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Bundesbank
The single most important economic institution in Germany outside the
federal government is the central bank, the Deutsche Bundesbank (commonly
called the Bundesbank). It has the dominant voice in German monetary policy.
Through that voice, it establishes and maintains a firm policy in favor
of solid currency value within Germany and increasingly within the EU
and even the world at large.
If a central bank's reputation is its most precious asset, the Bundesbank
is among the world's most highly endowed institutions. Its contribution
to the economic and political stability of West Germany and Western Europe
in the postwar years was almost legendary and was given due respect even
by those who disagreed with some or many of its policies.
Although the Bundesbank often appears to be the principal maker of German
economic policy, its exact powers are carefully set forth and circumscribed
in the 1957 law establishing the bank. The law assigned to the bank the
responsibility for "the preservation of the value of German currency,"
a mandate that was so important that it was clearly intended to override
the bank's other principal task, "to support the general economic policy
of the federal government." Even the latter task was carefully limited
by the specific provision that the bank "shall be independent of instructions
from the federal government."
The government does have a role, if it wishes to exercise it. Government
representatives can and at times do attend the meetings of the bank's
governing board, the Central Bank Council, although the government cannot
block the bank's actions but is authorized only to delay them for no longer
than two weeks. There are also informal contacts between the government
and the bank, and it is not unusual for senior officials at the Chancellory
or the Ministry of Finance to know in advance what the council might be
expected to decide at its next meeting.
The bank has more authority in the realm of monetary policy than any
other major European central bank. It is most closely based, at least
in its structure although not in its formal mandate, on the United States
Federal Reserve Bank. It exercises more functions than the Federal Reserve,
however, in part because it carries out some exchange responsibilities
that are assigned to the United States Department of the Treasury. The
Bundesbank issues money and makes monetary policy by controlling short-term
interest rates such as the discount rate for loans to other banks and
the Lombard rate for short-term funding for business.
As of mid-1995, the president of the Bundesbank was Hans Tietmeyer, who
made his mark in the economics and finance ministries as a career official
and then as a state secretary. Kohl appointed him Bundesbank president
in 1993. The Bundesbank's Central Bank Council has seventeen members,
with the majority of nine being the presidents of regional or Land
central banks. The representatives of these banks can, therefore, outnumber
the eight members of the Central Bank Council who work out of the bank's
executive office in Frankfurt am Main, the Direktorium (Directorate, giving
the bank a strong orientation toward developments in the country as a
whole, while public and foreign attention usually concentrates on the
Directorate. Land central bank presidents are nominated by Land governments.
They do not serve at any government's pleasure, including that of the
Land that nominated them. The members of the council who are in the Directorate
are appointed by the president upon the nomination of the chancellor,
but even these members are not subject to government direction.
The single most important fact about the Bundesbank, however, is its
powerful and consistent anti-inflationary philosophy. That philosophy,
grounded in its absolute determination to avoid the social upheaval caused
by the Great Inflation of the early 1920s, is central to the bank's thinking
on every occasion and has given it enormous influence. Although a number
of economists, especially some in the United States, have long argued
that the Bundesbank's policies are excessively restrictive and potentially
deflationary, the bank is popular with most German voters and with much
of German business. The voters do not wish to see their savings eroded
by inflation. Businessmen are inclined to believe that a lower inflation
rate will permit them to hold down their costs and remain highly competitive
over the long run although others might receive some temporary advantage
from devaluation. Germans believe that a country with a stable currency
will be able to have lower capital and labor costs because lower inflation
expectations make lower interest rates and stable wages acceptable.
German demographic realities have added further reasons for anti-inflationary
policies. As the population ages and as more Germans live on pensions
or on fixed investment incomes, the importance of price stability has
become a powerful consideration for a growing sector of the electorate.
That sector of the electorate fully supports the Bundesbank's anti-inflationary
policies.
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