Central Bank Independence and the Legacy of the German Past, by Simon Mee, Cambridge University Press, 368 pp, £75, ISBN: 978-1108499781
The American humourist Will Rogers joked that the two greatest human inventions were the wheel and central banking. Before the establishment of central banks, depositing gold in a bank entailed a high risk. From the late Middle Ages goldsmiths and money changers began to issue loans in the form of bank notes which were greater in value than the gold on deposit. This system of fractional reserve banking greatly facilitated trade and enterprise but if some of those to whom loans in the form of notes were given, could not repay, other depositors were likely to panic and seek to exchange their notes for gold. As the bank held only a fraction of the notes outstanding in gold, it could not redeem all its notes and would collapse, bringing down other businesses with it. It was to reduce this risk that, from the seventeenth century onwards, central banks were established and given the sole right to issue banknotes. By the middle of the nineteenth century several of them were also “lenders of last resort”, supplying funds to banks which were in trouble ‑ at a penal interest rate to discourage them from irresponsible lending.
Germany’s first central bank, the Reichsbank, emerged from German unification under Bismarck. When Prussia and the German states defeated France in the Franco-Prussian War of 1870, which resulted from Bismarck’s ambition to expand German unification, France was forced to pay an incredibly punitive five billion gold francs to Germany. This gold was given to the Reichsbank when it was established in 1875, enabling it to issue the Reichsmark, based on the Gold Standard. The Reichsbank, established with the plunder of German aggression, would survive two world wars, also the outcome of German aggression, and would end ignominiously with its last resident, Hjalmar Schacht, tried at Nuremberg for organising the funding of Hitler’s re-armament of Germany.
Simon Mee’s compelling and profoundly researched story of Germany’s Bundesbank and its struggle to free itself from associations with the Nazi era, begins with an account of Schacht’s management of the Reichsbank in the interwar period. Schacht, a chilling Prussian bureaucrat who began his career during WWI as a German government official plundering occupied Belgium, was appointed president of the Reichsbank in 1923 as the bank was attempting to end the hyperinflation of 1922-23. Having been accused of corruption while working in occupied Belgium, his appointment was opposed by the directorate of the Reichsbank, but the Weimar government pushed it through. Schacht was a fierce opponent of the reparation payments imposed on Germany by the Treaty of Versailles and his opposition made him attractive to the newly established National Socialists, with whom he aligned himself when he resigned in 1930. He was reappointed president of the Reichsbank by Hitler when he came to power in 1933. Schacht greatly admired Hitler and after his reappointment he was reported as saying of him. “I am the brains. I will steer him.” He was later described as “Hitler’s Magician” for his scheme to circumvent the prohibition of German rearmament imposed at Versailles, by creating an artificial company to issue bonds which effectively were government bonds. He created a strong role for himself and the Reichsbank by writing articles and giving speeches which emphasised the need for a central bank independent of government. The Reichsbank was independent when it presided over the hyperinflation of the 1922-23, yet the mythology cultivated later by the Bundesbank was that the Weimar central bank had printed money recklessly under government direction and that only a central bank fully independent of government could be trusted to control inflation.
Schacht and his fellow directors of the Reichsbank, Wilhelm Vocke, who would later head the Bank Deutscher Länder (BdL) , the central bank established by the Allies, and Karl Blessing, who would become first president of the Bundesbank, all served Hitler without reservation until 1939. Both Vocke and Blessing administered the laws under which Jews were persecuted financially and Blessing joined the Nationalist Socialist Party in 1937, the year in which he became a director of the Reichsbank. Blessing participated in a meeting in 1938, three days after Kristallnacht, attended also by Goebbels and Heydrich, which decided on the strategy for “completely eliminating Jewish participation in the economic and social life of Germany”. He claimed at Nuremberg to know nothing of the persecution of the Jews but a letter he wrote seeking an apartment in Berlin confiscated from a Jewish family was found after his death. Blessing, while a manager with Unilever, was also a member of Himmler’s Freundekreis, a forum of Nazi-supporting industrialists and SS officials which channelled money to the SS. This involvement with Himmler would return to haunt Blessing when he became the first president of the Bundesbank. But Blessing had appointed as head of public relations at the Bundesbank Viktor von der Lippe, whom he had met at the Nuremberg trials, where von der Lippe was acting as defence lawyer for leading Nazis. Von der Lippe, an unscrupulous master of spin, quickly whitewashed Blessing’s Nazi associations with the complicity of supine German newspapers.
An essential element of that whitewashing was a memorandum signed by Blessing, Schacht and Vocke in January 1939 in response to a demand by Hitler that the Reichsbank issue credits, that is print money, to finance the gap between government receipts and expenditure arising from rearmament. The memorandum strongly objected to the government’s inflationary policies, arguing that they endangered the stability of the Reichsmark. As Simon Mee points out, they were solely concerned with the negative financial effects of deficit funded rearmament and expressed no moral objection to it. Hitler was to take control of the Reichsbank, which immediately funded rearmament by printing money, leading to the collapse of the Reichsmark by the end of WWII.
When the Allies took control of Germany after the defeat of Hitler, they found the Reichsbank had ceased to function and to restore economic stability sponsored the creation of a new central bank the Bank deutscher Länder (BdL) in 1948. Who but Wilhelm Vocke, Hitler’s willing acolyte during his years at the Reichsbank, and now reinvented as a monetary martyr, was more suited to be its president?
The establishment of the BdL aroused a debate about central bank independence which is still relevant today. In the wake of WWII, the Bank of England and the Banque de France had been nationalised and did not have independence of governments in monetary policy. When the Federal Republic was established, the BdL was operating successfully and Vocke was ruthlessly seeking to make it independent of government. To do this he had to falsify the history of the fully independent Reichsbank, of which he had been a director during the hyperinflation of 1922-23. He created what Simon Mee with impressive insight calls the “monetary mythology” that only an independent central bank could be relied on to prevent inflation and maintain stability.
Vocke’s desire for a fully independent central bank aroused strong opposition from Konrad Adenauer, the first chancellor of the Federal Republic. In 1956 Adenauer called interest rate increases by the BdL “a guillotine falling on the German people” and pointed out that the institution was “responsible to no one”. But Vocke had skilfully created an image of the Bdl as a bulwark against inflation and Adenauer had to concede independence to the Bundesbank, into which the BdL was transformed by legislation in 1957. The success of Vocke’s PR campaign was proven by the fact that shortly after Adenauer’s speech, Vocke was described by Der Spiegel as “chancellor of the Deutschmark”.
Vocke retired, laden with honours, in 1957 and his place was taken by Blessing, who was president of the Bundesbank from 1957 to 1969. But having succeeded in establishing a powerfully independent Bundesbank, Blessing’s past almost caught up with him. In 1965 his former mentor, Schacht, emerged from his dotage to assert in an article in Quick, a lowbrow German magazine with a large circulation, that Blessing had presided over the “second inflation” of the years 1939-46 and was facilitating a “third inflation”. Blessing knew that responding directly to Schacht’s accusations would focus attention again on his own role in the interwar Reichsbank. But he did not need to respond, as Schacht was ridiculed in the mainstream press for presiding over the hyperinflation of 1922-23 and the issue was quickly forgotten.
A more serious threat to Blessing emerged when Deutschland Report by Bernt Engelmann was published in 1965. Engelmann revealed the significant continuity between the Third Reich and the Federal Republic. The book pointed to Blessing’s membership of Himmler’s “Circle of Friends” and his role in the economic persecution of German Jews. These revelations prompted a masterly campaign by Blessing’s spin doctor, von der Lippe, who issued a document whitewashing him as a defender of central bank independence and opponent of Hitler. The mainstream German press swallowed this line unquestioningly and Blessing remained president of the Bundesbank until he retired in 1969.
With Blessing’s retirement, the Bundesbank might have hoped to be free of Nazi-era associations. Blessing’s successor, Karl Klasen, who was president of the bank from 1970 to 1977 had, in his youth, been a member of organisations opposed to national socialism. But Klasen was succeeded as president by Otto Emminger, who had concealed his membership of the Nazi party, which was only revealed after his death.
A book on the history of the Bundesbank could have been so technical that it would be of interest only to economic historians, but Simon Mee has written a fluent and compelling account of one the most important financial institutions in Europe, which should be read by anybody with an interest in the history of modern Germany, or the role of central banks. Mee assembles compelling evidence that the doctrine of central bank independence is not grounded in economic science (insofar as economics might be considered a science) but is a political and cultural creation. Germany’s fierce attachment to an independent central bank, whose principal role is the control of inflation is grounded, not in the facts of German history, but in a mythology carefully created by Wilhelm Vocke and Karl Blessing, the founders of the Bundesbank and its predecessor, the Bank Deutscher Länder, men whose only difficulty with Hitler’s intention to unleash devastating war on Europe was his method of financing it. Vocke and Blessing created that mythology to obscure their own culpability, and it became the foundation stone of the Bundesbank, which in turn provided the template for the European Central Bank (ECB). The Bundesbank only accepted the ECB on the condition that it give priority to maintaining price stability, and insisted that it be located in Frankfurt, close to the Bundesbank, to reassure the many Germans fiercely opposed to the euro that the ECB would be a European version of the Bundesbank.
In 2011 the Bundesbank hoped to see its then president, Axel Weber, made president of the ECB but in a move which Vocke and Blessing would have approved, Weber stepped down from his post, ruling out his candidacy because he opposed the ECB’s purchase of government bonds from highly indebted euro-zone countries in an effort to help them stave off bankruptcy. Jürgen Stark, chief economist of the ECB and a former vice-president of the Bundesbank, also resigned from his post in 2011 in protest at the ECB’s bond-buying. Weber and Stark objected to bond-buying by the ECB because they considered it tantamount to “printing money”, not because it rescued banks at the expense of workers and taxpayers.
In narrating the history of the idea of central bank independence, as exemplified by the Bundesbank, Simon Mee also provides an acute analysis of the argument that only an independent central can implement a monetary policy that is of benefit to all citizens. He points out that Adenauer, who presided over the economic resurgence of Germany in the 1950s, was aware that in supressing inflation, an independent central bank would create unemployment. But Vocke’s view that inflation must be suppressed whatever the cost in unemployment won the day and the German trade unions, in an example of what Marxists would call false consciousness, accepted Vocke’s argument. Giving priority to maintaining low inflation is a brutally political choice and it was for this reason that many countries, including the UK were reluctant to leave that choice to an independent central bank. Alan Budd, an economic adviser to Margaret Thatcher, was quite explicit about the true aim of anti-inflationary policy when he explained that reducing inflation was “a very good way to raise unemployment and raising unemployment was an extremely desirable way of reducing the strength of the working classes”. It is much easier to control inflation than to spring an economy out of deflation as Japan has discovered after twenty years of trying and failing to do so.
Simon Mee’s book is an invaluable contribution to the debate on central bank independence at a time it when is being questioned. Donald Trump has berated the Federal Reserve for failing to lower interest rates and Mark Carney, governor of the Bank of England, was vilified by pro-Brexit politicians for pointing out the possible negative consequences of Brexit. The sharpest and most justified criticism that central banks face is that, despite their claims to technocratic expertise, they failed to anticipate the banking crisis of 2007-08 or the euro zone’s debt crisis. Their policies of quantitative easing to rescue failing banks also favoured the very rich by raising asset prices, while workers were subjected to a decade of austerity.
Central Bank Independence and the Legacy of the German Past also shows that the concept of Stunde Null (Zero Hour) that is, that there was no continuity between the Third Reich and the Federal Republic, is a fiction. Only the most notorious survivors of Hitler’s regime were tried at Nuremburg and only a few were executed. Many leading Nazis went on to hold key positions in the institutions of the Federal Republic and the great German firms that contributed so much to Germany’s Wirtschaftswunder, or economic resurgence, all had worked enthusiastically with Hitler. Deutsche Bank, where Karl Klasen, the Bundesbank’s third president, began his career, invested the money stolen from the Jews annihilated in the Holocaust. (The institution showed that its ethics had not changed by the early years of the twenty-first century when it participated in manipulating interest rates, selling toxic securities in the lead-up to the financial crisis, laundering money for criminals from several countries and helping Iran, Libya, Syria and Sudan violate US economic sanctions.)
In 2017 the Bundesbank finally accepted that Blessing and several other of its directors had served Hitler, and initiated an investigation into the Reichsbank’s role, during the tenure of Vocke and Blessing, in the crimes of the Nazi era, including generating an inflation in Nazi-occupied Greece that led to the wiping out of the local currency and the creation of a famine. (In a grim reprise of the Reichsbank’s treatment of Greece during WWII, Germany has insisted on imposing brutal austerity on the country since 2010.) The investigation into the Reichsbank’ s Nazi activities has not yet been published, but when it is it should acknowledge Simon Mee’s brilliant analysis of the history of the Bundesbank and the development of its discredited economic ideology which it attempted to foist on all of the EU.
Sean Byrne is lecturer emeritus in economics at Technological University Dublin.