11. The Fortress of Academic Freedom

What did German academics who resisted the Nazis think about the economic decentralization policies that American businessmen had derided as “quite new to the German mind?”

Dec 29, 2024

A fortified city of freedom. That’s one rough translation of “Freiburg”—the name of a town in southwestern Germany founded in 1120 as a “free market” town on an important trading route. This status gave the town more autonomy in setting its own rules for trade and commerce than other territories under the thumb of feudal lords.

Recap: Germany’s hyper-concentrated death star economy fueled Hitler’s rise to power and the outbreak of WWII, so U.S. postwar policy prioritized economic decentralization to parallel democratic political reforms. Yet on the ground, General William H. Draper, Jr. recruited bankers and big businessmen to run the “economic side of the occupation.” After the first two decentralization leaders resigned in frustration, an experienced investigator was brought in. Alas, forces both inside and outside military government were thwarting progress even though the military governor understood the importance of decentralization. Another Allied Power shared some blame for gridlocked negotiations. Then the midterm elections of 1946 shifted the balance of power domestically. In the summer of 1947, two leaders abruptly departed Germany: the biggest roadblock to reform and the strongest advocate for it. Without them, would reform get back on course– or further derailed? It turns out a patent lawyer’s love life might have played a role. German officials had mixed views on the Allies plans.

A “Conscious Task of Public Economy Policy”

The city’s eponymous university, founded in 1427, is one of the oldest in Germany. During the Nazi era, the University of Freiburg lived up to its name by harboring scholars who questioned the Third Reich’s approach to political economy, and instead developed a new vision for a free market system.

In 1933, an attorney named Franz Böhm published “Competition and Monopolistic Struggle”—the foundational text of what came to be known as “ordoliberalism.” Böhm’s views were informed by his firsthand experience with enforcement of Germany’s weak cartel regulations at the Imperial Ministry for Economics. Breaking from neoclassical economics’ fixation on equilibrium models, Böhm sought to explain how monopolies and cartels undermined the rule of law and the liberal constitutional order of the Weimar Republic. Böhm came to regard competitive markets, where no player could abuse market power over another, as guarantors of peace and the rule of law.

In 1936, Böhm and several other scholars published an “Ordo Manifesto.” The ordoliberals elevated competition to a fundamental constitutional principle for governing both state and private actors. Böhm was clear-eyed about the tradeoffs involved: “[i]f we want freedom, we have no option but to sacrifice some advantage which we could obtain only by employing concentrated power.” In other words, potential benefits of centralization, such as efficiency, could not offset harms to individual economic freedom. And the state had to play an active role to create the conditions for such freedom. As ordoliberal economist Alfred Müller-Armack declared a decade later: “the free market is not automatic… we must today regard the organization of competition as a conscious task of public economic policy.”

The ordoliberals scrutinized all forms of corporate economic power, ranging from cartels to monopolies to patents and other restraints on trade. For example, a co-author of the manifesto, Walter Eucken, advocated not only for monitoring cartels, but also subjecting mergers and acquisitions to approval by a special commission, which would have the power to either impose conditions or prohibit the transaction.1 In reports commissioned by the Allies, Eucken also recommended breaking up Germany’s big banks.

Map of Germany — Freiburg in southwest Germany (Berlin is in northeast).

Located in the southwest corner of Germany close to the borders of Switzerland and France, near the Black Forest, Freiburg was a natural fit for those who wanted to distance themselves from the Nazi regime, both physically and philosophically. Nonetheless, the university’s scholars did not carry on unscathed. Eucken, who began his career as a conservative, nationalist thinker, was eventually interrogated by the Nazis thanks to his growing “reputation as an outspoken critic of Hitler’s dictatorial regime and its authoritarian and totalitarian ideology.” Other academics fled the country. The city itself also suffered the scars of war; most of the old, medieval center was destroyed by Allied bombing.2

Some who fled took refuge in French, British, and American institutions, and influenced economic warfare investigations and policymaking in their host countries. For example, Franz Neumann, a Jewish scholar who fled to New York City in 1933, coined the term “totalitarian monopoly capitalism” to explain the organization of the Third Reich and its drive to “total war.”3 In addition to developing new theories, such expats conducted empirical studies to debunk arguments that cartels stabilized the economy.4

After the war ended, some expats rebuilt connections at home. One key example was Heinrich Kronstein. Although Kronstein did not label himself as part of the Freiburg School, he was close with Böhm. After the war ended, Kronstein co-authored the policy reports that originally guided OMGUS and next spent the latter part of 1945 heading the German Agencies Section of the Economics Branch of OMGUS, where he focused on unravelling legal problems relating to foreign-held corporations. He then split his time between teaching at Georgetown Law School and the University of Frankfurt, which enabled him to keep close ties with contacts working on drafting German competition laws and in academia. Thus, he “necessarily saw the problems of American antitrust law in the light of German experience and the problems of German antitrust law in light of American experience.” Kronstein believed that law must be “wertgebunden” (value-bound) to effectively protect freedom, and that one of the principle aims of the legal system should be preventing private individuals and organizations from acquiring power that threatens the stability of the system.

Another German academic who returned home after the war was Walter Hallstein, who had chaired the Institute for Comparative Law at the University of Frankfurt until he was captured and held as a prisoner of war at a military camp in Mississippi from 1944 to 1945. While there, he worked with the University of Chicago to establish a camp university where he taught, among other subjects, American antitrust law. In the summer of 1945, he enrolled in a re-education program arranged by the U.S. Department of War, which gave him the opportunity to network with other returning Germans.5 Three years later, he went back to the U.S. through an exchange program between Georgetown University and the University of Frankfurt, where he impressed Kronstein as “the best qualified man to build bridges to German universities.”

The ordoliberals were not entirely alone in their efforts to rethink Germany’s political economy. Other groups, including certain socialists, communists, trade unionists, proto-Keynesian economists and the French Popular Front, had developed antipathy towards cartels by the 1930s because of the Great Depression. By the mid-1940s, ordoliberal views were becoming mainstream.6

Böhm and other ordoliberals started drafting the new German government’s anti-cartel law in 1947.7 Yet, even with the support of Ludwig Erhard, the first Director of Economic Administration in the fused American/British zones of occupation, the ordoliberals did not achieve political influence commensurate with their intellectual influence. Indeed, “none of Erhard’s advisers received a relevant position [in German government] when the restructuring of the German industry finally began.”

A “Lack of American Literature”

Outside of academia, a group of proactive German attorneys formed a committee to figure out “how to apply the guiding principles, developed in USA, to the base of the economical and judicial development in Germany.” But, as one wrote to FTC Commissioner Garland Ferguson in 1949, they were “handicapped by the nearly entire lack of American literature,” equipped only with a few old law review articles, and would appreciate receiving more resources for education and discussion. This meant that were they missing out not only on precedents and historical material; they were also missing out on contemporaneous events in American antitrust, such as the 1948 divestiture of unlawfully acquired theater chains and the break-up of the Paramount system. Such cases elaborated on the rationale for such structural remedies, including “depriv[ing] the defendant of the gains from his wrongful conduct” and “undo[ing] what could have been prevented had the defendants not outdistanced the government in their unlawful project.”

Another German attorney drafted a preamble to a commentary on Law 56, which found that the Americans’ legislation was aligned with the German philosophical principle that “freedom does not mean unrestraint but willing obligation” and even with certain existing legal principles, although “[t]he want of a legislation and jurisdiction which secure the free action of every tradesman cannot be refused” (likely meaning, denied). This attorney concluded:

“Thus, the Law No. 56 of Military Government proves itself to be not—as it is often looked upon—a handcuff by the victors but a base for the development of a German legislation and jurisdiction on this line of administration of justice, so authoritative for our future political and economic life. It is the task of our jurisdiction to rank the regulations of this law into our law concerning competition and to develop it according to the German conditions. We cannot and will not resign from taking ideas from the America jurisdiction. Therefore this work, too will occupy itself thoroughly with the state and the development of this American jurisdiction.”

Quite New to the Ordinary German Mind?

That even practicing attorneys had difficulty accessing information about American antitrust law raises questions about OMGUS’s approach to public outreach. Was this just an isolated oversight in an otherwise coherent program? Were ordinary Germans even aware of America’s plans to introduce economic democracy hand in hand with political democracy? If so, what did they think?

Stay tuned for the next installment…

Primary Sources

Below are newly-scanned primary sources relevant to today’s installment:

1949 Letter from German patent lawyer Werner Cohausz to FTC Commissioner Garland Ferguson about lacking resources on American antitrust
The draft preamble to a commentary on Law 56 referenced in the letter.

Part of my goal with this project is to facilitate renewed scholarship into this era, so I plan to post more scans to Internet Archive— however, to minimize spoilers, I’ll wait to post some of them until later in the series. I’ll also provide a list of some excellent secondary sources.

Balancecraft

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