US inflation foes could copy Bonn
How can the United States keep down its inflation rate? Stick closer to its monetary targets. That's the advice of Dr. Otmar Emminger , one of the men most closely associated with West Germany's remarkable low rate of inflation during the postwar years.
Between 1950 and 1983, the industrial country with the lowest average rate of inflation has been West Germany - not Switzerland. Dr. Emminger joined the Bundesbank, Germany's central bank, as director of research in 1951, retiring as president in 1980, and a member of the bank's board of governors for some three decades.
Dr. Emminger does not mean that the Federal Reserve System should worry about short-term deviations from the money supply ranges established by the system's Federal Open Market Committee. He regards the excitement in the US money market over the latest monetary statistics each Friday as ''sheer nonsense - a French farce.''
But Dr. Emminger does believe the Fed must be more conscientious than the Bundesbank about staying within its monetary targets, because of the higher inflationary expectations in the US. If American labor leaders and businessmen see money growing rapidly, they will anticipate higher inflation and demand higher wages or prices.
Recently, the US administration predicted that average wages would increase about 6 percent next year.
''I find that depressing,'' Dr. Emminger noted in an interview. ''If anyone said that in Germany, he would be laughed at.'' He was here to attend the annual joint meeting of the International Monetary Fund and World Bank last week, the 34th such meeting he has attended.
The difference in West Germany is that labor leaders there believe the central bank when it announces monetary targets that should result in low inflation. ''We have established a position of credibility,'' Dr. Emminger said, speaking of the postwar years: ''We have never had double-digit inflation.'' Trade unions make smaller wage requests when they expect only 3 percent inflation - the level anticipated in Germany next year - rather than the 5 to 7 percent expected here.
In the United States, he went on, ''there is no (recent) tradition of stability - no credibility.'' Right now the growth of the nation's money supply by several measures is within the various targets. In the past, however, the Fed has often missed its targets.
The Bundesbank, Dr. Emminger said, has missed its targets some years, but not to the extent the Fed has. If the Fed can remain within its targets for another 11/2 years, ''people may be more stability-minded,'' he added. ''It very much depends on wage developments.'' He would like the Fed to aim for a modest but extended recovery.
Dr. Emminger describes himself as a ''pragmatic monetarist.'' By his definition, that means the central bank does not need to attain its targets from month to month or even from quarter to quarter to keep inflation under control. ''It is technically impossible and unnecessary.''
Nor, he adds, will a good monetary policy correct all the mistakes in fiscal policy (government tax and spending decisions) or wage actions. ''We have never believed that.''
The Bundesbank was the first of the major central banks to adopt a public target for monetary growth, in December 1974, followed four months later by the Fed and soon thereafter by many other central banks.
''Our first communique explained that this only has a chance of success if budget policy and if wage and price policy fall into place,'' Dr. Emminger said.
Another relevant point he makes is that the velocity of money - how many times per year money turns over - ''can play unexpected tricks.'' In the US, an unforeseen slump in velocity deepened the recession of 1981-82 beyond what was anticipated. The supply of new money to the economy resulted in lower output of goods and services than usual. ''I had warned some of my friends here that they would have some unexpected experiences,'' he recalls.
Because of such velocity problems and also difficulties with measurement, Dr. Emminger prefers to look at the larger measures of money, which include some elements of savings rather than merely money used for transactions. He says the Fed should drop M-1, a narrow money measure, as a target. This question of which money-supply measure to use is a hot one among economists.
Besides dealing with domestic German monetary policy, Dr. Emminger was long the Bundesbank's chief architect in international monetary policy. In a certain way he was responsible for the ''floating'' of the US dollar.
Since March 1973, the value of the dollar in relation to the West German mark and many other currencies has been determined by demand and supply on the foreign-exchange markets; in other words, ''floating.'' At that time, the president of the Bundesbank was in the hospital and Dr. Emminger, his deputy, faced an inflow of dollars that was ruining the bank's domestic monetary policy. The inflowing dollars, being paid for by marks, were dramatically swelling Germany's domestic money supply. Some 22 billion deutsche marks were paid out in five weeks, twice the amount of new money normally supplied the German economy in a year.
Dr. Emminger told his board, ''Now it is quits,'' and the mark was floated against the dollar. The Bundesbank no longer tried to keep the mark at a certain fixed exchange rate on the foreign-exchange markets by, at that time, buying dollars.
The former central banker regards some recent academics' calls for a return to a fixed exchange rate or a gold standard as impractical, considering the massive amounts of dollars that can quickly flow across borders. ''There is no alternative to floating rates against the dollar,'' he says.