Illusions of Decontrol

The founding myth of modern Germany can be traced back to June 20, 1948, when Ludwig Erhard, economic director of the Anglo-American occupation zone in Germany, created the Deutsche Mark. To stabilize the new currency, he paired the paper issue with the removal of price controls. By spring 1949, German production rose from 51 percent to 78 percent of its 1936 level. Over the next eleven years, GDP grew at an annual average of over seven percent. 

In this account, Wirtschaftswunder, the German postwar economic miracle, emerged through a reduction in the quantity of paper money (the old Reichsmark was redeemed at a 10:1 ratio), the freeing of prices, and the unleashing of the power of markets. Erhard himself invoked this parable to describe the incipient business-led boom—words that remain etched in German and European law—the social market economy.

This neoliberal interpretation of postwar German history holds that economic stabilization lies with those who can guarantee market-determined prices. Germany’s ordoliberal tradition is claimed to have built a kinder, gentler neoliberalism, accepting within its boundaries what in America came to be known as the “welfare state.” In political speeches, in teaching materials and newspaper articles, in TV documentaries, and in an ever-growing pile of books, commemorative publications, and specialist essays, this economic constitution is invoked and celebrated. The market-hagiografic documentary Commanding Heights (2002), based on Daniel Yergin and Joseph Stanislaw’s history of the global political economy during the twentieth century, depicts Erhard’s currency reform as the only “gleam of light” in a dark era of planned economies and price controls.¹ To this day, sound money and privately set prices are guiding principles of German economic policy. Where other nations celebrate their revolutions, their Independence Days, and their heroes, Germany celebrates the “social market economy” and the twentieth of June 1948.²

There’s only one problem: the narrative is a myth. Erhard’s price decontrol was a failure, quickly met by revolt from below, which forced the West German state to once again control core prices. It was this politicization of prices—not Erhard’s unleashing of the market—that helped form the institutional basis for the Wirtschaftwunder. If the German market economy was really made social, this wasn’t thanks to the benevolence of enlightened Christian Democrats (CDU). Rather, the so-called “social market economy” was a concession made by the CDU to the popular movements which had forcefully repudiated Erhard’s market fundamentalism and fought for a larger share of West German gains in the years after the war. 

Currency reform

Ludwig Erhard came to office as the “Wirtschaftsdirektor” (later Secretary of Commerce and Federal Minister for Economic Affairs) on March 2, 1948. A champion of the free market, he promoted competition. In his own formulation, the “market as such is social,” meaning that it had no requirement to be further socialized by mechanisms like price controls.³

The introduction of the Deutsche Mark in June 1948 was not a West German invention, as is often contended. Rather, it was conceived and implemented by the Allies. To eliminate the money surplus from World War II, financial assets were devalued by 93.5 percent. Thus, ten Reichsmarks turned into 0.65 D-Mark. Overnight, savers were largely expropriated, while owners of assets such as real estate, companies, or stocks with semi-finished products hardly suffered any losses.

With the new currency in place, Erhard was in a position to pursue a “free market economy.” He exempted major commodities from management and removed important price controls over food and consumer goods. In doing so, he explicitly neglected advice from members of his own administration, Leonhard Miksch in particular. The latter intervened by telephone even on the day before the changes came to work. He urged to refrain from the releases of the “politically and socially sensitive prices” like textiles and shoes.⁴ It was in vain. However, even after June 20, the state continued to regulate rents, energy, and some basic foodstuffs.

With controls removed, prices on basic consumer goods unsurprisingly skyrocketed. They continued to rise in the following weeks. At the same time, the wage freeze from the Third Reich had remained in effect and wasn’t lifted until November 1948, further reducing workers’ purchasing power. On top of that, West Germans were deprived of accessing their cash savings. In response, Erhard rehearsed the usual neoliberal mantra that prices would “level off” or “balance” (“einpendeln”) over time, which did not happen.⁵ In the first twenty days after the currency reform, the prices of shoes, housewares, and vegetables and fruits rose by fifty to two hundred percent, eggs even more. People feared for their basic supplies and denounced the blatant inequalities which came to light. Months went by, and the situation did not improve.⁶

The result was a wave of social and political unrest in the autumn of 1948. Protests took place in almost every city. Market stalls were looted and large-scale consumer boycotts or “strikes” took place across the country. Housewives “socialized” eggs, which were in particularly high demand. The unions became involved, pushing the anti-inflation movement to a new level.

On October 28, 1948, a crowd of 80,000 people took to the streets in Stuttgart during working hours to protest the crisis. German and American police battalions used tear gas, bayonets, and armored vehicles to bring the angry crowd under control. The US-Constabulary, newly trained for riot control, was also deployed. A curfew was imposed. Events culminated on November 12, when a general strike was called—the last to date in Germany. More than nine million people—almost eighty percent of the wage-earning public—stopped work to protest Erhard’s free market.⁷

Political interventions

These events put great pressure on West-German politicians. Ultimately, Erhard and other CDU officials were forced to change policy course. In September, the Bizone government pulled the emergency brake in terms of economic policy. This was followed by a discursive shift some weeks later.

To counter the fatal dynamics of privately determined “free” prices, the government reintroduced controls through the backdoor. Tables of “reasonable” prices were published; fines were introduced for all those that contravened the new decrees.⁸ Moreover, decrees were issued to steer profit margins and target price gouging.

When government price schedules, voluntary exhortations, and even fines failed to stabilize consumer markets, production programs were implemented. The government rolled out a program to refurbish discarded military goods for civilian use. But as these new products flooded the markets, their prices only adjusted to those established by the decontrol fiasco. Only an executive order imposing fixed prices and fixed profit margins reestablished some order.

A proper production program, inspired by the British “Utility Goods” program—previously smeared in Germany as socialist—was implemented with particular success. The Jedermannprogramm (“Everyman Program”), delivered shoes and clothes of standardized quality to customers at predetermined low prices. Administrative distribution of resources—non-price rationing by the government of industrial materials favoring those companies participating—was the lever to enforce entrepreneurial participation.⁹ By the beginning of 1949, more than half of all consumer goods sold across the counter were once again at fixed prices—a victory of the broad social repudiation of Erhard’s free-market policies.¹⁰

The “social market economy”

It was at this same time that the term “social market economy” first appeared in public discourse. Originally used by Erhard in 1949, the term was quickly taken up by his opponents in the Social Democratic Party (SPD) and the trade unions as a slogan to use against the different advocates of the free market economy. Transposed to the language of the left, the idea of a social-market economy came to encapsulate the demand for more socially-oriented economic policy, which in turn was backed by strikes and demonstrations.¹¹

The CDU’s Hermann Pünder then adopted the term. Completely unknown today, Pünder was Erhard’s superior and the highest German official in the Western zones at the time. Pressured by the forthcoming general strike, he claimed in Parliament on November 10, 1948, two days before the national work stoppage, that the government would “not create and operate a free market economy, but only a social market economy”—and had allegedly always done so. An impressing self-deception—or a blatant lie. Pünder afterwards compiled a corresponding brochure titled “Our Social Market Economy” and promoted this new political watchword within the CDU.¹²

 In February 1949, as the CDU began preparations for the first election campaign in the coming Federal Republic, Erhard had little choice but to substitute the term “social market economy” for the free market. But though the language had changed, his convictions had not. Again, his speeches returned to the old mantras: “Only the market economy is social.”¹³

When CDU Chairman and later Chancellor Konrad Adenauer proposed “Planwirtschaft oder Marktwirtschaft” (“planned economy or market economy”) to describe the party’s program in the coming election campaign, Johannes Albers, a representative of the CDU’s workers’ wing, quickly intervened with a “Social!” shoutout. This is why Adenauer proclaimed “social market economy” as the guideline, rather than the adjective-less “market economy.” It was officially decided to focus the election campaign on the striking formula “social market economy or bureaucratic planned economy.”¹⁴

The result was the “Düsseldorf Guidelines,” published on July 15, 1949, which served the CDU as a platform for the campaign for the first federal election in August 1949. The fact that the CDU made the “social market economy” its program cannot be understood, however, without the outcome of the trust in markets, social uprisings, the numerous strikes, and Albers’s heckling.

By June 1949, taking stock of the popular success that the “social market economy” was having across the electorate, Erhard wanted to stake ownership of the idea, claiming that he alone had “coined” the term.¹⁵ It was this version of events that rapidly gained traction, ultimately becoming the authoritative with the 1957 publication of Erhard’s bestseller, Prosperity for All. This myth has now persisted for over six decades.

Today, the “social market economy” is enshrined in the Lisbon Treaty—and thus in the whole of Europe—as a guiding principle (“common provision”) of continental government. The history of its emergence, however, remains obscured, particularly the role of the labor struggles and social movements that repudiated Erhard’s market fundamentalism in a conscious effort to make the economy more social. 

At the seventy-fifth anniversary of Erhard’s monetary reform, it is important to correct the narrative. Rejecting Erhard’s notion of a free market economy, Germany’s last general strike represented a fierce battle with the political order and achieved major concessions that define Germany’s economy today. That the reforms’ catastrophic consequences required the CDU to embark on a policy U-turn demonstrates both the centrality of price setting to economic and political stability and, crucially, the significance of popular protest in securing those measures in the first place.