At the end of 1960 the BRD’s gold and currency reserves amounted to 33 billion DM while the considerable availability of liquidity created the conditions for a large granting of credit. To better define the financial framework, it should be added that, with effect from 6 March 1961, the federal government decided to revalue the mark by 5%.
Foreign demand dwindled, large foreign exchange stocks dwindled, and entrepreneurs slowed down investment due to high wages and growing foreign competition. The prices of export and import goods fell, while those of consumer goods increased, thanks to high incomes that stimulated greater demand. In 1965 a new phase of economic development reached its peak. In that year the gross national product exceeded that of the previous year by 5.6%. Due to the shortage of labor, foreign workers were increasingly employed. Since 1966, the annual rate of increase in real terms of the gross national product has been decreasing more and more and the trend continued in the following years: reduced to 2.9% in 1966, it underwent a new decline in 1967. The recession began mainly due to the decrease in both private and public investment, which had already manifested itself in 1965. It would have produced far more serious effects if it had not been for a sharp increase in exports. Imports from DM 72.67 billion in 1966 fell to 70.18 in 1967 (−4%); in the same period exports rose from DM 80.63 billion to 87 (+ 7.9%). The trade balance, which was 8 billion in 1966, reached 16.9 billion in 1967. The cyclical repercussions were also felt on the formation of savings and on assets. Imports from DM 72.67 billion in 1966 fell to 70.18 in 1967 (−4%); in the same period exports rose from DM 80.63 billion to 87 (+ 7.9%). The trade balance, which was 8 billion in 1966, reached 16.9 billion in 1967. The cyclical repercussions were also felt on the formation of savings and on assets. Imports from DM 72.67 billion in 1966 fell to 70.18 in 1967 (−4%); in the same period exports rose from DM 80.63 billion to 87 (+ 7.9%). The trade balance, which was 8 billion in 1966, reached 16.9 billion in 1967. The cyclical repercussions were also felt on the formation of savings and on assets.
The federal government in 1966 ordered the sum of 2.5 billion DM for investments based, unlike traditional budget management, on deficit spending. In this way, additional state investments were financed, especially in railways, post offices and road construction. These initiatives, arranged by order to industry and construction, were not sufficient to quickly overcome the recession; for this purpose, at the end of 1967, a second economic and structural program was approved which provided for an amount of public expenditure of 5.3 billion DM. These cyclical stimulus measures were supplemented by short-term amortization facilities, which should have promoted investments by entrepreneurs. These measures were also favored by the tax concessions deriving from the transformation of the trade tax into value added tax (VAT), implemented on January 1, 1968.
From the beginning of 1968 the economy of the Rep. Fed. Di Germany found itself in a phase of rapid economic growth. It resulted in the fastest and largest boom since the end of the war. In the autumn of 1971, symptoms of a progressive economic stabilization began to appear. The increase in exports, which continued to rise sharply and continuously even during the recession of 1966-67, continued in the following years and in 1968 amounted to 18.4 billion DM.
Both the short-term foreign capital invested in Germany and the large trade balance surpluses determined an inflationary potential. A significant outflow of foreign currencies occurred only when, after the formation of the social-liberal coalition, the mark was revalued by 9.3%.
In 1970 the gross national product, in real terms, increased by 5% compared to 1969, the year in which the increase was 8%. The decrease in the rate of increase depended in particular on the decline in industrial production, whose increase of about 6% was much lower than that of the previous two years (1969, 13%; 1968, 11.8%).
With the increasing exploitation of productive potential there was a parallel strong demand for labor which fueled a notable wage increase in 1970.
The entrepreneurs tried to increase prices by reason of the whole increase in costs; the Bundesbank’s efforts to reduce this tendency and to keep the value of money stable were frustrated by the banks and entrepreneurs who, for investments etc., drew low-cost credits from the Eurodollar market. The federal government and the Bundesbank then adopted a series of measures aimed at safeguarding the flow of foreign currency, the exchange of the mark was temporarily liberalized and the payment of interest on bank loans of foreigners was subordinated, in principle, to the authorization requirement.
However, the recession had begun, and reached its lowest point in the period 1974-75. In those years, in fact, there was a strong restriction in demand, mainly due to the decline in exports and a sharp decline in inventories and fixed investments. This unexpected weakness in private demand until mid-1975 had its repercussions on the labor market. The unemployment rate continued to rise, despite the ebb of foreign workers, and its average rate in 1975 was twice as high as in 1967.
At the end of 1974, economic policy was gradually led back to stimulating demand. A sharp slowdown in the rate of inflation, to which a significant slowdown in wage increases from the 1974-75 collective bargaining contributed, facilitated this trend which the high and growing level of unemployment made indispensable. The expansionary measures have been designed in such a way as not to jeopardize price stability.
Monetary policy. – The monetary unit of the Fed. Rep. Of Germany is the German mark (Deutsche Mark -DM), established in 1948.
Its parity with the dollar, originally of 0.30 dollars for one mark, underwent changes due to the revaluations carried out, one on March 6, 1961, at the exchange rate of 1 DM = 0.25 dollars = 0.222.168 gr. of fine gold; the other on 27 October 1969 at the exchange rate of 1 DM = 0.27 dollars = 0.242.806 gr. of fine gold. Finally, on 9 May 1971, by resolution of the federal government, the fixed exchange rate of the mark was temporarily liberalized.
The German Federal Bank (Deutsche Bundesbank) acts as a central bank; its monetary and credit policy is mainly based on a flexible discount policy, open market operations and reserve policy.
The monetary reserves of the Bundesbank (gold reserve and total net foreign credits), from the end of 1960 to the end of 1970, amounted, as a rule, to over DM 30 billion. The only exceptions: DM 29.6 billion at the end of 1962 and DM 26.4 at the end of 1969. In both cases the reason was the revaluation of the mark. In the last ten years, the gold reserve has been around DM 12.5 to 18.2 billion at the end of each year and that of US dollars between DM 2.2 and 28.6 billion.
The international monetary crisis in recent years has not spared even the Rep. Fed. Di Germany, even if the balance of payments imbalances have generally been in the sense of surpluses.
Banks and large German companies have escaped the Bundesbank’s restrictive policy by taking on dollar credits in the USA and on the Eurodollar market at advantageous conditions. Dollar inflows into Germany became more substantial as rumors of a revaluation of the mark prompted speculation to invest dollar capital in the German money market in the short term. Consequently, the monetary reserves of the Bundesbank increased from March 1970 to May 1971 from DM 27.8 billion to 68.6 billion. To safeguard a further surplus of liquid from abroad and to restore the efficiency of the central bank’s monetary policy instruments, the government decided, in harmony with its partners of the EEC and with the approval of the International Monetary Fund, to temporarily liberalize the exchange rate of the mark starting from 9 May 1971. A prolonged period of monetary rigor followed, modified by the Bundesbank only towards the end of 1974. In 1975 the policy monetary policy had the purpose of creating conditions suitable for a resumption of activity without giving rise to the risk of a return to inflation. The new formula, consisting in setting a target of 8% for the growth rate of the central money stock for the year 1975, was inspired by the idea that, given the various consequences that the transmission mechanisms of monetary policy, the best way to achieve good stabilization results was to take a regular expansion of the volume of monetary aggregates. At the beginning of 1975, global demand had not yet recovered, indeed it had further regressed, and the growth of monetary aggregates had slowed down. The Bundesbank therefore had to intervene heavily to implement its objectives. Between January and September, the discount rate was reduced five times from 6 to 3½%, short-term interest rates were significantly lowered and the reserve requirement ratios were reduced twice.
Despite these measures, the growth rate of the money supply remained below the expected 8% until mid-year due to the lack of dynamism in the monetary sector. Instead, there was a rapid growth (11 million DM) of liquid reserves freely usable by the banks. In mid-1975, after the public sector deficit had been repeatedly adjusted upwards, the Bundesbank intervened massively on the open market. The central bank’s interventions on the capital market coincided with the resumption of general economic activity and, starting from August, the growth in the quantity of money rapidly increased, remaining at seasonally adjusted annual rates above 10% for the rest. of the year.
Financial policy. – In 1970 the gross national product of the Rep. Fed. Amounted to 679 billion DM, a figure which, compared to the prices of the time, was 125% higher than that of 1960. Deducting, to the extent of 3.5% per annum, the price increases that have occurred since then, a real increase of 60% of the total is obtained, and of 5% per annum.
The significant increase in the yield of real production is largely due to the sharp increase in productivity. In 1970 workers produced, for every hour worked, 66% more of the goods and services produced ten years earlier, while the number of workers increased by only 4% and average working hours decreased by 7½%.
The ratio of agricultural production to industrial production, which was still 1: 1 a century ago, had changed to 1: 5 by 1950 and 1: 14 in 1970. This is the typical ratio of a highly industrialized country. Precisely this industrialization has determined the significant extension of the tasks of public finance.
According to ITYPEMBA, the tasks undertaken by public finance, in Germany, are: to maintain stability in the expansion of the internal economy, consequently eliminating any economic fluctuations; promote constant and adequate economic expansion through the creation of a functional structure; achieve a more equitable distribution of income and wealth.
This new direction of fiscal policy was given with the Law on Economic Stability and Development (Gesetz zur Förderung der Stabilität und des Wachstums der Wirtschaft) of 1967, which makes it possible to deal more efficiently with short-term fluctuations in the economic process..
The tax burden, which remained virtually unchanged from 1960 to 1970, was 22.7% in 1970, equal to 154.1 billion DM. In the first place among the tax receipts is the income and corporation tax, which is around 40% of the total revenue; that on income is progressive while the other is proportional. The public sector debt is relatively low: in 1968 was about 1880 DM per – capita, at the end of 1970 the total debt of the state amounted to 121 billion DM. Between August 1970 and June 1971 the government, in order to temporarily restrict purchasing capacity, introduced an additional 10% income tax and corporation tax, exempting low-income taxpayers. The entire amount, amounting to DM 6 billion, was deposited with the Bundesbank and then repaid. Since the end of 1973, financial policy has taken an expansionist orientation. In 1974, to counter the rising trend in unemployment, the government launched three anticonjunctural programs for the same year, for an additional expenditure of DM 3.6 billion (0.4% of the gross national product), mainly destined for public investment and to help the labor market. On January 1, 1975, important decisions, in the financial and budgetary sphere, involving tax reliefs, resulted in savings of DM 18 billion. A temporary subsidy to fixed investments was also decided, for an amount of 7.5%, in the armament, construction and energy sectors.
In 1976 these measures began to take effect, but in 1975 the public sector deficit having reached the limit of -63.2 billion DM, the government presented, in August 1975, a medium-term project 1975- 79, which establishes the strategy to be followed to progressively reduce the budget deficit. The measures involve an increase in the value added tax from 11 to 13% and an increase in indirect taxes on tobacco and alcohol starting from January 1977.