The Father of the Social Market Economy Ludwig Erhard was born 125 years ago
by Professor Dr Eberhard Hamer, Mittelstandsinstitut Niedersachsen e.V.
125 years ago, on 4 February 1897, Ludwig Erhard was born in the German city Fürth as the son of a textile merchant. He could no longer afford the profession he had learned as a textile merchant because of a foot injury, but he was able to study in Nuremberg and later in Frankfurt without taking his Abitur. He then stayed on at various economic institutes and wrote as an economic journalist during the war about the reconstruction after a lost war – which the ruling party resented and prevented him from becoming a professor.
After the war, he was entrusted by the Allies with the preparation of the currency reform, became director of the two-zone economic administration of the western occupation zone in 1948 and wrote the “Düsseldorf Principles of the Social Market Economy” for the CDU in 1948.
The first federal elections in 1949 were still dominated by the bitter economic policy dispute between planned economists and market economists. For many, abandoning the hitherto existing centrally administered economy seemed like a betrayal of distributive justice and of the lower classes. Ludwig Erhard, on the other hand, was an advocate of the social market economy, which wanted to steer the production and distribution of goods via the price system. Today, one can no longer imagine the bitterness with which both sides defended their positions. The author campaigned for the CDU together with Ludwig Erhard at the time and still remembers how heatedly it was discussed in the election meetings whether “market economy is not just egoism”, whether “market economy can provide jobs”, whether “the supply of goods functions at all if it is no longer planned”. The counter-argument that a free market organises itself if the state only provides it with the framework data was listened to with great scepticism and the majority did not believe it.
The CDU’s election victory in 1949 made Ludwig Erhard the Federal Minister of Economics (until 1963) and he was able to push through his concept of a market economy and liberation from state constraints. Price proved its worth as a means of control. Where prices rose, they indicated scarcity, the increased prices offered higher profits and thus an incentive for more production. And consumers reached for the cheaper products, thus forcing prices down.
The state was only supposed to ensure that all market participants had the greatest freedom of action and that the basic law of the market economy – equality of opportunity – (like equality of rights in society) was enforced. Competition law with a ban on cartels, the ban on discrimination and Ludwig Erhard's care in building up a strong middle class in fair competition served this purpose.
However, so that “no one gets lost in our market economy”, he demanded social security (social market economy) in the event of failure.
A return to Ludwig Erhard would be particularly important today, where the state is again expanding like an octopus in all areas of life, where prosperity depends less and less on one’s own performance than on the use of subsidy and social programmes, where two-thirds of the population live on state transfer payments1 and where global banks and corporations dominate our market and our politics and discriminate against the independent middle class, where personal companies are taxed more heavily than corporations,2 where politics is no longer about value creation, growth and economic benefit, but, as in unfortunate times, about imposing ideologies (ecology instead of economy) with the help of dirigisme, the rule of functionaries, control and a growing planned economy.
Ludwig Erhard's secret for the “economic miracle” he created lay in his definition of profit. He enforced that only the surplus taken out by the company was considered taxable profit.3 This meant that companies could first finance themselves with internal profits, create investments and jobs, before the state octopus withdrew this money from them, as it does today (over 70 %). However, this infuriated the international financial industry, which did not want self-financing companies, but rather external financing through loans given by them, and was finally able to convince Adenauer4 that the state would receive more taxes if it taxed not only surpluses, but also internal revenues. Thus, the time of Ludwig Erhard remained the golden age of small and medium-sized enterprises. Everyone could start up on their own, even without outside capital, finance themselves from profits, grow and create an equity ratio that was also common internationally as a precaution against economic crises.
In the meantime, the banks with their borrowed capital are calling the shots again, more than a million medium-sized businesses will not survive the next crash due to a lack of equity capital, and the corporations have grown unilaterally at the expense of medium-sized businesses.
The author has inherited another legacy from Ludwig Erhard. Ludwig Erhard was the first and only Federal Minister of Economics who knew that prosperity does not come from international corporations but from small and medium-sized businesses that are loyal to their home country, that small and medium-sized businesses are the decisive population stratum for jobs, investments, economic growth and for public finances. He was the only one to successfully pursue SME policy (thus also having the greatest success), to found an SME research institute in Bonn and, through a former comrade-in-arms, to initiate the SME Institute in Hanover, thus founding SME research in Germany.
In the SME Institute Niedersachsen, concepts and strategies for a reconstruction of the German economy after the eco-ideology phase and its coming crash are again being worked out – as Ludwig Erhard did during the Nazi period – including the new dimension in EU centralisation, EU government and EU centralised economy. •
1 cf. Hamer/Jörgens. Wer ist Mittelstand? (Who is Mittelstand?), Hanover 2021
2 Where global banks and corporations even enjoy tax advantages by shifting their profits.
3 Not, as is the case today, every in-house surplus through allocations and settlements and the most complicated tax calculation in the world.
4 Through the German Banker Hermann Josef Abs (Deutsche Bank)
Ludwig Erhard
cc. Ludwig Erhard was born on 4 February 1897 in Fürth, the son of a textile merchant. After attending secondary school, he completes a commercial apprenticeship in Nuremberg. From 1916-1918 he was a soldier in the First World War and was seriously wounded at Ypres on the Western Front in 1918.
From 1919 to 1922 he studied at the Nuremberg Commercial College and from 1922 to 1925 business administration, national economics and sociology at the University of Frankfurt/Main. Doctorate (Dr rer. pol.) on a monetary policy topic. 1925-1928 works as managing director in his parents' business. 1928-1942 he is scientific assistant and later deputy director of the “Institute for Economic Observation of German Manufactured Goods” in Nuremberg. In 1942 he founds his own consumer research institute, the “Institute for Industrial Research”.
In March 1944 he completed a memorandum in which he assumed that Germany would lose the war. Immediately before the assassination attempt of 20 July 1944, he sends this memorandum to Carl Friedrich Goerdeler, who is at the centre of the civil resistance against the Nazi regime.
After the end of the war, Erhard first became Minister of Economics in the new Bavarian government. In 1947 he becomes head of the expert commission “Sonderstelle Geld und Kredit” (Special Office for Money and Credit) under the Bizone established by the British-American administration. He is entrusted there with the preparation of the currency reform.
In March 1948, the Economic Council of the American-British Bizone elects him Director of the Economic Administration. Parallel to the currency reform in June 1948, Erhard initiates the abolition of management and the liberalisation of prices in the western occupation zones.
In July 1949, the CDU in the British occupation zone adopts Erhard’s economic policy concept of the social market economy in the “Düsseldorf Guidelines”. In September 1949 Erhard is elected to the first German Bundestag and becomes Federal Minister for Economic Affairs in Konrad Adenauer’s first cabinet. He remains so until 1963.
In February 1957, Erhard publishes his most important book, in which he presents and explains in detail his concept of the Social Market Economy for the general public: “Wohlstand für alle” (Prosperity Through Competition; Thames & Hudson 1958).
After Adenauer’s resignation in October 1963, the German Bundestag elects Erhard as the new Chancellor. He remains so for only three years. In October, the members of the FDP government resign in protest against the financial policies of the CDU and CSU. This is followed by Erhard’s resignation as Chancellor on 1 December. He is succeeded by Kurt-Georg Kiesinger of the CDU with a Grand Coalition government of CDU, CSU and SPD.
Ludwig Erhard remains a member of the German Bundestag until his death on 5 May 1977.
Compiled according to https://www.hdg.de/lemo/biografie/ludwig-erhard.html