Prologue Magazine

The Black Market in Postwar Berlin

Colonel Miller and an Army Scandal

Fall 2002, Vol. 34, No. 3

By Kevin Conley Ruffner

Berlin black market U.S. and Soviet soldiers and German citizens at a Berlin black market, August 15, 1945. Allegations that American military personnel profited from such markets created a serious public relations problem for the military. (NARA, 111-SC-209943)

Col. Francis P. Miller's testimony on August 14, 1946, before the US Senate's Special Committee to Investigate the National Defense Program unleashed an avalanche of allegations of wrongdoings in the US Office of Military Government (OMGUS) in Germany.1 Following reports of the breakdown of military discipline among army personnel in Europe in the months after the end of the war, Colonel Miller's complaints had a ripple effect in Washington, attracting the attention of politicians, senior policymakers, and military officials. Allegations that army personnel profited from the burgeoning black markets in Germany posed a serious public relations problem. The ensuing investigations in the fall of 1946 provide insights into the US occupation of Germany, which have been generally ignored by the participants themselves as well as historians.

When he met with the special committee, Colonel Miller had just returned to the United States from his assignment as the executive officer and plans and policy officer with the Office of the Director of Intelligence (ODI) at OMGUS headquarters in Berlin. There, he had played a key role in planning for the structure of American intelligence in occupied Germany.2

The quick demobilization of the army in Germany and the division of command between the United States Forces European Theater (USFET), under Gen. Joseph T. McNarney, in Frankfurt and Lt. Gen. Lucius Clay as the deputy military governor and director of OMGUS in Berlin, frustrated Colonel Miller's plans for a large postwar intelligence organization. Miller resented Clay because he shifted most of the intelligence responsibilities and resources to the USFET headquarters.3 The military government itself had only a few intelligence officers in Berlin and scattered throughout the various German states (Laender), a fatal flaw in Miller's opinion.

Colonel Miller also held personal grudges against several of Clay's leading staff officers, especially then-Brig. Gen. James B. Edmunds, the director of administrative services.4 Miller regarded Edmunds as corrupt and involved in illicit relationships with German women. He also felt that Edmunds had been vindictive towards several subordinate officers on the OMGUS staff who complained of what they perceived as illegal activities within the headquarters.5 With the assistance of Col. Henry G. Sheen in ODI, Miller began an unofficial investigation into the activities of General Edmunds and his staff. When General Clay learned about the private investigation, he ordered it to cease. Miller and Sheen then took their complaints to Maj. Gen. Withers A. Burress, the USFET inspector general, who dismissed their claims as lacking foundation. Burress, however, referred the two officers to the OMGUS inspector general. Miller refused to approach that officer because he fell under the direct supervision of General Edmunds.6

In April 1946, Miller complained to an old friend, Dr. Thomas Parran, surgeon general of the Public Health Service, who was on a fact-finding tour of Europe. Miller "confided that he was morally shocked over some of things that he believed were going on in Berlin." Parran, in turn, urged Miller to take his concerns to the Senate special committee and promised an introduction to its chair, Senator James M. Mead (D - New York). By July, Dr. Parran had informed the special committee and its chief investigator, George Meader, about Colonel Miller's concerns.7

The following month, while on terminal leave from the army, Miller appeared in an executive session of the special committee. His testimony provided the senators with a graphic view of the state of General Clay's intelligence organization and collection efforts, the "moral disintegration" of American officers and enlisted men and its effects on American "prestige and reputation," and the extent to which private economic interests, both American and German, influenced US occupation policies.8

Colonel Francis P. Miller Colonel Miller flatly denounced his commanding officer. "General Clay," he stated, "does not attach importance to intelligence." Citing as an example the need for American intelligence to ascertain the extent of starvation in the Russian zone during the winter of 1945 - 1946, Miller reasoned that, "like many of the older Regular officers, [Clay] does not understand intelligence and is not interested in it." He went so far as to claim that the "success of our occupation depends upon the Deputy Military Governor [Clay] being informed in the field of politics, economics, and social affairs, and if he is not adequately informed, either he or his successor is, in the governmental sphere, some day going to get as badly caught out as we were in the military sphere at Pearl Harbor. It is just as simple as that."9
Col. Francis P. Miller (NARA, 260-357-1)

When discussing the state of discipline among army personnel, Miller said it was his "considered judgment that the German troops occupying France had a better record in their personal contact with the population than the American troops occupying Germany."10 Furthermore, he alleged that white officers were afraid to control Negro troops, and soldiers of both races behaved badly in front of German civilians. Soaring rates of venereal disease among Negro personnel, he claimed, were key indicators of the breakdown of discipline among these troubled units.11

The root of the army's overall problems in Germany, Miller explained, lay in its officer corps. Miller described what he had heard about officers involved in the black market and other illegal activities. Viewing the rising Soviet threat in Germany, the colonel complained to the congressional committee, "we have too many men in the Army who think of America as a pigsty in which the sows shove each other around to get at a delicious trough. There is something wrong with attitude of too many of our citizens towards this country and its future. It is," Miller flatly declared, "because these men are not thinking of the national interest and the American way of life, but of padding their own pockets, making what they can, from the officers down to the GI, that we have had the incredible situation in Germany where, as you realize, much more money was coming home than was being paid to the troops."12

When asked by the senators where the fault lay, Colonel Miller cautioned that it was only a "relatively small minority" of officers and soldiers who created this unfortunate picture in Germany. Yet "it is like a rotten apple that spoils the rest of the apples." The rot, in Colonel Miller's mind, started at OMGUS in Berlin. "Frankly," Miller admitted, "I can't understand General Clay's tolerance of some of the men I have named."13

The Black Market in Berlin

In the ten years after World War II, Europe relied, to a great measure, on goods and services produced and sold in the underground economy. The black market peaked during the first three years after V-E Day, before the Marshall Plan and currency reform sparked economic revival, especially in the new Federal Republic of Germany. While every European country suffered through various forms of the black market, Germany and Austria, and more critically, Berlin and Vienna, became the epicenters of this temporary economy.

By the summer of 1945, the black market was in full swing in Berlin.14 Following the arrival of American and British troops in July, two large markets opened in the Tiergarten and Alexanderplatz. Located in the British sector, the Tiergarten, the remnant of one of Berlin's largest parks in the shadow of the burned-out hulk of the Reichstag and the Brandenburg Tor, was Berlin's largest and best-known black market. Russian soldiers mingled with other Allied troops, German civilians, discharged German soldiers, and displaced persons in a great bazaar where everything and anything was offered for sale or barter.15

Cigarettes, chocolate, liquor, and small foodstuffs constituted the most easily disposable commodities.16 American soldiers purchased ten packs of cigarettes for fifty cents at the PX and sold them for one hundred dollars. Watches and cameras, however, were the most lucrative items on the black market.17 Col. (later Brig. Gen.) Frank Howley, commandant of the American sector in Berlin, witnessed firsthand the Soviet passion for watches:

On the Russian G.I. level, the immediate goal was a watch. Russians love watches for a number of reasons. They always have been associated in the Muscovite mind with affluence and an established, even exalted, position in life. Peasants never owned watches. A wrist watch— well! Watches soon became a universal commodity because troops had no confidence in Russian currency. Also, a soldier could send a watch home and his wife could barter it for a cow. Even our G.I.'s realized the fortune, in Russian eyes, represented by a watch and started selling their own and converting the money into American dollars, although our men were forbidden to enter these markets. Some Russian soldiers wore a half dozen watches. A Mickey Mouse watch was worth more than a jewel-studded trinket from Cartier. Some Russians paid the equivalent of US$1,000 for a watch.18

The black market was so lucrative that private soldiers sent thousands of dollars to the United States derived from their illegal earnings. In addition to the cash generated by the black market, soldiers also exchanged PX goods for precious German items, including antiques, artwork, family heirlooms, jewelry, rugs, china, and porcelain. The army shipped these valuable goods to America when the soldiers returned home. In July 1945 the army's finance office in Berlin disbursed one million dollars in pay, yet soldiers sent some three million dollars to addresses in America.19

The American decision in 1944 to give the Russians the plates for the Allied occupation marks appears to have the main factor behind the explosion of black market activities in Berlin. The Soviets printed untold amounts of occupation currency and used it to pay their troops in Germany. Those soldiers, who had served for years without compensation, were told to spend it in Germany because the money could not be taken back to the USSR. They then embarked upon a spending spree in 1945, fueling the black market in Berlin.20

The US Army incurred an estimated $300 million in extra costs because of the occupation plate fiasco and subsequent black market activities. Yet there was a higher price to pay. In time, the army instituted measures to restrict the amount of money that soldiers could send home, and it cracked down on the sale or trading of American goods.21 The black market affected all levels of the American army in Germany and strained early German-American relations. Officers, enlisted men, and civilians alike succumbed to the lure of getting rich quickly with little risk or worry.22 "The very prevalence of the petty black-market activities contributed to a gigantic fraud which gave many Germans the impression that Americans are fundamentally dishonest and weak. This was not an enviable reputation," concluded the official army historian in Germany, "and it detracted from the effectiveness of American efforts in Germany."23

From Victory to Disarray

The United States Army ended the war in Europe with more than three million men and women in uniform. By late 1946, the army's strength in the United States Forces European Theater (USFET) had been whittled to 200,000 troops, and it continued to drop until the outbreak of the Korean War in 1950.24 The victorious American forces degenerated into a largely poorly trained and ill-disciplined force mainly interested in living a soft garrison existence. According to a 1946 army intelligence report, German civilians regarded American troops as "men who drink to excess; have no respect for the uniform they wear; are prone to rowdyism and to beat civilians with no regard for human rights; and benefit themselves through the black market."25 In February of that year, a report issued by the Strategic Services Unit (SSU), the successor to Office of Strategic Services (OSS), stated that Berliners felt that "an American is just a Russian with his trousers pressed."26

Indeed, the army found itself overwhelmed by the demands of demobilization in the rush to return home. The remaining troops, often inexperienced and poorly trained, were "occupied in occupying" the American zone of Germany and its sector in Berlin. "Much of Joe's 'activity' is simply sitting," said one observer. "Everything of value to us must be guarded. The objects that we have found it desirable to guard have ranged from major war criminals to thousands of ordinary POWs, the Reichsbank gold reserve, the looted and displaced art, our own radio stations, telephone exchanges, supply dumps, fuel reservoirs, headquarters, airports, machinery, finance offices, and mail." In addition, the army was responsible for the administration of military government in Germany, enforcing the denazification of the Germans, and general law and order duties. Little time remained to train for combat missions.27

As victors in the defeated land, many Americans assumed the role as a sort of imperial Raj. While the war raged, the army commandeered houses, factories, transportation facilities, and public buildings for military purposes. Coupled with this requisitioning, American soldiers "liberated" the property of the enemy. Looting fever continued after the German surrender, further accelerating the breakdown of military discipline. Soldiers of all ranks resisted Gen. Dwight D. Eisenhower's ban on fraternizing with German civilians. Enacted as the army first crossed into enemy territory in 1944, American personnel were expressly forbidden to have any social contact with the Germans. But this policy simply proved unenforceable and tied up army commanders just as the war's tensions eased. In June 1945, Eisenhower lifted the ban on American soldiers playing with children. The following month, the fraternization ban fell apart and was formally abolished in October (with the exception of American soldiers marrying Germans or billeting in the same houses).28

The dissolution of the fraternization ban effectively gave Army officers and enlisted men unbridled sexual license. One soldier in late 1945 revealed that "at the risk of letting the cat out of the bag, it must be admitted that all the GI wants in Europe is a 'good deal'— that is a comfortable place to sleep, food at all times, a woman to do laundry and pressing for cigarettes or candy, no Army duty requiring labor, and a chance to fraternize as often as possible." In this soldier's opinion, "in Germany, naturally, the GI finds the best deal."29

"Goin' frattin" soon became a major activity for American soldiers and a cause of significant disciplinary problems throughout the American zone and in Berlin. In some instances, black and white soldiers fought over German women who were eager to make friends with the victors. One result was a dramatic escalation of venereal disease— some 235 percent between May and December 1945— among American soldiers in Germany.30 VD soon became a major public health menace in occupied Germany. Prostitution among German women also rose to unprecedented levels. By 1946 an estimated 500,000 women made a living in Berlin on the streets, leading one German official to state that it had become "impossible to distinguish between good girls and bad girls in Germany. Even nice girls of good families, good education and fine background have discovered their bodies afford the only real living. "Moral standards," he exclaimed, "have crashed to a new low level. At the present rate, in two months I wonder if there will be a decent moral woman left."31

The rapid turnover of personnel in 1945 - 1946 created havoc for the army in Europe. The black market coupled with loosened sexual mores and permissive attitudes toward the appropriation of German property contributed to the army's poor command climate in the American zone and in Berlin.32 It did not take long for the deterioration of the army in Germany to become the subject of concern to commanders in Germany and in Washington. Starting in the summer of 1946, USFET was rocked by a series of congressional and War Department investigations coming on the heels of embarrassing courts-martial of officers and enlisted men who abused army soldiers at the Tenth Replacement Depot in Lichfield, Great Britain, during the war.33 The press also picked up on a series of scandals involving army officers and looted treasures.34

Political Firestorm

Colonel Miller's testimony to the Senate special committee was the match that ignited a political firestorm in Washington. Anxious to use scandals in the American military government's program in Germany to attack the Truman administration, congressional Republicans seized upon Miller's allegations as the fall electoral campaign approached. Senator Owen Brewster, a Republican from Maine and a member of the special committee, called for an immediate Senate investigation and accused Democrats of delaying for political reasons.35 "I know of nothing before the committee of comparable importance," he told reporters. "Munitions, scandals, questions of who received gifts for launching ships, and other matters are water over the dam. This occupation situation," Brewster asserted, "involves the welfare of our boys overseas, and the prestige of the United States and probably affects the course of future wars."36

Despite Brewster's charges, Democrats were also indignant. "I want to say," Senator Mead told Colonel Miller, "we appreciated your being here and you have told us a very interesting, although rather shocking story." Mead further declared that "it would be difficult for me to believe that men of the standing and integrity of General McNarney and General Clay would tolerate anything of this character, at least as widespread as it apparently is, according to your testimony."37 Senator Mead announced on September 12 that the special committee would undertake a review of the army's policies in Germany, including allegations of misconduct by military personnel. He did not, however, offer a specific date for any hearings.38 Two weeks later, Senator Mead resigned from the special committee in order to concentrate on his gubernatorial race in New York. Senator Harley M. Kilgore (D - West Virginia) was named acting chairman and, after consulting with the special committee and President Harry Truman, directed George Meader, the special committee counsel, to launch the investigation.39

The Meader Investigation

Meader launched an aggressive investigation and interviewed dozens of witnesses in Washington, including ranking members of the State and War Departments.40 On October 10, Meader flew to Paris to confer with Senator Arthur H. Vandenburg (R - Wisconsin) and Texas Democratic Senator Tom Connally, a member of the special committee and, more important, chairman of the Senate Foreign Relations Committee. Both senators agreed to the need for the special committee to investigate the American military government program in Germany. Connally even expressed the sentiment that the United States was the "biggest sucker in the world" for accepting displaced persons from all over Europe and feeding them in the American zone of Germany.41

While in France, Meader also visited with Secretary of State James F. Byrnes and Walter Bedell Smith, the US ambassador to the Soviet Union and former chief of staff to Gen. Dwight Eisenhower. He then proceeded to Frankfurt to meet with senior army officers at USFET headquarters, where he encountered Melvin Benson, a former OSS officer and an investigator from the House Military Affairs Committee, who was also in Europe examining military government activities. From October 15 until his return to Washington on November 5, Meader met all of the senior officers in Germany and Austria, including General McNarney, Lt. General Clay, and Gen. Mark Clark.42

Mindful that his investigation cut across the jurisdictions of several standing Senate committees, Meader concentrated on the issues raised in Colonel Miller's testimony before the special committee in August.43 His report, completed shortly after his return to Washington, uncovered several cases of officer misconduct and other breakdowns in army discipline.44 In his conclusion, he noted that the "Committee ought to explore thoroughly and in a continuing investigation the conduct of government in occupied areas on the part of United States agencies."45

Berlin Black Market, Part 2
Berlin Black Market, Part 3

Kevin Conley Ruffner is a historian with the History Staff of the Central Intelligence Agency, specializing in World War II and early Cold War intelligence. His two-volume book of documents, Forging an Intelligence Partnership: CIA and the Origins of the BND, 1945 - 49, was recently declassified. Dr. Ruffner is currently writing a book on the black market and the U.S. Army in Berlin.

Articles published in Prologue do not necessarily represent the views of NARA or of any other agency of the United States Government.