How Germany’s post-war economic revival set it on course for liberal leadership

Hitler has dozens of English language biographies, Konrad Adenauer, Germany’s first post-war chancellor just a couple. Himmler, Goring or Speer have all been the subjects of multiple books. Ludwig Erhard, West Germany’s economic affairs minister from 1949 to 1963 – the man credited as the architect of the Wirtschaftswunder, the country’s post-war economic miracle – has a solitary English biography. 

But the story of how Germany, West Germany initially, climbed out from the rubble and ruins of the curtailed Thousand Year Reich is not only an extraordinary story on its own terms, but one that weighs heavily on our age.

It is a story about how a faith in democracy and a deep mistrust of ideology and narrow nationalism, steered a country away from crisis and rebuilt politics as something practical and pragmatic.

It created a nation whose polity is built on faith in the market, but not at the expense of social justice, and faith in social justice, but not at the expense of the market.

You can still see these qualities in Angela Merkel’s pragmatic, rational, moralistic chancellorship. They are the same qualities that shaped the German polity as it came into existence in the aftermath of the collapse of fascism.

Which means, of course, that this story begins with Hitler.

By January 1945 it was inevitable that Germany was going to lose the war, but the tactics which the Nazis adopted in the last few months of the Reich achieved nothing but the intensification of that defeat.

In one final outpouring of psychotic will, Hitler turned defeat into something apocalyptic. Some 450,000 German soldiers died in the first month of 1945 alone. By the time of surrender, three quarters of Cologne was in ruins, as was half of Hamburg, and the centres of Berlin, Dresden and Munich. The towns of Moers, Wesel and Jülich were almost destroyed.

In 1900, Dûren, one of Germany’s wealthiest towns, had a population of 27,000. By the end of the war, it was  practically zero. In his book On the Natural History of Destruction (1999), the German writer WG Sebald tells us that in 1945 “There were 31.1 cubic metres of rubble for everyone in Cologne”. In Dresden, that figure was 42.8 cubic metres. 

This pointless last stand of the Nazis, all those ruins and all that death, acted as a line in time, a line as stark as a border. It was a line where the physicality of existence had a clear before and after. 

You can still see the last remnants of that line in the preserved shattered remains of the Kaiser Wilhelm Church on the Kurfürstendamm in Berlin, and in the remains of the Nikolaikirche in Hamburg. But the line also exists psychologically within Germany’s idea of itself.

Germany is a country where the presence and absence of borders and walls sit heavily and that temporal wall between Hitler’s apocalyptic last stand, and the day after, a line made of ruins and corpses is as real as brick, mortar and barbed wire.

And it is on this side of that line in time where the phenomena of the Trümmerfrauen enters this story. These were the women (literally, ‘rubble women’) employed to clear the debris that lay across the country.

Their status has been much mythologised, especially in East Germany where statues were built in their honour, but the Trümmerfrauen were held up as a symbol of the German people’s desire to get on. 

The truth is that only a small percentage of women did this work, about 5% of the female population in Berlin and about 0.3% in the British sector. And the majority of them were not plucky volunteers motivated by a belief in Germany’s future.

For doing the work you got extra rations, and items discovered in the rubble could be sold on the black market, which was almost the only market that functioned – cigarettes were better currency than the Reichsmark.

And the Trümmerfrauen also found old clothing which was fashioned into dresses, known as Lumpenkleider (‘rag dresses’). These garments, which were not as bad as they sound (German women who lived through economic depressions and war had become good at improvising) were a way of dressing up to attract occupying troops.

Having a GI or a British Tommy on your side was a method of survival in those desperate circumstances. And so was prostitution. Amongst the ruins, sex was also currency.

The rubble was cleared away and piled up into Schuttberg (‘debris mountains’). You can still see these Schuttbergs throughout Germany. They are strange, isolated hills, often found in otherwise flat landscapes, or parks on the edge of cities. Some, like the one in Munich’s Olympia Park, have become recreational areas.

Perhaps more than anything else, these Schuttbergs are a symbol of that immediate post-war period, places that seem unnatural in the landscape, like barrows in an English field.

They are sites where the past – and memory of it – have been buried and made anodyne.  

So what did come next, once the line was drawn and the past buried? 

The plan was that the Allies would decide what Germany’s future would be, and these occupying powers were not that interested in remaking it as a functioning, productive state.

In the west of the country, the US-led strategy was based on de-Nazification, justice, and trying to create economic stability. There was also a policy for creating democratic intuitions, but only at a local and regional level.

The Soviets had their own strategy for their sector: a revanchist occupation, a suppression of freedom and ultimately a paranoid, thuggish, dictatorial rule.

The disagreements between the tripartite western occupied zones and the Soviet-controlled east, which were initially over currency reform, marked the start of the Cold War.

But, amid the geopolitics, and against all expectations, something else was happening within Germany. Among the ruins and shattered population, a new German polity was coming into being, one that put its faith in democracy, compromise and the market. It was also a polity that was deeply suspicious of ideology and had a strong adherence to morality.

And this was not just the birth of modern Germany; it was also the birth of centrist politics in Europe.

This German Ordoliberalism, as it is called, was an antecedent to the neoliberalism that took hold in the 1980s. But it was also the antecedent to the Third Way politics of Clinton, Blair and Brown and that period of relative peace, relative stability and relative economic growth that millions enjoyed (and millions seem to have forgotten about). 

So how did Ordoliberalism, this neoliberalism with a social conscience, come into being? To answer that we must now turn to the man considered to be the architect of the Wirtschaftwunder, Ludwig Erhard.

Both Hitler and Erhard ended the First World War in hospital. For Hitler, this was a heavily self-mythologised moment, his stab-in-the-back moment, the well-spring of his vengeful, hateful world view.

Erhard’s injuries were worse than Hitler’s. His leg and arm suffered permanent damage, and he couldn’t return to his pre-war profession in textiles. But his response was not to swear revenge on the world.

In September 1919, Hitler attended a lecture in a beer hall in Munich. Frustrated by what he heard, he spoke, and in doing so he convinced a couple of others that his opinions were worth listening to. This was the birth of the Nazi Party. Three months later, Erhard attended a lecture about economics at a business college in Nuremberg. The subject gripped him, so he enrolled on a course in accountancy.

Erhard was a plodder. He plodded his way through a subject which required a good grasp of mathematics and mastery over detail, two qualities that never came naturally to him.

But, while Hitler was organising a failed putsch, going to jail and dictating a book full of his hateful, preposterous theories on racial identity, Erhard gradually mastered his subject.

He did well enough that he was given special permission to study for a degree without having his Abitur.

An easy-going, tolerant member of the German lower middle classes, Erhard did not look much like an outsider. Yet he was entirely at odds with the country in which he lived. His understanding of economics was idiosyncratic. This plump little man, with his disarming smile and slightly shambolic ways, drew just about the opposite conclusions to practically everyone else regarding economics.

One of the fundamental political divides of the 20th century was that between those who believed the market should set prices and wages, and those who thought it was the role of the state to do so.

The debate became a pressing one after the First World War, where the civilisation that had grown out of the principles of free trade faced a moral collapse. Then, during the Depression, as markets collapsed,it stopped being an academic debate. It became urgent issue.

Capitalism already faced a rival in Marxism, but the English economist John Maynard Keynes had created a second alternative to the free market which was, crudely, that the state had to govern the market.

Keynesianism dominated the middle third of the last century. From Roosevelt’s New Deal to Attlee’s administration, state intervention was used to stimulate growth with huge capital projects. The Nazis had done the same. Whatever the morality of their regime, in terms of economic policy, theirs was an orthodox approach. 

But Keynsianism had a few critics, and Erhard was one of them. The main criticism was a belief that state intervention could only work in extremis. There is an argument that Roosevelt’s New Deal only really saved the US economy once it moved onto a war footing. In Germany, this shift to militarism was more explicit. The autobahns may have seemed like the new future, but it was the production of Tiger tanks and Heinkel bombers that got the Germany economy working (as well as a debt-disguising mass issuing of bonds).

In both countries it was war that gave the real stimulus for the Keynesian counter-cyclical investment – and war is not a great advert for an approach to economics.

But there was also a second criticism, a subtle argument that the market is a natural social phenomenon, whereas the state is not. The market makes itself up as it goes along, based on genuine needs and desires, whereas the state is an attempt to impose order on society artificially.

Friedrich Hayek, the great theorist of the modern free market, in his book The Road To Serfdom, would argue that the moral failings of the Nazis were concomitant with this statist economic intervention and that all such intervention, including by the Attlee government, came with the potential for the same degradations. This is quite a claim – the Nazis built death camps, Attlee built the NHS – but that didn’t stop Hayek’s ideas shaping Thatcherism and Reaganomics.

But you don’t have to be a free market flagbearer to see why this anti-statist belief in the free market might have some traction among a few outliers within Nazi Germany. And Erhard was not quite the lone free marketer. A group of economists based at Freiburg university also argued that it should be the market, not the state, that set economic policy.

This group, lead by Franz Böhm and Walter Eucken, became one of the few points of intellectual resistance to the Nazis within Germany. These Freiburg circles conceived of a post-Nazi free market Germany. But this wasn’t just an intellectual exercise. Activists associated with these circles were involved in the plots to assassinate Hitler, and some were executed. Eucken and Bohm both survived the war, Bohm only surviving because of a muddle over a name.

But while members of the Freiburger Schule played their dangerous games, Erhard just plodded on and somehow continued his work without too much fuss from the Nazi government.

Then, because Erhard was an economist with a Nazi-free past, he was able to work immediately after the war as an economic consultant, first in Fürth, his hometown, and then for the state of Bavaria. 

In the winter of 1948, the Allies appointed him as head of the Sonderstelle Geld und Kredit (‘Special Office for Money and Credit’) a body which would help prepare for currency reform. This was Erhard’s moment. Allied price and wage controls were largely meaningless – cigarettes and brandy had become more reliable forms of currency than the Reichsmark.

So the Allies, for all sorts of reasons, including as a geopolitical snub to the Soviets, replaced the Reichsmark with the Deutschmark. This new currency was like pressing a reset button; it cleared West Germany’s debts. 

But Erhard went further. Unbeknownst to the occupying powers, Erhard went on the radio and announced that price controls would be removed. General Lucius Clay, the US military governor of Germany, was shocked and told Erhard that his advisors had told him that this was a bad idea. Erhard replied, “my advisors say the same”. It wasn’t long before the German economy began to grow at a spectacular rate. 

For neo-liberals, this is one of their greatest triumphs. Believers in the free market cite this Erhardian moment as proof that their worldview is correct. But this is over-stating quite what Erhard achieved. Firstly, the clearing of the debt, the Marshall Plan and Cold War realpolitik all helped the German economy. But even on its own terms, this free market moment was never what it seemed.

Erhard’s staunch belief in the free market was never that staunch. He believed that the market should set prices and wages, but then, out of pure pragmatism, he would compromise on those core beliefs. This free marketer believed that the state had to be a guarantor of how the market operated. And it was this compromise that brought him in line with those other Germans who were attempting to rebuild a post-Nazi West German polity.

A new political class was formed in Germany almost immediately after the war. These men were either members of the socialist SPD (Sozialdemokratische Partei Deutschlands) or were the conservatives that would form the CDU (Christlich Demokratische Union Deutschlands) and the CSU (Christlich-Soziale Union in Bayern) parties. The SPD had the advantage of being demonstrably anti-Nazi. Many had spent the war in exile or had been imprisoned by the Nazis. They believed, with no little arrogance, that their unblemished records all but guaranteed a socialist German future. But they were wrong.

The socialists had the disadvantage of being associated with the instability of the Weimar years. Many Germans felt that the infighting between the SPD and the communist KPD in the 1920s had been a factor in allowing the Nazis to take power. In other words, the SPD was seen as being ideological; in 1945, in Germany, people were worn thin by ideology.

More interesting were the CDU and its Bavarian sister party, the CSU. They were formed spontaneously in the weeks after the war. The founders were often people who had resisted the Nazis not because of left/right political objections but on moral grounds. This explains the inclusion of ‘Christian’ in both names; these were parties that wanted to shape a new Germany around the basic tenets of Christian morality. Again, after the Nazis, even an atheist could sympathise with many of these fundamental Christian moral principles. The CDU/CSU were parties built upon arguments for a country whose values were based on the sanctity of human life, common decency and tolerance. These parties came into existence as the counterpoint to the moral and physical wasteland that the Nazis had left.

The CDU/CSU were conservative parties that tended to lean towards the centre. They were believers in the market. They were not hostile to forms of social justice. They were suspicious of ideology (in one of his most famous election slogans Adeneur, the first leader of the CDU, used the slogan Keine Experimente! (‘No experiments!’). Perhaps the greatest example of the CDU not caring about ideological purity was Erhard, who, when he became West Germany’s second chancellor in 1963, led the CDU, despite not being a member of the party.

Many criticisms can be made of the CDU/CSU in the decades following the war. Adenauer was a ruthless careerist; Erhard was notoriously slapdash. Both parties were lackadaisical in allowing former Nazis into their ranks and both, especially the CSU, acted as if the vast, seismic catastrophe that had ruined Germany – and wrecked the idea of civilisation – never really happened. Bavaria in the 1950s was all schläger, lederhosen and pathological denial.

But what was created in Germany in the late 1940s, from among the ruins, became the basis of a democratic society that has become the model of what a democratic society should be. 

Twenty years ago, liberal democracy had seemingly defeated almost all that had stood to replace it over the last, terrible murderous, century. And, as the new millennium started, the two democracies that seemed most triumphant were the two that had taken the lead in defeating fascism, and which had then outlived democracy’s greatest ideological antitheses, Soviet communism: the US, with its principled, rigid, federalist faith in the people, and the UK, with its own informal and improvised faith in the demos – both left the 20th century in some sort of triumph. 

Looking back on it, that triumphant phase can be seen as so much hubris. In the UK, populism – that suffocating mess of opinion mongers, explainers, chancers and spivs – has, at times, made government teeter on the edge of being unworkable. In the US, having a narcissist in the White House has, at times, seen the country teeter over that edge. Two decades on from what felt like a brilliant future, and populism has reduced so many of the achievements of liberal democracy to rubble, leaving little more than the shell of decency and the mimicking of agency. Both countries no longer seem lodestars in the face of the global challenges posed by Putin’s spiteful, disruptive paranoia or China’s tyranny.

But if the city on the hill is currently a Westminster or Washington slum, liberal democracy does still have a champion. It has Germany.

Germany isn’t immune to the scourge of populism. The far-right AfD has managed to get a foothold, despite Germany’s polity being easily the best it has ever had and despite Germany being the best it has ever been. Yet populism has not managed to make a ruin of the country’s politics.

The nation isn’t perfect, no democracy ever is – which is sort of the point of democracy, it’s a process, never a fixed point – but Germany’s deep mistrust of ideology and of narrow nationalism has produced a politics as something practical and pragmatic.

Germany has had other advantages which have acted to stabilise its polity. It hasn’t had to disentangle itself from the legacy of empire. It never had to assume the role of world leader, it’s never really had to have much of a foreign policy. The reunification of 1990, which triggered a wave of optimism in Germany, came at the very moment that the USA, the UK and France were facing a new world order as well as experiencing a bit of a hangover from the 1980s. Not surprisingly, for a country that had reached the depths of despair in 1945, Germany has spent the decades since then not really having to deal with declinism like the Brits and the Americans.

It has never really had to prop up a failing industrial sector in quite the same way as the UK and the USA had to in the 1970s, in part because the German industrial sector had been decimated in the 1940s and could therefore be rebuilt from scratch. Just compare the 1970s image of striking Leyland workers outside ageing buildings in Longbridge with the shiny new BMW and Mercedes works in Munich and Stuttgart. 

But all these factors are premised on what really was a miracle – that somehow, against all expectations, Germany managed to create a stable polity, based on sound economic
practice, from amongst the ruins of its cities. This provides anyone who despises populism with a version of liberal democracy that is better than its critics. It also shows how liberal democracy will always be the best way of dealing with a crisis.