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New Marks, Old Mistakes in Berlin

There can be no doubt that the Russians deliberately created the Berlin crisis. Every step they have taken in recent months has been designed to cause a chaotic situation which, they hoped, would drive the Western Allies out of the German capital. But the westerners, by their ineptitude and lade of foresight, have unwittingly aggravated the crisis and worsened their situation in Berlin, thus playing into the hands of the Russians.

It is quite true that the western Berliners are worried by the Russians' cold blockade of the American, British and French sectors of the city, and heartened by the fabulous fleets of planes pouring in supplies. Most of them blame the Russians for their plight. Though they recognize the present duel as a war of nerves, they notice that, as always, the westerners are the allies of life and liberty, the easterners of starvation and distress. But they are at present most intimately concerned with the effect upon their lives and futures of the simultaneous circulation of two currencies in the city. And for the distress this causes, they do not hold the westerners blameless.

The crisis is certain to figure in future textbooks on economics, Seldom before has Gresham's famous law that “bad money drives out good” had such a proving ground.

For the financier, there may not be much to choose between the western-backed Deutsche mark, the official currency of the western sectors, and the Russian-backed “sticker” mark (the old Reichsmark with the stickers attached), the legal tender in the eastern sector and the Soviet occupation zone generally. Both currencies have no backing except the bayonets of the respective occupation powers.

But the situation is different for a majority of ordinary Berliners. Before the Deutsche mark was introduced here, they had heard news about what the new currency could buy in the western occupation zones. Moreover, relying instinctively on a currency backed by the West as against one backed by the East, they plumped for the Deutsche mark as "good" money. Their choice seemed justified by loud trumpeting by western "experts" that the new money was “hard”—just the sort every right-thinking Berliner should use.

Yet, just a fortnight after the new money began to circulate here, the "experts" are forced to admit that the Deutsche marks have virtually disappeared. Everybody is either hoarding them or using them exclusively for black-market purposes, since the black marketeers are now refusing the old Soviet-sponsored currency. At the moment, the new marks have only gone underground. But Berlin buys far more from western Germany than it sells there; and observers predict that the new marks will drain out of the city altogether as soon as more normal communications are restored with the western occupation zones. At that time, western Berliners will be back where they would have been if the new currency hadn't been introduced into the city—they will be using the Soviet-sponsored old marks.

Meanwhile, the way the introduction of the new currency was handled here has had two bad results: (1) it has done more than anything else to hurt the confidence Berliners had in the Western powers; and (2) it has in effect defeated the Western powers' political purpose in bringing the new marks to Berlin. This purpose was to prevent the Russians from using general circulation of the old marks as a powerful lever in their control of the city.

But the westerners were incredibly inept, and as a result the old Soviet-sponsored

marks are now in fact the city's main currency. They also are well on the road to becoming the city's only currency. Except for speculators who have reaped rich harvests, no western Berliner has gained anything, and most have lost. Moreover, it was precisely those Berliners who trusted the westerners who suffered most, since these pro-westerners refused to accept the Russians' offer to profit by eastern-sector currency reform.

The political loss of prestige has been enormous. The pro-West Berliners feel very strongly that the westerners have welched on them, pointing to the sequence of events as proof. The new mark was introduced here on June 25, the day after the Russians had announced their own currency reform. Most Berliners recognized the Russian announcement as the inevitable, even necessary, response to the previously announced western currency reform. But they welcomed the contest on a political basis, seeing in the western move proof that America, Britain and France would remain here no matter what Russian pressure might be applied to get them out. On this basis, they were ready to accept the difficulties that would arise as a result of the simultaneous circulation of the two currencies.

A certain amount of protest was voiced when the western authorities ruled that both currencies would be accepted at par for rationed foodstuffs, elevated and subway fares and in payment of municipal services such as gas and electricity. Nevertheless the ruling was eventually accepted. Insistence on payment in the new marks for food rations would have made impossible the situation of the hundreds of thousands of Berliners who live in the western sector but work in the eastern. Moreover, Berlin's elevated railways are under complete Russian control because they form part of the Soviet zone's general railway system.

During the following days, other western orders broadened the field of goods and services for which both currencies had to be accepted at face value, and there was a mounting wave of protest from pro-western Berlin politicians and financial experts. The final blow fell on July 4 when the westerners suddenly announced that only 25 percent of all wages would be paid in western marks, the remainder in the old marks. In effect, this decision forced the acceptance by Berliners of a major part of their wages in a currency that western officials had been denouncing as inflationary and worthless.

J. O. Fisher Freeman, deputy Financial Adviser to General Clay, told newspapermen that it had never really been the intention of the westerners to introduce the Deutsche mark as the main currency in the western sectors of the city. He made this statement the day after the issue of the 25-percent-wage decision. To American and British newspapermen who heckled him, he said, "One might really regard the 25 percent to be paid in western marks as a hard-currency bonus."

For 90 minutes Freeman and Bernard Cook, of the British headquarters, were put through grueling questioning. The main point of the criticism was that the westerners were trying to carry out the currency reform according to the textbooks without regard for die unique political and economic position of Berlin today. Repeatedly, the two financial experts were forced to admit that they had not allowed for difficulties that correspondents and other observers had warned against for months, indeed since the first mention of currency reform.

Questioning of the experts brought out, for example, that no provision had been made for employers in businesses earning no new marks to obtain such marks for the payment of their employees' wages. And it became clear that practically every employer would pay all wages in cheap eastern marks, salting away the valuable western ones either for a rainy day or for a flight out of Berlin to the western zones. These facts had almost literally to be forced from the experts. And the attitude of the Berliners was not improved by the rumor that General Clay had to intervene personally before Freeman and Cook would agree to meet the press.

The first stages of the Russians' cold blockade of the city did not seriously bother Berliners. Since the complete stoppage of land communications on July 4, the Berliners of the western sectors have been feeling the pinch. The immediate creation of the air bridge, over which some 500 transport planes have been flying in supplies, prevented any cutting of the scanty food rationing, but there has been a great reduction in the available supply of electricity. Long summer days make this tolerable in homes, but street cars have been rarer and even more overcrowded.

Most important of all, factories in the western sections are going on halftime, and the city authorities expect to have 100,000 unemployed to deal with. Within a month or so, industrial production will have come almost to a halt because of lack of electricity, coal and raw materials. The success of the air bridge makes it hard to say flatly that sufficient quantities of coal and raw materials could not be flown in. But air-transport experts believe it would take at least 600 of the heaviest four-engine bombers to bring in the coal, and many hundreds more the raw materials.

For all this, the Berliners hold the Russians primarily responsible, but as the days pass and the situation grows more tense, there is a tendency to grumble more about the westerners' lack of foresight and faulty understanding both of their eastern antagonists and of the exacting requirement of a power-politics contest.

Theoretically, the next step the Russians could take would be to interfere with the operations of the westerners' air bridge. However, no one here expects them to disregard General Clay's warning. The airfields at which the transport planes land are well within the American and British sectors, and any interfering with planes in the air would amount to an openly offensive act—something which both easterners and westerners are carefully avoiding. In fact, the most noticeable aspect of all the Russian acts is that they have at least the appearance of legality, and could be countermanded without serious loss of face. For example, the stoppage of rail freight operations between Berlin and the West was officially explained as the result of "technical difficulties on the railway tracks near Magdeburg." If the Russians wanted to back up, they could say the tracks had been repaired.

The western authorities here are in no position to carry out successful reprisals against the Russians. It is true, that they could put them out of the Berlin radio station in the British sector of the city, or they could close the canal running through the western sectors of the city, which carries much vital Russian traffic. But the Russians' hold so many better cards in this kind of game that it would be folly to try to play it.

Only strong government action in Washington, London and Paris can force the Russians to lift the blockade, and it can be been for granted that Moscow will exact a high price. Though the Russians realize by now that they cannot force the westerners, out of the city by war, they also feel that the westerners can remain here only as long as a majority of the western-sector Berliners want them to stay: if the pro-western Berliners ganged up with the East against the West, the western position would be untenable.

Here is where the currency blunders come in. The Russians, as usual, are using two strings to their bow. While making the economic situation of the Berliners as difficult as possible, they also are trying to shift the blame to Washington and London. Thus far, the scheme is not a success, but a start has been made in confusing the Berliners.

If more blunders are made—and the Russians are counting on them, —Moscow hopes a day will come when the Germans in the western sectors will ask the Americans and British to get out. If that day comes, the Americans, British and French will have to stage the most disgraceful retreat of the cold war.

This article originally ran in the July 19, 1948 issue of the magazine.