Germany's Economic "Miracle" By David Henderson

Larry White has a good op/ed in tomorrow’s Wall Street Journal on Germany’s post-World-War-II economic miracle. He attributes this correctly to Ludwig Erhard’s abolition of Hitler’s price controls that the Allies had continued to enforce after the war ended. He also points out that later the Allies reduced tax rates substantially.

I deal with all these issues at greater length in my Concise Encyclopedia article, “German Economic Miracle.” Here’s an excerpt:

Price controls on food made the shortages so severe that some people started growing their own food, and others made weekend treks to the countryside to barter for food. Yale University economist (and later Federal Reserve governor) Henry Wallich, in his 1955 book, Mainsprings of the German Revival, wrote:

Each day, and particularly on weekends, vast hordes of people trekked out to the country to barter food from the farmers. In dilapidated railway carriages from which everything pilferable had long disappeared, on the roofs and on the running boards, hungry people traveled sometimes hundreds of miles at snail’s pace to where they hoped to find something to eat. They took their wares–personal effects, old clothes, sticks of furniture, whatever bombed-out remnants they had–and came back with grain or potatoes for a week or two. (p. 65)

I also give data on the cuts in tax rates:

Along with currency reform and decontrol of prices, the government also cut tax rates. A young economist named Walter Heller, who was then with the U.S. Office of Military Government in Germany and was later to be the chairman of President John F. Kennedy’s Council of Economic Advisers, described the reforms in a 1949 article. To “remove the repressive effect of extremely high rates,” wrote Heller, “Military Government Law No. 64 cut a wide swath across the [West] German tax system at the time of the currency reform” (p. 218). The corporate income tax rate, which had ranged from 35 percent to 65 percent, was made a flat 50 percent. Although the top rate on individual income remained at 95 percent, it applied only to income above the level of DM250,000 annually. In 1946, by contrast, the Allies had taxed all income above 60,000 reichsmarks (which translated into about DM6,000) at 95 percent. For the median-income German in 1950, with an annual income of a little less than DM2,400, the marginal tax rate was 18 percent. That same person, had he earned the reichsmark equivalent in 1948, would have been in an 85 percent tax bracket.

Drawing on work by Tyler Cowen, I also point out that the Marshall Plan was only a small part of the story.