Following the birth of a central monetary authority in 1876, Germany participates in the prewar gold standard. Monetary policy reflects Germany's typical concern for controlling inflation until the outbreak of war.
Like most countries, Germany suspends the gold standard for the war. The war is financed not by taxes but by bonds, in the expectation of post-victory payments from other countries. This bet makes it difficult to negotiate an end to the war, as peace without victory would make honoring the bonds impossible.
War debt and reparations lead to the printing of huge sums of currency, causing high inflation. The Weimar Republic still evokes images of wheelbarrows of currency for everyday shopping. In 1923 a U.S. dollar is worth more than four trillion marks. The U.S.-led Dawes Plan briefly alleviates the reparations problem in 1924. Reducing payments and making loans available, it restores relative stability.
The Dawes Plan is followed by the Young Plan, which sets reparations at $25 billion (approximately $267 billion in 2001 dollars) over nearly 60 years. The plan, implemented in 1930, is abandoned because of the onset of the Depression and Hitler's rise to power. The Depression also causes U.S. creditors to call in their debts, and the situation worsens.
Deficit spending and massive rearmament contributes to falling unemployment, and the 1936 Four-Year Plan further increases spending and state control. Despite declaring that they have no use for gold, the Nazis amass gold through confiscation and other means, which proves crucial for maintaining the economy and later financing the war.
Rationing plus price and wage controls restrain inflation for much of the war despite large increases in the money supply to finance military spending. War funds come largely from mandatory loans and credits from German financial institutions as well as expropriations from occupied territories.
The currency falls to 1/500th of its value, and cognac and American cigarettes become common units of trade.
In June 1948 the United States and Great Britain replace the worthless Reichsmark in a sudden currency reform. Keenly aware of inflation's role in Hitler's rise, the Ordoliberals underline the importance of a strong currency, and the Deutsche Mark (DM) grows steadily from the 1950s on. Chancellor Adenauer commits Germany to reparations payments to victims of Nazi atrocities.
The Bundesbank is created with significant autonomy and the primary goal of fighting inflation. Critics charge that the inflation obsession hurts employment and growth, but the memory of the destructive effects of inflation are strong. Monetary policy is controlled through short-term interest. Becoming fully convertible in 1958, the DM stands out for its strength and stability.
The Bundesbank helps put the brakes on the fast-growing economy out of fear of its principal nemesis, inflation. As chancellor, Ludwig Erhard tries to support the dollar as the Bretton Woods system comes under stress. The weak economy in 1966 contributes to the end of the Christian Democrats' long run in power.
The next two coalition governments look to a more Keynesian style of planning as a way out the downturn. The Law for Promoting Stability and Growth sets targets for currency stability. Despite pressure from the United States to revalue, the government fears harming exports if the mark is allowed to appreciate. The Bretton Woods system of fixed exchange rates ends in 1971.
European countries try to link their currencies within narrow bands, but the global systems shifts to floating currency in 1973. Despite the efforts of the Bundesbank, problems plague the economy, even seeing both high unemployment and inflation in 1981. Floating rates increase flexibility, but raise fears that the Bank's anti-inflation efforts will keep the value of the DM too high for exports.
The influence of banks on major companies through board membership comes under pressure from European Union rules.
Currency is a key challenge of reunification. Longtime Bundesbank president Karl-Otto Pöhl decides to move cautiously to keep East German goods competitive. But the politicians suddenly announce a unified currency, causing economic dislocation in the rusted-out East. After 1990 the Bank keeps interest rates high to prevent inflation, affecting growth and jobs across Europe.
The Maastricht Treaty commits Europe to a unified currency and a European central bank and mandates limits on inflation, deficits, and debt. Some Germans worry that a common currency will make monetary policy too soft. Other Europeans fear the reverse, but hope to have more say in European monetary policy than before, when the Bundesbank made unilateral decisions that affected the continent.
The euro is born, used at first for government and corporate accounting. The European Central Bank, based in Frankfurt, is modeled on the independence of the Bundesbank and emulates its anti-inflationary stance. On New Year's Day 2002, the euro enters full circulation, and the Deutsche Mark is retired. Shopkeepers are accused of taking advantage of the changeover to raise prices.
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