel, and food, food proved to be the major restraining factor in British

zone. “Inadequate food supplies diminished coal output, which in its turn reduced steel

production on which the mining industry relied, and after the drastic food rations cuts in

March 1946, a rapid decline in [the British] zonal economy ensued.”29 To make matters

worse, Britain was heavily indebted to the US as a result of WWII. Because the Britain’s

distressed financial situation prevented it from being able to continually subsidizing imports

to Germany, the British threatened to halt coal exports, using them instead to rebuild the

zone’s industry. An interruption in the flow of coal threatened economic recovery in the rest

of Europe, so the US responded quickly and proposed a merger.

The fusion of the British and American zones served to speed up Germany's recovery

by eliminating trade barriers while cutting Britain's costs of administering its zone. In the 2

December 1946 agreement between the two governments, the US and UK declared their

commitment to the principle of economic unity.30 The agreement would remove barriers of

trade between the two zones and the two governments would share administrative

responsibilities while providing imports. Imports consisted of agricultural imports and

industrial inputs, the cost of which was to be offset by exports from the zones. Any
28
British Zone Review (4 January 1947), Vol. 1, No. 34, pp. 1-2.
29
British Zone Review (4 January 1947), Vol. 1, No. 34, p. 1.
30
“Agreement Between the Governments of the United Kingdom and the United States on the Economic Fusion
of Their Respective Zones” (2 December 1946), DGO, pp. 195-201.

13
outstanding costs uncovered by exports would be borne equally by each country. The pooling

of resources and exploitation of each zone’s comparative advantage promised to relieve the

occupation’s drain on Britain’s resources.

In December of 1947, the Americans agreed to take upon an even greater financial

responsibility for the bizone. Because it was previously determined that all exports would be

paid for in dollars, and Britain’s dollar resources were seriously strained, Britain could no

longer afford to pay for bizone imports. Thus, the UK, after making a series of payments and

provisions of imports for the end of 1947 and for 1948, “the liability of the Government of the

United Kingdom to supply Category A goods and services shall… be discharged.”31 Category

A imports consisted of foods, fertilizers, and other goods associated with either reviving

agriculture or providing basic necessities. Following this agreement, Britain was called upon

to supply only about 7% of the foreign aid to the bizone.32 The US, with its superior

economic strength, assumed greater financial responsibility and a correspondingly

predominant status in the bizone.

The Decline of the Reparations Plan

Of the stated goals of the initial reparations plan settled in March 1946, that of

bolstering German self-sufficiency became increasingly important as other considerations,

such as the industrial disarmament of Germany. The US and UK shrugged off or ignored

Soviet demands that reparations be given priority. They started dismantling the initial

reparations plan, which called for a number of restrictions and prohibitions on industries that

could be useful in war and made numerous plants available for reparations. One problem

31
Treaty Series (1948), No. 4, Cmd. 7301, p. 2.
32
Statistical Handbook of Bizonal Recovery (1949), p. 3.

14
with this plan was social; a rapidly deindustrialized economy would result in huge

unemployment and civil unrest. Even more pressing upon the UK government was correcting

the balance of payments dilemma.

In August 1947, the UK and US agreed on a Revised Plan for the Level of Industry,

which loosened industry restrictions and raised permitted capacity levels.33 The revival of

Germany’s metals, machinery, and chemicals industries, previously considered a security

threat to the rest of Europe under the original reparations plan, came to be recognized as

essential to an economically healthy Germany and Europe in the August 1947 reevaluation.

The revision allowed a level for these industries that amounted to only a 5 to 10% reduction

from the 1936 level. In addition, though most reparations were to be taken from the metals,

machinery, and chemicals industries, the revision asserted that “it is impossible to provide a

self-sustaining economy in the bizonal area without materially increasing the levels in these

industries.” Thus, reparations had to be reduced or delayed to fill the needs of Germany’s

economy.

While the March 1946 plan called for a reduction of industry to about 50 to 55% of the

pre-war level in 1938,34 the August 1947 revision called for an increase to 100% of the 1935.35

This amounted to a 29% reduction of 1938 levels of industry instead of 50 to 55%. The US

and UK projected that by 1952, the revised plan would allow a per capita production capacity

of 75% of 1936. In reality, the German economy surpassed the 1935 level by 1950. The

Morgenthau mentality, which called for industrial disarmament and reduction of Germany to

an agrarian economy, was expiring. In its place was a realization that a healthy German

economy was in all of Europe’s interests. By 1951, the only industries that still faced

33
“Revised Plan for Level of Industry in the Anglo-American Zones” (29 August 1947), DGO, pp. 239-45.
34
The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 8.
35
“Revised Plan for Level of Industry in the Anglo-American Zones” (29 August 1947), DGO, p. 240.

15
significant restrictions were ones with direct war potential, such as chemicals, shipbuilding,

and high-tech industries. Whereas the March 1946 plan listed 1,683 plants for reparations,

that list had been reduced to 700 plants by April 1949 to allow for greater German industrial

capacity.

Did Britain Win or Lose from Reparations?

Figures in this section will be expressed in postwar prices, ranging between 1946 and

1949. There are certain limitations to these numbers, since it was during this period that both

the US and UK devaluated their currency. The devaluations point to the underlying

inaccuracies in exchange rates and price levels throughout international currencies at this

time. Despite these distorting factors, financial statistics regarding British occupation zone

unequivocally reveal that the costs far outweighed the benefits.

In 1936, an average year for the pre-war German peacetime economy, the region that

became the bizone was importing $1 billion and exporting $1.75 billion.36 The bizone area

accounted for the bulk of Germany’s pre-war food imports. Though the initial March 1946

reparations plan heavily restricted the metal-related exporting industries, the plan still

assumed that total exports from all of Germany would reach $2 billion in 1949, enough to pay

for both imports and the costs of occupying Germany.37 However, by the end of 1946 Britain

expected to have spent hundreds of millions of dollars on food imports to its zone alone,

making up almost two-thirds of total imports. Compounding these costs was occupation

expenditure, which equaled or exceeded expenditure on imports.

36
In 1947 prices. From “Revised Plan for Level of Industry in the Anglo-American Zones” (29 August 1947),
DGO, p. 241.
37
The Plan for Reparations and the Level of Post-War German Economy (27 March 1946), p. 8.

16
After the US/UK fusion in January 1947, the British and American governments

estimated that they would have had to pay $1-1.25 billion in food imports to the bizone for the

year 1947 out of an estimated $2 billion worth of total imports.38 Each government also

agreed to pay $62.5 million to purchase imports of raw materials and industrial equipment to

the bizone.39 Dismantling German plants and shipping them out as reparations while the US

and UK imports industrial equipment would have been absurd, so the list of German plants

available for allocation kept shrinking. Both the US and UK were still responsible for sharing

the financial burden of providing for necessary imports of food-related goods. By October

1947, Britain had paid $348,244,107 to sustain the zone. Of $412 million worth of imports,

the British zone could only afford to pay for $63 million of it by itself through exports and

other forms of payment.40 In fact, German exports could only pay for less than 8% of its total

imports. Given this balance of payments, the March 1946 plan turned out to be excessively

optimistic. Whether the British and Americans had originally intended to comply with the

plan or not, restrictions and reparations inevitably had to be reduced to repair Germany’s

exporting power.

After the amendment of the bizonal fusion agreement in December 1947, Britain was

only liable to pay $70 million a year, which amounted to only 7% of total foreign aid to the

bizone. By 1948, the bizone was reporting an export surplus of $271,110,531 over non-food

imports.41 By February 1949, British military governors reported that export earnings were

sufficient to pay for over 90% of food imports.42 And finally, on 1 October 1949, the US and

UK transferred all assets of the Joint Export-Import Agency, the bureau responsible for the
38
“Revised Plan for Level of Industry in the Anglo-American Zones” (29 August 1947), DGO, p. 241.
39
Report of Price, Waterhouse & Co. (1950), p. 3.
40
“Extracts from the Eighth Report from the House of Commons Select Committee on Estimates, Session 1946-
7, British Expenditure in Germany” (20 October 1947), DGO, p. 250.
41
Report of Price, Waterhouse & Co. (1950), p. 4.
42
British Zone Review (19 March 1949), Vol. 2, No. 21, p. 11.

17
bizone’s foreign trade, to the West German government. At that point, the Germans no longer

needed US and UK foreign assistance to purchase their necessary imports.

After paying for imports to their zone and for occupation costs, what did the British

actually gain in the form of reparations to offset the costs? Under the reparations plan

administered by the Inter-Allied Reparation Agency (IARA), there were two types of

reparations. As explained before, reparations were not taken from current production for fear

that it would hinder German industrial recovery. Thus, export revenue was used to pay for

imports to Germany rather than allocated as reparations to other countries. Category A

reparations consisted of German external assets and captured German supplies, and Category

B reparations were industrial capital equipment, consisting mostly of plant parts, machine

tools, and ships. For each of the two categories, every recipient government was allowed to

“draft” a certain percentage of available reparations, with their percentages based upon how

much they were damaged by Germany during the war. The June 1951, the IARA report

revealed that, up to that point, Britain had drafted approximately $85 million in reparations

from each category. Britain significantly underdrafted Category A reparations by drafting

only 16.38% out of an entitlement of 28%.43 Britain also underdrafted in most subsets of

Category B except for German merchant shipping. Of the 10,870,000 gross registered

tonnage of ships the UK lost in WWII, the British managed to gain back 353,406 tons in

reparations. The merchant shipping proved to be a major asset because 97% of the ships

slated for allocation were already available by May 1946.44

The timing of the reparations was important because they were most helpful to

recipient countries when received immediately after the war. The IARA asserted that,

43
IARA (1951), p. 20.
44
IARA (1951), p. 23.

18
Although the amount of industrial capital equipment received as reparation is small
compared with the amount originally expected to be made available, it has made a
substantial contribution to the post-war economic recovery of Member Governments.
This contribution was frequently of particular importance because, in the immediate
post-war period, much vital equipment delivered as reparation could not have been
obtained from other sources, without a delay of several years.45

Because the damage caused by war left many countries with a lower capital endowment than

their economy was geared for, reparations could help them recover some of their lost

productivity. Plants that would otherwise have taken years to rebuild could immediately be

assembled from German plant parts and begin manufacturing goods.

However, most reparation deliveries were not as prompt as the IARA claimed.

Allocations were not only reduced, but they were also delayed to allow German industrial

recovery. Only 20 plants were made available by May 1946 out of 667 plants slated for

dismantling, 490 of which were in the British zone. By the end of 1946, only 110 were

available. This figure sluggishly raised to 244 by the end of 1947, and to 400 by the end of

1948.46 Allocations were delayed partly because the plants could not be dismantled fast

enough and largely due to the fact that Britain wanted to maintain its zone’s industrial

capacity. Some industries that were considered essential to German industrial recovery were

completely eliminated from the list of available reparations. Inland water transport was slated

for reparations, but in November 1947 “the Agency was informed that, owing to the heavy

losses inflicted on German inland water transport during the war, it was unlikely that any

would be made available as reparation.”47

The Final Report of the IARA in 1961 stated that Britain received $180 million of

reparations. Because Britain was the second-largest recipient of reparations, right behind the

45
IARA (1951), Annex 20, p. 1.
46
IARA (1951), p. 25.
47
IARA (1951), p. 24.

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US, some suggested that Britain excessively pursued reparation deliveries. “The purpose of

further reparations appears to be purely to restrict German industrial power, at best for reasons

of security, and at worst, to hamper German competition.”48 The British government

maintained that “It is not the policy of His Majesty's Government to restrict Germany's ability

to compete in world markets in the interests of British trade; and the Level of Industry Plan,

which leaves intact many industries competitive with our own.”49

The evidence sides with the British government. The cost of imports to the zone far

exceeded any competitive advantaged Britain could have gained through decreased German

exports. German industrial revival was largely the result of American and British policies of

reducing reparations. Though the original reparations plan aimed for a reduction of the

German economy to 55% of its 1938 level, the plan was continually adjusted such that the

German economy was able to recover to its 1936 level by 1950. Also, the $180 million

Britain collected in reparations is substantially less the $5 billion Britain theoretically would

have received under the Soviet plan, which the UK earnestly opposed. Compared to the

several hundred million dollars Britain paid for imports, the $180 million received in

reparations was mere trifle. Accelerating German economic recovery to the point of self-

sufficiency by opposing reparations was the best thing Britain could do to recover its losses in

administering the occupation zone.

By 1951, most of Germany’s major reparation obligations had either been paid or

cancelled. Afterwards, West Germany’s rehabilitated economy demonstrated vigorous

growth, outpacing the UK’s own economy. The history of reparations reveals Britain’s role in

restoring sound foundations for the German economy. The UK managed the triple

48
The Economist (10 June 1950).
49
“Statement by the Control Commission for Germany (British Element) Regarding Reparations from the
Western Zones, Dismantling, and ERP” (24 September 1948), DGO, p. 332.

20
relationship between food, coal, and steel in its industrialized zone to maximize the rate of

recovery despite a number of restrictions. The most notable hindrances were lack of food and

the Soviets’ insistence on reparations and the disarming of Germany. The British spent their

dwindling foreign exchange to supply its zone with imports while eliminating reparations

deliveries to the USSR and loosening industrial restrictions. After the fusion with the US

zone, the Americans largely took over the task of reviving the German economy, but could not

have done so without the UK’s commitment to its zone in earlier years.

21
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