The Establishment of the BUNDESBANK (1945-1957) with Reference to Central Banks' Independence and Federalism

Abstract

The aim of this article is to analyze the process of establishing the Bundesbank after the Second World War, in particular, the issues of the central bank's independence and federalism in relation to an argument over economic policy during the period of West Germany's postwar rehabilitaion. At the end of the war, the Reichsbank ceased to exist as a central bank for all of Germany. In the three Western occupational zones, State Central Banks (Landeszentralbanken) were organized for each state and the Bank of German States (Bank deutscher Lander) was founded to act as a coordinating body for them. The majority in the decision-making body of the Bank of German States consisted of the Presidents of the State Central Banks. It was explicitly stated that the bank shall not be subject to the instructions of any political body. At first, however, the Allies retained some control over the Bank. After the Federal Republic had come into existence in 1949, the Finance Minister, F. Schaffer, drafted legislation whereby the Bank of German States was provisionally established as the Bundesbank. He argued in favour of restricting the Bank's independence. At that time, Schaffer wanted an expansive monetary policy in a situation of alarmingly high and rising unemployment. On the other hand, the Minister for the Economy, Prof. Dr. L. Erhard, supported the Bank's independence. He put liberal economic principles at foundation of the social market economy (Soziale Marktwirtschaft) and regarded stabilization of the currency as important. In March 1951, the Allied Bank Commission was abolished. After this supervision of the Bank's activities was removed, and the Bank of German States enjoyed an almost complete independence of the federal government. The independence of the Bank was universally accepted. When the Bank of German States became the Bundesbank in July 1957, the Land State Banks were merged with it. But the structure of decision making was preserved. The Bank's independence met with the wide-spread approval of the West German society that had been disillusioned by the experience of the great inflation of the 1920s and of the Third Reich, and the bank's monetary policy is part of West Germany's economic policy, the social market economy.