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Economic liberalization in the post–World War II era

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The period directly after the war did not see many, the most notable exception being West Germany's reforms of 1948, which set the stage for the Wirtschaftswunder in the 1950s and helped inform many of the liberalisations that were to come.

However, it was not until the 1970s that the stagflation of the period forced many countries to look for new economic systems. The emergence of neoliberalism and other associated economically liberal doctrines saw a wave of economic liberalisations sweeping the globe.

Starting with Chile in 1975, various governments adopted and implemented liberal policy. The most important of these were Ronald Reagan and Margaret Thatcher, who developed the initial wave of neoliberal thought in practise.

Chronic economic crisis throughout the 1980s and the collapse of the Communist bloc at the end of the 1980s, helped foster political opposition to state interventionism in favor of unregulated market reform policies. From the 1980s onward, a number of communist and socialist countries initiated various neoliberal market reforms, such as the Socialist Federal Republic of Yugoslavia under the direction of Ante Marković (until the country's collapse in the early 1990s), and the People's Republic of China under the direction of Deng Xiaoping.

In the 1990s, a second more socially-liberal wave of liberalisation swept the world under Bill Clinton and Tony Blair.

Post-WWII economic liberalism

West Germany

Background

Germany ended the European theatre of World War II with its unconditional surrender on 8 May 1945. It faced war damage to its economy and the problems of mass migration due to the expulsion of ethnic Germans from areas east of the Oder–Neisse line.

April 1945 to July 1947 saw the Allied occupation of Germany implement Joint Chiefs of Staff directive 1067 (JCS 1067). The aim of this directive was to transfer Germany's economy from one centred on heavy industry to a pastoral one, in order to prevent Germany from having the capacity to wage war. Civilian industries which might have a military potential, which in the modern era of "total war" included virtually all, were to be severely restricted. The restriction of the latter was set to Germany's "approved peacetime needs", which were defined to be set on the average European standard. In order to achieve this, each type of industry was subsequently reviewed to see how many factories Germany required under these minimum level of industry requirements. In May 1946, the first plan stated that German heavy industry was to be lowered to 50% of its 1938 levels by the destruction of 1,500 listed manufacturing plants. Restrictions on steel followed.

It soon became obvious that this policy was not sustainable. Germany could not grow enough food for itself and malnutrition was becoming increasingly common. The European post-war economic recovery did not materialise and it became increasingly obvious that the European economy had depended on German industry.

In July 1947, President Harry S. Truman rescinded on "national security grounds" the punitive JCS 1067, which had directed the U.S. forces of occupation in Germany to "take no steps looking toward the economic rehabilitation of Germany." It was replaced by JCS 1779, which instead stressed that "[a]n orderly, prosperous Europe requires the economic contributions of a stable and productive Germany."

By 1948, Germany suffered from rampant hyperinflation. The currency of the time (the Reichsmark) had no public confidence, and thanks to that and price controls, black market trading boomed and bartering proliferated. Banks were over their heads in debt and surplus currency abounded.

However, thanks to the introduction of JCS 1779 and the first Allied attempts to set up German governance, something could be done about this. Ludwig Erhard, an economist, who had spent much time working on the problem of post war recovery, had worked his way up the administration created by the occupying American forces until he became the Director of Economics in the Bizonal Economic Council in the joint British and American occupied zones (which would later, with the addition of the French occupied territory become the basis for West Germany). He was placed in charge of currency reform and became a central figure in events that were to follow.

Economic reforms

In spring of 1948, the Allies decided to reform the currency. In preparation for this, a new central bank system was established in West Germany with independent Land Central Banks and the Bank deutscher Lander with headquarters in Frankfurt am Main.

Currency reform took effect on 20 June 1948, through the introduction of the Deutsche Mark to replace the Reichsmark and by transferring to the Bank deutscher Lander the sole right to print money. Each person received a per capita allowance of 60 DM, payable in two instalments (40 DM and 20 DM) and business quota of 60 DM per employee.

Under the German Currency Conversion Law on 27 June, private non-bank credit balances were converted at a rate of 10 RM to 1 DM, with half remaining in a frozen bank account. Although the money stock was very small in terms of national product, the adjustment in the price structure immediately led to sharp price increases, fuelled by the high velocity of money through the system. As a result, on 4 October, the military governments wiped out 70% of the remaining frozen balances, resulting in an effective exchange of 10:0.65. Holders of financial assets (including many small-time savers) were dispossessed and the banks' debt in Reichsmarks was eliminated, transferred instead into claims on the Lander and later the Federal Government. Wages, rents, pensions and other recurring liabilities were transferred at 1:1.

On the day of the currency reform, Ludwig Erhard announced, despite the reservations of the Allies, that rationing would be considerably relaxed and price controls abolished.

Results

In the short term, the currency reforms and abolition of price controls helped end hyperinflation. The new currency enjoyed considerable confidence and was accepted by the public as a medium of payment. The currency reforms had ensured that money was once more scarce, and the relaxation of price controls created incentives for production, sales and earning this money. The removal of price controls also meant shops filled up with goods again, which was a huge psychological factor in the adoption of the new currency.

In the long term, these reforms helped set the stage for the Wirtschaftswunder (German for economic miracle) in the 1950s.

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