The Rise Of Deutsche Mark

As a weak currency of a defeated country, how could D-Mark rise to be the secondimportant reserve currency rapidly? That is what the paper focuses on. Mainstreameconomics assumes that because of large economical scale, low inflation, steadygrowth, and a developed and large financial market with open capital accounts onenation’s currency can be chosen as an international currency eventually. An incumbentinternational currency has a built-in advantage when competing to retain its status.This kind of network externalities makes the internationalization of late comer’s currency veryslow. The benefit as international currency issuer is much greater than burden.The experiences of the D-Mark internationalization are different from that theory.First, Germany has no domestic developed financial market and had kept capitalaccounts control until the mid-1980s. That is to say D-Mark realized theinternationalization first, after that the Capital account liberalization. Second, despitethe network externalities caused by US-Dollar’s incumbent advantage the rise ofD-Mark was rapid and achieved in a short time from1960s to1980s. Third, Germanyhad gotten huge benefits and a high international reputation from D-Mark as thesecond important international, but why would Germany give up it and introduce Eurowith an uncertain future?The mainstream economics has poor explanatory power for the special drivingforce and mechanism of the D-Mark internationalization. The political economyemphasizes the currency internationalization is a reconstruction of global wealth andresources among the nations and its fundamental driving force lies in great powers’competing for, possessing and restricting the international monetary power. The jointpolitical institution among the nations is an effective way to the currencyinternationalization. This perspective has a better match with German experiences.This paper argues that the heavy pressure and burden on Europe especially onGermany caused by the Dollar’s exorbitant privilege contributed to the direct drivingforce for the Deutsche Mark’s Internationalization. The frequent Dollar crises andespecially the “Great Inflation” in1970s mainly caused by the arrogant US foreignmonetary policy opened a “Window of Opportunity” for Deutsche Mark’s rise.Germany seized this chance and established the Deutsche Mark-dominated European Currency System outside US Dollar system that had supplied the institutionalassurance and legality for Deutsche Mark’s internationalization. Deutsche Mark’sinternationalization meant the Dollar’s “circulation sphere” was eroded. With theintroduction of Euro the Dollar’s Influence was driven out of the Europeancontinental, while Deutsche Mark under cover of Euro made the Germany get moreinternational monetary power. Euro is “upgraded” D-Mark’s internationalization innature.Different from the prediction of many mainstream economists the Euro-zone didnot collapse at the height of the European sovereign debt crisis in the summer of2012,The Euro has become more stable right now. Why did mainstream economics wronglypredict a Euro break-up? The reason lies in its core assumption that the Euro comesfrom a natural development of the market in a General economic sense. And manwould just analyze the action in the euro only from the market principles. In realitythe Euro was typically born in “politics among nations”, not only following themarket principles. After that the European sovereign reserve currencies had beenreplaced by Euro.Germany had become the biggest winner. Although Germany gaveup his own D-Mark, which had been the second most important reserve currency inthe world, but it obtained a kind of power with the highest gold content in the EU,namely the international monetary power, which could influence and dominate theother member states. Because of this, Euro is for Germany not only a currency, but acore national interest. Preserving that national interest Germany has launched “adefense of Euro” during the European sovereign debt crisis. Because of thecomplicated political logic behind this German defense of euro the role of Germany isboth focused on and questioned and its crisis measures are highly controversial.It was D-Mark that had seized that change in1970s to realize theinternationalization, not French franc or Italian lira, Because Germany has morepowerful and competitive industry which had supported D-mark’s internationalization.While USA created the global demand for Dollar through exporting the financialgoods, Germany through exporting industrial products. High value-added “Made inGermany” and its global industry chain made D-Mark to be the only qualifiedcurrency to compete with US-Dollar.The secret of D-Mark’s rise is “political currency cooperation institution”+“industrial competitiveness”...