The mechanics of the West German recovery is a tale rarely told. The Marshall Plan was the means through which the Americans channelled money for the recovery of all states in Europe in the Western sector and Japan. The USA had 80% of the world’s gold supply, so could well afford the largesse needed by all the collapsed economies. Over the four years, $13 billion (equivalent to well over $100 billion today) or 0.5% of the USA Gross Domestic Product (GDP) was channelled into dollar-starved Europe.

The policy and the volume of money ensured that the USA controlled post-war European economic development, focused on free trade, unrestricted flow of goods between nations and the USA, and made available a tradable currency: US dollars

It is worth noting that China today is in a similar position, with a surplus of the world trading currency (US dollars) for quite different reasons and is using her spare resources for development in very different ways to the Marshall Plan. Both countries experienced excess reserves of the global cash which they used for 'development'. Marshall himself was a five-star general and a war hero. The money was channelled into all the Western European states between 1948 and 1953.

Germany and KfW

The Kölner Dom (Cologne Cathedral) stands seemingly undamaged (although having been directly hit several times and damaged severely) while the entire area surrounding it is completely devastated. The Hauptbahnhof (Köln Central Station) and Hohenzollern Bridge lie damaged to the north and east of the cathedral. Germany, 24 April 1945.

The so-called German 'miracle' is widely noted in the literature, but how this was achieved has been ignored. The Americans provided the German government through imported goods (so-called counterpart funds) sufficient US dollars, $1.4 billion, to create a German-run "Development Bank": the Kreditanstalt fur Wiederaufbau (the German Credit Institution for Reconstruction), colloquially known ever since as KfW. KfW was founded in 1948 as a bank owned by the German state and uniquely in Europe has remained not just the third largest bank in Germany in 2020, but is still state-owned, a reflection of KfW's importance to the German economy. The task of re-establishing the economy was fast. KfW had always been run from day one by Germans. The German government repaid the loan in full by the end of 1962.

The new KfW had dollars to lend and provided the base from which German industry redeveloped. Readers may remember from earlier blogs that the German regional banks had been vital for Germany’s earlier development. After 1870, these banks had raised equity for the German industry. They had played a partnership role in Germany’s rapid development at this time. After 1948, KfW again played a vital role in the resuscitation of the German heavy coal and steel industry, KfW funded housing projects, (as they did a second time after 1990 when East Germany became part of Germany as a whole), KfW provided funds for exporters. In brief, KfW provided the missing link in explaining Germany rapid growth after 1950.

The Germans had one more vital benefit as a result of the two wars. The ancient ruling classes, including monarchs, had been severely weakened and had ceased to play a central role in politics they had lost much of their economic power. As we noted earlier, any ancient ruling classes were the wrong people to develop capitalist industrialisation. As a former employee of KfW German with a long heritage as an insider said in a speech:

“...it is absolutely right to attribute a considerable part of the German Wirtschaftswunder the turmoil of our class structure... Germany lost the eastern part with their ultra conservative agro based Krautjunker (cabbage junker) to a rising power of forward looking people, industrialists, trade unions and new political parties who were able to put counterweight on the recovering conservative class... in my opinion the student movement of the sixties was the Grande Finale and breakthrough of the new structure.”

“The symbol of this new set up was the social market economy... a model based on catholic social teaching... (plus the) highly effective innovative small and middle sized enterprise... mostly family owned... a more cooperative identity... the back bone of the German industrial structure.”

- quoted from a speech copied to the author from a senior long-time KfW employee in 2016

Despite the huge success of KfW, no government has attempted to privatise the KfW.

Japan and DBJ

Japan, like Germany, was offered resources soon after the end of hostilities to set up The Development Bank of Japan. In 1947 the aptly named Rehabilitation Finance Corporation was set up with US loans. By 1951 it had been renamed the Development Bank of Japan. A year later it was setting up branch banks in the major Japanese cities. From then onwards, the DBJ remained 100% government-owned and became a major development bank growing annually. The DBJ became the key vehicle that goes a long way to explain Japan’s rapid growth after 1945.

As in any development situation where the production and savings of the country are low, the volume of domestic savings was inadequate for the task of reconstruction. Like KfW, the DBJ was able to utilise the USA dollars that arose from the commodity aid provided by the Americans. The Japanese were able to use state planning, as it would be called today, to direct scarce resources to specific areas of industry, coal, steel, electricity, shipbuilding. The government was able to channel scarce financial resources, through banks which it owned, to the industrial sector which would lead to rapid economic development. As the statistics of growth illustrated, Japan had 15 years of great success.

What do these examples tell us?

The rapid German and Japanese recoveries after their military defeat in 1945 were important on several levels. Firstly, they illustrate how quickly a country that has already experienced industrialisation can be rebuilt after a catastrophe. The fact that both countries had 'already experienced industrialisation', is important as it tells us that the ‘dynamic’ that people have to go through before they industrialise had already been achieved. The experience illustrates what can be done with goodwill when a richer nation supports a nation wishing to 'develop'.


Copyright Notice. This blog is published under the Creative Commons licence. If anyone wishes to use any of the writing for scholarly or educational purposes they may do so as long as they correctly attribute the author and the blog. If anyone wishes to use the material for commercial purpose of any kind, permission must be granted from the author.

Previous
Previous

#70 The ‘Third World’ & Development

Next
Next

#68 The Marshall Plan: Protecting Europe from Communism