This document is based on the best information regarding Western Germany currently available to the Economic Cooperation Administration, and the views expressed herein are the considered judgment of the Administration. Both the text and the figures for 1949/50 are still preliminary in character; participating countries will therefore understand that this report cannot be used to support any request, either to the Organization for European Economic Cooperation or to the Economic Cooperation Administration, for aid in any particular amount for any country or for any particular purchase or payment.

February 14, 1949

Administrator

III

# Contents

<table><thead><tr><th></th><th>PAGE</th></tr></thead><tbody><tr><td>PART I. Summary and Conclusions</td><td>1</td></tr><tr><td>PART II.</td><td></td></tr><tr><td>CHAPTER I. ANALYSIS OF THE CURRENT SITUATION</td><td>8</td></tr><tr><td>Background</td><td>8</td></tr><tr><td>Use of Resources</td><td>9</td></tr><tr><td>Sources of Resources</td><td>16</td></tr><tr><td>External Balance of Payments</td><td>23</td></tr><tr><td>Internal Balance of Payments</td><td>23</td></tr><tr><td>Financial Situation and Policy</td><td>25</td></tr><tr><td>Balance of Resources</td><td>30</td></tr><tr><td>Efficiency and Productivity</td><td>31</td></tr><tr><td>Political and Social Factors</td><td>35</td></tr><tr><td>CHAPTER II. BASIC PROBLEMS OF THE WESTERN GERMAN ECONOMY</td><td>38</td></tr><tr><td>Economic Resources</td><td>38</td></tr><tr><td>Internal Finance</td><td>42</td></tr><tr><td>Restoration of Foreign Trade</td><td>43</td></tr><tr><td>Internal Problems</td><td>46</td></tr><tr><td>Level of Recovery</td><td>47</td></tr><tr><td>Summary</td><td>47</td></tr><tr><td>CHAPTER III. DESCRIPTION AND CRITIQUE OF NATIONAL RECOVERY PROGRAM</td><td>50</td></tr><tr><td>General Considerations</td><td>50</td></tr><tr><td>Consumption</td><td>50</td></tr><tr><td>Source of Resources</td><td>51</td></tr><tr><td>Exports</td><td>63</td></tr><tr><td>Balance of Payments</td><td>65</td></tr><tr><td>Investment and Fiscal Policy</td><td>67</td></tr><tr><td>Appraisal of the Recovery Programs for Western Germany</td><td>69</td></tr><tr><td>CHAPTER IV. JUSTIFICATION OF ECA AID</td><td>79</td></tr><tr><td>I. Supplemental Requirements for 1948/9</td><td>79</td></tr><tr><td>Bizone</td><td>79</td></tr><tr><td>French Zone</td><td>81</td></tr><tr><td>II. Justification for ECA Aid for 1949/50</td><td>83</td></tr><tr><td>Introduction</td><td>83</td></tr><tr><td>The Bizonal Program—1949/50</td><td>84</td></tr><tr><td>French Zone—Program for 1949/50</td><td>92</td></tr><tr><td>Critique</td><td>95</td></tr><tr><td>Summary and Recommendations</td><td>102</td></tr></tbody></table>

V

# PART 1

## SUMMARY AND CONCLUSIONS

Even more than recovery from the tremendous physical destruction during the War, the chief problems of Western Germany are recovery from the complete disorganization of economic life and political institutions which followed the defeat, and the difficulties of adjusting to the separation from industrial Western Germany of the predominantly agricultural Eastern territories which were formerly a major source of food for the West.

The population of Western Germany has increased substantially over pre-war levels and is at present about 66 percent as great as that of all Germany before the War, as the result of a large influx of population from the Separated Areas, Czechoslovakia, and, more recently, from the Eastern Zone. By 1952 the ratio may be expected to rise to about 72 percent. On the other hand, the industrial resources of Western Germany represented only 59 percent of total German resources before the War, and its agricultural resources comprised only 45 percent of pre-war Germany's arable land. The unavailability of imports from the territory east of the Oder-Neisse, which is now under Polish Administration, has deprived Western Germany of a major source of food supply. Under present conditions, it must import more than 40 percent of the food needed to support its population. It can pay for this food only by raising exports of manufactured goods to levels well above pre-war.

To raise exports to the required level, the economy of Western Germany must make much further progress. Industrial production, which at the end of 1948 was at about 78 percent of its 1936 level, must be raised by about 50 percent. Agricultural output, particularly animal husbandry, must be raised to restore indigenous food production to its pre-war magnitude. The amount of food and manufactured products available to the population must be augmented sharply in order to provide a tolerable standard of living which, while remaining significantly below pre-war, would still provide the economic incentives necessary for efficient productive effort.

The economic recovery of Western Germany is necessary to enable it to become economically self-supporting and to avoid the political dangers which might well resolve from economic distress. A democratic Western Germany with a functioning economy can make valuable contributions to the recovery of all Western Europe, both by making available needed exports and by providing a market for products of other participating countries and it can, thus, play an important role as a responsible member of a revived Western European community.

Many obstacles must be overcome before these objectives can be achieved. Effective government must be established. The financial structure must be put in order and government costs must be reduced. Germany's internal price structure must readjust to existing conditions. This will require acceptance of a lower standard of real incomes

1

than before the war. Externally, a workable relationship must be reestablished between Germany's internal prices and world market prices for the commodities which Germany must import or export. Germany's trade relations with the rest of the world must be restored as rapidly as possible.

It will be necessary not only that Germany's industrial production be increased but also that the industrial structure be reoriented to make the most efficient possible use of available resources, particularly of increased manpower.

Following the surrender in May 1945, the German economy was in a state of almost complete collapse. Industrial production was at a virtual standstill. Imports ceased completely, except for food enough to prevent actual starvation which was brought in by the United States and the United Kingdom.

Following the surrender, the territory east of the Oder-Neisse, which represented 24 percent of pre-war Germany's total land area, and 28 percent of its arable land was placed under the provisional administration of the Polish Government. The remainder of Germany was divided into four occupation zones operating as separate economic units. In late 1946 the United States and the United Kingdom merged their two zones of occupation; this merger combined, in a single economic area, the most important industrial section of pre-war Germany. During 1948 the barriers to the movement of goods and persons which had previously existed between the Bizone and the French Zone were removed. Steps were taken to integrate the foreign trade of the French Zone with that of the Bizone through the Joint Export-Import Agency. Agreement was reached upon the establishment of a uniform ration standard for the two areas.

Since the beginning of 1948, particularly since the end of June, there has been substantial economic progress in Western Germany. This has been due, in part, to the large increase of industrial raw materials made possible, not only by ECA aid, but more importantly by revenue from the sale of exports. The exceptionally mild winter of 1947/48 increased the availability of coal to industry and the excellent crops of the past year and greater U.S. financed food imports permitted an increase in the food ration, which greatly improved working morale and efficiency. The drastic currency conversion at the end of June restored normal economic incentives for the first time since the occupation and greatly stimulated all fields of activity.

As a result of all these factors, industry pushed ahead rapidly during 1948. The general level of production in the Bizone increased from 44 percent of the 1936 rate in December 1947 to 78 percent in December 1948, a rise of more than 75 percent. Bizonal exports during 1948 were 2½ times those of 1947. The food ration for the "normal consumer" was increased by 300 calories per day during the year, or to 1,850 calories. Allowing for supplemental rations and for off-ration consumption, this corresponds to an average food consumption by the non-farm population of about 2,450 calories. Despite the recent improvement, this remains about 15 percent below pre-war in quantity and the diet

2

is seriously deficient in quality with a preponderance of starches and
a continuing shortage of proteins, fats, and protective foods.

The level of industrial production in the French Zone was some-
what lower than that in the Bizone during the first few years of occu-
pation. In June 1948 production had reached 51 percent of 1936, or
the same relative level as in the Bizone. By October, 1948, output was
at 66 percent of the 1936 level as compared with 73 percent in the
Bizone.

Despite considerable improvement during 1948, the availability of
consumer goods in Western Germany remains far below pre-war,
whereas requirements are well above normal because of the extreme
shortage of supplies during recent years. Perhaps the most acute need
is for adequate housing. Arrears of new construction and maintenance
have accumulated since 1939. War damage has expanded this defi-
ciency to major proportions. Destruction and damage in the Bizonal
area is equivalent to at least three million dwelling units. The large
increase of population further aggravates the problem, the solution of
which will take many years.

One of the most serious economic problems of the Bizone during
the immediate post-war years was the enormous excess of currency,
which resulted in extreme inflationary pressures and largely destroyed
normal economic incentives. A drastic currency reform was introduced
during June 1948, under which 6.5 new Deutsche Marks were given in
exchange for each 100 old Reichsmarks, of which six Deutsche Marks
were for free use while one-half Deutsche Mark was blocked for medium
and long-term credits. At the same time there was a widespread re-
laxation of the very strict price and rationing controls which had
previously existed.

As already stated, the currency conversion proved to be a major eco-
nomic stimulus. However, prices have advanced persistently since the
reform. Early fears that the money supply would be too tight were ap-
parently unfounded, and it is possible that further expansion of money
circulation or credit would be dangerous. Proper use of the counterpart
fund should help to combat this danger.

For the next few years further economic recovery in Western Ger-
many cannot be achieved without substantial foreign aid. It is com-
pletely impossible for Germany's industries, at their present reduced
level of production, to provide the exports needed to pay for the imports
of food required to provide even a minimum diet and for the raw
materials without which its manufacturing plants could not operate.

The long-term recovery programs, submitted by the Authorities of
the Bizone and the French Zone, contemplate that by 1952/53 agricul-
tural production in Western Germany would be restored to about pre-
war levels and that industrial production will be about 10 percent
greater than in 1936. This industrial production target is regarded
as too low to permit the economy to become self-supporting, and it
is believed that it should be raised to at least 120 percent of the 1936
rate, as the minimum compatible with the objectives of the European
Recovery Program.

3

In general, the industrial capacity and manpower needed to achieve this rate of production are available, despite the destruction during the War. Considerable investment will be needed, particularly to expand electric generating capacity, which is the major present and potential bottleneck. There will also have to be extensive investment in housing and other reconstruction, in the transport system, and in the mining industry. These four areas comprise more than half of the total long-term investment program.

On the basis of the separate plans submitted by the Authorities of the Bizone and the French Zone, the over-all foreign accounts of Western Germany would be close to balance for 1952/53. There would, however, be a remaining deficit of about $300 million with the Western Hemisphere. This assumes, moreover, a very considerable expansion of trade with Eastern Europe. If this does not materialize, the Western Hemisphere deficit would be significantly greater.

This difficulty in balancing dollar accounts reflects the fact that the bulk of Germany's imports are food and raw materials, which come largely from sources outside Western Europe, while the natural market for most of its exports lies within Europe.

It is obvious that Western Germany must make every possible effort to achieve closer balance in its dollar accounts by limiting its imports from the Western Hemisphere to those clearly essential for its economy and which cannot be obtained elsewhere, and by increasing its Western Hemisphere exports. It is questionable, however, whether Western Germany can avoid incurring a substantial, continuing, dollar deficit, though careful planning might reduce its magnitude significantly. The full solution of this difficulty probably does not lie within Germany alone; it is to be hoped that it can be found within the cooperative framework of the OEEC.

The totals of the first two annual programs for the Bizone and French Zone are summarized in the following table:

Bizone

(In millions of dollars)

<table><thead><tr><th></th><th></th><th>1948/49</th><th>1949/50</th></tr></thead><tbody><tr><td rowspan="2">Bizone Request:</td><td>Total aid</td><td>1083.0</td><td>912.1</td></tr><tr><td>Less GARIOA</td><td>-637.0</td><td>-539.7</td></tr><tr><td></td><td>ECA aid</td><td>446.0</td><td>372.4</td></tr><tr><td rowspan="2">OEEC Recommendation:</td><td>Total aid</td><td>1051.0</td><td>"</td></tr><tr><td>Less GARIOA</td><td>-637.0</td><td>"</td></tr><tr><td></td><td>ECA aid</td><td>414.0</td><td>"</td></tr><tr><td rowspan="2">ECA Estimate:</td><td>Total aid</td><td>984.0</td><td>880.6</td></tr><tr><td>Less GARIOA</td><td>-573.4</td><td>-476.6</td></tr><tr><td></td><td>ECA aid</td><td>410.6</td><td>404.0</td></tr></tbody></table>

French Zone

<table><tr><td>French Zone request (gross dollar aid)</td><td>100.0</td><td>100.0</td></tr><tr><td>OEEC recommendation of gross dollar aid</td><td>100.0</td><td>"</td></tr><tr><td>ECA estimate of gross dollar aid</td><td>99.2</td><td>115.0</td></tr></table>

a National Submissions for 1949/50 not yet reviewed by OEEC.

4

During 1948/49 the Bizone has received external aid from three sources. These have included a contribution by the British Government of $70 million in sterling, direct appropriations through the Department of the Army under the Budget for Government and Relief in Occupied Areas (GARIOA) and from ECA. Originally it had been planned that the GARIOA appropriation would be $637 million and that ECA would provide $414 million. The actual amount of GARIOA funds will be about $64 million below the original estimate, reflecting price reductions, higher crops and shift of food procurement to European sources. Although exports to all countries are running considerably higher than originally anticipated, dollar exports will probably not exceed the original estimates significantly. Consequently, it is essential to maintain at least $410.6 million of ECA aid.

The Bizone received direct aid from ECA of $109 million in the second calendar quarter of 1948. The aid for the current fiscal year granted out of present appropriations amounts to $307.1 million, of which $225.5 million is direct and $81.6 conditional aid. Consequently, a supplemental allotment of $103.5 million is needed for the second calendar quarter of 1949 to complete the total for the fiscal year.

In the case of the French Zone, ECA aid is the only form of foreign assistance available. The French Occupation Authorities submitted a request for ECA aid for fiscal year 1948/49 in the amount of $100 million. This was approved by the OEEC and finally recommended at $99.2 million by the ECA. On a per-capita basis this amount of aid is considerably lower than that provided for the Bizone during 1948/49, despite the fact that the French Zone would have required proportionately more assistance in order to permit it to accelerate its progress from its relatively more depressed level.

The French Zone received direct aid of $20 million in the second calendar quarter of 1948. $72.3 million has been allotted to the French Zone out of the ECA appropriation since the beginning of the fiscal year, (of which $61.2 million is direct and $11.1 million conditional aid). An additional $26.9 million is therefore required to complete the program for the remainder of the fiscal year.

The net drawing rights position of both the Bizone and French Zone is about in balance during fiscal 1948/49.

The strides which have been made by the economy of Western Germany during 1948 have set the stage for considerably further improvement for the fiscal year 1949/50. By the middle of 1950, if adequate aid is forthcoming, Western Germany should be able to restore its industrial production to a level about 10 percent below pre-war and to provide for its population a standard of living which, although well below that of 1936, would still be sufficiently improved to constitute a real incentive for further effort.

While the 1949/50 programs for the Bizone and the French Zone show roughly the same degree of progress, the present level of economic activity in the French Zone is below that of the Bizone. Consequently, the realization of the plans, as presented, would still leave the French Zone, by the middle of 1950, at an economic level substantially below that of the Bizone.

5

Both programs were prepared before there had been adequate opportunity to assess the full impact of the economic up-turn, which started in July. The extent of recovery has substantially exceeded expectations in many fields and as a result the objectives, which had been set, already appear low.

In the case of the Bizone, the plans submitted by the Bizonal Authorities called for increasing the level of industrial output to an average of 80 percent of 1936 for the fiscal year 1949/50. By December 1948, however, production had already reached 78 percent of the 1936 level. The goals projected in the plan for many individual industries have already been surpassed. Consequently, it is believed a target of 90 percent of 1936, as the average for the next fiscal year, should represent a minimum objective.

In the case of the French Zone, it was proposed to raise the industrial level to 75 percent of 1936. It is essential that progress in this area be accelerated so that it should not act as a drag upon Western German economy. While it may take somewhat more than 12 months for the French Zone to catch up with the Bizone fully, it would appear that the industrial production targets for the French Zone should be at least 80 percent of 1936 for the fiscal year 1949/50.

The original Bizonal program submission forecast a deficit of $937 million in all currencies for 1949/50. This was to be met by a United Kingdom contribution of $70 million in sterling, by a GARIOA appropriation of $540 million, and by ECA funds in the amount of $372 million. In return, the program contemplated that the Bizone would make available to other participating nations drawing rights in the amount of $45 million.

Subsequent revisions, designed to improve the feeding level, resulted in a rise in the import program. Total export targets were correspondingly increased, reflecting the probability that the production goals originally set could be bettered substantially. However, despite all efforts to shift procurement to non-dollar sources, it appears impossible to avoid an increase of about $10 million in the deficit with the dollar area.

At the same time, the estimated availability of GARIOA funds has been reduced by about $63 million. It was not believed advisable to increase the estimated amount of ECA aid sufficiently to make up for the increase in the dollar deficit and the reduction in GARIOA funds. Accordingly, it is now estimated that $404 million of ECA should be available to the Bizone in 1949/50. This would still leave an uncovered dollar deficit of approximately $42 million. In return, it is estimated that the Bizone should make a very substantial amount of drawing rights available to other participating countries.

In the case of the French Zone, the program submitted by the Occupation Authorities requested ECA aid in the amount of $100 million. In order to bring feeding levels in line with those projected for the Bizone, and in order to accelerate industrial expansion, it would appear that total imports would have to be increased by at least $15 million. Since the export program as submitted by the French Zone Authorities already appears optimistic, this would make it necessary to increase

6

the amount of aid available. Accordingly, it is estimated that the French Zone will require $115 million in ECA aid during fiscal 1949/50.

The total amount of ECA dollar aid estimated as required for Western Germany for 1949/50, therefore, amounts to $519 million. In order to ensure the greatest degree of progress and the most effective utilization of this aid, it is essential that closer coordination be achieved between the programs for the Bizone and the French Zone. There should be agreement upon approximately equal consumption levels in both areas, and at least an approach to equivalent production objectives. The programs should plan for the most effective use of mutually available resources.

It is expected that Trizonal Fusion will become effective in 1949, in which case the aid made available to all of Western Germany would, of course, be handled as a single fund.

7

PART II

Chapter I—Analysis of the Current Situation

A. BACKGROUND.

Pre-war Germany was the most powerful industrial country in Europe. Germany's industrial preeminence was based principally upon the skills of her population rather than upon her natural resources, although she ranked first in the world in the production of brown coal, second in the production of steel and electric power and third in the output of "hard coal".¹ With the exception of coal, Germany had to import a large part of the raw materials needed for industrial production and a substantial proportion of her food requirements. Despite all efforts to increase domestic agricultural production, Germany was only about 83 percent self-sufficient in food at the outbreak of World War II. To pay for her imports Germany exported coal and manufactured goods, principally products of heavy industry, which contributed extensively to the economies of other European nations.

Following the surrender in May 1945, the German economy was in a state of almost complete collapse, due not so much to the physical destruction during the war as to the complete disorganization of economic life and of political institutions. Industrial production was at a virtual standstill. The imports without which the economy could not be maintained ceased completely, except for a minimum of food supplies essential to prevent actual starvation brought in by the United States and the United Kingdom.

Under the Potsdam Agreement, the territory East of the Oder-Neisse, which represented 24 percent of Germany's total land area and 28 percent of its arable land, was provisionally placed under Polish Administration. The remainder of Germany was divided into four occupation zones which had to operate as separate economic units. In the middle of 1946 agreement was reached by the United States and the United Kingdom on an economic merger of their two zones of occupation; this was consummated at the end of the year. This merger combined, in a single economic area, the most important industrial section of pre-war Germany, which before the War accounted for 56 to 58 percent of the area, population, employment, manufacturing production and national income of that portion of Germany west of the Oder-Neisse and for 60 percent of its industrial exports.

The economic relations of this area to the other zones of occupation have since shown divergent trends. Trade with the Soviet Zone has been progressively curtailed, and is at present at a virtual standstill. However, economic relations between the Bizone and French Zone have become increasingly close and complete economic and political merger

¹ This is a translation of the German term "Steinkohle", which includes principally bituminous coal, but also some anthracite.

8

appears to be approaching. This merger will not, however, include the Saar, which is now integrated with the French economy.

During the period immediately following the Bizonal economic merger industrial recovery was relatively slow. The unprecedentedly severe winter of 1946/7 and the acute drought in the summer of 1947 greatly aggravated the difficulties of recovery. It was only through the availability of GARIOA-procured foods that a severe crisis was averted, and it was only narrowly averted because of the shortage of funds and the relatively low world availability of food, which made it impossible to import more than the minimum quantity of goods needed to prevent disease and unrest. By the end of 1947 the general level of industrial production in the Bizone was only 45 percent of that in 1936. In the French Zone the figure was about 40 percent.

At the beginning of 1948 steps were taken to increase imports sharply. The exceptionally mild winter of 1947/8 had permitted substantial savings in coal and made considerable stocks of fuel available for industrial revival. Weather conditions in the Spring and Summer were unusually good and the harvest was much larger than expected. ECA aid began. Currency reform was instituted at the end of June 1948, restoring the economic incentives which had previously been lacking. According to the report of the OEEC on the 1949/50 program, "the immediate effect of this reform has been most encouraging." At the same time there was a widespread relaxation of economic controls which restored a large measure of economic freedom.

As a result of all these factors, industry pushed ahead rapidly. The general level of production rose more than 75 percent during 1948, most of the increase occurring in the last half of the year. The availability of goods for domestic consumption rose sharply.

The Autumn of 1948 has thus witnessed the first signs of sustained economic revival in Western Germany. The economy is once more taking on the aspect of a going concern. Much further progress is necessary and many obstacles remain to be overcome. Nevertheless, for the first time since the occupation, recovery seems to be on the way.

## B. USE OF RESOURCES

### 1. Gross Available Product.

The following tabulation¹ shows estimates of the distribution of the Gross Available Product (the total of all goods and services produced plus net foreign aid) in Western Germany during 1948.

¹ It should be stressed that these estimates can be regarded as no more than rough approximations. There are no reliable statistics available with respect to investment or saving. Estimates of the over-all value of industrial and agricultural production are subject to many uncertainties; for other sources of income, particularly services, the estimates are even more difficult. The problem is aggravated by the unsettled price situation and the continued prevalence of unreported black market transactions.

9

Table 1. Gross Available Product by Use, 1948

<table><thead><tr><th rowspan="2"></th><th colspan="4">In billion dollars</th><th colspan="4">In percent of total</th></tr><tr><th>Bizone<sup>a</sup></th><th>French Zone<sup>a</sup></th><th>Western Germany</th><th>Bizone<sup>a</sup></th><th>French Zone<sup>a</sup></th><th>Western Germany</th><th>Bizone<sup>a</sup></th><th>French Zone<sup>a</sup></th><th>Western Germany</th></tr></thead><tbody><tr><td>Total</td><td>24.1</td><td>2.2</td><td>26.3</td><td>100</td><td>100</td><td>100</td><td></td><td></td><td></td></tr><tr><td>Non-governmental consumption</td><td>15.6</td><td>1.5</td><td>17.1</td><td>65</td><td>68</td><td>65</td><td></td><td></td><td></td></tr><tr><td>Gross investment</td><td>4.5</td><td>0.2</td><td>4.7</td><td>19</td><td>9</td><td>18</td><td></td><td></td><td></td></tr><tr><td>Governmental consumption</td><td>4.0</td><td>0.5</td><td>4.7</td><td>16</td><td>23</td><td>17</td><td></td><td></td><td></td></tr></tbody></table>

<sup>a</sup> These figures include the corresponding sectors of Berlin. In general, the figures shown in this report do not include Berlin unless specifically stated.

## 2. Consumption.

The share of the Gross Available Product entering into private (including business) consumption is slightly above pre-war. (65 percent in 1948 vs. 61 percent in 1936¹ for the Bizone.) Nevertheless, and despite the recent improvement, the supply of food, clothing and housing remains well below pre-war. Personal consumption expenditures for 1948, in the Bizone, are estimated at $15.6 billion, or about $360 per capita. In 1936, total consumption expenditures were 19.5 billion, measured in 1948 prices. However, the 1936 population was much smaller, and per-capita expenditures were about $550. Consequently the present per-capita expenditure level is only 65 percent of that in 1936.

In the French Zone, personal consumption expenditures for fiscal 1948/49 are estimated at about $300 per capita, or two-thirds of the estimated expenditure of $450 during 1936.

The improvement in food ration scales has been of primary importance. In the summer of 1946, the normal consumer ration in the British Zone was only 1050 calories per day; in the U.S. Zone it was about 1375 calories. By the autumn of 1946, following agreement on the Bizonal economic merger, the ration in both zones was raised to about 1550 calories, where it was maintained throughout 1947. While this was the nominal scale, actual food issue often fell well below it, particularly during the severe winter of 1946/7.

"During the first quarter of 1948, while the official ration remained unchanged, food actually distributed to normal consumers fell below 1200 calories per day in several large industrial areas and averaged approximately 1350 calories per day in the whole Bizonal Area. Sharply increased food imports, made possible by Congressional approval of the GARIOA deficiency request, permitted the restoration of the official ration in April and a gradual increase to 1650 calories per day in June. Continued heavy imports financed by GARIOA, ECA, and the proceeds of exports, permitted the ration to be raised to approximately 1850

¹ The year 1936 is used as a base period, both because it is the last for which a census of German industry is available and because it represents the closest approach available to "normal" conditions, characterized by neither boom nor depression. Moreover, in later years a rapidly increasing proportion of German resources was devoted to preparation for war.

10

calories per day in August, at which level it remained throughout the balance of 1948.

The average food consumption is, of course, considerably higher than this figure. In the Bizone (excluding Berlin) 5.1 million, or ⅓ of the 41.8 million inhabitants, are "self-supplying" farmers and their families whose average consumption may be estimated at 3200 calories, and an additional three million are partial self-suppliers. Of the remaining "non-self-suppliers", about half receive supplementary rations of varying amounts, depending upon their status. For all "non-self-suppliers" as a group, the average ration is about 300 calories higher than the basic, or "normal-consumer" ration. In addition, consumption of off-ration food by non-self-suppliers, including both food that is not on ration and black market purchases of food on ration, probably averages an additional 300 calories daily. On this basis, the normal-consumer ration of 1850 calories corresponds to an average consumption of rationed food by the non-farm population of about 2150 calories, and a total consumption, including off-ration food, of about 2450 calories. For the population as a whole, including self-suppliers, the average food consumption would be between 2550 and 2600 calories.

For the non-farm population, this average consumption level is about 85 percent of pre-war in quantity. It remains far below pre-war in quality, however, with a preponderance of starches and a continuing serious deficiency in fats, proteins, and protective foods. This deficiency in quality is reflected directly in the working efficiency of the population.

Until recently, average food consumption levels in the French Zone were lower than in the Bizone. The effects of this were partly mitigated by the larger proportion of farmers in the French Zone, and the much smaller urban population. Recently, the ration level in the French Zone has been equalized with that of the Bizone.

The most important field in which present consumption levels in Western Germany exceed pre-war is that of electric power. Precise figures are not available because of the difficulty of distinguishing between industrial, institutional and residential use. It is clear, however, that the consumption of power per household is well above the levels of 1936, paralleling in this respect developments in other participating countries.

The availability of consumer goods, still very low as compared with 1936, has shown much improvement during 1948. In the Bizone, for example, the production of leather shoes jumped from a monthly average of 1.2 million pairs in 1947 (about 0.34 pair per capita per annum) to more than 2.5 million pairs, about 0.7 pair per capita, during October, 1948.

Available supplies of textiles and clothing for consumption during the first three-quarters of the year were about 30 percent of the 1936 level. Large quantities of U. S. Army surplus goods, released during the past few months, should alleviate the situation somewhat. The recently inaugurated "Jederman" (Everyman) Program, is intended to meet the urgent needs of 1/10 of the Bizone's population for suits, dresses, blankets and children's garments of a utility type at reasonable prices.

In appraising the present need for durable and semi-durable con-

11

consumer goods, it must be remembered that normal purchase and replacement of such goods as clothing, furniture and kitchen utensils, has been increasingly difficult since the beginning of the War. There is a huge backlog of consumer needs that must be filled, while production of consumer goods remains well below normal.

Perhaps the most acute need is for adequate housing. Arrears of new construction and maintenance have accumulated since 1939. War damage has expanded this deficiency to major proportions; destruction and damage in the Bizonal area is equivalent to at least three million dwelling units. The large increase of population further aggravates the problem, whose solution will take many years.

Consumption of solid fuel for household use is still much lower than pre-war. Per-capita household consumption during the first three winters of the occupation was extremely low. For the winter of 1948/9, about 300 pounds per capita will be made available in the Bizone, considerably less than half of the pre-war level, but a large improvement over the preceding winter.

In the industrial field, consumption of materials remains well below pre-war and consumption efficiency is very poor. In the case of coal, for example, the present (December 1948) level of industrial consumption is close to 90 percent of that of 1936, whereas the over-all level of industrial activity is only 78 percent. The rates of coal utilization in railway transport, electric power and industry generally are uneconomically high. This has been due to such factors as poor condition of equipment and low and irregular operating rates. In addition, prior to currency reform, there was little incentive to economize on the use of fuel and there was large-scale diversion of coal to black-market channels, as well as accumulation of unnecessarily large stockpiles. There has been considerable improvement since the introduction of currency reform, both because of the restoration of economic incentives to economize and because of the increase in operating rates and labor efficiency. However, the situation remains far from satisfactory.

In the case of steel, output in the Bizone, by the end of 1948, had reached the rate of about 7.4 million ingot tons of steel annually. This represents about 80 percent of the ingot equivalent of the estimated rate of steel consumption in the Bizone in 1936.

Consumption of electric power by industry is apparently higher than pre-war, though, as was already mentioned, it is impossible to segregate industrial from domestic consumption. This increase in power utilization reflects in part increased electrification of industry, transport and handicrafts. It is probable, however, that there has also been a substantial decline in the efficiency of consumption of electric power, partly because the rate schedule is not designed to encourage economy of utilization.

### 3. Investment

During the first three years of occupation the rate of investment in Western Germany fell, in general, well below replacement needs. What investment did take place was largely financed through black market transactions. As may be expected, under such circumstances, the bulk

12

of this investment flowed into the less desirable economic channels. For example, retailers who dealt in black-market goods generally devoted as large a part of their earnings as possible to the accumulation of inventory and to the repair of their stores and equipment. In the industrial field a large proportion of the transactions were in effect on a barter basis; producers of equipment traded their product for equivalent values in the form of semi-finished or finished goods manufactured by those who required the equipment. There was considerable accumulation and hoarding of raw materials and semi-finished products as well as of manufactured goods throughout industry.

No statistics as to the extent of investment of this type are available. However, it is clear that, because of the general low level of industrial activity, the rate of investment was not sufficient to prevent considerable further deterioration of plant and equipment and that the investment which did occur was not directed to maximum economic advantage. With currency reform, and increased manufacturing output, the picture has changed considerably.

According to the estimate of the Bizonal Authorities, the rate of gross investment during 1948 will equal 68 percent of the 1936 level. The amount of this investment is calculated at $4.5 billion. There is, however, $1.1 billion of foreign aid available during this period, part of which will go directly into investment, with the remainder contributing indirectly to the investment effort by making goods available which would otherwise have to be supplied from domestic resources. In other words, the net contribution of the Bizonal economy toward gross investment for 1948 will be about $3.4 billion. This represents about 15 percent of the Gross National Product (i.e. the Gross Available Product less the amount of foreign aid.)

The great bulk of the German contribution to gross investment will be in the form of current repairs and replacement by business firms. For 1948 as a whole, the Bizonal economy had not yet reached a position to provide more than a negligible amount of net investment from its own resources, though by the end of the year the position had improved considerably.

In the French Zone probably more than half of the total gross investment will represent the direct and indirect contribution of foreign aid. Net new investment from domestic sources will also be very small.

The Bizonal program for 1948/9 calls for credits for investment in the amount of DM 3,123 million. This is a substantial increase over the preceding post-war years and will benefit principally the transport, communications, public utilities, and mining industries which together will receive about DM 2,160 million or over two-thirds of the total The expected distribution of these credits for 1948/9 is set forth in the following table:

13

Table 2. Bizone—Estimated Distribution of Credits—1948/9
(In Million Deutsche Marks)

<table><tr><td>Mining</td><td>400</td></tr><tr><td>Public utilities</td><td>780</td></tr><tr><td>Metals and metal products</td><td>57</td></tr><tr><td>Chemicals, POL and rubber</td><td>81</td></tr><tr><td>Machinery and optics</td><td>81</td></tr><tr><td>Building industry</td><td>2</td></tr><tr><td>Transportation and communications</td><td>980</td></tr><tr><td>Food, agriculture, forestry and fisheries</td><td>150</td></tr><tr><td>Housing and public buildings</td><td>200</td></tr><tr><td>All other investments</td><td>392</td></tr><tr><td><strong>TOTAL</strong></td><td><strong>3,123</strong></td></tr></table>

In the French Zone, investment credits will be about DM 280 million during 1948/9, as follows:

Table 3. French Zone—Estimated Distribution of Credits—1948/9
(In Million Deutsche Marks)

<table><tr><td>Public utilities</td><td>20</td></tr><tr><td>Industry</td><td>80</td></tr><tr><td>Agriculture</td><td>30</td></tr><tr><td>Railways</td><td>70</td></tr><tr><td>Road repairs, inland waterways, port facilities</td><td>36</td></tr><tr><td>Housing</td><td>30</td></tr><tr><td>Tourist traffic</td><td>10</td></tr><tr><td>Industrial training & scientific research</td><td>4</td></tr><tr><td><strong>TOTAL</strong></td><td><strong>280</strong></td></tr></table>

### 4. Governmental Use of Resources.

In 1948, governmental authorities in the Bizone consumed approximately $4 billion or 16 percent of the Gross National Product, in comparison to $5.8 billion and 18 percent respectively in 1936. These figures do not include pensions, social insurance and relief, which are added to personal consumption expenses, and also government investments which are included under gross investments. They cover only current expenses for goods and services used by the authorities in performing their governmental functions. No breakdown showing the composition of these figures is available. However, there is no doubt that, despite recent moves toward greater economy, the governmental authorities and the Occupying Powers use a disproportionately large amount of manpower, as well as of housing and office space.

In the French Zone, total governmental consumption is expected to be about $500 million, or DM 1.7 billion. As in the case of the Bizone, governmental expenditures are excessive. However, occupation costs have been considerably reduced, and are now about DM 40 million per month.

### 5. Exports.

During the period immediately following the surrender, exports from Western Germany almost ceased. However, the dependence of other

14

European nations upon German coal and the need for providing a minimum of foreign exchange led to the early resumption of coal exports. The importance of these exports was recognized in April 1947 when the Occupation Authorities for the Bizone agreed with the French Government to export stated proportions of Bizonal coal in a ratio increasing as production in the Ruhr-Aachen area rose to 330,000 tons per day. (This rate has recently been surpassed, but no decision has yet been reached as to the percentages to be applied at higher levels of output.) Exports of timber in substantial quantities were also pressed, principally in order to provide material needed in the United Kingdom for reconstruction. During 1946, coal and timber exports represented almost all of the export shipments from the United States and United Kingdom Zones.

In 1947 total export shipments from the Bizone amounted to about $222 million, including invisibles, of which coal and timber still represented more than 70 percent. Exports of manufactured products remained small, reflecting both the general low level of industrial activity in the Bizone and the need for retaining within the area the goods needed for its industrial revival.

Since the beginning of 1948 Bizonal exports have risen rapidly and steadily. As compared with the quarterly average of $56 million during 1947, exports jumped to $91 million in the first quarter of 1948, $139 million in the second quarter, $166 million in the third quarter, and about $204 million in the fourth quarter. Total exports for 1948 (including invisibles) were about $600 million, or more than 2½ times those of 1947. Exports during December 1948 reached an annual rate of more than $860 million.

At the same time, there was a sharp change in the composition of Bizonal exports. Whereas coal had constituted 55 percent of the total in 1947, the ratio during November 1948 (the last month for which details are available) was only 43 percent. On the other hand, manufactured goods, which constituted less than 1/6 of total exports in 1947, amounted to about 1/3 of the total in November 1948. Actual exports by commodity groups during 1948 and the monthly average during the first 11 months of 1948 are shown in Table 4.

The great bulk of Bizonal exports has been to other participating countries. During the first 11 months of 1948 about 88 percent of the total exports went to other participants, six percent was to the Western Hemisphere, principally the United States, and the remaining six percent to other non-participating countries, including the non-participating sterling area.

During the past year the Bizonal authorities have negotiated trade agreements with most of the European countries and within the past few months have entered into negotiations with Latin American countries.

In the French Zone, exports were maintained at relatively high levels during the first three years of occupation. This reflected the reluctance of the French Occupation Authorities to finance any deficit incurred in the area out of the French Treasury. The execution of this policy was

15

made possible in part by the fact that until 1948 the Saar, with its large exportable surpluses of coal and steel, was part of the French Zone.

Table 4. Bizonal Exports by Commodity Groups
January-November 1948

(In thousand dollars)

<table><thead><tr><th></th><th>Monthly average<br>Jan.-Nov.</th><th>November</th></tr></thead><tbody><tr><td>Coal</td><td>23,225</td><td>28,249</td></tr><tr><td>Machinery and vehicles</td><td>3,828</td><td>7,547</td></tr><tr><td>Textiles and products</td><td>3,825</td><td>5,363</td></tr><tr><td>Timber and products</td><td>2,506</td><td>2,885</td></tr><tr><td>Chemicals</td><td>2,098</td><td>2,878</td></tr><tr><td>Iron & steel products & scrap</td><td>2,175</td><td>4,858</td></tr><tr><td>Products of clay, glass & stone</td><td>773</td><td>998</td></tr><tr><td>Vegetable products (hops, etc.)</td><td>491</td><td>28</td></tr><tr><td>Scientific instruments</td><td>801</td><td>1,066</td></tr><tr><td>Crude non-metallic minerals & products</td><td>762</td><td>1,244</td></tr><tr><td>Metal products</td><td>817</td><td>2,137</td></tr><tr><td>Drugs and medicines</td><td>250</td><td>259</td></tr><tr><td>Other commodity exports</td><td>1,417</td><td>3,328</td></tr><tr><td>Electric power</td><td>360</td><td>179</td></tr><tr><td>Invisibles</td><td>4,597</td><td>6,429</td></tr></tbody><tfoot><tr><td>Total Exports of Goods and Services</td><td>47,925</td><td>67,448</td></tr></tfoot></table>

As a result, French Zone exports in 1947 amounted to $124 million—about 55 percent of Bizonal exports during the same period. Before the War exports from the French Zone, including the Saar, were only 14 percent of Bizonal exports.

About 1/3 of the total exports in 1947 represented coal and steel. In addition there were very large exports of timber from the Black Forest. More than 80 percent of the total exports went to France.

Since the beginning of 1948 the Saar has been integrated with the economy of France. Nevertheless, improving industrial production has made it possible to maintain total exports from the French Zone, without the Saar, not far below the level of shipments from the Zone, including the Saar in 1947. For the first nine months of 1948 total exports amounted to $81 million, of which about half were exported during the third quarter of the year. It is estimated that total exports for the year were about $110 million.

Principal exports at present are timber (about 37 percent) and chemicals (about 13 percent); other important commodities in the export program are machinery, textiles, and clocks and watches.

Exports by commodity groups for the first nine months of 1948 are shown below:

16

the 1935/8 average, but output of potatoes and sugar beets is well above pre-war. Animal husbandry, which depends principally upon imported fodder, is still substantially under the pre-war average, and the output of livestock products can be raised only by considerably greater importation of fodder grains and high-protein feeds.

The value of agricultural output in the Bizone for 1948 is estimated at $3 billion, or almost 80 percent of 1936. Production of major crops is shown in the following tabulation:

Table 8. Production of Major Crops—Bizone
(In 1000 metric tons)

<table><thead><tr><th></th><th>Average<br>1935/8</th><th>1948/9</th></tr></thead><tbody><tr><td>Total Bread Grain</td><td>4,991</td><td>4,518</td></tr><tr><td>Barley</td><td>1,449</td><td>743</td></tr><tr><td>Oats</td><td>2,700</td><td>2,159</td></tr><tr><td>Potatoes</td><td>16,052</td><td>21,448</td></tr><tr><td>Sugar Beets</td><td>3,877</td><td>4,600</td></tr></tbody></table>

The French Zone is producing from 1200-1300 calories per capita per day. The proportion of animal products is higher than in the Bizone.

Production of principal crops in the French Zone in 1935/8 and 1948/9 is shown below:

Table 9. Production of Major Crops—French Zone
(In 1000 Metric Tons)

<table><thead><tr><th></th><th>Average<br>1935/38</th><th>1948/49</th></tr></thead><tbody><tr><td>Bread Grains</td><td>677</td><td>575</td></tr><tr><td>Potatoes</td><td>3,457</td><td>3,250</td></tr><tr><td>Sugar Beets</td><td>355</td><td>400</td></tr></tbody></table>

## 2. Industrial Production

### a. Bizone.

As already stated, under a series of favorable developments, industrial production in the Bizone, which had improved very slowly during the first three years of occupation, jumped sharply in the third quarter of 1948 and reached in December a level 78 percent of that attained in 1936. (See Table 10) Virtually all segments of industry shared in the improvement. The daily output of hard coal in the Ruhr—of vital importance to all industrial operations—rose to about 330,000 tons per day by mid-January, 1949, as compared with about 255,000 tons per day during January 1948. Steel production jumped to an annual rate of 7.4 million ingot tons as compared with actual output of less than 3 million tons in 1947. The electrical manufacturing industry has made outstanding progress, to a level more than 60 percent above 1936. (This reflects a considerable shift of capacity after 1936 from Berlin to Western Germany.) The production index for electric power and gas in December 1948 was about 25 percent higher than it had been in the same month in 1947, and about 40 percent above the level of 1936.

The value of industrial production in the Bizone for 1948 was about $10.4 billion, or about 60 percent of 1936 (valued at 1948 prices). For

18

In 1947, after the Bizonal merger, the general program of financ-
ing minimum imports of food, agricultural products and POL needed
to prevent disease and unrest by direct United States and United King-
dom appropriations was continued. Imports of the raw materials
needed by industry were to be paid for out of the proceeds of exports.
Moreover, very close supervision was exercised over the character of
these non-relief imports in order to ensure that they comprised the
commodities needed for economic recovery.

During the calendar year 1947 imports rose to only $727 million, of
which all but about $100 million were in the "disease and unrest" cat-
gory. Exports during the year, however, amounted to about $222
million.

Since commercial imports during 1947 were only $100 million, this
left the Joint Export-Import Agency with a substantial cash position
as of the beginning of 1948. Accordingly, the level of commercial imports
was stepped up rapidly; during the five months, May through September
1948, the monthly average was well over $50 million as compared with
only $8.5 million during 1947. During the first 11 months of 1948 the
total imports for commodities in this category were about $275 million
more than in the entire year 1947. At the same time the imports of
agricultural products, fertilizers and POL were also raised sharply in
order to permit improvement in the diet of the population.

The increased level of imports has contributed very importantly to
the expansion of industrial production and, in turn, of exports.

More recently there has been a serious drop in the level of commer-
cial—that is principally industrial—imports. In October, 1948, these
imports dropped to only $32 million; and in November they were only
$34 million, compared with $52 million in September. The reasons for
this decline, which are complex, are discussed below (Chapter III, page
44). Preliminary figures for December show commercial imports rising
again to about $50 million. While this represents considerable improve-
ment, the level remains well behind schedule.

For 1948 as a whole, preliminary figures show total imports of about
$1.4 billion of which almost $1 billion were food, feed, seed, fertilizer and
petroleum products.

Until 1948, no deficit financing was available for imports into the
French Zone. Nevertheless, the high export revenue made it possible
during 1947 to import a total of $135 million (including freight). About
3/4 of this total was food and agricultural products.

During the first six months of 1948 imports into the French Zone
—without the Saar—totaled $83 million—an annual rate of about $166
million. During the last three months there was a further sharp in-
crease to a total of $54 million for the quarter, or an annual rate of $216
million. Imports into the French Zone have thus been expanded con-
siderably during 1948, partly reflecting the availability of ECA aid.

At the same time, the proportion of food and agricultural products
has dropped somewhat, to about 50 percent of the total. Other major
items include textile raw materials, hides and skins, rubber, petroleum
products and non-ferrous metals.

21

deficit during this period with the United States and other Western
Hemisphere countries was at least $827 million and was probably actu-
ally about $850 million. On the other hand, there was a surplus of
probably between $120 million and $140 million with other participat-
ing countries during the same period. There was a small net deficit
on trade with the rest of the world.

The large surplus with other participating countries is due partly
to the lag in imports since July. As this lag is remedied, the balance
of trade with other participating countries should shift in the other
direction.

In 1947, external accounts in the French Zone were about in balance.
In fact, the Zone entered into 1948 with a moderate credit balance to
its account, reflecting the surplus of exports over imports in the first
years of the occupation.

The separation of the Saar reduced the area's export potential. At
the same time depleted pipelines had to be refilled, natural resources
conserved, and a start made on the road to recovery. The availability
of ECA aid made the necessary change in export-import policy possible.
In the first nine months of 1948, imports exceeded exports by $55 mil-
lion. This deficit was covered partly by $15 million of ECA aid, by $7
million in the form of credit balances on earlier operation, and $4 million
Safehaven ¹ funds. This left a remaining deficit of $29 million.

The balance of payments of the French Zone for fiscal year 1948/9 forecasts a net deficit of $101 million. The increase over the actual rate during the first nine months of 1948 reflects the fact that ECA aid was not available during the early part of the year and that, so far, actual ECA financed imports have been lagging.

E. INTERNAL BALANCE OF FINANCE

The internal balance of finance in Western Germany cannot be
estimated with any accuracy at the present, because the German econ-
omy is still too close to the drastic currency reform of June 1948. The
following figures, however, represent the best estimates which can now
be made of the probable order of magnitude of the internal balance.
They indicate an inflationary potential of about DM 5.1 billion.

In the private sector of the economy, anticipated gross savings of DM 10.9 billion fall far short of the anticipated gross investment of DM 15.5 billion. Net savings, deducting depreciation and replacement are, of course, far lower. This low level of savings reflects partly an effort by both individuals and business concerns to replace goods and equipment expended during the War. All but a negligible proportion of the personal income is being spent on consumption. Increased contributions for social insurance are largely offset by the need for a high level of payments to disabled and destitute persons.

ECA counterpart funds for the fiscal year are expected to amount to
more than DM 1.2 billion. Apparently, the counterpart fund set up

¹ Funds owned by German nationals which were removed to neutral countries during the War.

23

against purchases under GARIOA¹ funds (including the United Kingdom contribution) has been largely used. This fund is reduced in the first instance by the fact that internal German transportation costs from port to the point of distribution are charged against it. There has been a large advance from the fund of JEIA to finance the present excess of exports over JEIA imports, in order to permit JEIA to make the necessary local currency payments to exporters. In addition, there are substantial further expenditures of an extraordinary character. The situation is aggravated by the fact that GARIOA imports represent the major share of the deficit financing by foreign aid. Consequently the amount of counterpart funds available to constitute a non-inflationary source of investment and generally to implement fiscal policy is relatively limited.

Table 13—Anticipated Internal Financial Balance—Bizone
(Fiscal Year April 48/March 49)

<table><caption>(In billion marks)</caption><thead><tr><th></th><th>Debit</th><th></th><th>Credit Deficit</th></tr></thead><tbody><tr><td>A. Private Gross Capital Formation</td><td>15.5</td><td>C. Savings &amp; Depreciation (less government)</td><td></td></tr><tr><td>B. Government Expenditures</td><td></td><td>1. Business</td><td>8.2</td></tr><tr><td>1. Bizonal Economic Administration</td><td></td><td>2. Individual</td><td>0.7</td></tr><tr><td>2. State governments <sup>a</sup></td><td>13.0</td><td>3. Increase in Social Insurance Reserves</td><td>0.5</td></tr><tr><td>3. Local</td><td>2.5</td><td>4. Blocked funds offsetting foreign contribution of imports</td><td>1.5</td></tr><tr><td></td><td>16.0</td><td></td><td>10.9</td></tr><tr><td></td><td></td><td>D. Government Revenues</td><td></td></tr><tr><td>1. Bizonal Economic Administration</td><td></td><td>2. State governments <sup>a</sup></td><td>12.5</td></tr><tr><td>3. Local</td><td></td><td></td><td>2.5</td></tr><tr><td></td><td></td><td></td><td>15.5</td></tr><tr><td>E. Totals</td><td>31.5</td><td></td><td>26.4</td></tr><tr><td>F. Deficit</td><td></td><td></td><td>5.1</td></tr></tbody></table>

<sup>a</sup> State government transfers to local governments comprise 40% of local government revenues. Here, these transfers are subtracted from state revenues and expenditures and applied solely to local government revenues and expenditures.

Under a decision of the Bipartite Board, consisting of the United States and United Kingdom Military Governors, internal transportation charges will no longer be charged against the GARIOA counterpart after March, 1949. This should materially augment the amount of counterpart funds available to implement fiscal policy. Additional increases in the fund may be expected if the recovery in commercial imports which was noted in December continues.

## F. FINANCIAL SITUATION AND POLICY.

### 1. Government Budgets.

Prior to currency reform, the budgets of the German governmental agencies were in balance in all of Western Germany. Some states had a substantial surplus. For the first half of 1948 income of all government agencies in Western Germany (excluding the local "Gemeinden") amounted to approximately RM 2500 million and expenditures to RM

¹ The appropriation to the Department of the Army for Government and Relief in Occupied Areas.

24

move, partly because of tax evasion after the conversion. Subsequently, there has been progressive improvement, as shown in the following tabulation. By March, 1949, the end of the fiscal year, the cumulative deficit may be reduced to about DM 100 million if the surplus reached in October can be maintained.

For all Bizonal Governmental agencies combined, the total deficit, including new loans for capital expenditure, may finally amount to somewhere between DM 500 million and DM 1,000 million for the current fiscal year. It is probable that the actual deficit will lie closer to the lower than to the upper limit.

## 2. Money.

### a. Supply and Circulation.

Before the currency reform of June 1948, currency supply in Western Germany amounted to approximately RM 150 billion.

The old Reichsmark balances of individuals were converted into new Deutsche Mark accounts on the basis of 6½ DM for 100 RM, (about one to 16) of which 6 DM were for free use and ½ DM was blocked for medium and long-term credits. The total amounts released, including those to the public authorities and the Occupying Powers were approximately DM 12 billion.

Together with further credit expansion, total circulation, including bank deposits, rose to about DM 16 billion as of November 30, 1948 (See Table 15.) Early fears that money supply would prove too tight have proved unfounded, and it is possible that further expansion of money circulation or credit would be dangerous.

Table 15. Money Supply in Western Germany, November 30, 1948.

(In billions of Deutsche Marks)

<table><thead><tr><th></th><th></th><th></th><th></th></tr></thead><tbody><tr><td>A. Origin</td><td>B. Composition</td><td></td><td></td></tr><tr><td>Currency reform:</td><td>Bank notes<sup>b</sup></td><td>5.7</td><td></td></tr><tr><td>Head quota to individuals<br>(DM 60 per head)</td><td>Central bank<br>deposits<sup>c</sup></td><td></td><td></td></tr><tr><td>Initial quota of business</td><td>public</td><td>1.6</td><td></td></tr><tr><td>Initial quota to German<br>authorities</td><td>private</td><td>0.2</td><td>1.8</td></tr><tr><td>Initial quota of occupa-<br>tion authorities</td><td>Other bank<br>deposits<sup>a, c</sup></td><td></td><td></td></tr><tr><td>Conversion of bank<br>deposits (6 percent)</td><td>public</td><td>2.1</td><td></td></tr><tr><td>Credit expansion since<br>currency reform<sup>a</sup></td><td>private<br>demand<br>savings</td><td>5.2<br>1.3</td><td>8.6<br>16.1</td></tr><tr><td>Total<sup>a</sup></td><td>Total<sup>a</sup></td><td></td><td></td></tr></tbody></table>

<sup>a</sup> Estimated

<sup>b</sup> Excluding notes issued in Western sectors of Berlin (0.4 billion) and notes held by banks (0.3 billion)

<sup>c</sup> Excluding interbank deposits and blocked deposits

### b. Gold and Hard Currency Reserves.

Foreign exchange held by the Bank of the German States for the account of the Occupation Authorities amounted to $253 million at the end of November, 1948. With the exception of these funds and a lim-

26

ited quantity of Safehaven funds and debts on post-war trading accounts, no other goods or foreign assets are available to the German economy.

### c. Exchange Rates.

The Deutsche Mark does not have any official exchange rate. For all practical purposes, the "conversion factor" fixed by the Joint Export-Import Agency at $0.30 per Deutsche Mark fulfills the function of an exchange rate, except for the import of staple foodstuffs. In the case of foodstuffs, internal prices are low in relation to world markets, and the average conversion rate for food imports is about $0.50 to the Deutsche Mark. However, it is planned to make the 30-cent rate applicable to foodstuffs starting in March, 1949, and to use internal subsidies to prevent excessive price increases.

The new currency cannot yet be converted legally into foreign exchange, except on approved commercial transactions. Black-market currency transactions within Germany and sales of currency outside the country are on a basis far below the real value of the Deutsche Mark though the Mark strengthened about the end of 1948. While these transactions have little commercial significance, they tend to undermine the confidence of the people in the stability of the Mark.

## 3. Volume of Credit and Rates of Interest.

Credit expansion in Western Germany has proceeded rapidly since currency reform, as shown in the following table:

Table 16. Bank Loans Outstanding
(In millions of Deutsche Marks)

<table><thead><tr><th>Date</th><th>Total bank loans outstanding</th><th>of which: loans to<br>business enterprises<br>and<br>private individuals</th></tr></thead><tbody><tr><td>31 July, 1948</td><td>1,339</td><td>1,244</td></tr><tr><td>31 August</td><td>2,378</td><td>2,244</td></tr><tr><td>30 September</td><td>3,196</td><td>3,011</td></tr><tr><td>30 October</td><td>3,847</td><td>3,549</td></tr><tr><td>30 November</td><td>4,400 (est.)</td><td>4,100 (est.)</td></tr></tbody></table>

The rapid expansion of credit created definite inflationary pressures. In November instructions were issued by the Bank of the German States with a view towards restricting short-term credit.

There is, as yet, little evidence of saving on the part of individuals in Western Germany, for there still exists a tremendous pent-up demand for consumer's goods and a lack of confidence in the stability of the currency. The excess of withdrawals from savings accounts over deposits during the two and a half months from September 1 to November 15, 1948, amounted to approximately DM 680 million for the Trizonal Area. Business saving out of current income is expected to reach a maximum amount of DM 1.0 billion over the current fiscal year. It must be assumed that voluntary savings will fall short of present investment targets.

27

Various plans for deriving funds for long-term investment are under consideration. A Reconstruction Loan Bank was authorized in September, but has not yet started operations and has not yet received any funds. In addition to the 500 million blocked marks¹ from currency conversion which are to be made available, it is expected to secure its lending funds from subscriptions under an amnesty for tax evaders, and from compulsory loans or savings. Counterpart funds may also be available.

Interest rates have been kept high by the banking authorities as an anti-inflationary measure. Although the rediscount rate of the Bank of German States is only one percent, the discount rates of the State Central Banks are five percent, and the rates quoted by the commercial banking institutions are as high as 7-9 percent for short-term credits. There is some danger that the high rates restrict legitimate business transactions without acting as a deterrent to speculation.

### 4. Price Levels and Movements.

After more than ten years of strictly controlled prices, the currency reform of June 20, 1948, and the new economic policies instituted at the same time, as well as a number of actions taken in preparation for the currency reform, brought about a complete change in the price situation of Western Germany.

The isolation of the German economy from world market developments and the denial of normal internal adjustments had to be terminated. Accordingly, as a preparatory measure, legal prices during the six months prior to currency reform were increased up to 15 percent for gas, up to 33 percent for electricity, 33 percent for lead and zinc, up to 35 percent for milk and dairy products, 50 percent for pulses, and 50 percent for copper. Most fundamental of all, increases of 66 percent for coal and more than 75 percent for steel and steel products exerted a profound influence upon industrial costs.

In the late spring of 1948, Military Government ordered the use of a universal conversion factor of 30 cents per Reichsmark in all import and export trade with the exception of coal and certain other exports and imports of basic foodstuffs. Where the resulting amount of Reichsmarks was less than what the exporter would receive at the legal price, he continued to receive the higher legal price; where it was more, he received the higher proceeds on his export shipments.

Associated with the currency reform of June 20, 1948, was the release of wide areas of commodities from price and allocation or rationing control. It was hoped that the scarcity of the new money in the hands of consumers and the needs for money income on the part of the producers would lead not only to the reappearance of goods on open sale, but also to a general stabilization of prices.

Price controls were, however, retained over a few very essential items, including grains and grain products, milk and dairy products, potatoes, meat and fats, coal, iron and steel and gas and electricity.

¹ Representing the 0.5 Deutsche Marks per 100 old Reichsmarks withheld for medium- or long-term credit. See page 26 above.

28

Price changes for these commodities must have the approval of the German Economic Council and the Bipartite Military Government. There are a number of other products remaining under control, whose prices can be raised by the German Economic Council without military approval.

Actually, the index of the prices of 29 basic industrial materials in the Bizone rose 30 percent in the five months from June, 1948, until November, 1948. The prices of 15 basic agricultural items rose 20 percent in this same period. The over-all Basic Materials Price Index showed an increase of 25 percent. The month by month movement of these indexes, on a 1938 base, is shown in the following table:

Table 17. Basic Materials Price Index—Bizone.

(Index Numbers—1938 =100)

<table><thead><tr><th></th><th>Industrial<br>materials</th><th>Agricultural<br>items</th><th>Combined<br>index</th></tr></thead><tbody><tr><td>1938</td><td>100</td><td>100</td><td>100</td></tr><tr><td>1948—May</td><td>158.7</td><td>123.0</td><td>144.4</td></tr><tr><td>" June</td><td>175.6</td><td>123.5</td><td>154.8</td></tr><tr><td>" July</td><td>179.3</td><td>127.2</td><td>158.6</td></tr><tr><td>" August</td><td>200.3</td><td>129.2</td><td>171.9</td></tr><tr><td>" September</td><td>209.9</td><td>132.2</td><td>178.8</td></tr><tr><td>" October</td><td>213.7</td><td>152.4</td><td>189.2</td></tr></tbody></table>

There has also been a substantial increase in the cost of living during this period. The official Cost of Living Index, which shows an increase of only about seven percent in the Bizone between May and November, 1948, is generally believed to understate the extent of this increase. Prices of men's suits, for example, rose about 20 percent between July and November, and the prices of women's dresses increased somewhat more. These increases in prices have created considerable unrest, both among workers because of higher living costs, and among farmers because farm prices have not been permitted to advance as rapidly as industrial prices.

In the French Zone, the general trend has been about the same, but price levels are somewhat lower than in the Bizone, and the extent of decontrol has been less.

A substantial readjustment of German internal prices was necessary after their long insulation from world markets. On the other hand, it is clear that serious consequences would follow if the rate of increase from January to October of five percent per month should continue much longer. Recently, prices have shown some indication of stabilizing.

29

G. BALANCE OF RESOURCES.

The balance of resources in the Bizone appears as follows:

Table 18. Estimated Balance of Resources—Bizone 1948.
(In billion dollars)

<table><thead><tr><th>Sources</th><th>Amount Per-<br>cent</th><th>Uses</th><th>Amount Per-<br>cent</th></tr></thead><tbody><tr><td>Agriculture</td><td>3.0</td><td>Personal Consumption</td><td>15.6</td><td>65</td></tr><tr><td>Industry</td><td>10.4</td><td>Gross Investment</td><td>4.5</td><td>19</td></tr><tr><td>Other domestic econ-<br>omy</td><td>9.5</td><td>Government current<br>expenses</td><td>4.0</td><td>16</td></tr><tr><td>Foreign net contri-<br>butions</td><td>1.1</td><td>Net purchase by<br>foreigners</td><td>..</td><td>..</td></tr></tbody><tfoot><tr><td></td><td>24.0<sup>a</sup></td><td></td><td>24.1<sup>a</sup></td><td>100</td></tr></tfoot></table>

a See Footnote—Table 6 above.

Foreign contributions thus account only for five percent by value of the total resources. Direct military assistance by United States and United Kingdom represents 2/3 of this; programmed ECA aid 1/3. The real importance of foreign aid for the economy is, however, much greater than indicated by the small percentage figure. Without it, the economy would be virtually paralyzed, and recovery would be impossible.

Total resources for the French zone are estimated at approximately $2.2 billion. The role of foreign aid is roughly comparable to that in the Bizonal area. This represents entirely ECA funds and its importance to the French Zone is great because it is the first outside assistance to be received since the end of the war.

H. EFFICIENCY AND PRODUCTIVITY.

1. Labor.

The total labor force available in the Bizone, at the present time, is 15 percent larger than before the War, reflecting the increase in population, as shown in the following table.

Table 19. Changes in Size of Population of Working Age and of Labor Force in Bizonal Area from 1936 to 1948.
(In millions)

<table><thead><tr><th>Period</th><th>Population of working age (14-64)</th><th>Total labor force</th><th>Total Employed</th><th>Total wage or salary earners</th><th>Unemployed</th><th>Percent of working age population in labor force</th></tr></thead><tbody><tr><td>Average 1936<sup>a</sup></td><td>23.4</td><td>15.8</td><td>15.0</td><td>9.6</td><td>0.8</td><td>67.5</td></tr><tr><td>May 1939</td><td>23.8</td><td>16.9</td><td>16.9</td><td>11.6</td><td>0.0</td><td>71.0</td></tr><tr><td>Sept. 1946</td><td>26.5</td><td>16.3</td><td>15.5</td><td>10.8</td><td>0.8</td><td>61.5</td></tr><tr><td>June 1948<sup>a</sup></td><td>27.5</td><td>18.0</td><td>17.5</td><td>12.2</td><td>0.5</td><td>65.5</td></tr><tr><td>Sept. 1948<sup>a</sup></td><td>27.6</td><td>18.2</td><td>17.4</td><td>12.2</td><td>0.8</td><td>65.9</td></tr></tbody></table>

a Projections of official estimates.

According to this table, the labor force in September 1948 was greater by 2.4 million than in 1936 and greater by 1.3 million than in 1939. Thus it is adequate in size for the production program envisaged, partic-

30

ularly if it becomes equal in performance to the pre-war labor force and provided the other factors affecting productivity are sufficiently developed.

In the French Zone, where the population is slightly lower than pre-war, the labor force is also somewhat smaller than in 1939. In addition to the decline in population, there has been a drop in the proportion representing the working-age groups, and a large increase in the ratio of women.

There are additional labor reserves for Western Germany, such as German war prisoners still held abroad in the fall of 1948, former war prisoners who accepted temporary free labor contracts in France and Great Britain, the refugees from the Soviet Zone who continue to infiltrate into the Western Zone, and several hundred thousands of the displaced persons now in Western Germany who may fail ultimately in their attempts at resettlement elsewhere.

Most important of all potential sources of additional labor supply is the great number of women available for work, who during the post-war years did not join the labor force. War losses among men resulted in a large surplus of women in the most productive age groups; in the United States Zone, for example, the ratio of women to 100 men was 170 and more for the age groups between 20 and 30 at the end of 1946. In the labor force, however, the percentage of women is lower than in the pre-war period, as shown in the following table:

Table 20. Proportion of Women in the Labor Force.

Bizonal Area

(In millions)

<table><thead><tr><th>Period</th><th>Total labor force</th><th>Female labor force</th><th>Percent of total</th></tr></thead><tbody><tr><td>May 1939</td><td>16.9</td><td>6.0</td><td>35.5</td></tr><tr><td>June 1948</td><td>18.0</td><td>6.1</td><td>33.9</td></tr><tr><td>Sept. 1948</td><td>18.2</td><td>6.2</td><td>34.1</td></tr></tbody></table>

In the French Zone women comprised about 32 percent of the working force in June, 1948, whereas they represented 58 percent of the inhabitants of working age (14 to 64).

The shortage of skilled workers which had been strongly felt from the beginning of the Occupation has become aggravated by the expansion in production following the currency reform. This is particularly true in the building trades, foundries and machine industries. Categories in special demand are stone cutters, bricklayers, lathe-turners and motor mechanics.

Prior to currency reform, the German administrative agencies in the Bizonal Area had undertaken limited programs of training and re-training and are reported as continuing and expanding these programs. An important innovation since currency reform is the introduction in the United States Zone of a "Training within Industry" program, based upon the experience gained in the United States during war time. This program is to be instituted throughout the entire Bizone. Ac-

31

cording to an official British report, German labor and management
are participating enthusiastically in the project.

One of the most serious present problems relating to the labor force
is the maldistribution of the working population. The evacuation of
most larger cities during the last years of the War and the allocation of
expellees and refugees to the rural districts has produced a widespread
dislocation which can be corrected only by the solution of the housing
problem around the industrial centers. The industrial distribution of
the labor force has been greatly distorted. A comparison between June
1933 and June 1948 indicates that metals and textiles industries lost sub-
stantial numbers of their employees, while the personnel of public and
private administrations increased by 30 percent in the Bizonal area.
Employment in agriculture grew by 73 percent; in toy production by
81 percent; in the theater and film industry by 113 percent. Finally
there is a great excess of employment in domestic and other purely
personal services, though there has been some decline in this group
during the last half of 1948.

Beginnings of a needed redistribution of labor are visible since cur-
rency reform. At the end of September 1948 employment in iron, steel
and metals production had increased by nearly nine percent, in textiles
by about seven percent above June. Employment with Military Govern-
ment, on the other hand, declined by six percent, and in public adminis-
tration by 2.8 percent. Employment in agriculture, in spite of a decline
since June was still 62 percent greater than in 1939. On the other hand,
coal mining showed a slight reduction (0.7 percent) in spite of persistent
efforts to attract large numbers to the mines.

Labor efficiency in Germany after the surrender was low. To some extent this was due to factors having no direct relation to the workers themselves, such as the operation of plants at a small fraction of their available capacity, insufficient, war-damaged, worn-out and obsolescent equipment, inferior raw materials, interruptions in the flow of power, materials and operating supplies, diversion of part of the working force to repair, maintenance and reconstruction in much larger proportion than normal, inefficient management, and inefficient and inadequate technical supervision.

From the point of view of the workers themselves, poor physical con-
dition was of primary importance, reflecting insufficient nutrition. In
addition, there was an unduly large proportion of older workers, a lack
of skilled labor and generally low morale. Prior to currency reform,
moreover, there was little or no monetary incentive to the workers to
increase output and substantial absenteeism for the purpose of foraging
or black market operations.

Over-all figures on labor productivity during the period before cur-
rency reform are unreliable. Many workers were carried on the pay-
roll simply because of the desire to hold a working staff together rather
than because of the need for their services. Production was often not
fully reported by manufacturers. Very approximately, output per
worker per day in the manufacturing industries during the first half
of 1948 was probably not much over ½ of that in 1936.

32

Since currency reform there has been substantial improvement in many lines, though productivity still remains well below pre-war. This has reflected both the more favorable operating conditions resulting from the generally higher level of manufactured output and improved efficiency and morale on the part of the individual worker attendant upon better rations and the restoration of monetary incentives. In addition, the number of working hours has increased to an average of about 44 for male workers. (The official work week is 48 hours). Quantitative estimates of the improvement in productivity vary and are sometimes contradictory, but it seems probable that there has been an increase in output per man day to about 2/3 of pre-war. In addition, there has been a very marked reduction in absenteeism.

In the most important field, the Ruhr coal mines, output per man-shift has not changed significantly since currency reform. The marked reduction in absenteeism has been the principal cause of the rise in output. There has also been some increase in output per worker at the face.

There seems no doubt that workers after currency reform work harder and more conscientiously.

While average money earnings are somewhat higher than in 1938, the cost of living over the same period has risen over 40 percent according to the Cost of Living Index; the actual rise was undoubtedly greater. Under Military Government policy promulgated on 28 April 1948 negotiation of new wage and salary agreements providing for increases up to 15 percent for certain groups were permitted. By the end of September about 1/3 of all wage and salary earners in the Bizone had been granted increases under this policy.

In November, 1948, all restrictions on wage increases were removed. Nevertheless, labor unions have shown considerable restraint in avoiding demand for wage increases that would seriously augment inflationary pressures.

Immediately after currency reform, the real earnings of the industrial worker averaged 70 percent of what he earned in September 1938. It is obvious that, as result of the War, the German standard of living is bound to decline. This will express itself in a change in relationship between incomes and the cost of living. Nevertheless, there is room for considerable improvement in real wages over their present low level.

## 2. Farmers.

Total agricultural output in the Bizone is at present about 85 percent of pre-war; in the French Zone about 70 percent. Because of the large increase in the number of agricultural workers, output per worker is only about half of pre-war.

Money income, as the major incentive, has not yet fully resumed its normal function. Black marketing has not yet completely disappeared. Farmers show an inclination toward preferential production of unrationed foodstuffs which, because of their scarcity, bring a high price.

33

Recent trends have been definitely unfavorable. Industrial prices have risen considerably more than food prices. Farm prices within Germany are about ⅓ below world market levels.

The result of the widening gap between farm and industrial prices has already had a serious adverse effect upon collections, with farmers holding back an increasing portion of their product for sale on the black market.

### 3. Capital.

Conflicting factors tend on the one hand to stimulate, and on the other to discourage incentives to new investment. In addition, there are physical factors calling for an abnormally large investment while others severely limit it.

The great amount of war destruction together with poor maintenance in the war and post-war years, and pent-up demand for both consumers' and producers' goods are stimulating factors of great proportions. Abolition of most controls in conjunction with the currency reform (except for basic foodstuffs and basic industrial materials) gives business a free hand. The system of license requirements for new businesses has recently been removed which should encourage the establishment of small business enterprises.

Wage levels have thus far been kept stable, while prices have considerably increased. This discrepancy has, at least for an initial period, given a strong profit incentive. A further stimulus was provided by the reduction of profit and income taxes, and by steps to re-establish within Germany legal protection for patents and trade marks. Export requirements and procedures have been considerably loosened up, so that the majority of exporters can now deal directly with their foreign customers in so far as pricing is concerned. Internally, the administrative barriers created by the zonal division have been removed in Western Germany.

Finally, establishment of a Reconstruction Loan Bank was approved whose function it will be to provide medium and long-term credit.

On the other hand, savings were all but wiped out by the currency conversion and new savings since then are insufficient to finance much investment. Business savings are small and mostly absorbed by repairing and retooling rather than being used for expansion programs. As stated above, the low propensity to save is caused by the abnormally large, pent-up demand for consumers' goods, the lack of confidence in the stability of the currency, and especially the fear of future economic and political developments. Pending legislation concerning equalization of the burden of war and post-war losses threatens a capital levy, and the deficits in government finances may necessitate new taxation. All these uncertainties combined encourage the conversion of liquid funds into commodities, especially those that can be easily hidden or carried away, such as gold, foreign currencies, and jewelry.

## I. POLITICAL AND SOCIAL FACTORS.

Immediately after defeat Germany became an area for experiment in quadripartite government intended to prolong the wartime coalition.

34

This stage has been gradually transformed, by the difficulties en-
countered, into one of ideological conflict between the forces of Com-
munism and the forces of Western Democracy. In the absence of a
peace treaty, certain problems are in the process of being regulated by
special agreement, as in the control of the Ruhr; some are becoming
progressively more acute, as the Berlin situation.

Distinct from these international problems is the problem of in-
ternal reconstruction and reintegration along democratic lines. The
consequence of total defeat was an unparalleled rupture and disinte-
gration of the bonds that had held German society together. The gov-
ernment had disappeared, the entire system of Nazi values was dis-
credited, the economy was dislocated and at a standstill, the currency
was largely fictitious; all effort was bent to the immediate grim task of
survival and adjustment to the radically altered conditions of exist-
ence. Allied policy facilitated the disintegration of the former Nazi
social pattern, since among the occupation objectives were included
programs of denazification, demilitarization, deconcentration and de-
cartelization of industry, dismantling of factories, and dispossession
of German external assets. Simultaneously, through positive policies
and material relief, the Allies sought to assist the population toward
reconstruction and reorganization in a democratic pattern. In certain
directions great progress has been made. It is apparent, however, that
progress will remain uneven, and that German society will continue
to manifest many unusual tensions and strains.

The absorption of millions of refugees and expellees from the East
into Western Germany has been extremely difficult in an economy in-
capable of providing bare necessities. This has been further aggra-
vated by the unequal distribution of the newcomers. While the French
Zone actually decreased in population, such regions as Schleswig-Hol-
stein and Lower Saxony increased their population by 67 percent
and 42 percent, respectively. Over 2/3 of the influx went to rural dis-
tricts.

The war losses caused far-reaching distortion of normal popula-
tion ratios. An over-aged, man-deficient, de-urbanized and partially
uprooted population was faced with the task of social reorganization.
The cultural and economic integration of the refugees from the East
is still far from complete. In Bavaria and Wuerttemberg-Baden, for
example, at the end of 1947 refugees comprised 16 percent of the work-
ing age population but almost 38 percent of the unemployed.

Social disintegration was aggravated by an almost complete break-
down of government and administration. Totalitarian institutions had
to be replaced as quickly as possible by democratic ones. The zonal
division of Germany and the setting up of military governments often
created new administrative units and severed old-established units. It
took months to restore such elementary prerequisites as transporta-
tion and communications, while lack of raw materials, food, manpower,
physical destruction and exhaustion, and the general insecurity, aggra-
vated by the absence of a stable currency, hindered the reestablish-
ment of normal economic processes.

35

By the end of 1948 Western Germany had made considerable progress
towards the reestablishment of a normally functioning society. Under
the guidance of Military Government and supported by economic assist-
ance mainly from the United States, a new governmental administra-
tion has been built up, the main traditional political parties (with the
exception of the outlawed Nazi and nationalist parties) have reappeared,
and the organizations of business and labor are again operative. The
German people is regaining confidence in its capabilities and in the pos-
sibility of obtaining an improved standard of living as the result of
Germany's integration into the Western European economy. Elected
state governments have been in existence for two years. Preparations
are being made for the establishment of a federal government for all of
Western Germany. The convening of a democratically elected parlia-
ment and the adoption of a constitution is scheduled for 1949.

Two big parties represent the main political forces; the Christian Democratic Union (CDU) and the Social Democratic Party (SPD). Both parties are firmly rooted in the democratic tradition; they differ mainly in their views on the desirable degree of government interference with free enterprise and on the degree of centralization of a federal government. The SPD is convinced of the need for a planned economy, with a substantial nationalized sector comprising the key industries, but does not propose to abolish private enterprise. The CDU advocates in general only a minimum of government controls over the economy and has sponsored the recent decontrol program in the Bizonal Economic Administration. Influence of the Communists may be greater than their number warrants, by virtue of concentration of activity in the trade unions and work councils. Their weak point is the burden of championing policies imposed by the Union of Soviet Socialist Republics; their strong point, an ability to capitalize on Western mistakes, on German fears, and on social and economic discontent. Smaller parties include the Democrats who stand for a free economy with a minimum of controls, and local groups of nationalist tinge, such as the Bavarian Party in Bavaria and the National Democrats in Hesse, also capitalizing on discontent and charges of inefficiency and neglect of local interests by the major parties.

At the same time, the new associations of businessmen and the trade
unions are exerting an increasing influence on the economic and politi-
cal life. The completion of the denazification program for the cate-
gory of followers, and "nominal members", and exonerated persons has
permitted reemployment of large numbers in German administrative
posts and in business who will inevitably exert an influence politically
and socially.

Labor is at present demanding a larger share in business administra-
tion, especially participation in planning and management. The SPD
and the trade unions propose the reintroduction of price control for
vital consumer goods and the socialization of key industries.

The administrative consolidation of the Bizonal economy reached a
decisive stage with the establishment of the Bizonal Economic Ad-
ministration in 1947. This agency should be supplanted in 1949 by a
trizonal organization with authority, so far as the economic field is

36

concerned, to cover currency, banking, the main taxes, occupation costs, foreign trade, prices and wages, production and distribution of industrial and agricultural goods, etc. In certain of those fields a trizonal administration is already operative, but it will take its final form and assume its full functions only when the basic instruments of Western German reorganization, the Occupation Statute and the constitution will have become law. Such a reorganization would in effect result in the establishment of a unified political and economic structure in Western Germany.

The salient fact at present, in contrast with the situation a year ago, is that Western Germany is relatively speaking a "going concern". Control of currency, investment, allocation of national resources, foreign trade, remain subject to the decision of the Occupying Powers. The proposed Western German government will be a Provisional Government, limited as to sovereignty and possessing jurisdiction over only two-thirds of pre-war Germany. Nevertheless, Western Germany has shown extraordinary resiliency. Politically and psychologically the decision to treat a democratic Western Germany as a partner in European recovery has been of major importance. Participation with 16 other nations in the common European effort is the first opportunity to progress toward rehabilitation within the Western European community of nations. Every German political figure, including Communist, is sensible of the significance of the ERP in these respects and of the fact that present opportunities are decisive for Germany's future.

37

# Chapter II—Basic Problems of the Western German Economy

## A. ECONOMIC RESOURCES

### 1. Effects of the War.

The basic problems which must be solved to permit the restoration of a self-supporting economy in Western Germany are the direct aftermath of the War. They are greatly intensified and complicated by Germany's position as a defeated and divided nation. Western Germany is at present separated by an extension of the "iron curtain" from a large part of the territory and resources of pre-war Germany. There is as yet no German Government above the level of the individual states. Except for foreign trade, currency, central banking, and taxes, administration of the French Zone remains separate from that of the Bizone.

The degree of disruption of economic life, and the physical damage to housing, transportation and industry was greater in Germany than in other participating nations. Trade relations between Germany and non-European nations were severed in 1939; those with other nations on the Continent were all but cut off after the surrender, and for several years thereafter the German economy remained largely insulated from world markets. Germany has lost its merchant fleet and all its external assets. Some of these problems are in process of near-term solution; others, however, are of a character which require fundamental changes in economic structure and in the orientation of trade, if the objective of a self-supporting economy is to be attained within the life of the European Recovery Program.

Western Germany faces the task of achieving economic recovery with considerably smaller economic resources—present and potential—than were available to pre-war Germany. Consequently, the plans for Western German recovery must start from the recognition that the pre-war pattern cannot be reestablished. Basic and far-reaching changes in economic structure and orientation are a prerequisite to a self-supporting economy. The problem is to utilize available resources effectively and to develop a new pattern of international trade which will provide Germany with food and raw materials and absorb her industrial exports in exchange.

### 2. Territorial Changes.

Pre-war Germany could not provide all the food required by its population, and Western Germany was the major food deficit area. Moreover, eight million expellees and refugees from the Separated Areas, the Sudetenland and Eastern European countries have found their way to Western Germany. More recently, the influx has been augmented by infiltrees from Berlin and the Soviet Zone of Occupation, moving west across the "Green Border." As a result, the population of Western Germany (excluding Berlin) has risen to about 47 million as compared with less than 40 million before the War, an increase of 15

38

percent. By 1952, the population is expected to rise to 50 million if the estimates in the long-term programs for the Bizone and French Zone are realized. Deprived of access to the food supplies of the Separated Areas, the farms of Western Germany can provide for little more than half of the food needs of the increased population. In addition, provision must be made for the inhabitants of the Western Sectors of Berlin. The development of outside sources for the remainder of the food requirements, and of means of paying for them is the overriding problem.

It was the expressed intention in the Potsdam Agreement that the four occupation zones of Germany were to be treated as a single economic unit. It has never been possible to obtain Soviet assent to the implementation of this intention. These developments have thrown a further major strain upon the Western German economy. Plants and industries, which were complementary in pre-war Germany, are now effectively separated in different economic worlds. For example, the optical industry in Western Germany can no longer obtain optical glass from Jena. The huge electrical manufacturing industry in Berlin and the extensive machinery industry in Saxony can no longer provide equipment for Western Germany in exchange for steel from the Ruhr. The tie-lines between the large lignite-using power plants in the Soviet Zone and the Western Zones have been cut, aggravating the acute power shortage.

Western Germany (excluding Berlin) has at present a population about 68 percent as great as that of all Germany before the War; by 1952 the ratio may be expected to rise to about 72 percent. In contrast, the resources available to Western Germany represented, before the War, the following proportions of total German resources:

<table><thead><tr><th></th><th>Western German resources<br>as per cent of all<br>Germany (1936)</th></tr></thead><tbody><tr><td>Area</td><td>53</td></tr><tr><td>Arable land</td><td>45</td></tr><tr><td>Manufacturing production</td><td>59</td></tr><tr><td>Exports of manufactured goods</td><td>66</td></tr><tr><td>National income</td><td>56</td></tr></tbody></table>

In addition to the loss of resources, the barrier at the border of the Soviet Zone has forced an extensive and inefficient re-routing of traffic, throwing an added strain upon the already over-burdened transportation system. Before the War, the prevailing direction of traffic was East-West and rail and highway arteries were developed accordingly; the change-over to North-South traffic involves slow and difficult readjustment.

These specific difficulties resulting from the disruption of economic ties with the Soviet Zone are by no means its most important consequences. Facilities can be replaced in time, and traffic re-routed. Much more serious is the broader effect of the restriction of Western Germany's trading area. If economic unification were achieved, the food import requirements of all four zones would be about the same as for Western

39

Germany alone, while the industrial potential available to provide exports would be almost 1/3 greater. This would make the long-range task of achieving a self-supporting economy somewhat easier.

### 3. Need for Increased Exports.

With curtailed resources and an increased population, therefore, Western Germany must export considerably more than before the War in order to pay for increased imports that are absolutely essential. This cannot permit as satisfactory an economic life nor as adequate a standard of living as would be true in a larger and better-balanced trading area. Nevertheless, it is from this basis that planning must proceed.

Before the war, the metal and metal-working and chemical industries contributed by far the major portion of the export revenue of Western Germany. In 1936, for example, total exports of manufactured products from Western Germany amounted to about RM 3.0 billion, of which 2.1 billion, or 70 percent, consisted of metals, chemicals and the products of the metal-working industries. Exports of mining products—principally coal—comprised 12 percent of the total.

This pattern of export distribution was not accidental; it reflected the character of Western Germany's industrial structure and the requirements of the importing countries. It is unlikely that the proportion of future Western German exports coming from such industries as textiles, leather, and ceramics can be substantially greater than in the past, even though output in those industries is not seriously affected by the security limitations nor by the reparations program.

Metals and metal products, chemicals, and coal will have to continue to provide the bulk of Western Germany's exports in the future. Despite the limitation on steel production, a substantial increase in the exports of these products is possible. Undoubtedly, exports of steel as such will be very small but, on the other hand, exports of finished machinery and chemicals can well be considerably higher. To some extent the task will be eased by the fact that Western Germany before the War supplied considerable quantities of machinery to Eastern Germany, which should now be available for export.

### 4. War Damage.

The degree of physical destruction in Germany during the War was greater than in any of the other participating countries—though not as great as in some areas of Eastern Europe. The destruction encompassed industrial plants, transportation, the utility system and private and public housing. Of these, the most serious was the disruption of the transport system. There was severe destruction of freight cars, railways, and highway bridges, barges, and inland waterway installations. Repair of these facilities has been accorded high priority, and the situation has improved considerably in recent months. However, much remains to be done, and it will be necessary to devote a considerable share of Western Germany's limited resources to rehabilitation of the transport plant for some years to come.

The damage to housing — both public and private — in the cities of Western Germany has been incalculable. Inadequate housing has

40

had a major retarding effect on industrial operations, particularly in
the Ruhr where the lack of suitable accommodations for miners and
steel-workers is still a source of major concern. Three years after the
surrender, the job of reconstruction has hardly been started although,
following currency reform, there has been a spurt of unorganized re-
building activity in certain cities. Up to the present it has been im-
possible to accord general reconstruction a high priority, and for some
time in the future it may be necessary to concentrate largely upon
housing programs of immediate industrial significance, as in the Ruhr.
Nevertheless, it is not believed that adequate steps have been taken
to do as much of a job as could have been done with available re-
sources. The first systematic study of the problem is only now being
undertaken by the Bizonal economic authorities.

5. Impairment of Invisible Earning Power.

Western Germany has lost the bulk of her pre-war sources of in-
visible foreign exchange revenue. In part, this represents the loss of
virtually all German foreign assets. In the case of Germany, however,
this is less serious than for other participating nations such as the
United Kingdom, since German assets abroad were sharply curtailed
after the first World War and revenue from foreign investments was
not, in the thirties, a major source of foreign exchange. In 1935, for
example, total German income from interest and dividends was only
RM 100 millions; payments by Germany on foreign account were more
than six times as large.

Before the war, the German merchant fleet provided about RM 200
million in net revenue annually. This would be about $150 million at
current prices. The bulk of this fleet was based on Western German
ports. With the need for paying ocean freight on the import of food-
stuffs from overseas that were previously obtained within Europe, the
loss of revenue will be even greater.

Finally, tourist travel has been non-existent since the War. The
magnitude of the loss may be measured by the fact that earnings from
tourism in 1936 amounted to RM 320 million for all Germany; a large
part of this revenue was earned in Western Germany. The restoration
of this tourist traffic should now be given a high priority in order to
obtain foreign exchange. However, the Bizonal plan contemplates
tourist revenue of only $15 million for 1949/50, and only $70 million
for 1952/53. The French Zone tourist target for 1952/53 is only $8
million. These objectives are much too low; a considerably more vigor-
ous effort seems indicated. One problem which must be overcome is
that charges are at present far too high, so that they discourage rather
than encourage tourist travel. Prices should be lower—not higher—
than those in surrounding countries which have, at present, far more
to offer in the line of accommodations and travel comfort. For ex-
ample, hotels in the Austrian Tyrol are advertising very attractive
prices for the winter season in an effort to recapture the tourist trade;
prices in Western Germany seem exorbitant by contrast. A policy of
promoting tourist trade should be given prompt consideration.

41

## B. INTERNAL FINANCE.

Internally, the primary problems of restoring a sound currency, achieving a realistic price and wage structure, providing the necessary high levels of investment while avoiding inflation, balancing governmental budgets and reestablishing strong financial institutions have not yet been fully solved. The currency reform introduced at the end of June 1948 represented a long stride toward reestablishing the value of money in Western Germany. The effects of this step in stimulating production have been spectacular. However, the currency reform brought in its wake a train of new problems which are the cause of increasing concern. As pointed out previously, (see Ch. II, page 24), savings are falling far below investment, creating a distinct inflationary trend. The situation has been aggravated by the need for large expenditures for the support of Berlin. Serious price disparities have appeared and have led to increased unrest among workers and farmers.

There is a shortage of both short-term and long-term capital needed for reconstruction. Interest rates on short-term loans are very high, often reaching 10 percent. There is an urgent need for long-term capital, and few sources for such capital. Easier credit for production is urgently needed, but any substantial increase in the volume of credit would increase inflationary pressures.

The basic problem of domestic finance is thus to provide the means needed for public and private reconstruction and investment without setting into motion an inflationary spiral.

In the long run this problem cannot be solved by fiscal or monetary measures alone. Production of goods and services must be increased to such an extent that consumers can *raise* the absolute *amount* of their expenditures devoted to the purchase of goods and services, and at the same time *lower* the *ratio* of these expenditures to their total income. Only in this way can both the absolute amount and the proportion of savings be increased without interfering with the essential improvement in the standard of living.

Fiscal and monetary policy must be designed to prevent currency and credit from expanding at a faster rate than the supply of goods and services, but without holding the supply of money so low as to restrict the demand for goods and services below the potentially available output. The balance between these two dangers is narrow, and the monetary authorities may frequently be faced with the dilemma of risking inflation or slowing down the pace of reconstruction. During the crucial first years of the recovery program, a slight degree of inflation would probably be less dangerous than a recession. The authorities must, however, keep all the standard weapons of anti-inflationary policy ready for use: flexibility of tax rates, government expenditures, and credit volume. They must also be prepared to use direct controls if necessary. ECA can assist in fiscal policy by its control over the expenditure of local currency counterpart funds.

42

C. RESTORATION OF FOREIGN TRADE.

1. Exports and Trade Controls.

As far as external economic relations are concerned, it is vital that Western Germany reestablish normal trade contracts with its customers and sources of supply. Some steps in this direction have been taken and limited quantities of foreign currency are being made available to German businessmen for the purpose of reestablishing trade contacts. Much more remains, however, to be done in this field. Western Germany must revise its trade practices to meet present-day competition and adjust its products and its styling to the demands of world markets. It must establish trade contracts and commercial trade outlets. At present, Western Germany has no consular or commercial representation abroad. Without such representation, the foreign-trade objectives cannot be achieved.

A major problem in connection with the restoration of German foreign trade is the remaining disparity between the German price structure and world prices for internationally traded commodities. It is not simply a question of German prices being generally higher or lower than those in the world markets but rather that they are badly skewed because of their long insulation. In spite of the corrections which have occurred in recent months, there remain serious cost-price adjustments which the German economy must undergo in the process of reestablishing its foreign trade. It may well develop, in the course of this process, that there are many products which Western Germany cannot, in the future, export on a competitive basis or afford to import. It will be necessary to readjust planning accordingly, and in particular to concentrate on export of products taking better advantage of Germany's technological resources.

2. Imports.

One of the principal factors contributing to the recent industrial upswing in the Bizone was the sharp expansion of industrial imports in the first half of 1948. The flow of these materials gave new life to the German economy and contributed importantly to the spurt in production which followed.

From June to November the import trend was definitely downward. December showed some improvement, but commercial imports remained well below schedule, and about $20 million less than December exports. If continued, this low level of imports would necessarily affect future industrial expansion in Western Germany. In addition, because of the lack of imports and the increase in exports, JEIA has been forced to release substantial quantities of Deutsche Marks to exporters without corresponding receipts of local currency from importers. This has made it necessary for JEIA to borrow over DM 600 million from GARIOA counterpart funds, thus increasing inflationary pressure within Germany. The same trend has occurred in the French Zone where, in the absence of other counterpart funds, it has been necessary to fall back upon JEIA resources for the local currency required.

43

The failure of imports to reach scheduled levels has also had serious, disturbing effects upon payment arrangements under the Intra-European Payments Agreement between Western Germany and other participating nations. On the one hand, a large part of the Bizone's and French Zone's drawing rights have not been expended, while on the other, drawing rights which were extended to other participants have in some cases been exhausted, making it necessary for those countries to make dollar payments to cover the balance due. In the face of these developments Western Germany's need for imports remains as great as ever.

The factors contributing to the decline are numerous. In the first place, there are numerous administrative difficulties which have retarded the placement of orders for imports. The procedures involved in obtaining import licenses through the Joint Export-Import Agency have been very cumbersome, resulting in excessive delays in obtaining the necessary authorizations. It is to be hoped that the simplified procedure recently introduced will improve this situation substantially.

A second major difficulty is the fact that the international prices of certain commodities translated at the 30 cent mark are well above internal German price levels. In part this reflects the fact that internal price readjustments are not yet completed. The situation is greatly aggravated, however, by the fact that on purchases from soft-currency areas the price to the German importer is derived by first calculating the dollar equivalent of the selling price on the basis of official exchange rates and then translating the dollars into Marks at the 30 cent rate. Consequently, if the official exchange represents an overvaluation of the currency of the exporting country, the Deutsche Mark price is correspondingly high. This affects, particularly, imports of commodities which are produced within Western Germany, though not in sufficient volume to meet the program. Under such circumstances, purchasers within Germany prefer to accept the delay involved in ordering domestic goods rather than pay the premium on imported goods.

Another difficulty is the lack of credit available to importers and industrial consumers of imported materials. In view of the high interest rates on short-term credit and the unavailability of longer-term loans, inventories have been reduced to minimum levels in many cases, thus reducing pipe lines and deferring the needs for imports.

The lack of consular or commercial representation abroad has hampered procurement. The difficulties involved in the rapid transition from a completely controlled to a largely uncontrolled economy have not been sufficiently resolved.

In this connection, it was necessary during the past few years to restrict Western German imports to food and the "hard goods" needed to start the economy functioning. Many of Germany's potential exports, however, are in the "soft goods" or semi-luxury class; such as cameras, chinaware, toys, and leather goods. To sell these, Germany must accept some soft goods in exchange, and these imports would also have some anti-inflationary effect.

It is evident that every possible effort must be made to restore and increase the flow of imports and to remedy existing difficulties imped-

44

ing that flow. It is probable that a good many of these difficulties are
transitional in character and that they will disappear as necessary
economic readjustments take place.

3. Trade With Western Hemisphere.

Basic to the problem of establishing a self-supporting economy in Western Germany is the balancing of dollar accounts. While this is a general problem of many of the participating countries, it is especially acute in the case of Western Germany, owing to the fact that the bulk of her imports are food and raw materials which must come largely from sources outside Western Europe. On the other hand, the natural market for most of Germany's exports, comprising principally coal and the products of heavy industry, is within Europe. In 1929, when world trade generally was at a much higher level, there was a deficit of over RM 1.6 billion with the Western Hemisphere; the surplus with Europe was almost RM 3 billion. Even in 1935, Germany had a trade deficit with the Western Hemisphere of about RM 300 million which was more than balanced by a trading surplus of RM 560 million with Europe. At the present time the factors making for this disparity are greater than before the War because of the curtailment of trade with the food and raw materials-producing areas of Eastern Europe. During 1948, for example, the deficit of Western Germany with the Western Hemisphere was greater than its total foreign exchange deficit; trade with other participants showed a surplus. In the French Zone, also, almost the entire current deficit is with the Western Hemisphere.

The long-term plans for the Bizone and French Zone show for 1952/53 a combined deficit of about $300 million with the Western Hemisphere, which would have to be compensated by a surplus in trading with the rest of the world. This assumes a large shift in food purchases from the Western Hemisphere to Eastern Europe whose realization depends partly upon unpredictable political factors. Should this fail to materialize, the probable size of the deficit with the Western Hemisphere in 1952/53 would be considerably greater, and there would be an equivalent trading surplus with other participants.

Western Germany must, of course, make strenuous efforts to econ-
omize on dollar imports, increase her own dollar exports, and devote
special attention to the development of dollar markets. It must be
recognized, however, that it may prove impossible for Western Germany
to achieve a balance directly in its own dollar trading. In part, the
solution of this problem lies outside of Western Germany, and it is
inseparable from the over-all European problem of balancing dollar
accounts and restoring convertibility of currencies which is a primary
responsibility of OEEC.

4. Foreign Investment.

German recovery can be speeded, and the Balance of Payments
deficit narrowed, by private foreign investment. Despite existing un-
certainties, there has been interest on the part of foreign capital in
the possibility of investment in Western Germany. So far, Military

45

Government has not permitted private capital to enter. Plans are now
in progress to relax these restrictions under appropriate safeguards.

D. INTERNAL PROBLEMS.

In addition to these basic problems, there are many others whose
solution is necessary to ensure or accelerate the attainment of a self-
supporting economy. Among these, the following may be stressed:

1. Productive Efficiency.

The level of efficiency in the use of both human and material re-
sources is very low. For example, hard coal production in the Ruhr-
Aachen area is still at the rate of less than one ton per man-shift, com-
pared with 1.67 tons in 1936. At the same time, the amount of coal
required to produce a ton of steel or a kilowatt hour of electric power
or to move a ton-mile of freight is well above pre-war. The limited
resources available to Western Germany make it imperative that they
be utilized to maximum efficiency.

Germany's long isolation has prevented the interchange of tech-
nological information, and the War took heavy toll of her technicians
and interfered with the training of a new generation. Technical as-
sistance from abroad is needed urgently. The opportunities for im-
proved efficiency afforded by the break in historical continuity should
be used to the full in government, industry, and agriculture.

2. Electric Power.

In the industrial field, the electric power bottleneck is probably the
most critical for the next few years. This reflects, in part, the world-
wide trend toward increased use of electric power in preference to
other forms of energy. Repair and rehabilitation of existing capacity
and the installation of new capacity—partly to replace power pre-
viously obtained from the Soviet Zone—have a high place in the re-
covery program. There may also be some possibility of economy
through increasing efficiency of power utilization. In addition, Ger-
many's electric power resources and requirements must be adequately
integrated into the European net.

3. Iron Ore.

The provision of adequate quantities of richer iron ore is essential
to the steel production program. The use of Lorraine ores would con-
tribute to the solution of this problem.

4. Government.

Finally, the problem of reestablishing an effective Western German
government remains. The transfer of functions from Military Govern-
ment has been only partial, and the administrations for the Bizone and
French Zone are still separate. Nor have the German authorities
as yet assimilated effectively the limited functions which have been
transferred to them. Competent personnel is lacking and must be
trained.

It is urgent that German governmental responsibility be reestablished effectively, and that the merger of the French Zone and Bizone

46

be consummated as soon as possible. Yet it must be recognized that there may be a serious, though presumably temporary, loss in administrative efficiency when a provisional government for Western Germany is inaugurated, and has to undertake the economic functions now performed by the Occupation Authorities. The development of governmental competence and "know-how" takes at least as much time as the development of managerial competence in industry. Nevertheless, it is essential that the transfer of functions be consummated as soon as practicable; any delay would only prolong and aggravate the subsequent readjustments.

## E. LEVEL OF RECOVERY.

In view of all these factors, it is not surprising that German recovery has lagged greatly behind that of the rest of Europe. Even with the sharp upswing, which followed currency conversion, manufacturing output in December, 1948 was only 78 percent of the 1936 level. In contrast, production in most other participating countries is well over pre-war. This disparity between the level of economic recovery in Western Germany and that of the other nations creates in itself serious trade problems. Western Germany could neither take the goods which the other participating nations wished to sell nor provide the exports needed by them for their own recovery. A healthy and stable European economy is, in part, dependent upon the further recovery of Germany toward the goals that have been established. In the past, what have appeared to be problems in trade and payments were, in part, the consequence of the fact that the level of recovery in Germany was so far below that of the other nations that they could not, through trade, supply each other's mutual requirements.

As a result of territorial losses and the zonal division, Western Germany has to substitute international trade for what was formerly internal trade. A new pattern of intra-European trade is required for the post-war world. The development of this pattern among the participating nations is among the foremost problems in the remaining years of the European Recovery Program.

In any such pattern, however, Western Germany must again become a major source of industrial products, especially of machinery and chemicals, for other participating nations. Not only would this contribute directly to their industrial revival, but it would also permit a substantial reduction in dollar drain, since Western Germany could supply many of the requirements which must now be obtained from the Western Hemisphere.

In addition, the revival of East-West trade within Europe is of prime importance to Western Germany. Such trade would not only provide a non-dollar source for many essential food and raw material imports, but also a large market for exports of manufactured goods.

## F. SUMMARY.

In the list of conditions which have been described, it is evident that the Western German economy must be reoriented to meet the changes

47

which have occurred since the beginning of the War. The principal features of this necessary reorientation may be summarized as follows:

1. The Western German economy will have to support a population considerably larger than before the War and must do so without the free interchange of goods and services with Eastern areas, which existed before the War. Its industries must be rounded out in such a way as to minimize the impact of the loss of complementary Eastern resources, including power and transportation facilities.

2. Western German industry must adjust to the limitations and restrictions imposed for reasons of security. This will involve some shift of the balance between heavy and light industry as well as within individual industries. From the point of view of internal requirements, a considerable increase in the light industries would in any event be needed to provide for the consumption needs of the increased population, even at a lower per-capita standard than pre-war. They may also play a larger role in foreign trade than before the War, though German exports in the future, as in the past, will have to consist largely of coal, metals and metal products (including precision instruments and optics) and chemicals. However, there should be some opportunity to shift within these industrial categories; for example, to produce and export more light machinery in place of steel and heavy machinery; and to concentrate as far as possible upon chemicals of high unit value rather than upon crude chemicals. Plans looking toward such changes should be drawn as soon as possible, based upon careful analysis of future market possibilities, in the light of the resources available to Western Germany. It would appear urgent that this job be done as soon as possible, while the pattern of industrial recovery is still flexible, rather than to find subsequently that German productive capacity is not effectively adjusted to the needs of world markets.

3. The labor supply in Western Germany will be considerably greater than it was before the War, reflecting the increase in population. It is true that, at the present time, a considerable part of this increased population is not in the more productive age groups and that there is a large excess of women. Within three or four years, however, there should be some substantial accessions to the labor force from children coming into productive ages, including the "Hitler babies" of 1933/4. It would appear imperative to plan for the effective use of this increased labor force, within the industrial pattern available to Germany. For example, it should be possible to speed up greatly the planned rate of clean-up and reconstruction, as well as of industrial activity not affected by security limitations and, as far as possible, not dependent upon imported raw materials. The problems involved are difficult, but they should not be insoluble.

4. Germany's internal price structure must be stabilized. It is possible that more selective decontrol would have avoided many of the present difficulties. It is recognized that, because of the longulation of the German economy from that of the rest of the world, considerable price readjustments were necessary and that some of these had to be painful. The fact that legal prices in Germany had been more stable than anywhere else in the world prior to the decontrol

48

made price increases inevitable to bring Germany's markets into line with world markets. On the other hand, the present situation is causing considerable unrest and there is real danger of a serious inflationary trend.

It would be clearly impossible at this stage to reimpose the controls which had existed previously in substantially their original form, even if that were regarded as desirable. On the other hand, it seems equally clear that steps must be taken promptly to bring the situation into hand. In part, these steps may be monetary involving, for example, stringent tax enforcement, and the restriction of bank credit, probably on a selective basis. In addition, a large scale program for the manufacture of utility consumer goods to be sold at reasonable prices has been introduced. This program should be supported by channeling ECA raw materials, such as hides and cotton, into the manufacture of goods of this type.

5. Over the longer term, certain basic changes in price relationships within Germany are inevitable. For some years in the future the standard of living in Germany must be lower than it was before the War. In terms of price, this means that real wages cannot reach the pre-war level; that is, that prices of consumer goods generally will have to remain somewhat higher than wages as compared with 1936. This fact should be recognized fully by the responsible authorities in Western Germany and governmental policies adjusted accordingly.

6. With industrial prices decontrolled, it is difficult to see how food prices can be held to existing levels. They are far out of line with world prices; the average conversion rate on food imports is about 50 cents to the Mark. The maintenance of the prevailing level is causing much dissatisfaction among farmers, and is hurting food collections. If a gradual increase of food prices could be achieved without touching off a series of wage increases, it would reduce the general inflationary pressures somewhat. As stated earlier, it is planned to apply the 30-cent conversion rate to food imports in March 1949, and to hold internal food prices in line by subsidies. A gradual readjustment of the food price level could then be achieved by a progressive curtailment of the subsidy program.

7. The identification and correction of the causes which have contributed to the recent slump in imports is of critical, immediate importance. This would not only have an anti-inflationary effect and aid industrial recovery, but it would also materially improve trade relationships with other participating nations.

49

# Chapter III—Description and Critique of National Recovery Program

## A. GENERAL CONSIDERATIONS.

The long-term recovery program for Western Germany had to be formulated with due regard to the basic economic and political conditions which have been described. The more important of these may be summarized as follows:

1. It is estimated by the Occupation Authorities that the population of Western Germany (excluding Berlin) will be about 50 million by 1952. This would represent an increase of about 25 percent over 1939 when the population of the area was less than 40 million. In addition, it is necessary to provide for the food requirements of some two million persons in the Western sectors of Berlin. Because there are more inhabitants than can be supported from the soil of Western Germany, any economic program for Western Germany must assume the need to import about 40 percent of the food requirements of 50 million persons plus virtually all the food requirements of an additional two million inhabitants of Western Berlin.

2. Western Germany is also deficient in most of the raw materials needed for her manufacturing industries, with the principal exception of coal. The level of industrial production that can be attained is, therefore, keyed to the volume of raw material imports. In order to achieve the status of a self-supporting economy, the industries of Western Germany must provide exports sufficient to pay both for the food needed by its population and the materials needed by its plants. Within reasonable limits, the higher the production targets, the larger the total import bill, but the easier it would be for the area to provide the exports to balance its accounts.

3. Under present international agreement, steel production in the Bizone is limited to 10.7 million ingot tons annually — or to about 11 million tons for all Western Germany. This imposed certain limits upon the character of the area's long-term program.

## B. CONSUMPTION.

The recovery plan for the Bizone contemplates a total increase in Gross Available Product from $24.1 billion in 1948 to $33.9 billion in 1952/53, about five percent higher than in 1936. In the French Zone, the expected increase is from $2.2 billion in 1948 to $2.9 billion in 1952/53, about the same level as in 1936.

Details of the expected use of the Bizonal product are shown below. Over the four-year period, total private consumption expenditures are expected to rise only 40 percent from 1948, investment by 70 percent, and governmental expenses by only five percent.

The long-range program for Western Germany involves acceptance of a standard of living lower than enjoyed before the War. This arises

50

from the fact that the plan calls for agricultural production at about the same level as before the War and industrial production only 10 percent greater than 1936, while population will have increased about 25 percent. Consequently, if the program is realized, the average quantity of all goods and services available for personal consumption per capita would be about 15 percent less than in 1936.

Table 1. Gross Available Product by Use—Bizone.

<table><thead><tr><th rowspan="2"></th><th colspan="3">In billion dollars<br>1948 prices</th><th colspan="3">In percent<br>of the total</th><th colspan="3">In percent<br>of 1936</th></tr><tr><th>1936</th><th>1948</th><th>1952/53</th><th>1936</th><th>1948</th><th>1952/53</th><th>1936</th><th>1948</th><th>1952/53</th></tr></thead><tbody><tr><td>Personal consumption expenses</td><td>19.5</td><td>15.6</td><td>22.0</td><td>61</td><td>65</td><td>64</td><td>100</td><td>80</td><td>113</td></tr><tr><td>Gross investment</td><td>6.6</td><td>4.5</td><td>7.7</td><td>20</td><td>19</td><td>23</td><td>100</td><td>68</td><td>117</td></tr><tr><td>Government current purchases</td><td>5.8</td><td>4.0</td><td>4.2</td><td>18</td><td>16</td><td>13</td><td>100</td><td>69</td><td>72</td></tr><tr><td>Net purchases by foreigners</td><td>0.4</td><td>—</td><td>—</td><td>1</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>TOTAL</td><td>32.3</td><td>24.1</td><td>33.9</td><td>100</td><td>100</td><td>100</td><td>100</td><td>75</td><td>105</td></tr></tbody></table>

In the Bizone, personal consumption expenditures per capita in 1952/53 are expected to reach $475, or about 1/3 over present levels, though only 86 percent of pre-war. The level in the French Zone will be somewhat lower absolutely, reflecting its less industrial character, but will bear about the same relation to pre-war. For purpose of comparison, this reduction from pre-war to 1952/53 would be of about the same magnitude as that which occurred in the United States between 1929 and 1932.

Under the plan, food consumption in 1952/53 would be not far below pre-war in quantity, with a considerably larger proportionate reduction in quality. Shoe consumption should be close to pre-war but textiles only 2/3 of pre-war. On the other hand, the reduction in the per-capita availability of such goods as furniture and domestic appliances, coffee, and tobacco will undoubtedly be considerably greater. The standard of domestic heating will similarly remain below pre-war levels.

As to housing, the standard of living will remain incomparably lower than in 1936. Ten million additional persons are crowded into the housing left over after destruction of about three million housing units during the War. The long-term program provides for rehabilitation by repair of only somewhat over one million housing units by 1952/53.

Restoration of Germany's pre-war standard within four years is impractical; on the other hand, any sharper reduction than that contemplated would not be compatible with the needs of an efficient industrial population. In fact, one of the basic problems implicit in the long-term program is whether a per-capita level of consumption about 15 percent below pre-war will provide the necessary economic incentives.

### C. SOURCE OF RESOURCES.

The expected composition of the Bizone product in 1952/53 is shown below, compared with 1936 and 1948.

51

Table 2. Gross Available Product by Origin—Bizone.

<table><thead><tr><th rowspan="2">Origin</th><th colspan="3">In billion dollars<br>1948 prices</th><th colspan="3">In percent<br>of the total</th><th colspan="3">In percent<br>of 1936</th></tr><tr><th>1936</th><th>1948</th><th>1952/53</th><th>1936</th><th>1948</th><th>1952/53</th><th>1936</th><th>1948</th><th>1952/53</th></tr></thead><tbody><tr><td>Agriculture</td><td>3.8</td><td>3.0</td><td>3.8</td><td>12</td><td>13</td><td>11</td><td>100</td><td>80</td><td>100</td></tr><tr><td>Industry</td><td>17.3</td><td>10.4</td><td>19.0</td><td>53</td><td>43</td><td>56</td><td>100</td><td>60</td><td>110</td></tr><tr><td>Other domestic<br>economy</td><td>11.2</td><td>9.5</td><td>11.1</td><td>35</td><td>39</td><td>33</td><td>100</td><td>85</td><td>99</td></tr><tr><td>Foreign net<br>contribution</td><td>—</td><td>1.1</td><td>—</td><td>—</td><td>5</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>TOTAL</td><td>32.3</td><td>24.0</td><td>33.9</td><td>100</td><td>100</td><td>100</td><td>100</td><td>75</td><td>105</td></tr></tbody></table>

## 1. Agricultural Production.

At the present time the basic ration is 1850 calories per day, equivalent to an average consumption for the non-farm population of about 2400-2450 calories, including both rationed and non-rationed foods. This remains about 15 percent below the pre-war level in quantity, with a much more than proportionate reduction in quality. In particular, the supply of fats, meats and the so-called "protective foods" is far too low. The long-term program for the Bizone contemplates an increase in the average feeding level of non-self-suppliers to 2700 calories per day by 1952/53,¹ which would still be below pre-war. In the French Zone the goal is 2600 calories, reflecting the lower proportion of industrial workers entitled to supplementary rations.

It is planned that slightly more than half of this requirement—1400 calories per person per day for non-self-suppliers — will be supplied from indigenous production. The achievement of this goal will require the following basic steps, according to the program:

a. Restoration of unit yields to pre-war levels.

b. Indigenous production of high caloric crops, such as potatoes and sugar beets, with less emphasis on extensive crops, such as grains, which yield less calories per acre.

c. Increase of the yields of fodder crops and grass, already above pre-war levels, by the use of improved plant breeds and improved husbandry.

d. Increase of cattle and pig population to 100 percent and 90 percent of pre-war levels respectively in order to satisfy minimum consumption requirements for meats and fats from domestic production as far as possible.

e. Increase of the fishery fleet to permit an expansion of about 50 percent in the fish catch.

Detailed plans for achieving these production objectives are being developed. It is necessary, among other factors, to provide adequate supplies of fertilizers, agricultural machinery, high-grade seeds and limited amounts of fodder. Improvement of farming methods through research and education is contemplated. Provision will also have to be made for adequate farm credit.

Assuming that these objectives are realized, it will still be necessary, according to the long-term program, to import food equivalent to about 1300 calories per day for the non-self-supplier population of Western Germany, in addition to virtually the entire 2700 calories per capita

¹ Subsequent recalculation by the Bizonal Authorities indicates that it may be possible to provide a somewhat higher feeding level without increasing programmed food imports.

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1936; consequently, the plan contemplates an over-all increase of about 41 percent in the course of the next four years. For the French Zone the present rate of output (October, 1948) is 66 percent of 1936, hence the increase over present output would be about 55 percent.

In order to achieve this general objective, the following plans have been projected for major industries:

b. Coal.

It is expected that the daily average output of hard coal in the Ruhr-Aachen area will reach 425,000 tons per day during 1952/3. This represents an increase of about 95,000 tons per day over the present level of 330,000 tons (Jan. 20-24, 1949), and is about 10 percent higher than the actual rate of output achieved in 1936. In 1938, however, daily production was close to 450,000 tons and it is expected that this level will be regained by the end of the year 1953.

The attainment of this high level of coal production is vital to the success of the entire program. Ruhr-Aachen coal is needed not only by the industries of Western Germany, but it is also essential to most of the other participating nations on the European continent. The calculations prepared by the Bizonal Authorities indicate that even at this rate of mine output, the total coal supply would fall more than five million tons short of meeting combined domestic and export requirements. However, this requirement estimate may not fully allow for probable improvements in the efficiency of coal consumption. There is good reason to assume that as production rises to the planned levels, consumption efficiency should improve to an extent permitting export and domestic requirements to be met fully.

The achievement of this production target will require a large capital expenditure—estimated at $600 million—for supplying mining equipment, replacing war damage, improving mechanization and opening new pits. The great bulk of the needed equipment will be produced within Germany.

It is also anticipated that the present working staff of 347,000 (including about 35,000 clerical employees) will be augmented by about 15,000 additional workers over the period. Housing will have to be greatly improved, since bad housing is one of the principal factors hampering recruitment and making for low productivity. Average worker productivity in the Ruhr mines at the end of 1948 was only 65 percent of pre-war levels.

c. Petroleum.

It is estimated that in 1952/3 the Bizone will require 3.3 million tons of petroleum products. This represents an increase of slightly over 10 percent compared with the 1936 consumption of 2.9 million tons. In order to achieve this level, with the minimum expenditure of foreign exchange, it is planned to increase both crude-oil production and domestic refining.

The anticipated expansion in the exploitation of Western Germany's indigenous petroleum resources is necessarily limited. Before the War annual production of crude petroleum in the Bizone amounted to 445,000 tons; in the third quarter of 1948 actual output was at an

56

annual rate of about 650,000 tons, and by 1952/3 it is planned to raise this figure to 750,000 tons.

Before the War, Germany imported most of her gasoline and diesel oil, limiting refining operations to production of lubricants and bitumens. It is proposed to change this pattern so that all of the Bizone's imports can be in the form of crude. At present, crude oil refining is at the rate of about 1.3 million tons annually, including crude imports of 690 thousand tons per year, and domestic crude of 650,000 tons. By 1952/3, it is estimated that refining capacity will be adequate to process 3.25 million tons of imported crude annually in addition to domestic production of 750,000 tons, representing a total refining capacity of 4 million tons.

The French Zone program calls for importation of 28,000 tons of crude oil and 293,000 tons of refined products in 1952/3.

### d. Electric Power.

One of the most serious factors limiting Western Germany industrial recovery at the present time is the shortage of electric power. Total production of electric power in the Bizone during 1947 was estimated at 26 billion KWH. This includes production from both public utilities and private industrial power stations. It may be estimated that the present rate of power production is about 30 billion KWH annually. The long-term program of the Bizone contemplates an increase in this level of about 50 percent by 1952/3 or to 46 billion KWH. This estimated production level for 1952/3 is more than double the actual production of 22 billion KWH in 1936, in which year there were additional supplies from Eastern Germany. There has, of course, been a very sharp rise in the consumption of electric power in all countries, reflecting an increase in the electrification of industry and transport, as well as greatly increased consumption in the home.

For the French Zone a similar increase in electrical power requirements is foreseen with consumption requirements rising from 2.7 billion KWH in the current fiscal year to 3.2 billion KWH in 1952/3, and with production rising from about 2.2 billion KWH (rate during October 1948) to 2.7 billion KWH in 1952/3.

Bizonal expansion plans cover expenditure of $750 million on repair and installation of increased capacity. One of the important phases of the plan is the construction in the Ruhr of 16 new thermal plants designed to use coal of non-merchantable grades. About half this program will be completed by 1952/3. Expenditures in the French Zone are estimated at $50 million annually.

### e. Steel.

According to the program, the output of ingot steel in the Bizone will reach the permitted level of 10.7 million tons in 1950/51. French Zone production is estimated at 350,000 tons for 1952/3, making a combined total for Western Germany of about 11 million tons. Steel production has been increasing very rapidly during recent months; in December 1948 the annual rate of output was already about 7.4 million tons in the Bizone, almost 2½ times the output in 1947.

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f. The Engineering Industries.

It is planned that production in the engineering industries as a group, including both mechanical and electrical engineering, will be restored by 1952/3 to a level 4 percent higher than in 1936. This represents an increase of only about five percent over the rate attained in December 1948. The pattern of production forecast for 1952/3 will vary somewhat from pre-war, with less emphasis on heavy machinery and equipment and with a considerably greater output of light machinery and electrical engineering. This is necessary because about half of Germany's total output of electrical equipment came from Berlin before the War, and this capacity has been largely destroyed or dismantled. It will be necessary also to increase production of various types of machinery (e.g., textile machinery) whose pre-war source was principally in what is now the Soviet Zone.

g. Chemicals.

Bizonal production in 1952/3 is expected to be about 100 percent of 1936 production, representing an increase of about 1/3 over the present rate. Considerably more than proportional emphasis will be given to the production of fertilizers, for which the target is far above pre-war. In the French Zone, which has some of the most important chemical plants in Western Germany, it is expected that chemical production in 1952/3 will be increased to about 40 percent above the 1936 level.

h. Timber.

Since 1935 the forests in the Bizone have been cut in excess of the annual growth. Cutting has been intensified since the end of the War, partly to provide exports for repair of war damage in such countries as France and the United Kingdom, and partly because timber represented an immediately available cash export. At the end of 1948, cutting was at about 170 percent of annual growth. It will be necessary to reduce timber production to replacement levels in order to prevent too serious a depletion of forests. This is the only industry in which a major reduction in output is contemplated.

In the French Zone, also, it is planned to reduce lumber production by 1952/3 to the rate of annual growth. Timber exploitation in the French Zone over the past years has been even more severe than in the Bizone, and there is said to have been serious depletion of reserves in the Black Forest. Even if production is held to the rate of growth, however, production in the French Zone will be more than adequate to meet its own needs and will permit substantial shipments to the Bizone and, according to the plan of the French Zone authorities, for export.

i. Textiles.

Substantial expansion is contemplated in the textile industry in both the Bizone and French Zone to a level in excess of 1936 by the end of the four-year period. This would represent an increase of about 50 percent over the rate of operations during December 1948. Considerable investment will be required to rehabilitate plants neglected during the

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war and to eliminate bottle-necks resulting from the loss of complementary resources in the Soviet Zone. In addition, plans contemplate a large increase in the output of rayon and staple fiber as a means of saving the foreign exchange required for the purchase of natural fibers.

### j. Paper and Pulp.

The paper and pulp supply of Western Germany has been very seriously affected by the loss of resources in the Soviet Zone and in the Separated Areas. Before the War, Western Germany accounted for less than half of German paper and pulp production. Eighty percent of the pre-war newsprint capacity was in the Soviet Zone. The limited Bizonal capacity, coupled with the shortages of raw material and fuel, has resulted in a very sharp drop in consumption in Western Germany from about 41 kilograms per capita in 1936 to about nine kilograms per capita in 1947. For 1952/3 it is expected that production will be increased to a level permitting domestic consumption at the rate of 23 kilograms per capita and exports of over $20 million. In the French Zone, output in 1952/3 is expected to be six percent higher than in 1936.

### k. Fine Machinery and Optics.

This industry has always played an important role in the German economy and exports of scientific instruments, cameras and similar products form a significant source of foreign exchange revenue. Production in this industry will be pushed and it is expected that by 1952 it will exceed 1936 output by about 15 percent in the Bizone. This compares with an estimated level of 72 percent of 1936 at present, and represents an increase of more than 50 percent over present operating rates. It will be necessary, in order to achieve this target, to establish facilities to replace the loss of sources in the Soviet Zone, particularly in the case of optical glass.

### l. Leather and Shoes.

The principal problem in this industry is to provide the increase in production necessary to take care of the large increase in population and the depletion of consumer inventories. In the Bizone, for example, it is expected that production in 1952/3 will be about 80 million pairs of all types of shoes as compared with 71 million in 1936. On a per-capita basis, however, this represents a reduction from 2.10 pairs per head in 1936 to 1.74 in 1952/3. (The availability of leather shoes in 1952/3 is estimated at 1.30 pair per capita.) The same per-capita level of consumption is projected for the French Zone. Before the War, however, shoe manufacturing was one of the principal industries of the French Zone. It is anticipated that it will be possible to raise production in that Zone to a level that will permit the export of about four million pairs annually after meeting the domestic requirement on the basis indicated. This would still leave the leather industries in the French Zone operating at only 88 percent of the 1936 rate.

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### 3. Transport.

The problem of providing adequate transport facilities to meet the planned expansion of industry is of critical importance in Western Germany. The economic separation of the Soviet Zone has necessitated a difficult and inefficient rearrangement of traffic routes. In addition, destruction during the War—particularly of bridges, largely by the retreating Nazi troops—was very considerable.

In the case of railway transport, efforts will be concentrated on the problem of restoring freight to the pre-war standard. It will not be possible to do this for passenger service, because of the condition of the tracks and the priority accorded to rolling stock for freight.

The number of locomotives in service is to be increased from 7600 to 9200 and that of serviceable freight cars from 234,000 to 306,000 for the Bizone. Production of this rolling stock would be almost entirely from domestic resources after the end of the current fiscal year. No substantial program is envisaged for passenger coaches at the present time. A gradual program for the replacement of permanent way will be undertaken. It is unlikely that this can be completed in less than 10 years.

Intensive effort will be devoted to inland water transport which has always played a very important role in the German transport system and which suffered great damage during the war. It is not expected that it will be possible to restore the pre-war efficiency fully by 1952/3. An extensive repair program is under way. There are at present about one million tons of sunk or war-damaged craft of which it is expected some 70 percent are worth repairing and will be in service by 1950. Under the program, it may be necessary to contract for part of this job outside Germany. By 1952/3 it is expected that the present fleet of 2.4 million tons can be increased by about 1/3, in addition to which there should be some improvement in utilization.

At the same time repairs of war-damaged tugs will be pushed between now and 1950 and new tug construction will be resumed in 1950/1. By 1952/3, it is expected that the serviceable fleet of tugs will be increased by about 1/3 from its present level of 220,000 HP. Considerable effort will be devoted to the improvement and rehabilitation of waterways and installations.

The rehabilitation of highway and road transport and of urban transport facilities will also be given considerable emphasis. It will be necessary to more than double the commercial bus fleet and to provide a large increase in the availability of trolley buses and trolley bus trailers. The bulk of the transport program can be achieved through domestic resources.

### 4. Imports.

As in the case of the production program, the import programs for the Bizone and the French Zone have been submitted separately. The Bizonal program of commodity imports is summarized in Table 7 compared with the corresponding figures for the 1948/9 and the 1949/50 programs.

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The total level of commodity imports for 1952/3 is projected at 75 percent above the 1948/9 program and more than double the actual rate of importation during 1948.

It is impossible to compare this program directly with pre-war figures because no statistics were collected before the war for Western Germany as such. However, a very rough approximation would indicate that the program contemplates an increase in the level of imports by as much as 30 percent over 1936 imports into Western Germany.

The long-term program contemplates an increase of food imports of about 57 percent over the program for 1948/9. This reflects:

a. The anticipated population increase of about three million persons over the four-year period;

b. the need for increasing the quantitative food intake to approximately pre-war levels for the average non-self-supplier; and

c. a marked improvement in the quality of the diet.

The most important element in increasing the cost of these imports is the improvement of quality. Thus, while the import of bread grains is raised by only 10 percent, that of coarse grains for feeding livestock is doubled. Fats and oils are raised by 150 percent and meat and dairy production are trebled.

Concurrent with the increase in the total level of food imports is a marked shift in source. Whereas the program shows total imports of agricultural products increasing by 57 percent, imports from the participating countries and the sterling area are expected to rise 120 percent. Imports of agricultural products from the Western Hemisphere would actually decline by about $100 million, while almost $350 million of such products would be obtained from Eastern Europe. The practical feasibility of obtaining agricultural imports on this scale from Eastern Europe is a crucial question.

Imports of industrial raw materials are expected to more than double from the 1948/9 program level, to provide the basis needed for the industrial expansion. Among the most significant increases in this category are a tenfold expansion in the imports of copper—principally for use in the production of electrical equipment and transmission lines—an expansion of more than 100 percent in textile materials and products and a rise from $24 million in 1948/49 to $265 million in 1952/3 in imports of timber. The increase in timber imports is intended to provide materials needed for reconstruction, while, at the same time, reducing the domestic cut to the level of annual growth.

In the case of raw materials, it was not possible to project any over-all change in the distribution of purchases as between the dollar and the non-dollar areas. Many of the needed raw materials are simply not available within the participating nations and the sterling area in volume sufficient to support any major switch.

In the case of timber, however, it is expected that the principal source could be found within Eastern Europe. This is, of course, subject to the same uncertainties as those relating to the purchase of food in that area.

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Purchase of equipment from foreign sources is expected to drop substantially during the next four years. The estimate for 1952/53 is $65 million, compared with $111 million in 1948/49 program. This would be a natural consequence of the rehabilitation of the Bizone machinery industry.

In the French Zone the total imports of commodities for 1952/53 are estimated at $278 million, as shown in the following table:

Table 8. Comparison of French Zone Import Programs.
(In millions of dollars)

<table><thead><tr><th></th><th>1948/9</th><th>1949/50</th><th>1952/3</th></tr></thead><tbody><tr><td>I. Agricultural products</td><td>83.3</td><td>84.7</td><td>92.0</td></tr><tr><td>II. Solid fuels</td><td>7.0</td><td>—</td><td>—</td></tr><tr><td>III. POL</td><td>8.7</td><td>11.8</td><td>14.6</td></tr><tr><td>IV. Ores & metals</td><td>42.8</td><td>46.0</td><td>50.5</td></tr><tr><td>V. Equipment</td><td>24.0</td><td>24.1</td><td>5.0</td></tr><tr><td>VI. Textile materials and products</td><td>24.0</td><td>34.4</td><td>49.7</td></tr><tr><td>VII. Other goods</td><td>39.3</td><td>52.6</td><td>66.1</td></tr></tbody><tfoot><tr><td>TOTAL</td><td>229.1</td><td>253.6</td><td>277.9</td></tr></tfoot></table>

It is evident that the planned increase in imports is much smaller than in the case of the Bizone. Total commodity imports for 1952/3 are to be only 20 percent higher than in 1948/9. Imports of foodstuffs are shown to rise only 10 percent over the period, while imports of industrial commodities expand only 28 percent.

## D. EXPORTS

### 1. Bizonal Export Program.

According to the long-term program for the Bizone, commodity exports will rise much more rapidly than imports. A nearly four-fold increase is anticipated from the level of $666 million in 1948/9 to $2.8 billion in 1952/3. The expected development of commodity exports is shown in Table 9. The bulk of the anticipated increase in exports is to be in the form of manufactured products—machines, textiles and “other products.” These exports are expected to rise from $310 million in the 1948/9 plan to more than $1,650 million in 1952/3. This represents a return to the normal pattern of the German export trade. Before the War, Bizonal exports of metals and metal products, machinery and optics and chemicals accounted for 68 percent of the total exports of manufactured products from the area; by 1952/53 the corresponding percentage, according to the Plan, would be 63 percent. This moderate reduction from the 1936 ratio reflects principally the fact that substantial exports of steel as such, which played an important role in the area's pre-war trade, will not be possible under the ceiling on steel production.

Exports of coal will continue, as in the past, to contribute an important part of the area's export revenue, though the percentage is expected to drop sharply from almost half of the total in 1948/9 to about 15 percent in 1952/3. This would represent a great improvement towards a more rational export picture. In 1936 exports of mining prod-

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ucts—principally coal—represented 13 percent of the total exports from the Bizone. The planned exports of coal assume a continuance of the international agreement establishing the proportion of the Bizonal coal production that is to be made available to other European countries.

Table 9. Bizone—Comparison of Annual Export Programs
(In millions of dollars)

<table><thead><tr><th rowspan="2"></th><th colspan="3">TOTAL</th><th colspan="3">Western Hemisphere and Other Non-participants</th><th colspan="3">Other Participating Countries and Non-participating Sterling Area</th></tr><tr><th>1948-49</th><th>1949-50</th><th>1952-53</th><th>1948-49</th><th>1949-50</th><th>1952-53</th><th>1948-49</th><th>1949-50</th><th>1952-53</th></tr></thead><tbody><tr><td>I. Agricultural products</td><td>10.0</td><td>22.9</td><td>60.0</td><td>3.3</td><td>11.0</td><td>30.2</td><td>6.7</td><td>11.9</td><td>29.8</td></tr><tr><td>II. Mineral solid fuels</td><td>275.0</td><td>330.3</td><td>409.0</td><td>7.0</td><td>10.0</td><td>14.5</td><td>268.0</td><td>320.3</td><td>394.5</td></tr><tr><td>III. Petroleum products</td><td>0.0</td><td>12.0</td><td>8.0</td><td>0.0</td><td>5.0</td><td>4.9</td><td>0.0</td><td>7.0</td><td>3.1</td></tr><tr><td>IV. Ores and metals</td><td>68.5</td><td>88.2</td><td>126.0</td><td>13.0</td><td>17.2</td><td>36.2</td><td>55.5</td><td>71.0</td><td>89.8</td></tr><tr><td>V. Machinery</td><td>103.0</td><td>199.4</td><td>990.0</td><td>19.1</td><td>57.4</td><td>570.4</td><td>83.9</td><td>142.0</td><td>419.6</td></tr><tr><td>VI. Textile materials and products</td><td>56.5</td><td>93.4</td><td>212.2</td><td>11.4</td><td>20.6</td><td>105.2</td><td>45.1</td><td>72.8</td><td>107.0</td></tr><tr><td>VII. Chemicals</td><td>26.8</td><td>57.8</td><td>400.0</td><td>0.0</td><td>0.0</td><td>0.0</td><td>0.0</td><td>0.0</td><td>0.0</td></tr><tr><td>VIII. Other products</td><td>126.0</td><td>204.0</td><td>605.0</td><td>19.5</td><td>73.1</td><td>596.4</td><td>133.3</td><td>190.7</td><td>408.6</td></tr><tr><td>TOTAL</td><td>665.8</td><td>1,008.2</td><td>2,810.2</td><td>73.3</td><td>194.3</td><td>1,357.8</td><td>592.5</td><td>813.7</td><td>1,452.4</td></tr></tbody></table>

It is anticipated that textiles will account for about seven percent of total exports—about the same proportion as pre-war. The remainder of the export program includes limited exports of certain agricultural products, such as hops and wine, in addition to glass and ceramics, fine leather goods and a wide range of miscellaneous products.

In 1936 exports of manufactured products from the Bizone amounted to about RM 2.7 billion. Assuming average export prices to have doubled¹ since 1936, this would be equivalent to about $2.15 million at 1948 prices. The commodity export program for the Bizone represents therefore an increase of about 30 percent as compared with 1936.

Under the 1948/9 program more than 80 percent of the total Bizonal exports are to go to other participating countries; in 1947 the actual ratio of shipments to participants was 93 percent; in 1948 it was about 88 percent. Programmed shipments to the Western Hemisphere for 1948/49 represent 9 percent of the total; actual shipments in 1947 were only 3 percent and in 1948 about 6 percent.

By 1952/3 it is anticipated that the share of other participating countries will be reduced to 43 percent of Bizonal exports. Shipments to the Western Hemisphere will rise to 21 percent and those to Eastern Europe to 19 percent.

This shift in the pattern of trade reflects partly the growing diversification of German exports. Up to the present time, the bulk of export shipments have been coal and timber. As exports of manufactured products increase, it should become possible to find wider markets in the rest of the world.

¹ A paper submitted by the Bizonal ECA delegation to the OEEC estimates the average price rise to be greater, and the planned increase over 1936 consequently narrower.

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plan, would be balanced by foreign investment. In fact, the indicated
deficit is well within the margin of error of the calculation.

While the program thus shows over-all accounts in approximate
balance, there are large deficits remaining with both the Western
Hemisphere and the sterling areas, amounting to about $220 million for
the Western Hemisphere and $100 million for the sterling area. A
credit balance of about $35 million is expected with non-participating
countries outside the sterling area.

Table 11. Balance of Payments—Comparison of Annual Programs—Bizone.

(In million dollars—all currencies)

<table><thead><tr><th></th><th>1948/9</th><th>1949/50</th><th>1952/3</th></tr></thead><tbody><tr><td>I. Expenses:</td><td></td><td></td><td></td></tr><tr><td>Imports F.O.B.</td><td>1,598</td><td>1,848.9</td><td>2,818.1</td></tr><tr><td>Transport</td><td>206</td><td>214.5</td><td>289.0</td></tr><tr><td>Invisibles and other</td><td>47</td><td>21.2</td><td>40.2</td></tr><tr><td>TOTAL</td><td>1,851</td><td>2,084.6</td><td>3,147.3</td></tr><tr><td>II. Receipts:</td><td></td><td></td><td></td></tr><tr><td>Exports</td><td>666</td><td>1,008.0</td><td>2,810.2</td></tr><tr><td>Transport</td><td>39</td><td>45.7</td><td>100.0</td></tr><tr><td>Invisibles and other</td><td>38</td><td>50.0</td><td>165.0</td></tr><tr><td>TOTAL</td><td>743</td><td>1,103.7</td><td>3,075.2</td></tr><tr><td>III. Current Balance</td><td>-1,108</td><td>-980.9</td><td>-72.1</td></tr><tr><td>IV. Capital Operations:</td><td></td><td></td><td></td></tr><tr><td>Payments</td><td>21</td><td>0.0</td><td></td></tr><tr><td>Receipts</td><td>18</td><td>44.0</td><td></td></tr><tr><td>Net</td><td>-3</td><td>+44.0</td><td></td></tr><tr><td>V. General Balance</td><td>-1,111</td><td>-936.9</td><td></td></tr></tbody></table>

The program contemplates that the sterling deficit can be covered
in part out of the surplus with South American and "other non-participating countries", and in part through direct sterling investment.
However, if any part of the sterling deficit were made up by sterling
payments from non-participating countries in South America and elsewhere, this would merely throw the dollar position further out of
balance.

2. French Zone.

The program for the French Zone shows a much larger proportionate
deficit in the balance of payments in 1952/53. Total expenditures are
set at $312 million, with receipts of $276 million, leaving an over-all
deficit of $36 million in all currencies. The deficit for the Western
Hemisphere alone is $79 million, which may be partially compensated
by an indicated surplus of $47 million with other non-participating
countries outside of the sterling area. It is expected that there will
be a surplus of $14 million with the entire sterling area and a deficit

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of about $18 million with other participants. The expected trend in the balance of payments is shown in Table 12.

Table 12. French Zone—Balance of Payments—Comparison of Annual Programs.

<table><caption>(In million dollars—all currencies)</caption><thead><tr><th></th><th>1947</th><th>1949/50</th><th>1952/3</th></tr></thead><tbody><tr><td>Western Hemisphere</td><td>-56</td><td>-100</td><td>-79</td></tr><tr><td>Sterling Area—Total</td><td>n.a.</td><td>-14</td><td>+14</td></tr><tr><td>Sterling area—Non-participating</td><td></td><td>(0)</td><td>(-5)</td></tr><tr><td>Sterling area—Participating</td><td></td><td>(-14)</td><td>(+19)</td></tr><tr><td>Other participants</td><td>+43<sup>a</sup></td><td>+16</td><td>-18</td></tr><tr><td>Other non-participants</td><td>-2</td><td>-4</td><td>+47</td></tr><tr><td>Total</td><td>-15</td><td>-102</td><td>-36</td></tr></tbody></table>

<sup>a</sup> Including participants in Sterling Area.

### 3. Western Germany.

If the estimates for the Bizone and the French Zone are combined, there would be a total deficit in all currencies of about $108 million in a total trade of about $3.5 billion in both directions. The deficit with the Western Hemisphere alone, however, would be about $300 million, even assuming that no part of the Western Hemisphere payments would be in the form of sterling. There would be a somewhat smaller net deficit with the sterling area—about $70 million, a surplus of about $190 million with “participating countries”, and a surplus of about $70 million with all other countries.

## F. INVESTMENT AND FISCAL POLICY.

### 1. Investment.

Attainment of the recovery objectives for Western Germany will require large investment effort. The existing need for investment to replace wartime destruction, to make up for arrears in maintenance and repair, and to fill existing industrial bottlenecks will require a continued high percentage of total resources. In fact, one of the major problems of government in Western Germany during the next four years of intensive recovery effort will be to hold down personal consumption in an economy already lacking consumer goods, to hold down governmental expenditures, and to provide the needed investment without creating deficits of such magnitude as to threaten the program with inflationary disturbances.

In 1948, gross investment in the Bizonal areas is estimated at $4.5 billion. By 1952/53, it is hoped that this will be raised to $7.7 billion—about 15 percent greater than in 1936.

Investment effort will be concentrated on the key industries. At the same time a large investment will be needed for activities which will not contribute immediately to dollar earning capacity, especially reconstruction and housing, but where neglect would delay recovery in other key industries.

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The following tabulation gives a breakdown of programmed investment in the Bizone both in terms of money and in terms of finished steel products, by consuming group:

Table 13. Bizone—Long-Term Investment Program.
(1948/9 through 1951/2)

<table><thead><tr><th rowspan="2">Consuming group</th><th rowspan="2">Finished steel consumption (thousand metric tons)</th><th colspan="2">Amount of investments after deduction for depreciation and depreciation reserves</th></tr><tr><th>Million Deutsche Marks</th><th>Million dollars</th></tr></thead><tbody><tr><td>Mining</td><td>1,050</td><td>2,000</td><td>600</td></tr><tr><td>Public utilities</td><td>1,450</td><td>4,000</td><td>1,200</td></tr><tr><td>Metals and metal products</td><td>550</td><td>1,090</td><td>327</td></tr><tr><td>Chemicals</td><td>650</td><td>1,100</td><td>330</td></tr><tr><td>Machinery and optics</td><td>262</td><td>795</td><td>238</td></tr><tr><td>Construction industry</td><td>250</td><td>425</td><td>128</td></tr><tr><td>Transport</td><td>2,024</td><td>3,205</td><td>962</td></tr><tr><td>Agriculture</td><td>730</td><td>1,500</td><td>450</td></tr><tr><td>Housing & public buildings</td><td>810</td><td>7,100</td><td>2,130</td></tr><tr><td>All other investments</td><td>224</td><td>5,785</td><td>1,735</td></tr></tbody><tfoot><tr><td>TOTAL</td><td>8,000</td><td>27,000</td><td>8,100</td></tr></tfoot></table>

It is expected that the total volume of net investment needed, including rebuilding of inventories of $4 billion, will be about $12 billion over the period. This represents about 11 percent of the Gross Available Product, compared with a peak of 12 percent reached in 1928.

The importance of stimulating voluntary savings is recognized both by the Bizonal Authorities and by the OEEC. The attainment of any considerable volume of voluntary savings, according to the report of the OEEC on the 1949/50 Bizonal Program, "depends on certain factors. The level of income is expected in 1952 to be 19 percent lower per head than in 1936. Secondly, the essential replacement of personal goods must inevitably encourage a tendency to spend. Thirdly, taxation still remains high. The Bizonal Authorities expect that forced savings for investment purposes will be obtained through direct and indirect taxation, compulsory loans, etc." It is intended also to encourage savings by a strong publicity campaign stressing the potential increase in real value of the deferred spending power, and by tying personal savings to home construction and reconstruction.

In order to permit large-scale investment by government, taxes would have to be raised or governmental expenses reduced. Both methods will be considered. Increases in taxation would have to be of a type which would not discourage business investment. It is also planned to encourage private business financing itself by investment out of current profits. Differential tax advantages in favor of undistributed profits will be considered.

In the French Zone the investment program will have the same general objectives, and will presumably be implemented by the same

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methods. The principal features of the annual investment program for the French Zone for 1952/3 are summarized below:

Table 14. FRENCH ZONE—Long-Term Investment Program
(Annual Rate—1952/3)

<table><thead><tr><th></th><th>Steel req'ts.<br>thousand tons</th><th>Value<br>million dollars</th></tr></thead><tbody><tr><td>Construction & reconstruction</td><td>35.0</td><td>53</td></tr><tr><td>Railways</td><td>100.0</td><td>83</td></tr><tr><td>General equipment</td><td>36.0</td><td>45</td></tr><tr><td>Electric power</td><td>24.5</td><td>45</td></tr><tr><td>Agriculture</td><td>n.a.</td><td>45</td></tr></tbody></table>

## 2. Prices and the Monetary Situation.

The full impact of the currency reform and the removal of controls has not yet run its course. The process of readjustment of internal German prices to world markets is not completed and cannot be completed until all remaining subsidies are discontinued. For this reason, neither the French Zone nor the Bizone authorities plan immediate action with respect to establishing a formal external value for the Deutsche Mark. They do assert categorically, however, that they will combat all inflationary pressure and maintain the stability of the purchasing power of the new money.

## 3. Governmental Budget.

The Bizonal authorities are pledged to pursue a policy of balancing the budgets at a relatively low level.

The long-term plan calls for governmental economies in wages and salaries through reduction of personnel. No strong efforts, however, have yet been made by governmental authorities to effect such savings, and strong pressure will have to be exerted in this direction.

In the French Zone, it is expected that governmental budgets may be balanced by 1949/50.

# G. APPRAISAL OF THE RECOVERY PROGRAMS FOR WESTERN GERMANY.

## 1. Coordination of Bizonal and French Zone Programs.

Taking into account all the difficult conditions confronting Western Germany, the programs submitted for the Bizone and the French Zone represent substantial efforts to devise a practicable program which might build up a self-supporting economy.

Because there is, as yet, no Western German Provisional Government, nor any single Allied occupying authority for the area, the programs for the Bizone and the French Zone were prepared by the Bizone and the French Zone authorities and submitted separately to OEEC. There was

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some informal consultation between the officials of the two areas in order to approach conformity in broad objectives, but this did not extend to integration of the various segments of the two programs. There is not yet a single long-term program for Western Germany. The two areas are, however, on the way to becoming a single economic unit, and political unification seems probable long before the end of the planning period. Barriers to the interzonal movement of goods and persons have already been removed, and since October 15, 1948, foreign trade is under the control of a single agency—the Joint Export-Import Agency. Under such circumstances, it is evident that there can not long remain any substantial economic disparities within the area, other than those reflecting the fact that the economic character of the French Zone is somewhat different from that of the Bizone, with relatively more emphasis upon agriculture and less on industry.

Comparison of the programs for the Bizone and the French Zone reveals numerous important differences. While the consumption objectives are roughly similar, the production goals show considerable variance, and the import and export programs show even greater discrepancies. There is some indication that the plans for neither area have been designed to take the fullest advantage of the resources available in the other. For example, Bizonal plans call for an expansion of petroleum refining capacity sufficient to eliminate the need for imports of refined products with a substantial resultant saving in foreign exchange. For the French Zone the great bulk of imports throughout the period are scheduled to be in the form of finished products. In view of the relatively small requirements of the French Zone, it should be entirely possible for its needs to be satisfied from the refining facilities of the Bizone, perhaps with some minor increase in capacity of Bizone refineries. On the other hand, the Bizonal plans apparently contemplate that all the shoe requirements of its population will be satisfied from plants within its own boundaries, which does not take into account the fact that the traditionally large shoe production capacity in the French Zone is sufficient to contribute substantially to Bizonal needs and that there is every reason to assume that the leather industry in the French Zone will operate at about the same proportion of capacity as the Bizone. There are also certain differences in the basic assumptions which require reconciliation. For example, population in the French Zone has not increased at all, in comparison with pre-war, while the Bizone shows a 30 percent increase. The long-term program of the French Zone assumes that there will inevitably be some flow of population from the Bizone into the French Zone during the next four years following the recent removal of barriers to the movement of persons across the zonal boundaries. The program for the Bizone makes no compensating adjustment.

In summary, a closer integration of the recovery plans for the two areas is essential. The best solution would obviously be submission of a single long-term recovery program covering all of Western Germany. As a step in this direction, OEEC recently addressed a request to the three Military Governors, asking them to prepare a unified "Trizonal" long-term program.

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## 2. Industrial Production Objectives.

The general economic objectives of the programs for both the Bizone and the French Zone take due account of the problems to be resolved. They recognize the difficulty—probably the impossibility—of raising the standard of living of the population of Western Germany in 1952/3 to pre-war levels. A reduction of about 15 percent in personal consumption expenditures as compared with 1936 may be inevitable. The projected food consumption levels seem reasonable, though it may not be possible to achieve as great an improvement in the quality of the diet as is contemplated in the Bizonal plan, but probably somewhat more of an improvement than is forecast in the program of the French Zone.

In both areas, the industrial production objectives for 1952/3 are conservative. In their general character the objectives must be keyed to the resources available to Western Germany as well as to the limitation upon steel production. On the other hand, the production objective must provide for the utilization of the available labor force and of the substantial productive plant capacities which exist in this area.

The Bizonal target for over-all industrial production of 110 percent of 1936, and the French Zone target of only 103 percent are considerably more conservative than the targets set by other participating countries. There is question as to whether a Western Germany producing at only 110 percent of 1936 would be able to play its proper role in the kind of Western Europe which the other participating nations are forecasting for 1952/3, and which ECA is sponsoring.

The rate of industrial improvement, which has occurred since the beginning of ECA aid and the introduction of currency and economic reform, indicates the resilience of the Western German economy and its ability to make large forward strides under favorable conditions.

Giving due weight to the problems faced, it is still believed that the sights should be set higher. The question of whether the Western German production targets can be increased in the face of the limitation upon steel production, is of crucial importance. It may be that the steel limitation will not be decisive, since it provides about 10 percent more steel for Western Germany than was actually consumed in 1936, a year, moreover, when some steel was used for war preparation. Eleven million tons of crude steel would provide about eight million tons of finished steel; consumption in Western Germany in 1936 is estimated at about 7.2 million tons. On the other hand, this would not take into account the abnormal demand for steel for reconstruction, the world-wide trend toward increase in the per-capita consumption of steel, and the increase in German population. In any case, it will be necessary to ensure the most efficient use of the steel available and to develop technical programs to this end.

In particular, the projected rates of operation of the following industries as established in the long-term programs seem unduly conservative:

a. The target for the engineering industries—mechanical and electrical combined—is set at 105 percent for the Bizone. This figure is

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too low for the mechanical engineering industry alone, where it should
be possible to attain a level of production at least 10 percent above
1936 by throwing proper emphasis upon light as against heavy ma-
machinery. As far as electrical equipment is concerned, the capacity
remaining in the Bizone is sufficient to produce far more electrical
equipment than in 1936, and actual output in December 1946 was 163
percent of the 1936 average.

b. The production of chemicals in the Bizone is set at 100 percent of 1936, as compared with actual output of 78 percent during December 1948. It would seem entirely feasible to push Bizonal chemical production more vigorously to a rate well above 1936. In the French Zone, by comparison, the target figure for this most important single industry in that area is set at 143 percent.

c. The objective for the fine machinery and optics industry has been set at only 115 percent of 1936. As there has been no significant loss of capacity in this industry, it is estimated that it should be sufficient to produce about 140 percent of the 1936 level. It would appear desirable to plan for this rate in a field where requirements of steel and critical materials are very small in relation to the value of the product.

d. Other industries, for which the targets appear modest, are stones and earth—of prime importance to the reconstruction program—and glass and ceramics, which can contribute significantly to export revenue.

For the French Zone, similarly, production goals should be raised. In particular, the metal working and machinery industry, whose 1952/3 output is projected at only 82 percent of 1936, should be able to produce at a very much higher rate.

These suggested increases in production targets would permit planning for a considerably more rapid rebuilding of a peaceful self-supporting economy in Western Germany. It would make possible a quicker reconstruction of the area's cities, transportation systems and industrial facilities, and probably a significant improvement in the standard of living of the population beyond the levels envisaged in the plans. More rapid replacement of worn-out and inefficient equipment would permit a substantial reduction in manufacturing costs and prices. It is not suggested that this higher level of industrial output would permit raising export objectives since, as pointed out below, the magnitude of the export plan as presented may be in excess of market potentialities. Higher production would, however, significantly lessen the burden upon the economy of providing those exports for which markets will be available.

### 3. Import Objectives.

Analysis of the Bizonal import program for 1952/3 reveals that it is based upon certain optimistic assumptions, particularly with respect to the development of trade with Eastern Europe. The import figures for a number of items appear liberal. For example, it may be possible to provide a satisfactory diet with somewhat lower food imports. There is question as to whether it is necessary to increase the value of imports of industrial raw materials by well over 100 percent as compared with

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1948/9 to support an increase in industrial production of only 50 to 60 percent. The indicated requirements for copper and textile materials may be high. The projected imports of timber are far in excess of pre-war. More efficient use of indigenous resources and economies in the utilization of fuel and materials should permit some reduction in import requirements.

In appraising the program, however, it is recognized that the import figure shown for 1952/3 represents an effort to estimate a pattern of trade rather than to establish firm requirements so far in the future. There is advantage in setting the sights at a high level even though in practice some of the indicated requirements can be reduced as experience accumulates and the period to which they apply approaches. In addition, supply difficulties might make it impossible to purchase the full quantities projected.

Once foreign aid ceases, the size of the import program will be determined by the level of exports which can be attained. If exports materialize at the rate projected, it may well prove possible to utilize imports in corresponding volume. If not, it will become necessary to adjust the import program to the availability of foreign exchange revenue as well as to that of physical supply.

In the case of the French Zone, the picture is quite different. It is, in fact, difficult to envisage the attainment of recovery at all on the basis of the import level projected, or the achievement of a 60 percent increase in the level of production when imports of industrial materials are to rise by less than 30 percent. Since the Bizone and French Zone are to constitute a single economic unit, recovery in these two areas should keep pace. Food standards must be approximately the same as long as there are no barriers between the zones. A greater improvement in food quality is necessary to conform with the Bizonal pattern. In the case of industrial materials it is necessary to supply the plants in the French Zone and the Bizone at approximately the same relative levels.

It is essential that the two programs be brought into line and, while some reduction may be foreseen in the import program for the Bizone, a large increase in the French Zone program is imperative.

## 4. Export Objectives.

As in the case of the import program, the long-term export program prepared by the Bizonal Authorities seems based upon somewhat optimistic assumptions. There may be considerable difficulty, for example, in finding markets for the amount of machinery, chemicals and textiles which it is planned to sell abroad. If these export goals cannot be realized, it will, of course, be necessary to modify the import program correspondingly. Some degree of modification of both sides should be possible without upsetting the balance.

On the other hand, the French Zone export program seems too low. For example, exports of chemicals from the French Zone before the War amounted to RM 110—over $80 million at 1948 prices. The anticipated level for 1952/3 is only $70 million, showing a decrease in spite

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of the fact that production in the industry is expected to be 40 percent higher than before the war. Exports of machinery and metal products in 1947 amounted to about RM 165 million—or over $100 million at 1948 prices. Exports for 1952/3 are set at only $80 million. Here again it is believed that the figure should be higher rather than lower than pre-war. It has already been recommended that production targets for this industry be raised.

In both the Bizone and the French Zone there is one important potential source of revenue, whose contribution seems to have been underestimated. Western Germany can offer exceptional advantages to tourists in its various watering spas, in the Bavarian Alps and the Black Forest. It has the finest trunk and touring highways in Europe. As suggested in the preceding Chapter (see page 41) it should be possible to promote tourism extensively and to devote substantial immediate investment to the preparation of the necessary accommodations, including special arrangements for the food and other requirements for the tourists. Low promotional rates should be offered to attract travelers. If such a program is pushed vigorously, income from tourism in 1952/3 could well rise to double the levels estimated.

## Balance of Payments.

On the basis of the programs, as presented, it is evident that the major balance-of-payments problem foreseen by the responsible authorities in both areas is not that of achieving an over-all balance of accounts, but rather that of obtaining the necessary dollars.

It may well be, in fact, that the assumptions in the Bizonal program, contemplating trade with Eastern Europe at the rate of $580 million in both directions by 1952/3, will not be possible to achieve. If trade relatfons with Eastern Europe should not improve to an extent permit ting an interchange at this level, it would be necessary to find other sources for the agricultural products and, in good part, these sources would have to be in the Western Hemsphere. On the other hand, the Western Hemisphere might not be able to absorb the quantities of Ger man exports of machinery, chemicals and similar products, which are now programmed for delivery to Eastern Europe. This would result in a con siderable further unbalancing of the dollar account.

The Western German authorities must make every effort to con tribute to the solution of this problem, by limiting imports from the Western Hemsphere and increasing dollar exports, and by reorienting their economic and industrial structure accordingly. As already indi cated, a considerable reduction in import targets may be feasible without endangering the basic recovery objectives; balancing imports and exports at a somewhat lower level would probably also improve the dollar position appreciably. It is highly improbable, however, that Western Germany can avoid incurring a substantial, continuing dollar deficit, though careful planning might reduce its magnitude significantly.

The full solution of this difficulty does not lie within Germany alone; it is to be hoped that it can be solved within the cooperative framework of the OEEC.

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### 5. Investment Program.

The Bizonal long-term program assumes that gross investment in 1952/3 will be about 17 percent higher than in 1936, and that it will represent about 23 percent of the Gross Available Product as compared with 20 percent in the pre-war year.

Considering the great need for consumption goods within Germany, it is doubtful that a significantly higher investment program would be practicable. In comparing the objective with pre-war, it should be borne in mind that investment in 1936 was at a very high level, reflecting pressure by the Nazi authorities in their drive to prepare German industry for war.

The general direction of the investment program seems compatible with the objectives to be obtained, although it is possible that there should be much greater emphasis upon housing, and upon reconstruction generally. It is possible, also, that the investment programs for individual industries would be modified by closer coordination of the programs for the Bizone and the French Zone. For example, the petroleum refining program for the Bizone should provide for meeting French Zone needs for finished products; plans for the textile and leather industries of the Bizone should contemplate making full use of French Zone facilities.

The real problem in the field of investment will be largely related to the means required for the realization of the program rather than to its magnitude or character. To the extent that it depends upon voluntary investment, heroic efforts will be required to enlist the necessary support among both business and individuals. Individual initiative has been stifled for so long a period under the Nazi Regime, during the War, and subsequently under military occupation, that a major change in thinking and habits will be needed if the program is to succeed. The instinct to save has similarly suffered from the first inflation, from the War, and now because of the East-West tension.

Business savings are still small and are largely absorbed by repair and retooling rather than in new investment. Sources of long-term capital are still almost non-existent.

The present inflationary tendency, following the abolition of most controls, does not encourage savings. Some degree of price stability is essential before individuals will change from buying for the present to saving for the future.

Under the circumstances, the realization of the investment program, which is itself essential to sound recovery, will require vigorous and coordinated action, by all agencies of government. The inflationary trend must be arrested. Sources of long-term capital must be provided and savings plans adequate to change the habits of a generation which has become unaccustomed to private savings must be developed quickly and pushed effectively.

### 6. Fiscal Policy.

The plan for the Bizone contemplates practically no increase in current consumption by government ($4 billion in 1948 and $4.2 billion in 1952/3). This would leave government consumption in 1952/3 at 72 per-

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cent of the 1936 level and at 13 percent of the expected 1952/3 Gross National Product.

The reduction of government expenses in Germany is imperative if the resources necessary to productive effort are to be adequate. Under the Nazi Regime a huge bureaucracy was developed, both to implement party policy and to administer the detailed controls which had been imposed over every phase of economic and personal life. This has disappeared, but the bureaucratic tradition in Germany remains strong. At present it is difficult to find government officials of the caliber needed for the unusually complex tasks they are performing and will have to perform. Initiative and responsibility must be developed, as well as administrative skill. Administrative procedures are often wasteful or cumbersome. Modern public management methods, such as have been developed in the last decades in the United States have not yet been introduced in Germany. Attempts by the Military Government to revise the civil service and administrative system have thus far met with only limited success.

It is not to be expected that this situation will improve immediately after the establishment of a provisional government of Western Germany. In fact, the reverse may be true initially as the government starts to take over the tasks which are now performed by the Occupation Authorities, and as the stabilizing influence of the latter is removed.

As in the case of the investment program, the principal problem in reducing governmental expenditure will be that of execution rather than planning. It may even be possible to reduce the share of governmental expenditure still further, to a level below that of 1948. This may be facilitated by a probable reduction in the burden of occupation costs and by the relaxation and simplification of economic controls of all types.

On the income side, the proposal to increase certain kinds of taxes seems reasonable. These increases must not be such as to affect business savings adversely. In view of the need of holding down consumption, particularly in luxuries, taxes to discourage such expenditures may be highly desirable. Enforcement of tax laws must be pushed with the utmost vigor.

In addition, the complete elimination of subsidies should be stressed, both to reduce the cost of government and to limit personal consumption. The principal problems in this field are again likely to be those of execution rather than of conception. The course of action outlined in the program is logical, but it involves many steps which may prove difficult to implement politically.

In the general field of money and prices, the program contemplates that further price and wage adjustments will have to be achieved before the structure of Bizonal prices is fully adjusted to the world market. As stated in the program, the question of possible readjustment of the external exchange rate will have to be examined after these adjustments have taken place. Any immediate action in this direction would be premature. The internal price level for food and agricultural products still represents one of the major present distor-

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tions existing between the structure of internal German prices and that
of world markets.

7. Use of Manpower.

In the French Zone, where the population has declined since 1939, it is expected that the available working force in 1952/3 will be no larger than pre-war. In the Bizone, however, the situation will be quite different, and the problem of utilizing manpower effectively is crucial.

Under the long-term program submitted by the Bizonal Authorities,
total labor requirements in industry, trade and agriculture in January
1953 will be 19.1 million, while the available labor supply will be about
21.3 million. This would leave a surplus of more than 2 million persons,
about 3/4 of whom would be female.

The program points out, however, that this surplus is in part merely
statistical and that it is hoped that a considerable portion of these
workers can find employment in handicrafts and in minor industries
and that efforts will be made to provide employment for the re-
mainder in work, such as clearance of war debris, not requiring the
use of critical materials essential for the long-term program. This
indicated excess of manpower reflects, of course, the large increase in
population as compared with the conservatively estimated industrial
production.

Germany's most important economic resource is her manpower. Under the circumstances, it would appear essential that the plans for economic recovery contemplate the full and effective use of this manpower and that any plan which indicates a large surplus by 1952/3, should be re-examined carefully. Some increase in labor requirements would, of course, result from the suggested increase in production targets. Considerable further development of the handicraft industry might be possible, particularly along directions that would provide for exports of handicraft products.

It would appear especially urgent to envisage much higher employ-
ment in the building trades. The program calls for 900,000 construction
workers and building expenditures at the rate of DM 4.5 billion (about
$1,350 million annually). Limitations on the rate of reconstruction are
described in the program as: (a) The proportion of the national income
which can be expended annually on reconstruction and rubble clearance.
(b) Availability of building labor. (c) Availability of timber and steel.

It is recognized that expenditures for work which is not immediately
productive, such as rubble clearance, intensifies inflationary pressures,
particularly since a large part of this work might have to be financed
by government funds. Nevertheless, the need is sufficiently important
to make it desirable that expenditures be at a considerably higher
level than planned, even though this might require drastic counter-
measures to balance the accounts, such as increases in taxation.

The availability of building labor should not prove an insuperable
obstacle. By 1952 sufficient time should have elapsed to permit the
training of an adequate force, particularly in view of the general labor
surplus.

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The availability of construction materials, including steel and timber, must, of course, be taken into account in the development of reconstruction plans. There are, however, considerable possibilities of material conservation in this field, even though they may require some change from traditional German practice. It may be possible to save steel, for example, by increasing the use of stone and reinforced concrete. Technical research should suggest possibilities for reducing timber requirements. In general, a considerable acceleration of the reconstruction program should afford the best opportunities for the efficient use of the Bizonal labor supply.

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# Chapter IV—Justification of ECA Aid

## I—SUPPLEMENTAL REQUIREMENTS FOR 1948/9

As described in Chapter II, sustained, vigorous economic recovery in Western Germany did not start till 1948. Until the end of 1947, imports of both food and industrial materials had been insufficient to provide the stimulus needed for revival. Consumption levels for the population were far below those required to sustain labor efficiency. The availability of consumer goods was so restricted that normal economic incentives to increase earnings were virtually non-existent. Neither the raw materials nor the fuel needed by the area's industries were available in quantities sufficient to permit industrial expansion. Upon the initiation of the European Recovery Program, it became possible for both the Bizone and the French Zone to plan for economic recovery. The programs submitted by these two areas for fiscal year 1948/9, and their requirements for the balance of the fiscal year, are described below.

### A. BIZONE.

Following the end of the war it would have been impossible to prevent actual widespread starvation in the United States and United Kingdom occupation zones of Germany without very substantial foreign assistance. It had been originally contemplated in the fusion agreement, under which the two zones were integrated into an economic unit, that this assistance would be limited to the procurement of the supplies of food, feed, seed, fertilizer, and petroleum products necessary to prevent actual disease and unrest. The requirements of the area for the industrial raw materials and equipment essential to industrial recovery were to be paid for out of the proceeds of exports.

Under this procedure, which prevailed until the beginning of ECA aid in 1948, recovery was necessarily slow. Additional assistance was essential to move the Bizonal economy off dead-center. Such assistance was required to provide additional food—over the minimum needed to prevent disease and unrest—in order to improve the physical condition and morale of the working population and thus achieve increased working efficiency. Higher imports of raw materials were needed to support industrial expansion, and some imports of equipment were required to eliminate bottlenecks which had been hampering recovery particularly in the fields of mining, transport, and electric power.

The program submitted by the Bizonal authorities for fiscal 1948/49 reflects these considerations and provides for total foreign exchange expenditures for the year of $1,851 million, of which $1,599 million represents commodity imports, $205 million transport, and $47 million other invisibles. Slightly more than half of the total imports of the area represent food, feed, seed, and tobacco. Imports of equipment—particularly transport—amount to $111 million and the bulk of the remainder represents raw materials essential to industrial recovery.

About 60 percent of the total commodity imports are programmed from the dollar area. Over 75 percent of these dollar imports are food,

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textile raw materials, and other agricultural products, since non-dollar sources for most of these are necessarily limited.

Total foreign exchange revenue was estimated at $743 million, of which $666 million represent commodity exports. Coal constitutes more than 40 percent of the total commodity exports with the remainder comprising a wide range of machinery, chemicals, textiles, steel scrap and other products. Only a small part of these exports—about eight percent—could find markets in the Western Hemisphere.

The total dollar deficit as estimated by the Bizonal authorities amounted to $989 million (including a debt of $12 million to the Commodity Credit Corporation) of which $637 million was to be financed by direct appropriations through the Department of the Army, leaving $352 million for ECA financing. On the non-dollar side the net deficit was $122 million, of which $70 million was to be covered by the sterling contribution by the British Treasury, leaving a net deficit with other participating countries of $52 million.

Negotiations with other participants, however, indicated that it was doubtful whether the Bizone would be able to purchase goods in the participating area in the amount desired. Accordingly, the OEEC Council recommended that the Bizone be granted $414 million in total dollar aid against which it would give up $10 million of net drawing rights to other participants. The actual trend of the Bizone's European trade in the latter part of 1948 has confirmed the validity of this OEEC judgment that the Bizone would not show a deficit in its accounts with other participating countries (over and above that covered by the $70 million sterling contribution by the United Kingdom).

During the latter part of 1948 a number of important changes occurred affecting the position of the Bizone. Industrial production has expanded well ahead of schedule. Exports to all destinations have also substantially exceeded the program, but this increase has been primarily in trade with other participating countries; it is unlikely that exports to the Western Hemisphere will exceed the estimates of the Bizonal authorities by a substantial margin. Crops were considerably better than had been expected. On the other hand, there has been a sharp reduction in the amount of GARIOA aid to the Bizone, which was reduced from $637 million, as originally estimated, to $573 million, or by about $64 million. This reduction in GARIOA aid is only partly compensated by the better crops and by a possible small increase in dollar export revenue.

Under the circumstances, and in order to maintain the pace of recovery in the Bizone, it is necessary that continued ECA aid be made available for the remainder of the fiscal year. The Bizone received direct dollar aid of $109 million in the second quarter of 1948. The aid for the current fiscal year, granted out of present appropriations, amounts to $307.1 million, of which $225.5 million is direct and $81.6 conditional. Consequently, a supplemental allotment of $103.5 million is needed for the second calendar quarter of 1949 to provide a total of $410.6 million for the fiscal year. It should be emphasized that total dollar aid to the Bizone on this basis would be about $67 million less than originally programmed. The position is summarized in Table I.

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Table I. Bizone
Illustrative Balance of Payments for 1948/49 (ECA Estimate)
(In millions of dollars)

<table><thead><tr><th rowspan="2"></th><th colspan="3">Dollar account</th><th rowspan="2">Non-<br>dollar<br>account</th><th rowspan="2">Grand<br>total</th></tr><tr><th>U.S.</th><th>Other</th><th>Total</th></tr></thead><tbody><tr><td>1. Imports</td><td>720.8</td><td>209.9</td><td>930.7</td><td>742.8</td><td>1,673.5</td></tr><tr><td>2. Exports</td><td>33.0</td><td>6.0</td><td>39.0</td><td>697.8</td><td>736.8</td></tr><tr><td>3. Merchandise balance</td><td>-687.8</td><td>-203.9</td><td>-891.7</td><td>-45.0</td><td>-936.7</td></tr><tr><td>4. Invisibles (net)</td><td>-79.0</td><td>-6.0</td><td>-85.0</td><td>+55.0<sup>a</sup></td><td>-30.0</td></tr><tr><td>5. Current account balance</td><td>-766.8</td><td>-209.9</td><td>-976.7</td><td>+10.0</td><td>-966.7</td></tr><tr><td>6. Settlements</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>7. Capital transactions</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;a. Non-ECA financing</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;b. Repayments</td><td>-12.0</td><td>—</td><td>-12.0</td><td>—</td><td>—</td></tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;c. Other (GARIOA)</td><td>+573.4</td><td>—</td><td>+573.4</td><td>—</td><td>—</td></tr><tr><td>8. Net position</td><td>-205.4</td><td>-209.9</td><td>-415.3</td><td>—</td><td>—</td></tr><tr><td>9. Est. requirements for<br>ECA aid</td><td>—</td><td>—</td><td>410.6</td><td>—</td><td>—</td></tr><tr><td>10. Uncovered deficit</td><td>—</td><td>—</td><td>4.7</td><td>—</td><td>—</td></tr></tbody></table>

a This takes account of estimated U. K. contribution of $70 million to Bizone.

## B. FRENCH ZONE.

Until the end of 1947 the French Zone of Germany was administered by the Occupation Authorities on a self-supporting basis. In view of the internal budgetary difficulties confronting the French Government, it was not felt that it could provide any form of deficit financing for its area of occupation. As a result, imports were held to a minimum and exports were pushed to the utmost. Consumption levels were kept considerably lower than those in the Bizone. Natural resources were exploited to the maximum, particularly in the case of the timber of the Black Forest where cutting was maintained at a rate well above annual growth. Stocks of raw materials remaining after the end of the War were drawn upon as far as possible.

Even with this policy the French Zone could not have been maintained on a self-supporting basis had it not been for the coal and steel resources of the Saar which provided exports substantially in excess of the food and raw material requirements of the Saar population. After the integration of the Saar economy into that of France, this source of foreign exchange was no longer available.

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As a result of these developments, it became necessary to plan for the economic recovery of the French Zone on a basis parallel to that of the Bizone and for the use of its resources on the basis of continuing yield. Depleted pipelines of raw materials had to be replaced. This could not be done without foreign assistance. Accordingly, the French Occupation authorities submitted a request for ECA aid for fiscal year 1948/49 in the amount of $100 million. This was approved by the OEEC and by the ECA.

The program as submitted by the French Zone for fiscal 1948/49 contemplates total expenditures of $253 million, of which $24 million represent transport and invisibles and $229 million represent commodities. Of the commodity imports, $87 million—or over one-third—represent food, feed, seed and fertilizer needed to support a ration level of 1850 calories per day for normal consumers, or the same as that in the Bizone. In addition, the import program includes about $35 million for textile materials and hides and skins required to permit the textile and leather industries of the area to provide, after allowing for some exports, a minimum of shoes and clothing for the population. (According to the program, textile consumption is estimated at about one-third of pre-war.) Iron and steel and non-ferrous metals represent another $43 million; these materials are needed principally to support the machinery industry of the French Zone which is closely linked to that of the Bizone. Imports of equipment, particularly transport, are another major item. The bulk of the dollar imports ($99 million) represent food and agricultural commodities, including textile raw materials, for which adequate non-dollar sources are not available.

Total foreign exchange earnings of the French Zone are estimated at $152 million, of which $145 million represent commodities. The largest items in the export program are lumber and chemicals. Under the program, French Zone exports for fiscal 1948/49, without the Saar, would be about 20 percent greater than those from the French Zone, including the Saar, in 1947. Because of the nature of these exports, only $10 million could be programmed to the dollar area. The remainder of $135 million in commodities, and $7 million in invisibles, is destined largely to other participating countries, particularly France.

With a dollar invisible deficit of $12 million, this program left the French Zone with a total dollar deficit of about $101 million. Accounts with other participating countries were expected to be virtually in balance.

As a result of the aid which has been received so far, there has been considerable progress within the French Zone. The official food ration has been raised to parity with that of the Bizone. Industrial production has moved ahead substantially, partly as a result of the aid received and partly reflecting the stimulus of the currency conversion. Manufacturing production in October 1948 amounted to 66 percent of the 1936 rate, representing a marked improvement since the beginning of the year but still remaining about 12 percent below the Bizone. The

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metal and metal-working industries were particularly retarded as were the consumer goods industries such as leather and textiles.

The amount of aid provided in the program for the French Zone is regarded as the minimum needed to permit even a moderate resumption of industrial activity. On a per-capita rate it is considerably lower than that provided for the Bizone during 1948/49, despite the fact that the French Zone would have required proportionately more assistance in order to permit it to accelerate its progress from its relatively more depressed level.

The French Zone received a direct grant of $20 million in the second calendar quarter of 1948. The amount of aid which has been allotted to the French Zone out of the ECA appropriation since the beginning of the fiscal year has been $72.3 million (of which $61.2 million direct grant and $11.1 million conditional aid). An additional $26.9 million is therefore required to complete the program for the remainder of the fiscal year. The estimated balance of payments is shown in Table 2.

Table 2. French Zone.
Illustrative Balance of Payments for 1948/49 (ECA Estimate)
(In millions of dollars)

<table><thead><tr><th rowspan="2"></th><th colspan="3">Dollar Account</th><th rowspan="2">Non-Dollar Account</th><th rowspan="2">Grand Total</th></tr><tr><th>U.S.</th><th>Other</th><th>Total</th></tr></thead><tbody><tr><td>1. Imports</td><td>77.5</td><td>19.1</td><td>96.6</td><td>178.1</td><td>274.7</td></tr><tr><td>2. Exports</td><td>5.0</td><td>2.5</td><td>7.5</td><td>180.0</td><td>187.5</td></tr><tr><td>3. Merchandise balance</td><td>-72.5</td><td>-16.6</td><td>-89.1</td><td>+1.9</td><td>-87.2</td></tr><tr><td>4. Invisibles (net)</td><td>-9.1</td><td>-3.5</td><td>-12.6</td><td>-2.5</td><td>-15.1</td></tr><tr><td>5. Current account balance</td><td>-81.6</td><td>-20.1</td><td>-101.7</td><td>-0.6</td><td>-102.3</td></tr><tr><td>6. Settlements</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>7. Capital transactions</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;a. Non-ECA financing</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;b. Repayments</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>&nbsp;&nbsp;&nbsp;&nbsp;c. Other</td><td>—</td><td>—</td><td>—</td><td>—</td><td>—</td></tr><tr><td>8. Net Position</td><td>-81.6</td><td>-20.1</td><td>-101.7</td><td>—</td><td>—</td></tr><tr><td>9. Est. requirements for U.S. Aid</td><td>—</td><td>—</td><td>99.2</td><td>—</td><td>—</td></tr><tr><td>10. Uncovered deficit</td><td>—</td><td>—</td><td>2.5</td><td>—</td><td>—</td></tr></tbody></table>

## II. Justification of ECA Aid for 1949/50

### A. INTRODUCTION.

The strides which have been made by the economy of Western Germany during 1948 have set the stage for considerable further improvement for the fiscal year 1949/50. For the first time since the surrender, the Western Germany economy is again a "going concern." By the middle of 1950, if adequate aid is forthcoming, Western Germany should be able to restore its industrial production to a level within 10 percent of 1936 and to provide for its population a standard of living which, while well below that of 1936, would still be sufficiently improved to constitute a real incentive for further effort.

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The 1949/50 programs for the Bizone and the French Zone have been submitted separately. While both show roughly the same degree of progress, the present level of economic activity in the French Zone is below that of the Bizone. Consequently, the realization of the plans, as presented, would still leave the French Zone, by the middle of 1950, at an economic level substantially below that of the Bizone.

For reasons which are set forth in detail below, it is believed essential to accelerate the rate for recovery in the French Zone so that the two areas should at least approach equality by the middle of 1950.

In order to permit the achievement of substantial further economic progress during 1949/50, it will be necessary to provide total United States aid to Western Germany, amounting to $996 million. Of this total, $477 million would be provided to the Bizone through the Department of the Army, leaving ECA aid at $519 million. On the basis of present information, about $115 million of this amount would be required for the French Zone, but the final division should await the submission of more closely coordinated programs with revised production and export objectives in order to ensure the maximum results from the assistance granted.

It is believed that the provision of assistance of this magnitude would permit Western Germany to make a substantial and increasing contribution to the recovery of Europe generally.

## B. THE BIZONAL PROGRAM—1949/50.

### 1. Consumption.

The program presented by the Bizonal authorities for 1949/50 shows an estimated increase in the Gross Available Product from $25 billion in 1948/9 to $27 billion in 1949/50. Of the total increase in values, $1.4 billion would go into higher personal consumption expenditures, while $600 million would go into gross investment. Government expenses are expected to remain unchanged.

Expressed as shares of the total product, personal consumption expenses would remain unchanged at 65 percent, gross investment would rise from 19 to 20 percent, while government current purchases would decline slightly from 16 to 15 percent. This trend is shown in Table 3.

Table 3. Bizonal Program—1949/50.

Gross Available Product by Use.

<table><thead><tr><th rowspan="2"></th><th colspan="3">In Billion<br>Dollars<br>(1948 prices)</th><th colspan="3">In Percent of<br>the Total</th><th colspan="3">In Percent<br>of 1936</th></tr><tr><th>1936</th><th>1948-<br>49</th><th>1949-<br>50</th><th>1936</th><th>1948-<br>49</th><th>1949-<br>50</th><th>1936</th><th>1948-<br>49</th><th>1949-<br>50</th></tr></thead><tbody><tr><td>Personal Consumption Expenses</td><td>19.5</td><td>16.2</td><td>17.6</td><td>61</td><td>65</td><td>65</td><td>100</td><td>83</td><td>90</td></tr><tr><td>Gross Investment</td><td>6.6</td><td>4.7</td><td>5.3</td><td>20</td><td>19</td><td>20</td><td>100</td><td>71</td><td>80</td></tr><tr><td>Government Current Purchases<sup>a</sup></td><td>5.8</td><td>4.1</td><td>4.1</td><td>18</td><td>16</td><td>15</td><td>100</td><td>71</td><td>71</td></tr><tr><td>Net Purchases by Foreigners</td><td>.4</td><td>0.0</td><td>0.0</td><td>1</td><td>0</td><td>0</td><td>100</td><td>0</td><td>0</td></tr><tr><td>Total</td><td>32.3</td><td>25.0</td><td>27.0</td><td>100</td><td>100</td><td>100</td><td>100</td><td>77</td><td>84</td></tr></tbody></table>

<sup>a</sup> Government current purchases include current expenses for goods and services only. All public expenses for pensions, social insurance and relief are included in "personal consumption expenses" and government investments are under "gross investment."

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On a per capita basis, it is expected that personal consumption expenditures would rise from $372 in 1948/9 to $399 in 1949/50, or about seven percent. This would still leave the level of personal consumption only 73 percent of pre-war (1936).

According to the plan, the increase in personal consumption would take the form largely of increased availability of manufactured goods, such as shoes and textiles. As regards food consumption levels, the program as originally presented anticipated a reduction of 50 calories in the average ration for 1949/50 as compared with 1948/9, or from 2200 to 2150 calories per day. Subsequently, however, the Department of the Army, in consultation with ECA, has prepared a revised food import program that would provide some improvement in feeding levels during fiscal 1949/50.

The availability of materials for industrial consumption is expected to increase to keep pace with the increased rate of activity, including particularly coal, steel, construction materials, and power. Some improvement is also anticipated in the efficiency of utilization of fuel, power and materials. Present utilization rates are very low in many cases.

## 2. Production Objectives.

The anticipated increase in the Gross Available Product will come principally from industry, where it is expected that output will rise from an estimated $12.0 billion in 1948/9 to $13.8 billion in 1949/50, or by about 15 percent. This would permit the industry of the area to contribute about 51 percent of the total Product, or almost the same ratio as in 1936. Table 4 presents the distribution of the Gross Available Product by origin as presented by the Bizonal Authorities. It shows a small increase in agricultural production, but it was apparently prepared before there had been a full opportunity to appraise the bumper crops of the current year. In fact, therefore, the figure for agricultural production for 1948/9 should be somewhat higher than shown and in excess of that indicated for 1949/50.

Table 4. Bizonal Program—1949/50.
Gross Available Product by Origin.

<table><thead><tr><th rowspan="2"></th><th colspan="3">In billion dollars<br>(1948 prices)</th><th colspan="3">In percent of the<br>total</th><th colspan="3">In percent of 1936</th></tr><tr><th>1938</th><th>1948-<br>49</th><th>1949-<br>50</th><th>1936</th><th>1948-<br>49</th><th>1949-<br>50</th><th>1936</th><th>1948-<br>49</th><th>1949-<br>50</th></tr></thead><tbody><tr><td>Agriculture</td><td>3.8</td><td>3.0</td><td>3.2</td><td>12</td><td>12</td><td>12</td><td>100</td><td>80</td><td>84</td></tr><tr><td>Industry</td><td>17.3</td><td>12.0</td><td>13.8</td><td>53</td><td>48</td><td>51</td><td>100</td><td>69</td><td>79</td></tr><tr><td>Other Domestic<br>Economy</td><td>11.2</td><td>8.9</td><td>9.1</td><td>35</td><td>35</td><td>34</td><td>100</td><td>80</td><td>81</td></tr><tr><td>Foreign Net<br>Contribution</td><td>0.0</td><td>1.1</td><td>.9</td><td>0</td><td>5</td><td>3</td><td>—</td><td>—</td><td>—</td></tr><tr><td>Total</td><td>32.3</td><td>25.0</td><td>27.0</td><td>100</td><td>100</td><td>100</td><td>100</td><td>77</td><td>84</td></tr></tbody></table>

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a. Agriculture.

In carrying out the long-range agricultural objective, it is planned in 1949/50 to increase further the areas planted in bread grains and in root crops, partly at the expense of fodder grains. For all major food crops there will be definite increases in plantings over 1947/8 and 1948/9 levels. Grain plantings will remain well below pre-war, but plantings of other crops will exceed pre-war considerably. The estimates are shown in the following table.

Table 5. Acreage of Principal Crops—Bizone
(Thousand hectares)

<table><thead><tr><th></th><th>1935/8<br>Average</th><th>1947/48</th><th>1948/49</th><th>1949/50</th></tr></thead><tbody><tr><td>Bread grains</td><td>2,499</td><td>2,020</td><td>2,121</td><td>2,200</td></tr><tr><td>Fodder grains</td><td>1,956</td><td>1,615</td><td>NA</td><td>1,569</td></tr><tr><td>Edible Pulses</td><td>14</td><td>33</td><td>40</td><td>45</td></tr><tr><td>Fodder Pulses</td><td>34</td><td>46</td><td>NA</td><td>93</td></tr><tr><td>Potatoes</td><td>940</td><td>967</td><td>1,019</td><td>1,125</td></tr><tr><td>Sugar Beets</td><td>119</td><td>148</td><td>146</td><td>152</td></tr></tbody><tfoot><tr><td>Total</td><td>5,562</td><td>4,836</td><td>NA</td><td>5,184</td></tr></tfoot></table>

The effort to increase yields per hectare will continue. It is planned to increase the application of fertilizer and it is believed that, for the first time, world availability of nitrates and phosphates will be adequate to permit the necessary imports. Special attention is being directed to the improvement of cultivation by the adoption of new agricultural methods.

Taking into account the small increase in population, the Bizonal plan assumed that actual output would provide about 1,100 calories of rationed food per person per day for the non-farm consumer. Subsequent revisions in the fodder import program would provide about 60 calories per day additional.

b. Industrial Production.

The program, as submitted by the Bizonal Authorities, estimated that the general level of production would average 80 percent of the 1936 rate during 1949/50. This represents an increase of about 20 percent over the level originally forecast for fiscal 1948/9, but only a very much narrower improvement over the rate actually attained during the last quarter of 1948. Output of hard coal would average 343,000 tons per day, about 10 percent below the 1936 rate and 20 percent under the goal for 1952/3. Production of crude steel would rise to over nine million tons for the fiscal year. Generation of electric power would amount to 32 billion KWH, well above pre-war levels. There would be a large increase in petroleum refining.

In the field of transportation 25,000 new freight cars would be built. By the end of the fiscal year, according to the program, all repairable inland water craft would be back in service, including 353,000 tons of sunk or war-damaged craft, and 28,000 HP of tugs.

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c. Imports.

The 1949/50 import program as originally presented contemplated a total foreign exchange expenditure of $2085 million, an increase of about 13 percent over the 1948/9 plan. Commodity imports alone were projected at about $1849 million, an increase of about 15 percent as compared with the program for the current fiscal year. The programs for the two periods are shown in detail in Table 6, and their relative composition by major commodity groups is compared in Table 7.

Table 6. BIZONAL PROGRAM SUBMISSION
Comparison of Annual Import Programs—(In million dollars FOB)

<table><thead><tr><th rowspan="2"></th><th colspan="2">Total</th><th colspan="2">Western Hemisphere and other non-participating countries</th><th colspan="2">Other participating countries, and non-participating Sterling Area</th></tr><tr><th>1948/49</th><th>1949/50</th><th>1948/49</th><th>1949/50</th><th>1948/49</th><th>1949/50</th></tr></thead><tbody><tr><td><strong>Agricultural products</strong></td><td>827.8</td><td>864.2</td><td>651.2</td><td>638.8</td><td>176.6</td><td>225.4</td></tr><tr><td>Bread grains</td><td>295.2</td><td>312.5</td><td>295.2</td><td>312.5</td><td>0.0</td><td>0.0</td></tr><tr><td>Coarse grains</td><td>87.7</td><td>76.5</td><td>87.7</td><td>73.9</td><td>0.0</td><td>0.0</td></tr><tr><td>Fats and oils</td><td>152.8</td><td>188.6</td><td>105.5</td><td>120.5</td><td>47.3</td><td>68.1</td></tr><tr><td>Meats & dairy products</td><td>23.4</td><td>35.5</td><td>11.6</td><td>22.9</td><td>11.8</td><td>12.6</td></tr><tr><td>Tobacco</td><td>31.7</td><td>36.1</td><td>19.2</td><td>20.5</td><td>12.5</td><td>15.6</td></tr><tr><td>All other</td><td>237.0</td><td>215.0</td><td>132.0</td><td>88.5</td><td>105.0</td><td>126.5</td></tr><tr><td><strong>Mineral solid fuels</strong></td><td>6.8</td><td>6.2<sup>a</sup></td><td>6.2</td><td>6.2</td><td>.6</td><td>0.0<sup>a</sup></td></tr><tr><td><strong>Oil and petroleum products</strong></td><td>43.5</td><td>32.3</td><td>38.0</td><td>32.3</td><td>5.5</td><td>0.0</td></tr><tr><td>Crude oil</td><td>11.1</td><td>32.3</td><td>56.0</td><td>32.3</td><td>5.5</td><td>0.0</td></tr><tr><td>Petroleum products</td><td>32.4</td><td>0.0</td><td>32.4</td><td>0.0</td><td>0.0</td><td>0.0</td></tr><tr><td><strong>Ores and metals</strong></td><td>131.2</td><td>212.4</td><td>34.2</td><td>62.9</td><td>97.0</td><td>149.5</td></tr><tr><td>Steel making materials</td><td>40.5</td><td>49.1</td><td>8.6</td><td>4.6</td><td>31.9</td><td>44.5</td></tr><tr><td>Finished steel</td><td>27.5</td><td>60.9</td><td>1.5</td><td>5.8</td><td>26.0</td><td>55.1</td></tr><tr><td>Copper</td><td>9.3</td><td>29.5</td><td>7.7</td><td>22.5</td><td>1.6</td><td>7.0</td></tr><tr><td>Other ores and non-ferrous metals</td><td>53.9</td><td>72.9</td><td>16.4</td><td>30.0</td><td>37.5</td><td>42.9</td></tr><tr><td><strong>Equipment</strong></td><td>110.9</td><td>93.5</td><td>34.6</td><td>47.8</td><td>76.3</td><td>45.7</td></tr><tr><td><strong>Textile materials & products</strong></td><td>176.5</td><td>271.4</td><td>85.8</td><td>139.9</td><td>90.7</td><td>131.5</td></tr><tr><td>Raw cotton</td><td>78.8</td><td>128.6</td><td>67.2</td><td>113.5</td><td>11.6</td><td>15.1</td></tr><tr><td>Raw wool</td><td>34.7</td><td>47.6</td><td>7.0</td><td>10.7</td><td>27.7</td><td>36.9</td></tr><tr><td>Other textile materials and manufactured products</td><td>63.0</td><td>95.2</td><td>11.6</td><td>15.7</td><td>51.4</td><td>79.5</td></tr><tr><td><strong>Other goods</strong></td><td>301.4</td><td>369.0</td><td>108.3</td><td>118.0</td><td>193.1</td><td>251.0</td></tr><tr><td>Timber</td><td>24.1</td><td>30.9</td><td>8.5</td><td>11.7</td><td>15.6</td><td>19.2</td></tr><tr><td>Fertilizers</td><td>39.1</td><td>29.8</td><td>10.0</td><td>3.8</td><td>29.1</td><td>26.0</td></tr><tr><td>Other products</td><td>238.2</td><td>308.3<sup>b</sup></td><td>89.8</td><td>102.5</td><td>148.4</td><td>205.8<sup>b</sup></td></tr></tbody><tfoot><tr><td><strong>TOTAL</strong></td><td>1598.1</td><td>1849.0</td><td>958.3</td><td>1045.9</td><td>639.8</td><td>803.1</td></tr></tfoot></table>

<sup>a</sup> Excluding about $42.5 million coal imports from the U. K. balanced by equivalent shipment, from the Bizone to OPC.

<sup>b</sup> Including $27 million electric power and gas.

Table 7. Distribution of Imports by Commodity Groups—Bizone

<table><thead><tr><th></th><th colspan="3">Percent of total</th></tr><tr><th></th><th>1936</th><th>1948/49</th><th>1949/50</th></tr></thead><tbody><tr><td>Food and agriculture</td><td>34</td><td>52</td><td>47</td></tr><tr><td>Industrial materials—total</td><td>66</td><td>48</td><td>53</td></tr><tr><td>Raw materials</td><td>(37)</td><td>(20)</td><td>(35)</td></tr><tr><td>Semi-finished goods</td><td>(18)</td><td>(17)</td><td>(12)</td></tr><tr><td>Finished products</td><td>(11)</td><td>(11)</td><td>(6)</td></tr><tr><td>Total—all imports</td><td>100</td><td>100</td><td>100</td></tr></tbody></table>

As is evident from the tables, there is a marked shift in the composition of the import program with imports of a recovery character

87

increasing greatly in relative importance during the next fiscal year. Imports of industrial raw materials, in particular, would be about twice as great in 1949/50 as in 1948/9, rising by more than $300 million. At the same time, imports of semi-finished and finished products would decline substantially. For example, increased domestic refining of petroleum will permit a shift from imports of refined products to crude oil during the year, with a substantial resultant saving in cost. Imports of fertilizer will be cut as domestic production increases. The equipment import program is also lower, reflecting higher machinery output in the Bizone.

Since the program was originally presented, the Bizonal Authorities and the Department of the Army, in agreement with ECA, have determined that it was necessary to increase the food import program to provide for some improvement in the ration levels during 1949/50. In general, the food import program has been increased by about $60 million, excluding freight.

During 1949/50 there will be a considerable shift in the pattern of imports by areas of origin. Imports from the Western Hemisphere will be lower, while imports from other participating countries and from other non-participants—particularly Eastern Europe—would increase.

### d. Exports.

Total foreign exchange revenue on current account was originally programmed at $1104 million, of which commodity exports would have been about $1008 million. The composition of commodity exports in the original program is shown below compared with the corresponding figures for 1948/9:

## Table 8.

### BIZONE

#### Comparison of Annual Export Programs
(In million dollars)

<table><thead><tr><th></th><th colspan="2">TOTAL</th></tr><tr><th></th><th>1948/9</th><th>1949/50</th></tr></thead><tbody><tr><td>Agricultural products</td><td>10.0</td><td>22.9</td></tr><tr><td>Mineral solid fuels</td><td>275.0</td><td>330.3<sup>a</sup></td></tr><tr><td>Oil and petroleum products</td><td>0.0</td><td>12.0</td></tr><tr><td>Ores and metals</td><td>68.5</td><td>88.2</td></tr><tr><td>Machinery</td><td>103.0</td><td>199.4</td></tr><tr><td>Textile materials and products</td><td>56.5</td><td>93.4</td></tr><tr><td>Chemicals</td><td>26.8</td><td>57.8</td></tr><tr><td>Other products</td><td>126.0</td><td>204.0</td></tr></tbody><tfoot><tr><td>Total</td><td>665.8</td><td>1008.0</td></tr></tfoot></table>

<sup>a</sup> Excludes about $42.5 million additional coal exports balancing equivalent receipts from the U.K.

As shown in the table, the over-all increase as compared with 1948/9 was estimated at about 50 percent. This would be accounted for prin-

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cipally by a large expansion in the export of manufactured goods, particularly machinery, chemicals and textiles, whose combined export levels were expected to be twice those shown in the program for 1948/9.

Subsequently, the large increase in exports, which has occurred during the last half of 1948, has made it possible to augment these estimates substantially. It is now believed that exports to all destinations will be about $85 million greater than the original program forecast. Most of this increase would be on shipments to other participating countries, though part of it would be to Eastern Europe to pay for larger imports from that area.

Invisible exports are estimated at $50 million, compared with $38 million for 1948/9. The increase is due to inclusion in this estimate of $15 million for receipts from tourism.

### e. Balance of Payments.

The over-all balance of payments is expected to improve substantially during fiscal year 1949/50 as compared with the 1948/9 program. The net deficit on current account on the basis of the original program would decline to $981 million in all currencies as compared with $1108 million estimated for fiscal year 1948/9.

Table 9. Bizonal Program Submission
Balance of Payments—All Currencies—1948/9 and 1949/50
(In million dollars)

<table><thead><tr><th></th><th>1948/9</th><th>1949/50</th></tr></thead><tbody><tr><td>Total current expenditures</td><td>1,851</td><td>2,085</td></tr><tr><td>Total current receipts</td><td>743</td><td>1,104</td></tr><tr><td>Deficit on current account</td><td>1,108</td><td>981</td></tr><tr><td>UK contribution</td><td>70</td><td>7</td></tr><tr><td>Net current deficit</td><td>1,038</td><td>911</td></tr><tr><td>Net capital movement</td><td>-3</td><td>+44</td></tr><tr><td>Net deficit</td><td>1,041</td><td>867</td></tr><tr><td>GARIOA</td><td>637</td><td>540<sup>a</sup></td></tr><tr><td>ECA aid (net)</td><td>404</td><td>327</td></tr></tbody></table>

<sup>a</sup> As estimated at time program was submitted. The estimate has since been cut to $477 million.

<sup>b</sup> Plus $45 million conditional aid.

It was estimated that about $70 million of this deficit would be covered by the United Kingdom sterling contribution, leaving a net remaining deficit on current account of $911 million. Taking account of capital movements, the net deficit in all currencies, after the sterling contribution, was estimated at $867 million for 1949/50 as compared with $1041 million in the 1948/9 program. The expected capital movement includes $24 million German assets from Austria, Sweden, Denmark and possibly other countries. The German assets from Sweden, represent "Safehaven" funds, which were transferred to Sweden by German nationals during the War for safekeeping. The resources in Austria and Denmark represent unsettled debts on current trading account. In addition, it is

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expected that foreign investment in the Bizone may reach $20 million. Table 9 compares the estimated over-all balance of payments for 1948/9 and 1949/50 as originally programmed. It indicates the deficit financing anticipated by the Bizonal Authorities at this time.

Subsequent changes in the estimated Balance of Payments are discussed below (pp. 98, 99).

## f. Fiscal and Credit Measures.

It will be necessary during 1949/50 to initiate a large part of the long-term capital investment program. Table 11 presents capital investment targets for the year as compared with 1948/49. It is evident that capital investment is expected to rise by about 50 percent during the year.

According to the program, general internal policy would be directed essentially toward the restoration of a free economy. The principal instruments of economic control would be the regulation of the supply of currency and credit, coupled with a policy of minimum government expenditure and the encouragement of voluntary private savings. Direct controls would, however, be maintained over food rations, rents and the distribution of coal and steel and some other scarce materials.

Tax policy would be directed to discourage spending on luxuries and to provide revenue for private investment. It may also be necessary to increase taxation or to pursue a program of forced loans to provide funds for essential public investments, particularly in the electric power and transport industries.

Exports would be encouraged by measures to ensure that the price returns from export trade would be favorable in comparison with the internal market. Consideration would also be given to preferential allotments of coal, power and steel to firms which make important contributions to the export trade and the extension of preferential credit through the Reconstruction Loan Bank to manufacturers and merchants engaged in export.

Table 11. Capital Investment Program—Bizone
Comparative Net Investments by Industry Groups
(In million dollars)

<table><thead><tr><th rowspan="2">Group</th><th rowspan="2">Total<br>Program<br>July/1948-<br>June/1952</th><th rowspan="2">Outside<br>Capital</th><th colspan="2">1948/49</th><th colspan="2">1949/50</th></tr><tr><th>Financing Total</th><th>Self-<sup>a</sup></th><th>Outside<br>Capital</th><th>Self-<sup>a</sup></th></tr></thead><tbody><tr><td>Mining</td><td>600</td><td>90</td><td>48</td><td>138</td><td>180</td><td>75</td><td>255</td></tr><tr><td>Public utilities</td><td>1,200</td><td>210</td><td>18</td><td>228</td><td>315</td><td>22</td><td>337</td></tr><tr><td>Metals and metal products</td><td>327</td><td>17</td><td>25</td><td>42</td><td>25</td><td>36</td><td>61</td></tr><tr><td>Chemicals</td><td>330</td><td>21</td><td>23</td><td>44</td><td>120</td><td>21</td><td>141</td></tr><tr><td>Machinery and optics</td><td>238</td><td>21</td><td>14</td><td>35</td><td>106</td><td>11</td><td>117</td></tr><tr><td>Building industry</td><td>128</td><td>3</td><td>na</td><td>na</td><td>9</td><td>na</td><td>na</td></tr><tr><td>Transport and communications</td><td>962</td><td>205</td><td>83</td><td>288</td><td>308</td><td>80</td><td>388</td></tr><tr><td>Agriculture</td><td>450</td><td>18</td><td>very high</td><td>na</td><td>32</td><td>moderate</td><td>na</td></tr><tr><td>Housing and public buildings</td><td>2,130</td><td>60</td><td>very high</td><td>na</td><td>480</td><td>moderate</td><td>na</td></tr><tr><td>Other industries</td><td>1,000</td><td>45</td><td>na</td><td>na</td><td>150</td><td>na</td><td>na</td></tr><tr><td>Allowance for unforeseen costs</td><td>735</td><td>0</td><td>na</td><td>na</td><td>75</td><td>na</td><td>na</td></tr></tbody><tfoot><tr><td>Total net investment</td><td>8,100</td><td>690</td><td>810</td><td>1,500</td><td>1,800</td><td>480</td><td>2,280</td></tr></tfoot></table>

<sup>a</sup> The estimate of total self-financed investment is regarded as reasonably correct, but the breakdown by industries is merely a rough approximation.

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