The economic and currency reform of 1948: the basis for stable money Guest contribution by Bundesbank President Joachim Nagel for the special publication of the Ludwig-Erhard-Stiftung “Wohlstand für Alle – Fördern, Fordern, Freiheit”

It’s three years after the end of the Second World War. The Allies have freed Germany from Nazi rule and divided it into four occupation zones. Scarcity of supplies and a shortage economy still prevail. The supply of almost all goods is managed by the state. Most things can only be officially obtained with ration coupons or by allocation.

The official prices are set by the authorities. This masks the inflation that has resulted from the enormous monetary overhang created by the Nazi government and the Reichsbank from 1933 onwards to finance armament and war. The upshot is that no one has any confidence left in the Reichsmark. The black market is flourishing, with goods being bartered and cigarettes used as currency.

The Allies are arguing amongst themselves about Germany’s political and economic future. Their conflicting interests have already led to the failure of an initial proposal for a currency reform. In March 1948, the Soviet Union leaves the Allied Control Council. The three Western Allies – the United States, the United Kingdom and France – now pursue a currency reform for their zones.

Planning and preparations for this currency reform are subject to the strictest secrecy. Unrest among the general public is to be avoided. Headed by 26-year-old American economist Edward A. Tenenbaum, German experts draft the legal framework for this at barracks in Rothwesten near Kassel.

Their key laws, enacted by the occupying powers, enter into force on 20 June 1948. The Deutsche Mark replaces the Reichsmark in the three western zones. The Deutsche Mark banknotes had already been printed in the United States at the end of 1947 and then brought to Frankfurt as part of the secret “Operation Bird Dog”.

The banknotes are distributed as of Sunday, 20 June. In exchange for 60 Reichsmark, every citizen of the western zones receives 40 Deutsche Mark directly from the ration offices, followed by a further 20 Deutsche Mark in a second tranche shortly thereafter. As of 21 June, the Deutsche Mark is the sole legal tender. Everyday payments such as wages, salaries, insurance and rents are converted at a rate of 1:1. However, those with savings are hit hard: Reichsmark balances are gradually converted to Deutsche Mark at a rate of less than 1:10.

Harsh transition

The transition to the new currency was tough. Many savers faced financial ruin. At the same time, however, the huge monetary overhang from the Nazi era was radically reduced. The currency reform laid the foundations for public confidence in the new currency.

Price controls were largely eliminated on 20 June 1948 as well. Ludwig Erhard, the then director of economics of the post-war Bizonal Economics Council, was convinced that an economic recovery required not only a stable currency, but also free prices. Government-imposed prices suppressed incentives for entrepreneurial activity and productivity.

Free prices, as Erhard knew, direct resources to where they generate the greatest welfare gains. Erhard advocated this strength of the market economy. Speaking to the West German public via radio, he explained “why we can have confidence in the new currency and why the decisive renunciation of the principle of the command economy is a prerequisite for the success of the reform and our economic recovery in general.”

The currency reform and the elimination of price controls changed people’s lives from one day to the next. Until 20 June 1948, although people and businesses had money, namely Reichsmark, they were unable to buy virtually anything. From 21 June 1948, goods could once more be bought with money, as sellers found that it was now worthwhile again to offer goods at prices they could set themselves. Enterprises were able to purchase intermediate goods more easily and calculate investments. And the general public marvelled at shop windows which had previously been empty but were now suddenly filling up.

However, most people only had the initial personal allowance of 60 Deutsche Mark. They therefore earned the new money through hard work. Despite social inequality and widespread poverty, the economic recovery was able to pick up speed. A key element in the success story of the Deutsche Mark, which was soon to begin, was the new central bank for the western zones, the Bank deutscher Länder. The US and British military governments had established it on 1 March 1948, with the French military government joining a short time later.

The new central bank was tasked with maintaining the stability of the currency. This required a stable price level. As an institution, the German central bank was designed in such a way that the German government would no longer be able to use it to finance government expenditure. In 1957, the stability mandate was transferred from the Bank deutscher Länder to the newly established Deutsche Bundesbank.

The latter fulfilled this mandate successfully for more than 40 years and received a great deal of international recognition for doing so. For example, between 1949 and the start of the single monetary policy in the euro area in January 1999, the inflation rate averaged 2.7% – despite international currency crises and two oil crises. This is significantly lower than in most industrial countries: the United States recorded just under 4%, and in Switzerland, too, the inflation rate during this period was higher at 2.9%.

Since 1999, the euro has been our single European currency. Responsibility for it lies with the Eurosystem, which comprises the national central banks of the Member States and the European Central Bank (ECB). It was modelled on the Bundesbank: independent of political influence, federal, and with the mandate to maintain price stability.

The euro, too, became a stable currency: between 1999 and 2023, the average inflation rate has been just under 2%. On average, it has therefore been more or less exactly where it should be in the medium term from the perspective of the Eurosystem and many other central banks.

Challenges for the ECB 

The Eurosystem has faced considerable challenges during this time: the global financial crisis, the euro area sovereign debt crisis, a period of deflation risk, the coronavirus pandemic and, for the last two years, an exceptionally high wave of inflation.

To break the high level of inflation, we as the Governing Council of the ECB have acted decisively. In particular, we have raised key interest rates consistently and at a considerable pace – by a total of 4.25 percentage points so far (as at August 2023). We will hold course until we have reliably returned to the target annual inflation rate of 2%.

Today, 75 years after the introduction of the Deutsche Mark, we can look back on its success story. The Bundesbank and I, as its President, are working hard to ensure that our children and grandchildren can look back on the euro with just as much satisfaction – in Germany and throughout the euro area.