Rebuilding Germany: The Creation of the Social Market Economy, 1945-1957

Published by EH.NET (April 2005)

James C. van Hook, Rebuilding Germany: The Creation of the Social Market Economy, 1945-1957. New York: Cambridge University Press, 2004. xiv + 312 pp. $70 (cloth), ISBN: 0-521-83362-0.

Reviewed for EH.NET by Jonas Scherner, Department of Economics, University of Mannheim.

Today the concept of Soziale Marktwirtschaft (social market economy) often is considered to be a synonym for the welfare state and the related growth problems which became evident in Germany in the last years. In his monograph about the creation of the social market economy in Germany, James C. van Hook rightly emphasizes that this definition is not in accord with the concept implemented in West Germany after World War II. In fact, at that time Soziale Marktwirtschaft represented an economic system, in which — compared with other western democracies’ economic systems — the influence of the state on the economy was a limited one. In several countries the experience of the Great Depression and the prevalence of Keynesianism induced a greater importance of public planning and in some countries certain branches even became subject to socialization.

Van Hook mainly examines two questions: First he asks to which extent the Germans themselves made a contribution to the implementation of the social market economy, which according to Van Hook is characterized by private property, free markets and, generally, the non-existence of public planning. Was it the case, as some authors state, that the adoption of this type of economic system was the result of Allied pressure? Van Hook assumes that the Germans — despite the legal influence of the Allies — de facto had considerable scope to shape their economic system themselves.

Secondly, van Hook examines the development of the social market economy during the 1950s and challenges some interpretations in the literature, especially with regard to the so-called Investment Aid Law (Investitionshilfegesetz) of 1952 and the Law against Restraints on Competition (Gesetz gegen Wettbewerbsbeschr?nkungen) of 1957. He questions the assumption that these laws represented a restoration of elements which were characteristic of Germany before World War II.

Van Hook succeeds in demonstrating that the Germans contributed to securing private property to a great extent. The Allied decision of 1947 against socialization did not preclude such a course of action. After some years, the future German government should decide on Germany’s economic system. The Americans hoped for the complete abandonment of all socialization plans, whereas the British government wished the socialization of basic industries. Therefore, the discussion among Germans and the question of which political parties would govern in Germany were decisive regarding the property concept and the economic system. Van Hook’s analysis also sets forth in detail an interpretation which, however, is generally not questioned in literature: The establishment of free markets in 1948 was accomplished due to the initiative of the Germans and despite the scepticism of the Americans and the British. This reform, according to Van Hook, was the necessary condition for the economic success of the social market economy with the result that the majority of the Germans accepted it — as well as democracy. Therefore, the German contribution was in fact significant. However, this does not mean, as Van Hook emphasizes, that the contribution of the Allies was irrelevant. The Americans, especially, ensured the success of the social market economy by exploiting the European Recovery Program to foster international trade liberalization. Regarding the American influence, Van Hook should have addressed more extensively other elements of the social market economy such as the design of the currency reform in 1948 and the establishment of an independent central bank, which, according to Christoph Buchheim and some other authors, were very important for its success.

Regarding the development of the social market economy during the 1950s, van Hook begins with the decision process resulting in the Investment Aid Law of 1952. The motivation for this law was the fact that in West Germany a functioning capital market did not yet exist and the prices of basic products were still regulated. As a consequence, production and investment in such regulated branches were too low. Therefore, the Allies and leading German business associations exerted pressure on the German government to provide the basic industries with funds to invest. In the end, such funds were collected according to the Investment Aid Law through a forced loan on German industry. Some authors, such as Werner Abelshauser, consider this measure a violation of the social market economy’s fundamental principles. However, van Hook demonstrates that Ludwig Erhard himself considered this law as a temporary regulation only, necessary to overcome a short-term bottleneck. In addition, as van Hook emphasizes, the German economics minister succeeded to soften the demands of both the Americans and German industry.

After some years indeed, the economic conditions that had made evident the need to funnel extra funds into basic industry in order to ensure the continued expansion of the rest of the economy had vanished. Therefore neither this law nor any other rigid regulation became a long-term constitutive element of the German economic system after World War II. Consequently, this law did not imply an erosion of the social market economy. In a similar way, van Hook considers the implementation of the controversial Law against Restraints on Competition promulgated in 1957. This law replaced the blanket prohibition of cartels established by the Allies in 1947, permitting exceptions, even if in principle cartels remained forbidden. Furthermore, no norms regarding concentration were established. Again, some authors interpret the permission of exceptions as a violation of the social market economy’s principles. However, van Hook rightfully stresses the point that this law created a culture of competition in Germany which had a lasting effect on the German economy. This impressively contrasts with the first half of the century when Germany was the synonym of a highly cartelized country.

In sum, van Hook’s study is a valuable supplement to our knowledge about the history of the implementation of the social market economy in West Germany, based on rich archival material. Unfortunately, the bibliography does not include the secondary literature, sometimes complicating the reading of this persuasive book.

Jonas Scherner’s current research interests are investment contracts between industry and the Nazi regime and learning curves in the munitions industry in the Nazi period. Recent publications are “Ohne R?cksicht auf Kosten? Eine Analyse von Investitionsvertr?gen zwischen Staat und Unternehmen im Dritten Reich am Beispiel des F?rderpr?mienverfahrens und des Zuschussvertrags,” Jahrbuch f?r Wirtschaftsgeschichte 2004 and “Demystifying the German Armament Miracle during World War II: New Insights from the Annual Audits of German Aircraft Producers” (with Lutz Budrass and Jochen Streb), Yale University Economic Growth Center Discussion Paper No. 905 (Jan. 2005).