Eye of the Storm
Chapter section from:
Airbridge to Berlin ---  The Berlin Crisis of 1948,  its Origins and Aftermath 
By D.M. Giangreco and Robert E. Griffin
© 1988
(Used with permission)

  Prior to the formation of any West German government, the Western powers decided they would be the implementers of the currency reform. They did not want to saddle a new provisional German government with the potentially unpopular consequences of a currency reform.⁽²⁰⁾ In any event, only the three military governors had the authority to issue laws valid in more than one land.

  During the spring of 1948, there were consultations with German economic experts whose input was sought because they would eventually be responsible for developing and uniting the economy after the currency reform. Some of their recommendations were incorporated into the plan, but all the final decisions were made by US, British, and French financial officials. It was also necessary to limit the discussions with the Germans to maintain secrecy on the exact date of implementation.⁽²¹⁾

  The forthcoming currency reform was not a surprise to the German population, but to hinder speculation and black marketing, the exact date of implementation was a secret. Rumors of the impending currency reform and preparations by authorities to set up facilities for the exchange of old currency for new appeared in newspapers throughout May and June 1948. In May 1948, British Foreign Secretary Earnest Bevin stated the Western powers were preparing a separate currency reform. On June 16, 1948, the Hamburg Senate announced it had designated 1,500 offices to exchange money and that the exchange would undoubtedly be conducted on a Sunday in the near future.⁽²²⁾

  The possible Soviet reaction to a separate currency reform was also no surprise to the Western powers. In November 1947, Clay stated that the implementation of plans for a unified West German government would be accompanied by an early effort to blockade Berlin and to drive the Western powers out.⁽²³⁾ In answer to Bevin's statement, the official newspaper for the Soviet Military Authority in Germany stated:

Allied financial experts explain the currency reform at a press briefing at OMGUS headquarters, 18 June 1948. US Deputy Assistant Financial Advisor Jo Fisher Freeman is speaking, British and French advisors are seated to his right and the man at far left against the wall is believed to be Edward Tenenbaum.

  A currency split would mean that one part of Germany irrevocably would become a foreign power for the other. A currency border with strict control would have to be erected . . . as exploitation of exchange rate differences by speculators must be prevented, the borders would be sealed hermetically.⁽²⁴⁾

  And Edward Tenenbaum, one of the OMGUS currency reform planners, observed:

  We recognized clearly that the date of a bizonal or trizonal currency reform eastern Germany would become a foreign country. The only real link between the four zones - a common currency - would be broken, and the de facto absence of economic unity would be turned into a de jure state of economic disunity. ⁽²⁵⁾

  During the spring of 1948, the new currency, packed in 23,000 boxes and weighing 1,035 tons was brought secretly to the old Reichsbank building in Frankfurt/Main.⁽²⁶⁾ The banknotes were purposely innocuous: there was no indication of an issuing authority, no signature, nothing promising to redeem the notes. They bore only the denomination and the words "Deutsche Mark" and "Banknote."⁽²⁷⁾

  With the unsuccessful resolution of German economic problems at the Council of Foreign Ministers in London in 1947, Clay and his advisors urged the currency reform be implemented immediately, but he was instructed by Marshall to make a final attempt to obtain acceptance of a unified new currency for all of Germany. Endeavors were made to obtain quadripartite agreement on currency reform up to and including the last meeting of the Allied Control Council on March 20, 1948, which the Soviets broke up by walking out in protest of the plans by the Western powers to form a provisional West German government.⁽²⁸⁾

  Clay had originally set June 1, 1948, as the date for the currency reform in the Bizone. At the last moment, the French indicated they would be willing to join the United States and Great Britain by including their zone in the plan for the establishment of a provisional West German government and the currency reform. The date for the currency reform was then reset for Sunday, June 20, 1948, with the official announcement to be made on Friday, June 18 after the banks closed for the weekend. It was also agreed the US, British, and French military governors would notify the Soviet military governor on June 18 by separate identical letters.⁽²⁹⁾ Between June 1 and June 17, 1948, the French again hesitated and threatened not to join the currency reform, but finally on the very eve, June 17, the French Assembly ratified the London agreements on the future of Germany and the currency reform proceeded with the announcement on June 18. Regarding the implementation, OMGUS reported:

West Sector residents exchanging Reichsmarks for Deutsche Marks.

  The long anticipated currency conversion in the Western Zones of Germany was officially promulgated on 18 June 1948 by the Military Governors of the US, UK, and French Zones The first law for the reform of the German currency (Military Law No. 61) became effective on 20 June in the three Western Zones of Occupation; it did not apply to the Western Sectors of Berlin which were still considered to be under Four Power rule.

  This law established the Deutsche Mark, and invalidated the Reichsmark, as the basic unit of the new currency. Small notes and coins, however, were to remain in use for the present at one tenth of their nominal value. Every inhabitant was permitted to exchange a per capita quota of RM 60 at a 1 to 1 ratio. Of this sum DM 40 were to be paid out at once and the remaining DM 20 within 60 days. To meet their payrolls, business enterprises were granted advances equal to DM 60 for each employee against the firms' subsequent conversion rights. A moratorium upon all debts until 26 June 1948 became effective immediately. Additional monies held by public, government, and financial institutions were to be converted at a later date. Single persons and family heads were to report all monies and credit balances in their possession. German authorities were also charged with the preparation of laws within a six month period for the equalization of financial burdens (Lastenausgleichgesetz). Tax reforms were to become effective as speedily as possible following the financial reform.⁽³⁰⁾

  As seen from the above, the currency reform was not a simple revaluation, but a comprehensive and complicated set of changes to wages, prices, public and private debt, exchange rates, banking reform, and burden sharing covered by several implementing laws whose full effect took months and years to fully realize. However, the currency reform in the Western zones did not take long to be declared a success. Only a month later, OMGUS stated:

  No event since the capitulation of the German armies has had such an impact upon every sector of German life as did the currency reform in the Western Zones, which became effective on 2O June 1948. Overnight the financial and commercial life of tens of millions of persons was transformed. The foundation, upon which normal ways of life could be reestablished, had been erected.

  By the end of July 1948, it was evident that the first phase of currency reform had been successful. Basically the results have been those foretold by proponents of currency reform. The new money has brought out of hiding a relatively large and well assorted supply of goods. Wages and salaries have again acquired genuine purchasing power. Job efficiency has risen and there are indications of increased output in almost all fields of manufacturing.⁽³¹⁾

  Upon receipt of the US, British, and French military governors' letters on June 18, 1948, proclaiming the currency reform for the Western zones, Sokolovsky, in a public proclamation to the German people, charged that the agreements under the Potsdam declaration which stipulated that Germany be treated as an economic whole had been violated. Sokolovsky declared the new currency invalid in the Soviet Zone and in greater Berlin and possession of it a criminal offense. He also suspended highway and railway passenger traffic to and from Berlin and reduced freight traffic supposedly to protect the Soviet Zone from an influx of the old devalued currency.

  On June 20, Sokolovsky replied to the Western military governors' letters of June 18 by stating the currency reform was illegal, completed the division of Germany and warned if suitable arrangements could not be made it would be necessary to implement a currency reform in the Soviet Zone and Greater Berlin which he considered to be economically integrated with the Soviet Zone. On June 21, Clay replied by letter and denied the implication that Berlin was a part of the Soviet Zone and invited Sokolovsky to a quadrapartite discussion on the currency problem in Berlin to develop a solution which would be satisfactory to all.

  The Soviet reaction to the currency reform had been foreseen, but the Western powers were uncertain on what to do about Berlin. Although the British military governor wanted to make a strong protest about the traffic restrictions to and from Berlin, Clay demurred and said the Soviet actions were understandable and that he would have taken similar actions had the Soviets initiated a currency reform before the West. Clay preferred to wait a few days to see how the Berlin situation developed.⁽³²⁾

  As early as April 29, 1948, the Department of the Army, following discussions with the State and Treasury Departments, advised Clay that when the time of the projected Soviet Zone currency conversion was made known, Clay should try to reach immediate agreement on a uniform special currency for Berlin. If that failed, he should point out to the Soviets that the United States was ready to introduce a Western currency into the Western Sectors of Berlin. Clay maintained the establishment of two currencies in Berlin would be most difficult and probably untenable in the long run. When the time came to negotiate, he proposed to negotiate for a monetary union of Berlin with the Soviet Zone , provided the currency was kept under Four Power agreement and control.⁽³³⁾

  The economic planners were not optimistic about Berlin's future. Drawing on the analogies of other such enclave areas as Hong Kong, Luxemburg, Liechtenstein, and Monaco, they felt the best Berlin could hope for was a similar relationship as a trading center and entrepot for East and West. However, these theories were dependent on Soviet acquiescence.⁽³⁴⁾

  The economists proposed a separate currency for Berlin under quadripartite control. A Soviet controlled currency was ruled out and a separate Western currency would present problems to maintain a unified city government. If it became necessary to issue a Western currency in the Western Sectors of Berlin, the economists foresaw the possibility of a flood of old devalued Reichsmarks and a potential danger to the new Deutsche Mark in West Germany. Therefore, to provide control, the new currency distributed in western Berlin would be distinguished from the currency released in western Germany by stamping it with a "B" for Berlin (in the way US dollars issued in the Hawaiian Islands during WW II were overprinted with "Hawaii").⁽³⁵⁾

  Economists and financial advisors saw other problems for Berlin if a separate Western currency was introduced. The Berlin transportation system depended on a streetcar, subway (U-Bahn), and elevated train (S-Bahn) network that had been built long before World War II and which travelled freely between sectors and to many outlying suburbs. Large numbers of Western Sector citizens worked in the Soviet Sector and vice versa.

The Soviet side of their checkpoint on the autobahn at Helmstedt.

  How could the Western Sectors of Berlin exist surrounded by a hostile foreign government? Imagine a city the size of Chicago divided arbitrarily at State and Madison, cut off from its suburbs, with the remainder of Illinois and all of Indiana, Michigan, and Wisconsin being a foreign country, and you get some illustration of the situation confronting the planners in June 1948.

  Based on all these factors, the Western powers decided that their policy in Berlin would be defensive. No steps would be taken, other than technical preparations for any eventuality, until the Soviets acted first.⁽³⁶⁾

  Sokolovsky accepted Clay's June 21 invitation for a meeting of financial experts of all Four Powers to discuss the Berlin currency situation. The meeting was held on June 22 in the ACC building in Berlin. The Soviets refused to accept the Western Powers' proposal for a separate Berlin currency and maintained that, because Berlin was closely integrated with the Soviet Zone's economy, Berlin's currency must be the same as the Soviet Zone. As a final fall back position, the Western Powers explored the possibility of allowing Soviet Zone currency to be the sole currency for all of Berlin provided the Four Power Kommandatura of Berlin, or some other agreed upon Four Power agency, could control the issuance and credit policy for Berlin. The Soviets insisted that they alone would control money and credit in Berlin and argued that any separate currency in Berlin would undermine economic stability in the Soviet Zone.

  The Western Powers reminded the Soviets that they had no jurisdiction over the Western Sectors of Berlin and that the Western Powers had no intention of surrendering their sovereignty to the Soviets. The meetings continued on until 10 pm without any resolution. Just before adjournment, a Soviet courier arrived to inform the Soviet delegate that a proclamation of a currency reform for the Soviet Zone and all of Berlin was to be released the next day.⁽³⁷⁾

  On Wednesday, June 23, 1948, the Soviet Military Administration issued SMA Order No. 111 which proclaimed a currency reform for the Soviet Zone and all sectors of Berlin to commence the following day. Although there had been strong indications that the Soviets had been planning a currency reform for some time, their technical preparations were makeshift. Initially, the old currency with a coupon attached was used as the new East Mark.

  The US, British, and French commanders immediately declared the Soviet order null and void in their respective sectors and proclaimed a monetary reform in the three Western Sectors of Berlin, effective Friday, June 25, along the general lines of the one previously proclaimed in the Western Zones of Germany. The technical preparations by the Western Powers were somewhat better in that the new West Marks, stamped with a "B," had been flown in secretly beforehand.

  The Western Powers, however, hedged their bet by allowing the new East Mark to be circulated in the Western Sectors of Berlin and in making the East Mark acceptable payment for rent, rationed food, taxes, transportation fares, utility bills, and postal services. Shopkeepers dealing in other goods could, at their option, accept East Mark acceptable payment for rent, rationed food, taxes, transportation fares, utility bills, and postal services. Shopkeepers dealing in other goods could, at their option, accept East Marks in trade. Soviet Zone postage stamps could also be used when posting mail in the three Western Sectors of Berlin. The Soviets did not reciprocate. Instead, they declared possession of West Marks by Soviet Sector Berliners and Soviet Zone citizens a criminal offense. They returned all mail franked with Western Zone postage stamps originating in the Western Sectors of Berlin precipitating what became known as the "Postal War."

  In addition, the restrictions on rail and barge traffic instituted on June 18 to and from Berlin were tightened to include highway and freight traffic. The Berlin Blockage had begun. The Allies countered with the airlift.