ADVANTAGES OF WAR (perhaps)
So far removed was all this from what the US wanted - the rationale presented to the US Congress and people, based on the creation of a United States of Europe along the model of the USA - that it may well have jeopardised US financial support to Europe. What may have saved it was the Korean War, or at least the fear of Communism which it intensified.
In the last article in this series I supported Werner Abelshauser's thesis that the rapid restoration of Germany's industrial and economic power was due not so much to the liberalisation policies promoted by Ludwig Erhard as to the fact that Germany had retained much of the industrial infrastructure created under the Nazis, especially during the war, together with a tradition of corporate enterprise that stretched back at least as far as the unification of Germany in the late nineteenth century. This potential for the development of high capital value products was unleashed by the emergence of a usable currency, something that had long been planned by the British and American occupiers and only held back by the need to seek, or to appear to seek, agreement with the Soviet side.
Erhard, however, was responsible for the administration of the reform and the way in which he went about it encouraged not so much development of Germany's productive capacity as a consumer boom. This, together with the need German industry had for raw materials to start up industrial production again, produced a demand for imports which rapidly put Germany into a balance of payments deficit that posed a radical problem for the EPU right at the moment of its inception. Quoting an account by Peter Temin (Emeritus Professor of Economics at the Massachusetts Institute of Technology, a student, as it happens of Charles Kindleberger):
'The EPU had set quotas for the member countries based on their 1949 intra-European trade. West Germany's trade had not revived as quickly as that of other countries, and it received a low EPU quota. As a result, West Germany would have to pay an increasing share of its deficit in gold, reaching 100 per cent before the end of I950. The country did not have the foreign exchange reserves needed to effect this transaction. The resulting problem emerged at the EPU managing board's first meeting in October I950 ...
'The Americans, in particular, were not charitable. As in I93I, the Germans were suspected of using the international monetary system for their own nationalistic aims. Happily, these negative views did not prevail. The EPU called in the expert team of Cairncross and Jacobsson who argued that the West German trade imbalance was only temporary. The EPU extended a $I20 million credit to West Germany with macroeconomic conditions. As requested, the West Germans tightened credit in late I950 and early I95I. Erhard also suspended some of his trade liberalization, formalizing the change in February. A trade balance surplus appeared in March I95I.' (9)
(9) Peter Temin: 'The `Koreaboom' in West Germany: Fact or Fiction?', The Economic History Review, New Series, Vol. 48, No. 4 (Nov., 1995), p.750.
Temin is arguing against a view argued by Abelshauser that the war, which started in June 1950, prompted a surge in demand for the high-capital intensified goods Germany was good at, thus prompting a 'Koreaboom'. Temin says (p.738) that 'neither American imports nor German exports rose unusually at that time. Instead Germany suffered an adverse price shock at the same time as its imports increased. The result was not a boom but a balance of payments crisis. The fledgling EPU acted swiftly to keep this small problem from escalating into a major economic or political crisis.'
Mark Spicka's book, Selling the economic miracle, which I quoted in the previous article and which is mainly concerned with the public relations policies of the CDU/CSU government, broadly accepts Abelshauser's view and gives some figures which seem to support it: 'New orders for goods to support the war effort streamed into the country. The industrial production index shot up from 100 in the fourth quarter of 1949 (1936=100) to 134 in the final quarter of 1950. This trend continued with production reaching 146 by the end of 1951 and 158 by the end of 1952.' (10) He gives Abelshauser as his source. Halevi agrees: 'The first five years following the defeat of Japan corroborate the view that recovery may peter out. This happened around 1948-49 after the drastic anti-inflationary budgetary policies applied by Joseph Dodge. The reconstruction led recovery stalled and the economy headed towards something more severe than a recession until the arrival of the ‘gifts from the Gods’ as Japanese economic historians are fond to call the Korean War. In Europe too recovery could have faltered. In Italy where, as pointed out by Augusto Graziani, the 1947 deflationary stabilization had been particularly harsh, the economy stagnated till the end of 1949. The Korean War proved once more to be the factor that prevented the slide into a recession. The early postwar German case is also a good indication that there was no substitute for the creation of effective demand on a large Continental scale. The Bundesrepublik’s recovery would have likely come to a halt without the income transfer from the United States, without Cold War rearmament, and, specifically, had the Korean War - an unforeseen event from the European standpoint - not acted as a major impulse to demand for Germany’s capital goods.' (11)
(10) Mark E.Spicka: Selling the Economic Miracle - Economic reconstruction and politics in West Germany, 1949-1957, New York and Oxford, Berghahn Books, 2007 (the full text is available free of charge at https://www.berghahnbooks.com/title/SpickaSelling), pp.97-8.
(11) Joseph Halevi: The Political economy of Europe since 1945 - a Kaleckian perspective, Institute for New Economic Thinking, Working paper No. 100. June 2019, p.9.
Nonetheless Spicka, Temin and Halevi are agreed that the combination of an increased consumer demand for imports and the need for imports of raw materials to support the restoration of industrial production at a time when, because of pressure from the war, prices were rising posed problems for the German economy. And Temin concludes (p.752):
'Even though the fighting itself was far away, American attitudes towards a possible war in Europe changed dramatically. Instead of thinking about reducing military expenditures after the last European war, the Americans urged everyone to consider increasing them in anticipation of the next war. The Americans put their money where their mouth was and supplied scarce dollars to promote an expansion of military spending.'
Hence Charles Kindleberger's remark, quoted by Halevi (Europe since 1945, p.5) that "the recovery program, never came to an end but was swallowed up in defense activity which developed under the North Atlantic Treaty Organization (NATO) following the North Korean attack on South Korea.”
The EPU was supposed come to an end - together with Marshall Aid - in 1952. It was the US State Department that wanted to keep it in existence, seeing it as a vehicle for advancing European integration. This was probably where US anxiety about the war with Communism proved to be advantageous. Although Britain was a major debtor in the system the Conservative government was hostile to it and was trying, unsuccessfully, to persuade the Americans that sterling was ready to become convertible with, and therefore as good as, the dollar. Ludwig Erhard in Germany too was pressing for convertibility of the deutschmark and a removal of all exchange controls. It is here that we can see a contrast between the neoliberal ideal proclaimed by Erhard and the actual strength of the economy which lay with the much maligned cartels. Quoting Milward again (European rescue, p.370): 'In a country where even the central bank perceived the currency as primarily an instrument of commerce it was unthinkable that the opinions of industrial exporters could be ignored. When consulted, the industrial association, Deutscher Industrie und Handelstag was even more insistent than the BDL [Bank Deutscher Länder] that any division between convertible and inconvertible currencies within EPU was a threat to German exports. This was to be a consistent position of German industrialists. Their collective organisation the Bundesverband der deutsche Industrie made the same argument two years later [in 1955]. Anything, they argued, which broke up the EPU would hold back the rapidly growing exports to EPU members who would no longer be able to pay for them with the same ease. What Erhard railed against as unrequited exports because they were paid for only by EPU credits, were the capital goods which brought high profits on which further investment depended and whose production had beneficial multiplier effects on the German economy.'