Physically, the nation’s infrastructure was utterly shattered: roads, telephone lines, electrical power lines, water pipes, sewage pipes, bridges, and roads were in many places nonexistent.
The economy had been smothered by Nazi policies of wage control and price control: the government had dictated the exact price of nearly every retail product from bread to bedsheets, and had dictated the exact wage of everyone from teachers to dentists.
Hitler had further damaged the economy by printing huge amounts of money: this was how the Nazi government paid for its war efforts. Further, the German civilians had suffered under crushing taxes.
The victorious western Allies kept these Nazi policies in place at the war’s end in May 1945. In the east, the Soviets established a socialist dictatorship which ended any hopes for personal freedom or individual political liberty.
In the West, the Allies - France, Britain, and the United States - retained Hitler’s economics, in part because some of them wanted to ensure that Germany would remain weak. The French in particular were vindictive. The British wanted to continue the damaging policies because they had not realized how utterly such policies would prevent any form of growth or prosperity. Among the Americans, some agreed simply because they didn’t know what to do, and because they wanted to get along with the other Allies. Some Americans, like Henry Morgenthau, wanted to utterly dismantle Germany’s industrial base, and keep it permanently in the ‘third world’ status.
Eventually, the Allies saw that a strong West Germany was the only effective defense against the Soviet Union. The USSR was ready to expand westward, and West Germany was the first line of defense. A weak West Germany would have been quickly overrun by the Soviets.
Gradually, the Allies turned control of the country over to the Germans. Initially, in 1945, the occupying Allied armies controlled everything in the country. By 1949, the Germans were able to elect their first chancellor, Konrad Adenauer, and operate with near-complete independence. The Allies retained some influence, but let the Germans, for the most part, run their own country.
As the Germans regained control of their own country, they worked to shed the economic policies which had caused so much suffering. Freedom returned to ordinary transactions: merchants were free to set prices, and consumers free to bargain.
The oversupply of currency was reduced. Currency oversupply had created inflationary pressures, which had been kept in check only by wage and price controls. But those controls, in turn, had given rise to widespread black market activity.
Concurrent with this deregulation and currency reform, a third aspect of Germany’s economic rebirth was tax reform, as David Henderson explains:
Along with currency reform and decontrol of prices, the government also cut tax rates. A young economist named Walter Heller, who was then with the U.S. Office of Military Government in Germany and was later to be the chairman of President John F. Kennedy’s Council of Economic Advisers, described the reforms in a 1949 article. To “remove the repressive effect of extremely high rates,” wrote Heller, “Military Government Law No. 64 cut a wide swath across the [West] German tax system at the time of the currency reform.” The corporate income tax rate, which had ranged from 35 percent to 65 percent, was made a flat 50 percent. Although the top rate on individual income remained at 95 percent, it applied only to income above the level of DM 250,000 annually. In 1946, by contrast, the Allies had taxed all income above 60,000 reichsmarks (which translated into about DM 6,000) at 95 percent. For the median-income German in 1950, with an annual income of a little less than DM 2,400, the marginal tax rate was 18 percent. That same person, had he earned the reichsmark equivalent in 1948, would have been in an 85 percent tax bracket.
Adenauer appointed Ludwig Erhard to address economic policy. Together, Adenauer and Erhard took Germany from its Stunde Null - its ‘zero hour’ and historic reset after the war’s destruction - to its Wirtschaftswunder - its ‘economic miracle’ which is not a violation of natural laws, but merely the predictable and replicable application of the laws of economics.
In less than a decade, Germany went from a likely candidate for permanent ‘third world’ status to the most powerful and quickest-growing economy in Europe, and one of the most significant economies in the world.
