Post-War Development of the German Economy - Research Paper Example

?The Postwar German Economic Recovery The German economy was drastically affected by the World War II because of a number of reasons. Germany was themost badly affected country and there was a little hope of restoration of its economic strength because the economic assault had begun years before the war and the war only aggravated the already detrimental situation. According to estimates made after the war, 20 percent of all the residential buildings in Germany were destroyed during the war. Various other indices of economic condition of the country also depicted disastrous conditions; the food production levels had fallen to almost half values as compared to the years before the war. There was a little hope of a revival because a considerably large percentage of the German population of working age was dead at the end of the war and at that time Germany was looking at the outside world for all kinds of aids for the restoration of its economy. There is no doubt about the fact that German economy was badly hit by the war, but the years of preparation also contributed to the devastated condition of the economy. Adolf Hitler imposed price controls on German population in 1936 in order to start his preparations for the war and acquire commodities and war materials for the army at the cheapest prices; 3 years later, rationings were also imposed on the German population. Conscription was also imposed on the German population in order to gather up a large military which drastically affected the labor sector and the non-military industries could not find labor to keep their plants running. After Nazis defeat and Hitler’s death, the Allied Control Authority which was formed by the succeeding allied forces under the governments of the United States, Britain, France and the Soviet Union, to run the affairs of government in Germany. The Allied Control Authority retained some of the policies of the Nazi Germany for the restoration of the economy; these policies included rationing, price controls and conscription of all types of resources for ensuring rapid economic recovery (Bidwell). An astonishing fact was the low rise in the cost-of-living index, which was only 31 percent high as compared to the values in 1938. The reason behind this was the fact that price controls had been imposed in Germany for the last 12 years by then. Another important observation in this regard was the fact that the amount of wealth in the German economy was also five to six times higher than the amount in the years before the war. So the main concern about the economy was production levels which had fallen to drastically low values. A wealthy economy in terms of money, price controls intact and low production levels; all these factors pointed towards one major problem _ shortages (Smith). During the war and post war years the Germans were only producing weapons, equipments and materials required for the war; the industrial and agricultural production was very low. During the war years, the main source of food for the Germans was the supplies seized from the occupied countries. Moreover the foreigners were also brought to German lands for farming purposes. This ‘system’ of food production served the German population and the military well during the war years but as soon as the war ended the German rationing system was left with very low supplies of food; incredibly insufficient to fulfill the needs of the German population. The United States Army contributed by dispatching large shipments of food to feed the prisoners of war and the German population, however this was not enough and more aid in terms of food was required for meeting the food demands but the international community was not willing to provide aid to Germany at the time when there were more deserving and innocent people in the world who were also affected drastically by the war. The other factors which contributed were the dissolving of the German Red Cross, whereas the International Red Cross and other international aid agencies were not allowed to work independently in Germany. The shortages of food in the major cities of Germany forced the German citizens to grow their own food; however growing food in cities was never easy therefore many Germans turned towards the countryside for exchanging various commodities for food which encouraged barter trade, a damaging trend for the economy. According to the Yale University economist Henry Wallich: Each day, and particularly in 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 (Wallich). Barter trade started flourishing very rapidly across the US and the British controlled zones of Germany. The main reason behind the development of this trend was the fact that there was almost no industry left in the post war Germany and thus the unemployment levels were so high; people were not receiving any salaries to buy themselves thing with money. The only option left in such a scenario is getting the essentials required for living in exchange of the non-essential possessions a man has, thus the emergence of barter trade in Germany was a natural phenomenon and therefore it could not be avoided. The extent of barter trade was so high that organizations started establishing official set ups for barter trade and a ‘standardization’ could be seen in the barter trade as well. The major disadvantage of barter trade is the fact that once exposed to it and self sufficiency; it is very difficult to bring masses back into an organized system of economy. So the very first problem faced by Allied Control Authority in restoring the economy was the abolishment of barter trade (Mierzejewski). The process of restoring the German economy required the establishment of free markets, abolishment of barter trade to crush monopolies. Cartels which allowed the major industrialists and trade lords to enjoy enormous profits at the expense of public interest were present in the prewar Germany and continued to exist after the war as well; eradication of this trend of price control through cartels was also essential for the restoration of the economy. The task could have been very easy if it was to be carried out in some other country with western ideology; however the German scenario was marked by long years of brain washing which has transformed the German nation into an uncivilized mob with no regard for foreign ideals of culture, society and economy thus establishing a system of economy in Germany different from that of the Nazi setup was very difficult. The first task was to find out people, within the German nation, who believed in the system of economy as proposed by the United States and Britain. There were people in Germany who were advocating a better system of economy even during the time of Hitler. Wilhelm Ropke was among those German economists who stepped forward at that time and suggested possible measures which could be taken in the post war scenario of German economy for restoration. A German economist was in a much better position to propose the right direction for future because he had experienced the conditions which prevailed during the times of Hitler and thus he was aware of the psychic developments of the German population with regards to economic reforms. Thus Ropke’s efforts were deemed as a breakthrough in the process of restoration as he proposed very practical and feasible solutions. Currency reforms were proposed by him is considered as his greatest contribution because he had clearly identified the hindrances in the restoration process. According to him, repressed inflation was the real cause and thus its abolishment was necessary. A two step program was proposed by him; the first step was to lift the price control restrictions which were imposed to lower the prices artificially. Putting an end to price control automatically triggers high levels of inflation; the second step of the program was proposed to deal with this. The second step was to introduce currency reforms in order to stabilize currency which will automatically control inflation. Thus the normal state of German economy could be stored very easily by following a few simple but strategically efficient steps. However the implementation was still difficult because of some political reasons; most noteworthy of which is the influence of Soviet Union and its support the Social Democratic Party which was the biggest opposition to the establishment of market economy (Braun). The strength of the system proposed by Ropke’s was the intellectual starting point selected by him. Bringing out reforms in German economy was no easy job thus Ropke proposed that the reforms should take place in small communities in the beginning because the economic activity in the small communities takes place under the supervision of moral sense. Market economy was the concept put forward by Ropke during Hitler’s times however this time he gave a unique direction to the concept of market economy by introducing the concept of social economy in Germany for the first time and thus he laid enormous stress on the role of local community in this regard. The state is a much bigger entity, independent of certain obligations which can only be imposed through local communities. So the system proposed by Ropke was very simple and practicable; however at the end of the day educating the German nation and increasing awareness in them was required. Ludwig Erhard was another German economist who proposed the same strategy for the revival of the economy. The emergence of two different economic thoughts gave rise to a debate in the stake holders regarding the future of the system of economy in Germany (Streeck). The debate was ultimately won by Wilhelm Ropke and Ludwig Erhard the decision was not totally based on merit; there were certain political motives behind the acceptance of the system proposed by Ropke and Erhard in the western zones of Germany. The proposed system faced the largest opposition from the pro Nazi groups and also communist groups in Germany; both were not acceptable to the United States and other western powers. Therefore Erhard was appointed as the Bavarian minister of finance in 1945 and in 1947 rose to the position of the director of the Bi-zonal Office of the Economic Opportunity, jointly established by Britain and the United States in the zones controlled by them (Mauch and Patel). The decision was politically motivated because the allies did not want the Nazis or communist rising to power in any condition. The first step taken by Erhard was the introduction of currency reforms and on June 20, 1948 he abolished the reichmarks and introduced deutsche mark as the new legal currency. The reason behind this was to control the high amount of money present in the German economy therefore a very small amount of deutsche marks were released initially. The impact was seen in the very beginning, the surplus and artificial wealth which was present in the German economy because of the large amount of currency present in it disappeared immediately and the authorities got control over the amount of wealth present in the economy. In addition to the implementation of currency reforms and introduction of deutsche mark, price control reforms also took place. The German Bi-zonal Council adopted the recommendations given by Erhard and a price control ordinance was introduced to eliminate all sorts of price controls from the market. As expected, the moves disturbed the masses to some extent however the impact on the economy was very useful. The impact of the elimination of price controls was the very first step forward in moving towards a free market economy. Almost all of the industries were greatly affected by the long prevalent price controls and were not able to meet the expenses of production, let alone generating profits. However with the elimination of price controls almost all the manufacturing industries started their production on a greater level because they were now in a position to meet their expenses and generate profits. Same was the case with agriculture as farmers started expecting good return for their crops and therefore they were free to adopt expensive techniques for improving the agriculture yield of their lands. In this way the most important problem of the German economy, the lack of production and shortage of supplies started moving towards a solution. Another suggestion given by Erhard was the abolishment of rationing system and thus the German rationing system was abolished in June of 1948. The objective behind the abolishment of the rationing system was to bring people to work and increase the productivity of the nation. With the introduction of a new currency and the elimination of price controls, opportunities in the German market were greater than ever. At that time the only thing which was barring healthy economic activity from taking place was the laziness of the German nation as a whole who was not contributing to the restoration process. So in order to use the human resource in the best possible manner abolishment of rationing was essential because people were not willing to work harder in the fields and factories because they were receiving the rations and food was not a problem for them. The German economy was not in a condition to give any subsidies or support rationing systems; therefore everyone had to work for earning their bread (Turner). The reforms started producing results and the reasons behind the effectiveness of the reforms were quite evident. With no price controls enforced, a competitive environment was created in which the manufacturers and farmers were more concerned about providing best quality in the cheapest possible price to attract buyers. Abolishment of price controls was also useful as it incentivized the suppliers to sell their products at higher prices and thus they were motivated to increase production. Since the rationing system had been abolished, the government under the bi-zonal council was able to reduce the governmental expenditure considerably and therefore tax reforms were also introduced to decrease the amount of tax levied by considerable amounts. The objective was to relax the general public and urge them to work for their own betterment and also for increasing the productivity of the national economy. The reforms turned out to be very effective in restoring the German economy. The various steps taken by the new authorities contributed greatly towards the restoration process. The currency reforms created a greater sense of value about the currency in the minds of general public and thus the introduction of the new currency forced them to put an end to barter trade. The increase in agricultural production also made food available to everyone. The currency reforms also reduced absenteeism from the industries and agricultural fields because the workers and farmers were now getting a good return for their work. The salaries offered to the workers in the new currency were much better as compared to the past and thus they were now happy to work and contribute towards the economic restoration. These trends drastically improved the industrial and agricultural production; within six months the industrial production had increased by 50 percent. The reforms continued to be effective in the longer run as well and the next 10 years witnessed a fourfold increase in the industrial and agricultural productivity of the Western Germany. Another proof of the success of the reforms introduced by Erhard in comparison of the economic model suggested by communist was the fact that the economic reforms of the Eastern part of the country which was controlled by Soviets failed to produce the desired results and the production levels were not improved at all (Jefferies and Melzer). The success of the economic policies of Erhard earned him the post of Germany’s first minister for economic affairs which witnessed a consistency in policy and thus the economy continued to accelerate under him. The economic restoration and revival in West Germany is very often attributed to the Marshall Plan, however the factual situation reveals that West Germany received lowest amount of aid from the United States under the Marshall Plan. The meager amount of aid received was only a fraction of the annual income of the country and in effect, the amount was being repaid to the allied forces in the form of the cost of their occupation of Germany and the provision of defense (Pommerin). The absence of all sorts of military activities in Germany and a negligible defense budget is also seen as a reason for rapid economic recovery. However the actual reasons behind the miracle that took place in German economy was the introduction of right policies at the right time. The story of postwar restoration of German economy is very simple and the reforms introduced were of very basic nature. Fortunately the economists were able to identify the problems and suggested the right type of policies at that time. Currency reforms and elimination of price controls provided the basis for free market economy and the abolishment of rationing and reduction in taxes contributed towards increasing productivity. Works Cited Bidwell, Percy. Postwar controls of the German economy. N.p.: Council on Foreign Relations, 1944. Print. Braun, Hans-Joachim. The German Economy in the Twentieth Century: The German Reich and the Federal Republic. N.p.: Taylor and Francis, 2010. Print. Jeffries, Ian, and Manfred Melzer. The East German economy. N.p.: Routledge, 1987. Print. Mauch, Christof, and Kiran Patel. The United States and Germany During the Twentieth Century: Competition and Convergence. N.p.: Cambridge University Press, 2010. Print. Mierzejewski, Alfred. The collapse of the German war economy, 1944-1945: Allied air power and the German National Railway. N.p.: UNC Press Books, 1988. Print. Pommerin, Reiner. The American impact on postwar Germany. N.p.: Berghahn Books, 1995. Print. Smith, Owen. The German economy. N.p.: Routledge, 1994. Print. Streeck, Wolfgang. Re-forming capitalism: institutional change in the German political economy. N.p.: Oxford University Press, 2009. Print. Turner, Ian. Reconstruction in post-war Germany: British occupation policy and the Western zones, 1945-55. N.p.: Berg, 1989. Print. Wallich, Henry. Mainsprings of the German revival. N.p.: Greenwood Press, 1976. Print. Read More