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.
