Reconstruction and Cold War in Germany

The Kreditanstalt f�r Wiederaufbau (1948�1961)

Armin Grünbacher

• Publisher: Routledge
• Year: 2017
• Print ISBN:
  9780815391364
• eBook ISBN:
  9781351150620
• Topic: History
• Subtopic: World History
• Index: History

At the end of the Second World War Germany was devastated; her cities lay in ruins, industrial output was minimal, the economy was in tatters and her territories divided into four zones, each governed by one of the main Allied powers. Yet the rapid onset of the Cold War ensured that the western powers needed to re-establish a strong West German state to act as a bulwark against Soviet influence. In this study the critical role of the Kreditanstalt für Wiederaufbau (KfW) in this process is closely examined. Established by the Anglo-American occupying powers in 1948, the main remit of the KfW was to provide investment for German industry, to help kick-start the economy. Its particular function was to provide loans to key industries that the commercial banks considered too risky or which offered unacceptably low returns. Yet as this study makes clear, its work was from the outset highly politicized, and its role in German reconstruction went much further than simply providing funds for capital investment. Bankrolled mainly by American Marshall Plan counterpart funds, the KfW was viewed in Washington as an essential tool in the wider Western response to the challenges of Soviet communism. As is shown throughout the book, this dual role inevitably caused some difficulties, as national interests could be overridden in favour of Cold War considerations. As Germany's post-war economy revived, this led to further tensions between an increasingly prosperous and self-confident West Germany and the continued interference of the Allied powers, particularly the USA, who had their own Cold War agenda. Utilizing archives in Germany, Britain and the United States, Dr Grünbacher has provided a clear synthesis of this multi-faceted and complex subject. By approaching the economic development of Federal Germany through the locus of the KfW, he offers a fascinating insight into the interactions of economics, politics and ideology that will be welcomed by all scholars with an inte

Part I
Setting the Scene

Chapter 1
The Cold War Developments and the Political and Economic Situation in Germany 1947–1948

While it is impossible to put a firm date on the ‘outbreak’ of the Cold War, it is clear that the 12 months from July 1946 to June 1947, which saw a change in tone of politics in Washington, were decisive in the development of the East-West tensions and had considerable impact on developments in (West) Germany. Following George F. Kennan’s Long Telegram, the USA began to adopt the Policy of Containment while the Soviet Union became increasingly frustrated by the failure to treat occupied Germany as an economic unit (mainly by the French), which was in clear breach of the Potsdam Protocol¹. Perhaps in an effort to get things moving again they announced during the Paris Conference of Foreign Ministers in July 1946 that they were considering the possibility of re-uniting Germany. This speech by Soviet Foreign Minister Molotov increased American fears that the Soviets wanted to take over the whole of the country. The Americans knew that they could not offer anything similar to the Germans without Soviet consent while, on the other hand, they could hardly block a serious Soviet attempt in this direction. In other words, in 1946 Stalin held the key to German unification and he knew this. Although there was still no clear US policy on Germany at that time, a united Germany under Soviet control certainly threatened American interests in Europe. The famous speech given by US Secretary of State Byrnes in September 1946 in Stuttgart in which he promised Germany’s reconstruction was therefore much more a direct response to Molotov and directed against Russia than John Gimbel suggests². Byrnes’ speech was the first clear sign of a change in US policy and demonstrated American willingness to integrate at least parts of Germany into the Western sphere of influence in Europe.

Whereas in 1947 the reconstruction in many western European countries was well under way and production figures were again reaching pre-war levels, the situation in Germany was entirely different³. This was not least because of the country’s division into four zones of occupation, all separately run by their respective Military Governors. In 1945 the Americans had hoped for a quick revival of German industrial production to pay with export proceeds for much needed food imports, but recovery remained at a very slow pace — particularly in comparison with the other European countries. The zonal division had created four separate economic areas, with the zonal borders as effective trade barriers. The British zone was most severely hit by this artificial division. The densely populated industrial areas of the Ruhr could only be kept viable with food supplies from Britain after its former agricultural hinterland in the east of Germany had been cut off. Under the Geneva Convention occupying powers had to take care of the civilian population under its control but with the United Kingdom itself struggling to support its population and the Treasury unable to provide the necessary funds to pay for the food supply of its former enemy as well, the British were desperate for a solution to this impasse. So the United Kingdom welcomed a proposal for merging their zone of occupation with the American zone, which would give them the chance to share the burden. In December 1946 the Bevin-Bymes Agreement was signed and on 1 January 1947 the two zones became the Combined Economic Area, commonly known as the Bizone. Although the other two occupying powers were invited to join the Anglo-American Bizone as well, its creation increased the Cold War sentiments. From the Soviet point of view the establishment of the Combined Economic Area appeared to confirm that the USA was attempting to dominate Western Europe and exclude the USSR from any economic benefits. Thus, the emerging Bizone had a significant impact on the course of the Cold War.

Of course, the Americans were hardly motivated by altruistic reasons for their decision to create the Bizone, which led to an increase in their occupation costs. They feared that the German population, facing a desperate economic situation, might begin to sympathise with the Soviet Union, in particular after Molotov’s Paris speech.

By early 1947 the small economic improvements, which had been achieved had come to an abrupt end because of the severe weather conditions of the 1946–47 winter which caused serious setbacks in production. This so-called ‘stagnation crisis’ which occurred as a result of too low an output of the basic industries, caused by a lack of transport, made the Allies aware that disruption originating from war damage was still severe in Germany⁴. It was not so much the destruction of roads, railways, bridges and waterways, which caused havoc, for most of these had already been repaired in 1945–46⁵. It was the lack of rolling stock and barges in operation, which caused a breakdown in the transportation system. It was not before the summer of 1947 and after the Allies had put considerable effort into transport and the basic industries, particularly into coal, that the German economy could recover and regain its 1946 production figures⁶.

By that time the Americans had realised that in Germany they could achieve the political and economic successes necessary for their Cold War purposes only with the co-operation of the Germans themselves⁷. To secure German participation in the decision-making and administrative process, a semi-autonomous German administration, the Economic Council or Wirtschaftsrat, was established in Frankfurt in 1947–48⁸. Although responsible for only two of the four zones, it was for the first time after the war that a preliminary German central governmental body was created. To keep French and Soviet criticism at a minimum and to stress its provisional, non-governmental character, the name ‘Economic Council’ was chosen. Nevertheless, the Economic Council would eventually become the core of the future West German government and with its legislation paved the way for the establishment of the Federal Republic in 1949.

In the accelerating Cold War the Western Allies realised that if they wanted to successfully integrate at least parts of Germany into their sphere of influence, they had to do more than to establish a German administrative body under their control. The revival of economic life became the paramount task but also a task which would encounter massive difficulties. The population of the territory of the future Federal Republic had increased by nearly 20 per cent compared to 1939, due to the influx of refugees and people expelled from the former German territory in the East. There was a low rate of productivity combined with a high rate of unemployment and hidden unemployment, even without these refugees⁹. Furthermore, the refugees were concentrated along the eastern border of the Anglo-American zone. These mainly agricultural areas in Schleswig-Holstein, Lower Saxony and eastern Bavaria could offer hardly any employment. Because of the destruction of housing in the industrial centres, there was no immediate prospect of resettling these people to places with better employment opportunities. By 1947 the destruction and lack of housing was one of the biggest social problems in Germany and it seemed likely to remain a long-term problem. Experts estimated that it would take 25 to 30 years at pre-war construction rates to eradicate the housing shortage in West Germany.

¹⁰Whilst having no immediate effect on the bleak situation, the establishment of the Bizone on 1 January 1947 signalled the beginning of an economic and political reconstruction, which, fuelled by the intensifying Cold War, developed during 1947 with increasing pace. For the economy, 1947 marked the beginning of West German’s real recovery while significant political developments and decisions helped to support the process.

On 10 March the Moscow Conference of Foreign Ministers (CFM) began. It was the last attempt by all the former war Allies to look seriously for a mutual political settlement in Europe but its success was more than doubtful right from the beginning. On 12 March the US President in a speech before Congress announced a new policy, which was to become known as the Truman Doctrine. In April the Moscow CFM finally ended in failure because of the American refusal to supply reparations from Germany to the Soviet Union. On his way back to Washington, US Secretary of State Marshall had a confidential meeting in Berlin with General Clay, the US Military Governor in Germany, which was to have a significant impact on further developments in Germany. Following Marshall’s speech at Harvard on 5 June in which he announced the European Recovery Program (ERP), better known as the Marshall Plan, the US Military Government in Germany on 11 July received new directions on how to run affairs in Germany. JCS 1067, the Joint Chiefs of Staff directive in place since April 1945, had prevented the pragmatic Clay from taking active steps towards German economic recovery¹¹. Now, the new directive JCS 1779 allowed and even encouraged those steps. The new directive was of considerable political importance. In terms of US domestic policy it was a victory for the State Department and the US Military Government (OMGUS) over the remaining ‘Morgenthau Boys’, hard-line members in the US administration close to Treasury Secretary Morgenthau who wanted a punitive settlement in Germany, and a signal that the top-level executives in Washington had accepted the course which OMGUS proposed. In terms of US foreign policy it was the last sign that Cold War considerations were now completely determining American thinking.

About six weeks later, by the end of August, the three western Military Governors agreed on an increased level for strictly controlled German industrial output, although the dismantling of industrial plants in the French and British zones continued¹². This kind of contradiction, reconstruction running parallel to dismantling, would go on until 1951 when the British at last gave it up. But the decisions taken during the summer of 1947 made sure that the German economy could finally take the road to recovery — and as Abelshauser has convincingly shown did so long before the Marshall Plan — although at first at a slow pace¹³.

The conditions for an economic recovery were indeed not as bad as one might have expected in the aftermath of the bombing war. While residential areas had been hard hit by Allied carpet-bombing, the impact on industry as a whole was less severe and even less on industrial machinery¹⁴. The Nazi re-armament programme had had a huge impact on Germany’s industrial structure. The Gross Fixed Assets (GFA) value of machinery in the Bizone area had risen by about 75 per cent in real terms of 1936 money between 1936 and 1945¹⁵. In this process the age structure of the machinery and the equipment, obviously improved as well, so that by 1945 more than half the machinery was less than ten years old. Neither the results of the Allied bombing, nor the dismantling or the lack of investments could reverse wartime expansion so that by 1948 the GFA was still 11 per cent higher than in 1936¹⁶. This extended and improved machinery would provide the material basis for the reconstruction, while the unemployed, and amongst them in particular the expellees and refugees, provided a large reserve of skilled and semi-skilled labour, keen to work even for relatively low wages. Although they had to be regarded as a liability to the national economy in the short term and would have to be resettl...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Tables
• Acknowledgements
• List of Abbreviations
• General Editor’s Preface
• Dedication
• Introduction
• Part I Setting the Scene
• Part II Raising Capital
• Part III ‘Guiding’ the Economic Reconstruction
• Part IV Figthing the Cold War: Exports and Development Aid
• Conclusion
• Glossary of German Financial, Legal and Economic Terms
• Bibliography
• Index