Federal Elements in the Germany Central Banking System

By Wertz, Hans | American Banker, October 29, 1985 | Go to article overview

Federal Elements in the Germany Central Banking System


Wertz, Hans, American Banker


The central banking system set up in the Western part of Germany after World War II is often viewed as an import from the United States. Indeed, the U.S. Military Administration was the driving force behind the re-establishment of a cental bank. The central banking system was to be organized on a decentralized basis in accordance with the new political system. A fully operational central banking organization was one of the important preconditions for the June, 1948 curerency reform, which introduced the Deutschmark as the new unit of currency. The Federal Republic of Germany was itself not founded until the following year.

In its outward appearances the new central bank closely resembled the U.S. Federal Reserve System. And yet, it was not simply a carbon copy of the American model. Each Land (Federal State) had its own legally autonomous Land Central Bank (Laendeszentralbank) which was the lender of last resort in its own area of jurisdiction. However, central responsibilities such as the issuing of notes and coins regulating foreign exchange, were the responsibility of the Bank of the German Federal States (Bank Deutscher Lander), whose capital was held by the Land Central Banks. The Central Bank Council (Zentralbankrat) functioned as an overall coordinating and managing body. Its membership included the Presidents of the Land Central Banks and also the President of the Bank of the German Federal States.

The Bundesbank was not established until 1957 -- following the merger of the Land Cental Banks with the Bank of the German Federal States. This step was taken to meet the stipulation in the German Constitution that a bank regulating currency and note-issuing be established as a federal bank. The central banking system, hitherto the responsibility of the States, now became a federal institution -- however, with decentralized features being retained.

As a consequence, the label Land Central Bank was maintained. Admittedly, these banks lost their legal autonomy, becoming main offices of the Bundesbank. However, their new status did not in any way make them mere extensions of the latter.

They are not bound to follow the instructions of the Directorate that took the place of the Bank of the German Federal States -- rather, they are authorized to conduct their own business and administrative matters. The ground rules governing their management are laid down by the Central Bank Council, which also -- as was the case in the previous system -- determines credit and monetary policy.

The Presidents of the eleven Land Central Banks continue to be members of the Central Bank Council. Compared with the members of the Directorate -- at the moment six, at maximum ten -- they hold the majority on this committee.

The Presidents of the Land Central Banks are nominated by "their" particular State Governments. …

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