John B.Goodman and Louis W.Pauly 287became a deficit of DM 10.5 billion in 1979. Capital inflows suddenly dried up;
indeed, capital began exiting the country. The value of the mark slid, and the
Bundesbank was forced to finance the deficit first by borrowing and then by dipping
into its reserves, which fell by DM 8 billion in 1980 alone. Faced with the novel
need to attract rather than ward off capital, the Bundesbank lifted remaining controls
on capital flows in 1981.
Reasons for Liberalization The sudden lifting of controls in 1981 was certainly
triggered by a shift in Germany’s external accounts. What is striking, however, is
that the Bundesbank did not consider it necessary to reimpose capital controls
when the current account returned to surplus in 1982 or when the mark once
again began to appreciate after the Plaza Agreement in 1985. The reasons for this
policy turnaround are several.
Official views on the deutsche mark clearly underwent a dramatic change in
the early 1980s. Throughout the 1960s and 1970s, the Bundesbank-had, in effect,
sought to prevent the mark from becoming a reserve currency largely to protect
its ability to conduct an autonomous monetary policy and to deflect pressures for
revaluation. Yet by 1983 the Bundesbank had reluctantly accepted the mark’s
increasing role in the world economy. Financial openness was seen to promise
benefits....
The rapid transformation in the Bundesbank’s perspective reflected the changing
interests of German banks. By the early 1980s, the large West German banks had
become extensively involved in external markets. Their international assets (loans),
for example, rose from $6.7 billion in 1973 to $73.3 billion in 1980 and $191
billion in 1985. With such rapidly rising international assets subject to world interest
rates, banks became concerned about retaining a similar flexibility on the deposit
side. In other words, changes on one side of bank balance sheets required similar
changes on the other. Henceforth, the ability of German banks to compete abroad
would depend increasingly upon the free movement of capital.
Deregulatory developments in Britain deepened such concerns; so too did policy
changes further afield. In 1984, for example, the United States and Japan concluded
a bilateral agreement aimed at facilitating the access of American financial firms
to the Tokyo markets. West German banks feared that this agreement would forever
lock them out of Japan unless their government stopped waiting for multilateral
liberalization and began to negotiate a similar bilateral deal. The reciprocity provision
built into the subsequent German-Japanese discussions of the management of
securities issues in one another’s markets underlined the new complexities that
would have to be addressed if a unilateral movement toward closure were ever
again contemplated.
More subtle pressures on official policies also emanated from changing corporate
strategies. In the 1970s and 1980s German companies became increasingly
multinational and directed larger volumes of their investment overseas. Reflecting
this evolution, German foreign direct investment in foreign markets rose from
DM 3.2 billion in 1970 to DM 7.6 billion in 1980 and DM 14.1 billion in 1985.
The growing internationalization of German business strengthened resistance to
the reimposition of capital controls.