AS THEY RANG IN THE NEW YEAR, citizens of 12 European nations traded in their currencies for the Euro. By March 2002, the non-negotiable Peseta, Lira, and Franc will be mere relics for antiquarians to collect—like Confederate money.
I, for one, will mourn the passing of the European currency that played a crucial role in erasing Nazi policies and resisting the spread of Communism—the Deutschmark.
Freezing Skeleton Cities
I heard from my father, who served under Patton in post-war Germany, how freezing civilians scrabbled to steal coal at night from a dump he guarded with an empty rifle; how ANYTHING could be bought from desperate Germans for cigarettes or nylons—then the barter currency; how whole sections of cities lay open to the sky like skeletons.
Today, Germans live better than Americans. They have longer vacations, higher pay, and more job security; their gravest national crisis stems from the low birth rate—which some say necessitates a mass influx of immigrants, with all the instability that may cause. Today’s extremist Green Party (appallingly, part of the government) was born in the tumults of 1968, when West German youth rebelled against the successful materialism of their parents—the very men and women who’d begged for coal and cigarettes from 18-year-old American boys.
What let the Germans rebuild so much, so quickly? Free markets, sound money—and the incredible political courage of the leader who made them possible, Ludwig Erhard.
Nazi Policies Survived the War
In 1946, Germany was still divided into four Occupation Zones—one Soviet, one British, one American, one French. In the Soviet Zone, Stalin had already begun constructing a totalitarian state, which he hoped to extend through all of Germany. Soviet-dominated Communist parties fared well in France and Italy; Western Europe was within a hairsbreadth of falling to Stalin without a shot.
The cities of Germany had been devastated by air-raids, the male population decimated in Hitler’s aggressions, and dozens of factories dismantled and shipped to Russia. Worst of all, Germany was still subjected to Nazi economics. For 12 years, Hitler had printed money freely, flooding the economy with Reichsmarks in order to build his war machine. He’d avoided a 1920s-style inflation by resorting to authoritarian wage and price controls, enforced by the Gestapo.
The Allies, led by socialists and New Dealers, made no plans to dismantle these controls; rationing continued for several years after the war in Britain, creating an economic mess that Orwell immortalized in 1984 (a playful inversion of the date when he wrote it, 1948).
Starvation in the Land of Goethe
In Germany, these controls caused a state of slow starvation, according to historian Aidan Crawley:
"By the spring of 1947, the Allied occupation was heading for a disaster of such proportions that it threatened to destroy not only the Germans, but the other nations of western Europe as well; for if Germany became depopulated its neighbours would inevitably be dragged down to a pastoral existence. The deterioration had been going on for more than a year. In February, 1946, the meagre ration in the British zone had been reduced to... two slices of bread, with perhaps a smear of margarine, a spoonful of porridge and two not very large potatoes.
"Mr. John Hynd, the British Minister responsible for Germany, said in a speech at Sheffield that it was ‘a matter of days whether twenty-three million people were going to starve in the streets.’" (The Rise of Western Germany, p. 60).
In fact, at least 100,000 Germans were stricken with hunger and related illnesses. Ludwig Erhard would later write:
"It was calculated that for every German there would be one plate every five years; a pair of shoes every twelve years; a suit every fifty years; that only every fifth infant would lie in its own napkins; and that only every third German would have a chance of being buried in his own coffin." (Prosperity Through Competition, p. 10.)
The German economy was actually in worse shape during the postwar peace than it had been when Dresden was firebombed.
Free-market economist Wilhelm Röpke bemoaned the fact that, although the entire world had been repulsed by the racial doctrines and military expansionism of the Third Reich, its economic policies were still implicitly being emulated:
"[T]he Allies are continuing the Nazi tradition, even to the point of using the whole jargon of their economic policy.... Under the alluring name of ‘full employment’ the Third Reich began a policy that subsequently destroyed step by step the economic order of free markets, until finally there emerged a collectivist order that in its essentials was not very different from the Russian. ... [E]verywhere socialists, planners, and champions of ‘economic control,’ whether they realize it or not, are still drawing on the Nazi model." (A Solution to the German Problem, p. 237).
The result in postwar Germany was a complete collapse of production and a reversion to a primitive, pre-medieval barter economy. Billions of meaningless Reichsmarks circulated, which theoretically could be used to purchase the strictly rationed goods at fixed low prices. In reality, few merchants were willing to accept this currency; most of their best produce stayed "under the counter," to be traded only for the cigarettes, nylons, and chocolates obtained from Allied soldiers. The fixed wages earned by typical Germans were hardly worth the wear and tear on a worker’s shoes and clothes.
But the Russians foiled all attempts by the Allies at establishing a healthy currency. The Soviets insisted that if a new currency were to be introduced in Germany, they must also have the plates to print it. This would have given Joseph Stalin the power to impose mass inflation upon Germany at will.
Germans Seize Freedom
The free-market economist Ludwig Erhard had spent World War II in utter obscurity, working for a cigarette company. Brilliant, energetic, and untainted by Nazi connections, he was the American choice in 1947 to head the German committee appointed to work on a currency reform. After months of wrangling, he won the committee over to endorsing a "shock-treatment"— a swift, sudden currency reform, combined with abolition of most wage and price controls.
Meanwhile, the Soviets were gradually sealing off access to West Berlin. The time had come to act. Stealthily, the Anglo-American military governors printed up a supply of the new "Deutschmarks" and slipped them into Germany in late 1947. The Anglo-Americans had no notion of abolishing price, wage, and exchange controls—indeed, that idea was repugnant to the British. The young John Kenneth Galbraith warned of utter disaster if prices were freed— echoing most establishment economists.
But Erhard was determined to dismantle the Nazi controls, so he acted boldly. As he would write later:
It was strictly laid down by the British and American authorities that permission had to be obtained before any definite price changes could be made. The Allies never seemed to have thought it possible that someone could have the idea, not to alter price controls, but simply to remove them. To assume such courage in a German so soon after the end of the war did not fit into the administration’s way of thinking just after an overwhelming victory. (Prosperity Through Competition, p. 14.)
On June 21, 1948, the currency reform took place:
"Overnight everyone’s money became worth only one tenth what it had been the day before. This applied to bank and other savings deposits as well as loans and mortgages, for obviously debts had to be scaled down at the same rate as the money with which they could be repaid. So that people with little money should not find themselves destitute, a minor exception was made with regard to cash. Everyone could exchange forty of their old [R]eichsmarks for forty of the new [D]eutschmarks and two months later another twenty marks at the one for one ratio. ... Businesses were allowed sixty [D]eutschmarks for each employee on the same one for one terms. State, local and public authorities were given an allowance equal to one month’s income. The rest of their funds, however invested, were cancelled outright." (Crawley, p. 157).
Erhard also took action to dismantle the rest of the hated command economy, by abolishing most wage and price controls. Erhard acted as if his plan had already received full approval and endorsement by the Allied authorities—a brilliant bluff that worked.
Erhard’s gamble amounted to blowing up a dam: The blocked productive capacities of the West German economy were able to flow freely again, to find their natural courses, once the crude irrigation system of controls and mandates had been cleared away. The wild flux would be guided by the price system once again and channeled only by the rigors of a strictly guarded money supply. Harsh measures—with brilliant results, as historians Dennis Bark and David Gress relate:
"The day following... euphoria engulfed most Germans at the sight of goods and food items they could only dream about in the past. Bakeries miraculously produced and displayed delicious cakes; vegetables, butter and eggs appeared in abundance. Items that had obviously been hoarded secretly and had been available on the black market only, suddenly appeared in display windows." (A History of Western Germany, p. 205).
Productivity leapt up by 30 percent in the following three months—six times its increase a year before. West Germany would become once more the engine of prosperity for the Continent. Nor was the recovery a momentary spasm—as we have seen in all too many post-totalitarian societies (principally Russia in the 1990s), which lack the fiscal discipline, rule of law, and ethical frameworks which make a market economy feasible.
After 12 years of revolutionary nihilism, and in the face of an expanding Communist empire, Germans were ready to reconsider the merits of older social programs—such as humane liberalism illumined by Christian social teaching. This pan-European movement for restoration of European civilization came to be called Christian Democracy. The success of the German economic recovery gave such freedom-loving Europeans the credibility they needed to win in postwar elections in Italy and France, and build up NATO as a bulwark for freedom.
None of that would have been possible, but for the creation of a solid currency, with free prices for a free people. So while Eurocrats hail the arrival of their new currency, I’ll take a moment to raise a little toast to a vanishing specie: Deutschmark, leb’ wohl!