Adrian Lee is a Solicitor-Advocate in London, specialising in criminal defence. He served as a London Borough Councillor for 20 years and was twice a Conservative Parliamentary Candidate. Between 1994 and 1995, he served as Chairman of the National Young Conservatives.
On Tuesday 30 June 2020, amidst fear of economic collapse in the wake of the lockdown, the Prime Minister made a speech evoking the memory of Franklin Roosevelt and signalling his own willingness for government to intervene in the economy and launch their own “New Deal” to stimulate growth.
The message from Boris Johnson was that desperate times required drastic measures. Fair enough, but maybe we should consider the example of Germany in the immediate post-war years before we leap into a Keynesian spending spree?
At the end of the Second World War the German economic structure lay in ruins. It is hard today to contemplate the physical destruction caused by ground fighting, aerial bombing, population displacement, genocide, and Nazi demolitions of vital infrastructure. Millions of people had seen their homes destroyed and malnutrition and disease were starting to spread throughout the country.
Yet within a decade the newly created Federal Republic of Germany had started to enjoy a prosperity that would last until the present. One person was principally responsible for this turnaround: Ludwig Erhard.
Erhard was born on 4 February 1897 in the town of Furth, adjacent to Nuremberg. His father, originally of peasant stock, owned a small clothing shop which he had started himself in 1888 and had married the daughter of a glassblower. At the age of three, Erhard suffered an infantile paralysis that left him with a deformity of the right foot that led him to having to wear orthopaedic shoes for the rest of his life. He was at best a mediocre primary school pupil and when it came to him moving on to secondary education he was sent to a vocational school.
By attending this school, he was automatically excluded from going on to university, as vocational schools did not offer the Abitur certificate required to enter higher education. Therefore, faced with few other options, in 1913 Erhard embarked on an apprenticeship at a textile firm in Nuremberg.
Despite having doubts about the Great War, he volunteered for military service in 1916 and became a gun-aimer in the 22nd Royal Bavarian Artillery Regiment. Unfortunately, his military career came to a sudden end on 28th, September 1918 at Ypres when he was struck by fragments of an Allied shell. He stayed in hospital until the Spring of 1919 and endured seven operations on his left arm and leg which resulted in the arm being shortened and his left leg permanently weakened.
Returning home to Furth in 1919, few would have laid odds on the success of this plump, disabled man with few qualifications. However his life was about to take a significant turn. Fed up working in his father’s shop, Erhard signed up for a course in business administration at a local college and all at once, found his vocation with the study of economics.
He received his diploma in March 1922 and was eager to undertake postgraduate studies, but once again there was a snag. The local college did not have the right to award formal degrees, so it took considerable lobbying by his tutor to have his star student accepted by the University of Frankfurt. In Erhard’s case an exception was made, and he was awarded his Masters degree in 1924. For the next decade Erhard worked as a researcher for a trade association in Nuremberg whilst studying for his Phd.
By the time that he had completed his doctoral thesis Hitler had come to power and, as Phd holders were allowed to take up academic posts, a precondition for graduation was membership of the Nazi Party. Erhard had no intention of joining the Nazis and so withdrew his thesis from consideration. Remarkably, throughout the period of the Third Reich, Erhard managed to keep his distance from the regime and continued working for bodies like the Consumer Research Company and his own Institute for Industrial Research.
Erhard believed that the key to Germany’s economic success lay in the re-direction of industry into the production of consumer goods. What he proposed was a significant break with Germany’s past, which until 1945 relied mainly on the heavy industries of iron, coal, steel, and chemical production. Erhard rejected fashionable criticism of materialism and argued that the purpose of economic activity was the satisfaction of consumer desires:
“Our economy serves the consumer, he alone is the standard and judge of economic activity”, as he put it. Economic goods helped to free people from mundane tasks so that they could pursue more lofty aims.
Erhard rejected Keynesian solutions and declared that currency stability should be accepted as a basic human right. He favoured balanced budgets and argued that only if tax revenues were available should the state spend money.
Another priority for Erhard was home ownership: “Property makes you free”, he declared in 1961. However, he wanted property to be attained through saving and not by receiving it as a grant from the state. In time, Erhard envisaged a society with wide share ownership in order to entrench acceptance of the free market. He rejected the concept of distributive justice as a society “…where everyone has his hand in the pocket of everyone else.”
In 1945 Erhard was swimming against the tide of economic thought. Britain had just elected the Attlee Government, committed to nationalisation, and the United States was still in thrall to the New Deal.
In Germany, the revived Social Democrats (SPD) had plans to collectivise the whole economy and institute a system of state planning. Their leader, Kurt Schumacher, spoke openly of the abolition of capitalism and the establishment of a socialist state. The opposition Christian Democrats (CDU) fell under the influence of a group of Christian socialists who lobbied the party to “curb capitalism” and to end the “traditional bourgeois society”. Indeed, as late as February 1947, Konrad Adenauer’s Ahlen Programme for the CDU stated: “The capitalist economic system does not correspond to the state and social needs of the German people.”
Erhard’s success seems to stem from the support that he received from US General Lucius D Clay, Head of the Office of Military Government in the American. occupation zone. Legend has it that Erhard turned up at their offices on the second day of American occupation to offer his services. Clay appointed him Minister of Economics of Bavaria and later Chairman of the Special Office for Money in Credit.
Throughout this period Erhard suffered immense political turbulence, which was not helped by his refusal to join any political party. The SPD opposed his policies on ideological grounds, whilst the Allies were still debating the merits of de-industrialising Germany. At one point, Erhard had to literally beg the Americans not to liquidate and dismantle BMW. However, he laboured on, putting the region back into working order and re-focusing industry on production of consumer goods, and on 2 March 1948 Erhard was elected Director of Administration for Economics for the whole western Allied zone. In this position he persuaded the Allies to implement currency reform by introducing the Deutschmark and allowing an end to rationing of consumer goods.
Eventually, with his policies starting to bear fruit, the CDU adopted Erhard’s policy of the “Social Market Economy”.
Erhard argued that the Social Market Economy differed from traditional laissez-faire in as much as it required a strong central state to act as umpire to prevent cartels and ensure the endurance of competitive markets. When questioned by Friedrich Hayek about the inclusion of the word “social”, Erhard explained:
“I hope you don’t misunderstand me when I speak of a social market economy. I mean that the market as such is social, not that it needs to be made social… The freer the economy, the more social it is.”
He would serve as German Minister of Economics for a total of 14 years and went on to serve as second Chancellor of the Federal Republic. In that time, he would argue with his adopted party, the CDU, on many issues, notably the European Community. Erhard was suspicious of creating European institutions, which he believed would lead to more planning and bureaucratic interference. He feared that a single economic or fiscal policy for Europe would inevitably fail and opposed tariffs against non-Community members.
Erhard died in 1977 and, therefore, sadly did not live to witness the 1980s, the era when his views gained wider acceptance under the Anglo-American alliance of Margaret Thatcher and Ronald Reagan. Yet we should remember how he harnessed the free market to lay the foundations of post-War Germany’s enduring economic strength, and his methods should be re-examined by Conservatives unconvinced by the long-term benefits of Keynesianism.