Less than ten years after World War II, people began talking about a German economic miracle (Wirtschaftswunder). Twenty years after the war, Germany’s economy was envied by much of the world. What was the secret behind this so-called Wirtschaftswunder?
At the end of the war in 1945, 20% of Germany’s buildings were destroyed; in Berlin, the capital, 40% were destroyed. Factories and railroad tracks that had survived the war were dismantled and shipped east and west to pay for war reparations. Power, sewage, transportation systems no longer functioned. Food production per capita in 1947 was only one-third of its 1938 level. Then how did Germany get back on its feet so quickly?
The Marshall Plan and the West German economic miracle
The US-sponsored Marshall Plan (European Recovery Aid) immediately comes to mind. Between 1948 and 1951, the U.S. paid out 12 million dollars in recovery aid. The top two recipients were Great Britain (26%) and France (18%). West Germany was third with a little over 11%. The Soviet Union, its allies and East Germany did not take advantage of the Marshall Plan, which might explain the different rate of post-war growth and reconstruction between East and West Germany. Many economists now say that the Marshall Plan was not the main reason for the West German economic miracle. But if the Marshall Plan was not the driving force, then what was?
The currency reform and the West German economic miracle
Many economists today feel that what looked like a West German economic miracle was really the result of policies that ended inflation, price controls, a high marginal tax rate and ration tickets. These policies promoted a “social market economy”, which unleashed a hefty increase in productivity. Germany’s currency reform of 1948 replaced the highly inflated Reichsmark (RM) with a much smaller number of Deutsche Mark (DM). http://www.econlib.org/library/Enc/GermanEconomicMiracle.html At the same time, many prices were decontrolled, taxes were cut and ration tickets were completed eliminated. A proponent of the currency reform, West German Finance Minister Ludwig Erhard said, “The only ration ticket the German people will need is the Deutsche Mark. And they will work hard to get these marks.”
Schools behind the free market economy
The school of economic thought, called the Soziale Markwirtschaft (social free market) was based at Germany’s University of Freiburg. Its founder was Walter Eucken. Among its members were Wilhelm Roepke and Ludwig Erhard. (http://www.walled-in-berlin.com/j-elke-ertle/ludwig-erhard-and-the-economic-miracle/) The Freiburg school was similar to the Chicago school based at the University of Chicago with Milton Friedman and George Stigler. Members of both schools believed in free markets, along with some slight degree of progression in the income tax system and government action to limit monopolies.
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Walled-In is my story of growing up in Berlin during the Cold War. Juxtaposing the events that engulfed Berlin during the Berlin Blockade, the Berlin Airlift, the Berlin Wall and Kennedy’s Berlin visit with the struggle against my equally insurmountable parental walls, Walled-In is about freedom vs. conformity, conflict vs. harmony, domination vs. submission, loyalty vs. betrayal.
Tags: currency reform, free market, George Stigler, German Economic Miracle, Ludwig Erhard, Marshall Plan, Milton Friedman, Soziale Marktlwirtschaft, WalterEucken, Wilhelm Roepke, Wirtschaftswunder
