Up from Stunde Null

When WW2 ended in May 1945, Germany was a destroyed country. Millions of Jewish Germans had been murdered in concentration camps; millions of German civilians had died when Allied aircraft dropped bombs on German cities; millions of German young men had died on battlefields.

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.

The War Ends, But Things Get Worse

When WW2 ended in 1945, Germany was destroyed in more than one way: millions of its people were dead; millions more wounded; and millions held hostage by the USSR.

The physical facilities of the nation were shattered: buildings and infrastructure were in some areas totally ruined, in other areas partially.

With the end of the war, and the end of Nazi oppression, the reader might think that this was the time that postwar rebuilding began. But things actually got worse after the war’s end, not better.

Although the German citizens were no longer held captive to Nazi subjugation, they were still shackled by Nazi economic policies. Ironically, those policies were continued by the western Allies.

England, France, and the United States continued those policies - high tax rates, regulated markets, government controls over wages and prices - perhaps partly in order to ensure that Germany remained weak.

In the first year or two after the war, these policies threatened to shape Germany into a “third world” country. Poverty increased, while worker motivation decreased. The economic environment lacked opportunity, predictability, and stability.

Historian Thomas Hazlett writes:

Yet the shocking reality was that war-scorched Germany was to face its greatest economic crisis in the years after 1945. The postwar devastation was the combined effect of two principal factors.

What drove Germany downward during these years? The effects of regulation and taxation, combined with an oversupply of money.

The Nazi government had printed huge amounts of cash, while rigidly regulating both prices and wages. This caused the buildup of inflationary pressure, which erupted at war’s end.

The Nazis could keep the economy functioning only through harsh repression, including draconian steps taken against the black market. Thomas Hazlett reports:

First, a tremendous inflation broke loose - the predictable result of prior history. Under the Third Reich, the German government had financed a colossal industrial build-up to accommodate the designs of the Nazi war machine. The tremendous industrial expansion was paid for with rampant monetary expansion. All the screws of the Nazi State had to be tightened to their breaking point to suppress the resultant inflation; the guns of the Gestapo turned on black marketeers and others who sought to evade the officially posted prices of goods and services. The result of the effective price controls under Fascism was the explosion of liquidity after Fascism.

Ironically, it was the black market which kept much of the country alive. It functioned after the visible economy collapsed.

The steps which eventually brought the German economy back from the brink of “third world” status began with Adenauer’s ability to persuade the western Allies that the Germans needed some sovereignty, including economic sovereignty, over their own country.

Adenauer had been elected chancellor in 1949. After the western Allies gave the German government some control over the national economy, Adenauer’s key economic appointee, Ludwig Erhard, masterminded policies of deregulation, lower tax rates, and currency reform.

Konrad Adenauer was chancellor from 1949 to 1963; Ludwig Erhard succeeded him in office and remained until 1966. Between the two of them, they unleashed the market forces which pulled Germany back from the brink of permanent “third world” status.

Ludwig Erhard: Freeing Germany

The horrors of WW2 inflicted almost every conceivable type of misery: Central Europe had seen the deaths of millions of Jewish Germans at the hands of the genocidal Nazis, the death of millions of young men on the battlefields, the deaths of millions of civilians during the bombing of cities, and the near-complete destruction of the physical infrastructure.

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 slowly became 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.

Adenauer and Erhard Lay the Foundations for Prosperity

At the end of WW2, Germany was a nation nearly destroyed. You might even take the ‘nearly’ out of the previous sentence.

Major cities had been bombed to rubble. Millions of Jewish Germans had been ruthlessly murdered in concentration camps. Millions of young men had died on the battlefields, and millions of civilians had died at home. There wasn’t much of Germany left.

The German economy, too, had been devastated. Hitler’s Nazi government had done everything possible to inflict misery: high taxes, price controls on retail goods, and government ownership of industries. This was the economics of genocide.

When the war ended in 1945, the totalitarian oppression did not immediately end. Germany was governed by the four victorious Allies: England, France, the Soviet Union, and the United States. They kept the harsh economic system in place, because they wanted to make sure that the Germans did not rise again to pose a danger.

Historian David Henderson describes how the Nazi system cruelly inflicted abuse on the Germans:

By 1948 the German people had lived under price controls for twelve years and rationing for nine years. Adolf Hitler had imposed price controls on the German people in 1936 so that his government could buy war materials at artificially low prices. Later, in 1939, one of Hitler’s top Nazi deputies, Hermann Goering, imposed rationing. (Roosevelt and Churchill also imposed price controls and rationing, as governments tend to do during all-­out wars.) During the war, the Nazis made flagrant violations of the price controls subject to the death penalty. In November 1945 the Allied Control Authority, formed by the governments of the United States, Britain, France, and the Soviet Union, agreed to keep Hitler’s and Goering’s price controls and rationing in place. They also continued the Nazi conscription of resources, including labor.

It would be the first challenge, and the first victory, for Germany’s Chancellor Konrad Adenauer, to persuade the Allies - more accurately, the three Western Allies - that the Germans did not pose a threat, that they would not rearm, and that they should be granted human rights, especially property rights and free market rights.

When Adenauer succeeded, he and his appointee Ludwig Erhard undertook a comprehensive program to free the Germans from totalitarian economics. Tax rates were reduced. Wages and prices were deregulated.

The result is known today in textbooks as the Wirtschaftswunder - the “economic miracle.” Personal freedom and economic growth grew together. The Encyclopedia Britannica describes the blossoming of Germany:

By 1950 West Germany’s gross national product had caught up with the 1936 figure. Between 1950 and 1955 the national income rose by 12 percent a year, while exports grew even faster. From a small deficit in 1950, gold and foreign currency reserves increased to nearly 13 billion deutsche marks by 1955, while unemployment fell from 2.5 million to 900,000. Per capita income nearly doubled. New homes were built at the rate of 500,000 a year. By 1955 West Germany had more than 100,000 television sets. Bombed cities had been rebuilt. Every other family seemed to possess a Volkswagen “beetle” car.

The policies of Adenauer and Erhard demonstrated that various forms of liberty are connected: to ensure basic human rights like freedom of speech and political liberty, it is necessary also to secure property rights and a free market.

Germany’s stellar economic performance during the second half of the twentieth century is built upon the foundations laid during Adenauer’s chancellorship from 1949 to 1963, and during Erhard’s chancellorship from 1963 to 1966.

The Unexpected Success of Postwar Germany

At the end of WWII, Germany was a wasteland: millions of young men had been killed in battle, civilians had been killed in bombing raids, the physical infrastructure - factories, water pipes, electrical and telephone wiring - was largely destroyed, and the nation’s economy was a disaster.

Hitler and his Nazi government had inflicted incalculable damage on the German people during the twelve years of their horrific dictatorship.

Many observers predicted that Germany would sink permanently into the ranks of the “third world” countries.

Konrad Adenauer became federal chancellor - Bundeskanzler - in 1949, and led the heroic efforts by millions of Germans to rescue central Europe from collapse. He was greatly aided by Ludwig Erhard, whom he appointed Bundeswirtschaftsminister: Minister of Economics.

The amazing recovery has become a standard example in textbooks about economics. Adenauer and Erhard, having persuaded the western Allies - England, France, and the United States - to return sovereignty to the Germans, set out a policy of reducing taxes and deregulating markets.

The Nazi policy of “national socialism” had dictated that the government should control the prices of everything from bread to shoelaces. Postwar freedom now meant that individual store owners could set their own prices, and customers were free to bargain.

The Encyclopedia Britannica describes the energizing effect of lower taxes and deregulated markets:

The West German currency reform that produced the western deutsche mark was a courageous act. It exchanged one deutsche mark for 10 obsolete reichsmarks; later the rate was slightly reduced. In one respect, the result was similar to that of Weimar’s hyperinflation; paper savings were suddenly devalued. This time, however, there was a limit to any losses. What was more, quite small quantities of the new currency would actually buy goods. When Ludwig Erhard, the economic director who had undertaken the reform, also dismantled price and other controls, the scene was set for the so-called Wirtschaftswunder, the German “economic miracle,” fueled by freedom and competition and the energy they released.

When Adenauer retired from the office in 1963, Erhard became chancellor and remained until 1966.

From 1949 to 1966, the two of them laid the foundations of economic prosperity, not only for Germany, but for central Europe generally, which has lasted for several decades. Much of what still exists in terms of a manufacturing base is running on the momentum of those years.

Economists see the resurrection of the German economy as paradigmatic for growth. David R. Henderson writes:

What caused the so-­called miracle? The two main factors were currency reform and the elimination of price controls, both of which happened over a period of weeks in 1948. A further factor was the reduction of marginal tax rates later in 1948 and in 1949.

Germany defied the expectations of the postwar world. When many economists thought that Germany would be relegated to a “third world” status, it instead became one of the most powerful economies, not only in Europe, but in the world.

Stunde Null - Rebuilding from Nothing

The end of the WWII is a major turning-point in the history of Germany. The end of the war meant the end of twelve years of Nazi oppression. The nation was largely destroyed, but it also had its first chance in a dozen years for constructive activity.

The devastation was immense: millions of Jewish Germans had been mercilessly murdered in concentration camps, joined by other victims like Gypsies, Jehovah’s Witnesses, and anyone who expressed political opposition to the Nazis.

Millions more had died when German cities were destroyed by bombs dropped from aircraft, and millions of young men had died on the battlefields. The German population was decimated.

Physically, the nation’s infrastructure was in shambles. Roads, electrical and telephone wires, and the pipes bringing water to houses were often non-functional. Buildings of all types had been destroyed.

The nation’s economy had also been gravely damaged by Hitler’s policies. The Nazis had controlled the prices of nearly anything that could be bought or sold, and taxed the people harshly.

Many observers assumed that Germany would permanently become a “third world” country, an ongoing economic disaster. As David R. Henderson writes,

After World War II the German economy lay in shambles. The war, along with Hitler’s scorched-­earth policy, had destroyed 20 percent of all housing. Food production per capita in 1947 was only 51 percent of its level in 1938, and the official food ration set by the occupying powers varied between 1,040 and 1,550 calories per day. Industrial output in 1947 was only one-­third its 1938 level. Moreover, a large percentage of Germany’s working-­age men were dead. At the time, observers thought that West Germany would have to be the biggest client of the U.S. welfare state; yet, twenty years later its economy was envied by most of the world. And less than ten years after the war people already were talking about the German economic miracle.

How did Germany rise from such devastation? Other nations have remained in the category of “developing world” without actually developing.

There are many complex aspects to Germany’s Wirtschaftswunder - its ‘economic miracle’ - including the cultural attitudes and ethics of central Europe. Self-discipline, focus, farsightedness, and societal emphases on education all played a part.

Additionally, the policies implemented by West Germany’s first chancellor, Konrad Adenauer, and his appointee, Ludwig Erhard, opened the door to economic growth. Simply put, they reduced taxes and reduced regulation.

Individuals were free to discuss the prices they wanted to pay. The give-and-take of talking about prices with local merchants revitalized the markets.

Lower taxes meant that opportunities arose for individuals to start their own small businesses and shops. Larger businesses could sell more because smaller businesses were thriving.

To understand why the Wirtschaftswunder was regarded as something like a miracle, we need to remember that Germany was rising from near-total destruction: millions of its people dead, its physical infrastructure demolished, and its economy shattered by years of Nazi socialist policies.

The time immediately after the war’s end, and immediately before the economic recovery, was called Stunde Null - the ‘zero hour’ - because it was almost as if history were starting over again. Germany had to rebuild itself from almost nothing.

Today, more than half a century later, economists still study the years of the Wirtschaftswunder - roughly 1949 to 1966 - as a landmark era of growth in world history. The Germans built one of the world’s most powerful economies from piles of rubble.

Merkel: a Rational Scientist in an Irrational World

Since Angela Merkel became Chancellor of Germany in November 2005, several situations have confronted her and shaped her chancellorship: the Eurozone economic problems centering on but not limited to Greece; Putin’s aggressive foreign policy; and Islamic terrorism.

Merkel’s style arises from her intense study of physics and chemistry: she earned her doctorate in 1986. She did not study political science or law, and so comes to government from a rational point of view rather than a professional one.

Being in the center of major geopolitical questions, Merkel has regularly appeared at or near the top of the list, created by Forbes magazine, of the world’s most powerful women. She was at the very top of the list in 2015, 2014, 2013, 2012, 2011, 2009, 2008, 2007, and 2006. In 2010, she was in fourth place.

Even on the list of the most powerful people - women and men - in the world, Merkel has made impressive appearances. In 2015 and 2012, she was ranked second, behind Vladimir Putin in first place. In 2014 and 2011, she was fourth. In 2013, she was fifth. In 2010, she was sixth.

Merkel entered politics full-time when she was elected, in 1990, as a representative in Germany’s Bundestag, similar to the U.S. House of Representatives. She is and was a member of the CDU political party.

Her election came shortly after the GDR, as East Germany was officially known, dissolved, and shortly after East and West Germany reunited, freeing the millions of Germans who’d lived under the socialist dictatorship in the east.

One factor which shaped Merkel’s worldview is her experience of the GDR, of living under Soviet socialist oppression, of throwing off that oppression, of gaining freedom, and of reuniting Germany.

Vladimir Putin symbolizes that Soviet oppression, and is perhaps a ghost of it. He has been a constant factor in global dynamics ever since Merkel became chancellor. Stefan Kornelius writes:

Putin had been president for five years when she became Chancellor. Later he swapped roles and spent some time as Prime Minister before returning as head of state in 2012. Ever since Merkel became Chairman of the CDU, Putin has been the leader of Russia. Not only that, they are almost the same age - Putin is two years older than her - and have followed similar paths in life, almost as if they were mirror images. Putin spent five years in Dresden, where he witnessed the collapse of the GDR and the Warsaw Pact and became fluent in German. Merkel grew up in the Soviet garrison town of Templin, showed her gift for languages by learning Russian, and like Putin experienced the fall of the Wall at first hand. While Merkel had always glorified the West, and demonstrated her love of freedom by following Western politics, 1989, the great year of change, certainly didn’t transform Putin into an ardent democrat. Whenever Merkel and Putin meet, two world views collide. For Merkel, the fall of the Berlin Wall was a liberating experience, whereas for Putin, a lieutenant colonel in the KGB, it was a deeply traumatic event. He sees the collapse of the Soviet Union as a historic defeat.

Dealing with Putin requires mental toughness, and Merkel has it. It is perhaps no coincidence that the only other woman to deal effectively with Putin also appeared frequently on the Forbes list of the world’s most influential women: U.S. Secretary of State Condoleezza Rice.

Another question which required both Merkel’s toughness and her ability for scientific analysis was the international financing of the eurozone. Fiscal discipline means enduring some hardships in order to avoid worse hardships. French leader Sarkozy worked with Merkel, but did not last in his office as long as she in hers.

Saying ‘no’ to additional debt is not always popular, but in the long run has proven to be the only path which offers even a slim chance for the survival of the regional and continental economy. Historians Alan Crawford and Tony Czuczka write:

For Merkel, whose position as Europe’s principal decision maker was cemented six months later when she lost her ally Sarkozy in France’s presidential election, the moment of truth for the euro area was the latest incarnation of financial crisis that had rocked her chancellorship almost since the beginning. Merkel was just 18 months into office when she was confronted with the worst global financial meltdown in living memory. She set about resolving each stage of crisis for which there was no playbook – in the banks, the economy, and as a result of euro countries’ debt loads – and she learned along the way. Catapulted to the forefront of European policy making during the euro trauma, it came to define Merkel’s chancellorship even as she struggled for a solution. Some leaders, like Papandreou and Berlusconi, collapse and fall victim to crisis; others like Merkel flourish. Lambasted for delaying, for backtracking, and for refusing to commit more resources to the crisis fight, Merkel showed at Cannes that she can suddenly be decisive, brutally so.

Merkel has been nimble enough to adjust her strategies as needed. Trying to cajole Greece into controlling its profligate spending, in 2010 she at first floated the idea of nudging Greece out of the eurozone; by late 2012, she was working on ways to keep Greece in the eurozone, but using the leverage to persuade it to rein in its extravagant spending and massive debt.

The big question mark looming on the horizon of Merkel’s chancellorship is how Europe will protect itself from Islamic terrorism, and how it can handle the flood of Syrian refugees - many of whom are neither Syrian nor refugees. It is far too early in history to know the outcome of this situation, for good or for ill.

Given her expertise in physics and chemistry, Merkel’s view of both economics and geo-strategic negotiating is a highly rational one. So far, it has been successful.