The effects of the 'social market economy' on the FDR *Politician to remember*: Ludwig Erhard

Social Market Economy: A socioeconomic model combining a free market capitalist economic system alongside social policies which establish both fair competition within the market and a welfare state

economic Recovery in the years 1945 -1955

  • Germany surrendered on the 8 May 1945.
  • The conference at Potsdam took place between 17 July - 2 August 1945. The Allies met to decide what to do with Germany.
  • Germany was divided into four zones run by the US, Britain, France and the Soviets. Each zone was run by a military high command.
  • They decided that Germany should not have the power to go to war again so all war and war-related industries were banned or had their outputs restricted.
  • The US and Britain wanted economic recovery for Germany but France and the Soviets wanted reparations so they dismantled many factories hindering any chance of an economic recovery for Germany.
  • The differences between the three other zones and the Soviet Zone increased as the Cold War started to develop. The two sides developed their own economic plans to aid their zones.
  • The Marshall Plan in 1948 gave the western zones $1.4 million in economic aid, this sparked the creation of the DM [for an effective way to administer the aid].
  • The Soviet Zone set up their own currency.

Ludwig Erhard:

  • Second chancellor of Federal Republic of Germany [1963 -1966].
  • Appointed Minister of the Economy in March 1948.
  • worked to create the social market economy with the Allies in post-WWII Germany and then as economic minister of Germany from 1948 - 1963.
  • Erhard disliked the phrase 'economic miracle' for the economic miracle period of 1955-66 as he preferred to think that it was a result of planning and hard work by the German people.


  • 21 June 1948: the Reichsmark is replaced by the Deutschmark.
  • On 24th June 1948 the economic council gave Erhard the power to abolish the most essential rationing, this meant that more consumer goods were available.
  • Wages were fixed until November 1948 to allow businesses to establish themselves and then abolished.
  • All businesses had workers council and in 1951 there was a policy of co-determination allowing for workers representatives on managerial boards in industry.
  • The Equalisation of Burdens Act 1952 gave the Bundestag the power to tax assets from the rich so that they could compensate the poor.


  • Non-food items were put up for sale again - people stopped hording and began selling their things.
  • Did not bring immediate recovery.
  • Factories and businesses replaced machinery and trained workers so they could start producing and training again.
  • Some businesses failed after the currency reform because they could not afford to pay wages.
  • Unemployment rose from 442,000 in June 1948 to 937,000 in January 1949.
  • Car production in 1959 was 4.5 greater than in 1950.
  • Steel production doubled.


Aside from facing opposition from within the government; from within the Economic Council and then the Bundestag, Erhard also faced opposition from the following:

  • Britain: Opposed the idea and supported the Labour union leaders who feared a social market economy would lead to exploitation of the workers by business workers
  • Industrialists: Wanted a pre-command economy with cartels and price fixing and no competition in the markets.
  • Socialists: Opposed the change because they wanted to nationalize industries and use state control.


  • The USA supported the new change because they themselves had a positive experience of a social market economy under the new deal.
  • The combination of a capitalist market and a responsible government won Erhard enough supporters in the Bundestag to continue his policies of change.

economic miracle 1955-1966

  • The Korean War: sparked a need for war supplies, although at this time Germany was not allowed to manufacture them, in 1955 it was eventually allowed to join NATO and allowed to re-arm and start producing war materials.
  • New investments: many businesses recovered enough by the mid-1950s to be able to invest in newer equipment and factories producing higher quality goods and thus earning an international reputation. Exports grew so businesses could invest more and employ more workers.
  • Immigrant workers: An influx of young, skilled and highly educated refugees from the GDR [3.6 million workers came to the FRG from the GDR] meant that there was a large efficient workforce to keep the wages low. They also actively participated in the new consumer culture sweeping the western zones.


  • Economic growth could not keep going at the rate of the 1950's and the early 1960's.
  • Demand for consumer goods fell as the novelty wore off.
  • The Berlin wall put up in 1961 by the GDR cut off their supply of efficient workers that had helped expand the economy.

Economic Challenges 1966-1989

  • In 1966 the government urged by the new economics minister Karl Schiller began to accept that it had to intervene in the economy, with the Bundesbank managing the money supply and a new system of federal and regional budgeting.
  • There were rising levels of government spending especially on social welfare [by 1970 it was 115.9 million] despite budget cuts to benefits.

The recession of 1966-67

  • Domestic and international trade decreased and unemployment and public spending increased. Guest workers were on one-year renewable contract without benefits, which meant that many left although they had been vital to the economy.
  • Karl Schiller reorganised the government approach by increasing planning, intervention and control and subsidising areas such as agriculture and the coal industry.
  • He re-introduces cartels to stop prices rising.
  • The 1967 Economic Stabalisation Law allowed government intervention in times of economic crisis, it also introduced a Five Year Plan for all government spending.
  • In 1968 a provision was added to the Basic Law that said the federal government could move money around the Lander, giving money from the richer to the poorer to provide more social welfare etc.

The oil crises of 1973 and 1978

  • The FRG came to rely on oil rather than coal as a fuel and car ownership pushed up fuel consumption.
  • In October 1973, the fourth Arab-Israeli war broke out and OPEC raised their prices and again in 1978. This hit the FRG a little hard as they got 40% of their fuel needs through OPEC.
  • The crisis hit the FRG between 1974-75; unemployment rose made worse by the fact that the baby boomers hit the employment market during this period. Recruiting guest workers was banned which helped the unemployment levels.
  • The government introduced measures such as 'car-free sundays' and speed limits to save fuel which helped oil consumption levels to drop.
  • The government used propaganda to encourage energy saving tactics and invested in atomic power to reduce dependency on oil. It also did this by not subsidising oil prices which made it more expensive and thus less attractive for those looking to save money. German industries started converting to new fuel rapidly.
  • The government also brought in public spending cuts and higher income tax in 1975.

challenges of the 80's

  • The gap between the rich and the poor continued to widen.
  • Unemployment hit 1.7m in 1981, its highest since the 50's.
  • Productivity levels were falling because of increased spending on unemployment benefits which created a slacker culture for the baby boomers.
  • The government of 1981 looked to change this by cutting public spending including benefits and housing.
  • The government of 1982 cut spending even more including maternity benefits as well as cutting public holidays and reducing the retirement age to 58. It also partly privatised state-run institutions by selling of shares in them.

integration into the european economy

  • The Allies included the Western Zones of Germany in their organisations set up to rebuild Europe.
  • Chancellor Adenauer was keen to establish ties within Europe especially with France in order to better the economic and political status of Germany within Europe.


changing living standard 1945 - 1989.

  • The war left many homeless and the immigrants influx put more pressure on housing.
  • A ministry of housing was set up to oversee building. Rents were frozen and the building industry was given tax concessions to build. Housing associations were set up to build homes; some were state run for social housing or those working in state run industries such as Volkswagen and some were private.
  • People began spending more on consumer goods such as TV'S, fridge's and washing machines for their homes as the economy strengthened.
  • By the 1980's about 90% of all people were covered by benefits and healthcare. People in 1980 lived on average 12 years longer than in the 1950's.
  • In 1973 the top percent of all households owned 78% of the wealth while in 1988 they owned 45% of the wealth.

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