Germany’s no-deal Brexit of 1948Thu 2:40 pm Europe/London, 4 Feb 2021
Every day that ticks by, the question gains a little more urgency:
Sure, we’ve left the EU. But now what?
Well, we’re not completely in the dark about what happens next.
As usual, history can give us some idea of what could be in store.
Did you know that the Germans were once ruled by British unelected bureaucrats, who ruined their economy with stupid regulations?
Until the Germans staged their own no-deal exit, thanks to the bravery of one man on a Sunday radio programme. At first they called him mad. Then they told him it was illegal. Then they tried to stop him.
But it was too late. The no-deal exit happened anyway. And, as a result, the German economy left Britain’s for dead. They even called Germany “an economic miracle”.
Today, I’d like to tell you the story of Germany’s no-deal exit of 1948. And explain what it means for post-Brexit Britain’s future.
You’ll be left asking yourself a simple question: is Boris Johnson Mr Fatty Wirtschaftswunder?
But, before we get to that, let’s start at the beginning…
Brexit by radio broadcast
After the war, the German economy was in ruins. Reichsmark banknotes were worthless. People survived thanks to the black market. American cigarettes were the currency for small transactions. Cognac for large transactions. Nylon stockings for in between.
Growing up, my German grandmother would eat my apple cores because of the waste-not-want-not attitude she learned from back then.
The Allied occupation government was led by the American military governor general Lucius Clay. But he didn’t do a very good job when it came to economic policy.
In November 1945, Clay agreed to keep Hitler’s price controls and rationing in place. He also continued the Nazi conscription of resources, including labour. It was the ultimate centrally planned economy, with government directing all economic activity.
The British representatives in the military government supported this position. And even implemented much of the same bad economic policy back home. My English grandparents remember it well. Excessive regulation and control of the economy. Just like the EU today, only worse.
But not everyone agreed.
Economist Ludwig Erhard had refused to join the Nazi Association of University Teachers during the war – a career-ending move. Instead, he published a manuscript advocating a free market economy in 1942. His co-author was interned by the Nazis for it.
But Erhard didn’t just talk the free market talk. He walked the walk.
After the war, the Allies became aware of his manuscript and its anti-Nazi nature. And so they “asked” him to become their economic adviser for Bavaria. Which he reluctantly agreed to.
He soon became Bavarian finance minister and the head of the Office of Economic Opportunity. His anti-Nazi credentials made him popular with the Allied elite, compared to other German leaders with questionable wartime backgrounds.
As part of the Office of Economic Opportunity, Erhard became a close adviser to General Clay. He eventually convinced the general to undergo currency reform. They replaced the worthless reichsmark with the deutschmark.
But Erhard wasn’t finished. What he did next is shocking and legendary in Germany. Think of it as a no-deal exit from the Allied military government.
Here’s how Erhard himself recalled what he did, in a TV interview 25 years later, as translated by me:
I knew exactly what the currency reform would bring. Also its consequences. But it could only work if we simultaneously enacted a decisive economic reform, from a completely centrally planned economy to one as free as possible.
But that had, because of its very nature, to include abolishing all rationing, price controls, economic controls and more. But the perception of this was, in people’s heads at that time, so unthinkable that it was only possible with a brave breakthrough.
In other words, the German economy had to be freed from the interventionism and regulation of the foreign bureaucrats at the time.
Now economic policy and bravery rarely go together. But Erhard was special:
The Frankfurt Economic Council gave me a series of broad executive powers in the expectation that we didn’t know exactly what the currency reform would bring and, in the case of chaos, someone would have to react quickly.
At the time, as the director for policy in the economy, I had secretly and quietly in my desk drawers accumulated the documents needed to repeal all price controls by simple decree.
I scattered all the inclinations and suspicions of my staff as to whether I would ever use them. They said, “For God’s sake, you’re not actually considering doing it, are you?” And I told them, “No, no, it’s just in case…”
And of course I could never have told the [Allied] military bureaucracy. They would’ve had even less understanding for my plans, and I would’ve had even less influence with them.
And then, on the Sunday of the currency reform, I announced it all [on the radio], in the correct assumption that, on a Sunday, no government bureaucrats are capable of work. And thereby it was done.
Erhard’s surprise radio announcement abolished the Nazi government price controls, and many other economic regulations, which the Allied occupation government had kept in place.
It was a shock move. He had no legal authority to do so. He just hopped on the radio and did it, of his own volition, in complete violation of the Allied military government in Germany.
It’s as if Dominic Cummins were to abolish the common agricultural policy and common fisheries policy on Twitter.
Making his move on a Sunday bought Erhard some time – why he chose that day of the week. But there would be hell to pay come Monday. Erhard recalls the meeting that morning, which made him even more famous than his surprise radio performance.
The next Monday, at an early hour, I was brought before the military government. I was told that what I had done was impossible and unimaginable. That it was forbidden and all of it would have to be reimposed. That I had broken all sorts of Allied military laws.
When I asked which laws I had broken, “I’d like to hear them precisely”, they read to me that, without consent from the military government, no changes to price controls could be made.
And I replied, “but I didn’t change them, I abolished them”.
That snarky response is what made Erhard so legendary in Germany. His defiance against the excessive regulations imposed by a foreign unelected government which were ruining Germany’s economy.
But General Clay took some convincing when it came to Erhard’s economic policy coup. Journalist Edwin Hartrich described what General Clay asked his friend Erhard that day: “Herr Erhard, my advisers tell me what you have done is a terrible mistake. What do you say to that?”
Ludwig replied “Herr General, pay no attention to them! My advisers tell me the same thing.”
The Brexit parallels are obvious. Erhard’s point was that it was precisely the experts who centrally planned the German economy into a mess who were also against the free market reforms…
The journalist Hartrich also wrote about how a US Army colonel followed up later with another stinging rebuke:
“How dare you relax our rationing system, when there is a widespread food shortage?”
Ludwig answered, “But, Herr Oberst. I have not relaxed rationing; I have abolished it! Henceforth, the only rationing ticket the people will need will be the deutschemark. And they will work hard to get these deutschemarks, just wait and see.”
Don’t the warnings about food shortages sound familiar?
What happened next earned Erhard the nickname Herr Wirtschaftswunder – Mr Economic Miracle. His other nickname was “der Dicke”, meaning “the Fatty”. Which is why I call him Mr Fatty Wirtschaftswunder.
After Erhard’s reforms, the German economy was suddenly freed from the controls and regulations the foreign and unelected government had imposed. They created what’s still known today as an economic miracle – Wirtschaftswunder.
Supposedly, Erhard’s timing was key. By the time the Allies got around to discussing how to reverse the liberalisation of the economy from excessive regulation, the effects were simply too strong to ignore. Author and historian Henry Wallich wrote, “The spirit of the country changed overnight. The gray, hungry, dead-looking figures wandering about the streets in their everlasting search for food came to life”.
Shops literally filled overnight as the black market came clean. The new money was worth enough to actually sell things for, instead of having to barter, which made transactions more efficient. And the market prices allowed supply and demand to balance. Profit became possible, encouraging production too.
Of course, abolishing price controls and currency reform were just the beginning. An economist at the Federal Reserve Bank of New York wrote that between June and August, “directive followed directive removing price, allocation, and rationing regulations.”
David Henderson, author of The German Economic Miracle wrote that Erhard’s motto could have been: “Don’t just sit there; undo something.” Erhard freed all the staples of life and manufactured goods from absurd EU like controls. I wonder if Britain will have the same bonfire of regulations after Brexit.
My favourite twist is that a lot of the remaining controls were simply no longer enforced. If you’ll recall, that’s what some UK politicians threated to do over Brexit too.
So, what happened to the German economy?
In three months, absenteeism at work halved from as high as nine and a half hours per week – time Germans had spent foraging or looking for the right person to barter with. Industrial production increased by more than 50%. Ten years later it had quadrupled and was three times as high on a per capita basis. A productivity and employment boom, in other words.
Six million new jobs were created between 1950 and 1960, sending the unemployment rate from 10.3% to 1.2%. That’s even lower than Britain’s unemployment rate in the years after the Brexit referendum!
West Germany’s economic boom took place while East Germany’s economy stagnated under central planning and socialism. Even today, East Germany hasn’t caught up. In fact, Germany’s economy quickly became bigger than Britain’s. My English grandparents always said, not in a spiteful way, that Germany won the war, in that sense. But they never ate my apple cores…
Being like Germany wasn’t a winning political strategy in Britain (at the time), so Britain’s much more interventionist governments continued to ruin their economy with central planning and regulation – the sort of thing the EU does now. The free market stayed out of fashion in Britain for a few more decades, even as it proved itself in West Germany.
It took a long time for Britain to discover Erhard’s intellectual inspiration, FA Hayek. In fact, the Allies banned his book The Road to Serfdom in Germany. But eventually Margaret Thatcher carried around one of Hayek’s books too, reportedly thumping the book on a table and declaring “this is what we believe”.
Erhard went on to become the first German minister of economic affairs and even became the German chancellor (like our prime minister). He wasn’t very good at the latter though. Which isn’t a surprise given how he dealt with the unelected foreign bureaucrats ruling his country in 1948. Not to mention his pro-American views clashing with the emerging attempts to create the EU at the time.
In fact, General de Gaulle criticised the Erhard government’s alignment with Washington and its refusal to align with France and create an independent European policy. Erhard wanted a Europe of cooperating nation states instead of a supranational structure like the EU. His opponent Walther Hallstein won the argument and even became the first president of the European Commission. Hallstein’s Nazi ties were later exposed, but let’s not go there…
The Wirtschaftswunder of 1948 was extraordinary. And I think the parallels to Brexit Britain are very strong. At least they should and could be. I can’t wait to find a German complaining about Brexit and point them out…
But what does all this mean for you?
I’m telling you about all this because we should be optimistic about Britain’s future. Brexit could be Britain’s very own Wirtschaftswunder. Breaking free from overzealous, over-regulating, foreign, undemocratic rule of our economy.
Which would make Boris Johnson our very own Mr Fatty Wirtschaftswunder.
But is he?
Is Boris Johnson Mr Fatty Wirtschaftswunder? Let us know what you think by emailing firstname.lastname@example.org.
I don’t know whether Boris will manage to unleash an economic miracle in Britain. And I doubt I could convince you to change your mind either way. He’s certainly slimmed down a little though…
But here is what I do know.
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Editor, Fortune & Freedom
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