We have all seen those grainy photographs: Wheelbarrows filled to the brim with cash. Kids building small castles with wads of banknotes. To this day, the hyperinflation of 1922-3 plays a powerful role in Germany’s story of itself, and that of its central bank, the Bundesbank, which turns 60 this Tuesday. But much in this story is myth.
To be sure, the German hyperinflation really was a traumatic experience. Savings became worthless overnight. And the episode helped to discredit the Weimar Republic, the troubled democratic state that emerged from the ashes of the First World War. Those worthless banknotes paved the road for Adolf Hitler’s rise to power, with the Germans going on to experience a second inflation during the Third Reich.
No wonder, then, that Germans hate inflation. And no wonder that they passed the Bundesbank Law in 1957, which enshrined an independent central bank that could say no to government demands for financing. West Germany took the lessons of its troubled history and applied them in a manner that ensured a better, more prosperous future. The independent Bundesbank went on to become one of the most successful central banks in the post-war fight against inflation, earning the respect – and downright envy – of other countries.
So far, so good. But a closer look reveals a far more complex picture. For starters, the Reichsbank, Germany’s central bank prior to 1945, was legally independent of government instruction during both the hyperinflation and deflation, the latter occurring amid the Great Depression. Yes, you read that right. An independent central bank presided over two monetary disasters. Of course, this is somewhat surprising given how, today, we associate central-bank independence with monetary stability. But the inter-war record of central-bank independence is a very different thing to the post-war one.
What’s more, Germany was not the only country to experience a hyperinflation in the twentieth century. Poland, Russia, Austria, Hungary endured one, too – with Hungary on record for having the worst of the lot. Following the Second World War, however, these countries failed to place price stability on the same vaunted pedestal of economic policy priorities.
Perhaps the rise of Hitler explains the Germany’s subsequent fixation on inflation? Well, no. It was arguably mass unemployment, not inflation, which radicalized the electorate in the twilight years of the Weimar Republic, propelling the National Socialists to power. So what accounts for the national mythology surrounding inflation in Germany?
Central-bank independence was an explosive issue in the late 1940s and early 1950s
The answer has less to do with the turbulent events of the inter-war era, and more with what happened after the war. In the post-war era, Germany’s monetary history became caught up in a political power struggle as the Allied powers in West Germany handed sovereignty back to the Germans. This power struggle concerned the Bundesbank Law that would establish a new central bank, and specifically the question of who should control monetary policy. Should it be the new federal government in Bonn? Or the various state governments? Or should the central bank itself be independent?
Far from being a matter of consensus, central-bank independence was an explosive issue in the late 1940s and early 1950s. After all, contemporaries pointed out, the Reichsbank was independent for much of the inter-war period, and that hadn’t helped. West German elites – politicians, central bankers, industrialists and trade unionists – mobilized their own versions of history. West Germany’s first chancellor, Konrad Adenauer, opposed central-bank independence. So did his influential finance minister, Fritz Schäffer. By contrast, other politicians, such as the economics minister, Ludwig Erhard, advocated central-bank independence.
It is often forgotten that one of very first drafts of the Bundesbank Law, penned by Schäffer’s finance ministry in 1950, proposed the effective elimination of the Bundesbank’s independence. But if Schäffer stressed the controversial actions of the independent Reichsbank during the Great Depression in justifying his proposals, Erhard countered by noting that Germany’s second inflation was the direct result of a politicized central bank.
Germany’s monetary past thus offered examples for both supporters and opponents of central-bank independence. A fiery public debate ensued. In a further complication, West Germany already had a central bank in the form of the Bank deutscher Länder. The Allied military authorities had established it in 1948 and made it independent of German political instruction. But it was a matter of time before the Allies withdrew from West Germany. And since the Bank deutscher Länder was established by military law, it would have to be replaced.
The Bank deutscher Länder lobbied heavily for its successor to be independent. Led by Wilhelm Vocke, a former Reichsbanker, the central bank often cited history when arguing the merits of an autonomous Bundesbank. Vocke explicitly linked Germany’s experience of two inflations to the need for an independent monetary authority. His goal was to make the idea of central-bank independence synonymous with economic stability. In 2017, this sounds like an easy sell. In 1949, the year in which West Germany was established, it was not.
After seven long years of debate, the Bundesbank Law was passed in 1957, providing for an independent central bank. In effect, the Law reaffirmed an institutional power struggle between the federal government and the Bundesbank over the direction of monetary policy.
The Bundesbank’s 60th anniversary is important because it demands that we re-examine Germany’s history in a new, refreshing perspective
In providing for a central bank that was independent of political instruction, the Bundesbank Law allowed for conflicts between the federal government and central bank to emerge. These conflicts often became ‘dramatized’ in the public sphere, creating controversies surrounding the Bundesbank’s independence. In turn, these public controversies gave rise to circumstances in which the lessons of inflation continued to remain relevant for future generations of West Germans.
The Bundesbank’s 60th anniversary is important because it demands that we re-examine Germany’s history in a new, refreshing perspective. Is it really the case that ‘the ninety-year-old national sense of trauma has not yet been fully overcome,’ as the writer Frederick Taylor suggested in his recent, popular account of the Weimar hyperinflation?
I am not convinced. It is better to view the importance of the German hyperinflation in terms of post-war politics. A clash of interests, one given continual life in the Bundesbank Law, compelled new generations of West Germans to understand contemporary political disputes in historical terms. Look again at those grainy photographs. The origins of this cultural ‘aversion’ to inflation might well have been psychological, and derived from personal experience. But the reasons as to why it has persisted so well in the German public sphere – as opposed to the public spheres of other countries that suffered inflations – are both political and institutional.
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