Lawrence Broz 215In 1871, one of the most pressing issues facing the newly established German
Empire was monetary reform. The nascent political union needed a common coinage
sufficient for national circulation. The silver standard was no longer considered
advantageous as Germany’s major trading partners in Eastern Europe (Russia and
Austria-Hungary) had been forced by inflation off silver onto inconvertible paper.
With the help of the large gold indemnity paid by France for losing the Franco-
Prussian War, Germany was able to adopt the gold standard in 1873. The gold
mark became the new monetary unit, and the free and unlimited coinage of silver
was discontinued.
Formally, the new German standard was not a limping standard of the French
variety but a full gold standard along textbook lines. In practice, however, the
gold convertibility of the mark was not automatic but discretionary, and the German
gold market was frequently subject to official manipulation. As in France, monetary
policy was geared to restrict convertibility and gold flows whenever the well-
being of the domestic economy was threatened.
Although Reichsbank officials claimed that discount-rate policy was their primary
tool for increasing or protecting the gold reserve, they employed several other
techniques that were outside the norms of the gold standard. Several of these
were of the “gold device” variety. For example, when the Reichsbank wanted to
draw gold to Germany, it often paid a premium or granted interest-free loans to
importers, a policy that was given unqualified praise by German bankers and
economists. To discourage gold drains, the Reichsbank also offered foreign coin
for export that was as light as legally possible.
The Reichsbank also added some new twists to the manipulation of the gold
market. For example, it sometimes made use of the option to redeem its notes
only at its head office in Berlin rather than at its branches near the borders, with
the effect that the gold export point could be raised minutely. That is, by forcing
the exporter to pay the added freight and insurance costs of sending gold from
Berlin to the port, the Bank initiated a small advance in the gold export point.
Though small, the action could influence the foreign exchanges in Germany’s
favor. In addition, the Reichsbank developed what was perhaps its most powerful
weapon to restrict convertibility and undesirable gold movements—a policy of
quiet, yet effective, “moral suasion.”
To prevent bankers from exporting gold at times when it was profitable to do
so, the Reichsbank let it be known that it would look with disfavor upon gold
taken for export.... German monetary authorities never codified or openly admitted
this subtle policy; yet money-market participants understood the policy very well.
It was effective in stemming foreign drains because bankers dared not risk the
vengeance of the Reichsbank; to do so could mean years of discrimination or
worse—the outright loss of privileges with the central bank....
As a consequence of its reluctance to allow a free market in gold, international
bills of exchange drawn in the German market did not have the same definite
gold value as those drawn in London, and this uncertainty limited Berlin’s role as
an international center....
What political forces steered Germany away from monetary orthodoxy? On
the surface, this is a perplexing question because major segments of German