Countries of the World/COUNTRYS.BIN/dp/0407/04071.txt

Text File | 1991-06-25 | 31KB | 492 lines

$Unique_ID{COW04071}
$Pretitle{373}
$Title{Federal Republic of Germany (West Germany)
Chapter 4C.   Money and Banking}
$Subtitle{}
$Author{Darrel R. Eglin}
$Affiliation{HQ, Department of the Army}
$Subject{west
percent
germany
banks
billion
exports
countries
foreign
credit
german}
$Date{1982}
$Log{}
Country:     Federal Republic of Germany (West Germany)
Book:        Federal Republic of Germany, A Country Study
Author:      Darrel R. Eglin
Affiliation: HQ, Department of the Army
Date:        1982

Chapter 4C.   Money and Banking

     The country's financial system was large, modern, and intricate. Besides
banking, the system included several stock exchanges, many insurance companies
(including those for reinsurance), and securities markets handling a variety
of financial instruments, both domestic and foreign. In addition the system
was closely linked to international financial centers with few restrictions
on flows of funds in either direction.

Currency

     The deutsche mark, West Germany's currency unit, was introduced during
the currency reform of 1948. In September 1949 its value was DM4.20 per US $1,
but West Germany, like most European countries in the aftermath of World War
II, maintained extensive foreign exchange controls. As the economy and exports
expanded, controls were removed in 1958, and since then the deutsche mark
has remained freely convertible. At times a few restrictions were placed on
certain kinds of transactions, largely to avoid the movement of funds by
currency speculators that affected West Germany's money supply and inflation.

     Many factors affect the internal and external purchasing power of a
currency. West German officials succeeded in maintaining price stability
within the country better than most other industrial nations. Expanding
exports kept the balance of payments under control at a time when many
industrial countries were experiencing less success. As a result the value of
the deutsche mark was appreciated several times in terms of the United States
dollar, the key currency in the international monetary system before the
1970s. In 1971 the dollar was devalued, and convertibility into gold was
officially abandoned. In 1973 the dollar was again devalued, and West Germany
stopped using the dollar for the central exchange rate, using instead the
market basket of currencies developed by the International Monetary Fund
called special drawing rights.

     Meanwhile in 1972 EC members set up a European system of controlled
currencies called the snake. Other European countries outside the EC
subsequently joined. At first fixed parities between the participants'
currencies were attempted, but when these proved impossible, limited
fluctuations were permitted above and below the fixed parities while each
participant allowed its currency to float against all other currencies outside
of the snake. Several members dropped out early. A better system was needed,
but it was a long time in coming.

     In March 1979 the European Monetary System (EMS) came into being after
long negotiations, encompassing all EC members except Britain. A basket of
participating currencies, called the European Currency Unit (ECU) was
calculated against which each member set an exchange rate. Market foreign
exchange rates could fluctuate 2.25 percent (6 percent for Italy) above or
below that rate before central banks intervened by buying or selling
currencies to stay within the prescribed limits. The participating members
had no obligation vis-a-vis currencies outside the system where foreign
currency markets essentially established the exchange rates. In October
1981 the basic exchange rate of several countries against the ECU had to be
adjusted because of differing inflation rates and other monetary developments.
West Germany appreciated the value of its currency in the EMS by 5.5 percent.

     The purpose of the snake and the EMS was to restore some order to
exchange rates after the breakdown of the system that had existed since World
War II. In the 1970s large liquid sums were available to speculators to shift
around to take advantage of small discrepancies in rates between currencies.
These shifting, large sums threatened domestic currency stability and affected
exchange rates-and therefore export prices-in many countries. The broader the
system the better for all concerned, but it meant subjugating some control
over domestic policies to international developments, which some countries
refused to do. The snake and EMS were limited efforts by a group of countries
that were close foreign trade partners. West Germany participated in these
efforts partly for its own interest and partly to support the EC concept.

     In the early 1980s the United States dollar remained the most important
currency in international trade, helped in part by the requirement of many
crude oil exporters that payment be in dollars. The deutsche mark also
remained a very important international currency, which other countries used
for currency reserves and as a safe investment. The exchange rate between the
two currencies was important to West Germany. In 1980-81 the deutsche mark
began to drop in value vis-a-vis the dollar for several reasons. At the end
of 1979 the market exchange rate was DM1.71 per US $1 compared with DM2.37 per
US $1 in June 1981, a decline of 28 percent. The lower value of the deutsche
mark was expected to help West Germany exports. West German monetary
authorities, however, were confronted with an outflow of funds that required
action opposite to that needed by the domestic West German economy.

Banking

     Banking was the most important part of the financial system. Public,
cooperative, and private credit institutions competed in West Germany, and
many also conducted business abroad. In 1981 there were  more than 5,350 banks
with over 44,660 branch offices. In addition the federal postal service
operated postal savings banks, which in 1979 had 18 million depositors and
DM23 billion of deposits, and there were some 148 private installment credit
institutions for consumer loans.

     Among the seventeen banks with special functions was the publicly owned
Reconstruction Loan Corporation (Kreditanstalt fur Wiederaufbau) originally
created to handle the Marshall Plan aid for West Germany. In the 1980s it
continued long-term loans for domestic development. It also provided
long-term credits for exports and handled West German aid to developing
countries. It received its funds primarily by bond issues and from the
federal government. Other public credit institutions provided special services
in industrial, agricultural, and mortgage loans.

     In 1981 the main banking organizations included 246 commercial banks, 599
savings banks, twelve central savings institutions Landesbanken), thirty-eight
private mortgage banks, and 4,225 credit cooperatives. The mortgage banks
acquired funds from the sale of long-term bonds, receipts of which financed
long-term credits particularly for housing and government projects. The
mortgage banks, most of which were owned by the large commercial banks, were a
major source of long-term credit. The credit cooperatives had an extensive
network of offices and in 1980 accounted for 11 percent of banking business.
They were particularly active in lending to individuals but also were
important sources of credit to housing and other businesses, including the
self-employed. Cooperatives' share of the country's banking business
increased rapidly, more than doubling from 1960 to 1980.

     Savings banks, usually municipally owned, had a large network of
branches, which facilitated rapid growth over the past thirty years. Most
savings banks were small, but a few were quite large. In 1980 savings banks
accounted for 22 percent of banking business, being an important credit source
throughout the economy and the main source for individuals seeking loans. The
twelve Landesbanken were the regional clearing and reserve institutions for
the savings banks, which along with the