Helmut Schlesinger, the quintessential post-war German central banker, turns 100 on 4 September, a quiet milestone in a life dedicated to monetary stability yet punctuated by international economic tempests.
Although he was president of the Bundesbank for only two action-packed years (1991 to 1993), Schlesinger had an impact in Germany and the wider world well beyond his brief period at the helm. Having joined Bank deutscher Länder – the Bundesbank’s forerunner – in 1952, just three years after the birth of the Federal Republic, Schlesinger embodied the twin features of the central bank’s persona.
The Bundesbank’s independence as a pillar of counter-inflation policies became an international yardstick for monetary discipline, set down in the constitution of Europe’s economic and monetary union, as well as for central banks in many other jurisdictions. At the same time, it was held responsible by politicians in the US and Europe for provoking recessions and disrupting currency markets. Schlesinger became the public face of an institution revered and feared in almost equal measure.
Schlesinger’s mild manner and gentlemanly demeanour provide a courtly overlay for a legendary stubbornness over monetary policy. All of this was put on vibrant public display during the European monetary turbulence at the beginning of the 1990s. In September 1992 Britain and Italy were forced out of the exchange rate mechanism – the forerunner of economic and monetary union – and France almost followed suit in more unrest the following summer.
Schlesinger was born less than a year after the death of Rudolf Havenstein, the hapless Reichsbank president who presided over industrial-scale banknote printing and astronomical inflation in the troubled years after the first world war. Given nominal independence by France and Britain as war-time creditors seeking to recoup German reparation payments, Havenstein refused to leave office. He conveniently died of a heart attack on in November 1923, paving the way for stabilisation of the currency, though not, unfortunately, of the Weimar republic, under his successor Hjalmar Schacht – who later became known as ‘Hitler’s magician’.
Rudolf Havenstein
Schlesinger is well away from the public scene, but not entirely quiescent. Coinciding with Bundesbank efforts in 2022, within the European Central Bank system, to tighten credit to counter the upsurge of inflation after the start of the Ukraine war, Schlesinger penned a private letter to the Bundesbank leadership. He gently reminded the present generation that negative real interest rates were not an effective way of dampening price rises.
Partnership with Karl Otto Pöhl
Schlesinger formed a renowned working partnership with Karl Otto Pöhl. The former journalist and top monetary official under Chancellor Helmut Schmidt joined the Bundesbank as deputy president to Otmar Emminger in 1977, after Schlesinger had already been at the central bank for a quarter of a century. When Pöhl became president in 1980, Schlesinger, as chief economist – who had spent his working life on domestic monetary issues with little foreign experience – became deputy president. During the coming hectic decade leading to German unification and the first steps towards EMU, polished Pöhl and stringent Schlesinger were the key force in European central banking.
An adept mountain climber from his youth in the small town of Penzberg near the Bavarian Alps, Schlesinger never had any shortage of staying power. He maintained a daily fitness routine by scaling the 12 flights of stairs to his office. Schlesinger was everything the mercurial and sometimes maverick Pöhl was not – orthodox, academic, ascetic and a convinced believer in a united Germany.
During international financial meetings he was frequently less impatient than Pöhl and better at getting on with interlocutors holding different opinions. One such encounter was with French President François Mitterrand, a long-time opponent of central banking independence, with whom Schlesinger once fell into stilted conversation after Mitterrand appeared stranded at a state reception at a German castle near Bonn.
Pöhl and Schlesinger formed an extraordinary tandem in secret talks over interest rates with Schmidt during the chancellor’s final bleak years in office. The duo resisted Schmidt’s entreaties for easier money to help save his coalition, which collapsed in 1982. James Baker, US Treasury secretary, ludicrously blamed Schlesinger and a ‘clique’ of Bundesbankers for allegedly ‘looking for inflation under every stone’ and precipitating the October 1987 stock market collapse with a minor interest rate increase.
Drama erupts in 1991-92
Drama erupted when Schlesinger took over the top job in 1991. With a trademark image for austerity, Schlesinger believed monetary diplomacy required action, not words. He prevailed upon the Bundesbank council to slam on the brakes to combat annual German inflation edging towards 5% after unification in October 1990. In mid-August 1991 the Bundesbank announced a fearsome 1 percentage point increase in discount rate and a smaller 0.25 percentage point rise in Lombard rate, as he said later, ‘to counter the wrong policies decided for the exchange rate of the East German Mark’.
Helmut SchlesingerÂ
Strains rose incessantly in the ERM. The denouement came after Schlesinger’s clumsily handled (although painfully honest) newspaper interview with the Wall Street Journal and Handelsblatt, circulated by news agencies in abridged and ‘unauthorised’ form on the evening of 15 September 1992, emphasised how sterling was exposed after an Italian devaluation the previous weekend. The pound (together with the lira) was forced to leave the ERM the next day (‘Black Wednesday’) after an international tide of sterling selling triggered massive Bank of England intervention that emptied the UK’s official stocks of foreign currency.
Meetings and phone calls with Chancellor Kohl formed an important part of German concertation over currencies. In contrast to Pohl’s fractious relationship with Kohl, Schlesinger had close ties with the chancellor who told the Bundesbank to ‘do what you can’ to calm foreign partners. Norman Lamont, the British chancellor of the exchequer, forced to announce UK departure from the ERM that he had never wanted to join, was caught up in the humiliating fall-out. Years later, Lamont wrote, ‘In my heart I thought attempts to persuade Dr Schlesinger to cut interest rates were probably in the end unlikely to succeed.’ Commenting on Schlesinger’s stubbornness, he said, ‘In his situation I might have behaved in a similar way.’
But it was not all bad news, among the many commentators who welcomed the UK’s ERM departure was William Keegan of The Observer. A week after ‘Black Wednesday’, he suggested that Schlesinger be awarded a knighthood for having brought about the collapse of the government’s economic strategy, which, he wrote ‘has done the country a great service’.
Benevolence – and failure of imagination – over EMU
During his presidency, Schlesinger displayed great scepticism on monetary union. After he retired from the Bundesbank in 1993, he suddenly showed benevolence, a transition that surprised and even irritated former colleagues such as his successor Hans Tietmeyer. Schlesinger wrote an article for The Economist in 1996 that generally welcomed EMU and said it was likely to take place in 1999 with six to 10 participants. Schlesinger’s new stance partly reflected a realisation – born mainly of down-to-earth patriotism – that Kohl deserved support for his euro policies. But Schlesinger had also become frustrated by the near impossibility of making timely realignments in a system of fixed but adjustable rates. He commented later. ‘The overall political situation in Europe made monetary union both necessary and desirable. If the political will was there, it would have been wrong – and impossible – for the Bundesbank to oppose it. We had good fortune since we could construct the ECB on the Bundesbank model.’
The reality of EMU has not lived up to these hopes. Schlesinger says today that he regrets the absence of the British – with their ‘wisdom and linguistic adeptness’ – from European monetary arrangements. And he admits that the central bankers and governments who laid down the groundwork for EMU did not have the ‘imagination’ to foresee the ills that befell it after the 2007-08 financial crisis. Repairing those flaws will be the task – a gargantuan one – for a new generation.
David Marsh is Chairman of OMFIF.