Ten-Year Miracle

November 10, 1958

BONN—The economic history of present-day Germany begins on a single day—June 21, 1948. This was the day of what is usually described as “the currency reform.” On that day two things happened—the old currency was abolished and a new currency substituted; and price controls (with the exception of rent controls) were abolished overnight. The very next business day, goods appeared in the shops, and enterprise began to spurt forward.

In most discussion, both in Germany and the outside world, it is “the currency reform,” rather than the abolition of price control, that gets the chief credit for the resulting economic “miracle.” But an analysis of the facts does not seem to support this conclusion. It is said that the old currency had become “worthless”—but it was “worthless” only because nobody would sell anything at the ridiculously unrealistic controlled prices. It was this that drove the Germans into a primitive barter economy. This is not to belittle the importance of the currency reform, with its insurance of a relatively stable value; but, as France and Italy have proved, with relative freedom from absurd price controls, a nation’s economy can function even after a huge inflation and with a currency unit with a value of a fraction of an American cent.

INCREDIBLE PROGRESS

After ten years the German economic miracle continues, and the most impressive evidence is in the incredible amount and quality of new building. Practically all the leading cities suffered terrific destruction in the second world war, ranging from 60 to 90 percent. Taking the country as a whole, it is estimated that before the war the number of dwelling houses (or dwelling “units”) was 11.5 million. Of these about 2,250,000 were totally destroyed and 2.5 million so damaged as to become uninhabitable, making a total effective destruction of some 4,750,000. The proportional damage to office buildings and factories was presumably much worse, because of the concentration of bombing in the center of big industrial cities. Yet one can stand at many points of Bonn, Cologne, Düsseldorf, and Frankfurt and see nothing but new buildings, nearly all looking modern, substantial, even luxurious. Since 1950 Germany has built new dwelling units at an annual rate of 540,000. If this rate is continued, the housing target of the government will be achieved by 1962 or 1963.

The Germans themselves attribute their economic miracle, in the recent words of Karl Blessing, president of the Bundesbank (Germany’s central bank), to their trust “in a free-market economy and in private initiative.” And this explanation is correct. But it is necessary to add that the German economy, like the Swiss, is only relatively, not absolutely, a free-market and private-initiative economy.

PERSISTENT PROBLEM

Take housing, for example. A large percentage of it, renting for certain maximum rents, has been built with the help of state subsidies. Like all subsidized housing, in England, France, or at home, it can usually be quickly recognized by its regimented or barracks-like quality. For new non-subsidized housing or office buildings, there is no rent control, but rent control is still kept on old housing, which explains why it is so seldom renovated or adequately repaired.

In spite of the incredible economic renaissance of Germany, and its success in maintaining, with Switzerland, one of the two hardest currencies in Europe, it has not wholly escaped from the problems and dangers of inflation. Since 1951 the consumer price index has risen from 108 to 119, though it has been steady since January. The inflationary pressure comes from three sources. Wages, particularly in the building industry, have been pushing upward. The favorable balance of trade has led to the domestic money supply increasing more than the domestic supply of goods. And there are heavy and increasing drains on the budget. As one example, social-security payments now go up automatically with a rising wage index.

The political problem of inflation in Germany, in short, is not unlike that in the United States; and our present election results are likely to make our own inflationary pressures greater rather than less.