Lawrence Broz 217producers, the Junkers preferred a monetary system capable of enhancing the
price of the low-quality grains they raised, not a system that put protecting the
value of the currency above all else.
Without the support of the powerful Junkers, represented at the pinnacle of the
German political system by Bismark himself, it is understandable why Germany
did not adhere strictly to the principles of the gold standard. That Germany also
lacked an equivalent of the City of London’s internationally focused money market
to champion orthodoxy was another constraint on the development of the German
gold standard. The result was a distinct bias in monetary policy toward domestic
objectives, as revealed by the Reichsbank’s frequent resort to moral pressure and
gold devices when external pressures were strong.
INTERNATIONAL EFFECTS OF GERMAN MONETARY
PRIORITIES
Like France, Germany also recognized how domestic priorities could be advanced
by releasing gold abroad in times of international stress. This policy as lender of
last resort resulted from the fact that the effectiveness of Reichsbank attempts to
moderate external pressures, through the techniques outlined above, had obvious
limits. If, for example, the Bank of England chose to raise Bank rate to whatever
height was necessary to attract capital and gold flows from the Continent, German
macroeconomic independence would be threatened. Hence, Germany had a domestic
interest in joining France in providing the gold standard system with the services
of the lender of last resort. The Reichsbank was willing to open its reserves to the
Bank of England because the policy offered the possibility of smaller, and certainly
more predictable, gold outflows....
Germany was thus more like France than England in terms of the way it
resolved the age-old dilemma between the internal and external objectives of
monetary policy. Neither country subordinated domestic credit conditions and
economic growth to the international objective of maintaining confidence in the
strength of the national currency so thoroughly or for so long as did England.
Yet Germany came to share with France the role of international lender of last
resort, smoothing out shocks to the payments systems that threatened the
independence of domestic macroeconomic policy making. Both the source of
the national concern for internal targets and the Reichsbank’s regime stabilizing
policies at the international level were rooted in German domestic politics. Unable
to perfectly insulate the German financial system from external pressures in
line with the interests of Germany’s dominant coalition, monetary authorities
found it advantageous to release gold to the source of the shock, via the Bank
of England. The action, however, was not based on any cosmopolitan commitment
to stabilizing the international gold standard on the part of German monetary
authorities. Instead, the German element of “central bank cooperation” can be
interpreted as an international spillover of German national preferences, which
again were far from orthodox.