The Deutsche Bundesbank is the central bank of Germany, comparable to the Federal Reserve System in the United States. The youngest addition to the ranks of European central banks, the Deutsche Bundesbank gained a position of preeminence among European central banks during the post–World War II era.
The Reichsbank, the central bank of Nazi Germany, came to an end in 1948. In West Germany the allied occupation authorities established a new currency, the Deutsche Mark, and organized a regional system of autonomous central banks, called Landeszentralbanken. At the apex of this system stood the Bank Deutscher Länder. This bank had the exclusive privilege to issue bank notes and acted as a lender of last resort. It was a two-tier structure, the lower layer composed of legally independent entities, and the structure may not have been organizationally efficient.
The Bundesbank Act of 1957 reorganized West Germany’s central banking system, merging the independent Landeszentralbanken and the Bank Deutscher Länder. The act incorporated these entities as the Deutsche Bundesbank, a corporation wholly owned by the West German government. The head office remained at Frankfurt am Main, and each of the 11 Länder central banks operated its own system of branch banks. In 1990 the state banking system of East Germany was integrated with the Bundesbank, and the latter assumed the responsibility for monetary policy in the unified Germany. The system is spread out into more branches than the Federal Reserve System in the United States; one of the Länder central banks may oversee as many as 50 branch banks.
The distinguishing characteristic of the Bundesbank is its independence from government officials. The German people, having suffered through two episodes of hyperinflation in the twentieth century, were committed to establishing a central bank that would protect the integrity of its currency. The law creating the Bundesbank conspicuously ignored any economic goals other than price stability. In the words of the statute:
The Bundesbank, making use of the powers in the field of monetary policy conferred upon it under this Law, shall regulate the money circulation and the supply of credit to the economy with the aim of safeguarding the currency and shall ensure the due execution by banks of payments within the country as well as to and from foreign countries.
(Bank of International Settlements, 1963)
The supreme policy-making body of the Bundesbank is the Central Bank Council, composed of a president, vice president, up to eight additional members of a directorate, and the presidents of the 11 Länder central banks. The president of the Federal Republic of Germany appoints the members of the directorate, each serving eight-year terms. The president of the directorate is appointed for an eight-year term, and is highly secure in that appointment. The president of the Federal Republic appoints the presidents of the Länder central banks upon the recommendation of the directorate of the Central Bank Council.
Because of its independence from government officials, the Bundesbank could concentrate solely on controlling inflation during the post–World War II era when other central banks, less independent of government authorities, pursued policies aimed at reducing unemployment. During the 1970s when most Western countries were racked by inflation, West Germany kept inflation to modest levels, and the Bundesbank rose to become the most influential central bank in Europe. In 1993 the European Monetary Institute, the precursor to a European central bank, was set up in Frankfurt, symbolizing the European Union’s commitment to sound monetary policies.