After three years of military occupation, inflation, controls and rationing, the ensuing chaos ruled supreme. At that time the Economics Minister, Ludwig Erhard, was a product of the Classical School. After serving in WW I he was trained as an economist by Walter Eucken, Franz Oppenheimer and Wilhelm Ropke. He knew that inflation and large state bureaucracies could not cure their problems. He knew that they were the problem.
Erhard was averse to everything authoritarian. Having carefully laid his plans, with agreement from the supervising Allies, he announced on June 19th 1948 that inflation was finished. A new currency would be issued. In round figures it was exchanged ten of the old marks for one of the new ones. The limit was 400 per person. 'And', said Erhard, 'there will be no more money printing'.
Then, knowing that he would never ever get agreement from the supervising Allies to change policy, he decided upon unilateral action. On Sunday July 8th, only three weeks later, he advised the public that he was to address the Nation between 11 pm and midnight about the problems which they faced and with which they were struggling. He advised them that in their own interest everybody should listen to what he had to say. He knew that ideology cannot be destroyed by force so he was persuasive.
He knew that everybody was sick of controls. He knew that everybody was sick and tired of being hobbled and kicked around by bureaucrats.
He had also previously expressed his views in many speeches, and his speeches were always well reasoned. He was a master of his subject.
He announced to the population that he had, as from midnight that night, abolished all rationing, wage controls, price controls, government control and regulation of foreign exchange rates. He was also reducing taxation and heavily reducing tariffs.
The burden of supporting tens of thousands of bureaucrats was, in one stroke, removed from the taxpayers' shoulders.
The following Tuesday (Monday was a holiday) Erhard was instantly called to book by General Clay, the Commander of the resident US occupying force. Clay quickly came to the heart of the matter, 'Herr Erhard, my advisers tell me that what you have done is a terrible mistake.What do you say to that?' Erhard's reply came swiftly and without hesitation: 'Herr General, pay no attention to them, my own advisers tell me the same thing'.
Under the terms of the surrender no changes were to be made to Allied policy without consultation with the conquerors. An economist Army Colonel on Clay's staff shouted at Erhard, 'How dare you unilaterally relax our rationing system and price controls when there is a widespread food shortage!'. Erhard replied courteously, 'But Herr Oberst, I have not relaxed rationing and price controls, I have abolished them'. It had not occurred to the bureaucrats that such a thing could possibly happen.
Erhard went on to say 'Henceforth, the only rationing ticket the people will need will be the Deutschmark. And they will work hard to get these Deutschmarks, just you wait and see'. He was confident, as reported in his book Prosperity Through Competition, and he abolished taxation on all income tax on hours worked over 40 hours.