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which controlled the issue of currency, carried on foreign exchange transactions, collected taxes, maintained the obligatory accounts of state-owned industrial enterprises, and handled all industrial short-term credit. The other specialized banks were directly responsible to the DNB and had no policy independence. The Investment Bank maintained the current accounts and handled short-term credits for construction enterprises and provided long-term credits for industrial investment. The Farmers' Bank made loans largely for agricultural investment, while the Trade Bank handled the accounts of and provided long- and short-term credit for trading enterprises.

As the result of a January 1968 reorganization, the State Bank of the GDR (Staatsbank der DDR) is now responsible for general monetary and fiscal policy, currency regulation, and interbank lending operations. The Industry and Trade Bank (IHB) handles all current operations, including both long- and short-term credit for industrial, construction, transportation, and trade enterprises. The IHB, which took over the regional and industrial branches of the DNB, is also supposed to work closely with the enterprises in drawing up financial, investment, and operating plans. The Farmers' Bank (now known as the Bank for Agriculture and Food Industries) has taken over responsibility for industrial enterprises processing foodstuffs. As under the old system, the most important function of the banks and of the Ministry for Finance is to control and monitor the operations of the economy—a function embodies in the financial plan.

The financial plan on the national level organized the flow of funds within the economy according to the dictates of the national economic plan for production and consumption. All lower levels of government, all state enterprises, and some types of cooperatives also have their own financial plans. Projections are made for the financial needs not only of the state sector but also of private enterprises, as well as for the incomes and expenditures of the population. The main components of the financial plan are the long- and short-term credit plans, the cash plan, and the budget.

The State Bank draws up both the long- and short-term credit plans. Before 1963 short-term credits were automatically extended to finance accounts receivable and inventories, and short-term credit almost doubled between 1955 and 1962, a period when inventories were rising rapidly. Beginning in 1963, enterprises were encouraged to use their own resources to cover a larger share of current expenses as well as for longer term investment needs. The normal interest rate for credit is 5%, but lower rates are granted for priority government tasks. Preferential rates are granted to finance above-plan production, maintenance of economic reserves, changes in production to improve quality, and assistance to the housing program.

Banks are also empowered to charge punitive interest rates (up to 10%) to enterprises which are suffering from unplanned losses, are failing to pay their bills, or are accumulating unplanned inventories. Increased emphasis has been placed on bank intervention in the economy since 1971, especially in regard to unplanned inventories, which had risen to 11% of total inventories of centrally controlled industries by 1970. These inventories were sharply reduced in 1972, in part because of the assistance of the IHB in providing funds to eliminate bottlenecks in production.

The cash plan is a projection of currency flows into and out of the banking system. Since the regime tries to keep cash payments to a minimum, the only major cash transactions are wages and salaries and retail sales. Thus, the cash plan is essentially an estimate of income and expenditures in private households. The chief aim of the plan is to insure that increases in income are absorbed by increased purchases of goods. Inflation is a constant problem, since the available supply of consumer goods and services cannot keep up with rising money incomes. The cash plan is backed up by detailed quarterly balances of household incomes and expenditures.

Although the importance of the credit plan has risen, the heart of the financial plan continues to be the budget. It is a major means of implementing the regime's plans for economic growth and of financing the activities of the state. The state budget is made up of the budget of the republic, the budgets of regional authorities, and the centrally planned financial resources of state-owned enterprises. Because it includes valuable information on important and sensitive aspects of economic activity and state policy, detailed information on its contents is closely held. The Ministry for Finance insures that versions circulated within the government are carefully edited and that only selected and meaningless figures are released for publication. Figure 28, showing published revenue and expenditure data for 1972 and 1973, illustrates the limitations in the available data.

The budget is still a major source of funds for capital investment, although budget grants for investment have dropped. The greater part of investment funds is now channeled from the budget through the banking system. The budget also supports industrial and agricultural enterprises with subsidies and other payments. It makes substantial direct

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APPROVED FOR RELEASE: 2009/06/16: CIA-RDP01-00707R000200110021-0