West Germany’s Economic Miracle -Wirtschaftswunder

Cover image- Wirtschaftswunder Deutschland nach dem Krieg -Josef Heinrich Darchinger

After spending a few semesters in mandatory Economics classes at University, I am certain of three things:

1. It’s virtually impossible to get more than two economists to agree on anything.

2. Guns and Butter are almost impossible to balance.

3. Taking a 7:00 a.m. Economics class might be the worst thing I’ve ever done.

However, when studying history, it is essential to have a basic understanding of economics. Or so they told me. Honestly, I can’t think of a better cure for insomnia than listening to someone lecture for hours about interest rates, global markets, guns, and butter. (…..zzzzzzz….) Still, now and then, money and history wrap together into an impenetrable mass, making it impossible to separate one from the other—for example, the post-War Wirtschaftswunder or German Economic Miracle.

I can hear those of you who managed to get past 1945 in your history classes now shouting, “It was the Marshall Plan”! Well, yes and no. The Marshall Plan did help the German economic recovery, but the contribution wasn’t the stuff of miracles. The heroes of our story come from unlikely (or unexpected) places. Two economists, Walter Eucken and Ludwig Erhard, proposed a plan so radical that it would be the stuff of legend and a Blockbuster film if it weren’t about economics. And honestly, none of it, not the money from the United States nor the work of the economists, would make a bit of difference if not for the most essential component- the hard work and determination of the German people.

A few years ago, I discovered a book filled with photos by Frank Darchinger, titled The Wirtschaftswunder, which inspired me to dig deeper. The Wirtschaftswunder took Germany, a country devasted by War and pre-war inflation, and flipped the script.  The country transitioned from an Agrarian to a Technological Society. It put a car in (almost) every garage and a refrigerator in every kitchen,  and it built Germany into a powerhouse on the world stage.

So, pour yourself a cup of coffee, maybe make a pot; it’s time for an economics and history lesson about the Wirtschaftswunder, West Germany’s Economic Miracle!

Treaty of Versailles, Crippling Inflation, and War

To put everything into proper perspective, let’s begin with a short history lesson. World War I ended with the signing of the Treaty of Versailles. Somehow, Germany got the rawest of raw deals. The country found itself responsible for reparations payments to the tune of 132 BILLION Gold Marks. Not only this, Germany lost over 10% of its land. So, they were hit with high payments and the loss of property that could have generated income. What’s a country to do? Well, if you need more money and you are in charge of printing more money, you print more. But here’s the thing. As a society, we all agree to give value to the slips of paper we call money. When a country bases its currency on the Gold Standard, it’s worth a fixed amount. For example, if a country agrees that gold is worth $ 1,000 per ounce, this means that every dollar is worth 1/1,000 of an ounce. (And they usually have the actual gold stored somewhere to back up the paper). However, Germany had withdrawn from the Gold Standard before the war, and the people printing the money on slips of paper went wild, printing more money without restriction. Then, the money lost value. And when money loses value, people lose confidence in it, and it loses more value, so more gets printed to compensate… and the downward spiral comes quickly. (For a great explanation about money, read Money: The True Story of a Made-Up Thing by Jacob Goldstein)

Suddenly, you needed wagonloads of Reichsmarks to buy a loaf of bread. People were demanding to be paid twice a day because their wages were worth LESS at the end of the day than at the start. Like the fabled Little Dutch Boy, German leaders were plugging the dike as fast as they could, but the water was coming over the top. The US stepped in with a plan to help pay reparations (It was a strange cycle- they sent money to Germany, Germany used the money to pay reparation bills, and the countries getting reparations paid off their debts to the US). It didn’t really help. Then, the US insisted the debt be reduced. But it was still too much. Germany’s economy tanked, and it dragged other nations down with it.

When the National Socialist Party came to power, Hitler stopped all reparations payments. The party then enacted economic policies that put price restrictions on goods and wages.  All this to keep prices stable and artificially reduce the cost of materials to build up the military. Then, as we all know, Germany went to war.

Sadly, war seems to be the quickest way to kick-start an economy. In the Middle Ages, war provided employment for all those extra sons (plus, they brought back treasure from pillaged lands), and in modern times, war fuels industry. Building tanks and guns creates jobs, allowing people to earn money to buy things, BUT (and here is where the Guns and Butter balance is so crucial), if you are putting all your efforts into guns, you don’t have enough effort in butter or other foodstuffs.  So, the economy was still a lopsided mess. (And just like that,  I’ve saved you a semester of college Economics)

And then, when we fast forward to the end of  World War II, Germany found itself occupied by four countries.

Post War

In 1948, 20% of Germany’s housing lay in ruins, industry was down by over one-third, and food production was 50% of its pre-war levels.  50% of all purchases happened on the Black Market (cigarettes were the preferred currency). Rations and shortages meant people only ate 10.00-1500 calories per day. Most of the country’s remaining workforce was unemployed, underemployed, or physically damaged by the war. The Allied nations knew they needed a plan to rebuild the German economy so the pre-war cycle didn’t start over.

But where to start? Initially, the Allies retained all of Hitler’s price controls, but this ultimately led to problems. While there was a LOT of cash floating around, it was just too much cash, and the Reichsmark was essentially worthless. So, even if there were goods to buy, no one wanted to take your money. The controlled prices meant that you would get a few worthless Reichsmarks for your carrots. These price and wage controls destroyed incentives. It just wasn’t worth the time or effort to produce goods.  The German economy essentially turned into a Barter Economy. People took trains from the cities to obtain food directly from the Farmers, trading clothes, furniture, jewelry, and other personal effects for potatoes, bread, and vegetables. A new job as a “Compensation Specialist” was created to assess proper trade values.

Bundesarchiv, Bild 146-1974-152-14 / CC-BY-SA 3.0, CC BY-SA 3.0 DE, via Wikimedia Commons 

A New Economic Plan- Social Market Economy

Let’s go back a few years. During the war, at the University of Freiburg, the Soziale Marktwirtschaft  (Social Free Market Group), led by Professor Walter Eucken, set up an intellectual resistance movement against Hitler’s totalitarian policies. The brave members of the group, including Ludwig Erhard and Wilhelm Röpke, believed in Free Markets, along with some government oversight, in the form of taxes and to ensure that monopolies don’t form. (For you economics junkies, it’s very similar to the Chicago School under Milton Freedman) In 1944, Ludwig Erhard, a member of the Soziale Markwirtschaft, put himself on the American radar when he wrote an essay explaining how to set up the German economy should be set up when the Nazis lost. (A brave and bold move for an economist!) At the end of the war, Americans appointed Erhard as Bavarian Finance Minister. In 1947, he received a promotion to Director of the Bizonal Office of Economic Opportunity, where he advised the Governor of the US Zone. There, along with Röpke, and armed with the crazy ideas developed in Freiburg, they came up with a plan to rebuild Germany’s economy.

The plan closely followed the beliefs of the Freiburg school. A Social Market Economy, including a Free Market, some government redistribution with taxes, and antitrust to prevent monopolies. BUT, they also included a social welfare system to act as a safety net for the people. Everyone on both sides of the Atlantic insisted it was too radical to work.

New Money- The Introduction of the Deutschmark

But before they could fix the economy, they needed to fix the money. William Röpke was appointed to oversee currency reform. The value of Reichsmarks was less than the cost of the paper it was printed on. There was just too much of it around. He proposed a new currency, the Deutschmark, and then advocated for a “contracting” of the amount of currency in circulation. What does this mean? (Hold on to your hats) The equivalent of 93% of the currency would disappear. To keep things under control, the new currency would now be tied to the amount of available goods to prevent inflation so that it would have actual value.

It worked like this-

On June 20, 1948, the Deutsche Mark was introduced, and the Reichsmark, as well as any other German currency in circulation, including notes used by the Allied Military, would be invalidated. Just POOF! Worthless. (Well, except for some small change to keep shortages from causing even more problems. Lucky you if you had a jar of coins under the bed)

Every inhabitant of the Western Zone, man, woman, and child, would get 60 DM (Deutschmarks) for their old money. 40 DM right away and another 20 a month later.

Money in bank accounts would be converted at a later date.

Credit and debt would be converted at a rate of 1o to 1 (10 Reichsmarks = 1 Deutschmark)

And it all happened overnight. You can read the details of Currency Reform here.

(One immediate effect of the reform was the Berlin Blockade by the Soviet Union. But that’s another story….First let’s get to the second part of the plan)

National Numismatic Collection, National Museum of American History. One Deutsche Mark (1948), post WWII Allied occupied Federal Republic of Germany (West Germany).
Circulated by the United States Army Command, this was the first of three 1948 issues of West German currency.

The Second Part of the Plan

On the very same day, the new currency was introduced, the old price controls were removed, and rationing was canceled. Everyone braced for disaster. But an interesting thing happened.

On June 21, shop owners pulled out merchandise from back rooms and cellars. Without rationing and price control, sellers knew they would receive a fair value for their goods. Getting more money for goods was the incentive they needed to supply more.

But it was more than that. With the availability of goods, the barter economy became unnecessary for everyday items. And, since people didn’t need to spend all day on a train to the countryside or searching for food, they could stay at their jobs, and productivity increased. (Compensation Specialists presumably lost their jobs, but so it goes)

And about those jobs… The new Free Market economy came with new stipulations. Employees were expected to participate in key company decisions like wages, benefits, and working conditions. And the government provided a social safety net. Enthusiastic employees and the new stable currency encouraged businesses to invest in modernizing their companies. By December 1948, the production of food and goods in Germany jumped 50%!

But… The Marshall Plan

To help Europe rebuild after the war and prevent the spread of Communism, US Secretary of State George C. Marshall devised the European Recovery Program, also known as the Marshall Plan. The United States sent $15 billion to 16 European nations over a four-year period beginning in 1948. (The Soviet Union and its satellite countries refused to participate). The $15 Billion ($173 Billion in 2020 dollars), around 5% of the USA’s gross national product at the time, was NOT distributed equally. Great Britain received a full quarter of all funds, while France got only one-fifth.

Germany received a larger share than Italy, but it still amounted to only $2 billion in total, and it didn’t come in one lump sum. At its peak, the amount of money ended up being less than 5% of Germany’s national income. PLUS, Germany was still paying off reparations… AND…. the nations occupying Germany were charging to be stationed there, a total of $2.4 Billion. Essentially, the Marshall Plan covered the Allied Nations’ expenses for rent and upkeep in Germany.

The Marshall Plan helped, but it wasn’t the source of the miracle. How can we see that? Germany’s economy outpaced that of Great Britain and France despite receiving less funding. Great Britain kept rationing until 1954! And Belgium’s recovery, based on Free Market reforms, happened BEFORE they got any Marshall Plan money.

German Industriousness- The Real Miracle

The productivity and industriousness of the German people created the TRUE miracle. 

You hear it over and over: German people are known for their hard work and industriousness. (If you want something done, give it to a German.)  So, as the government issued directive after directive to remove old policies and fix the financial problems,  the German people pushed up their sleeves and got to work. And their hard work was rewarded.

Because of the occupation and the influx of German Nationals expelled from the East, there were many new mouths to feed. Reforms started with food production. Farms modernized to keep up with new demands; a horse and plow wouldn’t be enough!  These new workers from the East contributed to the labor force, so Germany quickly began rebuilding the broken infrastructure to transport goods. Companies built new modern factories to sell goods to workers who suddenly had real cash in their pockets. By 1950, industrial production had increased by 25%. Between 1950 and 1959, the GDP (Gross Domestic Product), the value of goods and services produced by a country, rose 8% per year. Wages increased 80% between 1949 and 1955. Germany’s pre-war agrarian leapfrogged to industrial and technological in just a few years. By 1960, Germany was the third-largest economic power on the planet.

But it’s more than just numbers and percentages.

“The spirit of the country changed overnight. The gray, hungry, dead-looking figures wandering about the streets in their everlasting search for food came to life”
(pg. 71 Wallich, Henry C. Mainsprings of the German Revival. New Haven: Yale University Press, 1955)

 

The people of Germany found JOY again. 

People could work hard and be rewarded for their efforts. And in the new economy, rewards were more than just food on the table. Across Germany, store windows caught the eye with colorful modern goods. For the first time in years, there was disposable income, and products like cars, ovens, and washing machines were available to spend it on. This new consumerism created demands for more products and services, leading to new innovations and advertising. (Fun fact: the first TV commercial was for Persil laundry detergent.) By 1959, 3 million new housing units had been built.

By the 1960s, the pace of economic growth had slowed, mainly because it could no longer sustain such a rapid rate of growth. Today, Germany still holds steady as the 4th largest economy in the world.

The memories of that miracle, the time when West Germany went from grey to Technicolor, remain.

Wirtschaftswunder by Klaus Honnef, photos by Frank Darchinger

A few years ago, I found the book “Wirtschaftswunder” in a Bamberg bookshop (located by the Rathaus bridge). The cover image of kids at a gum and cigarette machine on the wall caught my attention. Flipping through the pages and pages of Darchinger’s photos feels a bit like looking through old family photo albums. There are images of people working, children in Kindergarten, families enjoying a meal, or a family trip: cars, new inventions, factories, and even old Imbiß’s. The book is a time machine. And like the Wirtschaftswunder itself, the photos go from black and white to color.

All text written by Honnef is in German AND in English. You can order a copy here.

Wirtschaftswunder

References

Wirtschaftswunder – Josef Heinrich Darchinger, Klaus Honnef, Frank Darchinger 2019 Taschen Books

German Economic Miracle- EconLib By David R. Henderson

German Economic Miracle Investopedia By GREGORY GETHARD Updated June 29, 2021

First Law of Currency Reform United States-Department of State. Documents on Germany 1944-1985

Treaty of Versailles- Britannica

Origins of the Economic Miracle- Robert Peterson