Born in Fürth, Kingdom of Bavaria, from 1913 to 1916 Erhard was a commercial apprentice. After his apprenticeship he worked as retail salesman in his father's draper's shop.

He joined the German forces during World War I 1916 as an artilleryman, fought in Romania and was seriously injured near Ypres in 1918. Erhard could no longer work as a draper and began to study economics, first in Nuremberg, later in Frankfurt am Main. He received his PhD from Franz Oppenheimer in 1925.

During his time in Frankfurt he married Luise Lotter (1893 - 1975), widow Schuster, on 11 December 1923. After his graduation they moved to Fürth and he became executive in his parents' company in 1925. After three years he became assistant at the Institut für Wirtschaftsbeobachtung der deutschen Fertigware, a marketing research institute. Later, he became deputy director of the institute.

Due to his injuries, Erhard did not have to join the German military forces during World War II. Instead, he worked on concepts for a postwar peace; however, officially such studies were forbidden by the Nazis, who had declared Total war. As a result, Erhard lost his job in 1942 but continued to work on the subject by order of the "Reichsgruppe Industrie". In 1944 he wrote War Finances and Debt Consolidation (orig:Kriegsfinanzierung und Schuldenkonsolidierung). In this study he assumed that Germany had already lost the war. He sent his thoughts to Carl Friedrich Goerdeler, a central figure in the German resistance against the Nazi government, who recommended Erhard to his comrades. Erhard discussed his concept with Otto Ohlendorf, deputy secretary of state in the Reichsministerium für Wirtschaft, as well. Ohlendorf himself spoke out for "active and courageous entrepreneurship (aktives und wagemutiges Unternehmertum)", which was intended to replace bureaucratic state planning of the economy after the war. Erhard was an outsider who supported the resistance, who personally and professionally rejected Nazism, and who endorsed efforts to effect a sensitive, intelligent approach to economic revival during the approaching postwar period. On the other hand he signed off his letters with 'Heil Hitler!' and he embraced annexationist policies that continued to influence his economic policies as finance minister and chancellor during the postwar period.

After the war Erhard became economic consultant for the American military administration of Bavaria who made him Minister of Economics in the Bavarian cabinet of Wilhelm Hoegner. After the American and British administration had created the Bizone, Erhard became chairman of the Sonderstelle Geld und Kredit in 1947, an expert commission preparing the currency reform. The newly created Special Department for Money and Credit in Germany's western zones of occupation in September 1947, under Erhard, focused attention immediately upon the general theme of monetary and financial recovery, resulting in the adoption of the so-called Homburg plan in April 1948 that set the stage for the recovery of the economy.

In 1948 he was elected Director of Economics by the Bizonal Economic Council. On 20 June 1948, the Deutsche Mark was introduced. Erhard abolished the price fixing and production controls that had been enacted by the military administration. This exceeded his authority, but he succeeded with this courageous step.

In 1949 he stood for election in a constituency in Baden - Württemberg for the first West German parliament after the war and gained a direct mandate. Later in the year he is alleged to have joined the Christian Democratic Union (CDU), though this fact cannot be established by any of Erhard's biographers.

In September, 1949, Erhard was appointed Minister of Economics in the first cabinet of Konrad Adenauer. His party made his concept of social market economy part of the party platform. Erhard believed in economic liberalism (now known as Neoliberalism). He joined the Mont Pelerin Society in 1950 and used this influential body of neoliberal economic and political thinkers to test his ideas for the reorganization of the West German economy. Some of the society's members were members of the Allied High Commission and Erhard was able to make his case directly to them. The Mont Pélerin Society welcomed Erhard because this gave its members the opportunity to have their ideas tested in real life, something that had been lacking. Late in the 1950s, Erhard's ministry became involved in the struggle within the society between the European and the Anglo - American factions and sided with the former. Erhard viewed the market itself as social and supported only a minimum of welfare legislation. However Erhard suffered a series of decisive defeats in his effort to create a free, competitive economy in 1957; he had to compromise on such key issues as the anti-cartel legislation. Thereafter, the West German economy evolved into a conventional welfare state.

In July 1948, a group of southwest German businessmen attacked the restrictive credit policy of Economic Director Erhard. While Erhard had designed the policy to assure currency stability and stimulate the economy via consumption, business feared the scarcity of investment capital would retard economic recovery. He was deeply critical of a bureaucratic institutional integration of Europe on the model of the European Coal and Steel Community.

Erhard's decision, as economics director for the British and American occupation zones, to lift many price controls in 1948, despite opposition from both the social democratic opposition and Allied authorities, and his consistent advocacy of free markets, helped set the Federal Republic on its phenomenal growth path. Erhard's financial and economic policies soon proved widely popular as the Germany economy made a "miracle" recovery to rapid growth and widespread prosperity in the 1950s, overcoming the wartime destruction and successfully integrating millions of refugees from the east.

After the resignation of Adenauer in 1963, Erhard was elected Chancellor with 279 against 180 votes on 16 October. In 1965, he was re-elected. From 1965 - 1967, he also headed the Christian Democratic Union.

Erhard explored using money to make possible reunification of Germany. Despite Washington's reluctance, Erhard envisaged offering Nikita Khrushchev, the leader in Moscow, massive economic aid in exchange for more political liberty in East Germany and eventually for reunification. Erhard's objective corresponded in time with Khrushchev rethinking his relations to West Germany. The Soviet leader secretly encouraged Erhard to present a realistic proposal for a 'modus vivendi' and officially accepted the chancellor's invitation to visit Bonn. However, Khrushchev fell from power in October 1964, and nothing developed.

Erhard believed the major world problems were soluble through free trade and the economic unity of Europe (as a prerequisite for political unification); he alienated French president Charles de Gaulle, who wanted the opposite. Support for the American role in the Vietnam War proved fatal for Erhard's coalition. Through his endorsement of the American goal of military victory in Vietnam, Erhard sought closer collaboration with Washington and less with Paris. Erhard's policy complicated Allied initiatives toward German unification, a dilemma that the United States placed on the back burner as it focused on Southeast Asia. Erhard failed to understand that American global interests — not Europe's needs — dictated policy in Washington, D.C., and he rejected Adenauer's policy of fostering good relations with both the United States and France in the pursuit of West German national interest. Faced with a dangerous budget deficit in the 1966 - 1967 recession, Erhard fell from office in part because of concessions that he made during a visit to U.S. President Lyndon B. Johnson.

In 1961, while vice president, Johnson had hosted Conrad Adenauer some two years before the German statesman vacated the chancellorship of the German Federal Republic. In December 1963, less than a month after he had assumed the American presidency upon the assassination of John F. Kennedy, Johnson staged the first ever presidential barbecue in Erhard's honor. The event was held in and about the Stonewall High School gymnasium in Stonewall in the Texas Hill Country. Among the entertainers was the internationally known concert pianist Van Cliburn, who appeared in a business suit, rather than his usual formal wear. As a member of the Texas House of Representatives, Samuel Ealy Johnson, Jr., Johnson's father, been sensitive to his German - American constituency and had opposed the Creel Committee's attempt to disparage German culture and isolate German - Americans during World War I. Adenauer and Erhard had also stayed at Johnson's ranch in Gillespie County.

Erhard's fall suggested that progress on German unification required a broader approach and a more active foreign policy. Chancellor Willy Brandt in the early 1970s went on to employ Adenauer's approach, now called "Ostpolitik", seeking improved relations with the Soviet Union and Eastern Europe and thereby laying the groundwork for détente and coexistence between East and West. In the 1980s Chancellor Helmut Kohl, however, reverted to Erhard's approach in collaborating with the Reagan Administration in its hard line anti-Soviet policy.

On 26 October 1966, Minister Walter Scheel (FDP) resigned, protesting against the budget released the day before. The other ministers who were members of the FDP followed his example — the coalition was broken. On 1 December, Erhard resigned. His successor was Kurt Georg Kiesinger (CDU), who led a grand coalition.

Erhard continued his political work by remaining a member of the West German parliament until his death in Bonn on 5 May 1977. He was buried in Gmund, near the Tegernsee. The Ludwig Erhard - Berufsschule (professional college) in Paderborn, Fürth and Münster are named in his honour.