Lending of Last Resort in Monetary Unions: Differing Views of German Economists in the 19th and 21st Centuries

The European Central Bank’s activities as lender of last resort are especially controversial in Germany. The overriding concern of the critics is an alleged tendency of creating moral hazard on the side of public and private borrowers in the European Monetary Union. This contrasts with the predominant views among German economists in the classical gold standard era, when the newly founded German empire merged the many currency areas in its realm into monetary union. Prominent experts and policy advisors, such as Erwin Nasse, Adolph Wagner and Friedrich Bendixen, argued that in view of the costs of system failures moral hazard ought not to be a predominant consideration at times of crisis. In critical assessments of the Currency vs. Banking debates in England, German commentators questioned the credibility and sustainability of strict rules for monetary policy in banking crises. Some even developed evolutionary views, in which monetary integration is driven by financial markets and lending of last resort becomes a constitutive characteristic of central banking, in particular in the formation of a monetary union. This paper compares the older German views about lending of last resort in monetary unions with the current discourse and explores possible explanations for the differences.