Lawrence White: The German Miracle ... Another Look
[Mr. White is professor of economics at George Mason University. This op-ed draws on his forthcoming book, "The Clash of Economic Ideas."]
Earlier this summer George Soros and some leading Keynesian economists criticized what they regarded as Germany's overly strict fiscal discipline. Yet Germany's real output expanded at a robust 9% annual rate in the second quarter, while the U.S. economy grew at an anemic 1.6% rate. So is Germany now a role model for how to recover?
In a June op-ed, German Finance Minister Wolfgang Schäuble justified his government's decision to cut spending, citing "aversion to deficits and inflationary fears, which have their roots in German history in the past century." He was presumably making a reference to the destructive hyperinflation of the 1920s.
Yet Mr. Schäuble might have cited another relevant episode from his nation's history. Sixty-two years ago Germany became a role model for recovery from a very different crisis. In the aftermath of World War II, Germany's cities, factories and railroads lay in ruins. Severe shortages of food, fuel, water and housing posed challenges to sheer survival.
Unfortunately, occupation policy makers actually perpetuated the shortages by retaining the price controls the Nazi government had imposed before and during the war. Consumers and businessmen battled against the bureaucratic regime of controls and rationing in what the German economist Ludwig Erhard described as Der Papierkrieg—the paper war. Black markets were pervasive.
Germany's new Social Democratic Party wanted to continue the controls and rationing, and some American advisers agreed, particularly John Kenneth Galbraith. Galbraith, an official of the U.S. State Department overseeing economic policy for occupied Germany and Japan, had been the U.S. price-control czar from 1941-1943; he completely dismissed the idea of reviving the German economy through decontrol.
Fortunately for ordinary Germans, Erhard—who became director of the economic administration for the U.K.-U.S. occupation Bizone in April 1948—thought otherwise. A currency reform that he helped to design was slated to replace the feeble old Reichsmark with the new Deutsche mark in all three Western zones on June 20. Without approval from the Allied military command, Erhard used the occasion to issue a sweeping decree abolishing most of the price controls and rationing directives. He later told friends that the American commander, Gen. Lucius Clay, phoned him when he heard about the decree and said: "Professor Erhard, my advisers tell me that you are making a big mistake." Erhard replied, "So my advisers also tell me."
It was not a big mistake...
Read entire article at WSJ
Earlier this summer George Soros and some leading Keynesian economists criticized what they regarded as Germany's overly strict fiscal discipline. Yet Germany's real output expanded at a robust 9% annual rate in the second quarter, while the U.S. economy grew at an anemic 1.6% rate. So is Germany now a role model for how to recover?
In a June op-ed, German Finance Minister Wolfgang Schäuble justified his government's decision to cut spending, citing "aversion to deficits and inflationary fears, which have their roots in German history in the past century." He was presumably making a reference to the destructive hyperinflation of the 1920s.
Yet Mr. Schäuble might have cited another relevant episode from his nation's history. Sixty-two years ago Germany became a role model for recovery from a very different crisis. In the aftermath of World War II, Germany's cities, factories and railroads lay in ruins. Severe shortages of food, fuel, water and housing posed challenges to sheer survival.
Unfortunately, occupation policy makers actually perpetuated the shortages by retaining the price controls the Nazi government had imposed before and during the war. Consumers and businessmen battled against the bureaucratic regime of controls and rationing in what the German economist Ludwig Erhard described as Der Papierkrieg—the paper war. Black markets were pervasive.
Germany's new Social Democratic Party wanted to continue the controls and rationing, and some American advisers agreed, particularly John Kenneth Galbraith. Galbraith, an official of the U.S. State Department overseeing economic policy for occupied Germany and Japan, had been the U.S. price-control czar from 1941-1943; he completely dismissed the idea of reviving the German economy through decontrol.
Fortunately for ordinary Germans, Erhard—who became director of the economic administration for the U.K.-U.S. occupation Bizone in April 1948—thought otherwise. A currency reform that he helped to design was slated to replace the feeble old Reichsmark with the new Deutsche mark in all three Western zones on June 20. Without approval from the Allied military command, Erhard used the occasion to issue a sweeping decree abolishing most of the price controls and rationing directives. He later told friends that the American commander, Gen. Lucius Clay, phoned him when he heard about the decree and said: "Professor Erhard, my advisers tell me that you are making a big mistake." Erhard replied, "So my advisers also tell me."
It was not a big mistake...