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Footing the Bill

As the crisis continues in Europe, one aspect remains unmentioned: Why are the Germans the focus of the debate?

The answer is of course that they are the Eurozone’s centre of growth, stability and fiscal responsibility. Sadly, they gave up their role as the monetary standard of Europe with the Euro. Still, it is the Germans that the world is looking to when it comes to Europe’s fiscal crisis.

But how did this come to be? Less than a lifetime ago, Germany was little more than a mound of rubble with some metal scraps mixed in.

Your editor would like to claim that Germany’s recovery is entirely due to the resolve and wisdom of the German people (of which he happens to be one), but Ronald Kitching provides a different view in the following excerpt from his book Understanding Personal and Economic Liberty. And after having sponsored the Australian visit of Austrian Economics hero FA Hayek, Ron would know.

[Editors note: The content of this article was first published in 2005]

Reform and Prosperity in Post-war West Germany

In 1945 at the end of the WW II there was no nation on earth more devastated than West Germany – ports, rivers and canals clogged with sunken ships, sunken barges, railways and communications devastated, six million of her most capable young men killed in battle, six million of her most productive people, the Jews, killed by Hitler’s henchmen, heavy and light industry practically bombed out of existence, and 12 million refugees seeking a safe haven from socialism.

After three years of military occupation, inflation, controls and rationing, the ensuing chaos ruled supreme. At that time the Economics Minister, Ludwig Erhard, was a product of the Classical School. After serving in WW I he was trained as an economist by Walter Eucken, Franz Oppenheimer and Wilhelm Ropke. He knew that inflation and large state bureaucracies could not cure their problems. He knew that they were the problem.

Erhard was averse to everything authoritarian. Having carefully laid his plans, with agreement from the supervising Allies, he announced on June 19th 1948 that inflation was finished. A new currency would be issued. In round figures it was exchanged ten of the old marks for one of the new ones. The limit was 400 per person. ‘And’, said Erhard, ‘there will be no more money printing’.

Then, knowing that he would never ever get agreement from the supervising Allies to change policy, he decided upon unilateral action. On Sunday July 8th, only three weeks later, he advised the public that he was to address the Nation between 11 pm and midnight about the problems which they faced and with which they were struggling. He advised them that in their own interest everybody should listen to what he had to say. He knew that ideology cannot be destroyed by force so he was persuasive.

He knew that everybody was sick of controls. He knew that everybody was sick and tired of being hobbled and kicked around by bureaucrats. He had also previously expressed his views in many speeches, and his speeches were always well reasoned. He was a master of his subject.

He announced to the population that he had, as from midnight that night, abolished all rationing, wage controls, price controls, government control and regulation of foreign exchange rates. He was also reducing taxation and heavily reducing tariffs.

The burden of supporting tens of thousands of bureaucrats was, in one stroke, removed from the taxpayers’ shoulders. The following Tuesday (Monday was a holiday) Erhard was instantly called to book by General Clay, the Commander of the resident US occupying force. Clay quickly came to the heart of the matter, ‘Herr Erhard, my advisers tell me that what you have done is a terrible mistake.What do you say to that?’ Erhard’s reply came swiftly and without hesitation: ‘Herr General, pay no attention to them, my own advisers tell me the same thing’.

Under the terms of the surrender no changes were to be made to Allied policy without consultation with the conquerors. An economist Army Colonel on Clay’s staff shouted at Erhard, ‘How dare you unilaterally relax our rationing system and price controls when there is a widespread food shortage!’. Erhard replied courteously, ‘But Herr Oberst, I have not relaxed rationing and price controls, I have abolished them’. It had not occurred to the bureaucrats that such a thing could possibly happen.

Erhard went on to say ‘Henceforth, the only rationing ticket the people will need will be the Deutschmark. And they will work hard to get these Deutschmarks, just you wait and see’. He was confident, as reported in his book Prosperity Through Competition, and he abolished taxation on all income tax on hours worked over 40 hours.

A taxation policy which accumulated capital by the billion was ‘7-D’ of the tax code. Under 7-D any German who invested in shipping and ship-building was granted a tax exemption. By 1953, 7-D had already attracted DM 1.5 billion out of the DM 2 billion invested in ship-building. Money came in from all over Germany. Another tax incentive which applied to all industries as well as shipbuilding was the remission of taxes on profits earned from export sales.

After giving the General a good sales talk about how successful his free market, low taxing programme was going to be, the ebullient, good natured Bavarian Professor departed from General Clay’s office with the Military Governor’s stamp of approval for his abrupt change of policy.

Under the ‘glorious’ socialist rule of the Fuhrer and his Nationalist Socialist policies, Germans worked only 38 hours a week. Many uninformed people who marvel at the recovery wrought by West Germany, attribute the recovery to the fact that ‘The German people are great workers’. And so they are – but it is a curious anomaly that until the Berlin Wall fell in 1990, the process of recovery did not start in East Germany.

However to return to West Germany – immediately after Erhard’s implementation of new policy, working hours commenced to voluntarily increase. Productivity increased dramatically as the people, free from the fetters of bureaucracy, and excessive taxation, went to work. Empty shop shelves filled almost overnight. With free labour markets, and free from Government Control and Regulation of Exchange Rates, the world’s scarcest commodity, Capital, flowed like water into West Germany and together with a free people, went to work.

Freed from excessive taxation, savings accumulated rapidly providing immense capital resources for the mighty engines of industrial production. An occupying witness later wrote ‘Within a week, there was a new light of hope in the eyes of the German people’. A German who was there told me ‘There was a new light in the eyes of the German people next day. We knew that if we were free of the bureaucrats we could really go to work’.

Erhard was constantly plagued to indulge in just a little government planning. His good natured riposte was ‘You can no more have a little government planning than you can be a little bit pregnant’. By 1953 half a million homes were being privately built annually – and by 1957, that is in eight years, the Federal Republic had accumulated the largest gold reserves of any country in the world except the USA.

Erhard would not permit unbridled bureaucratic activity or money printing. Millions of German entrepreneurs emerged and went into business from barber shops to ship building. Foreign capital poured into Germany, bringing innovation, productivity and prosperity to the once destitute population. ‘In order of importance, Germany has replaced the bureaucrat with the businessman’, Erhard declared.

In five years, West Germany was producing more than all of Germany produced before the war. Not only that, unemployment fell from 50 percent to 6 percent. In ten years not only was unemployment at zero, but it was necessary to import five million new workers from Greece, Turkey, Italy, Spain and France. Although opposition to all of Erhard’s policies continued, the voices of the opposition were smothered by the success of his policies.

Detractors claim that it was Germany’s share of Marshall Aid that brought on the recovery. But as reported by Henry Hazlitt;

Nothing similar happened in Great Britain, for example, which received more than twice as much Marshall aid. The German per capita gross national product, measured in constant prices, increased 64% between 1950 and 1958, whereas the per capita increase in Great Britain, similarly measured, rose only 15%.

Erhard reported in his book Prosperity through Competition that hordes of businessmen constantly called at his office seeking and even demanding privileges. Tariff protection and subsidies were their favourite subjects. Although he was pressured by many powerful industries, he did not capitulate to their demands. He replied that they had an ample, intelligent labour force willing to work hard, they had technical skills equal to any anywhere, his good policies attracted capital and the people were saving new capital, and under a regime of secure property rights, honest money, no protection or privileges, competition on a national and international scale produced strong industries. In turn, strong competitive industries were best placed to capture world markets. And strong competitive industries were the best insurance the nation had to keep her people employed and to provide constantly rising living standards.

The success of his philosophy is now history. After Erhard’s reform, Germany had Europe’s strongest currency, and one of the world’s strongest currencies, until the establishment of the Euro. It boasted one of the world’s highest living standards. The Bundesbank was Europe’s strongest bank and the Deutschmark the currency against which all other European currencies were measured.

And this was the case for many years. In Erhard’s book Prosperity Though Competition he titled Chapter 12 ‘Welfare State – The Modern Delusion’. In 12 pages he warned the West Germans to avoid the welfare state, as, if implemented, it would bring economic and social disaster. Unfortunately vote seeking politicians did not listen to his wise words and now Germany is paying the price.

Ronald Kitching
for The Daily Reckoning Australia

4 Comments

  1. David Lloyd says:

    After the war in Britian the progressive socialists helped, but as NANNY STATES do they help more for votes and glory feelings than peoples economic wellbeing , the consequences in Britian was lackluster effort blame game supreme, and we are owed. This all restricted inovation and self determination and Britan LOST OUT the talents of a whole generation was dismissed by apathy. Then Maggie kicked xxse and Britian clawed back some, only to give it all back economically by again social migration British hoards leaving the place as well as inviting the other hoards in. The humane economic value that left far exceeded the economic humane value that came. A Social Engineering lowest glory point.NOW THE MESS.

  2. Gary says:

    It is somewhat amusing that the axis powers (with the exception of italy) rose to pre-eminence in their respective geopolitical areas. If there is a god, he’s got one hell of a sense of irony.

    In many ways Britain’s ills are the same as Greece’s. Too much government, not enough work. Reading some of the nonsense that has come out of Britain recently (the conviction of a lady for loud sex and that goldfish incident)they’ve really hopped on the totalitarian bandwagon. Now they’re burdened with a hung government, and as pointed out in the Australian, none of the parties are really saying jack about how they’re planning to get Britain on the path to prosperity beyond the same old cliches and spin. Instead they care more about how the election was decided. Haha oy, do the UK a favour and shrink the government. First stop, the House of Lords. Second stop, Buckingham palace (does the queen really need all her staff and stuff?). Third, House of commons, and last but certainly not least, the bloated bureaucracy. Clean up the elections on the way, it’ll be easier to see what to do without so many talking heads in the way.

    As for those who left UK, guess one of the major reasons? Tax. So get rid of government, and they might come on back.

  3. David Bode says:

    That’s odd – the Germans don’t exactly have low taxes and their penchant for red tape and over-government is world renown. Read the article. Instead of blaming socialists for the UK’s demise, you’d be wiser to point your digit at the UK monied classes who are notoriously averse to producing things & would rather invest in property, finance and the good life. The last time I was in Germany, the sheer numbers of factories I saw everywhere was astounding – and most Germans were content to rent apartments. Must be the opposite of OZ where making money by making things is regarded as something akin to a disease. Yep – shoot a few thousand useless public servants and somehow the sun will shine and she’ll be right mate. What a bunch of F-wits.
    I guess now all the right wing loonies and would be property millionaires who read this site will again decry me as a raving pinko and mark my rating down to -100 or so. BOO HOO.

  4. RR says:

    One factor is that after the war, Germany was a nation of cautious and risk-averse people, especially when it comes to the male population. Most of the more risk-hungry men had fallen in the war, leaving pragmatic, smart and cautious people behind.

    Thus, the whole nation had a focus on productive industry, which didn’t provide high profits or get-rich-quick schemes, but a steady paycheck. The harsh experiences of the depression were naturally the main driving factor of attitudes, in the US as well.

    Lack of useless speculation is the single greatest source of economic strength and always has.

    I hope there is a better way to purge the global population of excess risk-taking this time, but people will find these attitude-changes very hard indeed.

    It is sad to see youth culture moving ever further into risky and frivolous behavior. Frustrated young men are the single most dangerous force of nature in existence. :)

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