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 (see Glossary), 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 (see Glossary) 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--see Glossary), 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.

More about the Economy of Germany.

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Source: U.S. Library of Congress