Why the Wirtschaftswunder?

What were the causes of the Wirtschaftswunder, the so-called “economic miracle” of transformation from Germany’s defeated chaos in 1945 to being –as “West Germany”- one of the economically strongest nations in the world by 1960?

The occupation directive JCS 1067 had given the astonishing instruction to the U.S. forces of occupation in Germany to “…take no steps looking toward the economic rehabilitation of Germany”. The Allied dismantling of the West German coal and steel industries decided at the Potsdam conference was virtually completed by 1950; equipment had then been removed from 706 manufacturing plants in the west and steel production capacity had been reduced by 6,700,000 tons. The industrially important Saarland with its rich coal fields was not returned to West Germany until 1957.

In addition to the physical barriers that had to be overcome for the German economic recovery there were also intellectual challenges. The Allies confiscated intellectual property of great value, all German patents, both in Germany and abroad, and used them to strengthen their own industrial competitiveness by licensing them to Allied companies. Beginning immediately after the German surrender and continuing for the next two years the U.S. pursued a vigorous program to harvest all technological and scientific know-how as well as all patents in Germany. John Gimbel comes to the conclusion, in his book “Science Technology and Reparations: Exploitation and Plunder in Postwar Germany”, that the “intellectual reparations” taken by the U.S. and the UK amounted to close to $10 billion. During the more than two years that this policy was in place, no industrial research in Germany could take place, as any results would have been automatically available to overseas competitors who were encouraged by the occupation authorities to access all records and facilities. Meanwhile thousands of the best German researchers were being put to work in the Soviet Union and in the U.S.

A kickstart towards recovery was certainly made by US economic aid in the Marshall Plan, but of much greater significance was the currency reform of 1948 which replaced the Reichsmark with the Deutsche Mark as legal tender, halting rampant inflation. This act to strengthen the German economy had been explicitly forbidden during the two years that the occupation directive JCS 1067 was in effect. The two main factors were currency reform and the elimination of PRICE CONTROLS, both of which happened over a period of weeks in 1948. A further factor was the reduction of MARGINAL TAX RATES later in 1948 and in 1949.

Contrary to popular belief, the Marshall Plan, which was extended to also include Western Germany after it was somewhat belatedly realized that the suppression of the Western German economy was holding back the recovery of the rest of Europe, was not the main force behind the Wirtschaftswunder. Had that been the case, other countries such as the United Kingdom (which received higher economic assistance from the plan than Germany) should have experienced the same phenomenon. Nonetheless, the amount of monetary aid (which was in the form of loans) received by Germany through the Marshall Plan (about $1.4 billion in total) was far overshadowed by the amount the Germans had to pay back as war reparations and by the charges the Allies made on the Germans for the ongoing cost of occupation (about $2.4 billion per year). In 1953 it was decided that Germany was to repay $1.1 billion of the aid it had received. The last repayment was made in June 1971.

The Korean war (1950-53) led to a worldwide increased demand for goods, and the resulting shortage helped overcome lingering resistance to the purchase of German products. At the time Germany had a large pool of skilled and cheap labour, partly as a result of the deportations and migrations which affected up to 16.5 million Germans. This helped Germany to more than double the value of its exports during and after the war. Apart from these factors, hard work and long hours at full capacity among the population in the 1950s, 1960s and early 1970s and extra labour supplied by thousands of Gastarbeiter (“guest workers”) provided a vital base for the economic upturn.

From the 1950s onwards, West Germany had one of the world’s strongest economies. The East German economy also showed strong growth, but not as much as in West Germany, due to the bureaucratic system and continued reparations to the USSR in terms of resources. Ludwig Erhard, who served as the Minister of the Economy in Adenauer’s cabinet from 1949 until 1963 and later became Chancellor, is often associated with the German Wirtschaftswunder. 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.

The effect on the West German economy was electric. Wallich wrote: “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” (p. 71).
Shops on Monday, June 21, were filled with goods as people realized that the money they sold them for would be worth much more than the old money. Walter Heller wrote that the reforms “quickly reestablished money as the preferred medium of exchange and monetary incentives as the prime mover of economic activity” (p. 215).
Absenteeism also plummeted. In May 1948 workers had stayed away from their jobs for an average of 9.5 hours per week, partly because the money they worked for was not worth much and partly because they were out foraging or bartering for money. By October average absenteeism was down to 4.2 hours per week. In June 1948 the bizonal index of industrial production was at only 51 percent of its 1936 level; by December the index had risen to 78 percent. In other words, industrial production had increased by more than 50 percent.
Output continued to grow by leaps and bounds after 1948. By 1958 industrial production was more than four times its annual rate for the six months in 1948 preceding currency reform. Industrial production per capita was more than three times as high. East Germany’s communist economy, by contrast, stagnated.

So was it a miracle at all, or just the rigorous application of common sense? The two main factors were CURRENCY REFORMS and the elimination of PRICE CONTROLS, both of which happened over a period of weeks in 1948. An additional factor was the reduction of MARGINAL TAX RATES later in 1948 and in 1949.

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