After the war this country was in shambles, experienced political dependence and pressure, economic collapse and rampant inflation. The level of agriculture development was lower than decades before the war, food production was cut by half, one-fifth of housing was destroyed; only one-third of industry functioned. Speculation, shortages and unemployment ruled in once prosperous country of Europe. What country was it?
It was Germany after the World War II. Indeed, due to Germany, or rather due to the policy of the Allied powers in relation to it, one of the most interesting economic experiments of the modern world became possible. After the partition of the country by the allies, West Germany began to develop according to the western “market” model and the German Democratic Republic – according to the model of the Soviet Union. Along with the principles of decentralization and demilitarization (common to both parts of the country) a confrontation between two economic systems took place in Germany and interesting economic scenario began to develop. What was the result? Real economic miracle, as in 15 years after the Second World War, West Germany was ahead of all (!) European countries in terms of economic development. But how was this possible? Let’s analyse.
Substantial financial assistance of the United States under the Marshall Plan played an important role. However, this was not the deciding factor, as the UK received twice more, and France – 1,5 times more money than West Germany. What, then, led to the German economic miracle? A number of factors, and they were the following.
Rehabilitation program in West Germany was based on the theory of “social market economy” – a “third vector” between capitalism and totalitarian economy. Characteristic features of this vector were:
- maintaining a certain role of the state in the economy;
- guarantees of private property;
- decentralization of economic decision-making;
- competition and free pricing.
However the state’s role wasn’t to regulate the economy, but to create economic order. That is to create “rules of the game” same for all and control their implementation. The state’s role also included the fight against monopolies, support for small and medium-sized businesses, and a number of tough and decisive reforms and changes that took place in the country:
A complete replacement of the national currency took place in 1948: instead of pre-war German Reichsmark Deutsche Mark appeared. US and European banks supported the new currency, began to accept it without restriction and trade it a high rate.
Many small regulations that restrict business were abolished, as well as the administrative allocation of resource and price control. Agreements between undertakings (cartels) on price-fixing were put under strict control and restrained.
Political and economic influence of large landowners was limited: a limit of land of one owner was set. Thus, by the beginning of 1950s only 10% of the land remained in the hands of the former landowners. The rest was distributed among medium and small proprietors. High property taxes were set, and thus large landowners contributed into the country’s recovery after the crisis.
Refusal from total nationalization
Western states decided to abandon large-scale nationalization of enterprises in West Germany, and in 1949 allowed the revival of big private enterprises in heavy industry: Krupp, Thyssen, Mannesmann, “IG Farben” and others.
Union industry and banks
Capital of large enterprises was controlled by the unions of banks, allowing enterprises to reduce dependence from the private shareholders, speculation or spontaneous decisions of owners.
Support for small and medium businesses
Credit and tax policy of the state was aimed specifically at supporting of small and medium businesses. This increased employment, reduced the deficit of goods and filled the budget of the country.
Already in 1952 the prices in West Germany almost stopped growing, and the rapid growth of the industry, consumer goods, housing construction began in 1953. Since the mid-fifties the country entered upon the path of constant economic growth that lasted about 20 years. West Germany’s GDP in 1956 was already twice as large as the GDP of 1936, and in 1968 – four times larger. By 1957 unemployment was only 1.8%, and the flow of investment into Germany from 1950 to 1957 increased by 81%.
To run a country, direct and support its development is a huge, time-consuming and complex task. Steps, listed above are only a plan, and the most complicated is to execute it. But history shows clearly that the problems that countries face in connection with military aggression, corruption, bureaucracy, depression or psychological devastation of the population are not new. “No economic situation may be so bad that strong will and honest work of all the people couldn’t cope with it,” the famous reformer of West Germany Ludwig Earhart once said.