THE ECONOMIC MIRACLE: Keywords: Inflation, stagflation, unemployment, Keynes, Ludwig Erhard, The Asian Tigers, Marshall Plan, Walter Eucken, Wilhelm Roepke, F. A. Hayek, Hitler, National Socialism, NAZI, Freiburg Circles, Eisenhower, Rabushka

A Cornucopia, ancient symbol of wealth and abundance

THE ECONOMIC MIRACLE

 

A miracle is defined as an inexplicable, unusual and mysterious event in the physical world that is beyond any scientific comprehension. It is beyond science. Faithful people recognize it and give thanks. A real scientist may humbly find it as a challenge to his knowledge and to his method, and an opportunity for new advances. An arrogant scientist will use it as an insult to hide his conceit, errors, and limitations in comprehending it.

In previous pages I described how political economists avoided the responsibility their limited knowledge had in creating the booms and busts that led to WW I. They blamed the capitalist system driven by the greed of business, thus, they called it “the business cycle”. They constructed a “fallacy of the straw man” to criticize an emerging market economy and declared it dead when they could not solve the mysteries of “The Great Depression”. Like the child that throws a rock to break a storefront window and hides his hand behind his back when asked, political economists, very expediently, offered in their other hand a manual on how to replace the window they had broken. It is called New Economics, or plain Keynesianism. It spread during the inter-war period like a virus. It infected academics in the English-speaking establishment on both sides of the Atlantic, and it became Law.

Keynes was clear his ideas were a way to fix the defective capitalism his generation had described and beat up. In a lecture he first delivered in 1924 titled "The End of Laissez-Faire," he gave birth to the idea of a “mixed economy”, part free market, part government control. The text follows.

"Confusion of thought and feeling leads to confusion of speech. Many people, who are really objecting to Capitalism as a way of life, argue as though they were objecting to it on the ground of inefficiency in attaining its own objects. Contrariwise, devotees of Capitalism are often unduly conservative, and reject reforms in its technique, which might really strengthen and preserve it, for fear that they may prove to be first steps away from Capitalism itself. Nevertheless, a time may be coming when we shall get clearer than at present as to when we are talking about Capitalism as an efficient or inefficient technique, and when we are talking about it as desirable or objectionable in itself. For my part, I think that Capitalism, wisely managed, can probably be made more efficient for attaining economic ends than any other alternative system yet in sight, but that in itself it is in many ways extremely objectionable. Our problem is to work out a social organization which shall be as efficient as possible without offending our notions of a satisfactory way of life."

Conveniently, the comedy of errors found another way to hide the fact that free-helicopter money does not work. It makes matters worse. Keynesians quickly followed the advice of the leader of the Reign of Terror. “War is always the first object of a powerful government which wishes to increase its power. A war affords the opportunity to exhaust the people, dissipate its treasure and to cover with an impenetrable veil its depredations and its errors.” These words were pronounced by Robespierre shortly after taking over control of the French Revolution. Wars are expensive, so they justify more inflation. Wars create many jobs, so unemployment drops. If you have heard of the “military-industrial complex”, you have been introduced to a creation of Keynesianism. To keep it going you need more wars to stimulate the economy.

The fire-bombing of Dresden, worse than Hiroshima and Nagasaki

Another creation of Keynesianism after WW II was the Marshall Plan. The National Archives describe its origin. “On April 3, 1948, President Truman signed the Economic Recovery Act of 1948. It became known as the Marshall Plan, named for Secretary of State George Marshall, who in 1947 proposed that the United States provide economic assistance to restore the economic infrastructure of postwar Europe.”  The plan distributed assistance towards the reconstruction in the amount of $ 13.6 billion. The sixteen Marshall Plan beneficiary countries in order of the funds received were the United Kingdom (25%), France (21%), Italy (12%), Netherlands-Belgium-Luxemburg (12%), West Germany (11%), Austria (5%), and Greece (5%). The remaining 9% included Iceland, Ireland, Norway, Portugal, Sweden, Switzerland, Turkey, and Denmark. All of the central European and Balkan countries, as well as East Germany were excluded, with the exception of Austria, as they had become part of the Soviet Union occupation. Switzerland and Portugal had remained neutral, and Spain, although assisted by Axis powers before the war, had undergone a civil war that reversed a communist takeover.

President Truman and the promoters of the Marshall Plan

It should be obvious that in 1948, the country that had suffered the most destruction was Germany. Its territory and its capital, Berlin, were cut in half making its reconstruction more challenging. At the end of WW II, West Germany was occupied by three different bureaucratic armies, and in the early years, it had to absorb a flood of 12 million refugees from East Germany that were escaping from the communism they knew would come. By 1948, the industrial production was only half of what had been in 1936 before the war. The inflation rate in the final months of the war had reduced the value of the NAZI Reichsmark from 2.50 ℛ︁ℳ︁ = $1US to 10 ℛ︁ℳ︁ = $1US. The National Socialist regime had imposed strict price controls and rationing. This had generated scarcity and an active black market that operated by barter. Unfortunately, after the defeat of the National Socialist government, the occupying Allied forces that had defeated Hitler imposed their own form of centrally directed economy by maintaining Hitler´s price and wage controls. Money was worthless, and Hershey chocolate bars and American packs of cigarettes operated as a more efficient form of money.

Dresden at the time Erhard took control of the economy

Ten years later, by 1958, an astonished Europe and a more astonished United States occupying administration, witnessed the headlines. An Economic Miracle in West Germany.

Of all the recipients of the Marshall Plan assistance, only West Germany and Italy had successfully managed to establish a stable new monetary system. Only West Germany, the one that had been most damaged by the war and not the recipient of the largest sums, had already doubled its GNP to twice that from before the war. How did it happen?

A living laboratory. West Germany's free market vs East Germany's communism

Of course, the Harvard designers of the Keynesian Marshall Plan take the credit, and so does the official history of the U. S. Government. Common sense requires the answers to other questions. How come the other countries did not progress at the same pace? How come the most destroyed economy that received less money that others succeeded? Don’t ask them. That is why it has been called a miracle, so you don’t ask the questions. Enough time has passed that the questions that were answered can be made public. They are no secret. They are just discreetly archived.

It had to do with one group of the several German underground resistance plots to bring down the National Socialist regime. Most failed, were repressed and paid the consequences. Three have received attention worth mentioning. The White Rose non-violent “conscience” movement was led by five students and one professor at the University of Munich. Operation Valkyrie was an attempted coup d’etat led by notable military officers whose motivations are questionable. Many religious leaders of many denominations, such as Dietrich Bonhoeffer were active in the underground and ended in the concentration camps. One that does not get enough attention is the network of numerous communist intellectual cells that after failing in politics were hunted down. Many escaped to the United States. The fact that most of them were Jews allowed their easy entry. They became the nursery of “The Enemies Within”. The group I want to highlight is identified as the Freiburg Circles, a group of professors and students that in addition to opposing the NAZI regime, worked in a plan for the reconstruction that would happen, sooner or later. The economics professor Walter Eucken’s resistance group was not just limited to academic opposition. One of his disciples, Ludwig Erhard was part of the group of businessmen, intellectuals and other notable economists and legal scholars who shared a vision of a free market economy. He was educated at the University of Frankfurt and had been a disciple of the free market economist, Wilhelm Roepke. Erhard wrote drafts of a plan that he sent to Carl Friedrich Goerdeler, an important leader of the resistance.

During the U. S. takeover, their archives fell in the hands of the high command. The rest is history, but not well known. Erhard was called in to interview with General Lucius D. Clay, the Allied commander and Deputy Governor of Germany and ended up in charge as Director of Economics of the occupied zone. His first assignment was to oversee monetary reform and implement the Marshall Plan. General Clay was a key assistant of General Eisenhower. His career was as an administrator and logistics expert, not in combat. Like Eisenhower, they were preoccupied with how the war effort had transformed the economies of the Allies into command economies, far from what the American free market economy had been, and not very different from the ones in NAZI Germany or the Soviet Union. Americans should remember Ike as the first one to warn about the “military-industrial complex”.

General Clay and General Eisenhower
Liberated West Germany from the Marshall Plan

At that moment in history, one non-academic book was circulating as a best seller. Keynes’ livelong intellectual nemesis, Friedrich A. von Hayek had published in 1944 “The Road to Serfdom”. The following year, the Reader’s Digest magazine published a condensed version for the public at large that sold in millions. Hayek warned that Western democracies, including the United Kingdom and the United States, had "progressively abandoned that freedom in economic affairs without which personal and political freedom has never existed in the past". The Road to Serfdom was not just a criticism of the centrally directed war effort, but also a warning against the rising influence of Keynes. Whether or not Clay or Eisenhower had read it, and shared Hayek’s concern is not certain, but “it was in the air”.

THE ROAD TO SERFDOM
A must read in 2024

This is the short story as told by Erhard in private among friends in Guatemala and in London. Erhard was confronted with a dilemma. He could attempt to implement the Keynesian Marshall Plan devised in Harvard with the central controls already in place that existed from Hitler’s regime that the allies had tried to drive, or to liberate the economy. He had proposed many changes to the Marshall Plan, but to no avail, until General Clay told him: “You are not authorized to make changes nor I to approve them. But you can trash it. You have the power to implement your plan.” Clay was also contemplating for the whole territory the Federal political organization proposed in Bavaria. This became the template for the Constitution of the Federal Republic of Germany. Erhard, a Bavarian, went ahead and trashed the Marshall Plan, a decision that resulted in the German Economic Miracle. When General Clay informed Erhard that all the American and English economic experts were opposed and greatly concerned about the consequences of eliminating all wage and price controls, Erhard replied, “So are mine.” Americans today have forgotten that “the war effort” created domestically the same type of government controls over the economy that Hitler had imposed in Germany.

Ludwig Erhard as 
Director of Economics of the Occupied Zone
later known as West Germany

A complete description, of course more diplomatic and documented, can be found in his best seller “Prosperity Through Competition: The Economics of the German Miracle” (1958). Erhard went on to be appointed as Minister of the Economy during Konrad Adenauer’s government and was elected Chancellor in 1963.

Erhard the celebrity of 
The Economic Miracle

Erhard knew that two key free market policies needed to be implemented immediately: a new monetary system and the elimination of all wage and price controls. He did it overnight, on a Sunday in June, when the bureaucrats were not able to blink. Each German would be given forty new Deutschmarks to be followed by a second installment of twenty. Credits and debts would be converted into the new currency at the rate of ten to one, all the old NAZI bills could be trashed. The following paragraphs are his description of what happened.

“The black market suddenly disappeared. Shop windows were full of goods, factory chimneys were smoking, and the streets swarmed with trucks. Everywhere the noise of new buildings going up replaced the deadly silence of the ruins. If the state of recovery was a surprise, its swiftness was even more so.”

“In all sectors of economic life, it began as the clock struck on the day of the currency reform. Shops filled up with goods from one day to the next; the factories began to work. On the eve of currency reform, the Germans were aimlessly wandering about their towns in search of a few additional items of food. A day later, they thought of nothing but producing them. One day apathy was mirrored on their faces, while on the next the nation looked hopefully into the future.”

“This measure of the undisputed success of the policy demonstrates how much more sensible it is to concentrate all available energies on increasing the nation’s wealth rather that to squabble over the distribution of this wealth, and thus be sidetracked from the fruitful path of increasing the national income. It is considerable easier to allow everyone a larger slice out of a bigger cake than to gain anything by discussing the division of a smaller cake.”

Erhard definitely was what, two decades later, is referred to as a “supply-side economist”, fully aware that the Law of The Market is a law of nature, a law that economic science recognizes as its fundamental principle. I discussed this concept as “Say’s Law” in “The Illusionists of Inflation”.

Who coined the phrase about the economic miracle? Most likely a frustrated Keynesian that did not understand what happened.

The United States under President Eisenhower did much to dismantle the apparatus of bureaucratic control created under the New Deal and the WW II effort. That did not happen in most of Europe, until Margareth Thatcher began the dismantling one generation later. 50 years later, the entrenched policies and bureaucracies seem to have taken over again, just as they create what looks like a WW III.

Hong Kong, Taiwan, South Korea and Singapore
More miracles emerge as the economies gain freedom

Just a few years behind what Erhard was doing in West Germany, The Tigers of Asia were awakening. One difference is that they began as poor, developing countries, without the human capital and previous infrastructure that Germany had enjoyed. Professor Alvin Rabushka, associated for many years with the Hoover Institution, published several books and numerous articles describing the “Economic Miracles of Hong Kong, South Korea, Taiwan and Singapore. What was the recipe? Stable currency and liberating the market forces. In only two generations they left poverty and underdevelopment behind. Today, 50 years later, these economic Tigers are among the most prosperous and free countries in the world. The sad exception is Hong Kong that was taken over by communist China in 1996 after being “loosely” (freely and with a minimum law and order government) under British control for 156 years as a colonial trading post. Hong Kong has been in decline for twenty years and serves mostly as the laundry of all the dirty deals of the Chinese Communist Party, including dumping and as a gateway for foreign investment.

Japan began the post-war with its own Marshall Plan
The four Asian Tigers on their own have surpassed it
Singapore is now 40% wealthier than the USA (100)

As we face the future in 2025, America needs an economic miracle that will restore the reliability of the US Dollar as a safe and sound currency. It should be safe from our own government. Restoring the US Dollar as a currency of reference in the world would add to our strength to promote American values around the world and protect the world’s savings against the destructive wave of Keynesian monetary policies. To stop inflation, the federal budget needs to be under control with a supermajority law that requires a balanced budget. State governments have such commonsense requirement. All expenses originated in Keynesian “demand stimulus programs” should be forbidden. A re-prioritization of the programs that distribute wealth should be returned to the state budgets and approved under the balanced-budget laws. The invisible costs of government regulations should be transparent. The recent Supreme Court decisions are clear: the bureaucracy does not have the power to legislate beyond what the Acts of Congress establish, nor can they be the administrative judges of their own decisions. Abusive, intrusive, unnecessary and politically motivated regulations should be eliminated. Subsidies and grants to promote specific sectors of the economy when they are not feasible under market conditions should be prohibited. Subsidies and grants to the states that promote policies contrary to the policies of their jurisdictions should be prohibited. Taxes should be transparent and all citizens and foreign residents benefitting from the services provided by government should contribute to their cost. Taxes should not be arbitrarily imposed on some and lifted from others. The tax burden should be such that politicians can’t use the tax system as a threat to some for the benefit of others.

Major revisions to the Executive branch should be made under the lens of the U. S. Constitution. The growth and extension of the administrative state would find itself in multiple violations. Departments such as Education, Energy, Health and Human Services, Housing and Urban Development, Agriculture, Labor, Commerce, and Transportation are highly questionable. How many of those functions belong to the states? If there is a role for the federal government, what should that role be?

Other institutions should be examined, such as the FED, Federal Reserve System. Its original function was to preserve the value of the currency and establish a stable price level. Since the Great Depression and subsequent economic crisis, Keynesian monetary theory has re-shaped its mandate. It now can alter the value of the currency at will, manipulate credit, and create inflation or deflation “as needed” to maintain employment and unemployment at politically acceptable levels. In other words, it is clearly in direct violation of the original intent. Moreover, if you have followed my arguments critical of the New Economics promoted as a cure for the collapse of the free market economics, all the changes are based on an error of the academics that promoted them. Or worse if the links to the intent to “debauch” the currency have any basis. This would require a major discussion that had already started. In 1976, Friedrich A. Hayek published his ideas about a currency system for the future in “The Denationalization of Money”. At one time decades ago, a new currency could have been created having as reserves “other stable and dependable” currencies. The US Dollar, the British Pound, and the Swiss Franc come to mind. The problem is that in 2025, all the currencies in the world have been contaminated with Keynes “monetary agitation”. What if the government let anyone use a currency of his choosing? What if the government permitted entrepreneurs to innovate in the monetary sector, such as by creating digital currencies or minting commodity money? This is precisely what F. A. Hayek suggested. There are many that would like to return to the gold standard, which could be another possibility.

One final discussion should be questioning what under the principles of the U. S. Constitution could be a clear limitation to the power of governments to intervene or interfere in the market. It is fortunate that two important documents were made public in 1776. One is the “Declaration of Independence” of the united Colonies. The other one is “An Inquiry into the Nature and Causes of the Wealth of Nations”, published by Adam Smith. It is no accident that some of its key ideas found their way into the U. S. Constitution. Once established as the United States of America, why did the interstate borders disappear?

Obama-Biden-Harris abusers of Keynesian errors
Masters of Deception

President Calvin Coolidge is often quoted for his declaration in 1925 that “The chief business of the American people is business.” His observation has the limitation that it leans towards the business side, ignoring the consumer side. We are now used to the phrase that the American economy is driven by consumer spending. The economic activity of the American people is commerce, including the business interests and the consumer interests. All transactions have a buyer and a seller that voluntarily agree to exchange what they both have judged to be in their benefit. The role of government is not to take one side or the other; it is the preservation of the integrity of the system as such. The two major political organizations seem to ignore this, and each one has become identified with one opposing side. Anything that is peaceful does not require the intervention of the powers invested by the people on those temporarily in public office. One role government has in the economy is maintaining a monetary system that is stable in value. Changes in the value of money alter a key clause of all contracts: the price over time. Another one is the preservation of competition. The market should be open to all innovations, reducing the entry requirements to a minimum. Property rights must be protected for everyone. Disputes should be resolved quickly and fairly. The U. S. legislation and judicial system had been considered a good model to follow. Many international contracts are radicated here, even in the parts are all foreign. For businesses, which require long term investments to mature, stable rules and taxes are crucial. Capital, financial and human, should be welcome.

What is not acceptable is what has been happening during the last three decades. Every political cycle has brought an economic and financial crisis. The concept of a government with limited powers no longer exists. Radical swings in policy have occurred from the control of one party to the other. A business and consumer climate of stability is gone. Budget deficits, arbitrary regulations, abusive exercise of executive powers, favoritism, prohibitions, and clear interference in the market activities for political purposes have become the norm. And still, we brag we are doing better than others as the explanation as to why the people should not complain. An old maxim explains this foolish attitude: “A malady of many is a fool’s consolation”.

   Imagine how much better we could be as nation if these reforms were adopted. Imagine what they would mean to you, your family and your community.