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My GMU Econ colleague, the great monetary theorist and historian Larry White, has this splendid op-ed in today’s Wall Street Journal. In it, Larry explains that the post-WWII “German economic miracle” resulted from economic liberalization – and that Germany’s economy slowed down when that liberalization was reversed. Here’s the heart of Larry’s essay:
Germany’s new Social Democratic Party wanted to continue the controls and rationing, and some American advisers agreed, particularly John Kenneth Galbraith. Galbraith, an official of the U.S. State Department overseeing economic policy for occupied Germany and Japan, had been the U.S. price-control czar from 1941-1943; he completely dismissed the idea of reviving the German economy through decontrol.
Fortunately for ordinary Germans, Erhard"”who became director of the economic administration for the U.K.-U.S. occupation Bizone in April 1948"”thought otherwise. A currency reform that he helped to design was slated to replace the feeble old Reichsmark with the new Deutsche mark in all three Western zones on June 20. Without approval from the Allied military command, Erhard used the occasion to issue a sweeping decree abolishing most of the price controls and rationing directives. He later told friends that the American commander, Gen. Lucius Clay, phoned him when he heard about the decree and said: “Professor Erhard, my advisers tell me that you are making a big mistake.” Erhard replied, “So my advisers also tell me.”
It was not a big mistake. In the following weeks Erhard removed most of the Bizone’s remaining price controls, wage controls, allocation edicts and rationing directives. The effects of decontrol were dramatic.
The shortages ended, black markets disappeared, and Germany’s recovery began. Buying and selling with Deutsche marks replaced barter. Observers remarked that almost overnight the factories began to belch smoke, delivery trucks crowded the streets, and the noise of construction crews clattered throughout the cities.
The remarkable success of the reforms made them irreversible. A few months later the French zone followed suit. The Allied authorities went on to lower tax rates substantially.
Between June and December of 1948, industrial production in the three Western zones increased by an astounding 50%. In May 1949 the three zones were merged to form the Federal Republic of Germany, commonly called West Germany, while East Germany remained under Soviet domination as the German Democratic Republic.
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{ 22 comments }
1 erp617 September 8, 2010 at 12:49 pmGee, just because freedom works on every level doesn’t mean we shouldn’t try to “improve” it by regulating and controlling it. s/off
2 CR September 8, 2010 at 1:07 pmI think the German economy did remarkably well recently recovering from the financial crisis. This might be the case because there is still significant high-quality manufacturing industry left in Germany. These products seem to be in increasing demand now.
3 Captain Profit September 8, 2010 at 1:10 pm“factories began to belch smoke, delivery trucks crowded the streets, and the noise of construction crews clattered throughout”
I can hear the rebuttals now, “See?! See the damage deregulation causes!”
4 jjoxman September 8, 2010 at 1:35 pmIf manufacturing is the path to recovery, why didn’t the U.S. do well in recovering from the crisis?
5 Anonymous September 8, 2010 at 2:02 pm“The American people have too much freedom.” Bill Clinton
6 Earl September 8, 2010 at 2:22 pmI can’t wait to see how the socialist magpies spin this.
7 Anonymous September 8, 2010 at 2:37 pm“…my advisers tell me that you are making a big mistake.”
Was Brutus one of those advisers?
8 Anonymous September 8, 2010 at 2:56 pmGiven Earl’s comment above, I’m not sure if people expected this (or if Don or Larry intended this) to be controversial or not. I don’t think it is – this is the explanation I’ve always heard. It’s the explanation that the liberal Barry Eichengreen provides in his recent history of post-war Europe. I think you’ll find more disagreement on why growth stalled in the 1970s, but I don’t think there’s any controversy around the source of the Wirtschaftswunder.
9 jjoxman September 8, 2010 at 3:01 pmI’ve always thought of this as the standard explanation to economists and economic historians. I get the feeling Don posted this essay here because it is quite splendid, but also because price fixing continues in a variety of industries and it’s important for non-economists to understand just how crippling price fixing can be.
10 Sam Grove September 8, 2010 at 3:41 pmThe folly of price controls: set too low, shortages; set too high, demand drops, black markets; set just right, superfluous.
11 Anonymous September 8, 2010 at 4:09 pmIsn’t it obvious that when government economic controls are removed or reduced consumers have less choice and higher prices and crime skyrockets?
12 Otto September 8, 2010 at 4:56 pmMagpies – perfect.
13 DG Lesvic September 8, 2010 at 5:06 pmThat’s all well and good, but I’m afraid that the furthest reaching free market reform of all wouldn’t get much aid and comfort from Larry White, for the last time I could get him to discuss it, he still believed in the now completely discredited notion that taking from the rich to give to the poor reduced inequality. So, even if he approved of the effort to get rid of income redistribution by means of progressive taxation, it couldn’t really get much aid and comfort from him. But he’s hardly alone in that. It is the failure of the whole Austrian School, too busy lighting candles to its past to ever move ahead.
14 DG Lesvic September 8, 2010 at 5:20 pmAnother thing about Larry White, that “great monetary theorist,” isn’t he one of the Keynesian Austrians, along with that other “great monetary theorist,” George Selgin, and perhaps Hayek, too, but contrary to Mises, who believe in “monetary stabilization?”
But, aside from those faults, which are no small matters, Larry White is still one of the greatest economists and teachers around, was a great teacher to me, personally, and I am eternally grateful to him for it. For, I love anyone who can teach me anything, unlike most in the Austrian School, who seem to hate anyone who can do so, and especially the professionals, most of whom would rather see an atom bomb fall from the sky than a new idea and a socialist dictator than an amateur teaching them their business.
15 DG Lesvic September 8, 2010 at 5:26 pmAnd, while I’m at it, I need to thank Russ and Don for permitting such comments. They would certainly not be permitted at most of the other major Austrian School blogs, certainly not at ThinkMarkets, Coordination Problem, nor Mises Economics blogs.
16 Dave September 8, 2010 at 6:28 pmA good rule of thumb is “do the opposite of what any Galbraith suggests.”
17 Pingry September 8, 2010 at 9:19 pm“Splendid?”
Did he take this from the Commanding Heights? Yergin and Stanislaw were splendid, and they weren’t Austrian cranks either.
–Pingry
18 Anonymous September 8, 2010 at 10:19 pm“Too many economists focus on growth without regard to the real cost.” – I agree.
“Real economic progress does not stem from environmental degradation” – Depends on what you mean by degradation. Any given process humans implement are subject to scarcity and generally require transforming some portion of resources from the environment. Unfortunately, no one can have their cake and eat it too.
19 Emil September 8, 2010 at 10:26 pm{ 22 comments }
Gee, just because freedom works on every level doesn’t mean we shouldn’t try to “improve” it by regulating and controlling it. s/off
I think the German economy did remarkably well recently recovering from the financial crisis. This might be the case because there is still significant high-quality manufacturing industry left in Germany. These products seem to be in increasing demand now.
“factories began to belch smoke, delivery trucks crowded the streets, and the noise of construction crews clattered throughout”
I can hear the rebuttals now, “See?! See the damage deregulation causes!”
If manufacturing is the path to recovery, why didn’t the U.S. do well in recovering from the crisis?
“The American people have too much freedom.” Bill Clinton
I can’t wait to see how the socialist magpies spin this.
“…my advisers tell me that you are making a big mistake.”
Was Brutus one of those advisers?
Given Earl’s comment above, I’m not sure if people expected this (or if Don or Larry intended this) to be controversial or not. I don’t think it is – this is the explanation I’ve always heard. It’s the explanation that the liberal Barry Eichengreen provides in his recent history of post-war Europe. I think you’ll find more disagreement on why growth stalled in the 1970s, but I don’t think there’s any controversy around the source of the Wirtschaftswunder.
I’ve always thought of this as the standard explanation to economists and economic historians. I get the feeling Don posted this essay here because it is quite splendid, but also because price fixing continues in a variety of industries and it’s important for non-economists to understand just how crippling price fixing can be.
The folly of price controls: set too low, shortages; set too high, demand drops, black markets; set just right, superfluous.
Isn’t it obvious that when government economic controls are removed or reduced consumers have less choice and higher prices and crime skyrockets?
Magpies – perfect.
That’s all well and good, but I’m afraid that the furthest reaching free market reform of all wouldn’t get much aid and comfort from Larry White, for the last time I could get him to discuss it, he still believed in the now completely discredited notion that taking from the rich to give to the poor reduced inequality. So, even if he approved of the effort to get rid of income redistribution by means of progressive taxation, it couldn’t really get much aid and comfort from him. But he’s hardly alone in that. It is the failure of the whole Austrian School, too busy lighting candles to its past to ever move ahead.
Another thing about Larry White, that “great monetary theorist,” isn’t he one of the Keynesian Austrians, along with that other “great monetary theorist,” George Selgin, and perhaps Hayek, too, but contrary to Mises, who believe in “monetary stabilization?”
But, aside from those faults, which are no small matters, Larry White is still one of the greatest economists and teachers around, was a great teacher to me, personally, and I am eternally grateful to him for it. For, I love anyone who can teach me anything, unlike most in the Austrian School, who seem to hate anyone who can do so, and especially the professionals, most of whom would rather see an atom bomb fall from the sky than a new idea and a socialist dictator than an amateur teaching them their business.
And, while I’m at it, I need to thank Russ and Don for permitting such comments. They would certainly not be permitted at most of the other major Austrian School blogs, certainly not at ThinkMarkets, Coordination Problem, nor Mises Economics blogs.
A good rule of thumb is “do the opposite of what any Galbraith suggests.”
“Splendid?”
Did he take this from the Commanding Heights? Yergin and Stanislaw were splendid, and they weren’t Austrian cranks either.
–Pingry
“Too many economists focus on growth without regard to the real cost.” – I agree.
“Real economic progress does not stem from environmental degradation” – Depends on what you mean by degradation. Any given process humans implement are subject to scarcity and generally require transforming some portion of resources from the environment. Unfortunately, no one can have their cake and eat it too.
Ah yes, for of course those countries without free markets tend to have both wealthier, healthier people AND less pollution
There is no such thing as a market failure — just people who don’t like what the market decided.
Pingry says…“Austrian cranks either.”
Pingry had to insert that word Austrian in there for a post that had nothing to do with anything Austrian. Any one doubt the obsession of this Bernanke fanboy? BTW, everyone remember that Pingry is here for respectful debate, not for name calling.
Well, it was also partially fuelled by low interest rates. Which is why it crashed during the 1970s (like everybody else).
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