The deutsche mark has been a model of stability since it became fully convertible in 1958. No other major currency, including the Japanese yen or the Swiss franc, has been stronger. The United States dollar, the cornerstone of the global system, has lost about two-thirds of its value against the deutsche mark since 1958.
The deutsche mark has become the second-largest currency component of global monetary reserves, second only to the United States dollar. Less than 10 percent of the world’s monetary reserves were held in deutsche marks throughout most of the 1970s, but the amount rose to 15 percent by the end of 1987. By the end of 1989, around 20 percent of all global monetary reserves were in deutsche marks. The deutsche mark’s position in global monetary reserves largely reflects the extensive deutsche mark holdings in European foreign-exchange reserve accounts as well as the desire among all industrial state treasuries and central banks to hold a stable currency in their reserves. According to the United States Federal Reserve Board, the United States government holds more than US$13 billion of its reserves in deutsche marks, an amount greater than its holdings in Japanese yen.
Bundesbank officials worry constantly that the growing circulation of the deutsche mark makes it difficult to control the supply of the central bank’s own currency. Deutsche marks held abroad, circulating abroad, and perhaps even used for currency intervention abroad are still part of the total German money supply. Sudden, large flows could have undesirable impacts on German interest rates or German prices, materially complicating the execution of German monetary policy. The bank fears that any decline in the deutsche mark’s value or in the German current-account surplus could set off a selling wave that would force it to intervene massively and perhaps unsuccessfully. Bundesbank president Tietmeyer has warned that the high deutsche mark holdings abroad place a particular burden on the Bundesbank because any loss of faith in the German currency could provoke large-scale selling. The deutsche mark has thus become a burden for Germany as well as a blessing. The Bundesbank stated in May 1991 that one reason it had to maintain high interest rates was to avoid the kind of decline and subsequent market effects that Tietmeyer had cited. The German currency risks finding itself on a treadmill where the stronger it gets, the stronger it must remain until the German monetary authorities no longer dare to reduce interest rates significantly for fear that they might spark a deutsche mark sell-off.
The IMF recognized the reality of German monetary power in 1990, when it promoted Germany and Japan to share the second rank just below the United States and ahead of Britain and France. German government and banking officials were not certain that they welcomed such prominence, but they were prepared to accept it as a reflection of international appreciation of German monetary policies.
The Domestic Economy of Germany
German International Economic Relations
The Economic Miracle of Germany
Impact of Unification on German Economy
Germany in the World Economy
Culture of German Management