Germany's Economic Miracle in Danger

How a stroke of genius gave the German economy lasting momentum

Germany‘s rise from postwar prostration to after-war affluence has been widely called the "Wirt­schaftswunder," the economic mir­acle. And anyone who saw Ger­many in the bleak years of 1945-­1947, the cities half in ruins, the currency so worthless that ciga­rettes were preferred to marks, the people hungry, listless, and apathetic, economic revival checked by scores of harsh occupa­tion regulations, might well have set a generation as a minimum term for the restoration of more or less normal conditions.

But striking improvement be­gan in 1948, when the worthless marks were swept into the ashcan and replaced by a new hard currency. It was a drastic surgical operation; for the second time in twenty-five years, a hopelessly in­flated currency had to be mainly written off. But the restoration of the incentive of sound money, with which food and clothing could be bought at normal prices, was the indispensable incentive to hard work and rising production figures.What gave lasting momentum to the brilliant economic recovery was a stroke of genius 

What gave lasting momentum to the brilliant economic recovery was a stroke of genius on the part of one man, chubby, cigar-smoking, enormously energetic Ludwig Erhard, Minister of Economics.

Well versed in classical econ­omics and a specialist in market research, Erhard was completely out of sympathy with the Nazi idea of a controlled economy and composed a secret memorandum on the economic and financial con­sequences that might be expected after the collapse of Hitler’s mad dreams of empire. Appointed di­rector of economic administration after the economic fusion of the American and British Zones of Occupation, he had the vision and courage to try the revolutionary experiment of economic freedom, leaving people free to work out of the postwar devastation and im­poverishment by their own efforts.

One Nazi institution which the occupation powers did not touch was an elaborate system of wage and price controls. When the cur­rency reform was carried out in the summer of 1948, Erhard took advantage of a loophole in what was then a strict system of for­eign control over Germany‘s econ­omy. It was strictly forbidden to change any single fixed price without the consent of the occupa­tion authorities. But there was no ban on abolishing the entire cum­bersome system; apparently, it was believed that no German would have the courage to risk such a step. This is just what

Erhard did. He made a bonfire of all the wage and price restrictions and launched Germany on the ris­ing tide of an economy that was freed after decades of severe con­trol.

This was not accomplished with­out difficulty and opposition. There is a story that General Lucius D. Clay, head of the American Mili­tary Government, called up Erhard and said: "All my economic ex­perts tell me that what you have done is very dangerous."

"So do mine," replied Erhard, and continued to steer his freedom course, with Clay’s later full co­operation and support. For a time prices rose sharply. The trade unions called a general strike in favor of a return to planned econ­omy and controls. Some of the more fainthearted officials in Erhard’s Ministry began to work on drafts of new decrees restoring controls. But Erhard was un­moved. He had bet on freedom and was confident he would not lose.

"Even if the price pendulum has passed the limit of what is moral and permissible," he de­clared at that time, "we shall soon enter upon a phase when, as a re­sult of competition, prices will be reduced to their appropriate level. This level will secure the best re­lationship between wages and prices, between nominal incomes and the price level."

Later, after the reality of the economic miracle had been gen­erally recognized, Erhard, in a reminiscent mood, summed up the considerations that guided him in this early critical phase of Ger­man economic recovery:

"The important thing was to create again an incentive to work. So, from the very beginning of our recovery, I encouraged free imports of foreign goods, and not on a basis of priorities or aus­terity. I was sure that the more we imported the more we would be able to export, thereby starting an ascending curve. Confidence in our new money was strengthened as people saw in the shop windows a larger and larger variety of for­eign goods, some of which they hadn’t seen since the beginning of the Nazi era.

"The competition of foreign products was bound to spur the ingenuity and resourcefulness of our own manufacturers, who had been cut off for a long time from economic contact with the outside world. There were critics at home and abroad who thought it was risky to bet so much on economic freedom. But we were committed to this bet—and we won."

Postwar Prosperity

Erhard’s policy touched off a steady boom of prosperity that transformed Germany in a few years from the shattered, listless, hungry country of the first post­war years into one of the most prosperous lands in Europe. I knew Munich before the war bet­ter than most German cities. When I first went there after the end of the war, the main streets were almost unrecognizable as a result of the bombings that re­duced much of the city to rubble and ruins. Many beautiful pieces of architecture have been irrep­arably lost. But one can now go from one end of Munich to the other and see few pieces of evidence of war destruction. The city is burst­ing at its seams with increasing population. Its main problem now is not reconstruction, but control of the almost unmanageable traf­fic, symbolized in the figure of one million additional cars on the roads of Germany in 1961. There have been times when the German financial authorities were embarrassed by an influx of fugitive moneyYear after year, after the foolish and vindictive restrictions on German industrial output were removed, new records were set in industrial output and exports to foreign countries. The only tangible sup­port for Germany‘s new currency when it was introduced in 1948 was an advance of $200 million from the United States, and the mark could be bought at a 40 percent discount in neighboring Switzerland. Now Germany‘s gold and dollar reserves exceed six bil­lion dollars, and the mark is considered one of the soundest of European currencies. Indeed there have been times when the German financial authorities were embar­rassed by the big influx of fugi­tive money from England, France, and other countries.

Refugees as Pacemakers

A brutal decision, completely at variance with the principle of self-determination affirmed in the At­lantic Charter, has worked out, in practice, to Germany‘s economic advantage. This was the expulsion or flight of some twelve million Germans and people of German ethnic origin from the eastern provinces of Germany, from Poland, Czechoslovakia, Yugo­slavia, and other countries of eastern and southeastern Europe. The booming free economy of the Federal Republic found working places for this enormous mass of uprooted people. Germans often speak of these newcomers as "pacemakers for all of us."

Without this extra labor force Germany, its population depleted by millions of war dead, could never have gone so far so fast. One such penniless refugee of the postwar period is named Berthold Beitz. He is now managing di­rector of the historic firm of Krupp, which does over a billion dollars worth of business a year. Traveling about in the Federal

Republic, one finds again and again concrete examples of how this free country has benefited from the managerial and technical and working abilities of people who have been driven from their homes by national or class bigotry. The Sudeten Germans of Czecho­slovakia were famous for their handicraft skills in producing musical instruments, toys, cos­tume jewelry. They were driven from their homeland at the end of the war. They brought these skills to the Federal Republic; one town, Gablonz, has even been re­established within the borders of Germany as New Gablonz.

During a visit to Düsseldorf, capital of the industrial state North Rhine-Westphalia, I be­came acquainted with a highly suc­cessful manufacturer of cosmetics named Schneider. Originally his business had been in Dresden, in the Soviet Zone of Occupation. Realizing that private business would ultimately be completely wiped out, Mr. Schneider took with him his blueprints, his trade secrets, some of his engineers and skilled workers and moved to the Federal Republic. His plant in Düsseldorf now far exceeds in quality and quantity of output the factory he left behind to be na­tionalized. This is only one of in­numerable examples of how the free part of Germany has benefited from the brains and private managerial capacity that have fled from the part that is under com­munist rule.

The combination of the German tradition of hard efficient work, the immense release of individual creative energy by Erhard’s free competitive economy, the turn in American policy from repression to helpful cooperation, the big de­mand in the postwar world for the machinery and machine tools which German plants were espe­cially qualified to turn out made Germany until recently the model economic country of Europe. Erhard struck off one restriction after another and led the parade of European nations back to full currency convertibility. The im­portance which the German Econ­omics Minister attaches to this subject is evident from this quo­tation from his book, Prosperity Through Co-operation:

"I go so far as to declare that whoever manages to do away with foreign currency control will have done more for Europe than all politicians, statesmen, members of parliament, businessmen, and civil servants put together."

New Problems Arising

But a visit to Germany in 1962 conveys the impression that the bloom is off the economic miracle and that some new problems have arisen in the place of those which were so brilliantly solved by the powerful upsurge of the German economy during the fifties.

The business boom in Germany, still very pronounced in the build­ing industry, has been both cause and consequence of increased sav­ings and capital accumulation, not only by the German people them­selves but by foreign investors looking for a country in which the rights to private property are re­spected. This comparative abun­dance of capital has eliminated unemployment. With some 25 mil­lion Germans at work, there are less than 100,000 registered un­employed; and these are mostly unemployable. Some 600,000 for­eign workers, mostly Italians, Greeks, and Spaniards, have been brought into Germany. And still there are some half million job opportunities that remain unfilled.

Such full employment creates its own special difficulties. When no one can be fired because of lack of replacements, it is human na­ture to slack off and work at something less than full efficiency. Despite the traditional loyalty of workers to some old-established firms like Krupp, which have al­ways taken an interest in the well­being of the employees, one now hears in the Ruhr and elsewhere numerous complaints of workers shifting capriciously from job to job, shamming illness, and stay­ing away from work. Workers re­ceive full pay for three weeks of absence from the job, and checks on abuse of this right seem inade­quate.

The labor situation also places the trade-unions in the driver’s seat. During the first years of the "economic miracle" there was con­siderable restraint in posing new wage demands. This is no longer true. Wages have been shooting up, out of all relation to produc­tivity. Wages rose by 9 per cent in 1960, by 10 per cent in 1961; the corresponding growth in pro­ductivity in the two years was 6.5 per cent and 3.7 per cent. The threat of a politically imple­mented, inflationary wage-price spiral in a country which could boast of one of the most stable currencies (in terms of purchas­ing power) in the world is quite real.

Another effect of this situation and one which is putting a con­siderable strain on Germany‘s fi­nances is that when employers cannot meet demands for higher wages out of their own resources, the state steps in and helps to foot the bill. This happened in the Ruhr last summer when the min­ers threatened to strike on the eve of an important state election and the federal government offered a handsome subsidy so as to make possible the payment of the 8 percent wage increase which the workers were demanding.

This sort of thing, of course, does not make it easier for the harassed Minister of Finance, Heinz Starke, who no sooner gets the national budget balanced than he sees it unbalanced again by some new demand for higher pay or larger subsidies. With the memory of two destructive infla­tions during the last forty years, there is in Germany a healthy fear of deficit financing, and the head of the Bundesbank, Karl Blessing, has sternly announced that his in­stitution will not finance a new in­flation.

Production Comes First

These clouds on the previously serene landscape of the "economic miracle" caused Erhard last spring to turn to the German people with an appeal that was almost an SOS. Posing the question, "Have We Lost the Feeling for the Possi­ble?" Erhard warned his country­men against succumbing to the il­lusion that a people can consume more than it produces. Erhard has never been a mouthpiece of big business. He has criticized employers as much for trying to keep up prices artificially through cartel arrangements as he has criticized the trade-unions for ex­cessive wage demands.

But in this appeal he took issue with a viewpoint that has been gaining ground among the trade-union leaders: namely, that "jus­tice" requires a redistribution of national income. Erhard warned that continuation of excessive wage demands would lead to a weakening of Germany‘s compet­itive position, to a diminution of investment, to a reduction in tax yields and, finally, to the destruc­tion of full employment. It would indeed be an irony of History if Germany should go astray.He ap­pealed to the German people, who for years had set an example to the world of productive and finan­cial discipline, not to throw away in a moment of blindness all they had built up, and remarked that it would indeed be an irony of his­tory if Germany should go astray just when other nations which had suffered from loose inflationary finance were coming to their senses partly because of Ger­many’s example.

It is an illustration of the jus­tice of Erhard’s warning that the big surpluses of exports over im­ports, which enabled Germany to advance from virtual national bankruptcy to a gold and dollar re­serve of over $6 billion, are di­minishing just when they are most needed to meet such require­ments as purchases of arms abroad, outlays for foreign aid, and the like.

Nothing that has happened or may happen in Germany detracts from the tremendous object les­son in the superiority of a free economy offered by Germany‘s spectacular recovery when Er­hard’s principles were in full force. This object lesson is further enhanced by the drab squalor in the Soviet Zone of Germany. This has been a real example of "com­petitive co-existence" between sun­dered groups of the same people, with the same educational back­ground and the same working ca­pacity. The results, to put it mildly, cannot be very satisfactory to Mr. Khrushchev. The erection of the barbarous wall between the two parts of Berlin has not changed by one iota the contrast between busy prosperity in the Western part of the city and desolate stagnation in the other.

The German economy ran well and smoothly when it was guided by the principles of classical lib­eral economics. If it is now expe­riencing some jolts and jars, this is because of departures from these principles.

Wages, employment, prices, and productivity will necessarily find their own natural and desirable levels if the government will fol­low two principles: (1) no infla­tion, and (2) no interference of any kind in the arrangements that employers and employees finally arrive at by free bargaining. 

Further Reading

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