West Germany not only recovered swiftly: she also regained the German soul, lost in 1866 when Germany became Greater Prussia...
In history, walls have usually been erected to keep out strangers and potential enemies, stop them from entering. This was the purpose of the Great Wall of China, of the fortifications in medieval Europe, and of Trump’s wall in Texas. The only walls to stop people from leaving were usually built around prisons. But this was also the purpose of the infamous Berlin Wall whose construction started on 13 August 1961. In 1949, the free states, Länder, in West Germany, previously in the occupation zones of the United States, the United Kingdom and France, had established the Federal Republic of Germany. In response, the Soviets who occupied the Eastern part, established a satellite state, the German Democratic Republic, GDR, East Germany, and implemented the traditional communist programme of abolishing private property rights to the means of production and trying to control the economy through central planning.
In East Germany, the Soviets installed a puppet government, but in West Germany, two able politicians gained power in democratic elections, the shrewd old conservative Chancellor Konrad Adenauer and his Economics Minister, the committed free-market economist Ludwig Erhard, who had previously led extensive liberalisation in the Western Zone, stabilising the currency and abolishing price controls. Fortunately, the American military governor had not listened to an adviser, his compatriot John Kenneth Galbraith, who had confidently commented: ‘There never has been the slightest possibility of getting German recovery by this wholesale repeal.’ (The German Economy, Foreign Economic Policy for the United States, ed. by Seymor E. Harris. Cambridge MA: Harvard University Press, 1948, p. 95.) Indeed, Erhard’s liberalisation of the economy was the beginning of the astonishing and impressive recovery of West Germany despite massive reparations demanded by the Allies, despite their confiscation of much industrial equipment and of all German patents and despite the resettlement of ten million German speakers who had been expelled from their homes in Central and Eastern Europe. In the 1950s economic growth in West Germany was on average close to 8 per cent a year. ‘The achievement of the Germans in the aftermath of their defeat is beyond praise,’ British historian Noël Annan once remarked.
Erhard enjoyed the support of a tiny, but influential group of economists who had not lost faith in the creative powers of capitalism, Walter Eucken in Germany, Wilhelm Röpke in Switzerland, Luigi Einaudi in Italy, Jacques Rueff in France, Friedrich A. Hayek in the United Kingdom and Frank H. Knight in the United States. Erhard became an active member of the Mont Pelerin Society, an international academy of classical liberal and conservative scholars that Hayek had founded in Switzerland in the spring of 1947. In West Germany the free-market economists prevailed even if internationally the economics profession had fallen under the spell of John Maynard Keynes and become largely interventionist, with the Hungarian-English economist Thomas Balogh (later Lord Balogh) sternly criticising Erhard’s liberal policies, pointing in ‘a final warning to the gains which the Soviet Zone of Germany has been able to record’. (Germany: An Experiment in ‘Planning’ by the ‘Free’ Price Mechanism, Banca Nazionale del Lavoro Quarterly Review, Vol. 3 (1950), pp. 71–102. Footnote on p. 101.)
Not all ordinary people in East Germany were impressed by the arguments presented by Galbraith, Balogh and their ilk. In 1961, at least 2.6 million people had fled from East to West Germany. They preferred to work for themselves rather than for the communist elite. This mass exodus, more than ten per cent of the population, had grave consequences for East Germany, and finally the communists decided to stop it by erecting the Berlin Wall, precisely sixty years ago. The Wall was to become the most poignant symbol of the Cold War which was first and foremost a contest between two ways of life, democracy or dictatorship, freedom or oppression. When I was a Visiting Scholar at the Hoover Institution in the 1980s, I had many conversations with one of the fellows, the American philosopher Sidney Hook. He said to me: ‘The Cold War was not primarily a struggle between two superpowers. It was about rejecting and resisting the Gulag.’ But the comparison between East and West Germany was also like a real-life experiment in economics: the same nation under two different economic systems, socialism and capitalism.
I should add that there is a little-noted asymmetry between socialism and capitalism which is relevant here. It is that socialism is possible under capitalism, whereas capitalism is not, or at least is not meant to be, possible under socialism. In a capitalist society, people are free to establish agrarian or industrial collectives and to share everything in common. But they are not free to force these choices of theirs upon other people. In a socialist society, on the other hand, people are not free to become capitalists, to sell their services or goods on the market, or to start new enterprises and hire others to work for them. In such a society, in Robert Nozick’s ironic phrase, the state has to prohibit capitalist acts between consenting adults. It is this asymmetry which explains the Berlin Wall. When people can vote with their feet, they invariably vote against socialism and for capitalism. This is what happened in East Germany.
Economic freedom is however not enough. Erhard’s liberalisation in the spring of 1948 was a success, but the reason his policies could be maintained was that he had an adroit and resourceful ally in Chancellor Adenauer, even if the two were not personally close. I think Erhard and Adenauer are personalities of great historical significance, each in his own right. The real German miracle was not economic, because the success of liberalisation was, and is, quite predictable despite any grumblings by people like Galbraith and Balogh. The real miracle was political. It was Germany’s stability in the crucial first decade of the Federal Republic. Adenauer became prominent as the President of the German Constituent Assembly which deliberated in the winter of 1948–1949. The result of those deliberations, the German Constitution of 1949, marked the change from a German Reich to a German Bund, to a decentralised political structure with separation of powers and checks and balances. In a remarkable book published in 1945, Die deutsche Frage, Wilhelm Röpke argued that Germany had lost her soul in 1866 when she became in effect Greater Prussia, after the defeat of Habsburg Austria by the Prussians. The old and highly civilised Germany of Gutenberg, Bach, Schiller and Goethe was replaced by Prussia, which was according to a French wit not a country with an army, but an army with a country. The significance of Erhard and Adenauer was that they presided over a Germany which had regained her soul, returned to the principles of free trade, private property, and limited government. What we can learn from them is to seek a world where walls are the exception and bridges are the rule.