ECB Can Be Successful Term Paper

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Even though this veto existed it was never used, this may be due to the manner in which Wilhelm Vocke, the president of the Bank deutscher Lander, managed the difficult political situation of the bank (Uwe, 1994). He was able to negotiate and co-ordinate policies with the Commission, creating a stable banking environment and one that was able to negotiate through the political difficulties, which were external but influenced the bank.

By 1950, the legislation for the creation of the central bank had begun. The legislation was formed under Chancellor Konrad Adenauer. During the creation of the legislation differences emerged between the parties involved regarding what the correct leadership should be between the central bank and the political authorities. It was argued by Fritz Schaffer, the finance minister, that the veto, which had been present with the Allied Banking Commission should be transferred to the Federal Government of Germany, and that the Bundestag should oversee the bank (de Hann, 2003).

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Adenauer also argued that the central bank policy should be controlled by the government (Uwe, 1994). Vocke believed that the bank should be independent of government control (Uwe, 1994). Voke was not alone, Ludwig Erhard, a government minister, also known as the "father of Germany's economic miracle" also supported the idea of an independent bank (de Hann, 2003) .These differences in opinion led to a situation in which there was a difficult relationship between Adenauer, the Bank deutscher Lander and later the Bundesbank, which was its successor (Uwe, 1994). These differences in belief persisted, and it was 1957 before the passing of the Bundesbank Act (Uwe, 1994).The basis of the Bundesbank was the former Bank deutscher Lander. The Bundesbank policies were founded upon the lessons and patterns that had been seen in the past.

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An area of success for Bundesbank has been that of price stability and the controlling of inflation. In the decades prior to Bundesbank, there was an inflationary condition. The 1920's saw great difficulties because of very high inflation (Hetzel, 2002). In the years following, the defeat of Germany in the Second World War there was also pressure on the economy and the demand for a stable economy, which also entered into the political culture of the time (de Hann, 2003). This culture was inherited and adopted by the Bundesbank and was retained throughout the history of the Bundesbank as a key value (de Hann, 2003). The period prior to the formation of the Allied Banking Commission and later the Bundesbank, must be understood to appreciate the culture. It is also important to understand how price stability was ingrained in culture as well as policy.

During the Weimar Republic era, there was hyperinflation and the currency collapsed. If we compare the currency to the U.S. dollar, which was stable at this stage, prior in to the First World War the value was 4.2 Reichsmarks to the dollar, meaning to buy a dollar it would cost 4.2 Reichsmarks. By 1919, the Reichsmarks had halved in value meaning that a dollar would cast twice the amount (Hetzel, 2002). The downwards spiral was eventually halted with the Reichsmarks reforms that took place in 1923 after the peak of hyperinflation and a record level of deflation was reached (Hetzel, 2002). A new currency was introduced, backed with the guarantee from a non-governmental body. This laid the foundation for a period of economic stability, which lasted from 1924 to 1928 (Hetzel, 2002

The result of the Weimar Republic was displayed in its ultimate failure and the rise of the dictatorship, the Nazi Party and eventually World War II. During the war, the German mark had retained its value. However, this was not the result of a strong stable economy, although there was an economic 'golden age' prior to the war, it was the force of the Nazi leaders and the way they used their power to reinforce this policy (Hetzel, 2002). After Germany lost the war many forms of exchange moved away from a market system to a barter system. Goods such as chocolate and tobacco products that were obtained from occupying forces had a greater value on the market, until the introduction of the Deutschmark to the economy on the 20th of June 1948 (Hetzel, 2002).

There were several stages involving the implementation of the Deutschmark. During the first stage, individuals were allowed to make an exchange of forty old marks for Deutschmarks. Thereafter, in August of 1948 twenty old marks could be exchanged for twenty new Deutschmarks, this was undertaken as the rate of ten to ten, ten old marks making one new Deutschmark for those with bank accounts. October 1948 also saw the receipt of 65 pfennig on the marks they held (de Hann, 2003, Hetzel, 2002).

This move re-established the German economy, which many critics credit with the jump-starting of the contemporary Germany economy (Hetzel, 2002). This introduction would later serve as model used during the 1990 reunification between East and West Germany. The main purpose of all these strategies was the creation of price stability and confidence in the economy.

The implication is that where there is economic failure there can also be political collapse. The need for political stability means that there has to be economic stability. When the Bank deutscher Lander was established, the purpose of the Bank was viewed as currency protection and to achieve this, the Bank believed they needed to be independent from the government (Wood, 1993).

This approach appears to be supported by evidence from other countries. For example, during this time, there was a 1.600% increase in prices in Britain, where the central bank was not independent, 48% increases were seen in the U.S. And 300% in Switzerland. By comparison, Germany was well managed with only a 250% increase (Woods, 1993).

The Bundesbank adopted this policy and it is evidenced by the statements that have been made by the Bundesbank on numerous occasions. This belief can also be seen when evaluating the leadership of the Bundesbank. For instance, President Helmut Schlessinger was known to have the philosophy that there was no such thing as only a little inflation (de Hann, 2003, Schlessinger, 1995). Later Hans Tietmeyer who took over from Schlesinger in 1993, had the same belief, he stated that "on one thing we are all in agreement: without a stable currency there can be no lasting economic prosperity and political stability" (Tietmeyer, 1993). This policy, also influenced the confidence they have placed in it as an institution (de Hann, 2003).

This Bundesbank culture focuses on protecting the currency to enable price stability loss. Within the policy of the Bundesbank there is accepted a rate of unavoidable inflation, this is determined by the real rate of growth and changes in output prices (Kole, 1995). Therefore, stability needs to be seen in terms of 'stable money' (de Hann, 2003). Support for the policies of the Bundesbank is also seen in the statues of law, where it is stated it should; "regulate the amount of money in circulation and of credit supplied to the economy, using the monetary powers conferred on it by this Act, whit the aim of safeguarding the currency" (Bundesbank Law, paragraph 3, Lexis, 2004).

The bank is unique in this respect, as no other central banks in Europe have this clear definition of purpose within a statute, nor does the American Federal Reserve (de Hann, 2003). However, this does not mean there is no debate regarding what it means. The idea of protecting the currency has two sides, the external and the internal. Externally means the measurement of the Deutschmark against the currency of other countries internally is the price of goods and services (de Hann, 2003). These two elements have become more important since the 1960's in an increasingly global economy, and may be seen as lessons that are very important when applying the Bundesbank to the ECB.

Beginning in the 1960's there was an increasing instability of global currencies, and the issues of global value and intentional inflation had to be balanced. Many countries had rates of inflation above Germany's (de Hann, 2000). Germany was member of the Bretton Woods agreement and complained about their obligation to hold up the price of the dollar, as this was a fixed exchange rate scheme (de Hann, 2003, Cardwell, 2001). The impact of this was Deutschmark becoming too strong, increasing the money supply in Germany.

Although, the eventual demise of the Bretton Woods agreements may have been seen as bad by many economists, the Bundesbank was not moved (de Hann, 2003). It is also believed that in 1978 following the problems with the Bretton Woods agreement, when EMS was created, there was opposition on the part of the Bundesbank, but it was forced to accept due to Schmidt (de Hann, 2003). However, the policy of price stability alone is not a sufficient lesson, as seen within EMS, where France also had the same policy, but entered the crisis in 1993 (Eijffinger, 1996).

The European Monetary System (EMS) was… [END OF PREVIEW] . . . READ MORE

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