It was the year 1975. In four months, the Bundesbank (Germany’s central bank before they changed its name to ECB in 1999) bought 7.6 billion Deutsche Marks bonds (sovereign, postal, and telecom) in the secondary market. According to this research note from BNP Paribas, it was the equivalent to 1% of Germany’s GDP.
Remarkably, Germany’s prices were far worse at the time than the than the Eurozone’s now. Germany would close 1975 with an inflation of 6%, and a GDP contraction of 3.4%. In other words: the European powerhouse was at risk of stagflation. And, having to choose between monetary stability and a further economic contraction, the Bundesbank opted to forfeit the former to save the latter. One can only wonder what would have been the German central bank’s reaction if it had to confront a minus 0.2 percent inflation, like the euro area is in now.
Even more so, the Bundesbank had to twist its own rules to buy the bonds. As explained by BNP Paribas:
“Helmut Schlesinger, board member and chief economist of the Bundesbank at the time, justified the policy action as follows: “We can only operate open market policy in order to regulate the money market, but not to finance the public deficit”. In other words, the Bundesbank needed to purchase bonds in order to maintain monetary policy’s transmission channel. The Bundesbank had set a monetary growth target for the year for the first time, which it risked missing (money growth slowed to 5.7% in May 1975, below the target for the year of 8%).”
It was a different era, of course. Just to give you some details: Pink Floyd was the rock band of the day, Franco was still alive in Spain, and Angela Merkel had not yet been appointed a leader of the youth organization of the Socialist Unity Party, i.e., the Communist party that ruled East Germany.
Unfortunately, the Bundesbank Annual Report of 1975, which used to be the best reference for this episode is not available. Those proficient in German can read, however, the pertinent issue of “Der Spiegel” or this interview in Austrian magazine “Kourier”. For those of us who are restricted to English, we always have the aforementioned BNP note, or this piece from Bloomberg in 2012.