German economic miracle

Germany’s rise as a global economic power-known as the “German Economic Miracle” or Wirtschaftswunder-originated at the end of the Second World War, when most of the country was in ruins.Allied forces attacked or bombed most of its infrastructure.The city of Dresden was completely destroyed.The population of Cologne dropped from 750,000 to 32,000.

In short, Germany is a ruinous country facing an incredibly bleak future. But in 1989, when the Berlin Wall fell and Germany was reunified again, it was the envy of most people in the world.Germany is the third largest economy in the world, and its gross domestic product (GDP) is second only to Japan and the United States.

It is understandable why many people would claim that the rebirth of Germany was an economic miracle. But how did Germany accomplish such a feat?

Key points

  • The German economic miracle refers to Germany’s rebirth as a global economic power after World War II.
  • German economist Walter Eucken was praised for developing a “social market economy,” a concept that promoted free market capitalism while allowing the government to participate in the formulation of social policies.
  • Ludwig Erhard, the German Federal Minister of Economics, has been hailed as the “father of the German economic miracle” after successfully promoting the German social market economy.

Germany after the war

These numbers tell the story of a country falling into chaos. The value of industrial output fell by a third. The country’s housing stock has decreased by 20%. Food production is half of what it was before the war began.Many men in the country between the ages of 18 and 35—a population that can bear the burden of rebuilding the country—are either killed or disabled.

During the war, Hitler formulated rations to limit the civilian population to no more than 2,000 calories per day. After the war, the Allied forces continued to implement this food rationing policy and restricted the population to between 1,000 and 1,500 calories per day.

The price control of other goods and services has led to shortages and a huge black market. Germany’s currency, the imperial mark, has become worthless, and its people have to barter for goods and services.

This country is occupied by four countries and will soon be divided into two halves. The eastern half became a socialist country and became part of the iron curtain deeply influenced by Soviet policies. The western half became a democratic country. Sandwiched in the middle is the former capital of Berlin, which was divided in two and finally separated by what would later be called the Berlin Wall.

Walter Juken

Perhaps the most important person in Germany’s amazing rebirth is Walter Eucken. As the son of a Nobel Prize winner, Okun studied economics at the University of Bonn. After the end of the First World War, Okun began teaching at his alma mater. He eventually moved to the University of Freiburg, where he will have an international reputation.

Social free market

Jucken gained a following at school, which became one of the few places in Germany where people who opposed Hitler could express their opinions. But more importantly, this is also where he began to develop his economic theories, which are called the Freiburg School, Ordoliberalism, or “Social Free Market.”of

Okun’s ideas are firmly rooted in the free market capitalist camp, while also allowing the government to participate to ensure that the system serves as many people as possible.For example, strong regulations will be developed to prevent cartels or monopolies. In addition, the huge social welfare system will provide a safety net for those who find themselves in trouble.of

He also supported the establishment of a strong central bank independent of the government and focused on using monetary policy to maintain price stability, which in many ways reflected the same ideas of Milton Friedman’s fame.of

Reaction to Eucken

The type of economic system proposed by Oken may sound completely normal today, but it was considered very radical at the time. We must consider the era when Oken produced philosophy.

The Great Depression that swept across the world hit Germany particularly hard. Hyperinflation basically destroyed the economy and led to Hitler’s rise.Many people think that socialism is an economic theory sweeping the world.Soon after the war, the western half of Germany, now controlled by the United States and allied forces, will have to decide which path to economic prosperity will take.

The father of the German economic miracle

Since West Germany is still in its infancy, the direction of the new country’s fiscal policy has aroused fierce controversy.Many people, including labor leaders and members of the Social Democratic Party, want a system that still maintains government control. However, Euken’s disciple, a man named Ludwig Erhard (he is known as the “father of the German economic miracle”) has begun to gain fame in the American army, and the American army actually still controls Germany.of

The beginning of Erhard

Erhard is a veteran of the First World War and studied at business school. He is largely an unknown figure and worked as a researcher in an organization focused on the economics of the restaurant industry.ofBut in 1944, the Nazi Party still firmly controlled Germany, and Erhard boldly wrote an article discussing Germany’s financial situation, assuming that the Nazis had failed in the war.of

His work eventually reached the US intelligence service, which quickly found him.Once Germany surrendered, he was appointed Minister of Finance of Bavaria, and then climbed all the way to become Director of the Economic Committee of the still-occupied western half of Germany.

New German Currency

Once gaining political influence, Erhard began to formulate a multi-pronged effort to bring West Germany’s economy back to life. First, he played an important role in formulating new currencies issued by the Allies to replace the worthless remnants of the past.The plan will reduce the amount of currency available to the public by 93%. This decision will reduce the meager wealth held by German individuals and companies. In addition, large-scale tax cuts have been implemented to stimulate spending and investment.

The currency is scheduled to be launched on June 21, 1948. In a highly controversial move, Erhard also decided to abolish price controls on the same day.Erhard’s decision has been almost universally criticized.Erhard was taken to the office of American General Lucius Clay, the commander responsible for overseeing the western half of occupied Germany. Clay told Erhard that his advisers told him that Germany’s new strict policy would be a terrible mistake. As everyone knows, Erhard replied: “Don’t listen to them, General. My adviser told me the same thing.”

However, it is worth noting that Erhard proved everyone was wrong.

The economic miracle blooms

West Germany came alive almost overnight. When people realized the value of the new currency, the store was immediately filled with merchandise. Barter transactions soon ceased; the black market ended. With the commercial market gaining the upper hand, people have once again been motivated to work, and West Germany’s famous sense of diligence has returned.

In May 1948, the Germans were absent from work for about 9.5 hours a week, desperately looking for food and other necessities. But in October, just a few weeks after the new currency was launched and price controls were lifted, this number dropped to 4.2 hours per week. In June, the national industrial production level was about half of the level in 1936, and it was close to 80% by the end of the year.

Marshall Plan

The European Recovery Plan, also known as the Marshall Plan, also adds to the rebirth of Germany. The bill was enacted by the United States Secretary of State George Marshall. The United States provided more than US$15 billion (approximately US$173 billion in 2020 prices) to European countries affected by World War II, most of which went to Germany.

However, the success of the Marshall Plan caused controversy among economic historians.It is estimated that during this period, the assistance of the Marshall Plan contributed less than 5% of German national income.

Over the years, West Germany’s growth has continued. By 1958, its industrial output was four times what it was ten years ago.

Bottom line

During this period, Germany fell into the middle of the Cold War. West Germany is a powerful ally of the United States, mainly a capitalist country, although the government plays an important role in overseeing the free market. East Germany has a close relationship with the Soviet Union and is communist.These two countries side by side provide a perfect way to compare the two major economic systems in the world.

Surprisingly, there is not much to compare. West Germany flourished, while East Germany lags behind. Due to the economic downturn and lack of political freedom, East German residents quickly protested and tried to leave the country in droves despite legal restrictions on travel. On November 9, 1989, the East German regime allowed its members to go directly to the west for the first time in decades. This caused East Germany to collapse almost immediately.Soon, these two countries will unite again.

But it will take a long time for the two sides to be equal. At the beginning of reunification, the per capita GDP of the eastern region only accounted for 30% of that of the western region.After more than 30 years, the GDP of the eastern region is still only about 75% of that of the eastern region. But in 1948, all this was unthinkable. Moreover, without Walter Eucken and Ludwig Erhard, Germany’s economic miracle might never have occurred.

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