26 SEPTEMBER 1992, Page 12


James Buchan is astonished

by British criticism of the German Bundesbank

THE GERMAN Bundesbank, which so signally failed to rescue Norman Lamont last week, may seem to British ministers the very model of bureaucratic small-mind- edness, arrogance and political innocence. It is these things but it is also a proud and self-conscious institution which, unlike Mr Lamont, knows how to reckon in decades. On three occasions this century, political meddling with the German central bank has been catastrophic for Europe. Since British politicians now pride themselves on their ignorance, I'll just remind them of these dates.

The first is 31 July 1914, when the Reichsbank broke its legal obligation to redeem all Reich banknotes in gold. This meant that the war could be financed through inflation and led, by such stages as military defeat, revolution, occupation and crippling reparations, to the day in Novem- ber 1923 when the mark was quoted on the Berlin exchange at 4,200,000,000,000 to the dollar. John Major, with his fondness for the German mark in its rare inflationary phases, would have been in clover.

The second is 7 January 1939, which is the date on the top right-hand corner of a secret letter signed by all the directors of the Reichsbank and addressed to Hitler at Berchtesgaden. The directors, under Hjal- mar Schacht, warned, in terms that could be understood by a child, that the unlimit- ed growth in public spending threatened a dangerous inflation. On the cover, a harassed official hand has noted the Fiihrer's decision and that the dismissal notices had been despatched. What is fasci- nating is that price control in the Third Reich was so effective and all-embracing that inflation wasn't really evident — except in such perverse manifestations as the stock-market boom of 1941 — until late in the war. For all his faults, Schacht knew what he was about.

The tamed Reichsbank, under Walter Funk, duly bankrupted the Germans by debasing the mark and issuing billions in dud war loans. But as early as 1941 the mark was already giving way to an excellent currency, which had the great virtue, because it was destroyed at the point of consumption, of regulating its own supPlY: cigarettes. The cigarette currency was replaced, in the Western zones of occupa- tion, by the deutschmark over the weekend of 19-20 June 1948. While not as astonish- ingly kursstabil as cigarettes, the deutschmark has been a good store of value, losing only about 3 per cent of its purchasing power a year to inflation. This is entirely thanks to the independent cen- tral bank founded by the Allies and known since 1957 as the German Bundesbank.

The third date is 23 April 1990, when Helmut Kohl's cabinet in Bonn overruled the Bundesbank and announced that wages and salaries in the former German Demo- cratic Republic, which had just collapsed, would be paid in deutchmarks at par. Since industry in the old East Germany was roughly a third as productive as in the old West Germany, it became uneconomic at 1:1 and promptly declared bankruptcy. Thus began the cycle of vast western subsi- dies, inadequate taxation, rising inflation and dear money which has tormented Ger- many and Europe. It is permissible to blame Kohl for his decision of 23 April 1990 (though I personally wouldn't), but not Karl Otto POhl, the then Bundesbank president, or his then deputy, Helmut Schlesinger. 'No central bank in the world,, Schacht wrote to Hitler, 'is in the position to maintain a currency against a really inflationary public spending policy.' On 21 June 1948, sterling was quoted at 13 deutschmarks and 43 pfennigs. As I write, it is trading at DM2.54. This is the extent of the British shame: that our ruling class, and successive Labour and Conserva- tive governments, have debased our cur- rency by 80 per cent. They have taken away by bad government four-fifths of the British public's wealth. How any British politician or bureaucrat, let alone Norman Lamont, can dare to criticise the Bundes- bank astonishes me.

Because of its success in capping prices in West Germany for 40 years, the Bundes- bank exercises a fascination both to the east and west of Frankfurt. But it remains committed to German price stability it is one of those bureaucratic glass slippers: like the European Commission, which is simply too small for the big feet of Euro- pean monetary and political union.