THIS June 20 marks the tenth anniversary of the adoption of the new German economic policy, by now known all over the world as the "social market economy." It is no coincidence that this date is also the tenth birthday of the new Deutsche Mark. The two events necessarily were simultaneous. The volte-face in economic policy, away from a hopelessly stagnating, directed economy towards a free market economy, could succeed only on the basis of a currency reform. I am generally called the father of the social market economy, and this is true to the extent that, in addition to being one of the engineers of the currency reform, I developed the principles of the new German economic policy and put it into practice, above all on the political level; but praise for the success of the policy must go in the last analysis to the honesty and indefatigable efforts of all classes of the German population.

Before I go into the matter in more detail I want to stress that there was and is no such thing as a "German economic miracle." There is no mystery about what has happened in the course of these ten years. To be sure, strength of soul and spirit were needed in order to believe that a new world could be built up from the war's ashes and ruins; but in all other respects it was the purposeful use of economic means and strict adherence to the market economy program which brought success.

The road behind us can be described as follows: The currency reform ended the inflation which had accompanied price fixing and which had been characterized by abundance of money, rationing and a black market. It then became necessary to establish a responsible monetary and credit policy. When this foundation had been laid, it was possible to remove all the restrictions characteristic of a directed economy and, above all, to restore the free formation of prices. Of course, the new equilibrium could not be reached without creating tensions and disturbances, and no wonder many politicians wanted to halt the process of adjustment and return to rationing and controls. The market economy was the main object of political, economic and social criticism; and since I was its most representative supporter I was at many stages and in many fields regarded as Enemy Number One.

Furthermore, in order to restore Germany's productive capacity and competitive position, it was indispensable to free the economy from its national isolation and to initiate a liberal trade policy. For me this was not a matter of pride or megalomania. On the contrary, it sprang from a consciousness that the only way to link the German economy with the world economy, and thus to lay the basis for future German prosperity, was for the German people, following their tragic catastrophe, to find the strength to stand this test. Only if one takes into account the enormous burden imposed on the western part of divided Germany, notably by the influx of more than 10,000,000 refugees simultaneously with the need to solve immense economic and social tasks, can it be fully recognized what perseverance was needed to bring the experiment to success. The courage shown by the German people in that plight might be called the courage of despair. But the secret of their success was perhaps the very fact that they had rid themselves of all illusions, no longer believed in miracles and knew they must trust to their own powers. At this juncture, too, came the Marshall Plan. Beyond its substantive importance, this aid proved so beneficial because it gave the German people fresh reason to hope that they had not been given up by the free world but could again become honest partners in it and find a way out of their country's ruins.

In those times of distress it was not always easy to persevere on the path of economic virtue. Above all, the figure of more than 2,000,000 unemployed out of a total of 13 million workers constituted a heavy social and political burden. The result was that there were repeated calls for "made" public work, abolition of the market economy, relaxation of the monetary and credit policy and abandonment of the liberal trade system. Even officials of the Military Government and of the Allied High Commission expressed serious doubts time and again as to our ability to continue a policy of market economy, given Germany's position in the world at that time. In their opinion, the abolition of rationing and price controls was a crime. Indeed, I was accused of disobedience or megalomania after the outbreak of the Korean conflict when I resisted the reintroduction of controls despite the shortages of raw materials which then began to appear. I considered that such a policy would be entirely unproductive. My experience has been that nothing is more likely to cause or aggravate shortages than useless attempts to control them.

The German economic policy entered one of its most dangerous phases when the credit margin which had been granted to the Federal Republic within the European Payments Union was exhausted. I was called a careless debtor and a gambler because I admitted imports beyond the extent of possible exports; but this I did quite deliberately in order to increase German productive capacity and create more jobs for German labor. The result was strange. Hardly had the additional credit margin granted to the Federal Republic been used up before the debts could already be paid back. A liberal policy which instead of fearing world-wide competition actually encouraged it brought the Federal Republic--as everyone now knows--the strongest creditor position in the E.P.U.

Though I do not intend to give a chronological description of events, I must mention that the German economic policy stood the test once again during the Suez conflict. As far as I can see, the Federal Republic was the only European country which did not impose restrictions on oil and fuel supply at that time. Even more important, during these ten years the Federal Government and the German central bank have constantly endeavored to defend the stability of the German currency--the new Deutsche Mark. Our monetary and credit policy, already considered to be severe, together with a consistent promotion of competition and several unilateral reductions in the German tariff, have succeeded in keeping the German price level relatively stable, at least more stable than in most other European countries. This has been true despite the fact that full employment was meantime reached. My hard struggle for the enactment of an anti-cartel bill, which approximately corresponds to the American philosophy, is sufficiently known. Though my ideas are not fully embodied in the "Law Against Restrictions of Competition" as finally enacted, I do believe that it can be called the most progressive law of the sort in the world.

There really is no need to prove by figures and statistics how successful the social market economy has been from every point of view. The fact that the Adenauer administration has been confirmed in every election, and each time with an increased majority, must be credited in large part to the German economic policy.

But it is not my intention to dwell on past successes and to underestimate the obstacles or dangers which still confront the effort to establish liberal economic coöperation between national economies and a sound international monetary order. There is no doubt that we have overcome the particularism of the thirties, and this is largely due to the American initiative. Under the gentle pressure of the Marshall Plan, the European countries have arrived at a better "European coöperation." The O.E.E.C. has achieved a great deal here--except for complete freedom in the field of trade policy and free convertibility. It would probably be too harsh, though not quite unjustified, to say that those in charge of the national economies have recognized the principle of freedom where it was obviously to their advantage, but that they have not conquered their prejudices and instead have insisted on protectionism and egoism at a time when it was necessary for Europe to find a way, over and above the dictates of national policy, to a true economic community.

Here we come to the point at issue: the European Economic Community. We would certainly underestimate the spirit underlying this six-nation community (France, Germany, Italy, Belgium, Netherlands, Luxembourg), embodied first in the European Coal and Steel Community, if we supposed that it served economic purposes only. Even before the failure of the European Defense Community its political aspects had become apparent. Today the Common Market, or European Economic Community as it is now called, likewise pursues the ultimate objective of a political confederation. I do not oppose this but on the contrary fully support it. Any scientifically trained mind must ask whether, how far and under what conditions economic integration which requires that opposing principles of economic and social policy be reconciled can create the basis for an integration of countries within the meaning of political law.

Obviously, the countries concerned differ considerably as regards their determination to defend the internal and external stability of their economies and currencies. Further, their trade policies range from relatively stringent protectionism to a readiness to practise extreme liberalism. One side would reject the consequences of free competition based on efficiency; the other would cheerfully accept them. Because an integrated European economy can be designed only as an integral part of a free world economy, I have even on occasion been quite willing to be called a "bad European," for example, when I fought against the imminent danger of European isolationism in the guise of protectionism and when I was suspected of opposing the Common Market simply because I objected to protectionist provisions which would have prohibited structural changes. The Common Market could not fail to increase economic efficiency and--much more than attempts at social harmonization in the absence of sufficient economic productivity--it would guarantee economic progress and social security. I am ready to make great efforts to ensure that our economic aims will also serve a political aim; nevertheless, I always warned that the establishment of the European Economic Community must not result in dividing the European nations which still live in freedom. Developments have proved that my apprehensions were justified. Today I am ready to reaffirm that the E.E.C., which in form and concept ultimately serves a political objective, is justified only if the separation of Western Europe into two hostile economic blocs is avoided by instituting a free trade area bigger than the original Six. Precisely because the E.E.C. is essentially a political organization, it is not realistic to point out that it will be open to all nations that wish to join; for in practice this simply means that in order to avoid economic disadvantages a country would be forced to accept the political consequences of membership. For various reasons, then, I am happy that with the consent of the German Federal Government and of all the parties of the German parliament I can stand for a policy aiming at the creation of a vaster free trade area.

In this connection, I think it is most interesting that since the E.E.C. came into being increasing numbers of American businessmen have been eager to establish plants of their own in one or more of the six member countries or participate in national enterprises there. They fear that in the future the trade policy of the Community as regards third countries might discriminate against them, and they want to create a basis for their own economic initiative within the area. Now, I am far from objecting to international inter-connections in finance and investment. Nevertheless, I have warned the American business world not to be too active in this respect, because that might be understood to mean that the free world had already taken for granted that E.E.C. trade policy would be protectionist. Even though the risk of this will be avoided by establishing a free trade area--as no doubt will be done--I consider that any concepts and actions which might lead to the formation of artificial blocs within the free world economy in the shape of so-called "large economic areas" are definitely prejudicial. The free world has shrunk in size so seriously that we cannot afford such "luxuries." Measured by the highest standards, integration on the pattern of the E.E.C. is justified only if it leads to intensification, i.e. liberalization, of world trade and simultaneously to a consolidation of the international system of currencies.

For instance, if Latin American and other countries that have tropical or subtropical climates object to French and Belgian colonies situated near the equator being included in the Common Market, or if they expect the scheme to prejudice their own national economies, their objections can be countered not just by providing additional development funds, necessary as that may be, but by adopting a free trade policy which opens the Common Market to the whole world. If only the peoples of the free world would realize how often false and irresponsible egoism and protectionism prevent them from demonstrating their political power and from rallying together in genuine solidarity!

I agree that, given the widely different conditions prevailing in the free nations, it is most difficult to achieve a sense of solid common interest and agree on a harmonized policy. This raises the problem of assistance to the so-called emerging countries. German capabilities to make capital loans are often overestimated. Actually, Germany is still badly in need of capital herself. To mobilize her gold and foreign currency reserves for aid to underdeveloped countries on the scale often urged would inevitably have inflationary results. The Federal Republic and the German Federal Bank regard it as their chief duty to defend the stability of the Deutsche Mark and with it the country's social order. Nevertheless, as recent trade negotiations have made quite clear, the Federal Government is fully aware that greater efforts will have to be made to help underdeveloped areas. Nor do I deny that Germany has a moral obligation in this respect, if only because of the fact that it was American aid which enabled her to embark on her own program of rehabilitation.

The Federal Republic does not wish to burden economic aid by awakening the suspicion that it is trying to acquire political influence. It therefore has refused, as a matter of principle and regardless of Germany's own fiscal situation, to give credits from government to government. Instead, it has opened the way for private industries to give credits and by offering government guaranties has helped private industries to grant more generous credits and arrange longer terms of repayment.

On the other hand, just as nations who supply aid must be careful not to use it to exert political influence, so they need to be satisfied that they are coöperating with honest partners who do not intend to operate back and forth between the two fronts but wish of their own accord to be part of the free world. Only in these conditions of mutual trust will it be possible to maintain and build up a spirit of solidarity against the nefarious ideology of totalitarianism.

The very range of subjects dealt with here is enough to make clear that no country, however large and powerful, is able on its own to determine and rule the fate of this world. We must face the fact that two social systems exist side by side and we must try to ensure that the struggle between them is fought out in the realm of the mind and the spirit. It will not be hard to develop the technical forms and methods of coexistence; but if force and violence aim to defeat reason the result can only be chaos. The truth of this should also enable us to recognize that the aim of establishing a social order which is in harmony with human nature need not involve an arms race but can be even better realized by way of jointly controlled disarmament. The free world does not need compulsion in order to remain alive to the merits and blessings of freedom. If the totalitarian system must resort to compulsion in the effort to unite the human race, this fact alone condemns it alike before God and man.

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  • LUDWIG ERHARD, Vice Chancellor and Minister of Economics of the Federal Republic of Germany; author of "Prosperity Through Competition"
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