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.
