An Economist Works a Miracle:

Ludwig Erhard, born February 4, 1897

by Paul A. Schons

(originally published by the Germanic-American Institute in February, 2001)

All resources had been spent and another war had been lost. In 1945 many were convinced that the destruction this time was so extensive that Germany would never again be able to redevelop as other than a kind of third world agricultural nation.

Some time before the end of the war a somewhat obscure economist recognized the inevitability of the loss of World War II and had begun to turn his attention to how the German economy might develop afterwards. Dr. Ludwig Erhard wrote his theoretical piece, Kriegsfinanzierung und Schuldenkonsolidierung (War Finances and Debt Consolidation) in 1944. He provided the paper to one of the leaders of the conspiracy against Hitler, Carl Friedrich Goerdeler. Ultimately that paper was to reach the Western Allies and bring Erhard to their attention. They saw in him a solid economist whose ideas could potentially be used in the post-war reconstruction.

Erhard was called upon to provide his input on economic issues immediately after the war. In 1945/46 he worked as an economics expert in Bavaria. In 1947 he was enlisted in the British-American zone of occupation as the chairman of the experts commission on money and credit. That group would lay the groundwork for the monetary reform essential to beginning the task of rebuilding the nation. Parallel to the monetary reform Erhard worked to end the controlled economy and fixed prices of the occupation and to introduce into the newly developing West Germany a structural basis he found essential: a market based economy.

The introduction of a market based economy was by no means a matter of popular consensus. In fact, there was very widespread and powerful demand for a fairly radical socialist system. To many a socialist system seemed to be the only way to survive the destitution brought about by the war. To many social justice seemed at odds with the theory of market economy. Erhard was quite in sympathy with a need to impose certain limits on a free market system for purposes of social justice, but was firmly convinced of the long term need for a free market base to the socio-economic system. He was convinced that a just and working society could best be built on an economic system allowing and making use of free enterprise. "Wettbewerb ist die beste Sozialpolitik" (competition is the best policy for social development.) Yet, as the elections of 1949 took place and Erhard became the Minister of Economics in the new German democracy, it was clear that compromise was needed between a fully free market economy and the expansive socialism demanded by so many (including the labor unions). It was in the spirit of such a compromise that the Soziale Marktwirtschaft (social market economy) came to be developed during the Adenauer/Erhard years. The social market economy provided for private initiative along with the freedom of industry to determine production and set prices within the natural constraints of free competition. At the same time a wide range of social rights and protections were put into place. Prominent among those social protections was the system of Mitbestimmung (codetermination) giving workers wide ranging decision making rights in industry (a system which in American eyes might seem radical even yet today).

The great compromise was indeed tenuous in its beginnings with a sense of profound suspicion by the advocates of the unrestricted free market system on the one side and the supporters of socialism on the other. The great question was, could they work together in the economic/social "partnership between equals" which the system advocated? Great diplomacy was needed to achieve the cooperation which the system required. In Erhard's words, "Ein Kompromiß, das ist die Kunst, einen Kuchen so zu teilen, daß jeder meint, er habe das größte Stück bekommen." (A compromise is the art of cutting the cake thus, that each feels he has got the largest piece.)

The German economy did grow. (Of course the Marshal Plan, the pressures of the developing Cold War and the related American production of arms within German borders all became a part of the mix.) Whatever the relative weight of factors, the economy grew rapidly and West Germany reemerged as one of the world's largest industrial economies. There was a prosperity for all which could have hardly seemed possible in the dark days after the war. Erhard would go on to become the chancellor and the concept of the Wirtschaftswunder (Economic Miracle) would develop. Erhard himself began to be called "The father of the economic miracle." Erhard disputed the term "miracle", however, insisting that the redevelopment of the economy and the society was simply the effect of a sound idea executed with consistent policies.

"Das erfolgversprechendste Mittel zur Erreichung und Sicherung jeden Wohlstandes ist der Wettbewerb."--Ludwig Erhard in his book "Wohlstand für Alle". (The most promising means for the achievement of and securing of prosperity is competition.)