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Forgotten Viceroy

June 2024
5min read

At a press conference in Berlin shortly after World War II, Gen. Lucius D. Clay, director of the military government of the American sector of defeated Germany, announced, “We are not here as carpetbaggers.”

While the word was carved on the heart of every American Southerner of his generation, it probably escaped most Germans entirely. But Clay’s Southern background would have a profound, and wholly beneficial, influence on the rebirth of Germany. One could almost call it the last great accomplishment of Sherman’s March to the Sea.

A four-star general who never fought a battle, Lucius D. Clay is, perhaps, an improbable American hero. But hero he certainly is. It was Clay who was the major impetus behind—and who organized and commanded—that decisive, bloodless victory, the Berlin airlift.

But while Clay is remembered for the airlift, his service as military governor, a position roughly the same as MacArthur’s in Japan, has been largely forgotten. Yet in the long run it was probably more important. For he both secured German friendship for the United States with his compassion for Germany in defeat and made possible the resurgence of that devastated country by backing the radical economic policies of Ludwig Erhard.

By securing Germany, Clay secured Western Europe and made possible the long-term success of the policy of containment. The full scale of his accomplishments is being realized only today, more than forty years after he retired from the Army and fourteen years after his death.

General Clay was born on April 23, 1898, in Marietta, Georgia, the son of a three-term United States senator. Only thirty-three years after the end of the Civil War, Sherman’s march and the turmoil of Reconstruction were an almost palpable memory in Marietta.

That is precisely the reason Clay approached his task in Germany as he did. “I tried to think of the kind of occupation the South would have had if Abraham Lincoln had lived,” he once explained.

Clay attended West Point, graduating in 1918. Too late to fight in World War 1, he joined the Army Corps of Engineers. There he advanced quickly, thanks both to his engineering skills and to his political ones.

In November 1944 Clay was sent to Europe to repair the port of Cherbourg, needed to supply the advancing Allied armies. In thirty days he quintupled the supplies passing through the port. In April 1945 he was put in charge of the military government being set up in the U.S. Zone. (At first Clay served under Gen. Joseph T. McNarney, the U.S. military governor, acting as what might be called his chief operating officer. In March 1947 he succeeded McNarney, thus becoming, in effect, chief executive officer as well.)

While the war still raged, the United States had had to develop a policy to deal with postwar Europe. Not surprisingly, perhaps, it decided on a draconian one. FDR had said to Henry Stimson that if he had his way, he would keep Germans on the breadlines for twenty-five years. The socalled Morgenthau Plan, drawn up under the direction of Treasury Secretary Henry Morgenthau, Jr., in 1943, called for Germany to be stripped of its heavy industry and converted into an essentially agricultural economy.

The Morgenthau Plan was utterly unworkable, and the plan that emerged at the end of the war was called JCS 1067. Prepared by the Joint Chiefs of Staff, this plan was still drastic, calling for what became known as the four D’s: demilitarization, de-Nazification, deindustrialization, and democratization. But plans drawn up by well-fed generals in the comfortable capitals of victory were no match for the reality that was immediate postwar Germany.

The German state had ceased to exist. Transportation was devastated. Millions of refugees with no place to live and no food to eat had swarmed into the country from the east in advance of the Red Army. What was left of the German economy was incapable of supporting the population at a level consistent with life.

It was Clay’s job to handle the dayto-day details of both implementing JCS 1067 and sustaining the lives of the people of Germany and making them once more capable of self-government.

His first task was making the Rhine, the Mississippi of Europe, once more navigable. Without the Rhine, coal from the Ruhr Valley could not be transported to industries and power plants; without the coal there hardly was a German economy.

Within a year he had cleared the thirty-five destroyed bridges that blocked navigation and had six shipyards back in operation, turning out barges and tugs. The economic heart of Europe began to beat once more.

But while performing such feats of engineering, Clay also pressed relentlessly for a change in American policy regarding Germany. He argued that a prosperous Germany would be far less likely to turn to communism than a desperate one. As American relations with the Soviet Union deteriorated, Clay made headway, convincing Senators Tom Connally and Arthur H. Vandenberg, the chairman and the ranking Republican of the Senate Foreign Relations Committee respectively. He also convinced his fellow Southerner Secretary of State James Byrnes. The President soon followed.

On September 6, 1946, Byrnes announced a fundamental change in U.S. policy. “The American people,” he told an audience in Stuttgart, “want to help the German people win their way back to an honorable place among the free and peace-loving nations of the world.” All thoughts of turning Germany into some sort of oversize Ruritania ended. The creation of what would become the Federal Republic of Germany began with the economic merging of the U.S. and British zones of occupation, as urged by General Clay.

One of the biggest problems faced by the German economy was the lack of a viable money. The reichsmark, the old currency issued by the long-defunct Weimar Republic and by the Nazis, had inflated into worthlessness during the war. Billions of them filled bureau drawers and bank accounts, but they wouldn’t buy anything.

The only thing that replaced the reichsmark was the American cigarette. As John Kenneth Galbraith has pointed out, cigarettes, while somewhat inconvenient, are not without their virtues as a medium of exchange. They come in various denominations, from the single cigarette to packs, cartons, and cases. Also, they are inflation-proof because if an excess supply causes a decline in value, the excess will be promptly smoked.

In 1948 Germany was effectively on the Lucky Strike standard. When rumors of a currency reform swept the country in June of that year, a German reporter asked General Clay if it was true that the U.S. Treasury was going to lend fifty million cartons to support the value of the new currency.

General Clay had other ideas. On June 20, 1948, he replaced the old reichsmarks with new Deutsche marks. Each German could exchange reichsmarks, at a ratio of ten to one, up to a total of sixty Deutsche marks. The rest of the reichsmarks floating around the German economy became as worthless de jure as they had already become de facto. Although the new currency was only fiat money, unbacked even by tobacco, it was immediately accepted in the marketplace, proving once again that the only thing needed to make something money is the general belief that it is money.

Lucius Clay both secured the friendship of a beaten Germany for the United States and made possible its miraculous economic revival.

With an accepted currency now in circulation, the German economy immediately began to revive. Empty store shelves began to fill up as goods came out of hiding now that they could be purchased with “real money.” The once thriving black market began to collapse, as did the cigarette economy (with the unfortunate result that millions of Germans began smoking again).

But much more was needed. The German economy—as well as the economies of most other European nations—was hobbled by strict rationing and wage and price controls. Ludwig Erhard had no doubt as to what to do about them. Erhard, one of the few German economists with a clean antiNazi record, had been chosen director of economic affairs in the emerging German government, a government that still lacked any powers not given it by the Allied military governments.

Erhard, who had largely worked out the details on the currency reform, now wanted to abolish all rationing and price and wage controls. He argued that only by freeing the German economy could it really revive. The late 1940s were the golden heyday of government interference in economies. So Erhard’s program was economic radicalism of breathtaking scope. He had submitted his ideas to the Allied military governments and had them wholly rejected.

So, on July 7, 1948, less than three weeks after the currency reform, he simply did it on his own dubious authority, pushing the legislation through the Economic Council and announcing the fact on national radio. The British opposed within minutes. General Clay certainly knew of Erhard’s views and almost certainly of his intentions, and there is no doubt he could have prevented their implementation. He did not.

The effect on the German economy was electric and immediate. Within a year food production had increased so sharply that Germans were eating better than the population of victorious Britain. Coal and steel production soared. In the twenty-one months after currency reform and the abolition of economic controls, German industrial production increased 83 percent. The postwar German economic miracle was under way.

Full credit, of course, must go to Erhard and the German people. Still, in 1948, a Georgia aristocrat who had grown up knowing what it could mean to lose a great war ruled in Germany. He too should get full credit.

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