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61ST CONGRESS \

2d Session

J

/

DOCUMENT

\

SENATE

N o . 593

NATIONAL MONETARY COMMISSION

The German Great Banks and
Their Concentration
in c o n n e c t i o n

with

The Economic Development of
Germany
By

DR. J, RIESSER
Geheimer Justizrat and Professor at the University of Berlin

Third edition completely revised and enlarged

Washington : Government Printing Office : 1911




NATIONAL MONETARY COMMISSION.

NELSON W. ALDRICH, Rhode Island, Chairman.
EDWARD B. VREELAND, New York, Vice-Chairman.
Junius C. BURROWS, Michigan.
JOHN W. W E E K S , Massachusetts.
E U G E N E H A L E , Maine.

ROBERT W. BONYNGE, Colorado.

PHILANDER C. K N O X , Pennsylvania.

SYLVESTER C. SMITH, California.

THEODORE E. BURTON, Ohio.

LEMUEL P . PADGETT, Tennessee.

H E N R Y M. TELLER, Colorado.

GEORGE F . BURGESS, Texas.

HERNANDO D. MONEY, Mississippi.

A R S E N E P . P U J O , Louisiana.

JOSEPH W. BAILEY, Texas.

ARTHUR B . SHELTON, Secretary.

A. PIATT ANDREW, Special Assistant to Commission.




TABLE OF CONTENTS.
Page.
xi

PREFACE

P A R T I.
INTRODUCTION.—The tasks of banks in the economic life of the nation
i. General considerations
:
2. Special considerations
(a) The tasks of banks during normal times
(b) The tasks of banks during critical times
(c) The tasks of banks in time of war and in preparing for
war (financial readiness for war and financial conduct
of war)

i
i
8
8
15

21

PART II.
T H E F I R S T P E R I O D (FROM THE MIDDLE OF THE N I N E T E E N T H CENTURY
TO THE Y E A R 1870).

CHAPTER I.—Sketch of economic conditions in Germany at the time
of the establishment of the oldest existing credit
banks.
CHAPTER II.—The German banks during the first period (1848-1870).
Influence of the Credit Mobilier, its merits and
defects
Differences between the Credit Mobilier form of
organization and that of the German banks,
founded during the first period, especially the
Darmstadter Bank and the Disconto-Gesellschaft
The A. Schaaffhausen'scher Bankverein
The Berliner Handelsgesellschaft
The Mitteldeutsche Kreditbank
Concluding remarks

27
44
49

56
71
75
77
83

PART III.
THE

CHAPTER

SECOND P E R I O D (FROM 1870 TO THE P R E S E N T D A Y ) .

I.—(1) Table of events during the second period which
influenced the development of German banking
m

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I.—(2) Sketch of the economic development of Germany Page.
from 1870 until the present
87
Preface
87
Growth'of population
2>2>
Growth of national wealth
91
Progress of national income
92
Investment of national wealth
93
Changes in the distribution of incomes..
96
Small and large scale industry
102
Population engaged in industry, commerce, and agriculture
103
Progress of agriculture
105
Necessary imports, unfavorable balance
of trade
no
Strengthening of the domestic market. .
113
The founding of stock companies
115
Production, consumption, imports, and
exports of pig iron
120
Production of coal
122
Electro-technical industry
123
Chemical industry
125
Textile industry
128
Domestic industry
129
Development of facilities of communication
130
Railroads
130
Postal facilities
..
131
Telegraph
132
Telephone
132
Merchant marine
133
Subsidies to navigation
134
The Hamburg - American Packet
Steamship Company
135
The North-German Lloyd
136
Agreements with the International
Mercantile Marine Company
136
Shipbuilding
140
Navigation on the internal waterways
141
Currency: The Reichsbank
141
Cartels, Definition, development in
Germany. Official inquiry
167
Steel Works' Union (Stahlwerksverband)
174

IV




Table

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Contents

CHAPTER I.—(2) Sketch of the economic development of Germany Page,
from 1870 until the present—Continued.
Preface—Continued.
Cartels, Definition, development
in
Germany. Official inquiry—Cont'd.
Struggle between the " m i x e d " and
" pure " works
175
International agreements regarding
the exportation of rails and girders.
182
Concluding remarks
" 183
CHAPTER II.—The German great banks during the second period
(1870 to the present)
186
Section 1. Introduction
186
Section 2. The current (regular) banking business
191
I. Debit operations of the credit banks (taking of credit)
191
A. The deposit business
191
1. General observations
101
2. Deposits in foreign countries
202
3. Deposits at individual Berlin great b a n k s . .
204
4. Deposits at all German credit banks and at
the Berlin banks
208
B. Other debit operations of the credit banks
211
The cheque system and its present use b y German banks
215
II. Credit operations of the German credit banks. (Lending of
credit)
219
A. Introduction
219
1. Observations on the granting of general
bank credit
219
2. Observations on the granting of industrial
credit in particular
229
Objections to the methods used b y the
banks heretofore in lending credit. . .
232
The proposal of Felix Hecht regarding
the organization of a central institution for long-term industrial c r e d i t . . .
240
B. The current-account business
259
C. The acceptance business
275
D. The discount business
289
E. The " l o m b a r d " (collateral loan) and " r e p o r t "
(carry-over) business
307
F. The brokerage business
323
G. The transformation, founding, issuing, syndicate
and security business
336
1. The transformation and founding business..
336

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CHAPTER II.—The German great banks during the second period Page.
(1870 to the present)—Continued.
Section 2.—The current (regular) banking business—Continued.
I I . Credit operations of the German credit banks. (Lending
of credit)—Continued.
G. The transformation, founding, issuing, syndicate,
and security business—Continued.
2. The issuing, syndicate, and security business
347

Section
Section
I.
II.

(a) The issuing business in general
(a) Methods used in the issuing
business proper and its
preliminary stages
(/?) The extent of the German
issue business
(6) The issuing of industrial securities..
(c) The floating of German State and
Communal loans
(d) The floating of foreign securities....
(a) Principles underlying the
flotation of foreign securities (see section 7)
(/?) Amount of foreign securities issued in Germany. .
(e) Amounts of listed securites issued b y
each of the (6) Berlin great banks
(see Appendices V and VI)
(J) The syndicate business
(g) The security business
The importance of a strong
bourse
3. Bank groups and syndicates
4. The over-sea and foreign business of the German
credit business
Part taken b y the banks in developing German over-sea
import and export trade
The opening of branches in Hamburg, Bremen, and London, and the organization of over-sea and foreign banks,
and of domestic subsidiary banks for over-sea and foreign
business
1. Participations of the Deutsche Bank
2. Participations of the Disconto-Gesellschaft
3. Participations of the Dresdner Bank
4. Participations of the Darmstadter Bank
5. Participations of the Berliner Handelsgesellschaft.
6. Participations of the A. Schaaffhausen'scher Bankverein
7. Participations of the Nationalbank fiir Deutschland
VI

347

348
358
364
377
384

384
392

395
396
402
406
407 .
420
420

432
432
440
445
447
450
452
453




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CHAPTER II.—The German great banks during the second period Page.
(1870 to the present)—Continued.
Section 4. The over-sea and foreign business of the German
credit business—Continued.
I I I . The common subsidiary companies of the German credit
banks for the promotion of over-sea and foreign business.
455
Section 5. General financial results of the German credit banks:
Gross earnings and their composition; general expenses; net profits; dividends; writing off; reserves.
460
Section 6. Character of the business management and business
development of each of the Great Berlin Banks
472
1. The Deutsche Bank
472
2. The Disconto-Gesellschaft
482
3. The Dresdner Bank
492
4. The Darmstadter Bank
498
5. The A. Schaaff hausen'scher Bankverein
507
6. The Berliner Handelsgesellschaft
517
Section 7. The so-called export capitalism. The investment of
German capital in foreign industrial and commercial
enterprises and securities. The establishment of
subsidiary banks exclusively for foreign business
with special reference to its connection with the
industrial export policy
527
Section 8. Reform proposals concerning bank deposits, and their
justification
546
I. General observations
546
1. '' Safety of depositors'' a reason for reform proposals.
549
2. Particular proposals made with this end in view by
Caesar Straus, Otto Warschauer, and Count von
Arnim-Muskau
549
3. Reform proposals based on other considerations
(Heiligenstadt)
553
4. Considerations on which the first-named reform proposals are based
554
(a) Supposed superiority of the English banking system
555
(6) The alleged small own resources (share
capital and surplus) of the German credit
banks
559
(c) The liquidity of the resources of the German credit banks. Coefficient of liquidity
561
I I . Criticism of the individual reform proposals
573
1. The creation of a central private deposit bank or of
a government deposit bank for the German
Empire and of similar deposit banks for each of
the German States
573
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Page.

CHAPTER II.—The German great banks during the second period
(1870 to the present)—Continued.
Section 8. Reform proposals concerning bank deposits, and their
justification—Continued.
I I . Criticism of the individual reform proposals—Continued.
2. The granting of priority rights to depositors
3. The fixing of a legal ratio between savings deposits
and the share capital
4. Legal regulations regarding the investment of deposits
5. Depositing a certain portion of the private deposits
at the Reichsbank
6. Publication of summary bank statements according
to a legally prescribed form
7. Penalty for " b a n k s and bankers who b y public or
written appeals, or through agents solicit deposits
or savings "
8. A supervisory board
Concluding observations

577
578
579
580
589

597
599
600

P A R T IV.
PROGRESS OF CONCENTRATION I N GERMAN B A N K I N G DURING THE SECOND
P E R I O D (1870

TO THE P R E S E N T ) .

CHAPTER I.—Causes of the concentration movement
1. General causes
2. Special causes
CHAPTER II.—Causes determining the extent and rapidity of the
concentration movement
Section 1. General causes
Section 2. Special causes
I . The liquidation of banks during the seventies
I I . The cartel movement in industry during the n i n e t i e s . . . .
I I I . Mistakes of (Stamp and bourse) legislation
Decline of the class of private bankers
IV. Special causes of the rapidity of the concentration movement during 1901-1904
1. The crises of the years 1873 and 1900
2. The founding of the United States Steel Corporation, February 23, 1901
3. The founding of the Steel Works' Union in
Dusseldorf, March 1, 1904

VIII

602
602
606
613
613
614
614
614
618
619
635
635
639
640




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Page.

CHAPTER III.—Methods and forms of concentration
Section 1. Outward course of development
A. The several (8) great banks (see Appendix VII)
B. The aggregate capital power represented by the great
bank groups
I. The group of the Deutsche Bank
I I . The group of the Disconto-Gesellschaft
I I I . The group of the Dresdner Bank
IV. The group of the A. Schaaffhausen'scher Bankverein
V. The group of the Darmstadter Bank
Section 2. General tendencies and forms of concentration
I. Scheme of general development
I I . The two periods in the history of concentration
Tables regarding the general development of concentration within the—
1. Great banks (see Appendix V I I I , Tables
1-8)

641
641
641
642
643
644
644
645
645
647
647
651

1008

2. Allied banks (see Appendix V I I I , Table
10)

1011

Section 3. The several ways and forms of concentration, their
advantages and disadvantages
I. Local concentration
I I . Concentration of capital and power
A. In a direct way
1. By means of increase of capital
2. Through absorption of banking firms and fusions
of banks
3. Through the creation of permanent communities
of interest
The communities of interest in the mining regions (Upper Silesia and Rhineland-Westphalia)
(a) through the founding of subsidiary and
trust companies
(b) through acquisition of shares
(c) through agreement
(d) through exchange of shares
B. In an indirect way, b y means of decentralization
of operations, viz, through the founding of—
1. Commandites (silent partnerships)
2. Branches
3. Agencies
4. Deposit offices

IX

653
653
656
656
656
658
664

666
667
672
673
677

680
684
696
699




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P A R T V.
Page.

The mutual influence of concentration in banking and in i n d u s t r y . .
I. Industrial concentration and its principal causes
I I . Influence of the banks and banking concentration on industrial concentration
1. On industrial concentration, unaffected or but
slightly affected by the formation of cartels
(a) the electro-technical industry
(b) the chemical industry
2. On concentration in industries with strong cartel
tendencies (the mining and metallurgical industries)
I I I . Influence of industry and industrial concentration on concentration in banking

703
703
712
712
713
721

725
750

P A R T VI.
The situation resulting from concentration; advantages and dangers
of concentration; the outlook for the future
NOTES

751
785

APPENDICES.
Bibliography
German credit banks founded during the years 1848-1856... .
German credit banks in 1872
Representation of the great banks on the supervisory boards of
stock companies
V. Value of securities issued at the Berlin Stock Exchange b y the
great banks during the years 1882-1908
VI. Value of securities issued at all German Stock Exchanges by
the great banks during the years 1897-1908
V I I . Development of concentration of the German great banks. . . .
V I I I . Progress of concentration within each of the great banks and
within the banks allied with them
Notes to Appendices VII and V I I I
I.
II.
III.
IV.

INDEX

883
892
893
897
921
959
982
1008
1013
1019

X




PREFACE.
In publishing the third edition of the present book,
which first appeared in 1905, the author has tried to comply with the general wish to avoid as much as possible
the mere reproduction of the text of the ten lectures on
which the early editions were originally based. Instead
of this, the present edition marks the partial realization of
the idea of the larger work which the author has constantly had in mind from the very beginning.
The author has tried to fulfil the expectation and
wishes of the critics (whose suggestions are always welcome) to the best of his ability and so far as the time at
his disposal permitted. The present edition has been
completely reshaped and considerably enlarged—as indicated in the title of the book—although the fundamental
features of the work and the particular treatment of the
concentration movement have been retained.
For this purpose it became necessary in the first place
to enlarge on the description of German economic development from 1848 to 1870, and from 1870 up to the
present day, in so far as this development exercised a
determining influence on the growth of German banking.
In the second place an attempt has been made, as far
as existing material permitted, to present in nearly every
chapter the separate development of each great bank,
without, however, obscuring the picture of the general
development.
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I n a separate chapter a comprehensive view is given of
t h e general management and development of t h e six great
Berlin banks. Accordingly it also became necessary t o
present a systematic description of t h e most important
debit and credit transactions of t h e banks. This permitted t h e generally desired and fully justified examination of t h e question whether a n d to what extent t h e
German great banks have actually fulfilled in t h e interests of t h e community t h e important and numerous tasks
set forth in t h e introductory chapter.
I n discussing t h e credit and debit business of t h e banks
it became possible also to devote some space to t h e treatm e n t of questions of technical methods and business policy, which h a d been entirely kept out from t h e earlier
editions.
I t will be found t h a t t h e chapter (VIII) devoted t o t h e
analysis and criticism of the reform proposals in t h e field
of b a n k deposits, which were discussed quite fully even
in t h e first edition, has been greatly enlarged, for t h e reason t h a t these proposals m a y be said to occupy at present
t h e center of German banking discussion. A further
reason was t h a t in t h e meantime t h e views of t h e various
experts have been published, as presented before t h e Bank
Inquiry Commission, of which t h e a u t h o r was a member.
An analysis and appreciation of these views seemed therefore pertinent.
Another subject which had to be passed over lightly in
t h e former editions—though against t h e wishes of t h e
author—viz, industrial concentration a n d t h e influence
which t h e concentration of banking exercises on it, has
now been treated in greater detail. However, for lack of
XII




P r e fa c e
space this chapter even now is limited to a study of this
movement in a few typical and specially important
branches of industry.
Suggestions as to form have also been adopted as far as
possible. Much discursive matter, hitherto contained in
t h e notes, has been incorporated in t h e text. On t h e
other h a n d large statistical tables, which formerly were
p a r t of t h e text, and t h u s broke u p t h e continuity of
presentation, have been removed t o t h e end of t h e book in
t h e form of appendices.
A series of what I consider very important statistical
appendices has been substituted for those printed in the
earlier editions. For t h e preparation a n d checking of
these tables I desire to express m y best t h a n k s to Dr.
Berthold Breslauer, of Berlin, t h e editor of t h e statistical
p a r t of t h e Bank Archiv. The tables showing t h e amount
of listed securities issued b y t h e six great Berlin b a n k s —
constituting Appendices V and VI—for t h e first time
provide complete material based on official d a t a concerning this important subject.
Appendix V I I I — t r e a t i n g of t h e course of t h e concentration movement in t h e case of t h e eight greatest Berlin
banks—has been brought down to December 31, 1908.
I t is hoped t h a t the book in its new shape will meet
with t h e same friendly reception which has been accorded
t o its earlier editions and t h a t it will be found a reliable
reference work, equally free from fulsome commendation
a n d from undue depreciation of t h e work of t h e German
credit banks.
R O M E , April,

igog.

xnr




TRANSLATOR'S N O T E .
Prof. Riesser's work, Die deutschen Grossbanken und ihre
Konzentration, of which the present volume is a translation, gives the most recent and fullest account of the
development, present organization, and practices of the
more important German so-called credit banks, particularly the six largest banks, which, with the possible
exception of one, may be said to have their central office
in Berlin. The name credit bank, which has been retained
in the translation, in no way characterizes the actual scope
of activity of these banks, but is the term used in recent
German banking literature to differentiate the commercial
joint-stock and kindred banks without the note-issue
privilege from other banks having a more restricted and
special field of operations, such as the mortgage banks,
the mutual or cooperative banks, the savings banks, etc.
The book abounds in technical legal and banking
terminology, for which no exact equivalents in English
exist. In numerous cases no translation was attempted.
In other cases where the terms occur frequently throughout the volume, a choice of an English equivalent, though
more or less arbitrary, had to be made. This applies
particularly to the term Depositen, the definition of which
the author declares to be impracticable. (See p. 196
et seq.) In German bank statements different meanings
are attached to the term by various institutions, the only
common feature being that interest is allowed on these
"deposits."
xy




Translator's

Note

An i m p o r t a n t function of t h e German credit banks is
the financing of corporations and t h e selling to t h e public
of the newly created securities of these corporations.
Throughout t h e volume this latter practice has been
designated as t h e issuing activity of t h e credit banks.
The success of these operations depends largely upon t h e
"issue credit'' of t h e bank—i. e., t h e confidence of t h e
investing public in t h e soundness of t h e securities offered
by t h e bank. I n several cases a literal translation of
German technical terms seemed entirely proper, though
such terms as pure and mixed works (p. 175), mine furnaces, furnace mines (p. 369), heavy industry, and t h e
like, even with proper explanations in the text, m a y be
regarded b y some as literary barbarisms.
The proofs of t h e translation have been submitted t o
t h e author, who made several changes in t h e t e x t which
do not appear in t h e German original. The figures bearing
upon American banking have been revised and brought
u p to date. Thankful acknowledgment is due t o
Dr. Robert Stein, of Washington, D. C , and Dr. H . G.
Friedman, of New York City, for valuable help rendered
to t h e translator.
M O R R I S JACOBSON.
WASHINGTON,

D. C , August,

XVI

1911.




THE GERMAN GREAT BANKS AND
THEIR CONCENTRATION.
PART

I.

INTRODUCTION—THE TASKS OF BANKS IN
ECONOMIC LIFE.
(i) GENERAL CONSIDERATIONS.

Walther Lotz, in his excellent book on the methods
of floating securities {Die Technik des Emissiongeschafts,
1890), makes the following statement (p. 60):
"One of the most prominent financiers in Berlin once
remarked to me that his profession was not affected by
the social question, which was usually regarded as the most
important factor in economic development, and that the
speculative banks adopted a neutral attitude toward it."
To my mind this statement proves that the Berlin
financier in question has strangely misconceived the position and duties of German banking within the realm of
"capitalistic economics." 1 To prove this in detail is
neither the least nor the most unimportant aim of the
present work.
Within the range of capitalistic economics there is a
whole series of important and special economic tasks
devolving on banks and bankers.
To begin with, the funds are capital in the popular sense
of the word (that is, sums of money constituting com903 n ° — 1 1

2

1




National

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ponent parts of wealth to be devoted to producing income)2 which accumulate in the safes of banks and bankers. It is the bankers' profession and duty not only to
take care of the capital, but to turn it to good account,
i. e., to make it productive, particularly by placing it at
the disposal of others for industrial and other purposes.3
Banks have to receive the funds placed at their disposal for the purpose of investment and profitable utilisation, and to direct them into proper channels through
the granting of credit.
The bank enters into relations on the one hand with
the capitalist who entrusts to it his available money for
productive investment and thus becomes its creditor, and
on the other hand, with entrepreneurs and others who
receive money for their ventures, and thus become its
debtors.
The part which a bank plays in its relations between
capitalists and persons engaged in various enterprises is
similar and as important as that of the trader who acts as
independent middleman between producer and consumer,
and who participates in the increase of values by transporting goods with or without intermediate manufacture
from districts where supply is plentiful to districts where
demand is great.
The so-called regular or current banking business is confined to the acceptance and granting of such or similar
credit (so-called credit and debit transactions). It includes deposits, current accounts, bill, contango, lombard,
and commission business.
The tasks involve, as far as is practicable within such
limits, the direct furtherance of the power of production of
2




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German

Great

Banks

all industries, including (after what has been said above)
commerce,4 and indirectly the furtherance of the purchasing power of all classes of the community.5 They
necessitate endeavors for the investment of surplus capital
in a suitable and economic manner, and its utilisation
for credit transactions.
In the next place, banks and bankers have to provide
for a sound and constant regulation of the circulation of
money and the adjustment of money settlements in so
far as these functions do not fall within the province of
special public banks. They also have to provide for a
banking organisation of the whole commercial system of
payment, and above all for an increase of those forms of
settlement which tend to take the place of cash: in particular the employment of checks, transfers {giro), and
bank clearing.6 Finally, they have to establish organic
relations between the systems of credit and payment,
by using their credit to convert the claims of their customers in the shape of bills, checks, money orders, etc.,
into current paper, and thus into ready money, using this
latter for the purpose of meeting payment on matured
obligations.7
The historical development of German banking, however, has considerably enlarged the scope of these duties.
The transformation effected since the middle of the
nineteenth century in the whole system of communications through the use of steam for ships and railways (see
p. 34), and the revolution in many industrial branches,
caused by the appearance of the steam engine, in conjunction with the creation of a large and unified German
economic territory through the customs union of the Ger3




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man States (Zollverein, 1833), paved the way for the expansion and world-wide aspirations of German industry,
and thus gave the impulse to large-scale production in
many branches of industry.
Thus it became necessary that capital as well as credit
should be devoted to the building of plants and works in
sums and for periods hitherto seldom required, if production on a large scale was to be maintained and extended.
This could only be made possible by the issue of shares or
debentures.
The joint stock company proving the most reliable ally
of trade and industry, conducted on a large scale, it
became necessary to transform private concerns into joint
stock companies and to establish new industrial enterprises in the shape of stock companies, whenever it was
desired to increase the credit of existing private concerns,
to enlarge or diversify production, or to enable domestic
industry to enter into competition with foreign producers.
The general public in Germany, whose funds were
meager compared to those of England, was neither able
nor willing at this juncture to participate directly or permanently in such ventures as mentioned above. The
private individual fought shy of investing his capital in
enterprises, and, content with smaller interest, bought
government securities.8
Adequate assistance for the demands of capital and
credit could not be expected from the existing note-issuing
banks, 9 whose increase had long been advocated in the
interest of increased facilities of payment, as the extent
of their activity was naturally limited by their special
functions. In the same manner private bankers, who at
4




The

German

Great

Banks

that time were very powerful, at least in several centers
(see below, p. 39), could supply only modest means for
such purposes—means which could neither suffice, nor
be tied up for any length of time. In addition to this, the
organisation of the banking business at that period was
in general neither prepared for, nor adapted to operations
of such a comprehensive and difficult nature (see below,
P- 40).
For these reasons such new and enormous demands
could be met only by the creation of special organs,
namely joint stock banks, which were called into existence to satisfy these very requirements. In the natural
course of things the banks gradually became the professional and expert intermediaries in meeting the new
financial wants. This they were able to do only through
continuous and systematic study of the money market,
as well as of the markets for the newly created securities,
especially among their own customers. Moreover, both
the continuity of their existence and regard for their own
issue credit (Emissionskredit), i. e., the permanent ability
of maintaining among the German public a market for
new securities issued under their auspices, insured a permanent interest on the part of these banks in the newly
created undertakings as well as in the securities which
they were instrumental in placing on the market.
It is, therefore, too narrow a view, and consequently
incorrect, to assume that (10) " the assistance of the numerous private bankers, equally conspicuous for intelligence
and wealth, would have amply sufficed for all the tasks
described above," and that the German credit banks grew
up solely, or almost exclusively, because the general public
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'rushed madly after the most speculative of securities/
and because of the endeavours made to cater as far as
possible to this speculative craze for railway, mining,
and foundry shares." It must, however, be acknowledged
that these reasons did play a certain part in the matter,
especially the desire of the smaller capitalists to participate indirectly in the industries promoted by the new
banks by the speculative acquisition of shares in these
banks ("speculating on speculation").
It has been said concerning Saxony, that although
the number of private banks was large for the time in
question, yet " their powers were inadequate to satisfy
the credit requirements." 11 There is ample testimony to
prove that this w§,s not solely a local symptom, and a
mere glance at the security issues made during that first
period leaves the same impression. Moreover it is stated
that it was just among private bankers of that period that
"the necessity for concentration of capital was felt the most,
and that a remedy was being looked for."12 We know
that the committees which in almost all German States
were petitioning for concessions (in Prussia long in vain,
as is well known) for the establishment of note issuing
and credit banks, were composed for the most part of
private bankers.13
Schaffle u goes even further in the following statement
published in a monograph about 1856:
"When industrial development has reached the stage
at which great industries are forced to acquire their capital
largely through the gathering of small capitals, special
economic organisations must develop on which special
functions regarding the initiative in stock transactions
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devolve. Banks for the promotion of such enterprises
meet this need.
" As long as these premises for the economic justification
of speculative banks have not been scientifically refuted
scientists should not allow themselves to be terrified by
the mere catchword 'credit mobilier', like children by a
bogy."
In this manner then, according to historical development,
the stock issuing, promotion, and conversion business in
Germany became a regular banking business, i. e., a
branch of the regular business of credit banks, which at
the same time carried on the so-called current business.
On the other hand, in view of the relatively small amount
of the available funds for bank investment proper, no
attempts were made to establish special deposit banks,
as under the circumstances but little profit could be
expected from them.
Even those persons who on principle are opposed to the
whole capitalistic and industrial development as it manifested itself in Germany during the last decades, and who
have no sympathy for this expansion of the regular business of the German banks, but rather deplore and find
fault with it, will not be able to alter this course as long as
the reasons exist which have led up to this development.
I am convinced that these reasons will continue to exist
for some time to come, owing to Germany's rapidly
increasing population, her moderate wealth (at least in
comparison to other countries), also because of her international position in trade and industry, a position attained
with difficulty, but which it will be even harder to maintain permanently.
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It will be seen by the description of the historical
development of the sphere of activity of the German
banks, that a proper and socially sound administration
and organisation of the different departments of banking
(especially of the last-mentioned branches), is one of the
most important social problems. Moreover as there are
as many social problems as there are spheres of social
activity, and the various branches of banking are of the
utmost importance in the economic life of the nation, the
banking problem is closely interwoven with the majority
of the other social problems, a fact which is in absolute
contradiction with the statement of the eminent financier
quoted by lyOtz.
2—SPECIAL

CONSIDERATIONS.

(a) T H E TASKS OF BANKS DURING NORMAL T I M E S .

The proposition last enunciated must be proved in
detail by a discussion of the main directions of banking
activity.
It certainly does not lie within the power of the individual or the legislator, or even of the administration of
the largest bank, to arrange matters in such a manner
that only the best sides of the capitalistic system may prevail in economic life. It is, however, the most urgent and
eminent duty of banks and bankers to endeavor, at least
within the scope of their activity, and as far as is within
their powers, to effect this as far as practicable, and to see
that the profit and loss account of capitalistic economics
is closed with a balance in favour of economic progress.
Above all, they must promote all the economic interests
of the nation, i.e., the interests of all producing classes
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without distinction, in so far as the services and the
credit required by them come within the sphere of banking activity, and do not conflict with the necessary premises of sound banking policy. These latter conditions
are determinative of the kind and extent of support
which the so-called ''credit banks" are in a position to
grant to agriculture.
In the next place they have to keep the amount of
credit to be granted within reasonable bounds, and to offer,
as far as is within their power, the utmost opposition to an
unsound demand for credit. The banks must therefore
endeavor to obtain at all times a comprehensive and accurate insight into the general conditions of the branches
of industry and trade chiefly dependent on them for support, in order to be able to discriminate between necessary
requirements and false hankerings after expansion and
aggrandizement. They should also be able to intervene,
or at least restrain and check, in cases where the form
and extent of the credit received cause the fear of unsound
development.
Their duties toward the investment-seeking public are
those of the honest broker, who, by reason of his experience and expert knowledge, is able to draw attention
to the advantages and dangers of investments, and particularly to explain in a purely objective manner the
dangers connected with securities yielding excessive interest or dividends.
As regards acceptances, they ought to place their services at their customers' disposal only for economically
sound purposes. They should keep the brokerage, the
contango and deposit business within normal limits, and,
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as far as it is possible to divine the purposes aimed at,
to operate in such a manner that these transactions may
not become a cloak for reckless and unsound speculation.
In the issue business they should take particular care
not to burden the market by an overproduction of securities or by the promotion of shaky ventures, for thereby they
might not only cause heavy loss to the purchasers of such
securities, but also inflict lasting and severe injury on
their own issue credit.
More especially they should transform only such undertakings into joint stock companies as are naturally suited
to that particular form of commercial organisation. Before deciding to promote or transform such undertakings,
they vshould make very cautious estimates regarding the
possible profits of these undertakings. In addition to this,
they should investigate the financial position of the whole
branch of industry, or business concerned, and, as far as
possible, form an opinion as to its future prospects and
risks. Finally, they should pursue not only a sound
dividend policy, but also a proper economic policy; resisting the temptation of momentary profits, they should
abstain from business that does not appear economically
sound, or might be detrimental to the business interests
of the nation.
The problems which the German banks have to solve
during ordinary times have become, step by step, more
comprehensive, more difficult, and more important.
The number of these tasks and the sphere of activity of
the German banks have grown with the increasing size,
consolidation, and power of the country. The banks,
particularly the " great banks, " were called upon to lend
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intelligent support to the Reichsbank (founded in 1875-76)
in its currency and discount policies, and in its endeavors
to introduce and promote "giro," clearing, and check
transactions, though this support was not always forthcoming to the full extent. Another task which fell to
their lot—and of which they can neither be said to have
acquitted themselves quite satisfactorily—was to support
the land policy of the government and municipalities by
means of the mortgage banks and real-estate companies
which they had established against purely speculative and
other undertakings which made no allowance for public
interests. In countless ways, especially by an active participation in the organisation of state and municipal
credit, they were called upon to make possible the accomplishment of important state and administrative tasks, as
well as to promote the growth of German towns and the
development of German ports, railroads, and highways.
They were called upon to organise German inland navigation, as well as to provide for the development of the
German railway system, and for the industrial utilisation
of electric light and electric power. They had to assist by
counsel and deed the business man crossing the seas as
pioneer of German trade. It became their function to
support the industrial export policy of the nation when
it came to be considered in Germany an economic necessity, and to promote the economic development of the
colonies, as well as of German cable communications by a
series of undertakings not promising immediate returns.
They had to strengthen our financial, and with it our
political, influence abroad; nor was this done without
many a bitter experience. For in this field they met the
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competition of the majority of the great powers in the
underwriting of foreign loans, the promoting of foreign
undertakings, and the opening of international business
relations, with the disadvantage that their rivals had
entered the field long before them. By assisting German
navigation, and establishing German banks abroad, they
imparted to the German name a renown previously undreamed of, thus extending by their activity the sphere of
German business and political influence. Finally, by a
cautious financial policy, they prepared our financial readiness for war, a\id for the carrying on of war.
How and to what extent German banks acquitted themselves of all these tasks will be set forth in the following
pages.
Difficult and numerous as are the problems of external
policy, those of internal policy are no easier. Success in
the latter field became conditioned upon the recognition
of two principles as the basis of all business activity.
Furthermore these principles had to be observed under all
vicissitudes, in the hurry of everyday life, in the pursuit of business, and in the finding of ways and means
for the carrying out of new and urgent tasks as they continually crop up.
These two principles are: The principle of the distribution of risks, on the one hand, and the principle of the
liquidity of assets on the other.
Nearly all the mistakes made in German banking, and
the reproaches leveled against it, can be traced back to the
violation, or misconception, of these fundamental principles underlying every sound banking policy. The principle of the distribution of risks must be observed in almost
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all branches of banking activity; not only in the granting of
short or long credit, but also in the promotion, conversion, emission, and syndicate business. It implies, among
other matters, that no single branch of current business
shall be exclusively fostered in an excessive and unsound
manner at the expense of others; that the entire
amount of blank credit, granted after the most careful
scrutiny, shall not bear an unsound proportion to the
total of secured credit; further, that credit granted to a
single undertaking, or branch of industry, shall not be
too high; that in case of underwriting and share issues
provision shall be made for a fitting distribution of participations; for there is always the possibility of a sudden change in political and economic conditions, as well
as of changes in the market which may affect particular
cases. It therefore becomes necessary to bear in mind
constantly the need of the diminution of risk, even in the
most promising ventures and during the most favored
state of the market.
The securing and maintaining of the liquidity of the
assets is another most essential task incumbent on a
banker. Indeed, in view of the variety of claims made on
the resources of bankers and banks, and of the multiplicity of aims pursued by them, it is one of the most
difficult problems of banking policy. It is all the more
difficult, since the establishment of the right proportion
of the so-called quick assets to the liabilities, especially to
the obligations falling due at any time, or within a certain period, does not always depend solely on the will and
discernment of the Bank. Possibilities have constantly
to be reckoned with; for instance, that the issue of new
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shares required to restore the necessary liquidity of the
bank's resources after a great increase of business is impossible during bad or critical times; that consequently
its assets would be tied up just at the very moment when
it might be called upon to relieve general embarrassment
by proper intervention.
It is, therefore, a matter of necessity to constantly control the liquidity of the resources by frequent general
inventories (Generaldispositionen)—as is done, for instance,
with the greatest care, and at short intervals by the German "great banks"—in addition to the daily cash inventories (Kassendisposition) ,15 further, to increase the
amount of the quick assets by a proper composition of
the security and bill holdings; to strengthen both the
visible and invisible reserves; and to regulate with the
greatest vigilance the extent of the obligations, as well as
their proportion to the liquid resources.
It may well be sa: 1 that, on the whole, the German
banks, or at least the greater part of them, and more
especially the "great banks" have accomplished and are
accomplishing a gooH deal in this respect. In this way
the objections which are continually urged against the
inclusion of the deposit business in our banks' spheres of
activity are most effectively refuted, or reduced to narrow
limits. For there can hardly be any question of 'danger" when the deposits, and the other obligations due at
short notice are balanced by more than ample security in
the shape of the quickest assets, and if, in addition, special
caution is exercised in the selection of the securities owned
by the bank, as was the case with the Deutsche Bank,
which on the last day of its fiscal year (December 31,
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190S) held among its assets some 40,900,000 marks of
securities, acceptable for investment in trust funds.
W e shall have to go into this question later on in a more
detailed manner. 1 6
(b) THE TASKS OF BANKS DURING CRITICAL TIMES.
If t h e sphere of activity of t h e banks, of which naturally only t h e most important features have been barely
outlined, is exceedingly extensive even during normal
times, necessitating great discernment, caution, knowledge,
and experience, it follows t h a t t h e extent and difficulty of
such tasks becomes considerably augmented during and
after those economic crises which all countries experience
periodically.
There will probably never be a permanent cessation of
crises, any more t h a n there will ever be permanent peace.
However, just as it is t h e d u t y of diplomats and statesmen constantly to reduce t h e possibility and probability
of wars b y t h e prudent removal, prevention, or mitigation of all disturbances of t h e political equilibrium, so it
is t h e d u t y of t h e directors of t h e great banks to prevent
in an ever-increasing degree t h e breaking out of crises,
to guard against a disturbance of t h e economic equilibrium as much as can be done by external influence,
and b y a cautious and preventive business policy in all
t h e above-mentioned spheres of activity.
This implies to a continuously increasing degree an
accurate knowledge of t h e internal conditions of indust r y , commerce and the exchanges, also of t h e financial
a n d commodity markets, and t h e general international
situation.
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This d u t y entails above all a keen perception of those
symptoms which, like storm-petrels flying before t h e
storm, act as signals to t h e experienced observer.
Science, in modern times, with t h e aid of particularly
delicate instruments, has been able t o record earthquakes,
and with accurate knowledge of t h e factors determinative
of a change of weather (as contained in t h e reports of
meteorological stations) to predict storms and give timely
warning to those concerned.
Similarly, undeterred by t h e course of contemporary
events, experienced observers, with t h e help of modern
scientific resources, and knowledge gained from former
crises, ought to be able to read disturbances of equilibrium as from an economic seismograph, and thus predict
t h e approach of crises.
The study of t h e history of crises 17 shows in t h e most
striking manner t h a t , provided t h e same causes exist,
t h e effects are as similar as if one crisis had " c o p i e d "
its predecessor, as a schoolboy copies his neighbor's
essay, or as a legislator frequently copies the draft of his
fellow-legislator's bill. Crises m a y be defined as lengthy
and serious disturbances of t h e bases of either t h e production, supply, or market systems, of t h e p a y m e n t and
credit systems, or of t h e m u t u a l relations of these systems.
F r o m t h e history of crises, 18 t h e knowledge of which I
regard as indispensable to every director of a bank, it can
be established with certainty t h a t almost without exception every crisis (stock exchange, credit, commercial, production crisis, etc.) is preceded b y a more or less rapid
rise of the rates for short-time credit, i. e., of t h e discount
rates.
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It will also be noticed that the cause of such a rise in
the discount rate is almost invariably an increase in the
demand for credit, a demand far exceeding the available
resources, which, wherever a central state note bank
exists, finds expression in a great increase in the demands
made on its funds.
The banks, by virtue of their accurate knowledge of
stock exchange conditions, of market quotations, of
"reports" and "deports," and of the rates for daily
and ultimo money, are best qualified to answer the question whether such an increase in the demand for credit
is accompanied by a corresponding increase in stockexchange speculation. They are also able to draw fairly
accurate conclusions, from the extent and kind of bill,
acceptance and current account credit required by their
customers, as well as from the volume of their report
and collateral accounts, as to the existence, or the approach, of such excessive speculation as is likely to cause
the outbreak of a crisis on the exchange. The greater
their clientele the more reliable are such conclusions.
The approach of an industrial or a commercial crisis
can be perceived or inferred not only from general economic conditions, but also from a series of phenomena
which take place in the field of bank transactions. The
imminence of such crises can be inferred from the rapid
growth of the claims made on the credit of the central
note bank, and in view of the growing intimacy between
industry and the banking world, from a series of occurrences that become reflected in the internal bank management, as well as in the impaired liquidity of the
bank's assets and the decrease of available cash resources.
90311 °—ii

3

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These symptoms need not manifest themselves in their
entirety nor simultaneously. Some of these occurrences
are: The increased credit demands, growing by leaps and
bounds and becoming more striking each day, and the excessive, and finally complete withdrawals of existing cash
deposits. Further, the displacement of short-term credit
by long-term credit; the rapid rise in the number of bills
due that have to be extended; the constantly increasing
offer of securities of an inferior and unsound nature from
a banking standpoint. Other signs (though they are at
first not easily recognised as such) are the demand by manufacturers of bank credit, especially of acceptance credit,
not intended for current operating expenses but for paying dividends, or for considerably augmenting fixed capital, i. e., extension of plant, new machines, premises, etc.19
Next, the continual demand for advances without any
stated reasons, or for veiled purposes; the constantly
growing delay in the receipt of payments due, and of the
so-called ''specifications" in industry (which only gradually
become known to the bankers, and seldom to their full
extent); the great and rapid changes, especially the sudden rise of prices of raw materials and manufactures;
finally, a superabundance of promotions, conversions, and
flotations, and the wholesale establishment of subsidiary,
affiliated, and trust companies.
Although Helfferich20 has proved (I venture to say with
mathematical exactness), that in most cases (especially
as regards the last German crisis) the amount of the gold
production, gold imports and exports, never had the importance which Sombart ascribed to them; still, like the
fluctuations of the rates of exchange and discount (bank
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and private discount), these factors should also be carefully watched.
Finally, important aids have recently been made available which in a characteristic manner—though with some
limitations—help to diagnose the approach of industrial or
commercial crises. I have in mind the valuable reports
first published in Germany by J. Jastrow, the editor of
the Arbeitsmarkt and later continued in the Official
Labor Gazette (Reichsarbeitsblatt). These reports give
data regarding the labor market, especially the demand
and supply at the public labor exchanges and the extent
of unemployment. It was these reports I had in mind
when I referred above to modern scientific auxiliaries.21
Laxity in the observation and appreciation of such
causes, especially if produced by ignorance of former
crises at home and abroad, is one of the gravest and most
fatal mistakes of which bankers can be guilty. It is the
less excusable the larger the power and the capital of the
bank, the wider the field of economic observation and the
greater the influence which may be exercised by means
of a prudent business policy.
A deficiency in this respect prevents the bank management from taking measures at the proper time, i. e., before
the outbreak of the crisis, and thus if not preventing a
crisis, at least mitigating its severity. The extent, nature,
and opportuneness of such measures above all serve as a
reliable gauge of the efficiency, prudence, and foresight of
a bank management.
For, during a crisis, it is difficult, often impossible, to
pursue a restrictive business policy, to collect outstanding
debts, to call in credits, to decline to discount bills and
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acceptances; indeed such a policy is generally a serious
mistake, likely to cause an increase of the extent and
intensity of the crisis, for it may give rise to the disastrous
notion that money and credit are not merely dear, but are
not to be had at all.22 What is required is a preventive
policy, a cautious intervention before the outbreak of the
crisis. To do this it is necessary to give opportune warnings against drawing bills, increasing engagements, and
credit; to make seasonable reference to the abovementioned indications of the probable approach of a crisis,
while making provision at the same time for a slow and
prudent though consistent increase in the liquidity of
the bank's resources. Provided this is done, the bank
can not only await quietly all dangers, but is also able
to offer support and aid in the form of discreet help, or
energetic and conspicuous intervention in order to
prevent or at least lessen and mitigate the collapse of
otherwise sound undertakings, temporary embarrassments
of clients, and serious disturbances of the market.
In this manner, the suddenness of the outbreak, as well
as the extent, duration, and seriousness of a crisis are
reduced. A further effect of such a policy is that the
crisis is not followed by a period of lingering and latent
depression, which is frequently worse than the crisis itself,
and which renders recovery, i. e., return to normal conditions, much more difficult. It must be acknowledged, however, that for persons standing in the midst of business and
practical life, and who are frequently confronted by occurrences of a contradictory nature, or difficult to fathom, it
is far more difficult to perceive the approach of a crisis,
than for critics, who ex post, or after the outbreak, can
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easily review circumstances and symptoms that have then
become clear and connected.
As a general rule, however, threatening signs such as
are described above (p. 17) as almost regular harbingers of
a crisis, ought to be correctly diagnosed whenever they
occur not singly, but as connected or mutually complementary symptoms of a serious affection of the body
economic.
It is a nobile officium, especially of the great banks, to
intervene after the outbreak of a crisis, not only where
their own clients or interests are concerned, to lend their
support, attempt reconstruction and thus to prevent or
at least remedy a serious disturbance of the market by
conspicuous and therefore especially efficacious action.
It will always redound to the credit of the great Berlin
banks and bankers that through their intervention immediately after the collapse of the Preussische HypothekenAktienbank, of the Deutsche Grundschuldbank and of
the Pommersche Hypotheken-Aktienbank, they prevented
(with almost immediate and favorable effect) the absolute
demoralization of the entire mortgage bond market, and
that through the reorganization of these concerns 23 they
reduced to a minimum the losses sustained in wide circles on account of the securities issued by these establishments. 24 The same applies to their intervention during
the catastrophe in Saxony.
(c) T H E TASKS OF T H E

BANKS I N TIME OF WAR AND I N

PREPARING FOR WAR (FINANCIAL READINESS FOR WAR
AND FINANCIAL CONDUCT OF W A R ) . 2 5

Banks have also to make timely provision (as far as
possible) in times of peace for the eventuality of war.
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The marshaling of financial forces must correspond to
that of military forces, and just as military mobilisation
is made possible by careful plans made in times of peace,
so too the marshalling of financial forces should be facilitated by schemes likewise devised in times of peace.
Weaknesses and gaps in the financial mobilisation may
be paid for as dearly as mistakes in the tactical deploying
of forces, for to both applies what I have said elsewhere,
" t h a t it is impossible without severe losses to evolve a
battle formation in the face of the enemy."
The most important preparation for financial mobilisation consists in fashioning the credit system in such an
elastic manner that in case of war it can cope with the
agitated and suddenly increasing calls for credit.
To meet this contingency, reserves must be created in
time of peace: reserves of considerable extent which can be
realised rapidly, i. e., mobilised. These must include on
the one hand a considerable amount of domestic firstclass securities, especially government and municipal
bonds, which in war times can be pledged, if necessary or
desired, at the "war lombard offices" (Kriegs-LombardKassen) ,26 On the other hand, they must include foreign
Goldvaluten, i. e., bills and other claims receivable abroad
in gold, and prime foreign gold securities negotiable on
various foreign bourses, consequently possessing an international market.27 Through the realisation of these gold
equivalents, and by calling in outstanding debts from
abroad, i. e., by utilising these reserves (the value of
which in such cases will be comprehended by the veriest
layman), a panic will usually be averted.

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The enemy, however, may endeavor to aggravate a
panic of this description by the sudden collection of outstanding claims, by an unlimited sale of our home securities, and by other attempts to deprive Germany of gold.
Attempts may also be made to dislocate our capital, bill,
and security markets, and to menace the basis of our system of credit and payments. Such a panic might easily
occur during the first few days after the declaration of
war if the impetuous demand for ready cash and cash
reserves (Angstreserveri) 28 is not amply and immediately satisfied. The latter demand often leads to precipitate withdrawals of giro and current account balances
and of deposits, to the recall of credit, and to the precipitate sales of merchandise and securities.
Accordingly, the banks must endeavor to terminate
such conditions as rapidly as possible, as well as to stem
the feverish demand for, and the collection of ready
money from all depositories, and places of hoarding and
storing, so that normal conditions are reestablished, under
which all the expedients and substitutes obviating the use
of cash will once more assume their normal importance for
circulating purposes.
Above all, the business policy described above (p. 20)
as indispensable during a crisis, must be pursued in times
of tension and agitation, which generally precede a war
long before its outbreak. Among others, restrictive measures, such as the withdrawal of credit, the refusal to accept
bills, or to discount customers' bills, must be avoided. In
the next place, interventions should be made in the market, and all means used for the gradual restoring of public
confidence in the solid groundwork of our finance and
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credit systems. It is such confidence which underlies not
only the acceptance of all cash substitutes (Geldsurrogate),
which abound to a far greater degree than ready money,
but also the determination to fulfil all pending engagements, or at least to terminate them slowly and cautiously,
as well as the resolution not to withdraw deposits, nor to
flood the market with securities at extremely low rates, &c.
The ''great banks" should cooperate in all these directions, not only by word or through influencing their clients,
but by their own example, especially by exercising the
greatest reserve in withdrawing their credit balances from
the Reichsbank, and in presenting bills for re-discounting.
Besides this, they should aid those "financial precautionary measures" which come within their sphere of
activity—i. e., those measures which may be undertaken
after the declaration of war in order to ease the market
and credit demand and to maintain our gold standard,
and the circulation of our bank notes.29
In Germany, as I have endeavoured to prove elsewhere,30
these tasks would be facilitated to some extent during the
critical weeks immediately following a declaration of war
by the amount of bullion likely to be at our disposal, which
includes the "war treasure" of 120,000,000 marks in the
Julius tower 31 at Spandau (this latter, however, would
not go far); and by the further fact that the expenses of
mobilisation,32 as far as can be judged to-day, could be
covered by the issue of bank notes.33 Another gratifying consequence would be that during this particularly
critical time the Government would not have to apply to
the Reichsbank with extensive demands for cash; and
further, that in so far as the State did not prefer to meet
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its requirements by additional taxes,34 it could await a
calmer and more favorable condition of the money market
for contracting loans to defray the cost of war.35
The most important consequence of this fact is, that in
negotiating such loans,36 the cooperation and good offices
of the " great banks " and great banking establishments can
be counted on to a far greater degree, and with much more
certainty than if the negotiations took place during the
days immediately following the declaration of war, when
the resources of the banks would be taxed to an extraordinary extent.
It is impossible for the Reichsbank in Germany to
execute smoothly and successfully its numerous and difficult tasks in war time without the assistance of the great
banks which form such an important factor in the whole
economic organisation of the country. The latter, however, must prepare in times of peace in the manner described above, if they are to render effective support during
war time. On the other hand, it would be preposterous
to demand of them complete " readiness for war," such as
would exclude or paralyse the banks' capacities for doing
their customary business.37
During the stages of deliberation by the administration
of the imperial treasury and the Reichsbank concerning
the adoption of the sometimes extremely complicated
financial measures for the maintenance of the German
currency and credit systems, as well as for affording relief
to the market, and facilitating money and credit transactions during war times,38 the directors of the great banks
and banking houses by reason of their practical experience, their intimate acquaintance with the situation and
the receptive capacity of the money market, particularly
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by reason of their exact knowledge of the requirements
and capabilities of their clientele, should be amongst the
first called upon to serve as a ''financial general-staff" to
the imperial treasury and the Reichsbank.
The above presents a broad outline at least of the most
essential of the many and gradually increasing duties performed with untiring perseverance by the German banks.39
In order to appreciate their achievements, it should be
borne in mind that during the first period (i848-1870)
their work and progress was greatly hampered by crises
and European wars, by German political impotence and
lack of unity, by our lack of capital, and the medley of
German monetary and coinage conditions of those years.
I shall now proceed to outline the growth of these
duties during the two epochs of general economic development, and the development of the German banks (with
particular reference to the great banks). These two
clearly marked epochs extend from the middle of the
nineteenth century to 1870, and from that year to the
present day.
As far as is possible without effacing or obscuring the
picture of the general course of development of the German great banks, I shall endeavor to do what I omitted
in former editions of this book, namely, to show in what
manner, and with what success each individual great bank
participated in the common work. Indeed, a thorough
and proper appreciation of the course of development of
each great bank will become possible only after detailed
monograph studies of each of these shall have been
published.40
The most important works of reference used in this book
will be found in the appendix.
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PART II.

THE FIRST PERIOD (FROM THE MIDDLE OF THE
X I X CENTURY TO THE YEAR 1870).
CHAPTER I.—SKETCH OF THE ECONOMIC CONDITIONS IN
GERMANY AT THE TIME OF THE ESTABLISHMENT OF
THE ODDEST EXISTING CREDIT BANKS.

In 1848—the beginning of the period about to be discussed—about 200 years had passed since the end of the *
Thirty Years' War (1618-1648).
Even then, however, Germany, which in consequence
of her geographical position from remote ages presented a
favorite battlefield for the whole of Europe, had not yet
completely recovered from the thorough spoliation and
devastation she had undergone.
A re-establishment of her completely ruined trade and
of her shattered fortunes was impossible during the
period from 1648 to 1815, owing to a series of European
wars. These were in particular the campaigns of lyouis
XIV, the Spanish War of Succession, the Seven Years'
War, and the struggles against Napoleon. Those wars and
campaigns were once more fought on German soil by powerful enemies, who like Louis XIV seized parts of the country (for instance, Strassburg, 1681), and devastated anew
other parts, such as the Palatinate and other Rhenish
countries. During the latter years of that period (18061815), the wars carried on with changing fortune against
Napoleon I, which terminated with his dethronement and
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banishment, prevented the beginning of recovery. It
was only during the three decades of undisturbed peace
(i815-1848), which preceded the economic epoch about
to be described (1848-1870), that the German nation had
time to recuperate and to engage in the first attempts to
rehabilitate trade, industry, and agriculture. 1
Evidently, it is only possible to outline here the main
points in the economic conditions of Germany brought
about by this lengthy period of peace, and only in as far
as they bear on the development and tasks of German
banking.
The population of Germany numbered at that time
about 35,000,000, and was not more than that of France
(34,500,000). Of capital there was but little; it was
estimated that in Prussia there were 720 marks per head
of the population, whereas the amount for England was
2,860 marks, according to an estimate made almost
simultaneously (1845) .2 At that period England had
almost completed her transition to a great industrial and
manufacturing country, supplying more than half of the
world's requirements. Her annual coal production at the
beginning of the 19th century was about 10,000,000 tons,
while that of Germany toward the end of the century
was little more than 120,000,000 tons.
In accordance with French example, serfdom, as well as
the hereditary subjection of the peasants had ceased in the
country during the first half of the 19th century, although
its abolition was slow, especially in the east of Germany,
where it had been firmly rooted for centuries. The abolition of hereditary subjection did away not only with the
obligation to furnish hand and team for the benefit of the
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landlords, but—what proved of even greater and increasing importance—with the obligation on the part of the
peasant to remain on the estate, or in the village belonging
to the same. In German industry, despite modsBt attempts
at reform undertaken by the legislation of the individual
states, the system of guilds (Zunftwesen) was predominant.
Only a few German States, e. g., Prussia (by the laws of
1810 and 1811) and Nassau, had abolished the obligation
of craftsmen to join guilds, and to obtain certificates of
ability (Befahigungsnachweis), and had introduced, on
principle, freedom of trade, an action against which a
vigorous protest was launched by the craftsmen's " parliament " sitting at Frankfort-on-the-Main from July 15
to August 18, 1848. Fairs continued to enjoy great
importance in some towns even after 1850, at least for a
number of special wares.3 Trade was confined mostly to
local markets and fairs. Delivery trade by sample had,
however, started on a small scale. But the conditions
for economic reform in most of the German States had
already been created by the establishment in 1834 of the
German Zollverein. It may be justly said, that this
great Prussian innovation, which transformed the participant German States into a unified economic area,
dealt the death blow to the mediaeval economic system
in Germany. It was only then that a uniform economic
policy became possible in the participating States, a
policy which soon asserted itself by its urgent demands
for protection of new and growing industries against the
overwhelming economic superiority of England.
The average annual value of the imports into the
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1846 has been calculated by K. H. Rau (Grundsatze der
Volkswirtschaftslehre, 8 ed., part 2, p. 318) at 210,303,000
thalers, or about 630,000,000 marks, while the exports
have beeifc valued at 170,089,000 thalers, or about
510,000,000 marks, which amounts should be used only
with reservation. During the last decade of that period
the exports rose quite considerably. Industry was still
mainly of the so-called domestic type, and principally
carried on in the country. This applies particularly to
the manufacture of textiles (spinning and weaving).4 In
the country it was still customary to manufacture at
home nearly all the personal requirements in the shape of
clothing, linen, and other textile goods. Almost the whole
of the German industry seemed to center at that time in the
textile and mining industries, both of which were chiefly
carried on in the country. 5 The number of workmen 6
employed in these industries exceeded by far the combined number of workmen employed in all other industries.
The total number of workmen employed in the mining
and smelting industries within the limits of the Zollverein
(created on January 1, 1834) about the middle of the
nineteenth century was 6o,8oo.7 In Prussia there were
48,659 workmen employed in the same industries (average
of the years 1848-1857), as compared with 101,908 according to the trade census of 1895. In 1840 the number of
steam-engines employed in the industrial area comprised
in the German Zollverein was not quite 500, whereas
there were over 5,000 steam-engines at work in England
about 1810. According to the Prussian Statistical Annual
(Preussisches Statistisches Jahrbuch),8 there were in 1852
only 2,124 steam-engines, developing 43>°5I horse-power,
employed in the entire industry of Prussia, of which almost
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half (according to number and power) belonged to mines
and foundries; machine factories occupied only the
fourth place in the list.
In the Kingdom of Saxony 9 the number of steamengines used for industrial and agricultural purposes
amounted in 1846 to 197 only, with 2,446 horse-power. At
the end of this period (1866), however, there were already
about 92,000 motors (100,000 H. P.) in use in Germany,
whereas in 1895 the total horse-power of all engines in use
was 3,400,000, of which 2,000,000 horse-power was employed in industry. In 1840 the whole German freight
traffic (with the exception of ocean, town, and rural
traffic) was calculated at about 2,000,000,000 ton-kilometers, whereas in 1900 it was estimated at 40,000,000,000
ton-kilometers, or almost twentyfold.10
In i860 the whole of Germany's industrial output
equalled only about half that of France; whereas to-day
she ranks second to England in Europe, and takes third
place in the world, only the United States and England
outranking her.
About the middle of the nineteenth century the proportion to the total population of industrial workmen u
(including those engaged in flour mills and all home industries) amounted in Prussia to only 2.98 per cent.
The enormous industrial growth that manifested itself
shortly after the establishment of the ZoUverein and its
economic measures was due not entirely to that organisation, but primarily to the construction of (private)
railways, begun in 1835 with the line between Nuremberg
and Furth. This led at the outset to an almost feverish
activity in the mining, smelting, machine, and kindred
industries.
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As early as the middle of the last century there was
quite a considerable demand for pig iron, chiefly by
reason of the above-mentioned construction of railways.
According to Oechelhauser12 over 17,500,000 quintals (Centner) of pig iron were used in railway construction from
1836 up to the beginning of our period (1850). The home
consumption, however, was not met by the home production. England had obtained a great start in the manufacture of that material, 13 coke blast furnaces having
been used as early as the eighteenth century in place of
the expensive charcoal fuel almost universally in vogue
in Germany during the middle of the nineteenth century.
In the Siegerland not a single coke blast furnace existed
at the beginning of the forties; the first coke blast furnace
in the Ruhr district was erected in 1847; moreover, the
existing blast furnaces were not very efficient.14 In 1847
the consumption of iron in the region comprised within
the Zollverein amounted to 28 Zollpfund (=14 kilograms)
per head of the mid-year population (Sering, loc. cit.,
p. 51), as compared with 309.8 pounds in 1899.
The production of pig iron in 1850 was less than that of
France, and even of Belgium; it amounted to 208,000,000
kilograms (1875, 2,029,000,000 kilograms).
The output of coal amounted in 1850 to 5,800,000 tons,
as against 109,220,000 tons in 1900.15
In the district of Siegen 38,880 tons of iron ore, valued
at 124,974 thalers, were brought to the surface in 1850,
as compared with 997,680 tons, valued at 11,857,779
marks, in 1900.16
In 1858 (according to Sering, loc. cit., p. 82) of the total
number of blast furnaces in Prussia, 56.9 per cent
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(1,328,429 Zentners) used charcoal, 37.2 per cent
(1,527,989 Zentners) coke, 5.9 per cent (243,516 Zentners)
coke and charcoal. Mineral fuel (coal) was not used before 1844 except in Silesia, and even there only in small
quantities.
As a result the iron imports from Great Britain reached
52 and 55 per cent of the total German consumption up
to the middle of the last century. This state of affairs
underwent a change only with the rapid growth of the
use of coal in Germany, and when the Zollverein abandoned its free-trade policy by the imposition in 1844 of a
duty on iron, which till then had entered free. It is
due to the energetic support of the German credit banks
that before long the following prophecy, contained in the
business report of 1856 of the A. Schaaffhausen'scher
Bankverein (p. 53), was fulfilled to the letter:
"The iron and coal output of Westphalia, and the
Rhineland, in the course of a few years, will not fall short
of that of Belgium; in the more distant future it will compete successfully in the international market with that
of England, provided one of the most important conditions for such competition—namely, the construction of
cheap means of communication—receives proper attention.' '
The following figures, giving the proportion of persons
engaged in industrial pursuits, as compared with the
entire population, apply to Prussia for the middle of last
century (1843) :17
Per cent.

Agricultural population
Industrial population
Persons employed in commerce

903 I I ° — n

4

60. 84 to 61. 34
23. 37
o. 97

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In 1846 there was only 1 person employed in trade and
industry to every 12.2 inhabitants, though in 1850 the figures were already 1 to every 8.5 inhabitants. In 1849 only
28 per cent of the entire population 18 of Prussia lived in
towns, and the population of Berlin did not exceed
331,894 19 (exclusive of soldiers) in 1840, and not quite
500,000 in 1858, and gave employment to only 3,000
workmen in 1840, a number which rose, however, to
10,242 in 1856.20 In 1849 there were only 15 towns in
Prussia the population of which exceeded 3o,ooo.21 Excluding Berlin, the following now important industrial
towrns had the greatest number of inhabitants:
Aix-la-Chapelle (about)
Klberfeld (about)
Crefeld (about)
Chemnitz and Diisseldorf each (about)
Dortmund, Duisburg, Essen, and Solingen each (about) 2 2

46, 000
35, 000
30, 000
26, 000
7, 000

With the aid of foreign (English) capital, gas lighting
was gradually adopted 28 after 1826 by the larger German
towns (first of all by Hanover and Berlin); it was only
after 1859 that petroleum became popular for lighting,
especially among the middle classes.
The construction of railways may be said to have
started on a large scale only about the middle of the nineteenth century. From 1835 to 1842 only railways of short
length and of merely local significance (between large
towns) to a total length of 87 German miles had been
constructed. These were the Nuremberg-Furth railway
in 1835; the Berlin-Potsdam, and the BraunschweigWolfenbiittel railways in 1838; the Leipzig-Dresden line in
1839; the Leipzig-Magdeburg, the Munich-Augsburg, the
Mannheim-Heidelberg, and the Frankfort-Mainz lines in
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1840; and in 1841 the Berlin-Anhalt, the DtisseldorfElberfeld, and the Cologne-Elberfeld railways. Up to 1855,
the date when the credit banks appeared on the scene, only
7,800 kilometers of railways had been built, which, spread
over the twenty years from 1835, meant only 390 kilometers
of new line annually. On the other hand, in 1865, ten years
later, almost double the amount of railway mileage (13,900
kilometers) was finished, or 610 kilometers of new line per
year, a performance in which the credit banks had taken
an active share. In 1875, or ten years later, there were no
less than 27,981 kilometers of railways in operation, again
a twofold increase.
This corresponds to the enormous increase of capital
invested in German railway construction during that
period. At the beginning of the fifties the amount of this
capital was stated as 140,000,000 thalers, in addition to
206,000,000 thalers preference shares, or a total of 346,000,000 thalers (1,038,000,000 marks); somewhat over
a billion marks.24 At the end of that period (1870) the
invested capital amounted, according to Engel, to over
4,000,000,000 marks (4,072,167,621 marks), in which sum
the preference shares are included.
As far as the means of transit in Germany were concerned, so-called " Chausseegeld," or road toll, had in
many cases to be paid to the end of the sixties, as a contribution toward highway construction and maintenance.
In Frankfort-on-the-Main, for instance, this toll was only
abolished on May 18, 1866. The highways in Germany
had in 1857 a length of only 30,000 kilometers as against
150,000 kilometers in 1900.

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The inland toll-gates in the majority of German States,
however, had already been abolished in 1834-35 by the
foundation of the Zollverein. This proved a great boon
in the economic field.
Equally beneficial in the legal field proved the adoption
in the fifties and sixties by the various German States
of uniform commercial legislation in the shape of the
Allgemeine Deutsche Wechselordnung and the Allgemeines
Deutsches Handelsgesetzbuch.
As far as means of transport were concerned, steamnavigation made a modest beginning on the Weser in 1817
and on the lower Rhine and Elbe in 1818. During the
middle of the nineteenth century, however, steam-navigation made more rapid progress.
At the end of the fifties Germany had no less than 17
different independent postal administrations in addition
to the Prussian-Austrian Postverein.25 In 1867 theThurn
and Taxis postal monopoly came to an end by transfer
to Prussia.
Up to 1844 fees for forwarding ordinary letters within
the confines of Prussia went as high as 19 silbergroschen
(1 silbergroschen = -^r thaler, or about 2]/2 cents). And it
was considered great progress when an agreement was
made in 1850 with Austria, whereby the cost of forwarding letters weighing less than 1 lot (lot = about half an
ounce) to the farthest of the three zones, or over 20 German miles (1 German mile = 7,420 metres), was fixed at
3 silbergroschen, or 9 kreuzer. It was only as a result
of this agreement that, at the beginning of 1850, stamps
were introduced in Prussia. Up to that time the fee for
conveying letters had to be paid in ready money at the
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post-office. Even during the forties the post-offices were
only opened on certain days in the week. There were no
postmen, not even in the towns, to say nothing of the
country; so that letters had to be called for at the postoffice. Letter-boxes were introduced for general use only
after 1850.
The slow development of postal facilities is best illustrated by a statement of Karl Lamprecht (loc. cit., p. 143)
that in Saxony, the "land of the Leipsic fair," the postal
regulations remained unchanged between 1713 and 1859.
In Great Britain, on the other hand, uniform pennypostage had been introduced in 1840; uniform postage
was introduced in Austria in 1861, and in the North
German Federation only in 1868.
The receipt of a letter, even as late as the middle of the
last century, must have been regarded as quite an event,
except by large mercantile firms, for there were only 1.5
letters per head of population in Prussia during 1842,
and even in 1851, the beginning of the period under consideration, only about 3 letters annually.
The telegraph system26 was first opened for public use
in Prussia (Aix-la-Chapelle) in 1843, in Bavaria and
Saxony in 1850, in Wurttemberg and Baden in 1851,
in Hanover in 1852, and in Mecklenburg in 1854.
"The charges of telegraphing were high and ill-arranged.
According to the zone tariff of 1858, which on the face of
it had already been reduced, it cost 2 gulden 6 kreuzers to
send 20 words from Frankfort-on-the-Main to Nuremberg,
or almost as much as to Amsterdam or Como (2 gulden 48
kreuzers); the shortest telegram to Bochum cost 4 gulden
12 kreuzers, almost as much as to Tilsit or Orsova (4
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gulden 54 kreuzers.)" 27 In 1850 only 35,000 telegrams
were sent in Prussia, as against 1,500,000 in 1865.
Only 102 joint-stock companies of all kinds, with a total
capital of 638,000,000 marks, or an annual average of less
than 27,000,000 marks, were formed in Prussia between
the years 1826 and 1850, that is in twenty-four years.28
On the other hand, during the following nineteen years,
the period from 1851 to the first half of the year 1870,
295 joint-stock companies, or almost three times as many,
with a total capital of about 2,405,000,000 marks,29
were formed in Prussia, making an annual average capital of over 124,000,000 marks, or more than four times as
much as in the preceding period.
Among the German exchanges at the beginning of this
period, the one at Frankfort-on-the-Main was the most
influential for state loans and similar securities, whereas
the Berlin exchange took the lead in railway securities,
the amount of which, however, was not yet great.30
Sixty-three securities were quoted on the Berlin Stock
Exchange in 1850 as against 309 in 1870, and 1,872 in
1900. At Frankfort-on-the-Main the first special organs
dealing with financial and commercial questions were published, viz: The Aktiondr, on January 1, 1854; the Frankfurter Geschaftsberichty on July 21, 1856 (which, on August
27, 1856, became the Frankfurter Zeitung und Handelsblatt). In the meantime, however (before the publication
of the Frankfurter Geschaftsbericht), the Berliner Boersenzeitung, with the Thursday supplement, the Berliner BoersenCourier, was published on July 1, 1855, in Berlin.
As far as the systems of coinage, money, and banks are
concerned, the following details may be of interest:
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During the whole of the period under consideration, and
to the final adoption of the common German coinage system in 1870, no less than 7 different kinds of coinage
existed in the various German States, which, with the exception of that of Bremen, were all based on the silver
standard. Between the South German gulden and the
North German thaler standards a fixed ratio had been
established at the general coinage conference in 1838
(Dresdner Convention), but solely for purposes of calculation,31 i. e., no State belonging to the convention was
obliged to admit the circulation of the coins of any
other State belonging to the convention.
The variety of the systems of coinage and standards
at home and abroad was doubtless one of the main reasons why bankers, who were called money changers at
that time, in the centers of trade and traffic at least,
formed a prosperous and well-filled profession. At the
center of money changing for middle and south Germany,
namely, the free town of Frankfort-on-the-Main, there
were 109 private bankers in 1855, among a total of 1,131
firms; and toward the end of the period under discussion
(1868-69), x 9 2 private bankers out of a total of 1,829
firms.32 These private bankers, who in numerous cases
carried on simultaneously commission business or commission and forwarding business, formed a very respected
class, especially at Frankfort-on-the-Main, a long time
before the period in question, having identified themselves
with the general existing commercial interests. A most
striking proof of this is an occurrence which took place
in 1810: " B y the order of Napoleon (at the time of the
Continental System) two French officials in Frankfort
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confiscated 185 chests containing English goods, the property of Frankfort merchants, and burnt them in front of
the gates of the town. Upon this the Frankfort bankers
refused to continue the discounting of French bills, and
caused thereby numerous failures in Strassburg, Nancy,
Rheims, and other places." 33 Thereupon the Continental
System was soon repealed in Frankfort-on-the-Main.
What was true of Frankfort-on-the-Main, however, is
not applicable to other towns and districts. In Stuttgart,
for instance, there were in 1855 only 14 firms (including
the Royal Court Bank) which claimed to belong to the
banking and discounting profession, and only one each in
Heilbronn and Ulm. " These were, however, partly carried
on in connection with other occupations, especially with
the forwarding business.'' The modest position held by
these firms appears best from the fact that in the industrial census taken in 1855 (no changes of importance took
place between 1852 and 1855) 25 banking firms are mentioned employing only a total number of 68 assistants.34
In the whole Kingdom of Prussia (in the territory
before 1866) the number of persons employed in the
money and credit business during 1858 (after several years
of economic prosperity), including principals and assistants, amounted only to about 1,800 (1,774), a n ( i these
were distributed among 602 enterprises, so that there
were 602 principals and 1,172 assistants, or about two
assistants to each business.
Of these 1,800 persons, 384 were employed in Berlin
alone.85
At the beginning of the period under consideration
modern methods of payment and credit had not yet devel40




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oped, and the giro and current-account business was
"almost unknown," with the exception of places like
Hamburg, where special conditions prevailed. Even in
a large commercial center such as Frankfort-on-the-Main,
at the beginning of the fifties, numerous porters with small
trucks laden with sacks and barrels of silver money could
be seen moving about the streets " a t any hour in the
forenoon." 86 The discounting of bills was "seldom practiced" 37 in Germany, except in chief trade centers and
exchange towns, and a systematic fostering of the deposit
business was still less in evidence, either at the credit
banks (p. 73) or at the note-issuing banks existing at the
beginning of the period. The amount of deposits at the
Prussian Bank, for instance, totaled only about 22,740,000
thalers (equal to 68,220,000 marks) 38 in 1850, in spite of
the inflow of capital which had taken place in consequence
of the discovery of gold mines in California (1848) and in
Australia (1851), and the simultaneous discovery of new
quicksilver mines in Mexico. In other banks of issue the
deposits were for the most part much smaller.39
At the same time, however, powerful factors (mentioned
above on p. 28) were making for progress.
Above all, the era of peace that had prevailed in Germany for an unprecedented length of time (1815-1848)
had caused a relatively large accumulation of capital,
which was seeking profitable investment.
As early as 1844 the first industrial exhibition in the
2ollverein area stimulated industry in numerous directions. The international exhibition in London in 1851,
at which the latest industrial progress and inventions
were shown, exerted a powerful influence on Germany. A
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few years later (1856) a great revolution took place in the
iron industry through the application of Bessemer's principle of turning pig iron into steel 40 without the aid of
human power by inclosing the pig in pear-shaped chambers (converters) and by conducting heated air through it
from powerful blast apparatuses—a process adapted in
1865 by Martin to ore containing small amounts of phosphorus and, in 1879, by Thomas and Gilchrist to ore rich
in phosphorus.
In the years 1834-1854 aniline colors were invented,
and in 1868 alizarine colors.
In 1840, Liebig published his manual on chemistry and
its use in agriculture, which laid the foundation of modern
agriculture. From 1831-1840 to 1871-1880 constant
progress, with few interruptions, was experienced in
agriculture. In the old Prussian provinces during this
period, the price of rye rose 69 per cent, that of wheat 60
per cent, and of barley 90 per cent; the selling price of
land not less than 200-300 per cent; the rents of the
Prussian domains increased from 4,500,000 marks, or 13.9
marks per hectare (1 hectare = 2.471 acres), in 1849, to
10,200,000 marks, or 35.6 marks per hectare, or an
increase of 156 per cent. These rises were frequently out
of proportion with the increases in the prices of agricultural products and in the productiveness of the area used
for agricultural purposes,41
As stated before, various industries, such as cotton
spinning, at the beginning of this period introduced manufacturing on a large scale (production on a large scale had
commenced in the mining industry many years before).
The large industries were, however, unable to attain a
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dominant part in the whole of industry, in which home
production still played a leading part. In the last decade
of this period we can also perceive a tendency toward
increasing the exports of industrial products the rapid
development of which in the second period gradually
caused a complete transformation in the character of the
whole German economic organization.
Hand in hand with the large increase of population,
a serious transformation deeply affecting the whole of
agriculture (which at this period was at the height of
prosperity) had been gradually developing, which led to a
considerable portion of the country's agricultural requirements being met by foreign imports; whereas at the
beginning of this period, the exports of important German agricultural products, with the exception of rye,
considerably exceeded the imports.42 (As early as i860,
the imports of rye exceeded the exports by 259,000 tons.43)
Industry, particularly the mining, machine construction,
and metal industries, etc., received large orders owing to
the rapid increase of railway construction, and was protected and strengthened, to some extent at least, through
the measures taken by the Zollverein against foreign
importations. The expansion of industry, however, and
with it the growing transition to large-scale industry
(Grossbetrieb), became an absolute necessity for the support and employment of the population, which showed its
greatest increase at the beginning of this period, and
continued to grow in later years.
Between 1816-1845 the population had increased from
24,800,000 to 34,400,000 (by about 9,600,000 or 38.7 per
cent), whereas between 1845-1875 it had increased only
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by 8,300,000, or 24.1 per cent, and between 1865-1895
only 31.8 per cent.
This growth, noticed in most of the German States up
to the middle of the last century, was almost entirely in
favor of the rural population, though we must not lose
sight of the fact that a great many of the industrial concerns (as has been already mentioned), (p. 30) were
situated in the country. L,oud complaints were heard
almost everywhere at that time that " there were too
many people in the country/' and it was frequently stated
with the greatest emphasis that the country was unable
to support a population of that number, and ways and
means should be devised to meet the new conditions.44
As a matter of fact the population of the agricultural
districts (especially those east of the river Elbe) increased
in the period 1816 to 1877 nearly 91 per cent, while that
of the industrial western and southern parts of Germany
increased only somewhat over 23 per cent, whereas between 1871 and 1900 the proportions were exactly the
reverse (26 and 79 per cent).45
It was under such economic conditions that the first
German credit banks were established.
CHAPTER I I . — T H E

GERMAN BANKS DURING THE FIRST

PERIOD

(1848-18 70).

It is easy to realize at present the exceptionally strong
influence exercised at the beginning of this period (about
the fifties) by the very great and rapid development of the
German railway system, above all on the mining and
machine industries. In order to appreciate it, we need
only recall the startling growth of the mining and machine
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industries, occasioned by the rapid development of the
electrical industry during the second period, although
quite different financial and banking conditions exist today. In both cases, however, the immediate consequences were serious crises (1857 and 1900), which were
brought on, however, in part by other causes.
The mining and smelting industries were the first to
undergo this transformation of which we have been
amazed witnesses.46 It is these industries which are
mainly responsible for the spread of capitalism and the
development of large-scale production, as well as the
gradual and radical change in the general economic conditions of the country.47
The enormous demands of the newly constructed railways for iron, coal, sleepers, locomotives, cars, etc., could
not be met even approximately by the means at the disposal of the industry of those days. New undertakings of
all descriptions, and the enlargement of existing ones, were
necessary. Figures and requirements, however, were calculated at ten times the right amounts, as is the wont of
reckless persons in agitated times, in whose minds the
prospective profits are sure to assume gigantic proportions. Thus, at the beginning of our epoch, following the
new railway enterprises, there arose in rapid succession,
and in strange medley, a large number of other new jointstock companies, especially in the fields of mining, smelting-machine construction, and banking.
The list of German credit banks founded during the first
eight years of this period (1848-1856), and which were
mostly provided with share capital ample at least for the
period in question, will be found in Appendix II at the
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end of this book. Among them the following were prominent at that time, according to the amount of their capital:
(i) 1848: The A, Schaaffhausen'scher Bankverein at
Cologne, formed as the result of the reorganisation of the
old banking firm of Abraham Schaaffhausen (which had
been seriously affected by the troubles in 1848), with a
capital of 5,187,000 thalers, or, in round numbers,
5,200,000 thalers = 15,600,000 marks, of which about
3,000,000 (3,199,800) thalers was immediately issued.
(2) 1851: The Disconto-Gesellschaft in Berlin, which
started however as a mere "credit partnership" (Kreditgesellschaft). In 1856 it was transformed into its present
shape, namely, a joint stock company en commandite
under the name of the Direction der Disconto Gesellschaft,
with a capital of 10,000,000 thalers = 30,000,000 marks,
which was issued in two instalments of 5,000,000 thalers
each.
(3) !853: The Bank filr Handel und Industrie, which
took up its headquarters at Darmstadt because no concession could be obtained at that time for a joint-stock
banking company, either in the free town of Frankfort-onthe-Main or in Prussia. The nominal capital amounted to
25,000,000 florins = 42,750,000 marks, of which, however,
only 10,000,000 florins = 17,100,000 marks was issued at
first; it was only in the year 1856, when the Disconto
Gesellschaft was transformed, that the Darmstadter Bank
assumed the size first contemplated.
(4) 1856: The Mitteldeutsche Creditbank at Meiningen,
with a capital of 8,000,000 thalers (24,000,000 marks),
of which, however, 3,000,000 thalers (9,000,000 marks)
remained in the portfolio of the bank; in reality, there46




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fore, the capital was made up of 5,000,000 thalers only,
divided into 50,000 shares of 100 thalers each; moreover,
of this amount 1,000,000 thalers were redeemed in 1859.
(5) 1856: The Berliner Handelsgesellschaft with a share
capital of 15,000,000 thalers (45,000,000 marks), of which
only a small part was paid in at first, namely, 3,740,150
thalers; of this latter sum 800,000 thalers (4,000 shares of
200 thalers each) remained in possession of the company.
In the four years (1853-1857) the paid-up share capitals of the railway companies newly formed in the various
German States, which were almost exclusively in private
hands (see p. 35), amounted to over 140,000,000 thalers,
and that of the joint-stock banks (Bankaktiengesellschajten) to over 200,000,000 thalers (600,000,000 marks).
Of 259 mining, foundry, steamship, machine-construction, sugar, and spinning companies, etc., existing during
this period, with a total capital of over 260,000,000 thalers
(780,000,000 marks), more than half were founded during
the four years mentioned above (1853-1857).48
During the one year, 1856, new joint-stock companies
with a nominal capital of about 150,000,000 thalers were
chartered in Prussia alone.
In order, however, to comprehend properly the rush
that took place just then, it must be remembered that
during this whole period (about twenty years), from 1851
to the first half of 1870, only 295 joint-stock companies,
with a total capital of about 2,405,000,000 (2,404,760,000)
marks (see p. 38), were chartered.
Of this total almost half, namely 1,020,000,000 marks
(340,000,000 thalers), represented the capital of the railway and joint-stock bank companies founded in Prussia
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during these four years (i853-1857). Of the total capital
of 2,404,760,000 marks' invested in Prussia in joint-stock
companies during 1851-1870 (first period), 2 250,960,000
marks were invested as follows:
Marks.

Mines, foundries, and salt works
Banks
Insurance companies
Railways

275, 410,
94, 650,
158, 460,
1, 722, 440,

000
000
000
000

so that these four classes of industrial and commercial
undertakings absorbed 92.7 per cent of the capital of all
joint-stock companies founded in Prussia during the
period in question.49
During this great process of transformation, which took
place in the same manner in all the other German States
up to 1856, scarcely any other aid could be called in than
that of the Bank fur Handel und Industrie, founded in
1853, which we shall style in the future, after its headquarters and conforming to public custom, the Darmstadter Bank. For the Disconto Gesellschaft, founded
in 1851, emerged from the narrow confines of a " mutual
credit partnership" (auf Gegenseitigkeit beruhende Kreditgesellschaft) only after 1856, while the attention of the
A. Schaaffhausen'scher Bankverein was necessarily occupied during those years with strengthening the inner
affairs of the firm of Abraham Schaaffhausen which it had
taken over.
The Darmstadter Bank, founded at the beginning of this
process of transformation, purposely assumed the title of
" Bank fiir Handel und Industrie."
" It is in no way the task of the bank," it was stated in
the first business report for 1853, " t o pave the way for
stock-jobbing operations, and to stimulate capitalists to
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unproductive gambling on 'change. On the contrary, the
bank is expected to promote sound and extensive undertakings by its own participations, and by investing outsiders' funds intrusted to its care. By means of its eminent position and clear insight into the whole situation
of German industry it is fitted to assist to the fullest
extent of its powers in directing capital and the spirit of
enterprise into the channels corresponding to the requirements of the moment. Its offices at home and abroad are
intended to facilitate export and the thousand and one
other relations between German industry and the money
market. It is the right and the business of the bank to
receive the funds- which some manufacturers may have
available for the time being and supply them to other
manufacturers who may require them. Through such a
constant exchange it hopes to stimulate and promote
industrial activity. Aside from the bank's participation
in great industrial undertakings, it is likewise authorized
to participate in the great creations and financial transactions of the governments, and to act as intermediary
in the placing of securities of foreign governments."
There is no doubt that part of this program, including
the statutory regulations,50 was influenced by the organization and aims of the Credit Mobilier (Societe generate
de Credit mobilier) founded in November, 1852, with a
capital of 60,000,000 francs. This is particularly true of
the debentures idea,51 and the fixing of the amount of the
capital. As a matter of fact among the founders of the
Credit Mobilier was Abraham Oppenheim, of Cologne, one
of the co-founders of the Darmstadter Bank, while one of

903 I I ° — 1 1

5

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the higher officials of the Credit Mobilier (Hess), was one
of the first directors of the Darmstadter Bank.
It may be of interest to note that the French establishment alluded to, which was intended to put the Saint
Simon ideas into, practice under the direction of the
PeVeires, was heartily welcomed by the Government, as
well as by the general public, as an institution likely to
form a counterpoise to the excessive power of the private bankers, and more especially of the house of
Rothschild.
"The founding of the Contango Bank, or Credit Mobilier/' says an article 52 published in Germany in 1856,
was based on a genuine and true principle belonging
entirely to our age. Enormous capitals had accumulated in the hands of several banking houses in different
towns in Europe. They dominated all business through
t h e enormous proportions of their capital.

*

*

*

They

made their own conditions as though they held a monopoly. * * * No limits can be discovered to these tendencies. This monopoly can be broken only by opposing
large capital with a still larger one, and this can be done
only by the association of many small capitals. Thus on
November 12, 1852, the Credit Mobilier Company was
founded with a capital of 60,000,000 francs, in 120,000
shares of 200 francs each.
The French Government desired simultaneously to
weaken the Bourbonist and Orleanist aspirations, which
were supposed to be represented by the house of Rothschild, through the concession of a Banque Gouvernementale
which among other things was to influence the quotations

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of government stock—of course in an upward direction
only!
Accordingly the Rothschilds (after co-operating in the
beginning) formed a very powerful syndicate of private
bankers as early as 1855 to fight the Credit Mobilier.
It is principally the Credit Mobilier, its organisation,
its unparalleled growth and decline within the short
period of fifteen years, that has influenced the public
mind to such an extent that German banks almost without distinction, and even up to the present day,53 are
designated as Credit Mobilier banks. The formation and
activity of that establishment form to a great extent 54
the subject of one of the most brilliant French novels,
namely, "L'Argent," by Emile Zola.
This result was largely the work of contemporary writers, who, impressed by the failure of the Credit Mobilier,
naturally gave vent only to very adverse criticism.55 A
prominent place in this field belongs to the voluminous
work by Aycard,56 published during the year of the failure
of the Credit Mobilier (1867). This book, containing 595
pages, which unfortunately was used and is still used constantly as an authority, is from beginning to end (and in
this particular I quite agree with Plenge57) nothing but a
pamphlet. It is a clumsy work, overflowing with repetitions and exaggerations, which had its origin in the spite
and jealousy of a small banker, whose small power of discernment prevented him from perceiving side by side with
the undeniable mistakes and faults of the Credit Mobilier
the incontestable services which that institution had rendered to the economic progress of his country.

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The Credit Mobilier, which, according to the amount of
its capital and the program outlined in its reports and
in the statements of its managing directors, was never
intended to be solely a flotation bank (Effektenbank), at the
very outset fixed its aims far too high, until they became
almost fantastic. For this program (although it may
have been the result of much forethought), was not one
that could be carried out with the ordinary means of a
bank, as it purposed an economic transformation on* a
grand scale of the entire railway, industrial, and credit
systems.
Further, the Credit Mobilier injured its own interests
to a great extent (as was recognised when too late),
through the distribution of excessive dividends (1855
over 40 per cent), as well as by persistent adherence to its
scheme of the issue of debentures, a matter generally
impracticable within the compass of any bank, and especially of one that had so many aims in view. That
scheme, rightly enough, was never executed owing to the
opposition of the Government. Thus it was debarred
above all from gradually increasing its share capital58 in
accordance with its growing business, and from strengthening its reserves in order to attain the liquidity of
resources which is the sole justification and qualification
for the pursuit of constantly increasing tasks.
It is also true that through its precipitate procedure,
and through the attempt to carry out simultaneously all
parts of its program, which in turn necessitated constant
and increased support of the Bourse, as well as through
the flotation of a superabundance of new securities and
companies,59 the Credit Mobilier paved the way in no
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inconsiderable measure for stock gambling, agiotage, and
share swindling pure and simple. The last-mentioned
effect was largely due to the business reports, which were
true paradigms of inadmissible concealments and puffing
advertisements (justly denounced, at least in most cases,
b y Ay card, although he does so in endless repetition),
which in t u r n caused t h e shares of the Credit Mobilier—
not without the influence of the institution itself—at t h e
very outset to become gambling stock of the very first
rank. 60
The Credit Mobilier did not foster t h e regular customer
business to any extent worth mentioning. The large
amount of deposits (up to 145,000,000 francs), however,
t h a t were intrusted to its care by t h e large railway companies which it formed, were invested to a considerable
extent in other railway shares, and industrial securities
of all descriptions, as well as in its numerous subsidiary
companies. 61
This circumstance, coupled with the enormous and
permanent advances made to these subsidiary companies
(especially to t h e Societe Immobiliere
which it had
founded), led to t h e complete immobilization of its share
capital, and thereby to the downfall of the bank, which
actually took place in 1867.
Moreover, strong speculation on t h e p a r t of t h e b a n k 62
itself, in t h e closest relation to the enormous amounts of t h e
tied-up securities, took place, which resulted occasionally
in considerable gains, b u t frequently and probably in t h e
majority of cases, in great losses.
On t h e other hand, however, it must not be forgotten
t h a t it was due above all to the boldness and tenacious
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energy of the Pereires that the enormous extension of
French railways, and partly also of foreign lines, was
brought about 63 in the period from 1850 to i860,64
when the Pereires were acting independently. This
opened up new fields of activity to French industry,
and gave it an undreamed of power, extension, and
organisation.
In addition it must be admitted in praise of the Credit
Mobilier that, as Aycard himself is obliged to recognise, it
continued to protect the enterprises it had founded and
the securities it had issued, and that it was just the persistent exaggeration of this principle, which in itself is not
reprehensible, that constituted the raain though not sole
cause of its downfall.
This downfall, however, was not prevented by the control on the part of the shareholders, a remedy recommended as most efficient in many quarters, and facilitated
by the by-laws of the Credit Mobilier, according to which
any 10 members at a general meeting by a written application could place any subject on the order of the day.
Further (and this is not less important), the downfall
was neither prevented nor foreseen by the existing substantial governmental control. No less important an
authority than Adolf Wagner,65 while under the first
impression of the crisis of 1900, thought it necessary to
propose for all German Banks a "State Control Bureau/'
an institution which in the case of the Credit Mobilier
had existed from the very beginning in a form which
partly met, and partly even exceeded the wishes of Adolf
Wagner. The charter, dated November 20, 1852, contains

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the following regulations regarding the government control which was by no means "an empty form:"66
" A R T . 3. La societe sera tenue de remettre, tous les six
mois, un extrait de son etat de situation au Ministere de
l'lnterieur, de PAgriculture et du Commerce, au prefet du
Departement de la Seine, au prefet de police, a la chambre
de Commerce et au greffe du Tribunal de commerce de
Paris.
" A R T . 4. En outre, la Societe devra fournir au Ministre
des Finances sur sa demande, ou a des epoques periodiques
par lui determinees, les memes etats presentant la situation de ses comptes et de son portefeuille, ainsi que le
mouvement de ses operations.
"lyes operations et la comptabilite de la Societe seront
soumises a la verification des d£legues du Ministre des
Finances, toutes les fois que celui-ci le jugera convenable.
II sera donne communication a ces delegues du registre
des deliberations, ainsi que de tous les livres, souches,
comptes, documents et pieces appartenant a la societe.
Les valeurs de caisse et de portefeuille lui seront egalement representees.''
£ ART. 3. The Company shall transmit every six months
abstracts of its condition to the Minister of the Interior,
Agriculture and Commerce; to the prefect of the police,
to the Chamber of Commerce and to the file office {greffe)
of the Commerce Court in Paris.
ART. 4. The Company shall furthermore furnish to the
Minister of Finance, either upon demand or at intervals
prescribed by him, statements of the condition of its
accounts and portfolio, also of the movement of its operations.
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The operations and the books of the Company shall be
subject to examination by the representatives of the
Minister of Finance at any time he may deem proper.
These representatives shall have access to the minutes of
the deliberations, also to the books, stubs (souches),
accounts, documents and other papers belonging to the
Company. They shall also have power to ascertain the
value of the cash and of the portfolio of the Company.]
I trust that I have given above, though only in brief
form, everything essential to form an opinion as to the
growth and downfall, the faults and excellencies of the
Credit Mobilier, without having omitted any of the important points which formed the bases of Sattler's 67 and
Max Wirth's 68 criticisms. I shall now take up the question whether and in how far it is correct to designate the
German banks (especially those of the first period) unreservedly as " Credit Mobilier'* banks.69
In the first place, as far as the by-laws are concerned on
which the Darmstadter Bank (Bank fur Handel und Industrie) was founded, it may be asserted, that taken as a
whole, i. e.,as regards the large majority of its regulations,
they are copied, not from those of the Credit Mobilier
(which was founded the year before), but consciously, and
in some cases literally, from the statutes of the A. Schaaffhausen'scher Bankverein, established in 1848. Consequently, they rest essentially on a German, and not on
a French foundation, and were the product of German
business customs and views.
This applies especially—I can only refer to a few instances here—to the most important part of the program, namely to Chapter III, in which the " sphere of
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activity and the powers of the bank" (sec. 10)70 are gone
into minutely, and which is almost an exact copy of the
corresponding paragraph in the Schaaffhausen by-laws
(sec. 20). This is preceded, in the by-laws of both banks,
by the following fundamental principle of sound banking
policy (sec. 10, par. 1 of the by-laws of the Darmstadter
Bank and sec. 20 of the Schaaffhausen Bank by-laws):
' 'The bank is authorised to carry on all kinds of banking business—that is, such business from which it can
easily withdraw its money in case of need."
The additional regulations of Chapter III of the by-laws
of the Darmstadter Bank are interesting. They were
evidently made with regard to the needs of the times.71 I
have pointed out above that they were partly a reproduction of the corresponding clauses in the Credit Mobilier's
program.72 They were lacking73 in the Schaaffhausen
Bank by-laws, which had been prepared five years earlier,
and under different economic conditions. According to
these regulations the bank was authorised:
(i) To undertake all loans, or enterprises of a public
nature on its own account, or partly on its own account,
to assign or transfer them, to realise them, or to participate in underwriting them, as well as to put in circulation
bonds payable to names or bearer to the limit of its undertaking or participation.
(k) To arrange for and effect the union, or consolidation
of various anonymous companies, as well as the transformation of industrial undertakings into anonymous companies.74
The programs of both of these two large banks belonging to the period under consideration75 (the by-laws of the
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Disconto Company were, in accordance with its origin
as a credit partnership, if anything more restricted) were
consequently neither fantastic, nor calculated to effect
revolutionary changes.
Naturally these pregnant differences in the by-laws
and programs could hardly be noticed, far less appreciated,
during the fifties. For the situation of general economic
conditions was almost identical at that time in France
and Germany, in so far as similar causes (described above)
produced similar results in both countries. In France,
as well as in Germany, an impetuous rushing forward
manifested itself from 1852-53 in all branches of industry,
especially in the mining and machine industry, caused
by the great haste with which railways were being constructed. In both countries a vast number of promotions, transformations, and flotations came to the fore
during a very short period; these, naturally, required the
aid of the newly founded banks which perceived in such
undertakings a rich source of gain. Added to this (and
again as a result of the same causes, accompanied by
the ever present and apparently irrepressible spirit of
speculation in both countries), discount rates went up
strongly in consequence of the excessive demand for capital. The rate of discount of the Bank of France, which
together with that of the Bank of England, was above all
determinative for Germany at that time, stood at 3 per
cent as late as 1852 (beginning with March), and that of
the Bank of England at only 2 per cent during AprilDecember, 1852.76
During the year 1853 the discount rate of the Bank of
England gradually rose to 5 per cent between the 29th
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Great

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September and the 21st December. In 1855, between
autumn and the end of December, it went up to 5 ^ per
cent and 7 per cent, after some fluctuations again to 7
per cent at the end of 1856, next to 8 per cent beginning
with October 19, 1857, to 9 per cent on November 5, and
to 10 per cent on November 9, 1857, a sufficiently sure
sign of an approaching storm. Similar conditions prevailed in the Bank of France, while the highest rate
recorded by the Hamburger Bank in 1857 was as much
as 12 per cent.77
A commercial and bourse crisis which was greatly
intensified by severe commercial crises in England and
the United States, broke out in 1857 simultaneously in
England, France, and Germany.
The situation in the two last-named countries was
bound to develop into a bourse crisis, even without the
simultaneous commercial crises in the United States and
England, in consequence of the excessive number of
company promotions, transformations, and new issues, as
well as through the collapse of the normal organisation
of the credit and money market produced thereby.78
The course of events on the Bourse was that which has
been constantly recurring. First of all, professional
speculators, upon learning at the Bourse of the universal
improvement in the economic situation, found that the
improvement was not sufficiently reflected in the bourse
quotations, and by heavy and continued purchases,
endeavored to bring about a lasting rise. It was only
then, as is generally the case, that the general public,
for the most part guided and influenced by the quotation
list, took up the matter. Its opinion, however, is based
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on slight practical knowledge. During times of a visible
rise of the market its credulity is exceeded only by its
hopes; it accepts the existing exchange quotations, however high, as the basis for calculating the intrinsic value
of securities, while these calculations grow more and
more fantastic from day to day.
As the economic development and the course on the
bourses of both countries at that time proved nearly the
same, and as the participation of the banks of both countries in excessive and irrational promotions, issues, and
flotations, above all in mining enterprises and railway
building (which first gave rise to the crisis,) was only
too obvious, the natural inference was drawn, that these
banks were identical in character and kind.
This conclusion, however, overstepped the mark. It is
true that the banks dating from this period, endeavored
from the very commencement to vindicate their right,
and even duty, to promote commerce and industry in the
most effective way, by participation in flotations, foundations, and transformations. The Darmstadter Bank in
particular had contemplated from the very outset the
creation of special "organs at home and abroad" 7 9 for
this purpose.
This bank accordingly 80 began, during the first years
of its existence, to create such "organs" on a large scale.
But it is equally true that attempts to found branches in
the various German States were unsuccessful, chiefly because of the opposition of the different governments, which
gave home banks the preference over the branch establishments of outside institutions. 81 Thus only an agency
could be established in Frankfort-on-the-Main in 1854,
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which existed until 1864, when it was replaced by a
branch. Only at Mainz, in the Grand Duchy of Hesse,
where the headquarters of the bank were situated, did the
bank succeed in opening a branch establishment as early
as 1854, while in the same year a silent partnership
(Kommandite) had been formed in New York (G. von
Baur & Co.), which, in 1856 and 1857, was followed by
the founding of further commandite connections in Berlin,
Heilbronn, Mannheim, Breslau, and Leipsic, and in the
sixties also in Hamburg, Stuttgart, and Vienna.82
Accordingly the account " commandites, branches and
agencies" stood in the books of the bank at 8,433,701.43
florins as early as 1856.
The promotion of industry, however, was not the only
aim that the banks had in view at that period. It had
been emphasized at the very beginning that participation
"in the great creations and financial transactions of the
Governments" also formed an essential part of their
program. This constituted a sphere of business activity
which the Credit Mobilier had constantly neglected in
favor of railway and industrial transactions, except in so
far as the exigencies of its position a s a " banque gouvernementale," a position which it aimed at and which it was
intended to fill, necessitated a different attitude. In
contrast to this all German banks, (especially those
founded during ttie period under consideration,) fostered from the very outset this special branch, namely,
public loan credit (state, provincial, and municipal),
and have attended to this branch of business effectively
and successfully ever since.

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In the following list the principal loan transactions of
the Darmstadter Bank and the Disconto Gesellschaft, (the
two most prominent banks of the period,) are given: 83
STATE AND MUNICIPAL LOANS.
DARMSTADTER BANK.

1854: Baden state loan.
Bavarian state loan.
1858: Bremen state loan.
Swedish state loan.
i860: Swedish state loan.
1861: Swedish mortgage loan.
(Lottery) loan of the Canton Fribourg.
1862 : Worms municipal loan.
1864: Austrian state lottery (Rothschild syndicate).
1866: Bavarian state loan.
Saxon state loan.
Wurttemberg state loan.
1868: Hessian state loan.
Brunswick (railway) loan.
Prussian 4 per cent state loan.
Hamburg \x/2 per cent state loan.
DISCONTO-GESELLSCHAFT.
1859: Prussian (mobilisation) loan of 30,000,000 thalers, effected jointly
with the leading Berlin banks and firms under the management of
the Disconto-Gesellschaft, which was the origin of the so-called
" Prussian Consortium (syndicate) " constituted during subsequent
years.
1866: Four per cent Baden Loan (30,000,000 thalers), effected jointly with
the Seehandlung, and the banking firm of W. H. Ladenburg &
Sons, at Mannheim.
Four per cent Bavarian issue of premium loan bonds (35,000,000
florins), jointly with the Royal Bavarian Bank and the banking
house von Brlanger & Sons, Frankfort-on-the-Main.
Brunswick loan (2,000,000 thalers).
*
1867: Four per cent Baden premium loan bonds (12,000,000 thalers).
1868: Four and one-half per cent Mannheim municipal loan (3,200,000
thalers) for the construction of the Mannheim-Karlsruhe Railway;
effected jointly with the banking firms of W. H. Ladenburg &
Sons and M. A. v. Rothschild & Sons in Frankfort-on-the-Main.
Prussian state loan of 40,000,000 thalers and 5,000,000 thalers
(Prussian syndicate under management of the Seehandlung).

62




The

German

Great

Banks

1869: Danzig municipal loan.
Prussian loans (agreement with Frankfort-on-the-Main) of 4,450,000
thalers and 550,000 thalers.

The German banks, following the example of the
Credit Mobilier, also founded industrial companies as early
as this period. Thus the Darmstadter Bank undertook
the promotion of the Wollmanujaktur Mannheim (paidup share capital 400,000 florins), of the Wurttembergische
Kattunmanujaktur (paid-up share capital 500,000 florins),
of the Oldenburgische Ostindische Reederei (paid-up share
capital 250,000 florins), the Kammgarnspinnerei und
Weberei, Marklissa (paid-up share capital 300,000 florins),
the Ludwigshiitte, near Biedenkopf (paid-up share capital
360,000 thalers, jointly with the Mitteldeutsche Kreditbank), and participated in the transformation of the
Maschinenfabrik und Eisengiesserei Darmstadt into a joint
stock company (paid-up capital 200,000 florins), as well
as in that of the Heilbronner Maschinenbaugesellschaft.
The example of the Credit Mobilier in creating subsidiary companies was also followed; thus the Darmstadter
Bank on November 5, 1855, founded the Hessian NoteIssuing Bank, known as the Bank fiir Siiddeutschland, with
a capital of 20,000,000 florins. Finally the Darmstadter
Bank, like the Credit Mobilier, made it a business principle from the very outset to remain permanently interested in the companies which it promoted* not only
through permanent representation of its own directors on
the board of managers, but also by the holding of a large
number of shares, through which, however, severe losses
were frequently sustained.

^




National

Monetary

Commission

Thus it participated in the seven industrial and commercial companies which it promoted or transformed
during 1856 (with a total capital of 1,580,000 florins) with
about one-third of the combined share capital of these concerns (813,157 florins). In contrast, however, to the Credit
Mobilier, the German banks never consented to tie up
their capital during the period in question by unlimited
advances to such subsidiary or affiliated companies.84
Furthermore, during those first years of impetuous
growth, some of them, like the Credit Mobilier, became
interested too extensively and too rapidly in railway and
industrial securities and enterprises, though thereby they
doubtless rendered great and permanent service to the
nation. The list below is intended to give a detailed
idea of the most important railway transactions in which
the Darmstadter Bank and the Disconto-Gesellschaft
participated at that time.
DARMSTADTER

BANK.

1854: Austrian State Railway (taking over of shares).
1855: Extension of the Rhine Railway from Nymwegen to Bingen.
Theiss Railway (taking over of shares).
1856: Financing the Bingen-Aschaffenburg Railway (via Mainz) and promoting the Elizabeth Railway (taking over of shares).
1859: Four and one-half per cent bonds of the Rhine-Nahe Railway (guaranteed by State) 4,500,000 thalers, jointly with the DiscontoGesellschaft.
1861; Preference shares of the Cologne-Minden Railway.
Private sale of shares and bonds of the Hessian I^udwig Railway.
1862: Placing of bonds of the Livorno Railway.
Conversion of the 4 X P e r c e n t Thuringian Railway preference shares
Issue of 1,200,000 florin preference shares of the Hessian Ludwig
Railway.
1863: Preference silver shares of the Galician Carl-Ludwig Railway, exempt
from taxation (Rothschild syndicate), of 6,000,000 florins.
Five per cent preference shares of the Moscow-Riazdn Railway of
5,000,000 rubles, guaranteed by State.

64




The

German

Great

Banks

Four per cent preference shares of the Hessian Ludwig Railway of
about 3,000,000 florins.
Silver preference shares of the Galician Carl-Ludwig Railway of
5,000,000 florins (Rothschild syndicate).
1866: Shares of the Hessian Ludwig Railway.
Shares of the Magdeburg-Leipzig Railway Lit. B.
Shares of the Altona-Kiel Railway.
Preference shares of the Upper Silesian and South-North German
Junction Railway (Reichenberg-Pardubitz).
1867: Common and preference shares of the Fiinfkirchen-Bares Railway
and construction of the line, as well as of the Siebenburgen and
Franz Joseph Railway (Rothschild syndicate).
First preference shares of the Magdeburg-Halberstadt Railway.
Bonds of the Russian Kozlov-Woronezh and Poti-Tiflis Railway.
1868: Shares of the Hessian Ludwig Railway (1,000,000 thalers).
Five per cent bonds of the Hessian Ludwig Railway (guaranteed by
State, 4,000,000 thalers).
Five per cent preference shares of the Hessian Ludwig Railway.
Organization of the Alfold Railway (Rothschild syndicate).
Construction of the Arad-Temesvar line (Rothschild syndicate).
Shares and bonds of the Austrian North-West Railway.
Shares of the Rhine Railway Lit. B. (5,000,000 thalers).
1869: Five per cent preference shares of the Berlin-Potsdam-Magdeburg
Railway of 7,000,000 thalers.
Five per cent preference shares of the Upper Silesian Railway of
13,305,000 thalers.
Four and one-half per cent guaranteed shares of the Thuringian
Railway Lit. C of 4,000,000 thalers.
Shares of the Cologne-Minden Railway of 9,068,200 thalers.
1869-70: Purchase of the entire Brunswick railway system from the Brunswick government on behalf of a syndicate for 11,000,000 thalers,
and an annual payment of 875,000 thalers for sixty-four years,
and transfer of its management and of the further extension
of lines to a special company.
DISCONTO-GSSEU.SCHAFT.

1853: Five per cent bonds, guaranteed by the State, of the Moscow-Riazan
Railway of 5,375,000 thalers; jointly with the Darmstadter Bank,
the banking firm of Sal. Oppenheim jr., & Co., and a St. Petersburg house.
1856: Three and one-half per cent bonds of the Upper Silesian Railway
Company.
1857: Four and one-half per cent bonds of the Cosel-Oderberg Railway
(1,500,000 thalers).

90311 ° — n

65




National

M on et ar y

Commission

1859: Four and one-half per cent State guaranteed bonds of the Rhine
Nahe Railway of 4,500,000 thalers (jointly with the Darmstadter
Bank).
1866-1868: Shares and bonds of the Bergisch-Markische Railway.
1867: First preference shares of the Nordhausen-Erfurt Railway.
1868: Shares of the Alsenz Railway.
Five per cent bonds of the Charkoff-Krementshug Railway of
£1,716,000 (jointly with J. H. Schroder & Co., London).

In considering this great activity displayed by the banks
of that time in the underwriting and issuing of securities,
we must not forget that (as a glance at the list will show)
these operations were almost exclusively confined to firstclass securities, the introduction of which has proved of
great benefit to the German investment market. It must
also be borne in mind that the whole task of carrying out
the great development of the German railway system at
that period was performed b)^ means of German private
capital (which was very small), and by the aid of banks,
with a total share capital extremely limited in comparison
to the magnitude of the undertakings.
The German banks at that time (almost without exception) when heavily engaged, took immediate steps to
restore the liquidity of their resources and the equilibrium
between their assets and liabilities, whereas the Credit
Mobilier, greatly to its detriment, postponed such attempts
till the year preceding its collapse.
Thus the Darmstadter Bank, the capital of which had
been paid up in full in the first series (10,000,000 florins
in 1855) raised its capital to 25,000,000 florins, though the
attempt made in 1857 to bring it up to the amount of
50,000,000 florins (provided for in section 4 of its charter)
failed almost entirely by reason of the crisis of that year.85

66




The

German

Great

Banks

Consequently the bank, up to 1864, pursued the course
(justifiable from the economic point of view, though
hardly from a business standpoint) of reducing the loans
on current account from 4,500,000 florins (1857) to about
360,000 florins (end of 1859), and of reducing also the
"Lombard and covered credits" and the "loan and
mortgage " accounts. The same course was followed with
regard to the item "illiquid claims," always specified in
.the reports up to 186486 although the administration was
doubtless perfectly aware of the serious objections to
such reductions from a business point of view.
The Disconto-Gesellschaft likewise resolved, as early as
1856, or about a year after its transformation into its
present form, to raise its commandite capital from
10,000,000 thalers to 20,000,000 thalers. Owing to the
crisis of 1857, however, this resolution could only be
partly carried out, and was cancelled later on.87
Like the Credit Mobilier, the German banks in the early
years of their existence (1855 and 1856), mainly under the
influence of the highly inflated quotations of their shares,
made the great mistake of distributing excessive dividends,
instead of holding them down and using the surplus to
strengthen their inner position and reserves. Thus the
Darmstadter Bank paid dividends of 10.66 per cent in
1855 and 15 per cent in 1856, and the Disconto-Gesellschaft
13% per cent in 1856 (10 per cent for nine months). This
course naturally had to be atoned for, especially by extreme fluctuations of dividends during the next few years,
and by large decreases during bad years. The dividends
of the Darmstadter Bank and those of the Disconto-

67




National

Monetary

Commission

Gesellschaft during this period (up to, and including 1869)
are shown in the following table: 88
Darmstadter
Bank.
Per cent.
sK

185418551856..
18571858..
1859.1860..
1861..
1862..
1863.186418651866.
18671868.
1869-

IS

5
SX
4
4
5
654
SH
6
6M
4 54
654

DiscontO'
Gesellschaft.
Per cent.

a 10

5
5
4
5^
6
754
6K
654
654
8
8
9

954
a For nine months.

The average dividend rate of the Darmstadter Bank
was: during the first decade of its existence (1853-1862), 6 %*
per cent; during the second decade of its existence 18631872), 8.7 per cent; 89 that of the Disconto-Gesellschaft
during the first ten years (1856-1865) of its existence as
a limited joint stock company (Kommanditaktiengesellschajt)—6.55 per cent; during the second decade (18661875), 13.15 per cent.90 It should be said though, that
neither bank neglected to increase its surplus, which, for
instance, rose in the case of the Disconto-Gesellschaft
from 16,600 marks in 1852 to 2,640,495 marks in i860,
and of the Darmstadter Bank from 39,109.8 florins in
1854 t o I > 5 5 3 I 3 6 3 . I 8 florins in 1868.
In contrast to the Credit Mobilier, current account
business was fostered during the period under discussion
68




The

German

Great

Banks

by both banks with the greatest care and success, although,
in the case of the Darmstadter bank, not to the same
extent as the promotion and issue business.91
The development of the current account business in the
Disconto-Gesellschaft and the Darmstadter Bank during
the period is shown in the tables below (pp. 70 and 71).
The tables show that the deposits of the DiscontoGesellschaft amounted on December 31, 1869, to 2,274,228
marks, and those of the Darmstadter Bank in 1869 (the
end of this period) to 10,800,268.34 florins. It should be
said, though, that this large amount was due to exceptional
and temporary circumstances, discussed on pp. 73 and 74.
The other banks to be considered in this connection,
the activity of which during this period has remained
almost unnoticed in literature,92 likewise show on the
whole a satisfactory development.

69




I. The current business of the Disconto-Gesellschaft, 1852-1861 and 1869.
[ A c c o r d i n g t o t h e J u b i l e e R e p o r t , p . 260.]
D e b i t s in
current
account.

Year.

Marks,
1, 4 7 0 , 8 1 7
3.307,677
4 , 7 3 2 , 728
5,785,026

1852
1853
1854
1855
1856

31.035, 73i
31,635,345
27,542,475

1857
1858
1859
i860
1861
A t t h e e n d of t h i s p e r i o d (1869)

25,904,374
3 1 , 718, 296
95

35.307.447
24, 270, 623

C r e d i t s in
current
accountMarks.
1 , 4 8 2 , 731
967,450
2 , 8 5 4 , 736
2,998,599
8,095,688
4,952,709
4,718,695
6, 1 5 2 , 5 4 9
12,724,215
i4,737,3o8
29,596,211

Deposits.

Marks.
1,921,233
2,229,633
2,145,345
2,281,473
it 691,520
1,657,200
2,321,886
2,55o,347
3,586,030
4.339,42o
14
2, 274, 228

I n c o m e from
interest, securit i e s , a n d bills.
Marks.
54,44i
144,162
215,538
281,478
1, 849,979
2,049,073
1,99o,306
1,235,670
1.755,198
2. 0 0 2 , 307
3,146,167

Income from
commissions.

Marks.
69,597
117, 690
103,791
I3L445
284,597
554,319
452,745
417,327
394,545
461,387
801,940




The

German

Great

I I . Darmstadter Bank,
C r e d i t s in c u r rent account.

1853
1854
1855
1856
1857
1858
1859
i860
1861
1862
1863
1864
1865
1866
1867
1868
1869

Florins.
212,457.21
632,079.21

Banks

1853-1869.
Debits in current account.

Florins.
935,431-33
2,754,870.35
5,605,238.53

Interest-bearing
deposits subject
to notice.
Florins.
412,430.31
868,000.00
No data.

388,864.34
2,538,430.80

8 , 9 7 2 , 184. 27

No data.

713.507.S8
226,269.39

7 , 0 4 3 . 0 1 5 . 22
8, 6 6 8 , 037. 41

1,307,506.30

674,952.58
619,384.19

7,999,386.39^
5,674,302.57^
4,670,961.20

3,337,067.41
1, 289, 9 2 8 . 70
1, 292, 170. 48
1,276,218.50

570,775-55
935,795-37^
I,228,338.14
736, 860. 42

3 , 7 0 1 , 9 7 4 . 15
a, 7 2 4 , 9 3 9 . 4 7
2,261,145.19

1,292,170.48

816,519.45
511,963.36
828,939.41

2, 9 6 1 , 3 2 0 . 20
3,464, 719.80
3,243,465.15

1 . 1 8 3 , 8 7 9 . 18
No data.
No data.

785,450.58
2,244,432.41

1,732,989-33
No data.

9.136,926.28

No data.

7.429,533-03

10,800,268.34

The A. Schaaffhausen'scher Bankverein, founded in
1848 with a business capital of 5,187,000 thalers (see p. 46)
(of which, however, only 3,199,800 thalers had been
issued at the start), during the first years of its existence95 under the cautious and experienced management
of W. Iy. Deichmann, Gustav Mevissen, and Victor Wendelstadt succeeded in starting important industrial undertakings, as well as in establishing numerous industrial
connections, especially in Rhenish Westphalia. Thus, for
the purpose of mobilizing the industrial participations
of the firm of A. Schaaffhausen, it took a considerable
part as early as 1851 in the founding of the Hoerder
Bergwerks- und Hiittenverein, at Cologne,96 in 1852 in the
Coiner Bergwerkverein,®7 as well as in the establishment of
the Colnische Baumwolls pinner ei und Weberei; the Colnische Maschinenbau-Aktiengesellschaft, the Coln-Musener
71




National

Monetary

Commission

Bergwerks-Aktiengesellschaft, and the Colnische Riickversicherungs-Gesellschaft.
"The board of directors," says the business report for
1852 (p. 3), "acted on the principle that the function
of a great banking institution is not so much to start
new branches of industry through extensive participations, as to induce the capitalists of the country, by
recommendations based on exhaustive investigations, to
turn idle capital toward such enterprises, which, when
properly launched, in response to existing requirements,
and offering the guarantee of expert management, bid fair
to yield reasonable profits/'
As early as 1851, the item "Participations in Industrial
Enterprises" amounted to 434,706 thalers. Up to 1858
the following promotions were added to those already
mentioned:
The Concordia, Colnische Lebensversicherungsgesellschaft;
the Agrippina, Colnische Transportversicherungsgesellschaft,
and the Colnische HagelversicherungsgesellschafL
The A. Schaaffhausen'scher Bankverein took part also
in the foundation of the Bank filr Handel und Industrie
(Darmstadter Bank), the Bank filr Siiddeutschland in
Darmstadt as well as of the Colnische Privatbank at
Cologne. Further, it assisted at that time in the amalgamation of the Rhenish, the Bonn-Cologne, and the
Cologne-Crefeld railway companies into one unified system
of railways, with a union railway station at Cologne.
The development of the current account connections,
mostly drawn from the industrial and commercial circles
of the Rhineland and Westphalia, is shown in the following
table:
72




The

German

Great
Debits in current account.

Year.

Total
amount. 9 8

Banks
Credits in current account.

Number.

Thalers.
1852 9
*

472

l853-

604

l854-

643

1855-

632

i856_
18571858.
18591860-

636

I86I_

616

i862_
18631864i865_
i866_
1867i868_
1869-

619

665
6S3
613
614

651

6,959.285.58
7, 2 1 2 , 4 7 2 . 0 5
8, 252, 6 3 1 . 3 2
7,339,369-58
7, 1 1 3 , 8 6 0 . 3 9
7 , 9 5 1 . 4 8 5 . 26
8,433.753-36

Total amount.

Thalers.
624
59o
611
630
639
621
639
622
675
676
708
692

5,345.243.98
5,924.497-66
6,270,191.84
5,661,290.25
5, 5 9 9 , 0 2 8 . 11
6,849,356.88
6,555.008.56

As to deposits (it is important to establish this fact as
the result of a deliberate business policy), no appreciable
increase during the period under contemplation could be
expected, owing to the principles adopted by the A.
Schaaffhausen'scher Bankverein as well as by most of the
other credit banks.
" According to the principles adopted after discussion
with the Board of Managers/' says the business report of
the Bankverein for 1850 (Appendix 2 to the minutes of
the general meeting, September 14, 1850) deposits are
received only on condition that three, six, and twelve
months' notice be given before withdrawal. I t is only
because of these principles and the low rate of interest
that the amount in hand is insignificant when compared
with former years. In the interest of the perfect safety
73




of our institution we do not deem it advisable to endeavor
to obtain an increase in the deposits through more attractive terms; we much prefer to carry on the business with
our own means, to the extent that such action is at all
possible in the banking business and is in the interests
of our correspondents.''
The deposits at the Bankverein at the end of this period
(1869) amounted to 883,616.80 thalers.
The dividends paid on stock Lit. B (according to section
10 of the statutes, the capital and fixed dividends of 4 X
per cent on stock Lit. A were guaranteed by the State)
during this period amounted to:
1848-1851
1852
1853
1854
1855
1856
1857
1858
1859
i860
1861
1862
1863
1864
1865
1866
1867
1868
1869
1870

Per cent.
4
67s
VA
6K
9
9K 1 0 0
9
6
6
6
6K
7
7
7lA
7K
7K
7X
7K
8
8K

:

The profits of the business were thus quite satisfactory,101 and the surplus funds amounted, as early as December 31, 1857, t o 32°>388-63 thalers.
The extension of the business by the establishment of
branches, agencies, and commandites had been contem74




The

German

Great

Banks

plated as early as 1853 (business report for 1853, p. 3),
and at the general meeting of September 29, 1855, a resolution was passed to add a paragraph (par. 82) to the bylaws, which read as follows: "The company is authorised
to establish a branch in Berlin, as well as agencies and
commandites abroad." This resolution, however, was not
carried into effect, owing to the refusal of the Prussian
Ministry of Finance and Trade to ratify the change of the
by-laws.
The Berliner Handelsgesellschaft, founded m 1856, devoted itself successfully, from the very outset, to the furtherance of the issue business (in accordance with section
2 of its by-laws, see note 73). Its nominal capital
was 15,000,000 thalers, of which, however, only 3,740,150
thalers were paid up (1859, 3,786,200 thalers); of the latter, again, 800,000 thalers (4,000 shares nominally at 200
thalers) remained in the portfeuille of the company.
In 1856 it participated in the Carinthia Railway (merged
in 1858 with the Lombard Railway), and in 1862 in the
conversion of the 4.% per cent preference bonds of the
Hamburg-Berlin-Potsdam-Magdeburg and Thuringia Railway; during 1867, i*1 the flotation of the Baden \% per
cent state loan and 4 per cent premium loan, of the Magdeburg and Halberstadt original preference shares, and of the
Thuringia Railway shares. Further, it negotiated the
issue of the 5 per cent Kozlov-Voronezh and the 5 per
cent East Prussian Southern Railway preference bonds.
In 1868, when the commandite capital, which had
been reduced meanwhile to 7,500,000 thalers (of which,
at that time 3,786,200 thalers had been issued), was paid
up to the amount of 5,625,000 thalers, it participated in
75




National

Monetary

Commission

the issue of the 4 X P e r cent Upper Silesian preference
bonds, the Russian Land-credit mortgage bonds, the
Yeletz-Orel preference bonds, the \Y2 per cent Prussian
state loan of 1867 Lit. D. to the amount of 24,000,000
thalers, part of which was issued in 1868, and in addition
arranged successfully for the public subscription and
placing of the 5 per cent (state—guaranteed) preference
bonds of theShuya-Ivanovo, Kursk-Charkov, andCharkovAzov Railway; of the 4 ^ per cent preference bonds of
the Breslau-Schweidnitz-Freiburg Railway; of the 7 ^ per
cent Roumanian Railway bonds, and of part of the first
preference bonds of the Halle-Sorau-Gubener Railway.
Finally, in 1869, it took a nominal part in the issue of
the 5 per cent bonds of the Moscow-Smolensk Railway;
of the 5 per cent preference bonds of the East-Prussian
Southern Railway; of the \% per cent preference bonds
of the Magdeburg-Cothen-Halle-Leipzig Railway; of the
shares of the Breslau-Schweidnitz-Freiburg Railway, and
of the Gotha premium mortgage debentures; it also had a
secondary participation {unterbeteiligt) in the taking over
of the original and preference shares of the Scklesische
Zinkhiitten, of the preference shares of the St. PetersburgBaltishport Railway, and of the loans of the Italian
Government raised on the church estates.
The commissions on the current business amounted to—
Silberjroschen.

i%7-•
1858
1859
i860
1861
1862
1863

13*219
27,440
73>2oi
67, 046
61,393
74, 060
68, 360

76

Pfennigs

10

14
18

6
102

IO
I

18

II

3

3

I




The

German

Great

Banks
Thalers.
68, 106
67, 349
82, 210
78, 735
128,034
134, 654

1864
1865
1866
1867
1868
1869

SilberPfengroschen. nige.
22
....
28
21
....
l6

26
27

....

The dividends amounted to—
Per cent.

i857
1858
1859
(About half of which was taken from the surplus fund.)
i860

5Jle
5K
5

1861

5

4X

(About half of which was taken from the surplus fund.)
1862
1863
1864
1865
1866
1867
1868
1869

9
8
8
8
8
8
10
10

All arrangements had been made, according to the
business report of 1857, for the establishment of commandites in other towns, but the realization of these
plans had to be postponed owing to the crisis.
Only the banking firm of Messrs. Breest & Gelpcke in
Berlin carried on business on account of the Berliner
Handelsgesellschaft since January, 1857. This firm, however, sustained large losses in 1863 through the failure of
a large export firm at Danzig.
The Mitteldeutsche Kreditbank 103 was founded in 1856
with a capital of 8,000,000 thalers, of which 3,000,000
remained in the portefeuille of the bank, while of the
remaining capital of 5,000,000 thalers, 1,000,000 thalers
were redeemed in 1859 ( s e e P- 47-) This bank, as stated
77




National

Monetary

Commission

before, should properly not concern us in this connection,
as during the period in question it was a note-issuing bank.
Its note issue amounted to 1,688,660 thalers in 1857 and
to 4,000,000 thalers in 1868. At Frankfort-on-the-Main
an "agency" (August Siebert) was established in 1856,
which was transformed into a branch office in 1872.
The Bank took an active part shortly after its foundation in a series of industrial, state, and railway transactions, which, however, were not always successful.
Thus in 1856 it participated to the extent of one-third
in the purchase of the Ludwigshiitte, near Biedenkopf,
which was transformed in 1858 (under the name of
Oberschlesischer Huttenverein) into a joint-stock company
with a capital of 600,000 florins. This operation caused
serious losses to both partners (the Darmstadter Bank
participated to the extent of two-thirds).
The participation during 1856 in a cigar factory at
Wassungen in the Duchy of Meiningen also terminated
badly.
On the other hand, it attained satisfactory results in
its simultaneous participation in the Hochheim enterprise
of sparkling wines (Burgeff & Co.), which was transformed
into a joint-stock company in 1857; also in negotiating
a 4J/2 per cent Swedish loan (jointly with the Darmstadter
Bank), and in a 100-florin lottery certificate loan, guaranteed by the Austrian Government, as well as in taking
over a preference loan of the Werra Railway (1,000,000
thalers), and in its participation in the establishment of
the insurance society "Providentia," at Frankfort-onthe-Main.

78




The

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Great

Banks

It was interested in the development of the brown coal
industry in the Nieder-Lausitz district from the very commencement of this industry; particularly in the Eintracht,
Braunkohlenwerke und Brikettfabriken, and the Use,
Bergbau-A ktiengesellschajt.
In 1858 it participated in taking over the balance of
the Werra preference shares of 250,000 thalers; a 4 ^ per
cent loan of the city of Bremen; and the \Y2 per cent
preference shares of the Frankfort-Hanau Railway.
In 1862 it took a leading part in the founding of the
Deutsche Hypotheken-Bank at Meiningen.
During the greater part of the period under consideration, it devoted itself to the regular (current) business.
Its turnover amounted
At the main
office.
Thalers.
1858.
1859i86o_
1861.
1862.
18631864.
1865i866_
18671868.
1869-

96,095. 137.01
73.318,091.32
61,213,709.22
57. 7 9 0 , 0 8 4 . 6 8
125,932, 187.58
165,869,918.46
159.529, 216.46
159.087,084.14
1 3 8 , 8 1 9 , 8 6 7 . 94
119,031,959.50
184, 3 0 1 , 3 8 9 . 66
263,770,732.68

At the agency in
Frankf ort-on-the Main.
Thalers.
84,818,800.50
H 5 , 3 4 3 , 4 i 8 . 70
113,077,193-43
104,037,760.17
122, 826, 3 6 1 . 49
90,335,317-34
103,733,794.54
105,770,692.99
1 0 2 , 5 2 8 , 8 3 1 . 20
95,355,576.96
1 6 6 , 9 7 2 , 8 6 8 . 90
2 3 4 , 0 0 8 , 3 0 8 . 20

The commissions amounted to—
Thalers.
58,067.39
23,660.02
28,962. 48
34,930.77
73, 175.81
206, 847. 58

1857
1858
1859
i860
1861
1862

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National

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Commission
Thalers.
114,998. 13
115,046. 66
101,401.46
76,664.87
73,268.79
115,407.34
146, 407. 43

1863
1864
1865
1866
1867
1868
1869

The current account business showed the following
results:
Credits.
Year.

Number of
accounts.

Amount.

Number of
accounts.

Thalers.
18571858.
1859i86o_
1861.
i862_
18631864.
1865i866_
1867i868_
1869-

210
205
216
278
312
309
347
316
239
285
316

469,268.20
578,029.84
492,810.82
6 8 8 , 0 5 9 . 09
768,511.91
1,200,912.81
1,561,300.64
i,9oi,9SS.S3
1,853.521.41
1, 254, n o . 70
1,553,950.14
1,588,034.88
i , 9 4 7 , 9 i o . 74

Amount.

Thalers.
348
399
415
547
687
726
709
677
493
588
656

1 , 5 9 4 , 7 2 1 . 11
1,441,089.00
981,676.98
1,642,790.67
2, 2 8 9 , 4 3 6 . 3 4
2,673,483.57
2,879,205.88
3,152,198.46
2.949,646.69
2,990,217.87
3,011,208.17
2,933.362.84
4,658,450.31

The following dividends were declared:

1859i86o_

Per
_-_
.__
-----

1861-

---

6

;

1862 _

.__

7

;

i86 3 _
1864.
1865 _
i866_
1867.
i868_.
1869.

---

7

18571858-

cent.
6
6
4
4

— 7K
---

7

.__
---

6
7

--- 8K
_._

80

10




The

German

Great

Banks

The deposits increased from 490,599.54 thalers in 1858
to 756,465 thalers in 1869.
The silent partnership {commandite) account stood, as
early as 1858, at 1,103,in thalers, without the commandites
being named. It is only in the report for i860 that a
Berlin commandite is mentioned, namely, Messrs. A. Wolff sohn & Co., whose place was taken by Messrs. G. Mtiller &
Co. in 1866. This commandite, simultaneously with the
Frankfort Agency, was changed into a branch office in
1873.
During 1869, 1870, and 1871 the original capital of the
bank, which had been reduced to 4,000,000 thalers, was
increased again to 8,000,000 thalers, and in 1872 to
16,300,000 thalers, equal to 48,900,000 marks.104
The liquidity of the bank's resources was nearly always
maintained, although energetic intervention was occasionally necessary. Thus, at the end of 1859 the bank owned
securities to the value of 179,813.32 thalers; and succeeded
in reducing the same during one year (i860) to 132,210.32
thalers, or by 47,603 thalers.
The attitude of the banks during the crisis of 1857 was,
generally speaking, economically correct. The Darmstadter Bank, for instance, could point out in its report for
1857 that during that year it was able to ease and mitigate
the economic situation by retarding industrial promotions
and by opportune interventions on the stock exchange;
through which course, however, its holdings of securities
rose from 8,500,000 to 10,500,000 florins in 1858, and to
12,500,000 florins in 1859, causing considerable loss later
on. During that year (1857) it was able to advance considerable sums to the Hamburg Senate, as well as to
90311°—11

7

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Monetary

Commission

several banks, thus proving that it had seasonably and
successfully strengthened the liquidity of its resources.
The A. Schaaffhausen'scher Bankverein also emphasized in its business report for 1857 (p. 1) that "its large
available means had enabled it at the time of the crisis
to continue to grant credit to its old solid clients, as well
as to increase the same suitably wherever it appeared
advisable."
Similarly, the Berliner Handelsgesellschaft report for
1857 (p. 2) states: "During the crisis we have helped to
smooth over difficulties by opportune assistance in numerous cases where a proper assurance was given that the
assistance granted would be repaid."
In all issue business and flotation activity, however,
the banks at that time were not slow to perceive clearly
the importance and necessity of the fundamental principle
underlying all prudent banking policy, namely, the distribution of risk; a principle which was adhered to by
several banks in their issue transactions to an extent that
often proved disadvantageous to their profits.
In 1859 the Darmstadter Bank (probably for the first
time) formed a "bank syndicate" 105 for the purpose of
taking over several engagements which had to be settled
in i860 (especially the Rhein-Nahe Railway bonds), a
proceeding emphasized in the business report of i860 in
the following words: "This form has its decided advantages, as it reduces risk and facilitates operations." 106
It must be admitted that the business reports107 of that
period left much to be desired as far as lucidity and conciseness are concerned (this was owing to the fact that a
proper form had yet to be found) * thus complaints,
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Great

Banks

both justifiable and unjustifiable, were not lacking.
Nevertheless, it must be emphasized that hardly any one of
them contained self-advertising commendation, and that
frequently they contained warnings,108 and that, for instance, Model (op. cit., p. 36) was able without any
difficulty to compile the profit and loss of the Darmstadter
Bank from 1853 to 1856, although a specified profit and
loss account was attached to the reports only beginning
with the year 1859.
The business reports of the A. Schaaffhausen'scher
Bankverein can also be described as thorough and
exhaustive.
On the whole, it may be said of the banks whose activity
falls within the period under consideration that they made
satisfactory progress in the organization and extension of
business connections (Kundengeschdft), and that they
undertook, with growing success, state, financial, and
railway transactions on a large scale, and to a far greater
extent than industrial transactions.
The words used by a specially competent expert,109 in
reviewing the activity of the Darmstadter Bank during
the first period, apply equally to all the banks, at least to
the most prominent of the period; namely, that they
" rendered special service in the development of European
state credit and in the execution of great railway constructions."
After reviewing the great work performed by the German credit banks during this first period—a work executed
gradually and gropingly, not without many faults and mistakes, but neither without great and permanent success,
although in the face of serious interruptions through
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Commission

European wars 110 and grave crises m —it will be difficult to
accept the view of A. Weber that German joint-stock
banking may be said to have become a common form
only in the beginning of the seventies (op. cit., p. 47).
Neither can we adopt the extremely subjective viewpoint of Max Wirth, the South German contemporary
critic, concerning the activity of the German banks during
this period. In his book on commercial crises (p. 271) he
places the fact that the Darmstadter Bank participated in
1857 in the promotion of the North German Lloyd, under
the heading "The requirement of industry and trade,"
following it up with an exclamation mark, and manifests
indignation at the bank's promotion of the " Concordia
Spinning and Weaving Works" (formerly S. Woller), still
flourishing in Bunzlau und Marklissa, by referring to it as
the " Promotion of worsted spinning works in far-away
North Germany."

84




PART

III.

THE SECOND PERIOD (FROM 1870 TO THE
PRESENT DAY).
CHAPTER

I.

(1) TABLE OF EVENTS DURING THE SECOND PERIOD WHICH
INFLUENCED THE DEVELOPMENT OF THE GERMAN BANKING SYSTEM.
1871-72

1871

1873
1874-1878.
1875
1876
1877-1878.
1879-1882.
1879
1879

1883-1887.

Termination of the.Franco-German war; sudden influx of the
war indemnity of 5,000,000,000 francs; irregular expansion
of the German system of private railways; impetuous
growth of production, rise of workmen's wages, of almost
all prices, especially prices of raw material and mining
products; strong speculative movement in all branches of
commerce and industry; beginning of the industrial cartel
movement.
Establishment of provincial discount companies in Berlin, Hanover, Aix-la-Chapelle, Bernburg, Elberfeld, Hamburg, Duisburg Ludwigshafen.
Foundation of the Deutsche Bank, marking the commencement of a systematic development of the deposit business, of the industrial export policy of the credit banks, and
of the concentration of German banking.
Bourse and industrial crisis.
. .Economic depression.
Foundation of the " Reichsbank'' (began business January 1,
1876).
Bank discount rate falls to 3% per cent in Berlin.
. . Russo-Turkish war.
. .Economic revival; formation of foreign railway companies,
and the issue of foreign loans.
Bank discount falls to 3 per cent in Berlin.
The commencement of the conversion of German state railway and municipal bonds; reorganization of the German
bank and coinage system, adoption of the gold standard;
beginning of the state purchase of the German private railways; treaty of alliance with Austria.
. .Depression in all fields; continuation of the issue of foreign
securities.

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Commission

1887
Alliance with Italy.
1888-1890. . .Boom, large number of promotions, transformations, issues,
bourse speculation, difficulties in meeting payments on
the state loans of Argentina, Portugal, Greece, etc.
1891-1894. . .Depression and stagnation in all directions.
1891
Failure of several Berlin banking"concerns.
1893
Foundation of the Rheinisch-Westfalisches
Kohlen-Syndikat.
1893
Meeting of the bank inquiry commission.
1895
Commencement of an upward tendency; quotations of the 3
per cent Imperial consols rise to 100.30 and of the 3 per
cent Prussian consols to 100.40; beginning of a systematic
industrial policy of the banks; foundations, transformations, issues; most of the great banks raise their capital.
1896-97
The upward movement intensified; brilliant development of
the electro-technical industry; further extension of the
German (state) railway system; increase of the Imperial
Navy.
1897
Formation of the Rheinisch-Westfalisches
Roheisensyndikat;
fusion of interests (Interessengemeinschaft) . between the
Deutsche Bank on the one hand, and the Bergisch-Markische Bank at Elberfeld, and the Schlesischer Bankverein
a t Breslau on the other, in order to promote an industrial
banking policy (denoting the commencement of close relations between the great banks and industry) which gave
an impetus to concentration of banking.
1898-1900. . .Market at its highest; rise of the average bank discount rate
in Berlin to 5.33 per cent and of the private discount rate
to 4.41 per cent (1900). Growth of money requirements
through the predominance of cash transactions in bourse
speculation instead of time bargains, as a result of the
bourse law of January 1, 1897.
1898
Outbreak of the Spanish-American war.
1899
Transformations, new promotions, and issues show a new
record.
Outbreak of the Boer war.
1900
Quotation of the 3 per cent German Imperial consols falls to
86.74 (as compared with quotations of 99.63 of the 2%
per cent British consols, and of 100.60 of the 3 per cent
French rente). The Deutsche Bank takes over 200,000,000
marks of German Imperial and Prussian consols.
1900-01
Crisis, fall in quotation of mining securities (end of March to
beginning of July); failure of the Pomeranian Mortgage
Bank, of the Mecklenburg-Strelitz Mortgage Bank,
of the Prussian J o i n t - S t o c k Mortgage Bank, of the
Deutsche Grundschuldbank, the Dresdner Bank fur Handel
und Gewerbe, the Leipziger Bank, and of many industrial
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The

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Great

Banks

undertakings especially in the electro-technical branch.
Energetic intervention of the great banks, strengthening
of the concentration movement; disposal to an American
syndicate of 80,000,000 marks 4 per cent state treasury
bills repayable in 1904 and 1905, maintenance of the low
bank discount rate (3% per cent) until the end of September.
1901-1902.. .Continued large needs of money on the part of the Empire,
the individual states, and municipalities, outbreak of the
Chinese troubles; foundation of the United States Steel
Corporation (1901).
1902-1906.. .Recovery; bank discount rate falls to 3 per cent (February,
1902), then increases to 4 per cent (October, 1902). February 9, 1904, outbreak of the Russian-Japanese war.
1904: Foundation of the Stahlwerksverband at Dlisseldorf;
impetuous movement of concentration. 1905: Foundation of the Oberschlesischer Stahlwerksverband.
1907.
American crisis; considerable rise of discount rates up to j}/£
p e r c e n t (average, 6.03 per cent).
1908
Termination of acute crisis in America; recovery; money becoming available; fall of the bank rate from y}4 per cent in
January to 4 per cent in December; average 4.76 per cent.
1909
Money circulates more freely; political troubles owing to
conflict between Austria and Servia; b a n k - l a w amendment; in the last months of the year beginning of an
improvement in some branches of industry, especially in
the mining industry.

(2) SKETCH OF THE ECONOMIC DEVELOPMENT OF G E R M A N Y
FROM 1870 UNTIL THE PRESENT.

The result of the victory in the great Franco-German
war was the creation of the German Empire in 1871.
Unity was established gradually also in economic life.
Weights and measures, the coinage and monetary systems, 1 the constitution of law-courts, procedure, and
law,2 were unified by degrees, and the army and navy 3
linked firmly together for the protection of the gains
attained. A central note bank (the Reichsbank) 4 was
founded for the purpose of regulating the money circulation and facilitating payments. Furthermore, a supreme
court for the Empire 5 was created.
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National

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Commission

The right of free migration and free competition (recognized as early as the sixties in the independent industrial legislation of the various German States) was introduced everywhere, at first through confederate and then
through Imperial legislation.
The epoch commencing in this manner represents one
of the greatest economic revolutions that has probably
ever taken place in any modern civilized state.
It does not lie within the scope of this work to attempt
to describe these changes exhaustively. The extent and
the development of the problems, however, which had to
be solved by the German banks during the period under
consideration, could hardly be comprehended without a
brief description of at least those chief factors of the
economic development which had particular influence on
the growth of German banking. It is only within such
limits that I have attempted to sketch them in the following outline.
I will attempt to summarize the numerous important
factors in this development under the following two heads:
This development is characterized on the one hand by
an enormous expansion in almost all directions of public
and private activity, coupled with 6 a further shifting of
the center of gravity of the whole economic fabric from
agriculture to industry; and on the other hand, by the
most intense concentration of forces, undertakings, and
capital. The following will give a detailed illustration:
The feverish rapidity of the economic development
, during the period in question must be attributed above
all to the rapid growth of the population, for which sustenance and employment had to be found.
88




The

German

Great

Banks

The population in 1816 amounted to about 25,000,000;
at the beginning of this period (1870), to over 40,000,000;
and in 1907 to 62,100,000 souls. During the last few
years it has increased on an average by about 855,000
souls annually, as compared with an annual increase
during recent years of about 373,000 in England and of
only about 58,000 souls in France.
It should be emphasized however that this enormous
increase in the population of Germany is not due to an
increase of births, which have decreased in proportion to
the population during the last three decades. The increase
is due principally to the very considerable decrease in
mortality, i. e., owing to the fact that as a result of improved
hygienic conditions the number of deaths in proportion
to the population has decreased far more rapidly than the
number of births. 7 Should this proportion change, an
eventuality bound to take place sooner or later, and
should the birth figures remain stationary or decrease
to a considerable extent, a continuation of the increase
in population hitherto recorded is out of question. Added
to this, the excess of immigration, which occurred for the
first time in the years 1895 to 1900,8 (and which still continues) may change again into an excess of emigration
which, from 1871 to 1895, amounted to about 2,500,000
souls. Finally, the increase in population may cease or
the rate of increase may decline, if there should be a
decline in the productivity of our national industry which
has been both a result as well as a cause of the increase of
population.
At the beginning of this period (1871) about 64 per cent
of the inhabitants of Germany lived in the country, and
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N ational

M o n et ar v

Commission

about 36 per cent (as compared with only 28.04 P e r c e i r t i n
Prussia in 1849) i*1 the towns. In 1893, however, the
percentage of country and town population was almost
equal, and in 1905 the percentage of people living in the
country amounted to 42.58 per cent only, whereas the
percentage of those living in towns had risen to 57.42 per
cent of the total population.9
According to the census of professions, trades, and occupations taken June 14, 1895, 26,000,000, or 42.7 per cent
of the population, were eusra ged in various professions,
trades, and occupations 10 (either as a main or subsidiary
means of gaining a livelihood) (erwerbstdtig im Hauptund
Nehenberuf.) They were divided as follows:
Of the total number, 20,770,875, or 40.12 per cent of the
entire population, were engaged in various professions,
trades, and occupations as a main source of livelihood (erwerbstdtig im Hauptberuf), as compared with 17,632,008,
or 38.99 per cent of the entire population, in 1882.
According to the occupation census taken on the 12th
of June, 1907, the main results of which were published
in the " Reichsanzeiger" of February 10, 1909, No. 35, the
number of persons thus engaged was 26,827,362, or 43.46
per cent of the entire population. These figures show an
increase of 6,056,487, or 29.16 per cent, as compared with
1895, whereas the increase in 1895, as compared with 1882,
amounted only to 17.80 per cent.
The population of the chief industrial towns n had
increased to an extraordinary extent up to the end of 1905,
in comparison with the years 1843 or 1849. Thus, for
instance: Aix-la-Chapelle to about 144,000, as compared
with about 46,000; Chemnitz to about 241,000, as com90




The

German

Great

Banks

pared with about 26,000; D o r t m u n d to about 175,000, as
compared with about 7,600; Essen to about 229,000, as
compared with about 7,000; Dusseldorf to about 253,000,
as compared with about 26,000. 13
At t h e beginning of the period under consideration there
were 8 towns, in 1905 as m a n y as 41 towns, with over
100,000 inhabitants. Berlin, which about the middle of
the nineteenth century numbered less t h a n 500,000 inhabit a n t s , in 1870, 774,000, in 1880 not quite 1,250,000, and in
1890 about i,50o,ooo, 13 has passed beyond t h e second
million since December, 1904.
As stated b y Ad. Wagner, 14 it seems at the present time
as difficult to m a k e a scientifically incontestable estimate
of German national wealth, as it is to estimate t h e amount
of income of t h e German nation or its annual savings.
A brief consideration of t h e facts will make this clear.
According t o t h e most recent calculation made (1908) on
the basis of w h a t is relatively t h e most accurate method,
taking as basis t h e Prussian supplementary t a x (i. e., a
direct property t a x ) , the wealth of Prussia amounted t o
130 billion marks. Taking into account 1 5 the proportion
of population (3/5) t h e German national wealth (given
by Mulhall in 1895 in his "Dictionary of S t a t i s t i c s " as
£7,500,000,000= 150 billion marks) is estimated a t 216 billion marks, or to avoid exaggeration at 200 billion marks. 16
Two years earlier (1906) t h e German national wealth was
estimated b y Evert 1 7 a t 200 billion marks, b y Ballod 18 in
1908 a t 251 to 266 billions, b y Steinmann-Bucher (1908) 19
a t even 314 billions; and in a recent essay ("350 Milliarden deutsches Volkvermogen"
Berlin 1909) at 350 t o 360
billion marks. Thus there is a difference of no less t h a n
91




National

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Commission

160 billion marks 20 between the highest and lowest (200
billion to 360 billion marks) estimates recently made, although most of them were based upon careful and conservative calculations.
Again, the result of the Prussian income tax assessment for 1907, chosen as a basis for estimating the German national income, gives a total income for the Prussian
population (1907) of 17,990,000,000 marks (11,747,000,000
marks for taxpayers; 6,243,000,000 marks for nontaxpayers). Calculated on the proportion of the population
this would result in a German national income of 25 to 30
billion marks, and an annual income of 484 marks per
head of the population. These figures, however, should
be used with great reserve.21
As a matter of fact Steinmann-Bucher calculates the
present German national income (in his book "350 MilHarden deutsches Volksvermogen," p. 102) as being much
higher, namely, 35 billion marks, though the grounds on
which he bases his estimate seem inadequate.
The same remarks apply to any estimate of the annual
German savings, i. e., the amounts by which the German
national wealth is annually increased from the German
national income. This amount Schmoller 22 has placed
at 2y2 to 3 billion marks, and it has been calculated by the
author of the Grenzboten article already mentioned (p. 91)
at 3.7 billion marks on the basis of an average annual
increase of 1,700,000,000 23 marks in the value of property
subject to the Prussian supplementary tax.
It is plain that the same objections, or other no less
serious, may be urged against all estimates for foreign

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The

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Great

Banks

countries which have been made according to any of the
above methods.24
If, however, it be desired to give merely a general idea
of the development of national prosperity in Germany
during this second period, it may be pointed out among
other things that the total income during 1907 of all
physical persons in Prussia (including an allowance for
non-taxpayers) amounted in round figures to 16 billion
marks for a population of 38,421,000, while in 1896 the
total income of these persons amounted to slightly over
10 billion marks, for a total population of 32,379,000.
The increase of income was thus 56 per cent, while population increased during the same period only 17 per cent.
The amount of property assessed for property taxes in
1905 amounted to about 82,500,000,000 marks, showing
an increase of 17 per cent, as compared with 1899, when
it amounted to 70,000,000,000 marks. The figures for
the other German Federated States show a similar
development.25
If an attempt be made to ascertain the amount of
German national wealth invested in Bourse securities
(which would be especially appropriate in the present
volume), equally great difficulties will be experienced,
despite the material collected in regard to this subject on
the occasion of the German finance reform bills of 1908.26
If the table compiled in the report of the Aeltesten
der Kaujmannschajt von Berlin 27 be adopted, in which
(according to the market report of June 30, 1906) the
nominal and market values of the securities dealt in on
the Berlin Bourse were estimated at about 9 2 ^ and 94K'
billion marks, respectively, it is evident that for our
93




National

Monetary

Commission

purpose t h e figures are too high in one regard and too
low in another. Too high, because in t h e table t h e t o t a l
of securities bearing fixed interest includes t h e a m o u n t s
withdrawn from t h e market during 1906 b y r e p a y m e n t ;
further, because it does not contain t h e total a m o u n t of
foreign securities in German hands, b u t only t h e a m o u n t
of foreign securities listed a t t h e Berlin Bourse. By far
t h e larger portion of these securities, however, were never
in German hands, as, for instance, Russian a n d Argentine
government bonds, as well as Russian and American railway securities. 28 Another p a r t of these securities, such
as t h e Italian, Austrian, and Hungarian state securities,
h a d passed or returned by t h e 30th June, 1906, from
German to foreign hands (especially t o t h e countries of
their origin) in consequence of conversions or of foreign
demand.
On the other hand, t h e results obtained b y accepting
t h e table as a basis, are in p a r t far too low, as m a n y of
t h e securities are not quoted on t h e Berlin Bourse, b u t
on other German exchanges. Other securities, such as t h e
debentures of small industrial undertakings, are not
quoted on any German bourse.
The Deutscher Oekonomist29
endeavors therefore t o
solve t h e problem in a different manner.
It starts
with t h e supposition t h a t , according to t h e income-tax
statistics in Prussia, t h e Prussian income derived from
capital property has been valued (though far too low)
at 1,610,000,000 marks, which, capitalized a t 4 per cent,
corresponds t o 40,000,000,000 marks for
Prussia,
and assumes t h a t of these 40,000,000,000
about
20,000,000,000 are invested in mortgages, t h u s leaving
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a balance of 20,000,000,000 for securities invested in
Prussia, a n d accordingly about 30,000,000,000 for t h e
whole of Germany.
This method of calculation does not yield indisputable
results, t h e more so, because no statistics exist regarding
t h e total mortgages outstanding in Germany, the a m o u n t
of which for Prussia is estimated a t 20,000,000,000 marks.
Thus every estimate must be more or less inaccurate.
Moreover, every purely schematic application of Prussian
to German general conditions is improper.
As a m a t t e r of fact it is assumed in t h e above-mentioned supplementary volumes to t h e German finance reform bill of 1908 30 t h a t in 1907 t h e German public held
German public a n d quasi-public securities, as well as
mortgage a n d municipal bonds of private mortgage banks,
to the a m o u n t of about 35,500,000,000 marks; industrial
bonds to t h e a m o u n t of 2,500,000,000 marks, and shares
of an actual value of 6,750,000,000 marks, making a total
of 44,750,000,000 marks of securities in German hands,
or 14,750,000,000 marks more t h a n t h e above-mentioned
estimate of t h e whole a m o u n t of securities in German
hands.
As statistical details are lacking (especially t h e yield of
the s t a m p duties), it is impossible to obtain a reliable
estimate 31 of German investments held in t h e shape of
securities of all kinds. On t h e whole, we m a y assume
(on t h e strength of a number of data) t h a t at least onethird of t h e national wealth is invested in securities. 82
According t o t h e different estimates of t h e German national wealth (200,000,000 to 360,000,000 m a r k s : see
above, pp. 91 and 92) it may be concluded t h a t the
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amount is between 66,000,000,000 and 120,000,000,000
marks, figures which present a wide margin, indeed. A
similar conclusion may be based on the issue statistics,
which, though somewhat incomplete, tend to prove that
1,200,000,000 marks, or about one-third of the annual
savings of the nation, is invested annually in securities.
Grave misgivings have been expressed, especially by
Ad. Wagner, regarding the tendencies shown by the development of German incomes during the period under
consideration. Wagner finds that it is in the main a
development along plutocratic lines and favoring the
interests of the money aristocracy, and he seems to think
that the entire economic development of Germany is
seriously menaced by "this constantly growing concentration of income, evidenced not only in the case of some
particularly rich persons, but also by a constant growth
in numbers of the c1asses occupying a high and even the
highest place in the economic scale." 33
In a study, breathing a high spirit of patriotism,34 he
has lately pointed out that about the middle of the nineteenth century there were only about 100 persons with incomes exceeding 100,006 marks in the territory corresponding to the confines of present-day Prussia, whereas in 1891
there were 1,400 to 1,500, in 1902, 2,800, in 1905, 2,900,
and in 1907, 3,600 such persons. In another place he
states that the national wealth and national income have
increased out of all proportion in favor of the upper and
of the highest classes, and not inconsiderably in favor of
the lower classes (especially the working classes), whereas
the large middle class maintains its position with great
difficulty in the list of taxpayers, and (as far as its share
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of t h e national income is concerned) is falling into a less
favorable position from day to day. 35
A consideration of t h e facts will show t h a t none of
these misgivings can be deemed justified in all or even in
their main points.
I n m y opinion (see p . 113) the increase in t h e number
of persons with incomes exceeding 100,000 marks in
Prussia (of present extent), from 100 in the middle of t h e
last century to 3,600 in 1907, is certainly a gratifying proof
of our economic development. B u t if we consider t h e
enormous growth of population in these 57 years, the
increase of such incomes does not seem very considerable,
b u t rather (relatively speaking) inconsiderable.
As a m a t t e r of fact, a smaller growth in t h e incomes
exceeding 100,000 marks might have suggested serious
misgivings regarding the development of national prosperity, in view of the fact t h a t during these sixty years
the entire standard of living, the entire consumption,
and thus t h e household budget of t h e individual, has doubtless increased to a very great extent.
After all, we can see b u t little significance in t h e fact
t h a t it is just t h e uppermost grade of taxpayers (mentioned b y Wagner) which has considerably increased
compared with the other classes, since those of its members who become wealthier must of necessity remain in
t h a t grade, there being no higher grade t o which they
could be transferred.
Finally, it m a y be pointed out t h a t during t h e period
under discussion t h e number of those persons who have
been moving upward from a lower to a higher t a x grade 36
has been constantly increasing; further, t h a t t h e relative
90311 °—11

8

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number (in proportion to the population) of non-taxpayers (i. e., persons in Prussia with incomes below 900
marks) who have been moving upward into the taxpaying
class during this period has also been constantly on the increase.37 This can be proved in detail. According to
Schmoller,38 in old Prussia the number of persons paying
taxes on incomes exceeding 3,000 marks was as follows:
1852
1867

'

Persons.
4 3 , 489
72,983

In Prussia of to-day:
1873

Persons.
123,284

1894
I9°2

319,317
449> 741

This shows, certainly, an absolute increase in the number
of taxpayers in Prussia (present-day area)39 with incomes
above 3,000 marks whose total taxable income (after legal
deductions) has risen from 2,792,345,342 marks in 1892
to 5,156,245,432 marks in 1907.
On the other hand, the income of persons subject to
the income tax in Prussia (present area) belonging to the
lowest grade (incomes between 900 marks and 3,000
marks) has risen from 2,911,981,421 marks in 1892 to
6,59i>553,725 marks in 1907.40
Between the years 1907 and 1908 the group paying no
income tax (incomes below 900 marks) decreased in the
proportion of 5,555 to 5,242; the number of taxpayers
in Prussia (with incomes exceeding 900 marks) increased
19.5 per cent between 1892-93 and 1898-99, whereas
the population increased during the same period only 8.2
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Furthermore, the returns of the Saxon income t a x , under
which until 1894 a ^ persons receiving a minimum income
of 360 marks were liable to taxation, give the following
figures for every 100 persons assessed:
1879.
Per

jLess than 300 marks
300 to 800 marks
800 to 3,300 marks
3,300 to 9,600 marks
Over 9,600 marks

_

I

1894.

cent.

7. 1
7- 1

Per

cent.

76.3
76.3

5.6
565.3
65.

20. 9

3i-

2-3

I

2.

•5

T h a t is to say, t h e number of taxpayers in t h e lowest
grades decreased, and t h e number belonging to t h e other
groups increased considerably. Moreover, t h e largest
increase during t h e period mentioned took place in t h e
middle group of taxpayers (800 t o 3,300 marks), supposed
by Ad. Wagner to be particularly endangered. Finally,
t h e total taxable income of physical persons in Prussia
has increased from 10,147,578,035 marks in 1896 to 15,873,774,007 in 1907.
I n t h e memorial of t h e Admiralty, dated December,
1905, entitled " Die Entwicklung der deutschen Seeinteressen im letzten Jahrzehnt," proof is furnished of t h e enormous upward movement of incomes in Prussia, in which
not only t h e wealthy classes b u t also those with smaller
incomes participated (900 to 3,000 marks) almost to t h e
same extent. The increase of t h e national income by far
exceeds t h e increase of population.

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The fact that the classes with small incomes, which,
by the way, are not solely composed of workingmen, had
a large share in this upward movement, can also 43 be
proved by the savings bank statistics.
Of the 9,000,000 savings bankbooks 4 3 in existence in
Prussia at the end of 1901, almost one-quarter were for
amounts not exceeding 60 marks, about one-seventh for
amounts from 60 to 80 marks, about one-eighth for
amounts from 150 to 300 marks, and only one-thirtieth
for amounts above 3,000 marks (at this stage depositors
begin to invest their savings in securities.).
The number of savings bank books grew as follows:44
Per 100 inhabitants.

Location.

Wurttemberg.

349,354
424,500
3,345.000

Prussia
i897
1904
1906

7,643.000

10,211,976
11,095,276

Per cent.
17. 1
20.3
12. 1
23-4
27. 71
29. 24

This number had doubled in Prussia during the time
from 1882 to 1897 and trebled up to the end of 1906.
The savings bank deposits totaled as follows:
Amount.

Wurttemberg-

1891

Prussia
1897
1904
1906
1907

Marks.
137,000,000
190,000,000
i»697.000,000
4,967,000,000
7,762,000,000
8,788,000,000
9,121,000,000




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These deposits had almost trebled in Prussia between
1882 and 1906, and were more than five-fold at the end of
1907. In 1882 every eighth inhabitant of Prussia possessed a savings bank book, and at the end of 1901 every
fourth inhabitant. The amount of deposits increased in
the German Empire from about 1,869,000,000 marks in
1875 to 13,889,000,000 marks in 1907, which denotes an
increase during these thirty-three years of 643.05 per cent.
From 1883 to 1907, or in twenty-five years, the deposits
have increased from 3,187,000,000 marks to 13,889,000,000
marks, or four and a quarter times.
Between 1883 and 1908, the deposits in the German
credit banks have also mcreased considerably; in credit
banks particularly, with a minimum capital of 1,000,000
marks each (v/hich are of greater importance for the deposit business 45), they rose from about 498,000,000 marks
at the end of 1883 to about 2,746,000,000 marks at the
end of 1908, an increase during these twenty-six years of
more than four and a half times.
It may be assumed that the greater portion of these
bank deposits, about two-thirds, consists of working
reserves of manufacturers and traders (doubtless including also the smaller ones), and of funds of capitalists deposited temporarily, but destined for investment in securities, mortgages, etc., and that only the smaller part
(about one-third) represents savings deposits proper.
The annual increase of the savings deposited with the
16,092 German cooperative credit societies (on January 1,
1908) was estimated at 225,000,000 marks.46 The majority of the members belong most probably to the clasf
of the smaller and smallest tradesmen.
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German foreign trade (i. e., special imports and exports)
according to the memorial of the admiralty dated December, 1905, entitled Die Entwicklung der deutschen Seeinteressen im letzten Jahrzehnt, rose from 7,300,000,000
marks to 12,200,000,000 marks in the decade from 1894
to 1904; the increase in weight was 60 per cent, and in
value 66 per cent.
During this period the special trade of England increased 38 per cent, that of the United States 59 per
cent, that of France 28 per cent, and that of Russia 23
per cent. Within the last twenty-five years German trade
has exactly doubled.47
The total number of establishments in trade and industry amounted, according to the census taken in 1895, to
over 3,000,000, in which about 10,225,000 persons were
at work.
Of these 3,000,000 establishments, nine-tenths—with
about 4,750,000 persons only—were small establishments,
as against only 19,000 large establishments, with over 50
persons each; the latter, however, gave occupation to about
3,000,000 persons, or almost to 30 per cent of all persons
engaged in trade and industry. As compared with the
census of 1882, the proportion of large establishments to
middle-sized and small establishments in 1895,48 had
increased 28.3 per cent in the mining and foundry industries, 3.6 per cent in the chemical industries, and 2.2
per cent in the industry of illuminants.
By far the majority of the 19,000 large establishments
with about 3,000,000 persons belonged to industry proper.
The average number of workmen, clerks, and other
employees belonging to the trade insurance associations
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(Berufsgenossenschafteri) in commerce and industry was,
in round figures, as follows:
1886

3,467,000

1895
1905

5,341,000
8,036,000

There were 124,074 steam engines (not including those
used in agriculture and forestry) with 7,587,650 horsepower49 at work in the German Empire in 1907, which,
if the effective horsepower of a machine during a normal
working day is computed as equivalent to the laborpower of 10 men, replaced the work of 75,000,000 men.
Of these 124,074 (7,587,650 IP) steam engines, 27,921
(3,065,223 HP) belonged to the mining and foundry
industries; the textile industry employed 11,039 steam
engines (934,763 IP) and the machine industry 8,066
(891,088 IP) steam engines.
According to the occupation census of 1895 the whole
population of Germany was divided as follows: Agriculture, 35.74 per cent; industry and mining, 39.1 per cent;
trade and transportation, 11.5 per cent. For Prussia alone
the following comparative data may be given:50
1843.
Per cent.
60. S4-61. 34
23-37
• 97

Agriculture
Industry and mining
Trade and transportation.

1895.
Per cent.
36. 12
38.73
n-39

Per cent.
28.59
42. 76
13- 17

The population of the Empire engaged in agriculture
and forestry, which still numbered 19,250,000 persons in
1882 (19,225,455 souls, or 42.5 per cent of the population),
decreased in the thirteen years following (1882-1895), to
18,500,000 (18,501,307 souls, or 35.8 per cent), the whole
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population increasing during the same period 14.48 per
cent; that is to say, the decrease in agricultural population amounted to about 700,000 persons, or 3.77 per cent
of the total population. Although the number of farms
(landwirtschaftliche Betriebe) and the area utilised for agriculture increased constantly during the thirteen years in
question, the number of agricultural laborers diminished
by over 254,000 persons.
During the same period (1882-1895), the industrial
population increased 26.12 per cent, and the commercial
population as much as 31.62 per cent.
Thus even the census of 1882 had made it evident
that a reversal had taken place; the industrial minority
of former times had become a majority, and the former
agricultural majority had been turned into a minority.
According to the census taken on June 12, 1907 ("Reichsanzeiger" of February 10, 1909, No. 35), this condition
has become very much more pronounced.
The total number of persons engaged in agriculture
(those making agriculture their main occupation, including house servants, and members of the family) has decreased still further, the number being 17,681,176 souls.
Of the entire population of the German Empire in 1882,
1895, and 1907 the distribution of the total population
by occupations showed the following percentages:
1882.

Agriculture (including gardening, stock breeding,
f o r e s t r y , a n d fisheries)
I n d u s t r y (including mining a n d t h e building t r a d e s ) .

Per

cent.

1895.
Per

cent.

42.5
33-5

3S-8

10. 0

11.5

39- 1

T r a d e a n d traffic ( i n c l u d i n g i n n k e e p i n g a n d t a v e r n
keeping)

1907.
Per

cent.
28.6
42.8




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The distribution by occupations of the population engaged in gainful occupations in the German Empire in
1882, 1895, and 1907 is shown in the following table:
1895.

Agriculture (including gardening, stock breeding,
forestry, and fisheries)
Industry (including the mining and building trades),
Trade and traffic (including inn keeping and tavern
keeping)

Per cent.

Per cent.

A3- 4

36. 2

32. 7

33- 7

36. 1

37- 2

Per cent.

Thus on the basis of the statistics of occupations it may
be stated with perfect assurance (with certain reservations to be set forth presently), that of the German population more than two-thirds are no longer employed in
agriculture.51 It would, however, be entirely one-sided
and incorrect (as has been pointed out by Oldenburg,
Ballod, and especially by Traugott Muller, in a highly
instructive article52) to infer from these facts that German agriculture is on the decline, and that Germany's
sole salvation lies in industry, especially in the export
industry.
It has already been mentioned 53 that both the number
of farms (landwirtschaftliche Betriebe) and the area devoted
to agriculture,54 have increased during this period; and
the same applies on the whole to stock raising,55 as well
as to almost all agricultural productions, especially those of
fodder and potatoes. This increase was due chiefly to the
steady improvement in the systems of culture and methods of work, as well as to the constantly growing employment of machinery driven by steam and electric power.
Between 1882 and 1895, for example, the number of steam
plows in use increased from 836 to 1,696, and the number
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of steam thrashing-machines from 75,690 to 259,364. On
the other hand, t h e number of large distilleries increased
fivefold since 1870 in the districts east of the Elbe
(according to K. lyamprecht, op. cit., p . 187), in consequence of the introduction of the high-pressure boiler for
steaming potatoes.
The intensity of agricultural cultivation has also grown
considerably, and likewise almost without exception the
average crop yields. Thus, if t h e period from 1879-1888
be compared with t h e year 1899, an increase will be found
to have taken place in the case of rye from 980 to 1,490
kilograms per hectare, in t h e case of oats from 1,140 t o
1,720, and of potatoes from 8,100 to 12,290 kilograms.
According to Ballod's essay on the economic development of Germany since 1870, t h e home production of all
sorts of grains increased within t h e last two decades about
36 per cent, whereas the population increased only about
18 per cent.
The net proceeds, however—that is to say, t h e profitableness of agricultural undertakings, fell considerably
in many parts of Germany mainly because of the great
increase in the domestic cost of production, and of foreign
competition having t h e advantage of lower cost of production, and cheap transportation b y land and sea. An
improvement in this regard has been noted only during
t h e last few years, due in p a r t to t h e greatly increased
duties on agricultural products p u t in force by the latest
commercial treaties. Until then, much to the detriment
of the general economic interests in large parts of Germany, t h e condition of agriculture, affected as it was b y
a heavy fall in the prices of its chief products, 5 6 and t h e
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growing encumbrances on landed property,57 had become
quite precarious. This condition, naturally, influenced the
amount of agricultural production 58 and, considering the
great influence of agriculturists on the politics and legislation of Germany, brought about—in some cases unnecessarily—results detrimental to other classes, without
simultaneous advantages desired for and by agriculture.
Finally, certain improvements in the agricultural credit
system were introduced, partly by state aid, as in Prussia
by the foundation of the Prussian Zentral-Genossenschaftskasse (Central Bank for Cooperative Societies) (1895) and
partly through the establishment of "Raiffeisen" loan
societies, and the Schultze-Delitzsch loan and credit societies. In this direction, i. e., of cooperative effort, much
remains to be done. The granting of credit by the Reichsbank, which in view of its own short-term obligations
may grant short credit only, can be depended on by
agriculturists only in exceptional cases in view of the
greater length of time occupied by the process of agricultural production. Agriculture requires a system of
credit adapted to its peculiar conditions of production. A
permanent organisation for this purpose would benefit
agriculture as much as the community at large, since the
common good requires that not only the interests of the
consumer but also those of the producer be guarded.
In other directions, too, the injudicious use of the above
data (see pp. 104 to 106) may lead to false conclusions.
In the first place, we must not lose sight of the fact that
a considerable amount of economic activity which in
our statistics is classed under the head of industry is
either largely of an agricultural nature, for instance, the
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manufacture of beet sugar and starch, distilling, brewing,
milling, etc., or else closely connected with agriculture,
such as baking, butchering, the manufacture of food and
drinks, brickmaking, etc.59 It must also be borne in mind
that our statistics do not take into account those persons
who, in addition to their main occupation were engaged
in agriculture as a secondary occupation. According to
Troeltsch (loc. cit. p. 121), the number of such persons
in 1905 amounted to 3,700,000.
Further, it must be remembered that although between
1882 and 1895 the number of independent producers in
agriculture increased by 2.9 per 1,000, the number of dependent workers (abhangige Arbeiter) decreased 16.1 per
1,000 during the same period, the agricultural labourers
having turned to other occupations, mostly industrial,
without returning and without being replaced.60
Finally, the period under consideration witnessed the
completion of a movement which set in during the earlier
economic period (1848-1870), namely, the gradual development into independent branches of industry of a whole
series of occupations, such as spinning and weaving, originally carried on as homework in the country, and therefore classified under the heading of agriculture. These
occupations no longer center in the country.
In this manner the number of persons occupied in
agriculture decreased statistically, without an actual decline of agriculture as such, and without a decrease of
the number of persons actually employed in agricultural
pursuits.61
Care should therefore be taken not to overstretch the
conclusions drawrn from the figures showing the per
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centage (seepages 104 and 105) of persons in Germany following agricultural, industrial, and trade pursuits, nor to
pit against each other too sharply the two expressions
''agrarian state" and "industrial state," which as the
result of indiscriminate use are assuming more and more
the character of dangerous catchwords, suggesting that the
two economic stages thus designated are essentially antagonistic. It is only by avoiding these errors that a proper
appreciation can be gained of the share of German agriculture in the national wealth and production, in fact in
the entire economic life of Germany.
All these considerations, however, do not impair the
correctness of the above statement (p. 88), namely, that
the center of German economic life has been shifted more
and more from agriculture to industry.62 The causes of
this fact are of very varied nature.
The larger the growth and the rate of growth of the
German population, the less German agriculture was able
to employ and sustain it.
It is true 'hat, until the beginning of the period under
consideration, German agriculturists exported considerably more of their products (especially grain, with the
exception of rye), mainly to England, France, Holland,
and Switzerland, than was imported from foreign countries.63 It is also an established fact that during the period
in question the necessity of exchanging German manufactured products 64 for foreign products of the soil (more
especially wheat and vegetal raw materials) became more
and more pronounced. Furthermore, agriculture, despite
great efforts and successes, was not able to increase in the
same proportion and with the same rapidity as the popu109




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lation. The deficit in agricultural production thus entailed, which despite all protective duties amounted as far
back as 1898 to over 2,000,000,000 marks per annum, had
consequently to be met by importation from abroad.
Similarly, German manufacturers were quite unable to
satisfy their requirements at home, especially of raw materials, as the required raw products are not to be had at
all in Germany, or, if the colonies be taken into account,
only in insignificant quantities. Consequently a large
portion, in some cases the largest portion of the requirements of German industry, has to be procured by imports
from abroad. The most striking instance of this is furnished by the textile industry occupying the first place
in Germany's export trade, which has to obtain from
abroad about nine-tenths of its raw materials (cotton,
jute, silk).65
The annual import requirements of foods and delicacies, cattle as well as raw materials, and half-manufactured goods necessary in German agriculture and industry
for further manufacture, or for direct use, could not be
paid out of German national capital (Nationalvermogen)
unless the nation was to be gradually impoverished; payment had to be made in another way.
An inconsiderable part of this payment is made to
foreign countries in such German home-grown raw materials as are not needed for home use. The greater part of
the payment, however, is made in manufactured goods
supplied to foreign countries which import into Germany
food and raw materials, or, in other words, in exporting
the results of German home labor in return for foreign
products of the soil.66 These manufactured goods consist
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principally of woollen and cotton manufactures, sugar,
machines, silk goods, coarse iron manufactures, chemical
products, etc.
In 1908 by far the larger part of our special exports
consisted of manufactured goods, namely, 65 per cent.
Raw material exported amounted to only 25 per cent,
foods and delicacies to 10 per cent.
The " industrialisation" thus characterized caused in
the first instance by an increased population that had
to be fed and employed, in its turn became the cause
of a further increase of the population. It was intensified
by the circumstance that simultaneously the industrial
demand for means of production was constantly growing
through "the displacement of organic by inorganic matter," as Sombart has pregnantly characterized this
recent technical development.
The tree of the forest has to make room for the iron
girder for building purposes, and is replaced by coal for
purposes of fuel. Animal manure and animal labor are
being displaced by chemical fertilizers (ground Thomas
slag, potash, Chile saltpeter, etc.), by steam engines, and
electric motors; through the discovery of aniline dyes
fields sown in madder became free for other cultures.
At the end of 1907 the special exports from the German
Customs Union amounted to nearly 6.4 billion marks
(6,389,860,000), and the special imports to about 8 billion
marks (7,664,000,000)67, whereas exports from the German Customs Union between 1842-1846 averaged, according to K. H. Rau, about 510,000,000 marks and imports
about 630,000,000 marks,68

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The excess of imports for home consumption into Germ a n y a t t h e end of 1907 (more t h a n half of which came
from Great Britain, the United States, Austria-Hungary,
and Russia) over German domestic exports (almost half
of which were sent to t h e above-mentioned countries),
or our adverse trade balance
(Warenverkehrsbilanz),
amounted thus to almost 1,300,000,000 marks (1895:
800,000,000).

I t will be found, however, 69 on comparing t h e import
and export figures of 1907 with those of 1882, t h a t on t h e
whole t h e imports of 1907 have increased proportionately
much more t h a n t h e exports. 70 Of raw materials and
half-manufactured goods t h e imports increased 200.1 per
cent; and t h e exports only 77.5 per cent. Of manufactured goods t h e imports increased 222.1 per cent; and t h e
exports only 183 per cent. The opposite tendency m a y
be noted for the period before 1882, when the growth of
imports was on the whole smaller t h a n the growth of
exports.
Further, commencing with 1882, it will be found t h a t ,
on t h e whole, the quantities of manufactured goods
exported have formed a constantly decreasing portion of
the total German industrial production.
Finally, it will be found t h a t t h e increase in German
industrial production (in the most important branches)
was greater after 1882 t h a n t h e increase in t h e average
number of persons employed; t h a t since 1885 the increase
in t h e number of gainfully employed persons has been
greater t h a n t h e increase of t h e general population, and
on the whole 71 greater t h a n t h e increase of production
a n d of the quantity and value of the exports.
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All these factors warrant the conclusion that since
about the beginning of the eighties the consuming power
of the German nation, i. e., the home market, developed
more speedily and vigorously than the foreign markets. 72
It can scarcely be doubted that this was due to the
greater accumulation of capital during the same period—
that is to say, to the growing development of national
prosperity.
This growth raised the productive power of the industrial population on the one hand, and the purchasing
power of the nation on the other, allowing at the same
time a portion of the added available means to be utilized
for the improvement of the German balance of payments.
This improvement of the German balance of payments
has been caused during the last twenty-five years, especially through the acquisition of foreign securities, which
rendered foreign countries "tributary" to Germany in so
far as they had to pay her interest. Additional improvements have been brought about by the granting of long
and short term credit to foreign countries, by the considerable growth of Germany's shipping, and by her participation in foreign undertakings. The necessity and the
benefit of these improvements, especially of the last
named, will form the subject of a special chapter (Sec.
VII of this part).
There can be no doubt, however, that an unfavorable
trade balance {Passivitdt der Wirtschaftsbilanz) of a
country is the less dangerous the more favorable its balance of payments, for it can then more easily afford to let
other countries "work for i t " and supply it with raw
material and food.
90311 0 —ii

9

113




National

Monetary

Commission

During the last few years there have been noticed certain though not absolutely indisputable indications that
the German balance of payments, while not unfavorable
throughout, yet evinces a certain tendency in that direction.73 This should serve as a warning to utilize the increasing accumulation of capital primarily, and to a greater
degree than hitherto, for the strengthening of the home
market; or, in other words, to increase home production and
purchasing power, particularly the agricultural production
of foodstuffs and our colonial production of raw materials,
and to employ our surplus funds only secondarily in
the service of so-called " export capitalism." 74
Industrial, commercial, and banking circles must not
forget that the strengthening of agriculture and its capacity for absorbing industrial products forms one of the
most indispensable means of strengthening the entire
home market; on the other hand, the agricultural interests vshould not overlook the fact that the most careful
fostering of the export industry, within the limits essential
for the strengthening of the home market, is in turn
demanded in the interests of national economy.
In my opinion the inferences to be drawn from the
above for the German credit banks are clear. As regards the past, they have rendered effective service in
promoting the development of the national economic
forces by participating to a considerable extent in the
strengthening of the home market, by increasing the
productiveness and purchasing power of the nation,
and by sharing in the above-described (p. 113) improvements of the German balance of payments. The favorable effects of the activity of the credit banks should be
114




The

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Great

Banks

admitted even by those persons who, in a spirit of exaggeration, hold the German credit banks responsible for
everything unfavorable that has happened in the industrial and commercial development of Germany.
On the other hand, as regards the future, the German
credit banks must aim at restraining "export capitalism"
still further than has been the case hitherto, particularly
during the last few years, more especially at times when
the home market according to all indications stands in
need of available home capital.
Furthermore, as far as it is practicable and in conformity
with Germany's international economic and financial
relations, they will have to shape the forms in which
export capitalism is to operate, especially by fixing the
dates of issue of foreign securities and the rates of
interest with due regard to the interests of national
economy, and of the domestic money and capital market.
We shall resume now our review of the economic conditions of the period under consideration.
As far as the formation of joint stock companies was
concerned (vide, p. 38) only 102 companies, with a
total capital of about 638,000,000 marks were founded
during the twenty-four years between 1826--1850 as compared with 295 companies, with a total capital of about
2,404,760,000 marks, founded between 1851 and the first
six months of 1870. At the end of 1908 the total number
of companies founded in the German Empire since 1871
(including undertakings that had been transformed into
joint stock companies) amounted to 6,249, with a share
capital of 9,439,530,000 marks (vide, p. 119), or about
9% billion marks. These figures do not include the large
115




National

Monetary

Commission

number of limited liability partnerships that had been
established during the same period. During the years
1867-1873 no fewer than 1,005 German stock companies
were licensed, and 682 were newly formed. From the
second half of 1870 to 1874 there were founded 857 companies with a joint stock capital of 3,306,810,000 marks.
The sudden influx of the 5 billion francs of French war
indemnity caused a great abundance of money which let
loose a veritable rage of speculation and enterprise. This
overproduction of new undertakings, just as in 1857, was
one of the main causes of the crisis of 1873. By September, 1874, o u t °f the above 857 companies, no fewer
than 123 were in process of liquidation and 37 in the
hands of receivers.75
As compared with the capital stock of the companies
founded between 1851 and 1870, the amount of capital of
the stock companies founded in the principal trades and
industries between 1870 and 1874 shows the following
increases:76
Building trades, about twenty - seven - fold (from
17,420,000 marks to 486,640,000); brewing, about twentyfour-fold; stones and earths, about nineteenfold; banking,
about ninefold (from 94,650,000 marks to 838,270,000
marks); metal working and machine construction, about
sevenfold; agriculture, about fivefold; chemicals, fuel
materials and illuminants, about fourfold, and sugar
manufacturing, about twofold.
In the mining industry, not mentioned in the above list,
the number of companies founded between 1870 and 1874
was also quite considerable. In fact, as regards the absolute amount of capital newly invested during these years.
116




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Great

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394,950,000 marks, this industry takes front rank.77
But inasmuch as the share capital newly invested in this
industry between the years of 1851 and 1870 reached the
large total of 275,310,000 marks, the increase during the
following period does not appear so striking.
As the German railway system had already been constructed to a considerable extent by the end of the former period (1851-1870), the capital of newly created railway companies was considerably smaller in 18 70-18 74
(778,000,000 marks) than in 1851 to 1870 (1,722,000,000
marks).
In 1883, 1,311 joint-stock companies published their
balance-sheets, showing a capital of about 3,918,000,000
marks. Among these, 128 companies (or about one-tenth
of the total number) with a capital of 571,250,000 marks
(or about one-seventh of the total capital) belonged to
the mining industry. 78
During the subsequent period, the years 1889 and 1890,
which were years of great industrial prosperity, are most
notable for the large number of company flotations.
In 1896 there were 3,712 joint-stock companies with a
paid-up capital of 6,845,760,00079 marks.
Their distribution 80 was as follows: 235 mining and
foundry companies with a capital of 1,022,330,000 marks
(or, including loans and reserves, 1,381,860,000 marks);
235 machine-building companies,81 with a total capital of
324,720,000 marks; 259 textile-industry companies, with
a capital of 414,910,000 marks; 378 brewing 82 companies,
with a capital of 367,200,000 marks; 164 building companies, with a capital of 172,760,000 marks; 98 banking
companies, each with a capital of more than 1,000,000
117




N at tonal

Monetary

Commission

marks, and a total capital of 1,240,300,000 marks; 108
companies in the chemical industry, with a capital of
332,870,000 marks; 39 companies in the electrical industry
with a capital of 195,610,000 marks.
From 1897 to the year 1900, when the crisis broke out,
there was again a flood of flotations. In these four years
no fewer than 1,208 joint-stock companies were floated 83
with a capital of 1,730,000,000 marks, among them 53
banks with a total capital of 124,776,000 marks.
In 1900 the total number of all German joint-stock
companies amounted to about 5,400. It was ascertained
that in the case of about 4,600 companies there was a
paid-up capital of 6,800,000,000 marks, and together with
loans and reserves, about 7,800,000,000 marks.84
We have already proved in detail by the list of new
companies founded between 1897 and 1900 what a superabundance of flotations preceded the crisis of 1900, just
as was the case before the crisis of 1873. Of the 4,000
joint-stock companies the year of whose flotation we are
able to ascertain, more than 1,600 are found to have been
founded in the years 1890-1900.
Nearly nine-tenths of all joint-stock companies belong
to industry; the rest to the banking business, with the
exception of 150 insurance companies, which, however,
claim nearly a third of the share and debenture capital.
The table 85 given below shows for each year the
number and combined capital of the joint-stock companies
floated since 1871. Their number amounted at the end
of 1908 to 6,249 with a joint-stock capital of 9,439,530,000
marks, which, compared with 1900, represents an increase
in joint-stock capital alone of nearly 2)4 billion marks.
118

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N at ton a l

M on et ar y

Commission

The average dividend income 88 for the years 1870-1900
of shareholders in companies whose shares were quoted
on the Berlin exchange may be seen from the following
table:
Gross
income.

Coal industry
Iron industry
Stone and earthen industry (building material, glass, china)
Metal industry w
Machine industry
Chemical industry
Electrical industry (i883-1900)
Spinning and weaving industry
Brewing industry
Banking
Life insurance

Net 89
income.

Per cent.
7-65
5-82
7. 62
8.86
7.oS
9.81
.
8.38
5.64
7-34
6. 74

Per cent.

11.24

07.42
a

5-34
5-39
7-75
4. 18
9-33
8.38
5- 13
6.44
06. 70
n . 24

0 1880-1900.

The above explains why during the periods under consideration (especially during the years of great industrial
development, 1886 to 1889 and 1895 to 1899) there has
always been such a great demand for shares in industrial
companies. This of course increased the over-production
of enterprises, especially as large amounts of inert capital
continued to be stirred since 1879 by the nationalization of
the railways and the great conversions of state loans.
As far as that branch of industry is concerned which
played such an important part in the whole development
of the first period, viz, the mining and smelting industry,
the following details are noteworthy:
The German output of pig-iron in 1870 amounted to
only 23 per cent of the English output, the English iron
industry having occupied the first place in the world up to
1890, since when the American iron industry took the




The

German

Great

Banks

lead. In 1880 the German output rose to an amount
equivalent to 35 per cent of the English output, in 1890
to 59 per cent, and in 1900 to 93 per cent; the English
production in the same year (1900) only equalled 63 per
cent of the American output. 91 After the expiration of
the fifties the German output of pig-iron exceeded the
Belgian, and in 1880 the French output. (See p. 32.)
From the beginning of the period under consideration
to the end of 1907 the production of pig-iron in the German Empire (including Luxemburg) rose from 1,346,000
tons (1870) to 12,875,000 tons (1907). In 1907 the total
output of France amounted to 3,589,000 tons, that of
Great Britain and Ireland to 10,083,000 tons, whereas
that of the United States amounted to no less than
26,194,000 tons.92
The importance of the last item can be gauged by the
fact that in 1875 Germany and the United States produced about the same amount of pig-iron (in round numbers, each 2,000,000 tons), whereas at the end of 1907 the
production of pig-iron in the United States was more
than double that of Germany (including Luxemburg);
and, further, that between July 1903 and July 1907 the
pig-iron output of the United States increased by no less
than 140,000 tons per week, or 7,000,000 tons annually.93
Despite the very considerable growth in Germany's
output of pig-iron during the period under consideration,
she was not able in the long run to meet her home consumption. Imports, especially from England, had to
be relied on to an increasing extent, and in 1907 they
totaled 443,624 tons.

121




National

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Commission

The pig-iron consumption in the German iron industry
increased considerably during the last few years of the
period in question (considering also the imports and
exports of pig-iron and the pig-iron contents of machinery
andiron manufactures imported and exported), namely,
from over 6,500,000 tons (or 111.50 kilograms per head
of the population in 1904) to 9,250,000 tons, or 147.60
kilograms per head of the population.94
As far as the proportion of exports and imports is
concerned, the same remarks apply as those made above
(pp. 112 and 113) regarding the development of industry
in general. In consequence of the great increase in home
consumption, the iron exports despite the greatly increased output, could not grow permanently, falling from
the high level of 480,575 tons attained in 1906 to 275,170
tons in 1907.
The output of coal 95 increased in Germany during the
second period from 26,398,000 tons in 1870 to 143,185,000
tons in 1907 (valued at 1,394,271,000 marks); the output
in France amounted in 1907 to 36,168,000 tons; in Great
Britain and Ireland (including lignite) to 272,114,000
tons, while that of the United States amounted to not less
than 425,156,000 tons.
In 1907 the output of German coal amounted thus to
one-half the English output and to about one-third the
output of the United States.
The total value of all German mining products
grew from 314,000,000 marks in 1871 to about one and
three-quarters billion marks (1,844,920,000 marks) in
1907.96

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The total production of the German electro-technical
industry, the enormous growth of which, beginning with
the middle of the nineties, exercised such a strong influence
on the other industries, causing in the main the general
over-production and the crisis of 1900, amounted as early
as 1898 to 228,700,000 marks. Of this sum 211,100,000
marks, or 92.3 per cent, was represented by the value
of articles belonging to the strong-current branch (which
was hardly developed twenty years before), and only
17,600,000 marks by the value of articles belonging to
the weak-current branch.
In 1883 Emil Rathenau, being convinced at the Paris
Exposition of 1881 of the far-reaching importance of the
new invention, formed together with Siemens & Halske
the first joint-stock company in the electric industry,
under the name of the Deutsche Edisongesellschaft filr
angewandte ElektrizitaL This company became independent of Messrs. Siemens & Halske in 1884, and developed in 1887 into the existing concern of the Allgemeine Elektrizitdts-Gesellschaft.
This firm was successful in improving the three-phased current to such a
degree that in 1891 300 horsepower was transmitted, with
very little loss of power, over a line of 175 kilometres to
the exhibition at Frankfort-on-the-Main, a feat that made
a great and permanent impression.
In 1896, as has been pointed out (p. 118), as many as
39 electrical joint-stock companies existed, with a total
capital of 195,610,000 marks, whereas in 1900 there
were quoted on the German exchanges the shares of 34
joint-stock companies in the electrical industry, with

123




National

Monetary

Commission

436,000,000 marks capital (22 in Berlin alone, with
396,700,000 marks capital).
The rate of dividend income of the shareholders of
these 34 companies amounted, between 1883 and 1900, to
8.38 per cent.
During the nineties, up to the crisis of 1900, feverish
activity, coupled with an almost chaotic and incalculable number of enterprises and forms of financing prevailed in the electrical industry, which in a very short
time had gained, at home as well as abroad, a position of
the highest importance. Bberstadt 97 quite truly remarks
that at that time the great electrical companies "were
simultaneously machine-construction factories, suppliers
of energy, and financing institutions," and there was
scarcely a form of management or financing which was not
utilised in the nineties by the electrical industry. There
were syndicates, subsidiary companies (Tochtergesellschaften), and trust companies,98 the latter especially
intended to relieve the banks of part of their enormous
financial and other tasks connected with electrical undertakings,99 operating companies proper,100 and manufacturing companies, as well as financing institutions, increases
and reductions of capital, silent participations, commandites, issues and sales in the open market, fusions, pooling
of profits (Gewinngemeinschaften), buying of shares,
separations and combinations, independent and syndicated enterprises abroad, conventions, syndicates and
cartels at home and abroad. In short, a medley of undertakings which might well have led outside observers
during those years to imagine that far more paper was

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Great

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produced in the electric branch of industry than power
and light.
To-day, when a condition of relative quietness has set
in and the early movement may be said in a sense to have
terminated, it will be seen that the sphere of activity of
the electro-technical industry, although only comprising
a relatively small number of prominent companies (see
Part V, sub. II, ia), has extended very largely.
Trade and industry headed by the mining industry, as
well as a considerable number of secondary electric railways, and more recently agriculture, absorb a constantly
increasing amount of light and power. The change of
standard railways from steam to electric railways, which
is only a matter of time, will create new and profitable
employment for the electro-technical industry.
In 1907 the German exports of products of the electrical industry amounted to about 153,000,000 marks and
the imports to about 8,000,000 marks.101 In 1907 the
electrical industry gave employment to 100,966 workmen,
as compared with 54,417 in 1898.
According to a circular inquiry made by the German
home office in 1899, the total value of the products of the
German electrical industry amounted to 228,700,000 marks,
as compared with 45,000,000 marks in 1891, a fivefold
increase in eight years.
As regards the chemical industry,102 according to Hiibner (" Jahrb. f. Volksw. u. Statistik," Vol. LIX, p. 146),
9 German chemical joint-stock companies, with a capital
of 7,300,000 marks, existed during the period 1854 to 1859;
in the seventies, however, their shares were no longer
quoted on the stock exchange.
"5




National

Monetary

Commission

The enormous growth of the chemical industry and its
dominant position in the world market date really from
the beginning of the seventies. Beginning with the summer of 1870 to the end of 1874, n o l e s s than 42 companies,
with 42,000,000 marks capital, were formed.
In 1883, according to the Deutscher Oekonomist (1885,
p. 75), no less than 51 companies, with a total capital of
127,220,000 marks, published their balance sheets.
In 1896 there were in existence 108 joint-stock companies, with a total capital of 332,890,000 marks, their
number having thus doubled since 1883.
The number of establishments in which more than 100
persons were employed, increased, between 1888 and 1898,
from 156 to 247, or about 60 per cent in ten years.
In 1902 there were 7,539 establishments in this industry employing 160,841 workmen with a total wage list of
about 164,000,000 marks, as against 5,758 establishments
with 110,348 workmen and a total wage list of 98,621,506
marks in 1894, and 4,464 establishments with 85,143 workmen and a total wage list of 67,300,000 marks in 1888.
From 1882 to 1895, or in thirteen years, the number of
workmen employed in the chemical industry increased 61
per cent. At the end of 1898 a total of 216,580 workmen
and other employees in the German chemical industry were
contributing to the obligatory insurance funds. The total
wages and salaries of all workmen and employees, according to the Bericht ilber die Verwaltung der Berufsgenossenschaften der chemischen Industrie for 1908, page 3, amounted
to 248,731,687 marks. The number of insured establishments was 8,699.

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Great

Banks

According to the census of June 14, 1895, there were
then in the chemical industry:
Number.
Small establishments (i to 5 persons)
Middle-sized establishments (6 to 50 persons)
Large establishments (51 persons or more)

_
_

8,228
1,781
376

18,122
25,993
71,116

10,385

Total

J

Employees.

io3IISi33I

The results of the latest census have not yet been published. Large establishments, while forming only a very
small part of the total number, gave employment to
almost two-thirds of all the workmen employed in the
chemical industry.
In 1907, 8,816 factories employing 207,704 hands figured
in the lists of the state insurance authorities, i. e., belonged
to the trade association of the chemical industry.104
The total amount of wages and salaries paid to workmen
and officials in the chemical industry amounted in 1907 to
230,223,733 marks.
The imports into Germany of raw materials for use in
the chemical industry and partly and wholly manufactured chemical products amounted in 1907 to 43,586,417
metric quintals of 100 kilograms each, valued at
552,414,000 marks, and the exports to 31,539,353 metric
quintals, valued at 640,418,000 marks.105
In 1907 the import trade decreased somewhat while the
exports fell off considerably; the only large increase being
shown in the exports of artificial indigo.106
A change in the English patent law directed against
the predominance of the German chemical industry, and
introduced on the 1st January, 1908, provides that every
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Monetary

Commis

s to n

holder of a patent must manufacture his patented
invention in England after four years' time from the date
when the patent was taken out in that country. As this
law was given retroactive force, and became applicable
twelve months after it had been passed, many German
chemical factories had to erect branch factories in England.
This naturally increases total expenses, but on the other
hand allows the goods manufactured in English branches
of German chemical factories to enjoy preferential duties
granted by some English colonies to the mother country.107
It may, however, become necessary to make a corresponding change in the German patent law, so far as Great
Britain is concerned. The ultimate result of the latest
unpleasant move on the part of our English competitors
may thus cause more harm than good to British industry,
as was the case with the act which provided for the compulsory marking " Made in Germany " of imported articles
of German manufacture.
Further details regarding the concentration movement
in the chemical industry are given below (Part V, sub.
II, ib).
The census of June 24, 1895, gives the following data
regarding the number of establishments and average number of persons employed in the textile industry:
Number.
Small establishments (i to 5 persons)
.,
Middle-sized establishments (6 to 5 0 persons)
Large establishments (51 persons and over)

Employees.

205,292

Total

3,260

258,181
147,477
587r599
993,257

193,358
8,674

The very important position occupied by the textile
branch in German industry is very evident from these
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Great

Banks

figures, as according to the census of 1895 the total number
of German establishments of all descriptions amounted to
3,144,977, employing on an average 10,299,269 persons.108
Of the 450,000 to 490,000 home workers, counted in
1895, almost one-half belonged to the textile branch of
industry, although the number of textile home workers
had decreased by 90,000 persons between the years 1882
and 1895, and in various branches of the textile branch
by one-fifth to three-fourths of the original number.
Since, however, despite this great decrease of hand-loom
industry in the textile branch (due principally to the
growth of large-scale machine industry), there was in 1895
a falling off of only 18,000 persons employed in home
work in German industry as a whole, as compared with
the number in 1882, it is evident that home work has not
declined in many German industries, but rather increased.
Ludwig Pohle109 is quite right in calling special attention
to this very interesting fact and to the above figures.
The fact should also be emphasized that the number of
home workers increased in the large towns from 31,000 to
71,000 between 1882 and 1895, having thus more than
doubled during these thirteen years.110
In the 3,144,977 establishments mentioned above as
existing in the German Empire in 1895, the 10,269,269
employees were distributed as follows: m
Number.

Small establishments (i to 5 persons)._
Middle-sized establishments (6 to 50 persons)
Large establishments (over 50 persons)

10

129

2,934.723
191,301
18,953

4t 770,669
2.454.333
3,044.267

3,144,977

Total

90311°—II

Average
number
employees.

10,269,269




National

Monetary

Commission

The number of large establishments is relatively small,
although between the years 1882, when they totaled
9,974, and 1895, their number had increased no less than
90 per cent. In view of this, the fact is particularly
striking that almost one-third of all persons occupied in
industry were employed in these large industrial establishments.
If we turn our attention to the enormous development
of the means of communication during this period, taking
the railways first, it will be seen (p. 35) that the network
of German railways comprised 27,981 kilometers as long
ago as 1875. As far as main lines are concerned, the German railway system was completed in the main during the
eighties. In the second period (the one under consideration) the private German railways were acquired by the
State, and the network of main and branch lines (standard
gauge) in Germany 112 at the end of 1907 totaled 56,196
kilometers, including 51,871 kilometers of railways owned
by the Government or managed on Government account,
and 4,320 kilometers of private railways.113 Of 53,822
kilometers in 1904, 33,734 kilometers belonged to the
Prussian-Hessian Railway Union.114
The capital invested in these standard-gauge main and
branch lines amounted at the end of 1902, in round figures, to 13% billion marks, and at the end of 1907 to about
15K billions, or at the end of 1902 to 258,000 marks per
kilometer, and at the end of 1907 to 277,100 marks per
kilometer of railway line.
At the end of 1906, 1,284,676,000 persons and
508,270,000 tons of goods 115 were conveyed by these
railways. An average number of 20 railway journeys is
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Great

Banks

thus shown for every inhabitant of Germany during the
year.
The total traffic receipts of the standard gauge railways
amounted in 1907 to 2,745,000,000 marks, and the total
expenses of operation to 1,894,000,000 marks. The surplus of traffic receipts over expenses of operation was thus
851,000,000 marks; the rate of profit on the capital invested amounted to 5.60 per cent, and the percentage of
expenses of operation to traffic receipts (coefficient of
operation) amounted in 1907 to about 69 per cent.
The home requirements of the German railways for
rolling stock alone amounted in 1907 to 288,000,000
marks. The requirements for operating material and
superstructure of the German railways during the last
fifty years, which were principally met by German mining,
metallurgical, and machine construction industries, have
been estimated at about 5 billion marks.116
In addition to the standard-gauge main and branch
lines, on April 1, 1907, there were in operation 3,719.2
kilometers of public street railways {Kleinbahnen) and
8,991.9 kilometers of secondary railways (nebenbahndhnliche
Kleinbahnen).117 To these must be added the narrowgauge state and private railways (end of 1907, 2,100 kilometers),118 besides sidings, mining, agricultural, and forest
railways not used by the general public.
As far as the postal service is concerned, it has been
pointed out (p. 37) that in Prussia during 1851 only about
three letters were received per head of population; in 1906,
over 5% billion letters and post cards (5,393,300,000)
were dispatched in the German Empire (including Bavaria
and Wurttemberg), averaging 86 letters per head of
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population. Printed matter (newspapers), samples as well
as parcels and articles of value are not included in the
above total.119 In 1904 the number of mail matter dispatched averaged 115 per head of population, and in
the same year there was one post-office to every 14
square kilometers of area and every 1,458 inhabitants.
At the end of 1907 there were 40,083 post-offices in Germany; at the end of 1906 there was one post-office to
every 1,530 inhabitants and 13.60 square kilometers.
In 1882 one telegraph office did duty for every 133.7
square kilometers; in 1904 there was one for every 18
square kilometers, with a total of 35,100,000 telegrams, or
an average of 0.65 telegram per head of population. At
the end of 1907 the number of telegrams dispatched
amounted to nearly 44,000,000, and the number received
to 46,000,000. At the end of 1907 there was an average
of 0.71 telegram sent per head of the population, and a
like number received. On the same date there were
37,309 telegraph offices in Germany.120
As to telephones,121 which were adopted during the
period under discussion, there were in Germany, at the
end of 1907, 30,901 towns and villages, etc., provided
with long-distance telephone offices (1899, 13,175). At
the end of 1907 87,521 (1899, 1,964) places could communicate with each other by telephone. Over 927,000,000
telephone conversations took place in 1903, and
1,466,000,000 in 1907. In 1907 there were 18.2 telephonic
messages per head of the population. In Berlin alone
there were in 1898 over 40,000 telephone call places, with
68,000 kilometers of line, over which 38,000 conversations
were carried on daily. In 1904 there was one telephone
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office to every 23.5 square kilometers and 2,448 inhabitants.
The total value of all German merchant vessels
amounted at the end of 1897 to about 300,000,000 marks,
at the end of 1899 to about soo,ooo,ooo,122 and at the end
of 1905 to about 810,000,000 marks (as compared with
290,000,000 marks in 1895 and 426,000,000 marks in 1898).
On the 1st of January, 1908, Germany possessed 4,571
seagoing vessels (merchantmen), with a carrying capacity
of 2,790,435 net registered tons, and a total crew of 71,853
men.
These 4,571 merchant vessels included 2,345 sailing
vessels of 433,749 net registered tons, 304 tugs of 99,903
tons, and 1,922 steamships of 2,256,783 net tons register.123
The net registered tonnage of the German merchant
marine (steam vessels) has increased from 375,000 tons
in 1884, to 2,257,000 tons (in round numbers) in 1908.124
According to the memorial of the admiralty, dated December, 1905, entitled "Die Entwickelung der deutschen
Seeinteressen im letzten Jahrzehnt" (Introduction, p. VI),
the shipping at German ports increased between 1893 and
1903 by over 52 per cent, or from 27,500,000 to almost
42,000,000 net registered tons. In 1907 it amounted to
56,129,000 net registered tons. In the same memorial it is
stated that Germany has been progressing about four times
more rapidly in international sea traffic than in population, while the increase of trans-marine traffic in German
ports has been almost six times as great.
As far as sea-going steamships are concerned, the German merchant marine occupied in 1874 fourth place,

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whereas the British, American, and French mercantile
fleets took the first three places in the order named.
In 1884, however, Germany caught up with the United
States (the ocean fleet of which had decreased considerably
by that time), and in 1889 France was outdistanced. In
1908 Germany, with a net tonnage of 2,328,000 tons,
occupied the second position on the list, although possessing
only 11.2 per cent of the steamships of the world's mercantile marine. On the other hand, England, whose progress
naturally was relatively smaller during that period, possessed in 1908 no less than 10,350,000 net tons, or 50.2
per cent of the world's mercantile flee* of steamships,
which latter amounted to 20,633,000 net registered tons.125
As regards her sailing fleet, Germany between 1880 and
1901 occupied fourth place among the nations, owning in
1880 957,000 tons out of the world's sailing tonnage of
6,994,000 tons. In 1908 it occupied only sixth place,
with 459,000 net tons register. The following are the
figures for the other countries:126
Tons.
1, 591, 000
1,419,000
667, 000
569, 000
5 I O , °oo

England
United States
Norway
Russia
France

The officers and crews of the German seagoing ships
(sailing vessels, tugs, and steamships) numbered on January 1, 1909, 72,450 persons, distributed as follows: Seamen, 34,308; engineers, 23,201; and various, 14,941. m
It is pleasing to note that subsidies were granted by
Germany solely for the maintenance of regular lines of
mail steamers of the North-German Lloyd and the Ger-

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man East Africa Line (the Hamburg-American Line does
not receive any subsidy) to eastern Asia, Australia,
Africa, and New Guinea beginning with the year 1894.
The amount paid in 1909 did not exceed the very moderate total of 7,440,000 marks, equal to 1.85 marks per
registered ton.128 These amounts include also the payments for carrying the mails.
As against this small amount Great Britain has been
paying since 1902 to the Cunard Line alone a yearly subsidy of £150,000, besides granting to that company a
loan of £2,600,000, bearing only 2% per cent interest.
The total subsidies granted by that country were not
less than 34,000,000 marks (1.95 marks per registered
ton). France spends 53,000,000 marks in subsidies
(28.00 marks per registered ton), Austria-Hungary,
26,000,000 marks (26.70 marks per registered ton), and
Japan, 28,500,000 marks (24.70 marks per registered
ton).129
The most prominent of the German shipping companies are the following:
1. The Hamburg-American Packet Joint Stock Company, at Hamburg, founded May 27, 1847, with a capital
of 300,000 marks (Hamburg currency), which has undergone not less than sixteen increases from 1853 to the present
day.130 This company began operations in 1848 with 3
sailing vessels, steamers between Hamburg and New York
being introduced only in 1856.
At the end of 1908 the company's share capital amounted
to 125,000,000 marks, and its surplus amounted, on January 1, 1909, to 16,800,000 marks.

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The amount of bonds issued was originally 55^2 million
marks. At the end of 1908 the outstanding bonds
amounted to 76.4 million marks.
The number of the company's ocean steamers amounted
at the end of 1908 to 162, with a book value of 185,953,076
marks.
2. The Norddeutscher Lloyd, at Bremen, was founded
in 1857, or ten years after the Hamburg Company, banks
and banking firms participating to a considerable extent.
Its original share capital amounted to 9,513,772 marks
(28,643 shares, at 100 former Bremen gold thalers). In
1859 the company started a regular fortnightly service
with four steamers between Bremen and New York.
The company's share capital totaled 125,000,000 marks
at the end of 1908, while its surplus funds have been
used up by losses.
Its bonded indebtedness originally amounted to 70
million marks. At the end of 1908 the bonds outstanding amounted to 76,034,700 marks.
The company's ocean-going fleet numbered at the end
of 1908 127 vessels (besides 2 schoolships), with a book
value of 189,114,000 marks.
Between 1902 and 1903 these two companies m made
essentially identical agreements m with the International
Mercantile Marine Company, which was founded January 1, 1903, by American bankers and shipowners, with
a capital of $120,000,000 (of which $60,000,000 were
common and $60,000,000 preference shares), and which
comprised nine American and English steamship lines.
This company, which is named the " Morgan trust," after
the originator of the association, is authorised to issue
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bonds to the extent of $75,000,000, of which $50,000,000
were issued at once. The contracts with the two German
companies, which are almost identical in tenor, have
been concluded for a term of twenty years, and contain
a stipulation that either party has the right after the
expiration of ten years to demand their revision; should
a revision not be agreed to, a year's notice may be given
for the termination of the agreement.
These international agreements contain the following
points:
1. A demarcation of fields of operation: the right of
trafl&c to and from all German ports is reserved to the
German companies; the trust's ships may enter German
ports only by their consent, whereas German ships,
coming from New York, may enter English ports for the
purpose of embarking passengers (each company 75
times yearly in any direction). The German companies'
ships bound for South America, Mexico, and the West
Indies, as well as those bound for such countries with
which the trust maintains no service, may also touch at
English ports.
On the other hand, the German companies abandon
in the main all claims to the Anglo-American freight
business.
Belgian ports (at which German ships had not called
before) are not to be touched by the German companies'
ships on their way to North America; the status quo
forms the basis of the arrangement for calls by German
or trust steamships at French ports. The German companies, however, are at liberty to increase their sailings
from French ports at their own discretion. In case such
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an increase takes place, the trust is entitled to an equal
increase.
Should any of the contracting parties desire to found
a new line (permanent reservation is made expressly in
favour of the newly instituted lines of the HamburgAmerican Company between New York and the West
Indies and between New York and eastern Asia), notice
of the intention must be submitted to the common committee of supervision. This committee does not possess
the right of veto, but the other contracting party has
the right, in such a case, of participating to the extent of
one-third in the proposed line (coasting lines excluded).
An agreement has been arrived at whereby the return
tickets of cabin passengers on North Atlantic lines of the
various companies are valid for all lines belonging to the
combination. Negotiations were likewise pending for a
common time-table for first-class steamships with alternating departures during the quiet season. These negotiations however, it seems, were not successful.
The agreements contain—
2. A reciprocal participation in profits whereby the
German companies allow the trust annually a quarter
of the amount of the dividends paid in excess of 6 per
cent, whereas the trust pays to the German companies a
quarter of the amount which they may lack in order to
pay a dividend of 6 per cent.
3. An arrangement for mutual accommodation in certain cases; i. e., each party before applying to outside companies must charter ships from the other party in the event
its own tonnage is found insufficient; also a provision

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to the effect that both parties under certain conditions
are to support each other against outside competition.
Both contracting parties bind themselves not to acquire,
directly or indirectly, shares in each other's concerns.
The evasion of this prohibition has been made more difficult by the German companies in 1902 (after the conclusion
of the agreement) by alterations in their by-laws to the
effect that in certain questions of national importance
resolutions may be passed only by a majority of threefourths (in the Hamburg-American Company by fourfifths) , and at two consecutive general meetings, and that
the members of the executive and supervisory boards must
be Germans domiciled in Germany.
The supervision of the proper execution of the agreement is placed in the hands of a committee consisting of
an Englishman and an American belonging to the trust
management and the directors-general of the two German
companies.
The agreements become null and void in case of war
between Germany and Great Britain or the United States,
or in case of war between Great Britain and the United
States.
In 1908 an agreement was arrived at between the Hamburg American Steam-packet Company (Hapag) and the
Woermann Iyine on one side, and the North German
I^loyd and the Hamburg Bremen Africa Line on the other
side. (At first only till the end of 1912.) The agreement
creates a limited community of interest between the
companies involved and regulates the traffic to West
Africa by excluding any independent action in connection
with the West African traffic by any of the parties to the
agreement.
*39




National

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Commission

Shipbuilding, which was promoted by German banks to
a great extent,133 became prosperous again only in the
eighties. It was only about that time that the British
practice of substituting iron for wood as the main material in shipbuilding, which began about i860, was first
followed by German shipyards. The " Vulkan" at Stettin,
the shipbuilding yards of Fr. Schichau at Elbing and
Danzig, of Blohm & Voss at Hamburg, and of the " Weser "
Joint Stock Company at Bremen stand at the head of
German shipbuilding. In this industry the joint-stock
companies showed in 1907 a total share capital of
54,000,000 marks and a debenture capital of about
25,000,000 marks.
According to the occupation census of 1895, 22,731
persons were employed in German shipbuilding, a number
which must have considerably increased during the last
fourteen years.
According to the data of the Germanischer Lloyd a
total of 368,440 gross registered tons of shipping (seagoing
steamships and sailing ships, river boats, other vessels,
and war ships) were built during 1907, the figures for 1908
being 279,137 gross registered tons; a large part of German sea-going merchant vessels (up to 1905 about onethird) is still being built abroad.
Germany's share in the shipbuilding of the world (merchant vessels exceeding 100 tons) as compared with Great
Britain's has been as follows:
Germany.
Per cent.
7-3
9.0
13.8

1892-18971898-1905.
1906-1907-

140

Great Britain.
Per cent.
77.4
67.4
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American shipbuilding (iron and steel vessels) in 1907-8
increased about sixfold as compared with 1892-1897.
If we turn from sea navigation, with its enormous dimensions, to inland navigation, which has developed considerably since the forties of the last century, it will be
found that 14 new joint-stock companies were founded in
this field during the eighties and six additional companies
in the nineties.134 The economic value of the German
waterways was estimated in 1895 at over 1,500,000,000
marks.
On December 31, 1907, there were 26,235 vessels, with
a carrying capacity of 5,914,020 tons, occupied in inland
navigation, including 22,923 without power of their own
and 3,312 ships with power of their own (steamships and
motor boats) .135 The total length of navigable waterways
was 13,748.6 kilometers.136
In 1895, 22 per cent of the total traffic fell to the share
of waterways and 78 per cent to that of the railways. The
amount of traffic carried on each kilometer of waterway
was 750,000 tons, and on each kilometer of railway 590,000
tons.
I take it for granted that the large increase of the
German navy during the period in question, which in
its turn resulted in important orders to and great activity
of various branches of German industry, is generally
known.137
We shall now take up the subject of currency (Zahlungsverkehr).
Before the foundation of the German Empire there
existed in Germany 31 banks authorised to issue bank
notes; to-day there are only 4 private note banks (in
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Bavaria, Saxony, Wurttemberg, and Baden) in addition to
the Reichsbank inaugurated on January i, 1876, in accordance with the law passed on March 14, 1875.
The Reichsbank,138 which took the place of the old
Preussische Bank, is a bank under the supervision and
management of the Empire, established with private
means and constituting a corporate body (juristische
Person) though not a joint-stock company. According
to section 12 of the bank law it is allotted the task "of
regulating the money circulation of the whole Empire, of
facilitating payments, and of utilising available capital."
The original capital, divided into shares (each bearing
the name of the owner), amounted at the time of foundation to 120,000,000 marks, and since the supplementary law
of June 7, 1899, has reached the amount of 180,000,000
marks; the surplus funds amount to 64,814,000 marks.
The management of the Reichsbank rests in the hands
of the Imperial chancellor, and, subject to his authority,
in those of the president and of the Reichsbank directors,
who are appointed for life; supervision is carried on by a
board of bank curators (curatorium), consisting of the
Imperial chancellor as chairman and four members.
The cooperation in the management by the share owners
(chiefly in an advisory capacity) is exercised through the
general meeting, and through the central committee
elected from its midst, which consists of 15 members and
15 alternates. The committee, which meets at least once
a month, under the chairmanship of the president of the
board of directors, receives monthly reports of the general
business situation as well as proposals for measures that
may be deemed necessary. (Sec. 32.) Its expert opinion is
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also to be heard on a number of questions, such as the discount rates and the maximum amount to which the funds
of the bank are to be applied to loans on collateral (see sec.
32 a-f); it elects 3 deputies, whose duty it is to exercise
supervision over the management of the Reichsbank, and
who are authorized to inspect the books of the bank, and
to participate in the meetings of the board of directors
(with advisory powers). No business with the Empire,
or the German Federated States for which unusual terms
are to be made, is to be transacted unless approved by a
majority of the central committee.
At the chief branches of the Reichsbank, established in
large towns outside Berlin (Reichsbankhauptstellen), district committees are formed from among the shareholders,
invested with the same functions as the central committee.
The local committees in turn elect 3 deputies for the constant control of the business management of the local
office. Over 500 various branches are in existence at the
present day.
The Reichsbank has the right to issue bank notes without direct limitation according to the requirements of its
business.139 Its right is only limited indirectly by section
17 of the bank law, which enacts that the bank must
possess in bullion and Imperial treasury notes a minimum
of one-third of the amount for which notes are issued,
and for the remainder—discounted bills fulfilling the requirements of the Bank Act (bankmassige Wechsel); furthermore, that a tax of 5 per cent must be paid on the
notes issued in excess of the cash reserve, i. e., bullion,
treasury notes, and notes of other banks, and of its
so-called tax-free contingent.
(Sec. 9.) The latter
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amounted, according to the Bank Act, to 250,000,000
marks, and since the liquidation of various private note
issuing banks to 472,829,000 marks. The bank is bound
to redeem its notes at all times " in German gold coin,"140 at
the main office in Berlin on presentation, and at its branch
offices in so far as the available cash and money requirements permit." (Sec. 18.)
In view of its power of issuing notes, i. e., obligations
that may fall due at any moment, the Reichsbank is
allowed to engage only in certain classes of transactions.
It is confined to transactions in precious metals; to the
discounting of bills running for not more than three
months and for which 3 or at least 2 persons of known
solvency are liable; the purchase and sale of imperial government bonds, of the bonds of Federated States, or of
domestic municipal corporations payable at their face
value at the latest in three months; the granting of
interest-bearing loans on collateral for a period not exceeding three months on movable pledges exactly defined by
law (sec. 13, clause 3 a-c); the purchase and sale of German debentures, exactly defined by the Bank Act (sec. 13,
clause 4 and 3b) (even if not due after three months); the
collection of commercial bills, the purchase and sale of
precious metals or of securities of all kinds on account of
third parties (security being given in advance); the receiving of interest—and noninterest-bearing moneys on
deposit and on giro account, with the proviso that the
amount of the interest-bearing deposits must not exceed
the limits of the combined capital and the surplus funds
of the bank; finally, the custody and management of
articles of value.
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The Reichsbank is required to publish from time to
time the rate at which it discounts or advances money on
collateral (sec. 15); like all other note banks (sec. 8), it
must publish the state of its assets and liabilities under
date of the 7th, 15th, and 23d, and the last day of every
month (at the latest five days after the above-mentioned
dates). It must also publish within three months after
the end of the financial year an exact balance sheet of its
assets and liabilities, as well as a statement of its profit
and loss for the year. All these statements must be
published in the " Reichsanzeiger."
From its foundation to the present day the Reichsbank
has fulfilled all the tasks devolving on it under section 12
of the bank law in an almost exemplary manner. The
details are well known and can only be summarized here.
The Reichsbank has rendered service in the first instance in facilitating payments through the introduction
on April 10, 1876, of "giro" transactions, the principle of
which is that in lieu of payment in cash between the
"giro" customers of the banks, book transfers may be
made by writing off the amount to be paid from the
account of the payor and transferring it to that of the
payee. " Giro " transactions form the most simple method
of settling claims and counterclaims at one and the same
bank, namely, by transfer from one account to another.
Since 1883 so-called compulsory clearance ("Verrechnungs-Zwang") has been introduced for " giro " customers,
according to which all claims of a "giro" customer arising
out of bill or collateral credit granted by the Reichsbank
are not paid in cash, but placed to the credit of his "giro "
account.
90311 °—11

ir

'

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Commission

Since 1896 most of the imperial treasuries, as well as
the state treasuries of Prussia and Baden, have opened
"giro" accounts with the Reichsbank.
The number of "giro" accounts increased from 3,245
in 1876 to 24,821 in 1908; aside from, the governmental
treasuries these accounts stand mostly in the name of
large commercial and industrial concerns,141 so that up to
the present the "giro" transactions of the Reichsbank
have partaken of a somewhat plutocratic character.
Therefore, in the interest of the more economical use of
cash as means of payment, the introduction of the postal
transfer and check system on January 1, 1909, must be
welcomed, as largely extending the circle of firms and persons who settle their claims and counterclaims by means
of transfer. As the Reichsbank has also joined this postal
transfer and check system, transfers can be made by firms
possessing postal-check accounts to Reichsbank "giro"
accounts of other firms by means of the Reichsbank
postal-check account. In the same manner the possessor
of a postal-check account, who likewise has a "giro"
account at the Reichsbank, may have the amounts standing to his credit in his postal-check account transferred
to his "giro" account at the Reichsbank.
Through this interlocking of postal check and Reichsbank "giro" systems (which latter might be considerably
extended), and through a still greater fostering of the use
of checks, whose ultimate liquidation, howrever, should
be effected by transfer and clearance, rather than by cash
payment, the present antiquated and unsatisfactory methods of payment in Germany will be considerably improved

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A great and necessary improvement would be brought
about by suitable agreements with foreign postal savings
banks, central note banks, and credit banks, whereby their
transfer systems might be made to cooperate with the
transfer systems of the German post-office and Reichsbank.
A first step in this direction is the arrangement of February i, 1910, for the clearing of postal checks and transfers between the German postal administration and the
postal savings bank administrations in Vienna and Budapest as well as the Swiss postal-check bureau.
The " giro " transactions of the Reichsbank with private
persons, private firms, and public treasuries in 1907 were
as follows:
Marks.

Average amount of each account- . _ _.
Average volume of transactions per account

24, 116
- 10, 876, 564

whereas the total volume of "giro" transactions during
1907 amounted to 260,656,851,081 marks.142
The number of postal-check accounts amounted at the
end of November, 1909, to 23,847, with a total balance
of 70,955,349 marks to the credit of persons and firms
having such accounts.
The means at the disposal of the "giro" department
strengthen the operating resources of the Reichsbank or
its power to serve the whole economic community by way
of bill and loan transactions, and enable it to make the
most rational use of its bank-note issue. At the same
time the currency set free through the "giro" method of
payments can be utilised for credit business.
The "giro" business of the Reichsbank, which is restricted to its customers, should be supplemented by the

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clearance system, which aims at discharging claims and
debts (especially checks, bills, etc.) among a number of
institutions and their clientele by means of balancing
their accounts—i. e., with the least possible use of cash.
A clearance system [Skontrationsverkehr] of this description, which has long been organised on a much larger
scale abroad in the form of clearing houses, (especially
in England and the United States), was instituted in Germany as late as 1883, in which year the Reichsbank
founded clearing branches [Abrechnungsstellen], At the
close of 1908, when there was a total of 17 clearing houses
with 198 members, the amount of paper presented for
clearing had increased to 10,531,271 from 1,979,012 in
1884, and the total sum cleared from 12,130,196,000
marks in 1884 to 45,960,854,400 marks in 1908.
In the three foreign financial centers, the total value of
clearances was as follows:
1884.

France (Chambre de Compensation des
Banquiers de Paris)
England (London Bankers' Clearing
house comprising City, Country, and
Metropolitan Clearing
United States (Associated New York
Clearing-house banks)

Marks.

Marks.

3.355»475>ooo

2 1 , 289, 210, 000

118, 464, 479, 000

260, 0 8 1 , 9 2 9 , 000

143.186,557,000

143

3 6 6 , 165, 106, 000

The small amount cleared at the German clearing
houses at the present time as compared with the clearing houses of the two last-mentioned countries is due on
the one hand to the gratifying circumstance that large
payments in Germany are effected with outside places by
means of "giro" accounts, or transfers on the books of
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the Reichsbank or post-office, and on the other hand
to the less gratifying fact that payments in Germany
are much less effected by means of checks which in turn
would pass through the clearing houses.
It should be stated, though, that the check law of
March n , 1908, passed after protracted opposition, has
removed a series of obstacles that have hitherto stood in
the way of the development of the check system in
Germany.
The total turnover of the Reichsbank 144 amounted in
1908 to 305,244,504,000 marks, or, in round figures, 305X
billion marks, as compared with about 47 Y/2 billion marks
in 1877 and about 142 billion marks in 1897; in these
total turnovers, cash payments are superseded by "giro"
transfers to a constantly growing extent. Thus the
volume of giro transactions increased from 41 billion
marks in 1886 to 188 billons in 1905, and it is due mainly
to this circumstance that the Reichsbank has been able
to operate with a relatively small amount of bank notes
even in periods of increased business activity.
The doubling of German bank-note circulation in 1907,
as compared with the average for 1881-1885—despite
the great increase in gold coinage and in the extent of
the giro transactions, is a clear proof of the enormous
growth of the requirements for means of payment on the
part of the greatly increased population during the period
under consideration.

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The average circulation of bank notes amounted toReichsbank.

^
Bank of France.
Per head
of
population.

Per head
of
population.

1876-1880
1881-1885
1886-1890
1891-1895
1896-1900
1901-1905
1907

Marks.
681,000,000
736, 800, 000
913,400,000
1,007,400,000
1, 1 1 4 , 8 o o , 0 0 0
1, 2 5 8 , 6 0 0 , 0 0 0
1, 4 7 8 , 8 0 0 , 0 0 0

Marks.
15-4
16. o
19. o
19.8
20.5
21. S
23-9

Marks.
1,912,700,000
2,268,900,000
2,285,100,000
2,702,100,000
3,052,800,000
3,447,400,000
3,897,400,000

Marks.
5i-5
59-9
59-6
70.4
78.8
88.2

Bank of England.

Amount.

Per head
of
population.

Marks.
571,300,000
522,600,000
499,500,000
523,400,000
565,600,000
5 9 2 , 3 0 0 , 000
591,300, 000

Marks.
16
14
*3
13
14
13
13

Ci

^

«0

3




The

German

Great

Bank

The reserves of the Reichsbank for the issue of bank
notes amounted to—
Gold.

Metal.

Cash.

Aver- High- Low- Aver- High- Low- Aver- High- Low est.
est.
est.
age.
est.
est. age.
est.
age.
Per
cent.
1876-1880
1896-1900

Per
cent.

Per
cent.

Per
cent.

85.0
79-5
72.8

104.3
102. 9

66. 1

77- 1

51-9

76.4

89.4

49-9

66.9

Per
cent.
96.3
99-4
82.6

Per
cent.
62. 4
49-7
44- 2

Per
cent.
34.o
52.4
Si-5

Per
cent.

Per
cent.
22. 5

54-4
71.7

32.6

65.6

32.0

As compared with this, the note issue reserves held by
the banks of France and England were as follows:
Bank of France.
Metal.

Gold

Bank of England.
Metal.

Gold,

\Per cent. Per cent. Per cent. Per cent.
99.0
87.8
98.3
129. 1
129.9
84. 1
52.0
120.5
117. 7
76.3
56. 2

1876-1888
1886-1900
1907

The proportion of reserves of the Reichsbank to bank
notes and other moneys falling due daily (the giro assets
in the first instance) was:
Gold.
Aver- High- Low- Aver- High- Low- Aver- High- Lowage.
est.
age.
est.
est.
est.
age.
est.
est.

1896-1900

66.
55-

1908

5i-

1876-1880

73.o
68. 1
58.2

53.2
38.5
38.2

60. o
52.9
46.9

151

69.3
65- 7
53- 7

52. 1

36.8
33.8

26.5
36.3
36.1

42. 1
47. 1
42. 6

19. o
24. 1
24.5




National

Monetary

Commission

This proportion in the case of the other two banks was
as follows:
Bank of France.
Metal.
69.8
69. 7
65.8

1876-1880
1896-1900
1907

Gold.

43- 1
48. S

Bank of England.
Metal.
46. 5
44-9
42. 1

Gold
46. 1
44-8

The average amount of gold in hand at the Reichsbank
(current gold-coin of the Empire, bars, foreign coin, etc.)
during the period in question was:
Per cent
of the
total
stock of
bullion.
Marks.
231.593»ooo
251,092,000
513,574,000
6 n , 296, 000
584,091,000
693,561,000
785,195.000

1876-1880
1881-1885
1886-1890
1891-1895
1896-1900
1901-1905
1908

44- 1
43-5
63.6
66. 1
68.6
73-8
77. 1

The amount of Reichsbank notes in circulation unsecured 145 by cash 146 or metal u 7 is rightly regarded as
the real " elastic" part of the whole note issue, as it
adapts itself very closely to the varying state of the
market, and the requirements of the business community,
the varying amounts forming a very reliable gauge of the
state of and fluctuations in the demand for means of
payment.
The following tables may serve as illustration.

152




(a) Amount of bank notes in circulation unsecured or exceeded by cash.a
Average stage.

Year.

1876-1880
1881-1885
1886-1890
1891-1895
1896-1900
1901-1905
1906
1907
1908

A m o u n t in
t h o u s a n d s of
marks.

102,263
117.113
73.943
48,879
228,623
278,736
438,461
53i,os6
415,319

Highest stage.

Percenta g e of
t h e figu r e s for
1876, or
for t h e
period
18761880,
respectively,

Date.

100. o

Jan.

7,1876

114.5
72.3
47.8
223.7
272.4
365.4
442.5
346. 1

Dec.

31,1884

Dec.

31,1889

Dec.
Sept.
Sept.
Dec.
Dec.
Dec.

31,1895
30, 1899
30, 1905
31
31
3r

A m o u n t in
t h o u s a n d s of
marks.

242,201
306,551
396,058
441,683
664,633
920,285
,045,476
,098,805
927,625

Lowest stage.

Date.

Mar.
Mar.
June
Feb.
Feb.
Feb.
Feb.
Feb.
Aug.

23,1879
15,1883
7,1888
23,1895
23,1898
23,1902
23
23

o T h e a m o u n t s of b a n k n o t e s e x c e e d e d b y c a s h a r e p r e c e d e d b y a m i n u s sign.

Difference
between
highest and
lowest
A m o u n t in
s t a g e s in
t h o u s a n d s of t h o u s a n d s of
marks.
marks.

—

25,350
4, 082
— 170, 630
— 177. 764
— 28,103
— 4L388
126,136
248,242
148,890

267,551
302,469
566.688
619,447
692, 736
961,673
9X9,340
850,563
778,735

faa




(b) Amount

of bank notes in circulation unsecured or exceeded by bullion and

Average stage.

Year.
Amount.

156,206
159.777
105, n o
82, 706
263,423
3i8,933
496,271
635.443
505.077

1876-1880
1881-1885
1886-1890
1891-1895
1896-1900
1901-1905
1906
1907
1908
a

Percentage of
the figures for
1876,
respectively,
for the
period
18761880.
100. o
102.3
67-3

52. 9
168.6
204- 2
284.7
364.6
289.8

Highest stage.

Date.

Dec.
Dec.
Dec.
Dec.
Sept.
Sept.
Dec.
Dec.
Dec.

31,1880
31,1881
31.1889
31, 1895
30, 1899
30, 1905
31
31
31

Lowest stage.

Amount.

283,701
344.948
425.957
467, 012
696,040
950,431
1.110,881
I, 181,743
995.243

specie.a

Amount.

Mar.
Mar.
June
Feb.
Feb.
Feb.
Feb.
Feb.
Aug.

23,1879
15.1883
7,1888
23r l895

23.1898
23,1902
23
23
22

21,511
41.743
-137. ii3
— 142,470
6,388
4.944
181,859
350.76o
245.387

The amounts of bank notes exceeded by bullion and specie are preceded by a minus sign.

Difference
between
highest and
lowest
stages.




The

German

Great

Banks

In 1907 the greatest amount of gold in hand was
759,181,000 marks (on May 23), and the lowest amount
471,848,000 marks (on November 30).
The average metallic reserve was:
1876
1880
1881
1885
1886
1890
1895
1896
1900
1901
1905
1908

_
-.
-. - ^ _
.
_
.

_
1

__

-

Marks.
510, 593, 000
__
562, 091, 000
556, 749, 000
_
586, 131, 000
_
693, 105, 000
801, 019, 000
1,011, 763, 000
891, 988, 000
817, 137, 000
911,411, 000
972,959, 000
1,019,065,000

The differences (Spannung) between the official rate of
discount and the private rate (market discount) averaged
by four-year periods as follows:
Berlin.
Per cent.

905
906

Per cent.

1. 19
0. 98
1. 04
1. 11
0. 71
1. 01
0.97

876-1880.
881-1885.
886-1890.
891-1895.
896-1900.
901—1905.

Paris.

Si
43
So
SS
09
60
90
28
06
79

I. I I
o. 91
1.23

1907
1908

*5
5

London.




National

Monetary

Commission

The average rates of discount of the central Banks in
Germany, France, and England since the institution of
the Reichsbank was as follows—
Reichsbank.

Bank of
France.

Per cent.

Per cent.

1876

4. 16

1877

4. 42

1879 __

3 • 1o

4- 3 4
4. 24

1880 _.

4- 42
4- 54
1883.

4- 05

1884.

4. 00

3. 00

1885.

4. 12

3. 0 0

1886.

3- 28

3- 0 0

1887.

3- 41

3-00
3. 10

1894.

3-32
3.68
4- 52
3.78
3 . 20
4. 07
3-12

1895 -

3- 14

1896.

3-66
3.8i
4- 27
5- 04
5-33
4. 10
3-32
3.84
4. 22
3-82
5- IS
6.03
4-75

1890..
1891 .
1892.
1893 -

1897 1898.
1899.
1900
190 I .
I90 2 .
1903 .
1904 1905 .
1906 _
1907 _
1908 _

3-09
3- 0 0
3-co
2. 70
2. 50
2. 5 0

2. 20
3.06
3- 25
3-00
3- 0 0
3-00
3-00
3-00
3- 0 0
3- 46
3-04

In 1906 the rate of the Bank of France was 3.00, and
that of the Bank of England 4.27; the rate in 1907 of the
Bank of France was 3.46, and that of the Bank of England

156




The

German

Great

Banks

was 4.93; and in 1908 the rate of the Bank of France was
3.04, and the rate of the Bank of England was 3.01 per
cent.
The private rate of discount (market discount) averaged
as follows:
rlin.
ce,,.

Paris.
Per

cent.

London.

Per cen£.

1876.

3- o 4

2. 25

1877-

3- 17

1. 75

2. 25

1878.

3-C7

2. 0 0

3-5o

2. 60

2. 25

1-75

3-04

2. 5 0

2. 25

3- 50

3-75

2.88

3.89

3-38

2.38

3.08

2. 56

3. 0 0

2. 90

2. 42

2. 6 0

2.85

2. 46

2. 0 4

2. 16

2. 23

2.05

2. 3 0

2. 42

2.36

2. 11

2. 75

2.38

2. 63

2. 65

2.70

3-78

2. 64

3-68

3. 02

2.58

2. 5 0

1.80

1.83

1.47

3- 17

2. 22

2. 10

1879-

1887-

1890-

1893189418951896.
1897189818991900.
1901 _
I902_

2. 25

1. 74

1. 77

0. 97

2. 01

1.63

0. 81

3. 0 4

1.83

1.52

3-09

1. 96

1.87

3-55

2. 12

2.65

4- 45

2. 9 6

3- 29

4. 41

3- 17

3- 7o

3. 06

2.48

3. 20

2. 19

2.43

2.99

1903190419051906-

3.01

2. 78

3-40

3- 14

2. 19

2. 70

2.8s

2. 10

2.66

4.04

2. 72

4-05

19071908-

5. 12

3-40

4-53

3-52

2. 25

2.31

iS7




National

Monetary

The average bill
amounted to—

investments of

Commission
the

Reichsbank
Marks.
356, 518, OOO
366, 955, OOO
463, 214,000
554, 142, 000
724, 438, 000
839, 752, 000
989, 445, 000
J IO
> 4 > 537, °°°
967,729, 000

1876-1880
1881-1885
1886-1890
1891-1895
1896-1900
1901-1905
1906
i9°7
1908

Since a central note bank always has to be in a position
to redeem its.notes (covered according to law in a special
manner) on presentation, and to meet its other daily
obligations (for which the mode of covering is not prescribed by law), the general principle ought to be observed
that, in so far as the law does not permit exceptions, its
credit business must be strictly in keeping with its debit
business, a principle which need not be so strictly maintained by the credit banks.
Accordingly a central note bank should grant shorttime credit only, either by discounting short-term bills
or by making short-time loans on collateral.
The discounting of short-term bills ought to occupy the
first place in the credit business of the Reichsbank, as
the latter is bound under section 17 of the bank law to
secure, by short-term bills, two-thirds of the notes it issues.
The Reichsbank in the course of time has acquired a
constantly growing percentage of the entire number of
outstanding bills. It is thus able to extend its note circulation, as the short-term bills falling due provide it
continually with the means of redeeming its bank notes.

is«




The

German

Great

Banks

Collateral credit business at the Reichsbank is relegated
to a secondary position, since collateral claims, for obvious
reasons,148 can not be used as reserve for notes. Nevertheless, collateral credit (which is likewise granted for three
months only) is normally less expensive to the debtor,
although since 1896 the rate of interest on collateral loans
has been 1 per cent higher than bank discount, for the
reason that interest on loans on collateral is computed
only for the actual duration of such loans, and that the
debtor may repay at any time part or the whole of the
loan. Lending money on merchandise has been discarded
more and more in favor of lending money on securities.
Thus at the end of 1908 only 5,390,100 marks were loans
on merchandise, whereas 170,533,650 marks were loans
on securities. The amount of loans on collateral, as a
whole, rose almost constantly, as follows:
Amount of loans Annual averon collateral
age outstanding.
made.

1904
1905
1906
-1907
1908 (decrease of the total and of the annual average)

Marks.
i» 957.4ii,820
2,093,427,625
2, 773, 191,475
3. 293.301,200
2,812,171,450

Marks.
74,180,000
72,033, 000
83, 631,000
98,140,coo
91,397.000

Apart from the possible difficulties of realisation, it
involves greater risk for the bank to grant credit on collateral than bill credit, as the nature of the credit required
cannot be recognised so easily as in the case of bills.
In granting short-term credit it is incumbent on the
Reichsbank administration to aim at regulating, through
the interest or discount rate, the domestic demand for
*59




National

Monetary

Commission

short-term credit which concentrates at the Reichsbank
and which is expressed to a great extent in its bill investments.
When credit is rendered more expensive by a high discount rate, which latter naturally influences immediately
the rate on loans on collateral and, gradually, general
interest rates throughout the country, excessive demands
for credit a t home, as well as excessive speculation, overproduction, and overvaluation of goods and securities
are restricted to a certain extent. Provided t h a t t h e
private rate of discount is high, and t h a t exceptional
circumstances (similar to those in 1907) do not intervene,
a high Reichsbank rate of discount can also check, diminish, or retard the outflow of gold to foreign countries. 149 As a rule, however, it will n o t cause gold t o be
imported from abroad, unless domestic discount rates are
raised far higher t h a n those abroad, and private rates of
discount are raised correspondingly and kept a t a corresponding height. In all other cases " screwing u p t h e
discount r a t e " will not cause gold to flow in from abroad,
b u t merely prevent temporarily a further increase in t h e
foreign exchange rate, t h u s preventing or postponing t h e
advent of the moment when the export of gold might
become profitable. 150
Complaints have been made against t h e Reichsbank for
having raised t h e b a n k rate (especially in 1907) without
necessity, at all events for having maintained it a t an
exorbitant height, t h u s severely injuring the interests of
trade, industry, a n d agriculture.
I t was also stated t h a t t h e Reichsbank was too obliging
as far as credit demands were concerned, particularly

160




The

German

Great

Banks

toward the credit banks, and the average amount of its
bill investments in 1907 (1,104,537,000 marks) and of its
investments in collateral 151 (98,140,000 marks) were
pointed to as a proof of the complaint. In particular at
the so-called "heavy terms" (schwere Termine) (the first
day of the quarters; also the fortnights from September 15 to 30 and December 15 to 30) it was said to
have weakened its position unnecessarily by granting
bill and collateral credit of too comprehensive a nature,
and that it discounted a great number of financial,
credit, and nominal bills (Leerwechsel)—i. e., such bills
as were not based upon real, bona fide commercial
transactions.
Finally it was urged that, because of its limited holdings
of foreign bills, the Reichsbank was unable to exercise
any appreciable, even if only temporary, pressure upon
the rate of exchange, whenever this rate had gone beyond
the "upper gold point," or tended in that direction; that
it was therefore not in a position to pursue an independent
foreign bill policy (Devisenpolitik), wrhich was demanded
by the circumstances, or at least to support and supplement its discount policy by means of a corresponding
foreign bill policy, even though subject to the same
limitations as its discount policy.
I consider that the proceedings of the bank inquiry
commission instituted by the Government in 1908 at the
instigation of the Reichstag, and the statements of the
experts examined at that time, go to show that only the
last mentioned objection can be sustained, and that only
to a limited extent.

903 I I ° — 1 1

12

161




National

Monetary

Commission

The amounts of foreign bills held by the Reichsbank
since 1876 were as follows:
1876
1877
1878

Marks.
I,672, OOO
i, 873, 000
5,351,000

1879
1880
1881
1882
1883
1884
1885
1886
1887
1888
1889
1890
1891
1892
1893
1894
1895
1896
1897
1898
1899
1900
1901
I902
1903
1904
1905
1906
1907
1908

3> 560, 000
9, 584, 000
7, 481, 000
5,590,000
4,004, 000
4, 631, 000
7, 951, 000
16, 961, 000
7,864, 000
3, 316, 000
3, 798, 000
5,420, 000
5,306, 000
4,715, 000
4, 113, 000
2, 54O, OOO
2, 569, OOO
2, 753, OOO
2, 411, OOO
4, 934, 000
19,045, 000
26, 753, 000
26, 946, 000
22, 733, OOO
24, 068, 000
22, 212, OOO
33, 093, 000
43, 244, 000
44, 461, 000
70,881, 000

On the other hand, as a result of the deliberations of the
bank inquiry commission, it has been firmly established
that, on the whole, the Reichsbank has not gone too far in
the amount of credit granted, although it was considered
advisable that in the future stricter principles should be
observed in discounting bills, and that the discounting of
162




The

German

Great

Banks

long-term bills and the granting of any kind of permanent
credit should, at least on principle, be abandoned.
Neither could it be proved that the Reichsbank during
1907 had raised the discount rate arbitrarily. On the contrary, the majority of the members of the bank inquiry
commission, and of the experts examined, were of the
opinion that the raise of discount rates was in the main
only the natural and necessary consequence of industrial
credit requirements, which in turn were not arbitrary, but
for the greater part legitimate and necessary, and that
had the discount rate not been raised, the situation of the
Reichsbank would have been much worse, and the drain
of gold much larger. As a matter of fact, the fixing of
the discount rate by the Reichsbank has solely a " declaratory/ ' and not a "normative" {Constitutive) significance.
The majority referred to were decidedly of the opinion
that, for the same reasons, the continued high rate of
discount, although much to be regretted, was a necessity.
In the course of the deliberations it became necessary even
for the most outspoken advocates to abandon the view
that the Reichsbank ought not to comply fully with the
sudden and abnormally large demands for credit that
arise at the so-called "heavy terms" {schwere Termine),
and which come principally from the credit banks.
It will hardly be denied that the credit requirements
at the so-called "heavy terms" are particularly legitimate and such as can not be deferred, and that these
requirements are met at the time by the Reichsbank in
the shape of short-term discount and collateral credit.
These requirements are: the credit demands on the first
day of each quarter, when, in accordance with German
163




National

Monetary

Commission

custom, rents, mortgage interest, salaries, wages, interest
payments, coupons, and frequently bills, etc., fall due, and
between the 15th and 30th of September and December,
the periods characterized by a similar natural increase of
credit demands on the part of all business interests.
The fact that the credit banks fall back to a very considerable extent on the Reichsbank just at those periods
is a necessary consequence of their being the agents of
the credit requirements of trade and industry, and that,
accordingly, the assistance sought is mostly for the satisfaction of the above requirements—i. e., the needs of
third parties—and only to a relatively small extent for
their own uses.
This does not prevent, however, the recognition of the
fact that the credit banks (as may, however, happen under
every system of banking) have frequently been too liberal
in satisfying the credit requirements of trade and industry,
and this not only in cases where operating credit was
granted in the shape of short-term credit, but also in cases
where investment credit was concerned, which in the early
stages may have worn the garb of operating credit and
developed only little by little into permanent investment
credit.
Nor is there any doubt that the demands made on the
money market, and above all, on the Reichsbank, were
frequently increased by a superabundance of issues,
promotions and transformations that were not always
justified.
As far as the resources of the Reichsbank were concerned, the majority of the commission proposed that
these should be increased, though it was deemed advis164




The

German

Great

Banks

able to effect this increase by a gradual increase of the
surplus instead of an increase of capital.
In addition, it was considered advisable that section 2
of the bank law should be changed, and that, following the
example of England and France, the bank notes issued by
the Reichsbank should equally be declared legal tender.
Naturally, the obligation of the Reichsbank to redeem its
bank notes in gold was to remain and, if possible, be even
more sharply emphasised.
The necessary proposals in these two directions are contained in the draft of a bill (art. 1, par. 2; arts. 3 and 4)
laid before the Reichstag in February, 1908, and since
made law, containing amendments to the bank act.
(Entwurf eines Gesetzes betreffend Aenderung des Bankgesetzes.—Reichstag document, No. 1178.) The provision, however, in force in England—which I consider both
necessary for and practicable in Germany, notwithstanding the argument to the contrary found on page 12 of the
report of the bill—according to which bank notes are not
to be legal tender for payments made in its giro and banknote transactions by the Reichsbank itself, has been unjustifiably omitted. Further, the draft authorises the
Reichsbank to buy checks, provided that two persons of
known solvency are responsible for the same, an authority
which the bank did not possess until then. This latter
measure is also in accordance with the views of the
majority of the members of the bank commission. On
the other hand, the permission granted by article 5, Section III, of the act of June, 1909, to use checks (which
in distinction to bills can not be accepted) as part of the
note reserve seems to be of doubtful wisdom. Finally,
165




National

Monetary

Commission

article 2 of the act provides for an increase of the tax-free
"contingent" of uncovered bank notes of the Reichsbank
from the present amount (472,829,000 marks) to 550,000,000 marks, so that the bank will have to pay the
5 per cent tax merely on the amount by which its note
circulation exceeds its cash reserve (see note 145) plus
this note contingent of 550,000,000 marks. The system
of a tax-free note contingent has thus been upheld, it
having been proved that this factor has had no influence
upon the discount policy of the bank. The Government and the majority of the commission were of the
opinion that the passing of the bounds of the tax-free
contingent was serving as a danger signal to the commercial public, although, as a matter of fact, from 1891
(before which date the bounds were never exceeded) till
1907 inclusive, this limit has been exceeded not less than
164 times.152 The last-named fact may therefore be said
to have brought about merely an increase of the tax-free
note contingent.
In concluding this review of the activity of the Reichsbank during the period under consideration, it must be
acknowledged that the regulation of our money circulation,
and of our systems of payments, credit and currency,
with which that institution had been intrusted, has been
in good hands. In particular it may be said that by
means of a circumspect discount policy, by opportune and
energetic intervention in 1900 as well as in 1907, i. e.,
during the most critical periods, the bank has been of the
greatest aid in preserving the German money market and
the entire economic organisation from lasting disturbances
of the gravest character.
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The above review of the most important factors which
influenced the development of industry and banking in
Germany during the period in question, would be quite
incomplete without a brief reference to the cartels formed153
during this era,154 and especially to those formed beginning with the period 1873-1875.155 These combinations
developed to an enormous extent in German industry,
and their growth was due in a great measure to the direct
influence of the German credit banks.
Cartels in the great majority of cases are either
"necessity's offspring" or at least due to its influence
or after-effects.156
They are associations, founded by contract for certain
periods of time, of independent enterprises belonging to
kindred branches of industry or of branches of industry
with nearly identical interests,157 the individual members
of the association retaining their independence but joining for the purpose of regulating production and sales
according to common points of view and in the common
interest.
A sharp distinction must be drawn (at least outwardly
and legally) between cartels and trusts, for the latter
although following the same aims158 represent permanent
and organic combinations of undertakings which have
sacrificed their independence, and do not always belong
to the same branches of industry, but possess common
interests.
Cartels are formed principally in branches of industry
which, like the mining and chemical industries, produce
staple articles (vertretbare Artikel), and in large quantities (Massengiiter). Their formation is rarest and most
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difficult in branches of industry producing special articles,
or which work up half-manufactured articles.
Furthermore, cartels are formed most rapidly and
easily in those industries engaged in the production of
staple articles, which show an organic, local, or capitalist
concentration into a limited number of large or "giant"
concerns {Riesenbetriebe); this has been the case for some
time in the mining industry, and more recently in the
chemical industry.
The formation of cartels is slowest and most difficult in
cases where both conditions—i. e., the production of
staple goods, and a limited number of large works—are
lacking. It is more difficult and unwieldy where a considerable number of middle-sized, and small (and moreover scattered) works exist side by side with large
concerns (Grossbetriebe).
The " necessity " for the formation of cartels in Germany
was clearly recognized, especially during the crisis of 1873,
as a result of the economic situation; by this means
overproduction at home and ruinously cheap prices were
to be terminated; this "necessity" likewise was the
origin of the protective-tariff movement of the seventies,
which was intended to ward off, or decrease foreign competition. The simultaneous introduction of a protective
system of duties is by no means indispensable for the
formation of cartels, at least not in the case of strongly
developed industries, as may be seen in the case of England. It seems to be only an attendant feature, easily
accounted for, in case of feeble industries, and which, in
some degree certainly, is likely to promote the formation
of cartels.
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I t is quite correct, and has been conclusively proved b y
Sering, t h a t at certain times, and under certain suppositions t h e iron industry in particular can not dispense with
protective duties, and t h a t well-organized cartels enable
protective duties t o become effective in favor of producers.
More t h a n this, however, can not be said; consequently
the assertion t h a t t h e organized iron or steel industries
can a t t a i n their aims only " u n d e r the system of protective duties " 159 is in m y opinion incorrect.
No official statistics existed u p t o t h e end of 1905 regarding t h e total number of cartels established in t h e German
industry, consequently t h e figures found scattered here
and there for earlier years must be accepted with reserve.
I n 1896 there are said to have been 250 cartels in the
whole German industry, 160 one-fourth of which belonged
to the iron and chemical industries, one-sixth to the
earthen and stone industries, and one-ninth t o t h e textile
industries.
According t o investigations m a d e in t h e iron industry,
which, however, can not be regarded as exhaustive, 44
cartels (conventions, syndicates) existed in t h a t industry
in 1903.
I n t h e statistics contained in t h e Denkschrift uber das
Kartellwesen
(p. 24), laid before the Reichstag during
December, 1905, t h e number of domestic cartels is stated
to be 385, divided as follows:
Coal industry, 19; iron industry, 62; metal industry
(excluding iron) , 1 1 ; chemical industry, 46; textile industry, 3 1 ; leather and india-rubber industries, 6; wood
industry, 5; paper industry, 6; glass industry, 10; brickmaking industry, 132; earths and stone industry, 27;
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earthenware industry, 4; food and delicacies, 17; electrical industry, 2; miscellaneous, 7. About 12,000 works
participated directly in these cartels (p. 25).
Numerous complaints before, during, and after the
serious crisis of 1900 among nonorganized branches of
industry, as well as in wider circles, against the price
policy pursued by the cartels,161 led to serious charges
against the cartel system, and ultimately, as usual, to its
absolute condemnation as being positively detrimental to
the public welfare. These complaints gave rise to an
official investigation by the imperial home office, which
lasted from November 14, 1902, to June 21, 1905. The
memorial (Part I) elaborated in the same governmental
department, and laid before the Reichstag on November
28, 1905, simply gives a review of the existing cartels
in Germany.162
In continuation of these investigations, it was proposed to bring out a compilation of the legal provisions
and regulations applying to cartels at home and abroad,
including also the most important decisions of the supreme
tribunals. Further, the results of the official inquiry
were to be tested in the light of specially prepared price
statistics. The material was to be brought down to
date "in all cases where the conditions determined in
the investigation had changed/' and, if necessary, the
material gathered was to be supplemented "through the
extension of the investigation to other cartels." (See
p. 18 of the memorial of 1905.)
The first part of the memorial is accompanied by
reprints "of all available by-laws (Statuten), company
and delivery agreements, etc., and business regulations''
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pertaining to cartels " in order to afford an insight into the
forms of organisation of the combinations" (pp. 18-19).
In addition to the associations of producers, the memorial treats also of the associations of consumers and
dealers.
In conformance with the outlined program, Part II 1 6 3
of the memorial, laid before the Reichstag on March 25,
1906, contains the provisions of the German civil and
penal laws, including the decisions of the supreme court
of the Empire. Part III, submitted to the Reichstag on
March 21, 1907,164 is devoted solely to a review of the
cartels in the coal industry.
Finally, Part IV, laid before the Reichstag on November 3, 1908,165 deals with the foreign cartel laws, including
those of the European countries, the United States, and
the British Colonies (Australia, New Zealand, Canada,
and Cape Colony).
This is not the place to discuss in detail the results of
the official inquiries preceding the publication of the
memorial, nor the inquiries themselves, which by no
means exhausted all aspects of the subject, especially
the important question of export bounties. It seems
advisable, however, as the conclusions drawn from this
inquiry are likely to occupy the attention of the legislative authorities, to examine some of the questions more
closely. It should be stated at the very outset that in
Germany, as opposed to the United States, all the railways are state property, and that any domination over
the railway tariffs by the cartels is out of the question.
According to my conviction, the official inquiry has
established*the following preliminary conclusions.
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The charge brought against the Rhenish Westphalian
Coal Syndicate.of having raised prices too high and too
rapidly during the years of greatest trade prosperity
(Hochkunjunktur) viz, 1898-1900 was proved unfounded;
as to the complaint that it did not reduce prices sufficiently and speedily enough after the crisis, no common
ground for the conciliation of the divergent views could
be found.166
The opinion that it is bad policy, unpatriotic, and incompatible with the public welfare to sell goods abroad
at lower prices than at home can be regarded as refuted.
In the event of overproduction at home, sales to foreign
countries are generally167 necessary in order to dispose of
the surplus home production and to relieve the home
market as far as possible, whereas the determination of
price in such cases is governed chiefly by foreign competition and prices prevailing in the international market.
The aim of the seller being always to obtain the highest
sale price possible, it may therefore be assumed as a
general fact that the regrettable occurrence of foreign
sales being effected frequently below home prices and
even below cost is solely due to the causes just named.
On the other hand, I am of opinion that the following
charges have been proved: The cartels in general, and
especially those in the mining industry, frequently lacked
all close touch and proper connection with each other, so
that a common business policy was out of question, even
if for these reasons only. A proper policy should at least
have set itself the task of establishing a proper relation of
prices for the products of the various industrial branches,
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factured wares, and finished commodities. Instead, the
coal syndicate pursued its own price policy (which was
certainly moderate throughout) without reference to the
coke syndicate; the latter in turn pursued its less moderate price policy without reference to the pig-iron syndicate,168 etc. Such a common business policy, moreover,
was out of question, because (a) the cartel system
(Kartellierung) never comprised the whole process of
production, i. e., the production of the raw material, of
the partially manufactured goods, and the finished article,
but only a single part, or parts, of the process of production, and because, furthermore, (b) the syndicate contract
frequently excluded a whole series of articles, as well as
all foreign business, from the cartel's sphere of influence.
It is clear, therefore, that the increase of prices fixed for
Germany by the cartels of the raw-material industries
benefited at first those cartels only, and that they were
able to dispose of their home surplus in foreign markets at
prices below those prevailing in these markets, and sometimes even below cost.
In the iron industry these facts caused considerable
injury, in the first instance, to the cartels formed in
industries following in the process of production, namely,
the production of partially manufactured goods. These
cartels in their turn endeavoured as much as possible to
shift the injury to their consumers, the industries following in the process of production, i. e., the industries
engaged in the further working up or finishing of the
partial manufactures. Hence, it followed that the further
an industrial branch was removed from the beginning of
the productive process the more intensely it was injured 160
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by the otherwise consistent {an sich naturgemdsse) business
policy of the raw-material cartels mentioned.
The unorganised industry of the more highly finished
products, therefore, was weakened and injured to a high
degree, and to a twofold extent; by unrestrained domestic
competition as well as foreign competition on the one
hand, and by the enforced raising of home prices for raw
materials and partially manufactured materials on the
other.
A considerable number of these evils which were calculated to counteract the essentially true purposes aimed
at by the formation of cartels, and which would have led
eventually to the disruption of the cartels,170 have been
removed at least for a certain number of industries by the
formation, on March 30, 1904 (retroactive to March 1), of
the Steel Works' Union (Stahlwerksverband, Dilsseldorf),
which united the Semi-Manufactures Producers' Association (the so-called Halbzeugverband), the Girder Manufacturers' Association {Trdgerverband), and the Rail and
Sleeper Combine, the total production of which, at the
time of its foundation, amounted to 7,900,000 tons (of
1,000 kilograms). The advantage of this union,171 which
was extended on April 30, 1907, for a further term of five
years, consists principally in uniting within its sphere of
activity the whole German output of partially manufactured articles, and a very considerable portion of the rolling mills' output. Further advantages of the combination
were the fact that all the works belonging to the union
were so-called "mixed" works and that it comprised at
least some of the mutually dependent cartels. The new
combination has also taken in hand the export trade, and
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is endeavouring, in conjunction with the Rhenish Westphalian Coal and Iron Syndicates (by means of contractual
arrangements), to regulate it in the common interest by
fixing export premiums and establishing a special clearing
house for exports. The export premiums, which amounted
to 2.50 marks per ton, were abolished, beginning with
July 1, 1907.
The union also has the avowed intention, carried into
effect since by a series of measures, to harmonise as far as
possible its own business policy, and more especially its
price policy, with that of the cartels following or preceding
it in the process of production. In particular its aim is to
fix the prices of all syndicate products in accordance with
the prices of the raw materials in such a manner as to partake of the benefit of the customs duty while showing the
utmost regard for the interests of the industries of the
more highly finished products.172
However, according to the memorials of February,
1908,173 and June the 5th, 1908, presented by the " p u r e "
Martin Steel Works (engaged in the production of crude
steel only) and the " p u r e " rolling mills (which only roll
steel and iron, but do not produce the iron and steel
material), to the Secretary of State for Home Affairs and
to the Reichstag, the Steel Works' Union had shown no
consideration for the interests of the finishing industry
as evidenced in many instances. It was stated that the
Steel Works' Union, with the object of suppressing the
" p u r e " rolling mills, had systematically kept the home
prices of half-finished material (the so-called "A" products
of the syndicate) so high that the " pure " rolling mills not
only had no profit, but at times a clear loss in the sale of
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the products manufactured from this half-finished material. For, simultaneously with the rise of prices for the
products " A"—which they on their part could not manufacture (as most of the members of the Steel Works' Union
could), but had to purchase—there had been a fall in the
selling prices of the products " B " of the Steel Works'
Union, comprising iron plates and bar iron, the sole
product of the " p u r e " rolling mills.
The entire advantage of the Steel Works' Union depended on the duty-free. importation of such raw materials as coal and ore. As it imported the latter free of
duty in those exceptional cases where it did not possess
ore of its own, the mixed works (Thomas Steel Works)
were able to keep the cost of their products below that
of the other works.
The superiority of the "mixed" works belonging to
the Steel Works' Union, it was claimed, was therefore not
based exclusively on the natural advantages of concentration, but chiefly or exclusively on the fact that these
works, being able to obtain their material without duty,
made a selfish and wrong use of the duty on imported pig
iron, half-finished, and scrap iron for the benefit of the
syndicate products and to the detriment of the " p u r e "
works. In the opinion of the " p u r e " works, these duties
were unnecessary, in view of the equally high cost of production abroad, especially in England.
This superiority of the mixed works, the argument went
on, rested on the further fact that although the cost of
material to the pure works was enhanced by the amount
of the import duty, the former made it impossible for
the pure works to realize the benefit of the customs duty
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in the prices of their products by refusing to sanction the
organization in a syndicate of the producers of finished
iron, especially of rolled plates and bar iron.
Under these conditions the " p u r e " Martin Steel Works
and the " p u r e " rolling mills demanded at one time a
suspension and early removal of the import duties on pig
iron, half-finished iron, and scrap iron (cfr. memorial of
5th June, 1908), and at another (cfr. memorial of February, 1908)—the introduction of import certificates for pig
iron and exported articles (i. e., for half-finished articles-—
bar iron, plates, and wire), by which means they could at
least secure to themselves the unhampered supply of material for articles to be exported.
The Steel Works' Union pointed out in its answer to the
above-mentioned memorials that the mixed works were
at a considerable disadvantage as compared with foreign
countries, both as to general conditions of production,
especially cost, and as to the far smaller social burdens
imposed abroad, particularly in England. A compensation
could be found only in better technical arrangements, in
savings in the cost of production and in a decrease of the
cost of transportation.
There could be no question of a systematic suppression
of the " p u r e " works. This might be seen from the fact
that the total sales of half-finished material amounted in
1907, to 1,200,000 tons, whereas the firms who had complained purchased only 340,000 tons, the production of
which required the services of only 5,000 workmen of the
Steel Works' Union's total labor force of 360,000 men.
Added to this were the export premiums continually paid
by the Steel Works' Union also to the above-mentioned
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works, which helped them to tide over bad times, to saynothing of the ever-increasing deliveries of half-finished
material to these works which were a matter of record.
The cutting of prices of iron bars and plates very often
emanated from the " p u r e " rolling mills, in fact it often
exceeded the amount of the export bounties.
It was a matter of regret that owing to objections of
several members of the Steel Works' Union, and to other
obstacles, the desired formation of bar iron and plate iron
syndicates had not become possible. The removal of
duties on half-finished material, pig iron, and scrap iron
desired by the " p u r e " works would result merely in a
dissolution of the Steel Works' Union. These duties
were indispensable as a protection against the enormous
power of the American steel combination against the
advancing Russian iron industry, and, lastly, against the
constantly growing British protectionist tendencies. The
abolition of the duties mentioned would prove at the
same time of general disadvantage to the whole home
industry, and especially to the rolling mills, as it would
entail the removal of the duties on iron bars and plates.
For these duties acted chiefly as prohibitive duties, a fact
disputed, however, by the " p u r e " rolling mills.
Finally, in the opinion of the Steel Works' Union, the
import certificates (for the export of articles worked up
from imported pig iron or half-manufactures), demanded
by the " p u r e " works, were too rigid in character and
could not be adjusted to varying market conditions. This
pliability, however, was essential to their successful application. If the demand of their substitution for the export
payments made by the syndicate were to be granted, they
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might easily assume the character of true export bounties, especially at times when home and foreign prices
were equally high.
As a sequence to this at times quite acrimonious controversy, the Steel Works' Union decided upon the reduction
of the domestic price of half-finished material by 5 marks
per ton (this came into force on the 1st of July, 1908).
But this did not help the " p u r e " works, since this reduction of the price for half-finished material had been anticipated, and accordingly the selling price of sheet and bar
iron had fallen 10 to 15 marks per ton; that is, below the
cost to the " pure " rolling mills. Since November 27, 1908,
the prices on fashioned bar iron (Formeisen) have likewise
been reduced for the first half of 1909 by 5 to 10 marks
by a resolution of the Steel Works' Union.
As no important improvement has taken place in the
condition of the " p u r e " rolling mills, a condition which
resembles in a striking manner the present condition of
the private banking business with relation to the great
banks, it will be necessary to consider the demands of
these works. It may be noted in this connection that
some of the great banks are found in their camp, at least
with part of their interests, though the large majority of
the great banks and by far the greater part of their interests are doubtless identified with the Steel Works' Union.
The carrying out of the plan to create bar iron and
sheet iron syndicates (which it would appear has been recently supported even by the Government) would seem
to be the most radical, and perhaps the only way of improving the doubtless precarious condition of the " p u r e "
rolling mills. Such a plan should certainly be supported
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by all means in the interests of German trade and
industry.
We must not forget, however, that the scheme to form a
general sheet-iron syndicate was wrecked not only by the
opposition of three South German members of the Steel
Works' Union (de Wendel, Maxhutte, and Dillingen), but
also by the opposition of a great number of Siegerland
works. The formation of the wrought iron syndicate on
the other hand seems to have come to grief owing to the
opposition of various works, as well as to the demands of
wholesalers who insisted upon being guaranteed a minimum profit for handling the products.
Another plan would be the extension of the number of
" p u r e " rolling mills by the erection of Martin works,
which would make them independent of the supply of
half-finished material from the Steel Works' Union. It
was on these grounds that the plan was strongly advocated in a memorial of the "Association of crude iron and
half-finished material consumers," which in the main sided
with the " p u r e " rolling mills against the contentions of
the Steel Works' Union.
The construction and successful working of new Martin
works presumes, however, the removal of the import duties
(as desired by the " p u r e " rolling mills) on pig iron, halffinished products, and scrap iron. It is, however, very
doubtful if the removal of duties would be in the interest
of national industry, and even more so whether the
change would prove of permanent benefit to the rolling
mills themselves.
In the first place I am not convinced that these import
duties have been used in a selfish and wrongful manner
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by the Steel Works' Union in order to crush the " p u r e "
rolling mills. On the contrary, it seems to me that even
the strongest combination is hardly able in the long run
to realize through its domestic selling prices the full protective duties on the half-finished material, because in
the main we export half-finished material. Certainly in
periods of booms the influence of prices in the world
markets will largely equalise the influence of duties and
freights on inland prices. Even the average inland price
for grain (the imports of which largely exceed the exports)
has not always equaled the average foreign prices plus
freight and duty.
In the foreign markets the determining price factor as
a rule and in the long run is mainly the condition of the
international market as affected by supply and demand.
Prices in the world market are quite independent of
domestic prices and are the result of altogether different
factors. There is no reason, therefore, why they should
correspond to the domestic prices plus protective duties
and the freight difference.
I also share the opinion of the Steel Works' Union that
once a breach has been made in the customs wall for iron
such as the pure works desire by the removal of the
duties from half-products and by the introduction of import certificates, the abolition of the remaining iron duties
would necessarily follow. For it will be difficult in the
long run to maintain free trade for the export business
and to continue to make use of protective tariffs for other
branches of the iron industry, such as pig iron, bar iron,
sheet iron, and wire.
It seems to me that much as the removal of protective
duties may be desirable on principle the removal of the
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duties on pig iron and half-products which, like the cartels,
are the means not only of raising but maintaining the
prices of domestic products, would be premature, for the
reasons stated in the memorial of the Steel Works' Union
and in view of present conditions. Nor can we be quite
sure that at no distant date the raw material (Einsatzmaterial) of the Steel Works' Union now entering duty
free (at least the ores) may not become subject to foreign
export duties.
Added to this is the fact that as long as the agrarian
protective duties continue, the one-sided removal of the
industrial protective duties would mean an unfair burdening of the industrial population, which would moreover
be left unprotected against foreign competition.
To return to the other purposes of the Steel Works'
Union (Stahlwerksverband):
The union endeavors, by a series of measures intended
to insure regular work for syndicate undertakings, to
reduce the cost of production, a matter which hitherto has
not been influenced in the slightest degree by the syndicates. Finally, it has promoted the formation of dealers'
associations, limited to certain districts, especially the
Rhenish-Westphalian, the Middle-German, and the South
German girder dealers' associations, the existence of which
was at one time endangered through dissension, but which
is now assured for another five years, dating from the
summer of 1907 to June 30, 1912.
The Steel Works' Union, by reason of its organisation
and of its freer attitude toward the export trade, is in a
position to pave the way for international agreements
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ceeded in bringing about such agreements, although only
for a short period each. On November 28, 1904 (retroactive from October 11, 1904), an agreement concerning
the export of rails was arrived at between England, Germany, France, and Belgium, to begin with, for a period of
three years (till March 31, 1908), and on November 24,
1904, an agreement was concluded between Germany,
France, and Belgium with reference to the export of
girders for the period of two and one-half years (until June
30, 1907).174
Both agreements have been extended indefinitely and
barring unforeseen incidents are likely to remain in force
until June 30, 1912, the date of the expiration of the Steel
Cartel agreement.
The United States Steel Corporation (acting also for
the Lackawanna and Pennsylvania Companies), founded
February 23, 1901, with a capital of $1,400,000,000, joined
the International Rail Cartel later on. The Steel Corporation does not comprise, as is frequently stated, the whole
steel production of the United States, but so far "only"
two-thirds of the American steel output, and controls
about 1,500 miles of railway, or rather less than 1 per cent
of the whole railway mileage of the United States.175
We shall close the review of the period with this mention of the international agreements, which were initiated
in Germany and in which up to the present German industry has been able to secure an eminently satisfactory position in accordance with its industrial achievements. This
period is characterized not only by expansion and concentration in the fields of trade, industry, and particularly
banking, but also by the greatest revolutions in the economic field; it marks the era of international trade, the
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precursor, and in part also the cause of the new era of
"world" and colonial politics. It was a period of vast
inventions and discoveries, which created perfectly new
industries, and fundamentally transformed existing ones,
and which imposed on the industries (often protected
by high customs duties) great tasks in the international
market, which were achieved to a considerable extent.
The revolutionary character of this epoch, however, expressed itself in two tremendous crises—in the crisis of
1873 and that of 1900.
This period marks the complete transformation of the
character of German industrial organization, begun in the
last decade of the preceding epoch. The new order, despite the partly sound, partly inadequate, arguments
urged against it, possesses no doubt the great merit of
having provided—principally by increased export trade—
food and occupation for the enormously increased population, which, it was stated as early as the middle of last
century, agriculture was no longer able to sustain. Moreover, the view seems fairly justified, at least to a certain
extent, that the recent growth of imports, which, as was
pointed out above (pp. 112 and 121), in certain branches
largely exceeded the simultaneous growth of exports, is a
fair indication that the large increase of production during
late years is due primarily to increased home demand.
The following question, however, should not be suppressed in this recapitulation of the past and forecast of
the future: What will happen if imports into Germany
continue to increase greatly, and exports fall off considerably? This danger must be borne in mind as a serious
eventuality, at least for some industries, a danger which
may result from high protective duties likely to be
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introduced abroad, especially in America and the British
Empire, as well as from existing German commercial
treaties.
As far as the latest commercial treaties are concerned
they offer one gratifying advantage benefiting the whole
community, namely, the assistance and support against
foreign countries demanded by agriculturists and absolutely necessary in many directions and parts of the
country. As a result of this support agriculture was able
to recover its former vigor and prosperity by internal
means, especially by a more vigorous and concentrated
development of agricultural credit and cooperation. This
development is highly desirable from the point of view
of national interests, as it tends to reduce the necessity
of foreign grain imports to the smallest extent possible.
But inasmuch as only such governmental measures can
be of general or permanent benefit in which consideration
for the interests of one class of the community goes hand
in hand with due regard for the interests of the community as a whole, it is our earnest hope that the protection of our home agriculture may not have been accorded
at the expense of commercial and industrial development,
or even of important branches of industry or industrial
export branches.
Much depends on the vigor of commerce, especially
the vigor of industry, which must continue to advance
and must not rest for a moment. Its further progress
will depend, first and foremost, on the powerful and
judicious support of those institutions but for whose
constant and energetic cooperation the great economic
achievements of the period could not have been attained,
to wit, the German banks.176
i»5




CHAPTER

III.—The German Great Banks during the second
period (1870 until the present).
SECTION

I.—(1).

INTRODUCTION.
The activity of the banks in the economic life of society
has often been likened to that of the heart in the human
body.
This comparison is quite proper. For just as it is the
function of the heart to regulate by means of certain
organs the circulation of the blood, which through countless
arteries and veins flows through the human body and
returns to the heart, so, as was shown above, it is the
function of the banks to regulate by certain economic
measures the circulation of capital, which flows from them
and returns to them, and which may properly be regarded
as the life blood of the modern economic organism.
The multiplicity and importance of the functions of
the human heart can best be seen from a study of the
functions of each part of the human body in the entire
organism. In a like manner some idea of the tasks fulfilled by the German banks during the more recent period
can be had from a discussion of those leading factors in the
general economic development of the period, which were
furthered by the banks, particularly through their activity
in the credit field, by floating enterprises and issuing
securities.
Inasmuch as important phases of this activity have been
described in the introduction and in the chapters devoted
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Great

Banks

to the early period of German banking, and as this activityhas proceeded on the whole along the same lines, though
on a larger scale, during the more recent period, it will be
sufficient to point out merely the special tasks undertaken
by the banks during this period.
For only in this manner will it be possible to achieve our
main purpose of presenting a complete picture of the
influence and activity of the banks in the general economic
development during the two periods.
But in contrast with former editions of this book I shall
endeavor in each of the subsequent chapters to describe,
at least in outline, the share of each of the large banks in
the common task. It will then be seen that, notwithstanding the similarity of the purposes and of the general
development, each large bank has shown a peculiar character and development, has pursued a peculiar business
policy (cf. Sect. 6, below) and that this policy, even within
the same bank, has shown numerous and at times radical
changes depending on the change of management, times,
and purposes.
Before proceeding with our inquiry let us recall what
amounts of capital were at the disposal of the German
credit banks for the achievement of their tasks at the
beginning of the present period. As stated before, of the
total amount of about 2,405,000,000 marks which represented the share capital of the stock companies founded
in Prussia during the nineteen years'period of 1851-1870,
the share of banking capital was 94,650,000 marks, that
is to say, less than 100,000,000 marks, or about 5,000,000
for each year (cf. p. 48, supra).

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In 1870 the capital of the large banks founded during
the earlier period showed the following amounts:
Bank fur Handel and Industry, 25,046,000 florins (42,936,000 marks).
Disconto-Gesellschaft, 10,000,000 thalers (30,000,000 marks). 177
Berliner Handelsgesellschaft, 5,625,000 thalers (16,875,000 marks).
A. Schaaffhausen'scher Bankverein, 5,200,000 thalers, (15,600,000 marks).
Mitteldeutsche Kreditbank, 1 7 8 5,000,000 thalers (15,000,000 marks).
In 1870 a Konzession was granted to the Deutsche Bank 1 7 9 with a capital
of 5,000,000 thalers (15,000,000 marks).
During the same year the Commerz- und Disconto- Bank at Hamburg was
founded with a nominal capital of 30,000,000 marks, of which 15,000,000
marks were paid in.
In 1872 the Dresdner Bank at Dresden was founded with a nominal
capital of 8,000,000 thalers, equal to 24,000,000 marks, of which 40 per
cent wTere paid in, i. e., 3,200,000 thalers (9,600,000 marks).
In 1881 under totally changed conditions the Nationalbank fur Deutschland was founded with a nominal capital of 45,000,000 marks, of which
20,000,000 marks were paid in.

Further substantial increases of both the number
and capital of the German credit banks followed in rapid
succession during this period. As early as 1872 the combined capital of the then existing German credit banks
(enumerated in Appendix III, at the end of the volume)
exceeded 1,000,000,000 marks (1,122,113,000 marks). Of
the total number, however, not less than 73 banks, with a
capital of 432,500,000 marks, were compelled to wind up
their affairs during the six years of business depression
which followed the crisis of 1873.180
Here again I shall depart from the method followed
in former editions. Following the usual classification of
banking business into credit and debit transactions, I
shall j as stated in the preface, take up the discussion of
the principal credit and debit transactions (Aktiv- und

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Passiv- Geschafte) of the German banks with particular
reference to the great banks.
At the outset the following general considerations
should be emphasized. It is regarded as a fundamental
rule both for banks of issue and for credit banks, which
are not permitted to issue notes, that the charactei of
their debit transactions shall determine the character of
their credit transactions,181 or, in other words, that a
credit bank must not grant credit different in character
from that which it receives. This proposition must indeed be recognized also as the fundamental principle of
credit banks, but it is to be understood in the sense
that a credit bank, in proportion as it has procured
moneys repayable on demand or within short or longer
terms, or has contracted credit obligations which become
due on demand or within short or longer terms, must
invest the funds at its disposal in such a manner that it
shall be in a position to meet its obligations at all times
when they become due.
At the same time, however, a bank may assume that,
at least in normal times, not all the moneys due will be
claimed simultaneously, just as a fire insurance company
is justified in assuming that not all the insured houses
will be destroyed by fire at the same time.
No general and fixed rules can be laid down as to the
percentage of the claims likely to be presented for payment. Such a percentage can be estimated only on the
basis of the experience gathered during a long time by
the individual bank, with due regard to the experience of
other banks and to its own peculiar character; in other

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words, by using the care and precaution customary in
business, and more especially in the banking field.
The general practice of the German large banks is
even more cautious,182 since they dispose of their funds in
such a manner as to be prepared at any moment to repay
one-third of all outsiders' funds (fremde Gelder), irrespective of whether they are payable on demand or after
longer or shorter terms, by the aid of resources which
may be regarded as being of first-class liquidity, i. e.,
cash, including bank notes, sight drafts, and checks,
contango {Reports), bills, also the so-called " N o s t r a "
credits, i. e., credits held with first-class domestic and
foreign banks and banking firms.
"Outsiders' funds" (fremde Gelder) include the deposits
(Depositen), the credit balances on current account, and
other balances not on current account, resulting from
loan operations and other issue business, or from the
coupon service, or from interest-bearing funds held until
settlement day to the credit of domestic and foreign
states, provinces, districts, communes, commercial and
industrial concerns, of land banks, note banks, and other
banks, insurance companies, administrations, corporations,
institutions, foundations, and private capitalists.
The liquid assets stated above include the so-called
reports, which as a rule, or at least primarily, comprise only
such as can be realized in the international market, as for
instance those concluded in London and which become
payable on an average within a fortnight (instead of the
usual term of four weeks). Similarly bills mentioned
among this class of assets must be such as can be used
for international transactions. They may be in terms
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Great

Banks

of German currency, since there is normally a large demand abroad for German prime discounts. Only in the
second place do the banks resort for this purpose to
short-term or shortly-due bills which may be rediscounted
at the Reichsbank.183
Such a constant readiness for the repayment of a third
of all "outsiders' funds" (not only of deposits), must be
regarded as more than sufficient, since never yet in the
history of the German great banks has there been a case
when payment of one-third of all the liabilities has been
demanded suddenly without notice. Were the Reichsbank to reckon with the possibility of a sudden presentation of one-third even of its notes only, it could not
maintain its present mode of calculating its liquid assets.
As a matter of fact, there is no legal provision whatever
for cash security, so far as the giro-claims of the Reichsbank are concerned.
SECTION

i. T H E

2.—THE CURRENT (REGULAR) BANKING
BUSINESS.

DEBIT

OPERATIONS

BANKS

OF

THE

GERMAN

CREDIT

(TAKING OF CREDIT).

(A) THE DEPOSIT BUSINESS,

(I) General observations.
As stated before (see pp. 73 and 74), the German banks,
during the first period, proceeded mainly on the principle
of carrying on their business, as far as possible, with their
own means. In the interest of their own security they
did not deem it advisable "to bring about an increase in
the amounts of deposits by granting more liberal terms."
Their customary practice, therefore, was to accept deposits
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repayable only after three, six, or twelve months' notice,
on which, moreover, only a small interest was paid.
The systematic fostering of the deposit business by
the German banks, which in England is regarded as an
essential element of banking,184 is due to the initiative of
the Deutsche Bank, which almost immediately after its
foundation in 1870 began to devote itself energetically to
this class of business.
Already during the Franco-Prussian war, toward the end
of 1870, the Deutsche Bank opened special deposit offices,
at first in Berlin, then in a number of suburbs, also in
Wiesbaden, Hamburg, Leipzig, and Dresden. In this
manner manufacturers and capitalists were enabled to
invest productively even the smallest available amounts
(of not less than 10 thalers), while the Bank was in a
position to use these deposits—which became its property with the restrictions mentioned above185—for certain
business purposes, having been the first to reach the conviction that, in view of the large demands and tasks presented to the banks their credit business could no longer
be transacted with their own means. Since, however, even
the use of only a portion of the deposits for its own business, even with the observance of the required restrictions, can be permitted only in case the remaining portion is adequately secured by most liquid assets (stets
greifbare Mittel), the Bank at the same time took exemplary precautions to provide for this form of securities
and adopted a special organization of the deposit business,
so arranged that the special division created for the purpose might, when necessary, be separated at any time and
made independent.
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Great

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The opening of these deposit branches186 on the one
hand made it easier for manufacturers and capitalists
to obtain bank credit; on the other hand it brought the
Bank in contact with a constantly growing number of
customers, whose financial standing was* known and who
formed a regular and steadily increasing circle of subscribers to the stocks and bonds issued by the Bank.
Conditions in Germany, unlike those in England, presented a number of serious obstacles to a vigorous growth
of the deposit business.
In the first place, the general custom in Germany among
manufacturing and other circles is to keep on hand much
larger amounts in cash than actually necessary. In the
case of the smaller traders and manufacturers this is caused
partly by the fact that often they have no regular bank
connections. For this reason they keep idle at home the
money needed to meet maturing obligations, and even
much more, from sheer timidity, merely using so much of
it as is required for their current business. The same and
similar remarks apply to many capitalists, who, following
old-time tradition, are often given to hoarding their cash
resources in the most primitive fashion.
To the extent, however, that the patent advantages of
interest-bearing investment helped to overcome this traditional inertia, it was the deeply rooted custom among large
classes of the German population to turn over small savings to the savings banks. The latter, in many cases,
were older than the credit banks, and owed their origin
to, and were identified with, local conditions. They were
convenient for the deposit and withdrawal of money, even

90311 ° — i i

14

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in the smaller towns, besides being either public institutions or, at least, under state control.
Finally, at the beginning of the seventies, the amount
of available national wealth was relatively small. Since
the deposit business presupposes large amounts of surplus
funds, the establishment of special deposit banks would
have proved unprofitable and was therefore out of the
question, at least for a good while.
Under these circumstances all that the German credit
banks could do at first was to use their utmost care and
efforts to prepare the ground for a gradually developing
deposit business. It was utterly out of the question, in
view of the then existing conditions and habits of the
people, that the latter would take their savings to the
credit banks in the same manner as to the savings banks.
In fact, the deposit offices had to create their own depositors. Their mode of procedure in this matter, allowing
for certain differences of conditions, was not much unlike
that of the English deposit banks during the early period.
As pointed out before the Bank Inquiry Commission, the
deposit offices extended credit to manufacturers and traders, thus enabling them to pay their creditors through their
intervention. The creditors quite often were induced
not to draw the money due or to re-deposit it, receiving
for it a higher than the customary rate of interest.
After the connection had been made in this or similar
manner, it followed, as a matter of course, that the persons
to whom credit was extended, as well as those who shared
in it, gradually came to deposit at the branch their cash
funds and reserves and to transact there all their banking
business.
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Great

Banks

The new customer began to draw checks upon the
deposit office, to discount there his commercial bills, to
have the office attend to most of his payments, and lessen
the risk in his import and export business. The office
granted him acceptance credit, undertook the investment
of his funds and the management of his property in securities, gave him information and advice and procured for
him advantages of all sorts. In this manner the deposit
offices, which from the mere profits of the deposit business would never have been able even to defray their
operating expenses,187 and which therefore were equally
interested in enlarging the scope of their business operations, gradually assumed the character of so-called
Wechselstuben (exchange offices), engaging in all classes of
banking business, like the central parent bank, or its ordinary branches, except dealing in securities on own account
and undertaking syndicate business (Konsortialgeschdfte).
This was carried so far that the new competition caused
loud complaints among the private bankers affected
thereby. It is thus seen that the origin of commercial
deposits at the German banks is altogether different from
that of the savings deposits at the savings banks. Statistically this may be proved by the observation that the
amounts of deposits increase or decrease in accordance
with the general increase or decrease of credit operations.
Equally different are the purposes for which deposits are
made at the two classes of banks.
The client of a savings bank, belonging almost exclusively to the middle and lower classes, has in mind an
institution which shall permanently and securely keep and
administer his savings deposits, and pay him the highest
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possible rate of interest. The client of a commercial bank,
belonging mainly to the middle and higher classes and
particularly to the commercial and industrial groups, as a
rule has in mind the temporary deposit and utilization of
his surplus funds, being therefore in most cases satisfied
with a low rate of interest until such time as he can invest
them permanently in securities, mortgages, or industrial
enterprises; moreover, he is particularly interested in turning over the administration and use of these funds to the
bank which attends to his other banking business.
With few exceptions the former has but one character.188
He is a depositor of savings and nothing else. The latter
has a Protean character; one day, in virtue of his deposit,
he may be a creditor, some other day, in virtue of his current account—or other connections with the bank, he may
be a debtor. He may become creditor as well as debtor,
for a thousand and one reasons. Thus, unlike the savings
bank depositor, he is not presumed to exclude the right of
hypothecation or detention of the deposit on the part of
the bank.
For this reason it is very difficult to give a definition
of the German term "bankmassige Depositen", since in
Germany the term comprises not only what are known in
England as current accounts, but likewise what are known
there as " deposit accounts." As these various designations are far from uniform and on the other hand are
coterminous, it is almost impossible to obtain, for the
various German banks, uniform and comparable data of
" deposits " on a scientifically unobjectionable basis. For
these and other reasons some banks have heretofore either
failed altogether to give any separate account of their
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deposits, or have shown t h e latter combined with t h e socalled " c r e d i t o r s " accounts. This is true of t h e Darmstddter Bank (which, however, has of late been giving separate d a t a for deposits), of t h e Berliner
Handelsgesellschaft, t h e Commerz- und Disconto-Bank, t h e Mitteldeutsche
Kreditbank, and t h e Nationalbank fur Deutschland.
Other
institutions, such as t h e Deutsche Bank and t h e Dresdner
Bank comprise among deposits on t h e one hand all " creditors " of their deposit offices and exchange offices—a
proceeding which can be explained only in view of t h e
peculiar development of t h e German deposit business just
described—and on t h e other all those " c r e d i t o r s " who
m a y have intrusted moneys to other offices of these
banks upon receipt of so-called "Depositenquittungsbucher"
(deposit receipt books) or else without such books b u t
expressly designating them as "deposits." 1 8 9
The Disconto-Gesellschaft, while stating separately t h e
" d e p o s i t s " in its regular reports, as well as in its jubilee
report of 1901 (p. 260), seems, however, to include under
t h a t head t h e current accounts of larger domestic and
foreign firms and corporations, since the amounts of these
deposits show oscillations which can not be explained exclusively b y contemporary business conditions or t h e state
of t h e money market. 190 On t h e other hand, its reports
up to t h e year 1908 invariably grouped under t h e head of
" c r e d i t o r s " instead of " d e b t o r s , " t h e balances daily due
{die taglich falligen Guthaben), held at its deposit offices.
I t is plain b o t h from t h e account of t h e development of
t h e German deposit business and from t h e purposes for
which these deposits are made and received, t h a t , as was
pointed out also at t h e third general convention of German bankers at Hamburg 1 9 1 (Sept. 5 and 6, 1907), only
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an exceedingly small portion of the deposits of the
German credit banks—in my opinion less than onethird—is made up of what may properly be called savings
deposits. By far the larger portion—not less than twothirds if not three-fourths—of these deposits represent
"operating reserves" of traders 192 (cash on hand, reserve,
etc.) or of funds of traders or capitalists temporarily
deposited but destined for investment in securities, mortgages, industrial enterprises, etc. This opinion is shared
unanimously by other students of the question, including
the experts heard in 1908 before the Bank Inquiry
Commission.193
Between 1870, when the systematic fostering of the
deposit business on the part of the German banks may
be said to have commenced, and 1891, that is to say,
during twenty-one years of the most intensive fostering
of this branch of business, those banks which hold by
far the larger part of the total deposits, namely, the 143
German credit banks having a capital stock of at least
1,000,000 marks each, had accumulated total deposits
amounting to 386,000,000 marks.
Nine years later, according to a compilation of the Deutscher Okonomist, 118 of the largest German credit banks
had accumulated 997,000,000 marks of deposits; i. e., after
thirty years of fostering of this branch of business, these
banks had succeeded in attracting not quite 1,000,000,000
marks of deposits.
After another nine years, on December 31, 1908, the
total deposits of all German credit banks reached about
2,750,000,000 marks, of which about 2,250,000,000 were
the share of the 143 German credit banks having a capital
of at least 1,000,000 marks each.
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Great

Banks

The large increase within the last nine years is due not
merely to the growth in the volume of credit operations—
the prime cause of growing deposits—and of the general
prosperity, but above all to the large increase in the number
of the deposit offices of the great Berlin and provincial
banks, especially notable during those years. It is also
due to the fact that owing to improvements of the bank
statements and the more thorough work of the private
statisticians, the statistics comprise now the operations of
nearly all German credit banks, 413 in number, with
all their branches, silent partnerships {Kommanditen),
agencies, and deposit offices.
In view of this circumstance and the fact that this total
represents the result of nearly forty years of concentrated
and consistent effort, even this result can not be regarded,
either absolutely or relatively, as a great success. Hence
the statement 194 made as early as 1904 that there was
"an unhealthy growth of deposits," seems entirely unfounded. This becomes especially apparent when the
above total is compared with the total volume of the savings deposits held by the German public and private savings banks, which, on December 31, 1906, had reached
a total of 13,250,000,000 marks, and by December 31,
1908, amounted probably to between 14,000,000,000 and
15,000,000,000 marks.
To this should be added the savings and other deposits
(fremde Gelder, less credit balances on current account)
held by the 16,000 cooperative credit associations (Kreditgenossenschajten) in city and country, which on December
31, 1906, amounted to about 2,000,000,000 marks, also
the amounts accumulated in the note banks, people's
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Commission

banks, and, since January i, 1909, in the check departments of the post-offices195 (which latter amount is likely
to continue increasing but can not be considered in this
connection).
It is perfectly improper either to calculate a percentage
of growth for arbitrarily chosen periods or for unequal
numbers of banks, or by comparing percentages to make
the growth of deposits in the German credit banks appear
considerably larger than in the savings banks or in the
English joint-stock banks.
Thus, for instance, the total deposits of 92 credit
banks at the end of 1892, 408,000,000 marks, were taken
as 100, and, compared with the total deposits of 118 credit
banks at the end of 1907, 997,000,000 marks, an increase of 144 per cent was found. As against this increase
the much smaller percentual growth of the same business
at the English joint-stock banks between the years 1890
and 1900 was pointed out, the number of which had
decreased during that period from 99 to 82 while their
deposits had grown from 335,000,000 to 572,000,000
pounds sterling, or only 71 per cent.
It is always easy to afford both to friends and opponents a small satisfaction196 of this sort by calculating
percentages and proceeding in the one case—i. e., of the
German deposits—from a low level, and in the other—
i. e., of the English deposits—from the high level of
£335,000,000 or 7,000,000,000 marks, since the per cent
increase in the case of the English joint-stock banks, in
view of the high level of their deposits from which the
start is made, can, in the nature of things, be but small.
It follows that the extent and gravity of the fallacies and
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Great

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blunders will differ merely according to the year which
is chosen as the base of comparison. An even larger
blunder is committed by those who calculate first the aggregate deposits of the savings institutions, credit banks,
note banks, and cooperative credit societies, and then
arrive at the "conclusion" that the percentual share
held by the credit banks in the aggregate is constantly
increasing, while that of the remaining institutions is
constantly decreasing. This is a graver blunder for the
reason that in this case figures of entirely different
nature—namely, of deposits in savings banks and those in
credit banks and similar institutions—are thrown together
and the calculations of percentages are then based on the
totals thus obtained.
It is, therefore, not surprising that with such methods,
which, however, often lead to important economic and
legislative conclusions, startling though arithmetically
correct results are obtained, showing a considerable percentual decrease of deposits in savings institutions, while
the absolute figures for these deposits show a continuous
and almost regular increase to between 14,000,000,000
and 15,000,000,000 marks on December 31, 1908, for the
country as a whole, as compared with 2,750,000,000
marks of bank deposits.
By using equally fallacious methods it is quite easy to
make the following totally different calculations:
In 1891—i. e., sixteen years ago—the German savings
banks had about 5,250,000,000 marks of savings deposits.197 On December 31, 1906, they held 13,250,000,000
marks. The increase was, therefore, almost threefold.
In the same year, 1891, the 143 German credit banks,
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Commission

with a capital stock of at least 1,000,000 marks each,
h a d 386,000,000 marks of deposits. On December 31,
1906, these deposits were 2,250,000,000; there was therefore a much larger, almost sixfold, increase.
If, however, instead of 1891 t h e year 1900 is chosen as
a starting point, it is seen t h a t t h e deposits of t h e Cxerm a n savings banks amounted then 1 9 8 to approximately
9,000,000,000 marks, as against only 997,000,000,!" t h a t
is, less t h a n 1,000,000,000 marks deposited in t h e German
credit banks. As compared with t h e above given figures
for the end of 1906, the savings deposits are seen to have
increased by about 4,000,000,000 marks, t h e deposits in
t h e credit banks by much less—i. e., only by about
1,500,000,000 marks. In other words, different results
will be obtained by percentual calculations according as
t h e level used as base of comparison is higher or lower.
(2) Deposits in foreign

countries.

As compared with t h e aggregate absolute figures of
deposits in the German credit banks of 2,750,000,000
marks on December 31, 1908, and approximately
2,500,000,000 on December 31, 1906, t h e corresponding
aggregate for t h e English deposit banks • (including t h e
Scotch and Irish banks as well as t h e Bank of England)
m a y be estimated at about 6,250,000,000 marks at t h e end
of 1905. According to Edgar Jafife 20° their current a n d
deposit accounts (gesamte fremde Gelder) on t h a t d a t e
aggregated 19,000,000,000 marks, while according t o the
London Economist of May 19, 1906, whose lower d a t a we
shall use as a m a t t e r of caution, they aggregated only
16,750,000,000 marks. If of this total 2 0 1 two-thirds is
allowed for current accounts and only one-third—which
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Great

Banks

is too low rather than too high an estimate—for deposit
accounts (held against deposit receipts with seven, fourteen, and more days' notice), we arrive at approximately
the above total of 6,250,000,000 marks—i. e., an amount
equal to the aggregate outsiders' funds (gesamte jremde
Gelder) held at the end of 1906 by the larger German
credit banks (with share capital of at least 1,000,000
marks each).
To these 6,250,000,000 marks of savings accounts
should be added for Great Britain (exclusive of Ireland)
deposits in the post-office savings banks and in the trustees' savings banks of about £2i6,50o,ooo,202 equivalent
to about 4,500,000,000 marks—making thus a grand
total of 10,750,000,000 marks. These latter banks have
to invest their available funds in British consols and
pay a fixed rate of interest of 2% per cent.
In the United States 203 the total amount of visible
deposits of all kinds, including savings deposits, held by
banks and private bankers on or about June 30, 1909,
was about $14,100,000,000, or slightly in excess of
59,000,000,000 marks. Of the total, the note-issuing
national banks held $4,898,500,000 (about 20,500,000,000
marks) while other banks and firms held 9,209,000,000
dollars (about 38,678,000,000 marks). Of this latter
total, $3,713,000,000 (about 15,595,000,000 marks) represented the deposits held by savings banks, $2,467,000,000
(or about 10^3 billion marks) deposits in the state banks,
about $2,836,000,000 (or 11,911,000,000 marks) deposits
in the loan and trust companies, and about $193,000,000
(or 810,600,000 marks) deposits held by private bankers.
The national banks are banks of issue; there is, however,
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Commission

no central institution to rediscount their bills. A series
of obligations204) has been imposed upon the national
banks by twelve acts, especially those of April 3, 1864,
and of March 3, 1869, viz:
(a) To hold a cash reserve of 25 per cent of their deposits
in the reserve cities and of 15 per cent in the other cities.
(6) To publish quarterly statements and balance sheets.
(c) Not to assume obligations in excess of their total
liabilities, less bank notes and deposits.
(d) Not to loan to any single person a total amount in
excess of one-tenth of their capital stock (a provision
which, according to an inquiry made in 1900, about 40
per cent of all national banks circumvented by subdividing
accounts, etc.).
(e) To transfer 10 per cent of the dividends to a surplus
fund, so long as the latter is below 10 per cent of the
capital.
(/) To make five reports each year to the federal
comptroller of the currency. The latter, moreover, may
examine the banks at any time and enforce the observance
of his orders and of the legal provisions under penalty of
closing the bank.
The above comparison shows plainly that the volume
of the German bank deposits even now is relatively small
as compared with that found in England and in the
United States. It also seems to be considerably below
that held by the French banks.205
(3) Deposits held by individual Berlin great banks.
The following figures show the growth of deposits in
some of the Berlin great banks which devoted themselves
first and most energetically to the deposit business.
204




The

German

Great

Banks

(a) DEUTSCHE; BANK.

The a m o u n t of deposits (expressed in millions of marks)
held b y this b a n k were:
1871.
1872.
1873.
1874.
1875.
1876.
1877.
1878.
1879.
1880.

9
7
11
12
10
9
12
13

1881 .
1882.
1883.
1884.
1885.
1886.
1887.
1888.
1889.
1890.

H
18
22
27
32
30
38
47
47
52

1891.
1892.
1893.
1894.
1895.
1896.
1897.
1898.
1899.
1900.

. 58
. 62
. 69
• 75
. 85
• 93
.102
122
155
191

1901.
1902.
1903.
1904.
1905.
1906.
1907.
1908.

214
213
237
286
34i
38i
476
489

The number of deposit accounts at the Deutsche B a n k
rose from 3,867 in 1883 to 21,771 in 1895, t h e latest year
for which t h e respective figures are available.
I t m a y be seen from t h e foregoing table, t h a t t h e deposits of t h e Deutsche Bank amounted t o 8,000,000 marks
at t h e end of t h e first year after its organization and
equaled t h e amount of its capital in 1894, reaching t h e
total of 489,000,000 marks on December 31, 1908, as
against a capital on t h a t date of 200,000,000 marks. The
most remarkable feature about t h e above figures (especially* in view of t h e above mentioned wide extension of
the t e r m " deposits ") is t h e almost uninterrupted growth,
both absolute and relative, of t h e deposits as compared
with t h a t of t h e capital.
The number of deposit accounts increased relatively
much more t h a n t h a t of other accounts (including t h e
current accounts, which numbered 230,203 a t t h e end of
1908).
The average size of t h e deposits a t t h e Deutsche Bank
has steadily decreased from 4,138 marks in 1883 to 2,570
marks in 1893 (no later d a t a have been published). This
goes t o prove t h a t the aim of attracting even t h e smallest
205




National

Monetary

Commission

available funds is being more and more thoroughly attained.
About two-thirds of the total deposits throughout t h e
period have been held by the central office at Berlin.
The number of deposit. offices was 74 at t h e end of
1908, compared with 12 in 1895 a n ( i 44 i*1 I 9°5- T h e rules
regarding t h e deposit business at t h e Deutsche Bank are
reprinted b y Joh. Fr. Schaer. 206 The principal points,
which in t h e main are typical for all the large banks, are as
follows:
(1) The minimum deposit m u s t be 100 marks.
(2) Each depositor, who does not stipulate a fixed t e r m
of repayment, receives an account book in his name, in
which are entered all deposits. Each deposit m u s t "be
accompanied b y a deposit blank, filled out by t h e depositor and handed to t h e cashier together with the a m o u n t
deposited.
(3) The account books, which, however, do not contain
the amounts withdrawn by t h e depositor, m u s t be presented each quarter for balancing.
(4) Deposits repayable at a fixed date are made against
b a n k receipts.
I n case t h e amount to be withdrawn is 30,000 marks or
over, written notice m u s t be given before 12 o'clock of t h e
preceding business day.
The rates of interest paid on deposit are published b y
notices a t the tellers' windows of t h e deposit branches a n d
m a y be changed at any time; this change, however, does
not affect rates on amounts deposited for a longer t e r m
if the change of the general rate is made prior to t h e
stipulated date of repayment.
206




The

German

Great

Banks

(b) DRESDNKR BANK.

The deposits of this b a n k show t h e following growth (in
millions of marks:)
18751876.
1877.
1878.
1879.
1880.
1881.
1882.
1883.

2. 8
3-2
3-o
2.9
3-6
4.0

5-7
4-8
5-1

1884.
1885.
1886.
1887.
1888.
1889.
1890.
1891.
1802.

6.4
6.6
11.4
10. 4
13-8
13. 1
11.5
13-7
15.3

18Q3
1894
I8QS
1896
i8Q7
1898
1899
1900

15
20
3i
39
37
55
62
94

7
6
1
18
4
2
9
5

1901.
1902.
1903.
1904.
1905.
1906.
1907.
1908.

77-5
93-2
108.2
136.7

I63-5
199.0
224. 8
224.5

(c) DlSCONTO-GKSEUvSCHAFT.

The deposits of this b a n k show the following growth (in
millions of marks):
1871.
1872.
18731874.
18751876.
1877.
1878.
1879.
1880.

16
64
36
9
11
7
7

887.

890.

19.8
21. o
13.2
15.2
35-2
18.13
7-8
20. 2
14.7
36.5

892.
893894.
895896.
897.

17
16
19
29
34
38
34
43
49

2
17
7
8
1
3
0
8
3

1900
i9°i
1902
i9°3
1904
1905
1906
1907
1908

48. o
75- o
78. 8
9i-o
100. o
no. o
153.4
H4-3
218. 5

I t should be noted, however, t h a t in the case of t h e
Disconto-Gesellschaft prior to 1908 deposits included b o t h
"creditors on current a c c o u n t " and "deposits repayable
upon notice.'' The above figures, as was pointed out before
(p. 70 and note 94), show great variations, inexplicable
b y t h e mere change from prosperity t o business depression
during t h e respective years. Thus, deposits in 1872 show
a total of 16,800,000 marks (exact figures 16,726,163
marks), in t h e following year t h e total reaches 64,800,000
(exact figures 64,788,366 marks). I n 1874 t h e total drops
to 36,500,000 marks (36,502,613 marks) and in 1875 even
t o 9,202,000 marks. During the years of business recovery, 1878 to 1880, deposits did not rise above 7,000,000,
207




National

Monetary

Commission

8,000,000, and 9,000,000 marks; in the following years,
1881 to 1888, they are considerably larger, though varying a great deal. The exact figures for the latter period
were as follows:
Marks.
19,784,613
20,952, OOI
13,216, 197
15,215,781

1881
1882
1883
1884

Marks.
35,256,915
18,276,965
7,761,959
20, 205, 660

1885
1886
1887
1888

But inasmuch as up to the 1908 report the "daily due
credits" were grouped not with "deposits" but with
"creditors," it would be correct to include with "deposits " the respective amounts, if these were known for the
earlier years.
The growth of deposits during the decade 1901-1908
on the whole shows but little oscillation.
The deposit offices of the Disconto-Gesellschaft in 1908
numbered 11, as compared with 1 in 1895 and 8 in 1905.
(d) DARMSTADTKR BANK.

The growth of deposits in this bank (in millions of marks)
proceeded as follows:
ollarcrs:
1870.
1871.
1872.
1873.
1874.
1875.
1876.
1877.
1878.
1879.

1880
1881 ....
1882 ....
1883 ....
1884 ....
1885 ....
1886 ....
1887 ....
5-6 1888
....
5-7 1 1889

16.1
22.4
12. o
27-3
16. 4
12.8
9. 1
i-9

1890.. .
6. 1 1
1891...
20.0 1892...
21.2 1893...
20.7 I894207.
16.5 1895...
15.2 1896...
14. 1 1897...
19. 1 1898...
19.7 1899...

18.5

10. 9
11.8

1900.
1901.
4.4 1902.
10. 6 1903.
1904.
30
1905.
36
1906.
39
1907.
3i
37
1908
34

43-2
46.8
67. o
72.3
174-5
147.8
148. 1
161.5
108.8

(4) Comparative growth of deposits in all German credit
banks and in the Berlin banks.
The growth of deposits during the last 20 years in all
German credit banks with a capital of at least one million
208




The

German

Great

Banks

marks each, numbering at present 158, is shown by the
following figures (in millions of marks):
1889
1890
1891
1892
1893

..
..
..
••

370.98
408. 01
385.96
389.86
377-19

1894
i895
1896
1897
1898

• •
. .
• •
••
••

1899..

486. 39
493. 26
546. 42
604.39
712.53

1900..
1901..
1902..

1903..

812. 96
997- 32
>035- 11
, 104.
13
, 261.25

1904.
1905.
1906.
1907.
1908.

1,565.96
1,839.92
2,I41.12

2,423.69
2,745.81

The corresponding aggregate figures (in million marks)
for all Berlin banks were:208
1890.
1891...
1892...
1893...

130.99
138.14
105.34
103.25
119.90

1894
1895
1896
1897
1898

.. 163.69
.. 196.13
.. 219.44
.. 228.25
. • 330.39

1899.. .
1900.. .
1901.. .
1902.. .
1903.. .

338.17
414-64
447.23
501.22
578.24

1904...
783.42
1905...
883.82
1906... 1,029. 62
1907... 1,158.71
1908... 1,246.97

Of the total deposits in the German credit banks about
two-thirds constitute deposits in the Berlin great banks.
This is due, on the one hand to the lack of zeal in fostering
the deposit business shown by the other credit banks as
compared with the Berlin banks (which have by far the
larger number of deposit offices), and, on the other hand,
to the general fact of the concentration of capital in
Berlin. The five greatest Berlin banks on December 31,
1908, held the following deposits:
Marks.
489, 238, 000
224, 575, 875
218, 544, 301
108, 814, 032
72, 335, 365

Deutsche Bank
,
Dresdner Bank
Disconto-Gesellschaft
Darmstadter, Bank
Schaffhausen'scher Bankverein
Total

1, 113, 507,573

Of these, the Dresdner Bank and next to it the DiscontoGesellschaft, both of which opened their first deposit offices
as late as 1896, come nearest to the Deutsche Bank in
the successful cultivation of the deposit business.
Of the total outsiders' funds (gesamte fremde Kapitalien) held by the 158 credit banks with a capital of at
90311 — 1 1 -

-15

209




National

Monetary

Commission

least 1,000,000 marks each, the following percentages are
represented by deposits proper:
At the end o f —
1905
i9°6
1907
1908

Per cent.
34-7
33-9
• • 36. 5
37.0

The corresponding percentages for the Berlin banks
were:
A t t h e e n d of—
1905
I9°6
1907
1908

Per cent.
27. 5
27.5
3i-5
33-7

It should be noted, however, that during this period, in
addition to the above mentioned banks, only the Darmstadter Bank was carrying deposit accounts, while the
Berliner Handelsgesellschaft, the Mitteldeutsche Kreditbank, the Commerz- und Disconto-Bank, and the Nationalbank fur Deutschland had no such accounts.
Of the total deposits reported at the end of 1907 for all
banks with a capital of at least 1,000,000 marks each, 47
per cent (as against 39 per cent in 1895) fell to the share
of the Berlin banks, and 41 per cent to the share of the
Deutsche Bank, the Dresdner Bank, the Disconto Gesellschaft, and the Darmstadter Bank.
Between the years 1895 and 1908 deposits increased
relatively much more in the Berlin banks than in the provincial banks, though deposits in the latter constitute a
larger per cent share of their total "outsiders' funds''
(fremde Kapitalien) than in the Berlin banks.209
On the whole it may be said that—
(1) The distribution of dividends by the banks is becoming steadier in proportion as their deposit business
develops.
210




The

German

Great

Banks

(2) The floating and issue business is relegated to the
rear in proportion as the deposit business comes to the
front.
(3) To a large extent it is the credit accorded to commerce and industry by the German credit banks from their
own means and their deposits that has caused the development of the productive powers of the commercial and
industrial classes. It is this factor, combined with the
increased productive power of agriculture, which made
possible the remarkable growth of the purchasing power
of all classes and callings of the nation.210
This fact alone should suffice to keep us from adopting
ill-considered " reform " propositions, equally hazy at times
both as regards their underlying principles and their future
effects.
B. THE OTHER DEBIT-OPERATIONS OF THE CREDIT BANKS.

Of the other debit-operations of the banks the greater
part need not be considered in this connection, since the
German credit banks do not issue bank notes, nor do
they (with the exception of the so-called mixed mortgage banks) issue mortgage bonds, or other bonds (Schuldverschreibungen), such as were intended to be issued by the
Credit Mobilier.
To some extent, however, the credit operations of the
credit banks in the shape of bill rediscounts, bill acceptances, of sales of drafts or in the line of current accounts,
or in the form of mortgage and lombard credit, must be
treated in the same manner in which these forms of credit
are treated when taken by other institutions.

211




National

Monetary

Commission

The details of these operations will be discussed in subsequent parts of t h e volume. I t is, however, proper t o
state at this place t h a t t h e Berlin great banks in order
to raise cash offer private long-term bills for rediscount
a t most, and even this rather unwillingly, in foreign
markets or to their own clients, b u t never at t h e bourse.
Ordinarily, however, as will be seen below, money is obtained at t h e Seehandlung (Prussian State Bank) b y means
of t h e less conspicuous hypothecation of bills. The paper
offered for rediscount to t h e Reichsbank either consists of
short-term private bills, or else of such long-term bills as
m a y shortly fall due.
A very considerable portion of t h e bill holdings of t h e
Reichsbank is probably m a d e u p of t h e rediscounted bills
of t h e credit banks, particularly about t h e time of t h e
monthly and quarterly settlements, when t h e demands
upon t h e banks on t h e p a r t of t h e business community are
especially heavy.
I t is also asserted—though it would be difficult t o prove
i t — t h a t in Germany just as in England, t h e credit b a n k s
resort t o large-scale rediscounting operations a t t h e
Reichsbank and a t other credit banks and banking institutions shortly before t h e dates when their balance statements are issued, in order to be able to show t h e largest
practicable figures under t h e heads of cash on hand, giro,
and b a n k credits. I t goes without saying t h a t such assets
are counterbalanced b y corresponding liabilities of the
banks in the shape of bill obligations of the rediscounting
banks.
There is also b u t little doubt t h a t in times of money
scarcity when German private discount rates went up
212




The

German

Great

Banks

considerably, while money rates in foreign markets were
comparatively low, some foreign capital, possibly even in
considerable amounts, may have been obtained by the discounting of German bank acceptances. This seems to have
taken place on a particularly large scale in 1899 at London
and to have occasioned caustic remarks directed against
this practice of boarding-out of finance bills m " made in
Germanjr," a criticism which was repeated with little or
no reason in 1908 regarding the then numerous American
bills of like character, a subject which is discussed later on,
on page 278.
The practice of credit banks of "boarding out" bills—
i. e., buying at home private bills and depositing them for
short terms in London or Paris whenever money rates are
low abroad and high at home—has nothing in common212
with the cases above cited. This practice as a rule partakes of the character of bona fide arbitrage transactions,
based upon the differences of interest in the domestic and
foreign markets. This is not infrequently done by the
great banks, which in that case assume the risk of loss
involved in an unfavorable turn of exchange rates, that
may occur in the meantime.
A rather different practice is presented by other recorded cases,213 involving efforts of obtaining abroad the
lacking operating capital by means of a somewhat hidden
and complicated hypothecation of bills, which do not seem
to have been always of prime quality. Foreign banking
houses, according to preceding agreements, are said to
have taken from the German credit banks the " discounted
bills indorsed by the latter and permitted themselves to
be drawn on or else to have given their checks on Paris
213




National

Monetary

Commission

or London. T h e foreign house was not expected t o dispose of t h e bills, which were redeemed shortly before
m a t u r i t y , either b y means of fresh bills or of short-term
bills on Paris or London. The bills were returned bodily,
t h e giro of t h e German b a n k was canceled, and t h e
same bills were discounted at t h e Reichsbank five or t e n
days before m a t u r i t y / '
I t is p a t e n t t h a t in such cases t h e German credit b a n k
runs heavy risks if, during t h e interval, a financial crisis
develops and as a result t h e renewal of t h e operation is
refused.
Another practice is reported b y Ad. Weber. 214 According to him, credit banks at first, when granting credit
t o their clients, drew in t u r n upon t h e latter t o their own
order, disposed of t h e bills accepted b y their debtors, and
thus procured fresh money for themselves. According
to Weber, this practice was quite common in eastern Germ a n y as late as 1901. A similar procedure (in t h e shape
of so-called solo bills—Solawechsel) is reported b y von
Lumm 2 1 5 to have been quite common in Alsace-Lorraine.
I t is also stated 2 1 6 b y Schar t h a t larger and smaller banking institutions will at times " t a k e from their clients fictitious, i. e., indorsable lombard bills and have them rediscounted upon t h e additional strength of their indorsem e n t " — a statement which I a m not in a position to
verify. I judge, however, t h a t none of t h e great b a n k s
were ever guilty of any of t h e above practices.
Generally speaking, t h e practice of the m u t u a l drawing
of accommodation bills between credit banks m a y be
regarded as very uncommon in Germany, although there
has been no lack of assertions t h a t t h e case of t h e City of
214




The

German

Great

Banks

Glasgow Bank, in England, was not without its German
counterparts. That bank "attempted to hide its enormous deficit, the result of excessive credits granted to a
number of export firms, by accepting in increasing amounts
drafts of these firms, also by taking over mere accommodation bills drawn by these firms and passing them on
for discounting." 217 Although not exactly in accord with
our systematic arrangement, it may not be quite out of
place to mention, in connection with the deposit business
just discussed, that the credit banks often undertake the
management of the financial transactions (Kassenjihhrung)
of their depositors, by attending to their collections and.
paying their obligations on their current and check accounts and by representing them in giro, postal-transfer
and clearance operations.
Regarding the giro system used by the large industrial
and commercial firms, which in Germany is at present
concentrated in the Reichsbank, some data were given
above (p. 147), where mention was made also of the postaltransfer business, instituted on January 1, 1909. The
latter institution fills a serious gap so far as the class of
middle-sized and small traders is concerned, but is likely
to be used in time to an increasing extent also by private
capitalists and public treasuries.
The current-account business of the credit banks with
their customers is found discussed in detail below (see
Section 2, II, B).
We have but a few remarks to make on the subject of
the bank-check business, as the latter does not come properly under the head of credit, but under that of methods of
payment (Zahlungsverkehr.) Accordingly, it is treated here
215




National

Mon etary

Commission

only in so far as, like the "cash keeping" for depositors, it
is one of the means by which the banks attract available
funds for productive uses, thus bringing about an increasingfy large concentration of credit at the banks by dispensing with cash for payment and making it available
for the purposes of credit.
This concentration of credit brought about by the
check system, and in particular the agitation in its favor
carried on during recent years in various wrays with the
consent and cooperation of the Government, including the
passing of the check act, has been vehemently attacked by
a recent writer, who takes the view that, by the " artificial fostering of the check and deposit system," 218 funds
which in his opinion without such fostering would " possibly" (p. 20) or, "surely" (p. 21) have found their way
into other channels (on this point see II, A, 2a) are
directed to the banks, where they are turned into credit
for large-scale industry (p. 19).
Now, in point of fact the agitation for the adoption of the
check system had been started long before the passage of
the check act, and the recent considerable increase of
deposits, on the basis of which alone checks may be issued,
likewise antedates the passage of the check act.
The above agitation was fully justified, in view of our
downright naive methods of payment,219 and of the crying
need of reform in this field, tending to dispense with the
use of currency which might thus become available for the
purposes of credit. Since this purpose could be attained
only very incompletely without the apex of the structure—
i. e., the transfer and clearing system—the check act provided for tax-free checks (now again abolished) only in
216




The

German

Great

Banks

case these checks were drawn upon such public or private
institutions or concerns which, like banks and banking
firms, as a rule participate in t h e transfer and clearing
system, and therefore presented the best guarantee t h a t
t h e real purpose of t h e check system—the redemption
without t h e use of currency—would actually be attained.
As a m a t t e r of fact, not only private banks and banking
firms, but, as is admitted by Lansburgh (pp. 13-14), likewise public banks, credit associations, and even savings
institutions (under certain conditions), were authorized b y
t h e check act t o honor tax-free checks drawn on them, 220
and surely it can not be said of t h e savings banks t h a t
they, like the cooperative societies, "deal, in t h e main,
only with a definite narrow circle of persons."
Despite t h e agitation, t h e use of checks in Germany is
still insignificant, 221 even if t h e estimate of t h e Statistical
Journal of t h e year 1902 m a y have been somewhat exaggerated, according t o which t h e liquidation of commercial
transactions in Germany required from nine to fifteen times
t h e a m o u n t of currency and b a n k notes t h a t was required
in Great Britain.
Notwithstanding t h e large increase in t h e use of checks
since t h a t year, t h e general fact noted by t h e English p u b lication is only too true. I t is difficult to give statistical
d a t a regarding t h e extent to which the check system is used
in Germany. According to t h e 1907 report of t h e Deutsche
Bank, t h e number of checks paid during t h a t year b y t h e
Berlin central office and by all its German branches,
amounted to over 10,000 per day, while t h e total a m o u n t
of these checks was about 5,000,000,000 marks for t h e year.
The material obtained at t h e beginning of 1909, in answer
217




National

M on etary

Commission

to an inquiry sent out at my request to all the German
credit banks by the Central Association of German Banks
and Bankers, can be used only in so far as the banks in
their replies were able to give comparative data for the
years 1900, 1903, and 1907, as well as to indicate separately their check business, and to present distinct figures
of their giro business with the Reichsbank, which in the
case of most banks is lumped with their cash business.
Full information along these lines was furnished by 59
banks only, and the data furnished by even these institutions permit only of the general conclusion that their
check business has grown to a considerable extent since
1900, both absolutely and relatively, when compared with
the simultaneous growth of their cash business. This
conclusion is confirmed by the following three tables,
though it would not be quite safe to draw general conclusions from these data, since conditions in Oldenburg
and Mecklenburg are somewhat peculiar (see below Part
IV, Chapter III, Sec. 3, II B 3).
Mecklenburgische

Hypotheken-

und Wechselbank
and Note Bank).

{Mecklenburg

Number of
check accounts.

Mortgage

Amount to the
credit of check
depositors.
Marks.

10

792

16,923 7i8

II

8oi

17.567 432

12 4 0 0

1900
1901
1902
1903
1904
1905
1906
1907
1908

19,473 0 3 0
19,424 624

12

826

13 445
13 943
14 519
15 189
16 57i

218

23,781 097
24,679 997
23,471 0 3 2
22,843 721
26,667 365




The

German

Great

Oldenburgische Landesbank

Banks

(Oldenburg State

Amount to t h e
credit of check
depositors.

Bank).

Number of
check books
issued.

Number of
checks paid.

Marks.
1900

1,242,861

455

1901

1,179,101

647

8,939

1902

1.785,319

831

15.5ii

1903

2,405,878

1, 096

21,016

1904

2,390,000

1.325

1905

2,915,098

1, 671

1906

3.243,347

1.955

25.97o
36,458
43.066

1907

3,954,464

2,326

51,I9i

1908

4, 1 7 2 , 5 9 8

2, 721

71,290

Oldenburgische Spar-

und Leihbank

(Oldenburg Savings-

Amount of
deposits.

1900
1901
1902
1903
1904
1905
1906
1907
1908

Marks.
1, 2 7 6 , 8 4 3
1,767,490
1,958,398
2 , 0 3 3 , 279
1,930,392
2,348,635
2,232,684
2, 352, 811
2,972,897

and Loan

Turnover.

Marks.
19,752,327
24,583,977
31,242,725
35,429,217
36,079,704
45,870,731
46,254,761
48,850,513
251,097,674

Bank).

Number of
checks paid.

17,270

18,659
22,255
26,077
27,686
27,918
29,747
3 2 , 299
47,319

II. THE CREDIT OPERATIONS OE THE GERMAN
CREDIT BANKS (LENDING OF CREDIT).
(A) INTRODUCTION.

(1) Observations on the granting of general bank credit.
In view of the rapid increase of population and the
correspondingly rapid development of credit in Germany
both during the first and second periods, it is not surprising that, except in a few directions, German banking

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practice has not yet developed definite principles in t h e
granting of b a n k credit. Generally speaking, t h e disposition shown toward the b a n k s has been t h a t of captious criticism rather t h a n of friendly appreciation of
what has been actually achieved. The critics should not,
however, forget t h a t even t h e oldest German credit
banks date back no more t h a n about sixty years, and
t h a t t h e greater p a r t of these banks are not even 40
years old. And yet in this relatively short period of four
to six decades our German credit banks have been obliged
to occupy in t h e national economy t h e place held b y
the " m a i d of all w o r k " in t h e private household. They
were called upon to discharge almost simultaneously
nearly all t h e tasks outlined in t h e introduction to this
book, and which devolved upon t h e m as t h e champions
of t h e energetic and progressive classes in industrial life.
Except such tasks as came within t h e sphere of special
banks, such as t h e note banks, t h e provincial cooperative
land mortgage associations {Landschajten), t h e mortgage
banks, or the cooperative societies, the credit banks h a d
to t a k e upon themselves all or nearly all t h e tasks which in
England are apportioned as a rule under a strict division
of labor among deposit banks (with a further subdivision
between city, west end, and suburban banks), merchant
bankers, colonial banks, and even bill and stock brokers.
I n the internal t r a d e of t h e nation and in its commercial
relations with foreign countries it was incumbent upon
t h e m not only to be at their posts, b u t ever to occupy
t h e outposts, to ward off sudden hostile attacks upon
t h e industrial forces of t h e nation, and to ensure their
safe and uninterrupted progress.
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The failure of the banks, therefore, to develop clear,
consistent, and organic principles for the regulation of
credit transactions and the lending of bank credit can
occasion no surprise, if we bear in mind the breathless,
nerve-racking activity of the period and the competition
among the numerous credit banks. It has been asserted
that the banks are the "directing force of the spirit of
industrial enterprise" of the nation. This claim, however, whether made by the friends of the German banks
or by its secret or open enemies, is greatly exaggerated.
The banks can indeed exert an influence on the extent
and the rate of speed of production, though not directly,
but only indirectly. They can do so only to the extent
that they assist with their credit in the development of
production on a large scale, with its greater division of
labor, its concentration and decentralization of establishments. In the midst of industrial progress even
the banks may not realize that production is too much
accelerated. Excessive production does indeed lead to
exaggerated demands for and in turn to excessive lending of credit by the banks. But even if the mutual
competition of the banks could be disregarded, it would
be naive to suppose that the banks might suddenly decide
to refuse credit to their great industrial customers,
because they had come to the conclusion that production
was excessive and overdone. When evidences of this are
present, together with other symptoms that suggest an
impending crisis, the banks in the first instance can do no
more than communicate these fears and issue warnings to
their clientele as a whole. Except under special conditions, the general restriction of credit is not to be expected,
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unless t h e general industrial situation, or t h e general
condition of t h e banks, makes this step inevitable, for
t h e sudden restriction of credit would prove ruinous not
only to individual establishments, but might under given
circumstances bring about a general panic.
I n a just appreciation of all t h e factors a t work in our
economic development we m u s t not forget t h a t while
t h e banks are t h e pioneers and t h e greatest promoters
in t h e accumulation of capital, the growth of capital
has in t u r n been influenced and accelerated b y t h e wonderful inventions m a d e along technical and other lines during
recent times.
These considerations are in no way intended to deny t h e
justice of t h e criticisms repeatedly a n d emphatically
m a d e with reference to t h e indiscriminate granting of
credit. On t h e contrary, such criticism is beneficial so
long as it is n o t too sweeping and does n o t reject t h e
whole system on t h e ground t h a t errors have been m a d e
in single cases, or makes t h e most serious charges against
t h e administration of t h e " n a t i o n ' s w e a l t h " b y t h e
banks.
Nothing would be further from t h e t r u t h or b e t t e r
calculated to call forth contradiction t h a n t o deny t h a t
m a n y grave mistakes have been made, not only in t h e
flotation of securities—a branch of banking t h a t has
absorbed so m u c h time and energy—but also in those
branches which are concerned with the facilitating of
payments (Zahlungsverkehr) and the granting of credit.
I have deemed it m y d u t y to call attention conscientiously
t o these mistakes in every section of this book. On t h e
other hand, nothing would be more one-sided t h a n t h e
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failure to recognize the natural causes of these errors.
So long as mere human beings are at the head of such
enterprises, errors, though sometimes different in character
and direction, are bound to be made under any banking
system. These can be avoided in part or lessened only
gradually, as a result of the experience acquired under
the system itself, as affected by local conditions.
I do not regard it, however, as an error in the justnamed sense that the German banks, as has been repeatedly charged, have used their resources and their organization in a one-sided and excessive manner in the interests
of trade and industry, and too little in the interest of
agriculture, a charge that in former times was often
brought against the Reichsbank ( m ). In an able address
on the "Problems of the Money Market" (2M) the president
of the Prussian Central Bank for Cooperative Societies,
Heiligenstadt, has pointed out that "agriculture in
Germany was the last great branch of industry to adopt
the modern methods of money and credit economy. In
consequence it found the instrumentalities and institutions of the money market already firmly shaped. Agriculture, therefore, can not well expect that, even if it
were possible, trade and industry, or, in other words, all
other business interests, should be subordinated to the
special needs of agriculture." In fact, however, such
subordination is possible only to a slight degree, and its
scope is particularly limited in the case of the Reichsbank.
As a note bank, the latter must see to it that its notes, or
one large part of its short-time liabilities, and likewise its
other short-time liabilities arising from its giro business,
should be offset by corresponding credit business (Activgeschafte)—i. e., short-term credit, granted by way of
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discounting paper or making loans on collateral. Now
t h e situation is essentially t h e same in t h e case of t h e
credit banks. Agriculture requires long-term credit t o
conform to t h e extended period of production involved.
Moreover t h e credit needed is such t h a t t h e b a n k can n o t
reimburse itself for it through the subsequent issue of
stocks or bonds. On principle, therefore, the credit b a n k s
can m a k e agricultural loans only to a limited extent. N o t
having an adequate knowledge of the basic conditions of
agriculture, of the profitableness of such undertakings, or
of t h e trustworthiness of the managers of such enterprises,
t h e banks would find it almost impossible t o allow t h e m
blank credit.
I n agriculture mortgage credit (Realkredii)
must
naturally play t h e leading part. Here, however, special
organizations based on landownership must step in. For
a number of years this has been done in an adequate measure b y t h e mortgage associations (Landscha)'ten)
and
similar public institutions, also b y t h e banking institutions
and loan banks established b y t h e mortgage associations,
t h e mutual credit societies (numbering about 16,000 225 ),
and t h e mortgage banks for urban real estate on t h e one
hand, and in Prussia t h e State Central Bank for Cooperative Societies on t h e other. The credit based on mortgages and other real estate security which has been
extended to German landowners must be estimated at
present at least a t 40,000,000,000 marks ($10,000,000,000).
The German credit banks have participated, b o t h
directly 226 and indirectly, in extending such credit b y t a k ing part in t h e establishment of mortgage banks, making
temporary loans on personal security to agriculturists for
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a more or less limited period, to be repaid in fall or
winter, 227 thus providing for t h e needs of planting and
harvesting, or for t h e purchase of lean cattle and t h e
acquisition of equipment and raw material for industries
subsidiary to farming. This is particularly true of the
provincial banks and notably of t h e very small banks,
which thus seriously impaired t h e liquidity of their assets.
I t m a y be said t h a t these operations fall essentially within
the scope of t h e local banks, as these are in a better position
to judge of t h e trustworthiness of borrowers on personal
security, and to determine the probability of repayment
of such loans. Nevertheless it has been demonstrated t h a t
" every year, during t h e season when young and lean
cattle are purchased, m a n y millions of marks are placed
a t the disposal of t h e trade by t h e Berlin banks, through
t h e intervention of t h e local b a n k s . " 238
German credit banks have hithereto done little for
the craftsmen and t h e small manufacturers and tradesmen, except when t h e banks have been closely connected
with t h e cooperative credit societies as in t h e case of
t h e Dresdner Bank. The reason for this lies in t h e fact
t h a t on t h e one h a n d unsecured credit (Blankocredit) is
naturally out of t h e question in most of these instances,
and on t h e other h a n d no proper security can be furnished
for personal credit (Personalcredit) which would moreover have to be in most cases long-time credit. Moreover
German craftsmen, small business men, and p e t t y traders
have been reluctant to open bank accounts. Unable to
maintain adequate balances, these classes are unwilling to
subject themselves to what they presume would be burdensome conditions. Moreover as checks have hitherto
903110—11

16

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been used but to a small extent and long book credit is
customary in their business, the aid of the banks in making
and receiving payments was not thought indispensable.
As things stand, there is still much to be done through
cooperative credit organizations in which the banks can
help a good deal. The postal transfer and check system
inaugurated January i, 1909, will prove particularly
beneficial in this connection, as it will provide the
craftsmen and small business men with a substitute for
bank accounts, which few of them now have. It will
induce them to accumulate with the post-office for use in
making payments not only cash immediately needed for
this purpose, but also such sums as may be required for
that purpose in the more distant future. This will, however, come about only gradually owing to the absence of
any provision for paying interest on balances kept on deposit with the post-office department. This is unfortunate,
for it will retard the adoption of the new system. There is,
however, one good feature in the nonpayment of interest,
in that it will serve as an inducement to the depositor to
use his deposits in excess of the irreducible minimum of
100 marks required, in paying off his debts at the earliest
possible date. This would be a good beginning in the direction of shortening among craftsmen and small business
men the period for making payments, a highly desirable
reform, heretofore often attempted in vain.
The Reichsbank has now joined in the postal transfer
system, and under treaties to be concluded both foreign
private institutions and postal savings banks (see p. 147)
are expected gradually to join in the system. This would
lead to the happy result of bringing about the organic
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union which has heretofore been almost completely wanting between the giro (transfer) business of the Reichsbank,
ministering chiefly to the needs of the large industrial
and commercial interests, and the postal transfer system,
which, it is hoped, will meet in a large measure the needs
of the craftsman and small business man.
In concluding these general introductory remarks I wish
to call attention to the following: I have repeatedly emphasized the fact that the mighty rush in the development
of our entire industrial life and of our system of bank
credit was the absolutely inevitable consequence of the
rapid increase of population. We must not, however,
forget the point on which Adolph Wagner has often insisted, namely, that this growth of population was not only
a cause but also an effect of the excessively rapid growth
of our general industrial and credit systems, and that for
this as well as other reasons, a less rapid progress would
be highly desirable. On account of the natural causes
pointed out above (p. 89) I have no doubt that this rate
of growth in population will not prove continuous. In the
same way, and from equally natural economic causes, there
will undoubtedly come about a slackening in the pace of
general industrial development, and with it in the expansion of our credit system, and the concentration of industry and banking. We are already beginning to feel this.
Here, too, flood tide will of necessity be followed by ebb.
This, however, absolves no one from the duty of helping to build up and maintain strong dams while the flood
is rising, so far as it is possible and practicable to do so,
in order to keep the turbulent waters from going beyond
all bounds and inflicting irreparable damage. However,
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these dams m u s t be erected a t t h e proper points, and built
b y experts possessed of the requisite theoretical knowledge
and adequate practical experience. These dams should
do no more t h a n keep the river in its n a t u r a l bed and unless t h e conditions are exceptional and the reasons for a
different procedure compelling, the dams should not be so
constructed as to force t h e river to seek a new channel
and in so doing destroy flourishing fields.
I also wish t o refute another view which has found frequent expression of late, and wliich was presented also before t h e Bank Inquiry Commission. I t is claimed t h a t as
a result of their connections with t h e banks and t h e system
of b a n k credit, private concerns have t o an increasing ext e n t abandoned t h e policy of investing their reserves,
as formerly, in German Government securities. These
reserves, it is contended, have been pressed by t h e banks
into t h e service of German t r a d e and industry 2 2 9 —that is to
say, have been p u t into channels which these funds " would
not have chosen of their own accord." The official a p pendices t o t h e report on t h e Imperial financial reform
bill of 1908 230 have effectually removed every ground for
such assertion, particularly as regards recent years. They
demonstrate on t h e one h a n d t h a t t h e German investing
public have displayed an extraordinary and increasing
willingness and power to purchase domestic securities
offering safe investment and a steady, though relatively
low, rate of interest, and on t h e other h a n d t h a t b o t h
public and private institutions have absorbed b u t a
"relatively s m a l l " p a r t of public issues, a t least as compared with similar institutions abroad.
I t is t r u e t h a t among these "domestic securities" there
are included municipal loans a n d mortgage bonds, issued
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by German public and private institutions. Bearing in
mind t h e considerable issues of securities by t h e Empire and
the federal states, and the fact t h a t comparatively little
of this is in t h e possession of state or private institutions
in Germany and foreign countries, 231 there can be no doubt
t h a t by far t h e greater p a r t of t h e Imperial loans, and of
t h e securities issued b y the federated states is in the hands
of t h e German public. The proportion so held, it appears,
has not declined in t h e past decade; on the contrary, it
has increased, and t h e increase has more t h a n kept pace
with t h e growth of wealth in the country.
(2) Observations on the granting of industrial credit in
particular.
In t h e foregoing it has been pointed out t h a t one reason
for t h e failure of the credit banks to develop in this period
firm and consistent principles t o govern industrial credit
lay in the fact t h a t even now p a r t of these banks date
back only six decades, the rest only four decades, and t h a t
in this period they were called upon to discharge simultaneously a multiplicity of tasks. Another reason lies in
t h e fact t h a t t h e German credit banks have developed
very differently, each in its own way and along special
lines.232 In this there are advantages as well as disadvantages. A further reason is, t h a t German industry,
though much older, did not begin its great expansion
before t h e second period.
German industry h a d still to learn slowly and gradually
the fundamental principles governing t h e taking of credit—
as to kind, amount, and the right time—in the same way
as t h e banks h a d t o evolve t h e fundamental principles
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applying t o t h e granting of credit. I t can not be doubted,
therefore, t h a t through ignorance of correct principles, or
an overestimate of t h e duration of a period of prosperity
or as the result of a certain a m o u n t of megalomania or
of competition, sins were committed on b o t h sides, in
borrowing as well as in lending. I t can be demonstrated
without much difficulty t h a t in m a n y instances industrial ventures took too much long-term credit from t h e
banks, or took it at t h e wrong time, to p u t into improvements, extensions, or new construction, sometimes without stating these to be t h e purpose of t h e loans, a n d
t h a t the banks often accorded such credit to industrial
ventures in too large amounts and a t inopportune times,
sometimes even after symptoms of an impending crisis were
apparent. I n a number of instances, and particularly
before t h e panic of 1901, it can be demonstrated t h a t some
banks h a d offered their credit unsolicited to industrial undertakings, or " t h r u s t " it upon them, 233 or at least m a d e
it so easy t o obtain t h a t t h e existing mania, great as it was,
for new construction and reconstruction, was further intensified. I t should not, however, be forgotten t h a t on t h e
other h a n d a t certain times t h e opposite charge has been
m a d e against the German credit banks t h a t they were
tying up their resources in stock-market speculation.
" O n e of the worst results of t h e present situation," says
E b e r s t a d t (Der Deutsche Kapitalmarkt, Berlin, 1901,
p . 115), " i s t h a t industry finds ' t h e tables all t a k e n ' and
t h a t the banks are positively in no position to furnish
adequate credit for industrial needs.''
Finally it has undoubtedly often happened, as we shall
explain more fully later, t h a t German credit b a n k s h a v e
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lent their credit to industrial concerns according t o t h e
usual principles—i. e., b y granting short-term credit t o
industry in t h e same way as to commerce, a kind of
credit well enough suited to commerce b u t as a rule
entirely unsuited and too costly for industrial needs.
Lastly, in consequence of t h e excessive decentralization
of German banking, t h e banks in granting their credit
have at times disregarded t h e principle of distributing
t h e risk, giving too much credit to one industry, or one
branch of industry, or even a single establishment. The
Leipziger Bank went under because, with a capital of
48,000,000 marks, it had allowed loans to t h e extent of
93,000,000 marks to t h e
Trebertrocknungsgesellschaft
(company for t h e utilization of desiccated lees).
The Dresdener Kreditanstalt fur Handel u n d Industrie
failed because it had extended too much credit t o t h e
Kummergesellschaft.
Aside from these mistakes, however,
t h e t r u t h is t h a t t h e capital available for commercial and
industrial enterprises in Germany was not equal to t h e
demand and capacity for industrial expansion existing for
t h e most p a r t independently of any stimulation b y t h e
banks. To this fact more t h a n any other are to be attributed all t h e crises t h a t have taken place. H a d not
t h e banks accumulated t h e available capital b y accepting
deposits, and m a d e it serviceable for productive purposes,
it is a question whether this maladjustment would not
have been far greater, t h e results much worse, and t h e
crises far more severe.
If t h e reproaches cast on German banks would restrict
themselves t o t h e formulation of t h e charges just mentioned, every objective critic of t h e German banking
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system might readily admit their justice, t h e more so as it
is scarcely imaginable t h a t these or similar mistakes could
have been avoided in any other banking system, where
banks have h a d an equally short existence. 234 T h e injustice lies in t h e exaggeration which has unfortunately gone
t o great extremes and taken peculiar forms. This is particularly unfortunate for the reason t h a t t h e criticism is
rarely accompanied b y any proposals for reform, and still
more rarely with any practicable proposals. I n b o t h directions t h e climax is reached in a work bearing t h e somew h a t sensational title ' ' T h e management of t h e nation's
wealth." 2 3 5 I can not ignore this work, because t h e author's views h a v e been highly appreciated b y those who
are opposed on principle to t h e German banking system
and who h a v e used t h e author's arguments as grist for
their own mills. I t m a y be stated t h a t t h e author was
himself a b a n k official, though not indeed one of t h e b a n k
directors who are treated with such scant indulgence
in t h e above work and in his other work, entitled
" T h e German Banking System." 2 3 6 T h a t which is
correct or partially correct in t h e book had been said
before in a more thorough and better way b y Heiligens t a d t and Bernhardt in the " Plutus " and elsewhere—thus,
for example, t h e statement t h a t t h e banks have been too
ready or too generous in granting credit to industry a n d
t h a t thereby they have increased t h e speed and extent of
t h e process of Germany's " industrialization"—a point
t h a t obviously can n o t easily be proven. 237
This is moreover expounded with endless repetition,
a n d of course with t h e usual embellishments t h a t t h e
control of t h e " n a t i o n ' s wealth," t h e utilization of t h e
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national reserve funds (Betriebsreserve), and the "general
industrial development of Germany " ought not to be entrusted to a "dozen men" (p. 24), the alleged perversity
of whose banking policy is repeatedly emphasized.
The substance of the other criticisms which Lansburgh
makes is as follows: The capital accumulated in German
credit banks through deposits—he insists on nearly every
page—is not utilized in accordance with the wishes of the
depositors. On the contrary, the short-term loans to the
banks are to a considerable extent converted into longtime advances to industry, and accordingly into further
industrial investments. It is, however, "not a question
(p. 17) whether the credit or advances made by the banks
are beyond cavil." In this connection the distrustful
remark is merely made (p. 16) that it is impossible to
tell from the bills what their character is. In another
place, however (p. 15), it is expressly admitted that the
"banks have up to the present followed sound principles
in maintaining the proper liquidity of their resources;"
furthermore (p. 11) that "for economic and ethical
reasons it is absolutely necessary that promotions and
improvements should go on;" that "the banks, as a matter
of fact, in determining the amount of capital to be
invested in an establishment or branch of industry, are
guided by its earning power" (p. 10), and finally that
"provided due care is exercised in the make-up of the
different classes of investments," we may regard the
conditions as sound (p. 15) "so long as the existing
practice is continued of investing 40 per cent of the
depositors' money in bills and the other 60 per cent in
loans to customers." According to the author, however,
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the criticism of a national banking policy should be primarily based upon considerations of general industrial
interests rather than of private interests (p. 17). He
therefore insists that bill credit and advances be granted
only to such enterprises "as would have been granted
such credit by the individuals who constitute the banks'
creditors, if they had been disposing of their money
independently, without the intervention of the banks."
This (ibid.) would not yet mean that '' every interest would
come into its own, that agriculture would receive its
proper share in the same way as industry, the government in need of funds, as well as the private individual
seeking credit. At any rate, however, there would be
nothing arbitrary about it." For, as stated in another
passage (p. 20), " t h e depositor may have had in mind
buying German bonds or mortgage bonds or acquiring an
interest in a business enterprise." In a still more prophetic
manner, we are told on page 21, that " without the intervention" of the banks, the deposits "would surely have
been devoted to different uses. They would have been
invested in government bonds and would have become
available to the government for other than purely industrial purposes. A part of the deposits would have gone
to the small dealers, craftsmen, and agriculturists."
As to these claims it would really be sufficient to ask,
How does the author know? It is, however, necessary
to add that the author would surely have arrived at
quite different conclusions if he had carefully investigated these points, and likewise his fundamental assumptions which we shall examine now more closely, for upon

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closer examination it is hard to take his contentions
seriously.
As the author has properly observed, in an article238
which appeared almost at the same time his pamphlet
was published, the available resources are generally
composed of "very many small sums of money, each of
which taken alone would remain unproductive." These
are made available for productive uses only because the
credit banks have for decades persisted in the laborious
work of bringing them together. As I have shown elsewhere, the intervention of the banks has made it possible
for these small amounts to render to industry in general
far greater service than could have been rendered by them
singly in the hands of the depositors, each one trying to
utilize his amount without the help of any intermediary.239
Were it not for the intervention of the banks these
amounts would have remained idle in the hands of the
depositors, their small size making them unsuited for
productive investment.
As this money has become available only through the
activity of the banks, it is impossible to set up as a principle governing its management and investment that it
should be used only for those purposes and undertakings
for which the various creditors of the banks might have
intended them, "had they acted independently and without the intervention of the banks in the disposition of
their funds." It is more than likely that, had it not been
for this intervention, they would in most cases have made
no use whatever of their money, and least of all used it
for industrial investment, but, following tradition, would

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have let it lie idle and yielding no interest, a situation
which even Iyansburgh would scarcely think ideal.
If nevertheless the "wish of the individual depositors"
be accepted as decisive in the matter of investing their
deposits, in spite of the fact that this wish is not communicated to the banks, and can scarcely be divined by
them, no one would seriously contend that the present
situation would be improved and not rather be made
much worse. For without being able to do so with absolute certainty the banks with their experience and expert
knowledge can ascertain far more correctly than the individual depositors the conditions of the market; for
different sorts of investments, the general state of industry,
the actual condition and the prospects of a given branch
of industry, trade, or agriculture, and the trustworthiness
of borrowers to whom bill credit or credit on current
account is to be granted.340
Morever, it is evidently wrong to assume that the
depositors, if left to their own decision, "might" have or
"surely" would have wished a different disposition of
their deposits than that actually made by the banks.
In the first place by far the larger part of the deposits
in German credit banks is made up of the working reserves of business men and of other temporarily available
funds of capitalists—in other words, of the funds of persons
thoroughly capable of reading a bank balance sheet. In
regard to the investment of deposits, these statements
convey the information which Lansburgh, too, has been
able to get from them. Thus it is certain that the majority of depositors do not object to the way in which
their deposits are invested, in particular to the investment
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in industrial credit in the shape of bills or of current
accounts. Unless this were so, noting the condition
appearing from the bank statement, they would betake
themselves with their funds to cooperative credit societies,
or to the savings banks in case they wished that the
greater part of their deposits be invested in mortgages
or if they regarded the savings banks as safer.
It is highly instructive in this connection to note the
prevalent opinion among the Federation of German Savings Banks as voiced in the testimony given before the
Bank Inquiry Commission by an expert, closely associated
with the savings banks, that about one-third of the
deposits in the savings banks are temporary in character,
intrusted to the savings banks by persons belonging to
the middle or even higher classes, "who know exactly why
they deposit their money in the savings banks, even if
only temporarily." The percentage is particularly interesting because it corresponds almost exactly to the proportion of the deposits in the credit banks which may be
designated as "savings deposits." If this be so, and I
have no reason to doubt it, it proves that, as a matter of
fact, a large number of persons who are thoroughly
familiar with financial affairs241 prefer to put into the
savings banks funds that are only temporarily available
pending permanent investment—funds better suited for
deposit in credit banks.
From this we may further infer that in intrusting such
deposits to the credit banks, or in leaving them there, the
class of depositors just mentioned, or those still better
situated, do so with a full appreciation of the way in
which these funds are invested. Nothing becomes, therefore, of the assertion "that were it not for the banks this
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very class of persons would have turned their money over
t o t h e small dealers, craftsmen, and farmers, or to " t h e
Government." Lansburgh himself admits it as t r u e in
a special case t h a t t h e classes from which t h e depositors of t h e b a n k are drawn know exactly w h a t t h e y are
doing, for elsewhere 242 he remarks t h a t " a s an immediate result of every boom in industry and trade, p a r t of
t h e money deposited with t h e banks is withdrawn a n d
invested in t h e most profitable branches of business."
This is another reason why we cannot admit t h a t through
t h e activity of t h e banks " t h e s e savings are forced into
investments which they would not have sought of their
own accord " (p. 12).
Finally, if it be t r u e t h a t t h e German credit banks h a v e
given their credit predominantly to industry and t r a d e
(we m u s t not forget t h e latter, particularly t h e export
and import trade), it is a question whether, aside from a
generous participation in government loans, this after all
is not necessarily t h e chief sphere of operation for t h e
credit banks.
W e have seen how mortgage and other land credit, with
a constantly increasing specialization, has been widely
extended and developed in a " t r u l y exemplary w a y "
(Lansburgh, p . 5) t o meet t h e needs of agricultural and
u r b a n real estate. Their credit wants, and particularly
those of agriculture, are met b y t h e cooperative credit
societies, t h e land mortgage associations (Landschaften) ,243
and t h e banks and other institutions which they h a v e
founded, t h e mortgage banks, and t h e Central Prussian
Bank for Cooperative Societies, atid other institutions of
t h e same kind. W e have also seen t h a t , t h a n k s to t h e
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16,000 cooperative societies, almost the same m a y be said
of facilities for credit on personal security (organized for
the purpose) of craftsmen and small business men, and
t h a t through t h e postal transfer and check system an
urgently needed improvement will be introduced in t h e
facilities for making payments. W e have furthermore
given t h e reasons why dealings with t h e credit banks and
bank credit are little adapted t o t h e needs of these
classes, and are therefore b u t little resorted to b y them.
W h a t is t h e inevitable conclusion from all this so far as
t h e banks are concerned ? Their domain is industry and
t r a d e (Lansburgh, p . 5), though not their exclusive domain,
as is evident from t h e fact t h a t they have lent their credit
to t h e State, t h e municipalities, etc.
I t has been clearly shown t h a t it was not t h e banks
t h a t brought about t h e industrialization of Germany,
b u t certain elementary economic causes working with
irresistible force.
I t is equally certain t h a t even under t h e least favorable
circumstances t h e banks have stood by t h e E m p i r e and
the Federal States in raising funds. This alone proves t h a t
another of Lansburgh's contentions is incorrect, namely,
t h a t as a result of t h e credit activities of t h e banks t h e
reserves of individuals and private establishments are
no longer invested in securities yielding a fixed income.
The very opposite of this is proved b y t h e appendices t o
the report on t h e imperial financial reform bill. Nothing,
then, remains of all of Lansburgh's contentions, beyond
the fact admitted on all sides t h a t t h e industrialization
of Germany has proceeded too rapidly. This is due to
a number of causes (no one can determine in w h a t
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proportion): to the rapid growth of population, the tremendous demand for credit made by trade and industry,
occasioned in turn to a large extent by the justifiable
struggle against foreign competition, and finally to
occasional mistakes by the banks in granting credit.
This may suffice in criticism of Lansburgh's contentions.
I shall now turn to the much better-grounded reasoning and proposals of the late Felix Hecht, whose views,
based on sound knowledge of the theory and practice of
German banking, were recently made public 2U in connection with his earlier treatment 245 of the subject.
In this connection a welcome opportunity is offered to
supplement these ''introductory observations" on industrial credit in a number of points. This at the same time
justifies a more careful examination of Hecht's proposals
in this part of the book.
Hecht's proposals are in effect that there should be
established a central institution for long-time credit which
should issue debentures indorsed to bearer, and render
assistance as nearly as possible to all branches of German
industry. These debentures are to be issued either on the
basis of securities taken over from the particular industrial
establishments, or directly and without such underlying
securities. They are to bear the indorsement and guarantee of the central institution. Bearing a higher rate of
interest, maturing earlier (an amortization of 7 to 8 per
cent as a rule being provided), and being attended with
greater publicity,246 the debentures of the central institution would, in Hecht's opinion, have great advantages over
existing industrial bonds. Moreover, owing to the wider
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distribution of risks, the security of these obligations would
be greater. In the first place the central institution would
extend its activities to all kinds of industrial undertakings which might present an assured earning power.
Furthermore, the earning capacity of these establishments
could be investigated by it more carefully than by the
credit banks. Unlike the credit banks, the central institution could have at its command a large staff of technical
and commercial experts, who would be in a particularly
favorable position to accumulate a very large and valuable stock of specialized experience. The supposed urgent
necessity for establishing such an institution is based on
the great difficulties which the credit banks encounter
to-day in adopting a rational policy as regards the granting of industrial credit.
We must accordingly begin by testing the correctness of
these premises. For this purpose it will be necessary to
discuss the conditions and the general principles underlying industrial bank credit, particularly as contrasted
with commercial bank credit, in so far as these have not
been adequately dealt with in these " preliminary considerations," and in my remarks in the Verhandlungen der
Mitteleuropdischen Wirtschaftskonferenz (Transactions of
the Central European Economic Conference) in Berlin
(May 17 and 18, 1909)247 to which I refer the reader.
With reference to this the following points maybe made:
1. The technique of commercial credit, which has been
generally well developed by the German credit banks, is not
identical, as Hecht rightly maintains, with the technique
of industrial credit. The latter is far from being as well
developed by the German banks as the former.
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(a) Whenever industrial credit is given, the creditor
is obliged to make sure, throughout the continuance of
the loan that the credit allowed has actually been used
for the purpose for which it was solicited. This he is
seldom in a position to do. In commercial credit, on the
contrary, this is not necessary, or at least not to the same
extent. Even when short-time industrial credit is given to
serve as working capital, the creditor is at all times obliged
to keep watch over it and to see that it is not used in a
manner at variance with the purpose and character of the
loan, by being put into permanent improvements, for
this would mean the tying up of an equal amount of
the bank's capital. Such supervision can be exercised
only with great difficulty.
(6) For this reason, also because of the resulting risk,
which is greatly augmented by the lack of technical
knowledge on the part of the bank, it is decidedly inadvisable for credit banks to participate directly to any large
extent in industrial enterprises. The instances in which
the banks became industrial entrepreneurs have for the
most part not turned out to their advantage. Direct participation (not always voluntary) in the sense of taking
over permanently stocks and bonds of the enterprise, is
less objectionable in itself, but even this is likely to prove,
under unfavorable conditions, a burden upon the bank's
resources and may result in serious impairment of the
liquidity of the bank's assets.
(c) In commerce the general practice is to give shorttime credit on personal security, well suited to commercial needs. It is necessarily renewed frequently or
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mission is stipulated. But such credit is in many respects
far too costly for industry, and often directly oppressive.
In industry such credit is needed only for the transitory
purpose of paying wages and salaries and obtaining the
working capital required either regularly, at more frequent intervals, or only once a year, for freight and
insurance premiums, for the purchase of raw material, and
other means of operation. Even this short-term transitory
industrial credit to provide for wages and working capital
is not entirely conformable to the rules and requirements
of short-term commercial credit, for here frequent renewals
and increased borrowings are out of question. Still, as a
rule it can be repaid more quickly than credit intended for
capital outlays. Nevertheless it is objectionable for credit
banks, for it often happens that it can not be taken out of
current income, and thus tends to develop into permanent
credit (Anlage-Kredit), contrary to the intention of either
party, or at least of the bank. In case payment is defaulted at maturity, a suit-at-law is for the most part out of
question, not only for business reasons, but also because
such a suit might lead to far more serious consequences.
(d) In view of the need for constant supervision with
reference to the stipulated use of the loan (see remarks
under section "a") which is far more urgent in industrial
credit than in commercial credit, a stipulation that a given
given industrial establishment should not deal with various
banks and bankers would seem particularly proper.
Hecht 248 and Ad. Weber249 criticise the German credit
banks on this ground, charging them with having frequently violated this principle, and pointing to the Terlinden case, where no fewer than 14 banks and bankers
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had suffered severe losses through ignorance of one
another's action. This criticism is, however, unjustiiied.
From personal knowledge of one of the contracts made
with the Terlinden Company I know that with a view to
supervision in this respect it was expressly agreed that
the company should not deal with other banking establishments. Such an agreement, however, is entirely unavailing
in the case of a dishonest debtor, and particularly one who
falsifies not only the books but also the underlying records
(letters, vouchers, etc.). In that particular case the situation would not have been easily revealed, even if the books
had been audited, a step for which there was no occasion
in the absence of any knowledge that the contract had
been violated.
Effective service in this direction could be rendered only
by a central credit bureau established by the credit banks
themselves to which they might report the names of the
borrowers, and the amount and kind of credit granted,
without stating the name of the creditor bank. It would,
however, be exceedingly difficult to establish such an institution, not only because of the mutual competition
among the credit banks but above all on account of the
imperative necessity of business secrecy.
2. The lending of short-term commercial credit is, generally speaking, less hazardous than the granting of industrial credit.
(a) Disregarding the cases where unsecured credit is
allowed to a manufacturer, in which case the terms and
conditions are the same as in commercial credit, and considering the problem of secured loans, we are concerned
primarily with secured credit given on the hypothecation
of the factory and the grounds belonging to it—property
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on which, as a rule, the mortgage banks will not lend.250
(We may disregard here the comparatively few instances
in which policies or securities are pledged.) Even where
a first mortgage is offered, which is not always the case,
the granting of the loan is not entirely unobjectionable.
If it becomes necessary to sell at auction the mortgaged
property, together with the machinery, at a time when it
is idle, little more is likely to be realized on the factory and
plant than the value of the material and the generally low
common value of the ground. In any event, the property
which serves as security for the loan does not represent
the same value to every future purchaser.
Credit ultimately secured by realty (Realkredit) may be
based further on the issue by the industrial corporation of interest-bearing bonds secured by mortgage. The
flotation of such securities is, however, justified only " i n
the case of a business with an established earning power,
which is independent of any particular management that
may be in control for the time being". 251
Loans based on bonds not secured by mortgage represent
of course nothing more than credit on personal security
(Personalkredit), and if no security of any kind is pledged,
it is nothing more than unsecured personal credit. Such
credit, however, should be granted only under the same
conditions under which commercial loans are granted; that
is, only after a careful investigation of the trustworthiness
and efficiency of the management, the earning capacity of
the business, as well as the profitableness and general
market prospects of the particular branch of industry.
(6) Industrial credit secured by lien on realty (Industrieller Realkredit), is particularly hazardous, when the
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industrial establishment concerned does not fall within
the scope of operation and experience of the creditor bank
or of its branches. In such cases the investigation into
the underlying security of the loan can not be made with
an adequate technical knowledge of the business and the
lack of it will cause losses much sooner and in larger
amount than in the field of commercial credit.
(<;) Having failed to give sufficient attention to the
above-mentioned conditions under which industrial credit
may be given, the creditor bank is very frequently obliged to
urge or bring about the reorganization of an establishment
as a stock company in case the latter has not yet assumed
that form. This involves risk for both parties, particularly when the change to the corporate form is to be made
in the face of conditions which may unfavorably affect
the market for the stock and bonds to be issued. Such
conditions are the presence of strong or even overwhelming competition on the part of other corporations
in the same line of business, the general, political, or economic situation, the immediate industrial outlook in the
trade, or the character of the management. Very often
the expediency, from the business point of view, of transforming a firm into a corporation does not receive sufficient attention in case of enforced reorganizations
effected for the purpose of mobilizing long-term loans, or
short-time credit which has gradually been diverted from
temporary to capital outlays, contrary to the wishes of
both parties, or, at least, of the lender; even less thought
is given in such cases to the earning power of the future
corporate enterprise, which is bound to be affected by the

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increased expense, or to the question whether the enterprise
is at all adapted to the corporate form of organization.
Where the main consideration in the formation of a stock
company is the necessity of mobilizing a loan and liquidating or shifting it, the situation is particularly dangerous
for the lender. On the one hand, the bank may be obliged
to carry the newly issued stock and bonds for a long time,
which will diminish its power to realize quickly on its
assets and interfere with its freedom of action. On the
other hand, if it succeeds in floating the securities it may
impair seriously or even permanently its ability to float
future issues (Emissionskredit). The same objections are
present, though not with the same force, whenever a bank,
for the purpose of mobilizing a long-term or standing loan,
is obliged to urge or assist an existing corporation in the
increase of its capital stock or in the issue of additional
bonds, since in this case as well the bank is obliged to
market the securities without much delay.
On the other hand, there certainly were many cases of
industrial enterprises that developed slowly and gradually
and by the judicious aid of long-term loans reached a point
where the condition of the enterprise, the prospective
earning power of the additional plant or improvements,
and the general industrial situation afforded sufficient
evidence that the organization of a stock company or the
issue of new stock or bonds was desirable and feasible.252
In the meantime such an establishment can obtain the
funds it may need in the shape of acceptance credit paying
interest on no more capital than has actually gone into
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3. Under existing requirements for admission to the
exchanges in Berlin, Hamburg, and Frankfort-on-the-Main
industrial securities to be listed, must be in issues having
a minimum par value of 1,000,000 marks ($250,000). On
the smaller exchanges it is sufficient that the issues have
a par value of 500,000 marks. As a result small concerns
may often be obliged to dispose of their bonds among local
circles merely without listing them on any exchange, which
is often a difficult task, or else they may be forced to have
recourse to short-time credit, which is not adapted to their
needs, or even to get along without credit. The latter contingency would, of course, happen only in case the provincial banks or bankers failed to lend their assistance.
Upon careful study of these considerations we must admit that the central institution proposed by Hecht may
prove beneficial in many ways. Hecht's view is that such
a special institution would not prove a serious competitor
to the credit banks, but would on the contrary develop
a field of usefulness of its own which would supplement
their work in many ways. This is hardly correct, at least
not so far as moderate-sized industrial establishments are
concerned.
On the other hand we can not admit the necessity of such
a central institution. During the next decades great progress will undoubtedly be made among the credit banks in
the direction of the organic development of long-term industrial credit, which Hecht found wanting. He himself,
referring to the past, emphasized at the beginning of his
monograph the fact that " during the last three decades the
organization of credit in Germany has made unexpected
progress." This advance in my opinion has occurred and
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will continue to occur not only in the field of commercial
credit, but in that of industrial credit as well.253 This is
particularly true of the latter, for many of the obstacles
which have hitherto stood in the way of the development
and organization of industrial credit are of a general character, and would have to be met by the proposed central
institution in exactly the same way as by the credit banks,
and perhaps under far greater difficulties. In the first
place such an institution would not have at its command
the experience of decades and the far-reaching connections which the credit banks have. The credit banks will
undoubtedly be in a position to avail themselves of the
same experts whom the central institution might employ.
This applies primarily to the trust and auditing companies
which the banks have themselves established, and is at
least equally true of those other organizations, which,
according to Hecht, are to cooperate with the central institution, like the federation and association of electrical
engineers, the society of naval engineers, the association of
German gas and water engineers, the association of German mechanical and railroad engineers, the federation of
German mechanical engineers, the German association of
mining engineers, and the association of German chemists.
In many important points the central institution would,
to say the least, have no advantages over the credit
banks in making long-term industrial loans. On the
other hand it would be sure to make some of the same
mistakes that have been made by the credit banks, and
some of these on a much larger scale. If perchance it
should avoid some of these mistakes, it is likely to commit other mistakes of possibly far more serious consequences to the industrial community.
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To begin with, it is evident that in the desire to find a
market for its obligations and to place them in competition with existing securities it would have to make every
effort to show large and continuous dividends.254 It
would therefore have to be exceedingly keen for business.
As a result, during times of the high tide of prosperity it
is likely to proffer loans unsolicited or to thrust funds
upon industrial enterprises more often than was the case
among the credit banks. Thus the abuse charged to
the credit banks will prove still more serious in its effects
on general industrial conditions and might lead to the
lending of credit to establishments which would never
have received it from the credit banks.
A more apparent and graver danger lies in this that a
special institution of this character can by no means be as
familiar with the general industrial and financial conditions as the credit banks. And yet, in granting credit,
this factor must be considered just as carefully as the
special conditions obtaining in the industry or the branch
of it concerned in the loan. It is to be feared that the
central institution will not take the general business
situation into consideration or will fail to give it due
weight.
Among the reasons assigned to prove the necessity
for establishing a special institution of this character it
is urged that industrial concerns are now forced by the
banks to resort to short-term commercial credit, which
is not adapted to their needs. As against this contention, it may be asked whether the effect of such a. special
institution would not be to force establishments to seek
long-term credit for purposes for which only short-term
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loans should be used, as, for example, for the purpose of
procuring current working capital. I think this at least
possible, and I am convinced that Hecht's charge (unjust
in my opinion) of the "mechanical standardization of
credit" (Schablonisierung des Kredits) brought against the
credit banks (see his "Memorial," p. 7) is likely to prove
true to a greater extent in the case of a special institution
of the kind proposed than it ever was in the case of the
credit banks.255
Again, as I shall show later in the course of this book,
a special institution would undoubtedly introduce new
and strong competition for the local provincial banks and
private bankers that make a specialty of extending credit
to the small and moderate-sized industrial establishments
(in case where they do not obtain such credit from the
cooperative societies), particularly credit connected with
the issue of sound industrial bonds in amounts of less
than 1,000,000 marks or 500,000 marks, issues too small
to be listed and dealt in on the exchanges (seep. 248).
Attention is also called to another point—the importance of which Hecht by no means underestimates—the
need of having the underlying conditions for industrial
credit investigated by persons and officers located where
the establishment is situated. This need could not be
met by such a central institution nearly as well as by
our large banks with their numerous branches, agencies,
silent partnerships {Kommanditen), deposit banks, and
allied institutions. Not having affiliations and subsidiary
institutions, the necessity for local investigation would
oblige the central institution to establish gradually all over
Germany a far more extensive network of local branches
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than those established or ever contemplated by the credit
banks. The desirability of such a step is very doubtful,
but unless this were done the facilities of the central institution for obtaining accurate information and carrying on
its investigations on the spot would be inferior to those
of credit banks.
A further point of criticism raised by the Frankfurter
Zeitung of September 16 and 25, 1908, was that the bonds
which it was proposed to issue would in effect have all
the characteristics of bonds payable to bearer, without
any governmental authorization therefor having been
given or even requested. Another just criticism is to the
effect that it ought to be shown " t h a t the loans to be
made with the proceeds of the sale of securities have
back of them sufficient security to justify people to invest
their savings therein,'' before " a new kind of obligation
is introduced, which would shift to the public the risk of
long-time industrial credit, formerly borne directly by the
lender." It is contended that Hecht has not proved this
point, for it is not enough to refer to the fact that the
same objection was raised at one time against the mortgage banks. The conditions are entirely different, both
on account of the difference in the character of the security, and the state supervision to which the mortgage
banks are subject, and the complete difference in legal
status, a point which will be gone into further below.
To this I may add the following. One of the advantages claimed for the central institution is that its bonds
would be issued against loans of the most varied kinds, and
resting on different kinds of security. Should this indeed
be the case, and were the prospectus to give an account of
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all the industrial enterprises concerned and in all the details
demanded by the requirements for listing the securities,
the complexity would be so great that it would be as difficult to determine the real value of the bonds as to ascertain the actual condition of the central institution itself.
Baron von Pechman (op. cit., p. 94) has properly called
attention to the point that the credit to be given by the
central institution would prove the less attractive to industrial concerns the shorter the period of amortization to
which they would have to agree besides the 5 per cent
interest and a high commission. And yet in enumerating
the disadvantages of short-term commercial credit for
industry, Hecht lays special stress, and very properly,
on its costliness.
Finally it must not be forgotten that Hecht's project
has long ago been realized abroad, even though only in
the form of a provincial bank. However, that is the form
which Hecht himself contemplated, at least at the start.
Now this foreign bank has not met with any great degree
of success.
About ten years ago (1898) a special institution of the
kind contemplated by Hecht was established in Austria—
the Bohemian Industrial Bank (Bohmische Industriebank)
in Prague—a provincial bank with the moderate capital
of 12,000,000 kronen ($2,436,000). Of late (since 1906)
it has had as one of its special purposes the flotation
of bonds based upon industrial loans repayable in
annual instalments. Up to the present the entire volume
of its bonds, secured by mortgages, had not exceeded
16,639,000 kronen ($3,378,000). In September, 1906, it
established a branch in Vienna, entering thus into direct
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connection with the money market of Vienna. Lopuszanski, secretary to the Ministry in Vienna, who gives
an account of this bank,356 withholds final judgment as to
its merits, notwithstanding the reasonable length of time
the institution has been in existence.
Moreover in accordance with the provisions of a special
enactment in Austria of December 27,1905,257 governing the
issue by the banks of certificates of funded indebtedness,
three large institutions were given the privilege of issuing
bank bonds (Reichsgesetz-Blatt 85. Stuck, Jahrg. 1905),
based on industrial loans secured by mortgage. The limitation imposed is that the aggregate amount of the bonds
must not exceed the total amount of the mortgages on the
industrial property by which the loans are secured. The
three institutions referred to are the Allgemeine Privilegierte Oesterreichische Bodenkreditanstalt, the Wiener Bankverein, and the Zivnostenskd Banka in Prague. Of these
only the latter began to issue such bonds as early as 1908.
Although four years have elapsed since the law was enacted
it can not be said that there has been any great activity
along the new lines.
I do not believe in the practicability of the new venture.
In view of our conditions in Germany, at any rate, I
would not advocate the adoption of a law which would
authorize banks to issue certificates of funded indebtedness,
particularly as no great use of such a privilege is likely to
be made in Germany, so far as can be foreseen. We may
recall in this connection that the issue of such certificates
of funded indebtedness was proposed by Pereire, and that
provision was made for it more than 50 years ago in the
charter of the Credit Mobilier and of the Darmstadter
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Bank. Everybody is agreed that it was fortunate that
such issues were never made. As it is, the concentration
and decentralization of the banks has led to a complexity
and obscurity in the bank statements that is constantly
increasing. The issue of certificates of funded indebtedness based on diverse industrial undertakings, the standing
of which can not be easily found out, would not tend to
lessen this obscurity.
Finally, certain weighty objections of a purely legal
nature remain to be discussed.258
The following are the only possible forms in which the
bonds might be issued:
I . BONDS SECURED BY MORTGAGE. 259

i. Supposing the central institution issues its own
bonds, two cases are possible:
(a) In consideration of a loan made to an industrial
establishment, it might take bonds issued by the latter
(and secured by mortgage) made out to the central institution or to its order. On the basis of these bonds the
central institution might issue its own bonds, depositing
with a trustee as security the bonds of the establishment.
(b) Another way would be this: The establishment issues
bonds secured by mortgage in favor of a bank, which
would make the loan in the first instance. Against these
bonds indorsed by the bank the central institution would
in turn issue its own bonds.
In my opinion there can be no doubt that, inasmuch as
the purpose of the central institution's "activity" is ''directed " 26° exclusively or in part to the making of mortgage
loans on the real estate of industrial establishments and to
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the issue of bonds on the basis of the mortgages acquired,
the institution would be a mortgage bank according to the
wording, meaning, and purpose of article i of the mortgagebank act of July 13, 1899. As such it must obtain a
charter. As its sphere of business is not be to confined to
any one of the Federated States, it must obtain its charter
from the federated council (Bundesrat). This being so,
the central institution would be subject to the limitations
of the mortgage-bank act. In this respect it would make
no difference whether the mortgage bonds issued by the
various establishments receiving loans were bonds secured
by a specific property or by the full assets of the institutions. These considerations apply to the two cases, (a)
and (6), because article 1 of the mortgage-bank act applies
equally, no matter whether the mortgage is originally
made out in favor of the central institution or the mortgage is obtained by the central institution from a third
party (cf. Komm. Bericht., p. 1, sec. 5; par. 1, No. 1, ibid.).
If this view is correct, the purpose of the bank, to make
loans to industrial establishments and to issue bonds
against them, would in these most important cases be
almost completely nullified. Even if we follow Ernest
Sontag 261 in rejecting Hecht's interpretation 262 of section
12, paragraph 1, clause 2, of the mortgage-bank act, the
policy of the mortgage banks, as shown in note 250,
p. 827, would continue unaltered, according to which,
with few exceptions, no loans are granted on industrial
establishments.
2. Suppose now that the central institution does not
issue its own bonds. We might then have a case where
the bonds secured by mortgage would be issued by the
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The

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Great

Banks

industrial establishment itself to the order of the central
institution, and the latter would no more than indorse
the bonds. It would make itself liable for them in the
same way that a bank assumes liability for a bill.263 In
this case the mortgage-bank act would not apply, for it
would not involve the issue of bonds by the central institution against mortgage loans made by it or by some
other party. The central institution would be acting
only as an intermediary, guaranteeing the bonds issued
directly by the various establishments. These securities,
to be sure, would gain in value and become more readily
marketable, for the reason that they had been passed on
and indorsed by the central institution, but scarcely
more than the industrial bonds floated by a well-known
bank.
On the other hand, so long as the bonds are issued by
various borrowers, and merely indorsed by the central institution, it would be impossible to combine and treat as one
aggregate loan of i million marks the issues of, say, four
establishments where each issue was for 250,000 marks.
This does away with a second argument advanced in favor
of the creation of a central institution, namely, that by
combining a number of loans it would enable the securities
of smaller establishments whose bond issues were for less
than 1,000,000 marks to be listed and dealt in on the
exchanges.
II. BONDS NOT SECURED BY MORTGAGE.
It might be thought that this difficulty could be obviated in the following manner: The central institution
would have the four establishments each issue in its favor
903110—11

18

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Mon etary

Commission

bonds for 250,000 marks, imsecured by mortgage. The
institution might then in turn deposit these bonds with a
trustee, and issue against them its own bonds to the
amount of 1,000,000 marks. These could then be listed
and traded in. The objection against this plan, however,
is that, if one of these establishments should become bankrupt, the claim based on these bonds would entitle the
central institution to no greater a share in the assets of the
bankrupt firm than would fall to the other non-preferred
creditors of the establishment. In other words, if the
industrial establishment becomes insolvent, the claims
arising from the bonds which it has issued and pledged
with the central institution are on a par with all other
non-preferred claims against the establishment. There
would thus be little inducement to the public to purchase
such bonds, even if these should be admitted to the exchange, which is doubtful. Should they be listed, it seems
to me that the exchange accepting them would at least
insist that, inasmuch as it might be erroneously assumed
from the fact that the bonds were pledged to the central
institution that they were secured by a preferred lien on
the property (dingliche Sicherheit), the absence of it should
be expressly stated in the prospectus. This would, of
course, spoil the market for such securities.
The outcome of these legal considerations is as follows:
1. In the case of an issue of mortgage bonds, the central institution, as such, could be active only in the case
described under I 2. Here, however, it would serve primarily only the interests of the larger establishments.
These are, as a rule, closely connected with the banks, and

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Great

Banks

have hitherto received too much rather than too little
credit.
2. As regards the issue of bonds without mortgage
security there is no real necessity for adding further to a
class of bonds which, contrary to what the purchaser
generally believes, do not confer upon him any right of
lien on the property (dingliches Recht), the more so that
it would be of no benefit to the small trader as such.
3. To allow the issue of bonds in cases I No. 1 a and b,
there would be need for amending existing legislation in
order to enable the central institution to avoid the necessity of obtaining a charter as a mortgage bank. In view
of the existing superabundance of industrial bonds, there
is no adequate justification for such amendment.
Should the central institution enter upon a career as
such, in spite of all the existing economic and legal objections, it can not, in my opinion, look forward to a rapid
or notably successful activity.
(B) THE CURRENT ACCOUNT BUSINESS. 264

Current account transactions between the bank and its
clients are one of the main sources of the commissions
earned by the bank in the general course of business. At
the same time the current account is the basis for the
various relations by which both parties are gradually
drawn into closer union. Through the current account
the bank serves in the first place in the capacity of " maid
of all work" in the business household of its customers,
performing a thousand and one services each for a small
consideration. This menial position, as a rule, is, however, only a temporary stepping stone in its progress to
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a position of influence, at times even of dominance, a n d
one offering great advantages of t h e most diverse kinds.
For this reason t h e current account more t h a n a n y
other b r a n c h of business represents the field in which t h e
various banks fight their competitive battles, particularly
t h e battle for t h e industrial clientele. Once regular relations are established through t h e current account, a direct
road is opened to power and profit for t h e bank. This
road leads past t h e various forms of loans, which of t h e m selves, especially the right to close t h e account, give a
certain a m o u n t of influence to t h e bank. I t leads further
t o increased power and profit through reorganizations,
promotions, flotations of securities, consolidations and perm a n e n t participations in industrial undertakings through
stock ownership, or representation on t h e supervisory
board, or both. Through these transactions it leads t o
t h e conquest of entire branches of industrial activity, t o
close affiliation with commanding industrial concerns,
cartels, and syndicates, and marks t h e beginning of t h e
supremacy of groups of banks.
I n t h e systematic development of the current account
business in industrial districts, attained only gradually,
and after much labor and trouble, we see at t h e same time
a powerful lever in t h e systematic industrial policy of t h e
banks. The successful carrying out of this policy tends
also fo establish, strengthen, and extend t h e supremacy of
the banks over t h e private banking houses usually found
in this field.
The essential features of t h e current account business
are t h e following:

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Great

Banks

I n t h e course of t h e current account transactions, t h e
German credit banks first of all provide their customers
with t h e facilities for making and receiving p a y m e n t s
(Zahlungsverkehr).
They receive payments, and m a k e
p a y m e n t s on their account, collect their bills, interest on
mortgages, and claims. For such of their customers especially as are engaged in foreign and over-sea trade, they
draw bills, checks, drafts, and letters of credit. By p u t t i n g
their signature to t h e commercial paper of their customers
they convert this paper into safe securities, negotiable
everywhere. 265 They accept bills drawn upon t h e m by
their customers or clients of t h e latter. They place at t h e
disposal of their customers t h e transfer facilities (Giroverkehr) provided by t h e bank, its branch offices and affiliated
banks, though this need is b u t seldom felt, in view of t h e
giro facilities offered b y t h e Reichsbank.
They also provide foreign bills of exchange for such of
their customers as need them for their foreign t r a d e
transactions. These have retained the character of
instruments of payments to a far greater extent t h a n
t h e domestic bills. These foreign bills are held b y the
German credit banks not only for t h e convenience of
their customers, b u t also to maintain the liquidity of
their own assets. They keep t h e m in their portfolios not
indeed to t h e same extent as t h e Reichsbank, b u t nevertheless in considerable amounts in order to be in a position
to draw gold from abroad, in case of a money stringency
or a panic. The amount of foreign bills is seldom reported
in t h e statements of t h e German banks. The annual
report of t h e Dresdner Bank for 1908 states t h a t out of
a total in bills of 248,666,816 marks (in 64,951 bills) on
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December 31, 1908, there were bills in foreign currency
to the actual value of 24,999,370 marks. In the same way
the Disconto-Gesellschaft reports that on the same date,
out of a total of 158,928,057 marks held in bills, there
were foreign bills to the value of 18,347,484 marks. In
1903 more than half (54.5 per cent) of the bill portfolio
of the Berliner Handelsgesellschaft was made up of
foreign bills.
To meet the wants of their customers, the German
credit banks furnish surety bills (Wechsel-Avale) for
their customers, more particularly in favor of the customs
and railroad authorities to guarantee the payment of
customs duties and railroad freight charges, on which
deferred payment has been allowed.266
They also undertake to collect foreign and domestic
bills, deducting their expense and commission. However,
under the terms of the current account, which are nearly
always identical on this point, they do not assume
responsibility in the case of foreign bills or bills on smaller
places in Germany, for presenting them on time, or for
having them protested. At the request of their customers
they make remittances by telegraph in order to meet
outstanding obligations in foreign countries.
In their current account transactions they reduce, for
their customers, the risks arising from export and import
trade by discounting or loaning on the bills drawn by the
exporter upon foreign purchasers. They allow the importer credit against which the foreign merchant may
draw, and, on the delivery of the bill of lading, they put
their acceptance on the bills of the foreign seller to the
amount of the invoice, thus making it possible for these
bills to be discounted.
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The

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Great

Banks

They allow their customers credit on current account
for a considerable period of time, or they give them
short-time credit on current account or independently
of it, by discounting the bills of their customers or their
clients, or by granting them loans on collateral or in the
shape of the so-called reports. In a few instances,
following the example of the Deutsche Bank, they have
begun lately to discount for their customers even outstanding business accounts.
They accept securities and documents of their customers for safe-keeping in their vaults, as a rule gratuitously
in case a commission is paid on transactions on current
account. In case they undertake at the same time to
look after these securities, they charge an exceedingly
small commission for this service.
Under the latter head we have the following operations:
The cashing of coupons as they become due and the presenting for payment of bonds drawn by lot, or repayable
for other reasons; the collection of mortgages and temporary interest (Genussscheine) the drawing of incomes
(Geltendmachung vonBezugsrechten); the exchanging of converted securities or the presenting of such securities for
stamping, in compliance with legal requirements. In the
case of a reduction of capital they deposit the securities
of their customers either for stamping or cancellation.
They further secure new sheets of coupons with the talon
(or certificate of renewal), they supervise the drawings
(with certain reservations), they make additional payments on securities not* fully paid up, they pay assessments on mining stock, advance cash for coupons payable
in terms of foreign money, etc.
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In accordance with their general and current account
regulations, the German great credit banks require a
special order of the depositor of securities, in case of
conversions, insurance, giving notice in the name of
stockholders before the general meeting;267 also in case
of instalment payments on account of securities not
fully paid, of assessments on account of mining stock,
and in case of reductions of capital when an exchange of
stock for a smaller amount of new stock is to be made
(Zusarnmenlegung von Aktien).
According to Waldemar Miiller,268 the Dresdner Bank
alone manages securities of customers aggregating in
value to nearly 2,000,000,000 marks, not counting the
securities held by its deposit offices. The German credit
banks or their deposit branches and exchange offices
(Wechselstuben) take care of sealed deposits in special
fire- and burglar-proof boxes and vaults, with keys held
by the bank and by the respective depositors, a function
performed abroad, and particularly in England and America, by special safe-deposit companies.
In accordance with special rules German credit banks
buy and sell securities on commission and make loans
thereon, according to terms described more fully below,
which are essentially the same for all the large banks.
Loans on mining stock, where they are not completely
barred, and on American railroad shares, are as a rule
subject to special agreements.
Customers having a current account with the credit banks
may, if they wish it, open a check account. Balances on
such accounts do not bear interest. On the other hand,
the bank charges no commission on the turnover of such
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The

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Great

Banks

accounts. An accounting is rendered usually each quarter. Deposits of cash to this account, if made before 12
o'clock, are credited as of the date of deposit or the next
business day; when made later, they are credited as of
the business day next following. Cash paid out on this
account is charged to the day on which it is paid.269
German credit banks, mainly through their exchange
offices and deposit branches, frequently act as intermediaries for their customers in securing for them mortgage loans, and often obtain for them or lend them
directly money for building purposes. They make themselves responsible either in the form of surety or of deposit of so-called "Aval-bills" to the customs or railroad authorities for the payment of customs duties or
freight charges, where credit has been allowed to their
customers; or for the proper fulfillment on time of contracts entered upon by their clients for supplies or work.
At the wish of their customers and on payment of a
moderate fee they insure securities left with them for
deposit and care against reduction in value in case of
drawings.
They finance the reorganization into stock companies
of business firms in which their customers are interested;
also the organization of new stock companies. They
underwrite the issue of newly created shares and bonds
in a great variety of forms and on the most diverse terms.
Finally, they supply or secure for their clients necessary
or helpful information regarding new business connections
which the latter may be contemplating and on the standing of individuals or firms to whom credit is to be extended,
also on foreign connections and markets. They grant or
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obtain for their customers various advantages and facilities,
b o t h in their commercial relations and in their itnutual
intercourse, and notably in connection with t h e flotation
of securities.
As a result of t h e m u t u a l competition of t h e banks,
commissions on German current-account transactions
have to-day fallen to a level lower t h a n ever. This is
very deplorable, for it m a y lead to t h e neglect of w h a t is
t h e mainspring of t h e banking business, t h e currentaccount transactions, and t o t h e preferment of other
more speculative branches of banking. A point has been
reached where a great m a n y services for which a charge is
m a d e abroad are performed in Germany gratuitously,
a n d t h e commissions, where paid, are so slight t h a t often
t h e y do not cover even in p a r t t h e share of t h e general
expense which these services involve. Thus as a rule t h e
commission for t h e business done on current account is figured on t h e larger side of t h e account, being one-half of i
per mille for bankers a n d i per mille for others. F o r bill
acceptances t h e commission is one-fourth of i per cent per
quarter. As a rule this charge is remitted b y most large
banks in t h e case of their regular customers, who are
allowed to issue time drafts on t h e bank. I t is exacted
only when they have no adequate funds on deposit in t h e
b a n k on t h e day when the acceptance is made. 270
I n the absence of a special understanding, interest is
allowed on credit balances normally at a r a t e i per cent
below t h e Reichsbank discount rate, a n d charged on debit
balances at i per cent above t h e Reichsbank discount rate.
Usually, however, provision is m a d e for a m a x i m u m r a t e
in t h e one case and a minimum r a t e in t h e other.
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Great

Banks

Payments on current account are usually credited as of
the same day or as of the next business day when they are
made after 4 o'clock. Money paid out is always charged
as of the day on which the payment is made. Bills
collected are entered according to special agreement,
bills discounted as of the day on which they are discounted.
Where the debit balance on current account against a
customer is not merely temporary or when the customer
needs credit either at stated periods (seasonal credit), at
irregular intervals, or continuously, terms must be agreed
upon as to the amount, the rate of interest, the security,
the commission to be charged, etc. These are usually
made in writing and mostly as soon as the account is
opened.
In the course of time and under the pressure of successive
legislative enactments and new legal requirements, the
banks have developed fairly uniform forms of contracts 2n
for their "business and current account transactions."
Naturally, however, reservations are made in regard to
special terms affecting commission, interest, the amount of
credit, and the conditions of repayment.
Credit on current account is given only to classes of
business to which bank credit is applicable, and is either
unsecured (Blankokredit) or secured. The bank, however, seeks always to find security against the risk it
assumes in the character and extent of its current account
transactions and in the differences that naturally appear
among its current account clients. The common policy
of the banks is to have as nearly as possible an equilibrium
between the amounts it must provide for current account
customers in the shape of advances or payments and the
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Commission

active balances of the deposits of other current account
customers, as well as deposits expected from them,,272
Under such conditions, comparatively little of the bank's
own capital is tied up in current accounts. This safeguards the bank's ability to realize quickly on its assets
and secures to it freedom of action. While this favorable
situation is not present every year, or in the case of every
bank, yet, on the whole, and on the average for a number
of years, the condition has been nearly approximated by
the great German banks.
In this connection Miiller272 justly says: '' For this reason
the customers most highly valued are those who, requiring
credit during the buying season, not only repay the advances during the selling season, but in addition accumulate
balances to their credit. This is true of a large number of
commercial firms and of many branches of industry, notably
in Berlin. The seasons for various branches of business
being different, a large bank with branches and connections in all industrial centers of Germany enjoys the
advantage of a proper distribution of its accounts among
all branches of industry, and of the best possible adjustment of credit and debit accounts. Moreover, the periodic
covering of loans exerts a reassuring influence, whereas
loans that are running throughout the year require
greater caution and constant vigilance."
The magnitude of current account transactions appears
from the following: At the end of 1908 the current
accounts in the Deutsche Bank, including accounts in the
deposit branches in Berlin and its suburbs, numbered
171,305. At the end of 1907 the Dresdner Bank had
31,631 current account customers at its central office and
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The

German

Great

Banks

67,212 accounts in its exchange offices (Wechselstuben), or,
in all, 98,843. At the end of 1908 the number of accounts
at the central office had risen to 35,542.
The security for credit on current account, or for credit
given on current account through acceptance, collateral
loans, or bill discounts, consists as a rule of shares, bonds,
merchandise, bills, or the outstanding accounts of the
borrower, that is, of claims arising from the sale of merchandise and manufactures, or of raw materials, halffinished or finished products, belonging to the firm
receiving credit, or of life-insurance policies, patents,
mortgages, dwelling houses, factories, land, or sureties
including secondary and counter sureties (Nach-und
Ruckbilrgschaften) and the like.
Under normal conditions, whenever the banks exercise
due caution—and most of them do—it may be shown that
it is not the secured credit on current account but the
unsecured credit which has proved the safest.
German credit banks grant unsecured credit (Blankokredit) as a rule only after a study of the financial statement of the applicant for credit and a thorough investigation of his trustworthiness, his financial standing, and
his business, which must present no obscurities to the
inquirer, and when it is established beyond doubt that,
so far as it is humanly possible to foresee, the loan will be
repaid and repaid on time. This practice of granting unsecured credit is far more extensive in southern and central Germany than in northern Germany, but it is seldom
granted to other than business men, at least not in considerable amounts.

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When security is demanded for a loan, it is a sign of
some doubt on the part of the bank, excepting the cases
when under general or special instructions of the board of
supervisors or under orders from the central office, the
executive officers of the bank or of the branch are forbidden
to make any unsecured loans or to make them beyond
certain amounts, or without special permission.
Hence the demand frequently made for a separation in
the bank statement of secured and unsecured loans can
not be based on the assumption that such data would
indicate to what extent the management was complying
with the dictates of business prudence in demanding
security, as such information would tell nothing regarding
the character of the security—which is the all important
thing.
Although mistakes have undoubtedly been made in
giving unsecured credit,274 the mistakes made in German
banking practice, and for that matter also in the practice
of foreign banks, in the lending of credit may be traced,
so far as my experience goes, far less frequently to
improper unsecured loans than to the facts pointed out
in our '' introductory considerations. ? ' Among these have
been excessive liberality and eagerness in lending credit,
the giving to or even forcing upon establishments of
long-time instead of short-time credit, violations of the
principle, which should always be observed, of distributing
risks, and, under the head of secured credit, the false choice
or false distribution of collateral—for which, however, the
competition of other banks may often be responsible—
accepting, for example, as security second mortgages, mortgages on building lots, unlisted or highly speculative secu270




The

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Great

Banks

rities, or, worst of all, accepting as "security" shares
and bonds of the company which was seeking credit. A
practice equally dangerous is the accepting of securities
as collateral at prices manifestly far higher than what they
might be expected to bring at forced sale, and the like.
I believe therefore that in general fewer dangers for
the bank are involved in unsecured credit than in secured
credit. The most questionable secured loans are those
that have developed out of original unsecured loans.275
The subject of unsecured credit arising from acceptances
will be dealt with more in detail further on. Such credit
is subject to its own rules and considerations. Satisfactory
as this form of loan may be to a bank at any given moment,
it can not be denied that to give a large or the largest part
of its credit to customers, in the form of acceptances, may
become a source of danger, for it may happen that just
during a crisis when the bank needs all of its resources, it
may be called upon to redeem its acceptances owing to
the inability of the drawers to redeem the bills.
The current account business, including the credit given
on current account, presents considerable advantages for a
credit bank, though in promoting this business there is
need of the utmost attention and caution. Once developed, however, it gradually yields regular earnings, which
are of particular help during adverse times, insuring to the
bank certain minimum dividends, and thereby affording
the management a certain repose and assurance even when
the more speculative branches of its business and more
particularly the flotation of securities fail to bring adequate
returns.

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While it is true that the stability of dividends increases
with the growth of the deposit business, the latter in its
turn is influenced by an extension of the current account
business. On the other hand, the increase of dividends is
dependent mainly upon the expansion of the current business and particularly the business on current accounts.
The proportion which interest 276 and commissions bear
to the total gross profits may be seen from the following
table. So far as commissions are concerned, only the
smallest part is due to transactions on current account;
by far the larger part comes from the banks' brokerage
business. For 1908 the profit from the bill business is
also included. The percentages are as follows:
1906.

1908.

Per cent.

Per cent.

69
64

Deutsche Bank
Disconto-Gesellschaft
Dresdner Bank
A. Schaaffhausen'scher Bankverein
Darmstadter Bank
Berliner Handelsgesellschaft
Nationalbank fur Deutschland

1907.

73

Per cent.
70. 6
61. 4
84.8
84.4
66.6
82.9
j
94-3

79
77

68
88
88

55
73

69

7i

96

79

Moreover, since a regular flow of business on current
account can take place only under favorable conditions in
trade and industry, the transactions on current account
give the credit banks an excellent insight into the economic
situation as it presents itself at any moment. At the same
time the bank thereby develops a following of customers
who are able to take over the securities floated by it.
Business on current account and more particularly
industrial loans on current account tend to promote concentration.277 They force credit banks to enter into close
272




The

Q er m a n

Great

Banks

alliance with the old and established provincial banks in
the industrial sections—an alliance of vital importance also
to the latter. This was in fact the real reason for the
first community of interests effected—the alliance of the
Deutsche Bank with the Bergisch-Markische Bank and the
Schlesischer Bankverein in 1897. Again, the provincial
banks and private bankers must gradually lose ground in
the competitive struggle for supplying industrial credit
in proportion as such loans increasingly become longtime loans, which force the lender to tie up large sums
for an indefinite period in capital loans and in flotations of securities which often do not allow of immediate
realization. With the increasing concentration of industry the situation becomes more acute, as increasingly
larger resources are required for industrial development
and expansion.
Finally, industrial loans pave the way for the employment of the bank's credit in the reorganization of industrial establishments on a corporate basis, or the flotation
of new securities in their behalf. Industrial credit thus
naturally ends in drawing the banks into closer relations
with all industrial interests, linking the credit banks with
industry in a well-nigh indissoluble union for weal or woe.
This union finds effective and visible expression both
toward outsiders and insiders in the mutual representation on the supervisory boards by the leading directors on
both sides.278
Similar remarks apply to commercial credit whenever
used merely for the organization of corporations or the
reorganization of firms as corporations and the flotation

903J1 0 —11

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of securities. This has been the case in not a few instances,
as for example in the case of certain navigation concerns.
The following data for different years in the second
period show the amount of loans (Debitoren), in the main,
though not exclusively, loans on current account, for all
banks (numbering 169 at present) having a capital of at
least 1,000,000 marks each; also the relation which these
loans bear to the share capital of the credit banks:
Year.

C a p i t a l of
R a t i o of
Number
L o a n s (in
b a n k s (in
loans to
of b a n k s . 1,000 m a r k s ) .
1,000 m a r k s ) . | c a p i t a l .

Per
1883
1895
1908

7i
94
169

886,360
1,992,660
6, 6 0 4 , 652

cent.

796, 447 !

in. 3

1,345,445 j
3, 253,673

148. 1
203.o

In the introductory considerations (p. 233 and following)
we have dealt with the objections and criticisms urged on
the alleged ground that the loans are made primarily
in an altogether one-sided and improper manner in the
interests of industry (more correctly trade and industry).
For all German credit banks having a capital stock of at
least 1,000,000 marks each, the total assets were invested
as follows:
Loans.

A t t h e close of—

| Per

cent.

1895
1906

!
1
\
:

Per

cent.

50
53

1907
1908

Bills.

53
52

Thus during a twelve-year period scarcely any change
worth mentioning is seen. The assets of the great banks
were placed as follows:279
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The

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Great

Banks
Bills.

1906.

Deutsche Bank
Disconto-Gesellschaft
Dresdner Bank
Darmstadter Bank
A. Schaaffhausen'scher Bankverein
Berliner Handelsgesellschaft
Nationalbank fur Deutschland. . .

1907.

1908

1906.

1907.

1908,

Per ct. Per ct. Per ct. Per ct. Per ct. Per ct.
29
33
43
29
40
45
55
18
59
59
45
24
49
51
55
22
48
57
13
67
62
68
21
45
44
41
18
43
45
45

(C) THE ACCEPTANCE BUSINESS.

In the field of credit there are essentially three kinds of
bank acceptances in use among German credit banks.
1. In the first place we have the acceptances in domestic
and foreign commodity transactions, that is to say,
mercantile acceptances (Warenakzepte).
We shall describe in another place the use of acceptances in foreign trade and the difficulties which had to be
overcome before German bills in terms of marks could attain to* the stage of approximate equality with English
pound bills, and how long it took before these mark bills,
at first unknown and disliked and having but a limited
discount market, reached the point where they are no
longer subjected everywhere to a higher rate of discount
than the pound bills on London.
A condition in which business men support directly the
burden of credit transactions and bear unaided the risk
involved is in general a sign that industrial organization
is as yet undeveloped. This is the situation in which
products and commodities are sold on long terms by the
manufacturer to the wholesaler, or by the latter to his
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retail customers, the seller drawing a bill on his customer
(often running for six months) ,280 anticipating the maturity of it, by discounting the long-time claim with a bank
or banker.
For a long time this was the exclusive procedure in
Germany. It involves on the one hand the serious disadvantage that the entire commercial and industrial class
becomes accustomed to this very long interval for loans
and payments, often of six months' duration. Like an
interminable disease, this practice affects also the final
link in the commercial chain, the trade of the retailer with
his customers. On the other hand this practice imposes
unusual hardships on over-sea trade and increases its cost.
The exporter has to draw on his foreign customer bills
in foreign currency for the latter's acceptance. Owing to
the limited market for such notes, he finds it difficult to
discount them, and has to pay higher rates of discount.
In addition, he has to bear the loss resulting from fluctuations in the rate of foreign exchange which may take place
in the interval.281
This early phase in the development of industrial organization has been outlived in Germany, at least to the
extent that for some time past, though in the main not
before the present period, the wholesale trade and large
industrial concerns no longer have been the sole and direct
grantors of credit, having as a rule given up the practice
of accepting the drafts of their customers or of drawing on
the latter. It is much more usual for the German wholesale trade and the large industrial establishments to draw
upon the banks or bankers with whom they regularly deal.
The bank's acceptance is then remitted to the creditor,
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Great

Banks

or arrangements are made with the bank whereby the
creditor may draw directly on the bank, the latter accepting the draft which is then discounted by the drawer.
This practice which has become common in large-scale
industry and the wholesale trade,282 whereby the immediate mercantile bill has gradually been replaced by the
bank acceptance, has in the course of time introduced a
certain amount of improvement in the direction of shortening the time for credit and payment in the wholesale trade and in industry conducted on a large scale.
The circumstance which has done most to bring about
this change is that only two- or three-month acceptances
of banks and banking houses whose acceptances are
regarded as prime discounts (so-called Privatdiskontos),
can be discounted at the private discount rate.
In England, according to the account of Edgar Jaffe,283
considerable advance has been made toward dispensing
with mercantile bills altogether, transactions between the
large firms coming more and more to be on a cash basis.
This third stage of development has been arrived at in
Germany only by the large cartels and syndicates which
may be thus said to undertake the solution of an important economic problem, that of restricting credit transactions between producers and their customers.
Thus, for example, the steel works' union, as stated elsewhere (note 172, p. 819) reduced the terms for payment on
domestic purchases to fifteen days, at the same time cutting down to a large degree the trade discounts allowed.
To foreign dealers trade discounts are no longer given
at all.

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The large German banks have among their holdings a
very large number of bills accepted by other banks (great
banks or affiliated banks) and discounted or rediscounted
by themselves. These bills arise from the above described custom, prevailing among the wholesale trade and
large industrial establishments, to draw on the banks, or
to make special arrangements with them whereby customers may draw on the banks, the latter accepting the
bills which are then discounted. Some recent writers
who advocate the strict separation of "mercantile"
from ' ' finance'' bills have improperly classed the above
described bills—true mercantile bills—among the finance
bills, on the ground that they are accepted and indorsed
by banks.
The following is a good illustration. In order to attract
gold to America from abroad in 1908, deliveries of copper,
cotton, petroleum, rice, and other raw materials and foodstuffs were effected much more quickly than usual and the
equivalent was collected much more promptly by drawing
against the shipments. As a result, an unusual number of
legitimate American commercial bills were drawn on the
leading German banks and accepted by the latter. Other
banks were glad to discount this paper. Obviously it
would be wrong to follow the customary tradition and call
such drafts " finance bills " merely because they were issued
with the manifest purpose of attracting gold, or to go
further and stigmatize them as kite flying or accommodation paper, as was frequently done at that time and up to
very recently in Germany as well as in England. (See
p. 213.)

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Great

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It would be very easy to multiply examples. They
prove that the term "finance bill" may often be a misnomer even when applied to bills which the banks are instrumental in circulating by their acceptance and indorsement
in cases where the purpose of the bill is clearly to raise money.
It would follow, from what has been stated before, that
the term would have to be applied to most bills that circulate in Germany at the present time. Thus for example,
according to a statement made before the bank inquiry
commission, out of German bills to the amount of about
400,000,000 marks which the Deutsche Bank alone held in
Berlin, about 300,000,000 marks' worth consisted of acceptances of German banks—a situation readily understood in
view of the foregoing considerations.
What has been said applies not only to bills originating
from domestic commercial transactions, but perhaps even
more so to commercial paper originating from oversea
commerce, and accepted by German banks. According to
the statement just cited, 200,000,000 marks of paper of
this class had been accepted by the Deutsche Bank alone.
It is clear from the foregoing considerations that the
greater part of the bank acceptances are found among the
bill holdings of the banks. In 1907 bills to the value of
2,621,630,000 marks were held by all the German credit
banks having a capital of at least 1 million marks each, of
which acceptances alone amounted to 2,035, 290,000 marks
or 78 per cent of the total bill holdings. It may therefore
be assumed that as a rule between 70 and 75 per cent of
the entire bill holdings of German credit banks are made
up of bank acceptances, a conclusion that agrees with the
data given above.
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Heiligenstadt is justly of the opinion that in order to be
regarded as a "legitimate'' bill, as distinguished from a
finance bill, a bill—i. e. every claim that is presented in the
money market in the form of a bill, must have "as its
basis an economic good (Wirtschaftsgut)." I should discard entirely the expression finance bill and use instead
the term nominal bill (Leerwechsel). However, the point
should be emphasized that this " economic good " need not
necessarily be a present or "concrete good" or a present
or concrete commodity transaction. It may just as well
be an advance given by the bank to domestic or foreign
industrial or commercial firms with the view of future
production or of a future commodity transaction.
In testifying before the bank inquiry commission,
Heiligenstadt himself pointed out another case where even
in the absence of such a loan, a bill issued would not be
a "finance bill," still less a " nominal bill." Thus a merchant, manufacturer, or provincial banker, who has a balance to his credit in a bank, may draw a bill on the bank
in order to convert this deposit into a form most liquid
and convenient for him. Under the same head belong
the cases mentioned by Lotz.284 Thus a banking house
may take over securities from a debtor, and sell them
to a third party. It may then draw on the purchaser, who
may in turn be a banking firm. Or again, in taking over
a loan, a bank may settle for it with its acceptance. As
a matter of fact, in both of these instances the transaction
involves "as much the circulation of a commodity peculiar to this branch of business as in the case of grain or
cotton bills," although all these bills may be found to bear
the names of bankers only. It would be impossible to
280




The

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Great

Banks

deal with all the cases belonging under this head with
anything approaching completeness.
In view of the foregoing it would be well to regard as
nominal bills only such long- or short-time bills, which are
not based on present or future production or on present
or future sales of commodities in industry, agriculture
or trade, or are not drawn with a view to liquidating
credit balances resulting either from these transactions
or from other causes. Neither is it material whether
such bills have been accepted or issued by banks or by
other firms, or drawn by one bank on another. In the
case of long-time bills, however, drawn by one bank on
another, or on private bankers, the presumption is that
they are nominal bills.
As a matter of fact, neither the Reichsbank nor any
other discount bank is able to distinguish a " nominal
bill" of this kind externally from a "legitimate bill" any
more than a legitimate stock-exchange time-transaction
can be distinguished from an illegitimate deal of the same
class. Hence there will always be cases where even the
most expert bill broker will be unable to tell with certainty
what kind of bill he is handling.
In connection with the expert testimony before the bank
inquiry commission, two members of the commission,
Heiligenstadt and Fischel, pointed out cases not at all
rare, which show particularly well how little the banks are
able, in many cases, to tell the true character of a bill from
the instrument itself, which may often come to them from
second or third hands, unless they know the character of the
business which gave rise to the bill. "Let us take the following example: A spinner imports cotton from America
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and gives his acceptance for it. He spins the purchased
cotton into yarn in two weeks, and sells and delivers the
yarn to a weaving establishment, drawing on the latter
for the goods. The weaving concern makes it into cloth
and sells the woven fabric to some print works, drawing
on the cotton print concern for the goods delivered.
Here we have three bills, each of which must according
to every characteristic be classed as the most substantial
bill in the world; and yet in the last analysis they are
based only on a single commodity" (Fischel).
As a matter of fact, according to the definition we have
given above, we could not characterize any of the above
bills as a "nominal" bill. The phenomenon in question
of one commodity furnishing the economic basis, or being
the "economic good" of a series of bills, may in case of a
boom period or in times of stress, such as was the case in
America in 1908, be intensified by the feverish hurrying
of the processes of production characteristic of such
periods, as witnessed likewise in our own electrical and
other industries.
L,et us assume that in consequence of such acceleration
a process that normally requires three months is crowded
into one month. At the expiration of three months,
instead of the usual one bill for three months issued by
one producer, there will be in circulation three bills,
drawn at the successive stages of the process of production
(by the producer of the raw material, the maker of the
partly finished product, and the manufacturer of the
finished goods). This, by the way, is one of the reasons
why we may almost always observe at the height; of a
boom period a great increase in the number of bills in
circulation.285
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The

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Great

Banks

2. The second class of German bank acceptances are the
industrial acceptances of the bank, particularly those intended to furnish funds for the following purposes:
(a) To provide temporarily for current operating expenses, viz., for salaries, wages, insurance premiums, the
purchase of raw material, and the like, purposes for which
short-time acceptance credit is in every way appropriate.
(b) To provide necessary working capital not merely for
temporary needs. As a rule, for this purpose long-time
credit should be resorted to. The use of short-time acceptance credit in such a case, as we saw above (p.
242), involves considerable danger. It is not necessary
to dwell here on both these points, as they are treated
at length in the introductory considerations and in the
discussion of Hecht's proposal of a central institution for
long-time industrial credit. What I wish to emphasize
particularly here is this: The volume of acceptances of
German credit banks in circulation has been swelled, to
no slight extent it seems, for the reason that, as abundant
experience has shown, acceptance credit, when granted
for other purposes than that of supplying temporary deficiencies in operating funds, is often not repaid at maturity,
but extended,i.e.,the acceptance, before it becomes due,
is replaced by a new bill issued by the borrower of industrial credit. This bill is again accepted by the bank, discounted, and with the proceeds the old acceptance is
taken up.
The danger involved here is greater for the reason that
this form of granting credit is particularly attractive to the
banks, for it does not require the immediate tying up of
their own funds.
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National

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Commission

3. The third category of German bank acceptances occurs when the acceptance credit of the credit banks is made
use of by bankers, mainly by provincial bankers, to finance
their own stock exchange speculations or those of third
parties (so-called speculative acceptances—Speculationsakzepi).28Q

In this case the possible consequences, and the dangers
involved, are the same as those described under 2a, where
the acceptance credit of the bank is granted to a manufacturer to provide needed working capital. There is no
doubt that throughout the second period the use by bankers of short-time credit on the strength of bank acceptances was resorted to on a very large scale and to an
ever-increasing extent, partly as a result of the shortcomings of stock exchange legislation. The three-month
acceptances of the credit banks are discounted at the
private discount rate and the proceeds are deposited by
the bankers in the bank in order to give them at once a
balance to their credit. On the other hand, the bankers
are debited with the acceptance only as per date of its
maturity. In this way the bankers attain their end of
getting money very much cheaper, for to use bank credit
in another form would cost them as a rule 1 per cent more
than the official bank rate.
In so far as this practice helps to meet the regular and
healthy demands of investment, there can surely be no
objection. The procedure becomes, however, objectionable
from the point of view of the general economic interests,
when it promotes extensive speculation and overstraining
of the stock market by the general public. There can be
no doubt that this has been indeed the effect to a large
extent.
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The

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Great

Banks

The fact is that for a long time past one-third of the
loans on current account given by the banks has almost
regularly been in the form of acceptances.287
For all the German credit banks having a capital of at
least 1,000,000 marks each, the ratio between total loans
and acceptances according to the Deutscher Oekonomist
was as follows:
(In millions of marks.]
oa s,
N u m b e r L u d nn g inac
of b a n k s . c le p tia n c e s .c

Acceptances.

Per cent of
acceptances in
total loans.

At the close of706 i

35-4

752

35-4

2,351
2,847

825

35- 1
34-6

3,29s
3,602

i» 153
1,294
1, 136
1, 176
1,300
1,400

1895
1896

94
98

1,992
2,127

1897
1898

102

1899
1900
1901

116

125

3,356

1902

122

3 , 55o

1903

124

1904

129

1905
1906

137

3,929
4,396
5,238
6,073

1907
1908

108

118

143
158
169

984

1,601
1,848
2,035

6,437
6,605

1,891 i

35
35-9
339
33- 1
33
33
30
30
33
28

For all the great Berlin banks, taken in the aggregate,
the ratio at the end of 1909 was 33 per cent; at the
end of 1907, 34.5 per cent; at the end of 1908, 31 per
cent. For the individual banks this ratio was as follows:
1906.

Per

Deutsche Bank
Disconto-Gesellschaft
Dresdner Bank
Darmstadter Bank
Berliner Handels-Gesellschaft
A. Schaaffhausen'scher Bankverein

1907.

cent.
28

Per

1908.

cent.

Per cent.

47

34
38

33

42

40

37

24

22

27

34
30

41

39

36 j




National

Monetary

Commission

The amount of acceptances of the six Berlin great
banks (including their branches) outstanding at the end
of each year was as follows:
[In million marks.]

Deutsche
Bank.

Dresdner
Bank.

DiscontoGesellschaft.

A. Schaaff- Berliner
hausen'HandelsscherBankGesellverein.
Kchaft.

Darmstadter
Bank.

At the end of—
1895
1896
1897
1898

1

122

75 1

49

41 j

32

1

116

76 J

44

36 I

33

99
117

I

47

128

53

130
!

35
34
34
37
37
54
59

3i

43

43

46
55
56
62
57
62
64
64
74
76

41

142

122

6J

141

131

89 j

142

104

.85 j

145

114

1903

180

129

1904
1905
1907
1908

185

149

1
103 j
101 j
142 ;

197
264

170

162 !

209

194 ;

149 j

232

189

171 ;

79 i

1899
1900
1901
1902

1

j

41
41

60
57
46
49

70

Acceptance credit increased almost continuously, notably in the eighties and nineties, even as compared with the
capital of the banks.288 On this point reference may be
made to the table printed on page 288. The differences
as compared with the figures reported by Ad. Weber
(Depositenbanken, p. 117) are explained by the fact that
in this table surety bills (Avale) furnished by the banks,
are included with acceptances.
Large as the share of the mercantile acceptances must
have been, there can be no doubt that relatively, as well
as absolutely, a very large proportion of the total acceptance credit given by bankers in this period was made up
of credit in the form of industrial acceptances of the
doubtful sort described under 2b, and of the no less doubt286




The

German

Great

Banks

ful " speculative " acceptances described under 3. Least
objectionable was the steady and by no means slight
increase of German bank acceptances in oversea trade.
Here they were used to provide reimbursement for advances on merchandise in transit, the bank in these cases
receiving documentary security, viz, bills of lading. For
the Hamburg, Bremen, and London branches of the great
banks, devoted primarily to oversea business, a regular
correlation can be traced between the growth of that
branch of business and the growth of acceptances.
A diminution in speculative acceptances can be expected only as a result of self-education in the banking
profession. This, I feel sure, will be effectively aided by
the voluntary publication, at regular intervals, of summary balance sheets. In my opinion the view that credit
in the form of acceptances and '' reports,'' could be made
"subject to certain rules" 289 through legislation is not
tenable.
The table printed below (p. 288), shows the amount of
acceptances for the eight great banks of Berlin (the
Commerz- und Disconto Bank and the Nationalbank are
added), and the amount of the acceptances of these eight
banks relative to that in 1883, which is taken as 100.
It also shows the relation of acceptances to their capital
stock, their own business capital (das eigene werbende
Kapital, capital plus surplus funds) and finally to their
entire earning resources (das gesammte werbende Kapital),
i. e. their capital stock, surplus, deposits and credits on
current account.

287




National

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Commission

Amount of bills ou tstanding (acceptances including " a v a l s " and checks) .290

Year,
In marks.

In percentages of the
figures of
1883.

In percentages of the
aggregate
capital of
the 8 great
banks.

In percentages of the
In percentaggregate
ages of the capital, suraggregate
plus funds,
capital and deposits, and
surplus funds credits on
of the 8 great
cunrent
banks.
account of
the 8 great
banks.

i89,795»100
220,532,000

53-3
59- 7

26.6

68 5

H9-7
123.5

70 4

61. 2

26.5

70 4

60. 4

129.4
134.0

69

2

58.8

26.6
27.8

69

3

274,778.100

1885
1886

61. 2

116. 2

254.347.5oo

1884

100. 0

227,229,700

1883

144-8

63

5

58.5
52. I

234,412,800

26. 9

1887
1888
1889

245.569,000

1890

254,338,000

134.0

57

5

46.8

1891
1892

248,280,300

130.8

52

9

299,049.800
301,806,600
354,241,200

157-6
i59.o
186.6
238.6
232.6

62

4

63

0

74 0

43- 1
50.9
51- 2
60. 0

78

1

63.6

74

2

59-9

26. 7

257-4
282. 2

70 8

7°

5

315-0

73

4

353- 2
330.8

82

2

26.9
25.1
25-9
27.8

77 3

57-4
57-0
59.o
66.0
61. 7
62. 7

24.4
24. 0

114

5

105

7

1893
1894

!
!
i

1895
1896

452,919,300
441,416,900

1897
1898

|

488,521,000
535,649,400
5 9 7 . 8 3 2 , 100
670,299,500
627,917,300
673,741,800

!
;
|

745,542,000
885,733,300
1,052,922,800

j

1,162,922,900
1,275,564,600

355-o
392.8
466. 7
554-8
612. 7
672. 1

1,188,077,900

626.0

1899
1900
1901
1903
1904
1905
1906
1907
1

77 0

84

5

6 7 3

88

7

99

9

69.8
78.8
81. 1

104 4

88.4
81. 4

25.1
23. 2
22. 7
21. 7
25.8
25-4
25.8
28.6

25. 2
2 4 9

24. 6
23-9
26.5
23-5

The table reveals the same development which was
noticeable with regard to the bill circulation, namely,
that the amount of acceptances in 1903 had not only
risen again to a point reached in 1889, but had even
largely gone beyond it. In 1908 there was a considerable
decline in the amount of acceptances of these eight Berlin
banks.
288




The

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Great

Banks

In conclusion it is of interest to note the ratio of bank
acceptances issued by all German credit banks (with a
capital of at least one million marks each) to the average
bill circulation (in millions of marks).291
A v e r a g e bill circulation, assuming a n a v e r a g e
period between
date and mat u r i t y of 75 d a y s .

B a n k acceptances on
December 31.
Millions of
marks.

3.050

706

3.275

752

3.505

1895.
1896.
1897.

825

3.875

984

1899.
1900.
1901.
1902.

4,187

1903.

4,453

1904.

4, 640

1905.

5. 140

1, 153
1, 294
1, 136
1, 176
1,300
1, 400
1, 600

4, 660
4,595
4,301

Per cent.

23
23
23
25
28
28
25
27
29
30
3i

(D) THE DISCOUNT BUSINESS. 292

German credit banks, like others of the same class, have
a special motive for investing their own and their depositor's funds in the bill discounting business, since they are
at the same time banks of deposit, and thus are obliged
to invest a large part of their deposits in securities maturing at an early date. As the various bills discounted
become due on different dates, the outflow of cash is
balanced by an assured inflow of cash to redeem bills, with
a resulting increase in the cash reserve and the opportunity
for new investments.
The first rank in this line of investment is held by those
bills that are regarded as prime discount bills throughout
the German discount market. Such are the acceptances of
the six foremost Berlin banks, namely, the Deutsche Bank,
90311 — 1 1 -

289




National

M on et ary

Commission

Disconto-Gesellschaft, Darmstadter Bank, Dresdner Bank,
Berliner Handelsgesellschaft, and the A. Schaaffhausen'scher Bankverein, as well as two private banks in Berlin,
Mendelssohn & Co. and S. Bleichroder.
In a general way, bills of the above description are
regarded as representative generic values, in the sense that
the standing of the seller who places them on the market
in any particular case has no effect on the terms of discount,
that is to say, the rate and the commission, as would be
the case with other bills offered for discount. However,
since in the case of these prime bills the rate of private
discount forms only the upper, not the lower limit, the
statement just made does not imply that they may not
occasionally be discounted below that rate.
The second rank is held by those bills which are regarded
as prime bills in the local markets of Berlin, Hamburg, and
Frankfort-on-the-Main (in addition to those of the preceding class) and are discounted at the private rate, provided
they fulfil the existing conditions of the bourse as regards
time and amount, a condition which applies also to those
of the preceding class.
According to the regulations of the Berlin Biourse
(similar ones prevail in Frankf urt-on-the-Main), these
prime bills (or private discounts) must be payable in Berlin
or at a place where there is a branch of the Reichsbank,
must be at least 5,000 marks in amount, and run not less
than two nor more than three months. However, in
fixing and quoting actual market rates of private discount,no difference is made between sixty-day and ninety-day
bills and between " representative " and " nonrepresentative" private discounts, a practice which to my mind is
290




The

German

Great

Banks

not correct. This quotation of the private discount rate
is made in Berlin, not officially, indeed, but yet after a
uniform fashion, by a private central agency, solely
interested in the discount business and acting under
instructions from those engaged in the business.293 The
rate of private discount prevailing at the bourse is occasionally underbid, as a result of competition, in the
bill-discounting operations which take place outside of
the bourse. The Reichsbank, however, does not buy bills
in Berlin below the Reichsbank rate of discount.
The acceptances of the largest mercantile establishments and industrial undertakings are not regarded as
prime discounts. However, as noted in the previous
chapter (p. 276), these firms do not generally regulate
their obligations by means of their own acceptances, but,
as a rule, by those of their banks.294
Aside from these acceptances of the leading commercial
and industrial firms just mentioned, which are of rare
occurrence, the acceptances of most of the first-class and
second-class provincial banks and bankers, while regarded
as nonrepresentative bills in the above sense, are admitted
to the benefits of the private rate of discount. In this
case the terms of discount are fixed in accordance with
personal and objective considerations, often quite incommensurable in their nature. If, for example, one of these
banks, or even a bank not belonging to this class, allows—
in the opinion of the bourse, which is specially sensitive
in this matter—its credit to be unduly strained it is apt
to be promptly reminded of this fact by finding the rate
of private discount of its acceptances raised, even though
but by one-sixteenth of 1 per cent, which thus occasionally
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constitutes a very effective means of checking the overloading of credit in the form of excessive acceptances.295
Furthermore, with regard to this class of paper, and still
more with regard to other discount material reaching the
bourse and not admitted to the privilege of the private
rate of discount, the principle holds that only those bills
are discountable at private discount that would pass as
"prime bills" even without the acceptance of a bank.
Such, in fact, ought to be the policy of the banks themselves in deciding whether a discount is to be made.290
Though there be ample reason for recognizing the best
commercial and industrial acceptances as "prime bills,"
yet the general discount trade gives a decided preference
to the bank acceptance as being easier to negotiate, with
the result that the commercial and industrial acceptances
are being more and more displaced by bank acceptances.
This is one of the factors that concurred in producing the
result noted above under C (p. 279), that some 70 to 75
per cent of all the acceptances discounted by German
credit banks and forming part of their bill holdings are
bank acceptances, discounted by the banks at the rate
of private discount. As these acceptances are payable in
gold, they are in demand even among foreign firms and
banks, especially note banks. These acceptances represent the amounts granted by the credit banks on discounted bills, either to customers having a current account
or to outsiders having no such account, as well as the
foreign bills. Here also the policy is "to take care that
the terms of settlement, never exceeding three months in
duration, shall be distributed over all the months of the
year, and, in particular, that relatively large amounts
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shall become due at the end of each quarter, when settlements are heavier " (die schweren Quartalstermine.)297 The
material in the shape of bills available for discounting is
very large in Germany.
The sum total of bills of exchange in Germany, put into
circulation in the course of any one year, was calculated
by W. Prion 298 for twenty-one years, from the proceeds of
the stamp tax on bills of exchange as follows:
[In millions of marks.]
1885. . . . 12, 060
1886. ... 11,826
1887. . . . 12,065
1888. . . . 12, I98
1889. ... 13,206

189O.. . 14,020
1891.. . 14,606
1892. .. 14,284
1893 . .
•

H,585

1894. .. 14,748

18951896.
1897.
1898.
1899.

• 15,241
. 16,386
• 17,526
• 19,374
• 20,937

I9OO...
I9OI...
I902...
I903...
I904...

23,204
22,965
21,505
22, 266
23,20I

For 1905 the estimate was 25,506,000,000 marks, that
is to say, the formidable figure of 25X billion marks, of
which the Reichsbank bought 9,175,000,000 marks' worth,
or 35.9 per cent.
For 1905, on the basis of the stamp tax of 14,100,000
marks and a total amount of bills of 25,500,000 marks
(deducting 10 per cent for rounding off), and assuming an
average of seventy-five days for the circulation period of
the bills, it is found that the average bill circulation
was 5,100,000,000 marks (31 per cent of which were
bank acceptances).299 Accordingly for 1907 (stamp tax
19,700,000 marks, total amount of bills, less 10 per cent,
in round numbers 31,500,000,000 marks) we get in round
numbers the sum of 6 billion marks.
It may be well, however, to caution the reader against
drawing any general conclusions regarding the higher or
lower economic development of a country from the larger
or smaller amount of bills circulating in it. Such con293




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elusions, though not infrequently made, are bound to be
in most cases deceptive. The amount of bills circulating
in a country is determined by an infinite variety of factors,
such as the more or less pronounced "industrialization,"
the greater or less degree to which industry and commerce
are habituated to bill credit, or to its complete or partial
replacement by cash payments; the higher development
and greater refinement or the greater or less costliness of
the other forms of credit, such as the collateral and report
business; the favorable or unfavorable state of the balance
of international payments; the greater or less degree to
which the population is habituated to the use of bank
notes, etc.
Were it not so, one would have to infer that the
United States with its relatively small bill circulation, is
backward in its economic development. On the other
hand, from the fact that in France from 1876 to 1907
the average per capita bill circulation has increased considerably more than in Germany, one would have to infer
that in France there had been an enormous and rapid
economic development. Both conclusions would be wrong.
France, for example, being a creditor nation (while
Germany is a debtor nation), has a large favorable balance of payments, since both the number of her population and her industrial activity, especially her export
industry, have for some time been stationary, and the
available resources of the nation are in large part invested
in the form of savings deposits and government bonds,
while commercial and industrial enterprises and stock
companies attract them far less than in Germany. The
favorable balance of payments is reenforced by the far
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greater amount of foreign securities in the possession of
France, and by the receipts from the enormous influx of
foreigners, especially in Paris and on the Riviera.
Hence, before drawing general conclusions regarding
any country, after ascertaining the amount of bills circulating in it, we shall have to examine its peculiar economic
conditions and the peculiar organization of its systems of
payment and credit, as we are trying to do in this book
for Germany.
This being premised, let us note the following:
The amount of bills held by all the German banks,
including note banks 300 and mortgage banks,301 was as
follows:302
Business year.

Number of
banks.

1883
1884
1885
1886

113
113
113
116

1887
1888
1889

us

1891
1892
1893
1894
1895

114
137
136
135
134
133
137
135

Amount of
bills (in
millions of
marks).
1, 203
1, 246
1,248
1,277
1.364
1.307
1,583
1, 670
1,661
1, 650
1,611
L736
1,857

Business
year.

1896
1897
1898
1899
1900
1902
1903
1904
1905
1906
1907
1908

Number of
banks.

146
150
156
164
165
171
167
170
175
182
188
203
214

Amount of
bills (in
millions of
marks).
1,970
2, 190
2, 360
2,946
3,087
2, 776
2, 812
2,972
3,081
3,507
4,074
4,459
4,3io

We see from this that in the boom year 1899 the amount
of bills in all the banks (including note banks and mortgage banks) rose to 2,946,000,000 marks; that in 1900,
immediately before the crisis, it even rose to 3,087,000,000
marks and that during the crisis of 1901 it fell to
2,776,000,000 marks.
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However, as early as 1903, as noted when speaking of
the acceptance circulation of the banks,, the amount of
bills had again risen to 2,972,000,000 marks, having thus
not merely equaled but even exceeded the amount of the
greatest boom year, 1899. This was on the whole a
normal and satisfactory development. Only an unhealthy
increase in the amount of bills, not accompanied by a
quiet and steady progress in economic development,
would be a matter of regret.
Finally, the amount of bills in the German credit banks
alone (with a capital of at least 1,000,000 marks each) and
the total amount of bills in the great Berlin banks alone,
during the last eleven years, was as follows (according
to the Deutscher Okonomist: 303
Amount of bills Amount of bills
in German
in the 6 great
credit banks
Berlin banks
(in million
(in million
marks).
marks).
660
716

1898.
1899

1901.

867
828

1902

859

1900

1903

865

1904

1,075
1, 231
1, 466

1905
1906

1. 509
1, 422

1907
1908

In 1908 all the German banks together held bills to
the amount of 4,300,000,000 marks, the German credit
banks together more than 2,700,000,000, the six great
Berlin banks in round numbers i,50o,ooo,ooo.304 Assuming, for 1905, a total bill circulation of 5,100,000,000 marks
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and the bill holdings of the six great Berlin banks in the
same year at about 1,000,000,000 (1,064,000,000)—as
against 1,231,000,000 marks, given in the above table,
Prion estimates the share of those six great banks in the
total bill circulation for 1905 at 20.8 percent. On page
279 we noted that as a rule about 70 to 75 per cent of
the bill holdings of the German credit banks consists of
bank acceptances. In that connection we also discussed
the various classes of these bank acceptances.
In the Reichsbank the average amount of domestic bills
was as follows: 1905, 775,723,000 marks; 1906, 946,201,000
marks; 1907, 1,060,076,000 marks.
The latter amount was classified as follows:
Amount.

Per cent.

Marks.
(a) Commerce, transportation, and insurance
(b) Banking and credit institutions (as central agencies
for the credit demand of business)
(c) Trade and industry
(d) Agriculture and allied trades
(e) All other credit users

17. 73

559,975,000
284,376,000

52.82
26.83

11,130,000
16,647,000

1.05

1,060,076,000

Total

1 8 7 , 9 4 8 , 000

100.00

1-57

The profits from the bill brokerage business, that is to
say, first and foremost the profits obtained from discount
transactions, have not hithereto been always separately
stated in the balance sheets of the German credit banks,
but have in many cases been combined with the interest
earnings, or with the profits gained from trading in foreign
bills and specie. (Devisen undSorten). Such, for example,
is the practice of the Berliner Handelsgesellschaft.
In England, on the contrary, according to Edgar Jaffe's
investigations,305 the amount of bills at the disposal of
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banks for the purpose of discounting has shown an almost
continuous decline.
One reason for this is that the English deposit banks,
which discount only for their customers, receive from them
only a part of their bills for discounting and as a rule the
less desirable part, while the larger part of the best bills
is turned over by these customers directly to the bill
brokers, so that the deposit banks are even obliged to buy
from these brokers a part of the bills necessary for the
investment of their funds. The deposit banks themselves
also sell to the bill brokers all bills on foreign countries,
as the banks themselves do not discount these.
Another reason, already mentioned, why the amount of
bills circulating in England has declined is, because, owing
to the more advanced organization of the system of payment and credit in that country, cash payment, at least
among the largest firms, is tending more and more to take
the place of bills, so that the very best commercial bills
are progressively disappearing from the English money
market.
Similarly bills drawn by importers of raw material on
the selling commission merchant, the so-called brokers'
paper, are gradually dropping out of use, being in large
measure replaced by collateral loans on the strength of
warrants on merchandise stored.
Finally, the number of bills drawn in England on foreign countries is very small compared to the number of
bills drawn by foreign countries on England (about i to 9),
because the prices of goods exported from England, owing
to the larger market for London pound bills, are calculated in pounds sterling, and payment accordingly is
ordinarily made in the shape of a bill on London.
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As a result of all these conditions, the English banker
wishing to invest his funds is limited in the main to the
" domestic bills, steadily declining in number and quality,
while his main interest in foreign bills lies in the acceptance business."306
As regards the English deposit banks, there was formerly a great abuse in the granting of credit by acceptance
of drafts, and as a consequence the acceptance business,
too, has declined to such extent that it is to-day conducted only on a very modest scale and under the safeguard of securities. Thus the acceptance business, even
in so far as it is carried on against shipped goods—that
is to say, against bills of lading, etc.—rests almost entirely
in the hands of the so-called merchant bankers 307 and of
the foreign banks,308 while secured or unsecured loans
in current account (loans or advances) constitute to-day
the principal form of credit of the English deposit banks,
which is granted exclusively to their regular customers.
However, owing to the easy transition from short-term
to long-term credit and the danger of tying up funds
in the latter, the same difficulties and complaints arise in
England as in the granting of industrial credit by our
own credit banks.309
In contrast with these English conditions, we saw that
in Germany the bill circulation and the bill holdings of
the banks, especially the credit banks, are very large, and
that of the total assets of the German credit banks in 1907
(as well as in 1895 and 1896), in round numbers, 53 per
cent appeared under the head of loans (Debitoreri) and 20
per cent under the head of bills.
The rate of private discount resulting from supply and
demand of short-term credit at home and abroad—that
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is to say, the rate of interest to be paid for short-term
credit in the way of discounting of private bills—is, of
course, subject to frequent and wide oscillations. From
it, in conjunction with other factors, especially the Reichsbank discount and the exchange rates, important conclusions may be drawn regarding the business conditions,
especially the state of trade and industry. This is undoubtedly true, even though, as we have seen, the bill
acceptance is not merely a means of granting credit to
trade and industry but serves also to a large extent to
procure the means for bourse speculation. But while the
rate of private discount corresponds in a general way to
the condition of the money market at any given moment,
the Reichsbank discount rate is determined not only by
that consideration but also by the general economic situation and by the task, incumbent on the Reichsbank, of
regulating credit and protecting the money standard.
It has been pointed out, and it must be admitted, that
the difference between the official rate of discount established by the Reichsbank for short-term bill credit and
the rate of private discount quoted in the open market in
Berlin for short-term private bills has been almost uniformly greater during this period than at any other European money center.
The differences were as follows:
Berlin.

Year

1. 19
.98

1876-1880
1881-1885

1. 04
1.11

1886-1890

0.51
• 43
.50

1. 11

•55
.09
.60
.28

• 91

1891-1895
1896-1900

.06

• 71

1. 01

1901-1905
1906

Paris.

1

1907

300

London.
0.51
.64
•93
1.03
.60
•43
. 22
.40

Vienna.
0.36
•5i
• So
.38
.26
.50
. 21
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It is also true that a difference of over 2 per cent
between official and private discount occurred in Berlin
seven times in the period 1895-1900 and nineteen times
in the period 1903-1907, while no such difference was ever
recorded in London and Paris.310 In explanation of this
phenomenon it was stated that this low rate of private
discount, occurring in part simultaneously with a high
rate of bank discount, was due to deliberate endeavors
on the part of banking circles to lower the rate and to
keep it low, for their sole benefit, in plain opposition to
the official discount policy of the Reichsbank, even in
cases where the Reichsbank raised the rate of bank discount, either to prevent an outflow of gold abroad or to
draw foreign gold into Germany.
It is not difficult to prove that the above-mentioned
great difference between the rates of private discount
and Reichsbank discount is not due to the cause alleged,
though it is much more difficult to assign the true reasons
for that phenomenon with even a comparative degree of
probability.
First of all, it is not true that the banks, and especially
the great banks, are essentially interested in keeping the
rate of private discount low by artificial means; on the
contrary, being buyers of bills, in which they invest
their funds, they are interested, like every buyer, in being
able to deduct the largest possible amount of interest on
these bills.311 As a matter of fact, very large amounts
of private bills are held not only by the great banks and
the other credit banks but also by the Reichsbank and
the other four note banks as well as by the mortgage
banks, cooperative credit societies (Genossenschaften),
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savings banks, insurance companies, commercial and industrial enterprises, etc.
This extensive participation of other buyers of bills
clearly proves that a low rate of private discount does
not always nor exclusively " benefit" the credit banks,
let alone the great banks. On the contrary, it benefits,
first and foremost, the commercial and industrial firms,
which, profiting by that low rate, draw on the banks,
while the banks are benefited only when, either in
response to demand or of their own accord, they pass the
bills on among their customers or into foreign countries.
Thus a deliberate or intentional " thwarting" of the
discount policy of the Reichsbank by the large banks
by way of an artificial lowering of the rate of private
discount is out of the question, especially since they may
be in the market both as buyers and sellers of bills,
the latter especially in case of orders on commission
{Kommissionsauftrdgen). As a general rule, the large
banks, having regard to the interest which they have to
pay on the deposits held by them and the interest which
they in turn draw for the credit which they grant on
bills, collateral loans, and contango (Reports), are essentially interested in making the rate of private discount
conform as closely as possible to the rate of bank discount, since their outlay on account of interest depends
on the rate of bank discount, while the receipts in the
way of interest depend on the rate of interest prevailing
in the market. Prion312 justly points out that the great
banks, in calculating the interest on the advances granted
by them, charge the lombard rate of interest of the Reichsbank, and that when the difference between bank dis302




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count and private discount greatly exceeds the average,
the customers have a strong incentive to profit by the
cheaper acceptance credit, which would lead to an unwelcome increase both in the offer of bills and in the
acceptance obligations of the banks.
On the other hand, it is not to be denied that the great
banks and other large discounting concerns exercise
a certain influence on the fluctuations of the rate of
private discount and its quotation at the bourse, seeing
that in this field, as in others, they are in a position to
compensate more or less the orders for the purchase or
sale of private bills by means of the sums which they
themselves invest in or withdraw from the private-bill
business, and to bring only the remainder on the market.
There are also exceptional cases in which the great banks,
as well as governmental and municipal offices in Germany
and abroad, are decidedly interested in keeping the rate of
discount as low as possible, and may attempt, at any rate,
by heavy offerings of cash or other measures, perhaps with
the cooperation of all the large discount dealers (Grossdiskonteure), to lower the rate of private discount or to
keep it low, for example when the issue of public bonds,
domestic or foreign, bearing a higher rate of interest is in
contemplation. However, the success of such attempts
will not depend solely on the power of the large discount
dealers, even if acting in concert, since the discount
market is intimately connected with the entire money
market, and consequently the rate of private discount
depends on a number of other factors, such as the rate of
bank discount and its probable development, the foreign
exchange rates, the rates of interest for call money and
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monthly settlement loans, etc. In view of this, and
the usually very large amounts of the bills marketed,
a notable or long-continued artificial lowering of the rate
of bank discount will be found impracticable, even with
the cooperation of all the large discount dealers. In
fact, if it were practicable, it would prove a very serious
matter, especially on those occasions when it is above all
desirable that the great banks should go hand in hand
with the Reichsbank and lend their energetic support to
measures which it deems requisite in the interest of the
general economic well-being.
If, for example, as a necessary and natural consequence
of an unfavorable turn in the balance of international payments, the foreign exchange rates (Devisenkurse) are so
high that there is danger of an outflow of gold, especially
of a withdrawal of foreign gold held on deposit in Germany,
the raising of the official rate of bank discount will as a rule
suffice to stave off for the time being or postpone the coming of the moment at which the exportation of gold begins
to pay, unless indeed there be a demand for gold at any
price, as from America in 1907. This precaution, however,
can accomplish its object only when, as is usually the case,
the rate of private discount is simultaneously raised to, or
maintained at a correspondingly high level, as indeed generally happens.
If in such cases the raised rate of bank discount considerably exceeds that of foreign bank discount, foreign countries, as a rule, in order to share in the advantage of the
high rate of discount in Germany, will temporarily increase their gold deposits in Germany, independently of the
state of the balance of payments, so that in such case the
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raising of the bank discount rate may lead to a temporary
gold importation from abroad; again, however, on the
supposition that the private discount rate, too, rises to or is
maintained at a correspondingly higher level.313
In these cases, however, in which the prevention of a
rise or of the maintenance of a high level of private discount rate would be especially dangerous, the great banks
and other large discount dealers, as a rule, have no
motive even to attempt the exercise of such an influence, because the probability is that, when the raising of
the bank discount rate is desirable in order to stimulate
the importation of gold from abroad or to prevent the exportation of gold, the situation will generally be such that
security issues are out of question.
The real reason for the great difference between the rate
of private discount and the rate of bank discount in Germany is probably to be sought, first and foremost, in the
fact that in Germany, as contrasted with France, there is a
relatively much larger number of persons or establishments, seeking to discount, whose competition in taking up
good bills prevents the formation of a rate of private discount corresponding more closely to that of the Reichsbank. A further reason may be found in the fact that the
rate of private discount is made, at least in a general way,
in conformity with the ratio of supply and demand existing in the market. On the other hand, the rate of bank
discount, while fixed by the Reichsbank with an eye to
the regulation of credit transactions and the maintenance
of the gold standard, depends in the foremost place
on the favorable or unfavorable condition of our total

90311 °—ii

21

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balance of payments, whose primary expression is to be
seen in low or high exchange rates.
However, another important factor must be considered.
In Germany, whose trade and industry make far larger
credit demands than is the case in France, this demand
is satisfied, in the first instance, by a great multitude of
credit banks, in the most diverse forms, a feature in which
Germany again differs from France. Thus trade and
industry in Germany, as regards their demand for credit,
especially in so far as that demand is to be satisfied by the
discounting of short-term bills, depend on the Reichsbank
onfy in the second place. As soon as this condition
changes—that is to say, as soon as the absorbing power
of the credit banks is exhausted, as may happen especially
in boom periods—the offer of short-term prime bills on
the market will not be balanced by a corresponding number of discount dealers. As a result, the rate of private
discount will rise and thus the difference between it and the
Reichsbank rate will grow less. This, it is true, will be
the case only so long as the Reichsbank in its turn is not
compelled to raise its rate of discount in order to restrict
the demand for credit made on it, especially active in
boom times.
In so far, however, as the credit banks, especially the
great banks, do exercise an influence on the rate of private
discount and the difference between it and that of bank
discount, it is indeed their duty to aim at lessening this
difference and to give their unstinted support to the discount policy of the Reichsbank, whose influence on the
private discount market, one of the most important fields
of credit granting, has doubtless been considerably dimin306




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ished through the concentration of the great banks. This
is the very field in which it is desirable, in the interest of
the general public, that the strict policy of dividends—
that is to say, of purely private interests—be subordinated
to public economic policy in cooperation with the Reichsbank, the more so, as in this field some of the functions of
the Reichsbank, viz, the regulation of credit, have to a considerable extent been transferred to the great banks.
It must be acknowledged that the great banks and
other great discount dealers have hitherto shown a decided disposition to be in the closest possible touch with
the management of the Reichsbank. Even Prion bears
witness that these banks occasionally are reluctant to buy
treasury bills (Schatzanweisungen), " especially when the
Reichsbank, from motives of discount policy, desires to
throw considerable sums on the market in order to influence the rate of private discount." 314
(B) THE LOMBARD AND REPORT BUSINESS. 315

The lombard loan (loan on collateral), like the bill discount, affords to trade, agriculture, industry, and private
capital the opportunity of personal credit, for short terms,
sometimes also for longer terms, but it differs from the discounting of bills in this, that this personal credit is only
granted on security.
The collateral may consist of merchandise, which in the
import and export trade is replaced by bills of lading.
These the merchant or manufacturer pledges in order to
obtain bank credit, which, as a rule, is cheaper than merchandise credit (Warenkredit). This bank credit he thereupon uses for a great variety of purposes. His object in
307




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Commission

pledging the security and taking the loan may be, as we
have seen, either to diminish his personal risk in over-sea
transactions or to increase temporarily or anticipate the
realisation of the working capital tied up in certain industrial or mercantile transactions. This form of creditgranting by the banks may give rise to the same dangers
that we described above, in connection with the acceptance and discount credit (transformation of the original
short-term working credit (Betriebskredit) into investment
credit (Anlagekredit). Another purpose for which security
is pledged is to avoid loss through the sale of merchandise
at low prices at an unfavorable moment.
The collateral may also consist of securities or bills,
the latter being in fact the only kind of pledges admitted
in the lombard business of the bourse.
Lombard loans may also be secured by insurance policies (at surrender value) or mortgages, the latter being
the most common form in the case of lombard credit in
the building trade, although involving some risk, since it
is not always possible to realize on mortgages at any
given time. Finally the collateral may consist of any
other kind of paper and claims of all kinds.
In all these forms of secured credit the first thing to
be considered is the value of the collateral, the person
of the borrower being only of secondary importance,
which is not the case in ordinary discount credit. However, even in the case of lombard loans the person of the
borrower plays some part at the bourse, inasmuch as the
amount of the loan, the amounts to be put up (Einschuss),
the interest to be paid, and the other conditions of the
lombard business, in a word, the acceptance or rejec308




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tion of the paper offered, are not decided without reference to the property of the borrower, his solvency and
trustworthiness. On the other hand, in the lombard
business of the banks, with their regular customers, aside
from the value and quality of the pledge, and the duration
of the loan, sometimes extending to as much as three
months, the terms of the loan are mainly determined by
the longer or shorter duration and degree of intimacy of
the business connection, the amounts involved in past
business transactions, and the commissions paid, as well
as the other advantages which the bank has derived or
expects to derive from this connection.
For obvious reasons, even short-term lombard obligations can not be regarded as liquid short-term investments to the same extent as ninety-day bills, and accordingly article 17 (44, No. 3) of the bank act prohibits the
Reichsbank and the other four note banks from using these
lombard obligations for their note reserve. They bear no
indorsements, but only the name of the debtor, and in
case of nonpayment at maturity they necessitate a forced
sale of the objects pledged, which, in the case of merchandise, and even of securities, according to the state of the
market, may lead to poor results or none at all, if there
happens to be a simultaneous sale of the same kind of merchandise or securities, or a slack demand, or a general
unfavorable condition of the market.316
The fact that money thus advanced is tied up for the
period agreed on is another circumstance tending to make
it inadvisable for banks to invest large amounts of their
depositors' funds in the lombard business. Furthermore, the objects pledged can not be repledged, except
309




National

Monetary

Commission

by special agreement, which is not customary. On the
other hand, bills, or at any rate private bills, being readily
transferable at any time at the bourse or elsewhere, represent a method of short-term investment which is much
more liquid, that is to say, more easily realizable.
This difference must not be lost sight of in considering
and estimating the liquid assets of banks. At any rate
the investment of money in the lombard business as a rule
is only for a short time, limited, in the practice of the German credit banks, to days, weeks, or a month, while credit
in the way of bill discounting is as a rule granted for a
longer period, since bank acceptances, in order to pass as
private bills, must run two to three months.
At the bourse three forms of lombard loans are distinguished:
i. Call money (Tagliches Geld), payment of which may
be required at any time. These loans are mostly made by
great banks or bankers, on collateral of securities or bills,
and the rate of interest on them is determined by supply
and demand of available call money and published each
day. As a rule this rate of interest is below the rate of
private discount charged on two-months' or three-months'
loans, except at the end of the month and on other occasions of strong demand for money, for example, when
instalments on securities issued become due. However,
despite the difference of periods for which money is loaned,
the amounts invested in lombard call money and in shortterm private bills may constantly alternate and interchange, according as the lender finds the rate of interest in
the one or the other field more favorable for his purpose,
thus making the rates interdependent.
310




The

German

Great

Banks

2. Ultimo loans (Ultimogeld), granted from the end of
one month to the end of the next, usually at a rate of
interest varying with the existing conditions of the money
market, being as a rule lower than the rate of contango
money and below the Reichsbank rate of interest on collateral loans, but higher than the rate of private discount.
3. Money loaned for a longer but fixed term, which at
the Berlin bourse is as a rule furnished, first and foremost,
by the Seehandlung (Prussian State Bank). That institution, as a rule, grants lower rates of interest than the
bourse. When the time the bills have to run agrees with
the duration of the lombard loan, the Seehandlung, in
discounting bills, charges the same rate of interest as in
case of the fixed-term lombard loan—that is to say, as a
rule in both cases the rate of private discount. In this
point, again, it differs from the bourse. On the other
hand, the Seehandlung is more exacting than the bourse
as regards the quality of the securities pledged and the
standing of the borrowers. At the bourse, on the other
hand, the rate of interest for ultimo collateral loans is as a
rule higher than the rate of private discount, but, except
in case of strong demand, lower than the Reichsbank rate
of interest on collateral loans. The latter, too, makes
loans only on certain classes of paper (art. 13, No. 3b,
of the bank act), and the limit to which loans are allowed
is considerably lower than at the bourse.
The opportunity thus offered by the Seehandlung of
obtaining favorable rates of interest is taken advantage
of by the great banks, which are able to comply with the
severe requirements of the Seehandlung as regards the
standing of the borrower and the quality of the collateral.
3"




National

Monetary

Commission

The usual requirement is that this collateral shall consist
of domestic or foreign government bonds, or of mortgage
bonds, but it may also consist of prime bills, which,
having already been indorsed in blank by the banks or
their customers when discounted, do not have to be
indorsed again. Thus in the latter case, through a
wholly unostentatious use of bills as collateral, a form
of credit is created which the great banks normally use in
preference to rediscounting private bills in the open market; normally, as we have seen, the great banks, when
they cannot avoid a step of this sort, prefer to rediscount long-term private bills in foreign markets or among
their own customers.
Aside from the above-mentioned forms, in vogue in the
lombard business at the bourse, the banks grant lombard
loans for longer terms, up to three months, in which the
lombard rate of interest is fixed by agreement, usually
higher than the rate of private discount.
The ultimo money loaned in the lombard business of
the bourse, against collateral in securities or bills, is used
to a very large extent by speculators in securities, either
to terminate or to prolong a speculation, provided, of
course, that they possess such securities. If such is not
the case, and the bull speculator (Haussier) is nevertheless willing to continue the prolongation, he accepts the
securities bought as per ultimo, obtaining the funds for
the purchase price by a loan on collateral repayable on
the last of the following month, for which he has to pay
the usual rate of interest for ultimo loans on collateral,
pledging the securities accepted and buying again the
same securities as per next ultimo. This lombard rate
31*




The

German

Great

Banks

of interest will, of course, be the higher the more active
the bull speculation at the bourse.
The bull speculator may use another method. 'Having
to take up certain securities on the last of the month, he
sells them to a third party (his bank) for delivery on the
last of the month, receiving payment or being credited at
the so-called settlement price (Liquidationskursus). At the
same time he buys back the same securities from the
third party at the same price, plus the so-called report
money, as per ultimo of the next month. The amount
of this charge has to be such that the bank shall be
compensated for the month's delay in receiving back
the purchase price of the securities pledged, so that it
has to receive the interest for the intervening period.
The rate of interest—that is to say, the rate of the report
money—is determined by the market value of each individual security or in percentages of the face value (according as the security itself is quoted in one way or in the
other).
On the other hand, the bear speculator—that is to say,
the person who, expecting a fall in quotations, has sold
securities which he does not own, for delivery on the
last of the month, but does not wish to procure them on
the last of the month because the market, instead of
falling, has risen, or is not in position to procure them
because he has no money, proceeds as follows: He
procures the securities to be delivered on the last of the
month by buying them from a third party that owns
such securities (his bank), to be delivered to him on the
same date. The bank thereupon debits him with the
purchase price and at the same time buys the papers
3*3




National

Monetary

Commission

back from him for delivery on the last of next month,
at the same price, with deduction of the monthly interest
to be calculated according to the method above indicated
(the so-called deport). The greater the scarcity of securities on the last of the month, and the greater therefore the need for them on the part of the bear speculators,
the higher will be, as a rule, the interest which the owners
of the securities will require to be deducted {deport),
which in such cases may thus be lower than the rate of
lombard interest for ultimo loans prevailing at the same
time.
To the speculator, all these cases represent, economically, a prolongation of his speculation; juridically, in the
last two cases (report business) the combination of a cash
sale with a purchase for delivery (report) or a cash purchase with a sale for delivery (deport).
The lender in such case is simply dealing with two different methods of granting credit, that is to say, of investing
such money as he may have at his disposal for the time
being. In the report business he runs somewhat greater
risk, because he has to furnish a sum of money exactly
equal to the quoted value of the security, but then, as a
rule, he draws somewhat higher interest, for as a rule the
report money is higher than the rate for ultimo money in
the lombard business, because the former includes a
premium for risk.
On the other hand, if the lender furnishes ultimo money
on collateral in the shape of securities, he runs less risk—
a matter of special importance to the owner of investmentseeking funds—because he is able to fix the amount of the
loan on the securities according to their quality, not being
314




The

German

Great

Banks

required to stake his money on them to the full amount
of the market value. However, since the rate for ultimo
money as a rule is lower than the rate of report money,
he usually draws less interest than in the report business.
From the point of view of both the speculator and the
lender, either case represents either intentionally or at any
rate in effect a fostering of speculation in securities,
through the taking or granting of short-term credit.
Hence the increase of the report business, especially in
case of a boom, is as a rule a grave symptom of a decided
increase in speculation. Accordingly, a writer in the
"Frankfurter Zeitung" justly finds no cause for congratulation in the fact that in the case of 10 banks in
Berlin and Frankfurt the sums invested in the report
business rose from 148,550,000 marks at the end of 1892 to
284,590,000 marks at the end of 1894, an increase of nearly
100 per cent, while from 1888 to 1889 the increase was
only 55 percent (from 344,760,000 to 533,240,000 marks).
The great banks as a rule will not act as brokers for those
of their customers who wish to invest money in reports,
because that would diminish the amount held in current
account on which they have to pay but slight interest,
while they themselves, as a rule, are able to make better
use of their depositors' money in the way of the lombard,
discounting or report business.
On the other hand, so far as their own temporarily
available resources are concerned, the great banks invest
heavily in the two forms of short-term credit, that is to
say, in ultimo loans, whose rate of interest influences also
the rate of private discount,317 and in report money. In
particular, when the domestic rate of interest is higher
315




National

Monetary

Commission

than abroad, the banks often invest very large sums of
foreign capital in report loans, although in such cases the
borrower has to assume the risk of a variation in the
exchange rates.
The tax on the report business to the full amount of
the transaction stamp (Umsatzstempel), based on the combined amounts of sale and purchase, led to the result that
at the German bourses the ultimo loans have declined in
importance in the lombard business, as compared with
the report loan, especially since the rate of tax applying
to the report business might also be applied to the case
of the ultimo loan.
This result was rather regrettable, all the more because
lombard loans, unlike report loans, have not one and the
same date of repayment, and because the pledges by which
they are secured cannot as a rule be realized as easily
as the securities of the report loans. Finally, the conditions of the report loans are typical, established once
for all by the terms of the bourse, while the terms of lombard loans, as we have seen, have to be fixed by special
agreement applying only to each individual transaction.
Recently similar factors have been operative in the
same direction. By the federal stamp tax law of June 3,
1906 (schedule 4a, sec. 4), the stamp tax on the report
business has been reduced to one-half of the former rate,
the tax being based on the more highly appraised of the
two transactions into which the report business is juridically divided. On the other hand, the so-called improper lombard business (uneigentliches Lombardgeschdft),
in which the recipient of the securities may return, other
securities of the same kind, is, according to the practice of
316




The

German

Great

Banks

the revenue authorities, subject to the full tax according
to the schedule. Only the taxing of the lombard business
proper, of little importance at the bourse, in which the
recipient does not enjoy the right referred to, is subject
to the law of the individual States. In Prussia, according to the exemption clause to schedule 58 of the stamptax law of July 31, 1895, the documents certifying such
lombard loans are exempt from tax, provided that they
are repayable within at most a year and that the value
of the security given is at least equal to the loan granted.
Lombard loans on the security of bills (which thereupon are not further indorsable) with the view of granting
but not of securing credit play a very unimportant part
among the operations of the great banks.
The former bourse law having absolutely prohibited the
dealing in futures in the case of certain securities and
greatly hampered it in the case of others, the cash business (Kassageschaft) has for years been the favorite sphere
of speculation in securities at the bourse, the bankers of
the medium and smaller class having to resort for that
purpose extensively to call money in the lombard business
in speculating either on their own or their customers'
account.
The terms usually charged on lombard business by the
great banks are about the same as those of the Berliner
Handelsgesellschaft, reprinted below from W. Prion's
work.318 They may, of course, be more or less modified
in individual cases, the lender enjoying considerable latitude in this respect, since these terms merely state the
maximum amounts of loans ("up to").

317




National

Monetary

Commission

If the market value of the securities no longer shows
the margin agreed on as compared with the loanable
value, a corresponding additional deposit (Einschuss) is
to be furnished, either in cash or in securities. The declaration to be signed by customers in the case of a lombard loan (unless the conditions of the current account
are deemed sufficient) has been reprinted by Friedr.
Leitner 319 and others.
MAXIMUM AMOUNTS IvOANABLE ON S E C U R I T I E S QUOTED AT
THE B E R U N

BOURSE.

I. Up to nine-tenths of the quotation of the day: Bonds
of the German Empire and of the German Federated
States; mortgage bonds issued by Prussian mortgage banks
and cooperative credit associations, as well as the bonds
of German cities and Prussian counties (Kreise) ; bonds of
German (other than Prussian) mortgage banks; stock and
debentures of nationalized railways; bank notes of foreign
states; gold and silver, in coin and in bars; debentures of
German railways.
II. Up to four-fifths of the quotation of the day: Bonds
of foreign governments and cities; foreign railway bonds;
foreign farm and real estate mortgage bonds; German railway shares.
III. Up to three-fourths of the quotation of the day:
Foreign railway shares; bank shares.
IV. Up to two-thirds of the quotation of the day: Debentures of industrial concerns quoted at not less than 90
per cent. Shares of industrial concerns quoted at not less
than 150 per cent; if the quotation is higher, the excess
a,bove 150 per cent is loaned on only to one-half the
3*




The

German

Great

Banks

amount and with the restriction that the loan is not in
any case to exceed 150 per cent of the face value. Securities quoted more than 20 per cent below par are not
accepted as collateral. Mining shares and securities not
quoted at the Berlin Bourse are loaned on only under
special agreement.
According to the official statement submitted to the
Bank Inquiry Commission under date of March 31, 1908,
the sum total of lombard loans of the Reichsbank (on
5,650 pledge receipts) amounted to 255,687,100 marks,
distributed as follows:
Marks.

1.
2.
3.
4.

5.
6.
7.
8.

Agriculture and allied industries (249 receipts)
Industry and trades
Commerce, transportation, and insurance
Banking and finance, viz.:
(a) Joint-stock banks 3 2 0
(b) Other financial institutions
Public savings banks
Cooperative credit societies of all kinds
Private persons
All others (corporations, foundations, etc.)
Total

1, 803, 300
17, 853, 600
21, 562, 800
99, 618, 900
88, 422, 000
12, 620, 500
5, 108, 900
5, 788, 700
2, 908, 400
255, 687, 100

The exhibit shows also how greatly, in the transactions
of the Reichsbank, the lombard business is eclipsed by the
discount business, a result due, no doubt, in part to the
fact that lombard loans are not permitted to be used as
reserve for notes.
In 1907, as was shown (p. 297), the average of domestic
bills held by the Reichsbank was 1,060,076,000 marks,
while during the time from December 31, 1907, to April 7,
1908, the Reichsbank bought 1,389,357 domestic bills to
the amount of 2,897,985,044 marks.

3*9




National

Monetary

Commission

Uaifortunately, in the German bank balances lombards
have hitherto been for the most part combined with ''reports " (under the head " lombards and reports " or merely
"lombards" or "reports") in one total. This is all the
more incorrect, because, although both kinds of investment represent as a rule forms of short-term credit,
lombards occasionally run for longer periods (up to three
months). Furthermore, although in many respects the
two kinds of investment serve the same purposes, yet, as
we saw, there are essential differences in these purposes as
well as in the nature of the investments.
As regards the composition of the '' reports," such an expert as Felix Hecht 321 has justly pointed out that they may
include securities not easily realized, and furthermore securities issued by the banks themselves and sold on credit
to their customers. However, the same may be true of the
lombards.
Again, in the balance sheets and reports of the credit
banks (with the exception of some great banks) it has hitherto to a large extent been the practice to make no difference between lombard loans on merchandise relating almost
exclusively to articles the prices of which are quoted in the
market or at the bourse and lombard loans on securities,
the latter including also securities not quoted at the bourse
or securities issued by banks but not yet listed at the
bourse. However, in the bimonthly summary balances
since published by the great banks (beginning with February 28, 1909),the "advances on merchandise and shipments " are separately stated, and hence it may be assumed
that the same will be done hereafter in the annual balance statements. At the same time the combination of
320




The

German

Great

Banks

11

reports and lombards " into one item has been retained,
probably on account of the practical difficulties that
would be involved in their separation.
Finally, some credit banks were accustomed formerly
to record advances on merchandise under the head of
"secured loans in current account" (gedeckte Debitor en).
Thus, in studying past records, we have to bear in mind
that in the balance sheets of most banks the two items
were lumped, and thus the growth of lombards and reports
for the four great Berlin banks stated below (in millions
of marks) can be traced only for the two items combined:
DKUTSCHS BANK.
1870
1871
1872
1873
1874
1875
1876
1877
1878
1879

2. 7
13. 2
19. 9
8.7
14-5
16.4
32. 2
11. o
15.5
34-8

I880.
l88l.
1882.
1883.
1884.
1885.
1886.
1887.
1888.
1889.

26. 2
32.5
29.8
30.6
34-8
11. 2
33- 1
30.8
47. 1
66. 1

1890
1891
1892
1893
1894
1895
1896
1897
1898
1899

40.7
26. 1

1900
1901
1902
1903
1904
1905
1906
1907
1908

69.4
98.3
184.6
184.
190,
238,
227,
154
222. 1

31-9
I4.9
II.4
18.6
48.6
36.O
23-3
27.4
3i.7
40. 6

1900
1901
1902
1903
1904
1905
1906
1907
1908

4958.
7338.
5749.
58.

21. 6
33-0
28.9
54.2

1900
1901
1902
1903
1904
1905
1906
1907
1908

43-6
34-3
69.8
60.8
68.9
101. 2
114. 1
103.5

DISCONTO-G^SElvLSCHAFT.
1870
1871
1872
1873
1874
1875
1876
1877
1878
1879

7. 6
8.4
37.8
16. 1
14-5
6
1.5
2. 1
5-3
14-7

1880.
31.
1882.

24.8
29-5
12.5
18.2
45- 1
26.8
3i-3
10. 2

35-3
34.7

1890...
1891. . .
1892...
1893...
1894...
1895...
1896...
1897...
1898.. .
1899. . .

3i.
3i.

DR^SDNBR BANK
i873
1874
1875
1876
1877
1878
1879
1880
1881

o.4
7
1.1
1.6
i-9
2. 7
5.4
4. 1
22. 5

1882
1883
1884
1885
1886
1887
1888
1889
1890

903II °—II

22

12. o
15. 1
19. 1
5-9
15.3
9.6
37.8
59.6
38. 2

1891
1892
1893
1894
1895
1896
1897
1898
1899

32I

•
.
•

• 49-9
•
•

42.3
51.8

• 57-6
• 73-8

•

40.03

.

34-8

•

73-0
62. 1

.

96.5

. 103.0
• 119.5

• 56.6
• 113.8




National

Monetary

Commission

DARMSTADTER BANK.
187O.
187I.
1872 .
1873.
1874.
18751876.
1877.
1878.
1879.

2. O
7-9
14-7
15-3
9 6

10. 3
7- 6
8.9
18. 5
28.0

1880.
1881.
1882.
1883.
1884.
1885.
1886.
1887.
1888.
1880.

1890.
1891.
1892.
18931894.
1895.
1896.
1897.
1898.
1899.

30
25
24
3i

34
24
22
26

39
4i

27. 6
22. 7
27. 6
24. 1
30.5
31.4
30-5
23. 1
32.3
31.0

27. 6
19. o

1900.
1901.
1902.
1903.
1904.
1905.
1906.
1907.

•38.9
37-9
45-7
72. 2

73-3
48.5
65.2

IQO8.

For all the German credit banks (with a capital of a t
least 1,000,000 marks each), t h e lombards and reports
during t h e last eleven years amounted to t h e following
sums (in millions of marks) *
1898
1899
1900
1901

668. 8
736. 8
597-7
594- °

1902
1903
1904
1905

1906
1907
i9°8

691. 5
708. 2
773-9
970-9

1, 099. 4
1,162.6
1,348.5

At t h e six great Berlin banks the lombards and reports
during t h e last eleven years amounted to the following
sums (in millions of m a r k s ) :
1898.
1899.
1900.

415.6
463.1
302. o

1901 .
1902 .
1903.

477.8
588.3
679-3

1904...
1905...
1906...

294-3
432.0
443-o

1907

594-4

1908

660. 8

Of the total assets t h e following amounts (in millions
of marks) were invested in lombards and reports:
1894.
Amount.

In the Deutsche Bank
In the Disconto-Gesellschaft..
In the Darmstadter Bank.. . .
In the Berliner Handelsge-

1895.

Per
cent.

Amount.

1908.

Per
cent.

Amount.

10.50

222. 12

12. 00

58. ic
113-8
65. 29

10. 9

S3.4o

69.7
48.5
54.o

15- 19
20. 08

60. 7
36.0
49.8

30-4

15. 20

3T.4

9.67
14. 77
15.09

21. 1

12. 93

25. 0

12. 50

15. 20

322

Per
cent.

6.5
9-6
12




The
(F)

German
T H E BROKERAGE

Great
BUSINESS

Banks
(Kommissionsgeschdft).

The brokerage business of t h e German credit banks,
especially'of the great banks, has never remained confined within the narrow scope assigned to the broker
(Kommissiondr)
by paragraph 383 of t h e Commercial
Code (Handelsgesetzhuch), according t o which t h e t e r m
broker (Kommissiondr)
designates exclusively a person
who makes a business of buying and selling, in his
own n a m e b u t for another's account, merchandise and
securities.
On the contrary, t h e German credit banks have from
t h e beginning also engaged, in their own n a m e and for
other persons' accounts, in business n o t consisting of the
purchase and sale of merchandise or securities, b u t
which are nevertheless subject to the legal provisions
regulating t h e brokerage business, according to t h e present
Commercial Code (art. 406).
As instances of such operations, t h e following m a y be
enumerated: The p a y m e n t of the indemnity to Spain by
the United States for the cession of the Philippines,
effected through the mediation of t h e Deutsche Bank, as
set forth b y Ad. Weber; 322 the cooperation of various
great German banks in the preparation and execution of
the nationalization of the private railways, first those of
Prussia and later those of other German States, begun in
1879 and continued for several years, a cooperation
which was very extensive and not confined to the purchase of shares; the cooperation of t h e Dresdner Bank
and the A. Schaaffhausen'scher Bankverein in t h e acquisition of an adequate a m o u n t of stock of the HiberniaGesellschaft, undertaken a t t h e instance of t h e Prussian
323




National

Monetary

Commission

Government, and again not limited to t h e purchase of
stock; the cooperation of the Disconto-Gesellschaft in t h e
settlement of t h e French war indemnity in 1871-72; t h e
mediation of t h e Disconto-Gesellschaft in t h e conversion
of t h e stock of t h e Roumanian Railway Company into
Roumanian government bonds (1879-1881); t h e reorganization of t h e Northern Pacific Railroad Company
effected b y t h e Deutsche Bank, partly on account of
third parties, etc. In the main, however, t h e business
carried on b y t h e credit banks and especially t h e great
banks is t h e brokerage business proper, conducted on t h e
bourse. The scope of this business has been enlarged b y
all t h e numerous factors tending toward an increase of
power and concentration, some of which we have already
mentioned, while others yet remain to be discussed.
Such are especially the relations to industry, constantly
growing more intimate, and the deposit offices established gradually in large numbers by all t h e great
banks, with the exception of t h e btrictly centralized Berliner Handelsgesellschaft. For although Waldemar Miiller 323 m a y be right in stating t h a t the business of t h e
deposit and exchange offices (Wechselstuben), "so long
as it was confined t o t h e use of interest and t h e commission business in securities, did n o t cover the considerable
expenses for rent, personnel, e t c . , " yet the originators of
these deposit offices acted on the expectation t h a t t h e
makers of t h e deposits and t h e users of their safes would
little b y little tend to utilize t h e other facilities of t h e
offices for arranging all their business and property m a t ters, especially investments of capital, t h a t is to say,
entrust t h e m with t h e brokerage of their bourse transac324




The

German

Great

Banks

tions. This assumption, founded on the desires and wants
of their clientele, has in the main proved well founded,
as well as the further expectation that the clients of the
deposit branches would also little by little become habitual
and trustworthy customers for the securities issued by
the central offices, their financial standing and solvency
being well known to the local offices.
The deposit branches have often been criticised as tending to encourage to a considerable extent speculation in
securities on the part of their customers, and to urge the
participation of customers in bourse speculations, after
the manner of "touting bankers" (Animierbankiers).
It
would be difficult to prove the justice of this criticism.
As a matter of fact, the central authorities of the great
banks and of the other credit banks, in view of article
94 of the bourse law, as well as from an intelligent regard
for their own interest, have from time to time issued the
strictest instructions to the managers of their deposit
branches and exchange offices to refrain from encouraging
bourse speculation on the part of their customers or
others. These instructions are periodically repeated.
It can not be doubted, however, that, notwithstanding all
instructions and warnings, certain managers of deposit
branches have offended in this respect. This is likely
to occur again, especially in the case of those managers
who, besides their salary, draw a commission merely from
the net profits of their deposit branches, a practice which
it would be well to discontinue. It must not be forgotten,
however, that the public and the customers themselves
often dictate to the managers, and not only resent every
exhortation or warning, but issue their orders in peremp325




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tory form. It may also happen that the speculators,
without the knowledge of the manager of one deposit
branch, enter into speculative enterprises with other
deposit branches and use the knowledge gained at one
branch either to check the other or for conclusive action,
beyond the control of the first manager.
Withal, the aim of these deposit branches and exchange
offices must be to minister solely to the legitimate investment of funds and to the other needs of their customers,
as they arise in the course of business, and to cultivate all
the branches of the regular (current) bank business, with
the exception of the security issue business and the security
business for own account. To their credit it must be
said that a growing portion of these establishments,
especially the older ones, have been following the policy
just commended.
Extreme caution must be practiced in the investment
business, both as regards the securities issued by the
banks themselves and other securities. It can not be
maintained that this caution has always been sufficiently
observed in the past. In particular it ought to be laid
down as a principle that those persons who are compelled
hj their financial situation to follow anxiously every
oscillation in quotations and who are severely affected
by every diminution in interest income should not be
advised to invest in dividend-paying securities, because
these are subject to great fluctuations not only as to dividends but also as to the market value, corresponding to
the fluctuating rate of dividends. On the other hand,
those persons who insist on acquiring dividend-paying
paper, either because of speculative tendencies or of their
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Great

Banks

needs of seeking higher returns than are usually offered
by government bonds and other securities bearing a fixed
rate of interest, would do well at any rate to "mix," that
is to say, to buy small amounts of safe stock of various
industrial enterprises, in order not to stake everything on
one card. The better returns in one branch of industry
or in one company will then offer them a kind of insurance
against diminished returns in other companies. The
principle of the distribution of risk applies also to the
private capitalist, and it is the duty of managers of
deposit branches to exert their influence in this direction,
whenever their advice is asked.
Aside from these cases, it is the practice among the
managers of the great banks, so far as I know, to instruct
the managers of deposit branches and exchange offices,
though not always with success, to abstain from all recommendations and advice beyond a mere statement of facts
within their knowledge regarding the securities to be
bought or sold, especially when such securities have been
issued by the great banks themselves, since in such case
the very fact of issue expresses the favorable opinion of
the issuing bank. When customers ask for information,
it is the branch bank manager's duty to point out to them,
to the best of his knowledge, those factors which, after
careful examination, he thinks will be apt to determine
the intrinsic value, safety, prospective yield and market
of the securities to be purchased or sold, including in the
appropriate case, the conditions under which they are admitted to trading at the bourses at home or abroad. He
should on principle decline to utter any prognostications
regarding the future development of the market value, no
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Commission

matter how urgent the questions which are almost
always addressed to him on this point. This caution is
especially demanded in view of the fact that the very
shrewdest experts in the money market, possessing the
most minute knowledge of the innumerable factors that
influence the market value, profess to be unable to lay
down any rule as the result of their experience, except
that, as they say at the bourse, "it always turns out
the other way."
In the brokerage business at the bourse, the Berlin
great banks 324 and a wide circle of other establishments
are guided by certain " business regulations," which in the
main are identical, as shown by the printed blanks. They
embody the following principles:
i. All orders given to the bank for the purchase or sale
of bills, foreign bills of exchange (Valuten), or securities
are executed by the bank in its own name, unless the
contrary is expressly agreed on, or unless the bank itself
in the individual case makes an express statement to the
contrary.325 Any phrases used in the transaction, such as
" I bought or sold for you," that might indicate an agreement with a third party, do not alter this rule. In each
instance the bank has the right to charge, in addition to
the commission, the regular expenses, especially the usual
brokerage (Kurtage) and stamp tax.326
2. Any bourse transaction undertaken by the bank for
its customers is subject to the rules in force at the time
in that kind of business at the domestic or foreign
bourse where the transaction is to be executed, even when
the business is transacted by the bank in its own name.
The bank has the right to prolong term engagements
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Great

Banks

made at the bourse, if it sees fit, or to cancel them entirely
or in part, unless the customer gives explicit modifying
orders regarding the pending engagement, which order
must be received at the latest on the last but one extension day—the so-called day of premium declaration {Pramienerklarungstag). The bank has the same right of cancellation before this term, if the person giving the order
fails, on demand, to pay such supplementary margin
{Einschuss) as may be required (see No. 3, below, second
paragraph) .327
3. In order to safeguard all claims against the customer
through the current business connection,328 as well as for
any bill obligation that may be pending (unless a special
arrangement has been made), the bank has the right of
pledge or retention in regard to any securities, including
interest coupons, annuity (Rentenscheine) and profit-share
certificates, and all other valuable paper which may have
come into its possession or keeping in the course of business or in any other way.329 However, if such securities
are turned over to the bank expressly in the name or on
account of other persons, the bank possesses the right of
pledge or retention in virtue of those claims only which
may have arisen in connection with the respective securities.330 Securities deposited in German banks without
being provided with a German stamp are not subject to
the right of pledge and retention.331
If the margin {Einschuss) or the balance due the bank,
including any pending bill obligations, is not paid when
due, a written demand for it is sent by registered mail.
If this remains without effect, the bank, in order to satisfy
its claims, has the right, without further warrant or period
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of grace, to sell the pledges at any time and place in accordance with the provisions of articles 1221 and 1235 of the
civil code.332 Article 1237, section 2, and article 1238 of
the civil code are not applicable to this case. Neither
has the customer the right, according to article 1246 of
the civil code,333 to require any departure from the regular
form of sale of the pledge.
The demand just mentioned is deemed to have been
delivered if it is sent by registered mail to the last address
known to the bank, even if the letter comes back marked
"Can not be delivered."
The>acquisition of the pledged object by the broker himself is permitted, according to article 400 of the commercial, code, only in the case of goods which have a market
or exchange price and in the case of securities which are
officially quoted; the broker has to prove that the price
which he charged to the client is the market price prevailing at the time of the execution of the order; this
time is the date ' ' at which the broker delivered the notice
of the execution for forwarding to the client'' (art. 400,
sec 2, paragraph 2 of the commercial code), a provision
which, like a number of others (articles 387, 400, sees,. 3b
and 5; articles 401, 405, sec. 2), is intended to prevent
the so-called "Kursschnitt"—that is to say, speculation by
the broker to the detriment of the client.
As a wilful contravention of article 400, section 2, paragraph 2, is subject to penalty (according to article 95, sec.
1, No. 2 of the bourse law), most of the great banks have
established a special bureau whose duty it is to see that
the law is strictly observed by their representatives at

330




The

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Great

Banks

the bourse. This or some other bureau also makes sure
that the proper stamps are used.
According to articles 3 and 4 of the law " relating to the
duties of business men {Kaufleute) in the safe-keeping of
securities belonging to third parties" of July 5, 1896 (the
so-called bank deposit law), the broker who carries out an
order for the purchase of securities (of the kind specified
in art. 1) is bound to send to his client within three days
a list of the items purchased, with indication of the nominal value, the numbers, and any other marks of distinction
(Stuckeverzeichnis—itemized statement). According to the
business regulations of the great banks, and most of the
German credit banks, however, the banks as a rule require
of their clients a written waiver of the sending of the itemized statement in case the securities purchased have not
been fully paid, and the client remains indebted to the
broker for the rest, the purchased paper being left as pledge
in the custody of the broker. The business regulations
expressly state that the object of this waiver is to prevent
the passing of legal title in the purchased securities to the
client, which, according to article 4 of the bank deposit law,
would be the effect (at the latest) of the sending of the
itemized statement. As it is, however, the broker—that is
to say the bank—retains title until the purchase price has
been fully paid. Until this is done, the items purchased are
not credited to the deposit account of the client and do
not become his property. Accordingly they are not kept,
on behalf of the client, separate from the bank's own holdings or those of third parties, and are not entered in the
deposit book according to their distinctive marks (art. 1 of
the bank deposit law). On the contrary, they are booked
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by the piece without indication of number, this record being often known in the great banks by the name of Account
C (Konto C), in contradistinction to the custody account,
pure and simple, of the items belonging to the client
(provincial banker) himself (Deposit Account A), and
Deposit Account B. The latter comprises the items in
regard to which the provincial banker (the client of the
great bank) making the deposit or transmitting an order
for purchase has made the declaration (in compliance
with art. 8 of the bank deposit law) that the items are the
property of others or that the purchase is to take place
for the account of others. This Deposit B, therefore, is
"not free;" that is to say, it does not serve the bank as
security for all its claims against the provincial banker.
In order that the broker (the central banker) may dispose
of items booked under Deposit Account B, it is necessary
in all cases, according to legal decision, that the client
(the provincial banker) shall have declared, that he in
turn had been given express consent to such disposition.
According to article 3, section 2 of the banking law, the
waiving of the requirement of an itemized statement
(Stiickeverzeichnis) may be done by bankers in any form,
even verbally, and once for all, but in the case of persons
who are not bankers only expressly334 in writing and only
for each individual case.
Only when the remainder of the purchase money has
been paid, the purchased items, on demand of the client,
are transferred from the item account (Account C) to
the Deposit Account A.
As regards the method of keeping securities booked
under or transferred to Deposit Account A, the great
332




The

German

Great

Banks

banks as a rule adopt the arrangement by classes, that is
to say, securities of the same kind but belonging to different customers are kept together, the items belonging to
any particular customer being, of course, marked by bands
bearing the customer's name and the nominal value of the
items. This method of keeping by classes enables each
item to be found more readily and is therefore preferred
to the method of keeping all the securities belonging to
one customer in a portfolio marked with his name. At
the same time, for the purpose of having a check on the
holdings, all banks carry both "living" account books, in
which each customer has one account for all his securities,
and a " dead " account book in which each class of securities has an account, the names of the customers being
entered under each class, with the items of that class
standing in their names.
In the case of mere safe-keeping of securities, or where an
order for purchase is followed by safe-keeping, many provincial banks and private bankers are in the habit of obtaining from the customer an authorization to return securities of equal value in place of those deposited or pledged,
or to use them for their own (the bank's) profit.335 Such
authorization has to be made in conformity with article 2,
section 1 of the bank deposit law, expressly in writing
and for each individual case, only when the person in
question is not a banker. The great banks, however, do
not make a practice of obtaining such authorizations.
The banks, although not required by law, regularly
furnish a memorandum giving the issue numbers of the
securities, generally by signing and returning one of the
two slips {bordereaux) which accompany the order.
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Commission

No perfectly reliable conclusions can be drawn from the
balance sheets hitherto in vogue concerning the extent of
the brokerage business of the great banks. On the one
hand, the heading l i Commissions'' (Provisionen) covers
not only the commissions derived from the brokerage
business in its widest sense, but also in many cases all or
part of the commissions derived from the discounting of
bills, which really ought to be booked under the bill
account, because these commissions are not always
deducted from the particular bill entries, but are calculated
only at the reckoning of the whole account (from the
amount of the total transactions) .336 Again, the commissions earned in the current account business are in many
cases booked under the commission account, so that this
account, homogeneous as it looks, is really a *' collective
account."
What has been said here of the commissions earned
through the discounting of bills holds true also of the
purchase and sale of securities, the commissions due to
the banker being either calculated from the total transactions of the account, on the larger side, or being at once
added to or deducted from the calculated total amount of
each individual statement.337 In the former case the: net
profit in the way of commissions is transferred in one sum
at the reckoning of the account to the collective account
" Commissions;" in the latter case the commissions are
booked in a separate account, but in that case, if a
wrong impression is to be avoided, they have to be
picked out singly and transferred to the commission account. This distinction while of no importance as regards
the question of the total amount of profit from the
brokerage business, does exert an influence, of course,
334




The

German

Great

Banks

on the amount of commissions. Thus, for example,
according to a resolution of the Stamp Union (Stempelvereinigung), the total transactions in dividend-paying
securities are no longer carried in ordinary account, as
was done so long as a commission was calculated only from
the total transactions of that account (on the larger side),
but a special commission is charged, both for the purchase
and for the sale of dividend-paying securities, which are
booked in a separate account, the dividend-paying security
account.
With the reservations resulting from the above statements, an approximate idea of the extent of the brokerage business in the German credit banks may be gained
from the following table, since a very large part of the
commissions {Provisionen) booked on the commission
account (Provisionskonto) is undoubtedly derived from the
brokerage business proper.
According to the Deutscher Oekonomist,338 the German
credit banks having a capital of at least i ,000,000 marks
each showed the following totals (in millions of marks):

Year

Gross
profits

Ratio of
Commis- commissions (Prosions
visionen)
(Provito gross
sionen) .
profits.

Year.

Gross
profits

Ratio of
Commis- commissions sions (Pro(Provi- visionen)
sionen
to gross
profits.
Per cent

Per cent.
77.8i
78.69

19.7

25-3

1897...

179.37

40.4

20. 5

26

0

1898.. .

218.38

50.5

23. 1

80.97

20. 7

25

5

1899-• •

261.77

57-9

22. 1

n o . 48

24. 2

22

0

1900.. .

262.02

60. 0

22. 9

141.00

32. 1

22

8

1901.. .

258.40

141.04

32. 2

22

8

1902.. .

256.76

58.9
57-7

22. 5

1891..

112.IS

253.21

62. 7

24.7

33

7
8

1903...

i n . 93

1904.. •

273.50

68.2

25.0

1893..

110.03

28.8
26. 7
27.8

25

1892..

25

2

1905.. .

3 3 0 . 20

81.4

24. 7

1894..

112.29

28. 1

25

0

1906.. .

377.o8

91.4

24.3

1895..

150.83

22

8

1907.. •

382.28

97-5

25. 5

1896..

158.93

34-3
35-4

22

3

1908.. .

417.20

103- 7

24.9

1885..
1886..
1887..
1888..
1889..
1890..

335

22. 5

22.8




National

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Commission

From this it appears that the commissions (Provisionen),
with the exception of the years of depression of 1891 and
1892, kept on rising, very rapidly from 1885 to 1890, less
rapidfy but very steadily for the period following 1892; but
since the total gross profits from 1885 OJ1 (with slight interruptions in 1891-1893, 1901 and 1903), also rose very
considerably, the ratio of commissions to gross profits
remained nearly uniform throughout the period 1885-1908,
showing, in fact, a slight decline.
At any rate, almost one-fourth of the gross profits
throughout that period resulted from commissions derived,
no doubt, for the most part from the brokerage business
(Kommissionsgeschdft) ,339
(G) THE TRANSFORMATION, FOUNDING, ISSUING, SYNDICATE,
AND SECURITY BUSINESS.

(j) The transformation and founding business.
The objections to the German " mixed banking system ' ' are twofold. On the one hand it is urged that the
deposits are not sufficiently secured by liquid assets, which
implies a lack of soundness in administration. This point
will be dealt with at greater length in section 8. On the
other hand, it is pointed out that the transformation
and founding business extensively conducted by the German credit banks involves grave dangers both for the credit
banks themselves and for the community at large. This
point we shall now proceed to discuss.
In previous sections (pp. 4 and 5) we noted that the
prompt undertaking of the transformation and founding
business—that is to say, the financing business proper 3t0 —
by the German credit banks, corresponded to an urgent
336




The

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Great

Banks

need of the industrial and commercial interests of Germany. The very earliest German credit banks were
created, first and foremost, for the purpose of promoting
trade and industry, as indicated by the very firm name of
the Darmstadter Bank: " Bank for Trade and Industry/'
The establishment in Germany of special banks of deposit
was out of the question, mainly because, in view of the
low level of prosperity of the population, such banks would
not have yielded sufficient profits.
Furthermore, in the very beginning of the volume we
pointed out that the special nature of the transformation
and founding business demands a vast amount of technical,
business, and general economic knowledge and experience,
which could only be accumulated little by little in the
credit banks. The need for such experience, combined
with the continuous watching of the money market and
an accurate knowledge of the capital market, as well as of
the factors connected therewith, such as the capacity
of the market for taking up new securities and the conditions determining the market value of these securities, etc., was of itself sufficient to create "special
economic organs," which, to use Schaeffle's expression,
were to perform "the special function of the initiative
in the joint-stock industry.''
Moreover, the necessity of a division of labor, of
combination and decentralization of establishments, of
supplying the wholesale demand and of overcoming or
warding off foreign competition, gave rise to industrial
large-scale production, whose favorite form is the stock
company, because it obtains credit more easily than the
individual entrepreneur, and on that account is more
903110—11

23

337




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Monetary

Commission

susceptible of expansion. This was another reason why
in Germany the task of transforming existing establishments into stock companies, or of founding new stock
companies, fell to the share of the banks, as central reservoirs of funds available for productive purposes, the stock
companies themselves representing a concentration of
small amounts of capital, each in itself insufficient for productive utilization.
Large-scale industry and capitalism, bearing to each
other the reciprocal relation of cause and effect, were thus
enabled, by the aid of the German credit banks, to unite
in an inseparable alliance, which impressed its characteristic stamp on the entire economic development of Germany during the two epochs under discussion.
We saw (pp. 38 and 115) that in Prussia, up to the intervention of the credit banks, during the entire quarter of a
century from 1826 to 1850, only 102 stock companies,
with a combined capital of about 638,000,000 marks,
were formed. In contrast with this, the first epoch here
considered (more accurately the period terminating with
the beginning of the second half of 1870), was marked by
the founding of 295 stock companies with a capital of
about 2,404,760,000 marks, due, first and foremost, to the
activity of the German credit banks in the field of transformation and issue.
But even this was merely the first puff of wind before
the beginning of the storm.
Beginning with the second half of the year 1870 up to
1874, 857 stock companies were formed in Germany, with
a capital stock of 3,306,810,000 marks. This overproduction in transformations 341 and new flotations in these
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German

Great

Banks

four and one-half years, as well as the great abundance of
money and the fever of enterprise and speculation, were
of course either created or at least reinforced by the
sudden inflow of the 5,000,000,000 francs of the French
war indemnity. Combined with other factors, that overproduction was one of the most important causes of the
great crisis of 1873.342
In the first epoch (from the middle of the nineteenth
century to the year 1870), when industrial enterprises
to a large extent lacked sufficient capital and energetic
entrepreneurs, the banks, in many, perhaps the majority
of cases, had to take the initiative in the work of transformation and founding. A natural incident of this process was that the banks often took a share, at times a very
considerable share, in the transformed or newly founded
enterprises through the purchase of stock or other direct
participation. As noted above (p. 72), the 1852 report of
the A. Schaaffhausen'scher Bankverein expressly states
(p. 3) that it is the function of a large bank " to induce the
capitalists of the country to direct idle capital toward
those enterprises, which, when properly launched, in response to real needs, and offering the guarantee of expert
management, bid fair to bring adequate returns." It was
that very bank, the oldest German credit bank, which
as early as 1851 took a share in the founding of the
Horder Bergwerks- und Hiittenverein, in 1852 in that of
the Coiner Bergwerks-Verein, the Colnische BaumwollSpinnerei, the Colnische Maschinenbau-Aktiengesellschaft,
the Coln-Musner Bergwerks-Aktiengesellschaft, and the
Colnische Baumwoll-Spinnerei und Weberei, wisely making choice of local enterprises in its near vicinity, which
339




National

Monetary

Commission

it was in position to keep under steady surveillance. In
this way it avoided those severe losses to which other
banks, not equally cautious, were subjected at that time.
Thus the Darmstadter Bank, shortly before the crisis
of 1857, took part in seven industrial enterprises which in
1856 it had transformed into stock companies or newly
founded. These enterprises had a combined capital of
2,500,000 thalers, in round figures. Among them was a
woolen and cotton factory, a spinning and weaving factory,
a mining company, the Oldenburg-East Indian Shipping
Company, and two machine factories. This permanent
investment in stock meant afterward corresponding
amounts permanently written off. In one case, that of
the Mannheim woolen factory, the entire stock was lost.
The Disconto-Gesellschaft in 1857 founded the Heinrichshiitte mining and smelting works with a capital of
about 1,750,000 thalers. In 1863, after heavy losses, it
was found necessary to separate that enterprise from the
Disconto-Gesellschaft and to place it in control of the
business managers, with participation of the DiscontoGesellschaft on a silent partnership basis. In 1872, the
establishment was merged in the newly founded Dortmunder Union Aktiengesellschaft fur Bergbau- Eisen- und
Stahlindustrie, which was destined to cause still greater
trouble to the bank.
The Mitteldeutsche Kreditbank suffered heavy loss
through the acquisition of the Ludwigshiitte at Biedenkopf, which in 1858 had been transformed into a stock
company under the name of Oberschlesischer Hiittenverein, the share of the bank amounting to one-third of
the stock. The same happened with the Wasungen cigar
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The

German

Great

Banks

factory, in which t h e b a n k acquired a share interest
in 1856.
This initiative in t h e business of transformations and
foundings, often dearly paid for b y t h e banks, was largely
reinforced a n d facilitated b y t h e defective legislation of
t h a t time, which m a d e practically no provision for t h e
true indication nor t h e strict civil and penal responsibility
of t h e persons concerned in t h e founding. I t was only
t h e new law (Novelle) of 1884 t h a t defined t h e t e r m
" founder " (Grihnder), provided for t h e complete publicity
of t h e founding process, and introduced strict civil and
penal responsibility of t h e founders and their associates.
The argument accompanying t h a t law describes t h e previous legal condition in words which deserve to be rescued
from oblivion (pp. 87-88):
"The founding process was concealed; the true indication of
the founders was not legally required; the leading promoters
acted without any sense of responsibility and were exempt
from any kind of control. The temptation to put private
interest above that of the company to be established was too
powerful. No person was appointed and no measures taken
to guard the interests of the company. For a long time after
its foundation the newly-formed company possessed no corporate autonomy.and remained defenseless in the hands of persons whose only object was their profit as founders. At the
same time the public, which these persons, without any risk or
responsibility, had in every possible manner sought to attract
to a participation in the company, either formally organized
or to be organized, had no reliable data whereby to form a
correct estimate of the enterprise.
In a number of the criminal proceedings that took place
during the crisis just past [1873] it was not even possible to
341




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Monetary

Commission

ascertain the names of the authors and publishers of the prospectuses by means of which the public had been invited to
subscribe."
So long as it was possible to start industrial transformations and foundings under the screen of anonymity and
freedom from any strict responsibility, there was of course
also an opportunity for " industrial stock jobbery'' ("industrielle Ausschlachtungen") which Sattler,343 with a somewhat strange exaggeration, describes as the essence of transformation in general; and, above all, overcapitalization
of the worst kind was the order of the day. There was
no inquiry into the prices allowed for the property contributed {Apports), nor into the compensations allowed
for the founding and the preparations for it, nor into
the intermediate profits made. The premium on the
shares issued by the company did not flow into the reserve
fund of the company, as it does now, but into the pockets
of the original owners who were credited therewith on
account of the property contributed by them (Apports).
As, moreover, the names of the founders and the intermediate profits were in nowise required to be published the
transformation and founding business could not fail to
become a special trade offering peculiar attractions. On
the other hand, it is not surprising that of the 857 stock
companies, with a capital of 3,306,810,000 marks, which,
as we have seen, were established in the time between
the middle of 1870 and the beginning of 1874, that is to
say, before the new Joint Stock Companies Law of 1884,
not fewer than 123 were in liquidation as early as December, 1874, and 37 were bankrupt (im Konkurs)Mi.

342




The

German

Great

Banks

As may be gathered from what has been said, the great
banks in the first epoch very largely footed the bills for
the transformations and foundings of that time. It must
be further admitted that, after quickly earning the profits,
often very large, from the transformation or founding,
they did not leave the enterprises to their fate, as they
might easily have done under then existing legislation, but
retained a share in them, often to a larger extent than was
compatible with the principles of liquidity. This was
done not only in order to retain the necessary influence
over the industrial enterprise, but also, as expressly stated
in many reports of that time, in order to exercise a permanent supervision over the management of those enterprises, a measure which was deemed indispensable in the
interest of the issue credit of the banks, since the transformation or founding was in most cases followed by
issues of stock or bonds. This was the main reason why
it became customary even in the first epoch to appoint
some of the directors of the credit banks as members of
the supervisory boards of industrial enterprises.
Even in the second epoch (1870 to the present date)
there was no lack of instances of permanent direct participations of the banks in industrial enterprises, leading
to the same untoward results as in the first epoch,
though during this more recent period they have been the
exception.
Thus the Disconto-Gesellschaft involved itself in great
loss and trouble ever since 1872 because of the foundation
of the Dortmunder Union, and after 1890 because of its
participation in the Internationale Druckluft- und Elektrizitats-Gesellschaft (Popp) and in the Venezuela Rail343




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Monetary

Commission

way. The same happened to the Dresdner Bank by
reason of the taking over of the Anglo-Deutsche Bank
(1892) and the consequent participation in the Export
and Warehouse firm (Export- und Lagerhaus-Gesellsehaf t)
J. Ferd. Nagel, which cost that bank about 2% million
marks.
The Deutsche Bank was for years involved in great
difficulties and annoyances through the foundation of
the Deutsch-Oesterreichische Mannesmann-Werke, established under its direction and with its participation in
1890, the bank having the presidency in the supervisory
board. In 1900 the capital stock of that concern had
to be reduced from 34,000,000 to 25,000,000 marks.
In the case of the Berliner Handelsgesellschaft, which
remained in the main a flotation bank even in the second
epoch, the loss in 1873 arose not so much from voluntary
participations in new foundations, in which it lost in round
figures 158,000 thalers, or \% per cent of its capital at
that time, as from securities of newly founded companies
that could not be disposed of—that is to say, involuntary
participations—such as are apt to occur in the issue business. It suffered also exceedingly large losses through
the founding of the German Local and Street Railway
Company {Deutsche Lokal- und Strassenbahn-Gesellschaft)
and the Petroleum Exploration Franchise and Oil Land
Company (Petroleum-Bohr Gerechtsamen- und OellandGesellschaft), in 1880.
It can not be doubted (see p. 242, under b) that
the permanent assumption of large risks in enterprises by credit banks is incompatible with the fundamental principles of sound banking policy. Transgres344




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Great

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sions of this rule have almost always brought their own
atonement, often of a cruel nature. For this reason the
credit banks, during the second epoch, in order to avoid
direct participation, have to a large extent resorted to the
intervention of trust and finance companies for the purpose of exercising their promoting activity and for the
financing of subsidiary banks.
The reorganization of an existing enterprise is a less
serious undertaking for a bank than a new foundation,
because the earning capacity of the enterprise has already
been tested for some time before transformation. On the
other hand, it is more risky than a new foundation, if the
transformation is compulsory. Such may be the case
when the industrial enterprise is compelled to resort to
this expedient for the purpose of canceling the bank
credit granted to it. It may also happen that a bank
which had granted to the enterprise long-term or shortterm operating credit, which in default of repayment has
little by little been transformed into permanent loans, is
compelled to demand the transformation in order, first of
all, to mobilize that credit in the form of stock, and then
to realize on that stock as soon as the state of the market
may permit.
The special danger of such a compulsory transformation, as noted in another connection (pp. 243 to 247), lies
in this that under the pressure of necessity it is not possible to give due consideration to the dangers that may
arise from the transformation, in view of the overwhelming
competition of other stock companies, or of the general
politcal, economic, and business conditions, and the market
conditions and prospects of the special branch of industry.
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There arise the further questions, whether the enterprise
is suitable for the form of a stock company, whether it
can be made to pay in view of the greater running expenses
which may with certainty be expected to result from the
transformation, and, finally, whether a sufficiently capable
management is on hand and can be permanently retained.
All these questions are apt to receive insufficient consideration in the case of compulsory transformations, with dire
consequences sooner or later.
On the whole, however, the transformation and Issue
business during the second epoch proceeded much more
quietly and conservatively than during the first epoch,
the reason being that the banks had little by little acquired
greater technical and business experience in this iield,
and were less and less required to take the initiative
in foundings and transformations. That initiative was
transferred to a constantly increasing extent to industry
itself, which became more and more independent in proportion as it was enabled to determine the necessity and
manner of investments of capital. In many cases also,
as we have seen, foundings or transformations were occasioned, during the second epoch, in obedience to the
requirements of the cartel policy, by purely technical considerations, as for example, the consolidation of a number
of small competing enterprises into one large concern, the
consolidation of different stages of the process of production in one establishment, the combination of iron furnaces with coal mines and conversely, etc.
Moreover, beginning with 1884, the intentional or culpably negligent overvaluation of property contributed
{Apports) was made very difficult, the concealment of the
346




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names of t h e founders and their associates and of t h e
founders' profits, or of profits m a d e pending t h e organization, was rendered virtually impracticable under existing
legislation, and t h e value of shares or compensations
granted as an equivalent for property contributed or
taken over was made subject to thrice-repeated audit b y
persons strictly liable civilly as well as criminally.
These new conditions helped t h e industrial concerns
to meet t h e crisis of 1900 infinitely better t h a n t h a t of
1873. B u t in addition, the new law of July 18, 1884
(art. 185b, Nos. 1 and 2), h a d placed t h e stock companies under obligation to establish a legal reserve fund,
to which a certain p a r t of the yearly net profits and the
premiums on any new stock was to be transferred (see
art. 262, commercial code). As a result, very considerable reserve funds had been accumulated, especially b y
industrial companies, b y the time t h e crisis of 1900 burst
upon them, strengthening their financial status, and
consequently also their power of resistance in critical
times.
2. The issuing, syndicate, and security

business,

(a) T H E ISSUING BUSINESS IN GENERAL.

The issuing business is discussed in this place, because its
development b y t h e German credit banks has been such
t h a t it became a branch of t h e regular banking business
from t h e very start, and because the issuing business in
very m a n y cases involves the granting of credit, though
this is n o t implied in its nature.

Accordingly it seems

appropriate t o discuss t h e issuing business in connection
with t h e other credit business of the banks.
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I t was normally to be expected t h a t t h e issuing business
would grow in importance in Germany as a consequence
of increasing prosperity, because t h e higher and middle
classes in Germany have long been in the habit of investing their available funds permanently either in enterprises, participations, real estate, buildings and mortgages,
or in securities. Bank deposits in Germany are made u p
mainly of t h e temporary investments of t h e available
funds belonging to these classes and the operating reserves
of the trading classes. By far the commonest form of
permanent investment is in securities.
(a)

METHODS USED IN THE ISSUING BUSINESS PROPER, AND IN
THE PRELIMINARY STAGES.

The issuing business of the banks, which in Germany
absorbs a very large portion of banking activity, is b y
no means one of those occupations in which large profits
can be raked in without trouble and " without corresponding work." 3 4 5 On the contrary, it requires a v a s t
a m o u n t of labor, sagacity, and caution on the one h a n d
a n d of financial, economic, and mercantile knowledge: on
t h e other. I n particular, those who conduct it m u s t h a v e
a clear insight into t h e situation and prospective developm e n t of t h e money and capital market, t h e relation between supply and demand in b o t h markets, and into t h e
working of those factors t h a t m a y influence t h e rates of
b a n k and market discount, the exchange rates, as well as
t h e absorbing capacity of the ordinary and extraordinary
circle of customers.
Thus, even before underwriting the proposed issue, a
careful and detailed examination is required, which pre348




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supposes a large amount of expert knowledge and practical
experience. The decision whether the undertaking (that
is to say, the financing) is advisable or not depends in each
case not only on the examination of the intrinsic value of
the securities to be underwritten, the reasonableness of
the price demanded, and the solvency and trustworthiness
of the debtor (state, commune, corporation, company,
etc.), but on a large number of other important factors,
which require close examination.346
First and foremost, in accordance with the fundamental
principles of banking policy, to wit, the distribution of
risk and the maintenance of the liquidity of the assets
which might be endangered by the tying up of funds for
a considerable period, it is necessary to inquire whether a
quick distribution of the proposed issue—that is to say,
a smooth and prompt completion of the financing and
issuing business—may be expected in view of the situation
of the home market (occasionally also of foreign markets),
the general economic and political conditions, the existing
and prospective ease or stringency of the money market,
the known or probable issue of like or similar securities,
some of which may bear a higher rate of interest, or be
presented under better auspices, or correspond more
closely to the existing favor or inclination of the
public, etc.
When the question of undertaking the issue has already
been answered in the affirmative, the fixing of the most
advantageous conditions of underwriting and of payment
requires the closest study and discussion. The very manner of underwriting will differ according to the situation
of the money and capital market and according to the
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periods for taking over and payment. In particular, these
and a number of other factors have to be considered in
order to decide whether it is advisable to underwrite the
entire amount in question unreservedly (in a lump or in
partial amounts, to be determined by agreement), or only
a part, without reserve, the other ' ' under option.'' In the
latter case it becomes important to decide whether the
prices of the ' ' options'' may be the same for all the partial
amounts to be taken up gradually, or whether the prices
of the '' options'' may be graduated in a manner advantageous to the financing establishment, while the seller
in such cases will frequently demand rising '' option''
prices. As regards the mode of payment and the periods
of taking up and paying for the partial amounts assumed
or to be assumed at option, the bank will have to try to
secure the most advantageous conditions, having regard
to the conditions of subscription that may afterwards be
deemed practicable.
If during the negotiations there occurs an unfavorable
turn either in the financial situation of the debtor or in
the money and capital market or in the political or general economic situation, and the bank while unwilling to
undertake the issue desires to bind the other party, it may
be found advisable to grant for the time being a certain
* credit to the party in question, and this will necessitate
the determination of the conditions of payment of interest
and principal. At the same time, however, the bank may
either try to secure the right of preemption of the future
loan, against which the credit is to be reckoned at a rate
which is known to be seriously offered by a third party
(which the bank will, of course, try to avoid as much as
350




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Banks

possible), or an option on the entire future loan or a part
of it, at a price or graduated prices to be determined
beforehand. The manner of this graduation and the
amount of the graduated prices may again give rise to
protracted negotiations.
As regards the principle of the distribution of risk, the
bank will have to consider whether it is not already overloaded with securities of the same kind, or even, if earlier
issues of the same debtor have not been completely
placed, or whether such overloading of the market with
the same or similar securities exists or is to be expected.
On the other hand, it is to be considered whether the risk
of the underwriting may not be diminished by the formation of an underwriting syndicate (UebernahmekonsorHum) or subsidiary participations (Unterbeteiligungen).
If the underwriting has been decided on, the juridical
features of the contract may sometimes present serious
difficulties, especially as regards the juridical form of the
act of pledging demanded by the bank of property items
intended to secure the loan. In that case foremost attention must be paid to the law (possibly foreign law) prevailing at the place where the items pledged are located,
and at the same time all the measures will have to be
agreed on which are necessary and admissible in order to
afford security also to the individual holders of the certificates of partial indebtedness to be issued—for example,
the appointment of a representative, whose rights and
duties will have to be defined. Again, it may be necessary that the so-called war clause be introduced, especially
if a considerable period elapses before subscription, as is
apt to be the case when the issue is to be made in different
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Commission

countries simultaneously, so that official listing will have to
be secured from several authorities. In virtue of this war
clause the bank would have the right to withdraw from
the contract in case any of the countries concerned
becomes directly or indirectly involved in war. It must
be borne in mind, however, that other unfavorable events
may occur, and hence it will be advisable to endeavor to
secure the insertion of a general withdrawal clause—for
example, to the effect that the bank has the right to- withdraw in case the quotation for the leading government
securities, such as German Imperial bonds or consols, shall
have fallen below a certain point.
Furthermore, the contract will have to provide that the
debtor shall agree to furnish all documents, balance sheets,
and other evidence required for the purpose of the subscription or demanded by the respective listing authorities
(Zulassungsstellen); to remit to the issuing house some time
before maturity the amounts required for the payment of
coupons or certificates drawn by lot, together with the
commission due to the bank for this service, which also
has to be specified; finally, to publish in designated periodicals those periodic notices which are legally required,
in particular, statements of the number and designation
of the securities which (in the manner agreed on—that is
to say, by lot or by free sale) shall become subject to redemption. In regard to such redemptions, drawings, etc.,
the debtor will also have to agree to make these redemptions, as well as the payments on coupons, at the home
of the underwriting bank, etc.
After the underwriting has been agreed on, the next
thing to determine will be the price at which the issue is
352




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Great

Banks

to take place in order to complete the transaction as expeditiously as possible. On this point the following observations may prove of value:
A purely arbitrary fixation of the issue price is hardly
ever practicable; on the contrary, the limits within which
anything like a free determination of the issuing price is
possible are, as a rule, decidedly narrow.
In the case of shares or bonds of a new enterprise the
lower limit is fixed by the price paid by the underwriter,
with the addition of interest, stamp tax, fees and commissions, and a suitable profit. This profit, especially in the
cases covered by article 41, section 1, of the bourse law,347
must also include a suitable premium against risk. The
upper limit is defined by the market quotations of enterprises of the same or similar nature, already listed at the
bourse, and the price of which will correspond in the main
and in the long run to the intrinsic value, the dividends
distributed, and the prospective earnings.
In the case of domestic state and communal loans the
upper limit of the issuing price, unless determined by the
debtor himself, will be fixed by the quotations reached by
former loans of the same debtor or by corresponding loans
of other states or communes enjoying about the same
credit. It may happen, however, that these quotations
are kept artificially low with a view to the impending
new loan, or that they are merely nominal and could not be
maintained in case of large transactions. The lower limit
in this case, too, is the price to the underwriter, plus interest, stamps, fees, and a profit, which, if possible at all,
varies in the case of domestic state and communal loans
between one-eighth, one-fourth, and, in rare cases, one-half
90311 °—11

24

353




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Commission

of i per cent, while even in the case of foreign state loans
a profit of three-fourths of i per cent is a rarity.
The issue prices of securities offered for sale simultaneously at several bourses at home and abroad have, of
course, to be so fixed at home that a disturbance of the
domestic sales through foreign sales during the period of
subscription and for some time after is not to be apprehended.
In case of an issue of bonds of a debtor who is already
represented by listed securities bearing a higher rate of
interest, the holders of these may be tempted, immediately
upon the publication of the new issue, to sell their old
securities, if they can do so with profit, and to buy the
new securities bearing a lower rate of interest, in case the
price of issue is such that a rise may be expected. As this
operation is apt to disturb and disorganize the whole
market in these securities, it may be desirable to guard
against it by an appropriate price of issue and by other
conditions of subscription.
It may, indeed, happen that in the issuing of securities
the price has to be fixed at a higher figure than might normally have been the case, especially when in time of a rising
market, by reason of an actual or expected increase in the
earnings of enterprises and the intervention of speculation,
the entire level of quotations rises. This will of necessity
have a marked effect on the premium on newly issued
securities, especially on those issued in connection with an
increase of capital of existing companies.348
The time at which an issue (subscription) is to take place
is of great importance as regards the question of underwriting in general and as regards the issue and the price of
354




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Great

Banks

issue. It is to be ascertained whether the bank or market
discount, which maybe low at the time of the underwriting,
or the pertinent foreign exchange rates, might not, through
existing or impending causes, tend to become more unfavorable at the time for which the issue is planned. If the
debtor desires the issue to take place at a certain time, perhaps coincident with the end of a quarter, when there is
notoriously a strong demand for cash in the money market,
it may be well to inquire whether it would not be better to
fix the date at the beginning of the next quarter, for
example, at the beginning of January, when, by reason of
payments on coupons, of bills, salaries, mortgages, interest,
rent, etc., there is wont to be greater ease in the money
market.
If this be not feasible, it remains to be considered
whether the taking up of the securities should not at least
be made easier for the subscribers or purchasers through
a graduation of the periods of taking up and payment, or
through facilities in the way of calculating the interest, etc.,
whether a larger bonus should be paid to the bankers whom
it is proposed to interest in the placing of the securities,349
whether the requirement of a cash deposit at the time of
subscription should be waived, etc.
Furthermore, steps should be taken, especially through
a low price of issue, to prevent the market from being disorganized, after the close of the subscription, by immediate
realizations of so-called "concert subscribers'' (Konzertzeichner), that is to say, persons who, in expectation of a
rise of the paper issued, subscribe solely for the purpose of
selling their subscriptions at once on the bourse, no matter
how insignificant the profit. One way of preventing this
355




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Commission

is to give some kind of preferential treatment to those subscribers who are willing to agree not to sell the securities
allotted to them for some months, but to deposit them
with the issuing firm.
Finally, as regards the time after the issue, especially
when an underwriters' syndicate (Uebernahmekonsortium)
has been formed, it remains to be considered up to what
amount—usually stated in the syndicate contract—the
securities shall be bought up in the market in order to prevent an immediate or premature fall of the quotation below the price of issue, in so far as this fall is not justified
by the general situation or by the state of the bourse.
According to the practice and banking etiquette prevailing in Germany, an issuing firm is not merely justified
but positively in duty bound, by the requirement of the
' ' care of an ordinary issuing firm,'' to effect such purchases of its own issues. This practice can not be regarded as an attempt to produce an artificial rise of quotations or to effect their artificial ''regulation." There is
always the danger that speculators may attempt, immediately or very soon after the issue, to depress the market
value by speculative sales or realizations, while there may
be no intrinsic reason for a decline. To guard against
this, it is well to have some one in the market ready to take
up these speculative securities, at least within certain
limits. Of course this precaution must not be carried so
far that speculators might be encouraged to speculate "on
the back'' of this very syndicate which is ready to purchase.
The execution of this part of the issuing programme thus
requires special knowledge of the bourse and special caution and alertness.
356




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Banks

The considerations here sketched have to be applied to
a greater or less extent before, during, and after each issue.
In addition, special difficulties may arise in certain cases,
especially in connection with the underwriting of foreign
loans, when care has to be used to insure against fluctuations in exchange, or against the thwarting of the issuing
operation through arbitrage operations of domestic or
foreign concerns, made possible by the condition of the
market.
At any rate, the multitude of factors to be taken into
consideration in this field suffices to show how incorrect it
is to suppose that this important branch of the activity
of the German credit banks can be conducted without
corresponding work, sagacity, and prudence.
There have been cases in which the principles controlling
the issue of foreign loans were not observed by German
issuing firms, any more than by foreign firms, possessing
much longer experience; but aside from these, it will have
to be admitted that in the immense number of instances,
especially in the second epoch, there were but very few
cases in which the issues could be said to have been undertaken in a rash or otherwise questionable spirit.350
The prospectuses published for the purpose of issue,
which, it must be said, are for the most part read only
afterward and only when something unfavorable has
happened, have almost invariably contained, in conformity
with the law, the data necessary for forming a judgment
regarding the intrinsic value of the securities issued. They
have also abstained from any undignified advertising, which
for that matter would not be allowed by the authorities on
whom the admission to the bourse depends.
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Commission

The German credit banks know from their own experience, or from that of other banks, that nothing is likely
to injure the reputation of a bank so severely and so lastingly among its customers and among the general public,
as a failure to discharge in the most conscientious manner
its duties in connection with the issue of securities.351
(/?)

T H E EXTENT OF THE GERMAN ISSUE

BUSINESS.

According to the Deutscher Oekonomist, the market
value of all the capital raised in Germany by way of issues
since 1889 was as follows (in millions of marks):
1889
1890
1891
1892
1893

1,741
1,520
1,217
1,016
1,266

1894
1895
1896
1897
1898

1,420
1,375
1,896
1,944
2,407

1899
1900
1901
1902
1903

2, 612
1, 777
1, 623
2, n o
1,665

1904
1905
1906
1907
1908

i,995
3, 190
2, 741
2, 135
3,415

From 1883 to the end of 1907, there were issued in
Germany securities to the selling value of 40,000,000,000
marks in round figures.
For the years 1900-1907 both the Frankfurter Zeitung
and the Deutscher Oekonomist have arranged the issues
by classes of securities, in the tables reprinted in the following pages.

31*




Issues of securities made in Germany, as ascertained or estimated (in millions of marks).
(See Supplement to Proceedings of Bank Inquiry Commission of 1908 [items I-V of question sheet].)

Class of securities.
Face value

(a) According to Frankfurter

Market
value

Market
value

Face value

Market
value

Face value

Market
value.

Zeitung.

German state loans
Foreign state loans
Municipal and provincial bonds
German mortgage bank bonds
Foreign mortgage bank bonds
Other bonds
Bank shares
Railway and street-railway shares
Industrial shares

187.30

172.50

554-95

506.01

44- 70
322.70
270.00
7.24

30.94

68.30

4 2 . 06

318.16

354-47

352.05

270.00

292.00

292.00

7. 12

7.87

7-57

201.15

448.58

147.74
68.18

199.94
115-03
6 5 . 12

532.82
313-47
416.44
373-00

22.53

89.61

116.31

135.14

195-33

29. 0 9

37- 13

39- 20

23.57

26. 23

21.55
8 1 . 21

367.90

76.04

103.82

1,854.87

136. 25
340.48

61. 46

211.54

1,583.69

343.36

461.59

441.83

254-44

348.00
144.12
342.86
461.59
29.33
258.53
26. 32

6.75
211.74

1,466.47

Total

575-00
344.35
419-95
373-00

6-73

1,808.70

94.36

29.39
256.67
33-o6

1,835.50

(6) According to Deutscher Oekonomist.
GERMAN SECURITIES.

State loans
Communal loans
Mortgage bonds
Railway bonds
Industrial bonds

216.30
222. 38
126.10
8 8 . 70
178.20

200.40

554-O0

505.57

220.35

294.37

293-58

126.10

210.50

210.50

85.02

14.99

14.81

178.77

189.31

193.29

580.00
197.89
411.04
8.77
164.25

317.63

536-40

340.00

196.13

214.14

208.56

411.04

564.72
2. 00
65.16

564.72

8.71
158. 10

i-94
64. 96




Issues of securities made in Germany, as ascertained or estimated (in millions

1900.
Class of securities.
Face value.

j
Market
value.

igoi.

of

marks)—Continued.

1902.

Face value. 1 Market
value.

Face value.

1903.
Market
value.

Face value.

Market
value.

(6) According to Deutscher Oekonomist—Con.
GERMAN SECURITIES—continued.
49.60

55-63

138.04

174.51

2. 91
30.60

3 02

43-90

48. 01

36.36

81.45

U4.33

3-99
4 6 . 61

3-43
67.57

297.47

461.06

116.05

I55.i8

160.40

184.47

155.28

195.32

1,316. 29

1 , 5 0 1 . 84

1. 4 1 2 . 73

1,412.31

1,647.70

1 , 6 5 7 . 19

i,39i.9o

1 , 4 2 4 . 13

185.20
3 . 00

Total

168.36
2.85
5.50
9. 00

37.5o
13.82

367.54
6 2 . 96
6. 29
29. 82

339.oo
6 1 . 22
6.16

88.16
36.50

80.77
35-32

FOREIGN SECURITIES.

5.63
-0.00

Industrial shares
Total
flratifl +^+ai

58.96
14.00
3.60

65.06
20. 90
3.60

8.36

29. 26
12.86
7. 16

156.59
1. 00

149-73
• 97

6. 00

9.00

6.75

2.56

1. 8s

• 51

3.27
4.72

29.30
3- 20
6.68
7-43
• 51

275.27

225.83

210.83

481.86

453.50

1 , 5 9 6 . 6 8 1 1,777- 11

1.638.56

1,623.14

2, 129. 56

2, n o . 69

280.39 1

8.74
87.93

8.75
83.44

12. 60
12. 00

16.95
16.44

245.93

2 4 1 . 67

1,637.83

1.665.80

c^




1907.

1906.

1905.

1904.
Class of securities.
Face value.

(a) According to Frankfurter
German state loans
Foreign state loans

Go
as

Market
value.

Face value.

Market
value.

Face value

Market
value.

Face value.

Market
value.

Zeitung.

Municipal and provincial bonds
German mortgage bank bonds
Foreign mortgage bank bonds
Other bonds
Bank shares
Railway and street-railway shares
Industrial shares

199.24
201.45
68.91
267.60

333-15

327-30

454.68
676.39
418.45
513.02
5.62
33i.3i
203.44
1 1 . 06
492.52

1,695-59

1,813.80

2,937-45

3,106.49

343-00
242.63
506.24
8.60
109.14

335-64
239.48
506.24
8.52
n o . 14

428.80
258.83
569.49
12. 00
114.06

429.66
257- 40
569.49
11.81
115.24

3.50
129.47
2.38
224.27

3.83
196.51
2.80
359.80

116.83

146. 50

184.19

309-18

552.09

1,579-23

I,762.96

1,809.19

2,082.19

285.00
100.76
217.08
•

467.38
21.87
203.59
136.55
70.78
192.58

Total

283.87

454.oo

87.24
216.77
467.38
21.34

724.21
421.36
513.02
5.62
151-99
6.80

668.00
169.32
4 3 i . 23
359-74
6. 75
258.07
206.24
37-35
440.74

668.97
163.61
429.79
359-74
6.77
257.29
289.77
4 2 . 46
624.28

2.577-44

5 4 6 . 00

54i.o6
4 9 . 83

5 1 . 11
505.57
287. 24

496.66
287.24

172.84

172.96

81.96
3-6i
164.66

107.31
4. 70

2,842.68

1,812.99

1,899.96

551-00
430.86
326.33
1. 00
170.90
.61

546.22
425.44
3 2 6 . 33

108.89
3.06

152.49
3 . 06

284.14

431 • 3 2

(b) According to Deutscher Oekonoinist.
GERMAN SECURITIES.
State loans
Communal loans
Mortgage bonds
Railway bonds
Industrial bonds
Railway shares
Bank shares
Insurance companies' shares
Industrial shares
Total

I

6 3 7 . 00

638.11

346.83

347.00

404-59

404.59

9.5o

389.94

9. 02
183.10
2. 16
282.19
1.86
652.80

2, 1 5 7 . 5 2

2,520.83

182.27
1.70
1.50

1, 8 7 6 . 7 9

• 99
172.79
.62

'OK

to

2,059.26
<-3




Issues of securities made in Germany, as ascertained or estimated (in millions of

Class of securities.
Face value.

Market
value.

Face value.

1907.

1906.

1905.

1904.

marks)—Continued.

Market
value.

Face value.

Market
value.

Face value.

Market
value.

(6) According to Deutscher Oekonomist—Con.
FOREIGN SECURITIES.
105.09

99.15

866.30

22.88

36.21
18.79
6-75
48. 18
4. 16
34.65
38.13
33.78

1,108.49

195-07

220.65

142.85

152.66

3,190.68

2,352.59

2, 7 4 1 . 4 8

2,019.64

2, 2 1 1 . 92

711.13

37.5o
20. 00

Railway bonds

47-75

42.05

Railway shares
Bank shares

20. 00
12.85

18.15

20. 00
206.82
4 1 . 00
46. 20
26. 00

8.60

10.33

12. OO

30.62
29. 20

236.34

232.11

I , 218. 32

1.815.57

1.995.07

3 . 0 2 7 . 51

Total
Grand total

39.51
47-77
17. 20

19.40
202.13

6.75
49-69

41.67
74-34

4. 00
3 0 . 00
24. 25

80.80

78.03

4. 00

3.80
32. 46

34.oo
8.00

15. 03

16.05

23. 34




The

German

Great

Banks

In these tables352 the amounts of shares, bonds, and
mortgage bonds set down are those officially reported in
the market. It is important, however, to note that the
following were omitted: Conversions; issues effected privately, outside of the official market (which were only
stated when they were advertised in public journals);
mere introductions of securities already quoted at German bourses; finally, new securities which made no demands on the market, inasmuch as they were issued
solely for the purpose of exchange against shares, etc.,
of another enterprise.
The figures given by the Frankfurter Zeitung are seen
to differ from those of the Deutscher Oekonomist very
considerably, both in the enumeration of the different
classes of securities and in the amounts under the head of
the same classes of securities.353
A word of explanation is required in regard to the issues
of foreign state loans (see article 2 11. G. 2d, below), noted
in both tables, because on the authority of these tables
the complaint has been made, even before the Bank Inquiry
Commission, that these issues have evidently had a decided
effect in making our balance of payment more unfavorable.
The prospectuses thus far issued concerning the introduction of foreign securities at the bourse give no indication of the amounts that have really been placed in Germany. On the contrary, according to the regulations
for listing hitherto in force, the entire foreign loan,
even if it was offered simultaneously in different places at
home and abroad, had to be noted at the German bourse,
for example, in Berlin, even when only, say, one-third of
the entire loan was intended to be placed in Germany and
363




National

Monetary

Commission

was so placed. It is true that, in virtue of this notation,
the other two-thirds also had acquired '' the right of domicile in Germany,'' as one member of the Bank Inquiry
Commission expressed it. However, the effect of this
favors not only the foreign country, which in such case
might throw on the German market the two-thirds placed
in. that foreign country, but it also favors Germany,
because the one-third actually paid for in Germany may
also be utilized abroad, if desired, since the conditions
of listing at the foreign bourses are as a rule identical
with those in Germany.
If we were to change our regulations for listing,
foreign countries would doubtless do the same, and the
consequence would be that the foreign market would be
closed to us as regards the part of the foreign loan placed
in Germany, a result which might be attended with grave
consequences in critical times and in time of war.
Furthermore, in regard to the statements made in the
tables, it is to be noted that foreign countries, if they
expect a profit, also partake of the foreign loans placed
in Germany. It must also be remembered that foreign
securities always tend to return to the home country, as
was extensively illustrated in the case of the Austrian,
and in recent years also in the case of the Italian securities.
How large a part of any foreign loan has been permanently placed in Germany can thus not easily be estimated, and this is the reason why the two tables (see
note 353 on p. 837) differ so much.
(b) T H E ISSUING OF INDUSTRIAL SECURITIES. 854

The business of issuing industrial securities is the keystone of the vast structure of the industrial relations
between banks and industry, whose foundation is the
364




The

German

Great

Banks

current-account business. The reverse process, namely
the case in which the issue of new securities of an enterprise transformed into a stock company becomes the
bridge for a regular current account and credit business
between the two parties, is of much rarer occurrence. The
dangers to the banks arising from both classes of business are equally great, being perhaps even greater in the
current-account business, for the simple reason that, as
we saw, no fixed rules for industrial credit have yet
been developed in the German banking business, assuming
even that such rules could possibly be evolved. On the
contrary, the technique of the issuing business, its premises
and limits, have become more and more familiar to the
German credit banks, often through sad experience. Their
details are thus well known, both as regards the issue of
new securities of an existing enterprise to be transformed
into a stock company (which, according to art. 41 of the
bourse law can take place only one year after the entry
of the company on the register and after the publication
of the first balance sheet), or those of a new enterprise, or,
finally, those arising from an increase of capital, fusion, or
reorganization. Of course the risk in the issuing business
will be less when the bank acts merely as broker, that is
to say, on account of the industrial enterprise, though in
its own name.
Speaking of reorganizations, it may be remarked that
the German credit banks, especially the great banks, have
rendered important service in that direction to distressed
enterprises, as well as to the public in general, especially
during the second epoch. After effecting the reorganization, which often involved great expenditure of time,
365




National

Monetary

Commission

capital and labor, and could only be carried out in the
face of great difficulties and opposition, the banks, by
staking their own issuing credit, restored the earning
capacity of the reorganized enterprises and put an end to
the prevailing disorder in the trading of shares, bonds, and
mortagages. This was illustrated not only by the reorganizations of the Berlin mortgage institutions, effected
by the cooperation of all the great banks and banking
houses of Berlin, after the collapse of 1901, but also by a
series of other reorganizations, such as those of the
Lothringischer Huttenverein Aumetz-Friede and the Differdinger Gesellschaft (now Deutsch-Luxemburgische
Bergwerks- und Hutten-Aktiengesellschaft in Bochum
und Differdingen). After their financial and technical
reconstruction, these companies contributed materially
toward raising the pig-iron industry of Luxemburg and
Lorraine to its present commanding position.
On the whole, however, the relations of the banks to
industry take the slower way of current-account credit
and the many forms of short-term credit above described,
in which the temporary demand for operating credit is
satisfied. Only little by little is the long-term credit developed which finds its natural commercial expression in
the issue of shares and bonds.
By such an issue the connection between the banks on
the one hand, as principal representatives of the capitalist system of economic organization, and industrial production on the other hand, is drawn so tight that they are
thereafter joined "for better or worse.'' Sooner or later
this connection finds further expression in the appointment of members of the bank directorate to the supervis366




The

Great

German

Banks

ory council of the industrial enterprises, while occasionally
some "captains of industry" are appointed as members
of the supervisory councils of banks. The former practice,
as was pointed out elsewhere, is virtually caused by the
necessity for the banks to maintain the influence which
they have gained through the issue; also by a regard for
their issue credit, which makes it the duty of the bank,
according to the well-established and sound practice of
German banking, to retain such permanent control. The
converse practice—that is to say, the appointment of leading personalities of an industry as members of the supervisory boards of banks, where, as a rule, they have much
less influence than the representatives of banks in the
management of industrial companies—is not merely an act
of courtesy toward the latter, but also the manifestation
of the mutual desire for an outward expression of the
close business relations that have been established and
the expression of a desire on the part of industry to maintain the closest possible agreement in views and aims as
regards the industrial policy of the banks.
Appendix IV gives a statistical view of the extent to
which such permanent contact between the two parties,
in mutual desires, demands, and interests, has been established during the second epoch by the appointment of
representatives of the great banks to the supervising
boards of industrial companies. The table also shows the
extent and degree of intimacy (manifested especially in the
filling of the office of president) of the industrial relations
of the great banks to the several branches of industry.355
This form of "friendly" relations through the filling of
positions on the supervisory board, it must be confessed,
367




National

Monetary

Commission

was sometimes effected only after considerable unpleasant argument, as, for instance, when the Dresdner Bank
gained two places on the supervisory board of the
Laurahiitte. 356
The slow and laborious work which often has to precede
the moment at which the question of an issue becomes
practical can not be too highly estimated as regards its
economic value. The cautious forward movement, step
by step and stage by stage, of a private industrial enterprise or an industrial stock company, that may have been
founded by the aid of a bank, toward higher and higher
aims is aided by a gradually growing current-account and
acceptance credit in proportion as the yearly surplus from
operation does not suffice for the necessary reconstruction
and additional construction. The burden of interest thus
imposed on the enterprise is in the nature of things accommodated to the state of improvements or enlargements of the time being. The larger and permanent
investment credit subsequently granted to the strengthened enterprise is merely the natural closing act of this
process of healthy and organic development assuming the
form of an issue of stocks or bonds. Examples of this
may be found in abundance in the connections of every
great bank with industrial enterprises especially in the
mining, machinery, and electrical industries.
On the other hand, the banks have found an especially
important and extensive field of activity in the promotion
of industrial combinations, consolidations, and fusions,
which, as a rule, are carried out exclusively or preferably
through the agency of issue credit. This tendency of the
business policy of industrial enterprises, manifested in
368




The

German

Great

Banks

various ways even during the first epoch, became especially
pronounced in the second epoch through the development
of the cartels. Thus, as early as 1853 the Phonix Company in Laar, established as a stock company, arose from
a combination of four iron furnaces and the Nassau ironore mines. In 1898, with the powerful aid of the banks,
it absorbed the Westfalische Union.357 Similarly, the
Horder Verein, founded in 1852, decided in 1864 to undertake the introduction of the Bessemer process, and accordingly acquired a number of iron-ore mines (Kleineisensteingruben). The possession of these, however, ceased to
be a necessity when the Horder Verein, with the assistance of the banks, acquired in 1879 the Thomas and Gilchrist patents.358
Again, the great increase in the number both of the
so-called " furnace mines " {Hilttenzechen)—that is to say,
iron furnaces which acquired coal mines—and of the socalled "mine furnaces" (Zechenhiitten)—that is to say,
coal mines which acquired iron furnaces—during the second epoch was in many cases rendered possible only by
the aid of the issue credit of banks. The same was true
of the so-called combined plants, which became necessary
after the introduction of the Thomas process and which
gave to them so great a superiority over the so-called
"pure works" (reine Werke), whose condition became
more and more difficult.
In the same way the banks promoted the great number
of fusions, whose object was either to get rid of troublesome competition, to combine successive stages in the
process of production, or to diminish the cost of production.359 Such fusions were especially frequent in the min90311 0 —11

25

369




National

Monetary

Commission

ing industry; for instance, in the case of the Gelsenkirchen
Mining Company and in the electrical industry, which
from the very beginning was in close touch with the
banking interest.
The regular current-account connection of the banks
with the great industrial establishments gradually led to
the result that the influence of private banking houses,
till then considerable, was crowded into the background,
despite the long-continued business connection between
these private banks and industry. The issue business
of the banks, which required larger and larger capital and
increasingly permanent investments—that is to say, the
assumption of a great and long-continued promoter's risk—
tended still more to weaken and eliminate the mediumand small sized private banking houses, a process which
extended far beyond the limits of the individual industrial districts, and which was intensified and accelerated
in a marked degree by the above-mentioned provision
of the bourse law (art. 39, now 41).
The assumption of fiscal agencies (Zahlstellen) for the
payment of dividends and interest on bonds and for
the redemption of drawn bonds, though at times unconnected with any issue, may nevertheless be regarded
as an incidental effect of the issuing business, tending to
promote not so much the process of concentration as the
profits of the banks, but at the same time leading occasionally to new current-account connections. Hence, so
long as the requisite caution is observed, the fiscal agencies, combined with the positions on the supervisory
boards, supply a means whereby the industrial connections of the great banks may be measured. From the lists
370




The

German

Great

Banks

of the six great banks of Berlin for 1903-4 Otto Jeidels ascertained the following numbers of industrial fiscal agencies
of these banks, which, however, are probably incomplete
(especially as regards the Disconto-Gesellschaft and the
Berliner Handelsgesellschaft):360
Number of fiscal agencies.
1.
2.
3.
4.
5.
6.

Deutsche Bank
A. Schaaffhausen'scher Bankverein
Dresdner Bank
Darmstadter Bank
Disconto-Gesellschaft
Berliner Handelsgesellschaft

250
211
191
161
in
95

As regards the class of industrial securities issued, it
may be said that, as a rule, the issue of shares is preferred
for obtaining the capital for permanent improvements,
while the issue of bonds (redeemable by amortization
within a fixed period) is preferred for obtaining the
means for improvements of considerable duration, indeed,
but yet terminating after the lapse of a certain time. It
must, however, always be kept in mind that the issue of
bonds, unlike the issue of stock, burdens the enterprise
permanently with fixed interest charges, so that it requires great caution. According to Otto Jeidels, in the
case of the six great Berlin banks above named, the issues
of industrial bonds in the boom period of 1899 amounted
to about one-fourth of all syndicate business (40 bond
issues out of a total of 161 syndicate participations),
and in 1901, the year of the crisis, as much as four-fifths
of all syndicate participations (83 out of IOI). 3 6 1
According to the Deutscher Oekonomist, the actual
capital raised by means of issues of German industrial
shares was as follows (in millions of marks):
371




National
1892.
1893.
1894.
1895.
1896.

2.5
34
36
143
213

Monetary
266

1897.
1898.
1899.
1900.
1901.

372
276
461
155

Commission
1902.
1903.
1904.
19051906.

184
195
360

1907.
1908.

431
560

552
652

According to the table from the Deutscher Oekonomist,
given above (pp. 360 and 361), the actual capital raised
in the shape of German industrial bonds issued from
1900 to 1908 was as follows (in millions of marks):
9 0 0 . . • • 178-77
901 . . • • 1 9 3 - 2 9
902 . . . . 1 5 8 . 1 0

64. 96
1903.•
1 9 0 4 . . . n o . 14

1 9 0 5 . . • 115-24
1906.. . 183.10

1907..
1908..

. 172.79
. 314

The foreign industrial bonds admitted to trading at the
bourse from 1897 to 1907 amounted to a nominal value
of 135,100,000 marks, of which 6,300,000 marks represents the value of converted bonds (Statistisches Jahrbuch fur das Deutsche Reich, 29 Jahrgang, 1908, p. 238).
The total number of industrial issues by the six great
Berlin banks 362 in the nine years from 1895 to 1903 was
as follows:

Deutsche Bank
Disconto -Gesellschaf t
Darmstadter Bank . .
Dresdner Bank
A. Schaaffhausen'scher Bankverein..
Berliner Handelsgesellschaf t

1898

1899

1895

1896

1897

10

13

13

17

19

15

9

15

21

23

8

7

10

27

15

25

17

17

25

3i

25

19

21

30

5o

16

16

24

24

23

Finally Jeidels endeavored to ascertain the geographic
distribution 363 of the industrial relations of the great
banks and the distribution, by classes of industries, of the
industrial companies364 connected with the banks, both
from the data regarding their representation on the super372




The

German

Great

Banks

visory boards and the fiscal agencies, though the latter
method can yield no reliable results. There can be no
doubt that the distribution of industrial relations is most
regular in the case of the Deutsche Bank and of the Disconto-Gesellschaft, and next to them in the case of the Berliner Handelsgesellschaft and the Darmstader Bank,
although the latter shows on the whole more South German and (as a consequence of the absorption of the Breslauer Disconto-Bank), also Silesian industrial relations,
which is also true of the Deutsche Bank. The industrial
relations of the Dresdner Bank, naturally, are mostly with
the Kingdom of Saxony, those of the A. Schaaffhausen'scher Bankverein with Rhineland and Westphalia.
The distribution of the industrial relations by branches
of industry is most regular in the case of the Deutsche
Bank and the Disconto-Gesellschaft, both banks having
extensive relations with foreign railway companies, and
the Deutsche Bank also with electrical companies. In the
case of the Darmstadter Bank the relations to tramways
and breweries predominate, in the case of the Berliner
Handelsgesellschaft the relations to the " heavy industries,' ' such as iron and other metals (schwere Industrie),
electric companies, and tramway enterprises.
Among particularly close connections during the second
epoch we may mention the following:
The Deutsche Bank with Siemens & Halske, the North
German Lloyd, the Hamburg-American Steamship Company, the Huldschinsky Works, the Deutsche PetroleumAktien-Gesellschaft, the German and Oversea Electrical
Company (Deutsche-UeberseeischeElektrizitats-Gesellschaft),
the Electric Elevated and Underground Railway Com373




National

Monetary

p a n y (Gesellschaft fur Elektrische
bahnen).

Commission
Hoch- und

Untergrund-

The Disconto-Gesellschaft with t h e Gelsenkirchen Mining Company (Bergwerks-Aktien-Gesellschaft), which on
J a n u a r y i, 1905, entered into community of interest relations with t h e Red E a r t h Furnace Stock Company of
Aachen (Aachener-Hutten-Aktien-Verein
Rote Erde) and t h e
Schalker Mine and Furnace Company (Gruben- und HiittenVerein) t h e Dortmunder Union, t h e Aschersleben Potash
Works, Ludwig Loewe & Co., t h e Machine Factory and
Flour Mill Construction Works (Maschinenfabrik
und
Muhlenbau-Anstalt)
Luther in Braunschweig.
The Dresdner Bank with t h e Kattowitzer Mining Comp a n y , Felt en & Guilleaume, t h e German-Austrian Mining
Company (Deutsch-Oesterreichische
Bergwerks-Gesellschaft),
t h e Lauchhammer Stock Company and the Laurahutte.
The Berliner Handelsgesellschaft with t h e General
Electric Company (Allgemeine Elektrizitats-Gesellschafi)
the
Harpen Mining Company (Harpener
Bergbau-Gesellschaft),
t h e Hibernia, t h e Consolidation Mining Company (Bergwerksgesellschaft Consolidation), the Upper Silesian Iron
I n d u s t r y (Oberschlesische Eisenindustrie),
the Upper Silesian Coke Works {Oberschlesische Kokswerke), t h e Accumulator Works, Limited (Akkumulatoren-Fabrik
AkiienGesellschaft) in Berlin.
T h e A. Schaaffhausen'scher Bankverein with AumetzFriede, the Harpen Mining Company (Harpener BergbauGesellschaft) , t h e Hoesch Steel Works (Stahlwerk Hoesch),
t h e Bochum Union (Bochumer Verein—absorbed
in 1907
by t h e Phonix), t h e Phonix, t h e Hoerder Mining and Fur-

374




The

German

Great

Banks

nace Company (Bergwerks- und Hiltten-Verein), the International Exploration Company (Internationale Bohrgesellschaft), the Hercynia Company (Gewerkschaft Hercynia).
The Darmstadter Bank with the German-Luxemburg
Mining and Furnace Company (Deutsche-Luxemburgische
Bergwerks- und Hutten-Aktien-Gesellschaft), and the Peaceful Neighbor (Friedlicher Nachbar), the A. Riebeck
Works (A. Riebeck'sche Montanwerke Aktien-Gesellschaft
in Halle), the Company for Brewing Industry (AktienGesellschaft fur Brauindustrie), Griesheim-Elektron Chemical Works (Chemische Fabrik Griesheim-Elektron), and
the Chemical Works formerly H. and E. Albert (Chemische
Werke vormals H. and E. Albert (Biebrich).
The representatives of the banks on the supervisory
boards of the industrial companies have always taken
special care to fulfill one very effective part of the " advisory function" 365 of the supervisory board, viz,to provide
for the disposal of the products of the industrial companies in question to suitable industrial enterprises on
which the banks were able to exercise some influence.
As regards industrial issues, Eberstadt 366 first ascertains
the net amount received by any particular industry from
the issues undertaken in its behalf, which amount he calls
net capital claim [Kapitalreinanspruch~\—(net capital
receipts [Kapitalreinempfang] would be a more correct
term)—consisting of the nominal value plus the (purchaseprice)—premium or minus the agio; whatever goes beyond
that "net claim'' or "net receipts," as a result of a rise
in the market value, he regards as pure " speculation,' *
due to the "gambling propensity of the public" (p. 15).

375




National

Monetary

Commission

In this way, of course, he arrives at enormous ' ' speculative
amounts.'' How false this view is may be seen at once
from the fact that the quotations of any particular day,
mostly based on insignificant transactions, can not be
regarded as a measure even for large amounts, let alone
the entire stock, and because the "speculators" very
largely reinvest the profits of their speculative sales in
industry. Above all, however, the statement is untrue
because the quotation depends first and foremost on the
varying intrinsic value of the securities, that is to say, "on
the condition of the enterprises in question, and does not
depend on the " gambling propensity'' either solely or
even in large part.367
It is because he disregarded the above considerations that
Eberstadt was able to arrive at the conclusion (p. 42) that
from January 1, 1895, to April 1, 1900, nearly 1,000,000,000
marks, that is to say, for the average of that period about
186,500,000 a year, were employed solely for "speculative
purposes'' in stock, mining and smelting enterprises alone
(he does not even include " Kuxe,' 'i.e., mining shares). In
contrast with this, he estimates the ' ' demand for capital
by industry" for the same period and for the same
branches of industry at only about 419,500,000, or about
80,000,000 marks a year.
The latter statement is as.erroneous, and moreover as
misleading, as the former. The demand for capital in the
mining industry, as we had repeated occasion to note in
speaking of the economic development during that epoch,
falls far short of the amounts supplied by issues, which
in bad years are only possible to a limited degree or not
at all. On the contrary, it is supplied also by way of
37<5




The

German

Great

Banks

current-account, discount, acceptance, report and collateral credit, etc., to a much larger extent than is indicated
by Ebeistadt. It is, of course, difficult to ascertain
the amounts thus placed at the disposal of industry in
general and of the mining industry in particular, either
for the period as a whole or for each year, since the
amounts in question are not separately booked. Certain
it is that they always played a great part. The most
summary comparison between the demand for short-term
credit, recorded on a previous page for a number of industries, with the amounts of credit granted during that
period, suffices to show that the issues alone came nowhere near covering that demand, and that the banks
throughout that period granted industrial credit368 to the
utmost possible limit, occasionally even to a degree incompatible with a sound distribution of risk.369
As regards the financing of shares and bonds of real
estate companies (Terraingesellschaften), it may be said
that in this direction the great banks have hitherto, in
many, perhaps most cases, not pursued any far-sighted
economic aims, and that to a large extent they have not
concerned themselves with the great questions of land
policy.
(c) THE FLOATING OF GERMAN STATE: AND COMMUNAL LOANS.

In describing the development of the German banks
during the first epoch (1848 to 1870), we saw that all
the great banks then in existence regarded it as an
essential part of their program and business policy to
take part in the business of floating state loans. State-

377




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Monetary

Commission

ments to this effect are found in some of the early annual
reports of these banks.370 On page 62 we gave a review
of the most important state and communal loans, which
were taken over during the years 1854 to 1869 by the
Darmstadter Bank and the Disconto-Gesellschaft, i. e.,
the two leading banks of that period. Success in this field
was achieved, however, as is expressly stated in the jubilee
report of the Disconto-Gesellschaft371 in the face of
decided " opposition on the part of the old-established and
well-known private banking houses, which until then had
held a monopoly of the financial business and in every
manner attempted to ward off the invasion of the new
banking companies." The banks in many cases won in
this struggle only by showing a far greater liberality
toward the individual States and communes in the fixing
of the terms of loans and in reducing the hitherto customary rates of brokerage.372 As a result numerous state
loans were taken over even during the first period, as for
instance, loans contracted by Prussia, Bavaria, Saxony,
Wurtemberg, Baden, Brunswick, Hamburg, Bremen,
Austria, etc., as well as municipal loans offered by Danzig,
Worms, Mannheim and others. As early as 1859 a
Prussian mobilization loan of 30,000,000 thalers was
taken over by the Disconto-Gesellschaft in conjunction
with other then existing Berlin banks and banking
houses, this joint operation being the forerunner of the
''Prussian syndicate'' (Preussenkonsortium) subsequently
formed under the leadership of the Seehandlung (Prussian State Bank). This syndicate became effective in

378




The

German

Great

Banks

1868, when it took over Prussian loans to an amount of
45,000,000 thalers. In the following year it took over additional Prussian loans to a total amount of 5,000,000
thalers, made necessary by the annexation agreement
(Rezess) with the erstwhile free city of Frankfort-on-theMain.
Between the years 1868 and 1901 the DiscontoGesellschaft, the Darmstadter Bank, and other credit
banks, as well as a number of private banking houses, at
times with the partial cooperation of the Seehandlung,
took over and issued 255,000,000 marks of Bavarian State
loans alone. As regards the war loan of August 3 and 4,
1870, amounting to 120,000,000 thalers, its issue was
effected without the cooperation of the banks by means
of a national subscription at the rate of 88 per cent. The
jubilee report of the Disconto-Gesellschaft mentions on
page 35 that at the preliminary negotiations regarding
this loan, held in the Prussian ministry of finance, the
two representatives of German banks and banking firms
present declared "that the success of this loan could be
assured only in case it was issued at a rate of 85 per cent."
The report continues:
"This rate was recommended upon the plain business
consideration that the issue price would have to be fixed
on a parity with the market prices then quoted for similar
Prussian state securities. The authorities, however,
reckoned only with the prevailing national sentiment and,
disregarding the actual conditions of the money market,
fixed the subscription price at 88 per cent. The result
was that the nominal amount subscribed on the two
subscription days, August 3 and 4, did not exceed

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National

Monetary

Commission

68,000,000 thalers, which at the subscription price of 88 per
cent yielded a net amount of only 60,000,000 thalers/' 373
In October, 1870, a funded federal loan of 20,000,000
thalers was issued with better regard for the condition of
the money market. In November, 1870, and January,
1871, additional war loans totaling 142,000,000 thalers
were issued in the form of 5 per cent treasury bills, payable
in five years. These loans were taken over and placed
by a German syndicate of banks and banking houses with
the collaboration of English banks. No use was made
of the last war credit of 120,000,000 thalers (law of April
26, 1870) because of the receipt of part of the French war
indemnity.
Between 1871 and 1880 no less than 640,000,000 Prussian and 142,000,000 Imperial loans were taken over and
issued by the Prussian syndicate and by the other syndicate for the loans of the Empire. The total amount of
public loans underwritten and placed by syndicates of
banks and banking houses on behalf of Hanseatic towns,
and the States of Wurttemberg, Saxony, and Hessen
reached nearly 1,000,000,000 marks.
After 1880, notwithstanding the successful experience
had with the old method, it was thought that in order to
prevent the growth of a monopoly of banks and banking
houses it would be feasible to place a large portion of
newly issued Prussian and other State loans with the
various applicants by way of competitive subscription (im
Wege freier Begebung). The result was in the main
merely a considerable depression in the market and of
the prices of German State bonds.

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Great

Banks

In February, 1899, the Deutsche Bank alone took over
75,000,000 marks of 3 per cent Imperial bonds and 125,000,000 marks of 3 per cent Prussian consols.
In September, 1900, the entire amount of 80,000,000
marks of 4 per cent treasury bills, payable in 3 % to 5
years, was awarded to the New York banking house of
Kuhn, Loeb & Co. This measure was strongly criticized,
notwithstanding the fact that the German money market
as a result was greatly relieved by the influx of gold
from abroad.
The amount of German communal loans issued during
this period in which the Disconto-Gesellschaft participated—and this for 40 cities only, specified in the jubilee
volume, page 42—up to the end of 1900, was, in round
figures, 300,000,000 marks, while the amount of mortgage
bonds of cooperative land credit associations (landschaftliche Pfandbriefe) and provincial and district loans {Provinz- und Kreisanleihen) issued during that period with
the cooperation of the Disconto-Gesellschaft reached
almost 1,000,000,000 marks.
Combining domestic State and communal loans issued
during the last 15 years of the second period, we find the
following totals, according to the Deutscher Oekonomist:
Net amounts realized {effective Betrage) in millions of marks.
1894
1895
1896
1897

295 I 1898
139 1899
160 1900
167 I 1901

261
660
420
799

I 1902
1903
1904
I 1905

733 I 1906
526 1907
575 1908
687 I

985
972
1, 770

The net amounts of German state loans only, as distinct
from German communal loans, issued yearly during the
important period 1900 to the end of 1908, according to the
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Commission

statements of the Frankfurter Zeitung, printed above on
pages 359 and 361, as well as of the Deutscher Oekonomist, were in thousands of marks:
Figures of the—
Year.

Frankfurter
Zeitung.
172,500
506,010
532,820
343,36o
283,870

Figures of the—
Year.

Deutscher
Oekonomist.
200,400
505,570
536,400
317,630
335,640

1905
1906
1907

Frankfurter
Zeitung.
454,68o
668,970
541,060
1,079,000

Deutscher
Oekonomist.

638, n o
1, 2 5 8 . 9 9 o

This is not the place to discuss the causes of the enormous growth in the yearly issues of state loans. Suffice it
to say that the constant pressure weighing on the market
of imperial and state loans already issued or about to be
issued has been one of the main causes of the low market
prices of German imperial and state issues,, prices which in
no way corresponded to their intrinsic value. Neither did
the reduction of the interest rate from 3% to 3 per cent
tend to commend these securities to German investors,
who were used to a higher interest rate paid by various
solid industrial securities and in most cases could not
afford such a low yield on their capital.
The German communal loan issues during the same
period are given in the following table, which states in parallel columns the data of the Deutscher Oekonomist and
those of the Frankfurter Zeitung. The latter, however,
includes under the same head loans issued by cities and
provinces:

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Great

Banks

Net amounts realized {effective Betr'dge) on German communal loans during
1900-1908.
[In thousands of marks.]
Figures of the—
Year.

Deutscher
Oekonomist.
220,350
293.580

1902 . . . . . . . . .

196,130
208,560
239,480

Figures of the—

Frankfurter
Zeitung.
318,160
352,050
416,440
340,480
216,770

Year.

1905

Deutscher
Oekonomist.
257,400
347,000

1907

425,440
511,7io

Frankfurter
Zeitung.
418,450
429,790
496,660
606,430

A comparison of the annual amounts of communal
loans with those of state loans discloses the striking fact
that the former differ in size but little from the latter.
There is no doubt that many of our communes have
become obsessed during the recent period, especially
during the last decades, by a sort of mania of greatness.
As Waldemar Miiller374 says, "Every mayor thinks he
has failed to live up to the requirements of his office if he
does not borrow a million every couple of years for
slaughterhouses, sewers, the construction or purchase of
electric plants and city railways, nay, even for paving and
schoolhouses, the expenses for which ought to be defrayed out of current revenues."
At all events, considering the large amounts added to
German communal loans almost every year, of which by
far the larger portion has been taken over and emitted
by the German banks, it can not be seriously contended
that in this field the German banks have not taken sufficient care of the "domestic market."

383




National

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Commission

(d) T H E FLOATING OF FOREIGN SECURITIES.

(a) Principles underlying the flotation of foreign securities.
In section 7 of this part (p. 527 and foil.) an attempt is
made to answer the question, whether the so-called "export
capitalism " is to be regarded as necessary, admissible, and
unobjectionable on general principles, and in particular
beyond the amount required to compensate for the excess of imports over exports.375 In that section, however,
the above question is discussed and answered only as a
matter of principle, while in the present chapter we are
concerned with the question, what special principles
are to govern the issue of foreign securities, and what
limits are to be drawn in this field.
In my opinion the three fundamental requirements for
a sound policy in this regard are as follows:
(1) The issue of foreign securities in the domestic
market, like the establishment of branches of domestic
enterprises and participations abroad, is permissible only
after the domestic demand for capital has been fully
satisfied, since the first duty of the banks is to use the
available funds of the nation for increasing the national
productive and purchasing power and for strengthening
the home market.
(2) International commercial dealings as well as international flotations ought to be but the means for attaining
national ends and must be placed in the service of national
labor.
(3) Even when the two foregoing conditions have
been fulfilled, the greatest care will have to be used in
selecting the securities to be floated. Our experience in
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The

German

Great

Banks

the eighties with Argentine, Greek, Portuguese, Chilean,
Servian, and similar securities proves the paramount
necessity of drawing a sharp distinction between individual
countries and securities.
It may be granted that so far as the eighties are concerned, when we entered that particular field in competition with other nations, we obtained, in the main, only
those foreign loans which the other countries, with their
old established international relations, either had left
to us or at least did not seriously contest, and that for
these reasons our choice was confined within rather narrow limits.
At present, when as the result of slow, careful, and laborious efforts, our financial relations with foreign countries
have improved to a gratifying extent, we must more than
ever be careful to underwrite as a rule only securities of
such countries as possess what may be called a rich and
extensive " hinterland/' either in the shape of good
colonies or of large provinces presenting a hopeful field
for agricultural, industrial, and commercial enterprise,
or countries which possess strong reserves in other shape
and are thus in a position to endure and speedily emerge
from hard times.
Furthermore, whenever practicable and in so far as we
are not bound by previous engagements toward foreign
countries, the time and amounts of underwriting as well
as the interest rates on foreign loans should be fixed with
due regard to the economic and financial conditions prevailing at home. In particular (barring those previous
engagements just mentioned), in times of industrial
prosperity, a proper regard for the discount policy of the
90311 °—ii

26

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National

Monetary

Commission

Reichsbank and for our balance of payments 376 should
induce our banks to show the utmost conservatism in
the flotation of foreign securities and in the granting of
long-term credits to foreign countries, a principle which
has not always been sufficiently observed by the German
credit banks. Still, in criticising the methods used heretofore, we must bear in mind that, when a foreign country, possibly after a long interval, applies to us for urgently
required funds, at a time deemed opportune to itself, it is
only in the rarest instances that we shall be in a position
to say that the time is not opportune for us and that the
applicant had better call at some other time. Such a
procedure might result not only in spoiling our relations
to the respective foreign country, but eventually in the
loss of our entire position in the international market.
Furthermore, in cases where the purpose of the loan
permits it, such pressure as we are able to exert should be
brought to bear in order to provide in the loan contract
that any orders for works and contracts, the expense
of which is to be defrayed by the loan, be placed in
Germany, in the interest of our industry.
As the jubilee report of the Disconto-Gesellschaft justly
remarks (p. 45), it was " precisely the action of the banks
in underwriting foreign loans and introducing them to the
German market that proved so signalty effectual in promoting the development of German industry." Thus,
among other things, the Russian, Austrian, Hungarian,
Portuguese, and Roumanian railway loans of the nineties,
as well as the financing of the Venezuelan, Anatolian, and
Bagdad railways, the constructions at the Iron Gate, the
long-continued work carried on by the Shantung Railway
386




The

German

Great

Banks

and Mining Companies, have brought to German industry a large number of lucrative orders. In other cases,
however, as a result of political and competitive conditions, all efforts to secure a participation of German
industry have failed, though on some particularly opportune occasions, as for instance, that of the Kongo Railway,377 the banks insisted, as a condition of their own
financial cooperation, that German industry be given a
share in the work.
On the whole, despite painful experience, we have to
agree with Schmoller's general conclusion 378 that, in order
to maintain and strengthen her position in the world
markets, Germany will have to increase rather than restrict her foreign financial business, provided, of course,
the above stated general and special requirements are
observed.
Other countries have had just as bad if not a worse experience in this field; moreover it goes without saying that
the mastering of all the difficulties in this field requires
an apprenticeship. This point seems to have been largely
overlooked by Sartorius Freiherr von Waltershausen in
his otherwise valuable work entitled "The economic system of investments of capital abroad." 379 The suggestions made in that book are largely—notwithstanding his
denial—the mere expression of a strong and, in my opinion, wholly groundless lack of confidence in the management of our banks as hitherto conducted, which, I maintain, have on the whole achieved great results in the interest of the nation, notwithstanding some occasional
faults and errors. Moreover, some of his suggestions, in
my opinion, are in a large measure impracticable.
387




National

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Commission

This is true in the first place of the suggestion that inasmuch as there exists no suitable representation of the interests of purchasers of securities, the protective committees representing foreign bondholders whose interests
are endangered should interfere in a preventive capacity
(op. cit., p. 310 et seq.) by carefully advising their constituents before the purchase of newly issued securities.
This suggestion was thoroughly punctured by Kaemmerer,
who points out that such an organization—the lack of
which the author deplores—does already exist in the shape
of our banks. For it can not be said that the banks advise
their customers against their own better knowledge in
questions of purchase of securities, underwritten by them
or by other banks, or that, as a rule, they are not far more
expert in this field than the members of any protective
committees.380 Moreover, according to our legal provisions, the very purpose of the prospectuses is to exhibit
the main points underlying the intrinsic value of the
securities. As a rule this is done, but the trouble is that,
as a rule, nobody reads them. The people who are speculating on a rise of securities neither read prospectuses nor
do they listen to the counsel or warnings of third parties,
let alone protective organizations.
A like criticism applies to the proposition (op. cit., p.
305) that the underwriters, in order to become permanently interested in state and communal issues, should
be legally required to retain permanently some part,
even though but a small part, of the issue (one-half to
2 per cent according to a graduated scale) and to deposit it, say, at the Reichsbank. The author may rest

388




The

German

Great

Banks

assured that not only bankers will "shake their heads"
at such a proposition (op. cit., p. 30). It reminds one
of the other proposition that the banks should redeposit
at the Reichsbank part of the deposits entrusted to them
by their customers. If this keeps on we may arrive at
an ideal state in which all the capital or the greater
part of it is redeposited and thus made safe. It is true
that this will insure the fullest degree of liquidity, security, and proper management, but the only trouble
will be that one will no longer be able to do any business. Do the critics really believe that it suffices to
turn the knob of legislation or to draw up a few governmental regulations in order to attain the proper management of our banks—in regard to which, for that matter,
the critics are by no means agreed? Vestigia terrenty in
no other field, as was repeatedly shown, have state control and legal interference proved such dismal failures,
as in that of banking. Though I am anything but an
advocate of laissez-faire principles, I have too exalted a
conception of the State and its attributes to wish to see
it exposed to further chances of tests of this kind, which
as a rule can only result in humiliation.
Notwithstanding this criticism of the individual proposals of the author, it gives me pleasure to acknowledge
that fundamentally, i. e., so far as the prerequisites and
aims of the issues of foreign loans are concerned there
seems to be no difference of views between us. I may
say that these fundamental principles were formulated
by me in the main as early as 1906 in the second edition

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National

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Commission

of this work, prior to the appearance of Waltershausens'
book.
My aim in the above discussion was merely to prove
that in this department of banking, as well as in others,
the lessons and experience of the past may enable us to
draw correct conclusions regarding the future and to discourage outsiders from proposing all sorts of impracticable reform measures.
On the other hand, granted that in consequence of
the issue of "exotic'' securities, German investors suffered considerable losses during the eighties, especially
from 1886 to 1889381 it seems to me rather immaterial
whether the data regarding the amount of these losses
are exact or perhaps, for various reasons, inexact. As
Ad. Weber has pointed out, hardly a single investor
bought at the highest price and sold at the lowest price;
furthermore, the calculation disregards the large number
of those who bought these securities for speculative
purposes only and who disposed of them after the considerable rise in the market (of 10 per cent and more)
which in many cases followed immediately after their
issue. It may also be pointed out that the table of the
Deutscher Oekonomist, reproduced by Ad. Weber (op.
cit., p. 133) contains securities which had not been under
a cloud (notleidend) even for a single day, such as the
Lisbon municipal loan. In the same manner I do not
ascribe any decisive importance to the unquestionable
fact noted by Schmoller in the well-known introduction
to the Proceedings of the Bourse Inquiry Commission
(p., XXV) that against the losses should be placed the

39°




The

German

Great

Banks

gains of about a billion marks which had accrued to Germany from investments in American and Russian securities alone, made during the period from i860 to 1892.382
However, with a view both to the past and to the future, it is necessary to note that the time at which those
issues took place was characterized by an abundance of
money, caused by a preceding period of economic depression which lowered the value of money and the rate
of discount. This was also the period of railway nationalization and of actual or threatened conversions.383 The
combined effect of these factors was to start an impetuous desire on the part of the investment-seeking public
for securities yielding a higher rate of interest.
In this connection it is interesting to recall the fact
recorded in Gilbart's book above cited,384 that in England,
also mainly as a result of a plethora of available capital
and the resulting low interest rate, as early as the years
1822 to 1825, inclusive, there were issued foreign, mainly
"exotic," loans, totalling £25,994,511, i. e., over half a
billion marks within four years,385 which later on gave
occasion for many a sad experience. It is true that
among these loans there is found a 5 per cent Prussian
loan of £3,500,000 issued in 1822, a 3 per cent Danish
loan of 1825 to the amount of £5,500,000, and a 5 per
cent Russian loan of 1822 amounting to £3,500,000, but
the rest, i. e., the greater part, were essentially "exotic
values," viz, 5 per cent loans of Australia, Brazil (2),
Greece (2), Mexico, Portugal, and Spain (2), and 6 per
cent loans of Buenos-Aires, Chile, Colombia (1), Guatemala, Mexico, Peru (2), etc. There had also been in

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National

Monetary

Commission

England a considerable reduction of the interest rate on
a large proportion of British consols, which doubtless had
long been foreseen, viz, in 1823 the conversion of £135,000,000 of 5 per cent into 4 per cent consols, and in 1825
the conversion of £80,000,000 of 4 per cent into 5% per
cent consols.
(/?) Amount of foreign securities issued in Germany.
The combined effective amounts of all foreign issues
(except issues of foreign shares of stock), viz, the issues
of foreign state and communal loans, railroad bonds, etc.,
since 1894, i. e., for the last fifteen years, according to the
Deutscher Oekonomist, were as follows:
Million
marks.

1894.
1895.
1896.
1897.

-. 338
300

1898.
1899.

.. 489
.. 608

1900.
1901 .

..

Million
marks.
. . 891
. . 203
. . 185
. . 199

Million
marks.
1902 .

1903.
1904.
I905-

• . 445 1906.
•• 199 1907.
. . 186 1908.
.. 874

Million
marks.
. . 149
. . 129
. . 205

The combined value of the foreign securities listed at
the German bourses from 1897 to 1907 according to the
Statistisches Jahrbuch fur das Deutsche Reich (vol. 29,
1908, p. 228), shows a total of 28,957,700,000 marks, of
which 8,224,600,000 marks represents the value of converted securities. This leaves a net value for newly listed
securities of 20,733,100,000 marks. The majority of these
foreign securities were listed simultaneously at foreign
bourses.
The 29,000,000,000 marks or thereabouts of listed
foreign securities show the following distribution:

392




Th

Gr ea t Ba n

er m a n

[In thousands of marks face value.]
Conversions
(included in
total).

Total
amounts.

Class of securities.

19,896,300

6,583,600

699,900

3. Mortgage bonds of Landschaften (cooperative land
754,5oo

202,300

332,700

8, 600

360,200

8, 600

24,300
2,680,300
3,928,600

1 , 3 4 2 , 400

145,800

a 18,800

i35,100

Total

2 8 , 9 5 7 , 700

%
a Transformations.

The effective value of foreign state and communal loans
alone according to the Deutscher Oekonomist was as follows:
1894.
18951896.
1897.

Million
marks.
• • 195 1898.
1899.
264 19OO.
233 1901 .

Million
marks.

.. 278 1902 .
. . I02 1903.
.. 171 1904.
. . 42 I905-

Million
marks.
. . 400
. . Il6

••

99

..

Million
marks.
1906.
1907.
1908 .

55
78
169

711

For the period comprising the largest activity in the
issue of foreign securities, viz, the years 1886-89, the
nominal value of these issues shows the following totals:
Marks.
516, 400, OOO
456, 300, 000
696, 100, 000
749, 100, 000

1886
1887
1888
1889

It appears thus that during these four years the nominal
value of foreign issues offered to German investors was in
excess of 2,417,000,000 marks,386 or 45 per cent of the nominal value of 5,431,000,000 marks of issues of all kinds.
The many serious objections to these figures are found
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National

Monetary

Commission

stated in a previous chapter (see above pp. 363). It may
suffice to mention here that as a matter of fact a considerable part of these issues was not placed in Germany
and therefore not paid by the German public.
If the above-given figures of the Deutscher Oekonomist
(see pp. 360 to 362) are used, which comprise all classes
of foreign issues including foreign shares (the amount of
which does not figure in the.above table), we obtain for
the period 1900-1908 the following totals:
Effective

amounts.

19OO
1901

1,000 marks.
275, 270
2IO, 830

1902
1903
1904.

453, 5 ° °
2 4 1 , 670
232, n o

1905
1906
1907
1908

1,000 marks.
I,108, 490
220, 6 5 0
152,660
228, 0 2 0

The effective amounts of both domestic and foreign
securities issued during the same period are stated above
on pages 360 and 362 by the same authority as follows:
1900..
1901
I902
I903
1904

1,000 marks.
I, 777, IIO
I, 623, 140
2? I IO, 69O
I, 665, 80O

1905
1906
1907
1908

1,000 marks.
3, 190, 680
2, 741, 480
2,211,920
3,415,820

i,995>°7°

A comparison of these two sets of figures proves that
the German banks, partly as the result of their experience with a part of the foreign loans issued during
the eighties, have become much more careful in issuing
such loans. As a matter of fact the amounts of foreign
securities issued during 1900-1908, as given in the above
trble, in most cases are not quite one-half and in some
cases even much less than one-half the corresponding
amounts for 1886-1890.
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The

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Great

Banks

It also appears from the table just given that the
amount of foreign securities issued during the year 1907,
152,660,000 marks, when as a result of the American
crisis there was a great money scarcity in Germany as well,
fell much below the like amount in 1906, 220,650,000
marks, while the amount for 1908 represents but one-fifth
of the corresponding amount for 1905.
During the high-tide period of the issue of foreign
securities (1886-1889), as stated before, the proportion of
these issues to the total issues effected in the country was
no less than 45 per cent. In 1905 the proportion was
only a little above one-third, in 1906 a little less than
one-tenth, and in 1907 only about one-fifteenth of all
issues effected in Germany during the same years.
The above figures prove likewise that during the very
years which we found to have been characterized by a
particularly gratifying increase in the productive and
purchasing powers of the nation, the "export of capital''
from Germany has considerably abated, and that during
these years the banks have been acting in accordance
with the principle laid down above (p. 384, No. 1) for the
regulation of foreign issues in general. In so doing they
were partly influenced, to be sure, by the high rate of
discount, "obeying necessity, not their own impulse.*'
(e) AMOUNTS OF LISTED SECURITIES ISSUED BY EACH OF
THE GREAT B E R U N BANKS.

Appendix V at the end of the volume contains exact
information regarding all securities issued by each of the
six great Berlin banks and admitted to the privilege

395




National

Monetary

Commission

of being traded in and quoted at the Berlin bourse during
the years 1883 to 1908.
Appendix VI gives similar information for the securities
emitted by the six great Berlin banks and admitted to
like privileges at all German bourses during the years 1897
to 1908. For earlier years than 1897 official data were
available for the Berlin bourse only.
(/) T H E SYNDICATE BUSINESS (Konsortialgeschaff).
As stated above (p. 349) the two essential requirements
of any sound banking policy are the liquidity of the
resources and the distribution of risks with regard to
persons, funds involved, time and place, even in the case
of the most promising undertakings and the most brilliant market condition, when there is every prospect
for a speedy and smooth transaction of the business.
As a necessary consequence of these two requirements,
when a bank contemplates the underwriting of a business
of some magnitude, it tries to strengthen itself by alliances., because there is always the possibility of a change
in the political and economic weather conditions, and in
the prospects and constellations bearing on each particular
transaction.
Accordingly we noted that in 1859 the German credit
banks, probably for the first time, formed two bank
syndicates. The first was organized by the Darmstadter
Bank for the liquidation of several engagements, which fell
due in i860, especially of the Rhine-Nahe bonds. The
i860 report of the bank makes special mention of this
agreement in the following terms: "This form has decided
advantages, since it diminishes the risk of the individual
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participants and facilitates the accomplishment of the
common task." The second syndicate was formed by the
Disconto-Gesellschaft for the purpose of underwriting a
part of the loan of 30,000,000 thalers required for the
mobilization of the Prussian Army and gave the first
impetus for the subsequent formation of the so-called
Prussian syndicate (Preussen-Konsortium).
The members of such syndicates, as a matter of course,
are under obligation to fix or bind their quota for the
common use of the syndicate during the term of the
syndicate agreement, which is fixed, but may be extended
by unanimous resolution. The execution of the common
operation is intrusted, as a rule, to a syndicate manager
or managers, whose action is subject to the approval of
the executive board of the syndicate, or, if the latter be
small, of the other syndicate members, as regards all
measures of importance or such as exceed the normal
course of the syndicate business. In most cases the
maximum amount of underwriting that may become
necessary is fixed beforehand. This maximum may,
however, be exceeded, as a rule, by majority vote or by
assent of the executive board in case the management of
the syndicate deems it necessary or profitable.
The frequent allotting of subsidiary or secondary participations (Unterbeteiligungen) by the individual members of the syndicates may be caused by considerations
of greater liquidity and of better distribution of risk. But
quite often such action may be due to mere business considerations, when it is desired by such courtesies to acquire
a claim to reciprocal treatment on the part of the favored
domestic or foreign houses, or else to reciprocate a similar
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courtesy already received. Very frequently this action is
a means of conferring a favor on customers regarded as
specially valuable, or of indemnifying certain customers
for participations which had yielded poor profit or been
terminated with a loss. Such "subparticipants" (Unterbeteiligte) acquire no rights against the syndicate, but only
against the member of the syndicate by whom the subsidiary allotment is made. The latter is under obligation
of keeping them informed and accounting to them and to
fulfill toward his subsidiaries everything " required by common honesty with regard to commercial etiquette" (par.
157 of the Civil Code) and conversely to abstain from
doing anything that might conflict with this principle.
An important class of syndicates are the so-called
guarantee syndicates (Garantiekonsortien) which are
formed by several banks in the interest of industrial or
commercial undertakings, in order to assure the success
of an increase of capital. In such cases the legal priority
right of the old stockholders may be excluded—the syndicate offering them the new shares at the price they were
taken over by the syndicate (zum Uebernahmepreis) plus
a certain surcharge. If the legal priority right remains,
the guarantee syndicate agrees to take over those shares
which are not accepted by the old shareholders. In many
cases the acceptance of syndicate participations is by no
means voluntary. Whenever there are permanent groups
(e. g. for Asiatic, Russian, Austro-Hungarian business or
for business in the domain of the electrical industry), any
bank belonging to the group is bound to accept its participation quota in the underwriting or issue unless there

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is a special arrangement—which is rarely the case—
whereby it is free to abstain from a particular operation
of the group. The obligation remains even when a bank
objects to the particular operation as a whole or to any of
its features, to the time, or, what is not less important,
the price, or to any other terms of the issue.
Since the formation of syndicates and the ceding of
subsidiary participations may be a feature of every underwriting and issue transaction and is of daily occurrence in
connection with an immense number of finance operations
of this sort, it would serve no useful purpose—even were
it practicable—to attempt to state the number and
amounts of syndicate operations and participations during
the first and second periods. Such an attempt would be
futile for several reasons:
In the first place until recently such syndicate participations of the banks were often lumped in the bank reports
with " securities owned, " which was decidedly wrong from
the accounting point of view. Only in the summary
reports (Rohbilanzen) of the great Berlin banks, published
since the end of February, 1909, has this practice been
discontinued. On the other hand, certain amounts, properly coming under the head of "syndicates" were often
booked with " securities,'' and vice versa. The true principle would be to book under the head of " syndicates " all
those participations which call for additional installment
payments or which are not at the disposal of the bank,
while securities allotted to the bank as a result of a syndicate participation either without the above restrictions, or
when these restrictions no longer apply, should go under
the head of "securities." Finally, in many cases, the
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items "syndicates" and "securities" are either not specified at all or only insufficiently specified in the balance
sheets. The mere enumeration of the syndicate participations loses all interest and value, unless combined with
information showing the distribution of risks with regard
to persons, funds involved, time and place, which is,
however, impracticable from the business point of view.
Neither is it practicable, as will be shown more fully in
section 8, to carry out the suggestion of giving a statement of the installments remaining due and unpaid at the
end of the year on account of syndicate participations,
since, for obvious reasons, the amounts of these obligations may not be known to the syndicate management
itself and at all events could, in most cases, not be ascertained on the 31st of December.
For these reasons I am in a position to give only a few
numerical data; and even these data must be used with
caution because of the shortcomings found until recently
in the accounting methods of our banks.
The number and amounts of syndicate participations
of the Deutsche Bank in State, communal, and railroad
securities, as well as in "shares and bonds of various
companies," during the crisis year 1900, and the years
immediately preceding, i. e., during the period 1897 to
1901, inclusive, were as follows:387
Number of
participations.

Amounts
in thousands of
marks.

107

30,220

127

33*920

146

1897
1898
1899
1900
1901

29,810
32,080
33,87o

160
179

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The syndicate account of the Dresdner Bank for the
years 1896-1900 was composed as follows:388
[Amounts in million marks.]
1898.

3-8

10

4.98

5
9

4-5

5

2. 19

5

23

8. 18

60

27.85

9

6-9

6

i-3

13

6. 2

12

4. 8

7

3- 1

7

5-3

7

2.3

5

2. 4

16.3

5o

20.8

46

32.0

86

39-3

76

6.9

9

4-9

10

8

4-9
3-8

1. 4

6

2. 1

24

10. 9

35

57

24.6

68

Amount.

10

1900.

Amount.

14

Amount.

Number.

8-7

Number.

Amount.

12

1899.
u
<v

Amount.

Number.

1897.

Number.

1896.

a

1. S t a t e s e c u r i t i e s , l a n d
mortgage bonds, a n d
preference b o n d s (Pri2. S h a r e s a n d b o n d s of
railways a n d other
transportation enter-

4. S e c u r i t i e s i s s u e d b y
real-estate companies
(Terraingesellschaf t e n ) .
5. I n d u s t r i a l a n d i n s u r ance companies; over-

Total

•9

2.4

According to the summary reports of seven great Berlin banks as per June 30, 1909, the syndicate participations of these banks 389 on that day showed the following
figures, as compared with corresponding figures under
date of December 31, 1908.
[Amounts in thousands of marks.]
Syndicate participations.
Banks.
June 30,
1909.

Dec. 3 1 ,
1908.

24,100

36,840
64,430
33.59o
46,840
33, 590

31,800

33,

13.900

12,130

23,000

Disconto-Gesellschaf t

48,500
36,300

Darmstadter Bank

90311°—II

44,900

27

401

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(g) T H E SECURITY BUSINESS.

The security transactions of the banks may be said to
be partly voluntary, partly involuntary in character.
The voluntary transactions of this class include the
investment of the liquid bank resources in correspondingly liquid investment securities—i. e., such as can be
speedily realized and, secondly, speculative security transactions. The latter may assume the form of the perfectfy legitimate though largely speculative report and
arbitrage transactions, or that of regular bourse speculation, or finally that of acquiring securities for the purpose of obtaining a temporary or permanent influence on
industrial undertakings.
The involuntary security transactions of the banks
comprise (i) the holdings of such securities as the bank is
unable to dispose of, including securities either issued by
the bank itself or turned over to it as its share of syndicate participations, (2) the purchase of securities immediately after their issue, for the purpose of preventing an
undue depression of their market value.
Generally speaking, considerable security holdings are
not regarded as a favorable sign, although during critical
periods large holdings of this class may represent an
increased proportion of particularly liquid assets, or a
special reserve for deposits. Thus, for instance, the
Deutsche Bank in its 1908 report mentions holdings of
32,000,000 marks in treasury bills and defends this course
as proper and correct. As a rule, however, excessive
holdings of securities will be interpreted to mean either
that the times have not been propitious for the issue
business of the bank, or that it maintains excessive
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speculative engagements, or that it is involved to an
excessive extent in speculative transactions on its own
account—a line of business which can be regarded as permissible only to a very limited extent—or, finally, that it
has been unable to find sufficiently profitable employment
for its funds. It is for these reasons that a large proportion of the writing off done by the banks occurs under
the head of securities' account.
In accordance with sound banking policy the investment
securities include also foreign securities, payable in gold
and dealt in at several bourses, which are therefore of an
international character. During critical or warlike periods such securities form a valuable reserve and increase
the banks' capacity for intervention and action. But, as
stated above, a large portion of these holdings may be composed of shares of stock, through the possession of which
the bank intends to exercise temporary or permanent influence upon an undertaking either by shaping the decisions of a given general meeting of stockholders, or by
"controlling" it outright, or by obtaining representation
on its supervisory board.
Of all the German banks the Darmstadter Bank is probably the one that since its foundation and up to the present
time has published more detailed statements regarding the
composition of its security holdings390 than any other
bank.
The Darmstadter Bank gives the following groups: (i)
German public securities, real estate mortgage bonds, and
railway debentures; (2) foreign state and communal
bonds, first mortgage bonds of foreign railways, and bonds
of German industrial undertakings; (3) stock shares of
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German and non-German industrial and mining concerns;
(4) bank shares; (5) sundry holdings.
The Deutsche Bank groups its security holdings under the
following four heads: (1) State and communal bonds,
mortgage bonds and railway bonds; (2) shares of railroads,
banks, and industrial concerns; (3) bonds of industrial
concerns; (4) sundry holdings.
The Dresdner Bank distinguishes among its security
holdingsonly three groups, viz: (1) State bonds, mortgage
bonds, railway and industrial bonds; (2) shares of banks,
railroads, other transportation companies, and insurance
concerns; (3) shares of industrial corporations.
It would therefore be of but little value to give figures
of securities held by the various banks, since, as was remarked on page 399, the account "securities owned'' in
many cases appears understated, inasmuch as a certain
portion of the securities, properly belonging under that
head, is booked under the head of " syndicate participations." On the other hand, it is equally true that securities which properly belong under the head of " syndicate
participations " are at times found booked under the head
of "securities owned." A similar shifting is frequently
noticed between the account "securities owned" and that
of "permanent participations in other banking institutions and concerns," if the two accounts are separated at
all. The bimonthly summary statements, now published
by a number of banks, separate the two accounts.
During the period of great activity preceding the crisis
of 1901 the account "securities owned" showed a large
increase over that shown for the previous years. Thus
the Dresdner Bank showed the following changes
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(in millions of marks) under that head for the years
i896-1900:
1896

Group I .
Group I I .
Group I I I

1897.

1898.

1899.

12.8

9.9

9-8

2.7

4-9

2.9

5-8

8-7

8.2

IS

6. 1
19

16.1
6.5
10. 7

This table shows a considerable increase largely in the
amount of industrial shares held.
In the case of the Darmstadter Bank the like account
for the period 1896-1902, classed by its five groups,
shows the following changes (in millions of marks): 391
1896.

Group I..
Group II.
Group III
Group IV
Group V.

1897.

1898

1899

1900

1901.

1.8

1.3

1. 1

5-9

1. 2

4

1.4

4.8

3-2

3-1

2.3

5-1

•9
39

5-4

5-4

4.8

2.6

1.9

3-3
i.9

4.4
3-3
9-4

1-7

1-7

1.6

2.9

1

1

•7

1

•9

•7

The summary balance sheets {Rohbilanzen) of the
undermentioned banks published under date of June 30,
1909, show the following figures (in millions of marks) for
the account " securities owned, "though without detailed
grouping, as compared with the figures for the end of the
preceding year.392
Situation on Situation on
June 30,1909.1 Dec. 31,1908
Deutsche Bank
Disconto-Gesellschaft
Dresdner Bank
Darmstadter Bank
A. Schaaffhausen'scher Bankverein
Nationalbank fur D e u t s c h l a n d . . . .
Commerz-und Disconto-Bank

5i.3
23.8
54-4
5i.5
43-o
26.5
31.8

405

55-68
29. 49
61 03

47 77
42 33
17

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In closing this chapter the following points regarding
the investment and issue activities of the banks must be
emphasized:
The successful accomplishment of the important and
various tasks devolving upon the banks, becomes possible
only when there is a strong bourse—i. e., an organization of
the utmost strength and elasticity during normal times
and of the utmost power of resistance during critical and
bad times. It is only through the concentration of the
converging streams of offers, demands, and news that
resultant prices will present a fairly accurate picture of
underlying conditions. But this function of balancing
offer and demand can be performed by the bourse in a
satisfactory manner only in case there can be enlisted for
permanent as well as temporary service sufficient amounts
of capital to be used in transactions, which, like trading
in futures, prevent as much as practicable violent and
sudden variations in the quotations of securities and are
apt to give timely warning of impending disturbances of
the financial equilibrium. As Schmoller puts it in his
Grundriss, Volume II, page 37, in the security market the
option business represents " a more refined technique of the
modern business for future delivery;" it is " an instrument
of increasingly correct calculation of future probabilities,
a means of controlling the most important elements of
price formation" and a form of business, "which may be
improved, regulated, and placed on a higher moral level
but can not be dispensed with." The same author very
properly says, on page 493 of the same work: "Every
improvement in the organization of the market has in view
a more correct price formation, while any lessening of
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extreme price variations results in the lessening of the
damages caused by crises. ,,
It is often said that the strength of a bourse lies in the
fact, that in times of general business prosperity it will
register invariably a strong upward movement of values
notwithstanding all obstacles caused by fiscal and bourse
legislation. But such a view is due to imperfect knowledge and excusable only on that ground. Economic laws
are superior to governmental laws. No bourse or fiscal
law can prevent altogether the upward movement of business, nor a corresponding advance of values—which is
merely emphasized by speculation—of concerns sharing
in that advance.
This error is the more regrettable, because the need
of a strong bourse is felt more and more in view of the
impending grave competitive struggle. Now, the strength
of a bourse is shown precisely in the fact, '' that during
prosperous periods it is successful in preventing impetuous and excessive advances of values, during bad times—
in averting excessively rapid and sudden declines in values, and during a crisis—in preventing the unreasonable
discouragement of the public and thus an undue depreciation of values.'' (Memorial of the Zentralverband
December, 1903, p. 35.) It is only necessary to recall the
disastrous 9th of February, 1904, the date of the outbreak
of the Russian-Japanese war, in order to get a clear idea
of a strong bourse—and its reverse.
SECTION

3.—BANK GROUPS.

The subject of this chapter are not those bank groups,
which are formed as the result of the permanent clustering
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of a number of so-called "concern-banks" (Konzernbanken) around a leading bank, representing a permanent
community of interest and action of the banks concerned
and embracing the entire field of banking operations.
These groupings are the result of concentration tendencies
and will be discussed at length in a subsequent chapter.
Nor will the discussion of this section take in the socalled " syndicates'' (Konsortien) which, as was pointed
out above, are formed with the view of distributing the
risk, of preserving the liquidity of resources and in the interest of smoother and more rapid performance of a single
given financial operation. It has been shown that whenever the risk or the engagements assumed are especially
large, syndicates composed of a shifting number of banking firms are constantly formed for each given case either
under the name of a "guarantee-syndicate" or "loansyndicate.' '
The bank groups, which are to be discussed in the present chapter, are permanent combinations, formed by
certain banks and banking firms for certain operations or
classes of operations, and involving a more or less close
alliance among the individual banks. Among the reasons
of such formations the following may be mentioned:
i. In the beginning of the first period they were the
only means of enabling the new banks to share in the
participation of domestic and foreign loans in competition with the powerful private houses, especially the
Rothschilds, who until that time had an almost uncontested monopoly in that field. This was the occasion
which gave rise to the so-called Preussenkonsortium

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Great

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(Prussian syndicate) for the underwriting and issue of
the Prussian consols, to a somewhat differently composed
group, formed during the second period, to underwrite
the loans of the German Empire and to the so-called
Rothschild group for undertaking the issues and kindred
operations of the Austro-Hungarian Government.
(a) The Prussian syndicate, as already stated, owes its
origin to a syndicate of large Berlin banks and banking
houses formed in 1859 under the leadership of the Disconto-Gesellschaft on the occasion of the Prussian army
mobilization loan of 30,000,000 thalers.393 It took a leading part in the loan operations of the sixties and seventies, continuing its activity to the most recent years in
floating most of the Prussian state loans. This arrangement, however, was by no means exclusive, as the Prussian Government during the eighties, also during most
recent years, in order to prevent a monopoly, repeatedly
appealed to the market direct. On other occasions the
Government would dispose of portions of its loans to
individual banks and banking houses, although the permanent effects of such a policy on the market were
rather unfavorable. Sometimes a member of the group
would underwrite singly an entire imperial or Prussian
loan. The latter mode was followed in May, 1900, when
the Deutsche Bank undertook the issue of 200,000,000
marks of German imperial bonds and Prussian consols.
The Prussian syndicate, as at present (in 1909) constituted, is headed by the Royal Seehandlung (Prussian
main bank), and after the elimination of defunct firms
includes the following banks and banking houses:

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Bank syndicate for Prussian
Konigliche Seehandlung

state loans.

(Prussian Jacob S. H. Stern, Frankfort-on-the-

main bank).

Main.

Bank fur Handel und Industrie.

L. Behrens & Sonne, Hamburg.

Berliner Handelsgesellschaft.

Norddeutsche Bank, Hamburg.

S. Bleichroder.

Vereinsbank, Hamburg.

Commerz- und Disconto-Bank.

M. M. Warburg & Co., Hamburg.

Delbriick, Leo & Co.

Allgemeine Deutsche Creditanstalt,

Deutsche Bank.

Leipzig.
Direction der Disconto-Gesellschaft. Rheinische Creditbank, Mannheim.
Dresdner Bank.
Bayerische Hypotheken- und WechF . W. Krause & Co.
selbank, Munich.
Mendelssohn & Co.

Bayerische Vereinsbank, Munich.

Mitteldeutsche Kreditbank.

Konigliche Hauptbank, Nuremberg.

Nationalbank fur Deutschland.

Ostbank fur Handel und Gewerbe,

A. SchaarThausen'scher Bankverein.

Posen.

Sal. Oppenheim, jr., & Co., Cologne.
Lazard Speyer-EHissen,

Wurttembergische

Frankfort-

Vereinsbank,

Stuttgart.

on-the-Main.

(b) The bank group for underwriting the loans of the.
Empire, as at present constituted, is headed by the
Reichsbank, and after the elimination of various defunct
firms includes the following banks and banking houses:
Syndicate for imperial
Reichsbank.
Konigliche Seehandlung

loans.

Mendelssohn & Co.
(Prussian Mitteldeutsche Kreditbank.
Nationalbank fur Deutschland.

main bank).
Bank fur Handel und Industrie.
Berliner Handelsgesellschaft.
S. Bleichroder.

Commerz- und Disconto-Bank.
Delbriick, Leo & Co.
Deutsche Bank.
Direction der Disconto-Gesellschaft
Dresdner Bank.
F . W. Krause & Co,

A. SchaarThausen'scher Bankverein.
Sal. Oppenheim, jr., & Co., Cologne.
Lazard Speyer-EHissen,

Frankfort-

on-the-Main.
Jacob S. H. Stern, Frankfort-on-theMain.
L. Behrens & Sonne, Hamburg.
Norddeutsche Bank, Hamburg.
Vereinsbank, Hamburg.
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M. M. Warburg & Co., Hamburg.
AUgemeine Deutsche Creditanstalt,
Leipzig.
Rheinische Creditbank, Mannheim.
Bayerische Hypotheken- und Wech-

Banks

Bayerische Vereinsbank, Munich.
Konigliche Hauptbank, Nuremberg.
Ostbank fur Handel und Gewerbe,
Posen.
Wurttembergische

selbank, Munich.

Vereinsbank,

Stuttgart.

ic) In Austria there has existed since 1848 a close
relationship of the financial administration of the Government with the Vienna house of Rothschild, which until
1855, when the Osterreichische Kreditanstalt was added,
conducted practically all the financial operations for the
government. It was only in 1864 that the Disconto
Gesellschaft, at the head of a syndicate of German banking houses, entered into competition with the Rothschild
house and the Kreditanstalt, and was allotted, out of a
total silver loan of 70,000,000 florins, the portion of
23,500,000 florins. It was this successful competition
which brought about the entrance of the Disconto-Gesellschaft into the group known subsequently as the Rothschild syndicate. During the following years a number
of other banks and banking houses joined, including
the AUgemeine Osterreichische Bodenkredit-Anstalt of
Vienna, the Ungarische AUgemeine Kreditbank, and the
Bank fur Handel und Industrie. The latter institution,
as early as 1854, had joined the Rothschild firm in underwriting a loan for the Government of Baden, and in 1862,
that is to say, much earlier than the Disconto-Gesellschaft, had participated in an issue of 83,000,000 florins of
the Austrian 5 per cent i860 lottery loan by the Rothschild firm and the Kreditanstalt. Later on the group
was joined by the banking houses of S. Bleichroder, Sal.
Oppenheim, jr., of Cologne, and Mendelssohn & Co., and
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during the most recent period—for state loans—by the
Austrian Postal Savings Bank.
The Rothschild syndicate represents to-day a firm
organization for the common management not only of
Austro-Hungarian finance operations of a public character, but also of all other finance operations which it
cares to undertake in either of these two countries. It is
composed at present of the following concerns:
Rothschild group.
Direktion der Disconto-Gesellschaft. de Rothschild freres, Paris.
Osterreichische Kreditanstalt fur N. M. Rothschild & Sons, London.
Handel und Gewerbe.
Allgemeine Osterreichische BodenM. Wodianer.
S. M. von Rothschild, Vienna.

kredit-Anstalt, Vienna.
Sal. Oppenheim, jr., Cologne.

Ungarische Allgemeine Kreditbank Mendelssohn & Co.
in Budapest.

Osterreichische

S. Bleichroder.

state loans).

Postsparkasse

(for

Bank fur Handel und Industrie.

(2) The organization in 1890 of a group for Asiatic business was the natural consequence of the founding, in 1889,
by a number of large banks and private banking houses,
of the Deutsch-Asiatische Bank. A great many difficulties
had to be overcome before this bank could be founded.
In the first place there was the nearly always successful
tactics of the Chinese negotiators in charge of the national
finance and railroad business of playing off against each
other the individual competitors in the various countries.
On the other hand, for a long time no concerted action
with English banking circles nor even of German banks
with each other could be attained, the latter having
formed two separate groups under the leadership of the
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tively. The organization of the Deutsch-Asiatische Bank
and the formation a year later of the Syndikat filr
Asiatische Geschdfte (syndicate for Asiatic business) put
an end to the competitive struggle between those two
groups. Inasmuch as independent action of other German banks had but little chance in the future, united
action of German interests became assured not only with
reference to Chinese, but also all Asiatic financial operations, the new powerful syndicate, led by the DiscontoGesellschaft, undertaking the common planning and managing of loans and advances to the central governments,
provinces, and railroad companies in China, Japan, and
Korea and the organizing of railroad and mining companies in China. The structure of this syndicate is, however, somewhat loose, as it is left to each member to keep
aloof from any individual transaction.394
The successful activity of this syndicate was frustrated
for the time being by the outbreak in the nineties of the
Chinese-Japanese war. In March, 1896, the syndicate succeeded for the first time, with the gratifying cooperation
of the English Hongkong and Shanghai Bank, in taking
over £8,000,000 of the total Chinese loan of £16,000,000.
An agreement was also reached with the English bank for
future common action in Chinese business on the basis of
equal participation, resulting, soon afterwards, in 1898, in
the common taking over of the remainder of the Chinese
war indemnity to Japan in the shape of a 4 ^ per cent
loan of another £16,000,000.
Since then the Asiatic syndicate has managed successfully a number of other financial transactions.

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(3) The formation of groups for the permanent common
handling of other domestic state loans—as for instance, the
underwriting of the Bavarian and Baden loans and of foreign state and railroad loans (such as Swiss, Argentine,
Mexican, Russian, Roumanian, Portuguese, etc.)—occurred
more frequently during the second period. These groups,
however, if we except the Russian group headed by
Mendelssohn & Co., did not attain the same solidity of
structure and consequent exclusive power as the group
formations mentioned in paragraph 2. Their origin was
often due to a combination into one group of syndicates,
originally opposing each other, or to the subsidiary banks
of a great bank combining into a single-issue group for certain underwriting purposes. The same remarks apply to
group formations for the taking over of municipal loans,
as, for instance, of Cologne, Hamburg, Frankfort-on-theMain, and Munich. In the latter case the groups are
composed of local houses, strengthened in some cases by
the joining of friendly outside banks. However, these
groups show frequent changes of membership, since
they were never strong enough to completely shut out
competition.
As this chapter is devoted exclusively to the discussion of permanent bank groups, no specific mention is
made of those syndicates which, originally formed independently of each other, for the taking over of state or
municipal loans, frequently coalesced into one group for a
single transaction, in order to do away with mutual outbidding. Such transitory combines may be characterized
as mere price conventions.

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On the other hand, syndicates originally formed as
societates unius rei, for instance, for the taking over of
a municipal loan, may gradually coalesce into solid and
permanent group formations. During the second period,
particularly, it became more and more customary to maintain the combination after the first successful cooperation
in case the character of the transaction was such that its
recurrence at regular intervals might confidently be expected. This was unfortunately true of municipal loans,
the recurrence of which could be predicted with almost
mathematical certainty. In such cases each party of the
syndicate felt at first only morally bound to refrain from
independent bidding or from joining another syndicate,
but to either suggest or await an invitation to a meeting
of the syndicate, unless it had informed beforehand the
management of the old syndicate of its contrary decision.
The management of such syndicates, unless a change was
expressly provided for, as a rule remained unchanged for
subsequent transactions.
(4) A large number of bank groups originated during
the second period as a result of the changed relations of
the banks to industry as set forth in previous chapters.
In this field the formation of groups, while due to
designed industrial policy, had become more pronounced
and definite since the nineties, and in turn caused a more
refined differentiation and growing intensification of this
policy. The principal cause was, however, the enormous
demand for capital by industry in general, and the electrotechnical industries in particular. Accordingly we find
such bank groups closely allied with the so-called " heavy "

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industries (mining, iron and steel) as well as with t h e
" l i g h t " industries, especially the electrical industry,
breweries, secondary railways, a n d petroleum enterprises.
Until about 1900 there had been formed, t o correspond
with t h e seven combinations of electrical undertakings
t o be discussed later on, seven b a n k groups, each backing t h e respective industrial combination and attending
t o t h e issue business of the industrial combination as
well as to its other financial operations. I n particular
t h e Siemens & Halske stock company was backed in
1900 by a group of 11 banks headed by t h e Deutsche
Bank; t h e combination formed under t h e leadership of
t h e Allgemeine Elektrizitatsgesellschaft (A. E. G.) was
backed b y a b a n k group consisting of 8 banks headed b y
t h e Berliner Handelsgesellschaft; t h e combination known
as t h e Union-Elektrizitatsgesellschaft (U. E. G.) was
backed by a b a n k group headed b y t h e Disconto-Gesellschaft, etc.
I n t h e same year t h e so-called " Loewe-Gruppe " (i. e.,
t h e group of industrial undertakings controlled b y t h e firm
Ludwig Loewe & Co.) was backed b y t h e same six banks
a n d banking houses which stood behind t h e Union-Electrizitatswerke. This banking syndicate, formed a t first
for purposes of common underwriting, subsequently conducted also t h e other financial operations of t h e industrial group. 395 I t appears t h a t since t h e nineties t h e ever
increasing extension of t h e plant and t h e annexing of a
number of hitherto independent concerns m a d e it impossible to have t h e largely increased demands for capital m e t
either b y t h e original firm or b y any single banking institution, t h e latter partly for t h e reason t h a t a number of b a n k 416




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ing institutions were simultaneously interested in several
enterprises of t h e electro-technical industry.
I n t h e field of secondary railways (Kleinbahnen) several groups were formed. One of t h e m is headed by t h e
Berliner Handelsgesellschaft, which founded t h e Westdeutsche Eise?ibahngesellschaft.
Another is headed b y
the Darmstadter Bank, which organized t h e Siiddeutsche Eisenbahngesellschaft
at D a r m s t a d t ; a third,
headed b y t h e Nationalbank fiir Deutschland, is backing
the Allgemeine Deutsche Kleinbahngesellschaft
und vereinigte Eisenbahn- Ban- und Betriebsgesellschaft a t Berlin
(General German Secondary Railway and Consolidated
Railway Construction and Operation Company).
The object of t h e first group was t o assist t h e firm of
Lenz & Co., engaged in t h e construction and operation of
secondary railways; t h a t of t h e second group, to assist
t h e similar enterprises of t h e firm H e r r m a n n Bachstein;
while t h e group headed by t h e Dresdner Bank has
founded t r u s t companies for t h e floating of German
and Austro-Hungarian railway securities (Zentralbank fiir
Eisenbahnwerte), also t h e firm Orenstein & Koppel (now
consolidated with t h e firm Arthur Koppel), engaged in t h e
construction of field and secondary railroads.
In t h e field of the petroleum industry the two foremost
groups are those headed by the Deutsche Bank and b y
the Disconto-Gesellschaft.
These organizations are the
expression of the industrial enterpreneur activity of the
great banks, an activity which during this period has for
good reasons been slackening. The aim is to counterbalance t h e monopoly position in the petroleum market of
the American and Russian producers.
903110—11

28

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I n 1903 the Deutsche Bank became interested on t h e one
h a n d in t h e Roumanian petroleum company Steaua
Romana b y taking over a large portion of newly issued
stock and b y having one of its directors m a d e chairman
of the supervisory board, and, on t h e other, in t h e
Galician petroleum company "Schodnica. "
Subsequently, on J a n u a r y 21, 1904, together with t h e
Wiener Bankverein, t h e Darmstadter Bank, the Nationalb a n k fur Deutschland, t h e Mitteldeutsche Kreditbank, a n d
t h e banking firm of J a k o b S. H . Stern in Frankfort-onthe-Main, it founded in Berlin the Deutsche Petroleum
Aktiengesellschaft
(with a share capital of 20,000,000
marks), into which it merged its participations in t h e
Roumanian, Russian, and Galician, also in some Hanover
petroleum enterprises. The new company soon after
m a d e an agreement with t h e
Petroleum-Produkten-Aktiengesellschaft in H a m b u r g for t h e transportation of t h e
Roumanian petroleum.
About t h e same time (1903) t h e Disconto-Gesellschaft,
together with t h e firm of S. Bleichroder, participated in
t h e petroleum industry company " Bustenarii''
and in another large Roumanian petroleum company, t h e ' ' T e l e g a
Oil Company ( L i m i t e d ) , ' ' which made an agreement for
t h e transportation of t h e petroleum with the Shell Transp o r t and Trading Company, which in t u r n owned shares
of a nominal a m o u n t of 2,600,000 marks, out of a total
nominal capital of 3,000,000 marks in the PetroleumProdukten-A
ktiengesellschaft.
I n 1905 t h e Roumanian petroleum refining company
" V e g a " and the " S o c i e t y for t h e Development of t h e
Roumanian Petroleum I n d u s t r y Credit Petrolifer''
were
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organized, the first under the combined auspices of
the Disconto-Gesellschaft, S. Bleichroder, and the Compagnie Industrielle des Petroles at Paris, for the purpose
of refining crude petroleum. In the same year the Disconto-Gesellschaft group merged its Roumanian petroleum
participations in the " Allgemeine Petroleum-IndustrieAktiengesellschaft" founded by it with a capital of
17,000,000 marks.
A third group, headed by the Dresdner Bank, and comprising the A. Schaaffhausen'scher Bankverein, the Internationale Bohrgesellschafty and several industrial and
banking firms, founded in Roumania a third petroleum
company under the name of the "Petroleum-Aktiengesellschaft Regatul Roniana," with a capital of 24,000,000 lei
(francs).
In 1906 the European Petroleum Union, with a capital
of 37,000,000 marks, was founded by Russian petroleum
producers, closely connected with the crude-oil producing firm of Nobel Brothers in St. Petersburg and the
banking house de Rothschild Freres in Paris, in company
with the Deutsche Bank and other (Russian, Roumanian,
and Galician) petroleum interests, with the object of consolidating the various European selling organizations
controlled by them.
In all the above-described cases special care was taken
to distribute the risk by the formation of groups, to
mobilize the participations by the organization of stock
companies, with the view, undoubtedly, of disposing of at
least part of the participations as the companies grew in
strength, and of retaining only an amount required for the
continuance of permanent influence.
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The industrial-bank groups are thus seen to differ from
other bank groups in that they represent a combination of
the industrial entrepeneur activity—which as matter of
principle it would be better to leave to industry itself—
with that of bank financing proper and a special banking
initiative (Bankinitiative).
It is the latter that has
caused the unprecedented growth in Germany of some
new industries, such as the electro-technical, or the creation of hitherto nonexisting industries, such as the
petroleum industry.
SECTION

4.—THE OVER-SEA AND FOREIGN BUSINESS
OF THE GERMAN CREDIT BANKS.396

I. T H E PART TAKEN BY THE BANKS IN

DEVELOPING

GERMAN OVER-SEA IMPORT AND EXPORT TRADE.

As stated before, a special section (Sect. 7) will be
devoted to the discussion of the question whether, to what
extent, and under what circumstances the so-called " export capitalism"—i. e., the investment of German capital
in foreign enterprises, businesses, and securities, particularly the founding of subsidiary companies destined exclusively for over-sea business, is necessary and proper.
For the present we will merely note the fact that the German great banks, since the beginning of the second period,
devoted themselves energetically to the promotion of our
industrial and commercial relations with over-sea countries. We shall attempt now to describe briefly the commercial objects of this activity and the gradual development of this part of German banking policy.
The earliest formulation of this' policy, which extends
far beyond the previous limits of German banking, is
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found in paragraph 2 of the charter of the Deutsche Bank.
There can be no doubt that the founders of that institution, in view of the general economic position of Germany,
regarded this as their foremost aim and a necessary and
true policy, for its execution was stated to be part of the
program of the new bank in the following terms:
The object of the company is the transaction of all sorts
of banking business, particularly the fostering and facilitating
of commercial relations between Germany, the other European
countries, and over-sea markets,
The purpose of this program was to fill a gap in the
organization of German credit and banking clearly perceived by the founders and more particularly by the early
managers of the bank. This "bold stroke" and the economic insight disclosed can not be appreciated too
highly.397
The Deutsche Bank has followed its ambitious program398 with the utmost vigor and tenacity, preparing
its future success by a number of deliberate and farsighted measures.
The activity of the Deutsche Bank as an intermediary on
behalf of import and export trade was soon taken up also
by the Disconto-Gesellschaft, which in many lines of banking activity during this period showed a degree of development as large, or nearly as large, as the Deutsche Bank.
Previously, German industrial and commercial interests
in foreign, especially over-sea countries had to fall back
almost exclusively upon the intermediary of English and,
in some cases, French banking institutions. For while
bills in terms of German currency had no foreign market,
English bills particularly, had almost boundless and unlim421




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ited circulation, since English banks were represented in
one form or another in all parts of the world.
As the first result of its activity, the Deutsche Bank
secured for German commerce and industry a firm position in the world market, and introduced German bills
into the channels of over-sea commerce where they were
almost unknown up to that time. This was especially
difficult at the beginning of the period, when the gold
standard did not yet exist in Germany, for bills in terms
of the multifarious German currencies (see p. 39) were
unknown and disliked in international business, (which
is transacted mainly by means of bills,) and were therefore subject to higher rates of discount than the London
sterling bills.399
In order therefore to improve these conditions, the
first requisite was to open credit at London to the German importer and exporter. This the Deutsche Bank
attempted to do at first through an agency of its own at
that place. When this attempt failed, through difficulties
of formal nature, the bank acquired an interest in the German Bank of London, Ltd., without, however, attaining
fully the desired object.
On the other hand, the German exporter and importer
was to be given an opportunity400 " t o obtain such credit
in Germany by the introduction of German currency bills
in over-sea markets and by offers to buy the bills drawn on
German exchange centers." The Deutsche Bank attempted to attain both these objects by establishing in
1872, i. e., before the introduction of the German gold
standard, branches in Yokohama and Shanghai which
were to buy bills drawn on Germany, so that the Ger422




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man exporter, who had calculated the selling price of his
goods in marks, might' be paid abroad in marks, while
the importer might credit the foreign seller at the bank
with the amount of the invoice in marks and meet payment in marks upon bills subsequently drawn by the
seller.
Both branches in eastern Asia had to be closed in 1874,
i. e., after an existence of barely two years, mainly because
the continuous depreciation of silver had diminished the
invested capital. Similarly the La Plata bank, opened in
1872 by the Disconto-Gesellschaft and taken over by the
Deutsche Bank in 1874, had to be liquidated in 1885. But
in the meantime the Deutsche Bank opened branches in
German centers of over-sea trade—one in Bremen (in
1871) and another in Hamburg (in 1872). In the same
year a silent partnership (Kommandite) in New York was
formed. By 1871, in order to obtain the means required
for these enlargements of its business, its capital had been
doubled from 5,000,000 to 10,000,000 thalers.
Finally, in 1873, ft succeeded in opening in London a
branch of its own, whose business operations soon assumed
considerable proportions. The clients of the bank, who
imported goods from over-sea markets, were now in position to draw their bills either in marks on Germany
(Berlin, Bremen, Hamburg) or in pounds sterling on
London, as it appeared to them more advantageous in
accordance with the respective discount and exchange
rates in the two countries. Thus the first and most difficult stage in this development was successfully passed.
It must be said that even the program of the Deutsche
Bank was regarded with little favor in banking and
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bourse circles. The sentiments prevailing among these
circles at that time are accurately reflected in a South
German newspaper, which has been used by Model as
the only journalistic source not only as regards this
subject but also in discussing the activity of the banks
during the earlier period. This paper 401 stated, not more
than four weeks before the foundation of the Deutsche
Bank, that the houses which were chiefly interested in the
projected bank were "not regarded as able" to manage
an institution of this class "in accordance with modern
requirements" and "that its founders would save themselves from a splendid fiasco if they were to take over
their own shares, since there was absolutely no sympathy
for the project in Berlin."
The same paper, in speaking of the doubling of the
share-capital in 1871, stated that there was no need for
such an increase, "even if it were true that the bank
intended to establish silent partnerships in the regions
peopled by the Riff pirates, Kaffirs, and Blackfoot Indians."
After the initial failures, when the branches in Eastern
Asia had to be closed (in 1874), the following remarks
were made: " T h e Deutsche Bank, in closing its branches
in Shanghai and Yokohama, confesses its inability to
execute its original high-sounding program, since it was
primarily founded for the purpose of freeing German
commerce in foreign countries, particularly in China,
Japan, and the East Indies, from the tutelage of English
and French bankers. The question of liquidation of the
bank is now being seriously debated; at all events, a reduction of its capital would seem to be advisable."

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A still sharper criticism of the Deutsche Bank by the
same paper in 1875 reads as follows: " One of those banking establishments, which has anything but fulfilled its
program, and whose right to exist can only be based
on the fact that, though long moribund, it still manages
to exist, is the so-called Deutsche Bank in Berlin.'
The Deutsche Bank, however, has not allowed itself
to be diverted from its path either by its early failures or
by criticism. Mainly through its branches and agency in
Bremen, Hamburg, and London, it fostered the over-sea
business consistently and with ultimately brilliant success.
In a subsequent chapter we shall relate the attempts of
the Deutsche Bank, and after it of a number of other
banks, to lend their energetic and ever-growing support
to German import and export trade by means of branches
as well as through the founding of subsidiary banks.
The principle which may be said to have dominated their
entire activity has been correctly formulated by Emil
Herz402 as follows: '' The part of the confidential adviser
in business (der wirtschaftliche Vertrauensmann) both at
home and abroad must be taken by the banker.''
As soon as German trade felt certain of banking support in its import and export activity on the part of the
branches of the banks in the great centers of oversea
trade (Hamburg, Bremen, London), or of the German
subsidiary banks working hand in hand with the parent
banks in Germany, it naturally emancipated itself from
the foreign intermediaries by enlisting the usually much
cheaper services of the German banks and their branches
or of their subsidiary banks.

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Let us first take the case of the exporter.403 He sells
his goods as a rule on long terms for delivery at over-sea
places, where after possibly several months' sailing they
are paid by the buyer only when unloaded and then only
by means of the buyer's acceptance. Through his connection with a German bank the exporter is now enabled
to turn over his bill of lading to that bank with an order
to deliver the same to the buyer through its over-sea
connection, say its subsidiary bank, after payment of the
amount of the bill or after acceptance of the draft, the
latter in case the goods have been sold on longer terms.
In case of nonpayment, of which he is to be advised by
cable, the order further provides that the goods are to be
insured and stored at the over-sea place of destination at
the expense of the seller.
In such cases the exporter is usually able to procure at
least part of the purchase price, and thus fresh operating
capital, long before the arrival of the goods, the bank
granting him an advance upon the floating goods. This
advance is made upon the pledging by indorsement of
the bills of lading, which secure the delivery of the goods
at the point of destination and upon the transfer of the
accompanying insurance policy either according to fixed
loan terms or according to such terms as may have been
agreed upon on the particular occasion. These advances
vary between 40 and 75 per cent of the invoice, a copy
of which is to be handed to the bank.
It goes without saying that such advances are granted
as a rule only on such goods which are not easily subject
to the risk of decay, waste, breakage, loss of weight, or
leakage.
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Provided the documents are genuine and the exporter's
personal credit is good up to the amount advanced, the
bank, when taking the above precautions, will run but
little risk. The risk will naturally be greater, in case the
advance is made on goods which are not yet definitively
sold. In the latter case, when, for instance, the exported
goods are directed to the oversea representative of the
domestic export firm, who is to try to sell them only upon
arrival, the loan will be made as a rule by a subsidiary
institution of any of the German banks (as for instance
the Deutsch-Ueberseeische Bank, the Deutsch-Asiatische
Bank, the Bank fur Chile und Deutschland, etc.). These
banks, at the request of the oversea agent of the domestic
exporter, who turns over to them the bills of lading, will
receive and store the goods upon arrival at destination,
and in turn will honor the bills drawn upon the German
exporter's oversea representative who takes the goods
from the storehouse and gradually makes good the credit
on the drafts as he sells the goods.
In such cases the loan transaction is particularly risky
when the agents order too large a stock and thus cause
a reduction in the price of the export goods, which may
be even intensified, in case the banks have to undertake the forced sale of the goods after failure of the subsequent payments. In these cases the bank may suffer loss
if the recipient of the advance proves of insufficient solvency, or the pledged goods—of insufficient value.
Besides granting advances upon merchandise the banks
render assistance to the export trade in various other
ways. They will, for instance, give him reimbursement
(rembours) credit (see p. 428, below) against the documents
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b y attaching their acceptance to t h e draft of the seller,
who is thus enabled to discount it at t h e private rate.
T h e bank m a y also accord its acceptance to t h e domestic
exporter on t h e basis of b a n k credit, extended not b y him
to t h e foreign buyer, b u t b y t h e latter to him, t h e b a n k
being ordered b y t h e foreign buyer to accept t h e drafts of
t h e domestic exporter up to a certain amount, against
receipt of t h e shipping documents, which order is usually
confirmed by t h e b a n k to t h e exporter ('' confirmed letter
of c r e d i t ' ' ) .
However, t h e most prominent function of t h e branches
of t h e German banks a t H a m b u r g , Bremen, and London,
also of t h e oversea banks, is t h e financing of imports from
oversea countries, especially of raw materials. 404
This is done in t h e following m a n n e r : T h e domestic
buyer of t h e article (importer) procures in t h e first place
from his German b a n k a ' ' d r a f t ' ' credit
(Trassierungskredit) in the form of ' * r e m b o u r s ' ' credit u p t o approximately t h e a m o u n t of t h e invoice in favor of t h e oversea seller of t h e article (wool, cotton, grain, rice, coffee,
ore, etc.), with t h e understanding, t h a t t h e seller, or
t h e latter's bank, shall have authority to draw upon
t h e b a n k of t h e importer to t h e extent of t h e purchase
price. The bank will accept t h e foreign bill, which t h e
oversea seller or his b a n k will send to it after t h e loading of t h e goods, or have presented t o it for acceptance
b y a German banking connection, only in case a full set
of t h e bills of lading together with insurance "policy,
invoice, description of weight and quantity and, if need
be, t h e certificates of origin, are t u r n e d over to it.405 I n
this way t h e delivery of t h e goods to t h e b a n k is assured,
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as are also the identity of the article and the terms of
sale, as described by the importer, as well as the fact that
the particular transaction is a real, bona fide commercial
transaction, corresponding to the importer's statement.
After the bank has accepted the bill, which as a rule
runs for thirty or one hundred and eighty days after sight,
the seller is enabled to discount it either abroad or at another German bank, the first bank having to honor its
acceptance on maturity.
In case the importer, as is normally the case, has resold
the goods to another domestic buyer, the goods must be
forwarded to this new buyer. In that case the bank will
have to deliver to its customer the shipping and other
accompanying documents, for the purpose of forwarding
them to another trusted party. This does away with its
collateral security, and up to the time of payment or the
remittance of a draft by the buyer the bank has to grant
blank credit, which, however, is usually of but short duration. When this remittance is received, the bank discounts it, credits the amount to the importer as per date
of maturity, and as a rule finds itself in possession of the
cash a good while before maturity of its own acceptance.
In case the buyer has not resold the goods, they are
stored after their arrival in Germany, under the supervision of the bank or of its representative, the bank
receiving a new security in the shape of the storehouse
certificate, the bill of lading having been delivered to the
master of the vessel at the time of unloading.
In the case of these import transactions the granting
of credit may likewise be required, as for instance when
the German importer has to pay at once, at the time of
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loading abroad, the purchase price for the goods bought.
In such case his German bank accords him " reimbursement " credit {Rembourskredit) by ordering its oversea
affiliation to pay the purchase price upon receipt of the
documents, the importer returning the purchase price
upon arrival of the goods, or in case of sale to a third
party (see above) on return of the documents.
Finally, if the importer has sold the goods to another
country, prior to their shipment, his German bank will forward the bills of lading to its affiliated bank in that country
and order it to hand the documents to the buyer or his
bank upon payment of the purchase price or against
acceptance.
It is in this manner that transactions relative to the
importation of cotton from America, of wool from Australia, Cape Colony or Argentina, of grain from Russia
or America, of rice from eastern Asia, of copper from
America, of ores from Spain and Sweden, are effected to an
annual aggregate amount of several billions of marks.406
As the underlying documents and declarations are examined with extreme care (much more needed in this than
in other classes of business transactions) the settlement
is made as a rule without any hitch, since, as Waldemar
Muller justly remarks, the bank in granting the combined
reimbursement and acceptance credit, runs a risk only in
case the documents happen to be forged, or if after the
goods are handed to the importer " in trust" (zu treuen
Handen), the latter as well as his buyer fail at the same
time. Against such emergencies the banks may take
some, though not always sufficient precautions.407

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Loans on merchandise collateral may be combined
with "reimbursement transactions" ("Remboursgeschaft")
in case the importer or his foreign agent desire to lay
in abroad a stock of raw materials. In the latter case,
upon receipt of the acceptance the goods are held insured
in store at the disposal of the bank by its shipping agent
(to whom the documents are sent) until such time as the
client has released them in total or in part by remitting
the corresponding amount of the purchase price.
It is clear that the ''reimbursement" business can be
successfully handled only by first-class banking houses
whose acceptances are known as prime bills abroad as
well as at home, and are therefore taken without question,
even in larger amounts. For such bank acceptances are
to be preferred per se to the acceptance of the commercial
house which receives the goods, and usually also for the
additional reason that they can be realized at the private
rate of discount. As a rule these banks and banking
houses will grant such credit in terms of German currency;
only in exceptional cases, as in some countries of South
America, Asia, and Australia such credits will be in terms
of pounds sterling and bear the acceptance of their
London agency.408
Since as the result of continuous efforts mark bills have
gained a respected position in foreign markets alongside
of sterling bills, British aid and intervention is no longer
required in nearly the same proportion to settle the balance of payments on account of German imports and
exports. The time may be said to have passed, at least
in the majority of cases, when German exporters, in order
to collect their foreign claims, and foreign exporters when
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selling goods to Germans, had to draw on London, or
when German importers had to settle t h e credits of their
sellers via London.
When t h e Deutsche Bank m a d e its first efforts to gain
for m a r k bills an equal standing as compared with sterling
bills, it had not merely to struggle against foreign lack of
confidence and t h e competition of the English b a n k s ,
it also became t h e object of attack on the p a r t of domestic
banking and other interests on t h e ground t h a t , as a result
of t h e above-described fostering of our oversea import a n d
export trade, in accordance with its program, its acceptance account at times became so greatly swelled as t o
exceed, and sometimes even greatly exceed, the a m o u n t
of t h e share capital of the bank, even after t h e large
increases of its capital during t h e later period. B u t as was
shown above, the acceptance business for t h e promotion
of oversea commerce, which is transacted chiefly b y means
of international bills, contains no excessive elements of
risk, provided only due caution is observed. Hence
in criticising t h e extent of t h e acceptance accounts
of our banks, regard should be h a d not so much to t h e
q u a n t i t y as to t h e quality of the drafts which t h e b a n k s
accept.
II.

T H E O P E N I N G OF B R A N C H E S I N H A M B U R G ,

BREMEN,

AND L O N D O N , AND T H E ORGANIZATION O F O V E R S E A AND
F O R E I G N B A N K S , AND OF D O M E S T I C SUBSIDIARY B A N K S
FOR O V E R S E A AND F O R E I G N

( J ) Participations

BUSINESS.

of the Deutsche

Bank.

I n the preceding chapter we saw how the Deutsche
B a n k opened branches first a t Bremen (1871), and H a m 432




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German

Great

Banks

burg (1872), the German centers of oversea commerce,
and London (1873), with the view of fostering German
oversea import and export trade. These branches were to
serve, so to say, as advanced posts for the observation,
exploration, and winning of new territory by the German
banks.
(a) In 1886 the Deutsche Bank organized in place of
the above-mentioned La Plata Bank, which had to be
liquidated in 1875, the Deutsche Ueberseebank (effective
July 1, 1887), with a paid-up capital of 6,000,000 marks
(10,000,000 nominal), for the purpose of fostering commercial relations with South America, especially Argentina. This bank in turn was superseded on June 17,
!893, by the Deutsche Ueberseeische Bank*09 founded in
Berlin with a capital of 20,000,000 marks, and increased in
1909 to 30,000,000 marks.410
The bank has had a continuously prosperous career, as
may be seen by the rate of dividends paid:
Per cent.

Per cent.

Per cent.

Per cent.

1901
1902

1893

6

1897.

8

1894

7

1898

8

1895
1896

9
9

1899. .

8

1900

8

8
8

I905
1906

8
9

I903
1904

8
8

I907
1908

9
9

The number of its branches totals at present 21, of which
8 are in Chile (Santiago de Chile, Antofagasta, Concepcion,
Iquique, Temuco, Valdivia, Osorno and Puerto-Montt),
4 in Argentina (Buenos Aires, Bahia Blanca, Cordoba, and
Tucuman), 4 in Peru (Lima, Callao, Trujillo, and Arequipa), 2 in Bolivia (La Paz and Oruro), 1 in Uruguay
(Montevideo), 1 in Ecuador (Guyaquil), and 2 in Spain
(Madrid and Barcelona). The firm name of the branches
in foreign countries reads: Banco Aleman Transatldntico.
90311 °—11

29

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The former branch of the Deutsche Ueberseeische Bank
in the City of Mexico was merged, in 1906, with the Mexikanische Bank fur Handel und Industrie (see below under
" m " ) , founded with the cooperation of the Deutsche
Bank. In turn the Deutsche Ueberseeische Bank absorbed the firm Guillermo Vogel & Co., in Madrid, in
which the Deutsche Bank had previously held a silent
partnership interest {Kommandite).
(6) In March, 1889,411 the Deutsche Bank, in conjunction with the Dresdner Bank and other institutions, with
the view of fostering German commercial relations with
Turkey, founded the Anatolian Railway Company {Societe du Chemin de fer Ottoman d'Anatolie), with headquarters at Constantinople, which, having acquired before
December 31, 1892,412 a small railway opposite Constantinople, undertook to extend it from Haidar-Pasha, near
Constantinople, to Ismid (92 kilometers), thence to Angora
(486 kilometers) and from Eski-Shehir to Konia (445
kilometers). The capital of the company was at first
45,000,000 and subsequently 60,000,000 francs.
{c) In the same year (1889) the Deutsche Bank, jointly
with the Wiener Bankverein, acquired the share interest
held by Baron von Hirsch in the Actiengesellschaft der
Orientalischen Eisenbahnen (Oriental Railway Company),
founded in 1879 with a capital of 20,000,000 Austrian gold
florins and operating 1,563 kilometers of railways,413 and
with it the concession for the Macedonian line SalonikiMonastir. This concession it ceded to the Societe du
Chemin de fer Ottoman Salonique-Monasiiry founded February 5, 1891 (with headquarters at Constantinople), with
a share capital of 20,000,000 marks and debentures of
60,000,000 francs.
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I n North America t h e Deutsche Bank maintains very
active business connections, resulting in numerous financial transactions and underwriting of American public
securities, treasury bonds, various railway bonds, and
other railway transactions. T h e temporary depression in
the price of Northern Pacific securities caused, for t h e time
being, grave anxiety to the bank, which was terminated
by the reorganization of t h e railroad, effected under its
auspices.
At first (beginning with October 15, 1872) t h e b a n k
secured a silent partnership interest in t h e banking firm
of Knoblauch & Lichtenstein, in New York, 414 amounting
to $500,000 currency (1,845,000 marks), b u t as a result
of financial losses of t h a t firm it h a d to reduce its participation to $400,000 (1,680,000 marks), 415 while t h e
liquidation of t h e firm, which took place October 15, 1882,
caused even a loss of about 700,000 marks. 416
I n 1890 t h e Deutsche Bank, mainly because of its connection with m a n y American railroads, especially t h e Northern Pacific Railroad Company, instituted, in conjunction
with Frankfort and American houses, t h e Deutsch-Amerikanische Treuhand-Gesellschaft
(German-American Trust
Company) at Berlin, with a nominal share capital of
20,000,000 marks, whose main object was t o issue its
own debentures on t h e basis of solid American securities to be purchased b y it, and, in the second place, to
represent t h e interests of holders of securities issued by
American enterprises which h a d become insolvent. W h e n
t h e first object of t h e company, mainly in view of t h e
precarious financial situation in t h e United States, was
found t o be unrealizable, t h e capital of t h e company was
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at first reduced to i ,000,000 marks.417 Later on, by the
by-law (Statut) dated December 9, 1901, the company
was reconstructed under the new name of Deutsche Treuhand-Gesellschaft. While the second of the above-named
purposes still remained one of the objects of the reconstructed company (whose capital was increased to 1,500,000
marks), its principal function became the examination of
the accounts of stock companies and the undertaking of
trustee operations and those of pledge holding. Its activity in these fields has proved eminently satisfactory.
In 1889 the Deutsche Bank, with the view of promoting
commercial relations between Germany and Eastern Asia,
participated in the founding of the Deutsch-Asiatische
Bank at Shanghai, with a capital of 7,500,000 taels. (See
III, par. 1, below.)
(d) With the view of executing the financial part of the
tasks of the Anatolian Railway Company, there was
founded at Zurich in 1890, with the participation of the
Deutsche Bank, the Bank filr Orientalische Eisenbahnen,
with a nominal capital of 50,000,000 francs of common
shares (Stammaktien) and 13,000,000 francs of preferred
shares (Vorzugsaktien).418 The debenture capital since
May, 1907, amounts to 30,000,000 francs.
(e) In 1894, with the view of fostering commercial
relations between Germany and Italy, the Deutsche Bank
participated in the founding of the Banca Commerciale
Italiana at Milan, the present capital of which is
105,000,000 lire. (For particulars, see III, par. 2.)
(/) Between the years 1898 and 1904 the Deutsche
Bank, together with other banks and firms, participated

43 6




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German

Great

Banks

in the founding of the Deutsch-Atlantische,
Ost-Europaische und Deutsch-Niederldndische
Telegraphen-Gesellschaft, and t h e Norddeutsche Seekabelwerke (North-German
marine cable works). In 1908 it took p a r t in t h e founding of t h e Deutsch-Siidamerikanische
Telegraphen-Gesellschaft. (See pp. 458 and 459, No. 6.)
(g) I n 1899 t h e Deutsche Bank cooperated in t h e
launching of the Schantung-Bergbauand the SchaniungEisenbahngesellschaft
(Shantung Mining and Shantung
Railway Companies) founded b y a number of German
banks and firms. See pp. 458 and 459, No. 6.)
(h) When in 1901 t h e Anatolian Railway Company was
granted t h e concession for t h e extension of its lines from
Konia t o Bagdad and t h e Persian Gulf,419 t h a t company,
in conjunction with a number of Turkish, German,
Austrian, French, Swiss, and Italian firms, founded t h e
Imperial O t t o m a n Bagdad Railway Company. 420 During
1905 a controlling interest in the railroad between Mersina
and Adana was acquired in behalf of t h e Bagdad Railway, t h e first portion of which, from Konia to Burgulu,
was opened for traffic October 25, 1904. I n t h e spring
of 1908, "after four years of laborious negotiations," 4 2 1
t h e required state guarantees were a t last secured for t h e
further construction of t h e Bagdad Railway over t h e
Taurus and Amanus mountains to Syria and upper Mesopotamia as far as El Helif near Mardin (840 kilometers
from t h e last point reached by t h e Bagdad Railway in
1908, 1,738 kilometers from Constantinople, and about
1,155 kilometers from Bassora on the lower Shatt-elArab), " assuring thus the furtherance of this great
undertaking.''
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(i) I n 1904 the bank founded the
Ost-Afrikanische
Gesellschaft (East-African Company), with headquarters
in Berlin, a colonial company with 21,000,000 marks of
nominal capital, the Empire guaranteeing a minimum
interest return of 3 per cent and repayment at t h e r a t e
of 120 per cent.
(fe) I n 1904-1905 the Deutsche Bank participated in
t h e founding of the Deutsch-Ost-Afrikanische
Bank with a
capital of 2,000,000 marks and central office at Berlin,
which is b o t h a credit and note issuing bank for the Germ a n colony of E a s t Africa. (See I I I , sec. 3, below.)
(I) In December, 1905, the Deutsche Bank, in conjunction with the Deutsche Ueberseeische Bank, t h e
banking house of Lazard Speyer-Ellissen in Frankforton-the-Main and the Schweizerische Kreditanstalt, with
t h e view of promoting German commercial relations with
Central America, founded the
Zentral-Amerika-Bank,
Aktiengesellschajt,
with central office at Berlin and a
capital of 10,000,000 marks, of which 25 per cent was
paid in for the time being. But, as the company was
unable to secure t h e state concession for the transaction
of banking operations for its proposed branch in Guatemala, t h e original object of t h e enterprise was changed
in 1906, so t h a t t h e present n a m e reads Aktiengesellschajt
jiir uberseeische Bauunternehmungen
( " C o m p a n y for oversea building enterprises")- Its present object has t h u s
been considerably narrowed. Dividends paid during 1905
to 1908 were: o, o, 5, and 4 per cent.
(m) In 1906 the Deutsche Bank, in conjunction with
t h e banking house of Speyer & Co. in New York, with
the view of promoting German commercial interests in
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Great

Banks

South America and more especially in Mexico, founded
the Mexikanische Bank fur Handel und Industrie (Banco
Mejicano de Comercio e Industria), with its main office
in New York. This bank, as stated above, assumed the
business of the Banco Aleman Transatlantic© in Mexico;
its nominal capital is 10,000,000 pesos, the term of its
concession is forty years; the dividends paid in 1907 and
1908 were at the rate of 6 per cent.
As regards the foreign participations of the Deutsche
Bank in Europe it may be stated that—
(n) The bank had entered into a silent partnership
as early as January 1, 1873, with the Paris banking house
of Weissweiller & Goldschmidt422 by a participation
(Kommanditeinlage) of 1,000,000 francs, but this participation was reduced to 500,000 francs as early as 1876,
and terminated soon after, owing to the liquidation of
that firm.
(0) In 1877 (Oct. 1) the Deutsche Bank entered into a
silent partnership with the Vienna banking house of
Giiterbock, Horwitz & Co. by a participation of 750,000
florins (1,290,000 marks), which was, however, repaid
December 31, 1883.423
(p) In 1895 the Deutsche Bank formed a silent partnership with another Vienna banking firm, Rosenfeld &
Co., but subsequently organized a group of German and
Austrian banks for the purpose of participating in Austrian and Hungarian business.
(q) In 1895 the Deutsche Bank entered into a silent
partnership with the Madrid firm Guillermo Vogel &
Co.424 The latter, as mentioned above, was taken over
in 1906 by the Deutsche Ueberseeische Bank.
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Commission

(r) The bank became interested in the mining business
in the early nineties by a participation in the firm Ad.
Goerz & Co., of Berlin and Johannesburg.
Almost all the other great banks followed the example
of the Deutsche Bank in developing and extending foreign and oversea relations, some of them rapidly and
energetically, others hesitatingly and to an inconsiderable
extent. The bank which did so most rapidly and extensively was the Disconto-Gesellschaft.
(2) PARTICIPATIONS OF THE DISCONTO-GESEU.SCHAFT.

This bank as early as 1873 had participated in the
founding of the La Plata Bank, subsequently transferred
to the Deutsche Bank.
(a) In 1880 the Disconto-Gesellschaft cooperated in
the reconstruction of the Deutsche Handels- und Plantagen-Gesellschaft der Sudseeinseln (German Commercial and
Plantation Company of the South Sea Islands). The
capital of this company was 2,750,000 marks. During
1883-1887, at the instigation of Ad. von Hansemann,
it cooperated in the organization and founding of the
Neu-Guinea-Kompagnie
(with a capital of 6,000,000
marks).
(6) In 1887 the Disconto-Gesellschaft, in conjunction
with the Norddeutsche Bank, founded the Brasilianische
Bank fur Deutschland*25 with main office in Hamburg
and a capital of 10,000,000 marks, for the promotion of
commercial relations between Germany and Brazil. This
bank has at present (1908-9) five branches (in Rio de
Janeiro, Sao Paulo, Santos, Porto Allegre, and Bahia).
The rates of dividends were as follows:
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Great

Fiscal year ending June 3 o— Dividends.

Fiscal year ending June 3 0 -

Per cent.
1890
1891
1892
1893
1894
1895
1896
1897
1898
1899

Banks
Dividends.
Per cent.

1900
1901
1902
1903
1904
1905
1906
1907
1908

(c) In 1889 the Disconto-Gesellschaft participated in
the founding of the Deutsch-Asiatische Bank,426 organized
by seven Berlin banks with the view of fostering German
trade with eastern Asia (cfr., p. 455, No. 1). Particulars
regarding this bank are found further below.
(d) In 1890 the Disconto-Gesellschaft entered into
silent partnership connections (Kommandite) with the
banking firm of Ernesto Tornquist in Buenos Aires, and
the Antwerp firm H. Albert de Bary & Co., allied with the
former, the aggregate participation being 2,187,000 marks.
The latter firm was transformed in 1900 into the stock
company "Compagnie Commerciale Beige, anciennement
H. Albert de Bary & Co.," with a share capital of 5,000,000
francs, the Disconto-Gesellschaft continuing its participation through ownership of stock.427
(e) In 1894 it cooperated in the formation of the Banca
Commerciale Italiana (see below, p. 456, No. 2).
(/) In 1895 the Disconto-Gesellschaft, together with
the Norddeutsche Bank, and in cooperation with several
business houses having trade connections with Chile,
founded the Bank fur Chile und Deutschland428 at Hamburg with a capital of 10,000,000 marks. This bank has
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Monetary

Commission

now nine branches in Valparaiso, Santiago, Concepcion,
Temuco, Iva Paz, Oruro, Antofagasta, Victoria, and
Valdivia. Its dividends show the following development:
1896, o per cent; 1897, 5 per cent; 1898, 2 per cent; 1899-1901, 7 per
cent; 1902-6, 8 per cent; 1907, 4 per cent; 1908, 8 per cent.

(g) In 1897 the Disconto-Gesellschaft in conjunction
with the firm of S. Bleichroder, founded the Banca
Generala Romana 429 in Bucharest for the promotion of
German-Roumanian trade relations. The bank has now
(1909) two branches in Braila and Craiova, and an agency
in Constanza.430 Its capital is 10,000,000 francs (Lei).
Its rates of dividends were as follows:
1898, 6 per cent; 1899, 5 per cent; 1900, 7 per cent; 1901, 8 per cent;
1902-3, o per cent; 1904, 6 p e r c e n t ; 1905, 8 p e r c e n t ; 1906-8, 9 per cent.

(h) In 1898 the Disconto-Gesellschaft participated in
conjunction with a number of domestic and foreign firms
in the founding of the Ban que Internationale de Bruxelles
for the promotion of German-Belgian trade relations. The
nominal capital of the new bank was 25,000,000 francs.
It paid the following rates of dividends:
1899, 6 per cent; 1900, 4 per cent; 1901-3, o per ce:nt; 1904, 4 per cent;
1905-8, 5 per cent.

(i) In 1899 the Disconto-Gesellschaft participated, in
conjunction with a number of German banks and banking houses, in the founding of the Shantung Railroad and
Shantung Mining companies (particulars for which are given
below). During the period 1898-1904 and again in 1908
it took part also in the organization of several telegraph
and cable companies (see below, pp. 458 and 459, No. 6).
(k) In 1900 the Disconto-Gesellschaft founded the Otavi
Mining and Railroad Company with a capital of 1,000,000
marks, which was increased to 20,000,000 marks as early
442




The

German

Great

Banks

as May 12, 1903, for the purpose of constructing a railway
between Swakopmund and Tsumeb. Through the completion of a branch line between Onguati and Karibib a
junction was effected in 1906 with the main line Swakopmund-Windhuk.431
(/) In 1904 it founded the East African Railroad Company, with a share capital of 21,000,000 marks. A
minimum dividend of 3 per cent on this capital, as well as
a redemption price of 120 per cent, have been guaranteed
by the Empire.
(m) In 1904-5 the Disconto-Gesellschaft took part in the
establishment of the German-East African Bank, with the
main office at Berlin and a branch at Dar-es-Salaam,
which acts as a credit and note-issuing bank for the
German East African colony.
(n) In 1905 the Disconto-Gesellschaft, together with
the firm of S. Bleichroder, the Norddeutsche Bank, and
several Bulgarian firms, for the purpose of fostering German-Bulgarian trade relations, established the Banque de
Credit (Kreditna Banka) at Sophia, with a nominal capital
of 3,000,000 francs (lev).
(0) In the same year (1905) the Disconto-Gesellschaft
in conjunction with the firm C. Woermann at Hamburg,
established the Deutsche Afrika-Bank with a capital of
1,000,000 marks. This bank opened branches in 1904 at
Swakopmund, Windhuk, and Luderitzbucht and took
over the business at those places of the Damara and
Namaqua Trading Company (Limited) which had been
founded in 1904 by the above-mentioned firm.
(p) By the taking over of stock in 1905 the DiscontoGesellschaft became interested in the General Mining
443




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Monetary

Commission

and Finance Corporation (Limited) in London, founded
by the Dresdner Bank in conjunction with Albu Brothers, with a capital of £ i ,250,000. The investment did not
prove profitable, as may be inferred from the fact that the
value of this stock as carried on the books of the company
had to be reduced considerably several times.
(q) In 1906 the Disconto-Gesellschaft in conjunction
with a number of German banks, banking houses, and
firms took part in the foundation of the Kamerun Railroad Company. (See below, p. 458, No. 5.)
It is noteworthy that to the end of the nineties the
Disconto-Gesellschaft adhered to the principle of strict
centralization in the internal management of its affairs.
In particular it discountenanced the opening of branches
for the promotion of over-sea trade. It should be said
though, that it had been represented for years at Hamburg by the Norddeutsche Bank, with which it had
become closely allied during the first period.
It was only in 1900 that the Disconto-Gesellschaft, in
view of the considerable growth of its own over-sea
connections, decided upon the opening of a branch in
London, followed in 1903 by the opening of another
branch in Bremen.
It may be also noted that as early as 1888 the DiscontoGesellschaft, together with the Norddeutsche Bank
entered into an agreement with the firm Friedr. Krupp,
which had obtained a state-guaranteed concession for the
construction of the Great Venezuelan Railroad between
Caracas and Valencia with a total length of 180 kilometers, by which it took over the construction of that
road432. The transaction, while resulting in considerable
444




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Great

Banks

contracts and orders for German industry, caused the bank
numerous long-continued troubles and annoyances of
all kinds.
Finally, it should not be overlooked that the DiscontoGesellschaft, as a member of the Rothschild Syndicate,
participated in a large number of Austro-Hungarian state,
railroad, and other finance transactions, took part in 1887
and 1888 in the emission of Argentine loans, and participated in a number of finance and loan operations in behalf
of the Finnish, Russian, and Roumanian Governments
and railroads. (For particulars see App. V and VI.)
(3)

PARTICIPATIONS OF THE DRESDNER BANK.

(a) With the view of promoting its foreign, particularly
its over-sea relations, the Dresdner Bank founded the following branches: 1892, one in Hamburg; 1895, one in
Bremen, and 1901, one in London.
(b) In 1889 the Dresdner Bank participated in the
founding of the Anatolian Railway Company, also of the
Company for the Operation of the Oriental Railroads (see
above, 1 b and c), and in the establishment of the Dents chAsiatische Bank. (See below, p. 455, No. 1.) In 1891 it
took part in the founding of the Bank for Oriental Railroads. (See above sub. id.)
(c) In 1894 it participated in the founding of the Banca
Commerciale Italiana. (See below, p. 456, No. 4.)
(d) In 1899 it took part in the founding of the Shantung
Mining and Shantung Railway companies. (See below,
pp. 458 and 459, No. 6.)
(e) In 1904-5 it participated in the founding of the
German West-African Bank. (See below, p. 457, No. 4.)
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Commission

(/) In 1905 it entered into a close alliance with the
banking house J. P. Morgan & Co., of New York, London,
and Paris433, for the purpose of common action in the
field of international finance and issue operations and of
extending the German market for American securities.
This alliance led to the common participation of the two
parties in the now liquidated Sovereign Bank of Canada
at Montreal.
(g) About the end of 1905 the Dresdner Bank, in conjunction with the A. Schaaffhausen'scher Bankverein and
the Nationalbank fur Deutschland, with the view of promoting trade relations with the Orient, especially with
Turkey, Greece, and Egypt, founded the Deutsche Orientbank stock company in Berlin, with a share capital (now
fully paid-in) of 16,000,000 marks 434 and two branches
in Constantinople and Hamburg, taken over from the
Banque d'Orient in Athens. Since then additional
branches have been opened in Alexandria, Brussa, Cairo,
Kalamata, Smyrna, and Casablanca (Morocco). Dividends in 1906 were 4 per cent, in 1907, 4 per cent, and in
1908, 4 per cent.
(h) About the same time (end of 1905435) the Dresdner
Bank, with the view of promoting German commerce with
South America, founded jointly with the A. Schaaffhausen'scher Bankverein the Deutsch-Sudamerikanische
Bank stock company, with the main office at Berlin, and
a nominal capital of 20,000,000 marks, divided into 4 series
of 5,000,000 marks each. This bank has at present (1909)
3 branches (in Hamburg, Buenos Aires, and Mexico).
In 1908 it entered into close relation with the above-mentioned Sovereign Bank of Canada in Montreal (capital
446




The

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Great

Banks

$2,000,000), severed however in 1908 by reason of the
liquidation of the Canadian bank. No dividends have
as yet (i. e., for the years 1906, 1907, and 1908) been
declared by the Deutsch-Sudamerikanische Bank.
(i) In 1906 the Dresdner Bank participated, in conjunction with several German banks, banking houses, and
commercial firms, in the founding of the Kamerun Railway Company. (See below, p. 458, No. 5.)
(k) It became interested in the mining business by participating, in company with the Disconto-Gesellschaft, in
the General Mining and Finance Corporation, London,
which had been founded by it jointly with Albu Brothers,
with a capital of £1,250,000.
The Dresdner Bank also participated in the emission of
the 1905 Chinese state loan, in the 5 per cent loan of the
Tehuantepec National Railway Company, and in two
(4>2 per cent and 4 per cent) Japanese gold loans. (For
particulars, see Append. V and VI.)
(4)

PARTICIPATIONS OF THE DARMSTADTER BANK.

The Darmstadter Bank up to the present has not
established any branches for the promotion of over-sea
trade. But as early as 1854 it acquired a silent partnership interest (Kommandite)—the first of similar interests—in the New York firm E. vom Baur & Co. This
firm, however, went into liquidation about the end of
1885.436 In 1900, jointly with the Bankers' Trading Syndicate of London—its own creation—which in turn was
closely allied with the banking house S. Japhet & Co. and
the Nordwestdeutsche Bank (subsequently the Deutsche
Nationalbank, Kommanditgesellschaft auf Aktien) of
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Commission

Bremen, it took the first steps for the promotion of foreign
business.
In 1906, with the view of extending business relations
with the United States, it founded, in cooperation with
other German and American banking firms, the AmerikaBank, a stock company in Berlin, with a capital of
25,000,000 marks, divided into 5 series, of which 5,000,000
marks were fully paid in, and the rest to the extent of 25
per cent, while 10 per cent premium on the shares, i. e.,
2,500,000 marks, was placed into the reserve fund.
However, this bank went into liquidation in 1909, and its
shares were taken over by the Darmstadter Bank.
The Darmstadter Bank participated in the launching
of the following organizations for the promotion of over-sea
commercial relations:
(a) 1889: In the founding of the Deutsch-Asiatische
Bank. (See below, p. 455, No. 1.)
(b) 1898-1904 and 1908: In the founding of several telegraph and cable companies. (See below, pp. 458 and 459,
No. 6.)
(c) 1899: In the founding of the Shantung Mining and
the Shantung Railway Companies. (See below, ibid.,
No. 6.)
(d) 1906: In the founding of the Kamerun Railway
Company. (See below, p. 458, No. 5.)
Its own foreign, though not over-sea connections, were
quite numerous even during the first period.
(a) As early as 1857, for the purpose of promoting business with France, it formed a commandite in Paris. The
latter, after excellent results, had to be liquidated in 1871,
owing to the unfriendly sentiment then prevailing. In
448




The

German

Great

Banks

1873 a new commandite was established, which, however,
went into liquidation shortly after, in 1877.
(b) In 1870 a commandite was formed in Vienna
(Dutschka & Co.), which was liquidated in 1902. Its
clientele was taken over by the Wechselstuben-Aktiengesellschaft Merkur in Vienna, which in 1908 had a capital
of 20,000,000 kronen ($4,060,000) and 9 branches. There
is a close alliance between this institution and the Darmstadter Bank.
(c) In 1871 it founded for the promotion of trade
between Germany and the Netherlands the Amsterdamsche
Bank in Amsterdam,437 with which it has since maintained the most intimate relations. Simultaneously, for
promoting trade with Belgium a commandite was formed
in Brussels.
(d) In 1873-74 the bank formed a commandite in
Milan.438
(e) In 1877 the Darmstadter Bank, jointly with other
firms, founded the Ungarische Escompte- und Wechslerbank
in Budapest.
(/) In 1881 it founded the Wurttembergische Bankanstalt, formerly Pflaum & Co., in Stuttgart (share capital,
in 1909, 10,000,000 marks), which in turn formed in the
same year a contractual community of interest—the
earliest union of this class—with the Wurttembergische
Vereinsbank.
(g) In 1890 it acquired a commandite interest in the
banking house Marmorosch Blank & Co. in Bucharest. In
conjunction with the Berliner Handelsgesellschaft it transformed that firm into a stock company under the name of
the Banca Marmorosch Blank & Co., Societate Anonima
90311 °—11

30

449




National

Monetary

Commission

(effective January i, 1905), whose capital amounts at
present to 10,000,000 lei ($1,930,000).
(h) In 1898 it founded, in conjunction with a number
of domestic and foreign houses, the Banque Internationale
de Bruxelles, with a capital of 25,000,000 francs.
It also became interested in the mining business through
the acquisition of shares of the Consolidated Mines Selection Company and of the African Venture Syndicate
founded in 1903.
During the second period it participated in all the
Austrian and Hungarian emissions of the Rothschild
group, and together with several other banks and banking
houses took part in the emission of Portuguese state,
municipal, and railroad securities, which latter operations
for several years proved a source of great trouble and
financial losses. It also shared in the emission of the 5
per cent Chinese state loan, the 4 ^ and 4 per cent Japanese
loans of 1905, and other finance ooerations, for which see
Appendices V and VI.
(5)

PARTICIPATIONS OF THE B E R U N E R HANDEIVSGESEU,SCHAFT.

The Berliner Handelsgesellschaft participated in the
founding of the following companies for the promotion of
German oversea interests:
(a) 1889: Deutsch-Asiatische Bank. (See below, p.
455, No. 1.)
(b) 1898-1904 and 1908: Several German cable companies
and cable works. (See below, pp. 458 and 459, No. 6.)
(c) 1899: Shantung Railway and Shantung Mining
companies.
4S°




The

German

Great

Banks

(d) 1906: Kamerun Railway Company.
Among its foreign, other than oversea connections, the
following may be mentioned:
It had a share in the founding of the following institutions :
(e) 1872: Schweizerischer Bankverein in Basel with a
share capital of 50,000,000 francs.
(/) 1898: Banque Internationale de Bruxelles (jointly
with several other firms).
(g) 1904-5: Banca Marmorosch Blank & Co., Societate
anonima in Bucharest (jointly with the Darmstadter
Bank).
(h) 1908: Stock company formerly Andreevics & Co.
in Belgrade, with a share capital of 4,000,000 francs (jointly
with the Pester Ungarische Commerzialbank).
Moreover the Berliner Handelsgesellschaft maintains
close relations to the stock company Labouchere Oyens &
Co. Bank in Amsterdam (capital 6,000,000 florins) and
since 1903 to the New York banking house, Hallgarten
&Co.
It also took part 439
1887: In the founding of the Dutch South African Railroad Company in Amsterdam.440
1889: In the acquisition of the Egyptian railroad
system.441
1894: In the founding of the Banca Commerciale Italiana.
1894: In the founding of the Compania Sevillana de
Electricidad in Sevilla and the Compania Barcelonesa de
Electricidad in Barcelona.

451




National

Monetary

Commission

1897: In the founding of the Bank filr elektrische
Unternehmungen in Zurich.
1898: In the founding of the
Aluminium-Industrie-Aktiengesellschajt in Neuhausen (Switzerland).
1898: In the founding of the Deutsch-Ueberseeische
Elektrizitdtsgesellschaft (German Oversea Electric Company).
1899: In the establishment of the Deutsch-Ostafrika
Linie (German East Africa Steamship Line).
1903: In founding the Deutsch-Chinesische-Eisenbahngesellschaft.U2
1904: In founding the Deutsche Kolonial-Eisenbahnbauund Betriebsgesellschajt (German Colonial Railroad Constructing and Operating Company) for the execution of
railroad and port constructions in the German colonial
possessions.
Since April, 1905, it has been operating under a lease
contract the Usambara railroad in German East Africa.
In conjunction with the firm Lenz & Co. it has contracted
with the Imperial Government for the construction of the
railroad Lilderitzbucht-Kubub.
The Berliner Handelsgesellschaft took a prominent part
in the underwriting of all Russian, Chinese, and Japanese
loans emitted in Germany during the second period. It
also emitted several Servian state and railroad loans.
(For particulars see Append. V and VI.)
(6)

PARTICIPATIONS OF THE A.

SCHAAFFHAUSEN'SCHER

BANKVEREIN.

Although the main strength of this institution from the
start has been due to the promotion of domestic rather
45 2




The

German

Great

Banks

t h a n foreign business, it participated also in t h e founding
of the following concerns engaged in t h e foreign field:
(a) 1889: Deutsch-Asiatische
No. 1.)

Bank.

(6) 1894: Banca Commerciale
below, p . 456, No. 2.)

(See below, p . 455,

Italiana

in Milan.

(See

(c) 1898-1904 and 1908: A number of telegraph companies and cable works. (See pp. 458 and 459, No. 6.)
(d) 1898: Banque Internationale de Bruxelles.
(e) 1899: S h a n t u n g Mining and Shantung Railway
Companies. (See below, pp. 458 and 459, No. 6)
(/) 1905: Deutsche Orient-Bank

in Berlin, jointly with

the Dresdner B a n k (see above sub. 3, g) and t h e Nationalb a n k fur Deutschland.
(g) 1905: Deutsch-Sudamerikanische

Bank,

stock com-

pany, in Berlin, jointly with t h e Dresdner Bank.

(See

above sub. 3, h.)
(h) 1906: K a m e r u n Railway Company, jointly with
several other banks.

(See below, p . 458, No. 5.)

(7) P A R T I C I P A T I O N S O F T H E NATIONALBANK F U R D E U T S C H LAND.

This b a n k took p a r t in t h e founding of t h e following
institutions:
(a) 1889: Deutsch-Asiatische
No. 1.)
(6) 1895: Credito Italiano

Bank.

(See below, p . 455,

in Rome.

The present share

capital of t h e institution is 75,000,000 lire ($14,475,000);
its branches number a t present 17.

453




National

Monetary

Commission

(c) 1899: Shantung Mining and Shantung Railway
companies. (See below, pp. 458 and 459, No. 6.)
(d) 1904: Banque d'Orient, established by it in Athens.
(Share capital, 10,000,000 francs; branches in Saloniki and
Smyrna.)
(e) 1905: Deutsche Orientbank, stock company, in Berlin, founded in conjunction with the Dresdner Bank (see
above, sub. 3, g) and the A. Schaaffhausen'scher Bankverein. This bank was detached from the Banque d'Orient
and took over the latter's branches in Berlin, Hamburg,
and Constantinople. Additional branches have been
opened since in Cairo, Alexandria, Brussa, Kalamata,
Saloniki, Smyrna, Tangier, and Casablanca.
Since 1905 the Deutsche Orientbank has maintained a
community of interest with the Deutsche Palastina-Bank
in Berlin, founded in 1899 by the banking firm Von der
Heydt & Co., for the promotion of trade with Palestine
and the Levant. The latter bank took over the assets
and liabilities of the Deutsche Palastina und Orient-Gesellschaft (Limited) in Jerusalem, with a capital of 5,000,000
marks. It has now 4 branches (in Jaffa, Jerusalem,
Beirut, and Hamburg), and in turn founded a subsidiary
company, the Levante-Kontor (Limited), with a branch in
Constantinople. The dividends on its preferred stock
show the following rates:
1899.
1900.
1901.
1902.
1903.

Per cent.
1904.
. . . .
O
I905.
I906.
1907.
1908.

454

Per cent.
. . . .
O

5
6
6
6




The

German

Great

Banks

if) 1909: The bank took part in the increase of capital
of the Credit Mobilier Frangais.
I I I . — T H E COMMON SUBSIDIARY COMPANIES (Tochter-

Gesellschaften) OF THE GERMAN CREDIT BANKS FOR
THE PROMOTION OF OVER-SEA AND FOREIGN BUSINESS.

The following subsidiary institutions were founded
jointly by a large number of German banks and banking
houses to assist German trade and industry in gaining
new markets and to preserve and expand existing markets
or to develop our colonies.
1. In 1889 there was founded for the promotion of
our trade in eastern Asia the Deutsch-Asiatische Bankus
at Shanghai, which at the end of 1908 had twelve branches
in Berlin, Hamburg, Tientsin, Tsingtau, Hankow, Hongkong, Calcutta, Tsinanfu, Peking, Yokohama, Kobe
in Japan, and Singapore. The share capital amounts
to 7,500,000 Shanghai taels, fully paid in. The following great banks participated in its founding: The Deutsche
Bank, Disconto-Gesellschaft, Dresdner Bank, Darmstadter Bank, Berliner Handelsgesellschaft, A. Schaaffhausen'scher Bankverein, and Nationalbank fur Deutschland.
By grant (Konzession) dated July 6, 1906, based on paragraph 3 of the law regarding the colonies and the imperial
decree regarding the issue of bank notes in the colonies,
dated October 30,1904, the Deutsch-Asiatische Bank was
given the right for a period of fifteen years to issue bank
notes in denominations of 1, 5, 10, and 25 Mexican dollars
and of 1, 5, 10, and 25 taels through its branch offices
located in the German possession of Kiauchau and in
China. The dividends444 paid were as follows:

455




National
1889.
1890.
1891.
1892.
1893.
1894

Monetary
Per cent.
O

Pe cent.
Per

1899
1900
1901
1902

O
O

5
7
8

1895
1896,
1897

Commission

1903
1904
1905
1906

10

6

i9°7
1908

.

-

6
7
7
9
10
10

n
9
8
8K

2. In 1894, for the promotion of our trade with Italy,
there was founded the Banca Commerciale Italiana^
in Milan. Among the participants there were the same
great banks, except the Nationalbank fur Deutschland,
which was interested in the Credito Italiano. The capital of the Banca Commerciale Italiana at the end of
1908 was 108,000,000 lire. It has now 35 branches,
among them one recently opened at Constantinople.
The dividends paid were as follows:
Per cent.
1895 .
1896.
1897

. . . . ey2
.... ey2

1898 .
1899 .

. . . . 7K

1900,
1901

. . . . 8K

....

....

-j

8^

1902 .
1903
1904
1905,
1906 .
1907
1908 ,

Per cent.
8
8
8
9
9
9
9

For the promotion of trade with Tunisia the Banca
Commerciale Italiana in turn founded in 1907 the Banca
Commerciale Tunisina with the head office at Paris.
During the same year it also participated in the increase
of capital of the Banco Commerciale Italiano in Sao Paulo,
Brazil, whose firm name has been changed since to the
Banco Commerciale Italo-Brasiliano (capital 5,000 contos).
In 1908 it founded in Constantinople the Societd Commer456




The

German

Great

Banks

dale per VOriente (share capital, 3,000,000 lire) for the
promotion of trade between Italy and Turkey.
3. During 1904-5 the Deutsch-0 staff ikanische BankUQ
was founded with the head office at Berlin, a nominal
capital of 2,000,000 marks and branches at Zanzibar,
Mombassa and Dar-es-Salam. This institution acts both
as an ordinary and a central note bank for the German
colony of Bast Africa.447 In its latter capacity it is
to regulate the money market, to facilitate payments
within the colony and to make remittances between the
colony on the one hand and Germany and other countries
on the other. It has also been granted the privilege of
issuing bank notes in terms of rupees in accordance with
business demand up to the threefold amount of its capital
with minute provisions regarding the reserve for its note
circulation.448
Among the institutions participating
in its foundation there figured also the Deutsch-Ostafrikanische Handelsgesellschaft (German East African
Trading Company) which had been organized in the same
colony likewise with the cooperation of German banks.
Among the great banks which took part in the foundation of the East-African Bank we find the Deutsche Bank
and the Disconto-Gesellschaft.
4. During 1904-5 the Deutsch-Westafrikanische BankUQ
was formed, a colonial company with a capital of
1,000,000 marks and its main office at Berlin. At the
end of 1908 it had three branches (in Hamburg, Lome in
Togo, and Duala in Kamerun). Its function is to act as a
bank in the colonies of Togo and Kamerun, i. e., to regulate the money market and to facilitate payments in these
colonies; also to facilitate remittances between these colo457




National

Monetary

Commission

nies on t h e one h a n d and Germany and foreign countries on
t h e other. T h e Deutsch-Westafrikanische Bank does n o t
possess, however, t h e privilege of note issue. 45° I t m a y
be noted t h a t t h e participants in its foundation include
besides t h e Dresdner Bank and several commercial firms,
also t h e Deutsch-Westafrikanische
Handelsgesellschaft (German West African Trading Company) which operates in
the same colony.
5. The year 1906 witnessed t h e foundation of t h e K a m erun Railroad Company for t h e construction of a railway
from Duala to t h e Manenguba Mountains with a capital of
5,640,000 marks preferred and 11,000,000 marks common
stock. In accordance with act of May 4, 1906, t h e German Imperial Government guarantees a 3 per cent yearly
dividend on t h e common stock, besides t h e redemption of
t h e capital at t h e rate of 120 per cent. (Reichsgesetzblatt, 1906, p. 525.) Of the great banks the following took
p a r t in the foundation of t h e company: Berliner Handelsgesellschaft, Darmstadter Bank, Disconto-Gesellschaft,
Nationalbank fur Deutschland, Norddeutsche Bank and
the A. Schaaffhausen'scher Bankverein.
Among t h e
founders figure also t h e banking firms S. Bleichroder,
von der H e y d t & Co. in Berlin, Wilh. Schlutow in Stettin,
M. M. Warburg & Co. in Hamburg, also the commercial
firm C. Woermann in H a m b u r g , and t h e Aktiengesellschaft fiir Verkehrswesen (Stock Company for transportation enterprises).
6. Again in t h e interests of national policy all t h e b a n k s
and firms concerned in the foundation of t h e DeutschAsiatische Bank took p a r t also in the launching of t h e
following enterprises. In all these cases there could be
458




The

German

Great

Banks

no thought of t h e speedy realization of t h e capital tied u p in
these enterprises.
1898: L a n d - u n d Seekabelwerke A. G. (Stock Comp a n y for land a n d sea cable works) in Cologne - Nippes
(share capital 6,000,000 marks).
1899: Schantung-Bergbau-Gesellschaft
(Shantung Mining
Company) in Berlin, with a share capital of 6,000,000 marks.
1899: Schantung-Eisenbahn-Gesellschaft
(Shantung Railway Company) in Berlin, with a share capital of 54,000,000
marks.
1899: Deutsch-Atlantische Telegraphen-Gesellschaft, Stock
Company in Cologne, with a share capital of 24,000,000
marks.
1899: Norddeutsche Seekabelwerke (North German Sea
cable works), stock company in Cologne-Nordenham, with
a share capital of 6,000,000 marks.
1899: Osteuropdische Telegraphen - Gesellschaft (EastEuropean Telegraph Company), stock company in Berlin,
with a share capital of 1,000,000 marks.
1904: Deutsch-Niederlandische
Telegraphen-Gesellschaft
(German-Dutch Telegraph Company), stock company in
Cologne, with a capital composed of 7,000,000 marks of
stock and 7,250,000 marks of bonds.
1908: Deutsch-Sudamerikanische
Telegraphen-Gesellschaft
A. G. (German-South American Telegraph Stock Company), in Berlin, with a capital composed of 4,000,000
marks of stock and 7,800,000 marks of bonds.
1907: A number of German hanks participated in t h e
establishment of t h e S t a t e Bank of Morocco.
At t h e end of t h e nineties there were in existence only
4 German over-sea banks. I n 1903 their number was 6,
with 32 branches, while a t the beginning of 1906 there were
459




National

Monetary

Commission

as many as 13, possessing a combined capital of fully
100,000,000 marks and about 70 branches.
But even these achievements appear rather unimportant
when compared with those of other countries in the same
field. Thus, for instance, England, in 1904, had 32 colonial banks with head offices in London and 2,104 i*1 the
colonies, besides 18 (30 in 1907) other British foreign
banks with 175 branches.451 France in 1904-5 had 18
colonial and foreign banks with 104 agencies; Holland 16
over-sea banks with 68 branches.
SECTION

5. GENERAL

FINANCIAL

RESULTS

OF

THE

GERMAN CREDIT BANKS; GROSS EARNINGS AND THEIR
COMPOSITION;

GENERAL

EXPENSES;

NET

PROFITS,

DIVIDENDS, WRITING OFF, AND RESERVES.

The financial results of all German credit banks (with a
share capital of at least 1,000,000 marks) for the years
1885 to 1908, inclusive, their number, and the dividends
paid by them, are summed up in the following table: 452
Dividends.
Year.

1885
1886
1887
1888
1889
1890
1891
1892
1893
1894
1895
1896

Number
of banks.

71
7i
7i
71
93
92
95
94
93
96
94
98 ,

Gross earnings, in
thousands
of marks.

77, 810
78,690
80,970
n o , 480
141,000
141,040
112,150
i n , 930
n o , 030
112,290

150,330
158,930
460

Net earnings, in
thousands
of marks.

56,140
57,180
57,74o
75,39o
n o , 500
98,300
74,140
76,850
71,770
85, n o
i n , 920
118,350

Amount of,
in thousands of
marks.
46,430
47,i7o
48,000
58,970
81,920
79,630
63,070
61,230
59,74o
68,620
83,55o
92,690

Rate of
(per cent).

6. 41
6.43
6.53
7-79
8.77
7. 60
6. n
5.80
5.72
6.49
7.61
7.66




The

German

Great

Banks
Dividends.

Year.

1897
1898
1899
1900
1901
1902
1903
1904
1905
1906
1907
1908

Number
of banks.

Gross earnings, in
thousands
of marks.

102
108
116
118
125
122
124
123
137
143
1S8
169

i79,37o
218,380
261,170
262,020
258,400
256,760
253,210
273,500
330,200
377,o8o
382,280
417,230

Net earnings, in
thousands
of marks.

134,690
162,800
195,470
185,270
152,640
156,170
170,560
189,780
224,730
255,530
255,38o
261,010

Amount of,
in thousands of
marks.

Rate of
(per cent).

101,830
126,360
148,560
140,520
n o , 520
120,5IO
130,880
145.540
168,540
186,880
190,720
194,820

It may be seen from this table that the German credit
banks have paid an annual dividend below 6 per cent only
three times during the last twenty-four years, namely,
for the years of depression, 1892 and 1893, when the
rate went down to 5.80 and 5.72 per cent and for the
crisis year 1901, when the rate was as low as 5.66 per
cent. Even for the years 1902 and 1903 following the
crisis the average dividends exceeded 6 per cent, while
for each of the last five years the average has been in
excess of 7 per cent. During the years of the high crest
of business activity, 1889 a n ( l I 899, average dividends
in excess of 8 per cent were paid, viz, 8.77 and 8.12 per
cent. These are exceedingly satisfactory and moreover
stable results.
It is further seen that the average 1907 dividends of
7.45 per cent show a decline since 1906, when the average
was 7.88 per cent, notwithstanding the fact that the
average discount rate of the Reichsbank in 1907 stood
at 6.03 per cent, as against only 5.15 per cent for the
461




National

Monetary

Commission

preceding year. This may serve as an additional argument against the contention that the banks are interested
in a high bank rate. The truth is that whatever advantage they may derive from the higher interest rates on
current account, this advantage is as a rule more than
compensated by the fact that in such times emissions
are either out of question or else made quite difficult;
that in addition the security business is less profitable,
that the value of the security holdings is shrinking,
necessitating corresponding amounts to be written off,
and that at such time losses under the head of debit
accounts are also inevitable. A continuous high bank
discount rate is therefore as a rule not favored by the
banks.
If it is considered that the operating capital of a bank
includes also the surplus funds and that therefore in
calculating the dividend rates the former must also be
reckoned, the following results for the last seven years
are obtained, according to the Deutscher Oekonomist: 453
[Amounts expressed in thousands of marks.]
1902.

1903.

1904.

1,948,476

1,984,642

2,005,136

2,175,315

380,211

391.362

400,372

448,380

2,328,687

2,376,004

2,405,508

2,623,695

120,512

130,881

145.5ii

168,536

5. 10

5.5i

6.05

6. 19

6-59

7- 25

1905.

Share capital on which dividends
Surplus at the beginning of the

Total of capital and surplus
(Gesamtes eigenes Kapir
tal)

Rate of dividends calculated on
the basis of capital and surplus
per cent. .
Rate of dividends calculated on
the basis of c a p i t a l only

462

7-75




The

German

Great

Banks

»
1906.

1907.

1908.

2,371,781

2,559,202

2, 627, 855

479,56i

554,4ii

586,750

2,851,342

3,113,613

3,214,605

186,884

190,722

6.50

6. 12

6.06

7.88

7-45

7.4i

Share capital on which dividends
Surplus at the beginning of the

Total of capital and surplus
(Gesamtes eigenes Kapital)

Rate of dividends calculated on
the basis of capital and surplus
Rate of dividends calculated on the
basis of capital only. . .per cent. .

It appears that on an average more than \% per cent
of the dividends is to be imputed to the surplus funds.
It is hardly possible for an outsider to calculate the
return to the banks themselves on the capital invested,
since neither the average amounts of capital employed
during a given year nor the interest paid by the banks
are known. For the same reason it is impossible to
calculate the profits of the various business branches of
the banks. Neither are the net returns to the holders
of bank shares identical with the dividends received by
them, in case a premium was paid, when the shares were
purchased. For the period 1871 to 1900 the average
income from dividends derived by shareholders of German
credit banks amounted to 6.74 per cent; for 1880-1900
to 6.84 per cent, while the net income of shareholders for
the last ten years was 6.70 per cent.454
For the year 1908 the returns on various shares from
the shareholders' point of view455—that is, the net returns
to shareholders—were as follows:
463




National

Monetary

Commission

Banking, 7.7 per cent; insurance, 19.3 per cent;
chemical industry, 15.7 per cent (large-scale chemical
enterprises, 11.5 per cent); mining, smelting, salt works,
etc., 9.5 per cent; textile industries, 9.4 per cent; electrical industry, 8 per cent; secondary railways {Kleinbahnen) and street railways, 4.3 per cent.
The average dividends of the 14 Berlin banks 456 were
invariably higher than those of other banks, as may be
seen from the following table, which gives the comparative figures for the last seventeen years:
Average dividends paid
byAll German
banks with a
capital of at
least

Average dividends paid
byAll German
banks with a
capital of at
least

Berlin
banks.

marks each.

1892
1893
1894
1895
1896
1897
1898
1899
1900

Per cent.
5.80
5-72
7-49
7.61
7.66
7.63
7.86
8.12
7.19

Berlin
banks.

1,000,000

1,000,000

marks each.
Per cent.
6.03
5
8
8
8

73
14
29

48
8 45
8 45
8 59
7 61

! 1901
1902
1903
1904
1905

1906
1907

Per cent.
5- 75
6. 72
7- 23
8.15
8. 72
8.77
7-93
8.06

We may reiterate here what we stated in the earlier part
of the volume, viz, that the rate of dividends increases
with the increase of the current business of the bank,.while
the steadiness of the dividends increases with the increase
of its regular deposit business.
On the other hand there is no basis of fact for the notion
of a recent writer,457 according to which the profits of the
bank increase in proportion to their combined capital and
464




The

German

Great

Banks

surplus, a fact which he regards of the utmost economic
interest. As a matter of fact, the reverse is true: With
the progressive growth of profits—that is, with the growth
of business, especially their current business—the banks,
in accordance with sound business policy, have been
increasing their capital.
Of the total gross profits of the German banks (with a
capital of at least 1,000,000 marks each) almost onequarter is due to commissions earned chiefly in the brokerage business. According to the Deutscher Okonomist the
gross profits, commissions, and the proportion of commissions to gross profits show the following figures:
Number
of banks.

Gross profits Commissions
(1,000

(1,000

marks).

marks).

Proportion
of commissions to
gross profits.
Per cent.

7i

83,OOO

19, 9 0 0

24. o

1885
1886
1887
1888

7i

77,800

19. 700

25.3

7i

78,700

20, 5 0 0

26. o

7i

8o,900

20, 700

25-5

7i

n o , 050

24, 200

22. o

1889

93

141,000

3 2 , 100

22.8

1890

92

141,000

3 2 , 200

22.8

1891

95
94
93
96

112,OOO

28, 8 0 0

25- 7

i n , 900

26, 700
27, 8 0 0

23.8

1892
1893

n o , 000

25- 2

150,300

1896

97
98

28, 100
34, 3 0 0

158,900

35. 4 0 0

22.3

1897

102

179,400

1898

108

218,400

40, 4 0 0
5o, 5 0 0

23. I

1894
1895

112,200

25.0

22. 8
22. S

1899

116

261,800

57. 900

22. I

1900

118

262,000

6 0 , OOO

22. 9

1901

125

258,400

58, 800

22.8

1902

122

256,700

5 7 , 700

22. 5

1903

124

253.200

62, 600

24. 7

1904

129

273.500

68, 200

25.0

1905

137

330,200

81, 400

24.7

1906

143

3 77.ooo

9i. 4 0 0

24.3

1907

158

382,300

97. 500

25-5

1908

169

417,200

103. 700

24.9

903II — I I -

-31

465




National

Monetary

Commission

The gross profits of the Berlin banks show the following
figures (in million marks):
1897
1898
1899
I9°°
1901
1902

98.8
126.8
•

i9°3
1904

H4-5
139-9
131. 6
138. 2

i9°5

i9°-7

1906
1907
1908 458

201. 9
201. 3
196.0

140- 4
152.6

According to a calculation of the Kolnische Zeitung*59 the
total gross profits of 57 German banks in 1903 originated
as follows: From bills and interest, 48 per cent; from
commissions, 25 per cent; from issues and participations,
22 per cent.
For the years 1905-1908 the profits from commissions
and interest constituted the following proportions of the
total gross profits: (a) for all banks: 71 per cent, 75 per
cent, 86 per cent, and 76 per cent; (b) for 9 Berlin banks:
67 per cent, 71 per cent, and 78 per cent.
Of the gross profits of the Berlin great banks the following proportions were derived from commissions and
interest:
1906.

i9o8.46°

1907.

Per cent.

Per cent.

69
64

73
68

79

88

55
73

Deutsche Bank
Disconto-Gesellschaft
Dresdner Bank
Darrnstadter Bank
Berliner Handelsgesellschaft
A. Schaaffhausen'scher Bankverein

69

77

79
88

Per cent.
70.6
61. 4
84.8
66.6
82.9
84.4

The assertion has been made that as early as 1894 all the
banks except the Darrnstadter Bank, and in 1905 all the
banks, except the Disconto-Gesellschaft and the Darrnstadter Bank derived sufficient earnings from their current
466




The

German

Great

Banks

business, that is, the specie, coupon, and bill business,
interest and commissions, also from their commandites, to
fully pay their dividends. This assertion made by Loeb
(see Model-Iyoeb op. cit. p. 152) is erroneous, as the author
fails to deduct from the above earnings the corresponding
expenses of operation. These expenses461 for all German
credit banks with a capital of at least 1,000,000 marks
each were as follows (in million marks):
Year.
1883
1884
1885
1886...
1887...
1888
1890
1891
1892

Million
marks.
12.4
13-5
14. 0

14.8
15.6
17. 1

22.8
23-4
24. 0

Million
marks.

Year.
1893
1894
1895
1896
1897
1898
1899

26.

Year.

66, e
69 7
74 9
90 8

Q

26 2
29 2
32 8

37 0
45 8
53 3
59 8
64 ?.

Million
marks.

107 9
121

8

1908

It is seen that during the course of concentration the
cost of operation has been steadily and largely increasing.
In 1908 it constituted about 32 per cent of the gross earnings of all the larger banks, compared with 31 per cent in
1907, 28 per cent in 1906, 27 per cent in 1905 and only 18
per cent in 1895. For the 9 Berlin banks the cost of
operation in 1908 amounted to not less than 66,800,000
marks, as against gross earnings of 196,000,000 marks, that
is, 34 per cent, as against 32 per cent in 1907, 30 per cent
in 1906, and 28 per cent in 1905, the individual banks
showing proportions more or less favorable than the
averages just given.
For the 6 Berlin great banks the cost of operation for
1908 was 55,900,000 marks; that is, 33 per cent of the
467




National

Monetary

Commission

gross earnings, the figures for each of these banks being as
follows (in million marks):
1907.

1908.

Gross
earnings.

Cost of
operation.

Gross
earnings.

Cost of
operation.

53-6

20. 0

55.o

21.4

27.8
3i.5
17-8
14. 0
18.0

8.5

29. 0

8.9

9.8

3i.o
19-3
14. 7
18.3

10.5
8. 2

A. Schaaffhausen'scher Bankverein. . . .

7-6
2-5
3-4

3-9
30

The most noteworthy facts brought out by the table is
the relatively small cost of operation in the case of the
Berliner Handelsgesellschaft, due to its continued strong
centralization, and the relatively high cost of operation in
the case of the Deutsche Bank, due undoubtedly to its
strong decentralization.
The amounts written off by all German credit banks
(with a capital of at least 1,000,000 marks each) prior to the
fixing of the clear profits were as follows (in million marks):
Million
marks
1883
1884
1885
1886
1887
1888
1899
1890

Million
marks.
1892.
1893.
1894.
1895.
1896.
1897.
1898.
1899-

Million
macks.
1901 . . .

51.6

1902 . . .

24. o

1903 • • •

1904. • •
1905 • • •
1906 . . .
1907 462 _
1908 . . .

1900

This table does not include the amounts written off
prior to the fixing the gross earnings by reducing the valua468




The

German

Great

Banks

tion«of particular assets (so-called silent reserves). The
specially large amounts written off in 1901, viz, 51,600,000
marks, are due to the crisis of 1900-1901.
According to £tie Deutscher Oekonomist, the surplus
funds showed the following total amounts and proportions
to the share capital:
Data for all banks.
Year.

Capital
stock (in
thousands
of marks.)

Data for the Berlin banks.

ProporSurplus (in tion of
thousands surplus to
capital
of marks.)
stock.

Capital
stock (in
thousands
of marks.)

ProporSurplus (in tion of
thousands surplus to
of marks.)
capital
stock.

Per cent.

Per cent.

723,950

93,240

12. 90

326,740

55,o8o

17. 00

733,690

99,270

13.53

332,750

59,52o

18. 00

758,000

107, 900

14.23

35i,75o

67,140

19. 00

772,400

115,320

15-00

368,180

74,030

2 2 . 11

156,060

15.90

473,120

103,820

22. 00

187,880

17.82

507,450

119,650

23-58

1885
1886
1887
1888
1889

981,450

1890

1,054,330

1891

1,053,210

191,720

18. 20

481,240

117,910

24. 50

1892

1,057,090

200,310

494,390

123,180

24.92

1893

1,046,170

196,330

486,400

117,560

2 4 . 17

1894

i,067,520

199,820

534,200

120,490

22. 56
2 2 . 73

1895

1,134,820

210,620

18.95
18.77
18.72
18.56

1,240,310

235,250

19. 00

626,860
656,570

142,460

1896

153,040

23.32

1897

1,418,090

270,750

19. 10

758,080

172,320

2 2 . 73

1898

1,688,170

330,370

1 9 . 60

926,530

202,860

21. 90

1899

1,906,250

373,930

19. 61

1, 0 1 9 , 9 2 0

225,540

2 2 . 11

i,9S9,5So

39o,93o

19.95

1, 0 1 9 , 9 2 0

230,680

22. 62

1,959, 290

380,210

19.40

1, 0 1 5 , 8 0 0

223,730

2 2 . 13

1,980,590

39t,36o

19.75

1, 0 2 2 , 8 0 0

239,890

23-45

1903

1,989,960

400,370

2 0 . 12

1, 0 1 9 , 4 0 0

243,310

23.87

1904

2,066,540

21.68

1,071,200

278,950

26. 04

1905

2,223,580

21. 50

1,136,700

294,100

25.80

22. 70

1, 1 7 5 , 4 4 0

333,

750

28.30

22. 80

1,209,100

344,850

28. 50

22. 90

1,178,000

342,890

29. 10

1907

2,572,890

448,380
479,56o
554,4io
586,750

1908

2,646,610

607,070

2,432,140

A very material part of the surplus funds does not come
from the business profits, but represents chiefly amounts
paid in by the stockholders in the shape of premiums and

469




National

Monetary

Commission

placed with the surplus funds in accordance with the "provisions of paragraph 262 of the Commercial Code (formerly
article 185, b, sees. 1 and 2 of the Aktiennovelle (corporation share act) of July 18, 1884. The surplus funds grew
according to the above table in the case of all banks with
a capital of at least 1,000,000 marks each from 12.90 per
cent in 1885 to 22.90 per cent in 1908, and in the case of
the Berlin banks from 17 per cent in 1885 to 29.10 per cent
in 1908. On an average, the surplus funds grew more
rapidly than the capital stock.
During the year 1900, when the surplus funds in all the
banks amounted to nearly 20 per cent (19.95) and in the
Berlin banks to nearly 23 per cent (22.62), the surplus
funds in other enterprises (according to Ed. Wagon,
op. cit., p. 170) were:
Per cent.

In
In
In
In
In
In
In
In

the wood industry
building companies
the brewery industry
the coal industry
the machinery industry
the chemical industry
the rubber industry
the paper industry

8. 89
10. 87
17. 07
20. 48
22.94
23. 38
27.15
27.16

I must say, however, that this very favorable development of the surplus funds of the banks is due to the excellence of our corporation laws rather than to the excellent
policy of our banks, as Ed. Wagon would have us
believe.463
At all events it is due chiefly to the relatively large
surplus funds that the German banks and industrial companies were able to pass through the crisis of 1900 relatively
well, in strong contrast to the crisis of 1873, and that their
recovery after the crisis took so little time. It is seen that
470




The

German

Great

Banks

the surplus funds of the German banks compare quite
favorably with the surplus funds accumulated in the most
important branches of industry. It must, however, be
borne in mind, that, like the industrial corporations, our
banks have endeavored to accumulate so-called " silent
reserves" in addition to the legally prescribed surplus
funds as shown in the balance sheets. These " silent
reserves" can be traced chiefly to the extremely cautious
and conservative modes of valuing the assets of the
institutions before the gross earnings are calculated.
The fairly steady progress of the former period (18481870) contrasts with the rapidity with which Germany's
whole economic life and, with it, German banking are
advancing in the present period, in about the same way
as the speed of the mail coach of the times of the Holy
Roman Empire of the German nation, contrasts with the
flight of the modern automobile, which while it speeds
along, overcoming all obstacles, corners, and surface
difficulties, endangers at times both the innocent pedestrian as well as the occupants. Just as in the case of
the automobile, so in the case of German banks, public
safety and real progress are safeguarded only when the
persons in charge combine great technical skill with the
greatest virtue of persons in control, that of keeping
within bounds.
Not only private but also public interests are at staKe.
With the power and the influence of the large enterprises
grows also the responsibility of the managers, as well
as the necessity of supplanting the indiscriminate
choice of means by wise self-restraint of the leaders.
It is not without significance that a distinction is made
471




National

Monetary

Commission

between banks proper and private banking concerns, and
that the bank employees are spoken of as bank officials.
They are, in fact, employees of enterprises which by
reason of their functions and development "can not be
regarded as purely private undertakings" 464 and toward
which the regulations of private law are becoming less
and less applicable.
SECTION 6. T H E

CHARACTER OF THE BUSINESS

MAN-

AGEMENT AND BUSINESS DEVELOPMENT OF EACH OF
THE GREAT BERWN BANKS.

Before describing in the next chapter the concentration
movement in German banking during the second period,
I shall attempt to characterize summarily the particular
methods of management and operations of each of the
great Berlin banks, as shown in previous chapters, in
connection with their various activities.
THE DEUTSCHE BANK.

i. The distinct merit of the management of the Deutsche
Bank, which was founded only in the beginning of the
second period, is that from its very inception is showed a
clear insight both into the needs of the hour as well as
of the more distant future. Accordingly its policy has
been to make timely and proper provisions for these more
distant needs, so that the bank was hardly ever taken
unawares by unexpected happenings and in its actions
and policies was almost never influenced by untoward
developments. The bank was thus never compelled to
make sudden changes in its policy, dictated by the pressing
needs of the moment, and in all its activities presents a
picture of safe, quiet, and steady progress.
472




The

German

Great

Banks

2. There are three main directions in which t h e abovementioned qualities of management are brought out most
clearly and brilliantly, and in which t h e Deutsche Bank
has become a model for German banking as a whole:
(a) T h e Deutsche Bank, immediately after its creation,
adopted as an integral and essential feature of its banking
policy, t h e systematic fostering of t h e deposit business
through t h e establishment of deposit offices, (which numbered 74 at t h e end of 1908), thereby effecting t h e concentration of a p a r t of t h e available funds of t h e nation in
the credit banks for productive investments and uses.
The a m o u n t of its deposits increased from 4,800,000
marks a t t h e end of 1871 t o 74,800,000 marks in t h e year
1894 and reached t h e total of 779,500,000 marks at t h e
close of 1908.
(b) I t was first among t h e banks to recognize
cessity for t h e German credit banks, of following
matic industrial policy, and immediately upon
tion of this necessity it took the proper practical
line with its new policy.

t h e nea systerecognisteps in

I n t h e year 1897 a community of interests formed
simultaneously with t h e Bergisch-Markische
Bank in
Elberfeld and with the Schlesischer Bankverein in Breslau,
both of which h a d long been active in the chief industrial
districts of Rhineland-Westphalia and Silesia, secured
to t h e Deutsche Bank, with one stroke, a firm foundation
for p e r m a n e n t industrial connections in these districts.
(c) Although other banks had made scattered efforts
along t h e same lines, t h e Deutsche Bank was t h e first to
recognize t h e need of a systematic fostering of industrial
exports b y t h e German credit banks and proceeded to lend
473




National

Mon etary

Commission

its support t o t h a t policy with an energy u n d a u n t e d either
b y difficulties or occasional failures. Soon after its creation it established branches in Bremen, Hamburg, and
London, followed later b y t h e creation of subsidiary
companies in foreign countries or for t h e foreign trade,
such as t h e Deutsch-Amerikanische
Treuhand-Gesellschaft,
(1890) t h e Deutsche Ueberseeische Bank
(1890), t h e
Deutsch-Ostafrikanische
Banky
(1904-5),
the
CentralAmerika-Bank
(1905), and the Mexikanische
Bank fur
Handel und Industrie (1906).
The same and even larger purposes were served b y t h e
founding of t h e Anatolische Eisenbahn-Gesellschaft
(1889),
t h e Betriebsgesellschaft
der Orientalischen
Eisenbahnen
(1889), t h e Bank fur Orientalische Eisenbahnen (1891), t h e
Kaiserl.
Ottomanische Eisenbahngesellschaft
(1903), t h e
Bagdad-Bahn
(1903), and the
Deutsch-Ostafrikanische
Bank (1904-5).
I n all its activities abroad t h e Deutsche Bank was
governed b y t h e viewpoint which I endeavored t o express
in another p a r t of this book (Sec. 7) in t h e words: " T h e
skirmishes of t h e political advance posts are fought out
on financial g r o u n d " (Die politischen
Vorpostengefechte
werden auf finanziellem Boden geschlagen).
This is shown
best b y t h e bank's activities in Turkey, in t h e case of t h e
Anatolian and t h e Bagdad railways, etc.
I t was t h e above-mentioned lines of policy which
caused t h e Deutsche Bank (as we shall see in t h e n e x t
P a r t , IV) t o develop a strong tendency toward concentration, particularly by decentralizing its operations.
I n this connection t h e bank quite frequently and successfully availed itself of opportune moments for p r o m p t
474




The

German

Great

Banks

and energetic action, even at times when other banks
preferred to follow a cautious and waiting policy. For
instance, on the same day when the business and banking world was shocked by the news that the Leipziger
Bank had closed its doors the Deutsche Bank announced
the opening of a branch in Leipzig.
The beginnings of concentration date back to the
seventies, when the Deutsche Bank participated in a
number of bank liquidations, which will be discussed
in detail later on. This action proved the source of
considerable profits, and, what was more important,
resulted at the same time in the gain of a large clientele
of the first order in various sections of the Empire.
It also gave the bank an opportunity to obtain a firm
foothold in southern Germany by founding in Frankforton-the-Main, one of the leading financial centers, a
branch of its own on the ruins of the Frankfurter Bankverein.
By constantly extending the network of communities
of interest and by the conclusion of friendly agreements
(Freundschaftsvertrdge) on the basis of the " mostfavored treatment/' it steadily increased the concentration and through it extended its sphere of activity and
influence. With each further phase of concentration the
bank also increased the domain of its current-account,
bill, contango, acceptance, and emission business. This
can be seen very plainly from a comparison of the
table below (p. 480), which shows the earnings from its
various lines of business, with the table showing the
progress of concentration (Appendix VII). The bank
recognized from the very beginning, even while it was
475




National

Monetary

Commission

planning large activities abroad, that the fostering of the
deposit and the regular business must always constitute
the backbone of a German credit bank, and it took no
step in its concentration development which did not
involve also a vigorous advancement in this direction.
The systematic development of its industrial policy
began with the "bold move" of 1897. During the first
two decades, however, the bank did little or nothing
toward extending its industrial connections through
the founding or transforming of industrial enterprises.
At that time it sought to improve these connections rather
through expanding its current-account and acceptance
business. When in 1890 it followed the example of
the other banks by founding the Deutsch-Oesterreichische
Mannesmannrohrenwerke (German-Austrian Mannesmann
Tube Works), this "step from its straight p a t h " did
not prove profitable.
Since the nineties, however, the German Bank has
shown but little difference from the other banks as
regards its industrial, founding, transforming, credit, and
emission business,465 although, generally speaking, it
shows far less activity than the other banks in the field
of industrial promotion proper. It was only recently
that it entered upon this line of activity on a large
scale by financing, with apparent success, a number of
petroleum companies. (See above, p. 418 and following.)
It should be said that the Deutsche Bank was also in
advance of most other banks, in adhering the more
strictly to the principles of distribution of risk and
liquidity of resources the more it extended its sphere
of activity.
476




The

German

Great

Banks

Increases of capital for t h e purpose of restoring t h e
liquidity of its resources were never resorted t o a t a t i m e
when t h e liabilities h a d already grown to dangerous
proportions as compared with t h e liquid assets of the
institution, b u t were secured beforehand, when such an
unfavorable change was t o be reasonably expected as t h e
natural consequence of t h e normal growth of business.
Such increases often proved unpleasant surprises to stockholders and speculators, causing unjustified apprehension
of decreased earnings.
As a result of t h e mutually interdependent business
policies described above, t h e Deutsche B a n k has shown a
greater steadiness in t h e development of its dividends as
well as its surplus funds t h a n any other bank. This is
proven b y t h e table below, taken from t h e report of its
operations for 1908. I t s surplus funds, as shown in its
balance sheets (exclusive of t h e no doubt considerable
"silent reserves"), a m o u n t a t present t o 51 per cent of
t h e capital stock of 200,000,000 marks, t h e latter having
grown from an original capital stock of 15,000,000 marks
in 1870.
W i t h reference t o earnings from t h e current business
and t h e extent of its oversea business, t h e Deutsche Bank
takes first rank. I t s acceptance account as a result of
its large oversea business often reached proportions which
were deemed excessive in some quarters. T h e b a n k
undertook t h e underwriting and emission on a large scale
of German s t a t e and communal loans. I t h a d a leading
p a r t in t h e emission, among others, of t h e loans of t h e
following states: Argentina, Bosnia, Bulgaria, Chile,

477




National

Monetary

Commission

China, Mexico, Spain, and Turkey (for particulars see
Append. V and VI). It took up in their entirety the
German and Prussian loans of 1899, amounting altogether
to 200,000,000 marks.
The bank repeatedly suffered losses through the speculations of the managers of its branches and commandites;
thus in 1882 through the speculations of the managers of
its New York.commandite, in 1897 through the speculations of the manager of an exchange office (Wechselstube)
of the Hamburg branch, and in 1891 through the speculations and embezzlements of a Berlin official, which
necessitated a writing off of 1,000,000 marks. The losses
in the current-account business have been relatively small,
and in view of the large surplus have had no appreciable
effect on the bank.
On the other hand, like the other banks, it had to
write off repeatedly serious losses on account of participations and industrial business. Under this head fall
the losses due to the liquidation of its early branches in
Shanghai and Yokohama, of its commandites in New
York and Paris; the Argentine participations and emissions , the Deutsch-A merikanische Treuhand-Gesellschaft
(German-American Fidelity Company), the Mannesmannundertaking; also losses occasioned through its participations and connections in the United States, especially
with the American railways, such as the Northern Pacific
Railroad Company. The successful reorganization of
this road is due primarily to the energy and sagacity of
the Deutsche Bank.
The standing which the German mark bills attained
in foreign markets, and which constituted the first stage
478




The

German

Great

Banks

in the increasing independence of our export trade from
foreign intermediaries, is primarily the work of the
Deutsche Bank and in the second place that of the
Disconto-Gesellschaft.
The German Bank participated and as a rule took a
leading part in all the joint enterprises of the large banks,
initiated for the advancement of the foreign and especially the oversea relations of Germany, as, for instance,
in the founding of the Deutsch-Asiatische Bank (1889),
the Banca Commerciale Italiana (1894), the Banque Internationale de Bruxelles (1898), the Schantung-Bergbau
und Eisenbahn-Gesellschaft (1899), the telegraph and
cable companies of the years 1898 to 1908, and the
Kamerun-Eisenbahngesellschaft (1906).
The following table shows in detail the development
of the Deutsche Bank:

479




National

Monetary

Commission
Statistical review of the develop

Cash, coupons,
bills, bank
End o p credits, concalenda tango, treasury
year—
bills and
securities.

Marks.

Marks.

22,922,080

3,237,181
11,742,210

2,158,120
7,828,140

2 , 4 6 3 , 74o
7,600,918

3 8 , 6 7 1 , 172

27,842,441

18,293,382

23,512,090

72,854,311
81,435.860
7 2 , 1 1 7 , 806
110,373,161
65,103,158

50,727,055
5 6 , 9 7 7 , 289
43,547,190

25,184,925

12,487,373
17,447,623

30,269,944

96,454,424
41,546,656

35,312,592
41,310,408

17,091,166
16,328,058
13,400,531

42,475,164
41,038,337

73,577,426

4 8 , 4 7 1 , 197
68,585,210

42,776,959
56,035,000

13,117,797
14,178,119

63,938,491
92,471,665

49,490,850
64, 2 8 2 , 4 3 5

84,705,101
107,724,165
122,280,372

66,649,401
80,060,464
85,725,618

16,349,525
21,235,646
19, 384, 402
28,096,181

132,414,350

91,567,601

137,809,036
159,040,048

Marks.
5,680,689
22,739,225
41,602,899

1870..
1871 . .
1872 . .
1873..
1874..
1875-.
1876. .

.

1877. •
1878. .
1879..
1880. .
1881. .
1882. .

Debits on current account,
Credits on advances on merchandise, etc.
current
Acceptances.
account and
deposits.
(a) Secured. (b) Unsecured.

92,679,843

1883. .

.

85,896,970
110,913,709
106,236,471
129,277,138

1884.
1885.
1886.
1887.
1888.
1889.
1890.
1891.
1892.

.
.
.
.
.
.
.
.
.

.
.

149,917,199
164,517,101

•
.

159,531,662
175,801,987
208,419,928
217,646,924
234,758,079
248,828,238
252,553,545

1893-.
1894. •

.

.

.
.
•

Marks.
2,352,265

185,939,7i8
217, 3 2 2 , 6 2 1
203,247,700
200,297,992
205,848,449
214,453,616
250,630,525

.

247,762,714
285,869,072
296,959,088
314,997,810

.

378,777,898

•
1899. . •
1900. . .

436,939,357
453,857,134
486,153,982

1901. .
1902. .

.
.

573,593,263
674,679,032

630,259,107
720,476,427

1903. •

.

722,163,979
840,004,989

789,374,38i
893,594,072

1895. •
1896 .
1897. •
1898. .

295,845,950
287,217,599
359,718,954
444,068,368
4 7 9 , 9 4 7 , 211
531,166,114

1904. •
9 3 1 * 9 8 3 , 0 3 8 1,064,340,143
1905. . .
1 9 0 6 . . . 1 , 0 2 9 , 7 4 0 , 8 8 5 1,250,744.129
1907 - . . 1 , 0 2 4 , 5 8 4 , 737 1,264,405,721
1 9 0 8 . . . . 1 , 0 1 4 , 2 0 5 , 572 1,268 816,252

Marks.

17,521,326
24,555,468

3 7 , 6 1 4 , 960

38,836,891
44,032,363
48,205,643
45,834,592
54,216,214
46,140,476
69,048,298

36,503,597
27,876,166

83,658,784

91,567,364
95,685,222
106,626,950
139,041,615
115,164,961
86,918,718

26,820,749
30, 173,948

82,753,414
88,821,789

42,527,464
40,600,115
3 4 , 0 6 1 , 711
28,086,866

103,378,662
105,769,429
n o , 9 5 8 , 904
177, 1 2 4 , 9 4 4

29,898,397
36,691,151
33,983,676

93,912,184
105,801,771
101,076,473
85,007,988
96,093,677

154, 7 6 i , 9 9 3
182,405,232

46,937,48i
45,006,718

58,666,995

203,112,894

61,992,295

232,196,609

72,764,087

244,553,839
254,245,936
264,996,941

71,806,556

314,525,405
334,315,096
3 8 2 , 7 1 2 , 175

7 2 , 4 9 2 , 174
71,060,603
77,324,283
96,022,215

80,942,605

96,325,332
93,865,465
122,496,507
116,646,487
1 3 0 , 5 1 1 , 769
128,340,214
141,883,555
141,131,301
142,420,917
145,301,506 !
179,808,067
185,083,202

473,181,109

117,181,085
160,243,675

197,843,098
226, n o , 088

509,798,132
515,652,163

177,054,188
160,947,532

263,537,867

480

231,948,426




The

German

Great

Banks

ment of the Deutsche Bank.

Syndicate
participations.

Marks.

Capital
stock.

Surplus.468

Marks.

Marks.

15,000,000

830,932

30,000,000

36,215
161,972

Aggregate turnDividends. over during year.

Per cent.
5

1,894,900

703,611
1,308,987

1,090,216

2,341,569

5

2,494,231

3,434,506

3
6

1,738,834

45,000,000

4

1,720,608

4,411,581

1,267,186

6

3, 798,113

4,857,429
5,472,928

2,939,071

6,646,742

9

7,776,419
9,354,059
13,816,131

10

14,381,884
15,309,710

9
9
9
9
9
9

6,942,299
14,375,726
14,740,480
16,146,000
11,302,239
8,773,322
20,886,257
23,549,785
21,493,311
29,710,209
29, 7 3 4 , 2 5 1
26,901,840
20,799,573
21,794,852
13,847,627
30,938,125
33,882,758
31,634,568
35,868,442
31,527,497
35,056,687
35,505,516
32,355,392
33,058,426
23,563,873
35,367,9H
45,341,545
53,427,886
36,841,129

60,000,060

15,748,039
16,212,611

75,000,000

16,659,769
23,108,580
23,852,467
24,600,094

6M

10K
10

25,162,756

100,000,000

25,592,561
26,025,280
26,590,882
\ 38,634,390
I 39,651,027

160,000,000

45,275,637
46,458,129
48,049,218
49,34o,262
50,642,845
55,283,295

100,000,000

59,030,455
76,662,853

200,000,000

100,000,000

150,000,000

78,398,560

90311 ° — I I

1 0 1 , 8 3 1 , 917
103,699,003

32

481

10M

Marks.
239,342,864
951.445,036
891,276,883
765,140,668
509, 1 4 9 , 5 8 8
512,596,634
132,497,077
325,231,848
129,850,865
834,737.8o6
484,497,746
898,953,540
o54,5i3,78i
205,456,803
650, 971, n o
147,999,465
1 8 0 , 6 4 9 , 366
062,819,201
381,792,352
125,250,988
3 0 4 , 1 2 6 , 996
559,236,637
331,274,743
152,668,706
617,185,805
900,537,501
497,085,015
913,360,703
395,084,329
770,285,211
773,486,885
815,610,701
783,415,833
640,106,144
897.131,338
205,585,347
590,594,109
611,054,053
470,721,268




National

Monetary

Commission

THE DISCONTO-GESEU.SCHAFT.

The Disconto-Gesellschaft was founded at first as a
Kreditgesellschaft (credit partnership) by the later-day
Prussian Minister of Finance, David Hansemann, and in
1856 transformed into a Kommanditgesellschaft auf Aktien
(limited stock company), under the firm name Direktion
der Disconto-Gesellschaft. As we showed above, this bank,
as early as the first period (1851-1870), took a leading
part in the fostering of the current-account business and
in the underwriting and emission of German state and
communal loans and railway shares.
Until the year 1900, however, i. e., for nearly fifty
years, this company apart from commandite participations
adhered strictly to the policy of strict business centralization. It was only through the fostering and extending
of over-sea relations that it came to establish in 1900 a
branch in London. In 1901 the liquidation of the banking
house M. A. von Rothschild & Sons in Frankfort-on-theMain led to the opening of a branch in that city. During
the second period it was promineMly connected, as a
member of the Rothschild syndicate, with all the underwriting and issue business conducted by this group,
especially the state loans and the railway enterprises in
Austria and Hungary, also with the issue of Russian,
Roumanian, Chinese, and Japanese loans.
It fostered industrial relations even during the first
period with relatively good success, though refraining as
a rule from speculative excesses. In so far, however, as
it permitted itself to be led into financing and managing
industrial enterprises, it had to suffer the same, and at
482




The

German

Great

Banks

times, even worse experience than the other banks, as,
for instance, in the case of the taking over of the
HeinrichshilUe (Heinrich Smelting Works) in 1857; "the
founding in 1872 and the subsequent development of
the Dortmunder Union; the Grosse Venezuela-EisenbahnGesellschaft, the Internationale Druckluft- und ElektrizitatsGesellschaft (Popp), founded in 1890, and the blasting
works at the Iron Gate in Hungary taken over from
the firm G. Luther. Between the years 1891-1894 the
Disconto-Gesellschaft had to write off losses of about
10,000,000 marks on account of its industrial and other
participations.
On the other hand, in 1873 it founded the Gelsenkirchener
Bergwerksgesellschaft (G. Mining Co.), which became one
of the most prominent concerns in the mining industry.
Adolph von Hansemann, who at that time was one of
the general partners of the Disconto-Gesellschaft, and
its most talented manager, became the chairman of the
supervisory board of the new mining company. In this
way the bank secured numerous connections with industrial undertakings and cartels. These connections became
even more important when on January 1, 1905, a community of interests was formed between the Gelsenkirchener
Bergwerksgesellschaft, the Aachener Hiiiten-Aktien-V erein
Rote Erde (Aix-la-Chapelle Smelting Company Rote Erde)
and the Schalker Gruben- und Hiltten-V erein (Schalke
Mining and Smelting Company).
The Disconto-Gesellschaft actively and successfully
participated in the organization of the Rhenish-Westphalian Coal Syndicate, which was finally accomplished
in 1893, after many grave obstacles had been overcome.
483




National

Monetary

Commission

I n t h e eighties a n d nineties it effected a number of issues
for t h e August Thyssen Mining a n d Smelting enterprises,
especially t h e Schalker Gruben- und Hutten-V erein a n d t h e
Gewerkschaft Deutscher Kaiser.
I n 1874 ft participated in
a syndicate formed under t h e leadership of t h e Seehandlung (the Prussian S t a t e Bank) for t h e underwriting a n d
issuing of a 5 per cent loan of 10,000,000 thalers for t h e
K r u p p Works. This operation deserves special mention
because, on this occasion, for t h e first time in Germany,
t h e loan took t h e form of fractional bonds secured b y
blanket mortgage and provided for common representation of t h e holders of these bonds, which since t h e n has
become t h e common form of such obligations. 467
T h e Disconto-Gesellschaft maintains close relations with
t h e Rheinische Stahlwerke (since 1877), t h e S t u m m Works
in Neunkirchen, the Aktiengesellschaft
Gute
HoffnungsHutte (Gute Hoffnung Smelting Company) in Oberhausen,
t h e Bochumer Verein fur Bergbau und
Gusstahlfabrikation (Bochum Mining and Cast Steel Manufacturing Company) and the Kattowitzer Aktiengesellschaft fur Bergbauund Huttenbetrieb (Kattowitz Mining and Smelting Company) , the latter founded with a capital stock of 16,000,000
marks through t h e reorganization of the mining and smelting properties of t h e von Tiele-Winckler estate.
The Disconto-Gesellschaft through its connections with
Herm. Schmidtman and t h e Schmidtman mining a n d
other enterprises, especially t h e potash works in Aschersleben, stands in close relation t o t h e potash industry.
I n the field of machinery construction it is closely related
to the Schichau ship yards in Elbing and Danzig, t h e
Henschel Machine Works in Cassel, t h e Saxon Machine
484




The

German

Great

Banks

Works (formerly Richard Hartmann) in Chemnitz, the
Berlin Machinery Construction Company (formerly L.
Schwartzkopff) and the machine and milling machinery
works of G. Luther in Brunswick.
The Disconto-Gesellschaft has always taken a prominent
interest in the business operations of the Ludwig Loewe
Company and in all the enterprises founded by this company, a managing partner of the Disconto Bank serving on
the supervisory board of each of these undertakings. Thus
it participated in the administration and the security issues
of the Deutsche Waffen- und Munitions]abriken (German
Arms and Ammunition Works) in Berlin and Karlsruhe, the
Union-Elektrizitdts-Gesellschaft (Union Electric Company),
which took over the electrical department of the Ludwig
Loewe Company, the Gesellschaft fur Elektrische Unternehmungen (Corporation for Electrical Enterprises), etc.
It also cooperated in a large number of stock and bond
issues of the firm of Siemens & Halske.
In the sphere of insurance it maintains close relations
to the Aachener und Miinchener FeuerversicherungsGesellschaft (Aix-la-Chapelle and Munich Fire Insurance
Company), the Lebens- und Feuerversicherungsbank (Life
and Fire Insurance Bank) in Gotha, the Lebensversicherungs-Gesellschaft Nordstern (Northern Star Life Insurance
Company), which was organized in 1881 in Berlin, etc. It
participated in the financing of minor and secondary railways (Klein- und Nebenbahnen) only through its close
relations to the Westdeutsche Eisenbahn-Gesellschaft.
In the sphere of real estate business proper the DiscontoGesellschaft participated only occasionally, assisting in
the parcelling of some land tracts.
485




National

Monetary

Commission

In more recent times the Disconto-Gesellschaft developed an energetic activity in the petroleum field. (See
above, p. 418 and following.)
Finally, the Disconto-Gesellschaft has been very active
in the sphere of mortgage and agricultural credit. In
1864 it participated in the founding of the Erste Preussische Hypotheken-Gesellschaft (First Prussian Real Estate
Mortgage Company), which was later (Mar. 4, 1870) taken
over by the Preussische Zentral-Bodenkredit-Aktien-Gesellschaft; and in 1895 in the organization of the Landbank,
which was intended to encourage domestic colonization
and to promote German landed interests and agriculture in
the eastern provinces. The presidency in the supervisory
board of the new institution was taken by the managing
partner of the Disconto-Gesellschaft, Ad. von Hansemann.
The picture so far presented of the industrial and kindred activities of the Disconto-Gesellschaft, while unusually
varied and animated, does not, however, vary materially
from the general picture of the activity of the other great
banks in the same field.
As regards concentration the Disconto-Gesellschaft, as
we shall show later in greater detail, was active as
early as 1871, when it organized the Provinzial-DiscontoGesellschajt in Berlin, which in turn became the parent
institution of a large number of other provincial discount
banks. We shall explain later the reasons why this first
step necessarily failed. The failure caused the DiscontoGesellschaft to refrain for a long time from founding any
subsidiary institutions. It was only in 1880 (Feb. 13)
that the Disconto-Gesellschaft participated in the reconstruction of the Handels- und Plantagen-Gesellschaft (Com486




The

German

Great

Banks

mercial and Plantation Company) of Samoa, more particularly in t h e organization of t h e Neu
Guinea-Kompagnie and in t h e preliminary negotiations during t h e years
1883 to 1885. By assuming certain obligations this company, on May 17, 1885, obtained a special charter giving
it the rights of territorial sovereignty; also t h e exclusive
privilege to acquire landed property.
These activities were followed in rapid succession b y
the organization of the Brasilianische Bank fur Deutschland (Brazilian Bank for Germany) in 1887, t h e establishment of commandites in Buenos Aires and Antwerp
(1890), the founding of the Bank fur Chile und Deutschland (1895), t h e Banca Generala Romana (1897), t h e OtaviMinen- und Eisenbahn-Gesellschaft
(Otavi Mining and
Railway Company) (1900), the Banque de Credit in Sophia
(1905), the Deutsch-Ostafrikanische Bank, and t h e Deutsche
Afrika-Bank
in 1905. Aside from this, t h e DiscontoGesellschaft participated in all the enterprises undertaken
jointly b y the large banks, thus, in the founding of t h e
Deutsch-Asiatische
Bank (1889), t h e Banca Commerciale
Italiana (1898), the two Shantung companies (1899), t h e
telegraph and cable companies (1898-1908), and t h e
Kamerun-Eisenbahn-Gesellschaft
(1906).
F r o m w h a t has been said it appears t h a t the special
characteristics of the Disconto-Gesellschaft were t h e
extensive and far-sighted assistance rendered b y it t o
industrial exports, as well as to all foreign, particularlyoversea commerce; also t h e fostering of t h e regular banking business, especially the current account business,
begun in t h e first period and developed with great skill
and success during the second period.
487




National

Monetary

Commission

The results in the various lines of operations, while very
considerable, are not so steady as those of the Deutsche
Bank. This is particularly brought out in the presentation, by ten-year periods, of the current account figures,
as found in the jubilee report (1901) of the DiscontoGesellschaft.
During the first nine years (beginning with 1852) the
debits on current account amounted to 32,000,000 marks
in round numbers. At the close of the decade they
showed a decline in 1869 to about 29,000,000 marks,
though rising again in 1870 to 30,500,000 marks.
The next decade since 1871, starts with the greatly increased figure of nearly 93,000,000 marks; at the close of
1880 the amount had fallen again to 49,000,000 marks.
In the decade following we see the figures rapidly rise
from 53,000,000 marks in 1881 to 112,000,000 marks in
1885, and then again decline to 82,500,000 marks in 1890.
Beginning with 1901, however, we find, with the exception of a few small interruptions, an almost steady growth
of the debits on current account, which reached a total of
294,000,000 marks at the close of the fiscal year 1908.
The figures of credits in current account show a similar
fluctuation. In i860 they were about 13,000,000 marks,
in 1865 they had fallen to 10,500,000 marks, while the
closing year of the decade, 1870, showed a decided increase to 39,000,000 marks. In 1877 the amount had
declined to 29,000,000 marks, in 1880 it had risen to
55,000,000 marks, and in the next decade, in 1885, again
the maximum figure up to that time was shown, namely,
154,000,000 marks, which, however, declined at the close
of the decade (1890) to 90,000,000 marks.
488




The

German

Great

Banks

Similarly, beginning with 1891, and with much smaller
fluctuations t h a n before, a steady growth of t h e credit
figures is shown, t h e statement for December 31, 1908,
indicating a total of credits on current account of 235,000,000 marks.
In t h e discussion of t h e deposit business we gave t h e
reasons why the deposit business of the Disconto-Gesellschaft showed similar and at times even greater fluctuations. W e m a y disregard the first period because a t
t h a t time, as we have shown (p. 73), there was no systematic fostering of t h e deposit business.
I n 1870 t h e total deposits amounted to 3,500,000 marks
only.
The new period begins, however, with 15,000,000 marks
deposits (1870), which rapidly grew to nearly 65,000,000
marks in 1873, b u t dropped to 10,000,000 marks in 1880.
Similar fluctuations occurred in the following decade,
which began in 1881 with 20,000,000 marks. By 1887
the a m o u n t h a d declined t o 8,000,000 marks, while at the
close of t h e decade (1890) a total of 36,500,000 marks was
reached. The next decade again starts with only 17,000,000 marks, but, beginning with 1895, when t h e DiscontoGesellschaft, with t h e view of systematically fostering the
deposit business, opened deposit offices, t h e a m o u n t increased steadily to 48,000,000 marks in 1900. According
to its 1908 statement, in which, however, t h e deposits are
calculated in a different manner, (p. 207), t h e deposits of
the Disconto-Gesellschaft amounted to 218,500,000 marks.
Similar fluctuations are observed in the case of t h e commissions, which in 1870 amounted to about 1,000,000

489




National

Monetary

Commission

marks. From 1,333,000 marks in 1871 they increased to
4,660,000 in 1872, declined to 1,500,000 in 1876, rose to
4,500,000 in 1900 and to 6,500,000 marks in 1908.
The dividends on the commandite capital of the Disconto-Gesellschaft in the second period (those of the first
period were shown on p. 68) were as follows:
Year.

1871

Year.

Per cent.

Per cent.

1884

Year.

Per cent.

1897

24
27
14
12

1887

7

1888

11
11
10
10
12

1876

4

1889

14

8K

1877
1878

5

11

8^

1879

10

1880

10

1881
1882

11K

1872
1873
1874
1875

1883

1885
1886

1891

8
6
6
8

1892
1893

10

xoV2 1 1895
1 0 K 1896

1898
1899

.
9
8

&*A
190$

9
9
9

1908

9

10

There is no other German credit bank whose annual
dividends ever came near the dividends of 24 and 27 per
cent, which the Disconto-Gesellschaft was able to distribute in the years 1871 and 1872.
The capital stock of the Disconto-Gesellschaft on December 31, 1908, amounted to 170,000,000 marks, while
the surplus amounted to 57,500,000 marks, or 33.88 per
cent of the capital stock.
The manner in which the current banking business of
the Disconto-Gesellschaft has increased is illustrated
statistically in its Jubilee Report of 1901 (p. 25) by the
amount of correspondence carried on in this branch of
business.

490




The

German

Great

Banks
Letters
received.

6,135
85,800

Letters
sent.
6, 292

34i,3i8

87,513
208,240
452,166

533,102

626,043

204,877

The Disconto-Gesellschaft from t h e start was prominently connected with t h e Prussian Syndicate a n d
subsequently with t h e Rothschild Syndicate, t h u s participating in t h e Prussian, Austrian, a n d Hungarian
state loans. I t was likewise a member of t h e syndicate
organized for handling t h e Russian a n d Italian state
loans a n d those of t h e German Empire. I t took a leading
p a r t in t h e financial operations of t h e Chinese Government a n d participated t o a very large extent in t h e issue
of Brazilian a n d Argentine loans. I t was also t h e leading
member of t h e b a n k syndicate which handled t h e various
Roumanian state a n d railway loans (for particulars see
Append. V. a n d V I ) .
In reviewing t h e activities of t h e Prussian a n d t h e
Rothschild syndicates as well as t h e other great international financial operations of t h e German banks during
t h e second period, t h e jubilee volume of t h e DiscontoGesellschaft contains t h e following remarks: " T h e small
proportion of failures in carrying o u t t h e numerous enterprises of t h e last half of t h e nineteenth century * * *
is a lasting glorious testimony t o t h e honest a n d efficient
management of t h e financial business of this period.''
A considerable p a r t of this fully deserved praise m a y be
claimed b y t h e Disconto-Gesellschaft.

491




National

Monetary
T H E DRESDNER

Commission
BANK.

The Dresdner Bank, which was founded in 1872 and in
1881 transferred its center of activity to Berlin, by the
establishment of a branch there, claims our special
interest in a number of directions.
It achieved remarkable success in the deposit business
within an unprecedentedly short period, although it was
not until 1896 that it followed the example of the Deutsche
Bank in establishing deposit offices. At the close of 1908
it was conducting an extensive deposit business by means
of its 16 branches and 44 deposit offices.
Its deposits grew within less than twenty years from
less than 3,000,000 marks in 1875 to 94,000,000 at the
end of 1894, and reached an aggregate of 224,000,000
marks at the close of 1908, or fifteen years later. It thus
overtook the Disconto-Gesellschaft in this branch of
business, although the latter had been in this field a
much longer time.
In the same rapid and brilliant manner it managed to
develop its regular business, the first extensive increase
of which, just as in the case of the Deutsche Bank, dates
back to the seventies, when it participated in the liquidation of 4 Saxon banks. Its further growth is due largely
to the founding of branches, the absorption of a large
number of banks and private banking concerns, and the
establishment of numerous communities of interest. Its
branches numbered 16 at the close of 1908, this being the
second largest number for any German bank. It also
managed to secure a strong foothold in southern Germany
by taking over in 1904 the banking house von Erlanger

492




The

German

Great

Banks

& Sons at Frankfort-on-the-Main with its extensive ramifications, in the place of which it established a branch
of its own. In the same year it secured a large clientele
among the membership of the mutual credit societies by
taking over the Deutsche Genossenschaftsbank Sorgel, Parrisius & Co. For this new business it established a special
mutual credit department.
The credits on current accounts rose from 4,000,000
marks in 1873 to 95,000,000 marks in 1894 and 371,000,000
marks in 1908; the debits from about 9,000,000 marks in
1875 to about 95,000,000 marks in 1894 and 445,000,000
marks in 1908. As a result of great alertness and liberal
commission and interest terms, the bank succeeded in
securing a large number of customers wherever it obtained a footing, first among the circles of Saxon industry,
and soon after among wider circles. Its clientele increased
considerably through the absorption in rapid succession of
a number of banks and private banking houses, and later
through the entering of community-of-interest relations
with other banks in Rhineland-Westphalia and in Silesia,
by following the example of the Deutsche Bank. The
number of industrial undertakings, for which it acts as
fiscal agency (Zahlstelle), is exceeded only by that of the
Deutsche Bank.
Since 1892 it also undertook the systematic promotion
of foreign and oversea business, by establishing, just as
the Deutsche Bank, though not in the same order of
time, branches in Hamburg (1892), where it absorbed
the Anglo-Deutsche Bank, next in Bremen (1895) and
finally also in London (1901).

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Moreover, as early as 1889 it participated in t h e formation of t h e Anatolian Railway Company and t h e Company
for t h e Operation of Oriental Railways (Betriebsgesellschaft
der Orientalischen Eisenbahnen), of the
Deutsch-Asiatische
Bank, and t h e Deutsch-Afrikanische
Bank.
In 1891 it
took p a r t in t h e foundation of t h e Bank fur Orientalische
Eisenbahnen, in 1894 in t h e organization of t h e Banca
Commerciale Italiana, in 1899 in t h e establishment of t h e
two Shantung companies, and during t h e period 18981908 in the organization of t h e Deutsche
TelegraphenGesellschaften und Kabelwerke, in t h e establishment of t h e
Deutsch'Westafrikanische
Bank
(1904-5) and of t h e
Kamerun-Eisenbahngesellschaft
in 1906.
About t h e end of 1905, jointly with t h e A. Schaaffhausen'scher Bankverein (with which it h a d entered in
1903 into community-of-interest relations, now practically dissolved) and the Nationalbank fur Deutschland,
it established t h e Deutsche Orientbanky and about t h e
same time, in conjunction with the first-named institution, t h e Deutsch-Sudamerikanische
Bank.
I t also promoted and fostered with growing success
t h e over-sea " r e m b o u r s " business (see p . 428), without,
however, attaining in this field, as well as in t h e general
field of international connections, nearly as favorable
results as t h e Deutsche Bank or t h e Disconto-Gesellschaft.
I n various ways it sought to extend its continental
foreign connections. Thus, with t h e view of promoting
business in Austria-Hungary, it entered into close relations with a n u m b e r of Vienna banks. I n order to
gain a foothold in t h e Italian and Swiss markets, it participated in the foundation of t h e Banca Commerciale
494




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Great

Banks

Italiana and founded the stock company Speyr & Co.
in Basle.
In the field of "minor," i. e., urban and interurban
railway enterprises (Kleinbahn-Unternehmungen)
the
Dresdner Bank manifested considerable activity by founding the Central Bank for railway securities (Centralbank
fur Eisenbahnwerte) and the Continental Railway Construction and Operation Company (Kontinentale Eisenbahnbau- und Betriebsgesellschaft) in Berlin; also by participating in the Orenstein & Koppel Works for field and
"minor " railways. In 1898 it took a prominent part in the
formation of the Central Bank for railway securities
(Centralbank filr Eisenbahnwerte), a trust company,
which issues bonds of its own on the basis of AustroHungarian and German railway securities acquired by it.
Since 1909 it has been financially interested in the Orenstein & Koppel Works for field a n d / ' m i n o r " railways,
Berlin, amalgamated with and successors to the former
firm Arthur Koppel.
According to Otto Jeidels (op. cit., p. 137), the number
of industrial emissions under the auspices of the Dresdner
Bank for the years 1895-1903 compares as follows with
those of the other great banks: Dresdner Bank, 220;
A. Schaaffhausen'scher Bankverein, 187; Berliner Handelsgesellschaft, 170; Disconto-Gesellschaft, 151; Deutsche
Bank, 150; Darmstadter Bank, 148.
In the electro-technical industry the Dresdner Bank
from the very beginning participated jointly with the
Disconto-Gesellschaft and the Darmstadter Bank in the
firm Ludwig Loewe & Co. and its subsidiary companies.
After the absorption by the Allgemeine Elektrizitats495




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Monetary Commission

Gesellschaft of t h e Union-Elekirizitats-Gesellschaft,
one of
t h e Loewe creations, the b a n k became a member of t h e
A. E . G. syndicate.
The bank from t h e outset maintained and fostered close
relations t o t h e bourse. I t is this circumstance a n d t h e
peculiar composition of its security holdings which caused
t h e ofttimes undeserved criticism t h a t this b a n k , more
t h a n any other great bank, showed speculative tendencies.
I t was also pointed o u t t h a t t h e b a n k h a d considerable
participations in gold-mining enterprises a n d t h a t its
debit accounts were a t times largely composed of acceptances for which t h e bank stood sponsor. F a u l t was found
occasionally also with t h e extensive participations of
t h e bank in real estate corporations, though its operations
in this field were always effected with great skill a n d
success. T h e Dresdner Bank owned considerable real
estate in Wilmersdorf (Berlin), was interested in t h e Moabit
(Berlin) a n d t h e Hanover real estate companies (Moabiter
Terrain-Gesellschaft, Hannoversche
Immobilien-Gesellschaft);
also in t h e P a r k Witzleben (Berlin) Real E s t a t e Stock
Company. I t founded in 1893 t h e Berlin Real E s t a t e
Company (Berlinische Boden-Gesellschafi)
a n d in 1898
t h e Kurfurstendamm Real E s t a t e Company
(BodenGesellschajt Kurfurstendamm).
Among its larger losses
there figures one of about 2,500,000 marks, caused t o i t s
H a m b u r g branch through engagements with t h e export
a n d storehouse company J . Ferd. Nagel, which engagements, however, h a d been acquired from t h e AngloDeutsche Bank.
The bank distributed t h e following dividends:

496




The

German

Year.

Per cent.

1873

i-5
6

1874
1875

5
5-S
6-5
7
9
9

1876
1877
1878
1879

Great
Year.

Per cent.

1885

7- 5

1886
1S87

7

Banks
Year.

1897
1898

7

1888
1889

9

11
10

1891
1892
1893

2883

9
8
8

1884

7-5

1896

5-5
8
8
8

1882

9
9
9
8
4
6

7

1880
1881

Per cent.

7

7

1895

1905

8K
8H
7
1XA

A gratifying percentage of these dividends is derived
from the profits yielded by the regular or current
business.468
The share capital of the Dresdner Bank has been raised
nine times from 9,600,000 marks in 1872, the year of its
foundation, to 70,000,000 in 1904, the first iucrease
taking place as early as 1878. In 1909 its share capital
amounted to 180,000,000 marks (increased to 200,000,000
marks by 1910) while its reserves totaled 51,500,000
marks—that is, 28.61 per cent of the share capital.
The bank took a large part in the underwriting and
emission of securities. In the international issue field
it succeeded particularly in the emission of Mexican
railway loans; it also participated, jointly with the Darmstadter and other banks in the emission of Portuguese
securities. (See App. V and VI.) During most years,
however, it managed to keep its syndicate participations
within moderate limits. On the other hand, its security
account shows large holdings of industrial shares, which
were often used rather skilfully to support its industrial
policy.
903110—11

S3

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On the whole it may be said that the Dresdner Bank
has succeeded in very short time in gaining the permanent
favor of a large clientele because of the skill and alertness
of its management.
T H E DARMSTADTKR BANK.

Among the great banks the Darmstadter Bank during
the first, and largely also during the second period took
special care in guarding most carefully the liquidity of
its resources and the principle of the distribution of risk, at
times even refusing to engage in operations that, might
impair in any way the liquidity of its resources. If engagements of this sort were unavoidable, it showed the
utmost endeavor to liquidate as soon as practicable its
long-term engagements. This was the reason why soon
after its foundation it passed quite successfully the crisis
of 1857, and was able during that time to render effective
aid both to its clients as well as to various corporations
and other banks.
From the outset its reports contained many more particulars regarding its operations than those of almost any
other bank. This is especially true of the information—
given regularly up to 1900—regarding the composition of
its security holdings and its syndicate participations.469
It was shown before that during the first period it took
a most prominent part in the construction of the German
private railways, in the underwriting of a large number of
state and communal loans, and in promoting the rapidly
developing industry. It may be said that during the
first period, and to a large extent even in the beginning of
the second period, it was almost exclusively a bank for
498




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Great

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industrial promotions and only to a stnall extent a bank
for the emission of state, communal, and railway securities.
During the first epoch the bank, or at least its central
office, made but few systematic efforts to develop its current-account business. Its industrial connections originated during those years mainly from its emissions of
industrial securities, mainly industrial shares, which the
bank from the outset retained in large blocks, thus preserving a permanent influence on the administration of the
enterprises. This policy, while frequently the cause of
heavy losses, on the other hand enabled the bank to keep
a constant watch over those industrial undertakings
which it had founded or transformed into stock companies. We showed above that during the single year
1856 it founded seven industrial companies, in which it
retained a permanent participation extending to about
one-third of the entire share capital, or about 800,000
florins. Since these holdings resulted not from emissions,
but from promotions, it may be said that it engaged
designedly in entrepreneur activity, the risks of which,
it is true, were somewhat lessened by its continuous regard
for the liquidity of its resources, but which, nevertheless,
were quite apparent.
Neither did it make systematic efforts to foster the
deposit business during the first period and even during
a considerable part of the second period, for general reasons similar to those which are stated in the 1850 report
of the Schaaffhausen'scher Bankverein. (See pp. 73 and
74.) The bank proposed to carry on its business, as far as
practicable, with its own means, and in the interest of
the safety of the institution did not regard it expedient
499




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to " bring about aft increase of deposits by holding out
more attractive terms/' It was shown, however, that in
the beginning of the second period its deposits amounted
to about 11,000,000 florins, as against only 2,000,000
marks in the case of the Disconto-Gesellschaft and about
2,500,000 marks in the case of the A. Schaaffhausen'scher
Bankverein. This relatively large amount most likely
resulted from its close connections with various railway
companies, such as the Hessian Ludwig Railroad Company, and from the credits on current account of large
corporations and firms.
It was only in 1900, or much later than the other banks,
that the Darmstadter Bank resolved upon the founding
of deposit offices and thus upon a systematic fostering of
the deposit business. But meanwhile the other banks
had gained a considerable start and secured a growing
number of permanent and reliable investors for the securities emitted by them and, what is more important,
an ever-enlarging circle of current-account depositors.
To the credit of the bank it may be stated that it refrained from issuing long-term bank obligations. The
charter of the Darmstadter Bank, following the model
of the Credit Mobilier, provided for the issue of such bank
obligations which, secured indirectly by the newly created industrial enterprises, were to combine the scattered small capitalist forces in the launching of large
enterprises.
The Darmstadter Bank as a rule kept aloof from excessive speculative dealings, except in a few cases, when it
was subjected to particularly vehement criticism. Thus
during the first period it lost heavily, having like many
500




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Great

Banks

other banks become involved in speculative contango
and share transactions, which about t h e same time, i. e.,
in 1857, were compensated b y improper profits from t h e
trading in its own scrip (Berechtigungsscheine),
t h e socalled Darmstddter Enkel.470
Even during t h e earlier period t h e bank took a considerable p a r t in t h e foreign business in Italy, Belgium,
and more particularly in Austria-Hungary, where in t h e
beginning of t h e sixties, jointly with t h e Rothschilds
and t h e Kreditanstalt, it h a d engaged in Austrian s t a t e
and railroad finance operations, though joining t h e
Rothschild syndicate only some time later. As a result
of these a n d similar financial operations it felt constrained
as early as 1855 to have its capital of 10,000,000 florins
fully paid up (only 4,000,000 florins having been paid in
u p t o t h a t time), and to increase it to 25,000,000 florins
in 1856. On t h e other hand, in 1857, when, according to
the by-laws adopted, t h e capital was to undergo a further increase t o t h e m a x i m u m of 50,000,000 florins, t h e
increase was effected only to t h e infinitesimal extent of
additional 46,000 florins, a larger issue being headed off
b y the crisis of t h a t year.
The function of its offices in Frankfort-on-the-Main
(agency opened in 1854) and in Mainz (branch opened in
1854) was to foster more largely t h a n could be done b y
t h e central office in Darmstadt the bill and draft business and especially t h e current-account business. Until
t h e eighties and even later the bank was extremely conservative in granting acceptance credit, so much so t h a t
during t h e middle of t h e seventies t h e acceptance obli-

Soi




National

Monetary

Commission

gations of the Berlin office and of the branch at Frankfort-on-the-Main amounted to only a few million florins.
For the promotion of domestic and more especially
foreign business relations, a large number of commandites
were founded, which did not, however, justify expectations, as they proved to be in advance of the time.
As early as 1854 the first commandite in New York
was formed with the firm G. vom Baur & Co., in 1857 the
first commandite in Paris, and in 1867 a commandite in
Vienna with the firm Dutschka & Co. The establishment of other commandites was planned in London, St.
Petersburg, Prague, and even in Smyrna and Constantinople, but these plans failed of realization partly because
of the unpropitious times, partly also because of legal
difficulties. At all events the Darmstadter Bank may
claim to have proceeded first designedly in this field in
accordance with the program laid down in its very first
report for the year 1853, which stated among others
" t h a t the bank's organs both at home and abroad were
to facilitate the export trade as well as the innumerable
relations of German industry to the money market."
How far-reaching the plans of some people were even
in those early days may best be seen from the fact that in
1856 two of the founders and members of the supervisory
council of the Darmstadter Bank—Gustav V. Mevissen
and Abraham Oppenheim—quite seriously sounded the
Disconto-Gesellschaft whether it would not be advisable
to organize jointly a central bank for foreign commandites
with a capital of about 100,000,000 thalers, whose function
it should be " to prevent in the future the scattering of the
capital of those German banks which strove after foreign
502




The

German

Great

Banks

commandite connections and to bring about the most
competent possible representation of their interests." 471
With the view of decentralizing its business, the bank
from the early years until the nineties preferred the commandite system to the establishment of branches. This
is largely accounted for by the unsatisfactory experience
it had had with some of its branches founded about the
end of the fifties and the beginning of the sixties. In
1863, "in order to reduce the number of institutions
whose operations might lead to direct commitments of the
bank," it thought it necessary to transform its branch
at Mainz into a commandite. It was only in 1890 that it
parted with this principle by opening a branch at Hanover, shortly afterwards followed by another in Strassburg
(in Alsace). At that time it still had 8 commandites in
Heilbronn, Mainz, Dresden, Halle, Mannheim, Bucharest,
Berlin, and Neustadt, while in 1909 this number had
fallen to 3.
The average rate of dividend for the period 1854-1862
was €>yi per cent.
Between 1863-1872 the bank took over independently
many German and foreign, including several Russian
and Italian state bond issues, and participated in other
similar transactions. Its main activity, however, consisted in the financing and the construction of the German
and Austro-Hungarian railway systems, among others
the financing of the Gotthard Railway. During that
period it also founded a number of subsidiary banks
(Tochterbankeri); for instance, the Amsterdamsche Bank
(in 1871), the Siiddeutsche Bodenkreditbank, the Silddeutsche Immobilien-Gesellschaft, the Ungarische Escompte503




National

Monetary

Commission

und Wechslerbank in 1877, a n d t h e Deutsche Gold- und
Silber-Scheide-Anstalt,
preceded b y t h e foundation of t h e
Hessian Note B a n k {Bank filr
Siiddeutschland).
T h e average dividend
amounted t o 8.7 per cent.

for

the

period

1863-1872

During t h e following decade, 1873-1882, after safely
passing through t h e crisis of 1873, finance operations
in Austrian and German railway, state, and communal
securities were effected, while beginning with 1879 t h e
conversion of German state, railway, and municipal
debentures was started, which attained increasingly large
proportions in t h e following years.
T h e average rate of dividends for t h a t decade (18731882) was SJ4 P e r cent.
As a result of t h e state purchase of t h e railroads in
Germany and Austria t h e finance transactions with large
railway companies greatly diminished. Instead, t h e
bank, first among t h e great banks, during t h e decade
1883-1902, in conjunction with t h e railway constructing
a n d operating concern H e r r m a n n Bachstein, undertook
on a large scale t h e construction, operation, and financing
of t h e so-called minor railways {Kleinbahnen), in t h e first
place in Hesse, Baden, and Thuringia. T h e same period
witnesses t h e founding b y t h e b a n k of several industrial
companies and t h e participation in t h e underwriting of a
n u m b e r of state and communal issues a n d in t h e fusion
of t h e Jura-Berne-Iyucerne Railway with t h e Swiss Western
Railway. During these years t h e b a n k jointly with a
n u m b e r of other banks and banking firms took over t h e
issue of t h e Lisbon municipal and Portuguese state loans.
A p a r t from t h e Iyisbon municipal loan, interest on which
504




The

German

Great

Banks

has been regularly paid, the other loans proved a source
of great losses and annoyance to the bank and greatly
hampered its subsequent activity, inasmuch as the bank
felt in honor bound to mitigate, as far as practicable, the
consequences of the defaults on the part of the State and
railways, with regard to the holders of the state and
railroad securities.
The average rate of dividends during that decade
(1883-1892) was below 7^2 per cent.
During the following decade (1893-1902) its activity
became concentrated chiefly in the field of minor railways. In 1895 it took a leading part in the founding of
the Siiddeutsche Eisenbahngesellschaft. This company
amalgamated the small railways which had been completed by that time and on the whole were then in a fair
financial condition. The bank also had a hand in a
number of state and municipal issues and of industrial
real estate transactions.
About the end of the decade the bank derived considerable profits from a number of reorganizations of several banking and industrial concerns such as the Deutsche
Grundschuldbank, the Preussische Hypotheken-A ktienbanky the Pommersche Hypothekenbank, and the mining
and iron works Differdingen-Dannenbaum, also from
taking over in 1902 the Bank jiir Suddeutschland and the
Breslauer Disconto-Bank. About the same time it entered into a community of interest with the Ostbank jiir
Handel und Gewerbe in Posen.
Notwithstanding all these multifarious activities
the average dividend rate for the decade was but 6}i
per cent.
505




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Monetary

Commission

During the most recent period the bank paid special
attention to the fostering of the current-account and
deposit business. Its efforts in this field proved eminently successful, so much so that by skilful management
it was able to restore the liquidity of its resources, which
had become temporarily impaired. As a member of the
Loewe group it participated in all the enterprises of that
combination. It also took part in a number of state and
municipal loans as well as in several industrial issues. In
1905 it established community-of-interest relations with
the Bayerische Bank filr Handel und Industrie.
The number of its deposit offices at the end of 1908
was 39, exclusive of 7 agencies.
In 1900 it strengthened its foreign connection? by the
founding of the Bankers' Trading Syndicate in London,
in 1902 by entering into close relations with the Wechselstuben-Aktiengesellschaft Merkur in Vienna, and in 1903
by establishing community-of-interest relations with the
Nordwestdeutsche Bank in Bremen. During the years
1904-5 it participated in the transformation of its
former commandite in Bucharet into a stock company,
which assumed the firm name Banca Marmorosch Blank
& Co., Societate anonima. During the same period it
absorbed the banking firm Rob. Warschauer & Co., which
had important foreign business connections, especially in
Russia, and in which it had held a silent-partnership
interest since 1898.
In 1889 the bank participated in the founding of the
Deutsch-Asiatische Bank; in 1898, jointly with other
domestic and foreign institutions, it took a prominent part
in the founding of the Banque Internationale de Bruxelles.
506




The

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Great

Banks

During the years 1898-1908 it cooperated in the launching of the German Telegraph and Cable companies, in
1899 in the founding of the two Shantung companies, and
in 1906 in the organizing of the Kamerun Railway Company.
In 1906, jointly with several domestic and foreign
banks, it founded the Amerika-Bank for promoting business relations with the United States. This institution,
however, was placed in liquidation in 1909.
It may be said in conclusion that the Darmstadter
Bank from the very beginning acquired a high standing
among large circles. Its management, while not always
following a uniform business policy, adhered, however,
almost steadily to the principle laid down in paragraph 10
of its first by-laws. 472 As a result, it continued to
enjoy public confidence in an undiminished degree, at
first in southern Germany and subsequently in the whole
country, even during times which proved critical for many
commercial undertakings and banks.
T H E A. SCHAAFFHAUSEN'SCHER

BANKVEREIN. 4 7 3

This institution is the oldest German credit bank. Its
foundation dates back to the year 1848, when it superseded the banking firm A. Schaaffhausen, which at that
time had become involved in financial difficulties. The
capital of the reorganized institution was fixed at 5,187,000
thalers, of which, however, only 3,199,800 thalers were
paid in. As the firm A. Schaaffhausen had maintained
extensive industrial connections in Rhineland-Westphalia,
the new institution was in a more favorable situation than
the other present-day great banks, which were able to
507




National

Monetary

Commission

acquire a steady clientele only after years of laborious
efforts. Its primary task was to maintain and develop the
connections of the old and well-renowned banking firm,
whose clientele it had taken over, by means of transforming industrial undertakings into stock companies or
otherwise to mobilize the industrial participations in which
the capital of the old firm had been tied up, and to liquidate them as soon as the profitableness of the undertakings and general business and market conditions
would permit such action.
On pages 71 and following we enumerated a long list of
transformations and new foundations, effected by the A.
Schaaffhausen'scher Bankverein during the years 18511858. We mentioned there that from the outset the farsighted and expert management of the institution recognized clearly " t h a t the permanent success of the Bankverein was inseparable from the prosperous growth of
Rhenish industry in all its branches.'' Subsequent development fully proved the soundness of its position. The A.
Schaaffhausen'scher Bankverein has grown great with the
surprisingly rapid and strong development of the RhenischWestphalian industry, which until the most recent period
has been furnishing the very core of its industrial clientele.
The careful fostering of the current-account and underwriting business was a natural corollary of its industrial
connections and the necessity to extend and strengthen
these connections. The same can not be said of the deposit
business, to which the Bankverein paid no systematic
attention during the first period for general reasons mentioned in the chapter relating to the Darmstadter Bank.
As a matter of fact, its total deposits about the end of the
508




The

German

Great

Banks

first period, in 1869, amounted to 883,616 thalers only.
The founding of branches, agencies, and commandites
contemplated as early as 1853 did not at first materialize.
Neither did the bank succeed, as it then intended, in opening a branch in Berlin, as such action presupposed a change
of its by-laws, for which the then required state sanction
could not be obtained. The Bankverein passed through
the crisis of 1857 without being compelled to cancel any
outstanding credits.
During the first epoch, while manifesting great activity
in the founding and transforming business, it figured to a
relatively small extent in the underwriting field, though
participating in numerous syndicates organized during
that period by other banks.
Even during the second period the Bankverein was an
"industrial" rather than an "emission'' bank. At the
same time it was careful enough not to permit any undue
swelling of its acceptance account. Having its central
field of activity in the domain of the rapidly developing
Rhenish-Westphalian industry, its importance during the
second period as an industrial bank became preeminent.
Owing to its old-established industrial connections, it
continued during all stages and changes of business, notwithstanding severe competition, as the foremost industrial
counsel, financial aid, and agent in the execution of the
ofttimes ambitious schemes of a number of industrial
establishments. Foremost among the latter is the Horder
Bergwerks- und Huttenverein, founded as a stock company
in 1852, whose rapid growth up to 1873 and financial
troubles after 1873 claimed the energetic support of the
Bankverein up to the reorganization of the concern by
509




National

Monetary

Commission

the Bankverein jointly with the firm of Deichmann & Co.,
of Cologne. It was only after some time and the general
improvement of the business situation that this operation
led to a series of profitable emissions and other transactions. Even at present a director of the Bankverein is
the chairman of the supervisory council of the Horder
Verein, while, in turn, the general director of the latter is
a member of the supervisory council of the Bankverein.
Close relations were established with a number of large
industrial concerns, such as the Harpener Bergbaugesellschaft, the Bochumer Verein, the Phoenix and the Hoesch
steel works. This necessitated the increase of the resources of the bank, and thus fostered its concentration
tendencies. Both in the interest of successful industrial
issues as well as for other reasons to be considered later
closer relations with the leading bourse center became
necessary. It was only in 1891, however, that the Bankverein established such relations by opening a branch in
Berlin. Notwithstanding this action, the Bankverein by
no means became a Berlin great bank. It preserved its
essential character of a Rhenish great bank, though its
importance at the new center grew, as a matter of course,
with the absolute and relative growth of the branch, in
contradistinction to the Darmstadter Bank, which by
shifting its center of activity from the commercially unimportant town of Darmstadt to Berlin became to all intents
and purposes a Berlin great bank, the more so as with the
further growth of its business its clientele gradually ceased
to be exclusively or mainly south German.
In proportion as the tasks of the Bankverein in the field
of industrial credit and issues grew in size and number it
had to increase in comparatively rapid succession its paid-in
510




The

German

Great

Banks

capital from 9,600,000 marks t o 36,000,000 in 1880, to
60,000,000 in 1895, and t o 145,000,000 at t h e end of 1905.
During t h e second period it joined t h e concentration
movement b y t h e opening of branches, which numbered
10 at t h e end of 1908, and of deposit offices, the number of
which increased to 13 during t h e same time; also b y t h e
establishment of a subsidiary b a n k (Tochterbank),
the
Westfdlisch-Lippische
Vereinsbank,
Aktiengellschaft
in
Bielefeld, and finally b y t h e absorption of several banks
and banking houses. I t has only one commandite (in
Dresden), and after t h e dissolution of t h e community of
interest with t h e Dresdner Bank maintains such relations
a t present only with t h e Pfalzische Bank in Ludwigshafen
(1901) and t h e Mittelrheinische Bank in Coblenz (1903).
F r o m w h a t has been said heretofore it m a y be seen t h a t
t h e Schaaffhausen'scher Bankverein possesses no extensive
international connections. This probably was one of t h e
main reasons which induced it to establish t h e community
of interest with t h e Dresdner Bank, which maintains a
large number of such connections. This community of
interest became effective J a n u a r y 1, 1904, for a t e r m of
t h i r t y years, b u t was essentially terminated J a n u a r y 1,
1909. One result, however, of t h e temporary combination
was t h a t the Bankverein h a d to t a k e p a r t in t h e common
foreign enterprises of t h e other great banks, such as t h e
Deutsch-Asiatische Bank, t h e Banca Commerciale
Italiana,
and to t a k e even a leading p a r t in t h e establishment of
t h e telegraph and cable companies. I t also participated
in t h e founding of t h e Banque Internationale de Bruxelles,
t h e Shantung companies, and t h e Kamerun Railway Company, and jointly with t h e Dresdner Bank in t h e founding
5"




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Monetary

of t h e Deutsche Orient Bank
kanische Bank.

Commission
and t h e

Deutsch-Siidameri-

The special domain of the Bankverein is, however, t h e
industrial field, especially t h a t of t h e Rhenish-Westphalian
district. I t is particularly interesting and instructive t o
observe t h e various types of relations, as were shown b y
t h e example of t h e Horder Verein, which t h e b a n k formed
during t h e second period.
T h e b a n k as a rule and with good reasons avoided
permanent large participations in industrial enterprises.
I t s holdings of the stock of t h e Internationale
Bohr-Gesellschaft (International Exploration Company) a t Erkelenz—
devised to continue indefinitely—can hardly be regarded
an exception, since it needed this stock to support its
industrial policy in various directions, 474 as, for instance, t h e
maintenance of its influence in t h e second coal syndicate,
the penetration into various mining branches in Germany
and foreign countries, especially in Belgium, and, finally,
for t h e purpose of developing t h e Roumanian petroleum
business, entered into jointly with t h e Dresdner Bank.
(See above, p . 419.) These latter connections brought
it into contact with Silesian industrial interests, likewise
interested in t h e Roumanian petroleum fields. T h e result
wTas a new combination in 1904, which included, beside t h e
interests named, also t h e Dresdner Bank, t h e International
Exploration Company, and became known as t h e Petroleum Stock Company Regatul
Romana.
T h e Bankverein also took a leading position in t h e group
of t h e Elektrizitats-Gesellschaft
vormals Schuckert & Co.
until 1898, when it withdrew, having failed in its efforts t o
bring about t h e amalgamation of t h e above group with
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Great

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the Loewe group. It was only in 1903 that a combination
with the Siemens & Halske group was effected. Since
1898 the Bankverein participated in all the enterprises
and transactions of the Loewe group, viz, the British
Thomson-Houston Company, the Benrath Machine Works,
the stock company Boehler Bros. & Co., etc. The A. E. G.
(Allgemeine Elektrizitats-Gesellschaft) group and its activity
assumed larger proportions in 1904 by the accession of the
banks forming the Loewe group, after the taking over of
the U. E. G. {Union Elektrizitats-Gesellschaft) by the
A. E. G.
As a result of its connection with the Dresdner Bank,
the Bankverein was brought into contact with various
transportation companies, in the first place with the
Great Berlin Street Railway Company. It also became
connected with the Aktiengesellschaft fur Verkehrswesen
(Stock Company for Transportation Enterprises) Lenz
& Co., and the Bank fur Deutsche Eisenbahnwerte (Bank
for German Railway Securities). It was these corporations which for several operations brought about the joint
action of the Bankverein with the close ally of the Lenz &
Co. concern, the Berliner Handelsgesellschaft. Jointly
with the latter it founded in 1895 the Westdeutsche Eisenbahngesellschaft, which, in turn, organized the Vereinigte
Westdeutsche Kleinbahn Aktien-Gesellschaft (United West
German Minor Railways Stock Company) with a capital
of 6,000,000 marks, and in 1896 the Bank fur Deutsche
Eisenbahnwerte with a capital of 10,000,000 marks.
Through its current-account business the Bankverein
as a matter of course came to arrange for and undertake
the transformation into stock companies of industrial
90311 °—11

34

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Monetary

Commission

undertakings of its customers. Under this head fall the
transformation of the firm Carl von Born into the
Hiitten-Aktiengesellschaft vormals Carl von Born at Dortmund in 1896; of the firm Bucklers & Jannsen into the
Diilkener Baumwollspinnerei A. G. (Duelken Cotton Spinning Stock Company); of the firm Burtscheid, Ulrici & Co.
in Diilken into the Rheinische Webstuhlfabrik A. G.
(Rhenish Weaving Looms Manufacturing Stock Company),
in 1897; and of the firm Mannstaedt & Co. into the Kalker
Walzwerk (Kalk Rolling Mills') Mannstaedt & Co. in 1898.
Other operations of the Bankverein originating in the
same manner were: A commandite interest acquired in
the firm C. Luckerath (Limited), cloth dealers, the transformation of the Siegrheinische Gewerksckaft (Sieg-Rhine
Mining Concern (Limited), into a stock company (1897);
the transformation of the Selbecker Bergwerksverein into a
limited mining company (Gewerksckaft); the taking over
in 1901 of the bankrupt worsted spinning works, Eitorf,
Karl Schafer & Co., and its immediate transformation
into the Worsted Spinning and Weaving Works Eitorf
Stock Company, and the reorganization of the machine
tool factory, de Fries & Co., stock company, in Heerdt
near Dusseldorf. In the same class belong the amalgamation of two friendly concerns into the United Steelworks von der Zypen and the Wissen Iron Mills Stock Company, and the union of the works of two of its currentaccount customers into the Eschweiler-Koln Eisenwerke
A ktien-Gesellschaft.m In 1904 the B ankverein, in the interests of its clients, the Kolnische Maschinenbau-Aktiengesellschaft in Cologne-Bayenthal, for the purpose of
settling the deficit in its balance sheet, purchased jointly
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Banks

with other firms certain grounds owned by t h e works and
transferred t h e m to a newly formed real estate company. 476
I n connection with t h e operations just described, a
number of other transactions were effected partly in
t h e interests of t h e b a n k itself, partly in t h e interests of
friendly business houses, as for instance, t h e sale of its
participation in t h e above-mentioned
Hutten-Aktiengesellschaft vormals Carl von Born in D o r t m u n d to t h e likewise
mentioned Horder Verein.
The number of industrial issues of the Bankverein
during t h e years 1895-1903 amounted to 187, as compared with 220 effected b y t h e Dresdner Bank, 170 b y
t h e Berliner Handelsgesellschaft, 151 b y t h e DiscontoGesellschaft, 150 by t h e Deutsche Bank, and 148 b y t h e
Darmstadter Bank. Among t h e 187 industrial issues
of t h e Bankverein 103 were those of industrial bonds. 477
The number of companies for which t h e Bankverein effected industrial issues during t h e period 1895-1903 was
207, compared with 181 served in this manner by t h e
Dresdner Bank, 154 by t h e Disconto-Gesellschaft, 149 by
t h e Berliner Handelsgesellschaft, 140 b y t h e Darmstadter
Bank, and 139 by t h e Deutsche Bank. I t is seen t h a t in
this field t h e Bankverein attained t h e highest record.
Of t h e various industries t h e Bankverein has been in
closest touch with t h e mining and smelting industries.
As shown above, it maintained particularly intimate r e lations with t h e Harder Verein in Dortmund, also with
t h e Lothringischer Huttenverein Aumetz-Friede in Kneuttingen, which it reorganized in 1901 and again in 1903,
and which was amalgamated in t h e same year with t h e
Fentscher Hutten-Aktienverein.
The indirect consequence
S?5




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Monetary

Commission

of these close relations was that the Aumetz-Friede
works ordered its machinery from a client of the Bankverein, the Cologne Machine Construction Stock Company,
a practice which is often found among customers of the
same bank. The Bankverein maintained also close relations to the Harpen Mining Company, which it had founded
jointly with the Berliner Handelsgesellschaft, the iron
works Phoenix in Laar, the Hosch Steel Works, and the
Bochumer Verein, and through its connections with the
firm Spaeter & Co., part owners of the Rombacher Huttenwerke, with the latter works.
By reason of the above-named and other close connections with the Rhenish-Westphalian industry, the leading element in the coal mining and metallurgical industries of the country, the Bankverein came to play a
most important part in the development of the industrial
•cartels. Thus in 1899 it opened a syndicate office (Syndikats-Kontor) with a capital of 1,000,000 marks, which was
to undertake the representation of industrial combinations
and syndicates. The Steel Works' Union was formed after
hard struggles mainly for the reason that the Bankverein
held the majority of stock of the Phoenix Works and was
thus able to force a resolution in the general meeting of
stockholders to join the union against the wishes of the
director of the works.
In conclusion, it may be said that the A. Schaaffhausen'scher Bankverein from the start to the present day
was the leading institution in the Rhenish-Westphalian
industrial region. When in the course of development
the policy and management of these industries began to
exercise a considerable influence on the other German
516




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Great

Banks

industrial districts, t h e Bankverein in its capacity as t h e
leading institution in a special branch of business gained
also an influential position among t h e great German banks.
THE BERUNER HANDELSGESEIXSCHAFT.
The Berliner Handelsgesellschaft which was founded in
1856, was organized as a stock company " en commandite "
for the reason t h a t the latter form of organization did n o t
require a state concession in Prussia. At t h e time of its
organization its capital stock amounted to 15,000,000
thalers (45,000,000 marks) of which, however, only
3,740,150 thalers were paid in. Since the first period it
has been a prominent flotation b a n k
(Emissionsbank)
with the result t h a t in t h e matter of issuing and placing
securities it m a y boast of methods technically equal if not
superior to those used b y any other bank. As shown
above (p. 75 and following) it participated during t h e first
period in t h e underwriting of a large number of domestic
and foreign state and railway loans, including t h e issue of
Russian railway bonds.
In section 2 of its constitution it was expressly stated
t h a t its activities should comprise especially " i n d u s t r i a l
and agricultural enterprises, mining, smelting, t h e construction of canals, highways, and railways, as well
as t h e creation, fusion, and consolidation of joint stock
companies and the issue of stock or bonds of such
companies.''
Although during the earlier period it ventured b u t comparatively little into the industrial field and conducted
neither a current-account nor a deposit business, yet it
succeeded in earning large and almost steadily increasing

517




National
gains from

Monetary

Commission

its business of reorganizing

and

floating

enterprises and from its operations in t h e underwriting
a n d issue

field.

Its dividends in t h e first period were

as follows:
Per cent.

1857
1858
1859
i860
1861
1862
1863

5K
5K
5
5%
5
9
8

Per cent.

1864
1865
1866
1867
1868
1869

8
8
8
8
10
10

Negotiations for t h e establishment of " commandites in
other localities," provided for in the by-laws and mentioned in t h e report for 1857, had to be abandoned on
account of t h e crisis of 1857.478
Among serious losses which t h e Handelsgesellschaft
suffered during t h a t period m a y be mentioned t h a t of
150,000 thalers on account of t h e Dessaner
Kreditanstalt,
or more correctly, t h e latter's New York commandite,
besides a loss growing indirectly out of t h e failure of an
export firm in Danzig. This failure involved t h e banking
house of Breest & Gelpcke, of Berlin, which was conducted on account of t h e Berliner Handelsgesellschaft
since J a n u a r y 1, 1857. No difficulties were experienced
b y t h e b a n k during t h e crisis of 1857. During t h e second
period t h e bank devoted itself systematically and with
correspondingly good results also t o t h e current-account
business, though keeping aloof from t h e deposit business.
I t also took a leading part during the first years in t h e
foundation and transformation of industrial enterprises.
These operations, while a source of rich returns, naturally
resulted also in some losses. In 1871 it was able t o
increase its capital to 10,500,000 thalers. Its a t t e m p t s a t
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enterpreneur activity at the beginning of the second
period proved, however, disastrous, as mentioned on a
previous occasion. The construction of the Muldetal
Railway, which was financed by the bank, consumed,
according to the report of 1876, a large part of its available
resources. This necessitated a call for the payment of 30
per cent on the new stock.
The dividends during the first thirteen years of the
second period were as follows:
1870
1871
I872
1873
1874
1875
1876

Per cent.
9
I2K
12*^
6K
7
5
o

1877
1878
1879
1880
1881
1882

Per cent.
o
o
5
5y2
6
o

The losses occasioned by the Muldetal Railway enterprise caused the passing of dividends during the years
1876 to 1878, which in the year 1872 were as high as
12X per cent; in fact, they caused even a deficit.
In 1878, after the sale of the railway to the Saxon
government, which entailed a loss to the bank of 6,500,000
marks, its capital stock, which had grown to 15,000,000
thalers (45,000,000 marks), was reduced to 30,000,000
marks, and the profits from this operation were devoted
to the creation of a large special reserve fund for pending
industrial business.479 During the following years, 1879
and 1880, the bank was able again to pay dividends of 5
and $y2 per cent, respectively.
During the year 1880-81 the bank again suffered on
account of its participation in two industrial enterprises,
viz: The Deutsche Lokal- und Strassenbahngesellschaft
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Monetary

Commission

(German Local and Street Railway Company) and the
Petroleum-Bohr- Gerechtsarnen- und Olland- Gesellschaft
(Petroleum Drill Privilege and Oil Land Company), as
well as on account of extensive speculations in shares of
the bank's own capital and in Russian paper currency byone of the partners of the institution. The losses resulting
from these operations necessitated in 1882 a reduction of
the capital stock from 30,000,000 to 20,000,000 marks.
The above-mentioned speculation alone entailed a loss
of 8,250,000 marks.
There is no doubt that many present-day economists,
who on such occasions as well as after every general
crisis demand government intervention, including official
supervision, control, and inspection, or restrictive legislation, would at that time have seen the only salvation
in the carrying out of similar demands with regard to the
Berliner Handelsgesellschaft and for that matter to all
German credit banks. But there is likewise no doubt
whatever that such measures would have caused onlyfurther disaster, and would have prevented or restricted
the splendid development of German banking, which was
so very essential to the interests of the nation. In this
respect, as in many others, the practical wisdom of the
English, resulting from greater business experience, and
finding expression in the maxim, " Not measures, but
men," has proved far more successful.
Splendid results followed the inauguration of a new
management by careful as well as skilful partners (of
whom one is still on the board of management) and the
adoption of a business policy based on new principles,
and this notwithstanding the fact that confidence in the
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Great

Banks

bank, which had been almost completely lost, had to be
regained by the new partnership.
Even for the first year after the reorganization (1883)
a dividend of 7 per cent could be declared, and ever since,
with the exception of slight interruptions from time to
time, due to general economic conditions, the Berliner
Handelsgesellschaft has been following a career of continuous and increasing success.
Its dividends during the following years were as follows:
Per cent.

883.

886.
887.

...
..

1896.
1897.
1898.
1899.
1900.

7
9
9
9

1901.

10
12

890.
891.
892.
893.
894.
895.

9K
1%
6
5
7
8

Per
...
...
...

cent.
9
9
9

. . 9%
.
7

1902.
1903.
1904.
19051906.
1907.
1908.

On December 31, 1908, the "commandite" capital of
the Berliner Handelsgesellschaft was 110,000,000 marks,
while the surplus amounted to 34,500,000 marks, or 31
per cent of the capital stock. The debits on current
account amounted to 192,250,000 and the credits to
206,250,000 marks.
The peculiar character of the Berliner Handelsgesellschaft among the other great Berlin banks grew out of its
relations to;
1. The electrotechnical industry.
2. The so-called "heavy" industries, especially mining
and smelting enterprises.
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Commission

3. The street railways and minor steam railways.
It was particularly in the first-mentioned field that the
Berliner Handelsgesellschaft developed a many-sided and
fruitful activity. The great success achieved by the Allgemeine Elektrizitats-Gesellschaft (General Electric Company)
was due as much to the marvelously efficient management
of its general director, Emil Rathenau and his associates,
as to the intelligent and skilful financial cooperation of
the Berliner Handelsgesellschaft. The latter, as the chief
financial adviser of the General Electric Company, proved
as successful as did the Deutsche Bank in the case of the
firm of Siemens & Halske.
The Handelsgesellschaft undertook a large number of
financial transactions of all sorts as a result of its connection with the General Electric Company. Aside from the
numerous issues which it carried through for the General
Electric Company and other concerns which were either
allied with or subsidiary to it, such as the Berliner Elektrizitatswerke, I may mention its organization of separate
electrical companies in Seville and Barcelona (1894), in
Warsaw and Bilbao (1896), the foundation of the Bank
fiir Elektrische Unternehmungen in Zurich (1897); the
Deutsche Ueberseeische Elektrizitdtsgesellschaft (German
Transmarine Electrical Company) in Berlin, and the
Aluminium-Industrie-Aktiengesellschaft (Aluminum Manufacturing Company) in Neuhausen (1898), the ElektroChemische Werke (Electro-Chemical Works) in Bitterfeld
and Rheinfelden (1896), which were consolidated in 1899
and, finally, the Elektrizitats-Lieferungs-Gesellschaft (Electric Light and Power Company), etc.

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After the Union-Elektrizitats-Gesellschaft (U. E. G.)
was taken over by the General Electric Company in the
year 1904, the bank group which financed the General
Electric Company was strengthened by the alliance with
the bank group which financed the Loewe enterprises
(viz, the Disconto-Gesellschaft, the Dresdner Bank, the
Darmstadter Bank, and the A. Schaaffhausen'scher Bankverein). This group thus represents an enormous power
alongside that of the bank group headed by the Deutsche
Bank, which finances the Siemens & Halske concerns and
the newly organized limited stock company (G. m. b. H.)
of the Siemens-Schuckert Works, which grew out of a
combination in 1903 of some of the Siemens-Halske works
with the Schuckert Company. This latter combination
presents many points of contact and common interests
with the groups mentioned. The Berliner Handelsgesellschaft is, moreover, represented in the syndicate for
handling the Siemens & Halske securities.
In the "heavy" industries, especially in mining and
smelting, the Berliner Handelsgesellschaft also played an
important and at times even the leading part alongside
the A. Schaaffhausen'scher Bankverein. Together with
this institution, it is largely interested in the Harpener
Bergbaugesellschaft (Harpen Mining Company), is closely
connected with the Rombacher Huttenwerke (Rombach
Smelting Works), and wields an important influence in the
Ruhr coal district through its intimate connection with
the Konsolidation and the Hibernia mining companies.
In conjunction with the banking house of S. Bleichroder
and other banks, it succeeded in preventing the acquisition
of the Hibernia mines by the Government.
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Commission

The Berliner Handelgesellschaft, furthermore, is well
connected with the Upper Silesian iron and coal district
through its close business relations with the Oberschlesische
Eisenindustrie-Aktiengesellschaft Caro-Hegenscheidt (Upper
Silesion Iron Company Caro-Hegenscheidt) and the firm
Emanuel Friedlander & Co. in Berlin, one of the two sales
agencies of the upper Silesian coal combination.
Finally, in the field of street and minor railway enterprises the activities of the Berliner Handelsgesellschaft
had a particularly wide scope. It assisted the General
Electric Company in 1895 by the founding of the Leipzig
Street Railway Company and through the issue of the
securities of the Karlsruhe, Breslau and Stettin street
railway companies and those of the Allgemeine Lokal- und
Strassenbahngesellschaft (General Local and Street Railway
Company). Like the Darmstadter Bank, but at a later
date, it undertook also the promotion on a large scale of
minor railways (Kleinbahnen).
In this field its relations with the Stettin Railway Construction and Transportation Concern, Lenz & Co. were as
close as those of the Darmstadter Bank with the firm
Herrmann Bachstein. In view of its own former disastrous experience and that of other large banks, it began
its activity in this field by organizing in 1895, in conjunction with the A. Schaaffhausen'scher Bankverein, a trust
company at Cologne, known as the Westdeutsche Eisenbahngesellschaft (West German Railway Company), which
took the place of the Handelsgesellschaft in the operating
and financing of the Lenz enterprises. In 1896 another
trust company, the Bank fur Deutsche Eisenbahnwerte
(Bank for German Railway Securities) was organized,
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while the Badische Lokaleisenbahnen-A. G. (Baden Local
Railway Company) was founded to take over a part of the
Lenz railway system located in Baden and the Ostdeutsche
Eisenbahngesellschaft in Bromberg (in 1899) to take over
another part of that system. In 1899 the Vereinigte
Westdeutsche Kleinbahn-A ktiengesellschaft (United West
German Minor Railway Company) was founded, which
controlled as separate enterprises a large part of the railroads of the West German Railway Company. In 1901
the Handelsgesellschaft founded, alongside the older
limited company, Lenz & Co., a new A ktiengesellschaft jilr
Verkehrswesen (stock company for transportation), with
a capital of 10,000,000 marks, which took over all the shares
of the former company. The Berliner Handelsgesellschaft
engaged, in a large measure, also in speculative dealings
in urban land tracts (Terraingeschafi).
We saw above (in the discussion of the A. Schaaffhauen'scher Bankverein, page 515) that with reference to
the number of industrial issues effected during the years
1895 to 1903, the Berliner Handelsgesellschaft ranked
third, with 170 issues (as against 220 effected by the
Dresdner Bank and 187 by the A. Schaaffhausen'scher
Bankverein). It ranked fourth if the number of financed
companies is considered, this number being 149.
It is also represented by its managing partners on the
supervisory boards of a large number of industrial corporations. The international connections of the Handelsgesellschaft are extensive and of a high order. The company took a leading part in the formation of the DeutschAsiatische Bank in 1889 and of the Banca Commerciale
Italiana in 1894. It a l s o participated during the years
525




National

Monetary

Commission

1898 to 1904 and in 1908 in the organization of all the
German telegraph and cable companies, in 1899 i*1 the
organization of the two Shantung companies, and in
1906 in the founding of the Kamerun Railway Company.
Among its connections in the countries of continental
Europe we may note the following institutions in the
foundation of which it took part:
Schweizerischer Bankverin in Basle (1872), the Banque
Internationale de Bruxelles (1898), the Banca Marmorosch
Blank & Co., Societate anonima in Bucharest (1904-5)
and the banking company, formerly Andreevics & Co.,
in Belgrade (1908). Since 1905 it has been operating
the Usambara Railway in German East Africa, and
in conjunction with the firm of I^enz & Co. it is engaged
in the construction of the railway from Luderitzbucht
to Kubub.
It participated, in some cases most prominently, in
all of the Russian, Chinese, and Japanese bond issues
effected during the second period and emitted several
Servian state and railway loans. (See App. V and VI.)
The prominent place among the large Berlin banks
attained by the Berliner Handelsgesellschaft proves in a
striking way the truth established by years of experience
that the fate of banks as well as of industrial and commerical enterprises depends chiefly upon the ability and
trustworthiness as well as the energy and farsightedness
of the management.

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SECTION 7. T H E SO-CALLED EXPORT CAPITALISM—THE INVESTMENT OF GERMAN CAPITAL IN FOREIGN INDUSTRIAL
AND COMMERCIAL ENTERPRISES, AND SECURITIES.
ESTABLISHMENT
BANKEN)
SPECIAL

OF

SUBSIDIARY

BANKS

THE

(TOCHTER-

EXCLUSIVELY FOR FOREIGN BUSINESS, WITH
REFERENCE

TO

ITS CONNECTION WITH THE

INDUSTRIAL EXPORT POLICY.480

(A) In a previous part (sec. 4, sub. 1) it was shown
that the development of the foreign, and especially the
over-sea banking business during the second period,481
which was started by the energetic activity of the
Deutsche Bank represents the outcome of a well-designed
business policy482 on the part of the great German banks
which is directly and inseparably connected with the
general industrial export policy.
In order to judge whether this business policy has
been proper, necessary, or desirable from the point of
view of the public welfare, we must bear in mind the
facts presented in Part III, Chapter I, page 87 et seq.,
bearing on the development of the general economic
conditions in Germany during the second period (1870
to the present time).
We saw that German agriculture and forestry during
this period were not in a position to supply the domestic
demand by their own products. We also know that
in view of the large and continuous growth of our population, notwithstanding the best efforts and zeal, this
deficiency in the domestic supply could not be made
up by the application of more intensive methods in
agricultural production or by the extension of the cultivated area. Our deficiency in agricultural products,
527




National

Monetary

Commission

therefore, had to be made up to an increasing extent by
the foreign importation of foodstuffs.
Moreover, German industry was not in a position to
supply its needs at home, especially in the matter of
raw materials, and was compelled on the whole—i. e.,
apart from single branches—to suppty the demand for
raw materials largely and, in some instances almost exclusively, by importation from abroad.
It is self-evident that we can not pay in cash for these
very large imports of agricultural products and raw materials used in manufacture without impairing our national
capital resources. These imports must be paid, therefore, in some other way; and this is unavoidable, because
we need these imports for the existence of our agriculture and our industry—that is, for the sustenance and the
employment of our population.
Such payment has been made thus far in an unimportant degree by the exchange of such raw products as we
do not need for home consumption, but mainly by exporting manufactured products 483 to the countries from which
we import foodstuffs and raw products.484
The necessity for these exports of manufactured products is thus growing in proportion to the increasing deficiency in the supply of domestic foodstuffs and raw materials. Under present conditions, therefore, especially in
view of the constantly increasing population, our industrial export policy can not be said to have been a device
arbitrarily adopted, and therefore one eventually to
be abandoned. Nor is it an end in itself, but on the
contrary a means, indispensable to our entire economic
existence,485 of paying to a very material extent for our
absolutely necessary imports.
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As stated before, the German banks regarded it as one
of their chief functions actively to support both at home
and abroad domestic industry 486 and the export policy
adopted by the latter by promoting energetically German
foreign commerce. In connection with this general policy
they came to establish branches in foreign countries and
to organize for the foreign business special subsidiary
banks both at home and abroad, which, it is true, in many
cases proved at the same time the means of securing new
and profitable business. They also cooperated with the
government policies regarding the colonies, navigation,
canals, the navy, and cable connections, all of which bore
the closest relations to the above business policies.
It is plain, therefore, that the activities of the banks in
all these fields were of national importance. For upon
the successful discharge of the above functions depends
not only the maintenance and the extension of our influence and our importance abroad, but, what is more, our
entire economic existence.
It may be said that for some time at least the necessity
of this development from the point of view of the common national interests did not appeal to wide circles,
especially to those classes which were injuriously affected
by this development. For it goes without saying that in
the course and as the result of the industrial export movement, as in the case of any other fundamental economic
change, serious disadvantages manifested themselves.
With the steady growth of population the industrial export policy continued to be emphasized more and more
until about 1882, when it may be said to have reached its
point of culmination. During all these years agriculture,
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notwithstanding all its importance to the economic wellbeing of the nation, received but scant support, losing
much of its former strength, means, credit, and labor.
It is that policy which is partly responsible for the fact
that the percentage of population engaged in agriculture
decreased from about 61 per cent of the entire population in Prussia in the middle of the past century to 28.6
per cent of the entire German population in 1907, while
at the same time the population engaged in commerce and
industry increased from about 24 per cent (in the middle
of the past century in Prussia) to 56 per cent of the German population engaged in gainful occupations in 1907.
The latter circumstance has contributed materially to the
enormous growth of the manufacturing towns (up to 17
and 18 times the figures for the middle of the past century).
(B) The above-mentioned activities represent, however, only part of the functions of the banks in this
field.
For as was made clear from the statistical compilations,
which were closely scanned by the banks as well, notwithstanding all efforts in the fields of industry and foreign
trade, only part, though quite a considerable part, of our
imports of foodstuffs and raw materials could be compensated by means of exports of manufactures and similar
products. After deducting the value of our exports of
manufactures there still remained a very considerable
balance in favor of the foreign countries. The excess of
imports for consumption over domestic exports at the
close of 1907, as we saw above (p.-112), amounted, in round
figures, to 1,300,000,000 marks. To this extent, therefore, the balance of trade was against us.
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Now, there is no doubt that the claim that an unfavorable balance of trade in itself is disastrous for a country
can not be maintained as a general proposition, since numerous countries may be cited which show an unfavorable
balance of trade, but which with a particularly favorable
balance of payments, enjoy the utmost prosperity. These
are the countries which utilize the available surplus of
large capital accumulations, derived from their industrial,
agricultural, or colonial successes, for the improvement of
their balance of payments, The more favorable the balance of payments of such a country the less perilous will
be an unfavorable balance of its trade. In other words,
the more favorable its balance of payments becomes, the
less a country may hesitate to let other countries "work
for it," that is to say, permit itself to be supplied by other
countries with raw materials and foodstuffs, even though
as a result of such a policy its balance of trade may become unfavorable. For Germany the problem presented
itself of compensating the unfavorable balance of trade
by the utmost practicable improvement of our balance
of payments, in order to escape ultimate disaster through
a constant accumulation of unfavorable trade balances.
In this respect, as well, there was no. choice of means.
The problem was primarily one of creating debits in
our favor on the part of those countries which had a
favorable balance in their trade with us,487 debits at least
large enough to counterbalance the credits due them from
us by reason of the excess of their sales over their purchases in their trade with us. In the case of industriallydeveloped countries, the activities accomplishing this
result develop to a considerable extent automatically,
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i. e., as natural consequences of the industrial relations
to the less developed foreign countries, and to a smaller
extent, as the result of fixed plans and designs.
Foreign countries may become our debtors—
(i) Through business operations which we carry on
in and with foreign countries, which include exchange,
arbitrage, and commodity transactions with these countries undertaken either for speculative purposes, to secure
payment, or to attract gold from them, and through services which we render those countries, or through mercantile, industrial, or transportation enterprises which we
establish in the foreign countries or in which we participate.
The German enterprises established in foreign European countries, which were mentioned in section 4, sub. II
(p. 432 et seq.), include the foreign branches of the German banks, such as the Deutsche Bank, the DiscontoGesellschaft, and the Dresdner Bank in London. The
foreign German participations include the ownership by
German banks of stock in foreign banking institutions,
such as the ownership by the Commerz-und DiscontoBank of shares in the London and Hanseatic Bank, by
the Dresdner Bank of stock in the General Mining and
Finance Corporation (Limited) in London, etc. According to the report of the Central Federation of German
Banks and Bankers (Centralverband des Deutschen Bankund Bankiergewerbes) of December, 1903 (concerning
the effects of the stock exchange act and the stock exchange tax act), since the stock exchange act of January
1, 1897, went into effect, numerous time transactions and
other dealings of the German public in (American) rail53^




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way stock and in mining shares transacted in m a n y
foreign countries, particularly in London, Paris, a n d
New York, have to be considered in which, to escape t h e
German t a x on securities, t h e securities to a large extent
remained abroad. According to t h e inquiry of t h e central
federation (see above report, p. 48), which was only partially successful, the securities (for t h e most p a r t probably
of the classes above mentioned) 4 8 8 which the 18 largest
banks and banking houses of Berlin, namely, t h e members
of the so-called Stempehereinigung,
had in foreign depositories on December 31, 1902, on their own and outside
accounts amounted to 602,268,000 marks, while t h e value
of securities which only 149 other German (provincial)
banks and bankers had at t h e same time in foreign
depositories amounted to 454,151,000 marks.
According to Paul Dehn 4 8 9 the total investments of
French capital in foreign countries in the middle of t h e
year 1902, according to official investigations, amounted to
24,000,000,000 marks (30,000,000,000 francs). 490 Dehn
further states: 4 9 1 " I t is reported t h a t t h e English draw
annually 1,000,000,000 marks in interest from American
securities which t h e y hold, from plantations, factories,
constructions, etc., which they have instituted and with
which they pay for the foodstuffs which they import from
t h e United S t a t e s . " According to an address of Sir Edgar
Speyer before t h e Institute of Bankers, m a d e on J u n e 7,
1900, on " S o m e aspects of national finance," t h e total
amount of British working capital invested in foreign
countries was estimated to aggregate £2,500,000,000
or 50,000,000,000 marks. According to Helfferich, 493 t h e
former director of the Credit Lyonnais, Germain, estimated
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t h a t during recent years France invested annually about
1,500,000,000 francs in foreign securities.
(2) Through our acquisition of foreign securities t h e
interest or dividends on which are to be paid b y foreign
countries, or t h e capital amounts of which we are t o
receive when they become due, or when t h e securities are
sold abroad.
I t m a y be objected t h a t these investments in t h e first
place require means which must be drawn from domestic
sources and which go abroad (as, for instance, when a foreign loan is taken u p at home) in consequence of such
investments, and t h a t in the beginning at least we become
debtors of t h e foreign country, while any improvements
in this balance begin to show only later from the earnings
of our investments, and t h a t , for t h e time being, our balance of payments is not improved b u t rather made more
unfavorable. B u t while there are doubtless cases where
this argument is effective, yet in t h e majority of cases t h e
a m o u n t s which we invest a b r o a d — t h a t is, which we h a v e
t o pay to foreign countries in gold—are paid out of the earnings on other foreign securities which are in our possession
or through the sale or exchange of other foreign securities, or else are paid with goods which we furnish to t h e
foreign countries, it being as a rule agreed, when loans are
m a d e to foreign countries, t h a t our industries shall be
favored with t h e contracts and orders for the p a y m e n t of
which t h e loans were contracted. A portion of the securities which have been taken u p eventually find their way
back to the foreign countries, or other changes in t h e
international balance of payments m a y take place with
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tinually and daily through the importation and exportation of securities. Absolutely no information exists as to
the course in time or the volume of these movements,
although such data only would enable us to perceive more
fully the significance of the imports and exports of merchandise and specie, i. e., of the international commercial
exchanges.493
In so far as the German banks, either on their own
account or as intermediaries, have been active in both
directions named, and granting that they have observed
the necessary care and foresight in preventing or arresting a dangerous decline in those earnings of our foreign
investments, which might be applied to improving our
unfavorable balance of payments, they have undoubtedly
rendered valuable service, absolutely essential in the interests of our national economy. The following important
limitations, however, must be made:
The undertaking of or participation in foreign investments is practicable only when there is a considerable
surplus of capital at home and permissible only after the
domestic demand for capital is fully met. Even if these
conditions exist such investments are not to be favored,
when in the long run they result in the strengthening of
foreign industry and the enhancing of foreign competition
against our domestic trade and industry.
Such participations of German capital in foreign countries comprise chiefly banks, manufacturing, colonization,
plantation, mining, light, power, and railway undertakings and other land and water transportation enterprises.
The earnings from these participations increase the credit
side of our balance of payments only to the extent that
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they exceed the earnings of foreign investments in Germany. The latter are chiefly gas works and street and
local railway enterprises.
One of the important, if not the most important, item in
the balance of payments is represented by the credits
which we grant to foreign countries in our commercial
dealings with them. Since these amounts can be obtained
only from the books of the individual concerns which grant
these credits, it follows again that a total of the item in
question can at best be but approximately estimated.
On the other hand domestic enterprises and participations abroad, in so far as they do not merely benefit foreign
industry, are to be regarded favorably as a rule, especially
when proper care is used in their selection, when, in the
main at least, they are conducted on domestic account,
and when they are either intended or suited to extend the
domestic sphere of influence and to serve as a basis for
larger activity of domestic industry. These factors do not
affect immediately the balance of payments, though sooner
or later they are bound to find expression in ponderable
items in our necessarily inexact balance of payments.
The above considerations, it is true, do not justify
foreign investments, whenever and in so far as the earnings from our foreign investments and enterprises exceed
the amounts required to pay for our excess of imports.
As a matter of fact the returns from our foreign investments by far exceed the latter amount (see below, p. 545).
But we must always reckon with the possibility that
our domestic exports may decline, while our imports
will remain the same, or even increase. This would
result in a steadily growing adverse trade balance, which
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might become the more portentous the smaller the credit
items in our balance of payments, i. e., our foreign investments which render the foreign country tributary to
us, and the returns from which can be used to counterbalance the debit items in our trade balance. Furthermore, unless we render foreign countries tributary to
us to an increasing extent, the time might come when,
with the growing importance of their own home market, these countries would no longer be constrained
to furnish us with their foodstuffs and raw materials.
As it is, these exports or the money equivalent thereof
go to meet their obligations toward us in the shape of
profits and interest.
A large decline of our imports would also tend to destroy our industry, and thus our export trade, which furnish food and employment to our population, and which,
as it is, is greatly jeopardized by the growth of imperialistic and protectionist tendencies in countries which
are at present our principal customers.
(C) It is clear even from what has been said that our
foreign investments, as a whole, must necessarily go
beyond the lowest limits set by our adverse trade balance. But for a number of special classes of investment, the returns from which serve to improve our
balance of payments, the necessity and utility is proven
by other important and cogent reasons, which retain
their validity, even if the above general considerations
be regarded of insufficient strength.
(a) As regards the German insurance business in
foreign countries, it is desirable for the domestic insurance business for the reason, among others, that by
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tion of the risks is effected in time and place.494 The
returns from the foreign business of the German insurance enterprises naturally increase the credit side of
the balance of payments only in so far as they are not
counterbalanced by the earnings of foreign insurance
companies in and on account of Geimany.495
(b) The oversea banking business makes it possible for
our domestic exporters and importers, as well as for our
general commercial activity in foreign countries, to dispense with foreign intermediaries for their financial
transactions and credit needs. Through the financing of
the foreign business of our merchants German bank
acceptances have been introduced to foreign markets,
with the result that the ofttimes considerable earnings
of foreign concerns in this field have been turned into
German channels and have thus become available for
improving our balance of payments. Thus, for instance,
as late as 1888, according to consular reports, the commercial exchanges between Germany and Chile valued
in the aggregate at 60,000,000 marks yielded about
500,000 marks of profits to British bankers, merely
because all acceptances by means of which these exchanges were effected had to be liquidated in the British
market.496
In the excellent "Tabellen zur
Wahrungstatistik"497
(tables regarding currency statistics) of the Austrian
Ministry of Finance an estimate is mentioned—according
to which out of the total value of the oversea trade of the
European Continental countries more than 6,000,000,000
marks is yearly drawn on England. According to estimates
of the British board of trade, which relate to the year 1898,
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bankers' and other commissions aggregated in that year
18,000,000 pounds sterling (that is, about 432,000,000
marks).
The over-sea banking business, furthermore, opens up
possibilities for the investment of the domestic surplus
capital (see above, p. 92). This annually growing surplus
increases the demand for investment opportunities, which
can not be met fully by the issue of domestic state, communal, and other loans.
Our foreign banks are also in a better position to obtain
timely information regarding more important contracts,
works, and government orders about to be awarded or
regarding the impending issue of foreign loans, and are
thus able to lend much more effective assistance to German
concerns seeking the awards. Through their connections
with the foreign markets they are also in a position to call
the attention of foreign purchasers to German firms and,
vice versa, to bring to the notice of German manufacturers
and traders suitable representatives and purchasers in the
foreign countries.
Under the same head come also the profits of domestic
banks from trading in foreign securities and returns from
other foreign business. Against these earnings have to
be set, as elsewhere, the corresponding earnings of foreign
banks from German business, including the commissions
paid to foreign fiscal and disbursing agencies on account of
our coupons and bonds, loan conversions, talon renewals,
etc.
There is no means of estimating even approximately the
volume of the foreign business, including dealings in
foreign securities effected by our banking institutions, nor
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of the returns from this business in the shape of interest,
commissions, etc. They include chiefly the earnings from
underwriting, emitting, converting, unifying, and rehabilitating foreign state, railroad, and private securities; from
the financing of foreign operations and enterprises, from the
granting of credit to foreign firms, institutions, enterprises,
concerns, and individuals by way of current account,
bills and other credit operations; profits from the loaning
of domestic securities abroad, from the foreign bill business, including brokerage and remittances; from the foreign trade in specie, also earnings of interest, commissions,
and brokerage in international commercial transactions;
profits from the purchase of foreign bills of exchange and
the accumulation of credits (payable in gold) abroad;498
from services in connection with the payment of foreign
coupons, from the redemption of drawn or otherwise
matured debentures, the delivery of new coupon sheets,
as well as the talon renewals of foreign securities.
(c) The earnings of the German merchant marine from
oversea shipping also constitute an important factor in
our balance of payments. The above-mentioned '' Tabellen
zur Wahrungsstatistik" prepared by the Austrian Ministry
of Finance, estimate the freight receipts of the AustroHungarian merchant marine in the foreign trade at 60,000,000 crowns and the credit accruing therefrom to the international balance of payments of the country at 30,000,000
crowns.499 It is unnecessary to demonstrate that the services of our merchant marine in the oversea trade have
proved of immense value in the development of our export
trade and have contributed largely to increase our prestige
among foreign nations, our national power and influence,
as well as our financial strength.
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(d) Furthermore, we m u s t t a k e into account t h e earnings on account of foreigners traveling in Germany, which
are, however, more t h a n fully set off by t h e corresponding
foreign earnings on account of Germans travelling abroad.
(e) Other items in the balance of payments are: The
charges of domestic railways for carrying goods in transit
to foreign countries; the excess charges for the mutual renting of railway cars; clearance balances received in the international postal, passenger, telegraph
and telephone services; the expenditures of foreign
vessels in t h e home ports (minus our own p a y m e n t s in
foreign ports); t h e charges for the construction of vessels
on foreign account in our dock yards and our claims from
the sale of domestic vessels to foreigners; t h e claims arising
from the international exchange of patents and copyrights; t h e claims of members of the liberal professions,
i. e., technical experts, teachers, physicians, actors,
musicians, etc., engaged abroad; the claims resulting from
the ownership in foreign countries of land and mortgages, from liquidated inheritances and from marriage contracts concluded abroad, and, according to Ad. Soetbeer, 500
also the extraordinary payments 5 0 1 which one country
must m a k e to another as t h e result of political relations
or events (war indemnities, subsidies, pensions, cost of
administration).
Finally, an important factor in the balance of payments is presented b y —
(/) The investments of home capital in foreign securities,
t h e utility and necessity of which are based on a number
of weighty reasons besides those mentioned above.
Any a t t e m p t to liquidate t h e very considerable adverse
balance of our trade with foreign countries b y means of
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cash remittances instead of the interest and dividends
on foreign securities or the sales of such securities would
prove to be very expensive. It would lead to serious
disturbances in the money market, at times even to
crises, and might endanger in a large measure our currency and credit systems. Besides we need proper
foreign securities, i. e., such as are payable in gold to
secure our financial readiness for war (see p. 22 et seq.)
as a necessary means of compensation against eventual
withdrawals of large foreign credits.
We need them, furthermore, in order to be able to
draw gold from abroad to satisfy the urgent and pressing
needs for credit and instruments of payment which
usually occur in the last days preceding and the first
days following a declaration of war,502 as well as to meet
the violent demand for cash, which is apt to occur at
such times during a temporary loss of confidence in any
form of currency except gold. The holdings of such
international securities which can be realized at the
various international bourses present, therefore, the
best protection against the excessive fall during warlike
times in the quotations of our domestic securities and
against the weakening or glutting of our own stock
exchanges.
In this connection it must be remembered what important political results have been brought about by the granting or refusing of loans to foreign states and to what extent
the home government may use for political purposes its
power of permitting or prohibiting the issue, official
listing, and pledging of foreign securities, especially at
times when the foreign state, either because of the closing
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or overstocking of other foreign markets, is confined to
our exclusive assistance and when it is in our power to
inflict great damage on it by our refusal or prohibition.
The skirmishes of the political advance posts are fought
on financial ground, though the selection of the time
and the enemy as well as the manner in which these
skirmishes are to be fought depends upon those responsible
for the direction of our foreign policy.
Much more than ever before we Germans will have to
bear in mind that industrial contracts, commercial enterprises, and capital investments are conveying from one
country to another not only capital and labor but also
political influence.
Dehn very properly shows how French capital, for
instance, has rendered pioneer services to the French
foreign policy in Tunis and Morocco, in Turkey and
Greece, and, above all, in Russia, while Sombart goes
so far as to characterize "the whole Franco-Russian
alliance as a bankers' creation" (Bankiergebilde),503 an
assertion which is rather extreme. In the same vein,
Georg v. Siemens, in his article on "The National Importance of the Bourse" (in the Nation, Oct. 6, 1900), calls
attention to the great political advantages which we
gained in Italy, after political discord had grown up
between Italy and France, when we immediately placed
at Italy's disposal our capital and stock exchanges, and
that the battle between Russia and England about Persia
was primarily fought "on financial ground."
In more recent times we witnessed the beginning of
better political relations between France and Italy,
brought on primarily through financial reconciliation, particularly the taking over a few years ago by a French
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banking group of a large amount of stock in the Banca
Commerciale Italiana, created at the start without the
cooperation of French capital. We saw only recently
that the French Government threatened to withdraw
the listing privilege from the Turkish state bonds unless
certain contracts were awarded to French industry.
The British Government sought to prevent in every way
the granting of a banking concession in Persia to the
German Orienibank for fear that such a grant might lead
to a diminution of its own political influence.
The taking over of loans for China and Japan became
an object of contention among all great nations, for the
well-known reason that financial influence merely paves
the way for political influence. France and England are
competing in Spain and Portugal—and nearly all the great
powers in Turkey—to gain political influence by means of
financial aid. Notwithstanding some painful experience
in Argentina, the English banks and capitalists have been
tenaciously lending financial support to the efforts of their
Government to maintain and strengthen the British political sphere of influence in that part of the world. In Canada
and Mexico and in Central and South America the Americans are systematically planning by investments of capital and all sorts of financial measures to drive out both
European political interference and European commerce.
In view of the above facts and considerations, the question whether issues of foreign securities even beyond the
amount required to balance the excess of our foreign
imports are economically correct in principle must be
answered in the affirmative.

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The presumptions under which, in each individual case,
the issue of foreign securities is permissible and unobjectionable from the national point of view have been
discussed in detail above (p. 384 et seq.).
(D) With regard to the volume of the foreign investments of home capital,504 the report of the Reichs-MarineAmt of December, 1905, on Die Entwickelung der Dentschen Seeinteressen im letzten Jahrzehnt (the development
of German marine interests during the last decade) gives,
on the basis of consular reports, the following estimates.
The latter, of course, are based in turn upon estimates
more or less accurate of others furnished to the consuls at
their respective seats.
(a) The amount of German capital invested in foreign
undertakings, plants, business enterprises, and participations is estimated at 7,700,000,000 to 9,200,000,000
marks, equivalent to an income, reckoned at an average
of 6 per cent, of 462,000,000 to 552,000,000 marks.
Concerning this estimate the report remarks as follows
(Introduction, p. XI): " I n these amounts (7,700,000,000
to 9,200,000,000 marks) the current German merchandise
credits, which amount to at least one-fourth to one-third,
perhaps even to one-half, the amount of the yearly German
exports—that is, to 1,500,000,000 to 2,750,000,000 marks—
are included only in part, and the same is true of the credits
frequently advanced on account of imports." We have
already remarked above that there are no means of even
estimating the total credits granted by us to foreigners
in international trade, and the same is true of our charges
for services of all sorts rendered by us.

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(b) The amount of foreign securities in the possession
of German holders is estimated at least at 16,000,000,000
marks (ib., introduction, pp. XII, and 169), equivalent to
an income of 800,000,000 marks, reckoned at 5 per cent.
Accordingly the total amount of our foreig;n capital
investments for the year 1905 may be estimated at a
minimum of 24,000,000,000 to 25,000,000,000 marks
(with yearly earnings of about 1,352,000,000 marks) an
amount which very likely falls considerably short of the
true amount. (See note 20, p. 803.)
As a matter of fact, as was illustrated before in a few
important instances, the true volume of the foreign investments of domestic capital in the main fields, on account
of the lack of safe statistical bases, can not be estimated
even approximately. This is shown strikingly and in great
detail by the "Tabellen zur Wahrungsstatistik505 prepared
in the Austrian Ministry of Finance, especially in the
chapter dealing with "earnings in foreign countries"
(Erwerbstdtigkeit ausser Landes), although the subject
is treated in the report with the utmost care and
thoroughness.
SECTION

8.

REFORM

PROPOSALS

CONCERNING

DEPOSITS AND THEIR JUSTIFICATION

BANK

(5oe).

1. GENERAL OBSERVATIONS (506<*).
It was pointed out in an earlier chapter how the
German banks developed hand in hand with the scanty
means of the German people and in accordance with the
demands of German trade and industry. In England a
different development took place, which, while in equally
close touch with English requirements and the given
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concentration in the fields of distribution, credit, and
national wealth—all of which was entirely lacking in
Germany—led from the outset to a sharp differentiation
between the deposit banks and other banks. This is
sufficient ground for a large number of Germans, who are
wont to underrate domestic as compared with foreign
achievements, to point to the English system as the only
true one, and to demand its unrestricted adoption at
home. Similar views are, however, held in certain notable scientific quarters. It is particularly Adolph Wagner
who has been advocating for a long time a reform along
English lines, based in his case upon scientific conviction,
which, as is well known, is least apt to change under the
influence of mere practical experience.
To my mind it was a fortunate fact that the German
banks, from the very start, placed themselves at the
particular service of trade and industry. But at all
events it will be granted that this was due to the historically given German conditions and requirements. As a
result of this connection the banks have taken a considerable part in the splendid industrial and commercial
development of the country, which is characteristic of the
last decades. Starting at a time when domestic agriculture was no longer in a position to provide sufficient
food and work for the greatly increased population the
German banks contributed indirectly toward transforming Germany from an agricultural country, if not into an
exclusively industrial and commercial country at least
into one where these two economic interests are of preponderant importance. This is sufficient to arouse against
the banking interest all those who detest the whole trend
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of " industrialization." The charge is m a d e against t h e
banks t h a t through their deposit system they deprive
agriculture of considerable funds, which they use instead
for t h e support of industry, especially of t h e export industries. Political circles sharing these views are supported
in this campaign by the extremists on t h e opposite
side—i. e., t h e social democrats, who oppose t h e banks as
t h e most powerful and dangerous representatives of
movable capital.
A regrettable feature of German banking in common
with other industries is the gradual ousting of small enterprises by large-scale enterprise. This development has
caused a number of members and spokesmen of t h e
" m i d d l e classes" (in this case t h e smaller bankers—for
instance, Caesar Straus) to attack the German banks on
t h e ground t h a t they were pursuing an altogether wrong
course. Notwithstanding t h e heterogeneity of political
and economic views and the great variety of motives and
mutually exclusive purposes of those who have been
advocating " r e f o r m " in t h e field of deposits during t h e
last few decades, there is unanimity on one point, namely,
t h a t "something m u s t be d o n e " t h a t in some way or
other the funds flowing to t h e banks should be diverted
in a larger degree to agriculture, or " n a t i o n a l economic
ends," to use t h e more popular catchword. As soon,
however, as practical proposals are called for, various currents and parties appear with often obscure and contradictory demands, despite t h e fact t h a t the several parties
and assailants very often contrive to veil their true ends
and purposely move in separate columns with t h e view,
however, of combined attack. Moreover, each time a
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crisis occurs, an event which can hardly ever be avoided
in economic life under any banking system, there appear
on the scene any number of patented critics or persons
who have become experts overnight, who, to say the
least, try to impress the public that had the German
banking system been intrusted to their care it would
have worked faultlessly, and who use such favorable
occasions to prove their capacity of " saving the country "
by means of the most radical proposals.
i. SAFETY OF DEPOSITORS—A R E A S O N FOR R E F O R M PROPOSALS.

The majority of known reform proposals hitherto
made are based on the following considerations:
The German banking system, which, unlike the English
system, combines the issuing of securities and speculating
activity on own and outside accounts with the receiving
of money deposits endangers, of necessity, the safety of
the deposits. These are intrusted to the banks with
the confidence in their absolute security. The banks,
however, use them in providing the means for their
own enterprises and for speculation in securities on outside account.507 In Germany the detrimental effects
of such a system have already become evident in a
marked degree through overspeculation, excessive security
issues,508 crises,509 and bankruptcies, which have caused
great losses to depositors.
2. T H E PARTICULAR PROPOSALS, MADE WITH THIS END I N VIEW BY C E S A R
STRAUS, OTTO WARSCHAUER, AND COUNT VON ARNIM-MUSKAU.

We are therefore urged to adopt the British banking
system. The latter, it is said, provides for a strict
division of the field and for the complete divorce between
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stock exchange and deposits, and thus guarantees t h e
safety a n d prudent administration of t h e moneys deposited. I n other words, it is imperative t o effect a
complete separation between t h e deposit business a n d
t h e issue and flotation business. This is t h e general
t r e n d of the proposals of t h e late Caesar Straus, a former
private banker in Frankfort-on-the-Main, and of O t t o
Warschauer.
Straus advocates t h e establishment of a central deposit
b a n k for the whole German Empire b y private means,
b u t under government supervision, with a capital of
60,000,000 marks, of which 25 per cent, t h a t is, 15,000,000
marks, is to be paid in; t h e b a n k to maintain branches
in all important t r a d e and money centers and to transact
business in other places through t h e intermediary of t h e
Reichsbank. 510
Warschauer advocates t h e establishment of a Reichsdepositenbank (Imperial Deposit Bank) with a share capital
of 50,000,000 marks, of which 50 per cent, t h a t is,
25,000,000 marks, is to be paid in. Alongside this
imperial institution, deposit banks for t h e individual
States might be founded, which would bear t h e same
relation t o it as t h e present private note banks do t o
t h e Reichsbank. 511 The proposed institution, just as
t h e Reichsbank, should follow a plan of decentralizing its
operations through t h e opening of a large number of local
offices in t h e various confederated States. H e presages
for t h e proposed central deposit bank, the deposits of
which, in his opinion, would reach t h e total of at least
1,000,000,000 marks, a dividend of 21 to 22 per cent
( " a n extremely low e s t i m a t e / ' as he expresses himself).
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Judging by t h e average profits of t h e London stock banks,
he assumes as "extremely p r o b a b l e " a dividend in t h e
long run of 12 per cent. The above prediction may possibly explain t h e fact t h a t , according to Warschauer, t h e
proposed deposit banks are to be permitted to acquire
first-class mortgages as well as to advance money on
industrial securities and b a n k shares, to be sure with
the limitation t h a t only "first-class
securities" are to
be considered. This he thinks will cause a gradual
defection of depositors from t h e credit banks. The
latter, in his view, represent merely private interests
with no claim to special protection by t h e Empire, and
through their alertness will undoubtedly soon find new
and perhaps even more profitable fields of operation. 512
At t h e same
and after him
to be applied to
deposits. Most

time b o t h Warschauer and others before
made a number of substitute proposals
those of t h e existing banks which receive
important among these are t h e following:

The proportion of deposits, in so far as they are savings
deposits, 513 to t h e share capital—in other words, t h e
m a x i m u m amount of deposits a bank might be permitted
to receive should be fixed b y law a t about 200 per cent
of t h e share capital, as against 50 per cent, which is t h e
legal m a x i m u m for mortgage banks, since t h e smaller t h e
working capital t h e less secured were t h e rights of t h e
creditors.
Furthermore, the principle of publicity should be
adopted more largely t h a n heretofore w i t h regard t o
"savings deposits" (Spareinlagen),
which should be
stated separately in t h e balance sheets either by all 514
banks, banking associations with limited liability, a n d
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mutual credit societies,515 or by such professional depositaries, who receive the funds of the general public to the
extent of 50 per cent over and above their own invested
capital, who carry on a flotation and speculation business, or who participate in industrial undertakings,516
which would again be inclusive of all present-day banks
and even bankers. All of them should be held to publish
quarterly (as proposed by Count v. Arnim-Muskau before
the Bourse Law Committee under date of March 10, 1896)
or monthly reports, the form of which should be fixed
by law, and which should also state the percentage of
savings deposits to share capital.
These summary balance sheets should state:
(a) The total amounts of undertakings or flotations on
own or outside account.
(b) The total liabilities on the date of the statement
on account of participations or undertakings of any kind
whatever.
(c) The amounts of stock held apart from securities of
other classes.
(d) The amounts used for contango or collateral credit.
(e) The total liabilities incurred through the hypothecation or " carrying over " (Reportierung) of securities and
participations owned by the bank or through the hypothecation or ''carrying over" of securities and participations
owned by outsiders.
Other proposals include the demand, either that the
savings deposits, as in the case of the national banks in
the United States, should be granted a prior lien as over

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other creditors517 or else that a certain percentage of the
deposits should be invested in a special manner to be
prescribed by law.
3. R E F O R M PROPOSALS BASED ON OTHER CONSIDERATIONS.

Under this head comes the recent proposal made by
Heiligenstadt, the president of the Prussian Zentralgenossenschajtskasse (Central Bank of Mutual Credit
Societies). Without desiring to prejudice further necessary legal enactments, and pointing to American regulations, he demands that at least a beginning of legal regulations be made by requiring that ''whoever makes a
profession" of lending or administering moneys shall
maintain at the Reichsbank a cash reserve of 1 to 2 per
cent of all funds held on current account or deposit.518
This proposal, which was advocated on nearly the
same grounds also by two experts before the bank inquiry commission, is not based on the claim that the
German credit banks do not present sufficient safety for
their deposits, but primarily on the consideration that
mainly through the fault of the banks, the proportion
in German trade and commerce as a whole of invested
capital to the necessary liquid working capital and the
proportion of the liquid assets of the banks to their
liabilities, which represent their working capital, is unsound and should be improved.
At the same time, and perhaps even in the first place
the proposed reform, together with other measures, advocated by him, is intended, as Heiligenstadt expressly
states,519 " t o strengthen the operating resources of the

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Reichsbank" and to raise it to the position of "steward
of the national reserve," with the view of providing
greater security for the constantly increasing deposits
on current-account and other bank deposits.520
It is probably in this sense that the resolution of the
Tax and Economic Reform Association (Vereinigung der
Steuer- und Wirtschaftsreformer) dated February 13 and 14,
1906,521 is to be interpreted, in which the imperial chancellor is requested " t o provide for the legal regulation of
the modes of securing the deposits at the Reichsbank (!)
and other banks, especially in view of the growing proportions of the giro and deposit business ever since 1875,
that is, the year of the foundation of the Reichsbank.
So far as the Reichstag is concerned it confined* itself
until the present to point out the presumed insecurity of
the deposits by passing on June 17, 1896, the following
resolution, proposed by one of its committees:
Whereas the professional use by banks and business men of current
account- and other deposits urgently demands protective measures in the
interests of the depositors, the Chancellor is requested to inquire into the
subject with the view of ascertaining how such measures can best be taken,
to examine the principles underlying the present draft and the accompanying report, and to lay before the House as soon as practicable a bill in
regulation of the matter.
4. CONSIDERATIONS ON WHICH T H E FIRST-NAMED R E F O R M PROPOSALS ARE
BASED.

Before proceeding to a critical discussion of the individual reform proposals, it seems proper to inquire whether
reforms in the field of bank deposits—that is, protective
measures in the interests of depositors—are at all necessary or'even urgent in the present state of affairs or in
view of past experience. It is such measures that are
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advocated in the first batch of proposals, mentioned on
P a g e 55o a n ( i following and in the Reichstag resolution.
(a) SUPPOSED SUPERIORITY OF THE ENGLISH BANKING SYSTEM.

It has been asserted repeatedly that the English banking
system, with its division of labor between deposit banks
proper and other banks engaged also in the flotation and
underwriting business, necessarily presents a larger degree
of security for depositors, as compared with the German
"mixed" system. For the underwriting and flotation
business, it is argued, as is amply proved by the experience of the various countries, carries with it great dangers,
which in the case of the regular banking business do not
exist at all, or at least, only to smaller extent.
As a matter of fact, however, it has been incontestably
proven, especially by Ad. Weber and Edgar Jaff£ that
it is precisely the English deposit banks—not to mention
the most recent experience of the American note banks—
which despite their theoretic superiority have in practice
shown the most serious evils and abuses.
It is true, that the English joint-stock companies,
conforming to theory, have abstained in a direct way
from flotations and the underwriting business as well
as from bourse speculation. But this very fact causes
another great evil, namely, that the banks have never
shown any interest in the newly founded companies or
in the securities issued by these companies, while it is a
distinct advantage of the German system, that the German banks, even if only in the interests of their own
issue credit, have been keeping a continuous watch over
the development of the companies, which they founded.
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On the other hand the English banks have been promoting
stock exchange speculation, company flotations and security issues to an alarming extent by their practice of
placing at the disposal of the larger jobbers and dealers
their daily surplus money against the hypothecation of securities of all kinds.522 This went so far that the Journal
of the Institute of Bankers referring to this practice in its
issue of October, 1899, page 409, used the following strong
terms: "Nearly the whole of the professional speculation
on the Stock Exchange is carried on with bank money."
Among the securities hypothecated during the last
decade there was an enormous number of gold-mine and
American railway shares, which during critical times can
either not be realized at all or only at great sacrifice;
thus it is just in critical times that the joint-stock banks
have had to fall back for assistance on the Bank of
England.523 During critical times therefore the jointstock banks have to depend upon the "single-reserve
system," that is, upon a system, which even English
authorities have long ago condemned as inadequate and
dangerous, the more so as the Bank of England in turn
is lending out the funds deposited with it.524 It is
these large sums, indirectly placed at the disposal of
the stock exchange and speculators, which in the statements of the joint-stock banks constitute the largest
part of the item "money at call and short notice." 525
In Germany these sums would figure under the head of
"Reports and Lombards," whereas Caesar Straus,
strangely identified them with the item "Kupons und
Sorten" (coupons and specie) of the German balance
sheets, and therefore regards them as perfectly harmless.526
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I t is these amounts loaned by t h e deposit banks a n d
looking so innocent in the summary balance sheets,
which are mainly responsible for t h e conditions, which
Edgar Jaffe 527 characterizes in the following caustic expressions :
Nowhere are there so many swindling promotions as on the London
Stock Exchange, nowhere else has the general public lost such enormous
sums.

On the other h a n d it is also a fact 528 which I believe
t o have amply proven in another work of mine, 529 t h a t
during t h e great crises, through which England, like other
countries, has had to pass, an alarmingly large number of
deposit banks have failed.
I t m a y also be shown t h a t in other respects as well t h e
much-vaunted merits of the English joint-stock banks are
b u t illusory. The paid-up capital of t h e English deposit
banks is extremely small, both taken b y itself as well as
in proportion to the liabilities. I n 1904 it amounted for
87 deposit banks to 65,250,000 pounds sterling in round
figures, equal to 1,305,000,000 marks, or an average of
only 15,000,000 marks per bank. On the other h a n d t h e
proportion of surplus funds to the paid-up capital, b u t
not to t h e total liabilities is shown to be exceedingly high,
ranging between one-half to two-thirds and even u p t o
100 per cent. This is t h e sole cause, why even with small
gross profits t h e banks have been able to declare t h e
high dividends 5 3 0 (on their paid-up capital, of course) to
which Warschauer refers, though advocating a much larger
paid-up capital for his proposed Imperial deposit bank.
Finally Jaffe 531 showed t h a t " w i t h the exception of a
small number of t h e very best banks, which have a cashreserve of 5 t o 10 per cent, the English deposit banks kept
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no amounts on hand, which may be regarded as reserves
in the above sense/' In view of the large amount of time
deposits and deposits on current account and the small
paid-up capital of the English deposit banks, Jaff6 rightly
considers it impossible to class under this head the item
"money at call" (contango—and other loans to billbrokers and on exchange), since a portion of the money
lent out on the stock exchange could not be realized in
the event of a panic.
Neither can the item "cash" (i. e., cash on hand plus
credits at the Bank of England), the only one that might
be regarded as reserve, be classed as such in its entirety,
since part of it is absolutely necessary for the daily use of
the banks themselves. But even this, he emphasizes
expressly, is probably too favorable a picture, since,
according to his experience, a large number of the English
deposit banks—and some of the largest banks are the
worst offenders in this regard—in order to make the item
" cash on hand " appear as large as possible in their public
statements, withdraw from the market large amounts at
the end of each month and particularly at the end of each
half year.533 It may be said, though, that this statement no longer holds true for the most recent time, since
under the pressure of public opinion and following the
example of the leading institutions, nearly all the English
deposit banks maintain at present reserves in the above
sense which amount from 10 to 15 per cent of the liabilities. It may thus be seen how far the practical operation
of the English system justifies the enthusiasm for it as a
model to be adopted by us.

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We shall now take up the discussion of the reform proposals, which start with the assertion that the German
banks do not accord sufficient security to their depositors,
and examine the validity of the underlying assertions
that in Germany, as distinct from England, the proportion of share capital and reserves to liabilities, also the
proportion of liquid assets to immediately or shortly due
liabilities, is far too small; further, that deposits are used
in Germany for syndicate business and stock speculation,
and finally that the combination of the deposit business
with the underwriting and issuing business has caused
great injury to the public.
We shall start with the first and most prevalent charge.
(6) THE ALLEGED SMALL OWN RESOURCES (SHARE CAPITAL AND SURPLUS)
OF THE GERMAN CREDIT BANKS AS COMPARED WITH THEIR LIABILITIES.

The 169 German credit banks with a capital each of
1,000,000 marks and over, of which nearly all are holding
deposits (totaling about 2,750,000,000 marks) separately
mentioned in their balance sheets, show under date of
December 31,1908:
Marks.
2, 646, 000, 000

Share capital
Surplus

607, 000, 000

Total own resources

3, 253,000,000

As against these items there stand—
Credits on current account, including acceptances
Deposits
Or total liabilities

;

Marks.
4, 510,000,000
2, 746,000,000
7,256,000,000

In other words, the own resources of these 169 banks constituted almost one-half of their total Habilities, including
acceptances and deposits, whereas in England the paid-up

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capital constituted only about 10 per cent of deposits of
all kinds {fremde Gelder).53*
The 2,746,000,000 marks of deposits in the German
credit banks were more than fully covered by the share
capital and the surplus.534
As far as the eight great banks are concerned, the proportion between deposits of all kinds (liabilities) to share
capital and to share capital plus surplus, or to the bank's
own operating capital (eigenes werbendes Kapital), may be
seen from the following table:
Share capital plus
Share cap- surplus, i.e.,
ital (1,000 own operating
marks).
capital

Banks.

(1,000

Deposits
{Fremde
Gelder)
(1,000

marks).

Share
capital
= 100.

marks).
Deutsche Bank

Liabilities in per
cent of the—
Capital
plus
surplus
= 100.

Berliner Handels-Gesellschaft.
Nationalbank fur

301,831
2 3 1 , 500
227,593
184,358

1,274,648
599.643
463,551
395.122

637
333
2 73
257

422
259
204
214

145,000
n o , 000
85,000

179, i 5 7
144,500

205
190

166
i45

97,702

297,440
209,103
210,179

247

215

80,000

Bank fur Handel u. Industrie.
Schaaffhausen'scher Bankve-

200,000
180,000
170,000
154,000

92,820

184,458

229

198

Deutsch-

It goes without saying that the own resources of the
German credit banks have grown far less than the liabilities, for it must be borne in mind that during periods of
depression, when only small dividends were paid, fresh
issues of stock were altogether out of question. At all
events, there was no inducement then for working with
excessively large capital on which no adequate returns
could be expected.

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The surplus funds alone of all credit banks steadily
increased from 12.90 per cent of the share capital in 1885
to 22.90 per cent in 1908, amounting then to 607,070,000
marks. In the case of the Berlin banks these percentages
grew from 17 per cent in 1885 to 29.10 per cent in 1908.
It is my opinion, however, that this splendid showing
is due not so much to the superiority of our banking
methods, as is thought by Ed. Wagon,535 as to the
excellence of our corporation laws. These surplus funds
contribute at present more than 1% percent of the dividend earnings of all the banks and 1.73 per cent (as against
1.87 per cent in 1906) of the dividend earnings of the
Berlin banks.
It should be stated, though, that while the share capital and surplus are " guaranties," and while the increase
in their size improves the financial condition of the bank
and diminishes the danger of bankruptcy, yet they, as
well as the part of the debits which is "not required to
meet the claims of creditors, are on the main guaranties
for the stockholders.
(c) THE LIQUIDITY OF THE RESOURCES OF THE GERMAN CREDIT BANKS
COEFFICIENT OF L I Q U I D I T Y

(Liquiditatsschlussel).

The guaranties for the creditors, especially for the
depositors, are represented in the first place by those
assets in which the capital of the bank is invested, since
the creditors must have assurance not merely of the solvency of the bank, but even more so, that their demand
claims will be paid upon presentation and that the other
claims which are due on stated terms will be met when due.
In other words, the security of the creditors, especially of

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the depositors, depends primarily upon the amount of
liquid assets which the bank possesses and the mode
of their investment.536
The liquid assets for securing the demand and shortterm liabilities must be large enough and of such a kind
that the bank may be able to pay without delay those
liabilities, the presentation of which might be expected
during a crisis. The question as to what percentage is
likely to be presented for payment during a crisis can be
answered only according to rules of probability,537 differing according to circumstances (time, state of the market, etc.), which are learned only from practical experience, change with it, and can not therefore be fixed by
law. Similarly only experience during a long period can
teach what kind of assets may be regarded in a general
way as liquid assets, though it is much easier to determine those which can not be so regarded.
It is perfectly obvious, therefore, that there is no fixed
method of calculating the degree of liquidity applicable
at all times and places and to all institutions. Any
method may and will be objected to in one point or
another. There is the further drawback that the manner
in which the balance sheets are drawn up have varied
greatly, at least until the most recent period. Moreover,
there is no means of telling to what extent the various
items which, like bills, contango, advances on collateral,
may be regarded generally as liquid assets, contain amounts
that are not liquid, and inversely, to what extent an item
which, as a rule, does not come under the general head
of liquid assets does not comprise, in any concrete instance,
consols or other securities which can be quickly realized
under all circumstances or at least during normal times.
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Finally, in calculating the degree of liquidity, exact
and correct results may be obtained only if a distinction
is made between the daily liabilities, including commercial deposits, and those which fall due after some time,
since it is only the former which require security by
means of quick assets, while the latter may be properly
secured by those assets which will be realized on some
future date.538
After these preliminary remarks we may state that,
according to the method most commonly used in calculating the liquidity of bank resources, the liabilities
include the following items:
Credits on current account, including acceptances,
Deposits (Depositen),
Claims to net profits, undivided at the end of the business year;
while the liquid assets include:
Cash on hand,
Contango and loans secured by collateral (the two,
however, appearing in most balance sheets under one
common head),
Bills,
Securities.
Debits on current account are not included among the
liquid assets.
There is no doubt that this method, which is followed
by the daily press, especially the Frankfurter Zeitung,
and special periodic publications, as the Deutscher Oekonomist, is extremely schematic, as no distinction is drawn
in the case of credits on current account and deposits
between those claims which are daily due and those which
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fall due at a later date. Nor is it borne in mind that as a
rule, even during critical times, the majority of the clients
will forward to the bank at maturity funds to secure the
payment of their acceptances. The scheme is also faulty
for the reason that it includes among liquid assets all
securities—an altogether too optimistic an assumption—
while it excludes all debits on current account, notwithstanding that even during critical times a great number of
the debtors may be expected to pay up their due debts
within reasonable time after demand.
All these faults of classification are, however, of no
serious account, since the errors are not only in favor
of greater liquidity (as, for instance, when securities are
included among the liquid assets) but also against it539
(as, for instance, when all debits on current account are
excluded from among the liquid assets and all acceptances are included among the liabilities), and thus compensate each other to a certain extent; also because the
same methods of calculation are used in the comparison
of the more recent with the older balance sheets.
This can be proved arithmetically by changing slightly
the schedule so as to avoid the errors named, for instance,
by omitting acceptances from the liabilities or considering them only to the extent of one-third of the total, by
including at the same time among the liquid assets debits
on current account to the extent of one-half or one-third
of the total, and by including not the total securities, but
only one-third or 10 per cent of that total. It will be
seen that even with such a change of the schedule very
similar results will be obtained.

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According to the customary schedule the coefficient of
liquidity—that is, the proportion of the immediately
available or quick assets to all liabilities, without distinction between those daily due or those maturing after
some time 540 has been as follows since 1893:
For all
German
credit
banks.

1893
1894
189s
1&96
1897
1898
1899
1900

For the
Berlin
banks.

Per cent.
85

Per cent.
88
83
73
75
79
76
78
73

81
72

73
75
72

73
7o

For all
German
credit
banks.
Per cent.
1901
1902
1903
1904
1905
1906
1907

For the
Berlin
banks.

Per cent.

70

70

72

76
7i
70
65
63
63
64

67
66
62
61
60
62

The proportion has grown constantly worse during the
last fifteen years (except for the years 1896, 1897, and
1902) up to 1907, and it is mainly this fact which supplies
grist to the mills of the heterogeneous elements opposing
our present banking system. There can be, however, no
doubt that this falling ofif can be traced on the one hand
to the strong concentration movement in banking and
industry, particularly characteristic of this period, and on
the other to the unexpectedly large demands of industry
and the accompanying growth of speculation. It would
not be difficult to trace in detail the influence of the
above factors through the growth of debits on current
account and the long-term credits. The working of the
first factor, particularly in the shape of the so-called communities of interest, is discernible in the increase of the

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permanent participations; the two last factors are mainly
responsible for the growth of debits on current account
and of acceptances. The expectation seems, however,
justified that with the abatement of the concentration
movement and the strengthening of the numerous
branches, agencies, etc., founded by the banks during the
period, all of which make large demands upon the parent
institutions until they are able to stand on their own feet,
these items will show some reduction. An adverse
change in industrial activity may contribute to the same
result while causing a similar reduction of the bank discount and general interest rate. The picture presented
by the balance sheets of the banks must necessarily reflect
that of the entire national economy, since the banks are
the cash keepers of the nation. It is, therefore, hardly in
accord with the truth to speak of or object to the banks
as the "leaders of national enterprise" or of domestic
economic activity.
As it is the above table shows that the proportion of the
quick assets of the banks to their liabilities or the coefficient of liquidity of their resources even for the worst
year of the period (1907) was 60 per cent for all credit
banks, taken as a whole,541 and 63 per cent for the
Berlin banks. That is to say, the liabilities of the German credit banks to the extent of almost two-thirds of
the total were secured542 by liquid resources.543
The coefficient of liquidity in 1907 for 11 great Berlin
banks has been calculated by Heinemann in an article in
the Nation (No. 32, dated May 7, 1898) at 61 per cent,
while for 1906544 (by disregarding the item of securities)545
he reckons it at a little over 50 per cent. Similarly A. Kop5 66




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pel, writing for the Plutus of May 26, 1906, figures out a
decrease of liquidity for the 5 largest banks from 75 per
cent at the end of 1890 to 50 per cent at the end of 1905.
In this calculation he fails, however, to include securities
among the assets, while including among the liabilities
even the so-called Avale (i. e., bank sureties for the payment of railway freights, excise, and import duties).
An article of the Frankfurter Zeitung, dated April 4,
1907 (No. 93), discussing the coefficient of liquidity for 45
banks (9 Berlin great banks and 36 provincial banks, each
of them with a minimum capital of 10,000,000 marks),
with a total nominal capital of 2,198,800,000 marks, follows the customary method (without, however, considering
the net profits) and places this coefficient at 67.8 per cent
for the 8 Berlin great banks, arriving thus at the same
proportion of two-thirds security for the outstanding
liabilities.
Finally, the Deutscher Oekonomist of November 23,
1907, page 561, by using the customary method of calculation, but omitting acceptances from the liabilities and
securities from the liquid assets, places the coefficient of
liquidity on December 31, 1906, for 143 banks, with a
minimum capital of 1,000,000 marks each, also at about
two-thirds (credits on current account and deposits,
6,304,000,000 marks; cash on hand, bills, and loans on
collateral, 4,043,000,000 marks). Almost the same result
would have been attained by reckoning in the case of
these 143 banks the acceptances among the liabilities at
the ratio of one-third of the total and placing with
deposits and net profits the credits on current account
at the ratio of one-half of the total, i. e., by considering
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merely the immediate liabilities (as distinct from those
maturing after some time), according to the average
ratio between the two and by including among the liquid
assets, besides cash on hand, bills, and loans on collateral,
including contango, also one-third of the securities, but
excluding from the liquid assets any debits on current
account. The amounts thus obtained are 7,394,000,000
marks of liabilities, as against 4,406,000,000 marks of
quick assets.
These results tally fairly well with the coefficient of
liquidity of 62.76 per cent, which Waldemar Mueller assumed for 45 banks with a minimum capital of 10,000,000
marks each, at the Hamburg bankers' convention, although
he counted among the liquid assets one-half instead of onethird of the securities and omitted the net profits, but, on
the other hand, placed among the liabilities all credits on
current account. By excluding the total of acceptances
from the liabilities, which I regard, however, as improper,
he obtained an even higher coefficient of liquidity of 81.92
per cent.
It will hardly be denied that the coefficient of about
two-thirds obtained by the various methods, even for the
worst year, unless the methods used were altogether arbitrary, is sufficiently satisfactory, although in this regard
conditions in the English banks, for reasons already
stated, are far more favorable. But even for the German
credit banks the coefficient would be far more favorable
if we compared their quick assets merely with their immediate liabilities. This, however, is impracticable, at least
for the present, since the balance sheets of many banks
contain no information on that point.
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The composition of the liquid assets may likewise be
regarded/on the whole, as satisfactory.
On December 31, 1908, cash on hand in all banks
amounted to 537,500,000 marks,546 i. e., almost to 8 per
cent of the 7,256,000,000 marks, the combined credits on
current account and deposits, exclusive of acceptances.
In England, as we saw, even the best joint-stock banks
show a cash reserve of only 5 to 10 per cent, whereas the
majority of the banks have no amounts which may be
regarded as reserves in the sense used by Edgar Jaffe. In
the case of the German banks, the item cash is supplemented by the bill holdings, which on an average547 present
a very satisfactory amount, amounting to 2,742,400,000
marks, on the above date, so that on December 31, 1908,
the items cash and bills alone constituted 3,279,900,000
marks, as against deposits of 2,745,800,000 marks.
The statement was made and assiduously propagated
in the foreign press that part of the funds entrusted to the
banks, and even part of the deposits, are being used in
syndicate operations or speculation. This is refuted by
the mere fact that at the end of 1908 the combined total
of the items—securities, mortgages, and syndicate participations—in the case of the above-mentioned 143 (169 in
1908) credit banks, with a minimum capital of 1,000,000
marks each, was 1,298,052,000 marks, or less than onethird of the combined capital and surplus funds of these
banks, viz, 3,253,673,000 marks.548 About two-thirds more
of this amount would therefore have to be invested in this
manner before there could be any talk that outsiders'
funds, not to speak of deposits, were invested in speculative securities or participations.
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The above, it is hoped, will afford sufficient proof that
neither the amount nor the composition of the liquid
resources, nor the coefficient of liquidity afford any cause
for demanding the " reform" of our banks for the sake
of increasing the security of the deposits. Finally, the
statement, that the combination of the deposit business
with the promoting and issuing business has led to grave
losses, is correct only to the extent that in a number of
failures of credit banks as well as cooperative credit
societies and private banking firms depositors have also
suffered. So far as private firms were concerned, these
failures were brought about by the criminal acts of the
bank management, which had no connection whatever
with promoting or issuing transactions. Similar experience, only on a larger scale, was had with the English
deposit banks and is not likely to be avoided through any
legal regulations.
The figures of such losses as given by Otto Warschauer549
brought down to the year 1907 by the managing partner
of the Disconto-Gesellschaft, Dr. Arthur Salomonsohn,
were presented to the bankers' convention at Hamburg.550
These data, the accuracy and completeness of which
will hardly be doubted, relate to nine credit banks,
nearly all of them with very small capital, and two other
institutions, the Hannoverscher Hypothekenverein and the
Spar-und Vorschussbank, in Dresden, which either at the
opening of bankruptcy proceedings or before were cooperative societies. The total losses sustained by depositors
by reason of all these failures during the fourteen years
between 1894 a n d 1907 are calculated at about24,ooo,ooo
marks. It is rather difficult to ascertain the proportion
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which these losses bore to the total deposits of the German
credit banks.
It would not be correct to compare the total losses with
the amounts due to the depositors on December 31 of
each of these fourteen years, since the amount for each
successive year includes those for the preceding years.
Even if only the amount for December 31, 1906 (2,700,000,000 marks), were taken the total would be altogether
too small. For what we are concerned with are the total
amounts deposited during each year, and these naturally
will be much larger in view of the withdrawals, which are
especially heavy during the last months of the year.
This maximum amount of 2,700,000,000marks represents,
therefore, a total far below the actual amounts deposited.
On the other hand, the total loss of 24,000,000 marks,
as estimated by Salomonsohn is probably far too high,
since according to his explanation the claims of the
depositors were figured from the last bank statements
preceding the failures. In many cases, however, the
opening of bankruptcy proceedings is preceded by a run,
during which part of the deposits is repaid. It is plain,
therefore, that the amount of deposits—of which only
part represents savings deposits—is estimated too low,
while the losses are estimated too high. But even if we
accept both figures without change and divide the total
loss of 24,000,000 marks by the total deposits of 2,700,000,000 marks it will be seen that the average loss on all
bank deposits in the German Empire during the fourteen
years from 1894 to 1907 was about nine-tenths of 1 per
cent; in other words, of every 100 marks deposited during
the fourteen years, from 1894 to 1907, not quite 90
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pfennigs was lost. This period includes the crisis years
of 1901 and 1906, during which the German banks and
banking system, on the whole, proved their utmost soundness despite all difficulties and dangers. It is true that
subsequently, in 1907 and 1908, new important cases
occurred, when banking institutions which were receiving
deposits failed and the depositors suffered losses. According to my own inquiries these cases include 29 private
banking establishments, 11 registered cooperative credit
societies with limited liability, 1 industrial bank, 1 savngs
and credit bank, 2 loan and credit societies, 1 people's
bank, not registered as a limited credit society, and only
2 credit banks, viz, the Solinger Bank in Solingen and the
Bonner Bank fur Handel und Gewerbe in Bonn.551
After the foregoing discussion it would seem rather
unreasonable to maintain that deposits are being used
for syndicate participations or speculative operations or
that "grave losses" have been caused to German depositors by our banks and banking system, and to demand in
the same breath the introduction of special deposit banks
or special safeguards, the more so, as failures have by no
means been rare even among the special deposit banks in
England. It is not surprising that the constant reiteration of such statements, hurtful to German credit abroad,
in the long run finds a loud echo in foreign countries,
which are only too anxious for such news, and that even
the I/Ondon Economist could treat his readers in a recent
issue to the news that the German banks were "investing
their deposits in mortgages." 552

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CRITICISM OF T H E INDIVIDUAL REFORM

T H E CREATION

O F A CENTRAL

PRIVATE

DEPOSIT

PROPOSALS.

BANK O R O F A GOV-

E R N M E N T DEPOSIT BANK FOR THE GERMAN EMPIRE AND OF SIMILAR
DEPOSIT BANKS FOR EACH OF THE GERMAN STATES.

In order to bring German banking into conformity
with the English model, Caesar Straus proposes the creation of a private central deposit bank and Otto Warschauer the establishment of a government deposit bank
for the German Empire alongside of a series of deposit
banks for the individual States.
In view of the above discussion and the German and
English experience in this field, the change does not seem
justified in the interests of greater security for the depositors. Furthermore, the proposed changes are either
impracticable or dangerous. Straus's idea of a central
(einheitliche) deposit bank is impracticable, even if only
for the reason that neither the German great banks,
nor the other banks or bankers, are likely to join in the
foundation of such a central bank, since, being more conservative in their business views, they believe that, contrary to Warschauer's calculations, such a bank for the
present and a considerable time to come is not likely to
prove profitable.
The idea is impossible of realization, also, because the
Reichsbank, for obvious reasons, will never agree to transact the business of the deposit bank in those places,
where the former only, but not the latter, may have
branches of its own. If I am rightly informed the proposal met with scant favor at the time, just in the lastmentioned quarter.

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For various reasons the Warschauer proposal of an
imperial special government deposit bank, either singly or
in conjunction with like banks for the individual States,
is likely, at least for the time being, to share the same
fate.553 In the first place our authorities would hardly
disregard the reasoning that it would not do to substitute
bodily a foreign credit system, which owes its development to special local conditions, for a domestic system,
which is no less the result of peculiar conditions at home.
It will also be recognized that our banks have had a considerable share in the brilliant economic development
during the last decades, and that, therefore, any attempt
to paralyze their activity is likely to inflict grave injury
on our national industry. There will be the more hesitation about making the change when it is borne in mind
that the coming decades will undoubtedly bring a very
severe struggle for our national industry against foreign
competition, in which the unimpaired assistance of our
banks will be needed more than ever before.
Nor is it likely that there will be much sympathy with
any plan that is likely to diminish the " highly appreciated " and always welcome ability of our banks to contribute their share of taxation. In the case of the Reichsbank, which has had to pass through a severe struggle
with the competing note banks, there would be the
additional danger that the newly established state deposit banks might interfere with and thwart its discount
policy. That such a danger exists, is shown by conditions
in England,554 where the Bank of England's own bill
business has been declining for some years past, and
where the bank, owing largely to competition with the
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large deposit banks, is compelled to discount bills at the
prevailing market rate, which in most cases comes nowhere
near the official discount rate. It may also be shown that
the Bank of England no longer controls the market for
loans on collateral, as the large deposit banks find it
possible to supply the market with vast amounts for such
loans and are thus in a position to oppose successfully
any increase of the discount rate which the Bank of England might deem expedient. Thus it has come to pass
that of all the functions devolving upon it, and of which
no one can be eliminated without injury to the community, the Bank of England exercises successfully only one,
viz, the regulation of the currency.
This also proves the error of the writers who hold555
that "no conflict of interests between the Reichsbank
and a private central deposit bank need be feared/' that,
on the contrary, "they have common interests/' and that
both institutions, with the Reichsbank as "the leading
institution/' would "cooperate in maintaining and supporting the proper monetary circulation" of the country.
The establishment of state deposit banks would, moreover, involve a radical change for the worse, and not for
the better, of the entire German banking system.
It is not likely that the German credit banks will resort to any measures of self-protection during the early
stages, believing, no doubt, that for some time at least,
their deposit business will not be seriously endangered by
the fresh competition. Should, however, the founding of
government deposit banks, or even a more energetic quest
after deposits on the part of the Seehandlung and other
state institutions, come to be regarded as a serious danger
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to their own deposit business, the credit banks would, as a
matter of course and of self-protection, have to enter the
competitive struggle with all the means at their disposal.
In such a case they would proceed to transform, as far
as practicable, their present deposit departments into
separate deposit banks or to found new ones, and in
either case take over or keep the control,556 management,
and shares of the new deposit banks.
We should then have an imperial deposit bank, deposit
banks for the individual States, and a large number of
competing private deposit banks, all of which, including
the state and private banks, would be compelled to cover
the country with a network of branches. Sooner or later
all these institutions, possibly in conjunction with the
then surviving state note banks, would be found seriously
hampering, if not entirely blocking, the discount policy
of the Reichsbank.557 This, contrary to Ad. Weber
(op. cit., p. 262), we regard by no means as a " cur a posterior." Such a picture of the future is by no means exaggerated, if we are to judge by English experience.
Warschauer's proposal is based upon the erroneous view
that our banking system is inferior to the English system
and must give place to the latter. In order to refute
his views, it may suffice to state that for a long time the
English have been energetically demanding a reform of
their own banking, while pronouncing our system superior to their own, until their usual keenness of perception became blunted by the agitation which had sprung up
in our own midst. As late as July, 1906, the following
expressions were used in an article on "The future of
international banking," which appeared in the Bankers'
Magazine (No. 748, p. 51):
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" I n Germany we find a banking policy which, though
in minor points borrowed from other countries, differs
essentially from all others in giving full expression to the
national genius. It is as scientific and thoroughly coordinated as English banking is unscientific and haphazard.
German banking does not stand aloof from industry and
commerce, as ours does. The three are all closely associated. They have a common understanding and a
strong sentiment of solidarity."
This is a foreign opinion.558 In Germany the mere
fact that a hen is laying golden eggs suffices to call forth
in many quarters the desire to have it killed.
In view of the above considerations and the negative
attitude assumed by the imperial chancellor at the opening of the deliberations of the bank inquiry commission
toward the proposals to change by law our existing
mixed banking system, it would seem unnecessary to
repeat again the arguments propounded in the second
German edition of this work (pp. 155-160), that the
profits of the new central deposit bank, at least during
the early period, would most likely be very moderate
and not, as Warschauer believes, 21-22 per cent (!), or
at least 12 per cent.559
2. T H E GRANTING OF PRIORITY R I G H T S TO DEPOSITORS.

It was shown above that our past experience does not
justify the demand that priority rights be granted to
depositors. Such a demand, even if better founded,
could hardly be conceded, as such a preferment of depositors to other creditors of the bank, who may have entrusted their cash to the bank in current account or
90311°—11

3S

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otherwise, would be a death blow to the credit of the
banks. It may be also argued against it that the very
conception of deposits is not fixed either in theory or in
practice and still less defined in law with regard to their
manifold and constantly varying relations to credits on
current account, contango, etc.560
3. T H E F I X I N G OP

A LEGAL

RATIO

BETWEEN

SAVINGS

D E P O S I T S AND

THE SHARE CAPITAL.

The objection to a fixed ratio between share capital
and deposits "in so far as they are savings deposits" is
directed mainly against Warschauer,561 who advocates a
scheme similar to that legally prescribed for our mortgage banks.
This scheme would be unacceptable even if the words
"in so far as they are savings deposits" were omitted.
As a matter of fact, while it might have been desirable to
fix such a ratio in the case of the mortgage banks, which
are engaged in what may be called the standard business
of issuing mortgage bonds, such or other regulations would
be ill adapted to the credit banks with their innumerable
and constantly varying business relations. Warschauer's
proposal is based on the premise that the share capital
(he wrongly disregards entirely the surplus funds) ought to
bear a certain ratio to the deposits, whereas it was demonstrated above that the foremost protection of the creditors,
including depositors, are the liquid assets562 and not the
capital (and surplus), and that in Germany large share
capitals are required mainly in view of the diversity of
business transacted by our banks. This view is shared
in England, to which our opponents are in the habit of
turning for their authority.
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4. LEGAL REGULATIONS REGARDING THE INVESTMENT OF D E P O S I T S .

Proposals were made by certain experts who appeared
before the bank inquiry commission of 1908, to the effect
that those modes of investment of deposits which were
found correct and had been carried out at that time by
most of the great banks should be made the basis for
legal regulation, as it was intolerable that the " administration of the national wealth" 563 should be entrusted
to 10 or 12 persons without any legal safeguards. This
remark occurs frequently in banking literature and in
other connections.
Accordingly a legal regulation is demanded requiring
that a certain proportion of the deposits is to be invested
in German government bonds, the price of which would
thus incidentally be raised. As an alternative it is
proposed that about one-third or 35 per cent of the
deposits in savings banks, cooperative societies, and credit
banks be required by law to be invested as follows: Twenty
per cent in bills of exchange in accordance with the Reichsbank regulations, i. e., provided with three signatures and
running for a term not exceeding three months, and 15 per
cent either in other bills, in accounts at " giro " banks, and
in loans on collateral not exceeding a term of three months
on securities quoted at a German bourse (excepting the
bank's own shares or those of a "concern" bank, or such
securities as have been put on the market by the institution in question within three years preceding), or in German state loans or German imperial government bonds,
or finally, in first mortgages.
Against this it may be urged that even if the above
demand were complied with, the depositors, having no
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exclusive lien on these securities, would run the same
risk as they do now in the case of bankruptcy or crisis,
the only difference being that believing themselves guaranteed by law against all losses they would have all the
more reason to complain.
Unlike the mortgage banks and insurance companies,
whose business moves along beaten paths, the German
credit banks engage in an immense variety of complicated enterprises. Hence no regulations of the kind
above described could be applied to them without injury
to the special activity of each bank and of the credit
business in general. It seems impossible to imagine how
any set of regulations, suitable for all times, places, and
conditions, could be devised to determine the manner
in which the working capital is to be invested. At any
rate, the attempt to do so would be a very risky undertaking. Moreover, it is more than doubtful whether any
manner of investment could be legally prescribed that
would under all circumstances guarantee the liquidity
of the investments.
5. DEPOSITING A CERTAIN PORTION OF THE P R I V A T E D E P O S I T S AT THE
REICHSBANK.

Heiligenstadt's proposal56<t that the credit banks should
be required to deposit one to two per cent of the average
annual amount of all their credit items in cash at the
Reichsbank represents a totally different and broader
standpoint. The proportion was raised to 5 per cent by
some experts of the bank inquiry commission, who in all
other points adopted bodily the proposal and its argument.
Starting with the alleged fact that on an average only
50 per cent (between 1895 and 1905 only 37 per cent) of
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the annual national economic working capital ("volkswirtschaftliches Betriebskapital") placed in the hands of
the banks between 1886 and 1895 was used for working
purposes in the shape of cash, bills, and loans on collateral
(p. 83 loc. cit.), Heiligenstadt concludes that the balance
(i. e., during the latter period 63 per cent) of the money
belonging to the creditors or depositors was used for purposes of investment; in other words, that an excessive
part of the nation's working capital was converted into
investment capital through long-term credit or otherwise.
The above proposal was therefore considered justified,
inasmuch as the increase of the capital of the Reichsbank
(the regulator of the money circulation and of the credit
business) would be the best means to keep an adequate
portion of German working capital permanently liquid for
working purposes (p. 87) and to take the power of deciding the mode of employment of capital, at least to a
certain degree, out of private hands (p. 85).
Thus the proposal is said to be intended, first and foremost, to strengthen the working capital of the Reichsbank (p. 98, under X ) , and at the same time to prevent
the banks from tying up an excessive proportion of their
resources and thus endangering the security for their
liabilities (p. 95).
The supporters of this proposal described the sum to
be deposited in cash at the Reichsbank as "the national
working reserve," or "iron reserve" ("eiserne Reserve71)
which would enable the Reichsbank to issue three times
the amount in bank notes, the security for which could
not be withdrawn, and by which the nation could be
constantly supplied with liquid working funds.
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When subjected to analysis, both the premises on which
these views are based and the aims, as well as the conclusions arrived at, prove untenable.
As regards the premises, the facts set forth on previous
pages of the present work suffice to disprove the assertion
that German credit banks are in the habit of tying up an
excessive part of their resources (p. 83), and thereby
endanger the security of their liabilities. On the contrary, we saw that all the liabilities of the German credit
banks are covered almost up to two-thirds of their amount
by liquid resources, whereas the law requires that even
bank notes payable on sight may be covered by cash
reserves only up to one-third of their amount.
Heiligenstadt's method of calculating the coefficient of
liquidity (p. 83) is altogether too unfavorable. I can not
see on what ground cash, bills, and even loans on collateral,
are by him considered only partly as liquid means, contango and securities being omitted entirely.565
As regards the purpose aimed at by the proposal, it is
not clear how the Reichsbank (in the event of its noteissuing power being increased by the 2 per cent or 5 per
cent of fresh cash funds to be furnished by the banks) will
be able to keep these funds in any more liquid form than
that in which they are furnished by the banks; for the
banks would have to withdraw these very cash funds
from their most liquid resources, namely, cash balances,
bills, loans on collateral, etc. The same cash funds would
thereupon be invested by the Reichsbank in practically
the same form, namely, in bill discounts and loans on
collateral, for which it would issue its notes.

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Most probably, however, no fresh cash would flow into
the Reichsbank at all in this manner. The banks would
deduct from their "giro" account (which almost always
exceeds the contemplated "iron reserve") and place to
the credit of the Reichsbank whatever amount they might
be required to deposit, just as they would probably do in
case of a direct increase of the Reichbank capital in which
they were to participate.
Nor can it be maintained that even in this case the
Reichsbank, by reason of the sums placed to its credit,
would become possessed of a permanent security for a
threefold issue of bank notes. A permanent deposit, or
"iron reserve," is out of the question for the reason that
the sums which, it is supposed, can not be withdrawn
from the Reichsbank directly can be withdrawn indirectly in the form of larger loans, through bills, discounts,
or loans on collateral, or through deductions from the giro
balances exceeding the minimum deposit.
During a crisis—and Heiligenstadt's proposal is essentially intended for times of crisis, since for times of prosperity no reform proposals are needed—very many deposits will be withdrawn from the banks, and they will
themselves be forced to withdraw from the Reichsbank
at least a part of their 2 to 5 per cent reserve.
But even if this were not the case, the Reichsbank in
time of crisis, in order to prevent a run or bankruptcy,
would have no other means than to put in circulation all
or part of the "national working reserve," whereas in
times when money is plentiful this reserve would prove a
useless ballast.

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This brings us to a question which is by no means
unimportant, namely, whether the 2 to 5 per cent reserve
at the Reichsbank should bear interest or not.
If it is to yield interest, then all the grave reasons
become valid that may be urged against the acceptance
by a central note bank of interest-bearing deposits, and
which have caused the most prominent of these banks,
upon repeated deliberation, to refrain from accepting interest-bearing deposits. This attitude is mainly dictated
by the consideration that, if the central note bank does
not wish to bear the loss involved in the payment of such
interest—and it is hard to see why it should bear such
loss with indifference—it would be compelled to seek
lucrative business in the form of discounting and loans
on collateral, and possibly just at a time when it ought
to employ all the resources at its command to combat an
excessive demand for credit throughout the country, especially by raising the discount rate.
On the other hand, if the 2 to 5 per cent reserve is not
to bear interest, that would mean a considerable loss for
the credit banks carrying those reserves. They, too, would
of course not regard that loss with indifference, but would
be compelled to reimburse themselves in one way or
another, especially by paying their depositors less interest—a decidedly undesirable result. Furthermore—a still
more undesirable result in normal times—they would have
less funds to place at the disposal of the credit business.
An increased demand in the money market being thus
met by a diminished supply, the result would be a rise in
the rate of interest. Finally—and this would be the most
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perience, would probably diminish their noninterest-bearing cash reserves necessary for their liquidity by an amount
corresponding to their share in the " national working reserve" carried at the Reichsbank.
The ultimate result would be that the liquidity of the
banks, and with it of the body economic, would be impaired to exactly the same extent that Heiligenstadt
intended to improve it.
In substance, if not in form, this proposal amounts to
the same thing as the proposals which the Reichstag committee, for good reasons, had rejected on the occasion of
their deliberations on the stock-company bill of 1884.566
These proposals, which aimed at prescribing a special mode
of investing the legal reserve funds in cash, or in trustfund securities, were revived in 1901 in an article in the
Gegenwart by Imperial Bank Director Doctor Vosberg.
They are, however, liable to serious objections, at any
rate so far as the joint-stock banks are concerned; and
the same objections, therefore, apply also to the proposals
now under discussion.567
If the banks were compelled to keep their surplus in
cash, or to maintain a cash reserve at the Reichsbank,
they would have to withdraw this sum from their fully
employed working capital (for the suggestion that only
surplus capital is to be withdrawn is absurd), to wit, such
assets, as the bill holdings, securities, etc.
Thus they would be compelled either to restrict their
business operations, i. e., to call in credit previously
granted and refuse to grant new credit, a proceeding
which might lead to a crisis, especially in industry; or
they would have to attempt to make good this deficiency
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in working funds by the issue of fresh shares, which course,
if successful, would lead to a fresh strengthening of concentrative tendencies and, furthermore, to a fresh withdrawal of ready money from the market to an amount
equal to the total value of the share issues. If the attempt
to issue fresh shares proved unsuccessful, the calamitous
'state would continue, namely, the injury to trade and
industry, which were to be protected by the proposals in
question. In many cases, however, the issue of fresh
shares would not be possible, because the deposit of ready
money would either lead directly to a curtailment of business transactions, and hence of dividends, or would create
the fear of such curtailment, the result in either case
being a fall in the market value of the shares.
If the banks, despite the curtailment of business, endeavored to obtain satisfactory dividends—which is necessarily the aim of the business management of every jointstock company—they might easily find themselves compelled to resort to hazardous transactions, particularly
to force the founding and issue business more than ever.
Since, moreover, after the deposit of the guaranty reserve, they would possibly and even probably pay less
regard to their liquidity, that liquidity, as well as the
quality of their investments, might in the event of a run
turn out to have been impaired to a greater extent than
ever. If, however, securities were deposited instead of
cash, most of the banks, being compelled, in case of a run,
to sell the deposited securities, might not be able to do so
at all or only at a great loss. If these happened to be
trust-fund securities their market value would become
unduly depressed during the time of panic.
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Heiligenstadt's proposals would thus deprive the business community of productive capital in two ways—
through the deposit of a cash reserve at the Reichsbank
and through the issues of shares that might become necessary. Some of the supporters of the proposals have
already raised the amount of the proposed reserve from
1-2 per cent to 5 per cent; in fact, the amount would be
variable at pleasure in an upward direction. I assume
that this amount is to be deposited at the Reichsbank,
without the creditors having a lien—that is to say, a right
of segregation of these deposits (Absonderungsrecht) in
case of failure of the credit banks. If this be the case,
the Reichsbank, as has been pointed out, would have to
part with this cash reserve in the case of a run, which
might result in the claims of other creditors than the depositors being satisfied, on the principle of "first come—
first served," and the depositors might be turned away
empty handed.
If this is not to be the case, that is to say, if all creditors
are to be given a lien on the cash reserve, or the right
of segregation, then the Reichsbank, according to general
regulations, would not be permitted to part with this
reserve in case of a run, so that the failure which the
cash reserve was intended to ward off would in that very
case become inevitable.
It is also clear from the above that the practical consequences of these proposals would be directly opposed
to the efforts, recently made with such commendable zeal,
of expanding the check and transfer system, and thus
dispensing with the use of ready money in payments and
making it available for credit transactions.
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Again, it should be borne in mind that a cash reserve,
even of 5 per cent of all credit accounts at the German credit banks, that is to say, about 200,000,000 to
250,000,000 marks, could in nowise influence " t h e ratio
of working capital to invested capital" in German
trade and industry to any appreciable extent. Furthermore, while Heiligenstadt's proposal lays special
stress on the strengthening of the working resources of
the Reichsbank, a bill (since then disposed of) "to change
the bank act" (No. 1178 of Reichstag documents) admitted that the Reichsbank's own means had sufficed
hitherto for the purposes they were intended to serve,
and that consequently there was no need of increasing
them. Accordingly provision has been made merely for
a gradual increase in the working resources, by a gradual
strengthening of the surplus. Lastly, it must not be
forgotten that the Reichsbank will, as a matter of fact,
be placed in possession of considerable and increasing
working resources, through an agreement by which it
undertakes the administration of the sums which the
postal administration collects through the postal transfer
and check systems.
The fact that Heiligenstadt began by proposing a
reserve of 1 to 2 per cent, that the experts before the bank
inquiry commission afterward thought a reserve of 5
per cent appropriate, and that since then one of these
experts has felt prompted to raise the proportion to
10 per cent,568 ought to suffice to demonstrate the
inept and dangerous nature of all these proposals. For
why stop at 10 per cent? Someone is sure to turn up,
whether inside or outside the Reichstag, who, with "holy
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zeal" and with perfectly incontestable logic, will declare
even the 10 per cent insufficient, for it is obvious that 50
per cent at the Reichsbank are a far better safeguard than
10 per cent. The banks, to be sure, would in that case
fare like the donkey who was just getting accustomed to
live without food when he died.
My attitude toward the proposals here discussed, as
well as toward any reform proposals in the banking business, is based on the fundamental principle that all those
proposals are to be condemned which, without being of
any appreciable benefit to the community as a whole, are
injurious to so important and necessary a factor in
German national economy as the banks. In the same
way I am opposed to those proposals which do more harm
than good to the community at large, or which are obscure
in their motives and aims, and of whose consequences no
estimate can be formed. On the other hand, I should
not a priori be opposed to measures the execution of
which would impose certain sacrifices on the banks, provided such proposals promise to result in notable benefit
to the whole community and thus perhaps in indirect
advantages to the banks.
6. T H E

PUBLICATION OF SUMMARY B A N K STATEMENTS (ROHBILANZEN)
ACCORDING TO A LEGALLY PRESCRIBED F O R M .

Such a benefit to the general public and to the banks
is put forward as an argument for the publicity proposals,
especially that of Count Arnim-Muskau.569 Though not
worded to that effect, yet the meaning of this proposal,
in view of the nature of the German banking business,
amounts to this, that all banks and merchants who as a
part of their business accept deposits to amounts exceeding on an annual average half (?) of their liable capital
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shall be under legal obligation to publish summary statements on the first of every quarter. These statements,
it is proposed, are to conform to a legal schedule, a draft
of which is given, and are to be published at the latest on
the first of the following month in newspapers publishing official communications.
I do not believe that such statements would fulfill the
purpose of adequately enlightening the general public,
and especially the depositors, as to the condition of the
bank to which they have entrusted or intend to entrust
their deposits, no matter what schedule may be adopted.
If the schedule goes into minute details, it will as a rule
not be read any more than long prospectuses. If it does
not go into details, but merely gives "total amounts'' for
the various items, as is natural, and as is in fact contemplated in the Arnim proposal, it will be read, but will
seldom fulfill its purpose of enlightenment, since it will
leave the reader in the dark on those very points that are
of the greatest importance as regards the soundness of the
banks.
In particular, if the statement draws a distinction between the secured and unsecured debit accounts, the
essential point will be the kind of security given in the
individual case, whether a mortgage on improved rural or
urban real estate, a factory, or unimproved ground, and
whether the mortgage is first or second, whether securities have been deposited, and if so, what is their quality, whether bond has been given, and if so, what is the
financial standing of the bondsmen, etc. On all these
points the balance sheet will fail to enlighten the
reader. Neither will it be possible to gather from it the
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composition of the various items, such as the security and
syndicate accounts. In particular, it will be impossible
to tell whether the securities, bills, contango, loans on
collateral, debits on current account enumerated in the
statement are good or bad; and yet the quality of the
assets is the main point, the quantity being of secondary
importance. Further, acceptances may quite properly
have been substituted for book credit, and vice versa.
Business discretion, which is an imperative necessity,
will of itself forbid the publication of details, but even if
such publication were attempted it would simply cause
the statement to remain unread. This is precisely what
took place with the prospectuses, the publication of which
was vehemently demanded some time ago in the interest
of public enlightenment. If they are too long they are
never read, except long after their publication, for the
purpose of constructing a claim for indemnity when the
market value of the securities has greatly declined.
Further "total amounts" fail to indicate the most dangerous cases of credit granting, which have so frequently
caused banks to fail570 in England as well as in Germany—I need only refer to the Leipziger Bank—for
instance, the case in which a bank has granted excessive
credit to one and the same person, firm, company, or
institution, or to one and the same branch of industry/
The obligation imposed on American note banks never to
grant individual credit beyond a certain portion (one-'
tenth) of their share capital, does not take sufficiently
into account the situation and status of each bank. It is,
therefore, on the one hand, too schematic, while on the
other hand, as experience has shown, it can easily be
evaded.
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Experience has proved, moreover, that the most disgraceful failures, such as those which took place in England, particularly in time of crisis, occurred among those
very deposit banks that had published their statements.
The collapse frequently occurred immediately after such
publication, perfectly legal in form, without anyone
being able to gather from these documents even the
slightest hint of the impending crash.
Space does not permit all the details of the Arnim
proposal to be discussed here. I should only like to
make the following remarks in reference to the oftrepeated demand for a statement of all assessments due
on account of participations. Even the managers of a
syndicate are often unable to foretell the amount of these
assessments with any degree of certainty. Such is the
case with the liquidation of long-term engagements
resulting from the taking over of railways or factories or
other establishments, with the rehabilitation of distressed
or wrecked undertakings, with international business
whose management and central offices are located abroad.
Again, there are cases in which it is utterly impossible at
the time of publication of the statements to foretell the
amount to be ultimately invested in an enterprise (perhaps a fonds perdu) or the date of maturity and the
amount of subsequent assessments, or—a case of particularly frequent occurrence—the amount of the repurchases (Riickkaufe) which have to be undertaken so often
and to such extent even after the syndicate business
proper is ended. Syndicate assessments are like household budgets; those expenses that could not be foreseen
at the time the estimate was made are the very ones that
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crop up most frequently and are surest to disturb the
whole forecast.571
Finally, summary statements may be misleading, because frequently losses to be written off and other
deductions (Rucklagen) can only be ascertained in the
course of the business year or at or even after its close,
just before the drawing up of the annual balance sheet;
and yet the necessity and amount of these items are of
essential importance in gauging the bank's position.
Again, in a summary bank statement credit and debit
items appear without anything to show whether a creditor
is at the same time a debtor, and vice versa, and whether
compensations must accordingly be allowed for to a large
extent.572
But while I do not believe that the periodical publication of summary statements can contribute much toward
the enlightenment of the public regarding the true condition of a bank, yet I will not dispute the beneficial effect
of the public criticism that may be elicited by such publications. The comparison of statements of different banks,
published simultaneously, would afford a far broader and
more reliable basis for such criticism than can be expected
of a single statement.
I also regard these publications as a very excellent
means of self-education for the banks. Their mutual
criticism, based on the published statements, may gradually lead to uniform or approximately uniform principles
of business management, especially regarding the manner
and extent of credit granting, and gradually to an understanding concerning some lines, at least, of business
policy. This understanding might thereupon develop in
903110—11

39

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all these directions into firm and sound traditions, which
hitherto have largely been lacking.
For theoretical and practical reasons I should also consider it a very desirable and beneficial result if these
periodical statements should lead to uniformity in their
compilation, and gradually also to uniform annual balance sheets. This would facilitate the comparison of the
balance sheets of all the credit banks, a matter which at
present is attended with great difficulties.
Finally, it must not be forgotten that every new device
which enables us, unswerved by the current of phenomena,
to read, as it were, from a barometer, the present and the
near future of economic conditions must naturally restrict
the limits of error, which in this matter are necessarily so
wide. Summary statements of credit banks, 573 published
periodically, would serve that purpose, just as does the
publication of the condition of the Reichsbank, or of the
fluctuations of the Reichsbank discount (official) rate and
of private discount rates, of the demand for labor at the
German labor exchanges, as well as the publication regarding the revenue from the stamp tax, from which the amount
of bills in circulation at any moment can be ascertained,
and of the receipts from railway traffic, from which the
existing condition of industry can best be gauged. These
publications supplement each other.
Despite the undeniable and considerable advantages
which the periodical publication of summary bank statements thus affords, I am decidedly opposed to the legal
enforcement of such publication. My objections are based
on what seem to me the following cogent reasons:
In the first place, I consider it an ill-advised step on
the part of the legislator to give rise to the belief (which
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would naturally gain ground among wide circles of the
general public) t h a t from a publication of this kind, which
has never yet been adopted in England, depositors could
gain a clear idea as to t h e status, and therefore as to
t h e soundness, of the b a n k to whose charge they have
entrusted or intend to entrust their deposits. This belief
would be an erroneous one, no m a t t e r w h a t form of publication might be adopted, and it is not becoming or
incumbent on the legislator to aid in propagating such
errors. Cases like those of the Leipziger Bank and t h e
Marienburger Privatbank would most probably have
occurred under t h e same management, even if those banks
had published summary statements. As a m a t t e r of fact,
they did publish most handsome annual balance sheets,
which were, moreover, accompanied by a " business report."
My second reason, which to m y mind is decisive, is t h a t
a compulsory legal regulation of this kind can not be conceived without a legal schedule for drawing up t h e statement. I n fact, a multitude of such schedules have
already been suggested by competent and incompetent
persons.
Now, a legal schedule, unalterable for a series of years,
is an absurdity, for the business spheres of banks are constantly changing, and accordingly t h e schedule would of
necessity be subject to constant changes, dictated by
practical experience. A schedule drawn up by the bank
themselves to-day would of necessity be different from
one drawn u p ten years ago and from one t h a t might be
drawn up ten years hence.
If ever t h e impotence of legislation in any field was
evident a priori, it is in this field, where t h e business in
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question does not proceed in a stereotyped and automatic
manner, as is in the main the case with note-issuing banks,
insurance companies, and mortgage banks. The latter
are, on that account, much more susceptible of government regulation, which our German habit, the result of
centuries of drill, still prompts us to regard as the last
resort (ultimum refugium) in all cases demanding a remedy.
In the third place, practical experience, in Germany
especially, has abundantly shown that legislative capacity and skill are as yet imperfectly developed among
us, especially in economic matters. Such matters as the
publication of bank statements or the deposit of cash
reserves for the security of deposits, which to the layman
seem self-evident, urgently necessary, and simple in
execution—" simple solutions are always seductive to
simple minds"—are in reality exceedingly difficult and
complicated. Hence it is to be feared that the advocates
of these proposals, starting from the most diverse premises
and pursuing the most diverse purposes, would carry
them into execution in a form which can not fail to lead
to the gravest embarrassments, as experience has repeatedly proved. Above all, there is imminent danger—as
illustrated by the very wording of the Arnim resolution—
that, aside from credit banks, not only savings banks
and mutual credit societies would be compelled to publish statements, but also private bankers, which, to my
mind, is utterly inadmissible, for deposits are entrusted
to a private banker not so much in consideration of the
amount of his private means, but in consideration of his
supposed integrity. To compel him to publish a statement of his financial position would injure and paralyze
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him in the competition within the private banking profession. Legislators should under all circumstances guard
against ill-advised measures likely to cause injury to
and to hasten the suppression of the small bankers and
thus repeat the mistakes of the Bourse law.
Impressed with these considerations, I heartily welcomed the decision of the Berlin great banks to publish
voluntarily (beginning with 1909) at the end of February,
April, June, August, and October (in December the annual
statement is issued) summary statements according to a
schedule discussed and agreed on among them which
essentially corresponds to the schedule of the " Deutsche
Bank." This example has been followed to a great
extent by the joint-stock banks, and will doubtless in
time become the universal practice. During the early
deliberations of this question I pointed out that whatever
schedule was chosen, it would be sure to be criticized.
However, it is not easy to conceive a schedule which would
not be condemned by some critics, no matter whether it
was drafted by the banks or by other critics.
7. PENALTY FOR " B A N K S AND BANKERS WHO BY P U B L I C OR W R I T T E N
APPEALS

OR

THROUGH

AGENTS

SOLICIT

{anreizen)

DEPOSITS

OR

SAVINGS."

On the occasion of the passing of the bank-act amendment of 1909 the Reichstag petitioned the imperial
chancellor for a bill to ward off the danger caused by banks
and bankers who by public or written invitation or
through agents solicit {anreizen) the public to "invest
with them their deposits or savings.''
According to the debate in committee, the bill aims
at the suppression of low-class or touting bankers
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(Winkel-oder Animierbankiers),
or*of business men who
have no claim to t h e name " banker," b u t who, b y promises of specially high rates of interest or other advantages,
entice t h e public t o h a n d over t o t h e m their savings, while
t h e persons making these promises are neither able, nor
in m a n y cases willing, to return t h e deposits. 574
Certainly these are t h e only cases in which there exists
any danger for t h e public, and some of these cases m a y
a t once be eliminated from the discussion. If a written
invitation to open an account is issued by a business m a n
who a t t h e time of invitation is not willing to return t h e
deposit, nor likely to be able to do so at t h a t or some
future time, it should be considered as an a t t e m p t t o
defraud.
Under t h e law relating to unfair competition, t h e
Central Union of Bankers and Banks a t Berlin (" Centralverband des Deutschen Bank- und Bankiergewerbes
zu
Berlin") established for the protection of banking and
bankers' interests, is empowered to proceed against
persons who by their occupation are not entitled to call
themselves " b a n k e r s , " with a view to enjoining t h e m
from making public use of t h a t designation. I a m in a
position to state t h a t such action has been taken on
several occasions. 575 B u t neither these sham bankers
(Nicht-Bankiers)
nor savings banks, whose resources, as
we have seen, are often far from liquid, are aimed a t in
t h e badly worded Reichstag resolution, which only
demands t h a t steps be taken against banks and bankers.
Besides this t h e two absolutely different terms " d e p o s i t s "
a n d " s a v i n g s " are once more lumped
together.
Furthermore, t h e resolution recommends t h a t legal action
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be taken even when the invitation to invest deposits (?)
or savings (meaning, probably " investment of funds in
the form of deposits or savings") (zur Anlage von Depositen) is not made publicly, provided it be in writing.
But such a written invitation, which certainly is one
form of "solicitation," may under certain circumstances
become the duty of a bank or banker in a case where
through negligence or ignorance a customer whose business they look after leaves money deposited without
interest.
Moreover, as the word "solicit" (anreizen) used in the
resolution is extremely elastic, having received the most
diverse interpretation both in theory and in practice, I
do not believe that the measure proposed in the Reichstag resolution can lead to any practical results. It is
hard to say which is the graver mistake, to enact penal
laws whose effect far exceeds the desired and economically correct purpose or such as are rendered nugatory in
practice.
8. A SUPERVISORY B O A R D .

I am equally unable to approve the idea of a government board of supervisors recently advocated in many
quarters, especially by Obst. Such an institution has
never yet afforded protection against fraudulent manipulations, while on the other hand it is very apt to lull the
public into a feeling of security which such a board, from
its very nature, is not able to provide. Even though possessed of the most thorough expert knowledge, such a bodywould not be in position to obtain a sufficiently correct
estimate of the quality of the assets of a bank, to say
nothing of the fact that no bank can be expected to allow
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its competitor who might be called upon to act as
expert adviser t o t h e board t o gain an insight into its
business. 576
The experience of all countries and a t all times in regard
to t h e natural inadequacy of state supervision (see note
23 on p . 789, also p p . 54 and 601) should serve as a warning against any repetition of such experiments.
Herewith ends t h e discussion of t h e reform proposals
hitherto made. I n obedience t o t h e prevailing tendency
in Germany and to t h e current of t h e times, nearly all
these proposals aim a t some intervention b y t h e State or
b y legislation, which, as far as deposit banks are concerned, has always been most decisively condemned in
England, t h e very country which is assumed to be t h e
p a t t e r n for Germany t o follow in this matter. Although
I a m b y no means an adherent of t h e defunct Manchester
theory, I m u s t confess t h a t in this important, complicated, and difficult question I share t h e opinion expressed
fifty years ago b y a prominent authority in this very m a t ter, an opinion which unfortunately has not lost its
actuality and correctness: " T h e unfortunate system of
tutelage has never yet stood t h e test of practice. I t
merely leads from step to step, and when it has once been
adopted, there is nothing in which t h e State does not
think itself called upon t o interfere in t h e interest of its
citizens and for which t h e latter do not look hopefully
a n d imploringly t o t h e State, while t h e y themselves limit
their activity to complaints. , '
T h e m a n who wrote these words in 1857 was no other
t h a n Adolph Wagner. 577 I frankly admit t h a t I find this
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vincing than his later views and proposals, which, I regret
to say, are quite different.
No State measures will avail against a criminal or
negligent treatment of deposits, especially no legal regulations nor any supervisory board, such as Wagner proposed some years ago while under the immediate impression of the crisis of 1901, that is to say, at a time least
suitable for judicial and matured proposals.578 I feel
convinced that the German banking community did not
in any way deserve such a manifest vote of censure—for
a vote of censure it was; there is no use in blinking the
fact. The one thing that is essential above all in this
matter is the honesty, trustworthiness, and efficiency of
the bank managers. In the United States 579 the Comptroller of the Currency, who may order an investigation
of the national banks by special examiners, declared in
his official report for 1895 (p. 57 et seq.) that as a rule
the examiners detect mistakes, defects, and crimes only
after the failure has occurred, and that no supervision
by outsiders can serve as a substitute for the honesty
and competency of bank managers.580

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IV. THE PROGRESS OF CONCENTRATION
IN GERMAN BANKING DURING THE SECOND
PERIOD (1870 TO THE PRESENT).

PART

CHAPTER I.

CAUSES OF THE

CONCENTRATION

MOVEMENT.
I . GENERAIv CAUSES. 1

As was shown in the first part of the volume, the
German banks entered upon the present period with
very limited capital. The question therefore remains
to be answered: By what means have they managed to
meet the ever-increasing duties imposed upon them by
the tremendous industrial development of this period?
In a general way the answer is as follows: The same
factors which we have shown above to have been dominant in the general economic development of the period
appear again in the development of banking, viz, the
expansion and concentration of capital, resources, and
industrial enterprise. These two factors appear to the
superficial observer to be mutually exclusive. In fact,
however, they are related to one another as cause and
effect.
Concentration, a child of the capitalist system, is peculiar neither to modern development nor to German
conditions. It is as old as the capitalist system itself
and equally international. It appears with practically
all its concomitants in the activities of the state as well
as in private industry.
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As proof of its age we may quote one of many examples. As early as "the last quarter of the fifteenth and
the first quarter of the sixteenth century there took
place a concentration of capital invested in mining with
a rapidity scarcely equaled in our time." 2 Certain forms
of concentration such as the combination in one enterprise of successive stages of industrial production may be
traced back to the very beginnings of large-scale industry.
Its international character is evident from its appearance in England and America, in France and Belgium
in the same or even in a more pronounced form than in
Germany, 3 both in industry and in banking.
It is present equally in public and in private industrial
activities. This is but natural, for the same causes are
at work in both spheres even if not to the same extent.
Above all there is the necessity for uniform management
of all industry from one center. Thus the postal system
was united practically under one authority after all the
original enterprises, systems, and regalia had been abolished. In the same way the railroads passed out of the
control of the innumerable private companies, to be operated, in the first place independently by the various
States. Ultimately, after passing through intermediary
stages, they may be operated by the Imperial Government or form part of an imperial railroad union. Even
now, there are some unmistakable signs of a movement
in that direction. Thus, for example, there is the Prussian-Hessian Railroad Union, entered into by two States,
and the agreements regarding the joint use of operating
material among a number of the States of the Imperial
Federation.
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A similar development is shown in the absorption of
capital, industrial enterprise, and labor forces by large
cities; in the ever-increasing migration of rural laborers
to the cities during this period; in the great increase of the
urban population, particularly in the industrial cities; in
the conflict between commerce and industry on a large
scale and the retail trade, house industry, and handicraft, between large and small industrial establishments;
in the ascendancy of "mixed" over " p u r e " establishments; of commercial distribution on a large scale, including department stores over the small retail trade; of
the large landowner over the small peasant proprietor, the
large flour mill over the small milling establishments, etc.4
The difference in this period has been only in the intensity and rapidity with which the tendencies toward
concentration have manifested themselves. This has
been the result of certain factors which completely revolutionized the conditions and scale of production and
marketing, to wit: The extension and greater reliability
of the means of transportation as well as the great discoveries and inventions which revolutionized entire industries and imposed new tasks on them or created new
industries.
It was inevitable that the movement toward expansion and concentration during this period should have
proceeded with particular rapidity in German industry,
which at that time was developing by leaps and bounds.
This applies also to the German banking system, united for
weal and woe with German industry by a thousand and
one ties, due to its current-account, check, giro, and
credit business, and to the banks' activities in the fields
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of flotation of securities, organization of firms into corporations, t h e rehabilitation of companies, consolidations,
and loans. 5 The main reason of this development was
t h a t t h e German banks, with scarcely an exception,
appeared on t h e scene organized as stock companies or
in t h e kindred form of stock companies " en c o m m a n d i t e / '
The stock company is t h e keenest and surest, and hence
t h e favorite weapon which t h e capitalist system can
use in its struggle for concentration. I n itself t h e stock
company represents a form of concentration, viz, t h e
union of small and scattered units of property, in most
cases too small t o be fitted for productive uses, into a single
mass of capital suited and intended for industrial or productive purposes under single management. The facility
with which t h e shares can be marketed or t r a n s m i t t e d b y
inheritance, t h e probability of a longer t e r m of existence for
t h e corporation, owing to the far greater degree t o which
it is independent of t h e personality of t h e entrepreneur as
compared with other forms of business organization, and
finally t h e absence (at least in theory) of any limitation
on t h e amount of dividends t h a t m a y be expected on the
combined capital—all these elements give t h e corporation great power to a t t r a c t available capital. More t h a n
any other form of business organization, t h e stock company has t h e means of satisfying its needs for credit and
for expansion b y capital increases. The ease with which
additional capital can be secured naturally stimulates t h e
tendency toward capital increases. This tendency grows
in constantly increasing ratio b y reason of w h a t m a y be
regarded as an economic law in t h e realm of industry,
trade, and banking alike, according to which a twofold
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increase of capital means more than a twofold increase
of production and sales.6 For this reason the tendency
toward capital increases is enhanced by this very growth
of capital.
2 . SPECIAL CAUSES.

As stated above (p. 383) the period under consideration
was characterized by an unforeseen, suddenly developing
demand for capital on the part of the state and communes
and particularly industry and trade. This demand naturally made itself felt in the two important fields of banking activity, viz. that of national and international clearings and payments, and mainly in that of credit. It
became, therefore, an imperative necessity for the banks
to strengthen and extend the exceptionally weak foundation of capital and credit with which they had entered
upon this period.
Accordingly, the available funds of the country were
forced under great pressure to the central institutions of
credit—the banks which served, so to speak, as the distributing reservoirs for the collection of the resources of
capital and credit. From there, as from a higher altitude,
it was easiest to survey the extent of the general needs,
to calculate the proper mode of distribution of the available resources and to direct them more readily and
quickly into the various channels below. In other words,
the concentration of banking capital brought about in the
first place through an increase in the capital stock of the
banks meant the progressive accumulation in the banks
of the funds needed for industrial credit.
In this field concentration became especially urgent, on
account of the imperative necessity for distributing and
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minimizing risks 7 —a principle which can be applied
most thoroughly where business is conducted on a large
scale. There are a number of purely technical factors
which work in the same direction. When the banks are
relieved by central banks of issue of the task of providing
the necessary currency, they concentrate their activity
in the field of credit. The latter has the unmistakable
tendency to increase much faster than the cash resources
on which it is based. Moreover, the difficulty of securing
these resources, especially by way of capital increases,
grows more rapidly than the demand for credit. This
is because the ability of a bank to increase its capital
depends not only on the dividends which it has been paying and on the market value of the old shares, mainly
though not exclusively determined by these dividends,
but also on the condition of the money market. The
value of bank stock, like that of industrial securities,
fluctuates with variations in industrial prosperity and
the prospect of dividends. At a critical moment it may
easily happen that no market, or only a very limited market, can be found for new issues and for new bank
stock in particular, as the market may be paralyzed by
blundering legislation or by the fact that new issues had
been made in excessive amounts or in too rapid succession.
Furthermore, there are special technical or business
limitations on a bank's ability to increase its capital.
Hard times are never entirely absent, and these affect
the profits from the flotation of securities as well as from
the regular banking business. Under such conditions it
may become difficult for abnormally large stocks of capital to earn adequate dividends, though we may question
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t h e remark made to t h e writer in 1889 b y t h e head of one
of t h e largest private banking firms, t h a t in t h e long run,
with their larger capital, t h e banks could not earn more
t h a n t h e current rate of interest—a pessimistic view,
which has since been proved t o be entirely groundless.
There being t h u s limits—differing, of course, with particular circumstances—beyond which t h e b a n k s ' own
capital can not be increased, it becomes evident t h a t t h e
banks must a t t r a c t outside funds for use in their expanding business. The accession of these funds enables t h e
b a n k s t o do more t h a n merely increase t h e earnings of t h e
business—i. e., t h e rate a,nd, w h a t is more, t h e steadiness of
dividends. I n establishing special deposit offices for t h e
purpose of attracting available funds t h e banks are able t o
increase t h e size of their clientele, particularly among t h e
investing class, t o greatly extend their capacity t o float
securities on their own or outside account, and to place
t h e m securely and permanently among customers whose
circumstances and reliability are accurately known.
E v e r y successful flotation of securities tends in t u r n t o
increase t h e bank's power through its psychological effect,
which in this m a t t e r counts for a good deal. E v e r y increase in t h e power