Central bank reform, spatial diversity and monetary policy in Germany, 1876-1890

Abstract

"One size does not fit all". The aim of the thesis is to investigate conduct, impact and spatial dimension of monetary policy in Germany in 1860-90. Germany established one of the most successful monetary unions in the nineteenth century amid strong economic growth and stable bank note issuance. Yet, the role of monetary policy during its early years remains largely unexplored. This may lead to an incomplete understanding of the relationship between monetary policy and economic development in the latter part of nineteenth century Germany. The 1875 bank act (Bankgesetz) in Germany, following introduction of a single currency and the gold standard, adopted a unique mixed central banking system with the German Imperial Bank (Reichsbank) at federal and the private banks of issue (Privatnotenbanken) at federal state level. The thesis analyses monetary policy with emphasis on the monetary policy framework, transmission mechanism and reaction function. The findings show that competition between the Reichsbank and Privatnotenbanken influenced monetary policy conduct and established the stability conditions of the system; that Reichsbank's monetary policy was effective but had an undue negative impact on output while the impact of the Privatnotenbanken was mixed highlighting some scope for monetary policy spatial differentiation; and that the Reichsbank maintained considerable monetary policy discretion and acted more in line with a commitment under reputational forces than the rules of the game of the classical gold standard. The thesis uses new monthly bank balance sheet, economic and financial data and employs advanced statistical techniques based on structural vector autoregression models. The study relies extensively on narrative accounts based on archival parliamentary records and new Reichsbank reports. Nineteenth century Germany offers important lessons for the establishment of central banking in monetary unions and conduct of monetary policy under spatial diversity and reveals that decentralisation in a monetary union can be effective