Deutsche Mark

Deutsche Mark

The Deutsche Mark, or German mark, is the currency unit of Germany, comparable to the dollar for the United States. After the collapse of the Bretton Woods System in 1973, the U.S. dollar, no longer convertible into gold and subject to depreciation from inflation, lost some of its position as an international currency. As the U.S. dollar lost ground as an international currency, the German mark began to play the same role in the European economy as the U.S. dollar played in the world economy.

Compared to the British pound sterling, which can boast of a 1,300-year history, the history of the German mark is a bit short in light of the prestige that it now commands in international trade. In the immediate aftermath of World War II, the Reichsmark, the currency of Nazi Germany, no longer functioned as a medium of exchange. Trade took place on a black market, outside the system of German price controls, and commodities such as cigarettes and coal acted as mediums of exchange. Barter also flourished; city dwellers walked to the countryside with whatever goods they had and traded them for food.

The victorious Allies originally planned to introduce monetary reform in 1946, but an agreement between France, the Soviet Union, Britain, and the United States to treat Germany as single economic unit broke down, delaying monetary reform from May 1946 to June 1948. Part of the difficulty was that France, Britain, and the United States did not want to entrust the Soviet Union with plates to print currency, fearing that the Soviets would print up extra currency to impose an inflation tax on Germany. As the rift between the Western occupation powers and the Soviet Union widened, the decision was made to print the currency in England. The plan to replace the Reichsmark with a new currency, the Deutsche Mark, was a closely guarded military secret, given the code name Operation Bird Dog.

On 20 June 1948 the Western powers issued to every inhabitant in the three Western zones 40 Deutsche Marks in exchange for 40 Reichsmarks. Two months later another 20 Deutsche Marks were exchanged for 20 Reichsmarks. Aside from the per capita distribution, Deutsche Marks replaced the Reichsmarks on a 1:10 basis, one Deutsche Mark equaling 10 Reichsmarks. All debts were written down at this ratio, including government debt, mortgages, bank loans, and insurance policies. Bank deposits and balance sheets of businesses were adjusted on the same basis, deflating the asset side and the liability side to one-tenth of their original amounts. The authorities decreed that all new debts had to be contracted in Deutsche Marks. A central bank, patterned somewhat after the Federal Reserve System, was created from the branches of the Reichsbank. It was called the Bank of Deutscher Länder (Bank of German States), and in 1957 it was transformed into the Deutsche Bundesbank.

All price controls were lifted on 24 June 1948. With the new currency, goods suddenly showed up at stores where shelves had been empty for years. Apparently many goods had been hiding in the underground economy.

The Soviet authorities were forced to follow the example of currency reform in order to keep the Reichs marks no longer usable in the Western zones from flooding the Soviet zone. The Soviets issued the Deutsche Mark East and for a while the western Deutsche Mark circulated side by side with the Deutsche Mark East at equal value. By the end of July 1948 the Deutsche Mark East traded at about half the value of the Deutsche Mark, a factor that contributed to the political separation of East and West Germany.

A noted economist, Charles Kindleberger (1984), wrote, “I regard the German monetary reform of 1948 as one of the great feats of social engineering of all time.” The Deutsche Mark evolved into the most prestigious currency in Europe. During the inflation-ridden 1970s West Germany kept inflation to modest levels, and in the 1980s West Germany led Europe in the disinflation process. As Europe moved toward economic integration the Deutsche Mark played a major role in the monetary affairs of Europe. In the 1990s economic turmoil from combining the two Germanys cost the Deutsche Mark a bit of its reputation for stability. Also, France began to rival Germany in reputation for price stability.

On 1 January 1999 the European System of Central Banks launched a new European currency, the euro, that will eventually replace the national currencies of participating countries. The euro will replace the Deutsche Mark, the French franc, and several other European currencies.