Forgotten Viceroy

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On September 6, 1946, Byrnes announced a fundamental change in U.S. policy. “The American people,” he told an audience in Stuttgart, “want to help the German people win their way back to an honorable place among the free and peace-loving nations of the world.” All thoughts of turning Germany into some sort of oversize Ruritania ended. The creation of what would become the Federal Republic of Germany began with the economic merging of the U.S. and British zones of occupation, as urged by General Clay.

One of the biggest problems faced by the German economy was the lack of a viable money. The reichsmark, the old currency issued by the long-defunct Weimar Republic and by the Nazis, had inflated into worthlessness during the war. Billions of them filled bureau drawers and bank accounts, but they wouldn’t buy anything.

The only thing that replaced the reichsmark was the American cigarette. As John Kenneth Galbraith has pointed out, cigarettes, while somewhat inconvenient, are not without their virtues as a medium of exchange. They come in various denominations, from the single cigarette to packs, cartons, and cases. Also, they are inflation-proof because if an excess supply causes a decline in value, the excess will be promptly smoked.

In 1948 Germany was effectively on the Lucky Strike standard. When rumors of a currency reform swept the country in June of that year, a German reporter asked General Clay if it was true that the U.S. Treasury was going to lend fifty million cartons to support the value of the new currency.

General Clay had other ideas. On June 20, 1948, he replaced the old reichsmarks with new Deutsche marks. Each German could exchange reichsmarks, at a ratio of ten to one, up to a total of sixty Deutsche marks. The rest of the reichsmarks floating around the German economy became as worthless de jure as they had already become de facto. Although the new currency was only fiat money, unbacked even by tobacco, it was immediately accepted in the marketplace, proving once again that the only thing needed to make something money is the general belief that it is money.

Lucius Clay both secured the friendship of a beaten Germany for the United States and made possible its miraculous economic revival.

With an accepted currency now in circulation, the German economy immediately began to revive. Empty store shelves began to fill up as goods came out of hiding now that they could be purchased with “real money.” The once thriving black market began to collapse, as did the cigarette economy (with the unfortunate result that millions of Germans began smoking again).

But much more was needed. The German economy—as well as the economies of most other European nations—was hobbled by strict rationing and wage and price controls. Ludwig Erhard had no doubt as to what to do about them. Erhard, one of the few German economists with a clean antiNazi record, had been chosen director of economic affairs in the emerging German government, a government that still lacked any powers not given it by the Allied military governments.

Erhard, who had largely worked out the details on the currency reform, now wanted to abolish all rationing and price and wage controls. He argued that only by freeing the German economy could it really revive. The late 1940s were the golden heyday of government interference in economies. So Erhard’s program was economic radicalism of breathtaking scope. He had submitted his ideas to the Allied military governments and had them wholly rejected.

So, on July 7, 1948, less than three weeks after the currency reform, he simply did it on his own dubious authority, pushing the legislation through the Economic Council and announcing the fact on national radio. The British opposed within minutes. General Clay certainly knew of Erhard’s views and almost certainly of his intentions, and there is no doubt he could have prevented their implementation. He did not.

The effect on the German economy was electric and immediate. Within a year food production had increased so sharply that Germans were eating better than the population of victorious Britain. Coal and steel production soared. In the twenty-one months after currency reform and the abolition of economic controls, German industrial production increased 83 percent. The postwar German economic miracle was under way.

Full credit, of course, must go to Erhard and the German people. Still, in 1948, a Georgia aristocrat who had grown up knowing what it could mean to lose a great war ruled in Germany. He too should get full credit.