In today’s issue:
- Europe’s governments are falling like dominoes
- Economic miracles are born in political chaos
- Argentina is showing the way
Europe is in outright political chaos. Our government is the third most popular party in the country. Germany’s government is the latest to fall. France’s last prime minister barely lasted longer than Liz Truss. Romania’s elections were annulled.
Norway and Sweden are openly mocking Germany’s energy policy and threatening to cut power sharing agreements with other countries including us.
The EU’s internal borders are being policed. Germany is considering leaving the European Court of Human Rights and using the Rwanda scheme. Denmark is deporting immigrants.
The list of chaos goes on and on. But I suppose all this is the whole point of democracy. It makes abandoning the wrong path less painful than other forms of government. Just not painless.
Political chaos may just be a sign of choosing a new and better path. Change is inherently hard. But it’s not like Europe is incapable of it.
Speaking of which, I’d like to share one of Fortune & Freedom’s first ever articles. All new subscribers used to receive it. It may be my favourite story of the sort of political reform we need today. A reminder of what is possible at a time like this…
***
Did you know that the Germans were once ruled by British unelected bureaucrats, who ruined their economy with their stupid regulations?
Until the Germans staged their own no-deal exit, thanks to the bravery of one man on a Sunday radio programme.
Today, I’d like to tell you the story of Germany’s No Deal Exit of 1948. And explain what it means for Brexit.
After the war, the German economy was in ruins. My German grandmother still eats my apple cores because of it.
Reichsmark banknotes were worthless. People survived thanks to the black market. American cigarettes were the currency for small transactions. Cognac for large transactions. Nylon stockings for in between.
The Allied occupation government was led by military governor General Lucius Clay. But he didn’t do a very good job of it.
In November 1945, Clay agreed to keep Hitler’s price controls and rationing in place. He also continued the Nazi conscription of resources, including labour. It was the ultimate centrally planned economy.
The British representatives in the military government supported this position. And even implemented much of the same bad economic policy back home. Excessive regulation and control of the economy. Just like the EU today, only worse.
But not everyone agreed.
Economist Ludwig Erhard had refused to join the Nazi Association of University Teachers during the war – a career-ending move. Instead, he published a manuscript advocating a free market economy in 1942. His co-author was interned by the Nazis for it.
But Erhard didn’t just talk the free-market talk. He walked the walk.
After the war, the Allies became aware of his manuscript and its anti-Nazi nature. And so they “asked” him to become their economic adviser for Bavaria.
He soon became Bavarian finance minister and the head of the Office of Economic Opportunity. His anti-Nazi credentials made him popular with the Allied elite, compared to other German leaders with questionable wartime backgrounds.
As part of the Office of Economic Opportunity, Erhard became a close adviser to General Clay. He eventually convinced the general to undergo currency reform. They replaced the worthless reichsmark with the deutschmark.
But Erhard wasn’t finished. What he did next is shocking and legendary in Germany. Think of it as a no-deal exit from the Allied military government.
Here’s how Erhard himself recalled what he did, in a TV interview 25 years later, as translated by me:
I knew exactly what the currency reform would bring. Also its consequences. But it could only work if we simultaneously enacted a decisive economic reform, from a completely centrally planned economy to one as free as possible.
But that had, because of its very nature, to include abolishing all rationing, price controls, economic controls and more. But the perception of this was, in people’s heads at that time, so unthinkable that it was only possible with a brave breakthrough.
Economic policy and bravery rarely go together. But Ludwig Erhard was special:
The Frankfurt Economic Council gave me a series of broad executive powers in the expectation that we didn’t know exactly what the currency reform would bring and, in the case of chaos, someone would have to react quickly.
At the time, as the director for policy in the economy, I had secretly and quietly in my desk drawers accumulated the documents needed to repeal all price controls by simple decree.
I scattered all the inclinations and suspicions of my staff as to whether I would ever use them. They said, “For God’s sake, you’re not actually considering doing it, are you?” And I told them, “No, no, it’s just in case…”
And of course I could never have told the [Allied] military bureaucracy. They would’ve had even less understanding for my plans, and I would’ve had even less influence with them.
And then, on the Sunday of the currency reform, I announced it all [on the radio], in the correct assumption that, on a Sunday, no government bureaucrats are capable of work. And thereby it was done.
Erhard’s surprise radio announcement abolished the Nazi and Allied military government price controls and many other economic regulations.
It was a shock move. He had no legal authority to do so. He just hopped on the radio and did it, of his own volition, in complete violation of the Allied military government in Germany.
It’s as if some SPAD were to abolish the minimum wage on Twitter.
Making his move on a Sunday bought Erhard some time. But not much…
The next Monday, at an early hour, I was brought before the military government. I was told that what I had done was impossible and unimaginable. That it was forbidden and all of it would have to be reimposed. That I had broken all sorts of Allied military laws.
When I asked which laws I had broken, “I’d like to hear them precisely”, they read to me that, without consent from the military government, no changes to price controls could be made.
And I replied, “But I didn’t change them, I abolished them.”
That snarky response is what made Erhard so legendary in Germany. His defiance against the excessive regulations imposed by a foreign unelected government which were ruining Germany’s economy.
But General Clay took some convincing when it came to Erhard’s economic policy coup.
Journalist Edwin Hartrich described what General Clay asked his friend Ludwig Erhard that day:
“Herr Erhard, my advisers tell me what you have done is a terrible mistake. What do you say to that?”
Ludwig replied:
“Herr General, pay no attention to them! My advisers tell me the same thing.”
Can you think of any modern politician with that sort of oomph?
Erhard’s point was that it was precisely the experts who centrally planned the German economy into a mess who were also against the free-market reforms…
The journalist Hartrich also wrote about how a US Army colonel followed up later with another stinging rebuke:
“How dare you relax our rationing system, when there is a widespread food shortage?”
Ludwig answered:
“But, Herr Oberst. I have not relaxed rationing; I have abolished it! Henceforth, the only rationing ticket the people will need will be the deutschemark. And they will work hard to get these deutschemarks, just wait and see.”
What happened next earned Erhard the nickname Herr Wirtschaftswunder – Mr Economic Miracle.
After Erhard’s reforms, the German economy was suddenly freed from the controls and regulations the foreign governments had imposed. They created what’s still known today as an economic miracle.
Supposedly, Erhard’s timing was key. By the time the Allies got around to discussing how to reverse the liberalisation of the economy from excessive regulation, the effects were simply too strong to ignore.
Author and historian Henry Wallich wrote, “The spirit of the country changed overnight. The gray, hungry, dead-looking figures wandering about the streets in their everlasting search for food came to life”.
Shops literally filled overnight as the black market came clean. The new money was worth enough to actually sell things for, instead of having to barter, which made transactions more efficient. And the market prices allowed supply and demand to balance. Profit became possible, encouraging production too.
Of course, abolishing price controls and currency reform were just the beginning. An economist at the Federal Reserve Bank of New York wrote that between June and August, “directive followed directive removing price, allocation, and rationing regulations.”
David Henderson, author of The German Economic Miracle, wrote that Erhard’s motto could have been: “Don’t just sit there; undo something.”
Erhard freed all the staples of life and manufactured goods from absurd EU like controls. And, my personal favourite, a lot of the remaining controls were simply no longer enforced.
In three months, absenteeism at work halved from as high as nine and a half hours per week – time Germans had spent foraging or looking for the right person to barter with. Industrial production increased by more than 50%. Ten years later it had quadrupled and was three times as high on a per capita basis. A productivity and employment boom, in other words.
Six million new jobs were created between 1950 and 1960, sending the unemployment rate from 10.3% to 1.2%. That’s even lower than Britain’s unemployment rate since the referendum!
West Germany’s economic boom took place while East Germany’s economy stagnated. In fact, Germany’s economy quickly became bigger than Britain’s. My English grandparents always said Germany won the war, in that sense.
Being like Germany wasn’t a winning political strategy in Britain (at the time), so Britain’s much more interventionist governments continued to ruin their economy with central planning and regulation – the sort of thing the EU does now. The free market stayed out of fashion in Britain, even as it proved itself in West Germany.
It took a long time for Britain to discover Erhard’s intellectual inspiration, FA Hayek. In fact, the Allies banned his book The Road to Serfdom in Germany. But eventually Margaret Thatcher carried around one of Hayek’s books too, reportedly slamming it onto someone’s desk and declaring, “This is what we believe.”
Erhard went on to become the first German minister of economic affairs and even became chancellor. He wasn’t very good at the latter though. Which isn’t a surprise given how he dealt with the unelected foreign bureaucrats ruling his country in 1948.
The Wirtschaftswunder of 1948 was extraordinary. And I think the parallels to Brexit Britain are very strong. At least they should and could be. I can’t wait to find a German and point them out.
But what does all this mean for you?
***
This isn’t the only episode of a German free-market crusader undermining their own government with shock economic reform. The story of how hyperinflation ended in the 1920s is surprisingly similar. All it took was a broom cupboard with a telephone and a very determined economist. But that’s another story.
The real question is whether today’s political chaos is bad enough to trigger a change of heart.
Is there a Javier Milei or Ludwig Erhard somewhere in Europe? A person who doesn’t want marginal change, but wholesale?
Or will things have to get worse before they get better?
Let me know: [email protected].
For now, European stock markets are down in the dumps compared to America’s. If you are feeling optimistic, it may be time to buy.
And if you think we haven’t hit rock bottom just yet, check this out.
Until next time,
Nick Hubble
Editor, Fortune & Freedom
