# Reichsbank: independence, hyperinflation, and Hitler

Werner uses Germany as the warning case: Reichsbank independence, hyperinflation, Schacht, credit tightening, Nazi recovery finance, and later Bundesbank power.

*This story parallel: The central bankers and the road to war*
*This story part of: Princes of the Yen: Japan built, bubbled, and broken*
*This story part of: Money and finance*
*How the West supported the Nazis: finance, appeasement, and Cold War bargains parallel this story*

## 1871 — Bismarck founds the Reichsbank

When the Reichsbank was formed in 1871, Bismarck's private banker Gershon Bleichroder warned him that politics would sometimes have to override economics. So the bank was made answerable to a board of politicians led by the chancellor.

> "when the Reichsbank was being formed in 1871, his own private banker and confidant, Gershon Bleichröder, warned him that there would be occasions when political considerations would have to override purely economic judgments and at such times too independent a central bank would be a nuisance."
> — Lords of Finance

## 1875 — Foundation of the Reichsbank

The Reichsbank was founded in 1875 as a largely privately owned central bank accountable to its shareholders, giving it de facto independence from the German government.

> "This independence existed to a great extent de facto since its foundation in 1875, because the central bank was largely privately owned and accountable to the shareholders.21"
> — Princes of the Yen

## 1 January 1876 — Founding of the German Reichsbank

The Reichsbank opened as the central bank of the newly unified German Empire, replacing the Prussian Bank. It managed the gold-backed mark and became one of Europe's most powerful monetary institutions.

## 1908 — Havenstein becomes Reichsbank president

Rudolf von Havenstein became president of the German Reichsbank in 1908 and was a strong defender of central bank independence.

> "Rudolf von Havenstein, for instance, became president of the Reichsbank in 1908 and strongly defended the principle of central bank independence."
> — Princes of the Yen

## 1922 to 1923 — German hyperinflation under the Reichsbank

The German central bank, then called the Reichsbank, created too much money in 1922 and 1923, causing hyperinflation, the episode usually cited to justify postwar central bank independence.

> "It is well known that the German central bank, then called the Reichsbank, created too much money in 1922 and 1923, and hence caused hyperinflation."
> — Princes of the Yen

## 1922 — The Reichsbank Autonomy Law of 1922

The Reichsbank Autonomy Law of July 1922, enacted at British insistence to curb inflation by making the Reichsbank independent, instead gave inflation architect Rudolf von Havenstein tenure for life.

> "But the Reichsbank Autonomy Law of July 1922—ironically enacted at the insistence of the British, who hoped, by making the Reichsbank independent of the government, to curb inflation—had given the chief architect of inflation tenure for life."
> — Lords of Finance

## May 1922 to 1939 — Reichsbank independence written into law

The Reichsbank's independence from the German government was explicitly written into law in May 1922 and lasted until 1939, leaving it unaccountable to the people, government, or parliament.

> "Independence was explicitly written into law in May 1922 and lasted until 1939.22"
> — Princes of the Yen

## 1923 — Schacht appointed Reichsbank president

In 1923 the Allied Reparation Commission, dominated by Wall Street banks, handpicked and appointed Hjalmar Schacht as Reichsbank president against the wishes of the Reichsbank executives.

> "It was this commission that handpicked and appointed Schacht in 1923 as Reichsbank president against the wishes of the Reichsbank executives."
> — Princes of the Yen

## 1924 to 1931 — Reichsbank credit tightening and credit crunch

From the mid-1920s until 1933 the Reichsbank adopted highly restrictive policies, with a first phase of credit tightening between 1924 and 1926 followed by an even worse credit crunch in 1931, bankrupting thousands of firms.

> "The first phase of credit tightening, between 1924 and 1926, was followed by an even worse credit crunch in 1931. In both periods, thousands of firms failed to obtain funding and went bankrupt."
> — Princes of the Yen

## 1924 — Reichsbank made independent after hyperinflation

After the German hyperinflation of 1924 the Reichsbank was made independent from the government, leaving it free to impose credit controls as it wished; inflation had been brought under control by 1924.

> "Since the Reichsbank had been made independent from the government after the hyperinflation of 1924, it could do as it wished."
> — Princes of the Yen

## 1924 to 1930 — Schacht's reign as Reichsbank president

Hjalmar Schacht headed the Reichsbank from 1924 until his resignation in 1930, wielding credit controls so powerful that contemporaries called him a credit dictator and the Reichsbank Germany's second government.

> "Governments fell at a hectic pace, but Schacht remained firmly enthroned from 1924 until he resigned in 1930, a period that turned out to be crucial for Germany’s later development."
> — Princes of the Yen

## August 1924 — New banking law confirms Reichsbank independence

In August 1924 a new banking law reconfirmed the Reichsbank's independence from the government while greatly increasing the influence of Germany's foreign creditors, with the bank under the control of the Wall Street-dominated Reparations Commission.

> "In August 1924, a new banking law again confirmed the Reichsbank’s independence from the government—”but greatly increased the influence over the central bank of Germany’s foreign creditors.”23"
> — Princes of the Yen

## 1929 — U.S. deposit withdrawals throw Germany into depression

After the U.S. credit crunch that began in 1929, U.S. banks pulled their deposits from German banks and the Reichsbank made banks call in loans to German industry, forcing firm closures, mass unemployment, and Germany's plunge into the Great Depression.

> "When U.S. banks pulled their deposits from German banks in the aftermath of the U.S. credit crunch that began in 1929, the Reichsbank insisted that the banks call in their loans to German industry to pay the U.S. depositors."
> — Princes of the Yen

## 1933 to 1937 — Reichsbank's monetized fiscal policy under Schacht

From 1933 to 1937 the Reichsbank under Hjalmar Schacht combined stepped-up central bank credit creation with fiscal spending programs funded by bills of exchange purchased by banks and the central bank, known in the German tradition as silent funding.

> "This is effectively the policy combination adopted by the Reichsbank from 1933 to 1937."
> — Princes of the Yen

## 1933 to 1939 — Schacht reappointed head of the Reichsbank under Hitler

Hjalmar Schacht, who used his monetary powers to help hand Germany over to Adolf Hitler, was rewarded by being reappointed head of the Reichsbank from 1933 to 1939.

> "The highly acclaimed monetary technician Hjalmar Schacht, for one, used his skills and legal powers to actively and purposely hand Germany over to Adolf Hitler. He was rewarded for his services by being reappointed as head of the Reichsbank from 1933 to 1939.27"
> — Princes of the Yen

## 1939 — Hitler dismisses Schacht and nationalizes the Reichsbank

In 1939 Hitler sacked Schacht as Reichsbank president after disagreements and took more direct control over the central bank through a new law; he nationalized the Reichsbank the same year.

> "But in 1939 Hitler sacked Schacht as Reichsbank president after disagreements, taking more direct control over the central bank through the new law."
> — Princes of the Yen

## January 1939 — Reichsbank renamed and subordinated to the Reich government

In January 1939 the Reichsbank Law was changed, renaming the bank the Deutsche Reichsbank and making it directly accountable and subordinate to the Reich government rather than private shareholders or the Reparations Commission.

> "In January 1939, the Reichsbank Law was changed, with the central bank renamed the Deutsche Reichsbank and made directly accountable and subordinate to the Reich government, not private shareholders or the foreign Reparations Commission."
> — Princes of the Yen

## 1942 — Bank of Japan Law of 1942

The Bank of Japan Law was introduced in 1942, largely as a translation of Hitler's Reichsbank Law of 1939. The Ministry of Finance later fought off attempts to change it while the BoJ kept sole charge of window guidance.

> "While the ministry won the first political battle and avoided a change in the Bank of Japan Law (which had been introduced in 1942, largely as a translation of Hitler’s Reichsbank Law of 1939), the Bank of Japan remained solely in charge of window guidance."
> — Princes of the Yen

> "After his "parachute" study, which was published in 1942, Morrison's attention score and the research it generated seem not to be referred to again in the professional literature."
> — Life in Classrooms

## 1946 — Ichimada appointed Bank of Japan governor

In 1946, with the approval of the U.S. occupation, Hisato Ichimada, a Bank of Japan official trained in credit creation who had studied Schacht's Reichsbank in Berlin, was appointed BoJ governor.

> "In 1946, with the approval of the U.S. occupation, a young Bank of Japan official named Hisato Ichimada was appointed BoJ governor."
> — Princes of the Yen

## 1946 — Nationalization of the Bank of England

The British Labour government nationalized the Bank of England in 1946, following the earlier nationalization of the German Reichsbank.

> "The British Labor government followed suit in 1946 by nationalizing the Bank of England."
> — Princes of the Yen

## March 1947 — Emergency Measures Law of March 1947

Japan's postwar financial control measures, compared by Yoshino to Schacht's policies of the early 1920s, were fully implemented with the Emergency Measures Law of March 1947.

> "With the Emergency Measures Law of March 1947, they were fully implemented."
> — Princes of the Yen

## 1966 to 1982 — Tight Bundesbank policy linked to fall of three chancellors

The downfalls of chancellors Ludwig Erhard in 1966, Kurt Georg Kiesinger in 1969, and Helmut Schmidt in 1982 were directly or indirectly linked to tight Bundesbank policies.

> "The downfall of three chancellors—Ludwig Erhard in 1966, Kurt Georg Kiesinger in 1969, and Helmut Schmidt in 1982—was directly or indirectly linked to tight Bundesbank policies.33"
> — Princes of the Yen

## 1967 — German parliament passes the Stability and Growth Act

In 1967, ten years after the Bundesbank's founding, the German parliament passed the Stability and Growth Act, mandating the central bank to pursue price stability, high employment, external equilibrium, and steady adequate economic growth.

> "In 1967, ten years after the founding of the Bundesbank, the parliament passed the Stability and Growth Act, which clearly set out the objectives of its policy as “price stability, a high level of employment, external equilibrium, steady and adequate economic growth.”"
> — Princes of the Yen

## 1970 — Japan becomes the world's second-largest economy

Between 1960 and 1970 Japan's real GDP rose 2.6 times, and by 1970 it had overtaken Germany to become the number two economic power in the world.

> "By 1970, Japan had overtaken Germany and soared from the ashes to become the number two economic power in the world."
> — Princes of the Yen

## 1972 — Karl Schiller forced out over Bundesbank dispute

In 1972 German economics and finance minister Karl Schiller argued for revaluing the DM against excessive U.S. credit creation; the Bundesbank under President Klasen refused and the popular minister was forced out of government, though the Bundesbank took his advice a year later.

> "For instance, in 1972, when economics and finance minister Karl Schiller correctly argued that the excessive credit creation by the United States and massive flight from the dollar should be countered by revaluing the DM, the Bundesbank under President Klasen refused. The highly popular and hitherto successful minister was forced out of the government and resigned."
> — Princes of the Yen

## 2001 — German economy slows down

When the German economy visibly slowed in 2001, politicians including finance minister Hans Eichel wanted stimulatory policies but found monetary policy in the hands of the independent ECB and fiscal policy constrained by the stability and growth pact.

> "When the German economy started to slow down visibly in 2001, German politicians, including finance minister Hans Eichel, increasingly felt the need to implement stimulatory policies.5"
> — Princes of the Yen

## 2002 — ECB orders record shrinkage of Bundesbank credit creation

In 2002 the ECB ordered the Bundesbank to shrink its credit creation by record amounts; as money circulating in the economy shrank, demand fell and Germany moved into recession.

> "It ordered the Bundesbank to shrink its credit creation by record amounts in 2002. As the amount of money circulating in the economy shrank, demand fell and the economy moved into recession."
> — Princes of the Yen

## 1 January 2002 — Euro cash introduced; national currencies abolished

On January 1, 2002, new euro paper money and coins were introduced across most of Europe as twelve countries, including Germany with its deutsche mark, gave up their national currencies.

> "On January 1, 2002, new paper money and coins were introduced in most of Europe. What still seemed an unlikely scenario to many observers as recently as the mid-1990s happened without major obstacles or upsets: Twelve European countries gave up their national currencies."
> — Princes of the Yen