The Most Powerful Bank: Inside Germany's Bundesbank.

• Author: Walters, Alan

THE BUNDESBANK is one of the wonders of the Wirtschaftswunder that was ushered in by Ludwig Erhard's great reforms of 1948. Before the establishment of the Bundesbank in 1957, the Bank Deutscher Lander, a creation of the allied military government, had emphasized the importance of monetary policy in ensuring price stability. Both banks owe their independence and prestige to two catastrophes. The first was the great hyperinflation of 1920-23. This expropriated the wealth of the German middle classes and paved the way for Hitler; the gutter became the government. The second catastrophe was the hyperinflation of 1945-47--a consequence of the massive deficit financing of World War II. The Reichsmark currency was completely destroyed and the currency reform of 1948 ushered in the deutschemark, the Grail of which the authorities of the Bundesbank are the guardians.

During the early 1870s, the numerous states of Germany had fragmented currencies which were unified by the creation of the Reichsbank in 1876. From its inception the Reichsbank was completely dependent on the government. But as Germany had joined the gold standard, such dependence was not a matter of great concern. One of the central principles of international monetary economics is that if one fixes the exchange rate, then there is little or no scope for an independent monetary policy...a simple lesson that is forgotten more often than learnt. So, although Germany rarely obeyed the implicit rules of the old gold standard (it was a notorious hoarder of gold), the convertibility requirement prevented any inflationary financing until the abrogation of the standard in 1914. Then, at the behest of governments, the Reichsbank, by monetizing the large government deficits, ensured the hyperinflation of 1920-23.

As a result of the advocacy of Montague Norman, the powerful Governor of the Bank of England, and the pressure exerted by the Allies in May 1922, the Reichsbank was made independent of government by the Autonomy Act. The monetary reform of 1923 and the creation of the new stabilizing Rentenmark--"backed by the real estate of the Reich"--paved the way for the establishment of a new currency, the "Reichsmark," which was based on the gold exchange standard. The Reichsbank remained independent of government.

With the accession of Hitler, however, the Reichsbank was soon put in its place. Through one encroachment after another, the independence of the Reichsbank was repudiated. In 1937 it was made subject to the instructions of the Fuhrer, Hitler. In January 1939 six of its eight directors were dismissed when they criticized the excessive borrowing required to finance Hitler's spending plans. Thus Germany was all set for the great inflation that followed World War II.

It is not surprising that the German people developed a dread of inflation. Just as the hyperinflation of 1920-23 was important in projecting Hitler into power and to the devastation of war-time defeat, it also caused the complete collapse of the currency and of the economy after World War II. Never again. The independence of the central bank from government became the basis for the forerunner of the Bundesbank, the Bank Deutscher Lander, which was set up to implement the currency reforms of 1948. And with the establishment of the Bundesbank in 1957, a high degree of independence was written in the Bundesbankgesetz (charter).

All this is described in considerable accurate detail in David Marsh's book. Alas, he could not resist the temptation to dwell on the Nazi-party membership of some of the distinguished staff and councils of the Bundesbank. Such smear jobs might have been omitted. Yet Marsh is a gifted journalist and his command of events is most impressive. But...