The miracle of German economy

After WW2, 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.

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.

By 1948 the German people had lived under price controls for twelve years and rationing for nine years.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. The shortage of food forced German people to grow food in their own garden. They also had to barter.

 To clean up the postwar mess, Röpke advocated currency reform, so that the amount of currency could be in line with the amount of goods, and the abolition of price controls.  The currency reform would end inflation; price decontrol would end repression.

After the Soviets withdrew from the Allied Control Authority, Clay, along with his French and British counterparts, undertook a currency reform on Sunday, June 20, 1948. The basic idea was to substitute a much smaller number of deutsche marks (DM), the new legal currency, for reichsmarks. The money supply would thus contract substantially so that even at the controlled prices, now stated in deutsche marks, there would be fewer shortages.

On that same Sunday the German Bizonal Economic Council adopted, at the urging of Ludwig Erhard and against the opposition of its Social Democratic members, a price decontrol ordinance that allowed and encouraged Erhard to eliminate price controls.

Decontrol of prices allowed buyers to transmit their demands to sellers, without a rationing system getting in the way, and the higher prices gave sellers an incentive to supply more.

the reforms “quickly reestablished money as the preferred medium of exchange and monetary incentives as the prime mover of economic activity”

This account has not mentioned the Marshall Plan. Can’t West Germany’s revival be attributed mainly to that? The answer is no. The reason is simple: Marshall Plan aid to West Germany was not that large.Even in 1948 and 1949, when aid was at its peak, Marshall Plan aid was less than 5 percent of German national income. Other countries that received substantial Marshall Plan aid exhibited lower growth than Germany.