Was the Marshall Plan the cause for the successful economic recovery in post war Germany?
EXTENDED ESSAY
The " Economic Miracle"
in post war Germany
Was the Marshall Plan the cause for the successful economic recovery
in post war Germany?
Eran Neuberger
Table of Contents
THE QUESTION OF ECONOMIC PROSPERITY 3
EUROPE AFTER THE WAR 3
THE BEFORE AND AFTER BRIEFING 3
GERMANY IN PIECES 3
THE ECONOMIC THRUST FORWARD 3
THE CURRENCY REFORM OF 1948 3
THE MARSHALL PLAN 3
THE CLEAN CUT DIFFERENCE 3
GERMANY UNDER CHANCELLOR ADENAUER 3
THE ECONOMIC MIRACLE UNDER ADENAUER 3
APPENDIX 3
Was the Marshall Plan the cause for the successful economic recovery
in post war Germany?
The Question of Economic Prosperity
The German economic miracle has become a true landmark in economic history. The intensity of economic growth was a real phenomenon at the time and until this day is viewed as Germany's most successful period in the last century. The dramatic transformation from the destroyed post-war country Germany was, to one of the world's leading economic powers and the ability to reduce so drastically unemployment were incomparable at the time. Many historians believe that the conditions in which Germany found itself at the end of the war are comparable to the bottom of a deep trough from which ascend is the only way out - meaning from which it only can get better. Nevertheless, it is beyond belief how much the entire physical, socio-economic and political environment of a country and its people can be changed within a short period of 15 years, a period known as Germany's "economic miracle". Nowadays it is commonly assumed that such a miracle could only have happened in Germany because stereotypically its people are perceived to be endowed with immense organizational capacity and discipline, and that for years Germany's workers have always been in the "drivers seat", metaphorically speaking. However, this essay will prove that this assumption is a misconception and that it is mainly thanks to the wisdom and prudence of one of the century's great leaders that Germany underwent an economic miracle in the first 15 years of the post World War 2 era.
It is doubtless that Germany owes a great debt and has much to thank for the foreign aid it received, mainly within the framework of America's Marshall Plan. Germany must also be extremely grateful for the benefits it derived after the war from the long-term military occupation by the Allied Forces. This allowed Germany to concentrate and focus its priorities on economic development instead of spending its very limited resources on expensive defense ventures. However, looking at the objectives of the Marshall Plan and the reasons for the presence of a strong Allied military force in Germany, we must ask whether over the long term this policy indeed benefited Germany or mainly the Americans and their allies in their struggle against communism during the years of the cold war. We must also closely examine the Marshall Plan in order to prove that its contribution was not the exclusive or not even the main factor producing Germany's economic success during this era, but only a contributing, even though an important one for Adenauer's strategy of economic mobilization. Germany's success in the economic transformation is the result of prudently implemented political planning conceived by Chancellor Adenauer.
Europe After The War
The Before And After Briefing
Before the World Wars, Europe was perceived by many, but mostly by itself, as the center of the civilized world, the torchbearer of modern lifestyle. For hundreds of years European countries have been the model for many of the world's great civilizations. During World War Two and its aftermath, Europe's prosperity disappeared however, within a matter of years. The war caused total or at least severe partial destruction of many major European cities. Europe was quickly transformed from being the center of the world to the center of social, political and economical devastation.
Germany in Pieces
World War 2 resulted in the physical, moral, socio-economic and political upheaval of many European countries and foremost of Germany, which after the war was in a state of total devastation. Germany's economy was in shambles. The war caused the loss of twenty percent of all German housing, and by the end of the war food production was less than half its volume before the war. Henry Wallich, a renowned economist, illustrated this food shortage in his book Mainspring of the German Revival (1955). The following sentence cited from his book illustrates better than anything else these shortcomings: '...People from the city would leave daily to the countryside and would come back with whatever eatable things they could find and carry'.
Similarly, industrial production dropped to one-third of its output before the war. In addition, in 1945 the Allied Control Authority (representatives of governments from the United States, Great Britain, France and the Soviet Union) decided to keep the economic price control over Germany as it existed during the Nazi and War years, a controls resulting in "disaster and near famine condition." Moreover, many millions of men who were part of the German working force were killed in the war.
An unstable employment situation prevailed in the country. On the one hand, since the end of the war 150,000 jobs were lost by 1949; on the other hand there was an influx of 9 million refugees from all over Europe compensating for the loss of labor caused by the millions of war casualties. The economist Walter Eucken rightfully said: "The economic system is reduced to a primitive condition." He said, that with the removal of price control came inflation.
Germany, being the country guilty of all the suffering and damages caused during the Second World War ...
This is a preview of the whole essay
An unstable employment situation prevailed in the country. On the one hand, since the end of the war 150,000 jobs were lost by 1949; on the other hand there was an influx of 9 million refugees from all over Europe compensating for the loss of labor caused by the millions of war casualties. The economist Walter Eucken rightfully said: "The economic system is reduced to a primitive condition." He said, that with the removal of price control came inflation.
Germany, being the country guilty of all the suffering and damages caused during the Second World War was forced to pay large amounts of money to the Allies in reparation and restitution. During the war Germany also accumulated great debts that had to be repaid. Funds were collected from any possible source and money was saved for these purposes. Taxes were raised for covering these costly debts. The situation became so severe that the German people were afraid to invest in German enterprises because they feared that their investments could be diverted and used by government.
The Economic Thrust Forward
The German economic transformation, "the miracle", is considered to have taken place between the years 1948 and the early 60's. As described in the previous section, Germany suffered a severe economic crisis caused by the war. However, Germany was able to quickly re-stabilize its economy and to achieve a sustained growth rate that today seems unbelievable. The boom in the German economy overtook many of its neighbors who were in a similar situation. In 1949 alone, German industrial production increased by 24 percent. The first 6 months of 1950 showed a similar production growth. By the end of the period, in 1960, the annual industrial production growth rate was a remarkable 15 percent annually.
The booming industry provided plenty of new jobs: in 1948 an estimated 230,000 new jobs became available. After a two-years period, and with an unstable economy, an average of 80,000 new jobs were created by 1950. In the decade between 1950 and 1960, the unemployment rate dropped in West Germany from over ten percent to 1.2 percent. The question is what caused these great changes and where did the funding, necessary to sustain the economic growth, come from. There were many factors that jointly contributed to achieve such economic wealth within such a short period of time.
The Currency Reform Of 1948
After the War the German currency, the Reichsmark, which remained in force from the War and Nazi era, was almost worthless. Ludwig Erhard, the head of the West German Economic Council, who was well aware of the shortcomings of price and wage controls, proposed a risky currency reform. He maintained that such controls not only destroy incentives, but also transfer the wealth from the hard-working citizens to the bureaucrats. Contemplating the destruction caused by six years of total war, Erhard suggested that only a free market policy could get Germany back on its feet. To that end, he made two proposals: firstly, a new currency should be introduced and thereafter, to ensure its success, wage and price controls would be lifted. The long expected currency reform took place in June 1948. Initially, controls were lifted on a wide range of consumer goods. Within six months all controls on food were dropped. In order to gain support for his plan, Erhard labeled the wage and price control abolishment as a patriotic measure for replacing the foreign economic system imposed on Germany by the Allied occupation.
Over the short term, the currency conversion seemed to be very beneficial for the banking industry: the conversion rate from the old Reichsmark to the new Deutsche Mark was 10: 0.65, while debts were converted at a rate of 10:1. This meant that while converting debts, the value of monetary assets owned by the public diminished. However, the banks were forced to raise interest rates, which encouraged people to save more money and which in the long run was indeed beneficial for them and even motivated them to stay out of debt. (Further information regarding the currency reform are presented in Appendix 2)
Within the framework of the economic transformation, a new establishment, 'The Federal Cartel Office', was created with the objective to control the different markets and governmental institutions, and "prevent the return of German monopolies and Cartels".
The Marshall Plan
The intention of the Marshall Plan was to assist those European countries that were in need of finical aid after the war. The United States feared that "poverty, unemployment and the dislocation of millions of people in the postwar era were reinforcing the communist parties in many Western European countries."i The Marshall Plan was designed by the American Secretary of State George C. Marshall who, in a speech he gave at Harvard University, emphasized the forthcoming dark future for the European countries unless powerfully supported by America. "The truth of the matter is that Europe's requirements for the next three or four years of foreign food and other essential products - principally from America - are so much greater than her present ability to pay that she must have substantial additional help or face economic, social, and political deterioration of a very grave character."
The Marshal Plan organized and distributed over a period of the four years of its existence some 17 billion USD worth of economic aid. The Plans success brought a 15 to 25 percent of national production growth in the 16 nations receiving it benefits. American President Truman was so impressed by the plan's success that he initiated its continual and offered it to various third world countries in 1949. (Further information regarding the Marshall Plan is present in appendix1)
At this point, we should try to comprehend the true objectives of the Marshall Plan, which coincided with America's struggle to overcome the rapidly growing communism worldwide. Truman was petrified by the idea that a domino effect would soon wreck havoc in Western Europe and that eventually communism would also find its way across the Atlantic and penetrate northern America. The prevailing attitude was that communism means a dark future for America and the end of free trade and civilized life in general. To that end, the Marshall Plan was introduced with the aim to "win over" Western Europe, and to ensure the support of its countries for democracy. We learn that more than aiding Western European countries in their development and reconstruction efforts, the true objectives of the Marshall Plan were basically a cold war effort intended to counteract real or imagined, by the Soviets inspired, communist activities, thus preventing the feared communism from enslaving Western Europe. The Soviets, on the other hand, reacted to these efforts by building in August 1961 the Berlin Wall and isolating Soviet dominated countries from Western, capitalistic influence..
Although its intentions were laudable, the Marshall Plan only provided Germany with less than 5 percent of its national income. France, for example, received substantially more than Germany from this Plan but never achieved such a dramatic growth rate as Germany, which further proves that the Marshall Plan was not the dominant factor in Germany's economic growth. In addition, while the German government was receiving help from the Marshall Plan, it was still obliged to make reparations and restitution payments that amounted to well over half the funds received from the United States from the Marshall Plan. Moreover, since the United States decided to keep after the war large occupation forces in Germany, and in many German city there is still until now a presence of US troops, the United States charged Germany an annual fee of 2.4 billion USD for the up-keeping of these forces. On the other hand, the military presence of the United States in Germany has saved the German government substantial funds, which otherwise would have been used for its own military protection. With this in mind, we clearly see that the Marshall Plan was beneficial for Germany, however, it was by no means the major thrust that propelled economic development forwards during the years following the war.
France received a grant of over 2,7 billion USD from the Marshall Plan but it still took France 30 years to reach the economic level Germany arrived at within less then 15 years. When economists look back at the economic history of France they call the era during which France stabilized the "Thirty Glorious Years". However, in comparison with its neighbour, Germany, it is obvious that Germany underwent an economic "miracle" while France was failing to keep pace. To justify France's slower economic growth, the historian LaVerne Ripley pointed out that "vastly larger sums have been donated to other countries without preventing their economic disaster."
The Clean Cut Difference
Today, the French economy is grateful to the Marshall plan for the most generous help it received during the few years after the war. It is a recorded fact that France received a total of over 2.7 billion USD from the Marshall Plan . Germany too has much to thank the Marshall Plan for a total of almost 1.4 billion USD received in aid. However, when looking at these statistics and the fact that it took Germany only half as long as France to reach a comparable economic level of develop, we must ask ourselves what caused the German economic miracle. What pushed the German economy to become the "third strongest industrial country in the world"ii? It is clear that the Marshall plan was not the sole generator of Germany's rapid economic growth. We saw that it took France not only much longer to reach Germany's economic level, but it also received nearly twice as much as Germany received within the framework of the Marshall Plan.
Germany Under Chancellor Adenauer
Konrad Adenauer became the first chancellor of the Federal Republic of Germany in 1949. He was Chancellor during the fourteen years in which the economic "miracle" took place. Even before the war, Adenauer was firmly against communism and had been brought up as a Christian democrat. Politically, Adenauer was not accepted by the Nazi Party and was twice imprisoned during the Nazi rule. However, Adenauer's political preferences and experience was deeply appreciated by the Allied military occupation forces. In 1946 he was appointed chairman of the German Christian Democratic Union (CDU) and became in 1949, after his victory at the Bundestag elections, the first German Chancellor after the War.
Adenauer saw the growth of the communist parties in Europe as a "direct threat to the West and its values. "iii However, having attached great importance to his peaceful foreign polices, Adenauer was forced to find a non-aggressive solution for maintaining the CDU's role as Germany's dominant Party that will continue to form its government. Adenauer decided to use his political power for creating a Germany that puts the emphasis on the personal interests and well being of its population - the so called German CAPITALISM. Adenauer wanted people to become "selfish"; he wanted people to worry about their bank accounts and not their social standings. He believed that by having a community of people that are interested in their personal benefit, democracy would eventually overcome communism. It is not surprising that he therefore made drastic changes in Germany's economic policies.
One of Adenauer's first objectives was to deal with the growing immigrant population (guest-laborers). Adenauer recognized the potential of the many skilled foreigners and used their labour, which thus became an important factor in the "economic miracle." Adenauer's struggle with other economic issues demanded by the Trade Union Federation, such as the Law of Codetermination, were eventually solved and finally proved to significantly support economic growth for decades to come. As already mentioned, Germany has greatly benefited from the allied military forces stationed in its country after the war. It allowed Germany to concentrate on other issues such as on economic rehabilitation instead of on defence expenditures.
The Economic Miracle Under Adenauer
Today, it is assumed that the "economic miracle" mainly resulted from Adenauer's policies and his strive to stay close to the protection offered by the West, even though at a high price. Surely the Marshall Plan had contributed to solve the financial crisis Germany was suffering from, however it is clear that money alone did not rebuild the economy. The first move to economic success was to change the mentality of the German people. In the introduction to this essay it was suggested that such an economic miracle could only be feasible in a society consisting of people with an outstanding organisational capacity, such as the stereotypical German society is assumed to be. However, we know that without strong and wise local leadership, the entire world would have been unable to radically change Germany's economic structure. We may safely assume that the aid provided by the U.S. was substantial, but not decisive for creating German's "Economic Miracle".
It is commonly thought that the drastic change in the whole socio-economic structure was greatly benefitted by the stereotype of the Germans as being highly disciplined and efficient. Perhaps these generalizations have some truth in them. Perhaps the strategies imposed by Chancellor Adenauer and his government would have failed with different social characteristics. However, as Ludwig Erhardt said of Chancellor Adenauer after his death; "the rebirth of Germany is indelibly linked with Adenauer's name.iv"
Appendix
Appendix 1
Marshall Plan Expenditures
Economic Assistance, April 3, 1948 to June 30, 1952
(in millions of dollars)
COUNTRY
Total
Grants
Loans
Total for all countries
$13,325.8
$11,820.7
$1,505.1
United Kingdom
3,189.8
2,805.0
384.8
France
2,713.6
2,488.0
225.6
Italy (including Trieste)
,508.8
,413.2
95.6
Germany, Federal Republic of
,390.6
,173.7
216.9b
Netherlands (*East Indies)c
,083.5
916.8
66.7
Greece
706.7
706.7
--
Austria
677.8
677.8
--
Belgium-Luxembourg
559.3
491.3
68.0a
Regional
407.0d
407.0d
--
Denmark
273.0
239.7
33.3
Norway
255.3
216.1
39.2
Turkey
225.1
40.1
85.0
Ireland
47.5
9.3
28.2
Sweden
07.3
86.9
20.4
Portugal
51.2
5.1
36.1
Iceland
29.3
24.0
5.3
Notes:
a. Loan total includes $65.0 million for Belgium and $3.0 million for Luxembourg: grant detail between the two countries cannot be identified.
b. Includes an original loan figure of $16.9 million, plus $200.0 million representing a pro-rated share of grants converted to loans under an agreement signed February 27, 1953.
c. Marshall Plan aid to the Netherlands East Indies (now Indonesia) was extended through the Netherlands prior to transfer of sovereignty on December 30, 1949. The aid totals for the Netherlands East Indies are as follows:
Total $101.4 million, Grants $84.2 million, Loans $17.2 million.
d. Includes U.S. contribution to the European Payments Union (EPU) capital fund, $361.4 million; General Freight Account, $33.5 million; and European Technical Assistance Authorizations (multi-country or regional), $12.1 million.
Statistics & Reports Division
Agency for International Development
November 17, 1975
Appendix 2
Post World War II Collapse and Recovery
Notes on: The Fading Miracle
The Currency Reform of June 1948
The long anticipated currency reform came in June of 1948. The old Reichsmark was replaced with the new Deutschemark. The conversion was as follows:
Notes:
* Balances exceeding 600 Reichsmarks:
Supposedly converted at 10 Reichsmarks: 1 Deutsche Mark but the method of payment resulted in the conversion being actually 10 Reichsmarks: 0.65 Deutsche Mark or 15.4 Reichsmarks: 1 Deutsche Mark.
* Debts were converted at the 10:1 ratio.
* Official prices and pension payments were converted at a 1:1 ratio.
* The Reichsmark balances and Reichsmark bond holdings of commercial banks were wiped out but these banks recieved "equalization claims" equal to 4% of debt (25:1 conversion ratio) and deposits with the central bank of West Germany equal to 15% of demand deposits and 7.5% of time and savings deposits. The required reseverve ratios were 7.5% for demand deposits and 3.75% for time and savings deposits so the banks had excess reserves to support lending.
The central bank of West Germany was called the Bank Deutscher Lander until 1957 when its name was changed to Bundesbank (Buba).
948-1960 Spontaneous Growth
The monetary, economic and institutional reforms of June 1948 were followed by about 18 months of consolidation with stable to slightly falling prices.
Industrial production increased by 24% in 1949 and 12% in the first half of 1950. Over the period the average annual growth rate was 15% per year.
The employment growth picture was mixed. Labor requirements reflect not only the level of production but also the level of labor productivity. Labor productivity was increasing dramatically in the recovery period. In 1948 there were 600,000 new jobs but a loss of 370,000 old jobs for a new gain of 230,000. But in 1949 the were only 260,000 new jobs and a loss of 410,00 old jobs for a net loss of 150,000 jobs.
On top of this mixed picture on job creation there was an influx of 9 million refugees (expellees and immigrants).
The major problem was the capital shortage. Not only was there the problem of the war destruction of capital but the reparation confiscations of capital equipment depleted the capital stock and made entrepreneurs afraid to invest because of the possibility that their investments might be confiscated in the future.
Profitability was increasing because wage rates were not increasing as fast as prices and productivity. In other words, unit labor costs were declining.
The prescription for dealing with the capital shortage problem by the Keynesian economic advisers to the government was three-fold:
* 1. expansionary monetary policy
* 2. tax incentives for saving
* 3. investment planning by the government
William Ropke, an economist whom Americans would call conservative but in European terminology is called liberal, recommended increasing the interest rate to encourage savings.
The Tax Law Adjustment Acts of June 1948 and April 1949 created tax breaks for capital creation. West Germany had a high, graduated income tax imposed by the Allied Occupation Force after World War II modeled upon the New Deal income tax of the U.S.
There were income tax reforms over the period 1948 to 1955 to reduce the severity of the income tax program.
The West German government was directed involved in investment planning in the "bottleneck sectors" of mining, steel and energy.
West Germany retained the rent control program created during the days of the Weimar Republic, continued by the Nazis and later by the Occupation. There was thus a chronic shortage of housing which the government tried to alleviate with construction subsidies and public housing.
German foreign trade recovered dramatically despite the loss of Eastern European markets. Foreign trade increased 84.4% per year over the two year period 1948-1950. Throughout the 1950s it increased 16% per year in real terms. Thus West Germany very quickly wiped out its trade deficit and commenced running a trade surplus. Initial exports were raw materials such as coke from coal and scrap metal but by the end of the 1950s exports were mainly manufactured goods. Also by the end of the 1950s Western Europe had become the major customer and major supplier for West Germany.
i Quote from Encyclopedia Britannica book 7 page 881
ii Quote from "Questions on German history" by German Bundestag Public relations Division (English edition 1998) page 364
iii Quote from Encyclopedia Britannica book 1 page 96
iv Quote from CNN interactive, Knowledge Bank: Profiles: Konrad Adenauer
2
