The Search for Autonomy: Governments, Central Banks, and the Formation of Monetary Preferences

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a) State Preferences in International Monetary Diplomacy (1)

Introduced only in 1948, the German mark (DM) quickly acquired a reputation of stability and trustworthiness in international currency markets. Due to the strength of its currency, the Federal Republic of Germany (FRG) became a major player in international monetary policy from the mid-1950s onward. Its support was an essential factor in the preservation of the postwar international monetary order (the Bretton Woods system) which was characterized by fixed (but adjustable) exchange rates, the anchor role of the dollar, the dollar-gold exchange guarantee of the U.S., and the institutionalized transatlantic management of international monetary relations (Andrews 2003; Andrews, ed., 2008; Helleiner 1994). In the late 1960s, the system came under increasing strain and the U.S. called upon the major economic powers to support it by political and economic means. Shattered by a quick succession of speculative crises targeted at the DM-dollar exchange rate, German policy-makers saw themselves confronted with the increasing political constraints and economic costs of supporting the monetary system. With time, these costs seriously undermined their allegiance to the established framework of international monetary cooperation. As a result, alternative conceptions of monetary order emerged in Germany.

The period of 1965-78 was characterized by uncertainty and conflicts about these alternatives which presented three different fundamental policy options to German monetary decision makers (Zimmermann 2001). The first option was the retention of (or return to) the transatlantic management of monetary relations. This required the close alignment of German monetary policy to trends in the dollar exchange rate in order to avoid excessive imbalances, the resulting, preferably institutionalized, cooperation with American (and British) monetary authorities, and the acceptance of the leading role of the dollar. The second was the option of "benign neglect" to external imbalances, which entailed flexible or floating exchange rates for the DM, liberated capital markets, and the orientation of monetary policy on purely domestic objectives. At the core of this option lay the idea of national autonomy, that is, the conduct of monetary policy with disregard to external considerations. The last option was a regionally managed monetary order in which monetary relations to the most important neighbors and trading partners were closely coordinated among the participating governments whereas the regional monetary zone as a whole appreciated (or depreciated) against the dollar. For German monetary policy, this option was in essence the idea of European monetary integration. Transatlantic cooperation, national autonomy, and European integration: those were the three conceptions of international monetary order which from about 1965 onward became the subject of intense debate in Germany. At the end of the 1970s, the FRG settled for option three, monetary integration in a European framework. Though this basic orientation was still contested and the creation of a working European monetary order was beset by numerous international and domestic conflicts, the result of which was by no means preordained, the European option prevailed at the end. The conceptual base of Germany's international monetary policy was transformed.

Based on newly available classified material from German archives, this paper develops a framework for identifying the conditions leading to such fundamental policy changes in states and their reaction to external shocks (or monetary unions) in which monetary policy is co-decided by governments and a (more or less) independent central bank. It starts from the premise that the domestic constellation of monetary decision-making is a core factor explaining fundamental monetary orientations (2) of states (as opposed to explanations positing the explanation only on the level of the international monetary system). …