The House That Fear Built


By David Marsh

Times Books x 331pp x $25

When I was growing up in New York, my mother, who had left Poland in 1929, would try to convey to me our relative well-being by evoking one of the ghastlier images from post-World War I Europe: desperate Germans lining up to buy bread, their worthless marks overflowing the wheelbarrows that they had pushed to the baker's and that had become the emblem of the country's swollen money supply.

Of course, the story had a darker side. As hyperinflation peaked in 1923, leaving the mark worth one-trillionth of its 1913 value against the dollar, young Adolf Hitler rose to prominence when he was arrested for trying to lead his storm troopers in a march on Berlin.

Germany's Bundesbank finds it useful to keep alive in the public psyche the tragedy that engendered its anti-inflation creed, observes David Marsh in The Most Powerful Bank. As Europe's predominant central bank and the one most directly confronting the economic shocks of the cold war's end, the Bundesbank is under fire. North America and Asia worry that its obsession with inflation will plunge the world economy into depression. Germany's neighbors watch warily to see if Bundesbank policies will destroy 40 years of effort to unify Europe.

Given such drama, it's too bad Marsh has produced a largely historical work that suffers from repetition and a tendency to jump around in time. It's a slog through his slow account of precursors to the Bundesbank, which was formed by law in 1957. In fact, it's surprising that readers in Europe, where the book was published last year to wide attention, hung on past the opening sentence, which intones: "As a target for investigation, the Bundesbank fulfills a great many supremely appropriate criteria." Still, as a portrait of a dimly understood institution certain to be increasingly at the center of the global economy, the book is timely and worthwhile.

Marsh, European editor for the Financial Times, details well the Bundesbank's role as a last bastion of anti-inflation rectitude. The bank's headquarters, tellingly located at a distance from downtown Frankfurt's commercial bank towers, drives home the point as bluntly as any Bundesbank official could. While the U.S. Federal Reserve sits behind marble columns, the concrete Bundesbank building, Marsh writes, has all the visual appeal of a "high-rise Holiday Inn or a long-stay sanitorium." While cherubs grace the ornate ceilings of the Banque de France, there's not an Old Master to be found in the Bundesbank. Yet such respect does the guardian of the German currency command that the Bundesbank president's salary is $420,000, more than triple that of Fed Chairman Alan Greenspan.

Two decades of remarkable German economic success, Marsh reports, have made the Buba enormously influential. Insistence on Bundesbank-style Stabilitatspolitik "now forms the core of international economic policy...enshrined in a thousand summit communiqu s and ministerial declarations." Bundesbank officials are the "evangelists of world finance." No wonder they often seem self-righteous, even arrogant.

Marsh is most illuminating in dispelling the myth of the Bundesbank as a monetarist monolith. Pragmatism, he says, is one of the central bank's most important characteristics. "In steering its way through the monetary shoals of the 1990s, the Bundesbank will draw upon flexibility and resilience in equal measure."

Marsh hits his stride with insights into the bank's political maneuvering, particularly since German unification. Three German Chancellors, including Helmut Schmidt in 1982, can lay their downfall to Bundesbank actions. Marsh also blames the central bank for economic growth rates in Germany that since 1970 have been lower than those of most other industrialized countries. The price of currency stability may have been less for Germany than for more inflation-prone countries, but a price has been paid all the same.

Marsh finds clear limits on both the bank's clout and its legendary independence from government influence. At the time of unification, he notes, the Bonn government ignored Bundesbank warnings that instituting one-for-one parity between the West and East German marks would destroy East German industry. To make matters worse, Chancellor Helmut Kohl announced the parity move without even informing Karl-Otto P hl, then the Bundesbank's president. Marsh's detailed and definitive treatment of the urbane P hl's subsequent resignation is a highlight.

What's next for the institution that could well eclipse the European Community as post-cold-war Europe's most powerful? A major disappointment is Marsh's failure to update the U.S. edition with an analysis of Bundesbank activities in the turbulent year just past--which in August led to the effective collapse of Europe's system of managed exchange rates.

And given the primacy of personal chemistry in money politics, he misses in not probing the personalities moving the bank today. Of Hans Tietmeyer, the Bundesbank's new president and likely leader for most of the rest of the '90s, there's little more than a perfunctory biography. There's also little on the other men on the 16-member policy-making council that every two weeks meets to decide Europe's interest rates--and economic future. The world will be hearing a lot more from these central bankers in the years ahead. I would have liked to get to know them better.