Published 17 August 2017 by Simon Mee

Germany’s Monetary Mythology: Central Bank Independence and Crafting the Past

Financial district in Frankfurt, Germany. Photo/Credit: fotoVoyager/

Financial district in Frankfurt, Germany. Photo/Credit: fotoVoyager/


The job of a central bank is to ‘take away the punch bowl just when the party gets going,’ as William McChesney Martin, an American central banker, once quipped. In other words, the central bank should raise interest rates to rein in the economy before things get out of hand.

This is not always a popular job – and some central banks have done it better than others. Think of the Deutsche Bundesbank, for instance, which celebrated its sixtieth birthday at the start of this month. West Germany’s central bank was among the most successful in the post-war fight against inflation.

Indeed, we have long since reached the stage where the image of the Bundesbank has become a caricature. The German central banker: conservative, independent and not a smile to be seen. To be sure, if there were a punch bowl at a party, the German central banker would be the first to confiscate it.

Reputation is a priceless asset in the world of central banking. Credibility matters. How can we explain the Bundesbank’s reputation? Statistics are important, of course. The Bundesbank ensured that Germany experienced lower inflation rates than its trading partners, boosting the country’s competitiveness and prosperity. Such success breeds reputation.

But can numbers explain everything? Well, no. Another important factor can be history – or, at least a certain version of history. Germans, so the story goes, have long been scarred by the traumatic experience of inflation in 1920s: ever since, they have been dead set against inflation and for an independent central bank.

So no wonder the Bundesbank has been so successful fighting rising prices. The German central banker is motivated by the powerful example of his or her history.

But hold on a second. This picture is a little too neat – and there are some holes in the story. For example, Germany is not the only European country to have experienced a hyperinflation during the twentieth century. A bunch of others, including Poland and Hungary, have endured them. Yet it is only Germany that places price stability at the top of its list of economic priorities, ostensibly because of its traumatic history. What makes the German inflation so special?

To understand why Germany’s political culture is so fixated on inflation, we need to focus less on the hyperinflation itself and more on what happens afterwards. This is where approaches of cultural history – and my research – come in.

Put more precisely, we need to examine how the country’s monetary history became caught up in a post-war power struggle over the direction of monetary policy between the central bank, on the one hand, and the federal government, on the other.

The lessons stemming from Germany’s experience of inflation became politicised and mobilised into arguments in support of – and against – the need for central bank independence.

Wait, against? Contrary to popular belief, central bank independence was a controversial issue in 1949, the year in which the West German state was established. It was controversial because the Reichsbank, Germany’s central bank prior to the end of the Second World War, was legally independent of government instruction during both the hyperinflation and deflation. That is a historical fact – and it is one that is often forgotten.

In part this is because, today, we tend to associate independent central banks with economic stability, not instability. After all, that is what (most of) the post-war period teaches us. In 1949, however, that association was a far tougher sell. It was not a given. So the link between central bank independence and economic stability had to be carefully crafted, using select examples taken from Germany’s inter-war history, with other, more inconvenient facts shoved to the side.

Both supporters and opponents of central bank independence reverted to historical lessons amid efforts to influence the provisions in the Bundesbank Law, a crucial piece of legislation that established the post-war Bundesbank as we know it today.

Historical narratives of Germany’s past were forged amid this struggle for power – and in the end, those lobbying for central bank independence won the day.

Crucially, however, the Bundesbank Law itself reaffirmed this powerful struggle over monetary policy. In providing for a central bank that was independent of political instruction, the law made it highly likely that conflicts between the central bank and government would become ‘dramatised’ and spill into the public sphere.

These public controversies often centred on central bank independence. It was in these very episodes that the lessons of Germany’s experience of inflation became relevant yet again, geared in support of central bank independence.

Some historical experiences are more useful than others. A post-war institutional power struggle, one that centred on monetary policy, made Germany’s history of inflation more relevant for future generations of West Germans. Contemporary political disputes were treated in distinctly historical terms. An institutional struggle helped to foster this cultural preoccupation with inflation. That is what has made the German inflation so special – and so consequential – as opposed to those experienced by other countries.

Reputation is a priceless thing in the world of central banking – and it is even more powerful when a central bank has the right kind of history, or story, backing it. ‘The past is never dead’, the novelist William Faulkner once wrote: ‘It’s not even past.’ In the post-war era, Germany’s monetary history became a political football – and it remains one to this day.

Simon Mee

Dr. Simon Mee is a Theodor Heuss Research Fellow at the University of Oxford and Alexander von Humboldt-Stiftung. In addition, he is a Research Associate at University College, Oxford. He received his PhD in economic and social history at the University of Oxford, having studied prior to this at the University of Cambridge and Trinity College, Dublin. Dr. Mee’s research stands at the crossroads of cultural and economic history, with a focus on central banking and communications.