Monetary and Fiscal Unification in 19th Century Germany

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ESSAYS IN INTERNATIONAL FINANCE

ESSAYS IN INTERNATIONAL FINANCE are published by
the International Finance Section of the Department of
Economics of Princeton University. The Section sponsors
this series of publications, but the opinions expressed are
those of the authors. The Section welcomes the submission
of manuscripts for publication in this and its other series. Please see the Notice to Contributors at the back of this
Essay.
The author of this Essay, Harold James, is Professor of
History at Princeton University. His publications include
The German Slump: Politics and Economics 1924–1936
(1986), A German Identity (1989), and International Monetary Cooperation Since Bretton Woods (1996). He is also a coauthor of The Deutsche Bank 1870–1995 (1995).
PETER B. KENEN,

Director
International Finance Section

INTERNATIONAL FINANCE SECTION
EDITORIAL STAFF
Peter B. Kenen, Director
Margaret B. Riccardi, Editor
Lillian Spais, Editorial Aide
Lalitha H. Chandra, Subscriptions and Orders

Library of Congress Cataloging-in-Publication Data
James, Harold.
Monetary and fiscal unification in nineteenth-century Germany : what can Kohl learn from Bismarck? / Harold James.
p. cm. — (Essays in international finance ; no. 202)
Includes bibliographical references.
ISBN 0-88165-109-5
1. Monetary policy—Germany—History—19th century. 2. Fiscal policy—Germany— History—19th century. 3. Monetary unions. I. Title. II. Series. HG136.P7 no. 202
[HG998]
332.4′943′09034—dc21
97-2800
CIP
Copyright © 1997 by International Finance Section, Department of Economics, Princeton University.
All rights reserved. Except for brief quotations embodied in critical articles and reviews, no part of this publication may be reproduced in any form or by any means, including photocopy, without written permission from the publisher.

Printed in the United States of America by Princeton University Printing Services at Princeton, New Jersey
International Standard Serial Number: 0071-142X
International Standard Book Number: 0-88165-109-5
Library of Congress Catalog Card Number: 97-2800

CONTENTS

1

THE EXTENT OF INTEGRATION BEFORE GERMAN
MONETARY UNION

A Single Market for Goods
An Integrated Capital Market
A Single Labor Market
Steps toward Political Union
2

THE MONETARY UNIFICATION OF GERMANY

The International Move to Gold
Germany and the Gold Standard
The Need for Banking Regulation
The Gold Drain and the Central-Bank Debate
Rejecting Limits on Note Issue
The Structure and Character of the Reichsbank
German Monetary Management
3

THE FISCAL UNIFICATION OF GERMANY

Federal Income and Taxation
Protective Tariffs
Spending and Debt in the German States
4

2
3
4
4
5
5
6
8
10
12
16
17
21
22
23
24
24

Competition among Financial Centers
Control of Monetary Policy
Discretion in Monetary Policy
The Loss of Seigniorage and the Gain of Stability
Fiscal Problems of Federalism
The Size of the State

27
29
30
30
31
32
33

REFERENCES

35

THE MODERN EUROPEAN PARALLEL

MONETARY AND FISCAL UNIFICATION
IN NINETEENTH-CENTURY GERMANY: WHAT CAN KOHL
LEARN FROM BISMARCK?

The German Empire of 1871 was the most ambitious act of state creation and institutional reform in nineteenth-century Europe. The empire was formed out of eighteen separate states, which had previously had their own currencies and banking systems. The introduction of a single currency, the adoption of the gold standard, and the establishment of a new central bank, the Deutsche Reichsbank, occurred relatively smoothly as the outcome of a continuing and intense dialogue between the legislature (the Reichstag) and the executive (Reich chancellor Otto von Bismarck). The newly created bank stood for progress as the nineteenth century conceived it: in the setting aside of a multitude of archaic local moneys, and in the commitment to an international order and to management by a rule-based and nonarbitrary...
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