Thinking Small: The Long, Strange Trip of the Volkswagen Beetle

by Andrea Hiott

  After the war, in large part because of his prominent anti-Nazi stance, the Allies trusted Erhard and made him a minister of finance in the southern U.S.-controlled area of Bavaria. This appointment would naturally propel him into a position of economic leadership in the new Germany. Once the Allied mood moved away from the Morgenthau Plan and toward a spirit of desired regeneration for Germany, men like Erhard were consulted as to how to strengthen the German economy; they stood out as possible leaders in the new German-led Germany that would inevitably have to emerge. There was also the simple fact that Erhard was one of the few economists who had a plan, who had been working on that plan for many years, and who had the zeal and confidence to promote and pursue that plan once the Third Reich crumbled. Thus in 1947, after America and Britain joined zones to create the Bizone, Erhard became their director of economic affairs.

  Because his ideas still seemed so new and strange, at different times and in different ways, Erhard worried everyone—the Allies and his own countrymen were often at odds with him. But the young economist refused to conform, thus becoming a necessary part of Germany’s recovery as he pushed and challenged both sides, something very few others could do at the time. Erhard, despite all that had happened in his country over the past ten years, had a great deal of faith in the German people. And from the very first day on the job, he was convinced that economic recovery would have to come from them: In his eyes, only by freely and responsibly buying and selling their own individual services and goods could they redeem both their confidence and their prosperity. Contradictorily perhaps, and a bit unconsciously, the American and British system that was in place was a system still fraught with Nazi economic policy. As occupiers, the British and the Americans had not wanted to disturb the country even more than it had already been disturbed, and thus they had left economic controls (controls originating with the Nazi plan for autarky and German self-sufficiency) as they were. Erhard wanted to demolish all those things, to break it all apart and start again. But laissez-faire didn’t mean being passive so much as it meant actively getting out of the way: Regulation was needed in the sense that the old ingrained Nazi order had to be uprooted, and the market had to be freed. Erhard wanted government to guide but not direct.

  Of all the changes that Erhard was bubbling to make, the most crucial parts of his plan were his belief in the need to eliminate price controls, and the need for a currency reform. In the postwar German economy, there was no longer any relation between objects and money; money had become meaningless and the objects were worth more: There was no medium for exchange. This was a condition that was easy to see, and while all agreed something had to be done, not everyone was sure that creating a new monetary unit was the best action to take. Erhard and his supporters wanted a whole new kind of money (deutschmarks) to be created to replace the now worthless reichsmark, but others felt it was essential to keep the reichsmark because healing the economy was a matter of healing the currency, of bringing it back to a state of health.

  To many, including many Allied authorities, the details of Erhard’s theory felt like “economic heresy,”2 a recipe for total chaos. It was the same struggle that was happening at the VW plant: How much control was too much control? How little control was not enough? Some in Germany at the time, most notably the heads of the Social Democratic Party (SPD), argued that with Erhard’s currency reform, all the “common people” would lose and big capitalist concerns would win. Erhard’s detractors felt that the German economy was in a very precarious condition and that it needed to be taken care of and protected, that “it must grow in an incubator chamber” and not be required to carry too much weight. But after what he’d witnessed over the past decade of Nazi rule, Erhard was anything but naïve. He knew that any successful program would have to offer a delicate balance of order, freedom, and competition. Ideally, the economy that Erhard and the economists of the Freiburg School proposed would require companies and individuals to compete, but the very means of winning would require they also do right by their fellow men.

  For a moment in the early months of 1948, all eyes focused on Prague’s Czerin Palace when renowned Czech foreign minister Jan Masaryk was found dead in his pajamas in a courtyard just under his bathroom window. The scandal seemed to symbolize the growing problems of the Western world. Czechoslovakia had been free, but on February 28, 1948, it had been taken over by the Soviets. Masaryk’s name was one on the Kremlin’s list of men to be killed. Whether it was a Soviet plot or a suicide has never been resolved, but the event was evidence of the unrest that had once again mounted throughout the world. Stalin’s coup d’état of Czechoslovakia demonstrated that he had no qualms about pursuing his own goals with defiance and aggression, in much the same way Hitler had. Democratic countries did not want an authoritarian antidemocratic regime spreading through Europe. Hitler was gone, but the danger he represented was still there. And, once again, Germany was the crux of the new battle: As London’s Economist wrote at the time, “… the competition for the soul of Germany is now no longer avoidable—and it is the soul that must be won.”1

  When the Soviets moved into Czechoslovakia, Britain, France, and the Benelux countries formed a defensive union. This was a dramatic move, for it brought France and Britain back into an alliance, and it marked a sizable shift in the French attitude toward Germany. France would join their zone with the American and British zones, effectively making it the Allies minus the Soviets. The French would also give up their plans of trying to separate and control the rich Ruhr area of Germany, and agree to help create the International Ruhr Authority to get the industrial veins of Germany fully flowing again.

  In the Second World War, Russian soldiers had been a crucial reason for Allied victory. The Russian people suffered greatly—an estimated twenty-seven million of them died, more than any other nationality fighting at the time. The Allies were lucky to have the Soviets on their side in the war, but it was the Soviet people who had fought, not the Soviet government. And it was the Soviet government that the Allied governments were now beginning to see as a threat, one that became all the more daunting when combined with the condition that much of Europe was in at the time. It wasn’t only Germany that was in need of help, after all. It was much of Europe. And for Europe to be strong, Germany needed to be able to function without relying on Allied support. The recognition of this need, alongside the rise in Soviet aggression, became the catalyst that changed the Allied attitude toward Germany, and toward the rest of Europe as well.

  In the States, the attitude change was quite literal: General George Marshall replaced Byrnes as the secretary of state under Truman on June 5, 1947, and just five months later, gave a speech at Harvard that summed up this new way of seeing the world, introducing what would later be known as the Marshall Plan. “The truth of the matter,”2 Marshall said that day in his speech, “is that Europe’s requirements … are so much greater than her present ability to pay that she must have substantial additional help or face economic, social, and political deterioration of a very grave character.” Marshall’s plan called for a large amount of funds (what would eventually be just over $13 billion, something like $70 billion by today’s terms) to be given to Europe. According to those who supported the plan, giving Europe money would be the best thing for the U.S. economy, because much of the money would be used to purchase goods from the United States and would ultimately be pumped back into the United States, erasing debts owed and strengthening the market as a whole.

  It was a hard case to make to the American public and to Congress though, especially in a time where the only ones who truly understood the desperation in Europe were those who had seen it firsthand. Many people felt it was time for Europe, and especially Germany, to take care of itself. But Marshall had thought of that too: One big part of his overall approach was that before American funds could be given, Europe needed to show that it was ready to deal with those funds; it needed to come up with a new structure and plan for itself. Only once that plan
was made would America release the promised funds.

  In Europe, Marshall’s speech had a catalyzing effect. Word of it buzzed through the decimated countries—just the very possibility of getting help was enough to inspire a great deal of activity and work and they certainly had the clarity, intelligence, and integrity to create a competent plan. Sixteen countries arranged to meet in Paris and discuss how to set up a new European system as Marshall had suggested. The Organization for European Economic Cooperation, and later the European Steel and Coal Community—two organizations often seen as the first official steps toward what is today the European Union—were set up to find the best ways to allocate the funds and services of the Marshall Plan.

  Though the Marshall Plan would be extended to the Axis powers as well, the Soviets did not stretch out their hands, but rather, created their own plan for the Eastern Bloc, the Molotov Plan (what eventually became COMECON). In this way, the Soviets formed their own economic enclave in Eastern Europe, creating market ties between the communist countries and organizing trade through the USSR. In truth, many Americans eventually got behind the Marshall Plan not because they were thrilled to send more money to Europe, but because they were worried about the Soviet threat. The Communist Soviet state had become the new enemy of the West.

  As all this change was happening in the larger context of Germany, at the Volkswagen plant, Heinrich was still dealing with the possibility of the company being bought by an outside source. Henry Ford II was his biggest customer; a Volkswagen/Ford deal had come close to happening in 1947, but had fallen through because the British occupying force had been ensnared in difficult problems with the right-wing tendencies at the plant, and Ford had felt there was too much confusion about the best way to enforce denazification. But once Nordhoff began managing the plant, the negotiations with Ford began anew. At first, Nordhoff thought that joining forces with Ford might be a way to ensure the plant had a solid future. Joining with Ford would give the factory access to more capital and make it easier for them to repair and modernize the plant. Nordhoff also knew that merging with an American-owned company would loosen the restrictions that were then placed on foreign trade.

  Ford was equally interested at the start, but that interest turned sour. In one of the legendary miscalculations in automotive management, the otherwise very astute Ford employee Ernie Breech—upon reviewing Volkswagen’s proposal—offered his advice to Henry Ford II: “What we’re being offered here,”4 he said, “isn’t worth a damn.” But the real cause behind Ford’s final decline of taking control of Volkswagen was likely the factory’s proximity to the nearby Soviet line. The Ford company would later admit that they had serious reservations about controlling a plant that was just miles away from what was fast becoming the Soviet Bloc.

  Nineteen forty-eight was a year when Germany’s future felt very fragile. Since the war, the Volkswagen plant, and the country, had been hovering between options, teetering on the edge of “maybe this” and “maybe that.” And it was in October 1948, just as Nordhoff was preparing a new home so that Charlotte and the girls could finally join him in Wolfsburg, that Ford backed out of any possible deals.3 For Nordhoff, it was a crucial moment of change: He realized that the factory would have to prove itself, on its own, as a German brand. And though it was possibly the biggest challenge anyone could have imagined for such a company at the time, he could suddenly see that it was exactly the path that had to be taken. Perhaps in the back of his mind he was also thinking of the health and future of his country: If a factory that had been a Nazi creation could transform itself into an instrument of the free market and its democratic ideas, then Germany would be able to do so as well. Volkswagen was to be a German company, come what may, and Nordhoff would proceed with that idea at the center of any future plans. This responsibility became clear to Nordhoff just as it was becoming clear on a larger political and economic scale to the Allies and the German authorities; a new way of thinking had arrived, and men like Erhard and Nordhoff began to realize that confidence in Germany was the next step, the only way to move forward now.

  Behind the scenes in Germany, Ludwig Erhard was working furiously to push through a currency reform, and his actions did not stop there. At the same time, he was pushing for a price decontrol ordinance. In essence, and to simplify a very complex matter, this ordinance would wipe away all the old and lingering rules about how products were priced on the market, meaning that the most basic needs in any German’s life—vegetables, eggs, milk, as well as the industrial supplies required to produce supplies, clothing, and large-ticket items such as cars—would no longer be regulated or rationed, as they had been for the past ten years. Control of that sort would be placed in the hands of the market again.

  On the surface, this plan seemed highly illogical: The German people were experiencing a scarcity of vegetables and eggs and parts for cars, and so on, so deregulating the price of such things seemed absurd. It was an uphill battle to get his reforms passed, but Erhard could not be deterred. His incessant lobbying coupled with his clear and deeply reasoned arguments eventually provided him with the crucial support of General Clay and other Allied officials. But everywhere he went, Erhard had to explain himself. Hartrich tells of Erhard’s confrontation with a U.S. Army colonel named Oberst1 around that same time:

  Colonel Oberst: How dare you relax our rationing system, when there is a widespread food shortage?

  Erhard: But, Herr Oberst. I have not relaxed rationing; I have abolished it! From now on, the only rationing ticket the people will need will be the deutschmark. And they will work hard to get these deutschmarks, just wait and see.

  Erhard also cut high tax rates dramatically so that both the workers and their employers would have more money to spend; however, his tax reform did not include cutting taxes on high incomes or tax cuts for those who were already rich. Those would remain, helping to fund the rest. It’s indeed easy to imagine how this combination of cutting taxes, abolishing price controls, and wiping away an old currency in one fell swoop looked like a wild and dangerous move. And it’s understandable that so many were afraid it would result in a free-for-all fight for the limited available resources. But, Erhard asked, what if those resources were not limited; what if they only looked limited? Perhaps, Erhard reasoned, there was an abundance of goods. Perhaps goods had just been hoarded, congested, off-limits, forced out of the natural flow. This sounded like wishful thinking, and maybe it was, but a dramatic move had to be made so that the country could feel as though it had assets again.

  Erhard’s hope (and belief) was that the measures he was taking would provide a production push to German industry while at the same time force German businesses to deal with competition from the rest of Europe (reducing tariffs, Erhard hoped, would spur on the fighting spirit of capitalism) and yet allow German businesses to keep the prices of their goods low and affordable. Erhard knew that all of Europe was in need of the products that German industries could produce. Once German manufacturers got their factories running again, the market for their goods (both home and abroad) could be better and more profitable than anything they’d experienced before the war.

  In making all these changes, Erhard was not really gambling on markets or systems; he was gambling on the Germans themselves. It boiled down to the question of whether or not, in all his study during the Nazi years, Erhard had indeed come to understand human behavior. With the implementation of his reforms, he was betting that “men were primarily motivated by their never-sleeping appetite for material gain, coupled with their deep-seated instinct for self-survival; in short, by their quest for security and protection against want and helplessness in a troubled and feckless world.” And he was betting that people could do this without resorting to hurting one another. His notion of “capitalism with a conscience” was a belief in the ingenuity of German businessmen and German consumers, a belief that if given proper incentives, as well as large doses of responsibility and competition, the industry of his country would find its
own way without having to be directed by a detailed top-down plan.

  As word spread that a new currency was soon to become standard in Germany, the Volkswagen factory was bombarded with requests from customers to have their ration cards exchanged for vehicles before the currency changed. It was impossible for the factory to produce so many cars all at once—and because this was happening in many other industries in Germany at that time, it also became increasingly harder to get suppliers to provide enough materials to fulfill Volkswagen’s own ration cards. Everyone was trying to trade in their cards before they became obsolete. But even such doubt and panic did not deter Erhard. He pushed his currency reform through and hoped for the best.

  The days directly after Erhard implemented his reforms did not look auspicious for large German businesses, or for some small, industrial towns. There was now 90 percent less existing cash than there had been before the reform. Wolfsburg, for one, suffered almost immediately after Erhard’s wild move. The change of currency hit the town and factory hard. All the town’s land had been seized as former property of the German Labor Front, so all liquid and fixed assets were more or less null, which meant they had very little capital before the reform, and they had much less after it. Volkswagen was the town’s biggest taxpayer and it too was having severe liquidity problems directly after the currency conversion. In fact, the town had to apply to the Allies for a bridging grant to get it through. To some, it was as if their bank accounts had been halved, even as their bills became twice as large.