Economics Professors Bravely Resist Hitler

Many professors and academics in Germany opposed the Nazi government during the 1930s and 1940s. It was dangerous to do so: many were imprisoned or murdered because they spoke against Hitler.

Professor Walter Eucken worked at the University of Freiburg. When Hitler came to power in early 1933, Eucken began telling university administrators that Hitler’s policies, which affected the daily operations of the university, were wrong.

Among the university’s students, a small but vocal group were committed Nazis. They protested Eucken’s lectures.

After the horrors of Kristallnacht, Walter Eucken joined a group of clergymen and professors who explained that anyone who considered himself a follower of Jesus was morally obligated to oppose Hitler. This group was called the Freiburger Kreis and was ecumenical, meaning that it contained both Lutherans and Roman Catholics.

This resistance group in Freiburg had contacts with leaders of the nationwide resistance. Walter Eucken was in contact with Dietrich Bonhoeffer, who was leading both the efforts to smuggle Jews out of Germany to safety and the effort to assassinate Hitler.

As an economist, Eucken saw that genocide carried out by the Nazis was founded on their fiscal system. The Holocaust was based Hitler’s control of the nation’s finances. Eucken’s group formulated an economic opposition, called Soziale Marktwirtschaft, as historian David Henderson explains:

Eucken was the leader of a school of economic thought, called the Soziale Marktwirtschaft, or “social free market,” based at Germany’s University of Freiburg. Members of this school hated totalitarianism and had propounded their views at some risk during Hitler’s regime.

The Nazi economic system was based on the government’s ability to control how people earned their money, and how they spent it. The members of the Freiburger Kreis resistance group understood that this was how Hitler would finance his genocidal schemes.

The Freiburger Schule - the economic school of Eucken and his colleagues - understood the liberty was antipode of the Nazi government. The word ‘Nazi’ itself is an abbreviation for ‘National Socialist.’

Companies were ‘nationalized’ by Hitler’s government, meaning that individuals were not allowed to own, or make decisions about, businesses. The economy was ‘socialist’ because it had high rates of taxation, because healthcare and education were state owned and state operated, because the government dictated the exact price at which nearly everything was bought and sold, and because the government dictated the wages which people earned at any and every job.

Walter Eucken, the Freiburger Schule, and the Freiburger Kreis all saw the connection between individual political liberty and free markets. Only in a free market environment could the dignity of human life be respected.

Deregulation and lower rates of taxation would erase the foundations on which the Holocaust was carried out. As historian Henry Wallich writes,

During the Nazi period, the school represented a kind of intellectual resistance movement, requiring great personal courage as well as independence of mind. The free market doctrine protested against the dominant conditions of the times. It sought to construct an ideal system that would embody the opposites of these conditions and guard against relapses. The most oppressive condition was totalitarianism.

Three core ideas would effectively erase the horrors of Naziism: first, personal freedom and individual political liberty; second, eliminate government planning and control; third, eliminate cartels and monopolies.

When planning and controls are eliminated, the people who work in a factory can decide if they want to build 5000 or 6000 cars next year. The people in the bakery decide if they want to produce 400 or 500 loaves of bread per day.

This same flexibility would extent to setting prices and wages. Such flexibility and autonomous decisionmaking allows the economy to explore new options, respond to changing circumstances more quickly, and fine-tune itself with more nuance. Henry Wallich writes:

Freedom therefore is the prime tenet of the doctrine, and its program is designed to safeguard freedom. Planning and controls were a second major aspect of the contemporary scene. The free market doctrine rejects all planning and controls except those needed to insure competition. A third important fact of German economic life was cartelization of industry. The free market doctrine opposes all restraints upon competition.

Walter Eucken and his colleagues in Freiburg saw how the Nazi economic system led to monopolies and cartels. Cartels are groups of companies in the same industry which effective function as monopolies, setting prices and enforcing those prices because they are collectively the sole source of the product.

Monopolies form and exist only because of the government’s collusion in their formation and continued existence. David Henderson writes:

The school’s members believed in free markets, along with some slight degree of progression in the income tax system and government action to limit monopoly. (Cartels in Germany had been explicitly legal before the war.) The Soziale Marktwirtschaft was very much like the Chicago school, whose budding members Milton Friedman and George Stigler also believed in a heavy dose of free markets, slight government redistribution through the tax system, and antitrust laws to prevent monopoly.

The powerful ideas of Walter Eucken and the Freiburger Schule influenced Ludwig Erhard. Appointed by Konrad Adenauer, Erhard shaped the German postwar economic system, and succeeded Adenauer as chancellor in 1963.

From Stunde Null to Wirtschaftswunder

At the end of WW2, Germany was threatened with the prospect of permanently sinking to a “Third World” status. Indeed, some among the Western Allies, like Henry Morgenthau, wanted to take deliberate steps to ensure this fate.

As a nation, Germany was devastated. The population had been decimated: millions of Jewish Germans had been murdered; millions of civilians had been killed by bombs dropped from Allied aircraft onto German cities; millions of young men had died in battle.

Physically, the country was a wreck. All types of infrastructure were extensively damaged or destroyed: roads, electrical and telephone lines, pipes for fresh water and sewage.

The German economy was also in shambles. The Nazis had inflicted oppressive wage and price controls, along with high taxes, for a dozen years. Hitler’s government had dictated the exact retail prices for nearly every consumer good: bread, potatoes, clothing, furniture, books, etc.

The economy was in such bad condition that not only individuals, but also businesses, resorted to the practice of bartering. Historian David Henderson writes:

Barter also was so widespread in business-­to-­business transactions that many firms hired a “compensator,” a specialist who bartered his firm’s output for needed inputs and often had to engage in multiple transactions to do so. In September 1947 U.S. military experts estimated that one-­third to one-­half of all business transactions in the bizonal area (the U.S. and British zones) were in the form of “compensation trade” (i.e., barter).

The end of the war in May 1945 might have brought relief. The fall of the Nazi government represented a chance for freedom: the end of wage and price controls and the end of high taxes.

But instead of liberty, the victorious Allies at first brought only prolonged suffering. They maintained Hitler’s economic policies. The resulting suffering was immense, as historian Thomas Hazlett writes:

Enter crisis-source number two: Allied control policies. In an effort to forestall the inevitable realignment of money and prices, the Allied commanders of France, Britain, and the United States slapped on an extensive control network that fixed wages and prices at preinflation (1936) levels. The economically obvious occurred: goods disappeared from legal markets and were sold illegally at prices far above the official prices. Severe misallocation of resources took place; cigarette lighters, for instance, which were unregulated by price controls, zoomed in value and were much sought after by people desperately in need of food and shelter.

Germany had been divided into four sectors. The eastern sector was given to the Soviets, who promptly established a socialist dictatorship. Hope for any form of personal, political, or economic liberty in that sector was lost for several decades.

The remaining three sectors of Germany - one each for the British, the French, and the U.S. - were merged into West Germany.

One of the first major challenges for West Germany, and for its first chancellor, Konrad Adenauer, was to persuade the western Allies that Germany was not a threat, that Germany could be trusted with its own sovereignty, and that the Allies did not need to keep the Germans subjected to economic servitude.

Adenauer succeeded in convincing the Allies to give the Germans and their own elected government a large measure of sovereignty - although not complete sovereignty. The Allies would still maintain some control.

But the Germans got enough sovereignty that this could be their Stunde Null - their ‘zero hour’ when there was a chance to start over, a massive reset.

To launch the postwar economy, Adenauer relied on his appointee, Ludwig Erhard. Erhard was a scholar and an economist, but not much of a politician.

Erhard’s tactic was simple: reduce regulation and reduce taxation. As historian Henry Wallich writes:

Germany’s adoption of a policy of free markets and free enterprise is probably the most widely discussed of her postwar measures. It does not imply an economy altogether free from government intervention or monopoly; on the contrary there still exists a good deal of state control and market restriction in Germany. But it does represent a sharp change of direction, and there is ample justification for regarding freedom as the keynote of German economic policy. That Germany with an experience of full-scale peacetime planning unique among Western nations should have chosen this road is not without wider significance.

The was the beginning of Germany’s Wirtschaftswunder - its ‘economic miracle’ which was, however, no miracle, but rather simply the predictable and replicable working of the natural laws of economics.

The freeing of Germany’s economy was, however, not without difficulties. The German public was not used to a competitive marketplace, and did not understand how to shop for bargains.

Consumers raised under the Nazi regime assumed that a loaf of bread or a jar of jelly would have the same price in every store. Ludwig Erhard undertook a program of consumer education, teaching shoppers to compare prices and get the best deal.

Freed from regulation, German consumers and German businesses engaged in a remarkably fruitful period of activity. Combined with lower rates of taxation, the free market, as historian Alfred Mierzejewski writes, created prosperity for Germans at every income level:

The middle years of the 1950s saw a spectacular boom in the West German economy. Both domestic and export demand rose sharply. The result was that the economy grew at a high annual rate, peaking in 1955 at 12 percent. This explosive growth caused unemployment to decline as the economy generated enough jobs to employ most of those seeking work, whether they were longtime residents of the country or immigrants from the east. The boom led to the first attempts to recruit foreign labor in 1955. Initially coming from Italy, the flow of foreign workers, especially from Turkey, soon became a flood. They were indispensable to the continued growth of the West German economy. By mid-1955, the rapid economic expansion caused fears of inflation to spread among policy makers. The result was that Erhard and the Bank of the German States took a series of measures to moderate growth, leading to a decline in the rate of expansion in 1956 and 1957. In the late 1950s, only the Japanese economy grew more rapidly. West Germany continued to enjoy the fastest rate of growth of any European economy until 1961, when it was overtaken by France. Inflation remained low throughout.

Germans in the lower classes, middle classes, and upper classes saw their real incomes and net worths rise. These were the core years of the Wirtschaftswunder, and this growth was the economic momentum in German for decades afterward.

From a country that was teetering, at the time of Stunde Null, on the brink of “Third World” status, Germany arose to become an industrial power, indeed, the major industrial power in Europe.

The growth during the years of the Wirtschaftswunder provided the momentum which allowed Germany to move through the doldrums of the 1970s, and which allowed Germany to survive both later bad decisions in domestic economic policy and worldwide downturns.

All of this was the legacy of Ludwig Erhard and Soziale Marktwirtschaft - his program of free markets and reduced taxation.

Up from Stunde Null

When WW2 ended in May 1945, Germany was a destroyed country. Millions of Jewish Germans had been murdered in concentration camps; millions of German civilians had died when Allied aircraft dropped bombs on German cities; millions of German young men had died on battlefields.

Physically, the nation was in ruins. Electrical and telephone lines were, in some places, non-existent. Pipes for water, sewage, and gas were absent in other places.

Economically, the nation had been oppressed for a dozen years by brutal Nazi policies. The horrifying genocides had been built upon, and powered by, the twin foundations of taxation and regulation.

Hitler’s government controlled and specified the prices at which nearly everything could be bought and sold: bread, milk, onions, potatoes, clothing, fuel, furniture.

At the same time, there was equally little freedom in the wages of a worker: the government dictated the wages and salaries in all sectors of the economy.

With the war’s end, perhaps Germany would have a chance to recover. But there was one more obstacle to overcome: the economic policies imposed by the victorious Allies.

Germany had been divided into four sectors, one for each of the victors: French, British, American, and Soviet.

The Soviet zone quickly and clearly became a region devoid of economic or political hope: a brutal socialist dictatorship prevented the free exchange of ideas or goods.

The British, French, and American sectors were merged into what would become the territory of West Germany. Here, one might suppose, economic freedom would blossom.

But that didn’t happen right away.

Oddly, the three western Allies retained the Nazi economic policies. They were probably hoping to keep Germany crippled until such time as they could trust it.

Historian David Henderson describes how the Allies continued Hitler’s economic policies:

Each of the Allied governments controlled a “zone” of German territory. In the U.S. zone, a cost-­of-­living index in May 1948, computed at the controlled prices, was only 31 percent above its level in 1938. Yet in 1947, the amount of money in the German economy — currency plus demand deposits — was five times its 1936 level. With money a multiple of its previous level but prices only a fraction higher, there were bound to be shortages. And there were.

Price controls on food made the shortages so severe that some people started growing their own food, and others made weekend treks to the countryside to barter for food.

From 1945 to 1949, daily life in Germany was as bad, and sometimes even worse, than during the Nazi years. Henry Wallich documents the shortages:

Grotesque conditions resulted. Each day, and particularly on weekends, vast hordes of people trekked out to the country to barter food from the farmers. In dilapidated railway carriages from which everything pilferable had long disappeared, on the roofs and on the running boards, hungry people traveled sometimes hundreds of miles at snail’s pace to where they hoped to find something to eat. They took their wares — personal effects, old clothes, sticks of furniture, whatever bombed-out remnants they had — and came back with grain or potatoes for a week or two. Many who lacked the strength to provide for themselves in some such way succumbed to their hardships.

It was up to Konrad Adenauer, postwar Germany’s first chancellor, to convince the Allies that Germany could be trusted, and that therefore they could grant economic freedom to the Germans. Adenauer succeeded.

Adenauer had become chancellor in 1949.

Having obtained the ability to formulate economic policy - with some remaining Allied oversight - Adenauer turned to his trusted appointee, Ludwig Erhard. More an academic economist than a politician, Erhard set about revitalizing Germany’s economy.

This was Stunde Null - the “zero hour” when history started over for Germany, a massive reset.

Ludwig Erhard set about creating economic liberty, something the Germans hadn’t seen more than fifteen years. His policies were direct and simple: deregulate markets and reduce taxes.

Although the principles were simple, the implementation became complex: there was a new generation of Germans who’d come of age under Hitler’s rule, and they didn’t know how to look for a good deal.

They weren’t used to the idea that two stores might compete with each other and have different prices for the same loaf of bread. The notion of consumers doing ‘comparison shopping’ was unknown to them.

But businesses, workers, and consumers quickly learned to use their new freedoms.

By the early 1950s, newspapers were referring to the Wirtschaftswunder - the ‘economic miracle’ of postwar Germany. By every metric, ordinary citizens in Germany were benefitting from liberty: increased wages, personal net worth, and standard of living.

The ‘miracle’ was no violation of nature’s laws, but rather a predictable and replicable result of those laws: lower taxes and deregulated markets create prosperity. Political liberty and economic growth are largely coincident.

The War Ends, But Things Get Worse

When WW2 ended in 1945, Germany was destroyed in more than one way: millions of its people were dead; millions more wounded; and millions held hostage by the USSR.

The physical facilities of the nation were shattered: buildings and infrastructure were in some areas totally ruined, in other areas partially.

With the end of the war, and the end of Nazi oppression, the reader might think that this was the time that postwar rebuilding began. But things actually got worse after the war’s end, not better.

Although the German citizens were no longer held captive to Nazi subjugation, they were still shackled by Nazi economic policies. Ironically, those policies were continued by the western Allies.

England, France, and the United States continued those policies - high tax rates, regulated markets, government controls over wages and prices - perhaps partly in order to ensure that Germany remained weak.

In the first year or two after the war, these policies threatened to shape Germany into a “third world” country. Poverty increased, while worker motivation decreased. The economic environment lacked opportunity, predictability, and stability.

Historian Thomas Hazlett writes:

Yet the shocking reality was that war-scorched Germany was to face its greatest economic crisis in the years after 1945. The postwar devastation was the combined effect of two principal factors.

What drove Germany downward during these years? The effects of regulation and taxation, combined with an oversupply of money.

The Nazi government had printed huge amounts of cash, while rigidly regulating both prices and wages. This caused the buildup of inflationary pressure, which erupted at war’s end.

The Nazis could keep the economy functioning only through harsh repression, including draconian steps taken again the black market. Thomas Hazlett reports:

First, a tremendous inflation broke loose - the predictable result of prior history. Under the Third Reich, the German government had financed a colossal industrial build-up to accommodate the designs of the Nazi war machine. The tremendous industrial expansion was paid for with rampant monetary expansion. All the screws of the Nazi State had to be tightened to their breaking point to suppress the resultant inflation; the guns of the Gestapo turned on black marketeers and others who sought to evade the officially posted prices of goods and services. The result of the effective price controls under Fascism was the explosion of liquidity after Fascism.

Ironically, it was the black market which kept much of the country alive. It functioned after the visible economy collapsed.

The steps which eventually brought the German economy back from the brink of “third world” status began with Adenauer’s ability to persuade the western Allies that the Germans needed some sovereignty, including economic sovereignty, over their own country.

Adenauer had been elected chancellor in 1949. After the western Allies gave the German government some control over the national economy, Adenauer’s key economic appointee, Ludwig Erhard, masterminded policies of deregulation, lower tax rates, and currency reform.

Konrad Adenauer was chancellor from 1949 to 1963; Ludwig Erhard succeeded him in office and remained until 1966. Between the two of them, they unleashed the market forces which pulled Germany back from the brink of permanent “third world” status.

Ludwig Erhard: Freeing Germany

The horrors of WW2 inflicted almost every conceivable type of misery: Central Europe had seen the deaths of millions of Jewish Germans at the hands of the genocidal Nazis, the death of millions of young men on the battlefields, the deaths of millions of civilians during the bombing of cities, and the near-complete destruction of the physical infrastructure.

Roads, water pipes, telephone service, and electrical power lines were, in many places, nonexistent.

During the twelve years of Nazi dictatorship, the people had been oppressed by high taxes and by government control of wage and price levels. Free markets and property rights were nearly unknown.

Historian Thomas Hazlett details the devastation in Germany:

In 1945 Germany lay in ruins, the vanquished victim of mankind’s most grotesque holocaust. The war had shaken the German economy by its very roots: it destroyed one-fifth of all housing, decimated the transit lines between regions, reduced industrial output to but a third of its 1936 level, erased a huge percentage of the working-age male population, and swamped the countryside with a tidal wave of immigrants that would reach the 8.5 million mark by 1948. While the defeat belonged to the Nazis, the immense destruction belonged to the entire German nation.

Although the war ended in 1945, the misery continued for several more years. The victorious Allies were at first suspicious of the Germans, and did not want to allow them a chance to rebuild. In 1949, Konrad Adenauer became chancellor, and was able to convince the three western Allies that Germany would pose no threat.

Indeed, it became slowly clear that West Germany would be a hedge against Soviet socialist aggression, and an example of what the western Allies meant by ‘freedom.’

Adenauer received permission to begin restoring Germany’s economy. Two steps were decisive in repairing the extensive damage: lower tax rates and deregulated markets.

One of Adenauer’s key appointees was Ludwig Erhard. Born in Bayern, Erhard earned his doctorate at the University of Frankfurt. Alfred Mierzejewski writes:

Ludwig Erhard is difficult to characterize because he was unique. He was a man with economic training who was active in politics but who did not consider himself a politician. Erhard saw himself as an intellectual who understood how the economy functioned and who, therefore, could offer prescriptions to the German public to solve its economic problems. He had developed ideas over almost five decades based on the values transmitted to him by his liberal, tolerant parents. These ideas had been shaped but not fundamentally changed by his education and his professional experience. Yet, as Erhard was the first to admit, he was not a theorist or an original thinker.

More an intellectual than a politician, Erhard persisted in the strategies of reducing taxes and deregulating markets. But Erhard was not an extreme libertarian or an anarcho-capitalist. The phrase soziale Marktwirtschaft captures Erhard’s willingness to allow for some element of government spending; under his chancellorship, e.g., spending on education increased.

Erhard became chancellor in 1963 after Adenauer left office. Mierzejewski reports:

Some have criticized Erhard for this, attempting to minimize his accomplishment. Yet there is no reason to accept this critique. Many prominent theorists, not the least of them Karl Marx, have developed their theories based on ideas borrowed from others. Moreover, originality, by itself, is no guarantee of insight. Erhard advocated a set of ideas, unlike Marx and his followers, and unlike theorists of the right, based on practical experience and a sound understanding of human behavior. Moreover, unlike any of them, his ideas were effective. Just as important, they threatened no one and made no provision for violence or [for] the domination [of] a particular group. Erhard advocated ideas that - whatever their imperfections, whatever their internal contradictions, and they were few - were intended to improve the lives of all and to direct Germany toward a peaceful relationship with its neighbors.

During the chancellorships of Adenauer and Erhard, from 1949 to 1966, the German economy thrived because of the policies of lower tax rates, deregulated markets, and the abolition of government control over wages and prices. The Encyclopedia Britannica reports:

There was easier access to higher education and cheaper mass travel. There was more varied food; there was better health, preserved by better medicine. There were new synthetic materials, more plentiful housing, and wider automobile ownership. There were stereophonic recordings, color television, high-fidelity audio equipment, and cheap paperback editions of serious books. There were new, more classless eating-houses, pedestrian precincts, supermarkets, and shopping malls.

This amazing recovery is now routinely recorded in economic textbooks as the Wirtschaftswunder - the ‘economic miracle.’ But it was not a violation of natural laws. It was the logical unfolding of known economic principles.

Economists see Ludwig Erhard as paradigmatic. He released the power of the market and allowed it to accomplish an amazing event: an economic recovery which is still viewed as one of the most powerful in history.