At the Cobden Centre, Alasdair Macleod explains how the sensible reforms of one man rescued the West German economy from rationing, inflation, and deprivation:
Anyone who favours regulation needs to explain away Germany’s post-war success. Her economy had been destroyed, firstly by the Nazi war machine, and then by Allied bombing. We easily forget the state of ruin the country was in, with people in the towns and cities actually starving in the post-war aftermath. The joint British and American military solution was to extend and intensify war-time rationing and throw Marshall aid at the problem.
Then a man called Ludwig Erhard was appointed director of economics by the Bizonal Economic Council, in effect he became finance minister. He decided, against British and American misgivings, as well as opposition from the newly-recreated Social Democrats, to do away with price controls and rationing, which he did in 1948. These moves followed his currency reform that June, which contracted the money supply by about 90%. He also slashed income tax from 85% to 18% on annual incomes over Dm2,500 (US$595 equivalent).
Economists of the Austrian school would comprehend and recommend this strategy, but it goes wholly against the bureaucratic grain. General Lucius Clay, who was the military governor of the US Zone, and to whom Erhard reported, is said to have asked him, “Herr Erhard, my advisers tell me what you have done is a terrible mistake. What do you say to that?”
Erhard replied, “Herr General, pay no attention to them! My advisers tell me the same thing.”
About the same time, a US Colonel confronted Erhard: “How dare you relax our rationing system, when there is a widespread food shortage?”
Erhard replied, “I have not relaxed rationing, I have abolished it. Henceforth the only rationing ticket the people will need will be the deutschemarks. And they will work hard to get those deutschemarks, just wait and see.”
The US Colonel did not have to wait long. According to contemporary accounts, within days of Erhard’s currency reform, shops filled with goods as people realised the money they sold them for would retain its value. People no longer needed to forage for the basics in life, so absenteeism from work halved, and industrial output rose more than 50% in the second half of 1948 alone.
Erhard had spent the war years studying free-market economics, and planning how to structure Germany’s economy for the post-war years. It goes without saying that his free-market approach made him a long-standing and widely recognised opponent of Nazi socialism, a fact that enhanced his credibility with the military authorities tasked with repairing the German economy. He became an early member of the Mont Pelarin Society, a grouping of free-market economists inclined towards the Austrian School, founded in 1947, and whose first President was Hayek.
Erhard simply understood that ending all price regulation, introducing sound money and slashing the burden of taxation, were the basics required to revive the economy, and that the state must resist the temptation to intervene and had to reduce its role in the economy. He remained a highly successful finance minister for fourteen years, before succeeding Adenauer as Chancellor in 1963.
Erhard not only allowed unfettered free markets to rapidly turn Germany around from economic devastation, but being publicly credited with this success he presided over the economy long enough to ensure that bureaucratic meddling was kept at bay subsequently. His legacy served Germany well, despite the generally destructive actions of his successors.
The contrast with Britain’s economic performance was stark, where rationing was not finally lifted until 1954, and her post-war socialist, anti-market government was nationalising key industries. The contrast between Germany’s revival and Britain’s decline could not have been more marked.
