The stark numbers documenting Washington’s shameful profligacy should petrify anyone concerned about financial sanity and America’s future. The shortfall between revenues and spending in the most recent fiscal year exceeded $1.8 trillion, a sum larger than the entire federal budget in Ronald Reagan’s first year as president. Interest on the national debt now consumes more taxpayer dollars than national defense. Total federal debt, which blew through $36 trillion a few months ago, is rising like a rocket.
The DOGE project of Elon Musk and Vivek Ramaswamy is the first serious attempt in decades—maybe even America’s last chance—to tame the spending monster. This is not the first time that someone called the private sector in to fix a chronic public sector problem. Indeed, Musk and Ramaswamy should take inspiration from an American who fostered necessary fiscal discipline in no fewer than three countries—Germany, Japan, and the United States. His name was Joseph Morrell Dodge.
Born in Detroit in 1890, Joe Dodge was a successful Michigan banker nearing retirement when he was tapped to chair the War Contracts Board during World War II. His scrutiny of the deals between the government and armaments firms paid off. He saved taxpayers the equivalent of 200 billion in today’s dollars.
With the war’s end in 1945, the devastated German economy required his attention. General of the Army Dwight D. Eisenhower wired Washington: “Get Dodge to Germany fast.”
Dodge was no friend of big government. He knew that West Germany had to wean itself off socialism as fast as possible or post-war recovery would never get off the ground. Ravaged by hyperinflation, Germans often preferred cigarettes to near-worthless German marks. To begin correcting a desperate situation, Dodge advised spending cuts and a balanced budget. Following the work of the young economist Edward Tenenbaum, who also advised the post-war administration in West Germany and would later be known as the “Father of the Deutschemark,” Dodge also proposed a 90 percent reduction in paper currency. Germans would receive one new mark for ten old ones.
The plan was embraced by a key West German official (and later Chancellor) Ludwig Erhard, who went on to cut taxes by a third and implement free market policies that produced the famed “German economic miracle.”
“The world’s political problem today,” declared Joe Dodge in 1947, “is the extent to which Government controls or ownership will replace private enterprise….Underlying these problems and trends is the ultimate fact that the expansion of socialism and Government control and ownership finally leads towards some form of totalitarianism.” Perhaps he had read F. A. Hayek’s The Road to Serfdom, published three years earlier (1944) and condensed and popularized by Reader’s Digest in 1945.
Dodge’s reforms were just taking root in West Germany when, in early 1949, President Truman dispatched him to Japan to work with the Supreme Commander of the Allied Powers, the legendary General Douglas MacArthur. The editors of Time magazine later wrote:
[A]s General Douglas MacArthur’s financial troubleshooter, Joe Dodge saved Japan from runaway inflation by imposing a regimen of austerity. He combed the national budget, [and] once caught Japanese officials charging geisha girls to “miscellaneous” on their expense accounts. Dodge gave Japan its first balanced budget in 10 years.
Fixing Japan was at least as tall an order as fixing Germany. Writes James D. Savage:
The Second World War shattered Japan’s economy. A quarter of its buildings were destroyed, a third of its industrial machinery ruined, 80% of its ships sunk, and a quarter of total assets simply lost. Three million Japanese had been killed during the war, and on surrender 17% of the population was without work.
What became known as “The Dodge Line” did the trick. By implementing a balanced national budget and shutting down the printing presses, it ended hyperinflation. It drastically reduced government economic intervention across the board. It rationalized an incomprehensible tax code. Dodge’s intention was not to “plan” the Japanese economy, but rather to finally leave it alone. He killed every subsidy and price control he could get his hands on, and MacArthur cheered him as he did it.
“I think what is most important in rebuilding the Japanese economy is to balance the budget,” Dodge said in his very first meeting with the Japanese Finance Minister. “In order to balance the budget, you have to cut spending.” When urged by the bureaucracy to spend more on “infrastructure,” Dodge said no, insisting that such spending historically was “the least wisely administered and the least productive.”
An April 2010 report titled Fiscal and Monetary Policies of Japan in Reconstruction and High-Growth, 1945 to 1971 reflected on Dodge’s impact:
The fiscal 1949 budget also attempted to reduce government debt. In an effort to enable the economy to break out of inflation, it held down increases in spending across the board. Dodge Plan budgeting enabled Japan to balance its fiscal spending, restrain government outlays, cut price subsidies and eliminate the rationing system. Postwar inflation died down, and the postwar controls were thrown off.
Once inflation was killed, Dodge established a yen-to-dollar exchange rate of 360-to-1, where it remained unchanged for almost a quarter-century. Stable money became a key pillar of the Japanese economic miracle.
Gone in Dodge’s first budget for Japan were the Liquor Rationing Public Corporation and the Petroleum Rationing Public Corporation, along with dozens of other departments and bureaucracies. Another notable and deserving casualty was the Reconstruction Finance Bank, which made so many bad loans and fostered so much money printing that its effect was nicknamed “Reconstruction Finance Bank Inflation” by many Japanese. Dodge closed it down—lock, stock, and barrel.
It’s likely that Dodge understood a key fundamental that we must hope DOGE, the Trump administration, and the Congress will understand: If you only nip and tuck, the monster will grow back later. It’s best to rip this nonsense out by its roots and then run the whole thing through a woodchipper.
Dodge also trimmed the bloated state-owned railroad and telecommunications systems. It was not painless. James D. Savage notes that Japanese National Railways lost 100,000 workers. About 200,000 were cut from Nippon Telegraph and Telephone Corporation. (Later in the 1980s under Prime Minister Nakasone, both companies were completely privatized.)
By the end of World War II, hardly anybody in Japan knew what a balanced government budget looked like. Deficits had been the norm for half a century. Even before Keynesian economics constructed a dubious rationalization for red ink, the Japanese national budget was chronically underwater. Joe Dodge of Detroit changed that and planted a desire for balanced budgets into the Japanese psyche that lasted for two generations.
To cite Savage once again:
Japan’s inflation of the immediate postwar years was broken, the budget ran a surplus, and the cutting of subsidies and the revalued yen encouraged economic rationalization. The rapid growth of inflation of the late 1940s was halted, and when the effects of the Dodge Plan were fully felt in 1950, wholesale prices flattened out, whereas consumer prices actually fell.
The free-market miracles that transformed West Germany and Japan into economic powerhouses within a decade are so incredibly remarkable that one has to ask, “Why don’t Americans learn about them in public schools today?” Maybe DOGE should also tackle the non-education and the mis-education rampant in government educational institutions these days.
Joe Dodge was back in America well before the Truman administration ended in 1953. But soon thereafter, President Eisenhower named him his Director of the Budget. In barely a year, he cut the US federal deficit in half.
If DOGE can accomplish what Dodge accomplished, we too may experience a new American economic miracle.
Additional Reading:
World Trade: Man With a Puzzle by Time editors, Time magazine (January 24, 1955)
The Deutschemark’s Real Father (interview with German economic historian Carl-Ludwig Holtfrerich)
How the Revival of Post-War Germany Began by Bruce Bartlett
The Origins of Budgetary Preferences: The Dodge Line and the Balanced Budget Norm in Japan by James D. Savage
Fiscal and Monetary Policies of Japan in Reconstruction and High-Growth, 1945 to 1971
What Caused Japan’s Post-war Economic Miracle? by Lawrence W. Reed
By: Lawrence W. (“Larry”) Reed is FEE’s President Emeritus, Humphreys Family Senior Fellow, and Ron Manners Global Ambassador for Liberty. He previously served as president of FEE from 2008-2019. He chaired FEE’s board of trustees in the 1990s and has been both writing and speaking for FEE since the late 1970s. Original here. Reproduced with permission.
