Ludwig Erhard did more than anyone to de-Nazify the German economy after World War II.
By doing so, he gave birth to a miraculous economic recovery. He was a hero whose story holds lessons for today.
By every measure, Germany was a disaster in 1945 – defeated, devastated, divided and demoralized – and not only because of the war.
The Nazis were socialist – the name derives from National Socialist German Workers Party, so for more than a decade the economy had been “planned” from the top. It was tormented with price controls, rationing, bureaucracy, inflation, cronyism, cartels, misdirection of resources and government command of important industries.
Producers produced what the planners ordered them to. Service to the state was the highest value.
Young Ludwig resented the burdens that government imposed on honest and independent businessmen like his father, who was a clothing and dry goods entrepreneur. He understood what F. A. Hayek would express so well in the 1940s, “The more the state plans, the more difficult planning becomes for the individual.”
Hitler’s rise to power in the 1930s deeply disturbed Erhard. He refused to have anything to do with the Nazism or the Nazi Party, even quietly supporting resistance to the regime as the years wore on.
In 1947, Erhard achieved the chairmanship of an important monetary commission, and soon thereafter he became West Germany’s economics minister.
Erhard’s views had solidified into unalterable convictions: Currency must be sound and stable. Budgets must be balanced and bureaucracy slashed. Collectivism was deadly nonsense that choked the creative individual. State enterprises could never be an acceptable substitute for the dynamism of competitive, entrepreneurial markets. Envy and wealth redistribution were evils.
“It is much easier to give everyone a bigger piece from an ever-growing cake,” he said, “than to gain more from a struggle over the division of a small cake, because in such a process every advantage for one is a disadvantage for another.”
So on a June Sunday in 1948, he issued a decree wiping out rationing and wage-price controls and introducing a new hard currency, the Deutsche-mark. Then he issued a blizzard of deregulatory orders. He slashed tariffs and implemented a 15 percent cut in income taxes.
By removing disincentives to save, he prompted one of the highest saving rates of any industrialized country. West Germany was awash in capital and growth, while socialist East Germany languished.
Economist David Henderson writes that Erhard’s motto could have been: “Don’t just sit there; undo something.”
The results were stunning. “The German economy sprang to life,” as another economist put it. “The unemployed went back to work, food reappeared on store shelves, and the legendary productivity of the German people was unleashed. Within two years, industrial output tripled. By the early 1960s, Germany was the third greatest economic power in the world, while West Germany was assimilating hundreds of thousands of East German refugees.”
The pace of growth dwarfed that of any of the European countries that received far more Marshall Plan aid than Germany ever did. Erhard forever answered the question, “What do you do with an economy in ruins?” with the simple, proven and definitive recipe, “Free it!”
Lawrence W. Reed, a resident of Newnan, is president of the Foundation for
Economic Education. Each week, he writes about exceptional people, including
many from his book, “Real Heroes: Inspiring True Stories of Courage, Character