During the Q&A period after a lecture on monetary history, a student asked me, “Mr. Reed, do you think a central bank should be independent or should it be directly controlled by elected officials?”
To me, this was a choice between the devil and the deep blue sea. Which should I pick, Scylla or Charybdis? By whom would I rather be mugged — Scarface or Machine Gun Kelly? Given the awful track record of central banks, and the appealing alternative of free, private, competitive banks in a market economy, I thought the question was rather loaded, akin to asking a believer in the separation of church and state, “Which religion should we establish as the official one?”
The conventional wisdom — frequently wrong — holds that central banks should be independent so they can work for the good of us all, and then we can live happily ever after. It rarely questions whether empowering any person or persons to control a nation’s money and credit supply and its banking practices is a good idea. I wanted to answer the student’s query with another query, something like “Should the supply of green beans be managed by politicians or by a committee of people the politicians appoint?” Thanks, but green beans seem to do just fine with neither.
If forced to make a choice between the options the student offered, next time I might respond, “I don’t like having to choose between the lesser of two evils but if pressed to do so, I would grudgingly choose independence — if I knew that those running it would be like Hans Luther.” That’s not the answer I gave, because I didn’t know of Luther at the time.
Who was this monetary saint named Hans Luther? He was President of the Reichsbank, Germany’s central bank, from March 1930 until March 1933. Writing in The Atlantic a year ago, Timothy W. Ryback revealed that Luther was independent enough to stare down Adolf Hitler, at least for a while.
On January 30, 1933, Hitler became Chancellor of Germany. Nazi storm troopers (the SA) forced their way into the Reichsbank to mount a swastika flag on the building. Before the day was out, Luther was in Hitler’s office to lodge a formal complaint. Ryback recounts the tense exchange:
‘I pointed out to Hitler that the SA actions were against the law,’ Luther recalled, ‘to which Hitler immediately answered that this was a revolution.’ Luther informed Hitler in no uncertain terms that the Reichsbank was not part of his revolution. It was an independent fiscal entity with an international board of directors. If any flag were to be flying over the bank, it would be the national colors, not the banner of his political party. The next morning, the swastika flag was gone.
Now that’s “independence”! Especially because just nine months earlier, Luther had been shot in the shoulder by two Nazis objecting to his monetary policies.
Six weeks later, Luther was back in Hitler’s office. The Nazi leader wanted the banker to cough up cash to help finance a huge rearmament plan. Luther stunned Hitler by offering him about one-twentieth of what he wanted, not a pfennig more. Hitler was outraged, but for the moment, that’s all he got from Luther.
Luther’s independence lasted a few more days. Seeing the handwriting on the wall and likely fearing for his life, he resigned on March 16, 1933. He strongly urged President Paul Hindenburg to ensure that the bank didn’t fall into the wrong hands. To get Luther out of the country, Hitler named him Germany’s ambassador to the United States, a post he held for the next four years. Meanwhile, Hitler’s toadies assumed control of the Reichsbank.
Hans Luther was no stranger to politics. When he became President of the Reichsbank in 1930 at the age of 51, he had already served as mayor of the city of Essen, the Weimar Republic’s minister for food and agriculture, minister of finance, and even Chancellor of Germany for six months in 1925.
The Treaty of Versailles that ended World War I imposed a reparations bill that Germany could not afford to pay. By 1923, massive hyperinflation destroyed the value of the German currency. Debate raged in Berlin over what to do next. When it was suggested that a new currency be based on rye (the grain), Luther killed the idea. Then he introduced a new temporary currency called the Rentenmark, backed by a basket of commodities, followed a few months later by a gold-backed currency, the Reichsmark.
He also slashed public spending and the bureaucracy. He temporarily hiked taxes to bring in more revenue, and at the same time, he fired 400,000 government employees to help balance the nation’s budget. More than anyone else, he gets the credit for ending the inflation and restoring sound finance for a crippled Germany.
Note the irony here. This man was a central banker who, by supporting a gold-backed currency, sought to make his country’s money somewhat “independent” of a central bank. Precious metals served the world well as money for centuries because they put market forces in the driver’s seat instead of creatures of government called central banks.
The only biography ever written of Hans Luther appeared in 2010. Titled The Lives of Hans Luther, 1879-1962 by C. Edmund Clingan, it describes its subject as a courageous man who “gave more than forty years of good and honest service to his country,” then sullied it by four years as an ambassador for a government he knew to be increasingly vicious. He once confided that Hitler was “not a normal person.”
One of Luther’s finer moments came in February 1924 when, just weeks after stabilizing the currency, he spoke to the Reichstag. Clingan writes,
Luther used the analogy of a house. The ground floor was private business. The upper floors were the public economy and budget while the currency was the roof. Only by lightening the tax burden on private business could it support the public budgets and the currency because the war and its aftermath had damaged the “ground floor.”
He was a man of generally sound ideas. But in the end, the Hitler regime corrupted everything it touched, including the good things that Luther had accomplished, and to some degree, even Luther himself. Nonetheless, if a country finds a central bank foisted upon it, it could do worse than finding someone like Hans Luther to run it.
