On February 4th 1897, Ludwig Erhard, a pivotal figure in 20th Century political economy, was born. As an untainted anti-Nazi, Erhard was appointed Director of Economic Administration of the joint British and American zones of postwar Germany. The country was in a state of devastation. Its cities were bombed-out ruins, its people emaciated, its shelves empty, its currency worthless.
Erhard decided upon a bold course of economic freedom. The price controls put in place by the Allied military administration forbade any price to be changed without their consent, but in 1948 Erhard abolished the whole system in a day. One story has it that he chose to do this over a weekend when the Allied generals would be away playing golf. He also abolished production controls, and implemented the famous “bonfire of restrictions” that did away with most of the detailed regulations that were hamstringing any prospective recovery. He also introduced the Deutsche Mark as West Germany’s new currency.
He certainly exceeded his authority, but he got away with it. Another story tells that General Lucius Clay, head of the American military government, called him up and told him that his own economic experts all warned that what Erhard had done was very dangerous. “So do mine,” replied Erhard. Fortunately, it worked.
Prices rose, but the shelves filled as food poured in. With the new stable currency, trades could be done and factories opened. Germany got back to work. It was called the “German economic miracle” as West Germany rapidly became Europe’s most flourishing economy, and its currency the strongest. The German economy went from being a basket case to a world leader, and the German people enjoyed an unprecedented improvement in their standard of living.
It was economic liberalism that made this possible. It showed what people could do, once liberated from the government restrictions and controls that held them back. And it was Ludwig Erhard who had the wisdom to understand this, and who had the courage to give it the chance.