Also by Jeremy Leaman

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1 The Bundesbank Myth

2 Also by Jeremy Leaman RACISM, ETHNICITY AND POLITICS IN CONTEMPORARY EUROPE (with A. G. Hargreaves) THE POLITICAL ECONOMY OF WEST GERMANY, TOWARDS SUSTAINABILITY: Challenges to the Social Sciences and Local Democracy (editor with D. Eissel and E. Rokicka)

3 The Bundesbank Myth Towards a Critique of Central Bank Independence Jeremy Leaman Senior Lecturer Department of European Studies Loughborough University

4 * Jeremy Leaman 2001 Softcover reprint of the hardcover 1st edition All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, london W1P OlP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright. Designs and Patents Act First published 2001 by PA LG RAVE Houndmills. Basingstoke. Hampshire RG21 6XS and 175 Fifth Avenue. New York. N. Y Companies and representatives throughout the world PAlGRAVE is the new global academic imprint of St. Martin's Press llc Scholarly and Reference Division and Palgrave Publishers ltd (formerly Macmillan Press Ltd). ISBN ISBN (ebook) DOI / This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data have been applied for

5 Contents List of Charts List of Tables Preface Acknowledgements vi vi ix xi 1 Why is Money a Problem? 1 2 Autonomy and the German Traditions of Liberalism 22 3 Constituting Autonomy - From the Reichsbank to the 52 Bundesbank 4 Exercising Autonomy - From the 'Miracle Years' to the 114 End of Bretton Woods Towards Dominance - Central Bank Politics The Emperor's New Clothes - Monetarism, Monetary 193 Accumulation and the Blindness of Power The Final Chapter - Germany, EMU and the 220 Bundesbank 8 Concluding Remarks: Breaking the Myth 246 Bibliography 261 Index 271 v

6 List of Charts 4.1 Central Bank Money Stock, M3 and GDP Stagflation and Monetary Policy in Germany International Discount Rates Compared Current Balances, OECD, Germany, USA Growth and Long-Term Interest Rates in Germany DAX and Dow Jones Share Price Indices Current Account Balances as Percent of GDP List of Tables 3.1 Ratio of Reich Expenditure Covered by Reich Revenue Reich Debt from Discounted Treasury Bills Domestic Inflation and Reichsbank Discount Rate Bills Discounted by Reichsbank June - December Liquidation of Reich Debt in Money Stock and GNP in Germany Changes to Discount and Lombard Rates and Inflation Monetary Policy and Stagflation Germany Trade with OPEC Countries Growth Rates for Non-Oil Developing Countries and 178 Real Interest Rates Stagflation in Germany Profit Ratio, Investment Ratio, Growth and Employ- 197 ment in Europe Growth of Trade and GDP GDP Growth and Real Interest Rates Asset Ratios in German Enterprises Large-scale Mergers in Germany and Europe Realignment of the European Monetary System vi

7 6.7 Distribution of World Currency Reserves The Asymmetry of International Interest Rates: Current 228 Account Balances and Discount Rates in Selected Countries Restrictive Monetary Phases in the FRG Selected Indicators for the Unified German Economy Factory Gate and Consumer Price Trends in Germany Deflationary Continuum in Germany Annual Real GDP Growth in Old and New Lander of 244 the FRG Box Box 1 Law on the German Bundesbank July 1957 (extracts) 113 vn

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9 Preface The issue of central bank independence gained sudden prominence in political and academic circles in the 1980s and the 1990s. Before this time it had been regarded as an idiosyncrasy of the economic cultures of the United States, Germany and Switzerland or as a chance feature of federal systems of government. The sudden popularisation of autonomous central banking coincided with the stagflationary period which hit the OECD and other countries in the wake of the collapse of Bretton Woods and the two oil crises. The apparent and relative success of the German Bundesbank in steering the Federal Republic through stagflation elevated the principle of independent monetary policy to an article of faith among both neoliberal economists and their political allies. The dragon of inflation became the primary public economic enemy. Othe 1980s, one or two smaller states (Netherlands, New Zealand) transformed their dependent central banks into autonomous agencies, largely free from interference from elected governments, but it was in the wake of the collapse of communism, German unification and the resurrection of European Monetary Union that the trickle became a torrent and Germany's idiosyncratic model of monetary policy-making became the blueprint for most central banks in the OECD and in the emerging states of central and eastern Europe. This remarkable transformation of the institutional shape of economic policy-making encountered very little resistance. It is this process and the case, upon which it was based, which have motivated this study. I make no secret of my extreme scepticism about the efficacy and appropriateness of independent monetary policy for the complex political economies of the modern world. The problems facing mankind in the twenty-first century demand not less but more participation by informed democratic forces at every level and in every field of policy-making. The unanswerable quango, like the Bundesbank or its European clone, the ECB, seems to point in the opposite direction: in the direction of the disenfranchisement and disempowerment of civil society. It does not simply remove democratic control of one area of policy from the purview of voters, but generates a fatalism about the very nature of democratic influence. IX

10 Examining the mythology of the Bundesbank's apparent success could help to generate a new debate about the nature of civil society and the need to restore and strengthen instruments of democratic control which have either been removed or weakened by the dominant economic and political forces of the outgoing century. It might be naive to suggest that the dragon of inflation has been finally slain; the power of global corporations to exploit the potential for monopolistic pricing has, if anything, increased. However, it would seem legitimate to assert that the problems of humanity in this century will be those of distribution in the broadest sense: who enjoys what share of available resources, jobs, rewards, private and public goods, leisure, travel opportunities, health, nature. Answering such questions demands refined and painstaking participation by people at local, regional, national and supranational level. In this author's view, monetarism and its flagship institution, the autonomous central bank, contributed to one of the most disastrous episodes of economic 'management' in the modern world, namely the Third World debt crisis of the 1980s, the effects of which will still be felt for many years to come. The adoption of the independent central bank as core institution of economic policy could risk repeating such disasters. Jeremy Leaman Loughborough, April 2000 x

11 Acknowledgements This book would not have been completed without the support of family, colleagues and friends. This is a truism which nevertheless needs repeating in situations like this. Another truism, occasionally forgotten by scholars eminent or otherwise, is that analysis and discourse are collective activities. Writing a book like this one draws on the work and ideas of hundreds of other individuals, in their published work in their contributions at conferences, their questions at seminars or their queries over lunch. Even though I am critical of the ideological positions represented by the Bundesbank, it would be churlish to deny that it has been incredibly helpful in supplying information, in providing statistical sources and well researched papers. Friends/colleagues at work have likewise been extremely helpful in exploding some of my dafter lines of argument and guiding me into safer intellectual waters. My family has also been extraordinarily patient watching the often slow progress of the book. Above all, my wife Cheryl has been a source of great encouragement and support throughout. Finally, the book would not have been completed without the help of Karel Thomas in copyediting, proof-reading and indexing the rough old word-processed manuscript with which she was confronted. xi