Mr. Peterson is headmaster of The Pilgrim Academy in Egg Harbor City, New Jersey. His articles have appeared in a variety of publications, including National Review and Human Events.
This year marks the 40th anniversary of Ludwig Erhard’s sweeping free market reforms which gave economic freedom to over 80 million Germans and began West Germany’s 30-year post-war economic miracle.
At the end of World War II, Germany was in a shambles. Fire bombs—more destructive than the atomic bombs that were dropped on Hiroshima and Nagasaki—had completely destroyed Dresden. The population of Cologne had dropped from 750,000 before the war to less than 32,000. Germany’s storybook castles and great cathedrals lay in ruins, while makeshift shanty towns housed hundreds of thousands of Germans displaced by the Soviet occupation of the Eastern Provinces.
Industrial output was at a standstill, and German currency was practically worthless. A pack of American-made cigarettes could fetch more goods on the black market than hundreds of German marks.
William H. Peterson, who was a member of the Allied occupation forces, described the scene this way: “German men and women, for the most part ragged, hollow-eyed, thin, for-lorn-looking, peddled what wealth had escaped the bombing and burning—silver, jewelry, Zeiss binoculars, Leica cameras, Meissen china (frequently chipped) and bric-a-brac including ashtrays, lamps, clocks, and cheap paintings—all at fancy prices. I saw a used commonplace alarm clock go for the equivalent of $85—in 1945 dollars.
There was little hope for improvement. Incredibly, the Allies—who had freed Germany from the Nazi terror—imposed their own form of economic tyranny by maintaining Hitler’s price and wage controls.
Enter Ludwig Erhard. Born in 1897 in Furth, and educated at the University of Frankfurt, Erhard had been a disciple of the great free market economist, Wilhelm Roepke. After serving as an economist in Nuremberg, Erhard was appointed head of the post-war Bizonal Economic Council. Looking over the wreckage from six years of total war, Erhard knew that only free market policies could get Germany back on its feet. To that end, he made two proposals: introduce a new currency, then insure its success by lifting wage and price controls.
None of the experts doubted the necessity of his first proposal, but lifting wage and price controls? That went against current orthodoxy. When General Clay, military governor of the American Zone, informed Erhard that all the American economic experts were gravely concerned about the consequences of scrapping the wage and price controls, Erhard replied, “So are mine.”
Yet Erhard plowed ahead. He knew his history: more than 2,000 years of price and wage controls had always resulted in economic chaos. Not only do price and wage controls destroy incentives, Erhard pointed out, but they almost always transfer wealth from hardworking, patriotic citizens into the hands of cynics, bureaucrats, and those favored by the government.
Taking the country by surprise, Erhard went on the air on a Sunday night in June 1948. First, he announced that each German would be given forty Deutschmarks (replacing the old Reichsmarks). This would be followed by a second installment of twenty Deutschmarks. Credits and debts would be converted into the new currency at the rate of ten to one, and people would have to prove how they came by sums that exceeded 5,000 Reichsmarks.
Erhard knew that his current reform would be doomed if the new money, like its predecessor, faced bare store shelves and empty warehouses: To prevent this, Erhard announced the second—and by far more important—part of his program: most of Germany’s wage and price controls would be dropped. First, controls would end on a wide range of consumer goods. Within six months, controls on food would be dropped. Erhard gained support for his measures by billing them as a patriotic move designed to replace a “foreign” economic system that had been imposed on Germany. The German people were astonished to hear that all these changes would commence the next morning.
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.
The Marshall Plan certainly helped, but its influence was not great enough to cause the German “miracle.” As historian LaVerne Ripley points out, “vastly larger sums have been donated to other countries without preventing their economic disaster.”
Since the 1960s, Germany has turned away from Erhard’s free market policies. Many German young people missed the significance of Erhard’s reforms, while as U.S. News & World Report recently observed, “Chancellor Helmut Kohl has been a timid free-marketer.” After achieving wealth and leisure time by put-suing free market policies, a new generation of social engineers has devised schemes to divide the wealth, disregarding how that wealth was created. Intellectuals provided moral support for the move toward socialism, even though the very leisure they used as an excuse to undermine capitalism was itself the result of capitalism. The process is still going on.
The move toward socialism has manifested itself in higher taxes (West Germany has the highest corporate taxes of any Big Five economic power), unreasonable demands from labor unions, a 37.5-hour work week, and over-regulation. The result is that West Germany is, as one commentator put it, “Rusting on the Rhine.”
German legend has it that the great medieval ruler, Frederick Barbarossa (Red-Beard), is asleep inside Kyffhauser Mountain in Thuringia, awaiting the day when Germany is about to be destroyed by its enemies. Just at the last moment, so the legend goes, Barbarossa will be awakened by ravens encircling his mountain top. He will then arise and wrench his homeland from defeat and bear her to the glory of a new golden age. (There was method in Hitler’s madness when he code-named his invasion of Russia “Operation Barbarossa.”)
Ludwig Erhard didn’t sport a red beard, nor is there any evidence that he spent much time near Kyffhauser Mountain. But he did save Germany, for a time, from one of its greatest enemies—socialism—and helped bring about one of the great success stories of the modern world. Today, West Germany, as well as the rest of the world, would do well to learn from Ludwig Erhard’s example, on this, the 40th anniversary of his reforms.
1. William H. Peterson, “Inflation: Soviet Style, 1945,” The Freeman, April 1985, p. 208.