James Henderson

HIUS 4501 – Leffler

May 6, 2013

Unintended Consequences: General Lucius D. Clay’s Pursuit of Economic Unification

and the Disintegration of the Grand Alliance, 1945-1946

Resolution of the German question was a primary goal of both the Yalta and

the Potsdam Conference, a critical issue to the national interest of both the United

States and the Soviet Union, and the most contentious point of Soviet-American

diplomacy in the post-war period. From March 1945 until the end of 1946, U.S.

policy towards Germany was implemented and influenced by the U.S. Deputy

Military Governor of Germany, General Lucius D. Clay. As military governor, General

Clay established the foundations for liberal-democratic German self-government,

the reconstruction of the German economy, and the integration of the Western

zones of Germany under a single German government. General Clay’s main goal was

to create a stable post-war peace by building a liberal-democratic, unified Germany

capable of fueling the reconstruction of Europe while maintaining Roosevelt’s legacy

of the Grand Alliance through quadripartite control of Germany’s reparations,

reconstruction, and eventual reintegration into the international community.

However, his pursuit of the economic unification of Germany and the creation of

centralized economic administrative organs caused him to develop a policy of zonal

administration that would ultimately prevent Soviet-American cooperation in the

administration of a united Germany.

1

General Clay was born in Marietta, Georgia in 1898. His father was a U.S.

senator and his mother was an ardent supporter of the Confederacy. Clay’s early

years were steeped in politics and influenced by the effects of the American Civil

War and the Reconstruction that followed. The youngest of six children, Clay

watched as each of his elder siblings squandered their talents because of their lack

of self-discipline. Throughout the rest of his life, Clay’s steely self-discipline became

a hallmark of his character and gave him the ability to harness his natural

intelligence and talents. The discipline, determination, and political acumen that he

developed from an early age became defining characteristics of his career and gave

him the ability to excel in whichever task he was given.

Clay secured his appointment to the U.S. Military Academy at West Point in

1914. He lied about his age on his application in order to join the military a year

early. Although not uncommon during this period, it is one of the few lies credited

to the general and, according to his biographer Jean Smith, one of the few points that

made him feel truly uncomfortable. His record at West Point showed him to be

mediocre at the academy, largely due to his reputation as a ‘maverick’ and his

special ability to garner vast amounts of demerits. He excelled at English and

History, but performed exceedingly poorly at Mathematics and Discipline. General

Clay’s temperament was not suited to the excessive discipline at West Point, the

minute attention to detail, and the rote memorization. Had his class not graduated a

year early due to the American entry into the First World War, it is unlikely Clay

would have graduated from West Point at all.1

1 Jean Smith, Lucius D. Clay: An American Life (New York: Henry Holt and Company, 1990), p. 39.

2

Clay’s desire to serve in a combat role was a factor that influenced him from

his West Point graduation until his retirement from the Army in 1949. Clay had

chosen to join the Field Artillery because he believed it was most interesting and

would provide him with the opportunity to lead troops into combat. However, the

needs of the Army placed Clay in the Corps of Engineers. He never saw combat in

the First World War, or at any other time during his career. Clay’s early service

consisted of mostly mundane tasks with ROTC units and at the United States

Military Academy. However, from the unimportant jobs of a junior military officer

he was eventually chosen to represent the Corps of Engineers in Washington during

the spring of 1933.

In his biography of General Clay, Smith stresses that Clay’s assignment to

Washington in the spring of 1933 marked the decisive shift in his military career.2

While working in Washington, he met Harry Hopkins through his work with the

Works Progress Administration, and he made numerous congressional contacts

during his time working as the congressional liaison for the Corps of Engineers

rivers and harbors division.3 Smith explains that, “Clay’s political realism, his

experience in a family of politicians, fitted him uniquely to represent the Corps on

Capitol Hill. He understood politicians and how to deal with them: an intuitive

calculus of mutual reward.”4 General Clay’s experience on Capitol Hill reinforced his

childhood education in politics. He developed a very acute political acumen that

2 Ibid., p. 57.3 Ibid., pp. 62-63, 67-71.4 Ibid., p. 70.

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made him attuned to the political consequences of military actions. This was a trait

that would later serve him well as military governor of Germany.

When the Japanese bombed Pearl Harbor and drove the United States into

the Second World War, Clay was in charge of constructing what would become the

United States civilian aeronautical infrastructure as a part of Roosevelt’s emergency

defense initiative. Three months later in March 1942, he was tapped to head the

War Department’s procurement effort. This new task required him to compile the

logistical requirements for an eight million man army, to negotiate contracts with

private suppliers, determine the priorities of the Army’s supply needs, supervise the

production of materiel, oversee the research and development of new equipment,

coordinate the military’s Lend-Lease program, renegotiate costs with suppliers, and

dispose of scrap metals and surplus property.5 Throughout his time as the director

of materiel, the only instruction he ever received from his superior officer was,

“Your job is to find out what the Army needs and get it.”6

During Clay’s tenure as the director of materiel, the United States military

transformed from the seventeenth most powerful military in the world into the

world’s first military superpower. He oversaw the mobilization of the American

military-industrial complex and ensured sufficient production to supply both the

American armed forces and the armed forces of America’s allies through the Lend-

Lease program. In late 1944 Eisenhower summoned Clay away from Washington

with the promise of a combat command in Europe. However, upon his arrival in

Europe, Clay was instead ordered to resolve a logistical bottleneck that had resulted

5 Ibid., 114.6 Ibid., 113-114.

4

due to the rapid American advance through France. Clay’s efficient resolution of the

Cherbourg bottleneck earned him a Bronze Star, but he was unable to translate this

success into a combat command. Instead, General Eisenhower ordered him to

return to Washington to relay an urgent request for artillery ammunition from the

War Department.

General Clay never again had the opportunity for a combat command

because Supreme Court Justice James Byrnes, who had been assigned to lead the

Office of War Mobilization, requisitioned him to serve as his deputy director. As the

deputy director of the Office of War Mobilization, Clay oversaw the full range of

economic operations of the nation. This “proved invaluable when he went to

Germany, for his experience in the full range of the American economy was

unparalleled – a vital consideration in a devastated country that needed to be put

back together.” Moreover, after his post at the Office of War Mobilization, “Clay was

on intimate terms not only with Justice Byrnes . . . but with Washington’s entire

civilian leadership.”7 Clay’s experience directing the national economy during a time

of total war mobilization combined with his ability to work efficiently with the most

important civilian political leaders in the Roosevelt administration prepared him for

both the technical and the political challenges that arose during his administration

in Germany.8

Despite fundamental differences of opinion regarding U.S. policy towards

Germany within the Roosevelt administration, a consensus was quickly reached that

7 Ibid., 200.8 Jean Smith, The Papers of General Lucius D. Clay: Germany 1945-1949, vol. I, (Bloomington: Indiana University Press), pp. xxxvi-xxxvii.

5

General Clay was the most able man to lead the U.S. military occupation.9 Clay’s

experience in the Corps of Engineers, his impressive logistical success at Cherbourg,

and his work with Justice Byrnes at the Office of War Mobilization gave him a series

of credentials unparalleled in the American military at the end of the Second World

War. No other man in the American military had such extensive experience with the

American political system, key administration officials, and the intimate functions of

the national economy.

Clay himself admitted that, prior to his appointment to the post in Germany,

he had had no experience with German politics or the German economy.10 In his

biography of General Clay, Jean Smith writes that, “he was not given a copy of the

U.S. directive to govern the Occupation (JCS 1067) until he boarded his plane for

Europe; he did not think it necessary to consult the State Department before

leaving; and he did not read the Morgenthau Plan for eliminating Germany’s

industry and creating a ‘pastoral’ society until he reached Eisenhower’s

headquarters in France.”11 This is an exceptionally important point because it

demonstrates that General Clay was not selected to lead the American military

occupation of Germany because of his knowledge of Germany or of the raging policy

debate regarding Germany, but rather because of the confidence his superiors had

in his abilities and his detailed knowledge of the functions of national economy.

General Clay realized almost immediately upon his arrival to Germany that

the German Government and the entire German economy had completely collapsed

9 Ibid., 202.10 Lucius Clay, Decision in Germany (Garden City: Doubleday & Company, Inc., 1950), p. 7.11 Smith, Lucius D. Clay, pp. 5-6.

6

as a result of the prosecution of the war.12 As the leader of the American occupation

it was his responsibility to fill the void left by the German government in the U.S.

zone. The victorious Allied armies filled this political vacuum caused by the

unconditional surrender of Germany with the Allied Control Council, which had

been established to substitute for the national government and to maintain the

integration of the four zones through uniform policies.13 Germany was divided into

zones of occupation pending further negotiations and a final peace treaty with

Germany. However, the policy directive General Clay was issued in May regarding

his duties in Germany limited his ability to restore the German economy to a level

that could prevent chaos and suffering in the wake of the war, and therefore

precluded him from pursuing economic rehabilitation on a quadripartite level.

JCS 1067 governed U.S. actions in Germany from May 21, 1945 until July

1947, and as such was the primary guidance for General Clay in his role as the

American member to the Allied Control Council and as administrator of the United

States zone of occupation in Germany.14 The directive emphasized the importance

of the Allied Control Council as, “the supreme organ of control over Germany.”15 It

instructed General Clay to execute the policies of the Control Council in the United

States zone to the best of his abilities, while ordering him to follow the directives of

the Joint Chiefs of Staff in the absence of consensus in the Control Council. This

12 Smith, The Papers of Lucius D. Clay, p. 6.13 Carolyn Eisenberg, Drawing the Line: The American Decision to Divide Germany, 1944-1949 (Cambridge: Cambridge University Press, 1996), p. 98.14 Clay, Decision in Germany, pp. 16-17; John Gimbel, The American Occupation of Germany: Politics and the Military, 1945-1949 (Stanford: Stanford University Press, 1968), p. 2.15 Department of State, Papers Relating to the Foreign Relations of the United States, 1945, FRUS 1945, vol. III (Washington, D.C.: Government Printing Office, 1945), pp. 379, 827.; FRUS, 1945, Conferences at Malta and Yalta: pp. 124-125, 180.

7

ultimately resulted in Clay’s ability to operate independently in Germany in the

absence of quadripartite agreement on the Control Council.

General Clay’s military government had four basic objectives as outlined by

JCS 1067. First, Clay needed to impress upon the Germans the inevitability of chaos

and suffering as a result of the destruction of the German economy due to the war

for which the Germans were entirely responsible. Second, the military government

needed to prevent Germany from resurging as it had after the First World War in

order to ensure it could not threaten “the peace of the world”.16 Third, the

occupation would enforce the program of reparations agreed to at Yalta in order to

extract economic resources from Germany for Allied nations and to destroy

Germany’s potential for war. The final objective of Clay’s administration was to

provide relief to the countries destroyed by the Nazi war effort in order to prevent

chaos and disorder in the wake of the economic dislocations caused by the war.17

However, despite direct guidance that Clay should, “take no steps (a) looking

toward the economic rehabilitation of Germany, or (b) designed to maintain or

strengthen the German economy”, the directive authorized, “the production and

maintenance of goods and services required to prevent starvation or such disease

and unrest as would endanger these (American) forces.”18 This clause provided the

opportunity for General Clay to interpret the directive with more latitude, and it

allowed him to reduce the scale of German industrial dismantling in order to

16 FRUS, 1945, vol. III: pp. 380-381, 487; FRUS, 1945, The Conference of Berlin, vol. I: pp.780-82, 1501-1502; FRUS, 1945, Conferences at Malta and Yalta: p. 970.17 Smith, Lucius D. Clay, p. 668; FRUS, 1945, The Conference of Berlin, vol. I: pp. 436-438.18 Ibid., pp. 688-689. FRUS, 1945, vol. III: p. 386.

8

provide the necessary infrastructure to support exports that could offset the costs of

imports for the German economy.

The economic dislocation caused by the progression of the war was the

primary motivation for Clay’s decision to reduce the scale of industrial

dismantling.19 Allied bombing campaigns had destroyed German rail-lines

connecting agricultural sectors to industrial sectors, while the division of Germany

into separate zones of occupation provided further barriers to the movement of

essential goods and services throughout the country.20 The U.S. occupation zone felt

the economic dislocation caused by the war most acutely because of its deficiency in

food, coal, and other industrial material. 21 These deficiencies resulted in the U.S.

zone’s inability to support its population without imports of foreign foodstuffs and

raw materials. Clay understood that if Germany were not treated as a single

economic unit with centralized economic administrations, especially a

transportation administration, essential products like food and coal would not be

able to move freely throughout the country and Germany could not become either

stable or self-sufficient.

General Clay’s program of creating a stable and self-sufficient Germany

depended upon the rehabilitation of the German economy because he believed that

without some degree of economic recovery, the devastation and destruction of the

Allied war effort would prevent the German economy from producing enough goods

for export to pay for the imports of food required to feed its people. The ‘disease

19 Smith, The Papers of General Lucius D. Clay, pp. 6, 8.20 FRUS, 1945, The Conference of Berlin, vol. I: pp. 439-441.21 Ibid., pp. 439-440.

9

and unrest’ clause gave Clay the necessary latitude to pursue economic

rehabilitation while claiming that he was in fact abiding by the guidance provided in

JCS 1067. In order to provide Germany with the capacity to pay for imports of food,

agricultural goods, and coal, the German economy needed to be able to produce

goods for export.

The issue of export-import was essential to Clay’s military government in

Germany because without the ability to produce for export Germany could not

become self-sufficient. As a result, the United States would be forced to continue to

pay for German imports of food for the subsistence of Germany and the payment of

German reparations. Clay and his advisers knew that the provisions of JCS 1067

which prevented the American military government from taking steps to

rehabilitate the German economy made little sense.22 According to Robert Murphy,

Clay’s political adviser, Lewis Douglas, Clay’s financial adviser, described the

directive as having been “assembled by economic idiots” who would “forbid the

most skilled workers in Europe from producing as much as they can for a continent

which is desperately short of everything.”23 Clay himself wrote of JCS 1067’s

economic provisions that, “it seemed obvious to us even then that Germany would

starve unless it could produce for export and that immediate steps would have to be

taken to revise industrial production. Since there was no German Government to

initiate these steps, Military Government perforce would be responsible.”24

However, policy makers in Washington were reluctant to amend the directive and

22 Gimbel, The American Occupation of Germany, p. 1.23 Ibid., p. 1.24 Clay, Decision in Germany, p. 18; John H. Backer, Winds of History: The German Years of Lucius DuBignon Clay (New York: Van Nostrand Reinhold Company), p. 12.

10

no further change in policy was made until the Potsdam Conference ended in August

1945.

On August 2, 1945, the Official Gazette for the Control Council in Germany

published a report from the Potsdam Conference. This report reflected the attitudes

of the British, Russians, and Americans with regard to Allied policy in Germany. It

noted that supreme authority in Germany would be exercised by the commanders in

chief of the armed forces of the United States, the United Kingdom, the Union of

Soviet Socialist Republics, and the French Republic. These commanders in chief

would exercise supreme authority in their respective zones, and would share joint

control, “in matters affecting Germany as a whole,” on the Allied Control Council.25

Most importantly, it outlined the political and economic principles that would guide

the administration of Germany and the actions of the Allied Control Council.

The report outlined the purposes of the occupation of Germany to be, “the

complete disarmament and demilitarization of Germany and the elimination or

control of all German industry that could be used for military production.”26 The

Allies would seek to convince the German people that they had suffered a total

military defeat, to destroy the Nazi Party and its legacy, to prosecute war criminals,

to reeducate the German population in order, “to eliminate Nazi and militarist

doctrines and to make possible the successful development of democratic ideas.”27

However, the Allies agreed, “to prepare for the eventual reconstruction of German

political life on a democratic basis and for eventual peaceful cooperation in

25 Beate Ruhm von Oppen, Documents in Germany Under Occupation 1945-1954, (London: Oxford University Press), p. 42.26 Ibid., p. 42.27 Ibid., pp. 43-44.

11

international life by Germany.”28 To this end German administration would be

decentralized and development of local responsibility would be encouraged.

Although no central German government was authorized at the present time, the

Allies agreed to give the Germans a degree of autonomy in domestic affairs and to

create, “certain essential German administrative departments” in the fields of

finance, transportation, communications, foreign trade and industry.29

The most important result of the Potsdam Conference with regard to U.S.

policy and General Clay’s actions in Germany was the provision that, “during the

period of occupation Germany shall be treated as a single economic unit.”30 The

agreements called for the creation of common policies that would require the

implementation of central economic administrations in order to regulate the

German economy on a uniform basis as well as to provide for common, “import and

export programs,” and, “reparation and removal of industrial war potential.”31 The

importance of common import and export programs as well as a common policy for

reparations was intended to ensure the equitable distribution of essential

commodities between zones in order to produce a balanced economy throughout

Germany and to reduce the need for imports.

The agreement that reparations payments should, “leave enough resources

to enable the German people to subsist without external assistance,” ensured that

German exports would be first used to pay for essential imports and would prevent

28 Ibid., p. 43.29 Ibid., p. 44.30 Ibid., p. 45.31 Ibid., p. 45.

12

the confiscation of reparations from current production.32 This “first charge”

principle required that German exports could not be confiscated as reparations

because these exports were needed to pay for imports essential to the German

economy, most significantly foodstuffs and agricultural goods. 33 This was vital to

U.S. policy because without the ability to pay for its own imports, Germany would be

reliant upon external support in order feed its population. Essentially, without the

ability to subsist independently, the United States believed that American food

imports to Germany would be used indirectly to pay for German reparations as had

occurred after the First World War.

The United States had two possible courses of action with regard to military

government in Germany. First, it could promote a policy of economic regionalism

and political decentralization. This course of action would require sustained

imports from the United States in order to feed the Germans in the American zone

and to prime the economy in order to produce goods necessary for reparations

payments. On the other hand, it could seek some form of interzonal economic

exchange that would link the agricultural and industrial zones of Germany and, in so

doing, reduce or eliminate the amount of American imports necessary for economic

priming and food relief.

President Truman’s decision in June 1945 to export German coal to

northwest Europe exacerbated the issue because of the strains it placed on

Germany’s imports, exports, and trade balance.34 The pressure this decision placed

32 Ibid., p. 46.33 James F. Byrnes, Speaking Frankly, (New York: Harper & Brothers Publishers), p. 82.34 Gimbel, The American Occupation of Germany, p. 9; FRUS, 1945, The Conference of Berlin, vol. I: p. 636.

13

on the German economy was reflected in the Potsdam agreements. Potsdam

indicated a shift in economic policy that was caused by the recognition that

economic integration and centralization were essential in order to minimize

American expenditures for food for Germany’s population. General Clay and his

military government inspired this realization and influenced the policy shift

towards greater lenience for economic recovery. However, French actions and

policies following the Potsdam Conference prevented hopes of German economic

rehabilitation from materializing into concrete accomplishments and ensured a

continued need for American imports until the issues of economic unity and

centralized administrations could be resolved.

The admission of the French into the Allied Control Council gave them equal

power in quadripartite negotiations as each of the Big Three as a result of their veto

power. The exclusion of France from Potsdam ensured that French policies with

regard to Germany were not expressed in the Potsdam consensus, causing

cooperation within the Allied Control Council to falter almost immediately. France

did not accept the Potsdam decision to administer Germany as a single economic

unit with centralized economic administrations. She refused to support any

measure designed to create a single economic entity in Germany or to establish the

foundations for centralized economic administrative organs, which could lead to

economic recovery and unification. This policy was a crucial cause of Clay’s

difficulties establishing a self-sufficient, economically unified Germany.

Shortly after the Potsdam Accords were signed, the French released a

statement to each of the Allied governments declaring their policy towards Germany

14

and their opposition to the economic unification or central administration of the

defeated nation.35 This marked the beginning of French obstructionism in the Allied

Control Council as the French consistently vetoed efforts to establish centralized

administrative organs, to which the Russians, Americans, and British had agreed at

Potsdam. French obstruction in the Allied Control Council complicated the

successes of Potsdam’s reevaluation of the economic question.

Because of this, Clay needed clarification for what U.S. policy was with regard

to the treatment of Germany as an economic unit with centralized economic

administrations. He also needed to know what tools were available to him in order

to pressure the French to acquiesce to this policy or to pursue centralized

administrations outside the Allied Control Council and without the French. He did

not seek to revise American policy because he believed until the spring of 1946 that

JCS directive 1067, with the revisions made at Potsdam, provided a workable

solution to the German question.36 He viewed French obstructionism as the key

cause of continued barriers to interzonal trade and centralized administrative

agencies.

French obstructionism caused General Clay to question the ability of the

Control Council to govern Germany effectively.37 General Clay told the French

representative to the Control Council, General Koeltz, “The problem right now is the

fundamental principle of how we are going to govern Germany. If the Control

Council isn’t going to establish German administrative machinery it might as well 35 Clay, Decision in Germany, pp. 39, 110; Backer, Winds of History, p. 89; Smith, The Papers of General Lucius D. Clay, p. 84.36 Ibid., pp. 127, 133.37 Clay, Decision in Germany, pp. 109-110; Eisenberg, Drawing the Line, p. 170; FRUS, 1945, vol. III: pp. 871-877; Smith, The Papers of General Lucius D. Clay, pp. 84-85.

15

fold up as a governing agency and become a negotiating agency.”38 In a letter to the

War Department two days after this conversation, General Clay explained that he

had advised General Koeltz that the only action available to the U.S. Military

Government as a result of the French position was to pursue central administrations

outside of the Allied Control Council.39 Clay believed this would effectively eliminate

French influence outside of the French zone of occupation as the United States,

Great Britain, and the Soviet Union worked together to break down barriers to trade

and transportation between their respective zones. As early as September 1945,

General Clay was prepared to engage in tripartite negotiations in order to establish

coordinating machinery to facilitate trade and economic development on a tripartite

basis.

However, General Clay was fearful of the establishment of new and artificial

political units within Germany.40 He believed that this could lead to interzonal

negotiations and not genuine economic unification, which could potentially lead to

the permanent partition of Germany. In fact, interzonal negotiations did occur

between the American district of Hesse and the Soviet district of Thuringia in

December and January 1945-1946.41 Although the U.S. Military Government

allowed the trade agreement to proceed, it instructed all subordinate branch

governments to refuse any request for interzonal treaties in the future because it

viewed interzonal trade agreements as obstacles to the ultimate goal of economic

38 Clay, Decision in Germany, p. 110.39 Smith, The Papers of General Lucius D. Clay, p. 85.40 Ibid., p. 85.41 Gimbel, American Occupation of Germany, pp. 53-54.

16

unification. 42 The existence of successful interzonal trade had the potential to

reduce the need for central administration by providing an alternative economic

organization for Germany, however, this was unacceptable to General Clay because

he understood that only economic unity and centralized administration could fuel

the economic recovery of western Europe.

General Clay demonstrated his desire to achieve quadripartite solution to

German economic issues and his reluctance to establish German administrative

machinery unilaterally in the event of a failure to reach consensus with the French

in the Allied Control Council by waiting almost eight months before acting decisively

on the recommendations he had made to the War Department in September.

Between the first signs of French obstructionism in September of 1945 and Clay’s

reparations halt in May of 1946, he constantly requested that the diplomatic

channels of the U.S. government force the French to acquiesce to the provisions of

the Potsdam Agreement referring to the establishment of central administrations

and the treatment of Germany as an economic unit.

Clay responded to the French refusal to allow his program of economic

unification and centralized economic administrations to proceed in the Allied

Control Council by seeking government level intervention in order to force France to

acquiesce while he simultaneously developed the foundations for greater

centralization and German autonomy in his own American zone. During the eight

months between September 1945 and May 1946, Clay promoted the centralized

economic administration of the American zone by creating a, “coordinating agency

42 Ibid., pp. 53-54.

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for the U.S. zone,” that would be responsible for coordinating activities of the three

German states in the American zone, but would have no executive function.43 This

coordinating agency would become the Landerrat, an organization of German

administrators responsible to the U.S. Military Government responsible for

coordinating the economic activity of the German states within the American zone.44

General Clay decided to create the Landerrat primarily as a result of the

failure of the Allied Control Council to establish central agencies due to the French

veto of a central transportation administration on September 22.45 Clay announced

his plan to establish the Landerrat just six days after France blocked the

transportation administration, in an attempt to minimize economic dislocation

within the American zone and provide a framework for centralized administration

throughout Germany.46 The directive responsible for the creation of the Landerrat

explained that, “until such [central] agencies are created . . . Lander governments

would have to supervise the former national administrative services and to have a

joint coordinating agency.”47 The Landerrat served as this joint coordinating agency

for the Lander governments within the U.S. zone of occupation and provided the

foundation for economic integration and unification for all of Germany.

Clay designed the Landerrat as a temporary expedient to alleviate the

suffering in the American zone caused by economic dislocation. He knew that

centralized economic administrations within the American zone alone could not

43 Gimbel, American Occupation of Germany, p. 36.44 FRUS, 1945, The Conference of Berlin, vol. I: pp. 474-475.45 Clay, Decision in Germany, pp. 39, 110; Backer, Winds of History, p. 89; Smith, The Papers of General Lucius D. Clay, p. 84.46 Gimbel, American Occupation of Germany, p. 36.47 Ibid., pp. 36-37.

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resolve Germany’s economic issues because the U.S. zone was not a self-sufficient

economic entity.48 The Landerrat provided a foundation for stronger, more

integrated economic administrations but it did not eliminate the economic

dislocation caused by barriers to interzonal trade. Polish and Soviet administration

of traditional German agricultural lands, in the absence of central administrations

capable of ensuring the free flow of goods throughout Germany, greatly decreased

the supply of food in the western, industrial zones and contributed to a massive food

crisis in the spring of 1946.

The food crisis cemented in General Clay’s mind the urgent need to either

implement the economic provisions of Potsdam or to pursue a different path

towards economic self-sufficiency. The unwillingness of the State Department to

pressure France diplomatically ensured that the gridlock within the Allied Control

Council would not be broken unless Koeltz could convince Clay to abandon

economic unity and central administrations, or Clay could force the French to

acquiesce to his position. Unwilling to allow mass starvation within his zone and

unable to obtain sufficient diplomatic support from the State Department, Clay

channeled his frustrations towards the French policy into the reparations halt of

May 1946.49

On May 2, 1946, in an attempt to force the French to negotiate on economic

unity and to encourage the Russians to accept the American view that the

reparations issue and the issue of a common export-import policy for Germany were

linked, General Clay issued an order to stop payment of reparations to all Allied

48 FRUS, 1945, The Conference of Berlin, vol. I: pp. 439-441.49 Smith, The Papers of General Lucius D. Clay, pp. 24, 203-204.

19

nations from the American zone of occupied Germany.50 General Clay stated at the

time that the reparations halt was not intended against any one power, but that the

payment of reparations from the American zone without agreement as to the future

economic unity of Germany or the boundaries of that entity would severely damage

the ability of the American zone to produce enough goods for export to maintain a

favorable trade balance needed to provide food for the U.S. zone. This situation

would result in the United States indirectly paying for German reparations to France

and Russia. Clay would not allow continued reparations payments without final

agreement regarding the status of Germany’s borders and the fate of economic unity

and centralized administrations because these agreements were essential for a

finalized calculation of the level of industry necessary to pay reparations and

maintain a balanced export-import program.

The reparations stop failed to persuade either the French or the Russians to

accept the American position on economic unity and reparations. Unable to

convince the Allied Control Council to implement the provisions of Potsdam in their

entirety, Clay wrote a letter to the director of the War Department’s Civil Affairs

Division, General Oliver P. Echols, on July 19, 1946 in which he outlined what he

viewed to be the current American policy in Germany.51 In this letter, he clarified his

position that “a common import-export program, pooling all indigenous resources

and the proceeds from all exports was an essential part of Potsdam. We regard

Potsdam as a whole and cannot accept its parts unless the whole is to be executed.

The reparations program is based on a common import-export program and

50 Ibid., pp. 203-204; Gimbel, American Occupation of Germany, pp. 59-60.51 Smith, The Papers of General Lucius D. Clay, pp. 203-204.

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without the latter, the U.S. zone could not provide reparations.”52 The Allied Control

Council had failed to implement the economic provisions of Potsdam. Germany was

not an economic unit and quadripartite agreement had not been reached on

centralized economic administrations, reparations, or a common import-export

program.

The foundation of Clay’s July paper was his belief, “that the execution of the

agreement reached at Potsdam must be accomplished as a whole and not in part,”

and that the inability of the Control Council to treat Germany as an economic unit or

to settle the question of Germany’s final boundaries prevented this from being

accomplished. 53 He recognized that the primary objective of the United States was

the destruction of German war potential, re-education of the Germans, re-

establishment of democratic self-government, and the eventual reintegration of

Germany into the international community, but the vast majority of his letter

explained the breakdown of the economic provisions of Potsdam and the potential

consequences for the situation in Germany if they were not put into effect. 54

The main focus of Clay’s thinking at this period in 1946 was the removal of

zonal barriers to economic recovery and the genuine treatment of Germany as a

single entity in order correct the economic dislocation between the industrial

western zones and the agricultural eastern zones. He demanded that, “the air-tight

territories…created through the establishment of the four zones be eliminated and

that zonal boundaries serve only to delineate the areas to be occupied by the armed

52 Ibid., p. 204.53 Ibid., pp. 204, 238.54 Ibid., p. 237.

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forces of the occupying powers.”55 Clay’s policy paper was sidelined in Washington

and he was ordered not to publish this letter because it might commit the United

States to a position it was not prepared to take.56 The frustration Clay felt at this

time during the crisis in Germany resulted from his inability to resolve the key issue

of economic unity and his belief that policy makers in Washington were not clear on

their intended policy for Germany.57 Clay tried to resign his position in Germany and

retire because he felt that he could no longer effectively discharge his duties in the

absence of firm American policy.58 Ironically, Byrnes “Speech of Hope” in Stuttgart

that September demonstrated that Clay himself had played the major role in the

formulation of American policy towards Germany.

Byrnes’s speech resounded with Clay’s suggestions from his July 19th policy

paper and reaffirmed the importance of the economic provisions of the Potsdam

Agreement with regard to economic unity and centralized economic

administrations. Byrnes followed Clay’s policies dramatically by formally proposing

the merger of the U.S. zone with the British and any other consenting government.

“The carrying out of the Potsdam Agreement has, however, been obstructed by the failure of the Allied Control Council to take the necessary steps to enable the German economy to function as an economic unit. Essential central German administrative departments have not been established,

although they are expressly required by the Potsdam Agreement.The equitable distribution of essential commodities between the several zones so as to

produce a balanced economy throughout Germany and reduce the need for imports has not been arranged, although that, too, is expressly required by the Potsdam Agreement.The working out of a balanced economy throughout Germany to provide the necessary

means to pay for approved imports has not been accomplished, although that too is expressly required by the Potsdam Agreement.

The United States is firmly of the belief that Germany should be administered as an economic unit and that zonal barriers should be completely obliterated so far as the economic life and activity

in Germany are concerned . . . .The time has come when the zonal boundaries should be regarded as defining only the areas

55 Ibid., p 239.56 Ibid., p. 255; Gimbel, American Occupation of Germany, pp. 78-80.57 Smith, The Papers of General Lucius D. Clay, p. 254.58 Ibid., pp. 254, 259, 263.

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to be occupied for security purposes by the armed forces of the occupying powers and not as self-contained economic or political units.

That was the course of development envisaged by the Potsdam Agreement, and that is the course of development which the American Government intends to follow to the full limit of its

authority. It has formally announced that it is its intention to unify the economy of its own zone with any or all of the other zones willing to participate in the unification.”59

Byrnes speech the, “Restatement of U.S. Policy on Germany,” was a statement

reaffirming General Clay’s policies and actions. The speech was an

acknowledgement that the Allied Control Council had indeed become no more than

a negotiating body and had ceased to effectively govern Germany on a quadripartite

basis. It therefore cemented the shift in American policy away from the Allied

Control Council and towards bilateral negotiations between the United States and

the United Kingdom, the United States and France, and the United States and the

Soviet Union, rather than multilateral negotiations among all the Allied powers.

Clay’s creation of the Landerrat enabled the shift towards a formal policy of zonal

fusion as it provided an alternative to quadripartite control, economic unification,

and national, centralized administrations.

As a result of the four power occupation, quadripartite control was essential

in order to administer Germany uniformly throughout and to lay the foundations for

the economic reunification and centralized administrative organs agreed to at

Potsdam. The issue of the economic unity of Germany and its impact on the

treatment of reparations payments and the rehabilitation of the German economy

tested the ability of the Allies to cooperate within the Allied Control Council. The

Control Council failed this test and its inability to either govern Germany or to allow

Germany to govern herself resulted caused General Clay to act unilaterally in order

59 The Department of State, The Department of State Bulletin, Vol. XV (Washington D.C.: The Department of State, 1947), pp. 497-498.

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to prevent economic chaos, starvation, and disease within the American zone of

occupation. 60

General Clay believed that the United States policy in Germany called for the

treatment of Germany as an economic unit in order to create a German state capable

of supporting itself, the economic reconstruction of Europe, and reparations

payments to the nations it had destroyed in the Second World War. As a result, he

pursued economic unification of Germany through the Allied Control Council but

was prevented from accomplishing his goal by the French veto of central economic

administrations. Unable to pursue economic unification through the Control Council

on a quadripartite basis, Clay attempted to direct American governmental level

pressure against the French in order to force acquiescence to the policies

established at Potsdam. Clay’s inability to obtain French support for the economic

provisions of Potsdam led to the dramatic reparations halt of May 1946 that

catalyzed the collapse of Allied cooperation in the Control Council and the

movement towards economic integration through zonal fusion.

General Clay created the Landerrat within the American zone on his own

initiative. The zonal administrations he created established the framework for the

fusion of occupation zones and the merger of the American and British zones into

Bizonia in December of 1946. Despite his desire to maintain quadripartite control

of a united Germany, General Clay’s pursuit of centralized economic administrations

outside of the Allied Control Council machinery led to the economic integration of

60 Beate Ruhm von Oppen, Documents in Germany Under Occupation, p. 155.

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Germany’s western zones, Soviet suspicions of a western-bloc, and the ultimate

partition of Germany between East and West.

25

Primary Sources

Byrnes, James F. Speaking frankly. 1st ed. New York, N.Y.: Harper, 1947. Print.

Clay, Lucius D.. Decision in Germany. Garden City, N.Y.: Doubleday, 1950. Print.

Clay, Lucius D., and Jean Edward Smith. The Papers of General Lucius D. Clay: Germany, 1945-1949. Bloomington: Indiana UP, 1974. Print.

The Department of State. The Department of State Bulletin. Vol. XV. Washington D.C.: The Department of State, 28 October 1947.

Oppen, Beate. Documents on Germany under Occupation, 1945-1954. London: OUP, 1955. Print.

U.S. Department of State. Foreign Relations of the United States, 1945, Vol. III.

U.S. Department of State. Foreign Relations of the United States. Series: The Conference of Berlin (The Potsdam Conference), 1945, Vols. I-II.

U.S. Department of State. Foreign Relations of the United States. Series: Conferences at Malta and Yalta, 1945.

U.S. Department of State. Foreign Relations of the United States, 1946, Vol. V.

Secondary Sources

Backer, John H.. Winds of history: the German years of Lucius DuBignon Clay. New York: Van Nostrand Reinhold, 1983. Print.

Eisenberg, Carolyn Woods. Drawing the line: The American decision to divide Germany, 1944-1949. Cambridge: England UP, 1996. Print.

Gimbel, John. The American occupation of Germany; politics and the military, 1945-1949.. Stanford, Calif.: Stanford University Press, 1968. Print.

Smith, Jean Edward. Lucius D. Clay: an American life. New York: H. Holt, 1990. Print.

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