For most of the time in the twelve years after the currency reform, the development of the West German economy turned out to be a virtually unqualified success, with fast growth, tolerably low price inflation, a rapidly declining level of unemployment and an increasingly secure external balance. In the following two sections, we shall ask why this was so and, in particular, what contributions economic policy made to this apparently miraculous performance. For expository convenience, we shall deal separately with matters of the domestic and the international realm (Sections A and B respectively).

Overcoming capital shortage and unemployment

By late 1948, most independent observers agreed that the liberal reform of June 1948 had initiated a quite dramatic revival of the West German economy, with production soaring well above even the most optimistic expectations and inflation soon running out of steam. With the reform having basically succeeded, the policy debate took a slight turn away from the abstract philosophical issue of the vice or virtue of a social market economy to the more pragmatic question of whether the early expansionary momentum could be transformed into a sustainable non-inflationary process of cumulative supply-side growth at a full utilization of the economy's productive potential, above all the rapidly growing labour force. With the benefit of hindsight, it is clear that the following period of 15 to 18 months – a time of consolidation, if not of slight recession – was to become decisive in this respect. Therefore, this period deserves careful examination, both as to its actual economic development and as to the most exciting and paradigmatic policy debate which it brought about.