Germany's Big Choice: Postwar Economics

After WW2 ended in 1945, the USSR controlled the eastern part of Germany, and imposed there a socialist dictatorship. The western Allies - England, France, and the United States - administered the western side of the country.

Over the next several years, the western Allies gradually turned control over the Germans, who began to govern themselves. In 1947 and 1948, the Germans were making important decisions about economic policy, but the Allies still had the final power to approve or reject any legislation.

One central question faced the Germans: should they continue the economic policy of control, which the Nazis had imposed on the them in the 1930s and which the Allies had continued to impose at war’s end? This policy meant that the government dictated the retail price of everything from shoelaces to paint, and dictated the wages of everyone from the gardener to the surgeon.

This policy also included high rates of taxation. The combined effects of price controls, wage controls, and high taxes had inflicted misery on the Germans for over a decade.

Ludwig Erhard was an economist who’d opposed Hitler’s government during the war, and now, in peacetime, wanted to free people from the last vestiges of Nazi oppression. The Germans debated among themselves about how to move forward, as David Henderson writes:

Ludwig Erhard won the debate. Because the Allies wanted non-­Nazis in the new German government, Erhard, whose anti-­Nazi views were clear (he had refused to join the Nazi Association of University Teachers), was appointed Bavarian minister of finance in 1945. In 1947 he became the director of the bizonal Office of Economic Opportunity and, in that capacity, advised U.S. General Lucius D. Clay, military governor of the U.S. zone. After the Soviets withdrew from the Allied Control Authority, Clay, along with his French and British counterparts, undertook a currency reform on Sunday, June 20, 1948. The basic idea was to substitute a much smaller number of deutsche marks (DM), the new legal currency, for reichsmarks. The money supply would thus contract substantially so that even at the controlled prices, now stated in deutsche marks, there would be fewer shortages. The currency reform was highly complex, with many people taking a substantial reduction in their net wealth. The net result was about a 93 percent contraction in the money supply.

The debate about the money supply had been a technical one: until 1945, the Nazi government had financed its aggression by printing currency which it used to pay for war supplies. This massive flood of currency would have led to hyperinflation, but the Nazis prevented that by using strict price controls. The price controls tamed inflation, but led instead to extreme shortages.

So, if money supply was the first part of the debate, price controls were the second part. Both were important, but price controls were more easily seen as a direct attack on personal freedom. The German people had been tormented by over a decade of totalitarian controls in which the government dictated the prices on all retail goods.

Ludwig Erhard saw deregulation of the market not only as an economic step toward growth, prosperity, and the rebuilding of a nation destroyed by war, but also as a step toward personal freedom and individual liberty. Consumers were free to go to different stores, compare different products at different prices, and make a choice.

So it was simultaneously that the German government contracted the money supply while deregulating its markets:

On that same Sunday the German Bizonal Economic Council adopted, at the urging of Ludwig Erhard and against the opposition of its Social Democratic members, a price decontrol ordinance that allowed and encouraged Erhard to eliminate price controls.

That was merely the beginning. The money supply was contracted, for the most part, all at once. But the deregulation went on, bit by bit, in different sectors, on wholesale and retails prices.

At the same time, Erhard also began advocating for the strategy of lowering taxes. When Konrad Adenauer was elected to be Germany’s first chancellor in 1949, he would appoint Erhard to oversee economic policy. David Henderson notes that

Erhard spent the summer de-­Nazifying the West German economy. From June through August 1948, wrote Fred Klopstock, an economist at the Federal Reserve Bank of New York, “directive followed directive removing price, allocation, and rationing regulations.” Vegetables, fruit, eggs, and almost all manufactured goods were freed of controls. Ceiling prices on many other goods were raised substantially, and many remaining controls were no longer enforced. Erhard’s motto could have been: “Don’t just sit there; undo something.”

In 1948, Germany faced a monumental choice: continue the oppressive fascist economic system of high taxes and government-controlled prices, or deregulate the economy and create a free market. Because they chose the path of freedom, Germans enjoyed an amazing level of prosperity only a few years later.

Because they went from a ruined nation to a prosperous economy, and because they were not permanently cast onto the heap of ‘third-world’ nations, history books routinely refer to this as the Wirtschaftswunder - the ‘economic miracle’ - which was, in fact, no miracle at all, but merely the predictable and replicable results of the laws of economics.

Women in Germany - Seeking Value and Seeking Values

During the first decade or two of the twenty-first century, women in Germany continue to refine their roles in society, in business, in government, and in the family.

Given that Germany's chancellor, Angela Merkel, is regularly listed not only in Forbes magazine’s list of the world’s most powerful women, but also in its list of most powerful people, German females need little convincing that they can play influential roles.

They seem now to be asking questions, not about what they can do, but rather about what they want to do. Having proven that they can rise to the highest levels, they can now ask if it should be assumed that they must always want to do so.

Rather than fighting for economic or political power, German women seem to be working for the right not to be forced into business or politics. Why should anyone assume that women with university educations automatically want to devote the bulk of their lives to careers?

An interesting consequence of this trend is that men, too, are beginning to ask why professional activities are expected to be the core of man’s identity, instead of, e.g., his roles as husband or father. Germans, who still lead most of the world in efficiency and productivity, are asking if they can prioritize family life above the work world. In July 2014, Rose Jacobs wrote in Newsweek magazine:

Where American women can only dream of a system that encourages men to share more of the burdens of family life, Germany has replaced maternity leave with “parent time,” offering up to 14 months’ paid leave to couples who both take time off after their child’s birth.

Placing family ahead of career doesn’t mean surrendering the option of being active in business or politics. German men and women both want that alternative left open to them. But they don’t want to sacrifice the chance to be fully engaged parents and spouses - two roles regarded by many people as life’s most meaningful experiences.

The numbers show that women don’t have to surrender political influence to be active mothers and wives: while Germany has more full-time stay-at-home mothers than the US or the UK,

The US and the UK both have a lower proportion of women in their legislatures.

So German women win on both fronts: they can fully rival the men in the political world, and yet not be forced into the monotony and drudgery of full-time, lifelong employment in the business or political worlds.

Hitting Bottom: Postwar Germany

When WW2 ended in May 1945, nearly everyone in central Europe was relieved that the fighting was finally over. But other difficulties soon appeared.

The economy and infrastructure had been so damaged that mere physical survival was a full-time occupation for many people. They devoted their days to finding food, and some starved.

Germany had been carved into four sectors, one for each of the victorious Allies: the USSR, the USA, France, and Britain. The Soviet zone soon isolated itself, and the remaining three zones began, for practical purposes, to merge into a single territory, which would eventually become West Germany.

Starting in the early 1930s, the German economy had been savagely abused by the Nazis: the government had controlled the prices of retail goods and the wages of workers. Tax rates were high. These brutal policies kept the populace in misery.

The Allies, who controlled Germany as an occupational force after the war’s end, did not rescind Hitler’s policies. The three western Allies, each for its own reasons, kept the economic cruelty in place. Thomas Hazlett writes:

In the eastern zone, the Russian formula was basic: loot everything of value. In the west, however, there was a different problem: total indecisive ness. As Wilhelm Roepke relates: “Among the victors only Russia could be said to have had a German policy at all.” The western zones were afflicted by an acute case of disarray, and government policy fluctuated among the vengeance of the French, the reformist zeal of the British (Laborites), and the bewilderment of the Americans. About the only consensus to be found anywhere was to rely on economic controls.

It would not be until 1949, when Konrad Adenauer became Chancellor and appointed Ludwig Erhard to address economic concerns, that the suffering would begin to end. Together, Adenauer and Erhard initiated policies of deregulation and lower tax rates.

This was the moment of Stunde Null - the ‘zero hour’ when there was a monumental historical reset: a chance to start over and rebuild the economy.

Adenauer and Erhard allowed the consumers, merchants, and manufacturers to have a degree of free which they’d not experienced in over a decade. The result was the Wirtschaftswunder - the ‘economic miracle’ of amazingly quick growth. Germany would become, within a decade or two, the most powerful economy in Europe, and one of the most significant economies on the planet.

Whither Deutschland - Debating the Direction for the Postwar Economy

Before and during WW2, German scholars saw clearly the misery inflicted by the Nazis, and began to think about how to develop a better politico-economic system. One group of professors in Freiburg formed a group known as the Freiburger Schule.

This group, composed mainly of thinkers in the fields of economics and political science, included Walter Eucken, and had significant influence on the post-war policies of chancellors Konrad Adenauer and Ludwig Erhard.

The Freiburger Schule emphasized that the dignity and value of human life could be respected only in a society whose government also respected property rights: low rates of taxation and free domestic markets.

Parallel to the Freiburger Schule was another group, the Freiburger Kreis. The membership was to a significant extent overlapping between the two.

The Freiburger Kreis was less engaged in technical economics, and more concerned with a moral and cultural analysis of the situation in the late 1930s and early 1940s. It came to the conclusion that people who considered themselves followers of Jesus had a moral obligation to oppose Hitler’s government.

Both the Freiburger Kreis and the Freiburger Schule had connections with anti-Nazi resistance groups throughout Germany, and with anti-Hitler leaders like Dietrich Bonhoeffer. The Nazis executed members of both groups who’d been complicit in the July 1944 assassination attempt on Hitler.

The groups also had contact with a larger underground network outside of Germany. Scholars like Wilhelm Röpke had been forced to flee Germany when the Nazis took over in 1933.

Yet Röpke remained, by means of published articles, a part of the discussions held by the two groups. Referring to the Freiburger Schule as the ‘German school,’ David Henderson writes:

Among the members of the German school were Wilhelm Röpke and Ludwig Erhard. To clean up the postwar mess, Röpke advocated currency reform, so that the amount of currency could be in line with the amount of goods, and the abolition of price controls. Both were necessary, he thought, to end repressed inflation. The currency reform would end inflation; price decontrol would end repression.

The groups in Freiburg dealt with economic questions: how to revitalize Germany which had been devastated by Nazi monetary policies, by wartime bombing, and by the Allied occupation. They also considered social and political forms: how to increase personal freedom and political liberty, to prevent a repetition of dictatorship’s horrors and enable prosperity. They pondered moral and social questions: the obligation to oppose Hitler was tied to the obligation to respect the dignity of human life, including the obligation to respect property rights.

The last point followed from this line of reasoning: if a person spends time working to earn money, and the government confiscates money, the government is essentially confiscating time. Because life consists of time, the government would be confiscating a person’s life, which would amount to slavery or murder, an accurate description of the Nazi regime.

To control retail prices, or dictate wages, is likewise a violation of a human being. These Freiburg discussions, held before the fall of the Nazi government, constituted a radical resistance, treason against Hitler, and a courageous stand for human dignity:

Ludwig Erhard agreed with Röpke. Erhard himself had written a memorandum during the war laying out his vision of a market economy. His memorandum made clear that he wanted the Nazis to be defeated.

Although several members of the Freiburger Kreis and the Freiburger Schule were murdered by the Nazis, those who lived faced opposition after the war.

As the postwar situation clarified, two large political parties emerged in West Germany, the SPD and the CDU/CSU, alongside several minor parties. Among those minor parties was the FDP. The SPD wanted to keep in place the same economic program which had been in operation since the mid 1930s.

More a scholar than a politician, Ludwig Erhard eventually made his home in the CSU/CDU. He could have easily wound up in the FDP. Both the CDU/CSU and the FDP were friendly, in slightly different ways, to Erhard’s views. David Henderson describes the opposition to the program of the Freiburger Schule.

The Social Democratic Party (SPD), on the other hand, wanted to keep government control. The SPD’s main economic ideologue, Dr. Kreyssig, argued in June 1948 that decontrol of prices and currency reform would be ineffective and instead supported central government direction. Agreeing with the SPD were labor union leaders, the British authorities, most West German manufacturing interests, and some of the American authorities.

Despite this opposition, Adenauer and Erhard were able to implement policies of lower taxation and deregulation. This ushered in the Stunde Null - the ‘Zero Hour.’ This was a pivotal historic reset, a chance to restart after the destruction of the war.

Adenauer became chancellor in September 1949 and held office until 1963. Erhard was chancellor from 1963 until December 1966. During these years, the high tax rates from the Nazi era were reduced, and the price controls and wage controls largely eliminated.

The free market was, at first, a strange experience for ordinary German consumers, who hadn’t experienced such a thing for well over a decade. Ludwig Erhard introduced education programs for shoppers, helping them learn to look for good prices.

As obvious as it may seem to some readers, it was an odd notion for postwar Germans that the same package of coffee could be sold for three different prices in three different stores. They had to learn the skill of comparison shopping.

The effects of deregulation appeared quickly, and in nearly every metric: production rose, unemployment fell, infrastructure was rebuilt, and general economic health appeared. This was the Wirtschaftswunder - the ‘economic miracle’ - which was no miraculous violation of natural laws, but rather the predictable and replicable result of economic principles.

The growth during the years of Adenauer and Erhard formed the foundation for, and provided the momentum of, the German economy in the following decades, when it became not only the most powerful in Europe, but one of the most powerful in the world.

Freedom Revitalizes a Decimated Nation: Postwar West Germany

The chaos which followed the war’s end in May 1945 brought most economic activity to stop, and of what little production continued, much of it was carried out off the books, either as black market activity, or as barter.

Germany was a nation largely destroyed. Millions of people had died. Physical infrastructure was nonexistent in some part of the country, badly damaged in others.

The economy had been demolished, bit by bit, since the early 1930s, when the Nazis imposed high tax rates, controls on retails prices, and strict regulation of wages. This lead to a decline in economic activity.

In an effort to escape Hitler’s harsh economic policies, buyers and sellers engaged in off-the-books black market activity, which the Nazis in turn harshly persecuted.

After more than a decade of suffering at the hands of Hitler’s National Socialist market regulators, the Germans found that the war’s end did not immediately end the misery. In West Germany, the Allies and their occupational forces kept the Nazi policies in place.

In fact, conditions got at first worse after May 1945, rather than better. Currency flooded the economy and became nearly worthless. There were widespread shortages of retail goods. David Henderson describes the result:

Barter was very inefficient compared with straight purchase of goods and services for money. German economist Walter Eucken wrote that barter and self-­sufficiency were incompatible with an extensive division of labor and that the economic system had been “reduced to a primitive condition.” The numbers bear him out. In March 1948 bizonal production was only 51 percent of its level in 1936.

The reports used the word ‘bizonal’ to reflect that these were aggregate numbers for both the American and the British occupational zones. Later, the French would join the bizone, and it would become the trizone, which would later become West Germany. The Soviet occupational zone remained separate, and later became East Germany.

A complex technological economy cannot survive if its trading mechanisms are reduced to barter and black market tactics. Many observers expected that Germany would sink permanently into a ‘third world’ category.

Indeed, some among the western Allies wanted precisely that: Henry Morgenthau, the U.S. Secretary of the Treasury, argued that all Germany should be turned into farmland, with no industrial capabilities whatsoever.

Thomas Hazlett describes the ongoing deterioration of the German economy in the first postwar months:

The stupendous gap between the legal and illegal prices grew to such proportions that a general collapse of the currency ensued. People resorted to barter, and German cities typically saw a mass exodus on weekends as city-dwellers flocked to the countryside to trade with the farmers in kind. As the German economist Walter Eucken summed up: “The failure of money and the central administration of the economy has led to increasing self-sufficiency of economic units and to the emergence of a system of barter, two things incompatible with an extensive division of labor. The economic system is reduced to a primitive condition.”

A turning point was the election of Konrad Adenauer, Germany’s first postwar chancellor, in 1949. He convinced the western Allies to allow the Germans to form their own economic policies and make an effort to rebuild.

This was the Stunde Null for West Germany - the ‘zero hour’ when history experienced a gigantic ‘reset’ and there was a chance to begin again from the rubble of wartime devastation.

In East Germany, sadly, things did not go well under the Soviet socialist dictatorship. The economy continued to crumble, creating an ever-widening gap between East Germany and West Germany.

But the economics were merely one aspect of a larger difference: West Germany respected personal liberty: the freedoms of the press, of speech, of religious belief, of the political process, etc.

Economic freedom - the observance of property rights and of the free market - were inseparably tied to the other liberties. Because East Germany denied the right to personal expression, it denied rights of people to freely buy and sell.

Adenauer’s appointee, Ludwig Erhard, carried out policies of deregulation and lower taxes. Government control over wages and prices was greatly reduced, and retailers were allowed to compete by offering lower prices to consumers.

Instead of sinking into the swamp of ‘third world’ or ‘developing world’ countries - most which never ‘develop’ - West Germany revitalized both its political liberty and its free market. Personal freedom, in terms of deregulation and lower taxes, led to prosperity.

This was the Wirtschaftswunder - the ‘economic miracle’ - which was no violation of nature’s laws, but rather the predictable and replicable result of economic principles. Free markets and low rates of taxation are inextricably intertwined with those personal freedoms which both the Nazis and the Soviets so harshly oppressed.

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 that 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 Germany for decades afterward.

From a country that was teetering, at the time of Stunde Null, on the brink of a “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 worldwide downturns and bad decisions in domestic economic policy.

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