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.