Economy 1945-55

• Immediate post-war period:

  • German currency = worthless
  • Food was rationed and most people survived on less that 1500 calories per day
• Deutschmark:

  Due to the Reichsmark becoming worthless, the new currency, the Deutschmark, was introduced on the 20th June 1948 in smaller quantities:

  • Private citizens could initially exchange RM60 to DM40
  • Wages were converted DM1 to RM1
  • Other assets less generous - savings were converted RM100 to DM6.5
  • Debts to the value of RM400 billion were wiped out
• The authorities gave large deposits of Deutschmarks to banks to loan to businesses to develop production, which was successful. After the currency reform, industrial output increased by 50%, largely as a result of this willingness to invest and produce goods.
• Also on the 20th June 1948, Ludwig Erhard, director of economics of Bizonia, announced the abolition of price controls and relaxation of rationing. He believed that if prices found their own levels, producers would have more incentive to produce and farmers would send their food to markets, so food would return to markets. This worked. So, even though prices rose, Germans could buy good with their new Deutschmarks. The black market also disappeared.
• Tax reform/tax reduction:

  In 1950, the rate for those on average incomes of DM2400 fell to 18%, when it had been as high as 85% in 1948. The highest tax rate for those on incomes of more than DM250000 remained at 95%. In 1946, however, this had also applied to those on an income of RM60000 (DM6000) or above. This was to stimulate the economy as people had more money to spend.
• Impact:

  These reforms helped kickstart the economy. Absenteeism from work was radically reduced from 9.5hrs a week to less than 2hrs. This was because people no longer had to spend time queuing, bartering and journeying to find food. This also meant more productivity, causing the index of industrial production to rise significantly. In 1950 alone, the growth rate of industrial production was 25%, while unemployment fell from 10.3% in 1950 to 1.2% by the end of the decade. Between 1949 and 1955, salaries also rose 80%.
• Social Market Economy:

  The social market economy was a 'middle way' between a completely free and unregulated market and a state-controlled socialist economy. Businesses were allowed to develop independently and set their own prices and wages, while the state monitored the economy, ensured fair competition and intervened to protect the more vulnerable members of society through effective measures of social welfare. It seemed to work as by 1958, industrial production had quadrupled since the first half of 1948.
• The extent of economy recovery can be seen by:

  • the reduction of unemployment (11% in 1950, 1.3% in 1960)
  • the percentage of private savings to income, indicating citizens had surplus income (3.2% in 1950, 9% in 1960)
• The economy was characterised by:

  • rapidly declining unemployment
  • rising exports
  • rising real incomes after 1952
  • growing consumer confidence, leading to further demand
  • growing investment
  • emergence of new industrial centres (e.g. VW plant at Wolfsburg)
  • growing profits in established German firms (e.g. Krupp and Thyssen)
• The reasons for growth were as a result of government policies of intervention, such as:

  • work creation schemes
  • the Investment Aid Law of 1952 - provided government subsidy of DM3.2 billion to facilitate industrial investment
  • a rapid rebuilding programme
  • reducing Germany's protective tariffs (through the ECSC/EEC)
  • laws to prevent the development of economic monopolies, such as the 1957 Anti-Trust Law
  • strong banking controls - in 1957, the central bank, Deutsche Bundesbank was created with the authority over monetary policy (could raise interest rates and control the circulation of money)
• Other factors contributing to growth included:

  • a growing world economy
  • limited defence spending - more finances were available for investment
  • economic foundations - Germany had good sea ports, an abundance of raw materials and an educated and skilled workforce - they could easily recover. New factories could also be built with modern equipment and designs
  • the Korean War 1950-53 - led to a rise in demand for German exports, such as industrial goods and motor vehicles - boosted production and created more jobs
• Other factors contributing to growth included:

  • the Marshall Plan - totalled $1.5 billion in the period 1948-52, helped to buy equipment and rebuild/modernise - also led to growing confidence in the FRG's economy
  • co-determination - after large scale strikes in 1951 in coal and iron production, co-determination was introduced - allowed workers to elect representatives (often from their trade unions) to participate in the management of the business - led to good working relationship between the management and workers and also resulted in very low levels of strikes
• Trade and Exports:

  Trade became a priority. German industrial goods, such as machinery, vehicles and electrical equipment had a long reputation for quality and value. A trade deficit of DM3 billion had moved into profit by 1952.
• Investment:

  As confidence in the economy grew, investors were increasingly prepared to take risks. This helped tax concessions, which gave many businesses the financial capacity to invest in new designs and products.