Wirtschaftswunder - West Germany

West Germany

The fundamental reason for the quick economic recovery of West Germany can be found in the neoclassical growth model. West Germany had a skilled workforce and a high technological level in 1946, but its capital stock had largely been destroyed during and after the war. This small capital stock as well as production conversion back to civilian goods, monetary and regulatory problems led to an unusually low economic output during the first post-war years.

These initial problems were overcome by the time of the currency reform of 1948 which replaced the Reichsmark with the Deutsche Mark as legal tender, halting rampant inflation. This act to strengthen the German economy had been explicitly forbidden during the two years that JCS 1067 was in effect. JCS 1067 had directed the U.S. forces of occupation in Germany to "take no steps looking toward the economic rehabilitation of Germany".

The Allied dismantling of the West German coal and steel industries decided at the Potsdam Conference was virtually completed by 1950; equipment had then been removed from 706 manufacturing plants in the west and steel production capacity had been reduced by 6,700,000 tons. Although the industrially important Saarland with its rich coal fields was returned to West Germany in 1957, it remained economically integrated in a customs union with France until 1959 and France extracted coal from the area until 1981.

West Germany proceeded quickly after 1948 to rebuild its capital stock and thus to increase its economic output at stunning rates. The very high capital investment rate thanks to low consumption and a very small need for replacement capital investments (due to the still small capital stock) drove this recovery during the 1950s. Living standards also rose steadily, with the purchasing power of wages increasing by 73% from 1950 to 1960. As noted by the British journalist Terence Prittie in the early Sixties,

“Today the German working-man leads a comfortable life and wears a well-filled waistcoat. He eats well, and his food - although German cooking lacks the elegance of French – is wholesome and appetizing. He buys good clothes, and he dresses his wife and children well. He generally has money to spare for television sets, week-end excursions and football matches. And he is not afraid of celebrating occasionally on a grander scale.”

Productivity growth in West Germany enabled most workers to obtain significant improvements in their living standards and ‘security of life.’ In addition, as noted by David Eversley, “As real incomes rose, so public authorities were enabled (and indeed encouraged) to raise funds, both from taxation and through borrowing, to accelerate the rate of investment and current spending in projects which are partly immediately productive, partly conducive to the creation of the good life, as seen in Germany....Any superficial examination of the German townscape, let alone perusal of the statistics, shows that Germany has spent sums on hospitals, libraries, theatres, schools, parks, railway-stations, socially-aided housing, underground railways, airports, museums, and so on which are simply not to be compared with British efforts in this direction.”