Figure 1.--Germany was devestated by World War II. German cities and industry were destroyed by the Allied strategic bombing campaign. The Soviets as part of a reparations policy shipped factories i their occupation zone that survived the bombing back to the Soviet Union. Jobs were difficult to find and both food and consumer goods hard to ontain. Only American aid prevented a food crisis. And after 3 years the economy showed few signs of recovery. American officials believed that the enormous cirrency "overhang" was a major imoediment to ecomomic growth.

The currency problem soon became apparent to many working in occupied Germany. The United States Military Government (USMG) submitted a currency reform program to the Allied Control Council (ACA) at a very eary point (1946). The American plan was to create a new Mark at a 10 to 1 basis to help reduce the amount of currency in circulation. Currency reform was a complicated matter and there were provisions related to property, war losdes, bomb damage, propert loss through reparations, and many other matters. The British and French and even the Soviets were at first sympathetic. The Soviets quickly changed their position and began objecting to various aspects of the proposal. The Soviets for example demanded that rather than a centrally controlled printing operation that zonal commanders have control of the printing. This would have meant that the Soviets could have printed large quantities of notes that would have had to honored in the western zones. [Bennett, p. 43.] It is unclear why the Soviets were so opposed to currency reform. Cynics may argue that Stalin did not want a rapid German recovery. I don't think that was the reason. After all the Soviets still saw Communism as the surprrior ecoomic system. Probably the lack of control mean that the Soviets could no longer print Reich Marks that were honored in the Western zones. Surely Stalin would have objected to the lack of control that would result from a strong currency and vibrant market economy. And he probably saw the currency reform as the first step in organizing a West German government. After 2 years of fruitless dithering with the Soviets, the Western Allies finally acted. The First Law on Currency Reform in the American, British, and French occupation zones specified the conditions for the introduction of the new German currency to replace the Reichmark--the Deutschmark (June 20, 1948). The Law was promulgated by the three Western Military Governors (America, Britain and France) after they were unable to obtain Soviet agreement. The Reichmark was invalidated. The new currency was named the Deutsche Mark which was be divided into 100 Deutsche Pfennig. The old currency (Reichsmark, Rentenmark and Mark notes) issued by the Allied Military authorities was invalidated as of June 21. An exception was made for old Mark notes and coins up to a denomination of 1 mark. This was done to prevent a temporary shortage of small change. The small notes and coins continued in use until, but at one tenth their old or nominal value. Postage stamps remained valid at one tenth their nominal value. As a first step, each inhabitant of the western zone received a sum of the new Deutsche Mmark--60 marks to be purchased by an equal sum of old bank notes. Other money held by the German public, as well as savings accounts in banks, savings banks, and postal-savings institutions will be converted into Deutsche Marks at a later date. The conversion rate, which will drastically reduce the total amount of money in circulation, as well as other details concerning the exchange of these amounts of money, will be published shortly in further laws. The exchange rate was set at 10 to 1 as initially suggest in the American plan.

Conditions in Erst Germany

Conditions in occupied Germany including Berlin were terrible after the War and there was a first little improvement. Conditions in Berlin were terrible, but not unlike conditions in many German cities.

Initial American Proposal (1946)

The currency problem soon became apparent to many officials in occupied Germany. The United States Military Government (USMG) submitted a currency reform program to the Allied Control Council (ACA) at a very eary point (1946). The American plan was to create a new Mark at a 10 to 1 basis to help reduce the amount of currency in circulation. Currency reform was a complicated matter and there were provisions related to property, war losdes, bomb damage, propert loss through reparations, and many other matters. The British and French and even the Soviets were at first sympathetic.

Soviet Opposition

The Soviets quickly changed their position and began objecting to various aspects of the proposal. The Soviets for example demanded that rather than a centrally controlled printing operation that zonal commanders have control of the printing. This would have meant that the Soviets could have printed large quantities of notes that would have had to honored in the western zones. [Bennett, p. 43.] It is unclear why the Soviets were so opposed to currency reform. Cynics may argue that Stalin did not want a rapid German recovery. I don't think that was the reason. After all the Soviets still saw Communism as the surprrior ecoomic system. Probably the lack of control mean that the Soviets could no longer print Reich Marks that were honored in the Western zones. Surely Stalin would have objected to the lack of control that would result from a strong currency and vibrant market economy. And he probably saw the currency reform as the first step in organizing a West German government.

Negotiations

What followed was 2 years of fruitless dithering with the Soviets.

First Law on Currency Reform (June 1948)

The Western Allies finally decided that Soviet cooperation was unobtainable and acted. The Allies announced The First Law on Currency Reform in the American, British, and French occupation zones (June 18). The Law specified the conditions for the introduction of the new German currency to replace the Reichmark--the Deutschmark. It went into effect 2 days later (June 20, 1948). The Law was promulgated by the three Western Military Governors (America, Britain and France) after they were unable to obtain Soviet agreement. The Reichmark was invalidated. The new currency was named the Deutsche Mark which was be divided into 100 Deutsche Pfennig. The old currency (Reichsmark, Rentenmark and Mark notes) issued by the Allied Military authorities was invalidated as of June 21. An exception was made for old Mark notes and coins up to a denomination of 1 mark. This was done to prevent a temporary shortage of small change. The small notes and coins continued in use, but at one tenth their old or nominal value. Postage stamps remained valid at one tenth their nominal value.

Implementation

As a first step, each inhabitant of the western zone received a sum of the new Deutsche Mmark--60 marks to be purchased by an equal sum of old bank notes. Other money held by the German public, as well as savings accounts in banks, savings banks, and postal-savings institutions was converted into Deutsche Marks at a later date. The conversion rate drastically reduced the total amount of money in circulation. Other details concerning the exchange of money was published in subsequent laws. The exchange rate was set at 10 to 1 as initially suggested in the American plan.

Impact

Ludwig Erhard's widely feared currency reform proved to be the foundation of Germany's Wirtschaftswunder. It was followed by other measures lifting both NAZI and occupation restrictions and controls. In a very short period, the black market and barter exchanges disappeared. And to the surprise of many, shortages ended, inflation halted, and German industriouness began an almost unbelievable transformation. Included in the mix of 1948 events was the Berlin Airlift. It transformed how Germans saw the Americans and the American security umbrella created the stability needed for free market economics to function. The currency reform creating the DM created a real currency which gave the German prople a financial instrument which could serve as a reliable store of value and a reliable legal tender. The DM not only established the foundations of the West German economy and of the West German state, but also served as the foundation of the European Union's Euro.

Personal Accounts

A German reader writes, "I remember, 13 years old, Sunday June 20, 1948: Together with my grand-father we had to go to a small restaurant nearby to get the new money. The following week we were surprised at how fast the shops began showing new products in their windows. The U.S. government together with their Allies did a good job--the "Wirtschaftswunder". It was a big success, not only for us, but also for people in other countries. World economy grow up after a terrible war. As a small boy I had about 1000 Reichsmark in my account at the Savings Bank, then only 68 of the new Deutsche Mark remained. Such a currency cut with the present high debits of the states and following a second, world-wide Wirtschaftswunder would be now an interesting option. But, please, not the citizens loose the money, but the states - and they learn how to save money, what do you think of this idea? (well, I imagine that at the end again the citizens, old and young, haved to pay)."

Sources

Bennett, Jack. "The German Currency Reform,"

Navigate the Children in History Website:
[Introduction] [Biographies] [Chronology] [Climatology] [Clothing] [Disease and Health] [Economics] [Geography] [History] [Human Nature] [Law]
[Nationalism] [Presidents] [Religion] [Royalty] [Science] [Social Class]
[Bibliographies] [Contributions] [FAQs] [Glossaries] [Images] [Links] [Registration] [Tools]
[Children in History Home]

Created: 4:46 AM 2/25/2010
Last updated: 1:12 AM 5/15/2014