If you’ve ever flown over the Rhineland and seen its vast expanse of factories, highways and railroads, it’s hard to imagine that at the end of World War II, the US had proposed forcing Germany to become an agrarian, non-industrial country. Clearly, something didn’t go as planned.
Now Germany, with a nominal GDP of over 3.8 trillion US Dollars, is the largest economy in Europe and fourth largest in the world. With 83 million people, the nation has just 1% of the world population but represents over 5% of global manufacturing output. It exports €180 billion (over 200 million US Dollars) more than it imports, its primary goods including motor vehicles and parts, machinery, and chemical products.
So how did Germany rebuild itself from the rubble of World War II into one of the industrial powerhouses of the world? And who should get the credit?
THE MORGENTHAU PLAN
Germany was already an advanced industrial economy prior to World War II. With a GDP of 384 billion US Dollars in 1939 (adjusted at 1990 prices), it had a larger economy than all the other major powers of the time except the United States. However, the war devastated the nation and destroyed much of its industrial infrastructure, not to mention labor force.
Specifically, some estimates calculate that 7.4 million Germans died, over 10% of the population, many of whom were young men who would otherwise have filled jobs in heavy industry. Food production was reduced by 50%, housing stock by 20% and industrial output by 33%.
This destruction didn’t stop with Germany’s surrender, though. At the Potsdam Conference in the summer of 1945, the Allies made extensive plans to administrate the four occupation zones in Germany—those of the United States, the United Kingdom, France and the Soviet Union—and institute the conference’s “5 Ds”: demilitarization, denazification, democratization, decentralization and deindustrialization.
Much of this included taking resources and industrial and military infrastructure as reparations. For example, the Soviet Union was granted control of the Deschimag shipyards in Bremen, which they used to send equipment from manufacturing facilities all over the country back to the USSR. This included a fifteen-car trainload of machinery from the Gendorf power plant in Bavaria, which had previously provided electricity for 35,000 people.
It wasn’t just physical equipment, though. The Allies also took many of Germany’s intellectual capital like patents and technology. With Operation Paperclip, the United States even went so far as to recruit 1,600 important German scientists and engineers to move to the US and work for the American government or military. Researcher John Gimbel estimates that these “intellectual reparations” transferred nearly 10 billion US Dollars from Germany to the US and UK, or over $100 billion in today’s currency.
The United States based much of this strategy on the Morgenthau Plan, which had been proposed by US Secretary of the Treasury Henry Morgenthau Jr. in 1944. His idea was to divide Germany into separate north and south German states as well as create an international zone in the Ruhr, the center of German coal and steel production. Plus, the plan suggested that “all industrial plants and equipment not destroyed by military action shall either be completely dismantled and removed from the area or destroyed.”
It was ultimately estimated that this would wreck the German economy and kill upwards of 25 million people, so it was never officially adopted. Still, through 1947, the US occupation was operating on a philosophy of restricting German industry. In fact, President Harry S. Truman ordered the US occupation to “take no steps looking toward the economic rehabilitation of Germany, or designed to maintain or strengthen the German economy.” This was known as directive JCS 1067.
Keeping with this philosophy, in 1946, the Allies agreed to limit German industrial output to 50% of its 1938 level, which would be accomplished by destroying 1,500 factories. Additionally, there were limits on steel production, set at 5.8 million tons or about 25% of the prewar output, and cars, set at 10% of prewar levels. Altogether, the Allies wanted to return Germany to the same standard of living it had had in 1932.
However, by 1947, the US was beginning to reconsider their strategy for post-war Germany, something they gradually convinced the UK and France to go along with. Not only did they believe an economically revitalized Germany would help the recovery in Europe overall, but they thought West Germany would be an important ally in the Cold War against the Soviet Union. This led to a new plan.
THE MARSHALL PLAN
The Marshall Plan, nicknamed for US Secretary of State George Marshall, was an Act of the US Congress passed into law in 1948 officially as the European Recovery Program. Through this program, the United States gave over 13 billion US Dollars in foreign aid to Western Europe, which equates to over $160 billion today.
Initially, the Marshall Plan didn’t include Germany, and the primary recipients were the UK and France. However, in 1949, the US decided to go ahead and give around $1.4 billion in loans to West Germany, over $16 billion today.
In addition to the Marshall Plan, previous restrictions based on the philosophy of the Morgenthau Plan were lifted. President Truman rescinded the punitive measures of directive JCS 1067 and replaced it with JCS 1779, which stated that “an orderly, prosperous Europe requires the economic contributions of a stable and productive Germany.”
The cap on steel production was raised from 25% of pre-war levels to 50%, or 12 million tons per year. This was later removed altogether under the Treaty of Paris—they got creative with the name—in 1952, which gave control of Ruhr steel and coal production back to West Germany on the condition that the new nation join the European Coal and Steel Community.
However, while West German GDP grew by over 33% during the first three years of the Marshall Plan, many modern historians only give it partial credit for rebuilding Germany’s economy. Indeed, it’s estimated that this aid contributed less than 5% to Germany’s national income during this period.
Rather, the Wirtschaftswunder is considered to be more the result of the economic and fiscal policies and principles introduced in West Germany after the war. For the most part, these came from German authorities themselves.
THE FATHER OF THE WIRTSCHAFTSWUNDER
One of the intellectuals that US forces sought out after the war was Ludwig Erhard, an economist from Bavaria who had daringly published an essay in 1944 called “War Finances and Debt Consolidation,” in which he assumed Germany would lose the war. Erhard was a protege of economist Franz Oppenheimer and a follower of the Freiburg School of economic thought and its corresponding ideology of ordoliberalism, also known as “the social free market.”
Ordoliberalism was heavily in favor of free-market capitalism, but it did allow for considerable government involvement and regulation, including a strong but government-independent central bank and a social safety net. Naturally, this was quite different to the state-planned communism employed in East Germany, but it was also in stark contrast to how the Allies had been managing West Germany up to 1948. For instance, industrial limits, price controls and trade regulations, some implemented by the Nazis but left in place by the Allies and others implemented by the Allies themselves, had led to mass shortages and a rampant black market with most Germans living on just around 1,500 calories per day.
The US occupation initially appointed Erhard as finance minister of Bavaria, but he was later promoted to director of the economic council for the western part of occupied Germany. One of the first things he did in the role was promote and help conceive the development of a new currency for West Germany.
The currency at the time was the Reichsmark, and it had become next to worthless. In the last year of the war, the Nazis nearly doubled the amount of banknotes in circulation, and the Soviets had inflated away most of the rest of its value as another means of extracting reparations. The Reichsmark had become so unstable that many Germans even turned to using cigarettes, coffee and tea as currency.
Erhard and his German and Allied colleagues devised the Deutsche Mark to replace the Reichsmark. In one foul swoop, this would decrease the currency available to the public by 93%, which would painfully but necessarily rip off the bandaid of the old currency.
However, Erhard also did something that American and British authorities initially opposed, which was to remove all price controls—and on the very same day the new Deutsche Mark was released: 21 June 1948. Furthermore, he instituted large tax cuts with the aim of allowing more money to flow into investments and general spending. For example, a West German making the median income at the time of around 2,400 Deutsche Marks saw their marginal tax rate fall from 85% to just 18%.Results were almost immediate.
Part of the reason Germany’s economic reconstruction after World War II is called a Wirtschaftswunder, or “economic miracle,” is how quickly it happened. In June 1948 when the new Deutsche Mark was introduced, West Germany’s industrial output was half of what it had been in 1936, but by 1949, it was up to 80%.
With the elimination of price controls and a new currency that held its value, the black market disappeared almost overnight. Economic efficiency and industriousness returned as people no longer had to scavenge and barter for food and other goods.
The economic momentum only continued to mount. Living standards improved, certainly beyond the Depression-Era levels the Allies had previously planned for. During the 50s, West German output increased 8% per year on average, faster than the rest of Europe. By 1958, industrial production was four times what it had been just before Erhard’s reforms.
In 1955, the combined GDP of East and West Germany overtook that of the UK. Of course, Germany had a larger population, but by the 1970s, its per capita GDP had surpassed that of the UK too.
Unemployment was notably low as well, reflecting the efficiency and accessibility of Germany’s “social market economy.” During the early 60s, it averaged just 1%, reaching a low of 0.7% in 1970. This led to the Gastarbeiter program which brought migrant workers from other countries like Turkey to fill empty positions in the booming economy.
Ever since World War II, Germany’s economy has had few hiccups aside from global economic downturns such as the oil crisis in the early 70s and Great Recession between 2007 and 2009. Its biggest challenge came after reunification in 1991 when increased debt and government spending aimed at uniting the country and boosting East Germany’s lower productivity came in conflict with the German central bank’s policy of extremely low inflation.
Nevertheless, Germany remained an economic powerhouse and was the largest economy in Europe when the Euro was introduced in 1999, a title it still maintains, accounting for 28% of the Eurozone economy. It exported about €1.2 billion, or nearly 1.4 trillion US-Dollars-worth of goods and services in 2020, the largest in the EU and third largest in the world. Exports accounted for over 43% of the country’s GDP, compared to 18.5% for China and 10% for the US, the only two larger exporters.
This is all on the back of an impressive economic infrastructure. Now, just 77 years after being reduced to rubble in World War II, Germany has 27 Fortune 500 companies, fourth most in the world, including #10 Volkswagen with $283 billion in revenue. It has the sixth longest railway network in the world at 41,000 kilometers, or about 25,000 miles, roughly the circumference of the Earth. The famous Autobahn motorway network measures over 12,000 kilometers, or 7,200 miles, making it the third largest national highway system in the world after the US and China.
To this day, Germany is the EU’s largest manufacturer with 29% of its production, and its economy is considered to be more resilient to downturn than most other European nations. Now, like the rest of the world, its economy is facing the hurdle of the COVID-19 pandemic, but so far it has fared relatively well, having seen less decline in GDP in the second quarter of 2020 compared to other major European economies like France, Italy and Spain. Will the Wirtschaftswunder press on?
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