Economy - Post-1945 Economy (Bizonia and FRG)

Question 1

Why has it been suggested that an ‘economic miracle’ took place in Germany between 1951 and 1960?

Answer 1

It has been suggested that an ‘economic miracle’ took place in Germany between 1951 and 1960 because, within this period:
- Real economic growth averaged 8% per year
- Inflation was kept low at an average of 1.1%
- Unemployment fell from 11% in 1950 to just 1.3% in 1960

Question 2

Why was Germany’s industrial recovery not necessarily so miraculous?

Answer 2

German industry had not been devastated by war as its cities had. In May 1945, Germany had industrial plant which was 20% above 1936 levels, and Germany’s machine tool industry had increased by 75% since 1938, this being an important sector in the post-war West German economy

Question 3

Describe the ample labour force of Germany post-1945

Answer 3

• Despite the loss of millions of Germans during the war, this was compensated through their replacement by millions of German refugees who were expelled from eastern Europe between 1944 and 1946, approximately 9.1 million of these settling in West Germany
• Between 1949 and the building of the Berlin Wall in 1961, 3.8 million Easter Germans fled the GDR for West Germany, many of them skilled workers
• From the late 1950s, West Germany introduced the ‘guest-worker’ scheme; in 1959, foreign workers numbered just 150,000, which grew to 1.2 million by 1966. This made up for labour shortages in industries such as mechanical and electrical engineering and provided cheap labour in declining industries such as textiles
• This helped the German economy to maintain economic competitiveness against its international rivals

Question 4

Significance of the ‘social market economy’

Answer 4

• The ‘social market economy’ was a mid-way between unregulated private enterprise and a state-controlled economy, the aim being to allow private enterprise but also to allow the government the power to ‘police’ the market in order to prevent monopolies forming, thus allowing fair competitions and ensuring that Germany had a strong currency
• The CDU supported the concept, taking on the Dusseldorf Principles by 1949 under Erhard’s leadership. These principles developed into the ‘social market economy’ and were the basis for CDU/CSU economic policy between 1949 and the 1970s.
• The policy allowed the German economy to develop rapidly without causing major conflicts between trade unions and industrialists

Question 5

Significance of currency reform

Answer 5

• The Deutschmark (DM) replaced the Reichsmark in the Western zones in 1948. As well as replacing one currency with another, it also involved giving the banks large deposits of new DM to give to industry to invest in economic recovery. This stimulated the development of industry
• Of even greater significance was the establishment of an independent central bank, the German Central Bank or Bundesbank. This bank had the responsibility to manage the currency, including the power to raise and lower interest rates, without direct political interference
• The immediate impact of the currency reform was deflation, however it also removed most of the commercial debt of German industry. In doing so, it gave Germany the vital benefit of currency stability through the 1950s and 1960s

Question 6

Significance of Marshall Aid

Answer 6

• The ‘Marshall Plan’ by US Secretary of State George Marshall provided western European states with $13 billion in financial aid between 1947 and 1952
• In December 1948 alone, the western area of Germany received $99 million. In 1950, Marshall Aid accounted for 37% of western German imports
• The Aid stimulated economic growth; much of the Aid money was used to improve railways and the electrical and steel industries

Question 7

Why has the significance of Marshall Aid been overstated?

Answer 7

• Although western Germany received $1.6 billion between 1948 and 1952, this was equivalent to the relief money provided by the Germans themselves to aid German refugees moving to western Germany
• West Germany’s rivals also received more from Marshall Aid, Britain receiving $3.4 billion and France $2.6 billion

Question 8

Significance of the Korean War, 1950-1953

Answer 8

• At the time when Marshall Aid was beginning to cease, the West German economy received another boost because of the Korean War
• The paid rearmament of the USA and Britain meant that German exports, such as machine tools and motor vehicles, were in demand, giving another impetus to economic growth
• Also, unlike the USA, Britain, and France, West Germany did not have to expend any money on armaments until the mid-1950s

Question 9

How did Erhard prevent the black markets and hoarding prevalent in Bizonia in 1948?

Answer 9

The Bizonia economy was strictly controlled by military governors appointed by Britain and the USA, with price controls and rationing. This led to a large black market and the hoarding of goods. On 20th June 1948, when the new DM currency was announced, Erhard, Economic Director of the Bizone Council, ended price controls without consultation with military governors, bringing black markets to an end overnight

Question 10

How did Erhard further aid economic development in December 1951, on top of that provided by the Korean War?

Answer 10

In December 1951, Erhard gave another boost to the development of the West German economy through the Investment Aid Law, which involved a federal government subsidy to the manufacturing industry of 3.2 billion DM. As a result, the investment level of the West German economy rose from 19% in 1950 to 24% by 1960, far ahead of Britain and France

Question 11

In what ways was Erhard’s period as Economics Minister under Adenauer not a success?

Answer 11

• Erhard’s economic policies of the late 1940s led to a steep rise in unemployment, reading 3 million in 1950. Erhard was fortunate that the Korean War helped to stimulate the West German economy, as in the second half of the 1950s, German industrial production rose by one third
• Erhard also failed to limit the power of big business. In 1957, his Law on Restraints on Competition proved ineffective at curbing its economic power, and as a result, steel and chemical production firms epitomised the economic miracle
• The 1957 Pension Act and the development of the welfare state increased state expenditure, storing up problems for future FRG governments in the 1980s and 1990s.

Question 12

How were the economic crises of 1966-89 worsened by social welfare spending?

Answer 12

Running alongside particular crises and the measures taken to deal with them were rising levels of government spending, especially on social welfare. In 1965, for example, the government spent DM46.7 million on social welfare; by 1970, this was DM115.9 million. This happened despite various cuts to benefits

Question 13

What was encouraging about Germany’s export figures during these crises?

Answer 13

More encouragingly, the economy was helped by the fact that Germany’s export figures stayed healthy thanks to continued demand and the fact that Chancellor Schmidt worked hard to persuade other world leaders not to introduce protective tariffs to limit world trade during the first oil crisis of 1973

Question 14

Describe the recession of 1966-67

Answer 14

• Trade, both domestic and international, reduced and unemployment increased
• Many guest workers were on one-year renewable contracts without social benefits. Guest workers had been vital to economic growth and also vital to managing the effects of an economic crisis. At the start of 1966, there were 1.3 million of these workers; by 1967, there were 991,000. Productivity began to fall
• Due to its social welfare policies, the government had been spending more and more, and public spending was spiralling out of control. Erhard was chancellor and the economics minister, Karl Schiller, reorganised the government’s approach to the economy. He increased government planning, intervention, and control, for example, subsidies for agriculture and the coal industry. He also reduced cartels to stop prices rising
• The 1967 Economic Stabilisation Law allowed for government intervention in times of economic crisis to limit regional spending and introduced a Five-Year Plan system for all government spending. In 1968, a provision was added to the Basic Law that said the federal government could move money around between Lander, using money from the wealthy ones to provide more social welfare in the struggling ones. Schiller’s economic policies were regarded as having failed and he was replaced with Helmut Schmidt in 1972

Question 15

Describe the oil crises of 1973 and 1978

Answer 15

• During the 1960s and 1970s, the FRG came to rely on oil rather than coal as fuel, and car ownership pushed up petrol consumption. This was the same in many countries, as the Middle East, which was oil-rich, had so much oil that it was sold at an affordable price
• In 1972, the FRG spent DM10.8 billion on over 140 million tonnes of oil
• This changed in October 1973 when the Fourth Arab-Israeli war broke out at OPEC (the Organisation of Petroleum Exporting Countries) put up prices sharply in 1973 and again in 1978
• The FRG received forty percent of its fuel from OPEC, but now the 140 million tonnes cost DM32.8 billion in 1973 and DM49 billion in 1978. This contributed to an economic crisis which hit the FRG in 1974-75
• Unemployment rose sharply again between these years, made worse by the fact that the FRG’s ‘baby boomers’ were just beginning to hit the employment market. Again, georign guest workers found that their contracts were not renewed and a ban was placed on reciting guest workers, which, as in the recession of 1966-67. prevented the crisis from worsening

Question 16

Why was the FRG not his as hard as some other countries by the oil crises of 1973 and 1978?

Answer 16

• The FRG was helped by its export income and, once again, the economy recovered rapidly
• Oil consumption dropped, partly because of government measures such as encouraging ‘car-free Sundays’ and introducing speed limits on the autobahns in order to save fuel. Government propaganda pushed energy-saving tactics in homes and industry and the government also began to invest seriously in atomic power to reduce dependence on oil
• The biggest push to cut consumption was that the government, unlike others such as that of the USA, did not subsidise oil prices, but just let them rise in line with their actual cost. This made it expensive and encouraged cutbacks. German industries converted to new fuels much more rapidly than in any other country
• The government also brought in public spending cuts and higher income tax in 1975

Question 17

Describe the economic downturn in the FRG in the 1980s

Answer 17

• In the 1980s, the gap between rich and poor widened. This created friction, in particular a hostility toward guest workers
• The FRG had ridden out the crises of the 1970s better than some countries, largely due to its healthy exports. In 1978, West Germany even exported more to OPEC countries than it imported. Even though much of the rest of the world was in recession, Germany’s total exports continued to rise and stayed consistently ahead of imports
• However, the FRG never regained the economic heights of the 1960s, and real growth in the economy shrank as prices, which Germany had kept under control, began to rise with inflation. Unemployment hit 1.7 million, the highest since 1950
• This drove up the amount of spending on unemployment benefits and assistance for the long-term unemployed. The 1981 government cut public spending, including benefits and housing allowance, and was deeply unpopular, especially with those who felt that Germany should return to a social market economy

Question 18

Describe Helmut Kohl’s 1982 government’s rejection of increased welfare support and the measures implemented to tackle the recession and unemployment

Answer 18

• Despite the need to help the unemployed, the government that took over in 1982 was determined to turn the economy around by cutting spending even more fiercely, saying that welfare support just created dependency, an idea that was being taken up by many countries experiencing recession, including the USA
• Chancellor Helmut Kohl said that productivity levels were falling because of this dependency and because of the slack values of the baby boomers, and that people needed to be more independent in order to be energised to find and keep work
• Kohl’s government brought in even more cuts in social welfare spending, including maternity benefit. It also cut public holidays and reduced the retirement age to 58, urging people to take early retirement
• The government also sold off shares in state-run institutions (e.g. VW), partially privatising them. These policies produced a slight but growing improvement, and by 1989, unemployment was at its lowest, while the economic growth rate had risen