As economics minister during the Adenauer years (1949 – 63), Erhard was the chief architect of West Germany’s postwar economic recovery. He achieved what has been called an economic miracle through his “social market system,” which was based on free-market capitalism but included special provisions for housing, farming, and social programs. In 1957 he was appointed federal vice-chancellor, and in 1963 he succeeded Konrad Adenauer as chancellor. His government was troubled by an economic downturn and a budget deficit, as well as Erhard’s relative weakness as a leader, and he was forced to resign in 1966.
Perhaps no other figure is more closely associated with West Germany’s post-war economic recovery than Erhard. He returned from the First World War badly wounded and decided to study economics and sociology, achieving his doctorate in 1925. From 1928 to 1942 he worked in market research in Nuremberg, after which he founded his own institute with money from private industry. Intellectually he was thinking about the possible consequences of Germany’s coming defeat. From 1945 on he was encouraged by the Americans, working first as Economics Minister in Bavaria, and then in Frankfurt am Main on the currency reform. However Erhard was kept in the dark about the date and conditions of the new mark’s introduction (1948). He thought of resigning but was allowed to announce its coming on the radio. With it came the market economy which swept away many of the wartime controls still in place. Prices were high but the shop windows were full again. Long hours of work brought rewards. The German miracle was greatly helped by the outbreak of the Korean War in 1950 which gave West Germany its chance in world markets. The well-trained labour force was ready to be deployed. High unemployment helped to keep wages low.
Erhard was never really a party man and would have been at home in the Liberal FDP but Adenauer persuaded him to join his CDU. As noted, he served as Minister of Economics from 1949 to 1963. By the mid-1950s the German economy had recovered far more rapidly than anyone had foreseen, and Adenauer and Erhard were popular — but not with each other! The public saw Erhard as the “crown prince” and felt he should succeed Adenauer. By 1959 Adenauer was 83 but was only willing to give up as Chancellor if he could be President and Erhard (at 62) was somewhat restless. The two had other differences. Adenauer was far more political and was looking for a united, Catholic Western Europe whereas Erhard was more pragmatic. Adenauer had his power house in the party, Erhard did not. The losses at the election of 1961 decided the issue of Adenauer’s departure in 1963. Erhard seemed to be the man who could steer the CDU/CSU back to popularity. In the election of 1965 he led his forces to an unexpectedly good result against Brandt’s SPD.
As Chancellor of a CDU/CSU and FDP coalition Erhard could not deal with the manœuvring of the different factions. He attempted to stand aside between the quarrels of the so-called Gaullists and the Atlanticists. But he backed the USA against de Gaulle on defence issues, thus offending German Gaullists. Remarkably, it was not foreign policy but more economic policy which brought him down. In the summer of 1966 West Germany was suffering a mini-recession. Germany’s neighbours would have shrugged it off, but the Germans felt insecure with any hint of an economic downturn. The government lost popularity, was defeated in the Hesse regional elections on 6 November 1966, and Erhard resigned on 1 December.
So we come to the question: was Erhard the real “mover and shaker” in the Adenauer years? Erhard’s economic views were summarized in his advocacy of a “social market economy,” which one author has called a “free economy with a social conscience.” Erhard wished to use private initiative to rebuild the shattered German economy but to check it when it tended toward monopoly, cartelization, or extreme labor union demands.
Erhard well understood the inefficiencies that come with price controls. He had authored a memorandum during the war outlining his vision for a market economy in Germany. In 1947, the Allies, who wanted Germans with no ties to the fallen Nazi regime for the new German government, named Erhard the main economic adviser to U.S. General Lucius D. Clay, military governor of the U.S. zone. Erhard advocated a quick reform of the currency system and the decontrol of prices.
After the Soviet withdrawal from the Allied Control Authority, General Clay, along with his French and British counterparts, undertook a currency reform on Sunday, June 20, 1948. The amount of currency in circulation was dramatically reduced (by a factor of slightly more than 90 percent). Under the reform mapped by Erhard, the new legal currency, the Deutschemark, was substituted for the old Reichsmark. With the sharp contraction in the German money supply, he reasoned, there would be far fewer shortages because the controlled prices would now be stated in Deutschemarks. On the same day, over the strong objections of its Social Democratic members, Germany’s Bizonal Economic Council adopted a price decontrol law that gave Erhard the authority to eliminate price controls. Between June and August of 1948, Erhard decontrolled the prices of vegetables, fruits, eggs, and almost all manufactured goods. He substantially relaxed, or simply suspended enforcement of, other price ceilings.
At the same time, the government, following Erhard’s advice, cut taxes sharply. Walter Heller, a young economist with the U.S. occupation forces who was later to become chairman of President Kennedy’s Council of Economic Advisers, wrote in 1949 that to “remove the repressive effect of extremely high rates, Military Government Law No. 64 cut a wide swath across the German tax system at the time of the currency reform.” Individual income tax rates, in particular, fell dramatically. Previously the tax rate on any income over 6,000 Deutschemarks had been 95 percent. After tax reform, this 95 percent rate applied only to annual incomes above 250,000 Deutschemarks. For the German with an annual income of about 2,400 Deutschemarks in 1950, the marginal tax rate fell from 85 percent to 18 percent.
The immediate effects of these Erhard-designed reforms on the German economy were dramatic. Another U.S. economist with occupation forces wrote that 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.” On Monday, June 21, only a day after the announcement of currency reform, shops filled with goods as people realized that the money they sold them for would be worth much more than the old money. The reforms, wrote Heller, “quickly re-established money as the preferred medium of exchange and monetary incentives as the prime mover of economic activity.”
Another phenomenon was observed in the wake of the reforms: Absenteeism, which only a month earlier was averaging more than nine hours a week, was reduced significantly. Workers who had stayed off the job to forage and barter for life’s necessities found that it was no longer imperative for them to do so. By the fall of 1948, the absenteeism rate had dropped to about four hours. In the second half of 1948, Germany’s industrial output rose by more than 50 percent. This growth continued to be extremely strong over the next ten years, with industrial production per capita in 1958 measuring three times its level in the six months preceding the June 1948 reforms. What looked like a miracle in reality was not. Erhard expected these results because he knew full well the damage that had been wrought by inflation, coupled with price controls and high tax rates. In turn, he also was well aware of the large productivity gains that could be unleashed by ending inflation, removing price controls, and slashing high marginal tax rates.
Immensely popular with the German people as a result of the economic reforms, Erhard joined Konrad Adenauer’s Christian Democratic Union (CDU) only shortly before the first West German parliamentary election in 1949. When the party was victorious in those elections, Erhard became economics minister in the Adenauer government, in which post he remained until he succeeded the aging and increasingly unpopular Adenauer as chancellor in 1963. Erhard led his coalition government (CDU/CSU and Free Democrats) to victory in the 1965 election, after which he actively supported a normalization of relations with the countries of the Warsaw Pact. On March 25, 1966, his government sent a peace overture to the Warsaw Pact, proposing a renunciation of force. The failure to include East Germany in this initiative resulted ultimately in its failure. Erhard and his foreign minister, Gerhard Schröder, were labeled “Atlanticists” for their support of stronger ties with the United States and the North Atlantic Treaty Organization (NATO). This focus on West Germany’s relationship with NATO and the United States weakened the country’s ties with France, which Adenauer had worked so hard to build up during his years as chancellor. Erhard soon found his position untenable as recession wiped away memories of the economic miracle and those he once had considered his friends, including Adenauer, sniping at him whenever possible. He was accused of both indecision and lack of experience in foreign affairs. He resigned in 1966 and was succeeded as chancellor by Kurt-Georg Kiesinger. Erhard later confided that “soon after I took office in 1963, I had the feeling that my party friends were no friends.” A year after his resignation, he was named honorary chairman of the CDU.
Erhard spent the final decade of his life as a dignified elder statesman. He displayed no bitterness at what many felt was betrayal by his fellow members of the CDU. He wrote and consulted extensively in the area of his traditional expertise – the social market economy. When he died on May 5, 1977, he was lauded by his countrymen as “the father of the economic miracle.” He was 80.