Originally posted on Tuesday, September 17th, 2013
Perhaps June 20 should be celebrated as “World Good Money Day” …
… to help anchor certain facts in the culture.
Scene from the Berlin Airlift courtesy USAF Historical Research Agency
As summarized in an exceptionally lucid article, the German Economic Miracle, by economist (and editor) David R. Henderson — a research fellow with Stanford University’s Hoover Institution and an associate professor of economics at the Naval Postgraduate School in Monterey, California — and published in the estimable Library of Economics and Liberty:
“After World War II the German economy lay in shambles. The war, along with Hitler’s scorched-earth policy, had destroyed 20 percent of all housing. Food production per capita in 1947 was only 51 percent of its level in 1938…. Industrial output in 1947 was only one-third its 1938 level. Moreover, a large percentage of Germany’s working-age men were dead. At the time, observers thought that West Germany would have to be the biggest client of the U.S. welfare state; yet, twenty years later its economy was envied by most of the world. And less than ten years after the war people already were talking about the German economic miracle.
“What caused the so-called miracle? The two main factors were currency reform and the elimination of price controls, both of which happened over a period of weeks in 1948. A further factor was the reduction of marginal tax rates later in 1948 and in 1949.
After the Soviets withdrew from the Allied Control Authority, Clay, along with his French and British counterparts, undertook a currency reform on Sunday, June 20, 1948. … The currency reform was highly complex, with many people taking a substantial reduction in their net wealth. The net result was about a 93 percent contraction in the money supply.
Journalist Edwin Hartrich tells the following story about Erhard and Clay. In July 1948, after Erhard, on his own initiative, abolished rationing of food and ended all price controls, Clay confronted him:
Clay: “Herr Erhard, my advisers tell me what you have done is a terrible mistake. What do you say to that?”
Erhard: “Herr General, pay no attention to them! My advisers tell me the same thing.”
Hartrich also tells of Erhard’s confrontation with a U.S. Army colonel the same month:
Colonel: “How dare you relax our rationing system, when there is a widespread food shortage?”
Erhard: “But, Herr Oberst. I have not relaxed rationing; I have abolished it! Henceforth, the only rationing ticket the people will need will be the deutschemark. And they will work hard to get these deutschemarks, just wait and see.”
Of course, Erhard’s prediction was on target.
The effect on the West German economy was electric. Wallich wrote: “The spirit of the country changed overnight. The gray, hungry, dead-looking figures wandering about the streets in their everlasting search for food came to life”
Shops on Monday, June 21, were filled with goods as people realized that the money they sold them for would be worth much more than the old money.
Output continued to grow by leaps and bounds after 1948. By 1958 industrial production was more than four times its annual rate for the six months in 1948 preceding currency reform. Industrial production per capita was more than three times as high. East Germany’s communist economy, by contrast, stagnated.”
Many conventional economists today are offering counsels of despair, calling stagnation “the new normal.” The power of monetary reform, however, has been demonstrated many times — yet rarely as vividly as in the German Economic Miracle. Germany was in far, far worse shape than is America today. And bombed out Germany went on — with a monetary reform roundly condemned by the experts of its day — to become a wonder of the world.
In all began on June 20, 1948.
Let’s celebrate it, annually, as World Good Money Day.