David R. Henderson  

Germany's Economic "Miracle"

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Larry White has a good op/ed in tomorrow's Wall Street Journal on Germany's post-World-War-II economic miracle. He attributes this correctly to Ludwig Erhard's abolition of Hitler's price controls that the Allies had continued to enforce after the war ended. He also points out that later the Allies reduced tax rates substantially.

I deal with all these issues at greater length in my Concise Encyclopedia article, "German Economic Miracle." Here's an excerpt:

Price controls on food made the shortages so severe that some people started growing their own food, and others made weekend treks to the countryside to barter for food. Yale University economist (and later Federal Reserve governor) Henry Wallich, in his 1955 book, Mainsprings of the German Revival, wrote:
Each day, and particularly on weekends, vast hordes of people trekked out to the country to barter food from the farmers. In dilapidated railway carriages from which everything pilferable had long disappeared, on the roofs and on the running boards, hungry people traveled sometimes hundreds of miles at snail's pace to where they hoped to find something to eat. They took their wares--personal effects, old clothes, sticks of furniture, whatever bombed-out remnants they had--and came back with grain or potatoes for a week or two. (p. 65)

I also give data on the cuts in tax rates:
Along with currency reform and decontrol of prices, the government also cut tax rates. A young economist named Walter Heller, who was then with the U.S. Office of Military Government in Germany and was later to be the chairman of President John F. Kennedy's Council of Economic Advisers, described the reforms in a 1949 article. To "remove the repressive effect of extremely high rates," wrote Heller, "Military Government Law No. 64 cut a wide swath across the [West] German tax system at the time of the currency reform" (p. 218). The corporate income tax rate, which had ranged from 35 percent to 65 percent, was made a flat 50 percent. Although the top rate on individual income remained at 95 percent, it applied only to income above the level of DM250,000 annually. In 1946, by contrast, the Allies had taxed all income above 60,000 reichsmarks (which translated into about DM6,000) at 95 percent. For the median-income German in 1950, with an annual income of a little less than DM2,400, the marginal tax rate was 18 percent. That same person, had he earned the reichsmark equivalent in 1948, would have been in an 85 percent tax bracket.

Drawing on work by Tyler Cowen, I also point out that the Marshall Plan was only a small part of the story.


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COMMENTS (7 to date)
Liam writes:

Actually my favorite quote of Erhard's is when he was admonished for restricting price controls and food vouchers during Germany's food shortage and he responded that he had not restricted them but abolished them completely and the only voucher the Germans would need from then on would be the Deutsche Mark which the German people would work very hard to aquire.

I don't have the exact quote but it was one of my favorite stories from that episode in Germany's history. It's irrefutable evidence of how price controls don't work. And yet if you ask anyone why there were gas shortages in the 70's they will usually say because of OPEC! How quickly we forget!

Tracy W writes:

The other weekend I was in France, and went to La Coupla, a French museum built in a concrete dome originally built by the Nazis to launch V2 rockets at the UK. Logically enough the museum was focused on French experience in the two world wars and the V2s. Overall the museum was good, but annoyingly it stated that "despite rationing there were food shortages", which is the wrong way around.

(The museum also made me think better of Americans' knowledge of the world, the discussion of the suffering of Germany's prisoners - the Jews, the Gypsies, the Russian POWs, captured people from the French resistance, talked about such scenes of horror "unique in human history", oblivious to the horrors the Japanese were inflicting in East Asia.)

david writes:

Of course, since poverty would have been widespread, inequality-induced disorder would have been a negligible risk - less impression of gouging, etc. The price of food would rise but the farmer is as poor as you are.

And if trouble started nonetheless, well, there's the huge allied army just there...

In the absence of imposed support, Erhard would have been easily pushed out of power. Compare Hong Kong, which is also dismantling its non-interventionism in absence of such policy imposed from London. For whatever reasons, this sort of thing is never democratically popular. Development economists tend to refer to social-welfare systems as "market legitimizing institutions" - policies needed to get people to accept the market process at all - but I suppose a foreign army works too.

Note that by 1957 Erhard received vigorous democratic pushback against his preferred minimalist welfare state; thus the FRG became a expansive welfare state.

Jaap writes:

recently I got Naomi Klein's Shock Doctrine. this book is rife with promoting things like price-controls, oblivious to what that means when it comes to food-shortages. if it wasn't horrible & sad how she puts the stories, it would be funny.

David R. Henderson writes:

LIam,
The quote you refer to is in my article.

Liam writes:

David,

I knew I should have clicked on that link. Good Article.

Lee Waaks writes:

David,

I just finished reading Skidelsky's short biography of Keynes. In the last chapter, which is a discussion of Keynes's legacy, he argues that Marshall Plan spending in Germany produced a multiplier effect that was very salutary, if not key for the post-WWII recovery. Can you comment on this?

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