page_title: Wirtschaftswunder
section_title: West Germany
hierarchical_section_title: Wirtschaftswunder / West Germany
context_page_description: The term Wirtschaftswunder, also known as the Miracle on the Rhine, describes the rapid reconstruction and development of the economies of West Germany and Austria after World War II. The expression referring to this phenomenon was first used by The Times in 1950.
  Beginning with the replacement of the Reichsmark with the Deutsche Mark in 1948 as legal tender, a lasting era of low inflation and rapid industrial growth was overseen by the government led by West German Chancellor Konrad Adenauer and his Minister of Economics, Ludwig Erhard, who went down in history as the "father of the German economic miracle." In Austria, efficient labor practices led to a similar period of economic growth.
  The era of economic growth raised West Germany and Austria from total wartime devastation to developed nations in modern Europe. At the founding of the European Common Market in 1957 West Germany's economic growth stood in contrast to the struggling conditions at the time in the United Kingdom.
context_section_description: The fundamental reason for the quick economic recovery of West Germany can be found in the ordoliberal 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 was compounded by the difficulty in converting the German economy to the production of civilian goods, as well as rampant monetary and regulatory problems, leading 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 West 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 West Germany to "take no steps looking toward the economic rehabilitation of Germany".
  At the same time, the government, following Erhard's advice, cut taxes sharply on moderate incomes. Walter Heller, a young economist with the U.S. occupation forces who was later to become chairman of President Kennedy's Council of Economic Advisers, wrote in 1949 that to "remove the repressive effect of extremely high rates, Military Government Law No. 64 cut a wide swath across the German tax system at the time of the currency reform." Individual income tax rates, in particular, fell dramatically. Previously the tax rate on any income over 6,000 Deutschmark had been 95 percent. After tax reform, this 95 percent rate applied only to annual incomes above 250,000 Deutschmark. For the West German with an annual income of about 2,400 Deutschmark in 1950, the marginal tax rate fell from 85 percent to 18 percent.
  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, theaters, 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 direc
caption: German refugees from the east in Berlin in 1945
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