Chapter II. Problem No. 1: Germany

IN ANY economic survey of Europe, however brief, it is most profitable to begin with Germany. Germany has become the economic cancer spot of Europe. It has been producing a pitiable fraction of its pre-war industrial output. Steel production in the British and American zones, which reached 17,800,000 tons in 1938, has been cut down in 1947 to a bare 2,800,000. To support their own economies, the Allies have tried to encourage at least the production of coal. But the bi-zone in Western Germany, even according to the optimistic estimates of the sixteen European nations reporting on the Marshall plan, will produce only 133,000,000 tons of coal and lignite in 1947 compared with 206,000,000 in 1938. As the Ruhr, second only to Britain, was the greatest pre-war source of Europe’s coal supply, the result of this output shrinkage has been to slow down the whole economy of Europe.

The industrial paralysis deliberately imposed on Germany by Allied policy has forced Great Britain and the United States to pay the Germans “reverse reparations.” America has had to pour in foodstuffs to check starvation and disease.

All the countries surrounding Germany—Switzerland, France, Belgium, Holland, Denmark, Sweden—whose economies were closely tied in with hers, have suffered through the German collapse. And not merely because of a coal shortage. Holland, to cite but a single illustration, has suffered both as exporter and importer. Its ports of Rotterdam and Amsterdam, which served not only Holland itself, but the great hinterland of which Germany was the most important part, are largely idle because they no longer serve that hinterland. Dutch vegetable growers find their principal market cut off. On the side of supply, half the machines in Holland are of German make. But spare parts for them cannot under present conditions be obtained from Germany. The result is that when a single part is broken or worn out a whole machine becomes idle. The absence of a machine may in turn slow down a whole factory.

The first key to the revival of Europe, and to the reduction of the strain on the resources of the United States, is the economic revival of Germany.

It is grimly ironic that many of the same people who now tell us that we must pour our money and goods into Europe because European revival is essential to our own, are the very people who have been the most insistent on the policies that make and keep Germany an economic vacuum. For the great obstacle to German recovery today is not the destruction and dislocations of the war, huge as these were. It is the carving up of Germany and the present policies imposed on her by the Allied occupation forces.

The worst situation is undoubtedly in the Russian zone. Under the Potsdam agreement, the Eastern zone of Germany, which grew the foodstuffs on which the Western zones depended, has been cut off by the iron curtain. From behind that curtain we catch only brief and obscure glimpses of the Russian looting, collectivization and terror which have disorganized production in that area and prevented it from either helping or being helped by the industrial output of the Western sections.

Something will undoubtedly be accomplished by the economic merger of the British and American zones. In both zones, however, the socialist and restrictionist policies imposed have reduced and disorganized production to an appalling extent. Even as recently revised, the “level of industry” plan, which prevents various trades from turning out more than a small percentage of their pre-war output, not only destroys incentives, but imposes an arbitrary and impossible relationship of one industry to another, so that not even the low permitted levels of industry can be attained. As the London Economist has put it: “What is planned is actually a series of bottlenecks.”

No less demoralizing is the combination of a chaotic currency with legal prices and wages ridiculously below what a free market could bring. Add to this an untold number of economic prohibitions, and the requirement of a special license for almost every economic act, and it is hardly surprising that incentives should be non-existent, that labor and materials should be misdirected, that nothing should be synchronized with anything else, and that production should be utterly demoralized.

As John Davenport, after a visit to Germany, pointed out in the July 1947 issue of Fortune, German currency increased from six billion reichsmarks before the rearmament program to about sixty billion after the war, plus an unknown amount—perhaps ten billion or more—turned out by the Russians with plates dutifully supplied by the United States on Lend-lease. Yet despite this multifold increase in the currency, official German prices and wages have been held about where Hitler stopped them in 1936. As Mr. Davenport comments: “The results are precisely what would be expected—a black market, which is now the real market. . . . The farmer certainly has no incentive to produce more food for sale. Better live as well as he can, better hoard as much as he can, and better avoid money like the plague.”

Mr. Davenport presents an illuminating quotation from Dr. Walter Eucken, professor of economics at Freiburg University and heir to the German liberal tradition. Here are some excerpts:

“Germany today is suffering acutely from an overdose of planning. The Nazis laid the basis for German economic planning—for armaments and warfare. To our surprise the Allies left things largely as they were. Prices stayed under official control. . . .

“Barter has developed. Especially on weekends, people are pouring into the countryside—on foot, on bicycles, by train. They are looking for potatoes—now traded potato by potato—for wheat, rye, fruit and vegetables. And what do they offer? Household goods such as linen and furniture, or shoes and watches, or work—repairing wells, windows, and roofs for the farmer. They are rewarded, often for a whole day’s labor, with a few pounds of potatoes, half a pound of grain, a small basket of cherries. What one trader could easily ship by train at little cost, thousands now produce by strenuous and wasteful exertion. . . .

“Here we have a modern industrial country, closely packed with a dense population. This country is now evolving an economic structure as primitive as it may have been at the time of Charlemagne. . . . Meanwhile central planning boards continue to issue their inadequate directives.”

As Wilhelm Röpke writes in the September 6 issue of the British magazine Time and Tide: “Nothing would suit the Russians better than a decision by the Western Allies which would perpetuate the present economic paralysis of their zones in Germany. . . . It is not a very enlightened policy to stare anxiously into the enormous shell-hole which still goes under the name of Germany while beyond this hole another gang is experimenting with the same sort of explosives which, a short while ago, blew up Germany and a large part of Europe. . . . [Germany’s] role has passed eastwards, and it is only political inertia not to recognize this.”

In brief, in using unintelligent means to prevent Germany from again becoming a menace to the world, we have made it a burden to the world. Fortunately, thoughtful and thorough studies of the German economic problem are at last beginning to appear. Rather than expand further upon that problem here, I refer the reader who is interested to the recent studies by Wilhelm Röpke (“The Solution of the German Problem”), by Lewis H. Brown (“A Report on Germany”), by Gustav Stolper, Herbert Hoover, and others.

In restoring the productivity of Europe it is only common sense to begin with the sector that is most demoralized and over which we have most control.