Published by EH.Net (October 2022).

Mee, Simon. *Central Bank Independence and the Legacy of the German Past*.
New York: Cambridge University Press, 2019. xiii + 357 pp. $105 (cloth),
ISBN 978-1108499781.

Reviewed for EH.Net by Timothy W. Guinnane, Philip Golden Bartlett
Professor of Economic History, Emeritus, Yale University.



To be viewed as “German” enhances a central banker’s credibility,
especially when the individual in question is Italian. Few discussions of
European monetary policy disagreements get far before one hears the claim
that Germans take a dim view of anything that could cause inflation. Since
its creation in 1957, the German central bank, the *Bundesbank*, has been a
reliable bulwark against inflation. Germany’s leading role in the Euro
project guaranteed it would be a “hard” currency. Explanations of German
attitudes about monetary policy reach for a potted history of the 1922-23
hyperinflation. German history, the story goes, teaches the danger of lax
monetary policy and the importance of central bank independence.

Simon Mee digs into the origins of this tale about German attitudes. He has
two goals. The first is to insist on an accurate account of the *Reichsbank*,
the German central bank from 1876 until 1945. The large scholarly
literature represents this history accurately, but the facts go astray in
other accounts. Germany experienced considerable inflation during World War
I, in part because the *Reichsbank* lacked the independence necessary to
resist political pressure to finance the war via inflation. In May 1922,
however, the *Reichsbank *acquired considerable independence as part of a
deal concerning the reparations payments demanded in the Treaty of
Versailles. The 1922-23 hyperinflation thus does not fit a simple story
about the lack of central bank independence. Journalistic accounts also
tend to overlook a second Weimar-era policy disaster. With the onset of the
Great Depression, the *Reichsbank *pursued deflationary policies to stay on
the gold standard. The government bitterly opposed these efforts. The
*Reichsbank *had good company among central banks in this approach, but the
policy definitely reflected the central bank’s independence.

The western Allies created the Federal Republic of Germany (FRG) out of the
three western occupation zones in 1949. A new central bank preceded the new
state’s formation and survived until the new *Bundesbank* created in 1957.
In 1948 the British and U.S. occupation authorities created the *Bank
deutscher Länder* (BdL) using the decentralized model of the U.S. Federal
Reserve. While it answered to the Allied powers and to the German states
(who appointed the members of its directorate), the BdL enjoyed
considerable independence from Germany’s federal government. Everyone
expected the BDL to be a short-lived stopgap. However, debates over a new
institution ground on until 1957, when the German parliament agreed on the
framework for the new *Bundesbank*. The new central bank’s independence
formed the core area of dispute in this debate, and Mee draws much of his
evidence from this period.

Mee’s second goal focuses on understanding the way debates over the
creation and operation of postwar central banks helped to create popular
understanding of the *Reichsbank* and the Weimar era. Here he refers to
“myths,” which might be a bit too strong, but the word serves to underscore
what policymakers wanted: a past that was useful, if not necessarily
accurate. In arguing about the new *Bundesbank*’s role, and in later policy
debates, many actors explicitly or implicitly drew lessons from the Weimar
and Nazi period. Mee’s most engaging discussions concern the way central
bankers involved in post-1945 policy matters defended their pre-1945
conduct and used episodes from the *Reichsbank*’s experience to attack or
defend the notion of central bank independence. The recent past laid
heavily on the new Federal Republic of Germany. The 1922-23 hyperinflation
had done much to discredit the new Weimar Republic. Germany’s especially
harsh first years of the Great Depression revitalized the extremist
parties, including the Nazis.

Part of the history burden reflected the biographies of leading figures.
Halmar Schacht, who headed the *Reichsbank *1923-1930 and 1933-1939, and
who later served as a minister in Hitler’s government, had faced trial at
Nürnberg (Nuremberg) for crimes against peace. Acquitted, Schacht spent
much of his remaining life nursing public grievances against the BdL and
the *Bundesbank*’s leaders, some of whom had been his co-workers at the
*Reichsbank*. Wilhelm Vocke (1886-1973) testified in Schacht’s defense at
Nürnberg. Hitler had fired both for signing a 1939 memo that protested Nazi
plans to use inflation to finance the war. Vocke served as the first, and
effectively the only, head of the BDL, as well as the *Bundesbank*’s first
leader. The *Bundesbank*’s second director, Karl Blessing (1957-69) had his
own embarrassing past. Although also fired over that 1939 memo, Blessing
had been in SS leader Heinrich Himmler’s “Circle of Friends” (
*Freundenkreis*).

Serious political leaders opposed the notional of central bank independence
after the War. Konrad Adenauer (1876-1967), the FRG’s first Chancellor,
argued for the central bank’s explicit subordination to government
instruction. The BdL and the *Bundesbank* earned the public ire of other
postwar Chancellors, as well, making central bank independence a constant
theme. *Bundesbank* policy arguably played a role in the economic problems
that led to the fall of a coalition government in 1966.

An especially interesting chapter focuses on the *Bundesbank*’s relations
with the German press. Viktor von der Lippe ran the press offices for both
the BdL and the *Bundesbank.* He enjoyed an unusual close relationship with
the leadership of both institutions and evinced considerable sensitivity
about the image of both the institutions and their leadership. In 1965, the
*Bundesbank* asked a *school newspaper* to retract an article about
Blessing’s ties to Himmler.

Economists typically think of central bank independence as the ability to
resist measures that would bring temporary macroeconomic gains to help the
government in power, to the detriment of longer-term goals such as price
stability. Mee’s account illustrates the slipperiness of the idea of
central bank independence. Governments may not force a particular policy on
an independent central bank, but governments typically appoint central bank
directors. At some points, Mee implies that this appointment power risks
compromising central bank independence, which he presumably does not
intend, as it is standard practice in most countries. Central banks operate
under charters governed by parliaments, so their basic architecture endures
at the sufferance of the politicians. When the *Bundesbank* adopted
restrictive measures to deal with inflation in the early 1970s, unhappy
politicians spoke openly of rewritings its charter. Mee’s discussion also
raises the important question of “independent from whom?” Some central
bankers in the 1950s argued to Christian Democratic leaders then in power
that an independent institution would be a bulwark against future
governments run by the Social Democrats, who had been out of government at
the federal level from the Nazi takeover until the coalition government of
1966. Debate over the BDL’s replacement also reflected regional anxieties.
The federal states exercised a strong role in the BdL’s governance. To the
states, the BdL’s decentralization made it independent from the federal
government.

Mee stresses the process of creating and using historical memory to justify
arguments about central banks. Readers should not expect much on the nuts
and bolts of central banking itself. As a result, sometimes a controversy
is a little hard to follow because Mee omits key specifics about what the
central bank did or did not do. The book also has an unusual structure.
Each chapter begins with an extensive overview and ends with a longish
conclusion. This approach implies considerable repetition and invites the
reader to skip chapters in ways Mee may not have intended.

This fine contribution will appeal to anyone interested in German monetary
and central bank history per se, as well as to those interested in broader
themes related to the postwar German economy. Given his rich material, Mee
had little choice but to focus on the central bank. But the study deals
with a central theme in the history (and historiography) of the Federal
Republic, one that should make it useful to a much broader range of
historians. “Working through the past” (*Vergangenheitsbewältigung*)
reflected the social and political process of coming to grips with the Nazi
regime. This involved difficult institutional reform complicated by the
embarrassing presence of ex-Nazis (and sympathizers) in leadership
positions in business as well as political, educational, religious, and
other institutions. The problem of history was not just personnel.
Chancellor Helmut Schmidt told the *Bundesbank* in 1978 that Germany faced
two enduring weaknesses, one of which was “Auschwitz,” by which he meant
the legacy of the Nazi regime. Schmidt feared that German economic success
would heighten foreign sensitivity to that past, and argued, in effect,
that Germany needed to find ways to subsume its own monetary policy to
European institutions lest German economic success provoke a political
backlash. Thus, from a German perspective the various currency-coordination
schemes that culminated in the Euro reflect an effort to reckon with the
monetary past.



Timothy W. Guinnane is Philip Golden Bartlett Professor of Economic
History, Emeritus, Yale University. Recent publications include “Creating a
New Legal Form: The GmbH” (*Business History Review*, 2021); The
Introduction of Bismarck’s Social Security and System and Its Effects on
Marriage and Fertility in Prussia” (with Jochen Streb, in *Population and
Development Review*, 2021); and “We Do Not Know the Population of Every
Country in The World for the Past Two Thousand Years” (*Journal of Economic
History*, forthcoming.)

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