German Economic Miracle

How did Germany go from losing two world wars to being the biggest economy in the eurozone? Let's find out exactly what the German Economic Miracle was and what led to such success!

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    German Economy after WWII

    After World War II, Germany was licking its wounds. The cost of the conflict had decimated many facets of their economy. 20% of housing had been destroyed, infrastructure was damaged, and agriculture was down 51% on prewar levels as late as 1947. Furthermore, the Reichsmark currency was worthless, leading to bartering where cigarettes, tea, and coffee were commodities in exchange for food. With wartime food rationing still in place, it is fair to say that significant changes were necessary.

    German Economic Miracle Ration Stamp for Manual Labourer (1947) StudySmarterFig. 1 - Ration stamp for manual labourer (1947)

    Causes of the German Economic Miracle

    The German Economic Miracle or "Wirtschaftwunder" was also referred to as the "Miracle on the Rhine" by the British newspaper "The Times". This referenced the industrial heartland of West Germany, the Rhine, responsible for much of the industry. The growth truly began in 1948 but was not stimulated by one single factor. Let's examine some of the critical causes of Germany's Economic Miracle.

    Ludwig Erhard and the German Economic Miracle

    Given the dire situation, new schools of economic thought were always going to have traction in Germany after World War II. The Freiburg School of Economics is a political philosophy that originated in 1930 at the University of Freiburg. It was built on principles of ordoliberalism.

    Ordoliberalism

    The notion that market economics needs to be given freedom from government policy to maximise its potential. In addition, social welfare underpins the stability of the economy.

    When Ludwig Erhard became Director of the Economics Council in the Western occupation zone in 1948, he had the trust of the Allies because of his anti-Nazi views. Coupled with this, there was no question over his loyalty to Germany as he was a veteran of World War I. Therefore, the Allies were willing to allow him to put some of his notions into practice. Let's look at an overview of the three key facets that helped kickstart the economic boom:

    • Replacement of the Reichsmark with a new currency known as the Deutschmark. This stopped the black market, and, despite the initial colossal decrease in value (93%), money was again the primary agent of trade.
    • Removal of the price controls set in place by the Nazis and continued by the Allies. This control and the use of rationing for food continued after World War II, with some Germans only getting 1 000 calories per day!
    • Slashing taxes. The average West German earning 2 400 Deutschmarks was getting taxed for 85% of their earnings. Erhard's policies meant that this dropped to 18%. He also encouraged a flat tax rate for companies, encouraging private enterprise.

    German Economic Miracle Ludwig Erhard in Holland StudySmarterFig. 2 - Ludwig Erhard, who became Chancellor of Germany, in Holland in 1964

    Despite being given the trust of the Allies to reshape the economy, Erhard ensured the completion of the drastic processes by announcing them on a Sunday in June 1948; he knew that the Western Allies took the weekends off. With Erhard's carefully thought-out plans, there was always a great chance of an economic boom. This, coupled with other factors that we will examine, meant that it was far from a miracle that Germany became so successful.

    The Marshall Plan

    When it became apparent that it was just a matter of time before Germany lost the war in 1944, the United States devised the Morgenthau Plan. It aimed to turn Germany into an agrarian state which could not mount a conflict. However, this was later discarded when deemed too harsh. The mistakes made with the Treaty of Versailles after World War I were all too recent. However, the United States was also acutely aware of the Soviet threat once the war was over and feared that the Morgenthau Plan would help the Communists overtake Europe.

    Agrarian

    Land that is devoted to farming instead of industry, meaning there would be no ability to build weaponry and machines of war.

    West Germany was to be reborn as the industrial and military bulwark against the East.1

    - Barry Eichengreen, Marc Uzan, Nicholas Crafts and Martin Hellwig

    The Marshall Plan was more important as a symbolic gesture from the United States to involve a disgraced nation at the European table. It was the first significant step in a series of important economic ties that helped the West German economy to flourish. However, it also isolated the Eastern bloc countries and deepened nascent Cold War mistrust.

    Since the atomic bomb ended World War II in 1945, posturing began between the ideologies of the United States and the Soviet Union. The United States' intervention was informed by the domino theory. The polarising effects of this could be seen in the food shortages in Soviet-backed East Germany after splitting the nation into East and West in 1949.

    Domino theory

    The United States' idea was that if one state fell to communism, so could its neighbour. It informed much of the early policy during the Cold War.

    Collaboration and Exports

    In addition to the Marshall Plan, the establishment of a forerunner of the European Union in the same year led to the involvement of Germany in the Organisation for European Economic Collaboration. This opened the door for participants to trade freely and stimulate the recovery of European markets. In many ways, the chance for Germany to collaborate with European partners was far more important than the Marshall Plan.

    A case in point was the Korean War which started in 1950. As West Germany was not prioritising rearmament, due to their protection from Western Allies, it freed up the German industry to build weapons and export them to their Western partners. The German exports alone accounted for 30% of the total machinery used by NATO to support the South Korean forces in the conflict.

    Successes such as these made the animosity with which West Germany was viewed quickly forgotten. Although war reparations still burdened the German economy, their collaboration and strength of exports were considered vital. With the 1950s in full swing, West German war reparations were slashed by 50% and only paid if certain profits were reached to help their economy be more involved in tackling communism. As a result, their exports to the capitalist world were 3.6% of the total in 1950 and increased to 9.6% in 1959, the same as all of Germany before the war.

    Gastarbeiter

    The final important piece of the German Economic Miracle jigsaw came in the form of the foreign "Gastarbeiter" or "guest workers" who came in droves and worked for low wages. This programme started in 1955, but even before then, there was a steady stream of foreign workers; 10 million were added to the population from Eastern Europe in 19452. This was a new pool of cheap labour for the West German economy which significantly increased the workforce, though unemployment also remained high. Alt and Schneider argue that the German Economic Miracle may not have been achieved without these low wages. On top of this, before the building of the Berlin Wall in 1961, 4 million East Germans fled to West Germany for better economic prospects.

    YearEmploymentUnemployment
    194712 700 000658 000
    195215 000 0001 379 000

    In 1955 West Germany decided to keep replenishing this workforce by formally introducing the "Gastarbeiter" program. This involved working with non-European Economic Commission nations and paying for transport to and from housing in Germany. In 1960 there were 300,000 guest workers who were mostly Italian. However, this increased to 4.5 million by 1972, and this time Turks and Yugoslavs accounted for the majority. "Gastarbeiter" now made up 12% of the total workforce. These initiatives meant the economy could grow without too much inflation because wages remained low.3

    Results of the German Economic Miracle

    Let's look at the outcome of the German Economic Miracle.

    • In June 1948, the industrial input was half that in prewar 1936. It was already 80% by 1949.
    • Industrial output increased by 125% from 1950 to 1960.
    • The German economy grew by around 8% every year in the 1950s.
    • Exports rose from 8.4 billion Deutschmarks in 1950 to 41.2 billion in 1959.
    • The economy of East and West Germany became larger than the UK's in 1955.
    • The per capita GDP surpassed the UK in 1970.
    • As a key player in the eurozone, the German economy now represents the largest economy, with 28% of the total.
    • It is now the world's third-largest economy for exports, behind the United States and China.

    German Economic Miracle Volkswagen Golf StudySmarterFig. 3 - The German car company Volkswagen is number ten in the Fortune 500, a US list measuring total revenue

    German Economic Miracle - Key takeaways

    • World War II decimated the German economy leaving food shortages and the Reichsmark currency virtually worthless.
    • The philosophy of ordoliberalism and the resulting policies of Ludwig Erhard allowed the creation of a new currency, the slashing of taxes, and the removal of price caps. This was the primary reason for the German Economic Miracle.
    • The Marshall Plan, collaboration with Western partners, exports, and foreign workers also contributed to immense economic growth.
    • The German Economic Miracle was at its height during the 1950s with substantial industrial output and exports.
    • Germany remains a huge economy today and the biggest one in the eurozone.

    References

    1. Barry Eichengreen, Marc Uzan, Nicholas Crafts and Martin Hellwig, "The Marshall Plan: Economic Effects and Implications for Eastern Europe and the Former USSR", Economic Policy Vol. 7, No. 14, Eastern Europe 13 - 75 (Apr 1992).
    2. Peter Alt and Max Schneider, "West Germany's "Economic Miracle"", Science & Society Vol. 26, No. 1 46-57 (Winter, 1962).
    3. Philip L. Martin, "Germany's Guestworkers", Challenge Vol. 24, No. 3 34-42 (JULY/AUGUST 1981).
    Frequently Asked Questions about German Economic Miracle

    How did the German Economic Miracle happen?

    The German Economic Miracle happened due to a number of factors. The most important of these was the change of economic policy after World War II, but the Marshall Plan, exports to other countries and foreign workers all contributed too.

    When was the German Economic Miracle?

    The German Economic Miracle started in Germany in 1948 and was at its height during the 1950s.

    Who was responsible for the German Economic Miracle?

    The man who was most responsible for the German Economic Miracle was Ludwig Erhard, the Minister of West German Economic Affairs in 1948.

    How did Germany rebuild its economy?

    Germany rebuilt its economy primarily through a change in economic policy using the Freiburg School of Economics and ordoliberalism.

    What is meant by economic miracle?

    An economic miracle refers to a transformation of economic fortunes from bad to good in a very short space of time.

    Test your knowledge with multiple choice flashcards

    Which German company is number 10 in the Fortune 500?

    Which of these was not used as currency immediately after World War II?

    Which city did ordoliberalism originate from?

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