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Thursday, May 7, 2015

Ludwig Erhard: Architect of a Miracle

Real Heroes: Ludwig Erhard

How rare and refreshing it is for the powerful to understand the limitations of power, to actually repudiate its use and, in effect, give it back to the myriad individuals who make up society. George Washington was such a person. Cicero was another. So was Ludwig Erhard, who did more than any other man or woman to denazify the German economy after World War II. By doing so, he gave birth to a miraculous economic recovery.

“In my eyes,” Erhard confided in January 1962, “power is always dull, it is dangerous, it is brutal and ultimately even dumb.”

By every measure, Germany was a disaster in 1945 — defeated, devastated, divided, and demoralized — and not only because of the war. The Nazis, of course, were socialist (the name derives from National Socialist German Workers Party), so for more than a decade, the economy had been “planned” from the top. It was tormented with price controls, rationing, bureaucracy, inflation, cronyism, cartels, misdirection of resources, and government command of important industries. Producers made what the planners ordered them to. Service to the state was the highest value.

Thirty years earlier, a teenage Ludwig Erhard heard his father argue for classical-liberal values in discussions with fellow businessmen. A Bavarian clothing and dry goods entrepreneur, the elder Wilhelm actively opposed the kaiser’s increasing cartelization of the German economy. Erhard biographer Alfred C. Mierzejewski writes of Ludwig’s father,

While by no means wealthy, he became a member of the solid middle class that made its living through hard work and satisfying the burgeoning consumer demand of the period, rather than by lobbying for government subsidies or protection as many Junkers did to preserve their farms and many industrialists did to fend off foreign competition.

Young Ludwig resented the burdens that government imposed on honest and independent businessmen like his father. He developed a lifelong passion for free market competition because he understood what F.A. Hayek would express so well in the 1940s: “The more the state plans, the more difficult planning becomes for the individual.”

Severely wounded by an Allied artillery shell in Belgium in 1918, Ludwig’s liberal values were strengthened by his experience in the bloody and futile First World War. After the tumultuous hyperinflation that gripped Germany in the years after the war, he earned a PhD in economics, took charge of the family business, and eventually headed a marketing research institute, which gave him opportunities to write and speak about economic issues.

Hitler’s rise to power in the 1930s deeply disturbed Erhard. He refused to have anything to do with Nazism or the Nazi Party, even quietly supporting resistance to the regime as the years wore on. The Nazis saw to it that he lost his job in 1942, when he wrote a paper outlining his ideas for a free, postwar economy. He spent the next few years as a business consultant.

In 1947, Erhard achieved the chairmanship of an important monetary commission. It proved to be a vital stepping stone to the position of director of economics for the Bizonal Economic Council, a creation of the American and British occupying authorities. It was there that he could finally put his views into policy and transform his country in the process.

Erhard’s beliefs had by this time solidified into unalterable convictions. Currency must be sound and stable. Collectivism was deadly nonsense that choked the creative individual. Central planning was a ruse and a delusion. State enterprises could never be an acceptable substitute for the dynamism of competitive, entrepreneurial markets. Envy and wealth redistribution were evils.

“It is much easier to give everyone a bigger piece from an ever growing cake,” he said, “than to gain more from a struggle over the division of a small cake, because in such a process every advantage for one is a disadvantage for another.”

Erhard advocated a fair field and no favors. His prescription for recovery? The state would set the rules of the game and otherwise leave people alone to wrench the German economy out of its doldrums. The late economist William H. Peterson reveals what happened next:

In 1948, on a June Sunday, without the knowledge or approval of the Allied military occupation authorities (who were of course away from their offices), West German Economics Minister Ludwig Erhard unilaterally and bravely issued a decree wiping out rationing and wage-price controls and introducing a new hard currency, the Deutsche-mark. The decree was effective immediately. Said Erhard to the stunned German people: “Now your only ration coupon is the mark.”

The American, British, and French authorities, who had appointed Erhard to his post, were aghast. Some charged that he had exceeded his defined powers, that he should be removed. But the deed was done. Said U.S. Commanding General Lucius Clay: “Herr Erhard, my advisers tell me you’re making a terrible mistake.” “Don’t listen to them, General,” Erhard replied, “my advisers tell me the same thing.”

General Clay protested that Erhard had “altered” the Allied price-control program, but Erhard insisted he hadn’t altered price controls at all. He had simply “abolished” them. In the weeks and months to follow, he issued a blizzard of deregulatory orders. He slashed tariffs. He raised consumption taxes, but more than offset them with a 15 percent cut in income taxes. By removing disincentives to save, he prompted one of the highest saving rates of any Western industrialized country. West Germany was awash in capital and growth, while communist East Germany languished. Economist David Henderson writes that Erhard’s motto could have been: “Don’t just sit there; undo something.”

The results were stunning. As Robert A. Peterson writes,

Almost immediately, the German economy sprang to life. The unemployed went back to work, food reappeared on store shelves, and the legendary productivity of the German people was unleashed. Within two years, industrial output tripled. By the early 1960s, Germany was the third greatest economic power in the world. And all of this occurred while West Germany was assimilating hundreds of thousands of East German refugees.

It was a pace of growth that dwarfed that of European countries that received far more Marshall Plan aid than Germany ever did.

The term “German economic miracle” was widely used and understood as it happened in the 1950s before the eyes of the world, but Erhard himself never thought of it as such. In his 1958 book, Prosperity through Competition, he opined, “What has taken place in Germany … is anything but a miracle. It is the result of the honest efforts of a whole people who, in keeping with the principles of liberty, were given the opportunity of using personal initiative and human energy.”

The temptations of the welfare state in the 1960s derailed some of Erhard’s reforms. His three years as chancellor (1963–66) were less successful than his tenure as an economics minister. But his legacy was forged in that decade and a half after the war’s end. He forever answered the question, “What do you do with an economy in ruins?” with the simple, proven and definitive recipe: “Free it.”

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  • Lawrence W. Reed is FEE's President Emeritus, having previously served for nearly 11 years as FEE’s president (2008-2019). He is also FEE's Humphreys Family Senior Fellow and Ron Manners Global Ambassador for Liberty. His Facebook page is here and his personal website is