THE REAL SOURCES OF THE MIRACLE
Volkswagen production line, 1948
Although Erhard was not actually a member of the party he took the lead in the campaign. He was Adenauer's Minister for Economic Affairs from 1949 to 1963, and Vice Chancellor from 1957 to 1963, when he succeeded Adenauer as Chancellor. He thereby became the very personification of Germany's economic recovery. Not everyone, however, agreed with this rosy view. Spicka (pp.41-2) gives a summary of Werner Abelshauser's argument, published in 1982, that 'West Germany’s economic growth from the late 1940s through the 1950s represented a period of catching up after the destructive impact of the war, and that eventually West Germany fell into longer-term trends of twentieth-century economic growth. Abelshauser challenged the often accepted roots of the economic miracle by attacking the following postulates: that the West German recovery began with the currency reform of 20 June 1948; that this recovery was based upon foreign aid, especially the Marshall Plan; and that the changes in the political economy associated with the social market economy triggered the eventual West German economic recovery.'
A very similar critique was published as early as 1950 by the Hungarian-British economist Thomas Balogh. (14) He begins by summarising the arguments of the reform's supporters:
'It is said that the currency-reform, which put an end to the state of "suppressed Inflation" by annihilating excess purchasing power, together with the abolition of controls decreed simultaneously, has achieved a new "economic miracle". The abolition of food subsidies combined with a reduction of direct taxation is said to have restored incentive and increased initiative lacking in controlled economies. The play of the price-mechanism, it is argued, has provided for an "economic" use of resources which planned systems are unable to achieve and thus sped recovery. The Government is precluded from unbalancing the budget by law and has no say in credit policy. Thus it cannot indulge in inflationism. The rate of interest is once more restored to its rightful place as the main director of investment. Western Germany, it is said, shows the resilience and effectiveness of the "free market mechanism."' (p.71)
(14) Thomas Balogh: 'Germany: an experiment in planning by the "free" price mechanism', Banca Nazionale del Lavoro Quarterly Rreview, Vol III, No 13, April-June, 1950, pp.70-101.
Balogh argues however that the increase in production that followed the reform was already occurring in 1946/7 (making allowance for the hard winter of 1947) and was much less marked than it should have been once a money economy had been restored. The way in which the restoration had taken place had resulted in a huge increase in inequality and poverty. According to Spicka's account (p.41), unemployment more than doubled, from 442,000 in June 1948 to 937,000 in January 1949, owing to the inability of firms to pay using the new Deutschmark. In order to combat the possibility of inflation following the currency reform the supply of money had been cut drastically. Up to 60 (initially 40) Reichmarks were exchanged against Deutschmarks on a 1:1 basis but thereafter, and in the case of moneys lodged in institutions (bank holdings, pension funds etc), the exchange was 10:1. According to Spicka some 93.5% of currency was thereby taken out of circulation. As a result (p.40) 'workers, pensioners and small savers lost practically all their liquid assets' - for the second time in just over twenty years. Meanwhile 'the owners of physical assets or means of industrial or agricultural production had 90% of their debt wiped out.'
Nonetheless now that a trustworthy money was in circulation a flood of previously unavailable goods suddenly appeared on the market. Quoting Spicka again, 'Instead of a scarcity of goods being chased by abundant but worthless money, there were available goods but money was scarce.' In the absence of any government direction of the economy Balogh says (p.72) 'such productive effort and especially investment as exist are to a considerable extent misdirected towards luxury consumption, the creation of palatial hotels, restaurants, shops, movies and shops and industries catering for them ...
'There is no doubt of course that German recovery was maintained and important advances were achieved. The miracle so often talked about, however, is due to the fact that, while the progress since June 1948 was suddenly made manifest to tourists, progress before the currency reform was carefully and malevolently concealed with the intent of making illegal pecuniary gains [hoarding - PB]. To the superficial observer riding down the streets in a car the change must indeed have been miraculous.' (p.75)
Balogh explains that despite the destruction caused by allied bombing and the post-war dismantling of industrial assets for transfer either to the Soviet Union or to France, Germany's productive capacity remained surprisingly intact: 'The first and basic fact to remember is the failure of the Allied air attack on Germany to destroy or even seriously impair her industrial productive potential ... The frightful devastation of the centres of the cities and the loss of a priceless architectural heritage and the undermining - as far as a large part of the population was concerned - of the basis of civilised life should not lead to an overestimate of the effects on machines, which are less destructible.' (p.73)
Germany's productive capacity had been increased enormously by the Nazis. The point is confirmed by Spicka, paraphrasing Abelshauser (p.42): 'the total amount of fixed industrial assets was actually about 20% higher in 1945 than in 1936 because of the heavy wartime investment in German industry.' Simon Reich's Fruits of Fascism gives details of how Volkswagen expanded production during the war, largely (but not exclusively) through the use of slave labour in appalling conditions, but he also indicates how they managed to escape the consequences of the bombing (though he does say that some of the Daimler-Benz plants were badly affected):
'The first serious attack took place in April 1944, when 500 high explosives and 450 incendiary bombs were dropped on the plant with limited effect. By this time a dispersal plan had been activated by Speer's Ministry of Munitions, decentralising production in well-hidden, well-protected, and often underground locations. In Volkswagen's case the dispersal plants were located within 100 kilometres of the main factory ... Dispersal plants totalled 104,000 square feet, only about 2 per cent of the main plant, but this small area accounted for 827 machine tools - 32 per cent of what was located in the main works. Subsequent bombing occurred on 20 June, 29 June and 5 August 1944, and 1,383 high explosives and 58 incendiary bombs actually fell on plant buildings ... However, the controlling officer of the Volkswagenwerk under British trusteeship suggested that Allied attacks were not as effective as these figures indicate. Ivan Hirst claims that the Germans deliberately collapsed the roof on parts of the plant after major raids hoping to convince the Allies that the attack had been successful, thereby sparing it from serious damage. The plan was successful, and all raids ceased after August 1944 ... There was no roof on the press shop, but the plan successfully protected essential machinery and the plant suffered very little structural damage.' (pp.167-8)
The main problem according to both Balogh and Abelshauser lay in the 'bottlenecks' created by disruption in the means of transport which had been successfully targeted by the bombing - roads, bridges, railway track, rolling stock, canals, as well as much of the administrative structure which, Balogh says, had 'left the country cut unto a large number of almost autarchic districts.' But this had created problems for the occupying forces and the needs of the military administration: 'Given this unparalleled situation, the first phase of reconstruction [removal of bottlenecks caused by the disruption in communications - PB], carried out mainly under direct military control and primarily from the viewpoint of military needs, was remarkably successful.' It was a triumph of planning! Similarly, the introduction of Erhard's measures coincided with 'the increase in coal production as a result of the deliberately planned and selective scheme which should have been introduced much earlier.'
In short Balogh, and after him Abelshauser, argue that Erhard's reforms acted as a hindrance to German recovery rather than an aid, largely because they provided incentives to conspicuous consumption, therefore to imports, therefore to the flight of money out of the national economy, rather than to the development of the nation's own productive capacity, in particular the large scale industry (the cartels) which were favoured in the thinking of the SPD, less so in the thinking of the ordo-liberals. 'Nonetheless', as Galileo might have muttered underneath his breath, 'it moves.' There was an apparently miraculous German recovery. Something has been said of the reasons for this, mainly to do with the continuation of the productive capacity left by the Nazis. But more will be said in the next article when we will look at the impact of the Korean War and the radical restructuring of the US aid programme which it inspired.