In the aftermath of World War II, the victorious Allies of World War II developed industrial plans for Germany which would be imposed to reduce and manage Germany's industrial capacity.

Background At the Potsdam Conference (July–August 1945), with the US seeking to implement the Morgenthau plan, drawn up by Henry Morgenthau Jr., the United States Secretary of the Treasury, the victorious Allies decided to abolish the German armed forces as well as all munitions factories and civilian industries that could support them. This included the destruction of all ship- and aircraft-manufacturing capability. Further, the victors decided that civilian industries that might have military potential were to be restricted. The restriction of the latter was calibrated with Germany's "approved peacetime needs", which were defined based on the average European standard. In order to achieve this, each type of industry was subsequently reviewed to see how many factories Germany required under these minimum level-of-industry requirements.

Level of industry plans The first "level of industry" plan, signed by the Allies on March 29, 1946, stated that German heavy industry was to be lowered to 50% of its 1938 levels by the destruction of 1,500 listed manufacturing plants.Henry C. Wallich. Mainsprings of the German Revival (1955) pg. 348. In January 1946 the Allied Control Council set the foundation of the future German economy by putting a cap on German steel production capacity: the maximum allowed was set at about 5,800,000 tons of steel a year, equivalent to 25% of the prewar production level."Cornerstone of Steel". Time. January 21, 1946. The UK, in whose occupation zone most of the steel production was located, had argued for a less-limited reduction of 12 million tons of steel per year, but had to submit to the will of the US, France, and the Soviet Union (which had argued for a limit of 3 million tons). Steel plants thus made redundant were to be dismantled. Germany was to be reduced to the standard of living it had known at the height of the Great Depression (1932).Cost of Defeat, Time, April 8, 1946 Car production was set to 10% of prewar levels, etc.The President's Economic Mission to Germany and Austria, Report 3 Herbert Hoover, March, 1947 pg. 8

On February 2, 1946, a dispatch from Berlin reported:

Timber exports from the US occupation zone were particularly heavy. Sources in the US government admitted that the purpose of this was the "ultimate destruction of the war potential of German forests." Extensive deforestation due to clear-felling resulted in a situation which could "be replaced only by long forestry development over perhaps a century.".Nicholas Balabkins, "Germany Under Direct Controls; Economic Aspects Of Industrial Disarmament 1945-1948, Rutgers University Press, 1964. p. 119. The two quotes used by Balabkins are referenced to respectively; US office of Military Government, A Year of Potsdam: The German Economy Since the Surrender (1946), p.70; and US Office of Military Government, The German Forest Resources Survey (1948), p. II. For similar observations see G.W. Harmssen, Reparationen, Sozialproduct, Lebensstandard (Bremen: F. Trujen Verlag, 1948), I, 48. E. J. Bryce noted in March 1948 that "At the present rate of deforestation the resources of the British Zone will be exhausted within a very few years."Deforestation in Germany by E. J. Bryce, from 12 March 1948, page 16 of The Spectator

The first plan was subsequently followed by a number of new ones, the last signed in 1949. By 1950, after the virtual completion of the by-then much watered-down "level of industry" plans, equipment had been removed from 706 manufacturing plants in the west and steel production capacity had been reduced by 6,700,000 tons.Frederick H. Gareau "Morgenthau's Plan for Industrial Disarmament in Germany" The Western Political Quarterly, Vol. 14, No. 2 (Jun., 1961), pp. 517-534

Moderation of policy Beginning in mid-1946 American and British policy towards the German economy began to change, illustrated by Byrnes's September speech restatement of policy on GermanyDennis L. Bark and David R. Gress. A History of West Germany Vol 1: From Shadow to Substance (Oxford 1989) p178 (also known as the "Stuttgart speech" or "Speech of hope"). According to Dennis L. Bark and David R. Gress in A History of West Germany the Morgenthau Plan came to be seen as inflicting undue hardship, and so the approach was shifted, over time, to one encouraging German economic expansion. As part of this, the allowed levels of industrial capacity were raised.Dennis L. Bark and David R. Gress. A History of West Germany Vol 1: From Shadow to Substance (Oxford 1989) p179

According to Vladimir Petrov in Money and Conquest: Allied Occupation Currencies in World War II the reason for the change in US occupation policy was almost exclusively based on economic considerations. Although a large part of the occupation costs were placed on the German economy, the US and the UK were increasingly forced to supply food imports to prevent mass starvation.Vladimir Petrov, Money and Conquest; Allied Occupation Currencies in World War II. Baltimore, Johns Hopkins Press (1967) p. 261 According to some historians the US government abandoned the Morgenthau Plan as policy in September 1946 with Secretary of State James F. Byrnes' speech Restatement of Policy on Germany. Others have argued that credit should be given to former US President Herbert Hoover who in one of his reports from Germany in 1947 argued for a change in occupation policy, amongst other things stating: There is the illusion that the New Germany left after the annexations can be reduced to a "pastoral state". It cannot be done unless we exterminate or move 25,000,000 people out of it.Erik Reinert, Jomo K.S. The Marshall Plan at 60: The General's Successful War On Poverty , UN Chronicle (accessed 2008-05-20) Worries about the sluggish recovery of the European economy (which before the war was driven by the German industrial base) and growing Soviet influence amongst a German population subject to food shortages and economic misery, caused the Joint Chiefs of Staff, and Generals Clay and Marshall to start lobbying the Truman administration for a change of policy.Ray Salvatore Jennings "The Road Ahead: Lessons in Nation Building from Japan, Germany, and Afghanistan for Postwar Iraq May 2003, Peaceworks No. 49 pp 14,15 General Clay commissioned several expert studies about necessary changes in German economyE.g. Lewis H. Brown, A Report on Germany (New York, 1947) and stated There is no choice between being a communist on 1,500 calories a day and a believer in democracy on a thousand. In July 1947, President Harry S. Truman rescinded on "national security grounds"Ray Salvatore Jennings "The Road Ahead: Lessons in Nation Building from Japan, Germany, and Afghanistan for Postwar Iraq May 2003, Peaceworks No. 49 pg.15 the punitive occupation directive JCS 1067, which had directed the US forces of occupation in Germany to "take no steps looking toward the economic rehabilitation of Germany [or] designed to maintain or strengthen the German economy." It was replaced by JCS 1779, which instead noted that "[a]n orderly, prosperous Europe requires the economic contributions of a stable and productive Germany.""Pas de Pagaille!". Time. July 28, 1947. Nevertheless, General Clay needed over two months to overcome continued resistance among his staff to the new directive, but on July 10, 1947, it was finally approved at a meeting of the SWNCC. The final version of the document "was purged of the most important elements of the Morgenthau Plan."Vladimir Petrov, Money and Conquest; Allied Occupation Currencies in World War II. Baltimore, Johns Hopkins Press (1967) p. 236 (Petrov footnotes Hammond, American Civil-Military Decisions, p. 443)

The restrictions placed on German heavy industry production were thus partly ameliorated, as permitted steel production levels were raised from 25% of pre-war capacity to a new limit placed at 50% of pre-war capacity."Pas de Pagaille!". Time. July 28, 1947.

Economic consequences

The reduction in steel production that resulted from the first and the second level of industry plans meant that a steel production bottleneck ensued which forced other parts of German industry to fall below their own permitted production levels. The economy of the Bizone finally hit rock bottom early in 1948 as a consequence of this.Nicholas Balabkins, "Germany Under Direct Controls; Economic Aspects Of Industrial Disarmament 1945-1948, Rutgers University Press, 1964. p. 128-128.

Compounding the problems in the steel industry and their effects on the German economy as a whole was the prohibition against importing high-grade Swedish iron ore. Until that was lifted in 1948, German steel plants had to rely on low-quality local ore which required almost twice the amount of coal to process. Moreover, the Germans were also forced to sell their steel at wartime prices until April 1, 1948, which meant large losses for the industry.Nicholas Balabkins, "Germany Under Direct Controls; Economic Aspects Of Industrial Disarmament 1945-1948, Rutgers University Press, 1964. p. 130. Additionally, attempts to "decartelize" the German steel industry also contributed to the low output.

The Allied Control Council set the price for German coal at half what it cost to produce it.Nicholas Balabkins, "Germany Under Direct Controls; Economic Aspects Of Industrial Disarmament 1945-1948, Rutgers University Press, 1964. p. 124 From May 1945 until September 1947 the US, UK, and France exported German coal for $10.50/tonne, while the world price hovered closer to $25–$30 per tonne. During this period the Allies thus took roughly $200,000,000 out of the German economy from this source alone. In September 1947 the export price was raised but remained set at $5–$7 below world-market prices.

In Germany the shortage of food was an acute problem. According to the UNRRA in 1946–47 the average kilocalorie intake per day was estimated to be 1,080,Alan S. Milward, The Reconstruction of Western Europe. Table p.14 which according to Alan S. Milward was an amount insufficient for long-term health.Alan S. Milward, The Reconstruction of Western Europe. p.18 Other sources state that the kilocalorie intake in those years varied between as low as 1,000 and 1,500. William L. Clayton reported to Washington that "millions of people are slowly starving."Gregory A. Fossedal, Our Finest Hour.

Germany received many offers from Western European nations to trade food for desperately needed coal and steel. Neither the Italians nor the Dutch could sell the vegetables that they had previously sold in Germany, with the consequence that the Dutch had to destroy considerable proportions of their crop. Denmark offered 150 tons of lard a month; Turkey offered hazelnuts; Norway offered fish and fish oil; Sweden offered considerable amounts of fats. However, the Allies disallowed the Germans to trade.Nicholas Balabkins, Germany Under Direct Controls: Economic Aspects of Industrial Disarmament 1945–1948, Rutgers University Press, 1964 p. 125