50 Years of the German Mark

One of the trivial statements, purported facts, from perusing the Press,that sticks in my mind is that, if you assume the continuation of present trends in mortality, then the expectation of life of every white American baby girl born after the year 2000 AD will be over 100 years. We used to worry what people would do to fill up their added life span. In the case of American women, Alexander Graham Bell’s useful invention resolved that problem, just as Rupert Murdoch’s Sky Sports relieves all such worries for British men.

Be that as it may, the choice between work and leisure is little understood, perhaps little studied, by economists. Large segments of society, including our own academic community, are working harder and more hours now than we would have done 20 or 40 years ago, and that is so despite an income level that is much higher in real terms, even if we academics are racing down the comparative income ladder with a speed reminiscent of the clergy’s relative decline in the previous century.

Fifty years - it almost seems that this span of time is something of a magic number for German currencies. Fifty years was the age reached by the first German common currency: the Mark, which was created in 1873 after the German Reich was founded and perished amid the chaos of hyperinflation in 1923. Twenty-five years - that is, exactly half the magic number 50 -lay between the currency change of 1923 and the currency reform of 1948 which overcame the inflationary legacy bequeathed by Hitler’s war financing. Finally, 1998 is the 50th anniversary of the Deutsche Mark, and this will be its last birthday as an independent currency. But could the end of these three eras of German currency history have been more different? Surely not! In 1923 the currency that was abandoned was already ruined. Not only the currency but also the Reichsbank itself was compromised. Its conception and understanding of monetary policy were negated by reality. At the same time, the inflation of 1923 left a terrible legacy for the future fate of our country. In 1948 the inflationary ruins of the Hitler regime had to be cleared away and the foundations laid for a new beginning.

The Currency Reform (the ‘Reform’) of 20 June 1948 represents a turning point in the development of the post war German economy. The abolition of a money supply denominated in the Reichsmark and its replacement with the new Deutsche Mark was a symbolic act whose political, cultural and economic impact has resonated throughout the latter half of the twentieth century. The inauguration of the DM as a stable currency reinstated the conditions for regular price formation and economic calculation absent in Germany since the mid-1930s. Contemporaries witnessed the overnight disappearance of disorderly market phenomena - goods shortages combined with currency excess, fixed prices, exchanges in kind, and the black market - and the dawn of a new day with fresh currency, goods in the shops, and an incentive to earn money wages. In popular mythology this event stands therefore at the inception of the Economic Miracle; it is thought of as the founding moment of West Germany’s political and economic recovery, and it is generally linked to the elaboration of a social market economy as the foundation of prosperity. The Reform also had profound political effects: it predates the Federal Republic, but precipitated its formation.

There is actually nothing to add if a proven expert on German monetary policy such as Stephen F. Frowen and his co-author Karakitsos arrive at the conclusion that ‘The German policymakers have been very systematic and very pragmatic in their conduct of monetary policy. Their priorities between inflation and growth have remained time invariant … ‘(Frowen and Karakitsos, 1997, p. 527). The salient feature of German monetary policy is indeed its striking continuity, rather than frequent ‘paradigm changes’.

That applies first and foremost to its stability orientation. In the 50 years of the Deutsche Mark’s existence, Germany has achieved a high degree of price stability. In that respect, the last 50 years have been in distinct contrast to the monetary upheavals of the first half of the twentieth century with their calamitous political and social consequences. A comparison with inflationary developments in other countries during the past 50 years also testifies to how deeply stability awareness is anchored in Germany - something which is undoubtedly due to its specific past experience. The average annual rate of inflation in the United Kingdom over the past five decades - based on a broad index of consumer prices - has been 6.4 per cent, for example.

Central bank independence is now widely regarded as desirable. It is associated with low inflation, and low and predictable inflation appears to have effects on growth rates which, although modest year by year, build up to having significant beneficial effects on national income over longer periods (Barro, 1995). The idea that a central bank might be ‘too independent’ - quite aside from whether independence is a concept admitting of various ‘degrees’ - therefore may seem bizarre.

Nevertheless the question is worth pursuing. Doing so raises questions about the stability of the structure of the European Central Bank (ECB) and its relations with the European Parliament and national governments; and these questions in turn raise concerns about future economic performance in the European Monetary Union (EMU) area.

Since the establishment of the European Coal and Steel Community in 1951, Germany has been split into two rival camps. The one regarded European integration by way of the creation of common European institutions as an historical option that was in accordance with European realities and prospects. The other camp rejected the idea of establishing communities with specific organizational patterns. It advocated an economic integration of Europe propelled by market forces. Ludwig Erhard, a man with wider ideas, favoured a free trade area - of course an all-embracing one, not the realized small one.

The hypothesis advanced in this paper is that the Bundesbank was fundamentally responsible for postwar economic growth in West Germany. A monetary policy which targeted price stability produced an undervaluation of the Deutsche Mark. This was the basis for West Germany’s export-driven accumulation. It is thus necessary to distinguish between the nominal and real exchange rates of the OM. The former became increasingly influenced by West Germany’s international monetary commitments, whereas the latter was additionally derived from productivity gains. Qualitative factors also played a role in export growth.

Perhaps, the least understood area of macroeconomics is the exchange rate determination. The fluctuations and trends of the major currencies - US dollar, Deutsche Mark, pound sterling and yen - experienced in the last 15 years, and since January 1999 by the euro, are hardly compatible with the main exchange rate theories. A particular determinant, say, short-term interest differentials, yield differentials, relative current account balances, money supply differentials or relative prices of goods, is generally failing to explain systematic movements in the key currencies. This failure is exemplified in models with time-varying coefficients, where a particular determinant is totally unstable. Its influence over time changes from being extremely important, compatible with the underlying theory (correct sign), to unimportant over another period and even with the wrong sign over previous periods. The general verdict among theoreticians and practitioners is that we do not know what drives currencies.

When the euro was introduced early in 1999, the overwhelming majority of politicians and theoreticians were convinced of its success. This view reflected not only their view that the introduction of the euro was inevitable, but of greater importance was the previous year’s strong position of the Deutschmark (DM) - the key currency of the European Monetary System (EMS) prior to the introduction of the euro - relative to the dollar. It was also seen that the low interest rate of the DM indicated a smooth transition from 11 European currencies to one joint currency.

It is true that there is no guarantee that the monetary process (with the European Central Bank (ECB) as a participant in this process) will create a strong euro similar to its predecessor the DM. But the Eurosceptics’ traditional (and only serious) argument - that an increasing autonomy over income policy, especially fiscal and wage policies, will counter a strong price-level-centered monetary policy stabilization - must not be overestimated. Because the success of a stabilization policy does, to an extent, not just affect the regulation of the monetary process as such, but also has moderate consequences for the acceptability of the market process in adjusted national structures, with serious consequences for inadequately adjusted structures.

It is an honour for me to be asked to give the address at this dinner. Today’s symposium celebrates not one, but two, anniversaries. The first of course is the 50th anniversary of the German Mark. Nothing of course is for ever. But when the Mark bids us goodbye - whether in 1999 or 2002 - it will be in the process of giving birth to the Euro, a successor framed in its image. You will have heard a great deal both about the Mark and the Euro in the course of the day; and I should like to turn to the other event.