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 West Germany and East Germany - the Soviet occupational zone and the combined British, French, and U.S. zone.
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.