Revisiting the role of Edward Tenenbaum in the West German 1948 currency reform
With some additional notes about ordoliberal influence on the reform and Charles Kindleberger as an extra guest.
The currency reform of 1948 plays a crucial part in the postwar economic history of Germany as it is often seen as one of the two ingredients (the other being price liberalisations) that allowed the Wirtschaftswunder. With both attributed to Erhard and the ordoliberals, this narrative has been pivotal in building one of the most persistent mythologies of postwar West Germany.
Some have contested whether the postwar West German performance was in fact an ‘economic miracle’ based on ordoliberal principles or whether it represented the opening stage for a particular framework of social peace (see Fuhrmann 2016). Others have pointed out at how it came at a cost of putting aside de-nazification, with important consequences about the character of West German democracy (see Abosch 1962).
Furthermore, and building on the reality of the US’ postwar geopolitical choices, the prospect of implementation (and stability) of the Bretton Woods monetary system, the flooding of European economies with Marshall and GARIOA funds (1) and the remarkable social compromise between labour and capital (at specific costs) achieved across Europe, the performance of West Germany in general (and the twin reforms in particular) in heralding the impressive postwar economic growth has also been challenged (see Abelshauser 1987; Dyson 2020, p. 100). And one should also not forget a crucial component related to Germany specifically. As Jarausch has noted, industrial capacity in Germany was, in contrast to most other European countries, largely intact.
the bulk of industry had survived the bombing far better than private homes […] The expansion of the war economy had created new productive capacity […] many factories and plants had been repaired […] so that a remarkable number of machines found in the bombed-out factories still functioned (Jarausch 2006: 82; see also Tribe 1995)
At the same time, a highly skilled variable capital (labour power) was, in the Western part of Germany, in abundance. Again from Jarausch, we read that
the country continued to dispose of the technical skills of engineers, the marketing knowledge of management, and, above all, the manpower of soldiers returning home from captivity […] the large number of refugees and expellees […] added many people willing to work as well as possessing much needed technical skills” (Ibid).
Laying these issues aside, the key event of the currency reform itself continues to prompt debate and controversy. Two main sides are most prominent: those who wish to attribute the currency reform to the Military Government of the US (OMGUS), and those who wish to see a more prominent role played by Germans - and, in that context, ordoliberals.
Given that the currency reform was overseen by a newly created independent central bank (the Bank deutscher Länder - BdL), an extra point of contestation concerns the extent of ordoliberal influence in the design and institutional status of the central bank (I have written on this related topic in a forthcoming paper titled ‘Ordoliberalism and central bank independence: a case of foster parenting?”)
Most recently, a new book titled Edward A. Tenenbaum and the Deutschmark by renowned historian Carl-Ludwig Holtfrerich returns to the issue. An interview with the author where the main arguments of the book are laid out can be found here.
Laying out the main framework within which the currency reform took place, Holtfrerich explains that the goal of the Allied Occupation forces was to
liberate the markets from strict controls and restore normal supply-and-demand conditions in Germany. That was the whole purpose of the currency reform, to get market prices again, and thereby unleash production incentives and stop shortages (2)
He then continues with an short account of the main strategic views of the 4 Allied forces (US, UK, France and the USSR), concluding that the ground work for the reform was the famous Colm-Dodge-Goldsmith Plan (CDG) of 1946. Here, we get a first mention of the main argument of the book: that it was in fact Edward Tenenbaum, a 23 year-old economist from Yale with a celebrated military record, that was the brain behind the currency reform (3).
it was Tenenbaum who was accepted by everybody as the leading person after the decision had been taken in March 1948 that there would be a currency reform in West Germany only instead of a four-power currency reform.
Laying out his argument, Holtfrerich continues by stating that
In April 1948, Tenenbaum effectively imprisoned 11 West German currency experts with support staff for seven weeks in barracks on an American airfield near Kassel. They were completely cut off from their families, from the rest of Germany. In total secrecy, they aided Tenenbaum in adjusting his currency reform plan to German language and conditions.
The choice of words is rather peculiar as none of these experts were ‘imprisoned’ in any real sense. In the context of the immediate postwar situation in Germany, with de-nazification at its zenith (however short-lived it eventually was), being close to the Allied Authorities (and especially the US) was a particularly privileged position. To be trusted to advice on a central policy issue like the currency reform even more. It is worth keeping in mind that even Ludwig Erhard, the purported architect of the currency reform, the price liberalisation reform and future Economics Minster and Chancellor of Germany, was suspected as a Nazi collaborator. (4)
What is more, we already know that even in the drawing up of the CDG Plan, German experts were advised. Among them, Horst Mendershausen and Heinz Sauermann, with the latter noting in 1979 that
[…] although the legal basis was provided by the military governments, they could not do without German cooperation.” (Sauermann 1979: 312)
Himself a regular economic adviser to the OMGUS, Sauermann explained that to the extent that the overall agreement among Americans and Germans was the pressing problem of the monetary overhang, removing it was not a matter “requiring long discussions” as
on this point the views of the Americans were more or less the same as those of most of the German documents […] Studying the American plan, we find that it aimed at the immediate functioning of the price mechanism, i.e. the functioning of a market system.” (Sauermann 1979: 309).
The agreement was not coincidental. Already before the German capitulation, ordoliberals like Adolf Lampe and Walter Eucken - both members of the Akademie für deutsches Recht (5) - had authored studies about post-war reconstruction, focused on the elimination of the “excess purchasing power” created by the Nazi system of strict controls. Even Erhard himself, in a report for the Reichsgruppe Industrie in 1944 appropriately titled “War Finance and Consolidation of Debt” had argued that the war economy had created excess money supply and inflation which was, however, hidden by the rigidly imposed price and wage controls. Once the war was over, this hidden inflation would re-appear and wreak havoc on the economy.
Many of the plans fleshed out by German ordoliberals during the Nazi regime were then handed out to the occupation authorities. We know, for example, that “the Freiburg economists Lampe, von Beckerath, and Eucken were able to convene to formulate their monetary report entitled Währungssanierung durch Kaufkraftabschöpfung mit anschliessender Geldumlaufsauffüllung in Freiburg on 3 and 11 August 1945 respectively” (Glossner 2010: 34), passing it along to the occupying authorities upon completion. At the same time, Ludwig Erhard, working in Munich with a group of economists under the name Economic Working Committee of Bavaria, also submitted a draft law for the “Reorganisation of German Finance” to OMGUS in July 1945. Lastly, establishing the Sonderstelle Geld und Kredit in October 1947, with a board “sympathetic to free markets” (Mierzejewski 2004: 55) as per American wishes, was yet another forum where ordoliberal positions were dominant and from which Allied and German economic policy direction could (it was hoped) be influenced.
Nonetheless, agreeing on the issue of excess money was not, naturally, particularly novel - all postwar European economies suffered from a similar problem, something that explains why most postwar currency reforms had similar characteristics (6).
The difference lies in the belief that only by unleashing market forces was economic growth possible and this is a point of agreement between both German ordoliberals and the OMGUS - and especially Lucius Clay, who made sure he appointed those who shared the same opinion as him, i.e. Joseph Dodge and Edward Tenenbaum. As Fuhrmann (2016: 126, ff 37) notes,
“When asked by Erhard, Tenenbaum had no objections to a transition to free market conditions”
From this perspective, the exact authorship of the currency reform recedes in the background. In face of the common agreement between OMGUS and German experts that the best possible path for the West German economy was, to use Leonard Miksch’s own phrase, a jump in the icy cold water of the free market (Sprung ins Kalte Wasser”, minor differences in the technical details appear as less important.
At another point of the interview, Holtfrerich claims that Tenenbaum was
[…] the opposite of a vain person. He was a rather shy character. He never wanted to stand in the limelight. He wanted to conduct his business behind the curtain. Actually, he was asked in an interview in the 1950s whether he regretted that he was not credited for the currency reform in Germany by Germans. He said: “Who cares who gets the credit?” That was his attitude.
This is rather peculiar, given that Tenenbaum published a book in 1958 where he clearly gave himself credit for the currency reform. As Meardon (2014: 367) notes,
This was also the conclusion reached by Charles Kindleberger in the 1990s, himself indirectly involved in the currency reform of West Germany in his capacity as economic policy adviser for the OMGUS. After reading an article in the New Yorker which praised Erhard as the ‘priest’ of the currency reform, Kindleberger started a collaboration with F. Taylor Ostrander, a fellow adviser in the economic division of the OMGUS.
While their initial aim was to undermine the myth that Erhard was directly responsible for the currency reform plans, the collaboration between the two led to the question of the role of Tenenbaum. Here, they parted ways: Ostrander insisted that
Erhard’s role was the lifting of most price controls, but he “had nothing at all to do with M[onetary] R[eform]” per se. Tenenbaum was a “strange, unlikable type,” although “brilliant” and capable of working out the fine details of the reform; “but he does not deserve a larger place in history than this. (Meardon 2014: 365)
Kindleberger, however, was not convinced. Diving deeper into archival work, he resurfaced with a text that put Tenenbaum at the epicentre of the story. What fascinated Kindleberger, besides authorship of the reform which he took for granted, was Tenenbaum’s own description of the process of designing the currency reform as “conspiratorial”. In Kindleberger’s view, it was
perhaps it is less inflammatory to suggest that in complex financial matters which may roil economic and financial behavior there is something to be said for benevolent despotism (CPK/FTO, Draft 2, o. 27, quoted in Meardon 2014: 368).
Kindleberger continued in an attempt to draw out the implications of this, concluding that important reforms such as these are often
Unpopular, perhaps and requiring despotic powers to cut through. Arbitrary, perhaps, and mistakes would inevitably be made. [CPK/FTO, Draft 2, p. 31, op.cit Meardon]
But could they be characterised as unfair? His answer was indicative:
Not necessarily. . . . Ineffective seems clearly wrong in the German case. It is sad for the social sciences that democratic institutions sometimes fail at drastic financial surgery. It is consoling, however, that a successful operation, even one that fell a bit short of fairness in the German case, can strengthen democratic habits and institutions. (Ibid) (6)
Moving away from Kindleberger, this bring us to another important element of the discussion around the currency reform, namely the role it played in tightening inequality and unfair distribution.
While the reforms of West Germany were portrayed by ordoliberals as a ‘clean break’ from the immediate Nazi past of state planning - going as far as naming their liberal reforms a process of ‘denazification’ (7) - it is worth keeping in mind that this was actually translated into a rejection of all planning. In turn, this perspective allowed German conservatives and ordoliberals to even present the SPD as signifying some sort of continuity to Nazi economics. In other words, and on the basis of a selective economistic perspective, victims of the Nazi regime like the SPD were presented as having more in common with the regime as those who had in many cases directly collaborated with the Nazis, simply because the latter now promoted a free market that was presented, in the postwar period, as “anti-Nazi”.
In any case, a key discussion around the currency reform (in West Germany as much as elsewhere) were its distributive consequences. From this perspective, both the ordoliberals’ and Tenenbaum’s inputs acquire a special role.
Initially, and drawn up in the context of de-nazification, the CDG Plan was very explicit in its attempts to counteract the economically harsh effects of a currency reform with some egalitarian (re)distribution of the burden, a perspective also informed by a desire to punish those who had enriched themselves during the Nazi period. For this reason, specific measures (such as a capital levy) that had a progressive direction were added.
The ordoliberals involved in the discussions, however, were not in agreement. For them, the equalisation burdens of the CDG Plan were not acceptable, seeing instead the “Sprung ins Kalte Wasser” of the free market as necessitating “sacrifices” (from workers, of course). “A resolute reconstruction policy”, Lampe would claim, “calls for the courage to endure impoverishment” (“Entschlossene Wiederaufbaupolitik erfordert Mut zur Armut”) (in Blumenberg-Lampe 1986: 88).
This perhaps offers a new way of interpreting Erhard’s push that “Germans should have greater influence over the currency reform” (Nicholls 1994: 157). Reading Mierzejewski, we notice that Erhard
especially asked that the Germans be allowed to shape the equalisation of burdens that would accompany the introduction of the new currency. Clay then informed him that the Allies would handle the currency reform alone. The Germans themselves would solve the problem of compensating people for war losses and the disadvantages arising from the currency reform itself. Erhard was greatly relieved by this news. (Mierzejewski 2004: 66).
In fact, as Fuhrmann’s remarkable study has shown, a key focus of the German delegation in the ‘secretive’ talks at Rothwesten was geared towards avoiding responsibility for the foreseeable negative consequences that the currency reform would have on the population, by assigning its authorship to the Allies.
It is therefore quite reasonable to assume that the contradictory accounts about authorship of the reform were very much illuminated by such considerations. At the time, and in full knowledge of the devastating consequences that would come from such a jump in cold water, assigning full responsibility for the reform to the Allies might have been tempting for many. For the implementation of the currency reform and price liberalisations in July 1948 led to soaring unemployment, massive price increases and a real potential of starvation for workers and the poor. Mut zum Armut then, in exchange for “sound money and free prices”.
Not surprisingly, workers were less concerned about the functioning of the price mechanism and more with surviving with some dignity. In recognition of the class character of the reform (“a violent anti-social redistribution of German wealth and consuming power” as the British economist Balogh coined it in 1949), widespread social unrest ensued, generating demonstrations, riots (repressed by the occupation authorities) and, eventually, the November 1948 general strike. The last general strike to happen in Germany until this day.
———
Notes
(1) Analysis of the total amount of US aid to West Germany reveals that the GARIOA funds did not only start arriving earlier (in 1945) than Marshall Plan (EPR) funds (in 1948) but their magnitude was significantly higher. Initially earmarked for the provision of foodstuff to the West German population, already from 1946 and the unification of the American and British zones, a significant amount of GARIOA funds were directed towards “raw materials for industrial recover” (Hardach 1987: 436).
(2) I am purposely ignoring the claim that the currency reform aimed at liberating “markets from strict control” - it was the reform of price liberalisations that were geared to do that. I am also leaving aside the comment that the reform was hoping to “shop shortages” as it appears to imply that the shortages were the consequence of the absence of markets, somewhat omitting the fact that shortages were the result of the widespread strategy of businesses’ hoarding their products in expectation of the normalisation of the currency. I attribute both to the unavoidably shortened nature of the interview form.
(3) In his interview, Holtfrerich alleges that “the fact that Tenenbaum was Jewish played the main role in suppressing his merit and preventing his appearance in German history. I hope this book contributes to changing that”. While the goal is absolutely commendable, I am inclined to be sceptical about the explanation of anti-Semitism. As Holtfrerich himself mentions, Colm and Goldsmith of the CDG plan were also Jewish but this has not contributed to them being left out of German historiography.
(4) Holtfrerich mentions in his interview that Erhard was kept under watch by the US secret service in relation to his continued cooperation with Nazi high officials like Himmler and Göring. Given that Himmler had died in May 1945, shortly after being discovered by the British, the term “continued cooperation” appears bizarre. Göring, on the other hand, was also tried at Nuremberg and sentenced to death, though he managed to commit suicide just like Himmler with a potassium cyanide capsule. There is no reason to contest the possibility of Erhard cooperating with these Nazis after the German capitulation, but much stronger evidence of Erhard’s collaboration are already available. On the one hand, Erhard was directly connected with the Nazi Reichsgruppeindustrie through his close friendship with his sister’s husband, Karl Guth. In this capacity Erhard had met noy only key ordoliberal figures (like Rüstow and Röpke) but, most importantly, Wilhelm Rudolf Mann of IG Farben. He introduced Erhard to Josef Bürckel, becoming his informal adviser. Bürckel was initially Reichsstatthalter of Reichsgau Vienna, responsible for brutal policies against Jews, Social-Democrats and Communists. His tendency to embezzle funds for personal use made him so unpopular that even fellow Nazis did not like him. None the less, he was later promoted Gauleiter of the Bavarian Palatinate, the Saarland and the annexed French département of Moselle. After the war, and as the historical archives at the Institut für Zeitgeschichte in Munich show, the Americans treated Erhard with suspicion, not only because it was known that he had been the personal adviser of the Nazi Gauleiter Bürckel and “chief of the Hitlerite Institute for Industrial Research”, but also due to the fact that as Minister of Economics in Bavaria he had “filled virtually all the key posts with known Nazis”. [National Archives of the United States, RG 260/OMGUS, Institut für Zeitgeschichte [IfZ], 7/23-1/29, Page 2]. Controversies around Erhard did not stop. In December 1948, for example, A.C Hall, Deputy Chief of the Bipartite Control Office send a telegram to the Decartelization Office explaining that Erhard’s attempt to reorganize the Fachstelle Stahl und Eisen and to turn order steering and accompanying statistics over to the trade associations constituted a breach of the Office’s memorandum, which “prohibited such action inasmuch as order steering was considered a governmental functions and as such was an improper function for private administration”. [RG 260/OMGUS, 11/10-3/20, December 1948]
(5) Created by Hans Frank for the purpose of embedding the Nazi ideology in German Law. Frank was Hitler’s personal lawyer and “chief jurist” in occupied Poland, where he got directly involved in the mass extermination of the Jewish population. He was promptly executed for his role after the Nuremberg trial. Other members of the Akademie included Göring, Goebbels and Carl Schmitt.
(6) For an early but concise overview of all postwar European currency reforms, see Gurley 1953
(7) Walter Eucken would even make the claim that Allied reluctance to immediately push through the reforms was itself a sign of maintaining the Nazi system. As he put it in the first meeting of the Mont Pèlerin society in 1947, “[…] it was very surprising that occupation did not mean the end of the Nazi system. Their price and distribution system was preserved in all detail and with only little change in personnel” (Caldwell 2022). For the presentation of the liberal reforms as a denazification process’, see Févre 2022.
(8) This is reminiscent of a paper presented at the closed regional meeting of the Mont Pèlerin Society in 1981 in Vina del Mar, Chile, during Pinochet’s rule. There, the president of the German think tank Aktionsgemeinschaft Sozialmarktwirtschaft, Wolfgang Frickhöffer, presented a paper titled “The Implementation of a Market Economy: The German and the Chilean Models”, in which he favourably compared Pinochet’s “efforts” with Erhard’s vision of the social market economy in postwar Germany. According to Frickhöffer, Erhard’s success lay in the fact that in 1948 there was also “no democracy in Germany” (Frickhöffer 1982: 92)
REFERENCES
Abelshauser (1987) Die Langen Fünfziger Jahren: Wirtschaft und Gesellschaft der Bundesrepublik Deutschland, Schwann
Abosch, Heinz (1962) Menace of the miracle: Germany from Hitler to Adenauer, Collet’s, London
Blumenberg-Lampe, Christine (ed.) (1986) Der Weg in die Soziale Marktwirtschaft: Referate, Protokolle, Gutachten der Arbeitsgemeinschaft Erwin von Beckerath 1943-1947, Klett-Cotta
Dyson, Kenneth (2020) Conservative Liberalism, Ordo-Liberalism and the State, Oxford University Press
Frickhöffer, Wolfgang (1982) ‘La Implantación de una economía de mercado: el modelo alemán y el modelo chileno’, paper presented at the Mont Pélerin Regional Meeting in Vina del Mar, Chile 1982.
Fuhrmann, Uwe (2016) Die Entstehung der „Sozialen Marktwirtschaft“ 1948, UVK Verlagsgesellschaft, Konstanz und München
Glossner, Christian L (2010) The Making of the German Post-War Economy: Political Communication and Public Reception of the Social Market Economy after World War Two, I.B. Tauris Publishers, London/New York
Gurley, John G (1953) ‘Excess Liquidity and European Monetary Reforms, 1944-1952’, The American Economic Review, Vol. 43, No. 1, pp. 76-100
Hardach, Gerd (1987) ‘The Marshall Plan in Germany 1948-1952’, in Journal of European Economic History, Vol. 16, Issue 3, pp. 433-485
Meardon, Stephen (2014) ‘On Kindleberger and Hegemony: From Berlin to MIT and Back’, History of Political Economy, Vol. 46, Supplement 1, pp. 351-374
Mierzejewski, Alfred C (2004) Ludwig Erhard: A Biography, University of North Carolina Press