Engineer of a Miracle

(See Cover)

In that racketing, rocketing free half of the world that has otherwise never had it so good, inflation vexes more people, weakens more economies and nags at more governments than any other problem except Communism itself. In the U.S. the cost of living, inching upward through twelve straight months of humming productivity, has reached a record high of 121 (the 1948-49 average: 100). In Australia the whirling chase of money after goods has doubled prices in ten years. India's prices have leaped so crazily (wholesale food prices were up 54% in two years) that the government has had to slash its vital five year plan and bombard all capitals with supplicating cries for investment cash. Brazilians' living costs have more than trebled since 1950; Chileans' have risen twelvefold. Britain's index has shot up 43% in seven years, and France's latest 10%-20% price zoom for food and consumer goods has already wiped out any hoped-for gain from last summer's devaluation of the franc.

In this global sea of inflationary troubles there is one major island where enterprise, aided by record-breaking production, has achieved a basic stability of consumers' prices. In West Germany the cost-of-living index was up a modest 16 points from 1950 levels. This truncated republic, about half the size of the old German Reich and with about three-quarters of its population (53 million), looms as the economic wonder of the democratic West. The Germans' own astonishing energy and some $5 billion in timely U.S. aid have wrought their great part in what is universally hailed as "the German miracle." Chancellor Konrad Adenauer has created the indispensable moral atmosphere of democratic order and political responsibility. But the philosopher and engineer of the miracle is a pink-jowled, roly-poly professor, Economics Minister Ludwig Erhard.

Barrack Talk. At 60 Ludwig Erhard's plump cheeks fairly glisten with the new German look of wellbeing. But nine years ago he was to be found, in frazzled pepper-and-salt suit and dirty shirt, in a little hole-in-the-wall office in flaking, bomb-scarred barracks near the imposing Frankfurt headquarters from which Allied commanders bossed the U.S. and British zones of occupied Germany. "There sat the economics adviser to the conquerors,'' recalls one caller, "almost like a dog on a chain.'' The professor was a torrential talker. To all comers he talked and talked, in the midst of Frankfurt's flattened wreckage, of free private enterprise and the mechanism of Marktwirtschaft, the free-market economy.

Among the ragged populace scrabbling through Germany's ruins in desperate search for a single potato, and for that matter among leaders in most of the world's capitals, there were few who had much to say in those days about free enterprise. It was an idea that the Germans themselves had spurned from the moment Bismarck seized on the 19th century Economist Friedrich List's protectionist ideas to the hour that Hjalmar Schacht's totalitarian Autarkic collapsed with Hitler. U.S. experts laughed after listening to Erhard's spouting, or felt sorry for the pathetic figure so obviously lost amid the realities around him.

Turn the People Loose. Then, almost by accident, Ludwig Erhard got his chance. In June 1948, taking a decision that Erhard as Bizonal economic adviser, and director, had been advocating in memo after memo, Allied authorities suddenly revalued the West Germany currency (one new mark for every ten old ones). Convinced that Germany's recovery could not succeed with monetary reform alone, Erhard waited until one Sunday, when neither German colleagues nor military officials would be around to interfere, and announced on the radio that he had issued a formal decree ending all rationing and price controls at once. "Turn the people and the money loose," he cried, "and they will make the country strong."

His bosses were furious, astonished. Even victorious France and Britain were maintaining stiff controls to ration their meager austerity. From existing legal supplies each West German could expect to get one pair of shorts every 18 years, one pair of socks every 29 years, a suit every 98 years. "How dare you relax our rationing system when you have a shortage of goods?" raged one officer. Replied Erhard jubilantly: "I have not relaxed rationing; I have abolished it." To his countrymen he proclaimed: "The only ration ticket now is the mark." He asked for an interview with U.S. General Lucius Clay. "Herr Erhard," said Clay, "my advisers tell me this is a terrible mistake." Answered Erhard: "General Clay, pay no attention. My advisers tell me the same thing."

"It was," says a European economist, "the most fateful decision in postwar German history." At first it was touch and go as people rushed to buy suddenly unrationed goods. But Erhard shrewdly counted on merchants and farmers to bring out of hiding carefully hoarded goods, figured these would fill the gap until new production could get rolling under the stimulus of freed prices. "Na, Frau Muhr," he would ask his secretary each day, "are there still any textiles left in the shop windows this morning?" As prices soared, outraged citizens hoisted "Erhard to the Gallows" banners, and trade unions demanded a return to rationing and price controls. Replied Erhard: "We must let prices fluctuate. They will settle down." As a precaution, he drummed through a law making punishable the excessive raising of prices. On Christmas Eve, taking a professional's flyer in consumer psychology, he predicted: "Prices will drop in the spring."

They did. As Volkswagen Maker Heinz Nordhoff said, "From then on, things went." Elected to the Bundestag as a Christian Democratic Deputy in 1949, Erhard took over the Economics Ministry in Konrad Adenauer's first Cabinet. He prodded, exhorted, bullied, preached productivity and sleepless enterprise as the ticket to German recovery. He offered generous tax concessions for enterprisers who would build new plants, other tax inducements to those who could sell their products abroad. He used his power to reduce tariffs and import quotas to beat down the raw-material prices for Germany's expanding factories, boldly encouraged the importation of such "incentive" goods as Dutch cheeses, French lingerie, Spanish oranges and Swiss watches. He encouraged builders by lifting rent controls. Under his guiding and goading, production doubled in the first year after Erhard turned it loose, and before the end of the second it passed the 1938 peak, when Hitler's economy was straining every muscle preparing for total war.

The Shadow Ministry. For Erhard and West Germany, the Korean war was a commercial opportunity. Without the necessity for fast rearmament, West Germany's reviving heavy industries were in a position to move into many foreign markets hitherto the preserves of Britain, France and even the preoccupied Americans. Erhard urged German firms to send their salesmen hotfooting after their old South American markets. Orders poured back into Germany, but in the wild scramble for raw materials, domestic prices rose alarmingly.

Erhard reacted typically, alternating threats with exhortation. To unions he pleaded for deferment of wage demands, simultaneously made threatening noises about compulsory savings. To employers he talked of production norms and price ceilings. When unemployment topped 1,500,000, he beat off a censure move in the Bundestag by a scant majority. "Your policy," jeered Socialist Erik Nolting, "only makes the rich richer and the poor poorer."

Canny Konrad Adenauer quietly set up a shadow Economics Ministry in his chancellery to take over if Erhard's prophecies flopped. But the professor's exhortations to Germans to wait for lower prices paid off. The inflation threat faded, and the German economy took off on the boom that has yet to end. Shortly after that crisis, Erhard took a hefty bite on his cigar and told a visitor: "Remember all those announcements I made about controls? You know how many I had to put in force? None."

Germans call Erhard "Herr Optimist." Says Erhard: "I'm no optimist, but a realist who knows the capacity of free-market economy."

Ten Days After. Europe's most successful realist has risen in classically enterprising fashion from hamble origins. Born Feb. 4, 1897 in the town of Fuerth near Nuernberg in Franconia, he was the son of a peasant boy who left his farm to open a dry goods store in town. Badly wounded by a shell at Ypres, Corporal Ludwig Erhard returned home too weak to work in the store. He stayed on at Nuernberg's Commercial College, found his vocation in economics, went on to take his doctor's degree at Frankfurt University under a liberal professor who taught that "free enterprise is the essence." One of his most vivid memories is the postwar inflation, which wiped out his parents' savings, became so bad that it took a wheelbarrow full of marks to buy a suit of clothes. The experience made him a devout believer in the sound mark. His wife still remembers their marriage in 1923 as taking place "ten days after the currency reform," which replaced the worthless mark with a new one.

For the next 16 years Erhard helped run a small, city-supported market-research institute in Nuernberg. It was a backwater existence. Evenings Erhard dined heavily on Franconian smoked meat and dumplings, played the piano or took a hand at Doppelkopf (a four-handed card game) with his institute associates. After World War II broke out, local Nazis pressed Erhard to join Hitler's Labor Front. He refused, lost his post and founded an institute of his own. Friends in the German national association of manufacturers got him such jobs as surveying "The Total Headwear Requirements of Bombed-Out Persons." Convinced after Stalingrad that Hitler must lose, Erhard drafted weighty studies of postwar economic prospects. One such report fell into the hands of Karl Goerdeler, the Leipzig mayor who was scheduled to take over the government if the plot to assassinate Hitler had succeeded in July 1944. Goerdeler's judgment: "The man must become minister."

Apocalyptic Powers. Shortly after surrender, a jeep drove up to Erhard's modest house in Fuerth. A U.S. major demanded: "Are you Erhard? Please come with me." Erhard nervously embraced his wife and climbed in. At the U.S. military government office he learned that the U.S. authorities, impressed by the lack of Nazi ties in his record, had picked him for Bavarian economics minister. But Erhard, a Franconian, a Protestant and a reputed Freemason, never hit it off with his clannish Catholic Bavarian colleagues. No great shakes as administrator and organizer of hand-to-mouth subsistence measures, he was already wrapped up in his plans for sweeping visionary changes. He lost his post in the next ministerial shuffle. It was not till the Bizonal authorities called him to Frankfurt in 1947 that Erhard found his place, his platform and his apocalyptic powers.

Since the decisive breakaway of 1948, Erhard has proclaimed his Soziale Marktwirtschaft with all the incantatory efficacy of a prophet proved in 53 million pocketbooks. Strange as it may seem to Americans, the fact that he is a professor further enhances his great prestige, for in the elaborately graded system by which Teutons rate their proliferating official titles, the title of professor ranks highest of all. (West German President Theodor Heuss -another economist -is customarily introduced at banquets as "Professor Heuss, the President.")

Erhard is not the sole motor of Germany's booming enterprise. Skinflinty old Finance Minister Fritz Schaeffer, fighting stubbornly for his pfennig-pinching budgets, and Central Bank Boss Wilhelm Vocke. keeping alert hands on the nation's interest rates, have helped immensely in preserving the federal republic against inflationary dangers. But Erhard created the proper climate, bulled away the obstacles. Keeping clear of technical intricacies, he preaches the wider doctrine of expanding productivity, the Soziale Marktwirtschaft that might be translated loosely as "free enterprise alive to social responsibilities." It means, he once remarked only half jokingly, "The state can interfere if it is absolutely necessary."

Christmas Chatter. Erhard lives, breathes and talks Marktwirtschaft. He is forever evangelizing -at banquets, cocktail parties or even family gatherings. He has made 81 trips abroad, including five to the U.S. ("Free enterprise has given the American citizen," says Erhard, "a living standard and a chance for self-expression unparalleled in the rest of the world.") His energy is prodigious, his persistence monumental. On one four-week swing through Latin America ("the continent of the future"), Erhard outlasted two aides, who split the 18-hour daily duty of keeping up with him, outate, outdrank and outtalked his hosts in eight countries, and sparked a tremendous interest in doing business with Germany. Nothing defeats him. Says an associate: "As soon as he recognizes that he cannot get into a house through the front door, he is at the back quicker than the man inside can get there. If he finds both doors locked, he doesn't try to break the house down. He goes right on to the next house, and before you know it, he has dug a tunnel and got in through the basement."

His day begins at breakfast with his economist wife in their modest, government-owned home on the Venusburg overlooking Bonn. Heading for his Bonn headquarters, he dictates speeches as he rides, often stops off at a local market to check prices personally. As the Mercedes 300 lurches up to the entrance in a swirl of dust, his driver tries to get out and open the door. But Erhard is already out, Homburg in hand and cigar in mouth, charging toward the ministry entrance like a soccer forward. He waves jovially to the doorkeeper, fairly skips up the steps and down the long hall to his desk.

From his high-laced shoes (specially built up for his World War I injuries) and long wool underwear bulging beneath his socks to the paper holders into which he jams his long Sumatra or Brazil cigar, Ludwig Erhard has remained true to his staid Franconian upbringing. Though he now wears glossily tailored blue suits, their lapels are usually sprinkled with ashes. His youngest daughter is married to a Daimler-Benz executive. The son-in-law used to work for the High Authority of the European Coal and Steel Community in Luxembourg, but Erhard nagged .so persistently that a young man belonged not in a deadening bureaucracy but in "competitive private enterprise" that he finally changed jobs. "Germany has substituted the commercial man for the bureaucrat," proclaims Erhard.

Berlin to Baghdad. In their thrusting enthusiasm to take Erhard's advice, West German enterprisers have kept boosting the country's gross national product at an annual rate about twice that of the U.S. (see chart). Unemployment has effectively vanished, workers' real wages today have advanced 60% since 1950. By 1955 steel output reached 2,000,000 tons a month, topping that of the Reich and establishing Germany as Europe's foremost producer and the world's third (after the U.S. and U.S.S.R.).

The German export drive has devastated competitors. Says French Engineer Gaston Duverger: "All over the world German salesmen are walking circles around us." In Iran practically all buses running are now Mercedes-Benzes. Two of Baghdad's proud new bridges are German-built, as is the new one across the Nile at Cairo. The products of Bayer's giant Leverkusen works now fill the drugstores of Southeast Asia. Three years after the French gave up Indo-China, half the cars in Laos are German-made; in an auto race in the Belgian Congo, Volkswagen took the first eight places. The heavy-machinery firm DEMAG has built the first steel works in Egypt, Korea, Burma and the Philippines, and others for France, South Africa, Brazil and India. DEMAG-built furnaces now turn out some 37 million tons of steel a year round the world -13% of the world's product. Krupp's technicians are running up 41 waterside cranes in Pakistani ports, a dozen road-bridges in Colombia, a port coal-loading device for the Chesapeake and Ohio Railway in Newport News, Va.

Cars for Motorcycles. German exports have grown so much faster than imports that the country's gold and foreign-exchange hoard tops $5.8 billion," more than double Britain's, and Germans have embarked on a foreign-aid program of their own ($12 million in 1957 for technical-assistance projects involving some 25 countries). This year the World Bank borrowed $100 million in the Frankfurt money market. German firms have sent $380 million abroad in direct capital investment -roughly a third to Europe, a third to Latin America, a tenth to the U.S. and 15% to Canada.

With such booming export business the German machine has devoured ever more raw materials from abroad, and Erhard has fed it by four major tariff cuts during the last two years. No country in the world has lowered trade barriers as boldly and sharply. The cuts have also helped to keep prices down at home. German workers, long paid less than other Western Europeans because of the postwar needs of rebuilding and the huge influx of unorganized refugee workers from Eastern Europe, have been reaping the rewards of trusting in Erhard's insistence that production must come before benefits.

Workers are switching from motorcycles (sales fell 67% below 1952) to cars (up 270% in five years). They are eating so well again that in new cinemas, carpenters had to build the seats a couple of inches wider. People are buying 75% more refrigerators than in 1953; washing-machine sales are twice the volume of 1955. Last summer in 86 campaign speeches Erhard proclaimed: "I don't have to make any promises. I have kept them all in advance. Just look around you and see for yourselves." Erhard received such an ovation in Socialist Nuernberg that he raced off across his native Franconian countryside singing Ins Land der Franken fahren from his Mercedes' windows. He outdrew Socialist Boss Erich Ollenhauer three to one in the Saarland's industrial Voelklingen. Heckled by Volkswagen workers in Wolfsburg over his plan to sell their state-owned plant, he sent 35,000 letters to their homes explaining that the whole idea was to sell "people's shares" to small investors like themselves. Wolfsburg, like Nuernberg and Vঝklingen, went C.D.U. for the first time ever in the September landslide.

Cold Water. Erhard is no coddler of big business. When the Saar voted to return to Germany in 1955, a group of Saar industrialists asked for subsidies to help them make the transition from the French to the German market. Growled Erhard: "We jumped into the cold water in 1948, and look how we learned to swim. You'll learn even more quickly." He has waged long and bitter war on cartels. Germany is the fatherland of the cartel, and before World War II, an estimated 2,000 cartel agreements were in force in the Reich. Blocked by old-line businessmen in his first attempt to outlaw cartels in 1950, Erhard tried again, finally got a bill drawn up this year. At the hearings, industrialists who furnished the C.D.U. with much of its funds pleaded that cartels were necessary for times of recession. Erhard leaped from his chair, exploded: "That, gentlemen, is economic humbug." The industrialists suggested interpretations of the law be left to the courts. Snapped Erhard: "Courts are not fitted to judge whether a cartel is harmful to the economy or not. That is my job." Only Adenauer's intercession forced Erhard to accept a compromise bill permitting exceptions for "crisis" cartels and retail-price-fixing rings. "Damned little butter for such a big slice of dry bread," snorted Erhard as the Bundestag passed the bill. Yet even this watered-down law makes Germany the first European country to take a stand in principle against "associations in restraint of competition."

Erhard also succeeded in enshrining in the new treaty creating the six-nation Common European Market five stiff rules banning all agreements to prevent, restrict, or distort competition within the Common Market. Like Britain's Chancellor Harold Macmillan, he is a devoted believer in free trade among all nations. This does not make him an enthusiast for the Common Market. He fears it may become "an island of protectionism in Europe" because of pressure from the weaker economic members, especially France. "Why should I want to throw out controls and to abolish tariffs on a national level only to reintroduce them on an international one and on a much larger scale?" he demands.

The Big Change. After his personal success in the elections, Erhard is expected to stay on as Economics Minister. He would also like to take over Vice Chancellor Franz Blikher's chairmanship of the Cabinet's economic committee, which would enable him to gain overall direction of German economic policy. Up to now he has had to work in tandem with balky Finance Minister Schaeffer, who has incurred Adenauer's displeasure by holding back rearmament funds and thus delaying Adenauer's plans for stepping up German participation in NATO. Inevitably there is talk that Erhard might be in line to succeed as Chancellor, but his lack of an organized following within the party argues against that now. Says Erhard: "I don't approach that question, but it may one day approach me."

Erupting Volcano. Last week Erhard was deep in his newest battle against rising prices, brought on when the big Ruhr coal operators announced a sudden $1.20-$1.50-a-ton price rise only four days after the elections. To the coal operators' pleas that their prices were still the lowest in Europe, Erhard roared: "You have made a volcano erupt. The administration is disturbed, the government is wounded." To unionists seeking concomitant wage rises and benefits, Erhard insisted he would succeed in keeping prices down: "If you look into it, you will find that your real income is now higher than that of any other European country." He pointed out that he hoped the gross national product would increase by 4% in the next few years. "This 4% you'll get, perhaps a bit more, but shorter working hours just now are impossible."

The dynamic process that Ludwig Erhard has set in train by liberating his country's economy is still forcing basic changes. Last week in Paris Erhard threw his powerful support behind the plan to set up a free-trade area comprising eleven European nations (notably Britain) besides the Common Market's six. Always, to Europe's Socialists and faint of heart, he preaches his doctrine: "The most successful means for the achievement and retention of prosperity is competition. Only by competition can an economy expand to serve all people, especially in their capacity as consumers, and dissolve all advantages which do not result directly from higher performance. Free competition thus leads to progress and profits for the whole social order."

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