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17-10-2019

Stable money and central bank independence: implementing monetary institutions in postwar Germany

Author: Carsten Hefeker

Published in: Public Choice | Issue 3-4/2021

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Abstract

Germany prides itself in having one of the most successful central banks and national currencies with respect to independence and stability. I show that not only were both imposed on the country after 1945, but that German experts and officials resisted both initially. It thus represents a rare case of the successful imposition of institutions from abroad. Events are discussed in light of Peter Bernholz’s requirements of stable money and an independent central bank.

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A number of currency reforms were undertaken in Western and Eastern Europe after the war that differed in institutional detail (see Klopstock 1946; Gurley 1953) and degree of success (Dornbusch and Wolf 1990) from the German reform. The combination of currency reform and central bank design was unique to Germany.

However, Japan did not experience the same fundamental reforms in monetary institutions and currency as did Germany (see Holtfrerich and Iwami 1999).

Ritschl (2005) shows that many institutional structures of the postwar order in Germany actually are leftovers from the Nazi era.

Bernholz (1989) also analyzed the position of German ordoliberals concerning money in a market economy, which is an important intellectual foundation for the Bundesbank’s role.

Shifting resources to the war effort increased prices for civilian goods already in 1935–1936, prompting the Nazis to freeze prices in 1936 and wages in 1938 (Dornbusch and Wolf 1990).

The Soviets issued more than three times as much of those marks than the western Allies, which then flowed back to the US zone and were converted into US dollars (Backer 1978; Petrov 1967). Such currency arbitrage would create political problems later when a joint currency reform was discussed (see below).

One important part of the currency reform was the liberalization of prices that soon followed. Eliminating price controls was a German decision, however, and is therefore not the focus of the present paper. Some debate has arisen as to whether that particular step was supported by the US military government. Folklore has it that Erhard took action against the wishes of the military government, but that is a myth (Bernholz 1979). In fact, the American plan for currency reform already contained advice to liberalize prices (Sauermann 1979).

Another conflict that made cooperation difficult was the issue of German reparations. While France and the Soviet Union insisted on reparations, Britain and the United States were hesitant, given the post-World War I experience (Wandel 1980).

Occupation policy was promulgated officially in Joint Chiefs of Staff (JCS) directive 1067 of April 1945, which called for the pastoralization of Germany. While the US military government in Germany never actually followed that policy, it was reversed formally only with JCS 1779 in July 1947.

Erhard later became economics minister (1949–1963) under Chancellor Konrad Adenauer and his successor (1963–1966).

The six big German banks are Deutsche Bank, Commerzbank, Dresdner Bank, Bank der Deutschen Arbeit, Berliner Handelsgesellschaft and Reichskreditgesellschaft (Bennett 1950).

Dodge was a private banker and Clay’s adviser until June 1946. He was succeeded by his deputy, Jack Bennett.

Nominally, the president of the governing board had more power than the president of the directorate. De facto, however, Wilhelm Vocke of the directorate would become more influential than Karl Bernard of the governing board (Marsh 1992; Mee 2016).

With the creation of the Bundesbank, the two-tiered system was abolished and the LZB became mere administrative offices of the Bundesbank (Hauptverwaltungen).

On the personal connections between the Reichsbank and the new central bank, see Marsh (1992) and Mee (2016).

Bibow (2010, p. 499, fn.11) cites Miksch, an important adviser of later economics minister Erhard, that “central bank independence is very unpopular in Germany itself. It does not arise from the will of the Germany people but is part of the institutional setup that has been imposed by the victors to rule out a resurrection of German power politics” (my translation). See below on the public’s position concerning central bank independence.

In the ABC, the conflict over centralization between the Americans and the British continued. The British supported Vocke, the president of the BdL directorate, strongly in his push for more centralization against the US position favoring decentralization (Dickhaus 1998).

In 1988, the Bundesbank itself would write about the time that it was independent of German authorities, but that it, as in 1924–1930, was dependent on foreign political bodies (Bibow 2010, p. 501).

The CDG plan should not be confused with Dodge’s plan for a new central bank from November 1945. The currency plan is reprinted in Colm–Dodge–Goldsmith (1955), the first time that it was made publicly available in Germany. It is introduced by Sauermann (1955) and reprinted along with other plans and additional material in Möller (1961).

Wandel (1979, pp. 320 and 323) calls Tenenbaum the “father of the deutsche mark” and that he, “like no other person, was responsible for the development and implementation of the German currency reform”. Wandel goes on to write that Tenenbaum implemented it against “lively opposition” from Germans and in part even against Washington’s will. Tenenbaum later confirmed that he personally chose the name “Deutsche Mark” over several alternatives (Kindleberger and Ostrander 2003, p. 189).

The Nazi government was concerned with a reorganization of the currency system after the war and let experts propose and discuss their plans relatively freely (Herbst 1977; Tribe 2001). See James (1994) for Nazi plans for an international monetary system after the war.

A full list of participants can be found in Sauermann (1979). Möller (1961) contains a list of regulations and laws that were prepared at Rothwesten, relying heavily on German experts.

This issue was finally treated in separate legislation in 1949 and 1952 without Allied influence.

The conversion rate was based on estimates of production capacity in 1946 and used the average velocity of money from 1931 to 1933. But it overlooked that production capacity in 1948 was higher than in 1946 and it neglected a strong increase in velocity that led to an initially strong price increase after the reform (Gundlach 1987). Hielscher (1948), however, is a contemporary critique, saying that the endowment was too high and responsible for the price increase after the reform. See also Dornbusch and Wolf (1990).

The Bundesbank’s independence was regulated by ordinary law and could have been changed by a simple parliamentary majority (Stern 1998).

Throughout the discussions about the Bundesbank’s status, Adenauer would keep his position, never accepting a need for central bank independence. The central bank should not become “a state within the state” (Berger and De Haan 1999; Bibow 2010, p. 559).

After 1953, the responsibility for the Bundesbank law moved to the economics ministry and, thus, to Erhard.

Berger (1997a) sees the event as a tactical move by Adenauer to calm industrial interests by making the central bank a “scapegoat” because he later went along with the stabilization program of Schäffer and Erhard.

Karl Blessing was appointed as first president of the Bundesbank. He also had a background in the Reichsbank (Marsh 1992).

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Title: Stable money and central bank independence: implementing monetary institutions in postwar Germany
Author: Carsten Hefeker
Publication date: 17-10-2019
Publisher: Springer US
Published in: Public Choice / Issue 3-4/2021
Print ISSN: 0048-5829
Electronic ISSN: 1573-7101
DOI: https://doi.org/10.1007/s11127-019-00734-z

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