German Monetary History in the Second Half of the Twentieth Century: From the Deutsche Mark to the Euro
Robert L. Hetzel
"Starting in January 2002, citizens of the European Monetary Union (EMU) replaced their national currencies with the Euro, issued by the European Central Bank (ECB). Europeans created a new pan-European central bank as a symbol of a future united Europe. However, what historical process explains the broad monetary policy of the ECB, that is, its objective of price stability and its strategy for achieving that objective? The short answer is that its founders designed the ECB to look like the Bundesbank. How then did the Bundesbank evolve? To answer that question, I survey German monetary policy in the second half of the twentieth century.
I divide this history into three main sections.
The first treats the BrettonWoods system of fixed exchange rates.
The second treats the floating exchange rate period that began in 1973. It chronicles the Bundesbank’s ultimate decision to accord primacy to reducing inflation rather than unemployment.
The last explains how the Bundesbank dealt with the pressures created by movement toward a single European currency.
The evolution of the Bundesbank into an institution now identified as a modern central bank is fundamental to the article. A modern central bank This article follows Hetzel (2002), which summarizes German monetary policy in the first half of the twentieth century. The author gratefully acknowledges helpful comments from Michael Dotsey, Martin M. Fase, Andreas Hornstein, Thomas Humphrey, Joachim Scheide, and Alex Wolman. The views expressed in this article are those of the author and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System. 1 An examination of the monetary policies that central banks pursue requires a framework for understanding their choice of objectives and the way that they achieve those objectives. The Federal Reserve
"...At Maastricht in December 1991, members of the European Union signed the Treaty on European Union, which laid down conditions for membership in the EMU. Monetary union required that Germany forsake the DM—the symbol of everything that it had done right afterWorldWar II. German public opinion could accept such a sacrifice only if EMU members adopted the German model of stability symbolized by the Bundesbank (New York Times 15 March 2000, C1). France acceded for the sake of its foreign policy objectives of countering U.S. worldwide hegemonic influence and German European hegemonic influence (Dyson and Featherstone 1999, 252; Marsh 1992, 204). In 1990, Bundesbank president P¨ohl chaired the Committee of EC Central Bank Governors that drafted the ECB statute, and the Bundesbank prepared the single draft for negotiations. The Bundesbank worked to preserve its Stabilitatspolitik.41 It replaced the ambiguous reference in the Bundesbank Law of 1957 to “safeguarding the currency” with the explicit language, “the primary objective of the ESCB shall be to maintain price stability..."