Ludwig Erhard

views updated May 21 2018

Ludwig Erhard

The German statesman Ludwig Erhard (1897-1977) is credited with the decisions that resulted in West Germany's (now part of Germany) spectacular economic recovery following World War II. He served as chancellor of the Federal Republic of Germany from 1963 to 1966.

Ludwig Erhard was born in the northern Bavarian city of Fürth on Feb. 4, 1897. After serving in World War I, during which he advanced to the rank of sergeant and was badly wounded, Erhard resumed his business training. He continued his studies in economics and sociology at the progressive University of Frankfurt. After he received a doctorate, Erhard decided to devote his career to research rather than to business. He joined the staff of the Nürnberg Business School. From 1928 to 1942 he advanced from research assistant to director of the institution. The Nazis removed him from this position, however, after he refused to join the party. Erhard spent the remaining war years as a consultant to business enterprises.

Erhard's lack of compromising political ties and his reputation as an economic expert made him a likely candidate for the administrative posts set up by the Western Allied governments that occupied Germany after 1945. First Erhard was charged with the reconstruction of the war-ravaged industries of his native Fürth-Nürnberg area. Late in 1945 he was named economics minister in the Bavarian state government. After losing this post in 1947, Erhard was named to key positions in the council set up jointly by the British and American occupation authorities to coordinate economic activities in their zones.

Pushed Social Market Economy

Erhard's economic views were summarized in his advocacy of a "social market economy," which one author has called a "free economy with a social conscience." Erhard wished to use private initiative to rebuild the shattered German economy but to check it when it tended toward monopoly, cartelization, or extreme labor union demands.

Erhard well understood the inefficiencies that come with price controls. He had authored a memorandum during the war outlining his vision for a market economy in Germany. In 1947, the Allies, who wanted Germans with no ties to the fallen Nazi regime for the new German government, named Erhard the main economic adviser to U.S. General Lucius D. Clay, military governor of the U.S. zone. Erhard advocated a quick reform of the currency system and the decontrol of prices.

After the Soviet withdrawal from the Allied Control Authority, General Clay, along with his French and British counterparts, undertook a currency reform on Sunday, June 20, 1948. The amount of currency in circulation was dramatically reduced (by a factor of slightly more than 90 percent). Under the reform mapped by Erhard, the new legal currency, the Deutschemark, was substituted for the old Reichsmark. With the sharp contraction in the German money supply, he reasoned, there would be far fewer shortages because the controlled prices would now be stated in Deutschemarks. On the same day, over the strong objections of its Social Democratic members, Germany's Bizonal Economic Council adopted a price decontrol law that gave Erhard the authority to eliminate price controls. Between June and August of 1948, Erhard decontrolled the prices of vegetables, fruits, eggs, and almost all manufactured goods. He substantially relaxed, or simply suspended enforcement of, other price ceilings.

At the same time, the government, following Erhard's advice, cut taxes sharply. Walter Heller, a young economist with the U.S. occupation forces who was later to become chairman of President Kennedy's Council of Economic Advisers, wrote in 1949 that to "remove the repressive effect of extremely high rates, Military Government Law No. 64 cut a wide swath across the German tax system at the time of the currency reform." Individual income tax rates, in particular, fell dramatically. Previously the tax rate on any income over 6,000 Deutschemarks had been 95 percent. After tax reform, this 95 percent rate applied only to annual incomes above 250,000 Deutschemarks. For the German with an annual income of about 2,400 Deutschemarks in 1950, the marginal tax rate fell from 85 percent to 18 percent.

Economy Surged

The immediate effects of these Erhard-designed reforms on the German economy were dramatic. Another U.S. economist with occupation forces wrote that 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." On Monday, June 21, only a day after the announcement of currency reform, shops filled with goods as people realized that the money they sold them for would be worth much more than the old money. The reforms, wrote Heller, "quickly re-established money as the preferred medium of exchange and monetary incentives as the prime mover of economic activity."

Another phenomenon was observed in the wake of the reforms: Absenteeism, which only a month earlier was averaging more than nine hours a week, was reduced significantly. Workers who had stayed off the job to forage and barter for life's necessities found that it was no longer imperative for them to do so. By the fall of 1948, the absenteeism rate had dropped to about four hours. In the second half of 1948, Germany's industrial output rose by more than 50 percent. This growth continued to be extremely strong over the next ten years, with industrial production per capita in 1958 measuring three times its level in the six months preceding the June 1948 reforms. What looked like a miracle in reality was not. Erhard expected these results because he knew full well the damage that had been wrought by inflation, coupled with price controls and high tax rates. In turn, he also was well aware of the large productivity gains that could be unleashed by ending inflation, removing price controls, and slashing high marginal tax rates.

Named Economics Minister

Immensely popular with the German people as a result of the economic reforms, Erhard joined Konrad Adenauer's Christian Democratic Union (CDU) only shortly before the first West German parliamentary election in 1949. When the party was victorious in those elections, Erhard became economics minister in the Adenauer government, in which post he remained until he succeeded the aging and increasingly unpopular Adenauer as chancellor in 1963. Erhard led his coalition government (CDU/CSU and Free Democrats) to victory in the 1965 election, after which he actively supported a normalization of relations with the countries of the Warsaw Pact. On March 25, 1966, his government sent a peace overture to the Warsaw Pact, proposing a renunciation of force. The failure to include East Germany in this initiative resulted ultimately in its failure. Erhard and his foreign minister, Gerhard Schröder, were labeled "Atlanticists" for their support of stronger ties with the United States and the North Atlantic Treaty Organization(NATO). This focus on West Germany's relationship with NATO and the United States weakened the country's ties with France, which Adenauer had worked so hard to build up during his years as chancellor. Erhard soon found his position untenable as recession wiped away memories of the economic miracle and those he once had considered his friends, including Adenauer, sniping at him whenever possible. He was accused of both indecision and lack of experience in foreign affairs. He resigned in 1966 and was succeeded as chancellor by Kurt-Georg Kiesinger. Erhard later confided that "soon after I took office in 1963, I had the feeling that my party friends were no friends." A year after his resignation, he was named honorary chairman of the CDU.

Erhard spent the final decade of his life as a dignified elder statesman. He displayed no bitterness at what many felt was betrayal by his fellow members of the CDU. He wrote and consulted extensively in the area of his traditional expertise—the social market economy. When he died on May 5, 1977, he was lauded by his countrymen as "the father of the economic miracle." He was 80.