The Miracle of German Recovery: An Economy Planned for Free Enterprise

by HANS OTTO WESEMANN

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IN JANUARY 1947, nearly two years after the end of hostilities, German production was still in such a state of devastation and collapse that it was estimated that each inhabitant in the British zone would get only one new suit of clothes every forty years, one shirt every ten years, one pair of socks every four years, and a pair of shoes every three years. At the same period the average food ration consisted of less than 1,000 calories—40 per cent of the physiological minimum requirement.

That was 1947, one year before the currency reform, less than a decade ago. The German economy presented a picture of total chaos. The currency was unstable, the cities more or less in ruins, 500 million cubic yards of rubble had to be removed, railroad and motor traffic had shrunk to fractions of their former volume, the German Merchant Marine no longer existed, and every day thousands of refugees poured into Western Germany from pre-Hitler German territories in the East — in the end they totaled 10.9 millions. These people crowded into an area embracing only 52 per cent of the former territory of the Reich. Dismantling of the industrial plant for reparations reduced the already wretched productive capacity of the country still further. Worst of all was the breakdown of all moral standards in business life and all confidence in the economic policies of the government.

What has happened since — what is called the “German Miracle” — has resulted from the combination of intelligent economic policy with the determination of all citizens to work with all their strength. That these efforts have led to such impressive results is due to the released energies of a people so long deprived of freedom.

On June 20, 1948, the Germans formed queues in front of schools and town halls, as they had done so often in the previous ten years. They had come to turn in their old Reichsmarks, which on this day had been declared worthless, and to receive thenquota of new money. The sum of 60 Deutsche marks was handed out to each man, woman, and child within the American, British, and French zones of occupation. Everyone who ran a business, large or small, was credited with 60 marks for each person on his payroll, as an advance upon his suspended bank account; such bank accounts were converted from old Reichsmarks to new D-marks in the proportion of 6.5 of the new for 100 of the old marks. The ordinary citizen was unaware of all the complicated legal steps which had to be taken to convert the whole mechanism of the economy to the new currency. But he did not worry about this. For him, the fact that he once more held sound money in his hands, after long years of misery, was nothing less than a revolution.

It would be misunderstanding the historical development to imagine that the currency reform was the sole, or even the most important, cause of the economic recovery that promptly followed. Far more significant was the decision to replace the system of government control as much as possible by a basically free-enterprise economy. To the Minister of Economics of the Federal Republic, Ludwig Erhard, belongs the credit for having ventured this historic step in developing what is termed the “social market economy.” There were a good many arguments against such a decision. The military governors who held the political power wore full of skepticism, and came very close to oxerruling Erhard’s fait accompli. England and many other countries had adopted a welfare-state policy with considerable government control. Resistance in Germany itself was strong, and there were many, especially in the socialist camp, who predicted that the free-enterprise experiment would end in disaster, with millions of unemployed. Finally, the whole aspect of the German economy tended to suggest that such vast destruction and disorganization could be overcome only by the strictest kind of state direction of production and distribution.

Fortunately, the ideas developed by the economists and publicists of the so-called neo-liberal school won out. These people insisted that a government plan, which provided the citizen with no incentive but obedience to a bureaucracy, could not release a fraction of the energies that would spring from the ambition, responsibility, and initiative of individuals. The decision was taken, and the participants in the economic process, the consumer, the entrepreneur, and the worker, were given freedom of action in all but a few spheres. Competition was established as the fundamental principle of the economy.

Hundreds of thousands of Germans have justified this faith in their initiative, each in his own fashion. Most impressive of all, perhaps, were the accomplishments of those who fled across the “green border” from the Soviet zone of occupation, bringing with them nothing but a few plans or drawings, and the knowledge of how to build up a business. Here and there they found a town or village which was willing to place idle land or a heap of ruins at their disposal, and perhaps aided them to start anew by extending credit to them. They traveled on freight, trains or bicycles all over the country, digging up machinery here and there, starting up production on the most modest basis, then ploughing their profits back into expansion. The apparent mystery of this development is clarified by an incident that took place in the British sector of Berlin, where shortly after the end of the war a Soviet officer had directed the total dismantling of a world-famous electronics plant. A few years later he visited the same plant, to find thousands of workers employed at thousands of machines. ” We made a mistake,” he commented. “We should not have removed the machines, but the people.” (It should be kept in mind, of course, that after 1949 the Western Powers reversed their position on restricting German industry and began to encourage the expansion of production.)

“Freedom of commerce”—that is, the right of anyone to start up and run a business — had been abolished under the Third Reich. This right was restored even while Germany was still operating under occupation law. The government also withdrew from interference in the relations between employers and employees; it abandoned government arbitration and turned over to the organizations of capital and labor the responsibility for wage agreements. This decision, too, has been justified by subsequent developments. Strikes have been very rare and of short duration in the Federal Republic.

Above all, however, these liberal principles were also to be applied to the Federal Republic’s trade partners in the free world. Whereas the former German Reich had come close to supplying its food needs from the products of its own soil, the Federal Republic was now dependent on imports for some 40 per cent of its foodstuffs, and for much of its raw materials. To export enough to balance these imports became a matter of life and death for the German people. The government of the Federal Republic has therefore been a vigorous advocate of free trade, and of free convertibility of currencies.

The result of these efforts is clearly indicated by a few figures on German foreign trade. Imports rose from 4.6 billion D-marks in 1948 to 24.5 billions in 1955. (The D-mark is worth about 24 American cents.) In recent years the favorable balance of trade has mounted, with the result that the German mark has become one of the most solid currencies in the world. The proportion of foreign to total sales has risen to more than 14 per cent.

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BUT in economic policy as in everything else there are no rules without exceptions. Important segments of the economy were in so precarious a state that they could not be left to the free play of the market place. The critical shortage of housing, for example, would have driven rents to astronomical heights, which would have been socially indefensible. Therefore sizable contributions of public funds from the budgets of the federal government, the states, and the cities and towns have been provided to guarantee low-interest loans for new housing; the dwellings built on such loans wore subject to government restrictions, and rents were controlled. Builders were also allowed to deduct part of their investment from taxable income, and new buildings were exempted from local real estate taxes for ten years. Under this program, the six years between 1949 and 1955 saw the construction of a new dwelling for every fifth inhabitant of the Federal Republic.

A further exception to the prevailing competitive economy was agriculture. As long as agriculture had not recovered full production, it was protected from the pressure of foreign competition by a complicated system of tariffs and quotas, and for a few commodities prices and profit margins were fixed by the government. In addition, agricultural enterprises are tax-favored and enjoy cheaper interest rates. These protective measures will be continued until one of the aims of the agrarian policy is achieved — namely, to consolidate some of the excessively small holdings which burden nearly half of the useful farmland of the Federal Republic.

Reviewing the past seven years, we see a twosided picture. At first the more agreeable aspects of the newly acquired economic freedom came plainly to the fore. The almost insatiable backlog of demand and the rapidly increasing purchasing power of the consumer created a market with plenty of room for all. But as the seller’s market began to be replaced by a buyer’s market, a chorus of voices rose calling for protection from too much freedom. For example, we see certain industrial groups endeavoring to draw the teeth of the proposed antitrust bill, and suggestions are frequently advanced that the administration introduce fair-trade regulations. To what extent this trend will be in the ascendancy in the future cannot yet be foreseen.

When the federal government commenced operations in September 1949, more than two million unemployed were seeking jobs. The expellees from the East had been largely directed to the agricultural regions of the West. There they had some assurance that they would not go hungry, but they could never expect to find work. They would have to be moved into industrial areas as soon as jobs and housing could be provided for them. There was only one possible course: to step up industrial production rapidly, even at the cost of a certain degree of social hardship.

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ASSURANCE of an adequate rate of capital investment was therefore the principal problem of German economic policy, and has remained so to this day. Marshall Plan and other foreign aid was of great assistance, and a policy of liberal bank credit stimulated recovery, but the government had also to step in. Until savings could be accumulated —and this could not be expected for years, because everyone had to acquire so many necessities lost or lacking during the war — self-financing had to be undertaken; in other words, capital had to be obtained out of high prices. This approach proved so successful that a tax structure favoring this procedure by allowing rapid depreciation write-offs and exempting reinvested profits ceased to be necessary from 1951 on. d he Korean War boom also helped German industry, and made it a great deal easier to finance a part of the constant expansion of capacity through private investment.

It should be noted that in one important sector considerable government support was at first called for to achieve rising employment. Heavy industry could not practice self-financing because prices for coal and steel were held to an inadequate level by the Ruhr Statute. Therefore a government investment of one billion D-marks was provided.

All in all, during the postwar years an average of 25 per cent of the total social product was returned to industry in the form of investment. That is unquestionably a very high proportion, but it was necessary — and it has paid off. Since the currency reform approximately four million new jobs have been created in the Federal Republic. Without resorting to such questionable means as excessive use of government credit or inflating the currency, the Federal Republic has become a country of full employment , and is now faced with a possibly more difficult task of maintaining and increasing production in spite of a diminishing reservoir of labor.

Based on 1936, probably the last “normal” prewar year, German industrial production has more than doubled, and there has been a marked improvement in the general standard of living. This can be measured in various ways. To say that the average hourly earnings of industrial workers have risen from 1.12 to nearly 2 D-marks (48 U.S. cents) is not very illuminating, for it tells us nothing about the income of the millions who are not employed in industry. More significant, perhaps, is the fact that the average diet has risen from less than 1,000 calories a day per person before the currency reform to more than 3,000 calories at present.

Holding the line on prices is even more important from the social than from the economic point of view. Price stability is essential to protect those who are no longer employable and cannot increase their income by fighting for and winning higher wages. Today almost every country is having a hard time finding a cure for the disease known as the wage-price spiral. Thus far, however, West Germany has been remarkably successful in preventing large price increases. The price index for “standard-of-living goods” remained until late in 1955 on the same level as at the beginning of 1949. Even during the Korean crisis it displayed only a slight tendency to rise, and returned quickly to its former level. Yet not until 1955 was the government obliged to begin taking some action on prices. When prices started to rise as a result of full employment and constantly increasing wages, the government, stimulated foreign competition (to help hold prices down) by reducing tariffs. The Bank of the German States also imposed credit restrictions and increased the discount rate, in order to keep the boom from getting out of hand. The tying of wages to the index of the cost of living, such as has become customary in many countries, has not been done in the Federal Republic. We are convinced that such a procedure is virtually certain to reduce the purchasing power of the currency — or, in other words, to lead to creeping inflation, as has been the case in other countries.

The German labor unions have displayed a broad understanding of economic necessities, with the result that; the rise in wages has not outstripped mounting productivity. Today the unions have more than six million members, approximately one third of the total number of employees in the Federal Republic. They are based on the principle of having all the workers in a single industry included in one union. Sixteen big industrial unions have thus arisen, and have combined to form the German Trades Union Association. Among the long-range goals of this association are common ownership of the key industries (which need not necessarily be the same as nationalization), a voice for the unions in the operation of factories, and union collaboration in economic planning. These far-reaching objectives have not prevented the unions from participating vigorously in the reconstruction of a non-socialist economic order. They held down their demands while the self-financing program for industry was in progress. Now, however, they are concentrating upon reducing working hours without reduction of pay, and during the past year they have forced through wage increases which have in several cases far exceeded the rise in productivity.

This latest development marks the beginning of a long-term problem that will prove of serious concern to industry in the very near future. The pressure for higher wages is bound to increase, inasmuch as the number of young people leaving school and seeking jobs will continue to decline until 1960 — a consequence of the drop in the birth rate during the war. If to this we add the half million men in their most productive years who will be absorbed by the new German defense establishment, it is evident, that by 1960 the economy will have to manage with approximately one million fewer workers than at present. This critical situation can be mastered only by the resolute application of technological improvements.

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CRITICS of German economic policies point out that our average standard of fixing is still only half that of the United States. It would be fairer to recognize, however, that seven years is not a very long time for the reconstruction of a whole economy in a country that has been cut in two. Moreover, European particularism has prevented the creation of an internal market comparable in size and absorptive capacity to the internal markets of the United States or the Soviet bloc. Tor that reason the federal government has energetically supported all efforts leading toward the formation in Europe of a larger political and economic unit. For therein lies the key to the Free World’s ability to meet the economic and social as well as the political competition of the Totalitarian World.

Not all classes of the German people have shared equally in the fruits of our economic recovery. Among the most perplexing legacies of the war is the tremendous social reshuffling that has taken place. Speaking very roughly, two major groups stand out. One of these is composed of those engaged in active economic life. Within this group the relative rise of the industrial worker, and especially of the skilled worker, as against the white-collar class and the civil servants, constitutes the most noteworthy change. The other group embraces those who may be called the flotsam and jetsam of the war. They represent one of the gravest social problems now confronting the nation.

There are, for example, some four million victims of the war who are wholly or partially dependent upon public support. There are the expellees from the Eastern territories and the refugees from the Soviet zone, who until incorporated into the country’s economic life must be maintained at public expense. And there is the enormously increased number of persons who are dependent upon pensions of various types, and upon social insurance and public relief. “This explains the fact that some 40 per cent of the total income from taxation is spent for social purposes. Even so, many pensions and relief payments are too low and must soon be raised, a burden which will increase in the next several decades because the proportion of elderly persons to the total population is rising.

Sociologically speaking, one of the most distressing effects of the war and the currency reform was the virtual annihilation of medium-sized and small savings. Those who had depended on social insurance suffered virtually no losses in their old-age security. On the other hand, the many who had not wanted to be a burden upon others, and had thought to provide for old age or incapacity by savings accounts and life insurance, were hard hit by the currency reform. Thus the very citizens who were most inclined toward self-sufficiency and thrift were discriminated against. To this day, the effects of those harsh measures can be felt.

The taxation policies of recent years have done little to remedy this problem. These policies do have the undeniable merit of having produced a balanced budget, and of having maintained a solid currency. On the other hand, heavy taxation has made the reacquisition of private property very difficult — in contrast to the strikingly vigorous accumulation of capital in the public purse. There are serious social dangers in the existence of broad masses of propertyless people. And business concerns cannot be ready to weather depressions unless they can build up cash reserves.

In general, we do not notice whether a child has grown too fast until it is subjected to severe tests of strength. The economy of the Federal Republic has been spared such tests so far, and it is therefore difficult to say whether, in this brief period of reconstruction, it has yet acquired adequate solidity. Certainiy its strength is likely to be tested in the near future. The impending labor shortage has already been mentioned. The economic strains imposed by rearmament in the next few years cannot Yet be assessed. It is true that the highly favorable balance of trade will make it easier for Germany to purchase armaments in other countries. But German industry will still have to create additional specialized capacity. That will be primarily a problem of capital funds, and secondarily a problem of the labor market. Another substantial burden is the assistance which must go from the federal treasury to Berlin, which cannot be self-supporting as long as it is so completely isolated. And if, finally, by some happy turn in international relations, the reunification of Germany should be achieved, the full economic energies of the Federal Republic would necessarily be drawn upon for a period of years in order to bring the Soviet zone to an equivalent level of production.

All these tasks could be solved far more easily if it were possible to make Europe a unified economic. sphere. Yet such unification must not be achieved at the expense of the entire continent’s economic relations with the rest of the world, and this the German Federal Republic fully realizes. In her own internal economic policy Germany has seen clearly that freedom cannot be administered in small doses; it must be all-embracing.

In all such considerations, the United States is naturally seen as standing in the foreground, as the leading economic power of the Free World. The United States lent aid in many ways, especially through the Marshall Plan, to get the German economy started on the way to its present heights. Out of this unilateral relationship of the past several years have developed ties of friendship and partnership. The firmer these become, the greater will be the mutual advantages to both countries, and the common advantage to all peoples of the Free World. We may hope, therefore, that the socalled economic miracle will not only be a source of egotistic pleasure to the Germans, but will also remind them constantly of their broader obligations.

Translated by Richard and Clara Winston