Full text of Renewal of Reichsbank Charter
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61ST CONGRESS | 2d Session SENATE [ I DOCUMENT \ N o . 507 NATIONAL MONETARY COMMISSION Renewal of Reichsbank Charter Washington : Government Printing Office : 1910 NATIONAL MONETARY COMMISSION. NELSON W. ALDRICH, Rhode Island, Chairman. EDWARD B. VREELAND, New York, Vice-Chairman. J U L I U S C. BURROWS, Michigan. J E S S E OVERSTREET, Indiana. E U G E N E H A L E , Maine. J O H N W. W E E K S , Massachusetts. PHILANDER C. K N O X , Pennsylvania. R O B E R T W. BONYNGE, Colorado. THEODORE E . BURTON, Ohio. SYLVESTER C. SMITH, California. JOHN W. DANIEL, Virginia. 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. I. Results of the German Bank Inquiry of 1908 (articles published in t h e ' ' Frankfurter Zeitung'' during December, 1908). II. Draft of a bill for the amendment of the German bank act with explanations I I I . Excerpts from the proceedings of the Third German Bankers' Convention, held in Hamburg in September, 1907—The discussion of deposit banking (speeches by Dr. Jaffe\ Dr. Damm£, Dr. Solomonsohn, Max Schinckel, and Geh. Mueller) _ IV. Credit at the Reichsbank. By Dr. R. Koch, former president of the Reichsbank V. Concerning the collateral loan business of the Reichsbank, especially the lending on imperial and state securities. By Dr. R. Koch, former president of the Reichsbank VI. Concerning the renewal of the Reichsbank privilege. By Prof. W. Lexis VII. Concerning the renewal of the privilege of the Reichsbank and of the private note banks. By Dr. Moriz Stroell, director of the Bayerische Notenbank VIII. Law of June 1, 1909, amending the Bank Act 3 5 79 123 201 217 231 243 261 I Results of the German Bank Inquiry of 1908 [Articles published in the Frankfurter 5 Zeitung during: December, 1908] RESULTS OF THE GERMAN BANK INQUIRY OF 1908. I. THE INQUIRY COMMISSION—WHAT CAUSED THE MONETARY STRINGENCY—GERMANY'S FOREIGN TRADE— THE NATIONAL WEALTH OF GERMANY—THE DEMAND FOR CAPITAL AND CREDIT MONEY. The bank act confers upon the State the right to revoke the charter of the Reichsbank on January i, 1891, and at intervals of ten years after that date upon one year's notice. The charter, therefore, cannot be revoked before January 1, 1911, notice having been given not later than January 1, 1910. Recommendations for the renewal of the charter have to be submitted by the Imperial Government to the Reichstag during the session 1908-9, which has just opened. The Government appointed last April a representative commission which was intrusted with the examination of a large number of experts. The inquiry commenced on May 1 and was conducted in such an efficient manner that the hearing of the experts was concluded during the same month. Since then, after sifting the material and collecting additional data, the commission on October 12 began to wind up its labors, finishing on October 19. The results became known the same day through an inspired press notice which appeared with our comments in the second morning edition of the Frankfurter Zeitung for October 20 and 21. Full information may be expected by the public from the discussions 7 National Monetary Commission of the proposed measure in the Reichstag, from the amendments to the bank act which have now been drawn up by the Imperial Government and from the explanation of these amendments, and also from the minutes of the inquiry commission, which will most likely accompany the Government's proposals. The statements of the expert witnesses, in accordance with a promise given them, will not be published, nor is it at present intended to prepare a summary of the deliberations of the commission. The publication of the minutes just as they stand will, it is true, make it more difficult for one to inform oneself of the main points by a rapid glance; at the same time, it will enable the careful reader to get at the complete arguments pro and con, and weigh them against each other, instead of depending solely on a count of votes. How far the Imperial Government will embody in its draft of the proposed measures the results of the inquiry, and how far the Reichstag will approve or alter this draft, are questions for the future. It will be remembered that, although more time and work had been devoted to the problems of the bourse inquiry fifteen years ago—the commission then appointed rendered a very full report containing well-considered proposals—yet the Government materially changed the proposals of the commission and the Reichstag in its turn "improved for the worse'' the plans presented by the Government. This time the problems are much simpler and clearer, at least as far as the work of the commission goes. Nevertheless the members of the commission were asked to remain silent for a while; but the problems put before them have lately 8 Renewal of Reichsbank Charter been discussed so thoroughly and generally that beyond the meagre information given out for publication one may easily acquire a definite and interesting knowledge of the whole question. The valuable and very comprehensive statistics compiled by the Reichsbank for the purposes of the inquiry have also helped to enlighten a wider circle of the public. We are therefore of the opinion that we shall broaden and deepen the general interest in these important questions if now, upon the conclusion of the inquiry, we follow up our comments on the questions put to the inquiry commission (cfr. Frankfurter Zeitung, April 26 to May 12, 1908) with our observations on the work of the commission and on the subject-matter of the inquiry. It is generally recognized that the deliberations of the commission under the chairmanship of the president of the Reichsbank, Mr. Havenstein, were conducted on all sides very impartially, even when opinions were widely divergent; consequently, such refining of views and such an elucidation of the pros and cons of the questions have been reached by the opposing groups that very beneficial results may be expected therefrom by all concerned, more particularly by the Imperial Government and the Reichstag. In so far as a change of views took place, it must be ascribed to the slackening of the demand for credit facilities and to the fall in interest rates which has meanwhile occurred. Had this taken place a year ago an inquiry would perhaps not have been instituted at all. At least up to the year 1907 it seemed that the inquiry into banking matters which had been promised was to consist 9 National Monetary Commission merely of the examination of a few expert witnesses—• especially of some men who had already advocated certain changes. But when, during the year 1907, in spite of a gradual lessening of the industrial activity, the monetary stringency increased, and at last our bank rate reached its record figure of 7 X p e r cent, the public as well as the Reichstag became fairly alarmed. This apprehension has since considerably subsided, owing to easier money markets and the enlightening influence of the bank inquiry. The popular view has more and more come in line with that so long expressed by the Frankfurter Zeitung that the strain on the money market and rise of interest rates have not been caused through any inadequacy of the Reichsbank, nor through mistakes of its management nor through lack of currency, but principally through a steadily increasing disproportion between the supply and demand of capital. Moreover, we have long ago shown that the stringency and its effect were not confined to ourselves alone, but were international, although it must be admitted that Germany was especially hard hit. With us the transition to a commercial and industrial nation has made and is making rapid strides; in particular the large industries have made signal progress. The result is that wealth, capital, and credit have quickly grown, but more money has also been locked up in new plants and investments; the standard of living, wages, and prices have also risen, and the demand for capital has created a correspondingly high demand for circulating media. Yet our economic policy, as we have shown on former occasions, does not favor the formation of new capital, but rather retards it 10 Renewal of Reichsbank Charter through high tariffs and their exploitation by the industrial combines (cartels), through weakening the effectiveness of the stock exchange and through other legislative blunders. All these subjects were omitted from the list of questions submitted to the inquiry commission, and were therefore not fully discussed by it. The statistical material contains very little information concerning them, but we now add a few figures showing the development during the last two decades. The events of more recent times will be discussed later on. Our foreign trade with the principal countries, taking together the import and export of goods (excluding precious metals) shows the following changes since 1889: [In millions of dollars; $1 = 4.20 marks.] Country. Germany France England United States ___ ______ Increase, 1907. $3,682 _ _ _ _ __ ____ _ __ 1889. $1,703 ! 1907. Per cent of increase. 2.235 1.546 $i,979 688 44. 4 4.767 2,966 1, 800 60. 1 3,346 1.597 1. 749 1 As will be seen from the above, Germany's trade has increased much more than that of France and England, and even a little more than the trade of the new country, the United States. Besides this growth of Germany's foreign trade a heavy increase of the domestic trade must be taken into account, which was bound to create an increased demand for capital, money, and credit. More significant still is the difference influencing the international balance of payments. Looking at imports and exports separately, and taking the excess of imports over exports, we find that the amount owed by Germany for goods imported from abroad National Monetary Commission has grown much more than the corresponding item in other countries, while in the United States the amount to be received for exported goods has risen enormously; and whereas in the United States the excess of exports during 1907 does not mark a record (the years 1898, 1900, and 1901 having shown a greater excess) the excess of imports into Germany has had a steady upward trend and reached its highest mark during the year 1907. [In millions of dollars; $1=4 20 1 marks ] 1907 1889. Increase ( + ) or decrease (—) for 1907. Excess of imports into— Germany France England Excess of exports— United States $4ii.S $196.4 97-5 621.3 S4S-o 500. 1 56.6 + $215. 1 118.2 + 76.3 4- 443-5 How far during this period the increasing demand for currency necessary to settle balances was met by currency-saving devices will to some extent be evident in the next table. Concerning Germany this table covers collections passed through the clearing-houses of the Reichsbank, and one-half of the turnover effected without actual cash payments; concerning France the table shows one-half of the turnover effected in "compensations" of the Parisian bankers; England is represented by the collections passed through the London Clearing House; the United States by the collections passed through the New York Clearing House. This table does not show the clearings outside of the principal banking centers of the United States and England, nor does it show the increased 12 Renewal of Reichsbank Charter saving of currency resulting from the use of postal orders, checks, etc. [In millions of dollars; $1=4.20 marks.] Germany France England United States I $37,050.9 1 2,534.5 61,924.3 87,182.1 $10,884.5 487.8 37.059.7 34,798.8 $26,166.4 2,046.7 24,864.6 52,383.3 In spite of certain disadvantages Germany, as will be seen, shows some marked progress, thanks to the energetic efforts of the Reichsbank, but a good deal remains still to be desired. There is no doubt that the wealth of Germany has considerably increased. When, toward the end of 1893, Schmoller made an estimate for the stockexchange inquiry commission he thought it likely that the savings of the German nation amounted then to between 2 and 2]/2 billions of marks ($500,000,000 to $625,000,000) annually, of which 1 billion ($250,000,000) went into investment securities. Since then in Prussia alone taxable incomes exceeding $750.00 had grown from $726,050,000 in 1892 to $1,371,520,000 in 1907. The deposits in the German savings banks (at the end of 1907, $3,307,000,000) have, during the last decade, increased by a yearly average of about $143,000,000. Therefore, the annual savings of the German nation must to-day be taken as far exceeding those of 1893 or 1889. Recent estimates put the annual savings of Germany between $625,000,000 and $750,000,000, the Grenzboten of July 9, 1908, even rating them as high as $1,000,000,000. On the other hand, capital, too, has been in increasing 13 National Monetary Commission demand. Schmoller's estimate in 1893 that we invest every year about $250,000,000 in securities agrees with the statistics of new issues of securities floated during that period. Yet during the last five years (1903-1907) German securities, not including conversions, totaling about $625,000,000 annually, have been admitted to quotation on the German stock exchanges. This figure is taken from the official statistics which, among other things, include mortgage bonds authorized to be issued by the mortgage banks, and also mining stocks, etc. According to the statistics of the Frankfurter Zeitung (leaving out mortgage bonds and mining stocks, but including foreign securities) the new issues for the seven years 1901-1907 reached an average of nearly $524,000,000 annually, and for the years 1905-1906 alone nearly $714,000,000. In addition to this brisk demand for capital and money, for investment as well as for circulation, Germany has had to cope with the greater demands of agriculture due to an increase in the price of land and its products, and above all with the greater demands of manufactures due to a rapid enlargement of plants and of output. It is only necessary to point to the following statistics of German consumption: Average yearly consumption in kilograms for— 1886-1890. Amount. Coal Pig iron Cotton 1907^ Per capita. S 8 . 7 3 S . 000 Amount. Per capita. 1, 2 2 5 . 0 0 8 9 . 20 136,934,000 2,2IO.OC 4,278,000 13,046,000 201,046 4-19 a 385,280 213.80 0 6.28 a For the year 1906 • 14 Renewal Naturally of Reichsbank t h e demand for increased very considerably. credit Charter money has also Taking stamp fees as a basis for determining t h e amount of commercial paper p u t in circulation (deducting 10 per cent on account of t h e sliding scale fixed for such fees) we arrive at t h e grand total of $3,144,300,000 in 1889, which has since steadily increased from year to year until it reached $7,325,000,000 in 1907. This is an increase of $4,180,700,000, or about 133 per cent. If we add t h a t of all t h e bills created in Germany less t h a n 40 per cent passed through the Reichsbank—that of the average of the outstanding bill circulation t h e average holdings of t h e Reichsbank amount to only about oneseventh (in t h e first decade of its existence only 11 to 12 per cent, reaching in 1889 a maximum of 15.3 per cent and in 1907 about 13.8 per cent)—then we have furnished sufficient proof t h a t the monetary stringency and the high interest rates of 1907 were, speaking broadly, caused by phenomena t h a t had nothing t o do with any flaws in t h e organization of t h e Reichsbank or mistakes of its management. II. GOVERNMENT OWNERSHIP OF REICHSBANK — PRIVATE BANKS OF ISSUE NEW REICHSBANK SHARES — INCREASE OF SURPLUS—DISTRIBUTION OF PROFITS— TAX-FREE BANK NOTES AND INVESTMENT OF AVAILABLE FUNDS. Although t h e members of t h e inquiry commission and t h e general public are satisfied b y this time t h a t t h e existing organization of t h e Reichsbank cannot b e held responsible for a monetary stringency of such severity as 15 National Monetary Commission we have recently passed through, and that no change of the organization could possibly prevent a recurrence of such an event, the affairs of the Reichsbank have been the main feature of the commission's work. It is that part of the deliberations which has been brought to a conclusion, whilst the discussions regarding the protection of depositors were broken off and are to be continued next year. The commission was guided in its work by the list of questions which had been submitted to it by the Government, and we will treat the different subjects in the same order as they appeared on that list. The preliminary question as to whether it would not be better to place the Reichsbank under government ownership was not touched upon, but the Government opened the inquiry by declaring that the constitution of the Reichsbank should not be changed in any respect, and the way in which the questions were put clearly showed that it was the intention of the Bundesrat to renew the charter of the Reichsbank, and by no means to make use of its lawful right to abolish the institution. This policy is quite in keeping with the position which the authorities have always taken. While the sessions of the commission appointed to consider the banking act of 1899 were in progress, the representative of the Bundesrat announced in definite terms that it was unanimous in the determination " t o oppose the nationalization of the Reichsbank for political, economic, and financial reasons/' At the time when the Reichsbank was established we should have preferred to have had the capital supplied from imperial funds alone. Instead of that the Empire 16 Renewal of Reichsbank Charter contented itself with the power to revoke the Reichbank's charter at intervals of ten years, and when in 1889 this prerogative first led to discussions, we pointed out that the question hinged upon whether the Imperial Government considered itself entitled, in return for treating the resources of the Reichsbank as private property in case of war, to an insurance premium the amount of which has been steadily reduced at every renewal of the charter. The demands of the Agrarians that the Reichsbank should be compelled "to assist the economically weak" were later on met, in a measure, by state aid for agricultural credit institutions. In spite of this, however, the agrarian wishes carried considerable weight at the deliberations preceding the first renewal of the Reichsbank charter in 1889. We insisted at the time that the Reichsbank, in pursuance of its most important duty, the regulation and protection of the monetary system, had to consider above all the fluidity of its investments; and also that its policy already favored the demands of agriculture for financial help as distinguished from those of commerce and industry, and even from those of the banks and the bourse. And yet a member of the Reichstag, Doctor Arendt, has announced his intention of again proposing the nationalization of the Reichsbank. It seems likely, however, that his political followers will not support him in this, and he himself declared not long ago "that the business methods of the Reichsbank would not be changed in the least if the bank were continued for account of the Empire alone," which to him seemed purely a "financial question." The Reichsbank has demonstrated on many 83703—10 2 17 National Monetary Commission occasions—for instance, in the Reichstag and in its historical review for the period 1876-1900—that the financial importance of its privilege of note issue is generally overestimated and that the return which the Reichsbank makes for this right and the legal conditions governing the issue of its notes are either overlooked or considerably underrated. If government ownership of the Reichsbank meets with a more decisive defeat this time than in previous agitations—as is generally expected—it would be advisable to give this question a longer rest than ten years, as in all likelihood the same reasons which now influence the retaining of private capital would be equally potent ten years hence. In the interests of the Reichsbank and even, it may be, in the interests of the Empire, it would seem to be better not to provoke the same discussions again after a lapse of only ten years, the question having so often been fought out without gaining in import or interest. No suggestion seems to have been made as yet that the charter should be renewed at once for twenty or thirty years instead of ten years only. If such a new departure were advocated, it could not be passed without the strong support of the Bundesrat. The inquiry commission has apparently not discussed at all the renewal of the privileges of the four remaining private banks of issue. If the question had been up for discussion, a continuation of these institutions would undoubtedly have found zealous advocates not only in the governments of the respective countries where these banks are located, but also among the members of the 18 Renew aI of Reichsb ank Charter commission, whether conservative or otherwise. When the legal-tender provision for the notes of the Reichsbank was considered, it was often urged that the same privilege be extended to those private institutions. This recommendation was strongly opposed; the most that seems attainable is that these notes may be decreed legal tender in the country where they are issued. Strenuous objections would be raised even to a law which should permit the acceptance of private notes by public ofl&ces outside the State in which the notes were issued. The notes of the four private banks do as a rule circulate only in their home countries, which is sufficient. However, when a traveler wants to pay his fare at a North German railway station by tendering a South German bank note, the refusal which he gets is always resented as a nuisance if not a serious flaw in our monetary system. Provision should be made to prevent such occurrences, and this could be done by a simple agreement without amending the banking act. It will be seen in the following table what an unimportant part the private notes play nowadays. [In millions of dollars; $1=4.20 marks.] Assets. Year. Number of banks. Discounts. Loans. 18 $67.01 $10.73 8 48.39 5.83 4 1876 1891 28.73 14. 21 Circulation. Investment securities. Total. $4-35 2.91 2. 61 $56.45 41.77 33.8o Noncovered. $20.42 19.05 14. 28 The inquiry commission seems to share our conviction that a permanent regulation of discount rates can not be 19 National Monetary Commission achieved by increasing the capital of the Reichsbank. The bank was forced by the last amendment to the bank act to raise its capital from 120,000,000 to 180,000,000 marks ($28,570,000 to $42,860,000). One-half of the increase took place during 1900, the other half during 1904. It has since become apparent that this increase served hardly any other purpose than merely to shift capital from the open market into the Bank, but it fulfilled the wish of the Reichsbank not to let its capitalization remain too far behind that proper to a great credit bank. It also gave the Reichsbank the opportunity to increase its loans on collateral. Permanent influence, however, upon discount rates can never be attained by simply shifting more private capital into the Reichsbank. The present capital seems to afford ample security for the Bank's operations, and it looks as if the commission would prefer to strengthen the surplus in case a larger working capital should really become necessary. The Treasury would thus suffer a loss in so far as new shares become at once entitled to dividends, thus reducing the excess profits, of which the Imperial Treasury receives threefourths; but no considerable increase of profit is derived as a rule from new capital either added to the surplus or provided by shareholders, while on the other hand every addition made to the surplus means three times as much taken from the government's share of the profits as from that of the shareholders. The investment of capital in building plots which the Reichsbank has already made extensively and will without doubt make on a yet greater scale in the future, might serve as a motive for increasing 20 Renew aI of Reichsb ank Charter the surplus as the profit share of the shareholders. In 1876 $3,160,000 were invested in that way; in 1896 $7,900,000, and at the end of 1907 $13,040,000. The surplus, however, may, in point of fact, increase faster than the Bank's building investments. The bank act provides that after a praecipuum dividend to the shareholders has been set aside, 20 per cent of the remaining profits are to go to the surplus as long as the latter does not equal one-fourth of the capital. The premium received for the last issue of new shares brought the amount of the surplus up to $15,430,000, i. e., 36.007 per cent of the increased capital. A further increase of the surplus would present only one advantage to the shareholders, namely, that they would be entitled to half of the surplus if government ownership should be decided upon, and in this way would get back a part of the high price which they had to pay for their new shares, whereas they are entitled to one-fourth only of the excess profits. They will hardly find much consolation in this, as they know full well that conditions do not favor the setting up of government ownership at present or for a long time to come. Moreover, if the Reichsbank should be put under government ownership it would take an additional $23,800,000 in the surplus to refund to the shareholders even the 47 per cent premium and expenses which they paid for the new shares. Meanwhile the proposed contribution to the surplus means to the shareholders a considerable reduction of their dividends. If fully 20 per cent of all profits remaining after a praecipuum dividend of 3% per cent 21 National Monetary Commission had to go to the surplus—as was the case in former years— the surplus would receive from profits like those of 1907 not less than $2,190,000. This would have meant a loss to the Imperial Treasury of about $1,640,000 and to the shareholders of $547,600, which would have reduced the dividend from 9.89 per cent to 8.61 per cent, i. e., not less than 1.27 per cent. This would have been the dividend for a year of brilliant economic success. A charge of 20 per cent to the surplus would mean a dividend of 7.1 per cent instead of 8 per cent, 6.3 per cent instead of 7 per cent, and so on. Yet no discussion seems to have occurred during the bank inquiry on the qestion of how the surplus, after having been reopened, should be alimented. In some quarters it was thought that the contributions to the surplus should cease when the latter reaches about 40 per cent of the capital. This is not far above the present figure, but the idea is not in accordance with the prevailing intentions. A number of ways might receive consideration, such as, for instance, to provide that in a bad year nothing should be written off to surplus. This, however, would leave a discretionary power in the hands of the management which it might find rather irksome. The simplest way would be to fix a certain percentage, but if 20 per cent of all excess profit—as provided at present in the bank act—were to go to the surplus, it would mean, as stated before, a very considerable reduction of the receipts, both of the shareholders and of the Imperial Treasury. For the next ten years a charge of 10 per cent ought to be sufficient for all purposes. However, it seems to us well 22 Renew aI of Reichsbank Charter worth carefully considering whether a better plan would not be to establish a sliding scale under which a transfer to surplus would be made only after the profits of the shareholders and the Imperial Treasury had reached a certain minimum, say a dividend of 6 per cent, and of any profits exceeding a dividend of, say 8 per cent, the surplus would get not 10, but 20, per cent. In any case the shareholders will have to reckon with influences tending to reduce their dividends, not only because of economic ups and downs, but also because of the efforts of the Reichsbank to restrict some of their overzealous officials in the extension of credits and the intention of the Reichsbank to make pecuniary sacrifices in order to attract gold and to establish its control of the foreign exchange market. It is not altogether impossible that a proposal may be made in the Reichstag to change the present manner of dividing the profits between the shareholders and the Imperial Treasury, but we do not anticipate any success for such a move. Doctor Arendt, member of the Reichstag, has again declared in the press that the dividend should be limited to 6 per cent. The same motion was turned down in the Reichstag in 1899, on the ground that the introduction of the measure would stamp the Reichsbank even more as a state institution. The Government declared at that time that the proposition was unacceptable because it tended toward government ownership. Here and there the fear has been expressed that the fact that the Imperial Treasury receives the largest share of the profits of an imperial bank, which is controlled and managed by the Government, constitutes 23 National Monetary Commission a serious menace in times of war. The maximum of 6 per cent would give to the shareholders not above 4.869 per cent on the stipulated amount of capital actually paid up, and only 4.081 per cent on the purchase price of the last issue (144 per cent plus 3 per cent expenses), not to speak of the risk of a possible falling off of the earnings and the ever present fear that the bank may some day be dissolved by order of the Government. Such a considerable curtailment of the earning chances would frighten away capitalists for a time at least, if not altogether; whereas it is of great importance to the Reichsbank as well as the Empire that the shares should be held continuously by strong and permanent investors. It will be seen in the following table how the changes in the bank act have affected the distribution of the profits of the Reichsbank up to the present. [In millions of dollars; $i =4.20 marks.] Paid to the Net profits. Imperial Government. Stockholders. Surplus. Amount. Per cent 1876-1890 39-41 27. 11 6. 32 .03 1891-1900 4 6 . 27 23-47 22. 56 7.90 .24 1901—1907 51-37 29.42 1931 7-03 •65 The shareholders in 1879 received 86.7 per cent of the net profits, which were then at the lowest mark, the Government only 8.8 per cent; but in 1890 the shareholders received only 51 per cent and the Government 34.2 per cent. The amendment to the bank act which was passed in 1890 reduced the quota of the shareholders in 1891 to 24 Renewal of Reichsb ank Charter 48.5 per cent and raised that of the Empire to 46.1 per cent. In 1907 the shareholders received 34 per cent only, whilst the Empire's share amounted to 66 per cent. The next table shows the extent to which the distribution of profits has been affected by increases of capital. [In millions of dollars; $1 = 4.20 marks.] Share of profits paid toCapital. 1876—1890 1901—1904 1905—1907 _. Stockholders received on— Imperial Government. Stockholders. Nominal capital. 31-74 11. 73 17.69 49-67 8.91 Per cent. 6.95 6. 24 8.09 28.57 35-72 42.86 10.39 Actual investment. Per cent. 6.043 5-238 6.563 The average dividends received during the period 19001905 by the shareholders of various central banks of issue are as follows: Per cent. Reichsbank Bank of the Netherlands.. Bank of England Bank of France National Bank of Belgium Austro-Hungarian B a n k . . . 6. 22 9. 16 9- 5o 12. 60 15. 00 4. 61 The governments received the following share of profits for 1907: Amount. From t h e - $8,210,000 Reichsbank Bank of the Netherlands. .. Bank of France National Bank of Belgium Austro-Hungarian Bank.... 1,360,000 1,410,000 Per cent 66.0 54.8 16. 9 500,000 25 21. 0 2,270,000 37-5 National Monetary Commission The question whether the existence of the "contingent," or limit to the tax-free note issue of the Reichsbank, affects the determination of its discount rate was in fact hardly a question with the inquiry commission. The statistics show that the Reichsbank kept its discount rates at a minimum of 3 per cent in 1895, 1896, 1897, 1898, also in 1902 and 1905, even during periods when its circulation exceeded the nontaxable limit. Even during the years of our greatest industrial expansion the Reichsbank disregarded altogether the tax which it had to pay and managed to keep the discount rates at their lowest—e. g., \]/2 per cent in 1899 and 1906—at a time when its circulation exceeded the tax-free limit. The system of limiting the issue of bank notes by imposing a tax has this advantage, that not only the management of the Reichsbank, but the business world and the public at large are enabled by this automatically sliding scale to gauge the fluctuations in the demand for money, and have grown accustomed to look to it as a signal of possible stringency. It is necessary to fix the legal maximum with a view to this useful purpose. At first the limit of the tax-free note-issue happened to be fixed at 250,000,000 marks ($59,520,000), and it had actually risen by 1894, through the lapse of the privileges of private banks of issue, to 293,400,000 marks ($69,850,000). The last amendment to the bank act, which went into force in 1901, fixed the limit at 450,000,000 marks ($107,140,000), and it has since been increased to 472,829,000 marks ($112,570,000). It has happened a number of times that the total outstanding circulation was more than 26 Renewal of Reichsbank Charter covered by the cash resources, so that the limit set for nontaxable circulation became practically ineffective. In 1888 this occurred 28 times; in 1892, 27 times; in 1894, 22 times; in 1895, 20 times. Later on such cases gradually dwindled down to 4 in 1902 and 1 in 1905. Nowadays the outstanding circulation frequently exceeds the legal maximum. During the boom years, 1898 and 1899, the legal maximum was exceeded sixteen and twenty times, respectively; in 1902 three times; but seventeen times in 1906, and even twenty-five times in 1907. Not only the years of great industrial activity, but also the intervening periods, are accompanied by such rapid expansion of business and demand for money which the Reichsbank has to cope with, that there can be no doubt that an actual need for currency and for uncovered notes exists in this country. The following table shows the investment of funds by the Reichsbank during periods of five years, and their proportional growth as compared with the figures for the first five years. The fluctuations in the loans are quite marked, a great increase having taken place during 1891-1895 and a pronounced decrease during 1901-1905. Still greater were the fluctuations in those investment securities which depend upon the Empire's floating-debt requirements. The chief item, bills discounted, shows a continuous and uninterrupted increase, and the sum total of the Reichsbank's investments has increased correspondingly. Uncovered notes show a decrease only during the period from 1886 to 1896, when business was quiet, but since then they have substantially increased. It is also significant that 27 National Monetary Commission the number of officials employed by the Reichsbank has increased from 1,904 in 1876 to 3,024 at the present time. [In millions of dollars; $1 = 4.20 marks.] Discounts. Amount. Per cent, Amount. 84.89 87.37 n o . 29 131-94 172.49 199.94 235.S8 262.99 100. o 102.9 129.9 155.4 203. 2 235.5 245.5 274.0 12. 25 12.34 14.88 21.65 22.45 17.52 19.91 23.37 1876-1880 1881-1885 1886-1890 1891-1895 1896-1900 1901-1905 1906 1907 Total investments. Securities. 1906 1907 100. o 100. 8 121. 5 176.8 183.4 143- 1 162. 6 190. 8 Uncovered bank notes. Amount. Per cent, Amount. Per cent, Amount. 1876-1880 1881-1885 1886-1890 1891-1895 1896-1900 1901-1905 Percent. Per cent 1-55 5.58 4-75 1.89 2.78 19.23 27.88 23.73 100. o 360.8 306.4 122.3 179.5 1,242.3 1,801.3 1.530.6 98.68 105.29 129.91 155.48 197.72 236.69 283.37 310. 09 100. o 106.9 131-6 157.5 200.3 239.2 262. o 286. 7 24.35 27.88 17. 61 11. 64 54.43 66.37 104.40 126.44 100. o 114.5 72.3 47.8 223.7 272.4 365.4 442. 5 While it thus appears that an increase of the "contingent" is justified, the question remains how great this increase should be. A separate consideration of the special needs that arise at the close of the quarter is inadvisable in this connection; it would tend to confuse the issue, and would be of no practical use. The management of the Reichsbank and the general public have grown accustomed to these regular 28 Renewal of Reichsbank Charter flurries and do not overestimate their importance. Aside from this, it is a delicate task to determine a new limit. After passing through a period of unprecedented activity we are now in the midst of an era of stagnation, and nobody can say whether the lowest level has been reached and what the normal level will be in future. It remains to be seen what will be the effect of the Reichsbank's new policy of cutting down certain credits and of the increased use of currency-saving methods, although it must be admitted that progress in this direction is slow on account of a too timid fiscal policy which, to mention one instance only, stands very much in the way of the newly created postal checks. On the other hand the economic fluctuations during the last decades have never touched again the low records of former declines. We are rapidly and steadily progressing, and this causes a corresponding strain on the Reichsbank. It is to be hoped that the limit of the tax-free note issue will not be raised too quickly, since it might thus be rendered useless as our financial barometer in normal times. Nobody can expect that the contingent will be raised above 600,000,000 marks ($142,850,000). The opinion seems to prevail among wellinformed men that a limit of 500,000,000 marks ($119,040,000) would be best. It is doubtful whether the shareholders of the Reichsbank will benefit from such a change in the contingent. The need for uncovered notes remains always uncertain, and if the last amendment of the bank act had fixed the legal maximum at 600,000,000 marks instead of 450,000,000 marks it would have meant to the 29 National Monetary Commission shareholders an increase of their share of t h e profits of only about 0.167 per cent on t h e average capital or about 0.152 per cent on t h e present capital. This is only an insig- nificant fraction compared to t h e loss which t h e shareholders will sustain by reason of t h e reopening of the surplus reserve. III. GOU) EXPORTS—GOLD IMPORTS—OUR STOCK OK GOLD— ADVANCES ON GOLD IN TRANSIT FREE OF INTEREST— FOREIGN EXCHANGE POLICY—INVESTMENTS IN FOREIGN EXCHANGE—CREDIT BALANCES ABROAD. W e have already stated t h a t t h e inquiry commission showed a remarkable consensus of opinion on a n u m b e r of questions. This has been particularly t h e case on t h e questions dealing with the desire to strengthen t h e gold reserves of t h e Reichsbank b y means of (1) t h e discount and foreign-exchange policy, (2) interest-free advances on gold in transit, and (3) gold premiums. On t h e last point our opinion is generally shared t h a t such a premium policy is out of t h e question for Germany. T h e advocates of t h e measure have t a k e n t h e idea from t h e example set b y t h e Bank of France; b u t in France demands for specie can be satisfied with silver currency. can not and must not be done. In Germany this Nobody who can appre- ciate t h e advantages of a uniform monetary s t a n d a r d will advocate t h e imitation of t h e example set b y France, which for years saw a depreciation of its s t a n d a r d with a premium on gold in 1898 of almost 0.4 per cent (0.395), and for a time even 0.65 per cent. 30 Since 1904 t h e B a n k Renew aI of Reichsbank Charter of France, too, has abandoned gold premiums. We infer that the commission also agreed with us that the outflow of gold to foreign countries should not be prevented whenever and as long as the metal is required as a medium of exchange. Our foremost object must be the maintenance of the exchange parities in order that our credit in the international market and the reputation of the German gold standard may not suffer, with ,the purpose in view of finally placing the latter beyond all doubt and on the same firm basis on which the English sovereign stands to-day. We may safely say that all business men agree in considering it detrimental and regrettable that no gold was sent abroad when exchange for awhile in the fall of 1907 ruled above the gold export point; and it may be well to emphasize the fact that the management of the Reichsbank reached the same conclusion. As we have explained before, it must have been either mistaken patriotism or fear of antagonizing the Reichsbank which for so long a time kept our bankers from exporting gold, and which really created a depreciation, however short lived, of our monetary standard in the international money markets. Since that time it has come to light that the apprehensions of the bankers were quite unwarranted in fact, and all exporters of gold know better now. The next table deals with the movement of gold between Germany and foreign countries since 1900. The output of gold throughout the world had steadily increased up to 1899, when it reached $306,430,000. The next year it was reduced through the Boer War to $254,520,000, but it has 31 National Monetary Commission increased each year since, amounting to $400,000,000 in 1906, and to $404,760,000 (estimated) in 1907. Imports of gold during recent years have exceeded the exports in the principal countries. According to the trade bulletins of the last seven years (1901-1907) Germany's excess of gold imports over gold exports for that period was $316,120,000; France alone went ahead of Germany with its net import of $496,790,000, while England reported only $156,000,000, the United States $190,000,000, and Austria-Hungary not more than $54,050,000. The statistics, to be sure, are not complete, as they do not account for gold which travelers carry with them across the frontier in their pockets and portmanteaux. But it cannot be doubted that the inflow of gold into Germany during the years 1904 and 1906, for instance, was much larger than the outflow. In 1907, on the other hand, the exports and imports of the yellow metal nearly balanced each other; during October and November alone between $40,000,000 and $50,000,000 in gold had to be sent out of the country to maintain the par of exchange. In this connection it is worth while to notice that Germany's own gold production—derived either from foreign ores or from domestic and foreign residues—rose from $400,000 in 1884 to $2,785,000 in 1906. This domestic production, however, is more than offset by the extensive use of gold in industry, which seems to have increased considerably in recent years. The amount of gold thus absorbed has lately been estimated at not less than $25,000,000 annually, but the exact figures are not yet available. 32 Renewal of Reichsbank Imports Charter of gold. [In millions of dollars; $1=4.20 marks.} Germany. France. + 54.8 + 60.5 + 35-7 1906 +50. + 9+46. +94. +45+68. 1907 + o. + 65.2 1901 1902 1903 1904 1905 + 102. 9 + 125.0 + 52. 1 England. +32.9 +30.2 + 4-3 + 4.0 +37.6 + 16.7 +30. 2 AustriaHungary. +27 + 16, + 8. + 11 — o, — i, — 7. United States. + + + + + 3-1 8.1 20.95 36.4 3-3 108.8 88.1 The changes which the stocks of gold of the central banks of issue have undergone since the Reichsbank came into being will be shown in the next table by yearly averages. The Reichsbank's stock of gold touched its lowest mark in 1881, being then not more than $49,210,000. By 1888 it reached $144,830,000, and did not rise much above that figure until the end of 1907—a fact which is quite remarkable considering the heavy gains which were made by the other banks of issue during the same period. Gold reserves of the central banks of issue. [In millions of dollars; $1=4.20 marks.] Imperial German Bank. 68.3 144.8 143.3 135.9 177.5 160. 7 150.9 1876. 1888. 1896190019051906. 1907. 83703—10 3 Bank of France. 297.9 209.7 381.5 406. 9 55i.1 555-4 521. 1 Bank of England. AustroHungarian Bank 138.8 33-4 100. 1 29.0 214. 6 112 3 161. 1 161. 2 183.3 227.8 225.6 165.7 221.9 169. 6 33 Imperial Bank of Russia i57.o 169. 6 425.3 399.4 459-5 405.7 481.0 Bank of the Netherlands. 29. 6 25.7 13.2 23.4 30.9 27.8 28.8 National Monetary Commission In view of this great disparity, the Frankfurter Zeitung has for many years urged that the Reichsbank should make strong efforts to attract gold to this country by adopting a more effective and businesslike policy. This advice has not been entirely disregarded. So far back as 1879, when Germany stopped selling silver, the Reichsbank began to make advances against gold in transit, free of interest. At first these loans were granted for five or eight days, subsequently for longer periods—according to the provenance of the gold—and lately even for periods of more than six weeks. The Reichsbank admits the need for precaution lest advances should be made on gold which would find its way there anyhow, or which might merely pass through Germany in transit to another country. During the present year the Reichsbank has again resorted to this policy with the gratifying result that during the first nine months $56,170,000 of gold have been secured (in 1907, $9,400,000; in 1906, $54,000,000); and that the large increase in bullion and specie, which amounted to $259,050,000 on November 30 against only $161,660,000 a year ago, consists largely of gold. Not only has the Reichsbank gradually brought its policy with regard to gold imports in line with our suggestion; it has also come over to our view in the matter of foreign bills. The bank act does not prevent the Reichsbank from "discounting, buying, and selling" foreign bills. On the contrary, foreign bills may be used like domestic bills—in addition to its cash holdings—to cover the bank's outstanding notes. In view of this, there is a more and more general opinion that, as we have said, 34 Renewal of Reichsbank Charter the Reichsbank might influence the national balance of payments through its policy as to foreign bills. The influence would of course not be permanent, but on occasion it would be very useful. The rate of exchange does not very often go beyond the gold-export point, and even in 1907 sterling exchange ruled above that point only for twenty days. But that is quite bad enough, and a quotation for sterling as high as 20.60—as it was then—does not speak well for the esteem which our monetary system enjoys abroad. Fluctuations in the balance of payments and in the price of bills will always occur; nor will it be possible to avoid even sharp advances in the rate of exchange, such as are brought about either periodically, as by the demand for exchange to pay for grain, cotton, etc., or accidentally, by a change in the movements of commodities, subscriptions to foreign issues, withdrawal of foreign credit balances, etc. With a good supply of foreign bills at its command, the Reichsbank could prevent a sudden and forced rise of the exchange rates and meet the needs of international payments in time to prevent in many cases an actual exodus of gold. It is hardly necessary to state that the Reichsbank has long recognized that possibility. As late as 1898 its foreign bills amounted to but a few millions. The commission for the purchase of long-time foreign bills was then reduced from o. 1 per cent to 0.05 per cent, and by the next year the holdings had already increased. A summary for the last few years will be found on the following page. 35 National Monetary Commission [In millions of dollars; $1=4.20 marks.] Purchases of foreign exchange. i8951900. 19051906. 1907- Per cent English bills. 12.86 50. 41 54-53 69.49 63.84 Year. 79-3 95- 1 Maximum holdings. Date. 18951900. 190519061907- Aug. Dec. Dec. Nov. Jan. 15 31 30 23 is Amount. 0. 76 17.70 12.45 14.93 14.98 90. 2 81.7 81.8 Average holdings. Amount. o. 61 6.37 7.88 10. 29 10.59 Minimum holdings. Date. Feb. Feb. Aug. Sept. Dec. 28 23 23 15 31 Amount. 0.51 ! 0.78 4.84 4.12 5.61 Per cent, 0.5 3-3 3.7 4-4 4.0 Profits. Per cent. 5-05 4.24 3.81 5- 24 6. 14 The growth of the Reichsbank's foreign bill portfolio has been considerable, especially in view of the fact that the currency of such bills, which in 1895 did not exceed seventeen days, was gradually increased until in 1907 they ran sixty days. However, the Reichsbank still carries a much smaller quantity of foreign bills than the other central banks of issue. Of all bills bought by the Reichsbank in 1907, 4 per cent were foreign bills, while the Austro-Hungarian Bank's proportion of foreign bills amounted to 8.3 per cent, that of the Bank of the Netherlands to 12 per cent, that of the National Bank of Belgium (which treats them like its metal reserve as cover for outstanding circulation) to 23.9 per cent. The restraint of the Reichsbank cannot be ascribed to any reluctance on its part to make material sacrifices. The explanation is to be sought rather in the fact that for years the man- 36 Renewal of Reichsbank Charter agement held the opinion regarding gold imports and foreign exchange that it would be better not to interfere with the international movement of money, because attempts at artificial improvement were apt to be succeeded by vehement counter movements. Under the present management the Reichsbank has come to share our conviction that, when the balance of payments is favorable, it is wiser not to look on idly until the natural movements of foreign-exchange rates force an influx of gold and to run the risk, by such inactivity, that the surplus of Germany's commercial credit balances abroad be invested in foreign loans or used for other purposes. While gold imported into Germany upon the first favorable opportunity might be taken away again, it is nevertheless possible with constantly changing conditions that it might remain in this country longer than seemed at first likely. The inquiry commission did not discuss plans for adapting the foreign-exchange policy to this purpose, as the Reichsbank of its own accord had already begun to put to practical use the lessons learned in Vienna and Brussels. The National Bank of Belgium, as we have already pointed out, holds large amounts of foreign bills for its own account, besides those which it holds for the Treasury and savings banks, so that it has an enormous amount of such exchange at its disposal. The Austro-Hungarian Bank reports a considerably smaller quantity of such bills, and yet it is due to the efforts of that bank that the foreign-exchange rates have since 1901 never risen in Vienna more than 0.2 per cent above parity, while in Berlin in 1907 the sterling rate at 37 National Monetary Commission 20.60 was 0.83 per cent above the mint parity and 0.5 per cent above the exchange parity. This enabled the Vienna institution to maintain a steadier discount policy. For further information we refer to the article of our Vienna correspondent in the second morning edition of May 17, 1908, which contains a number of valuable data on this subject. Our correspondent outlines the remarkable methods by which the Austro-Hungarian Bank has gradually gained in its country the supremacy in the foreign exchange and bullion markets and perfected its arbitrage system in foreign exchange through correspondents all over the world. The article also describes how that Bank looks after its business and makes ready beforehand to meet expected heavy demands of money on the quarter or settlement days. The Reichsbank evidently intends to follow this example, if for no other purpose than to gain practical experience. It remains to be seen whether the Reichsbank will open check accounts in foreign centers, such as the Vienna institution maintains, and whether a proposition which came from Vienna about ten years ago, that the two banks should keep a permanent gold balance with each other, will be taken up again. The Reichsbank has apparently not decided yet on the amount of foreign bills which it will take at any one time, but seems to be anxious to make very careful observations before coming to a decision on that question. In its quarter - century report, the Reichsbank gave expression to the idea that its purchases of foreign bills might encroach upon the domestic demand for money. 38 Renewal of Reichsb ank Charter This contention no longer holds good, since the Reichsbank will from now on buy bills based on legitimate commercial transactions only and avoid all finance bills, and, in buying foreign bills, simply takes the place of other banking firms which formerly used to employ their funds in that way. Another objection—that the Reichsbank offers its funds to foreign countries at their low rates of interest— seems unjustified as long as the Reichsbank does not make purchases abroad, and this, according to banking circles, the Reichsbank has never done. The Reichsbank has managed to increase its foreign portfolio by continuously appearing in the Berlin market as a buyer. The Reichsbank has thus acquired large amounts of foreign gold, not only through its investments in foreign bills, but also through its credit balances abroad, which it has kept with its correspondents out of the proceeds of matured foreign bills. In its weekly statement the Reichsbank does not separate the foreign bills from the foreign credit balances and it wants to continue keeping the respective figures secret, pointing to the example of the AustroHungarian Bank, which does not disclose the total amount of foreign gold at its disposal in excess of the $12,000,000 which serves as cover for its outstanding note circulation. The Austro-Hungarian Bank's powerful control of the foreign-exchange rates and market is attributed solely to its practice of leaving the market in perpetual ignorance about the extent of its foreign-exchange investments. The annual report of the Reichsbank, however, will undoubtedly continue to give this information. At the end of 1907 the total of foreign bills was reported to be 39 National Monetary Commission only $6,140,000 and t h e total of credit balances with correspondents $2,400,000, t h e latter evidently being balances with foreign correspondents exclusively. I t is certain t h a t the Reichsbank's investments in foreign bills have during 1908 considerably exceeded those of the previous year and t h a t its credit balances abroad have also largely increased. This is evident from t h e weekly statements which show t h e " other assets " during t h e first months of t h e new year t o have been practically t h e same as last year, b u t disclose a heavy increase since t h e end of April. On April 30 the "other a s s e t s " amounted t o $11,430,000 more t h a n last year, and on J u n e 30 t o $29,050,000 more t h a n last year. This includes short-term advances against gold in transit. The excess of " o t h e r a s s e t s " over last year's figures did not fall below $11,660,000 even on September 30; on October 15 it amounted t o $15,470,000, a n d on November 30 t o $22,380,000. IV. GERMANY'S STOCK OF GOLD AND ITS DISTRIBUTION— SHALL THE NOTES OF THE REICHSBANK BE DECLARED LEGAL TENDER?—SMALL BILLS—SILVER CURRENCY— ADDITIONAL ISSUES OF SMALL BILLS. T h e question whether and in w h a t way t h e cash holdings of t h e Reichsbank, particularly its stock of gold, m a y or should be augmented b y attracting money from domestic t r a d e , forces upon us for preliminary consideration this difficult question: W h a t is t h e total gold supply of Germany? reliable. Unfortunately, t h e available estimates are not I t is definitely known t h a t up to t h e end of 1907, after deducting currency withdrawn from circula- 40 Renewal of Reichsb ank Charter tion, $1,044,750,000 of gold coin had been minted. It is not known, however, how much of this gold coin has been shipped out of the country or whether it has been melted down abroad or been held in its original shape. Nor is it known how much has been absorbed by domestic industries or other channels. The only statistics available at present are those issued by the Director of the Mint at Washington. The latter estimated the amount of gold in Germany at the end of 1906 to have been $1,030,200,000, of which $16.75 P e r capita were in circulation. Both figures seem too high, considering that the gold coin minted at that time did not exceed the Mint Director's estimate, while on the other hand allowance must be made for coin exported or used for purposes other than circulation, as well as bar gold and foreign coin in our possession which is not considered in the estimate. However, it is worth while to make a comparative study of the reports of the Director of the Mint, which for years have been compiled under a uniform system. The next table is reprinted from the Washington report. Germany's stock of gold, it will be seen, is relatively high, and gold coin circulates to a much greater extent in Germany than in any other country. The circulation of gold per capita is as follows: United States $6.71 England 7.00 Russia 2.54 France (which is so rich in gold) io-33 Germany 14. 64 4i National Monetary Commission [In millions of dollars; $1=4.20 marks.] Stock of gold. Country. End of 1906. Germany England France Russia United States_v__ 1, 0 3 0 . 2 Increase during + 112. 9 - 926.4 — 106. 2 + 84.3 + 172. 6 1.593-3 End of 1906. 1906. 486.7 939-3 In banks. 72.4 190.7 196.4 520. 0 609. 0 1, 0 8 1 . 4 Increase during 1906. — 27.4 + 8.3 - 35-5 + 174.5 + 125. 7 In circulation. End of 1906. Increase during 1906. 887. 1 + 140. 2 290. 2 406. 2 - 80. 7 — 70. 7 330.5 — 89.5 5ii.9 + 46.9 We will show next how Germany's gold is distributed between the Reichsbank and the public. From 1876 to 1907 the Reichsbank bought $821,700,000 in gold bars and foreign coin, of which only $98,500,000 were resold and $725,880,000 went to the mint for coinage. The German coined gold held by the Reichsbank has not increased in a ratio proportionate to these purchases, and this is true also even of its total stock of gold, including gold bars and foreign coin. After deducting the gold coin minted in Germany and held by the Reichsbank from the total amount of gold coined at the mint, there remained at the end of 1907 $919,820,000 of gold which was possibly in the possession of the banks and the public. This estimate includes gold which has since been exported, consumed, or lost. Yet, in spite of the liberal allowance which has been made for coin thus withdrawn from circulation, the quantity of gold which still circulates in our country will be found to be very large. 42 Renewal of Reic hsb ank Charter [In millions of dollars; $1=4 .20 marks.] German gold coin. Gold holdings of the Reichsbank. Year. Total. 1876 1881 __ __ - _ . 68. 27 49. 20 135-89 150.91 Bars, etc. 1 0 . 12 13-37 31-52 25-99 German gold coin. 58.14 35.84 104.36 124.92 Minted. 34i.70 419-53 871.85 1.044-75 In possession of the Reichsbank. 58.14 35.84 104.36 124.92 Remaining in circulation. 283.40 383.69 767.53 919.83 NOTE.—The amounts are averages for the years given. It had been suggested in the list of questions submitted to the inquiry commission that in order to strengthen the Reichsbank's stock of gold by money drawn from domestic trade, the notes of the Reichsbank should be declared legal tender. Such a provision obviously by itself would scarcely suffice to draw gold out of circulation into the Reichsbank, as the notes of the Reichsbank have been taken in payment by everybody without objection for more than three decades. We pointed out last spring that England, as well as France, has legal-tender notes, and yet in England the amount of notes in circulation is quite small, whereas in France it is greater than anywhere else, the figures per capita for 1907 being: England $3. 19 France Germany 2 3 • 59 5. 69 As it is, the notes of the Reichsbank are handled with an absolute confidence which could hardly be increased by declaring them legal tender. It might therefore be just as well to wait until an emergency arises and then to 43 National Monetary Commission issue the decree making the notes legal tender, and at the same time to enact by law that they be accepted at their face value in payment of debts, as France did in 1870. But the inquiry commission, which at first, we believe, was also of this opinion, has changed its mind, and now considers it advisable that the situation which already actually exists should receive legal sanction through the notes of the Reichsbank being made legal tender. The Reichsbank seems to have exerted itself to bring about that end, and the members of the inquiry commission, while thoroughly aware that the notes of the Reichsbank are freely taken all over the country, probably had in mind the burlesque "Schnabele" incident, when gold was hoarded for one whole day in Berlin, any serious disturbance being sufficient to remind the people of the fact that a tender of Reichsbank notes does not constitute a legal discharge from debt. It is therefore deemed preferable to proceed along these lines immediately, for, should the country be involved in a prolonged economic or political crisis, it would by that time have become accustomed to the legal-tender status of the notes of the Reichsbank and would in consequence be less inclined to hoard gold. To our objections that the enactment of a legal-tender law will cause a more frequent use of the gold clause in mortgages, etc., the advocates of the legal-tender measure point out that, even in the nineties, when our monetary system sustained for the last time the severe attacks of the bimetallists, the gold clause was hardly used and never enforced; only here and there, as in Frankfort, is it still 44 Renew aI of Reichsb ank Charter to be found under ordinary conditions. On the other hand, we should not care to see the gold clause entirely abolished by law; if it were, a temporary depression of our monetary standard—should one really take place— would surely find the money lenders and money seekers inventing some expedient, or money lenders might favor foreign gold bonds to the disadvantage of our own borrowers. No proposition seems to be under way to amend the law so as to change the present provisions for the redemption of the Reichsbank notes, as stated in article 18 of the bank act, which compels the Reichsbank to redeem its notes " at its main office in Berlin upon presentation "— that is to say, to an unlimited extent—and at all its branches " as far as cash holdings and money requirements permit." We have pointed out before that the Reichsbank is quite willing to do more than the law requires, and to exchange its notes for gold whenever this is necessary for the maintenance of the par of exchange; but it has not changed its views that, with its extended business throughout the country, it has no right in critical times to make it still more profitable for the exporters to ship gold by sending them whatever quantities of gold they desire to Kattowitz, or to Cologne, or to Hamburg. Nor will the bank in Berlin furnish to the exporter gold coin of full weight. On the contrary, as is also the case with the Bank of England, it prefers to pay out short-weight pieces, which, as experience shows, come back more quickly than others. On the other hand, it is to be expected that the law which at present compels the Reichsbank to redeem its notes "in current German money" 45 National Monetary Commission will be so amended as to compel it to redeem its notes in gold. This provision should be extended also to the 20-mark notes, whereas, according to article 9 of the present currency laws, payments up to 20 marks may be made in silver. It is advisable to embody this obligation as to redemption in gold, which has existed in practice for a long time, in an express law, mainly for the instruction of foreign countries, where to our knowledge even an expert has misinterpreted the purpose of the legal-tender decree. In any case it will be recognized abroad when the next reports of our big banks appear, that the stringency of last year was due to the reaction from an unprecedented trade activity and to nothing else. The condition of the Reichsbank, and especially its stock of gold, will also prove this. We have already mentioned that the Reichsbank has at last come over to our view and intends to specify the gold holdings in its weekly statements. It will be well for it to do this as soon as possible, at any rate not later than the beginning of the new year. It is to be regretted that the inquiry commission approved the issue of more notes of small denominations. This recommendation, however, did not receive the unanimous approval given to the legal-tender provision, but it was approved by a "majority of votes," in spite of the recent increase in the number of small notes. In 1906 the Reichsbank received permission to issue small notes of 50 and 20 marks, and in 1908 the maximum limit of silver currency per capita, which had been raised in 1900 from 10 to 15 marks, was increased to 20 marks 46 Renewal of Reichsb ank Charter per capita. The effects of these measures are evident from the next table, which shows how the denominations of the notes have changed in the course of years. In spite of the steadily increasing amount of the total circulation, the largest notes, those of 1,000 marks, have steadily decreased in number in the last decade, whereas the number of ioo-mark notes has steadily increased, not only immediately after the abolition of the old 500-mark notes, but even afterwards during the ten years preceding 1905. Since the issue of the 50 and 20 mark notes the circulation of 1,000-mark notes fell off still more, but so did that of the ioo-mark notes, so that it is possible that the 50-mark notes drove out of circulation, in the main, only the ioomark notes. At the end of 1907, 50 and 20 mark notes to the amount of $69,150,000 were in circulation, and since then there has been a slight increase, until now the total is nearly $71,420,000, which is the maximum that may be issued in small denominations. Of the total circulation at the end of last February, 8 per cent consisted of 50mark and 9.4 per cent of 20-mark notes. [In millions of dollars; $1=4.20 marks.] Year ending December 31— 1895190019051906. 1907- Total circulation. $314.31 335-7o 394-45 422.83 449.04 1,000-mark notes. ioo-mark notes. Amount. Per cent. Amount. $119.98 9 0 . 81 101.10 35-6 27. 1 25.6 22.3 $201.73 64. 2 244.35 72.8 17. 7 94-45 79.58 47 Per cent. 293.45 74-4 307.32 72.7 300.30 66.9 National Monetary Commission 50-mark notes. 20-mark notes. Year ending December 3 1 — Amount. 1895 1900 1905 __ Amount. $12.54 33- 16 2.9 7-4 $8.53 36.0 Per cent. __ 1907 Per cent. , . _ __ 8.0 It was to be expected that the 50 and 20 mark notes of the Reichsbank would temporarily drive the treasury notes out of circulation. The Reichsbank took in such large quantities of treasury notes that in 1906 it held more than $8,570,000 (against $5,230,000 to $6,190,000 in former years), and in 1907 more than $19,520,000, which left only $8,810,000 in circulation, as against about $22,610,000 in former years. But it is possible that the Reichsbank held these treasury notes back on purpose, because it was intended to split them up also into smaller denominations; moreover, during the present year $7,610,000 of treasury notes were again restored to circulation. At the end of 1907 there were in circulation about $79,760,000 in treasury notes and new notes of the Reichsbank of smaller denominations whilst of smaller bills only the $28,570,000 treasury notes were available, of which only about $22,610,000 were usually in circulation. Of those $28,570,000 treasury notes, $16,660,000 were 50-mark notes; $7,140,000, 20-mark; and $4,760,000, 5-mark notes; now it is proposed to put out $21,420,000 in 10-mark notes and $7,140,000 in 5-mark notes, besides about $33,330,000 48 Renewal of Reichsbank Charter of 50-mark and $35,710,000 to $38,090,000 of 20-mark notes, all issued by the Reichsbank. The idea which originally guided our monetary reforms was that notes should be used for large payments, coin for all others, and small notes for remittances out of town. There were good reasons for this, because the purer our gold standard the finer an instrument it becomes to link us with the commerce of the world. England permits no bank notes under £5; Austria, since the resumption of cash payments, none below 50 kronen (only up to that time were notes of 20 kronen in circulation); France and Italy, none below 50 francs. It would have been better to do without the 20-mark notes of the Reichsbank altogether; and now that we have them, it is all the more necessary for us not to overburden our monetary system with small notes. We showed above, for gold coin, the amounts of coin minted, and held by the Reichsbank and by the public, respectively; and we shall now give the corresponding statistics for silver coin. The taler coins having only gradually disappeared from the Reichsbank and from circulation, we have also added the number of talers which at each of the stated times were in the possession of the Reichsbank. We have left out the nickel and copper coins, as almost all of them passed into circulation. Up to 1907 $24,380,000 were minted (39 cents per capita), of which the Reichsbank held only $476,000, while all the rest—$23,810,000—was in circulation. 83703—10 4 49 National Monetary Commission $i =4,20 marks.] Silver in circulation. Population. October 31, i88o__ October 31, 1900. _ December 31, 1907 January 31, 1908._ Taler (3 Per Imperial Per marks). Icapita. silver capita Millions 45.2 Millions. 56.4 61. 9 61. 9 89.88 7.83 5.57 Millions. $115.14 52.55 i-59 o. 12 o. 09 Total. Per capita. Millions, $101.69 $ 2 . 24 2. 24 125.93 3.48 215.76 3.52 217.52 $216.83 215.81 In the Reichsbank and other government offices. Per capita. 223.59 223.09 $4.79 3.83 3-£o 3- 61 In circulation. Total. Per capita. Millions. Millions. October 31. i88o__ October 31, 1900_. December3i, 1907 January 31, 1908-. Total. $86.48 60. 40 55-95 61.52 $1.91 1. 07 0.86 1. 00 $130.35 $2.88 I55-4I 167.64 2. 76 161.57 2. 61 2. 74 It will be seen that at the beginning of the year about $3.57 per capita had been issued in silver coins, of which about $2.61 were in circulation. At the time the coinage laws were last amended the Government declared that the demand for silver coins (mainly 5 and 2 mark pieces) had increased to such a degree, especially for the payment of wages, that many branch offices of the Reichsbank were very far from being able to satisfy the demand for them. It was also argued that a careful policy required that the Bank should have at its disposition regularly at least $71,420,000 in silver to meet crises—in which case it would really have at its command, if we count the silver reserves of public treasury offices, about $78,570,000. If during the next four or five years another $60,470,000 were 50 Renewal of Reichsbank Charter to be coined, Germany would then have $276,900,000 in silver coin. After deducting the above $78,570,000 there would remain only $198,330,000 for circulation, or, assuming the population by that time to have increased to 64,600,000 people, not more than $3.09 per capita. This calculation is perhaps an underestimate; for, since an issue of $4.76 per capita is authorized, the population of 64,600,000 would warrant the coinage of $91,190,000, and not $60,470,000 only. The Government, however, is pledged to issue new coins only in proportion to the real needs of trade, and these the Government expected to become somewhat smaller on account of the issue of the 5-mark treasury notes up to the value of $21,420,000. We are nevertheless afraid that the Reichsbank may find the keeping of stock of $71,420,000 in silver (at the end of 1907 it was not quite $49,280,000) not permanently practicable unless it succeeds in attracting and keeping a proportionate gold reserve. We think, too, that the need for small media of exchange will be amply satisfied as long as an amount of silver coin (apart from the reserves of the Reichsbank and public treasury offices) equal to $3.09 or even $3.57 per capita, and of small bills totaling $100,000,000, equal to about $1.66 per capita, remains in circulation. We are the more sure of this in view of the fact that the extension of the check system and the introduction of the postal check may be expected to lessen the demand for bills of small denomination. The suggestion of the inquiry commission that the Reichsbank be authorized to issue still more small bills deserves very careful consideration. When, in 1905, 51 National Monetary Commission the first issue of small bills by the Reichsbank was proposed, the Frankfurter Zeitung pleaded strongly that this authorization should be strictly limited to 50-mark notes, and that even for these a maximum be fixed. The sum of $71,420,000 was, in point of fact, set as a maximum not, indeed, by law, but by a binding declaration from Count Posadowsky. But besides these 50-mark notes, the 20-mark notes have since been authorized. If in future the 50-mark notes, which in moderate quantities are really needed, should no longer continue to be regarded as small notes, that would strangely contrast with the spirit in which the limit of $71,420,000 was declared and accepted. In that case a maximum for the 50-mark notes should be fixed and the limit for the 20mark notes should be reduced considerably under the $71,420,000 fixed for the 20 and 50 mark notes together. We attach great importance to the fact that, although an increase in the amount of the 20 and 50 mark notes was suggested in the questions submitted to the inquiry commission, the official information given out to the press on the 19th of October mentioned only an additional issue of 50-mark notes as having been approved by the majority of the commission. The inquiry commission is supposed to have considered the issue of small notes preferable to the issue of silver coin because these notes must be covered in exactly the same manner as the larger ones; and yet, as things stand now, an increase of the silver circulation has been determined on which will exceed the requirements anticipated by the Government. A strong inflationist sentiment still exists among some 52 Renewal of Reichsbank Charter powerful interests in this country, which have recently been humored by t h e introduction of t h e 3-mark piece, which does not a t all fit into our monetary system. I t would be well to remember t h a t "Gresham's l a w " is as good as ever, and t h a t b a d money drives good money out of a countrv. V. CHECK SYSTEM OF T H E REICHSBANK—NATIONAL CLEARING SYSTEM—MORTGAGE CLEARING ON AND DEPOSITS—PRIVATE DEPOSIT M I N I M U M — D E P O S I T SYSTEM—INTEREST PUBLIC DEPOSITS—THE AGGREGATES. I t is generally agreed t h a t t h e best way to reduce the demand for currency is to encourage the practice of settling debts without the use of actual cash. The inquiry commission also regards as highly useful the efforts to make transfer, check, and clearing methods popular throughout t h e country. The schemes, however, which have so far been advocated with t h a t object in view would, if adopted, improve matters b u t little. I t is t o be hoped t h a t t h e German public will from now on make more use of the check system, and t h e check law recently promulgated and t h e thorough propaganda which has been conducted on behalf of t h e system seem t o justify this hope. The Reichsbank is in a position t o support these efforts effectively, and agrees with the inquiry commission t h a t its powers should be enlarged so as to permit it to purchase checks. If, however, the Bank intends, as is rumored, to deduct five days' interest on all checks purchased, t h e object intended is not likely t o be attained. This action would be in keeping with 53 National Monetary Commission the half-hearted methods employed by the Reichsbank in the collection of checks—methods which have been the cause of many letters of complaint written to the Frankfurter Zeitung. To quote one instance, it has transpired that one branch of the Reichsbank, "as an exceptional favor," complied with the request to take for collection and remittance of proceeds a check drawn upon itself, but stated at the same time that the sender must as a rule get his checks cashed at the local branch of the Reichsbank in his own city, which usually means two days' loss of interest and a deduction for postage and commission. The Reichsbank has the most vital interest in popularizing the check system as a means of economizing currency. One would therefore think that, like the large banks, the Reichsbank might credit to the account of the payee free of charge checks drawn upon itself. In buying checks the Reichsbank should drop— wholly or partly, according to distance—its minimum charge of five days' interest, seeing that checks are not intended for circulation, but for collection. We are still far from realizing the idea of a national clearing-house. The idea is generally regarded with favor, but the banks can hardly be expected to lend their unanimous cooperation, although the first suggestion came from the large Berlin banks, which were interested in the clearing-house as a means of simplifying their business with their branches. At first it was planned to make every check payable not only at the place upon which it is drawn, but also in Berlin. To this the independent provincial banks objected. The discussions were then 54 • Renewal of Reichsb ank Charter and there dropped, and it seems that the Berlin Bankers' Association has not paid any attention to the proposal for many months past. The establishment of a national clearing-house was repeatedly recommended by the inquiry commission, but with the precautionary suggestion that several other cities besides Berlin be designated as national clearing-house cities. The latter suggestion might meet with more general favor, as might also a plan to make these national clearing-houses an adjunct of the postal-savings banks which will shortly be established. Success in this field depends entirely upon time and tireless effort. A little over a year ago the Reichsbank was authorized to accept and make payments in connection with mortgages, but so far very little progress has been made in that new branch of its business. The opening of the proposed mortgage clearing-house has been deferred until April i, 1909. In order to attract a fairly large business to that institution, the cooperation not only of mortgage banks outside of Berlin, but also of other large dealers in mortgages should be solicited. Among the latter class, the insurance companies are conspicuous by their lack of interest. Our progressive insurance department would add to its laurels if it could successfully draw the attention of this class of the community to the great benefits which would be derived from their cooperation by the public as well as by themselves. State institutions as trustees of a considerable number of mortgages are also important to the development of this clearing system and yet seem to need a stirring up from above. 55 National Monetary Commission The proposal that the Reichsbank take interest-bearing deposits met with almost unanimous opposition. The bank act authorizes the Reichsbank to do so up to a total amount not exceeding its capital and surplus. This privilege, however, was used only during the first years of the Bank's existence. If the Bank were to try to attract large quantities of money by paying interest thereon, it would have to change its present policy of letting business come to it, and would have to hunt for suitable business to enable it to pay such interest, especially at times when money is abundant—that is, when it flows into the Bank in unusually large quantities, but is also unusually hard to dispose of. This would force the Reichsbank to adopt methods and run risks similar to those of the big banks— a course which is to be deprecated in view of the fact that the Reichsbank is the guardian of the German monetary system. As early as 1878-79 the Reichsbank ceased to allow interest on deposits, because through the speedy development of its deposit and transfer system, it obtained a considerable quantity of noninterest bearing deposits. At that time these deposits reached an average of hardly $47,600,000; in 1907 their average for the year was nearly $142,900,000. There is surely no need for the Reichsbank to accelerate this growth of its resources by paying interest on deposits. The statistics furnish interesting evidence as to the composition of the deposits. The Reichsbank has again refused to fulfill the urgent request made by us for years that it should separate the public from the private deposits in its weekly statements, as it 56 Renewal of Reichsbank Charter does in its annual report. This we regret in the interest of the community, which should be enabled to watch the fluctuation in the private deposits, so that it may form a judgment as to the weekly statements and as to the position of the money market. The Reichsbank is scarcely justified in refusing our request; the Bank of England and the Bank of France set an example in this respect which our public institutions would do well to follow. Particularly in Prussia, the old dread survives that to bare the cash resources of the Government to the public view might obstruct the negotiation or spoil the issue price of a public loan. This is not as true now with our highly developed banking system as it was formerly. The big banks generally know the requirements of the Empire and of Prussia, even though the public deposits in the Reichsbank are not separated from the private deposits; and they are as a rule not surprised when the Government announces the issue of a new loan. On the other hand, it has long been known that the credit balances of public institutions increase during the summer and decrease in the fall and until the beginning of the new year; the difference between the high and the low figure amounts to about 200,000,000 marks ($47,600,000) or more; it reaches that figure sometimes within a single month. The public and private deposits do not move up or down together, but are rather apt to vary in opposite directions. The present system of combining the two items is therefore liable to obscure the real movements and to be misleading. 57 National Monetary Commission [In millions of dollars; $1=4.20 marks.] Private deposits. Years. Public deposits. Total deposits. Amount. 1876-1880 1881-1885 1886-1890 1891-1895 1896-1900 1901-1905 1906 1907 46. 02 48.3S 84.08 115.26 117.52 135-S7 137.06 137.92 34.3i 39.03 62.31 73.i8 76.41 87.58 94- 14 95-84 74-5 80. 7 74.i 63.5 65.0 64.6 68.7 69.5 11. 71 9-32 21.77 42. 08 41. II 47-99 42.92 42. 08 Per cent. 25.5 19.3 25.9 36. S 35.o 35.4 3i.3 30.5 This table gives the impression that the deposits at the Reichsbank, after increasing rapidly, have, for some time past, attained a certain stability. This, however, applies chiefly to the aggregate amount. It will be seen that the public deposits have somewhat decreased since about 1900, while the private deposits show a steady increase. When in the fall of 1906 the Reichsbank raised the amount of the minimum balance to be kept on check account, loud complaints were made which were not altogether unjustified. The statistics of the Reichsbank do not sufficiently show the effect of this measure, because they can be used only for a comparison between the 15th of September, 1906, and the 31st of March, 1908—dates which do not correspond. Looking at the figures in that way, the account of the Reichsbank shows the minimum balances of private depositors to have increased from $19,410,000 to $27,000,000, i. e., from 28.3 to 43.7 per cent of their actual balances. Yet the total deposits had declined from $68,510,000 to $62,000,000. It therefore remains at least an open question whether the private deposits have actually been increased through the rais- 58 Renewal of Reichsbank Charter ing of the deposit minimums. It is well known that this measure has caused many large concerns to do their own clearing; even now the big banks try to do this, particularly with the out-of-town collections, so as not to provoke the Reichsbank to further demands through an increase in the bulk of their business. The public and the Reichsbank, however, have such a vital interest in the further development of the currency-saving check system that the Reichsbank should be as accommodating as possible in the matter of fixing the amount of the minimum balance. Experience does not warrant another raising of it, as was suggested in the list of questions submitted to the inquiry commission. It is our firm conviction that no considerable increase in the cash resources of the Reichsbank could be brought about in that way. We again refer the reader to the articles by our Vienna correspondent which appeared in our columns last May. According to him the Austro-Hungarian Bank does not require a minimum balance in excess of 20,000 kronen ($4,250), even from the big banks; the Reichsbank demands as much as 1,000,000 ; marks ($250,000), and more. Allowing even for the extended field of the Reichsbank operations, one must agree with our correspondent that the Vienna institution does much more than the Reichsbank in the way of giving its valuable services to its cilents " without charge or for an obviously insignificant remuneration.'' We admit, however, that the Reichsbank in its transfer system shows results which are of the greatest value to our economic life. The next table will show, alongside 59 National Monetary Commission of the total turnover of public institutions and private customers, the proportion of the turnover which was effected by means of the currency-saving transfer system. In 1876, 59.5 per cent of the turnover was effected in cash, in 1890, 27.9 per cent, falling to a little over 15 per cent in 1906-7. To every mark in the transfer accounts the total turnover in 1907 reached 451 marks, i. e., about 65 per cent more than twelve years before; 382 marks of this turnover was settled without cash payment, an increase of about 70 per cent. As an interesting feature we add to the next table an analysis of the accounts concerning the occupations and individual credit balances of the depositors. Of all the private accounts existing on March 31, 1908, 32.8 per cent were kept by commercial and transportation enterprises and insurance companies, 40 per cent by trade and industrial concerns, and only 16.7 per cent by banks and bankers. Of the sum total, however, of all private credit balances, only 13.8 per cent belonged to commercial and transportation enterprises and insurance companies; 27 per cent to trade and industrial concerns; and 51.6 per cent to banks and bankers. Each deposit made by commercial and transportation enterprises and insurance companies averaged $1,345; by the trade and industrial concerns, $2,150; by banking concerns, $4,172; by joint stock banks, $21,566. The deposits under $2,500 constituted 16.48 per cent; those from $2,500 up to $12,500, 19.83 per cent; from $12,500 up to $25,000, 10.57 per cent; from $25,000 up to $250,000, 29.64 per cent; and still larger ones, 22.69 P e r cent. The latter, 22 in number, averaged about $654,500 60 Renewal of Reichsbank Charter [In million dollars; $ I = M . 2 O marks.] Effected by cash payments. Year. 1895 1900 Total transactions. $22,309 _ _- Amount. Per cent. 4,053 38,960 6,534 Effected by book transfers. On every dollar in transfer balances. Credit balances. Total turnover. Turnover settled without cash payment. Amount, Per cent. 18. 2 18,256 81.8 81.51 274 224 16.8 32,426 83.2 121.96 319 266 1905 1906 52,890 8,183 iS-5 44,707 84.5 139.14 380 321 58,481 8,936 15-3 49,545 84.7 136. 67 428 363 1907 62,061 9.537 15-4 52,524 84.6 i37-6i 451 382 VI. a DOMESTIC BILLS—GERMANY AND FRANCE—BANK RATE AND PRIVATE RATE—ILLEGITIMATE PAPER—LOANS ON COLLATERAL. The question has come up for discussion whether efforts should be made to reduce within smaller limits the demands for financial assistance which are being made upon the Reichsbank at present. In this connection we refer to our next table, regarding the nature of the concerns in the different parts of the country whose bills were handled by the Reichsbank during the year 1907. The northeast provinces include Brandenburg, East and West Prussia, Pomerania, Posen, Schleswig-Holstein, while the "other provinces" include Silesia, Saxony, the Thuringian States, Hanover, Oldenburg, Brunswick, Hesse-Nassau, and Rhineland-Westphalia. It will be seen that of all bills discounted by the Reichsbank nearly 53 per cent were tendered by banks and bankers, nearly 27 per cent by industrial concerns, not quite 18 per cent by commercial houses, and a <*Gold bars and coin converted at 1,392 marks ($331.42) per pound fine. 61 National Mon etary Commission little more than i % per cent by interests connected with agriculture. This statement, however, may lead to false conclusions, unless certain facts are kept in mind. Bills of agricultural origin, which seldom are commercial but nearly always accommodation bills, are as a rule not tendered directly to the Reichsbank; and when the bills that reach the Reichsbank indirectly are included in the total, the number of agricultural bills will be found to have amounted in 1893-94 to 4.3 per cent and in 1897 to 5.1 per cent of all bills discounted. In the eastern provinces alone 20.2 per cent of the bills discounted were of agricultural origin; at some of the branch offices nearly one-half of the discounts consisted of such bills—in Flensburg, for instance, and also in Koslin, Tilsit, and Posen. Prussia's share in the Reichsbank's bill portfolio was nearly 77 per cent, and amounts falling to Prussian banks, manufactures, and commerce formed approximately the same percentage of the various totals in question. The details naturally vary somewhat; thus, Berlin alone contributed 7% per cent of all bills, but only 2 per cent of the bills drawn by industrial concerns, 5 per cent of bills by commercial houses, 11 per cent of bills by banks and bankers, while Rhenish Prussia contributed 12 per cent of the bills drawn by banks and bankers, 8 per cent of bills drawn by commercial houses, and fully 30 per cent of bills drawn by industrial concerns. 62 Renew aI of Reichsh ank Charter [In millions of dollars; $1 = 4.20 marks.] 193.9 Berlin Northeast provinces Other provinces. _ Other parts of Germany 19. 0 54.6 120. 4 76.82 99-7 74-8 5 3 - 2 78.6 3 5 - 2 2. 0 7.52 1 5 . 2 1 1 . 4 1.4 2.3 21.63 28.4 2 1 . 4 47.67 56.1 4 2 . 4 9.8 1 4 . 4 19.4 42. 1 5. 2! 0 . 0 5 i 30.0 1. 1 Per cent. Amount. 78.6 2.3 13-4 62.2 Per cent. Amount. Per cent. Amount. Per cent. Amount. Amount of domestic bills bought by the Reichsbank, drawn by— Percentage of all do- Banks and A Industry. Commerce. f^ bankers. Domes- mestic bills tic bills. bought by the Reichsbank. 87.3 1-5 41-3 45-0 4 3 . 3 : 1-2 58.5 23.18 33-6 25. 2 14.5 2 1 . 4 9-6 2 1 . 4 0 . 3 12. 2 ! Total 252.5 100. 0 133.3 100. 0 67.8 TOO. O 44- 7 IOO.O 2 . 6 5 IOO. O The comparison between the bill transactions of Germany and France will also be found of interest. The income derived from bill stamps justifies the conclusion that in this country, as well as in France, the volume of bills put into circulation has for years been on the increase. While only $3,333,330,000 of bills were created in Germany as recently as 1890, the same item ran up to $4,880,950,000 in France. This is the more remarkable when one takes into consideration that it is less usual across the Vosges than in our country to allow commercial debts to stand on the books for any length of time. But by 1907 the circulation of bills had increased in Germany to nearly $7,321,420,000; in France only to about $6,904,760,000. Therefore the increase in France amounted to about 4 0 ^ per cent only, but in Germany to nearly 120 per cent. This shows how rapidly the demand for accommodation, 63 National Monetary Commission hand in hand with the demand for capital, has increased in this country. Although the total amount of bills is nearly equal in both countries, yet, if we look at the distribution per capita, we find the relatively large amount of $174.52 in France, while in Germany it is only $118.33, a figure which France had already reached about the year 1880 but hardly exceeded before 1895. Assuming the average duration of all bills in circulation to be ninety days, it may be said that the Reichsbank participated in this circulation to the extent of only 13.8 per cent in 1907, and the Bank of France to the extent of only 12.5 per cent. The average time to maturity of bills discounted by the Reichsbank, which gets large quantities of bills when they are nearly due, is in the neighborhood of thirtytwo days, while bills taken by the Bank of France have an average of only twenty-six days to run. Up to about 1894 the average time to maturity of bills held by the Reichsbank had increased from thirty-five to about forty-one days, and it has since then gradually fallen from forty-one to thirty-two days. Of all bills put into circulation during the year 1907, 38.6 per cent were discounted by the Reichsbank, and 44.3 per cent by the Bank of France. The Reichsbank is naturally desirous to ascertain as far as possible how many bills circulate in the country and what the standing of the individual borrowers may be. That the Reichsbank does not obtain such a large proportion of all the bills as the Bank of France is partly explained by the fact that the difference between the bank rate and the open discount rate in Paris rarely 64 Renewal of Reichsbank Charter exceeds 0.5 per cent, whilst in Berlin it generally is as high as about 1 per cent or even more; in London the difference is subject to wide fluctuations; it amounted to fully 1 per cent ten to fifteen years ago, whereas in 1906 it shrank to 0.22 per cent. In this country, too, the difference has been smaller at times. In 1896 to 1900, for instance, it was only 0.71 per cent; it rose in 1906 to 1.11 per cent, fell in 1907 to 0.91 per cent, and rose again in the first six months of 1908 to 1.26 per cent. Each temporary shrinkage of the difference coincided with a period of monetary stringency, being caused by a rise in the market discount rate. On the other hand, as money usually fetches a higher price here than in London and Paris, the international currents of money are apt to depress our open discount rates, money being sent to Germany and German bills going abroad whenever the difference between the official and the private rate is sufficiently attractive. There are some differences in the methods of quoting the discount rates. In Berlin the discount rate for prime bankers' bills is quoted as the regular market price, while in London one has to pay commissions, and the bank rate is not always effective there. There is little prospect of a change until a readjustment of the relation between capital and credit is accomplished in Germany. The Reichsbank can, of itself, do little to gain greater control of the open discount market except through its discount policy and perhaps by rediscounting treasury bills in times of monetary stress, which might cause the market rate temporarily to advance within the neighborhood of the official bank rate. 83703—10 5 65 National Monetary Commission At any rate, it would be bad policy to attempt to increase the cash holdings of the Reichsbank by reducing its discount operations. But apart from that, it will be remembered that in a series of articles published last spring and entitled "The Problems of the Bank Inquiry/' the Frankfurter Zeitung expressed the view that the Reichsbank should not resort to artificial methods of attracting discounts. Some of its branches have at times been guilty of doing this, and have even tried to obtain bills while a rise in the bank rate was imminent, thus rendering the Bank's own discount policy ineffective. "It has since become known that the Reichsbank had to put a damper on the zeal of its officials about two years ago. So-called finance bills, drawn by bankers on bankers, and open to the suspicion of being drawn simply for the purpose of getting hold of money, have long ago and repeatedly been put on the index. Yet it was discovered that the branches of the Reichsbank frequently discounted bills which obviously were created for the sole purpose of furnishing their makers with permanent working capital. It even appears that on many occasions one or more renewals upon maturity were promised and discount credits granted against deposit of securities. Of course, it can not be denied that such renewals may represent perfectly straightforward transactions, but practical experience evidently has induced the Reichsbank to demand that as a general rule all transactions should terminate upon maturity of bills. Agricultural interests alone are to be allowed one renewal in case of need, as heretofore. Discounts against deposits of securi- 66 Renewal of Reichsbank Charter ties are henceforth to be granted in exceptional cases only; all other paper taken for discount by the bank and its branches must be genuine commercial paper, and all factitious bills are to be rejected. These are the instructions which were again sent to all the branches last spring, and provisions have also been made to enable the head office to keep posted on all discount transactions entered into throughout the country. In this way the Reichsbank is sure to minimize its risks and to keep its funds in a more liquid state. Undesirable accommodation is being withdrawn with careful moderation, so that the cleaning-out process should not bring about disturbances. The banks and bankers have taken over some of the accounts which the Reichsbank no longer cared to finance. It remains to be seen how long the new regulations of the Reichsbank can dampen the overzeal of its branch managers. It can not be said that the laxer methods were principally confined to officials who were desirous to increase their share of the profits. On the contrary, the illegitimate and undesirable bills were generally found in the possession of the small branches. The latter constitute about four-fifths of all branches, and their managers are not entitled to a share of the profits. Some of the banks' managers did not seem to be aware at all of the fact that the Reichsbank when investing its money had to be no less careful to insure quick convertibility of its funds than it must be to obtain proper security; nor were they alone to blame, as it is more than likely that the mistake had been made of judging the work of the individual manager too much by the profits which his 67 National Monetary Commission branch showed at the end of the year. It will be the duty of the head office to convince its subordinates that in the future the quality of their work will be judged not solely by the scale of profits which they can show. The Reichsbank can not do a collateral-loan business to an unlimited extent. Such loans are not to be counted as cover against outstanding circulation; and since they are made to one individual debtor, they do not offer the same chance of quick convertibility as do the bills, which bear the names of more than one person. It is true that these loans are secured by a pledge which can be liquidated by a forced sale, which, in case the security was in the form of stocks and bonds, would tend to depress prices. The bank act has, therefore, provided a maximum limit for the loans, which is fixed from time to time by the executive committee of the Reichsbank. If the capital of the Reichsbank should be increased, or if the surplus should be opened, this limit will most likely be raised. It is proposed that the Reichsbank should be authorized to make loans against hypothecations entered on the books of the Empire or its constituent States. The maximum limit provided for loans on collateral has up to the present never been made public, and the central management of the Bank seems to take it as an approximate guide only; but it is known that the limit has often been exceeded—in 1895, for instance, and afterwards, and in 1907 to a considerable extent. The former limit of $42,850,000 is supposed to be still in force, although it was actually exceeded after the increase of the Bank's capital to such an extent that on one occasion, 68 Renewal of Reichsb ank Charter on December 31, 1907, $86,660,000 were outstanding in loans on collateral. I t is likely t h a t t h e proposed new limit will be fixed with reference to this figure. The actual amount of loans on collateral gradually increased during t h e first decades, rising from a yearly average of $10,710,000 or $11,900,000 to $25,710,000 in 1897. At t h a t time t h e Landschaften requested t h a t t h e Reichsbank should accord t o mortgage bonds t h e same preferential t r e a t m e n t extended to imperial and state securities. Instead of complying with this request, the Reichsbank gave u p discriminating in favor of any securities, and since then its average loans fell to $17,140,000 in 1905, and amounted t o only about $23,330,000 in 1907. Most of t h e loans were m a d e against investment securities (95 per cent to 98^2 per cent). The percentage of loans against commodities was still as high as 14.9 in 1876, gradually decreasing to 1.5 per cent in 1907. The percentage of loans against precious metals was insignificant—only about 0.4 to 0.002 per cent. The distribution of the loans according t o t h e occupations of t h e borrowers and according to t h e different parts of the country is shown in t h e next table, which gives t h e figures as of December 31, 1907. [In millions of dollars.] Total amount of loans. Berlin alone Eastern and northeastern Germany, excluding Berlin Central Germany Rhineland-Westphalia South Germany _ _ Banking. 36.66 34.5o 0. 30 1. 06 0.03 9.02 1. 26 0.37 o.34 o.35 0.03 5.85 1-95 0.81 1.49 0. 18 68.69 4-73 5-00 o.475 1S.83 18.06 9.4i 6.76 86.72 13.08 6. 24 69 Industry. Commerce. Agriculture. 1.99 National Monetary Commission The fact that, out of loans to the value of $86,720,000, $36,660,000 were made in Berlin alone, of which banking concerns secured $34,500,000, is explained when one remembers that at that time the Preussische Central Genossenschaftskasse alone owed $16,100,000 to the Reichsbank in the shape of loans on collateral. On the 23d of January and the 23d of March, 1908, that institution owed the Reichsbank only $119, but on March 31, 1908, again $9,280,000. In view of the fact that the Preussenkasse makes severe demands on the money market at the close of the quarter, our belief is confirmed that the Preussenkasse is largely to blame for the stringency at those times which is the subject of so much complaint. The following table shows the nature of the pledges in the different parts of the country where the loans have been made, giving the figures as of August 15, 1907: [In millions of dollars; $i =4.20 mairks] Total amount of loans granted in— Description of collateral. State bonds Provincial bonds Municipal bonds Mortgage debentures Mortgage bank bonds. Rentes, etc Second-class securities (50 p e r c e n t ) . Merchandise _ _ Precious metals Bills Amount of collat- Amount of loans. eral Berlin. Eastern and northeastern Germany. Central Germany. South Germany. RhinelandWestphalia. Per cent. Per cent. Per cent. Per cent. Per cent. 26.8 8.7 25.0 7-3 32. 2 28.0 12.7 3.o 15.9 40. 0 29. 0 34.6 4. 0 4.2 28.2 69.45 43.67 5-75 9.3i o.57 0. 69 12. 66 2.31 26.5 58.7 7.7 0.6 6.5 10. 22 1. 92 2-59 0. 46 4-9 i-5 25.6 13-7 33-8 59-3 8.2 22.3 27.5 3-2 1-75 1.67 0. 22 20. 1 29. 6 97-3 24.9 0. 1 11.6 2.6 13.8 0. 64 20.3 41.5 19.1 4.0 0. 002 11. 14 0. 002 100. 0 2. 79 IS-1 70 Renewal VII. DEPOSITS OF THEIR of OF Reichsbank THE CREDIT Charter BANKS—PUBLICATION STATEMENTS—PRIVATE BANKERS—PUBLIC CRITICISM. The inquiry commission postponed its discussion of the deposits of the private credit banks, and we confine ourselves to a few remarks on that subject. The combination of taking in deposits, granting credits and financing, which prevails among our banks, was without doubt invaluable in promoting the economic progress of the last decades. The natural course of events may be trusted to bring about a separation of these different activities that will be sound and lasting. The larger banks might proceed in that direction at once, although it is doubtful whether such a step on their part would be immediately followed by the practical gain which advocates of that policy expect. A general and compulsory separation, if prematurely carried out, might lead to serious consequences, and the Government lost no time in informing the inquiry commission that it did not contemplate enforcing such a change. The only question submitted to discussion was whether it was necessary to insure the security and quick convertibility of deposits and savings by an act of legislation. It remains to be seen what other practical suggestions the inquiry commission will make. The commission knows, as well as we do, that it would not be feasible to treat alike all the concerns which accept deposits, if for no other reason than that they are incorporated in so many different forms (banks, bankers, savings banks, cooperative institutions, etc.), and that it would scarcely be possible to differ- 7* National Monetary Commission entiate between deposits and savings on the one hand and ordinary credit balances on the other. Preferential treatment of genuine depositors would either inflict an injury upon the other creditors and thus hold up our economic progress, or else would not be a sufficient protection to those for whose benefit it would be instituted. Supposing that laws could be framed which could be depended upon not to destroy Germany's vital economic interests and yet not to fail of their object through an amateurish timidity; even then, how, in the face of the ever-increasing number of credit institutions and their complex machinery, could we be sure of a strict observance of the laws and a proper system of supervision when our bank examiners have shown themselves so utterly incapable in the supervision of the mortgage banks, of which there are comparatively few, and whose machinery is much more simple? It would be dangerous to make the public believe that their money was absolutely safe because the banks where they kept their deposits were under the supervision of the Government. The best laws are liable to violation. Transgressions might occur from careless business methods, which, unfortunately, are not infrequent. No law could afford protection against fraudulent malversations, which, starting with unsuccessful attempts " t o get rich quick" and proceeding to minor offenses, grow to larger proportions step by step. The cases of the Leipziger Bank, the Spielhagen banks, and the Pomeranian Bank afford ample illustration of this truth. No law can be framed so as to free men from the duty of watching with 72 Renewal of Reichsbank Charter their own eyes and on their own responsibility those to whom they give confidence or money. The great banks in Berlin will soon begin publishing statements once in two months, so as to facilitate such watching of their affairs. One can hardly expect these banks to publish the " detailed balance sheets " suggested in the list of questions which was submitted to the inquiry commission. The work would absorb too much time and money. The statements which have been promised will for the present satisfy all requirements. It must not be assumed, however, that frequent publication of these statements will of itself give greater security to the depositors, but, if carefully analyzed and compared, they will yield valuable information. Of course the figures will not reveal what is really behind them—whether the bills discounted consist of quickly realizable bankers' and commercial bills, or to what extent they represent dubious outstanding accounts; what the quality of the other debit items may be; how many of the securities could be sold at short notice if necessary; whether the liabilities become due on call or within a short time, or were entered into for longer periods, or whether they are merely transitory obligations, etc. These defects, however, do not render annual reports worthless, nor do they speak against the publication of more frequent statements. On the contrary, " window dressing," so long as it was done only once a year, may have been an easy task; but to "dress u p " an account which is rendered every month or two would hardly be worth while, if it were not altogether impossible. Statements issued at frequent intervals during the year show 73 National Monetary Commission at once whether the December statement was in any way "doctored." This will gradually cure the temptation to " beautify " balance sheets. It will also become a thing of the past for long-sighted financial operations involving large amounts of money to be turned down toward the end of the year, but immediately afterwards taken up in the expectation that the transaction can be wound up before the next report is due. The new practice will deter the financial leaders from plunging light-heartedly into new commitments, but it need not be feared that the banks will refuse any legitimate demands for accommodation. The lively competition among our banks makes it safe to say that if any credits are withheld they are refused for the very good reason that the risk is not desirable. So far nearly all the members of the Reichsbank clearing house in Berlin have promised to publish their statements every two months, and the clearing house will in future admit to membership no institution which does not bind itself to follow a similar practice. Private bankers are exempt from this ruling. It would have been gratifying, and beneficial to their own interests, if they too had adopted the same plan, but we have to admit that in foreign countries also private banks do not as a rule publish such statements. While England was disturbed over the Baring crisis, some bankers adopted that policy, but it failed to become a general rule. The wealthiest and most respected banking firms are the very ones who do not take kindly to the idea. They do not want to disclose their resources, and it is certainly not in the interest of the public to force such private firms as still exist to emigration, 74 Renewal of Reichsbank Charter liquidation, or incorporation. The absorption of private concerns by the big banks, the growth of these monster institutions, and the indirect consequences of this concentration as shown in the banking business—all this has come about with such swiftness that the tendency must not be accelerated any further by legislative interference. The future will reveal more clearly than the present that the mammoth form is not the ideal in the banking business. We shall also learn that we can not light-heartedly dispense with the services of intelligent private bankers. Sooner or later these men will prove most valuable, as they are not forced by the mass and pressure of business—like the managers of the big banks—to rush through their work, but retain enough leisure for profound study and careful consideration of difficult financial problems, giving their ideas time to mature and retaining the faculty of constructive thought. The Berliner Handels Gesellschaft intends to refuse the bimonthly publication of its statement on the plea that it maintains no branch offices in Berlin to attract deposits. This contention is hardly sound, as the Berliner Handels Gesellschaft obtains its share of foreign deposits just the same as other Berlin banks; and we do not think it will be able to keep up its defiant attitude very long. It is expected that the provincial clearing-houses will in their own interest find it advisable to adopt the new method. The publication of their statements ought to be a good advertisement for the banks, as it reaches all classes and impresses them with the large figures on both sides of the account—those of the deposits already made, and those of 75 National Monetary Commission the investment of the funds. In fact it is not at all improbable that firms of questionable standing, who least deserve the confidence of the public but know how easily small capitalists are fascinated by the title "bank," will resort to publications of that kind in order to attract savings and deposits. It is therefore of great importance that the new statements be carefully analyzed by the public. This will be beneficial to the interests of depositors and banks alike. Three decades ago, when the Frankfurter Zeitung first began to analyze the published reports and look into the convertibility of the reported assets, the corporations thus criticised raised strong objections. Gradually the objections were dropped, and instead we received praise for teaching the German public how to study and critically analyze such reports. As another result of our work the corporations themselves increased their efforts to maintain a sufficiently liquid state—the industrial corporations because they did not want to become too much indebted to their bank, and the banks that furnished accommodations because they did not want to lock up their depositors' funds indefinitely. Our method of analyzing balance sheets has now become common property among the press and the public, the Government and the parliaments. The inquiry commission has adjourned its further deliberations on the protection of depositors until next year. The credit banks will by that time have started publishing their statements at short intervals, and the commission will therefore have more information to go upon. It will have to be borne 76 Renewal of Reichsbank Charter in mind, however, that the regularly published statements may be misleading, whether this be caused by accident or on purpose. Nor will this new departure satisfy all wishes. The banks are not compelled to itemize their obligations on bills rediscounted nor to explain items which are not easily intelligible to the outsider. It would be necessary to change our corporation laws in order to force them to do that, and legislation should keep away from that difficult subject as long as possible. Painful experience has shown what harmful results may be caused by such interference. It rests with the banks themselves to go ahead and introduce in their periodical statements and annual reports the uniformity and instructive comments which are needed so urgently. The promised reforms are welcome as a first step, and if further progress in the same direction be made, the bank inquiry will indeed have achieved most commendable results. 77 II. Draft of a Bill for the Amendment of the German Bank Act. 79 [For No. 1178.] DRAFT OF A BILL FOR THE AMENDMENT OF THE GERMAN BANK ACT. I, WlIyUAM, BY THE GRACE OF GOD GERMAN EMPEROR, issue in the name of the Empire the following decree, subject to the assent of the Federal Council and the Imperial Diet: KING OF PRUSSIA, ETC., ARTICLE I. § 24 of the Bank Act of March 14, 1875 (Reichs-Gesetzbl., p. 177), shall read as follows, article 2 of the act of June 7, 1899 (Reichs-Gesetzbl., p. 311), being canceled: Of the total net profit of the Reichsbank ascertained at the close of the year: (1) a regular dividend of 3 ^ per cent of the capital stock is first to be paid over to the shareholders; (2) of the remainder one-fourth is to be handed over to the shareholders and three-fourths to the Imperial Treasury; of this balance, however, 10 per cent is to be assigned to the surplus, the amount being contributed in equal parts by the shareholders and the Imperial Treasury. If the net profit does not amount to 3 ^ per cent on the capital stock the deficiency is to be made up out of the surplus. Whenever an issue of shares of the Reichsbank yields a premium, the sum thus realized is to be assigned to the surplus. 8 37°3— J o 6 81 National Monetary Commission Dividends unclaimed after a lapse of four years from their date of maturity shall accrue to the bank. ARTICLE II. The following provision takes the place of article 5 of the act of June 7, 1899 (Reichs-Gesetzbl.f p. 311): The share of the Reichsbank, as provided by the supplement to § 9 of the Bank Act, in the aggregate amount of the uncovered tax-free note circulation, inclusive of the shares of the banks listed under Nos. 2 to 12, 15 to 17, and 20 to 33, which have meanwhile reverted to the Reichsbank, is fixed at 550,000,000 marks, while at the same time the aggregate amount is increased to 618,771,000 marks. In the reckoning to be made for taxation purposes in connection with the statements appearing at the end of March, June, September, and December (§ 10 of the Bank Act), the share of the Reichsbank is increased to 750,000,000 marks and the aggregate to 818,771,000 marks. ARTICLE III. The notes of the Reichsbank are legal tender. Otherwise the provisions of § 2 of the Bank Act remain unchanged. ARTICLE IV. I. In § 18 of the Bank Act the words " legally current German money" are replaced by the words " German gold coins.*' II. § 19, section 1, of the Bank Act shall read as follows: 82 Renew aI of Reichsb ank Charter The Reichsbank must accept in payment at their full nominal value the notes of the banks designated by the Imperial Chancellor according to the terms of § 45 of this act, as long as the issuing bank punctually fulfills its duty of redeeming its notes. The Reichsbank must accept these notes in Berlin as well as at its branches in cities of more than 80,000 inhabitants and also at the branch office established in the place where the noteissuing bank is located. Under the same assumption the Reichsbank is obliged to give its notes in exchange for the notes of each of the aforementioned banks at its branches within the state that has authorized them to issue notes, as far as the note reserves and needs of the branch offices will permit it. The notes accepted or exchanged according to sections 1 and 2 may be presented by the Reichsbank only for redemption or in payments to the bank that issued them, or in payments in the place where the bank has its principal seat. ARTICLE V. I. In § 8, section 2, of the Bank Act following the word "drafts" in No. 2 are inserted the words "and checks." II. In § 13 of the Bank Act following the words "are liable" in No. 2 are inserted the words "also checks, for which at least two guarantors known to be solvent are sureties." III. In § 17 of the Bank Act following the words "are surety" are inserted the words "or checks, for which at least two persons known to be solvent are liable." 83 National Monetary Commission IV. In § 32, section 1, of the Bank Act following the words " relative to the purchase and sale of gold, bills" is inserted "checks." V. After § 47 of the Bank Act, the following amendment is inserted as § 47a: § 47a. For those private note banks to which the restrictive provisions of § 43 do not apply the decrees of § 17 are in force in regard to the covering for their outstanding notes. ARTICLE VI. I. Article 6 of the act of June 7, 1899 (Reichs-Gesetzbl., p. 311), is remodeled as follows: To § 13 of the Bank Act No. 3 under (b) is added, following the words "of the market value/' "on the same footing with these mortgage bonds are the debentures of domestic incorporated mortgage institutions made out to bearer, as well as those debentures made out to bearer of the other aforementioned institutions and banks which have been issued against loans made to domestic municipal corporations, or against the acceptance of a guarantee by such corporations.'' II. In § 13 of the Bank Act the following provision is inserted under No. 9: Interest-bearing loans for not longer than three months may be made on the security of claims which are entered in the imperial register of debts or in the state register of a German state. The maximum amount of such loans is to be three-fourths of the market value of the government bonds for which such claims may be exchanged. 84 Renewal of Reichsbank Charter III. Following § 20 of the Bank Act are inserted the following provisions as § § 20a and 20&: § 20a. If the lien on a claim entered in the imperial register of debts or the state register of a German state (§ 13, No. 9) is to be recorded in the public register of debts in favor of the Reichsbank, it is sufficient to have the motion certified to by the persons whose signature, according to § 38, will render the Reichsbank liable. Where § 38 demands the signatures of two members of the Reichsbank Directorate, other officers of the Reichsbank, made known to the board of the register of debts by the bank, will be permitted to certify. The provisions of § 183 of the law relative to matters of voluntary jurisdiction apply to the certification. § 20b. If a lien has been entered in the register of debts in favor of the Reichsbank (§ 13, No. 9), the bank acquires the lien even if a third party should have a right to the claim, and the lien takes precedence over the prior lien of a third party unless the claim of the third party was registered at the time of the registration of the lien in the register of debts, or was at that time known to the Reichsbank or was not known through gross negligence. Should the debtor be dilatory in paying the debt secured by the lien, the board of the register of debts is empowered and bound to hand out to the Reichsbank, even without proof of such delay, government bonds payable to bearer, against cancellation of the registered lien or part of the lien, unless there exist a legal order prohibiting such delivery to the Reichsbank, or unless 85 National Monetary Commission there are recorded in the register of debts rights of third parties or restrictions in favor of third parties which were registered prior to the lien of the Reichsbank. The lien is,also liable for the expenses incurred in the delivery of the bonds. The board of the register of debts must inform the Reichsbank of subsequent entries when the bonds are handed out. The provisions of § 20 apply to the satisfaction of the claims of the Reichsbank through the bonds handed out to it by the board of the register of debts. ARTICLE VII. The following provision is substituted for § 22 of the Bank Act: The Reichsbank is obliged to take charge of the business of the Imperial Treasury without compensation. The Reichsbank is empowered to take charge in like manner of the business of the treasuries of the federal states. ARTICLE VIII. Articles 3, 4, 5, and 6 of this act become operative on January 1, 1910; the remaining articles will take effect on January 1, 1911. Given under our own hand and imperial seal. EXPLANATORY BRIEF. In accordance with § 41 of the Bank Act of March 14, 1875 (Reichs-GesetzbL, p. 177), the Imperial Government reserved to itself the right, after giving one year's notice, either to liquidate the Reichsbank (the first date being 86 Renewal of Reichsbank Charter January i, 1891, and after that every ten years) and to acquire its real estate at its book value, or to acquire all of the shares of the Reichsbank at their nominal value. The consent of the Reichstag has to be obtained for an extension of time. The Imperial Government has not as yet exercised its right to give notice of the termination of the existing status. The current term of ten years will terminate on December 31, 1910; the last day for notice to be given is December 31, 1909. There is as little reason now as there has been heretofore to make any changes in the organization of the Reichsbank created by the Bank Act. The constitution of the Reichsbank has effectually stood the test during its life of more than thirty years, even in the face of the extraordinary strain to which the institution was subjected by the great demand for capital and money which manifested itself in the years 1906 and 1907. This bill therefore leaves unchanged the tried fundaments of the bank's constitution. While upholding the existing banking system, it embodies provisions designed to meet the increasing needs of business. In the first place, the purpose of the bill is to enable the Reichsbank to exert its activity on a larger scale. This is to be accomplished through the reopening and gradual increase of the surplus (art. 1) as well as through the elevation of the limit of the tax-free note circulation (art. 2). Furthermore, the bill looks to the stability of the currency by making the notes of the Reichsbank legal tender (art. 3). In connection therewith it gives a larger 87 National Mon etary Commission sphere of usefulness to the notes of the four private banks of issue still in existence (art. 4). With reference to the act of March 11, 1908, relative to checks (Reichs-Gesetzbl. y 1908, p. 71), the bill authorizes the Reichsbank and the private banks of issue to purchase checks (art. 5). Finally, it increases the kinds of collateral on which the Reichsbank may make loans (art. 6), and substitutes for § 22 of the Bank Act, in regard to the obligation of the Reichsbank to take charge of the business of the Imperial Treasury, a new provision which removes any doubt concerning the meaning of § 22 (art. 7). I. The Reichsbank's own resources consist of the capital stock and the* surplus. The capital, which in the beginning was fixed at 120,000,000 marks, was increased by Article I of the act of June 7, 1899 (Reichs-Gesetzbl., p. 311), to 180,000,000 marks. The surplus has, through its reopening provided for in article 2 of that act, as well as through the addition of the premium realized on the issue of shares of the Reichsbank, been brought up to 64,814,000 marks. Thus the Reichsbank's own resources amount at the present time to 244,814,000 marks. The funds of the other largest European banks of issue compare as follows: Bank of France. Francs. Capital Surplus 190,502,314 Bank of England. Pounds. 14,553.000 Bank of Austria-Hungary. Bank of Russia. Crowns. Rubles, 210,000,000 34.5I3.I94 3,000,000 15.305.349 __. 2 2 5 , 0 1 5 , 5 0 8 i7.553.ooo 225,305,349 In German, currency (marks) 1 8 2 , 2 6 2 , 5 6 1 358,607,790 191.509,547 Total 5,000,000 118,800,000 Renewal of Reichsbank Charter Thus the resources of the Reichsbank are exceeded only by those of the Bank of England. This bank, however, as well as the Bank of France, and the Bank of Austria-Hungary to some extent, has invested its capital in loans to the State or in government bonds, while the Reichsbank has its capital fully at its disposal for the performance of its actual tasks. In deciding the question as to whether nevertheless a further increase of the resources of the Reichsbank is desirable, it should be borne in mind that in the case of a central bank of issue its own funds are of less importance than they are in the case of other banking institutions; they serve principally as a guaranty fund for the creditors of the bank while the working capital is created through the notes issued and the funds deposited in the bank. The experience of all the banks of issue prove this. As a guaranty fund for the creditors of the Reichsbank its present capital is fully sufficient. The bank does not require an increase of its resources for the task directly laid upon it as a bank of issue and for the sake of the bulk of its business resulting from this capacity. Such an increase would lead, however, to an improvement in its condition, although, considering the aggregate of the liabilities of the Reichsbank, particularly in the matter of outstanding notes and outside funds, the condition of the Reichsbank would not be greatly affected even by a considerable increase in the capital. The supposition that an increase in the capital would find immediate expression in an increase in the metallic stock of the Reichsbank is erroneous. At any rate there is no guaranty that the 39 National Monetary Commission shares disposed of within the country will be paid for in gold. Very likely the payments would be made principally through the medium of bank notes or by means of deductions from current accounts, which would for this purpose have been strengthened through the discounting of bills or the obtaining of loans on collateral. Thus payments would either be made from the funds of the Reichsbank itself or the money be taken from the currency in circulation, which latter withdrawal in turn would, in part at least, have to be made good by recourse to the Reichsbank. An increase in the capital of the Reichsbank would not therefore permanently increase its specie reserves. An increase in capital will not influence the rate of discount, at least not for any length of time. It might have a temporary influence, but it would only tend toward dearer money. The original capital of a bank of issue is of no importance with respect to the rate of discount, which is governed by the state of the money market at large. Considering the large sums circulating in the money market, the capital of the Reichsbank can not, even if increased considerably, have an important influence on this market, the more so as it has no direct connection with the metallic stock of the Reichsbank. Neither does the Reichsbank need its own capital for the foreign exchange business—the purchase of foreign bills—the importance of which with respect to the discount policy of the bank is universally acknowledged. This business can be done exclusively with its own notes. From this point of view, therefore, an increase in the capital is not necessary. 90 Renewal of Reichsbank Charter The Reichsbank requires a working capital of its own for investment in real estate or in securities which are not a legal covering for notes, and especially for its loan business, and the discounting of treasury bills, and for no other purpose. For this branch of its activities, however, the deposits may be employed in addition to the capital and surplus. Appendix I will show that even at the times of the greatest strain the bank's own funds plus the deposits have exceeded by far the aggregate of loans and of the treasury bills discounted, while on an average during the year the original capital alone sufficed for these investments, so that the surplus was available for the real estate account, whose development may be ascertained from Appendix II. Only for the remainder of the assets (credits with foreign correspondents, noninterest-bearing advances in connection with gold importations) was it necessary to employ part of the deposits. Although up to the present time the Reichsbank's own funds have thus sufficed for the purposes for which they are intended and the necessity of adding to them does not make itself felt at present, it is of course impossible to tell whether the operations of the bank will not develop in future years to an extent which would render desirable the existence of larger funds of its own. An increase in the volume of loans, in particular, is quite possible, and moreover, it can hardly be expected just now that the demands upon the bank in connection with treasury bills will decrease. It has happened repeatedly (see Appendix I)—and this is a contingency that may of course occur in future—that the maximum demands on 91 National Monetary Commission the Reichsbank in both these connections have been made at the same time and perhaps at a time when the volume of deposits has been below the average. Furthermore an increase in the operations of the Reichsbank will naturally result in an increase of the other assets, those not available as covering for note circulation, particularly the real estate account, the credits with foreign correspondents, and the noninterest-bearing advances in connection with gold purchases. For these reasons it is advisable to consider, even at the present time, an increase in the funds of the Reichsbank, based on these possibilities. For this purpose, on the one hand, the increase of the original capital, on the other, the strengthening of the surplus, must be considered. As regards the significance of its own resources for the Reichsbank, it makes no difference which of the two funds is increased; both have the same tasks to accomplish. The only question is whether the increase of the original capital or the strengthening of the surplus will be the best means of augmenting the capital. In view of the possibility of strengthening the surplus by gradual additions and considering the status of the surplus as distinguished from the original capital, it seems advisable to choose the method of strengthening the surplus. This would achieve for the Reichsbank the same results that an increase of the original capital would bring about, while presenting in a lesser degree the disadvantages of the latter course. 92 Renewal of Reichsbank Charter First of all it is impossible that an increase of the surplus, effected through yearly assignments from the net profits of the Reichsbank, should have a disadvantageous effect upon the money market, such as might result from the increase of the capital at one stroke. The enlargement of the resources of the Reichsbank through yearly additions out of the net profits is better adapted to the development of business than the augmentation of the original capital by means even of several successive additions. While an enlargement of the capital makes it more difficult for the Reichsbank to adjust its business to general economic conditions increases the danger that the capital could not be used profitably in times of redundant money, this objection does not hold in the case of an increase of the surplus, as no interest is paid on it. Although the management of the Reichsbank has never laid particular stress on the obtaining of especially large profits, it is, on the other hand, its duty to see to it that the profits rise to their due level relatively to existing conditions. It would be a mistake to assume that the profits which the last annual statement shows as a result of peculiar economic conditions will be permanently realizable. On the contrary, periods of cheap money will of themselves bring about a decrease in dividends. It is not altogether impossible that at times when money is very cheap the Reichsbank, whose sphere of operation will become more limited with the growth of the national wealth, the constant expansion of other credit institutions, etc., will be compelled to draw upon the surplus for the distribution of the regular dividend of $% P e r cent. 93 National Monetary Commission This possibility would be still greater in case of an enlargement of the actual capital and might result in a permanent drop in the value of the shares of the Reichsbank below their rate at the time of emission, possibly even below their par value. Such a drop in the market value of the shares would not only injure the credit of the Imperial Government, but would also shake the confidence of the nation in the Reichsbank and thereby in the stability of the German monetary standard, which would react unfavorably upon the entire economic life of Germany. For these reasons the bill proposes to effect the increase of the Reichsbank's own funds, which is acknowledged to be desirable, by means of additions to the surplus. II. The system, created by § 9 of the bank act, of indirectly limiting the volume of notes in circulation by imposing a tax of 5 per cent on the amount of notes issued over and above a sum which exceeds the cash reserve by a certain amount (stipulated separately for each bank of issue), has been shown to have worked perfectly well by the experience of the many years that* have elapsed since the establishment of the Reichsbank. Although a certain indirect connection between the limit of untaxed note circulation and the action of the Reichsbank in regard to the discount rate must be admitted in so far as the exceeding of the contingent and the raising of the discount rate presuppose increased demands upon the Reichsbank, a direct influence on the discount rate through the fixing of the note contingent can not be expected. In fact, the 94 Renewal of Reichsbank Charter management of the Reichsbank has never allowed the tax imposed on the excess circulation to have any decisive influence on its discount policies. As therefore the discount policies of the Reichsbank will not be favorably affected by the elimination of the contingent, there is no reason to abandon this system. On the other hand, it seems altogether desirable to maintain the contingent system, as the exceeding of the contingent has more and more developed into a danger signal heeded by business men. The present amount of the tax-free note contingent can, however, no longer be regarded as sufficient. As has already been stated in giving the reasons for the draft of the act relative to the amendment of the bank act of June 7, 1899 (Reichstag Documents, No. 95, tenth legislative period, first session 1898-99, pp. 8, 9), the conditions on which the adjustment of the tax-free note contingent of the Reichsbank was originally based no longer exist, nor could the increase of the contingent provided for in the act mentioned above keep up with the development of business. Appendix III shows how the amount by which the contingent has been exceeded has been steadily growing since 1901. The figures for 1906 prove the inadequacy of the present contingent, showing that it was exceeded seventeen times with a maximum excess of 572,644,757 marks, but this is evinced above all by the events of the year 1907. That year shows no less than twenty-five instances, of which the excess reported on December 31 reached the amount of 625,974,363 marks, a maximum never reached before. At the same time it happened for 95 National Monetary Commission the first time in 1907, by reason of the large demands of business, that the Reichsbank had a note circulation which even in its yearly average exceeded the contingent, and that by more than 58,000,000 marks. Although one can not consider these two years as a general demonstration, because they were periods of exceptional financial strain, it has become evident that the present contingent of the Reichsbank is insufficient for the increased demands of business due to the increase of the population and the accelerated economic development in Germany. Under such conditions the present limitation of the Reichsbank's note circulation ceases to have any value. The too frequently resulting transgression of the normal limit causes a useless disturbance of business. The increase of the tax-free note contingent therefore appears to be a measure the justification and necessity of which are to be found in the increased development of our national economy. In establishing this increase the fact has to be reckoned with that the demands on the Reichsbank are regularly made to an especially large extent at the quarter days. The condition, resulting from custom, that at the beginning of a quarter large liabilities have to be met—for instance, in regard to mortgages, rent, interest, and salaries—causes at those times an extraordinarily heavy demand for instruments of payment, which it is the Reichsbank's unavoidable obligation to meet. The present contingent has proved absolutely insufficient in view of this increased demand, which has nothing to do with the fluctuations in the general economic situation. It is particularly on account of the periodical excess at the 96 Renewal of Reichsbank Charter quarter days that the Reichsbank has had to pay considerable taxes on its notes. Such restriction in the satisfying of legitimate needs is unjustified and not in accordance with the intent of the contingent system. It therefore appears necessary to adapt the contingent to the demands of business by a further increase operative at the quarter days only. A corresponding increase of the tax-free note contingent of the private banks of issue can not be considered, for reasons explained in detail in the draft of the act of June 7, 1899 (Reichstag Documents, 1898-99, I, No. 95, p. 9), on the occasion of the last increase of the note contingent of the Reichsbank. III. § 2 of the Bank Act states expressly that there is no obligation to accept bank notes for payments which legally are to be made in currency. As can be seen from the report of the eighth commission on the draft of a bank act (No. 195 of the Documents, second period of legislature, second session, 1874, P- 22)> when the Bank Act was under discussion, the suggestion to make the notes of the Reichsbank legal tender did not meet with general approval. The report of the commission assigns as a particular reason for this the circumstance that such a measure could not be considered because shortly before, at the time of the discussion of the bill regarding imperial treasury notes, this quality had been denied the notes issued directly by the Imperial Government. The disinclination shown here to making the notes of the Reichs83703—10 7 97 National Monetary Commission bank legal tender can be explained principally by the earnest desire then prevailing to do away with the existing paper regime and to place the metallic currency on a firm foundation. This aim has been realized to such an extent that at the present time Germany's metallic circulation, and particularly that of gold coin, is abundant and sufficient for all demands of trade. On the other hand, bank notes also are regularly taken in payment, and for payments of large amounts they are used almost exclusively. It can not be denied that the present legal status of this mode of payment is somewhat uncertain. The legal disadvantage of the existing situation for the debtor is, in the first place, that the creditor has the privilege to refuse the acceptance of bank notes, which may put the debtor into demur. Even if thus far there has been no trouble of any consequence in this connection, nevertheless such institutions which have to make numerous payments, banks especially, generally feel obliged for precautionary reasons to provide themselves with a considerable stock of gold in order to be prepared for any demand for gold that they may have to meet. Although the situation as created by § 2 of the Bank Act has not been such as to demonstrate the imperative necessity of an amendment of this provision, still the fact can not be overlooked that the present state of the law makes it possible that, as a result of contingencies that can not be foreseen, especially such as are connected with financial crises, our monetary intercourse will be very injuriously affected, in such a way as to threaten the depletion of the stock of gold in the Reichsbank. 98 Renewal of Reichsb ank Charter The bill in making the notes of the Reichsbank legal tender, is simply giving a firm legal basis to the existing situation, i. e., the acceptance of notes as instruments of payment in all monetary transactions. The obligation of the Reichsbank to redeem its notes remains unchanged, as a matter of course. The essential characteristics of the bank note3—their security, the method of emission, the possibility of adapting the amount of their circulation to the fluctuating demands of the market—remain unchanged, as well as their legal character, which embodies a claim on the Reichsbank. The investment of the notes of the Reichsbank with the quality of a legal tender can not possibly result in any harm to the currency system, while it has the advantage of preventing trickish behavior on the part of creditors and of securing for critical times a discharge of pecuniary obligations in accordance with existing methods. In proposing this measure the bill follows the examples of England and France. In England the notes of the Bank of England have been legal tender since January i, 1834. I n France the notes of the Bank of France were invested with this quality by the acts of August 12, 1870, and August 3, 1875. The conferring of the legal-tender quality upon the Reichsbank notes does not in any way affect the maintenance of the gold standard, as is proved by the example of the Bank of England. In order to emphasize this more strongly, the words " legally current German money " in paragraph 18 have been replaced by "German gold coin." This expresses beyond a doubt that even a single note of 99 National Monetary Commission the denomination of 20 marks must be redeemed in gold, although the amount of 20 marks comes still within the limit up to which imperial silver coin is decreed a legal tender in article 9 of the currency act of July 9, 1873. (Reichs-GesetzbL, p. 233.) That on the presentation of a number of 20-mark notes, the amount exceeding 20 marks must on demand be paid in gold, would, as it is, follow from the existing provisions pure and simple. In view of the fact that the private banks of issue are not permitted to issue any notes of the denomination of 20 marks, it seems unnecessary to enact a provision with reference to them in accordance with the amendment of paragraph 18. The provision, therefore, in regard to the redemption of the notes of the private banks of issue remains unchanged—that is, according to § 44, section 1, No. 4, of the Bank Act, redemption has to be effected in legally current German money. The unambiguous language used leaves no doubt but that " current German money" means metallic coin solely, and not the notes of the Reichsbank which are to be invested with the legaltender quality; this is, moreover, expressly confirmed by the tenor of paragraph 8, section 2, of the bank act, which mentions current German money as part of the metallic stock. Heretofore the Reichsbank has, indeed, as far as the provisions of § 186 allowed it free action, complied without exception to all legitimate demands of business. The necessity of maintaining unimpaired credit of the bank notes and the absolute stability of the gold standard demands that this remain unchanged. The management 100 Renewal of Reichsbank Charter of the bank therefore will at all times earnestly endeavor in the discharge of the obligations imposed upon it with respect to redemption to act in accordance with the wishes of business. The action of the Bank of England is restricted by the provision that in payments made by the bank itself its own notes are not a legal tender. On account of the peculiar nature of the giro business (the system of payments by means of transfers to, and deductions from, accounts current) and the large number of branches of the Reichsbank, there are serious objections to embodying a like provision in the bank act. The Reichsbank might otherwise be under the necessity, in the transfer of sums from one account to another, to make gold payments at its branches up to any amount, although it is altogether impossible for the bank to keep at all times and in all places gold reserves exceeding the regular demand in order to provide for such emergencies. Furthermore, the organization of these branches, which are in most cases managed by a single official, necessarily limits the amount of their gold reserves. Until now such demands have not been made upon the Reichsbank; they may, however, occur in future. Under these circumstances the clause, which seems fair as regards the Bank of England, in view of its different business methods and the small number of branches, appears inapplicable in the case of the Reichsbank, just as, for like reasons, it could not very well be applied in the case of the Bank of France. Furthermore, the obligation of the Bank of England to redeem its notes is limited in practice almost exclusively to Lon- IOI National Monetary Commission don, the obligation of its branches to redeem the notes issued by them being relatively of slight importance. It goes without saying that the Reichsbank will continue in the future, as it has done heretofore, to endeavor to make all payments as far as possible in the kind of money desired by its clients. The objection raised by the commission which drafted the Bank Act against investing the notes of the Reichsbank with the quality of a legal tender on the ground that this was denied to the imperial treasury notes can not be sustained. At the present time the imperial treasury notes, which, by the act of June 5, 1906 (Reichs-GesetzbL, p. 730), have been limited to denominations of 5 and 10 marks, count for very little now in the circulation compared to the large issues of the Reichsbank notes. It should be particularly noted in this connection that already at the time of the debates relative to the draft of the Bank Act in the year 1874, according to the report of the commission (Reichstag Documents, 1874, II, No. 195, p. 22), " a number of the members of the commission declared themselves to be of the opinion that it would be advisable to invest the notes of the Reichsbank with the legal-tender quality, and that such a step would have great advantages and no disadvantages for the public." It is necessary in the interest of uniformity in the German currency system that the quality of a legal tender be reserved for the notes of the Reichsbank. If these privileges were to be extended to the notes of the private banks of issue, the result would be the creation 102 Renewal of Reichsbank Charter of various kinds of money for Germany, and the uniformity of the German currency system, so laboriously acquired, would be again destroyed. Regard for the interests of the private banks of issue does not justify such a measure. In order, however, to enable the private banks to exploit the privilege of issue more thoroughly, the bill provides that the Reichsbank shall not only continue to accept in payment the notes of the private banks according to paragraph 19 of the Bank Act, but shall also exchange them for Reichsbank notes within their natural zone of circulation. By means of this provision, which insures to the holders of notes at all times the possibility of exchanging their notes for legal tender at all of the Reichsbank branches within their state limits, the notes of the private banks will be rendered much more available for the purposes of business than they have been up to the present. IV. The bill authorizes the Reichsbank and the private banks of issue to purchase checks. Since the act of March 11 of this year, in relation to checks, has made it possible for the holder of a check to obtain legal protection for his claim, just the same as the holder of a bill, the fundamental objections to the purchase of checks have been removed. In view of the altered economic conditions, the Reichsbank considers it desirable and even necessary that it be empowered to engage in the business of purchasing checks. Whether or to what extent it will make use of this authorization will depend mainly upon the development of the economic situation, the question 103 National Monetary Commission presenting some factors that have to be carefully considered. . Such an arrangement would offer to the public the advantage that the holder of a check payable in another city could get cash for it at any moment by having it discounted, whereas under the present method the amount is paid only when the check has been collected— that is, after a lapse of several days, and no liability is accepted by the bank for the presentation of the check for payment within the legal time limit. The discounted check, in accordance with its intrinsic purpose, would be presented for collection by the bank as quickly as possible and its equivalent put at the disposal of the party presenting it by means of the giro (his account current being credited with the amount), the necessity of a cash remittance being thus avoided. It is to be expected that the purchase of checks by the Reichsbank will stimulate the use of checks and in general promote monetary intercourse without the employment of cash. In the interest of the public such an extension is greatly to be desired. This new function of the Reichsbank would be fully in line with the task assigned to it in § 12 of the Bank Act to facilitate monetary settlements. V. According to article 6 of the act of June 7, 1899 (ReichsGesetzbl.y p. 311), debentures made out to bearer, issued against loans made to domestic municipal corporations or guaranteed by them, are placed on a level as regards their availability as collateral for loans with the bonds 104 Renewal of Reichsbank Charter of agricultural, municipal, or other institutions under government supervision, or of German mortgage banks. This extension of the class of securities against which loans may be made is based on the fact that these debentures offer fully the same measure of security as the bonds do and, in the general opinion of business men, are held to be their equal. (See Reichstag Documents, 1898-9, I, No. 95, p. 15.) The same applies to other debentures issued by agricultural, municipal, or other public mortgage institutions, for the security of such paper is eo ipso established by the constitution of these institutions, which are invested with a public character. It seems advisable, therefore, to admit these debentures as collateral for loans, independent of the nature of the claims which serve as security. The bill makes, in addition, the claims registered in the imperial and state registers of debts available as collateral. The act of May 31, 1891 (Reichs-Gesetzbl., p. 321), makes it possible for a holder of imperial bonds to convert them into registered debt of the Empire made out in the name of a particular creditor. The conversion is effected by registration in the imperial register of debts against delivery of the bonds. In case of cancellation of the registered claim the creditor receives bonds bearing the same rate of interest and of equal nominal value. A number of federal states have made similar arrangements in regard to their bonds. While, according to § 13, No. 36, of the Bank Act the holders of imperial and state bonds can secure loans on them at the Reichsbank, the Bank Act in its present 105 National Monetary Commission form does not permit of such loans against claims entered in the government register of debts. This in a measure places the holders of government bonds in a favored position relatively to those having credits in the government register of debts. Such a preference is not justified in view of the purely technical difference between the two classes of creditors. This disadvantage will naturally be felt more and more with the extension of the use of the public register of debts. Even now many financial institutions, particularly the savings banks and provident societies, have invested a considerable part of their resources in registered claims. In order to enable them to utilize their registered claims for credit purposes without losing time through their reconversion into bonds, which loss of time might prove disastrous in times of crisis, it is urgently to be desired that the Reichsbank be authorized to loan on such claims. This will, at the same time, enable those creditors of the Government who are now in the habit of keeping large amounts of government securities permanently with the Reichsbank, in order to borrow temporarily against them, to have recorded in their stead for such purposes a claim entered in the public register of debts, a remark being duly inscribed regarding its serving as security. This would relieve the Reichsbank of the custody of the securities and the tasks it would impose, and would simplify interest payments to the creditors of the state. The carrying out of this measure makes it imperative that the legal status of pledges of this kind be such that they will absolutely guarantee the security and liquidity 106 Renewal of Reichsbank Charter of the lien. The general ordinances of the Civil Code re mortgage rights on claims are not sufficient for this. They would not protect the Reichsbank in case of a previous assignment of the claim to a third party, that might not be recorded in the register of debts, nor against a prior unrecorded proof of the right of third parties to the claim. It is further not possible for the Reichsbank, according to the existing laws governing the register of debts, to demand the delivery of bonds, particularly without the participation of the holder of the claim in the transaction. For this reason, the bill, after the pattern of the act of March 22, 1893 (ReichsGesetzbl.y p. 131), which at present is operative only with regard to the official bond of the Reichsbank employees, places the mortgaging of such a claim to the Reichsbank on the same footing with a mortgage on movables, and provides in case of tardiness on the part of the debtor for the immediate payment to the Reichsbank out of the amount of claim. The privileged position of the Reichsbank resulting from this is justified on the ground that the Reichsbank, as the ultimate source of money and credit in the country, must in critical times be the first to satisfy the demands of credit and because this institution alone can have anything to do with loans of the kind in question. For the rest the Reichsbank enjoys even at the present time through § 20 of the bank act certain privileges in the matter of realizing on pledged property; it enjoys these privileges in view of the importance which the liquidity of its investments has for the entire economic life of 107 National Monetary Commission Germany. At the same time the bill provides in the interest of the creditor of the Government an easier method of recording the mortgage by simplifying the regulations which are in existence in the various laws governing the register of debts, such as, for instance, those of paragraph 10 of the imperial register of debts and paragraph 10 of the Prussian law governing the state register, dated July 20, 1883 (Preuss. Gesetzsamml., p. 120), which require an attestation of the motion by a court or a notary, which is both laborious and costly. REMARKS RELATIVE TO VARIOUS POINTS. RE ARTICLE I. According to the bill the increase in the surplus is to be effected by the assignment to it of 10 per cent of the annual profits, after payment of a dividend of 3% per cent. Such a provision would mean a probable annual increase in the surplus fund of the Reichsbank of about 1,800,000 marks, according to the estimate given in Appendix V, based upon the actual results of business. This increment appears, on the one hand, to be sufficient; on the other, it precludes an excessive increase in the Reichsbank's own funds for some time to come. The bill therefore does not fix a limit to the increase, especially as, on the termination of the ten-years' period beginning January 1, 1911, an opportunity will be given—in accordance with § 41 of the Bank Act—to determine whether the fixing of a maximum amount should prove necessary or advisable. The bill provides further that the annual assignments to the surplus are to be borne in equal shares by the share- 108 Renewal of Reichsb ank Charter holders and the Imperial Government. In the absence of this provision three-fourths of the amount would have to be borne by the Government and one-fourth by the shareholders, while if, in accordance with § 41 of the Bank Act, the reserve should be distributed, the Government and shareholders would participate equally. Although for this reason alone the provision would be fair and reasonable, it is rendered still more so by the fact that, as the bill provides for an increase in the amount of the taxfree note contingent, the Government will henceforth suffer a considerable loss from the diminution in the amount of the tax. This is of all the greater importance, as the Government is at present endeavoring to find additional sources of revenue for its budget. We must remember besides that out of the profit of the Reichsbank a dividend of 2>% per cent is guaranteed the shareholders by law; in proportion, therefore, as an increase of the bank's own funds tends to increase its sphere of activity and strengthens the foundations on which it rests, the results of such a measure will also be beneficial to the shareholders, particularly in regard to the market value of the shares. RE ARTICLE 2. The act of June 7, 1899, increased the tax-free note contingent of the Reichsbank to 450,000,000 marks, increasing at the same time the aggregate amount of the taxfree unsecured note circulation of all the banks of issue to 541,600,000 marks. In the meanwhile, in accordance with § 9, section 2, of the Bank Act, the quotas of the Frankfurter Bank, the Bank for Sliddeutschland, and the 109 National Monetary Commission Braunschweigische (Brunswick) Bank (Nos. 12, 20, and 24 of the supplement to § 9 of the Bank Act) have been added to that of the Reichsbank, whereby the share of the Reichsbank in the total contingent has risen to 472,829,000 marks. The increase of the contingent of the Reichsbank to 550,000,000 marks, as proposed by the bill, would make it conform to the increased note circulation and suffice to prevent a too frequent excess outside of the quarter days. By reason of the great demands made regularly upon the Reichsbank on the quarter days, a considerably larger increase of the contingent is desirable. The tabulations of the cash reserves and the note circulation, which according to § 10 of the Bank Act must be made on the 7th, 15th, 23d, and last of each month for the purpose of tax calculating, show such a large increase in the amount of the unsecured note circulation at the end of each quarter that the present contingent is exceeded by much larger amounts than that of the proposed regular increase in the contingent. The statements for the last of March, June, September, and December of each year show the highest figures. For these reporting days, therefore, the need of a further increase in the contingent is most urgent. As a remedy the bill proposes a further increase in the contingent of 200,000,000 marks for the quarter days. The increase in the tax-free unsecured note circulation thus provided for will in all probability suffice to prevent a too frequent and too large excess issue, which is to be deprecated in the interest of sound business. On the other hand, the increase is sufficiently moderate not to render nugatory the policy of restricting bank-note circulation. no Renewal of Reichsbank Charter RE ARTICLE 3. Article 3 cancels, as far as the notes of the Reichsbank are concerned, the present provision of § 2 of the Bank Act, which prescribes that in the case of payments which legally must be made in money bank notes need not be accepted. R E ARTICLE 4. The provision given under No. 1 expresses the obligation of the Reichsbank to redeem its notes at all times in German gold coin. While, furthermore, according to § 19 of the Bank Act, the Reichsbank is merely bound to accept the notes of the banks indicated by the Imperial Chancellor in conformity with § 45 of this act at their full face value, in Berlin as well as at certain branches, as long as the issuing bank punctually discharges its obligation to redeem notes, the bill imposes the further obligation on the Reichsbank to exchange these notes against its own within their natural circulation territory, fixed by the Bank Act— that is, in each case within the State that has authorized the private bank to issue notes. This enables the holder of the notes of a private bank who is not in debt to the Reichsbank to hand them in at one of its offices and get Reichsbank notes in exchange. R E ARTICLE 5. Article 5 authorizes the Reichsbank to purchase checks. In view of the amendment of § 13, No. 2, of the Bank Act, checks of the class mentioned in § 13, No. 2, may byreason of the provision embodied in § 44, section 1, No. 1, in National Monetary Commission also be purchased by those private banks of issue which are not subject to the restricting stipulations of § 43. In connection therewith the bill makes further amendments in some of the provisions of the Bank Act which are rendered necessary by this authorization. Checks, particularly, will be permitted as cover for the notes under the same conditions that goverji bills. In order to admit checks for note covering in the case of the private banks, a special provision has been inserted, § 47a. R E ARTICLE 6. Article 6, No. I, extends the class of securities available for collateral in favor of the debentures of incorporated mortgage institutions. This holds good also for the loan business of the private banks of issue. Article 6, No. II, authorizes the Reichsbank to grant interest-bearing loans for not longer than three months on the security of claims recorded in the imperial register of debts, or in the register of a federal state. Heretofore interest-bearing loans were limited to movable liens. The limiting of the loan to three-fourths of the market value of the bonds for which such a claim is exchangeable is in accord with the loan limit stipulated in § 13, No. 36, of the Bank Act. In order to facilitate the recording in the imperial register of debts, or the register of a federal state, of the liens to be entered in favor of the Reichsbank, it is provided (§ 20a) that in place of the more rigorous form demanded by the laws relating to the register of debts it shall be sufficient to have the motion for registration of 112 Renew al of Reichsbank Charter the lien in the register certified to by the persons whose signature renders the Reichsbank liable. (§ 38 of the Bank Act; ordinance of the Imperial Chancellor of December 27, 1875, Zentralblatt fur das Deutsche Reich, p. 820.) In order to facilitate business the bill provides that in place of the two members of the Reichsbank Direktorium, other officers of the Reichsbank may be assigned by the Reichsbank Direktorium for the task of certification; they must be made known to the board of the register of debts. The provision in § 206 is designed to preclude the possibility that a third party may enjoin the Reichsbank on account of a prior assignment or mortgage which was neither recorded in the register of debts nor known to the Reichsbank or unknown through gross negligence. The provision in § 206 further empowers the Reichsbank, in case the debtor is dilatory, to apply to the board of the register of debts for government bonds against partial or total cancellation of the registered claim. For this the written motion of the Reichsbank shall suffice, and it shall not be necessary that any other person participate in it, particularly the creditor of the register of debts, as would be required by the laws relative to the register of debts. When such a motion is presented, the board of the register of debts shall not ask for evidence of any kind, particularly no proof of the tardiness of the debtor, and the board can decline such a motion only in so far as this is provided for in § 20b; in particular, the board is not permitted to decline to hand out the bonds on the score of liens which were entered in the register of debts only after the mort83703—10 g "3 National Monetary Commission gage in favor of the Reichsbank had been recorded, neither may it make use of the right which it would otherwise have of sequestering the bonds. After having received the government bonds from the board of the register of debts, the Reichsbank acquires, in accordance with §§ 1287 and 1293 of the Civil Code, a lien on them to which the provisions of the Code relative to liens on movable property apply; as this is a case of a lien on movable property in connection with the business of loaning on security, the privileges accorded the Reichsbank by § 20 of the Bank Act in regard to the enforcement of its claims in the matter of liens will naturally be extended to the bonds thus handed over to it. RE ARTICLE 7. Paragraph 22 imposes upon the Reichsbank the obligation to receive payments for account of the Imperial Goverment and to make them up to the amount of the government's balance without compensation for its services. This obligation was extended in § 11 of the acts relating to the Reichsbank of May 21, 1875 (Reichsgesetzbl., p. 203), which makes it part of the business of the Reichsbank to take charge of the funds of the Empire without compensation and keep records of the payments accepted and made for account of the Empire. Doubts have repeatedly arisen as to the extent of the obligations which the Reichsbank has in this respect. The provisions of the present bill prescribe in indubitable terms that the Reichsbank shall transact the business of the Imperial Treasury without compensation. In view of the business which naturally comes within the sphere of the 114 Renewal of Reichsbank Charter Imperial Treasury, this can apply only to transactions of the kind connected with the treasury system. The words "business of the Imperial Treasury" will therefore in the meaning of the bill be understood to include all fiscal transactions which the Imperial Chancellor assigns to the Imperial Treasury. § 35 of the Bank Act establishes beyond a doubt that payments are to be made by the Reichsbank for the Imperial Treasury only up to the amount of the balance in its favor in the bank. Otherwise the Reichsbank would be making advances to the Imperial Treasury, which is not permissible. Furthermore § 34 of the " Geschaftsanweisung fur die Reichshauptkasse," a issued by the Chancellor, fixes the minimum balance of the Imperial Treasury at 10,000,000 marks for the giro or current account by means of which the entire business of the Imperial Treasury is to be carried on. The bill renders superfluous § 11 of the a This paragraph reads: By means of the giro account of the Imperial Treasury at the Reichsbank the entire business of the former is done in such a way that the balance at the close of each day represents the credit balance of the government. The giro account of the Imperial Treasury is subject to the general regulations relative to the Reichsbank giro business; the minimum balance is fixed at 10,000,000 marks, and anybody may make payments into the account at the Reichsbank and all its branches without having to pay any dues. Should the credit balance of the Imperial Treasury fall below the minimum limit, the Reichsbank Directorate may, in accordance with arrangements made, use Imperial Treasury notes whose equivalent is credited to the giro account. The giro-account customers of the Reichsbank must use the giro account exclusively as their medium for doing business with the Imperial Treasury. The Imperial Treasury must be informed by the giro customer or the payer who has no account at the Reichsbank of every transfer or every remittance to its giro account; if necessary, the name of the debtor is to be given. 115 National Monetary Commission statutes of the Reichsbank, as the management of the balance of the Imperial Government at the Reichsbank and the bookkeeping and accounting for payments received and disbursements made for the Imperial Government are part of the functions of the Imperial Treasury. The privilege of the Reichsbank to undertake business for the treasuries of the federal states as long as such business is of a central nature, as in the case of the Imperial Treasury, remains unaltered. 116 APPENDIX I. —Investments of the Reichshank in loans upon securities and in treasury bills as compared with its own and outside funds. [In millions of marks.] Year. 1 Outside Capital, Surplus, funds.a yearly yearly total average average yearly amount amount. average amount. 2 3 4 i876___ 1877--i878_._ 1879--i88o_._ 119. 1 12. 0 120. 0 12.8 120. 0 I88I___ 120. 0 1882._. 1883--1884--1885--i886__. 1887--i888___ 1889--1890 i89i___ 1892--- 120. 0 120. 0 13-9 15.0 IS-5 16. 2 17.4 19. 0 218.8 177.6 184.7 199-9 185. 5 181. 1 171.7 204. 0 120. 0 20. 1 223.0 120. 0 21. 1 120. 0 22. 2 120. 0 22.8 23.7 243 25-7 28.4 29.8 235-6 284.6 352.4 381.8 385.5 361.5 464. 1 5X1-9 120. 0 120. 0 120. 0 120. 0 120. 0 120. 0 120. 0 >3 Investments in both loans Investments in treasury Investments in loans upon Total and treasury bills. bills securities. capital, Outside funds, surplus, total outside Maximum of the Maximum of the Maximum of the on day funds, year. year. year. Yearly Yearly of colyearly Yearly average average umn 13. average average amount. amount. amount. amount. Date. Amount. Date. Amount. Date. Amount. 5 349-9 310.4 318.6 334-9 321.0 317-3 309. 1 343.o 363- 1 376. 7 426.8 495- 2 525.5 529.8 507.2 612. s 661.7 6 51.0 49-3 52.5 53-0 51-3 57-3 54-4 45-8 49.2 52.5 50. 1 51- 1 52.0 699 89.4 99.0 97-6 8 7 Jan. Dec. Dec. Dec. Sept. Sept. Sept. Sept. Dec. Jan. Dec. Jan. Dec. Dec. Dec. June June 7 31 31 31 30 30 30 30 31 7 31 7 31 31 31 30 30 9 11 10 62. 1 65.4 66. 2 85.4 51.0 49-3 52.5 53-o 81.2 8.8 18.5 8.6 8.6 140. 1 21.3 104. 6 126. 9 102. 8 May Mar. Jan. Dec. Dec. Sept. Sept. Jan. Dec. Dec. Sept. Feb. 31 31 7 31 7 7 7 7 7 31 30 7 36.0 30. 0 H5-5 104. 6 13-5 1. 1 93- 1 186.2 0.6 146. 1 7.8 5-2 156.3 128.5 o This is the total of public and private balances. 102. 5 12 30. 1 60. 1 36.8 75-8 63. 0 54-4 70.5 88. s 80. 1 64.6 53- 1 70.5 97- 2 24. 0 28.0 53.o 72. 6 50. 0 45- 1 13.0 25.0 38.1 26. 1 04. 2 97-6 14 13 Jan. Dec. Dec. Jan. Dec. Dec. Sept. Dec. Dec. Jan. Dec. Jan. Dec. Dec. Dec. June June 7 31 31 31 31 31 30 31 31 7 31 7 31 31 31 30 30 62. 1 65.4 66.2 85.4 117.7 133-4 in.8 103.9 183. 1 143-5 162. 7 149-8 106. 1 211. 2 172. 1 156.3 128.5 15 170.5 167.0 161. 5 220. 0 174.1 166.6 145-5 210.8 267.5 221. 1 291. 1 274.8 302.8 348.2 347-7 501.0 536.9 safe APPENDIX I.—Investments of the Reichshank in loans upon securities and in treasury bills as compared with its own and outside funds—Continued. [In millions of marks.] Year. 1 Outside Capital, Surplus, funds, total yearly yearly yearly average a v e r a g e amount. amount. average amount. 2 3 4 1893--1894--1895--i896___ 1897--i898___ i899___ 120. 0 30- 0 120. 0 30. 0 120. 0 30. 0 120. 0 30. 0 120. 0 30. 0 120. 0 30. 0 120. 0 30. 0 452 492 499 484 47i 474 524 1900 120. 0 30. 0 512 1901 150. 0 40. S 1902 150- 0 1903--- 150. 0 1904--- 150. 0 1905--- 180. 0 1906 180. 0 43- 9 47- 1 So. 9 64.8 64.8 64.8 64.8 596 576 553 534 585 575 579 649 1907--- 180. 0 1908 180. 0 I n v e s t m e n t s i n treasury I n v e s t m e n t s in loans u p o n I n v e s t m e n t s i n b o t h loans Total bills. a n d treasury bills. securities capital, surplus, outside M a x i m u m of t h e Maximum of the M a x i m u m of t h e funds, year. year year Yearly Yearly yearly Y e a r l y average average a v e r a g e average amount. amount. amount. amount. Amount. Amount. Date. Amount. Date. Date. 5 4 3 5 3 4 7 7 8 6 6 7 8 3 6 3 3 602. 4 642.3 649-5 634-3 621. 4 624. 7 674. 7 662.8 787.1 770.5 750.8 735- 7 830.1 820. 4 824. 1 894. 1 6 93-8 1. 1 13- 2 06. 0 108*3 96.4 80. 7 80.0 72.8 74- 1 74-8 74- 2 72. 0 83.6 98. 1 91.4 8 7 Dec. Jan. Dec. Dec. June Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Mar. 31 7 31 31 30 31 31 31 31 31 31 31 30 31 31 31 149- 2 9 10 0.3 Apr. 15 11 5-o 211. 2 0. 2 D e c . 31 197- 2 0. 2 Jan. 178. 1 0. 7 5-8 D e c . 31 Mar. 31 215. 1 i-5 13- 4 51.8 70.9 77-9 89. 1 204.3 101. 7 284.5 364-3 255- 7 113- 6 141. 7 146. 2 161. 4 189.9 212.7 94. 1 81. 1 129.3 186. 1 12 96.8 146. 6 7 Jan. 7 Dec. Apr. Nov. Apr. Sept. Apr. Dec. 31 15 30 15 15 15 31 Jan. 7 D e c . 31 8.0 8.0 35-o 106. 2 26. 0 102. 2 25. 0 82. 2 81.0 127.8 190. 0 216. 0 196. 0 248.7 255-6 251.6 383.0 83.4 109. 0 93-4 124. 6 145-0 152. 7 163.3 173- 7 197. 2 194.9 238.0 14 13 Dec. Jan. Dec. Dec. Dec. Sept. Dec. Dec. Dec. Dec. Mar. Sept. Dec. Dec. Dec. Dec. 31 7 31 31 31 30 31 31 31 31 31 30 31 31 31 31 149. 2 129.3 219. 2 197. 2 207. 6 198. 2 161.6 227. 2 284.4 372.9 334-8 394-6 404. 0 540. 1 475-8 558.9 Outside funds, total on day of column 13. 15 373-3 331-4 439-5 443-3 426.4 431- 7 475-6 497-o 563.2 544-0 535- 2 532. 7 630.8 652. 9 658.5 656.6 Renewal of Reichshank Charter A P P E N D I X II.—Real estate and other assets oj the Reichsbank. Value of real estate. At the close of the year. Marks. 13.278, 000 15,628, 600 17,704, 600 i7.95o, 600 18,622, 600 18,633. 000 19,244. 500 19,298, 500 19,493. 500 19,663, 500 19,888, 500 20,207, 500 21,113. 500 21,282, 500 21,517, 500 22,261, 500 22,913. 500 22,945, 500 24,293, 500 29,857, 700 33,196, 700 33.452, 700 35,493, 700 35,623, 700 36, 026,000 37, 267,200 40,552, 900 42,523, 800 45.4i6, 700 47.S09, 600 50,095. 400 54.787, 400 56,989, 000 I8T6_ 187718781879- 1885i886_ 18871888. 18891890. 1893189418951896. 18971899-i9oo__ I90i__ I902__ 1903-1904-_ 1905-1906-_ 1907-1908.. a These are the amounts given in the annual reports of December 31 of each year sub " O t h e r assets" reduced by the value of the leal estate. 119 APPENDIX III.—Note circulation and metallic reserve on the days of an issue in excess of the contingent. D a t e of excess. A m o u n t of contingent. Metallic reserve. Cash reserve. N o t e circulation. A m o u n t in e x c e s s of continsent.a Note circulation and other dem a n d liabilities.** C a s h covering, lin t h e m e a n i n g ! M e t a l l i c c o v - [of p a r a g r a p h 91 ering for— of t h e b a n k act, for— Total N o t e of d e - N o t e circu- m a n d c i r c u lation.) liabil- l a t i o n . ities. 10 Marks. 1.025,939,000 P.cU 59.9 P.ct. 26,092,168 841,533,000 19, 2 2 4 , 0 9 7 986,991,000 61. o 52.0 65.2 824,345,000 12,185,240 964,293,000 61.1 52.2 65.3 547. 586,000 854.137.000 32,678,704 1,121, 6 7 9 , 0 0 0 60.6 46. 2 64. 1 521,225,000 55o. 1 3 2 . 0 0 0 826,620,000 2,615,328 1,047, 6 8 6 , 0 0 0 63.1 66.5 274,834,000 669, 509.000 700,524,000 1,009, 523,000 34.161,339 1,300,665,000 66.3 69.4 Sept. 3 0 282,085,000 770,880,000 796,622,000 1,150,527,000 71,824,197 1,477,684,000 67.0 52.2 Oct. 7 286,585,000 754,964,000 781,279,000 1, 1 1 3 , 0 9 3 , 0 0 0 1,419,947,000 67.8 53-2 70. 2 D e c . 31 286,585,000 734.579.ooo 764,478,000 1, 1 6 0 , 5 3 6 , 0 0 0 45.225,933 109,477,598 i» 5 0 8 , 7 3 2 , 0 0 0 633 48.7 65-9 52.1 Marks. Marks. Marks. Marks. 1881.C Dec. 31 273.875.000 514,440,000 559,419,000 859,388,000 Sept. 3 0 273.875.000 513.198,000 548,432,000 Oct. 273.875,000 503,248,000 538,284,000 Dec. 3i_ 273.875,000 517,828,000 Jan. 273.875.000 D e c . 3i_ 7 Marks 50.1 P.cL 65.1 1886. 69.3 1890. 7 288,025,000 678,107,000 705,265,000 1,097,497,000 104,204,805 1.365, 5 4 4 . 0 0 0 IS 288,025,000 697.433.ooo 726,449,000 1,048,322,000 33.849,368 1.366, 5 5 6 , 0 0 0 31 288,025,000 718,804,000 745,872,000 1,052,835,000 18,930,925 1.35i.775.ooo 31 288,025,000 758,690,000 788,313,000 1,102,588,000 26,247,380 1.450,336,000 67.0 64.0 61.8 66.5 68.3 68.8 292,117,000 738,604,000 770,460,000 1,101,095,000 38,517.708 i.473.566,ooo 67. 1 Sept. 3 0 293.400,000 914,524,000 943,276,000 1,282,764,000 46,086,301 1.725,302,000 Oct. 293.400,000 900,310,000 930,824,000 1, 2 4 4 , 9 3 3 , 0 0 0 20,709,895 1.657,039,000 293,400,000 853.077,000 878,406,000 1,320,089,000 148,283,795 1. 7 5 9 , 6 3 8 , 0 0 0 7i.3 72.3 64.6 293,400,000 869,145,000 897,988,000 1,227,202,000 35,811,520 1,625,846,000 293,400,000 879,661,000 911,099,000 1,248,508,000 44,008,225 1, 6 6 7 , 3 9 8 , 0 0 0 7 286, 585,000 741,967,000 771,069,000 1,108,053,000 50,399,293 1.425,345,000 Sept. 3 0 288,025,000 724,721,000 752,260,000 1,131, 733,ooo 91,450,838 1,446,746,000 Oct. Jan. 51.0 69.6 66.5 64-3 69.3 53-2 70.8 52.3 7i.5 53-o 48.5 73-5 74-8 66.5 70.8 70.5 70.9 64.9 66.6 64. o 53-5 52.8 50.6 48.0 49-3 47-3 73.2 72.9 73-3 67.1 69. 2 66.0 51.7 53-4 44-7 46. o 48.3 49-9 50.1 49-6 1893. Sept. 3 0 1895- Dec. 31 54-3 1896. Jan. Mar. 31 J u n e 30 293,400,000 871.733,ooo 902,267,000 1,229,996,000 34,328,672 i,720,646,000 Sept. 3 0 293,400,000 815,546,000 844,459,000 1,257,418,000 119,558,561 1.699,071,000 Oct. 293,400,000 804,190,000 835,344,ooo 1,207,093,000 78,352,771 1,630,443,000 293,400,000 804,576,000 830,378,000 1,257,925,000 134, 1 4 9 , 4 2 2 1,701,245,000 Dec. 31 1897. 7 293. 4 0 0 , 0 0 0 824,715,000 853,988,000 1, 1 7 8 , 6 8 2 , 0 0 0 31,291,117 1,594, 9 8 4 , 0 0 0 M a r . 31 293. 4 0 0 , 0 0 0 860,965,000 895,693,000 1, 2 0 1 , 2 8 3 , 0 0 0 12,189,540 1,612, 3 3 2 , 0 0 0 June 30 293. 4 0 0 , 0 0 0 864,717,000 899,729,000 1, 221, 3 2 6 ,0 0 0 28,197.149 1,721, 8 4 1 , 0 0 0 70. o 71.7 70.8 Sept. 3 0 293. 4 0 0 , 0 0 0 755,946,ooo 787,689,000 1,286,923, 0 0 0 205,829,552 1,691, 9 2 3 , 0 0 0 58.7 Oct. Jan. 50. 2 7 293, 4 0 0 , 0 0 0 748,188,000 777,670,000 1,242,109, 0 0 0 171,036,711 1, 6 2 7 ,6 8 9 , 0 0 0 60. 2 15 293. 4 0 0 , 0 0 0 771,653,000 804,745,000 1, 1 6 8 , 4 1 4 , 0 0 0 70,265,650 i,596, 9 0 1 , 0 0 0 31 293, 4 0 0 , 0 0 0 800,041,000 832,428,000 1,164,848, 0 0 0 39,024,022 1,604, 2 7 2 , 0 0 0 66.O 68.7 293, 400,000 811,954,000 840,361, 000 1,140,842, 0 0 0 7,083,688 1,557, 3 0 1 , 0 0 0 71. 2 52. 1 293. 4 0 0 , 0 0 0 826,556,000 854,295,000 1.319,972, 0 0 0 172,281,834 1,746, 3 7 6 , 0 0 0 62.6 47-3 64.7 293, 4 0 0 , 0 0 0 848,458,000 879,122, 000 1.233, 080,000 60,564,833 1.626, 5 3 8 , 0 0 0 68.8 52. 2 293. 4 0 0 , 0 0 0 882,833,000 917,336, 000 1,281, 217,000 70,478,234 1,734. 1 7 5 , 0 0 0 68.9 50.9 51.7 46.3 49.0 41.7 42. o 43-2 45-5 v44-o 45-4 46. 2 48.0 47-5 49-5 71.3 71.6 Nov. Dec. 31 1898. Jan. Mar. 31 Apr. 293. 4 0 0 , 0 0 0 86s,394,000 899,637, 000 1,213, 934,000 20,899,051 1, 6 7 2 ,5 7 2 , 0 0 0 June 293. 4 0 0 , 0 0 0 808,698,000 842,983, 000 1,265, 909,000 129,523,423 1,747, 9 5 5 , 0 0 0 293, 4 0 0 , 0 0 0 809,320,000 842,950, 000 1,202, 077,000 65.723,356 1,649, 7 3 2 , 0 0 0 293. 4 0 0 , 0 0 0 738,098,000 769,695, 000 1.339. 589,000 276,496,927 i,77i, 3 2 1 , 0 0 0 293. 4 0 0 , 0 0 0 726,129,000 758,413. 000 1.293. 658,000 241,841,460 1,729, 4 7 4 , 0 0 0 293. 4 0 0 , 0 0 0 733,142,000 769,077, 000 1,229, 516,000 167,037,390 1,695, 8 4 8 , 0 0 0 7i.3 63.9 67.3 55-1 56.1 59-6 22 293. 4 0 0 , 0 0 0 750,925,000 783,690, 000 1,178, 463,000 101,371,201 1,649, 1 9 4 , 0 0 0 63.7 31 293. 4 0 0 , 0 0 0 728,185,000 762,631, 000 1.211, 318,000 155,284,568 1,654, 8 2 7 , 0 0 0 60. 1 7 293, 4 0 0 , 0 0 0 729,312,000 762,204, 000 1,185, 969,000 130,369,434 1, 6 0 7 , 7 8 6 , 0 0 0 61 15 293. 4 0 0 , 0 0 0 75o,235,000 787,350, 000 i,i55, 215,000 74.459,9o6 1,622, 1 4 3 , 0 0 0 23 293. 4 0 0 , 0 0 0 780,569,000 814,200, 000 1,113, 662,000 6,062,750 1,625, 3 6 5 , 0 0 0 64 70 30 July Sept. Oct. 30 7 IS 30 293. 4 0 0 , 0 0 0 772,964,000 808,268, 000 1,138, 333,ooo 36,654,865 1.627, 9 9 1 , 0 0 0 23 293. 4 0 0 , 0 0 0 814,398,000 843,689, 000 1,167, 674,000 30, 582,426 1,645, 0 1 0 , 0 0 0 31 Dec. 293, 4 0 0 , 0 0 0 752,293,000 781,037. 000 1.337, 391,000 282,955,278 1,788, 3 i 5 . o o o 67 69 55 74-1 66.6 70.1 57-5 58.6 62.6 66.5 63.0 64-3 68.1 73- 1 71. o 72.3 42. 1 57-5 47-5 51.4 46.8 48.9 44.6 46.4 46. 7 36.8 38.7 40. 6 43- 2 41.4 43-2 43-5 44-5 43-o 44-2 44.0 64.8 1899. Jan. 293. 4 0 0 , 0 0 0 779,846, 000 810,321, 000 1,250, 815,000 147,096,243 1,642, 7 7 2 , 0 0 0 15 293, 4 0 0 , 0 0 0 810,299, 000 844,233, 000 1,171, 718,000 34,083,149 i,576, 5 0 8 , 0 0 0 Mar. 31 293, 4 0 0 , 0 0 0 827,831, 000 861,735, 000 1,265, 040,000 1 0 9 , 9 0 5 , 732 1,768, 2 3 2 , 0 0 0 7 293. 4 0 0 , 0 0 0 831.346, 000 866,649, 000 1.212, 670,000 52,620,554 1,701, 5 1 5 . 0 0 0 June 30 293. 4 0 0 , 0 0 0 833,986, 000 868,135, 000 1,300, 241,000 138,704,569 1,870, 9 0 6 , 0 0 0 Apr. 62.3 69. 1 65.4 68.6 64. 1 66. 1 7 293. 4 0 0 , 0 0 0 827,130, 000 861,754, 000 1,250, 406,000 95,253,262 1,782, 6 1 2 , 0 0 0 Sept. 2 3 293. 4 0 0 , 0 0 0 801,865, 000 833,032, 000 1,126, 960,000 529,780 i,7i7, 1 8 4 , 0 0 0 71. 2 30 293. 4 0 0 , 0 0 0 686,691, 000 718,098, 000 1.382, 731,000 371,233.061 1,865, 7 4 1 , 0 0 0 July 23 293. 4 0 0 . 0 0 0 729,904, 000 761,829, 000 1,180, 341,000 125,111,446 1,691, 6 0 7 , 0 0 0 31 293. 4 0 0 , 0 0 0 707,618, 000 740,069, 000 1, 2 2 1 , 1 5 3 . 0 0 0 187.683,462 1.709, 1 6 6 , 0 0 0 49- 7 53-3 57-o 61.8 57-9 7 293. 4 0 0 , 0 0 0 711,772, 000 743.373, 000 1.183. 041,000 146,267,057 1,648, 4 6 1 , 0 0 0 60. 2 15 293. 4 0 0 , 0 0 0 731,044, 000 766,794, 000 1.161, 377,000 101,185,206 1,680, 2 0 8 , 0 0 0 62. 9 23 293, 4 0 0 , 0 0 0 749,403, 000 782,763, 000 1,128, 557,000 52.393.473 1,683, 8 6 4 , 0 0 0 30 293, 4 0 0 , 0 0 0 729,755, 000 764,933, 000 1.147. 544,000 89,212,815 66.4 63.6 65. 2 66.6 61.8 51.6 7 293. 4 0 0 , 0 0 0 695,076, 000 726,043, 000 1.303. 052,000 283,610,564 1,794, 6 3 4 , 0 0 0 15 Oct. 293. 4 0 0 , 0 0 0 704,078, 000 736,493, 000 1,234. 150,000 204,255,633 1,733, 5 3 5 . o o o 7 293. 4 0 0 , 0 0 0 741.276, 000 773,829, 000 1, 1 3 7 . 4 2 0 , 0 0 0 70,191,970 15 293. 4 0 0 , 0 0 0 762, 1 4 7 ,0 0 0 800, 342, 000 1,144, 113,000 50,372,058 23 293. 4 0 0 , 0 0 0 743,263, 000 772,639, 000 1, 2 0 2 , 1 1 5 , 0 0 0 30 293, 4 0 0 , 0 0 0 700,896, 000 727.9X7. 000 1.358, 933.ooo 1,697, 7 8 2 , 0 0 0 1,676, 3 8 1 , 0 0 0 136,076,334 1,733, 4 9 6 , 0 0 0 1,764, 8 6 9 , 0 0 0 337,6i5,993 1.834. 5 5 4 , 0 0 0 42. 1 38.2 72. 1 68.1 7i.5 66.8 68.9 73 5i 55 59 64 60 62.8 66.0 69 66 68 69 64 53 1900. 7 293. 4 0 0 , 0 0 0 730,761 , 000 763,019,000 1,265, 455,000 209,036,165 r.753. 3 5 5 . o o o IS 293. 4 0 0 , 0 0 0 7 7 5 , 8 4 5 ,000 813,108,000 1,154, 208,000 47.700,377 1.657. 3 2 2 , 0 0 0 Mar. 31 293. 4 0 0 , 0 0 0 743,665 , 000 778,312,000 1,309, 970,000 238,259,329. 1.797. 7 6 7 , 0 0 0 7 293. 4 0 0 , 0 0 0 754,485 , 000 789,821,000 1.217, 642,000 134,419.833 1,732, 1 2 7 , 0 0 0 IS 293. 4 0 0 , 0 0 0 772,492 , 000 809,611,000 1,145, 226,000 42,215,214 1,654, 3 1 1 , 0 0 0 30 293. 4 0 0 , 0 0 0 800,737 , 000 838,036,000 1,164, 622,000 33.184,581 1.663, 3 1 0 , 0 0 0 293. 4 0 0 , 0 0 0 822,247 , 000 857,820,000 1,309, 865,000 158,643,308 1,805, 8 7 1 , 0 0 0 293. 4 0 0 , 0 0 0 841,043 , 000 877.650,000 1,212, 104,000 41,048,095 1,7ii, 6 2 4 , 0 0 0 Jan. Apr. June 30 July 7 Sept. 3 0 Oct. 7 293. 4 0 0 , 0 0 0 725,427 , 000 758,035,000 1.343. 962,000 292,531,250 1,800, 3 7 9 , 0 0 0 293. 4 0 0 , 0 0 0 717,775 , 000 751,014,000 1.293. 213,000 248,799,646 1,748, 9 6 1 , 0 0 0 15 293. 4 0 0 , 0 0 0 754,332 , 000 794.137,000 1,219, 281,000 131,739,013 1,716, 6 4 9 , 0 0 0 23 293. 4 0 0 , 0 0 0 791,892 , 000 826,119,000 1,186, 495.000 66,979,521 I,690, 6 4 8 , 0 0 0 57-7 67. 2 56.8 62. o 67-5 68.7 62.8 69.4 54-o 55-5 61. 9 66.7 41.7 46.8 41-4 43-6 46.7 48. 1 45-5 49- 1 40.3 41. o 43-9 46.8 60.3 70.5 59 64 7o 72 65 72. 56. 58. 65 69 a T h e c a l c u l a t i o n h a s n o t b e e n m a d e o n t h e b a s i s of t h e r o u n d s u m s p u b l i s h e d w e e k l y i n t h e R e i c h s a n z e i g e r , b u t o n t h e b a s i s of e x a c t s p e c i a l i n f o r m a tion r e g a r d i n g cash reserve a n d n o t e circulation, while metallic reserve, cash reserve, a n d note circulation in t h e a b o v e t a b l e are given according t o those a p p r o x i m a t e w e e k l y figures. * O t h e r d e m a n d liabilities a r e t h e p u b l i c a n d p r i v a t e giro b a l a n c e s , t h e d e p o s i t s of p e r s o n s a n d firms w h o h a v e n o g i r o a c c o u n t , t h e a m o u n t s r e c e i v e d for d i s b u r s e m e n t t o p e r s o n s w h o h a v e n o a c c o u n t w h i c h h a v e n o t y e t b e e n p a i d , a s well a s g i r o t r a n s f e r s t h a t a r e e n r o u t e b u t will, o n a c c o u n t of t h e t i m e r e q u i r e d for p o s t a l t r a n s m i s s i o n , b e c r e d i t e d t h e n e x t d a y o n l y . c P r i o r t o 1881 t h e r e w a s n o e x c e s s c i r c u l a t i o n a t a n y t i m e . 83703—10. (To follow page 119.) No. 1. APPENDIX III.—Note circulation and metallic reserve on the days of an issue in excess of the contingent—Continued. Metallic covering for— Date of excess. Amount of contingent. Metallic reserve. Cash reserve. Note circulation. A m o u n t in excess of contingent. Note circulation and other demand liabilities. Total Note of decircu- mand lation. liabilities. Cash covering, ith in -ie meaning paragraph lofr the bank9 r of act, f o r — Note circulation.) 10 Marks 1900. 31 293, Marks. 400,000 Marks. Marks. Marks. P. ci. 62. 2 P.ct. P.ct. 45.2 65.0 1,642,760,000 63-4 46.8 66.2 Marks. 800,718,000 766,566,000 0 1, 232, 792, 0 0 138,674,040 1,696,066,000 116,142,019 293,400,000 768,664,000 8 0 2 , 4 2 4 , 000 1,211,965, 0 0 0 293,400,000 789,879,000 829,365,000 1.177,685, 0 0 0 54,922,497 1,663,026,000 67.1 47.5 70.5 30 293,400,000 814,165,000 8 4 9 , 6 7 4 , 000 1,166,141, 0 0 0 23,072,976 1,662,357,000 69.8 49.0 72.9 IS --- 7 293,400,000 809,503,000 844,706,000 1,140,318, 0 0 0 2,211,704 1.649,903,000 71.0 15 293,400,000 818,908,000 857, 1, 1 6 0 , 4 3 5 . 0 0 0 9.533.638 1.743.892,000 70. 6 23 293,400,000 805,507,000 835,738,000 1,201,249, 0 0 0 72,108,240 i,746,023,000 67. 1 31 293,400,000 729,830,000 760,628,000 1,409,945, 0 0 0 355.9i7.4i2 1.906,943,000 51.8 507,000 49.1 74-1 47-0 73-9 46. 1 69.6 38.3 53-9 1901. 7--- 450,000,000 761,002,000 793,201,000 1.309.198,000 65.995.930 1,814,128,000 58.1 41.9 60.6 31--- 450,000,000 811,663,000 845,076,000 i,321,420,000 16,347.335 1,826,520,000 61. 4 44-4 63-9 30.-- 460,000,000 830,442,000 861,819,000 1,430,427,000 108, 6 0 1 , 148 1.953.568,000 58.1 42.5 60.3 7--- 460,000,000 8 3 1 , 2 7 7 , 000 865,981,000 1.365. 1 5 3 . 0 0 0 39.176,396 1,865,886,000 60. 9 44.6 63-4 460,000,000 868,501,000 897,320,000 1,465,787,000 108,466,421 2,028,975,000 59.3 42.8 61. 2 151,015.199 2,034.572,000 56. 2 41.3 58.5 76.503.876 1.923. 737.ooo 59- 1 43-5 61. 4 231.638,836 2,060,433,000 Si-8 38.2 53-7 31--1902. 30 470,000,000 839,804,000 874.354.ooo i,495.37o,ooo 7 470,000,000 836,834,000 869,559,000 1, 4 1 6 , 0 5 9 , 0 0 0 31 470,000,000 786,123,000 814,830,000 1,516,469,000 1903. 470,000,000 823,318,000 854,481,000 1.397,190,000 72,628,154 1,913,106,000 58.9 43.o 61. 2 31 470,000,000 818,482,000 854,025,000 1.449.540,000 125,514.615 1.984,74i.000 56.5 41. 2 58.9 7 470,000,000 817.385,000 853,010,000 I.350,081,000 27,068,533 1,844,625,000 60. 5 44-3 63. 2 30 470,000,000 884,259,000 9i9,973,ooo 1,434,565.000 44,587.5i8 2,000,675,000 61.6 44- 2 64. 1 30 470,000,000 858,015,000 891,593,ooo 1,515,581,000 153.987.512 2,066,179,000 56.6 41.5 58.8 7 470,000,000 851,100,000 885,019,000 1.429.343.000 1,905,894,000 59-5 44-7 61. 9 31 470,000,000 793.459.ooo 820,537,000 1.565.490,000 2,140,408,000 50.7 37- 1 52.4 74,321, 008 274.949,399 1904. 7 470,000,000 834,443,000 868,434,000 1,438, 2 9 5 , 0 0 0 99,861,153 1 , 9 4 9 . 4 2 3 , 000 58.0 60. 4 31 470,000,000 828,079,000 860,804,000 1,496,935,000 166,126,902 2,036,574,000 55-3 57-5 7 470,000,000 852,917,000 899,609,000 1,385,839,000 16,222,874 1,917,082,000 61.5 64.9 30 470,000,000 870,048,000 902,449,000 1, 4 7 7 , 8 5 2 , 0 0 0 105,400, 518 2,017,605,000 58.9 61.1 30 470,000,000 793,i43,ooo 824,023,000 1,599,067,000 305,038,527 2,131.775.ooo 49.6 5i-5 7 470,000,000 789,444,000 833,181,000 1,482,350, 0 0 0 179,169,568 1,978,479,000 53-3 56. 2 15 470,000,000 839,669,000 897,616,000 1,395,915.000 28,298,848 1,895,677,000 60. 2 64-3 31 470,000,000 927,060,000 956,261,000 1, 599. 7 8 4 , 0 0 0 173.519,879 2,180,081,000 57-9 31 470,000,000 1,015,884,000 :, 0 5 2 , 4 8 8 , 0 0 0 1,543. 5 0 5 , 0 0 0 21,016,649 2,134.506,000 65.8 47-6 68. 1 30 470,000,000 9So,791,000 985.875,000 1.554. 8 0 2 , 0 0 0 98,927,495 2,133.903,000 61. 2 44-6 63-4 30 470,000,000 732,215,000 762,361,000 1,682, 6 4 6 , 0 0 0 450, 282,987 2,239,021,000 43-5 32. 7 45-3 7 470,000,000 755.i75,ooo 797,785,000 i,536, 3 6 3 , 0 0 0 268,574,916 2,060,636,000 49- 2 36. 7 55-5 14 470,000,000 787,357.000 837,735,ooo 1,450, 2 5 1 , 0 0 0 142,517,347 1.967,907,000 54-3 40. o 57-8 25,593.86i 64-3 59-8 1905- 1,918,945,000 60. 1 43-5 547,804 1.929.565.000 55- 1 41. 2 1,385, 5 2 5 , 0 0 0 75,864,662 1,859,920,000 57-7 831,043,000 1,656, 6 7 9 , 0 0 0 352,808,324 2,287,486,000 48.5 854.032, 000 580,000 1,515, 3 0 6 , 0 0 0 149,898,446 2,039, 8 0 2 , 0 0 0 41.9 58.9 888,980, 000 922, 9 2 1 , 0 0 0 1,629, 0 9 8 , 0 0 0 233,348,738 2,218, 094,000 40. 1 56.6 64.9 23 470,000,000 834,409,000 892,607,000 1,388, 2 0 4 , 0 0 0 31 470,000,000 794,174,000 825,527,000 1,442, 0 7 2 , 0 0 0 7 470,000,000 798,992,000 839,658,000 30 472,829,000 803,525,000 6 472,829,000 31 472,829,000 146, 42.9 35- 1 57-2 60.6 50. 2 1906. 7 472,829,000 915,79i. 000 958 4 2 8 , 0 0 0 1,477, 2 8 7 , 0 0 0 46,028,548 2,021, 8 0 1 , 0 0 0 45-3 30 472,829,000 844,429, 000 892 9 7 1 , 0 0 0 1,647, 8 7 2 , 0 0 0 282,073,455 2,247, 5 1 1 , 0 0 0 37-6 54-2 7 472,829,000 879,012, 000 939 0 4 1 , 0 0 0 1,501, 1 1 2 , 0 0 0 89,242,180 2,062, 8 1 2 , 0 0 0 42. 6 62.5 29 472,829,000 675.301, 000 725 9 6 1 , 0 0 0 1,704, 1 3 1 , 0 0 0 505,339,503 2,293, 8 4 6 , 0 0 0 29.4 42. 6 6 472,829,000 676,140, 000 738; 5 2 1 , 0 0 0 1,609, 9 9 1 , 0 0 0 398,638,411 2,128, 738,000 31.8 45-9 15 472,829,000 721,901, 000 794 6 8 0 , 0 0 0 1,497, 5 2 4 , 0 0 0 230,015,817 2,089, 2 2 0 , O O O 34-6 53- 1 23 472,829,000 774,652, 000 855 2 8 0 , 0 0 0 1,444, 5 2 0 , 0 0 0 116,408,112 2,010, 4 5 7 , 0 0 0 38.5 59- 2 31 472,829,000 736,921, 000 790 0 8 7 , 0 0 0 1,485, 0 9 8 , 0 0 0 222,177,585 1,995. 5 9 1 , 0 0 0 36.9 53-2 7 472, 829,000 742,860, 000 804 2 0 9 , 0 0 0 i,430, 5 0 1 , 0 0 0 153,461,465 1.915. 8 3 8 , 0 0 0 38.7 56. 2 IS 472,829,000 777,926, 000 849 7 7 5 , 0 0 0 1,389, 8 0 3 , 0 0 0 67,199,067 I.940. 1 6 5 , 0 0 0 40. 1 61. 1 30 472,829,000 766, 3 1 6 , 0 0 0 824 1 2 4 , 0 0 0 1,395, 5 3 0 , 0 0 0 98,574,212 1.986, 7 3 0 , 0 0 0 39-6 59-1 7 472,829,000 746,435. 000 812 2 9 1 , 0 0 0 i,376, 5 6 4 , 0 0 0 91,443,268 1.94i. 3 7 6 , 0 0 0 38.4 59.o IS 472,829,000 747.3oi. 000 822 670,000 1,394, 6 9 3 , 0 0 0 99,191,717 1.989. 5 1 7 , 0 0 0 37-6 59-o 22 472,829,000 735,673, 000 816 2 9 8 , 0 0 0 1,480, 9 3 1 , 0 0 0 191,799.292 2,085, 7 5 6 , 0 0 0 35-3 55- 1 31- 472,829,000 665,017, 000 730 4 2 2 , 0 0 0 1,775, 8 9 8 , 0 0 0 572,644.757 2,428, 781,000 27.4 41. 1 1907. 7 472,829,000 722,865, 000 800,081, 000 1,605, 5 3 0 , 0 0 0 3 3 2 , 6 1 8 , 913 2,152, 322,000 45-o 33-6 49-9 15 472,829,000 805,345, 000 896,781, 000 1,458. 5 7 1 , 0 0 0 8 8 , 9 6 1 , 275 2, 0 1 7 ,8 0 8 , 0 0 0 55-2 39.9 61.5 31 472,829,000 843,304, 000 9i6,397, 000 1,411. 8 1 8 , 0 0 0 2 2 , 5 8 8 , 939 1,926, 8 6 2 , 0 0 0 59-7 43-8 64.9 30 472,829,000 775.972, 000 858,428, 000 1, 73i.4 8 6 , 0 0 0 4 0 0 , 2 2 7 , 260 2,327. 4 4 4 , 0 0 0 44-8 33-3 49-6 6 472,829,000 820,315, 000 916,054, 000 1.595, 2 6 2 , 0 0 0 2 0 6 , 3 7 9 , 147 2,187, 009,000 5i-4 37-5 57-4 IS 472,829,000 884,009, 000 991,194, 000 1,474, 2 1 4 , 0 0 0 1 0 , 2 9 0 , 631 2,070, 0 4 6 , 0 0 0 60. o 42.7 67. 2 30 472,829,000 898,444, 000 990,415, 000 1,510, 3 2 0 , 0 0 0 4 7 , 0 8 0 , 525 2,095. 7 9 9 . 0 0 0 59.5 42.9 65.6 29 472,829,000 830,710, 000 925,908, 000 1,728, 7 6 4 , 0 0 0 3 3 0 , 0 2 3 , 078 2.355. 3 8 5 , 0 0 0 48. 1 35-3 53.6 6 472,829,000 84i,977, 000 9Si.So8, 000 1,625, 1 2 6 , 0 0 0 2 0 0 , 7 9 0 , 091 2,156. 0 4 8 , 0 0 0 5i.8 39-1 58.5 15 472,829,000 877,441, 000 998,341, 000 1,505. 7 9 1 , 0 0 0 3 4 , 6 2 1 , 418 2,079, 6 0 4 , 0 0 0 58 42. 2 66.3 31 427,829,000 878,064, 000 978,386, 000 1.478, 0 2 4 , 0 0 0 2 6 , 8 0 8 , 045 2,008, 5 6 0 , 0 0 0 59 43-7 66.2 31 472,829,000 860,813, 000 960,458, 000 1,452, 7 4 8 , 0 0 0 1 9 , 4 4 8 , 339 i,998, 2 6 3 , 0 0 0 59 43- 1 66.1 30 472,829,000 737,022, 000 838,333. 000 1,824, 5 4 6 , 0 0 0 5 1 3 . 3 8 4 . 283 2,434, 028,000 40 30.3 45-9 7 472,829,000 73o,5i5, 000 843.989. 000 1,712, 1 4 5 , 0 0 0 3 9 5 . 3 2 4 . 815 2,253, 0 0 0 , 0 0 0 42 32.4 49.3 15 472,829,000 768,496, 000 889,239, 000 i,596, 5 5 7 . 0 0 0 2 3 4 . 4 8 9 , 657 2, 175 , 6 2 0 , 0 0 0 48 35-3 55-7 23 472,829,000 808,382, 000 936,636, 000 1,538, 9 7 9 , 0 0 0 1 2 9 , 5 0 8 , 875 2, 137 4 4 4 , 0 0 0 52 37-8 60. 9 31 472,829,000 750,264, 000 852,377, 000 1,617, 0 3 4 , 0 0 0 2 9 1 , 8 2 5 , 808 2, 167 , 9 9 1 , 0 0 0 46 34-6 52.7 7 472,829,000 73o,437, 000 842,570, 000 1,562, 345.ooo 2 4 6 , 9 4 4 , 920 2, 101 , 8 0 4 , 0 0 0 46.8 34.8 53-9 15 472,829,000 729,805, 000 850,467, 000 1,497, 7 5 0 , 0 0 0 1 7 4 , 4 5 4 , 697 2,049 2 8 1 , 0 0 0 48.7 35.6 56.8 23 472,829,000 734,080, 000 858,373. 000 1,440, 5 3 8 , 0 0 0 1 0 9 , 3 3 3 . 199 1,983 , 3 7 0 , 0 0 0 51.0 37-0 59.6 30 472,829,000 678,520, 000 776,228, 000 1,510, 8 8 3 , 0 0 0 2 6 1 , 8 2 8 , 365 1,998 , 7 6 8 , 0 0 0 44 33-9 5i-4 7 472,829,000 681,760, 000 787,312, 000 1,468, 5 5 5 , 0 0 0 2 0 8 , 4 1 0 , 891 1,944 , 2 7 0 , 0 0 0 46 35- 1 53-6 14 472,829,000 700,565, 000 808,589, 000 i,476, 8 2 7 , 0 0 0 1 9 5 , 4 0 4 , 216 2, 0 2 0 , 1 8 4 , 0 0 0 47 34-7 54-8 23 472,829,000 714,836, 000 826,687, 000 1,569, 4 6 5 , 0 0 0 2 6 9 , 9 4 8 , 061 2,133, 4 6 9 , 0 0 0 45 33-5 52.7 31 472,829,000 704,179, 000 7 8 7 , n 7 , 000 922,000 6 2 5 , 9 7 4 , 363 2,544, 4 2 4 , 0 0 0 37 27.7 41. 7 1908. 7 472,829,000 758 6 8 2 , 0 0 0 856, 1 0 7 , 0 0 0 1,715. 7 1 7 , 0 0 0 3 8 6 , 7 8 1 , 134 2,242, 9 9 4 , 0 0 0 44- 2 49-9 15 472,829,000 838, 6 9 0 , 0 0 0 949, 652,000 i,540, 1 5 1 , 0 0 0 1 1 7 , 6 6 6 , 475 2,113, 6 2 5 , 0 0 0 54-5 61. 7 31 472,829,000 885, 9 5 9 , 0 0 0 972, 617,000 1,483. 9 3 3 , 0 0 0 3 8 , 4 8 6 , 282 1, 9 8 0 ,0 4 7 , 0 0 0 59-7 65.5 31 472,829,000 870 9 4 7 , 0 0 0 947, 295,000 1,781, 7 8 2 , 0 0 0 3 6 1 , 6 5 7 , 668 2,402, 6 5 8 , 0 0 0 48.9 53-2 7 472,829,000 880 1 1 7 , 0 0 0 97o, 748,000 1,643. 3 7 2 , 0 0 0 1 9 9 , 7 9 4 . 555 2, 178, 537,ooo 53-5 59- 1 15 472,829,000 1,015, 2 9 2 , 0 0 0 1,517, 7 4 5 , 0 0 0 2 9 . 6 2 4 , 868 2, 087, 8 2 6 , 0 0 0 60. 66.9 30 472,829,000 9i5, 4 8 8 , 0 0 0 946, 5 4 9 , 0 0 0 I,025, 347,ooo i,54i, 5 7 8 , 0 0 0 4 3 . 4 o i , 069 2,157: 8 1 1 , 0 0 0 61. 66.5 30 472,829,000 ,031, 7 9 9 , 0 0 0 1,103, 9 9 4 , 0 0 0 1,792, 6 2 3 , 0 0 0 2 1 5 , 8 0 0 , 33o 2,407 7 6 0 , 0 0 0 57. 61.6 7 472,829,000 ,059, 5 0 5 , 0 0 0 1,144, 5 8 0 , 0 0 0 1,666, 8 8 6 , 0 0 0 4 9 . 4 7 7 . 014 2,310 9 1 3 , 0 0 0 63. 68.7 30 472,829,000 1,103, 4 3 9 , 0 0 0 1,896, 9 1 3 , c o o 320,647, 610 2,556 5 7 9 , 0 0 0 54 58.2 7 472,829,000 ,033, 553,ooo ,039, 1 5 7 , 0 0 0 1, 119,6 2 0 , 0 0 0 1.759, 5 7 5 , 0 0 0 1 6 7 , 1 2 6 , 786 2, 4 2 1 4 5 9 , 0 0 0 59 63.6 15 472,829,000 1,159, 2 9 4 , 0 0 0 1,133, 6 3 0 , 0 0 0 8 , 6 6 3 , 955 080,000 65. 70. 7 472,829,000 3 , 069, 77,000 , 0 6 4 ,4 9 1 , 0 0 0 1,640, 7 8 7 , 0 0 0 31 1,674, 4 0 0 , 0 0 0 67,939, 5i6 2,285 1 2 3 , 0 0 0 63 67.7 .6 31 472,829,000 980, 147,000 1,047, 7 6 5 , 0 0 0 1,975, 3 9 0 , 0 0 0 454,793. 55i 2,631 , 9 6 8 , 0 0 0 49 53.o 39-8 83703—10. (To follow page 119.) No. 2. 2,341 •5 APPENDIX IV.—Note reserve and excess of circulation over and above the contingent. [Amounts in thousands of marks.] Excess of circulation over and above the contingent. 6 Tax-free note reserve.<* Tax-free contingent at the end of the year, and at the end of every five years. Year. Maximum. Average amount. 2 1876 1877 1878 i879__ 152,704 155.088 185,222 1881 1882 __ 1883.__ 1884 1885 1881-85 273,875 273.875 273.875 273.875 195.358 167.639 100. 0 101. 5 121.3 127.9 109. 8 171,202 100. 0 148,443 121,817 176,123 168,786 168,640 97.2 H5-3 no. 5 no. 4 273.875 1876-80 156,762 9i-5 196,583 128.7 144-4 181.4 127. 2 274.834 276,085 276,085 286,585 _ 79.8 288,025 1889 1886-90-_ _ 1891 1892 1893. 1894. 1895 _ - 1891-95 1896 1897 1898 1899. __ _ _ __ i896-i9oo__ 220,946 277, n o 194,200 i35,43i 288,025 204,795 119. 6 292,117 292,117 292,117 293,400 293,400 246,010 161. 1 283,444 185.6 183,302 243,237 120. 0 172. 0 159-2 293.400 i888___ 243,751 142,4 293,400 293,400 293,400 293,400 293,400 135.209 113,026 8,689 88.5 74.0 35-8 8.0 5-7 293,400 64,777 37-8 262,761 54,691 12,271 88.7 460,000 470,000 470,000 470,000 472,829 1904 1905 1901—5 1906 1907 1908 Amount. Date. 5 2 3.075 273,875 273.875 273.875 273.875 _ Date. 6 7 4 273,875 1880 1886 1887-- 3 272,720 1 Percentage of the figure for the year 1876 and of the figure for the five years 1876-1880. 214.635 254,390 163,790 153,514 153.534 107. 2 100.5 100.5 472,829 187.973 109. 8 472,829 472,829 472,829 34,368 c—58,227 22. 5 57.5IO 37-7 140.5 166.5 Jan. Mar. June Mar. June 242,981 7 23 7 23 7 Maximum amount of excess. Number of times the bank Sum statetotal of ment excesses. Amount. showed an excess of circulation. Minimum. 8 231.531 Date. 11 10 9 Amount. 12 13 Jan. 7 30,519 Sept. 30 5 6 , 9 9 7 Jan. 7 74,173 Dec. 31 7 1 1 , 6 4 8 Dec. 31 4 8 . 9 7 5 fMar. 23, [299,225 1 1879. Note tax paid. JJan. 7, [30,519 1 1876. Mar. Mar. Mar. Mar. June 222,422 241,643 299.225 7 23 15 15 7 1 2 269,793 268,549 33o,763 332,665 446.715 367,662 276,468 23 23 23 23 23 359,147 431,678 350,404 366,795 471,164 [Feb. 23, 1898. 92,795 JDec. 31, J 32,679 1 1884. 97 34,161 Dec. 31 34,161 36 226,528 Dec. 31 Oct. 7 109,478 104,205 236 325,082 585,771 38,518 3 215,080 4 253,598 6 9 Jan. 7 Dec. 31 446,209 Jan. 7 16 20 20 (-321,503 7i 737,199 1,850,325 2,733,402 2 , 4 1 7 , 139 8,184,274 J 1 416,426 501,388 367.994 358,796 508,971 JFeb. 23, 1 1905 508,971 32 4,229,393 346,693 224,587 323.939 17 25 14 3,547,485 5,376,670 2,461,861 Feb. Feb. Aug. 23 23 23 JDec. 31, [109,478 1 1889. 611 60,286 15 23 23 23 23 June Feb. Feb. Feb. Feb. 31 7 32,328 16,764 317.083 3i7,299 321,503 222,873 181,810 23 23 23 23 23 1 34 3 27 II,526 66,143 JFeb. 23, [471.164 I 1895. Feb. Feb. Feb. Feb. Feb. 32,679 2,615 1 7 31 fjune 7, U46. 715 j 1888. Aug. Feb. Feb. Nov. Feb. Dec. Jan. 10 Jan. Dec. 32,679 2, 615 3 6 252,251 23 15 7 15 7 33 26,092 36,180 fMar. 15, [269.793 1 1883. Feb. June June Mar. June 26,092 19,224 1 31 Dec. 31 Sept. 30 5 Dec. 31,409 1 1 260,499 221,532 338,577 5 459,158 3 773,057 7 8 1,073,638 9 1,584,963 Sept. 30 Dec. 31 JDec. 31, I 1895. Dec. Sept. Dec. Sept. Dec. 31 30 31 30 31 38,518 148,283 [148,283 264 134,149 205,830 282,955 37L233 355,917 465 768 JSept. 30, [371,233 1 1899. Sept. Dec. Dec. Sept. Sept. 40 2,847 2,518 8,525 30 31 31 30 30 108,601 231,639 274,949 305,039 45o,283 JSept. 30, 1 1905. 450.283 4.405 572,645 3,692 625,974 454.794 5.6oi Dec. Dec. Dec. 31 31 31 353 478 805 1,118 1,651 2,564 a This is the amount by which the note circulation which, in the meaning of paragraph 9 of the Bank Act, is not secured by cash reserves falls below the tax-free contingent. & An excess occurs if the note circulation which, in the meaning of paragraph 9 of the Bank Act, is not secured by cash exceeds the amount of the tax-free note contingent. c During the year 1907 there was an average note circulation subject to tax of 58,227,000 marks. 837 0 3—10. (To follow page 119.) No. 3. Renew a I of Reichsb ank Charter APPENDIX V.—Annual increase in the surplus of the Reichsbank calculated on the basis of the net profits realized in the twenty years, 1888-1907, assuming an annual quota of 10 per cent. N e t profit. Marks. 8,104,669 12,900,244 20.740,773 18,665,816 11,989,872 17,584.397 11,404,427 1890 1891 1892 1893 1894 3 lA p e r c e n t dividend on the capital. Marks. 4,200,000 4,200,000 4,200,000 4,200,000 4,200,000 4, 200, 000 4,200,000 4,200,000 4,200,000 4,200,000 4,200,000 4,200,000 4,200,000 5,250,000 5.250,000 9,919,434 17, 409, 232 19,396.832 22,-277, 946 31. 711,379 33,965.457 25,946,284 i9.99i.3oo 25.381,035 26,459,555 25.406,367 40,262,908 52,313,652 1895 1896 1897 1898 1899 1900 1901 1902 1903 1904 190s 1906 1907 A v e r a g e of t h e 20 y e a r s , 1 t o 1907 5, 2 5 0 , 0 0 0 5,250,000 6,300,000 6.300,000 6,300,000 22,591,579 4,725,000 121 Ill Excerpts from the Proceedings of the Third German Bankers' Convention, held in Hamburg in September, 1907 123 EXCERPTS FROM THE PROCEEDINGS OF THE THIRD GERMAN BANKERS' CONVENTION, HELD IN HAMBURG IN SEPTEMBER, 1907. T H E DISCUSSION OF DEPOSIT BANKING. The PRESIDENT. Gentlemen, before I give the principal speaker the floor, I wish to inform the assembly of something which will perhaps interest them, namely, that the Reichsgenossenschaftsbank at Darmstadt has kindly notified me that the agricultural cooperative institutions have adopted resolutions concerning the question of check legislation which are similar in content and in tendency to our own, so that the Director of the Reichsgenossenschaftsbank felt justified in making the following addition to his communication: " I n this important question of check business and check legislation, which will be next dealt with by the Reichstag, commerce, industry, and agriculture go hand in hand." Privatdozent Doctor J A F F 6 . Gentlemen, I fear that many of you shook your heads disapprovingly when you learned from the programme of the Third German Bankers' Convention that a theorist was to be the first to address you concerning the legal regulation of deposits. Now, gentlemen, even I was not able to refrain from this same head shaking when the flattering request of your committee came to me to undertake this report, for I am of the opinion that in the things of economic life the theorist has far more to learn from the practical man 125 National Monetary Commission than vice versa. I have complied with this request, and indeed gladly, for these two reasons, to which even you will perhaps allow some slight weight. In the first place, the question which we would deal with to-day has been opened for public discussion, not by practical men, but— at least for the greater part—by scholars, and therefore it is perhaps not inopportune if science takes a position with regard to it. In the second place, however, I can not regard myself, at least in this presence, as a pure theorist, for I have, during fifteen years of mercantile activity, acquired some sympathy with practical affairs. This activity has brought me into especially close relations with English business life, and particularly with English banking, and since the latter is represented to us more and more as worthy of emulation and imitation, especially in the line of deposit business, I should now like to deal in somewhat more detail with the advantages and disadvantages of this system. First of all, I should like to make a few brief introductory remarks concerning the general principles of deposit banking. The task of modern banking is a threefold one. First, the creation of a safe and convenient means of circulation and credit transfer as the necessary complement of the money and coinage system established by the State. This is effected through the issue of bank notes, through the check and deposit system, and through other means of facilitating payments. With this part of banking activity the German Bankers' Convention has already concerned itself in its discus- 126 Renewal of Reichsbank Charter sion of the "ways and means for economizing metallic currency" and the "renewal of the Reichsbank privilege." The other two functions of banking, which are much more important, and which together form the basis of the general system of credit organization, consist of what I might call credit concentration on the one side and credit distribution on the other. By credit concentration I mean the gathering of all the capital not in use at a given moment, from the greatest to the smallest portions, into a common reservoir; by credit distribution I mean the loaning out again of the capital thus collected to the men engaged in agriculture, commerce, and manufactures. From this double function there results the enormous importance of banking for modern economic life. The German nation particularly is compelled, because of its growing population and the relatively unproductive soil of its country, to develop industry, trade, and commerce, as well as agriculture, in the most intensive manner, and it is therefore more vitally interested than almost any other nation in making the fullest use of all available capital. This can be done, however, only if the available capital is made accessible to the business man through concentration in the banks and if the banks meet with no difficulties in the collection and distribution of this capital. The banks obtain the moneys necessary for their business in three different ways: First, from their own capital; that is, in the case of the great joint-stock banks, which are to-day of chief 127 National Monetary Commission importance, through the sale of their own shares and the accumulation of undivided profits in the form of surplus. Second, through transacting the money affairs of business men and the bigger capitalists (deposits on current account). Third, through the attraction of the cash and the savings of the great public which are seeking investment (deposit business in the narrower sense). The first of these sources is limited in its extent by quite definite bounds, which are fixed by banking policy and which can not be overstepped (the level of the dividends and the fluctuations in surrounding conditions). With increasing demand for capital on the part of business men, the capital of the banks is capable of increasing only very slowly. The result is that, with the progressive development of banking, the ratio of the banks' own capital to the capital coming from the other two sources always falls. In England the paid-in capital of the banks amounts to-day, on an average, to about 10 per cent of outside money; with us, in Germany, the total of outside money was, even in the year 1892, not greater than that of the capital of the banks. To-day the ratio is about as two to one—that is, the outside money amounts to about double the bank capital itself, and, to be exact, perhaps a little bit more. How to attract these outside moneys is, accordingly, a problem of continually increasing importance, for this is essential in order that the daily increasing needs of business may be satisfied. England affords us the picture of an almost perfect concentration of all avail- 128 Renewal of Reichsbank Charter able money in the vaults of the banks. In England the ideal is as good as attained, since not even the smallest particle of capital lies unused, but is drawn to the great reservoir of the London money market. It is one of the chief factors of the economic greatness of England that in London the necessary capital for every good business is always to be had cheap. This has been attained by the development of the check and clearing-house system on the one hand, and on the other, above all, by the assiduous nursing of the deposit business, by the extension of banking facilities over the whole country, and by the erection of branches, deposit offices, and agencies, which are spread over the whole land like a close-meshed net. Just as in the large and medium sized cities, so in the small towns and villages, everyone is afforded an opportunity to enjoy the advantages of a bank connection. The number of bank offices in Great Britain amounts to-day to far more than eleven thousand, and is increasing rapidly. A single bank controls more than five hundred such offices. The outside money (savings and current-account deposits) deposited with the banks amounts to between eighteen and nineteen billion marks. Every little property holder, every official, every shopkeeper and artisan— and, indeed, even a great number of the more well-to-do mechanics and farmers—are as much the customers of the bank as are the manufacturers and the capitalists. It is also the case that very many women have accounts with the banks, from which, among other things, the household expenses are settled. The public corporations, too, set a good example for others to follow. The State, 83703—10 9 I2 9 National Monetary Commission the county, the big corporations—these all deposit their money with the Bank of England or with one of the big banks, and all of their payments are transacted through these accounts. We in Germany are still very much behind this stage of development—partly as a result of the bureaucratic spirit of our public administrative bodies, partly as a result of the lack of acquaintance with business and the world on the part of the middle and lower strata in city and country, but in no small measure because our banks and bankers have not always given the proper attention to means of attracting the smaller deposits. The outside money of our banks amounted at the end of 1906 to 6,305,000,000 marks, of which 2,141,000,000 marks were deposits and 4,164,000,000 marks were other credits. The great difficulty of the extension of the check and transfer system is due in no small measure to the inadequate development of our deposit system. To be sure, an ever-increasing number of deposit accounts have been opened in the great cities in the last decade, and in recent times the competition among the leading institutions has led to the opening of similar accounts in many of our secondary cities. But the small towns and the open country are, for the most part, still outside the circle of operations of the banks, and even in the cities the smaller business men and shopkeepers, the officials and people of private means, have not yet been attracted in large numbers. If our banks desire to fulfill properly their great economic functions, then further development must begin 130 Renewal of Reichsb ank Charter here. The opportunities that offer themselves, if a shrewd and far-seeing policy is maintained, are indeed enormous. The field has, to be sure, already been occupied to some extent by institutions of other kinds—by the savings banks and by the Reichsgenossenschaftsbank—but it is large enough to afford room for all. In what way this extension of deposit business should proceed, the practical man alone can decide. Either the net can be extended on the English plan so that in every important center a deposit bank is instituted, upon which a more or less large number of agencies, and of bank offices opened only on market days, are dependent; or else an effort can be made to enter into closer relations with the local institutions already existing. A reorganization of deposit banking naturally can not proceed without great difficulties. These will lie chiefly in the increasing cost of the business and in the necessity for a central supervision of the branches and agencies. I may, however, express the conviction that our banks, which have mastered quite different difficulties, would solve even this problem in at least as satisfactory a way as the English joint stock banks have done. That the extension of the network of branches would finally pay appears to me to follow from this, that the English banks do not engage in a branch of business which would greatly add to the profits of the German deposit banks—the sale of investment paper to customers. The forward movement of our economic life in recent decades has been twice interrupted by temporary regressions, once at the beginning of the nineties, and again at 131 National Monetary Commission the beginning of the new century. These regressions have naturally caused the banking system to suffer sympathetically. Our German credit banking system as a whole, however, has stood the test both times excellently well; in each case better than the corresponding French and English institutions in similar situations. Nevertheless, on both occasions loud demands arose for legislative interference for the removal of real or apparent evilst The agitation of the nineties gave us the deposit law and the bourse law; that of the recent period of depression seems now to be restricted to a demand for a deposit law. In order to be able to judge rightly concerning the value or worthlessness of these efforts we shall endeavor to make clear what are the underlying motives of this demand. We can easily distinguish two tendencies, both of which make toward this goal, but from very different motives and causes. I would designate the first as the political. It arises from the circles which have written on their banners the protection of the so-called "middle class in city and country." It proceeds from members of the parties forming the right and a considerable part of the center, and above all from the union of farmers and the other representatives of agricultural interests—from those, therefore, who look askance at the development of Germany into an industrial state. Being declared opponents of mobile capital, they lack, for the most part, the understanding of the great economic significance of banks and bourses, which appear to them 132 Renewal of Reichsb ank Charter not as important factors of economic development, but as morbid and dangerous excrescences, whose efficiency must be restricted in every way. In spite of the fact that the bourse law, which is now recognized even by its framers as a complete failure, has injured German economic life very deeply, not only are all conceivable hindrances placed in the way of improving it, but new means are sought of hindering the progress of our industrial life; and for this purpose the legal regulation of deposit banking is proposed. It is very well known in those circles that the development of our industries is very closely connected with that of banking, that the enormous development of the former was possible only through the vigorous support of the banks, which drew the means for this, for the most part, from their deposit business. Under the pretense that the association of regular banking business with commercial activity, and the issue of notes which is characteristic of our German banking system, endangers the safety of deposits, it is proposed that the deposit business be subjected to legal limitations, which would correspond approximately to those applied to note issue. These proposals have recently been clothed in the formula ''legal regulation of the covering of the deposits of the Reichsbank and of all other banks in accordance with the increased importance of the transfer and deposit business since 1875." The intention is to prevent the banks which do a note issue business from accepting deposits, apparently in the secret hope of guiding these sums to their own mills, and 133 National Monetary Commission of thus finally fulfilling to some extent the oft-repeated demand for cheaper money for agriculture and handicrafts. The second tendency that makes for a legal regulation of deposit banking I would call the scientific. Its chief advocate is the well-known economist, Prof. Adolph Wagner, of Berlin, whom a number of other experts and also some practical men have joined. Their opinion is based upon the conviction that the system of joining regular banking business with the so-called irregular (promotion, flotation, and stock-brokering business) is full of the greatest dangers for the solidity of our banking system. They advocate, on the contrary, the English system of division of labor, under which the large joint stock deposit banks, it is alleged, carry on only the regular banking business, while the promotion and flotation business lies in the hands of private individuals and financial companies, which use no outside money in their business, and therefore are not included in England among the banks. The followers of this line of thought aim at making the attraction of money from outside—at least of savings accounts—difficult or impossible for the joint-stock banks and banks of issue. On the other hand, they advocate the erection of pure deposit banks which would be limited to the regular banking business in the investment of their funds, and forced to maintain a legally fixed reserve against the deposits, and to publish regular statements concerning their investments and cash on hand. In details the propositions are in marked disagreement; some advocate the erection of an imperial deposit bank as 134 Renew al of Reichsb ank Charter a sister institution to the Reichsbank; others demand the chartering of one or more joint-stock deposit banks established by private means, but subject to state supervision; others advocate deposit banks established by the separate states. Finally, there are some demands for a less radical change—namely, that the regular publication of accounts be required of the existing mixed banks, while at the same time certain advantages shall be given to the pure deposit banks. The time at my disposal does not permit me to present to you the different proposals in detail. You will find everything more explicitly dealt with in the excellent book by the president of the Centralverband, Geh. Justizrat Dr. Riesser, "Zur Entwickelungsgeschichte der deutschen Grossbanken," in which the particular points are subjected to a keen criticism, which, in my judgment, is incontrovertible. Quite recently it has been suggested that all banks be forced to keep against their deposits a cash reserve of about two per cent with the Reichsbank. The third speaker will deal with this proposition in detail. I shall confine myself to a general criticism, more especially because, in my judgment, the entire proof of the advocates of these measures is built upon two wholly erroneous assumptions, which I shall now endeavor to correct. In the first place it is no longer true that the English joint-stock banks are pure deposit banks, or that they carry on only so-called regular banking business. To be sure, the present joint-stock banks have no direct share in 135 National Monetary Commission flotations, promotions, and similar business. But indirectly, through the mediation of the bourse, most of them place an increasing part of their available capital at the disposal of speculation, and thus of promotion and flotation business. The more strongly the movement toward concentration in English banking proceeds, and the more also the administration of the provincial banks is transferred to London, the closer will be the connection of the banks with the bourse and the greater will be the sums regularly loaned there. I have treated this more in detail in my book, " Das Knglische Bankwesen," but even a very short consideration of the subject must make it clear to us that it can not be otherwise, according to the nature of things. We know that the available resources of the English people are almost wholly concentrated in the banks. If there is only one such reservoir at hand, then the sums which are necessary for flotation and stock business flow from this reservoir. No one who knows the English stock exchange will dare to assert that the business of speculation is carried on solely through the help of the professional speculators, the comparatively few and not very powerful financial companies, and the great capitalists and private bankers, like Rothschild. These afford only a relatively small share of the necessary capital. The absorbing capacity of the English stock exchange rests on the institution of jobbers or dealers—that is, the big stock dealers—who buy and sell on their own account any desired amount of the securities especially handled by them. They can only do this if behind them stand big money-lenders, who are ready at any time to take the 136 Renewal of Reichsbank Charter securities in question as collateral, and these moneylenders are none other than the big English joint-stock banks, which daily put their surplus money at the disposal of the bill and stock brokers connected with them. The big items which appear in the balances of these bankers under " money at call and short notice " are just such sums. The result of the division of labor is therefore simply that the English banks furnish the money for the flotation and stock business without thereby securing the slightest control for themselves over the business of speculation. Up to this time the English deposit banks have not suffered much from this, but it is well known that English speculation is in a very bad way because no influence is exerted upon it by the banks. Nowhere are so many extravagant speculations launched as on the London Stock Exchange; nowhere—not even in Germany—has the public lost such enormous sums, and nowhere does the constant enactment of more and more stringent bourse laws help so little. That is the first fallacy. The second is that the union of speculative with regular banking business in Germany has led, or must lead, to a jeopardizing of the banking business. I am inclined to think that exactly the opposite is the case. In the first place, an analysis of the balances of our leading institutions shows—and this is of chief importance— that the covering of outside money by immediately available assets is throughout satisfactory; as regards the amount of available cash reserve, we make a much better showing than most English deposit banks, especially since, 137 National Monetary Commission as above mentioned, the reserves of these banks consist in part of advances to the bill brokers and stock jobbers, which, in case of a collapse of the stock exchange, are not realizable, while the other part is deposited with the Bank of England, which uses these sums again, however, in its own business. On the other hand, with us in Germany, especially in times like the present, the holdings of stocks of many of our large banks may be felt as a heavy weight; but, in my opinion, they signify no danger whatever for deposit creditors. In the second place, scientific investigation of the development of our banking system in the last decades has shown that the greatest guaranty of a sound condition of our credit system lies precisely in the union of the flotation banking with the regular banking business. Institutions which carry on promotive business solely— we have a few such in Germany—are interested solely in effecting the quickest possible sale of the securities they handle to the public. With the sale of the securities, all connection between the promoter and the concern promoted ceases. In our large banks, on the contrary, the flotation business is only one link in the chain of various relations between the bank and the customers connected with it. The starting or enlargement of an undertaking stands always in the closest connection with relations that extend over years through the current-account business. The bank is, therefore, on the ground of longer connections, in the best position to judge whether an undertaking is ripe for promotion or not. Our great banks, too, as a 138 Renewal of Reichsbank Charter result of their varied connections with all branches of industry, are much better informed concerning the factors involved than mere promotion companies can be. The banks can gauge the condition of the world market much more accurately than can any such institutions. They are, by their whole position, so closely bound up with the well-being of the people that their self-interest and even their instinct of self-preservation forces them to carry on this promotion and flotation business as carefully as possible. They have, therefore, the greatest interest not only in the success of the flotation, but also in the permanent prosperity of the undertaking, which remains its customer. Not only regard for their reputation as to flotations, but in a much higher degree their desire to enter into permanent connection with the enterprises they launch, affords a guaranty of the solidity of promotion business carried on by our banks. Our banks have been the pioneers of industrial development—a development which in speed and magnitude has been equaled only in the United States. If this enormous expansion of our economic strength and of our wealth has occurred with much smaller disturbances than in any other country (England certainly not excepted), then for this our thanks are due chiefly to our system of mixed banks and to the proper use of this system. The organization of our banking system arose historically from force of circumstances, as clearly as did the opposite system in England. Both have their national justification, and both, of course, involve certain dangers. But the German system is not only the proper one for our 139 National Monetary Commission conditions, but it is also in itself the more successful and, so far as we can judge, the safer. No great economic organization attains an absolute ideal through legal provisions. Abuses and disappointments are always possible. The safest system is, however, that in which the legitimate self-interest of the parties concerned coincides with the true interest of the community, and this is better attained by our system than by the English. We ought, therefore, to refrain from depriving this system of its foundations by rendering it more difficult for bankers to attract deposits. We ought to guard ourselves especially against seeking to import into Germany through legal compulsion conditions that have arisen in England through natural development and without legislative interference. The only country which has attempted to subject its deposit banks to that kind of legislative prescription, namely the United States of America, has had very unsatisfactory experience as its result. Obstacles placed in the way of the deposit business would check and restrict the development of our banking system without giving us anything better in its stead. We must, therefore, combat such interference most energetically. But the more vehemently you object to attacks of this kind, the more necessary it is to examine, in the most critical manner, the proposals made by the other side, and, for your own part, to devise the requisite—the necessary—measures for the maintenance and development of deposit banking. 140 Renewal of Reichsbank Charter The chief question is whether a separation of deposit and current-account creditors on the books of the bank is desirable and possible, and whether the publishing of monthly statements demanded by so many—as is done in England by the joint stock banks, and also by the great private bankers, without legal compulsion—is to be recommended for us also. Further, whether the funds of the deposit department are to be managed separately; whether those obligations are to be covered and guaranteed in other ways than are the other obligations of the bank; and, finally, what course is to be advocated in the interest of a further development of deposit banking. These points and their bearings can be estimated rightly in detail only by practical men, and I will therefore leave them to be handled by the other gentlemen to whom the subject has been referred and in the general discussion. For my part, however, I will permit myself to warn you against the repetition of a cardinal mistake which has been made by those who were interested in the framing of the bourse law—namely, that of underestimating the strength of the opponent. You were reminded again yesterday how comparatively easy it is to bring about legislative interference of the most peremptory kind, and how difficult it is later to secure even a moderation of measures of that nature. Therefore the saying "principiis obsta" applies here— resist the first attempt. How this may best be done is no question for science, but for politics. It is not my place to give you advice 141 National Monetary Commission here, but if you will permit me to express my private opinion, then I should like to point out that the German merchant class has itself to blame if it does not occupy the position in the political and economic life of the nation to which its achievements and its importance entitle it. The German merchant has allowed his business to make such heavy demands upon him that he has almost renounced all share in the political life of the country. So long as no change occurs in this state of affairs, he need not be surprised if he does not receive the necessary consideration on the part of the Government and the political parties. From the parties there is not much to be hoped for in the present political situation. This is far from being the case, however, with the factor which is, after all, the determining one in matters of legislation—that is, the Government. The Government is supposed, of course, to look impartially upon conflicting interests, and it makes the effort to be just to all parties. But it would be only human for it to let itself be driven by the skillful and effective agitation of the agricultural classes and the middle class to actions which run contrary to the interests of other classes—at least if the latter allow this to happen without a remonstrance. What is necessary is, that these interests, above all the merchant class, should strengthen the backbone of the administration against the oft-repeated demand to bind our economic life in restricting chains. The administration will be grateful for such support, and the fruits will 142 Renewal of Reichsbank Charter not be long in coming. Should this assumption, however, be an erroneous one, which I do not believe, then there is always time yet to resort to those means which are used by the opposition party on all occasions, and to which Goethe's line applies—"Und bist du nicht willig, so brauch' Ich Gewalt." For instance, in case of the introduction of a deposit law, the idea could be hit upon of recommending a bankers' strike when a new loan to Prussia or to the Empire is being arranged. I believe that, especially in the present state of our loan market, the chance of attracting ''volunteer laborers" would not be a very large one. But apart from weapons of this sort—which I have of course mentioned only in j e s t there are plenty of other means by which further legislation injurious to the community may be prevented, if only it were decided to make use of them. I should be the last to recommend the attainment of special privileges through the use of pressure. But it is not a question of special privileges, either for the German merchant class in general or for the banking and exchange business in particular, but simply a question of seeing them guaranteed the right to keep, without disobedience to law, their rightful "share of the sunlight." Trade and manufactures, as well as agriculture, have the right to demand that they be estimated and treated in accordance with their significance and their capacity for rendering service, even that of bearing taxation. The German merchant wishes to be treated in accordance with the motto of the Prussian royal house—Suum cuique; to each his own, not more and not less! [Xoud applause.] 143 National Monetary Commission The PRESIDENT. I also thank the speaker for his especially clear and instructive remarks. As the masterly book on English banking which he has written can not be overlooked if this matter is to be studied, so no one can pass over his present remarks. At only one point do I disagree. If he intimated—only incidentally, indeed, and without himself countenancing the plan—that there may be even a possibility of bankers refusing their help in certain national contingencies, especially in the flotation of consols, in order to repay "force with force," after the model of labor strikes, then I say that this is a way which the German banking class never could and never will follow. If he has further intimated that we should busy ourselves with making an outcry, I reply that we are convinced that very many others are and always will be superior to us in the art of bawling, and that we have therefore decided to work through nothing but the inherent strength of our own arguments. This course, however, will and must lead us to victory, even if only in the future, and after many vain struggles. Of this I am convinced. Doctor DAMME. Gentlemen, the credit system of a country is an organic whole, closely associated with the economic needs and the customs of the people. One part fits into the other, like the wheels of a machine, and the task of maintaining the machine in the best possible working order falls to the bankers. In the banks money redundancy and money need balance each other. Over against the money-gathering activity, the so-called liability business, stands the money-distributing activity, the asset business proceeds in parallel lines, and it is a fun- J44 Renewal of Reichsbank Charter damental law of science that the nature of the liability business must determine the undertakings involved in the asset business. If the management of but one of the customary branches of the liability business receives a check—whether on its own initiative or through legal enforcement—then the results make themselves felt unavoidably on the asset businesses. If the State interferes, for instance, in the legal regulation of banking deposits, then that signifies nothing less than a revolution of the whole credit system under which Germany has advanced in recent decades to its present economic position—to the position which has given the established masters of the seas, the English, serious apprehensions. These apprehensions, as we all know, are not well founded, for the world's trade opens up every year new and unsuspected routes, on which the flags of all nations may meet each other peaceably, and the commercial peoples of the world may enter into competition for the best satisfaction of old and new needs. The fact that Germany has become so considerable a factor in this rivalry is to be attributed, not only to the political strength of the Empire, but also to the enterprise of our merchant class, which has been able to rely upon the elasticity of our credit system. Now, among the lessons which are always impressed afresh upon every generation of business men is the fact that credit is a tender plant, that it can indeed be planted and nurtured in favorable soils, but that for its development to a strong-rooted tree the lapse of time is necessary. " Credit can not be built according to plan, like a house/' says Bagehot in his well-known book, " Lombard Street," 83703—10 10 145 National Monetary Commission and the warning which he, a severe critic of the English single reserve system, gives is pertinent also for us. " Whoever lives under a great and well-grounded credit system must consider that if he destroys it he will not immediately have another fully developed one. For it requires years before the new system can attain the strength of the old. ,, These words may be taken to heart by those who regard the banking business as a proper object for their legislative ambition—and, also another saying of Bagehot's, a man who won distinction both as a theorist and as a practical man of affairs: " The best thing a government can do with the money market is to leave it to itself." If England is pronounced on many sides to be the land of the ideally organized banking system, then, on the one hand, this praise must be considered as very extravagant in view of the criticisms made by the English themselves; and, on the other hand, we should not forget that the system existing in England to-day has behind it a century of development and of the most far-reaching division of labor in banking. It has all developed as an organic whole, and legislation has been intelligently adjusted to fit existing conditions. If we should seek to-day to appropriate for ourselves the final result of such development in a foreign country, we might destroy our own vital germs of strength without providing an equivalent substitute. Obviously Germany is not yet sufficiently supplied with capital to refer all those who desire to trust their money to the banks to the small interest payments of a pure deposit bank; and to enable commercial banks, 146 Renewal of Reichsbank Charter which understand how to use great capital permanently, to attract the easily obtainable medium from depositors. All parties would be injured by restrictions. The depositor cannot live on low interest; the banker and the shareholder in the joint-stock bank see the income of their undertakings growing less and much highly promising work remaining undone. Economically, however, it is in any case right that unemployed capital be brought, so far as possible, to the places where it will perform the greatest services. Where, however, could it work in any greater degree directly for the good of the whole than in the credit banks, which are constantly redistributing it to money consumers in commerce, agriculture, and industry? Disregarding, perhaps, the smallest amounts, which merely contribute to the formation of capital in the form of savings, the available money, otherwise condemned to unfruitful idleness, becomes part of the great stream of money which is conducted over the whole sphere of business activity, vivifying and fructifying it. Now, it will be said that the great money stream is the very danger we must guard against; that it is never known when and how it will overflow, and that therefore it is better to guide it into different channels, even from the source; or, in other words, to differentiate more strongly the business of the banks. This argument has something plausible about it, and is quite unanswerable for a country which is thoroughly saturated with capital. Our natural development will lead us gradually to follow the road indicated without external compulsion. There is already a tendency in that direction. Even now, 147 National Monetary Commission according to the mortgage bank law of 1899, no more new banks can arise which carry on credit business of all kinds and at the same time issue mortgage debentures. The mortgage business has become a legally regulated specialty. Thus banks have already arisen which according to the English usage would not be designated at all by this name, but would belong in the class of the various " companies," as the Bank for Mining and Industry, the Bank for German Railroad Securities, the Central Bank for Railroad Securities, the German Bank for Colonization, the Land Bank, and many others. They all follow specialties. The process of differentiation is thus already in existence, and is undoubtedly progressing. When the creation of capital in Germany shall have reached a higher stage, the justified desire, which is still predominant, to increase capital rapidly by means of high interest rates will gradually be replaced by the anxiety to obtain the greatest possible security for what has already been accumulated, even if at a sacrifice as regards the rate of interest. Then the first-class investments with a fixed rate of interest will rise permanently in general favor, and it may be expected with confidence that then, out of the growing need, groping cautiously at first, a pure deposit bank will here and there detach itself from the general business of a credit bank or of a large private bank, with a prospect of success. Science is pretty well agreed as to the character that the business of such a pure deposit bank should have; in practice there are still many hard nuts to crack. In any scientific work on deposit banks we can read that 148 Renewal of Reichsbank Charter good bills are among the best investments which a deposit bank can make; value is attached in particular to the certainty with which payment of the liabilities can be counted on at fixed dates. In practice it is known, however, that in most places one of the most difficult tasks is to bring together in a big portfolio nothing but first-class bills. The city of Hamburg, to be sure, has no difficulty in this respect, as we heard yesterday from authoritative sources. In practice it is also known that many bills that are of perfectly legitimate origin and are indorsed with good signatures must be renewed when they fall due, because the business back of them can not be wound up in three months, and that these bills must encroach anew upon the money market, even if not on the accounts of the temporary bill holders. Who would not, a short time before the collapse of the Leipziger Bank, have considered bills which bore its indorsement among the best investment paper? The heavy loss, however, that arises from the discounting of all bills which were thought to be good but which are afterwards dishonored can more easily be borne by a bank which has many different irons in the fire than by an institution, which has no possibility of substantial compensation through other profitable business. The business of loans on collateral is therefore recommended to the deposit banks, subject to the proviso that a very low limit for loans be maintained. Prof. Otto Warschauer would establish for the Imperial Deposit Bank proposed by him the maximum limit for loans on first-class stocks at 30 per cent of their market value. This proposition will be approved by the other 149 National Monetary Commission banks, because in that way the Imperial Deposit Bank would not enter into serious competition with them in collateral-loan business. With a loan to 30 per cent of the value of the security, very few customers could be served, for even the Reichsbank itself would go far above that limit for first-class securities. A business of that kind, however, leaves nothing to be desired as to the safety for the deposit banks, if only some one could be found to go into it. Among the absolutely safe businesses which deposit banks are recommended to undertake, scientific authorities almost unanimously include the purchase of state securities and others designated as available for trust funds; further, commission business, and even flotation and syndicate business in public funds. Since these proposals were made new experiences have been gone through, which ought to lead to other results. Commission business may pass in any case, although it is well known that resourceful people have used this form of the exchange law for speculation, and have later tried to claim the protection of section 764 of the Civil Code, the patron saint for dishonest commission givers. The purchase of state paper has been unfortunately for years a losing business—interrupted only by the brief sunshine caused by the 4 per cent bills—and in this hall hundreds are present who, as participators in the last 3% per cent imperial loan and Prussian consols, lost at least 7 per cent in the final settlement of the loan. Such losses would have struck a pure deposit bank especially heavily, not only through the reduction of the yearly income, but also because the trust in the absolute security of the deposit bank must be neces- 150 Renewal of Reichsb ank Charter sarily lessened. The history of English banking teaches also that pure deposit banks are not immune from collapse. To older business men the fall of the City of Glasgow Bank is still an unpleasant memory. It is therefore evident how thoroughly the theoretically incontrovertible propositions must be tested by practice; and, with all deference to abstract science, the fear can not be suppressed that if such an exclusively practical question as this about the character of the credit system is not settled chiefly according to the dictates of practical experience, the nation will have to lament the results very bitterly. The greatest importance is attached by all theorists to the most complete publicity of banks doing a deposit business. The demand that he to whom the greatest trust is given must prove on his part how he makes himself worthy of this trust seems entirely natural. Now jointstock banks and the companies carrying on a banking business with limited liability are compelled to publish their balance-sheet every year; and if the law should compel them to publish monthly instead of yearly balance-sheets, that would mean an expensive inconvenience, but no change of principle for those banks. The value of publicity in this connection is enormously overstated. Thus, for instance, Neumann-Hoffer, in his book, "Depositengeschafte und Depositenbanken," says (p. 214): " It would be an excellent means of securing a rational conduct of business" (he is speaking of "the full and unqualified publicity of all bank operations"). Against this we can cite the fact, corroborated by much experience, that there is only one really effective means of 151 National Monetary Commission attaining the rational administration of business—namely, the direction of business by sane, wise, and upright men. The author cited says further (p. 216), that the bank creditors would, with a similar form of statement for all banks, compare the balance-sheets with each other, and therefore draw conclusions regarding the solidity of their banks. That is more than we have a right to hope. The mercantile insight of our public is still far behind this point in its development. Not only the ordinary little man, not only the intelligent men and women of the higher social circles of the official and professional classes, but also the greater part of our business men lack the information necessary for an understanding of the banking business and of bankers' balance-sheets. This lack of understanding accounts for many a passionate invective against our banks, and many a radical proposal based on generalizations from quite isolated instances of abuses. Theory and practice, written exposition, and teaching by word of mouth must work together for a long time before the general public is educated up to an intelligent cooperation in economic life, in so far as it is concentrated in the banks. With the growing knowledge.of the essential character of our banks and of their great national functions would come a better understanding of how closely our bank organization is adapted to the needs of our population and its economic condition. Finally, we ought also to ask ourselves whether the results attained in commerce, industry, and agriculture in the last half century do not 152 Renewal of Reichsbank Charter present significant proofs of the fitness of our institutions? I think I am not making too bold an assertion when I say that a revolution of our banking system, especially deposit banking, would be felt at present as disadvantageous by all productive classes, and not least by those who for weighty reasons have sometimes not been found among the friends of the banking business—that is, by agriculture and industry. The customer can approach his bank in a twofold role— as creditor, in current account or deposit account, or as debtor in one of the many customary forms. In his role as creditor the farmer and business man is now accustomed to enjoy the high interest which the banks can afford to pay their customers as the result of the favorable use of the money managed by them in all sorts of economic undertakings. It is not a matter of indifference whether the capital temporarily disposable brings an interest of from one-half per cent to about 2 per cent, as in England, or whether it participates, to a certain degree, in the favorable opportunities of the money market. Industry and agriculture are even more interested, however, in finding in the banks ever-obliging money lenders, who are always on hand for undertakings which are economically desirable and which promise to be successful. A change in deposit banking would naturally considerably decrease the stock of foreign capital in the credit banks, and the necessary consequence would be that their investment business would also be reduced and burdened with heavy conditions. The cheap credit which is customary among us in normal times would at first 153 National Monetary Commission not be maintained, though in time this condition might be restored, and no one, I imagine, will have the courage to predict when economic life, disturbed by such measures, would begin to return to a condition of equilibrium. The injury inflicted in the meantime would be most heavily felt perhaps by those who are most inclined to rebel against present conditions. I sum up what I have said as follows: First. The German banking system is essentially suited to the present needs of our economic life as it has been to those of the past. Naturally, it falls short of perfection, just as do all other human institutions. But that is no excuse for legislative interference in the German bank organization. Second. The banker class labors continually for the perfecting of its organization, and does not fail to discuss questions affecting this organization, as indeed the present day teaches anew. The objection can not be made that external pressure was needed before there was any public discussion of the deposit system; for only since the foundation of the "Central Union" ("Centralverband") have we been in a position to discuss freely questions of banking before an expert audience. But it is to be hoped that the whole nation will labor for the perfection of its economic insight, just as the banking class itself has done. We have the same ideal for the banking class and for the community—not tutelage, but independent judgment and initiative. [Applause.] Doctor JAFFIJ. Gentlemen, I should like to speak briefly in reply to the remarks which Herr Geheimrat 154 Renewal of Reichsb ank Charter Riesser has made concerning m y address, in order t h a t no misunderstanding m a y arise. Of course I did not think of recommending a strike, but, as I indeed expressly stated, I spoke of it only in a joke. If I remarked t h a t t h e banker class, according to m y private judgment, would do well t o p u t its influence more heavily in the scale, I did not thereby mean t h a t it should make an outcry—in t h a t I agree with t h e honorable chairman; I meant simply this: Let them make up their minds as to what they want, and let them give expression to their wishes and say t h a t they are backed by t h e whole banking class—in fact, t h e whole mercantile class. If they do this quietly b u t energetically, it will perhaps be even more effective t h a n a great deal of noise from other quarters. Geheimer Oberfinanzrat MuEUvER, director of the Dresden Bank. Gentlemen, the committee was in doubt whether it was fitting, while we are in the present stage of foggy suggestions of legislative action with regard to deposits, to burden t h e Bankers' Convention with this question. W e decided to do so because we wished not to expose the banking profession a second time to t h e reproach t h a t was made against it after the promulgation of t h e unsuccessful bourse law—that it h a d been deficient in p r o m p t and energetic opposition. The result of the bourse law may be designated as an effective paralysis of an arm of our economic body. Whether t h e course recognized by our legislators as necessary will be followed—that of repairing t h e injury and of giving back to a paralyzed arm the necessary mobility and elasticity—the future will show. The experiment which *55 National Monetary Commission is recommended for the banking system by surgeons unskilled in this sphere is an operation on the bowels of the body politic; if thereby the inner organs are injured the injury will be incurable. The contemplated step should at least proceed on the basis of a clear conception of the position and function of these inner organs. Instead of this, I see even in the preliminary list the question, "What is the economic nature of the deposits managed by banks and bankers? From what sources do they flow?"—a question involving a fundamental error on the part of the politicians and scholars who feel called upon to solve the problem they have themselves constructed. They desire to protect the savings of the smaller depositors and those unfamiliar with business against irrational use and resultant danger, and assume that the deposits figuring in the balance sheets of the banks and bankers are, for the most part, composed of savings. In opposition to this, I assert, on the ground of my practical and pretty comprehensive experience—and I believe that all the practical men in this assembly will bear me out—that the sums listed in the balance sheets as deposits are only in a very small part really savings. These deposits are collected chiefly from the business reserves of business men, who allow their other banking transactions also to be handled by their banks, and from the temporarily disposable capital of the larger capitalists, which is soon to be invested in securities, mortgages, etc. For the proof of this statement I must go somewhat further into the development of German savings banks. 156 Renewal of Reichsbank Charter The deposits of the Prussian savings banks alone, which amounted in 1870 to only 495,000,000 marks, have increased, until by the end of 1905 they were not less than 8,293,000,000 marks; during the years 1901 to 1905 the increase averaged 500,000,000 marks a year. The savings banks of the Kingdom of Saxony had in the year 1905 deposits amounting to 1,331,000,000 marks; these were distributed among 2,753,000 depositors, so that there was a savings bank book to every 1.62 inhabitants. The deposits of all the German savings banks amounted to 13,000,000,000 or 14,000,000,000 marks at the end of 1905. The savings banks invest their money chiefly in mortgages. According to the statistics of the Prussian savings banks, which are available in complete form only for 1904, there were invested at the end of that year 7,761,000,000 marks, as follows: Marks. In mortgages Securities (for most part not state, but communal paper). In other ways (bills, bonds, deposits with the communes, etc.) _._ 4,703.000,000 2,188,000,000 Per cent. 61 28 833,000,000 As a result of the high interest on mortgages the savings banks afford their depositors relatively high interest, which varies between 3 per cent and 4 per cent, rates with which the credit banks, at least the larger ones, cannot compete in times of normal money conditions. In addition to the savings banks the producing middle classes—especially the artisans, and more recently, the farmers—use the cooperative institutions (Genossenschaften), for interest-bearing investment of savings and of disposable working capital. According to the statistics 157 National Monetary Commission of the union of the Schultze-Delitzsch Genossenschaften, 1,020 Genossenschaften belonging to this union had at the end of 1905, besides their own property (including surplus) of 256,000,000 marks, outside moneys coming from private individuals to the amount of 893,000,000 marks, or three and a half times their own capital, which was generally used for credits to the members. The outside moneys have doubled in these institutions since 1895. The statistics compiled by the Prussian Centralgenossenschaftskasse comprised the returns from 13,912 associations which were attached to it; at the end of 1905, 5,685 of these associations, with a capital of only 54,000,000 marks, had not less than 758,000,000 marks of deposits— that is, almost fourteen times their own capital. The assets of 811,000,000 marks balanced against the obligations of these societies included 16,800,000 marks of securities and 29,600,000 marks of mortgages, and the remainder, 765,000,000 marks, was evidently invested in credits to the members, mostly loans on security. The total yearly increase of property in Germany is estimated, on the basis of the returns of the Prussian supplementary tax, to have averaged for the last few years about three and three-fourths billions of marks. But with reference to this increase we must not forget that a considerable part of it results from the increase in value of land holdings and industrial investments, especially the real estate of the big cities, and that industry, including agriculture, has plainly not, as is well known, divided all of its surplus profits, but has used them for the extension and improvement of its plants. 158 Renewal of Reichsb ank Charter It is to be observed, further, that the flotations of securities in Germany in the last decade require on the average about two or three billions of money yearly, and that of this there are about one and a half billions yearly of domestic securities paying a fixed interest—state and communal loans, mortgages, and bonds—which are reckoned in the investment of savings. From these figures it appears that there is such an exhaustive absorption of yearly savings (though we set the highest possible figure for these savings) as to leave small chance for the credit banks to compete for savings deposits with the savings banks and cooperative associations. For the greater part of the population in the small cities and in the open country there exist no institutions at all for this purpose; the credit banks have until now not thought about it at all, and can not for a considerable time think about extending their network of branches so far, since the results would be entirely disproportionate to the expense of establishing and maintaining them. I shall discuss later the peculiar conditions in Mecklenburg and Oldenburg, where pure deposit banks find a field of activity. In general the deposit business of the banks is limited to a few large cities, and so far Berlin is really the only place in which a system of deposit banking has developed on a large scale. The deposit banks and the deposit departments of the branch banks undertake the management of the financial affairs of the business men and capitalists who turn over to them their available stock of securities and cash, and leave to them the care of all their banking transactions. The business men have a credit or a debit excess 159 National Monetary Commission according as the receipts from the sale of their products and goods or the payments due by them in their business are the greater. Since they generally need temporary credits, discount their customer's bills, pay foreign bills, etc., a connection with a pure deposit bank with a limited range of business could be of no use to them. The real estate owner who turns over his rents to the bank, and makes his payments of mortgage interest and other expenses through it, is in the same position. The interest has frequently to be paid before the rents are collected. The capitalist who invests in stocks changes his investments, accumulates money gradually for new investments, waits after the sale of securities or after the payment of mortagages and other outstanding dues for a favorable opportunity for investments, and until that time lets his money stand at interest. On the other hand, he uses an opportunity which seems favorable to him for purchases before the necessary cash is in his hands, and applies for a loan on collateral. For this capitalist also the connection with a pure deposit bank, standing aloof from the stock and flotation business, would not serve. Since with the great number of accounts, and the diversity of the periods of money-need and money-surplus in the various branches of business a regular balance of deposits remains, the bank can pay an acceptable rate of interest for the latter, and out of the difference in rates, interest, and other profitable relations with its customers it can draw a profit exceeding the expenses of the business. The expenses of deposit banking are, however, so heavy that the mere interest-difference without the other transactions 160 Renewal of Reichsb ank Charter would suffice for covering them only with those banks that have a great many customers and very large deposit balances. The business margin of a pure deposit bank would be unprofitable for many deposit banks, even in Berlin. The representation of business here given is not affected by the fact that the opening of an account is not made dependent on the proof of the prospect of profitable transactions—that, on the contrary, every respectable private citizen is provided with an account on making a deposit. The depositors of small savings, who in many places like Hamburg are not insignificant in number, and who, in Berlin, for example, find the deposit banks more convenient because the receiving offices of the city savings banks are so far away, are of no importance in relation to the total amount of deposits. Only in the last few quarters, during which money has been high, and deposit banks were able to pay higher interest than savings banks, were a few accounts drawn from the savings banks and taken to deposit banks. As soon as money conditions become normal again, this money will probably flow back into the savings banks. I now proceed to the various assertions which are circulating abroad concerning the use of deposits and the cover provided for them by German banks. The first error, which might almost be called malicious, because it is contrary to the clear facts of the case, is the objection that the banks use their deposits for syndicate business and speculations in stocks. This is disproved by the published accounts furnished by the banks. The Frankfurter Zeitung has compiled very accurate statistics from the accounts rendered by the 45 joint-stock banks existing in 83703—10 n 161 National Monetary Commission Germany that have a share capital of 10,000,000 marks or more. According to these statistics, the 45 banks had at the end of 1906, with a paid-up capital of 2,198,000,000 marks, and a surplus of 542,000,000 marks—that is, with property to the amount of 2,740,000,000 marks—a total of 949,000,000 marks invested in syndicated shares and stocks owned by themselves; that is, only 34.6 per cent, or a little more than one-third of their capital and surplus. For none of the listed banks did the investment amount to more than 51 per cent of its capital and surplus. I will assume, for the sake of argument—though the generalization is far from being universally valid—that syndicated shares are to be characterized as nonliquid or risky investments; and I will further accept the theories of the expert critics according to which only bills, reports, loans on collateral, and half of stocks owned by the bank itself are to be considered as liquid capital; while the other half of the latter and all deposits on current account may be considered as less liquid, although with the foresight practiced especially by the banks that work with a great deal of outside money, the percentage of short-time loans is to be rated very high. It goes without saying that the most liquid investments correspond to liabilities demanding the quickest satisfaction, the next most liquid to the other liabilities, and the least liquid to the capital permanently belonging to the bank. It is incontrovertibly proved by the above statistics that none of the banks in question have placed more than about one-half of their own property, and not a penny of deposits, in syndicated business and holdings of stocks. 162 Renewal of Reichsbank Charter The statistics that follow afford a view of the cover existing for the banks' liabilities. Before proceeding to them, however, I wish to point out that in the normal course of business the duty of keeping a reserve against the circulating bank acceptances rests not upon the accepting banks, but upon the customers enjoying this form of credit. The major part of the bank acceptances arises from domestic and foreign trade. The purchaser of the goods desires to pay for them only on receipt, or a certain time after receipt, but the seller is empowered to draw on his bank at the time of sending the goods and to pay himself by discounting the draft. The purchaser of the goods is required to furnish to the accepting bank the cover for the draft before it falls due. Only in the abnormal case of the unfulfillment of this duty, therefore, need the bank provide for the cover out of its own capital, and it ought to be sufficient if the banks were required to keep a certain percentage of their acceptance liabilities as security for this case. As the critics have been accustomed, however, to take all the acceptances into consideration, I will place opposite each other the statements with and without acceptances. The 45 banks given in the statistics of the Frankfurter Zeitung (second page of the morning edition of April 4, 1907) had, at the end of 1906: Liquid resources: Cash and bank credits BillsReports and loans on collateral One-half of the stocks and other securities Total Marks. 694, 450, 000 2, 087, 340, 000 1,227, 370, 000 303, 660, 000 4, 312, 820,000 163 National Monetary Commission Liabilities: Deposits Balances due on current accounts 1,810, 920, 000 3> 453, 820, 000 Total Acceptances 5, 264, 740, 000 1, 606, 670,000 Total 6, 871, 410,000 The total of outside moneys was covered to the extent of 81.92 per cent, and the total liabilities, including acceptances, to the extent of 62.76 per cent. The table shows further that the amount of bills alone was considerably greater than the amount of deposits. If we take the four banks with the greatest deposit business (the Deutsche, Dresdener, Diskonto, and Darmstadter), the following figures result: Liquid resources: Cash and bank credits Bills Reports and loans on collateral One-half of the stocks and other securities Total Marks. 358, 070, 000 1, 066, 960, 000 578, 060, 000 133, 810, 000 -— 2, 136, 900,000 Obligations: Deposits Balances due on current accounts-_ 900, 570, 000 _ - 1, 663, 810, 000 Total Acceptances __ 2, 564, 380, 000 706, 490, 000 Total _ -_ 3, 270, 870,000 The total of outside moneys was covered to the extent of 83.33 P e r cent; the total liabilities, including the acceptances, to the extent of 65.33 per cent. When one considers that it was not thought necessary in the Reichsbank act to provide for the theoretically 164 Renewal of Reichsbank Charter possible case of a presentation of more than one-third of the bank notes, since it requires a minimum cash reserve of only 3 3 ^ per cent, the credit banks can not fairly be required to arrange their business so as always to be ready to pay ioo per cent of their liabilities. The covering of outside moneys by liquid resources, which, as is proved by the statistics, amounts to over 80 per cent of the total liabilities, or over 60 per cent if we include acceptances— and this in a year of such great tension on the money market as 1906—this cover is so entirely sufficient that it is in no way inferior to that of the famous English deposit banks, quite apart from the fact that with the German credit banks the ratio of capital to outside moneys is much more favorable than with the English banks. The classification of liquidity is with us clearly the same as in England, for, as the preceding speaker has already aptly shown, the items figuring in the English balance sheets as money at call and short notice are practically no other than what we call reports and loans on collateral. With full assurance, therefore, we can assert that the solvency of our credit banks carrying on deposit business fulfills throughout the strictest requirements dictated by the experiences of critical times, and that our credit banks are prepared to cope, if necessary, with a run on the banks. Whether the same thing can also be said of the communal savings banks is a question more difficult to decide, and one that is not to be answered directly from the experience of the last decade, in which the great increase of their deposits occurred, since we have not had 165 National Monetary Commission during this time a general collapse of confidence. The solvency of the savings banks, which have invested 61 per cent of their deposits in mortgages and 28 per cent in securities, and have been compelled even in these quiet times to write off half their surplus as a result of the fall in the market price of stocks, is certainly far inferior to the solvency of the credit banks. We are concerned here not merely with the certainty, guaranteed by the communes, that the deposits will be paid back at some time or other, but also with the question whether prompt payment in time of need is assured to the depositor, and whether the taxpayers of the communes are not made to suffer in consequence of their responsibility. Even less assured is the solvency of the Genossenschaften, working with the "Centralgenossenschaftskasse." I have already stated, on the basis of official statistics, that the balance sheets of 5,685 associations show liabilities to the extent of 758,000,000 marks, or fourteen times the amount of their own means, and that their 811,000,000 marks of assets comprise 16,800,000 marks in securities and 29,600,000 in mortgages, the remainder being in the form of secured loans. Even if (though it is not apparent from the statistics) a part of the assets is deposited with the Verbandskassen, and the " interest in the deposits with the Verbandskassen of the union banks," given at 92,000,000 marks, is included in this, that makes the case no better, because the Verbandskassen, according to official statistics, work with outside moneys to the amount of nine times their own means, and have invested their capital in the same nonliquid fashion as the individual 166 Renew aI of Reichsb ank Charter associations. The outstanding claims of these many associations with weak capital are obviously, both in quiet and in critical times, collected much more slowly and with greater difficulty than those of the credit banks. The Schultze-Delitzsch Genossenschaften, which have already withstood several crises and have learned by experience, keep within much narrower limits. If the Centralgenossenschaftskasse desires to maintain the extremely artificial structure of its credit organization in times of crisis, it faces an extremely difficult task, since the capital of 50,000,000 marks assigned to it by the Prussian State is insufficient, even in ordinary times, for its business. The Centralgenossenschaftskasse had, according to its statement of March 31, 1907, besides 32,000,000 marks of deposits, 57,000,000 marks of loans from banks and bankers, and it is known that it has frequently borrowed on security, not only on the Berlin Bourse, but also from foreign banks, at higher interest than it obtains from its own debtors, a course of action which I will not criticise in view of the usefulness of the institution to the community. It is a remarkable fact that the same political agencies which further with all their might the colossal credit tension of the associations at the cost of liquidity, and which neglect the reform of the communal savings banks (an urgent matter, and one with which they are more closely concerned) because they are loath to interfere in the interests of the classes that claim credit from the savings banks—it is indeed a strange phenomenon that these same agencies should go out of their way to attack 167 National Monetary Commission the deposit business of the banks. While we admit that there are objectionable features in the use made of deposits by the banks, the excitement over the matter is an illustration of the saying about the beam in one's own eye and the mote in the eye of another. Cui bono? The depositors are perfectly satisfied with present conditions. They have the choice between the savings banks, and in the larger cities a number of competing banks. They receive regular interest and have faith in the bank which they have chosen for themselves, and can change if they so desire. I am not aware that the depositors have demanded a change of existing conditions. In truth, our politicians and writers are rerum novarum cupidi; they are especially infected with the modern animus against great capital and great banks, and they believe that they have found the most sensitive point in the heaping up of outside moneys. Their attacks would receive less attention if they did not hold forth the prospect that certain minor popular aims would be attained as a result of their reforms—first, a better market for German state paper, and the maintenance of a higher level for the quotations of such paper; and second, a lowering of interest rates, and a moderation of the discount rate of the Reichsbank. The most radical reform proposed—and the one which its advocates pretend would be most effective in furthering these two secondary ends—would put up with the deposit business of the credit banks as an unavoidable evil, but would regulate their business through compulsory provisions, and prescribe for them the obligation of 168 Renewal °f Reichsbank Charter keeping a certain fixed part of their deposits permanently invested in state paper. This is contrary to the A B C of the banking business, which consists in selling acquired securities in the quickest possible way, and having the utmost freedom in the prompt purchase of new securities. A finance minister who possessed some understanding and experience in the matter of flotations would never desire to have the syndicate, whose cooperation he wishes in a new state loan, already crammed with old stocks of state paper. The more this is the case the more anxious must the syndicate be, both with regard to the magnitude of the undertaking and its conditions. Vice versa, the freer it has hitherto been the quicker and the more cheaply will it be able to accept the risk of floating the new loan. The greatest danger of new flotations, however, is that the banks, already weighted down with earlier compulsory investments, would throw on the market from their older stocks as much as they undertook of the new loan. That would be sure death for the market price of the new loan. Furthermore, the compulsory acquisition of state paper appears to me justified at most in so far as it applies to purchasers for whom permanent investments as such are economically rational, and who, therefore, in the choice between state paper and lower class securities or mortgages merely are directed toward the former. In this sense compulsory acquisition for savings banks and insurance companies is debatable, and in other countries is brought about legally or administratively. In Prussia, however, as I have already remarked, we have not even decided on any such measure with regard to the savings 169 National Monetary Commission banks. The introduction of a compulsory obligation for purchasers with whom, as with the credit banks, the fixing of capital in permanent or even long-time investments is contrary to the nature of their business, would be about the greatest injury that could be inflicted on state credit at home and abroad. We should be reminded of the procedure of some eighteenth century princes who, being unable to sell the porcelain of their manufacturers, imposed on the Jews the obligation of buying a set when they married. The single practical method which can lead to a better rating of state paper, and to the elevation of the exchange level, is the progressive rise of the national prosperity and an intelligent observation of the actual condition of the money market with regard to the production of state and communal loans, the excessive quantity of which—particularly of the latter—is responsible for the present bad conditions. Everything else is quackery. Just as illusory is the hope of effecting a decrease in the rate of interest by such or similar means. The high price of money is indubitably the result of the fact that the capital devoted to the supplying of credit, in spite of the accumulation of all available capital, does not suffice for the satisfaction of the need for credit. In so far, therefore, as the need can not in the judgment of the borrower be postponed, high interest must be paid; or if this can not be borne, the loan must be rejected. How, then, can one expect that a lowering of the interest rates will result if we withdraw from the reservoir of ready capital a part of the supply which affords credit, and use it for 170 Renewal of Reichsbank Charter other purposes? The opposite would certainly occur. And not only that, but such a measure would certainly cause an earlier rise of the money rate. For this it is not necessary that the means of granting credit be wholly withdrawn from the reservoir. Any limitation of free movement, any removal of credit from the place at which it was formerly sought to another place, with which the customer does not stand in the same relation, must operate toward a higher rate. Under this head falls the proposal, hardly meriting serious criticism, forcibly to transfer a part of the capital from the banks which had been managing it to the Reichsbank, and to give the latter the task of using it. There is one view, to be sure, according to which this effect of premature dearness of money is expressly regarded as desirable. This recently revived idea was upheld as early as 1892 by the late banker, Caesar Strauss, who maintained that the scarcity of money which generally occurs at the climax of a period of prosperity, and which ushers in the reaction, should be shoved forward to the beginning of the period of prosperity in order to guard against overspeculation and crises. Herr Strauss proposed to withdraw a great part of the interest-bearing deposits from the credit banks by means of an imperial deposit bank, whose direction he was ready to assume, under the protection of the Empire and of the Reichsbank. He proposed to check each developing period,of prosperity with forethought, even if without due consideration. Had this theory been put in practice since 1870, perhaps one crisis would have been avoided, but the preceding and following impetus 171 National Monetary Commission to development would still more certainly have been avoided, and patient Germany would have remained a poor country to this day. It is true that the economic progress of Germany since 1870 has not been regular, but has been interrupted every few years by retrogressions which partook more or less of the character of crises, and which involved considerable losses. But these were only temporary interruptions, and each retrogression was followed by a new extension of industrial activity which surpassed the earlier one and further increased the national wealth and the ability of the country to bear taxes. If we now stand on an equal footing with the other old civilized nations in commerce and shipping, agriculture and industry, if our ability to bear taxes has so greatly increased that there is hardly any complaint about the great expenses for army and navy, which seemed to many, even long after 1870, more than we could permanently bear, our credit banks may claim with pride that they, through their initiative, their participation in industrial undertakings, and above all, through their courageous and at the same time careful supplying of credit, have contributed not a little to this happy development. This granting of credit has been profitable for creditor, debtor, and the whole country. The reformers assume the increase of national property at the rate of 3,000,000,000 to 4,000,000,000 marks yearly to be a statistically established fact; they assume further that this increase is bound to continue automatically, as though it were entirely independent of the present system of labor—that is, of the close connection subsisting 172 Renewal of Reichsbank Charter between industrial enterprise and free mercantile movement—and as though this system could be replaced by a new one without danger. They seem to conceive of the accruing billions as like the cream on a jar of milk, which can be skimmed off and divided at will into regular portions between deposit banks, savings banks, cooperative associations, trade, agriculture, and manufactures, without letting the big capitalists get so much as a taste of it. I only fear that the recipe of these alchemists might cause a watery decomposition of the milk. One of the most amusing schemes with regard to the money system is the programme now submitted to our consideration. It consists of two parts: First, we are bidden to economize metallic currency by means of an extension of the check system, and thus to strengthen the Reichsbank's stock of gold and facilitate a moderation of the discount rate; and, in the second place, at the very same time we are told to render it difficult for the credit banks to attract and utilize deposits. Banks and bankers have not the smallest personal interest in accepting for others the care of their business without charging a commission. Check business imposes upon them only sacrifices, great labor, increase of personal and business expenses, responsibility, and the unavoidable danger of loss in case of the smallest oversight of a subordinate. The sole and absolutely necessary compensation for these sacrifices is the attraction of low-interest deposits on check or deposit accounts, and the possibility of an extensive and profitable use of this money. If this chance is taken from them or made more difficult, the instinct of self- 173 National Monetary Commission preservation will force the banks to oppose vigorously their utilization for check business, and thus the whole movement for an improvement of the means of payment and an easing of the money market collapses utterly. Thus, as frequently happens, one horse is hitched before and the other behind the wagon. The other propositions for legislative regulation are as yet so obscurely formulated that it would not, I think, be worth while for us to concern ourselves further with them in the Bankers' Convention. No one has yet succeeded in finding a definition for deposit credits, or in setting forth serviceable distinctions between current account credits, report moneys and deposits, or between deposits in the broader sense and savings. And we may, for the present, well leave to scientific inquiry the question whether it would be possible to establish a right to the preferential payment of savings deposits. I should like to add a few further remarks concerning the proposed pure deposit banks. The above-mentioned Herr Caesar Strauss had shown the results of his labors to the Reichsbank and to Doctor Miquel, at that time Minister of Finance, in 1892; and he afterwards published them in a brochure. According to his plan, an imperial deposit bank, with private capital but under the protection and supervision of the Empire and the Reichsbank, was to be organized. The capital was fixed at 60,000,000 marks, with 25 per cent paid in. The institution was to have branches in the larger cities, while in all other banking cities the Reichsbank establishments would have to 174 Renewal of Reichsbank Charter undertake gratis the acceptance of deposits and their repayment. Although the idea of responsibility on the part of the Empire—which has not even undertaken the guaranty of the obligations of the Reichsbank—or on the part of the Reichsbank was not included in the scheme, the project broke down under the objection that the name " Imperial Deposit Bank," and the cooperation required of the Reichsbank in the acceptance and repayment of deposits would be likely to awaken in the public the false notion that the Empire and the Reichsbank would have to bear the responsibility for the conduct of business. This reason will also prevent the execution of such a project in the future, and I believe, therefore, that the brief article recently published in the Tag by one of the provincial directors of the Reichsbank, in which the proposal of Strauss is again taken up, was written without consultation of the views of the Reichsbank management. In the year 1894, Herr Professor Doctor Warschauer proposed an imperial deposit bank with the same title, but with the modification that there should be supervision by the Empire but no cooperation with the Reichsbank; that it should have its own organization and numerous branches. He urged the scheme with fantastic representations of the extent of business soon to be expected—a billion marks of deposits—and the profit to be expected— 21 per cent to 22 per cent dividends. The professor was so confident of these high profits that he contemplated the immediate placing of shares of stock to the face value of 50,000,000 marks, with 50 per cent paid in, at an average 175 National Monetary Commission price of 150; that is, at a premium of 100 per cent on the amount paid in, directly after the promotion. If high finance should take up with such a plan, the reproach of wanton stockjobbing would not be inapplicable. There is naturally no objection from any standpoint to the establishment of a pure deposit bank if it is established with private capital and without the false colors of an apparent imperial guaranty. The credit banks need not fear the competition of such new institutions. It would not, in any case, be worse than the competition which they have among themselves. But the ability of a new deposit bank set up in the grand style to earn profits, must, under the conditions that prevail in Germany, be regarded as highly doubtful. The business of such a bank does not generally become great at one stride, like a newly created central note bank, provided with the monopoly of issue. A deposit bank, if it does not take over a business already created, must begin small, and gradually move forward. The conclusion based on the ability of the English joint-stock banks to earn profits is incorrect for several reasons. The joint-stock banks do not have to compete for their deposits with a highly developed savings-bank system, nor for their stock business with joint-stock credit banks carrying on general business. They are, besides, not pure deposit banks, but at the same time the check and clearing banks of the country, and they demand from their current-account customers large balances, for which they pay either no interest whatever or only a very low rate. A fundamental difference arises, further, from the greater wealth and 176 Renewal of Reichsbank Charter more conservative customs of English depositors, in contrast to our own, who demand higher interest, and, as shown above, are mostly business men with temporary need for credit. This being the case, the need for deposit banks has arisen only in a few places, as, for example, in Mecklenburg and Oldenburg, where, on the one hand, the moneyed public prefer the permanent possession of interest-paying bank deposits to the acquisition of securities or mortgages, and where, on the other hand, the communal savings banks are less extensively developed. Here there are several banks, with branches in cities and villages, with relatively small capital and large deposits, whose business, with some variations, corresponds approximately to the plan for deposit banks. In Frankforton-the-Main the Frankfurter Bank was transformed a few years ago into a deposit bank on surrender of the note-issue privilege. Its deposit business has not so far amounted to very much, since, with 18,000,000 marks of share capital, it has a yearly average of only 20,000,000 marks of deposits. It is important chiefly as the deposit and transfer bank for the rich Frankfort families and as the administrator to whose management they intrust large quantities of stocks. Its income arises less from the difference in interest on deposits than from the large commissions derived from its other business. If, in consequence of a failure to recognize these facts, a deposit bank were to be instituted on a great scale in accordance with the suggestions of Strauss and Warschauer, with an extensive network of branches, it would be sure to end in grievous disappointment, since it would 83703—10 12 177 National Monetary Commission be loaded down in the first few years by the expenses of the business. A change may occur in the future if, with the further increase of national prosperity, the surplus profits of producers are no longer, as at present, used for increasing and consolidating their business, and the number of capitalists becomes greater who, having no need to obtain credit, wish to have on hand in a bank large sums in the form of interest-bearing deposits. When we shall have arrived at this stage, pure deposit banks will arise of their own accord without legislative stimulus— partly through the transformation of existing institutions, partly through the establishment of new ones; and competition will bring it about that they voluntarily submit themselves in their own interest to the limitations of business customary in other countries. I sum up my remarks by saying that the existing condition of the German banking system is throughout a satisfactory one, that the interests of the creditors of banks, as well as of the business requiring credit and the economic interests of the country, have obtained their full rights, and that legal or administrative interference, which might result in dangerous disturbances of our economic life, should be resolutely opposed. I have taken the liberty, as a supplement to the foregoing and to the remarks of the other speakers, to draw up a number of formal declarations. I am sure no one will object if I do not read them again; if necessary, they can be read out just before the vote is taken. I merely wish to remark that if No. 3 should not be regarded as correct by individuals present—that is, if it is 178 Renewal of Reichsbank Charter thought that the banks of Mecklenburg and Oldenburg do not justify characterization as pure deposit banks to the extent which I have indicated—I should have no objection to the striking out of the middle passage or to a change in its wording. Personally, I hold the wording to be satisfactory and not open to misconstruction, and I shall wait to see whether a motion for a change comes from the assembly. Doctor SAI,OMONSOHN. Gentlemen, I wish to declare, at the beginning of my remarks, that I am in perfect agreement with the last speaker in all points. I am, with Herr Doctor Jaffe, of the opinion that English conditions are entirely different from our own, and that a transference of English institutions to Germany should not be attempted without careful consideration. I am also, on the basis of my studies and the experience of many years, of the opinion that our German banking system, as it has developed, is much better than the English. I have taken the floor in order to discuss a few points which have not been raised in the main speeches. I turn, first of all, to the suggestions which Herr Doctor Jaffe gave at the close of his presentation. He asked us to consider whether it would not be advisable, in view of the further extension of deposit banking in Germany, to separate the deposits from the current-account credits on the books of the banks; secondly, to publish the balance-sheets of the banks monthly; thirdly, to separate the management of deposits from other moneys; and, fourthly, to introduce special securities for deposits. I should like to take up these questions from the stand- 179 National Monetary Commission point of the banker. Herr Geheimrat Mueller has already reminded us that the attempt to find a comprehensive definition for deposits has not yet been successful. Therefore, the question answers itself—a separation of deposit accounts from the other accounts is not possible. We can not determine whether the money paid in is from surplus working capital or savings. Nor do I believe that the attempt to make such a distinction will succeed in the future. As for the question of the publication of monthly statements, Herr Doctor Damme has already shown that it would be an expensive and inconvenient affair. I am, however, of the opinion that in addition to this another disadvantage would be connected with it. In the first place, gentlemen, I take it for granted that those who make this proposal do not have in mind the publication of a complete and correct balance-sheet at the end of each month. That would be impossible at the end of the month. You yourselves know that the preparation of a bank statement requires at least two months. If we close on the 31st of December it is not possible, in spite of all our efforts, to present the completed balance-sheet earlier than about the beginning of March. It can, therefore, be only a rough balance. Such a rough balance gives no proper idea of the facts, and the greater the business is the less clear would it be. If the true condition of the bank is to be worked out from such a rough balance, then, as you all know, very large transfers must be made among the individual accounts. I will only remind you that the credits 180 Renewal of Reichsbank Charter and debits must be equalized, whenever anyone has both a credit and a debit, so that these accounts will compensate e$,ch other. Credits and debits will always give, therefore, a false picture in the crude balance. The stock account will also give a false notion, because large amounts entered first on the securities account must be transferred to the interest and commission account, just as, on the other hand, the interest must be charged to the securities account. The publication of the crude statement at monthly intervals is in itself practicable, as is shown by the example of the Hamburg deposit and transfer banks, which publish their statements regularly every month. This plan has its objectionable side, however, especially in the case of banks that engage in the note-issue business on a large scale. Great business secrets might be betrayed through the publication of figures and the changes which occur from one month to another. Suppose, for example, that state loans have been undertaken, and that it is to the interest of the State that these operations remain secret for a time. The operation would forthwith become known if the securities account of the bank or banks connected with the State should rise suddenly to a great height. Let me further recall to your minds the Hibernian incident. People had become excited on the bourse over the continued purchase of Irish stocks, and they suspected that something was brewing. Suppose, now, that the Dresdener Bank and the Schaffhausen Bankverein had had to publish their balance sheets and reveal the increase of their securities iSl National Monetary Commission accounts by these enormous sums. I believe that the interest of the State, as well as of the banks, would be injured through such publications. With regard to the separation of deposit business from the other branches of business, I believe that every bank that carries on deposit business has really worked out this separation already. I believe that in every bank that devotes itself to deposit business on a large scale each deposit branch is treated as a separate business concern, which has its own bookkeeping, draws up its own balance sheet, and with regard to the main business stands in the position of an outside customer. The aggregate of the deposit branches is also placed, as a rule, under a distinct management. This demand is thus fulfilled; it is fulfilled, as a matter of course, from considerations of convenience and orderly management. In the same way the fourth question—that concerning security for deposits—is easily answered. It is a matter of course for a bank director to make sure every morning of what there is in the vaults and of what obligations he has incurred. These obligations include the liabilities that fall due each day, and, of course, also the deposits. These are demands which are fulfilled spontaneously. Now, I should like to discuss still another point which, strange to say, has not yet been mentioned at all. We are always talking as if deposit business lay only in the hands of the banks. But do not the private bankers also carry on a deposit business ? Is the demand to be made in all seriousness that the private banker publish his accounts monthly, or would you forbid the private 182 Renew aI of Reichsb ank Charter bankers to carry on deposit business? Certainly not the latter, I believe, and the former would be the death of the private banker's business. The confidence which the private banker inspires in his section of the public would very often be destroyed if he were compelled to set forth his sometimes limited property qualifications. His business does not rest so much on the strength of his capital as on his personal abilities, on his knowledge of banking and the bourse, on his character, and on the confidence which he has won for himself in the city and the province. This confidence, however, arises also largely from the belief of the public that the discretion with which it wishes its business transacted is better afforded by the private banker than by the joint-stock banks, supposedly more subject to public control and more exposed to state interference. This belief would be destroyed if the private banker were compelled to expose his business affairs. I should like now to add a little to what was said by Herr Geheimrat Mueller. Herr Geheimrat Mueller has pointed out that the Genossenschaft banks maintain a relation between their deposits and their own resources that is very different from that maintained by the big banks. In the case of 1,020 Schultze-Delitzsch associations the deposits amount to three and a half times their own property, and in the case of 5,685 associations connected with the Prussian Centralgenossenschaftskasse about fourteen times their own property. I should like to compare in like manner the great, the medium, and the small joint-stock banks. The Frankfurter Zeitung has recently earned our gratitude by investigating the 183 National Monetary Commission smaller joint-stock banks, and has shown that there is one joint-stock bank which has 250,000 marks of paid-up capital and at the same time deposits to the amount of 1,800,000 marks. I believe that the Frankfurter Zeitung deserves great credit for calling attention to these conditions. For this reason I have made a compilation of figures which is in many respects instructive. I have grouped together all joint-stock banks with a capital of less than 300,000 marks. In this class we find 52 banks with a total capital of 5,000,000 marks, a surplus of 3,485,000 marks, and deposits of 69,000,000 marks. The same banks show 2,150,000 marks of cash and bank credits. Hence it appears that these banks have deposits to the extent of eight times their capital and surplus, and that their cash resources amount to 3 % per cent of their deposits. A similar collection of statistics for banks with a share capital of from 300,000 marks to 1,000,000 marks shows that we have 62 banks with a total share capital of 52,099,000 marks, a surplus of 10,427,000 marks, and deposits of 174,800,000 marks; these banks held 16,395,000 marks in cash and bank credits. The situation here is, then, that the deposits are three and a half times the capital and surplus, and that the cash resources amount to about 9% per cent of the deposits. If we compare with these the 45 banks of the Frankfurter Zeitung, referred to by Herr Geheimrat Mueller, we find that the latter, with a responsible capital of 2,740,000,000 marks, held 1,810,000,000 marks of deposits, and 694,000,000 marks of cash and bank credits. The relation here is a very different one. The cash resources amount 184 Renewal of Reichsbank Charter to 30 per cent of the deposits, and the latter do not form a multiple of the capital, but only 66 per cent of the responsible capital. Gentlemen, it must be said at once that these conditions existing among the smaller banks are worthy of consideration, of observation, and of study; and indeed they furnish some ground for those who say that legal regulation is necessary. But in this matter, too, I urge you to be cautious. There is, for example, among these banks one which has 30,000,000 marks deposits, with a share capital of 1,200,000 marks. By chance I was asked once, years ago, whether it was advisable for a lady who had inherited some shares in this bank to keep them. I examined the statement of the bank in question and found that at that time it held about 25,000,000 marks of deposits, while its share capital amounted to only 1,200,000 marks, and of these deposits 22,000,000 marks were invested in mortgages. I was shocked, and said that it was no investment. I collected information, however, and investigated this bank somewhat more carefully. I then saw that it was a bank which ten or fifteen years before had risen out of a Genossenschaft, and that it had paid high dividends for years; and the information which I received from expert authority was to the effect that in spite of this immobile investment the bank was entirely sound, and that it was not likely that its deposits would be withdrawn in such a manner as to put it in danger. This latter assertion was based on the fact that the bank had its customers in local business, that very close relations existed between the directors 185 National Monetary Commission and the customers, that the depositors were also for the greater part shareholders, and that, as experience had shown, there was such a relation of mutual trust that apparently no sound objection could be raised against this bank. I received these facts from expert authority. We are thus warned that these questions must be handled with great caution. The statistics presented by me show, further, that these banks, in spite of the fact that they are joint-stock banks, have really preserved the character of the cooperative institutions out of which they sprang, and that people should beware of drawing general conclusions from these small joint-stock banks, and of considering principles and policies which may properly be applied to Genossenschaft banks as generally applicable to all joint-stock banks. I wish to say, in conclusion, that all the discussions, including my own, suffer from one great mistake. Not a single speaker has raised the question, " Where are the abuses ?" Is there any practical reason for resorting to the bridle of legislation? If this question is raised, it is sure to be met with cries of "Leipziger Bank!" I have made a compilation for the last thirteen years, in order to establish what losses have really occurred to deposit creditors from 1894 until 1907. The Marienburg Private Bank is the last one in this list. If the joint-stock banks which have gone into bankruptcy during this period are selected, and if the quotas are considered which the depositors received, or will receive, in the liquidation, then there have been lost 24,000,000 marks in these thirteen years, including losses through the Leipziger 186 Renewal of Reichsb ank Charter Bank, the Marienburg Privatbank, and the Spar- und Vorschussbank in Dresden. This figure is large. If you consider, however, that, as the other speakers have convincingly set forth, these deposits are in reality not savings, but in greater part working reserves of business men; if you further consider that the period under consideration includes not only a period of business prosperity, but also one of depression, and, above all, a period of great bank failures, then you will agree that, though this figure in itself is large, the amount is hardly worth considering when compared with the enormous advantages for the national prosperity that have grown up through free movement in banking activity; and you will conclude that there is no necessity for legislative interference. I wish to express my full and entire approval of the declarations that have been proposed by Herr Geheimrat Mueller. Mr. BuECK, general secretary of the Centralverband Deutscher Industrieller. Gentlemen, do not fear that I, a mere layman, will attempt in this presence to add anything to the accurate, clear, and exhaustive contributions of the previous speakers, particularly the main speakers, or to supplement their remarks. I am not qualified for that, but I have had the honor of representing for thirtyfour years not the economic interests of a single district or State, but those of the greatest and most important part of all German industry. I have, in this long period, passed through many changes from deep depression to high prosperity and back again, and have had an opportunity of observing the extraordinary importance which 187 National Monetary Commission German banking has for industry. And so I thought that it might perhaps be to the point if, from the standpoint of a representative of the industrial interests, I were to confirm, only in bare outline to be sure, what has been said here so explicitly and so convincingly. Since the extraordinary scarcity and dearness of money coincided with a period of the greatest industrial development, I could not join in the laments over the situation. All industries were piled up to the utmost with orders which they could hardly fulfill. Many have, on that account, been strongly blamed, particularly the industries that supply raw material and half-finished products. They all naturally made the effort to expand themselves by enlarging their plants and by making new investments, so that these demands could be satisfied. This effort was somewhat checked by the increasing dearness of money. Though I do not by any means adopt the position of Caesar Strauss, yet I believe that this check has really operated favorably on our economic development. If a period of regression should again occur in our industries, then, as a result of these checks which have been in operation, the disadvantages and injuries for our whole economic life will not be nearly as noticeably destructive as if the justified efforts for extension had been given full play. But, gentlemen, a continuation of this condition would operate injuriously on our economic life; and hence the efforts, which were discussed in the main yesterday as well as to-day, to improve the money situation and to encourage it as far as possible, are explained. The chief means to this end lies in getting command of the 188 Renewal of Reichsbank Charter newly created capital which has arisen in so many places, and in such different amounts—a process which, I believe, has been somewhat overestimated in recent years in point of the rapidity of its accomplishment and the permanence of its effect. I believe that the first task is to bring together this newly created capital and to convey it again to the productive activities of the people. This is the task of our banking system. The first main speaker has characterized it as credit-concentrating activity. I should call it capital-concentrating and capital-distributing activity, and, gentlemen, it is of the greatest importance to our industries that banks and banking in Germany be not disturbed in this prosperous and fruitful activity. A disturbance would occur, however, if the goal sought by malicious persons and by theorists—that is, the separation of banking into the two categories above mentioned— should he attained. The rapid development of our economic life has astonished the world. But we still stand far behind another modern state, which has not, as has our poor Fatherland in its time, been thrown centuries behind in the march of civilization. If we do not wish to stand still, if we wish, as we all do, to hasten and overtake the nations which have gone on ahead of us, then we must constantly convey the new capital which we create to the productive activities of the people. In other words, I point out only what has already been said, that we are not yet rich enough for this separation in our banking system. We have not as yet a million people, as in England, who pay their tailor bills and household expenses by check, and 189 National Monetary Commission who have, according to our standards, great amounts lying in the bank, and are satisfied with a minimum rate of interest, or even no interest at all. Therefore it is clear that one of our most important duties is not to let the sources from which capital flows to our banks be disturbed or drained off. As has been repeatedly said with perfect truth by different speakers, these sources consist chiefly of working capital that is lying idle. It is necessary that this capital be conveyed to business through the banks without hindrance. And in this delicate matter it is proposed that legislation should interfere, though it would certainly cause a most lamentable disturbance. Gentlemen, with my scant stock of expert knowledge, I can form no conception of how it is possible for a manufacturer, when he has surplus money, to give it to a deposit bank, and when he needs money, to go to a so-called credit bank. I do not know whether such a banking system could maintain itself. Judging from the remarks of the third main speaker, I take it that it would be impossible. It is also a question with me whether, even if such a law is passed, a sharp separation is at all possible with us—that is, whether the so-called credit banks will not enter as current accounts the sums brought to them as deposits. In all these matters our present tendency to interfere by means of legal regulation with the natural course of development is sure to work more harm than good. It has been said many times, by others as well as by the advocates of this complete separation, that abuses and injuries to the public are liable to occur. As the previous speaker has already explained to you, in this 190 Renewal of Reichsb ank Charter respect the case is really not so bad. In this connection I should like to call attention to a certain tendency to look in all directions for the economically weak, who must be protected against the supposedly strong. In this instance, the public, as the weaker part, is to be protected against the stronger banking world. This is the social tendency, and everything that is touched by it is rendered holy and inviolable. But, gentlemen, even the last secretary of the interior, Count von Posadowsky, frequently declared in the Reichstag that we must be careful not to weaken the self-reliance of the people by too much supervision and too much protection. If I am not mistaken, he used the expression once that we should be careful not to place a guardian at the side of each man, and that every one should be brought up to self-reliance and to a recognition of his own responsibility for the actions of his economic life. If a banker offers a customer 6 or 8 per cent, while the large banks will give only 3 per cent, he is a very foolish man and lacking in good judgment who trusts his money to the former in order to reach the golden mountain. No law can protect the stupid; to limit banks in their important operations for their sake would be a foolish proceeding. This would be especially regretted by industry, which recognizes the importance of a fully developed banking system. I would not go as far as the first main speaker, who says that the banks have been the pioneers of industry. I would reckon among these pioneers the enterprise of the manufacturers themselves and the great technical skill of those associated with them. But there is no doubt that industry is thoroughly 191 National Monetary Commission convinced of the importance to be attached to the banks in connection with all their undertakings. My esteemed friend and colleague, Doctor Beumer, intimated in the introduction to his remarks of yesterday that there has not always been harmony between banking and industry. It is the well-known case where the one must ask and the other should give. Gentlemen, there is perpetual ebb and flow in the business between the banks and industry, and it goes without saying that harmony can not always prevail. But, gentlemen, I can establish the truth of what I have already said, that industry fully recognizes the importance of banking, both in good and in bad times. Whoever recalls the times of the seventies and the terrible crisis—I see here some gentlemen whose hair has become gray as my own, and who know what times those were— will remember how the banks, themselves in great trouble, pulled a great many of our industries through, when for years prices stood below actual cost. It was the German banking system, not nearly as developed at that time as it is to-day, that stood faithfully by the side of industry. Industry will not forget that. It will also stand by you to-day when legislative measures are proposed which would be injurious to you. I believe I can vouch for your finding in industry—at least in the most important industries, those from which support would count for most—a faithful confederate Mr. MAX SCHINCKEL. Gentlemen, I promise not to make large demands upon your patience. I can declare myself in harmony throughout with the remarks of the main speakers, especially with Herr Doctor Jaffe's re- 192 Renewal of Reichsbank Charter minder that if we wish to object, we should do so in time— that is, before the bills are introduced in the Reichstag. I can further declare myself also all the more in agreement with the address of Herr Geheimrat Mueller, since he took upon himself the unpleasant task of speaking the truth very plainly. That is good, even if not always welcome. But my very agreement with all this makes me the less able to subscribe to the third section of the resolution. To this I ask your attention for a few moments. It is the purpose of the resolution, no doubt, and, as I take it, of the whole Bankers' Assembly, to declare openly and absolutely that there is no occasion for legislation. I see in section 3, however, a weakening which seems to me out of place. The last sentence of this section indulges in prophecies as to what may happen in the future. I am a decided enemy of prophecies when there is any question of their being put on record by publication. Whenever I have had a hand in them, they have always gone wrong. And it would be very gratifying to me if the author of the resolution would decide to strike out this part of section 3. The words are printed spaced. They read: "Spontaneously without legislative instigation/ ' Gentlemen, if it is expressly stated in the first sentence that there are already parts of the country where pure deposit banks are necessary, those who are bent on blessing us with a deposit bank law might hit upon the idea that before permitting pure deposit banks to be established, we should make legal regulations governing such permission. I am afraid this is not as it should be. I 83703—10 13 193 National Monetary Commission hope the author of the resolution will pardon me for saying so. I am not so well acquainted with Oldenburg, but I know that the Oldenburg banks can not by any means claim to be called pure deposit banks in the usual sense of the term. They are interested in syndicate business, and also give blank credits. That should not be permitted to the pure deposit bank, according to the view of the legislators. In the case of the Mecklenburg banks—for I am not only a citizen of Hamburg, but also of Mecklenburg—I assert emphatically that they are very slightly differentiated from most other banks by their business. They have the single peculiarity that they have an amount of deposits seldom attained by the commercial banks. The cause of this is natural, and does not lie in the fact that the Mecklenburg citizen refrains from investing his money in mortgages. On the contrary, he makes such investments with an astonishing confidence. I know properties—the alphabet has not as many letters as these properties have mortgages in amounts of from 2,000 to 3,000 marks for widows and orphans. However, there is in Mecklenburg a great need for investments, in spite of the fact that the people earn but little money, as they are mostly only small agriculturists. But if they only deposit as savings the amount by which Mecklenburg taxes fall below those paid in other parts of Germany, there must be a very considerable total. Furthermore, Mecklenburg—I am proud of being able to defend Mecklenburg—is ahead of all our other states in that it has issued no state loans since time immemorial. As a result, the public has no oppor- 194 Renewal of Reichsbank Charter tunity to invest money in Mecklenburg consols. Finally, the people in Mecklenburg- have had very bad experience with the Sterlitz Bank. What is more natural than that they should go to the two well-established banks which offer them comfortable interest, and which are enabled to do this not because they are pure deposit banks, but because they are in the fortunate position of standing in most highly favorable relations with some great banks in Berlin. The banks have half their money deposited with the Berlin banks. How are they different from any other bank if they deposit their money in other banks? They can not, therefore, call themselves deposit banks, and they would labor under the same disadvantage as the pure deposit banks if they did not find favorable use for their money among their business friends in Berlin. I believe that we ought to put it to the main speakers—Herr Geheimrat Mueller has already half-way assented—whether it would not be well to drop this allusion to Oldenburg and Mecklenburg, partly because it can not be said that they are pure deposit banks, and partly on tactical grounds. I should not like to see the need of pure deposit banks recognized as yet. I do not care to make a motion, however, and I merely leave it to the main speakers whether and how far they will propose amending section 3. Geheimer Oberfinanzrat MUELLER: I have already indicated that I will gladly strike out the parenthetical passage in two places in so far as it relates to Mecklenburg and Oldenburg. As Herr President Schinkel has come forward as a Mecklenburger, I must defer to his greater 195 National Monetary Commission local knowledge. I have, however, already explained that these banks are not at all to be considered as pure deposit banks, and I must still maintain that of the existing banks in Germany they bear the closest resemblance to one's idea of pure deposit banks. On the other hand, I am not in favor of any further elisions. To my mind what we are here giving expression to is not prophecies, for which I also have no inclination, but the desire to meet a present need on the basis of present conditions, the consequent decision to wait for the future to show whether a greater need will arise, and finally the assertion that even if a greater need should arise, legal interference would not be necessary. It is therefore, I believe, quite proper to reply to those who now demand action from the legislator that at this time there is no economic need, and if later such a need should occur, legislative interference will not be necessary even then. The PRESIDENT. Gentlemen, I regret that a motion has been put to close the debate, which is signed by not less than seven gentlemen, while seven still remain on the list of speakers. Is a motion to close supported? (Cries of " Yes.") Will the gentlemen rise who are for closing the debate? There seems, unfortunately, to be a very great majority for closing it. Therefore, I close the debate. Justizrat CRUGER. I can, unfortunately, only express my regret at being unable, because of the close of the debate, to correct some misconceptions in the address of Herr Geheimrat Mueller, concerning the financial condition of the credit associations. The PRESIDENT. I suppose, gentlemen, that you forego the second reading of the resolution. (Agreement.) 196 Renewal of Reichsb ank Charter Number 3 is changed so that the first sentence now reads: "A need * * * has not yet arisen in Germany/' All the rest remains, except that in the last sentence the reference to Oldenburg and Mecklenburg is struck out. Will the assembly accept the resolution as a whole with these changes? (Agreement.) Will those who are opposed raise their hands? (None vote.) I declare, therefore, that this resolution of the German Bankers' Convention has been unanimously accepted. The resolution above referred to is as follows: ON THE QUESTION, IS THERE NEED OF LEGAI, REGULATION OF DEPOSIT BANKING IN GERMANY? i. The organization of banking and of credit existing in Germany, the peculiarity of which consists, on the one hand, in the union of general banking business with the management of outside moneys, and, on the other hand, in the intimate relation of banking to commerce and industry, has grown out of the economic development of Germany and has greatly contributed to the extraordinary growth of industry and the resultant increase of national prosperity. 2. Since the communal savings banks, developed in Germany more than in other countries, attract the savings of the laboring classes and the middle classes and afford to these a regular interest, the deposits flowing to the banks and banking houses are only in the smallest degree savings deposits properly so called; they are generally working reserves of business men, who also have their other financial affairs transacted by their banks; or temporarily available capital of capitalists, destined to later invest- 197 National Monetary Commission ment in securities, mortgages, etc. These two categories of depositors attach great importance to the fact that the same bank to which they give their money for interest serves them for all kinds of banking transactions, especially the granting of temporary credits. 3. A need for the establishment of pure deposit banks has not yet arisen in Germany. Such a need may arise in the future if, with further increase of national prosperity, the surplus profits of business men are no longer used, as they have been hitherto, for the enlargement and consolidation of plants, and if, as is even now the case in France and England, the number of those becomes very great who have considerable capital to put out at interest. In this stage pure deposit banks will arise spontaneously without legislative instigation, partly through the transformation of existing institutions and partly through the establishment of new ones; and competition will of itself result in their voluntary submission to the limitations of business customary in other countries, because it is to their own interest to do so. 4. According to the experience of other countries, a pure deposit bank can yield a profit and pay its depositors an acceptable rate of interest, only if the amount of deposits is many times greater than that of the paid-in capital. The conditions for this do not yet exist in Germany, apart from the exceptions mentioned in 3.® The overwhelming majority of depositors who now hold deposits with the credit banks could not be afforded the service by <*As appears from the discussion, the mention of these exceptions was stricken out from section 3 before the resolution was adopted; the fact that they were referred to in section 4 was evidently overlooked.—Translator. 198 Renewal of Reichsb ank Charter a pure deposit bank which they expect from their banking connection. A pure deposit bank, which must maintain a network of deposit offices in great cities and with branches in the provinces, would, in view of the narrow bounds within which its profit-bearing use of its funds is confined, be overwhelmed by the expenses of the business. 5. The fact that the business of credit banks that manage deposits is not subject to control must be taken into connection with the fact that the ratio of their own capital to the amount of deposits, and to the total of outside moneys, is decidedly higher than in the pure deposit banks of other countries. The statistics of the balance-sheets of all joint-stock banks of any importance that take part in deposit business show that the resources held as cover have satisfied the heaviest demands made upon them by critical times, both in point of their ratio to obligations incurred and in point of fluidity (bills, reports, loans on collateral and their own stocks, the latter calculated at one-half). The fact that the cover consists chiefly of bills and reports enables these institutions to be much more prompt in repayment of outside moneys than are the communal savings banks, which invest more than three-fifths of their deposits in mortgages. 6. Legislative experiments which proceed, out of theoretical considerations, to transplant forcibly from a wholly different historical background the best institutions of other countries to our banking system—which has had a very healthy development of its own—might easily cause dangerous disturbances of our economic life, and should therefore be resolutely opposed. 199 IV Credit at the Reichsbank By D R . R. KOCH Former President of the Reichsbank (Article from the Zeitschrift fur Handelswissenschaft und Handelspraxis, July, 1908) IV. CREDIT AT THE REICHSBANK. Dr. R. K O C H , former president of the Reichsbank. (Article from the Zeitschrift fur Handelswissenschaft und Handelspraxis, July, 1908.) In the general discussion anent the impending extension of the note privilege of the Reichsbank but little is heard now of the demand, made occasionally in former times, that the State take over the Bank and operate it as a state institution. It has become an almost undisputed axiom that special bank credit—distinct from the credit dependent on the Imperial or State Government— is useful and indispensable, particularly during a crisis. Elasticity of circulation would soon cease, the note would soon degenerate and assume the character of common paper money, were the issues regulated by considerations other than those of business requirements. This idea was expressed with great precision in the reports of the committees both of the French Chamber of Deputies and of the Senate on the occasion of the latest renewal of the charter of the Bank of France. " A state bank," said the report of the chamber committee, " means the power granted to the Government of issuing unsecured paper currency and induces the temptation of creating notes secured not by known resources (mainly short-term securities) in liquid shape, but by the general resources of the State; in a word, of issuing f a t money, which at the slightest crisis would meet with the same fate as the assignats of the Revolution/' 203 National Monetary Commission The senate committee report contains the following statement: " In the first place, the danger to any bank of this type (i. e., a state bank) lies in this, that it is subject to the State and exposes the latter, as proved by experience, to the constant temptation to use the Bank to settle its own financial difficulties at the risk of the credit of the Bank, and thereby causing harm to the credit of commerce and industry.'' But equally imminent would be another danger. The note banks, as is well known, grant as well as receive credit. They discount short-time bills and grant loans upon the pledge of certain classes of securities (Banking Act, par. 13); the bills, together with national currency, gold bullion, or foreign gold coin, and Imperial Treasury notes, serve as reserve for the bank notes (Banking Act, par. 17). In the case of a pure state bank there would be the particular danger that the granting of bank credit would be determined not by pure business principles, but by considerations of a more or less political nature. "The state bank," says the report of the French chamber committee, "means business mixed with politics." And the senate committee points out further consequences. "Then there would be the danger of mixing questions of finance with political discussion, of considering, for example, discount rates in the same spirit as matters of taxation and of injecting political passion into the solution of these most delicate, complex, and oftentimes almost imponderable questions.'' The debates in the Reichstag have demonstrated that this danger exists even with our present "mixed" bank- 204 Renewal of Reichsbank Charter ing organization, notwithstanding the compliments and praises bestowed on it by the leaders of French bimetallism, such as Meline. Complaints were heard about an excessively high discount rate even in years in which for months the rate was low (as for instance in 1905, when the average rate was as low as 3.82 per cent), although this rate depends essentially upon supply and demand in the money market. It was charged that artisans without property and small tradesmen are given no credit or but little credit, and that other industrial groups which are compelled to tie up for a long term their otherwise ample capital are but little able to avail themselves of the advantages of dealings with the bank. a The expert perceives at once the utter groundlessness of such complaints. The Reichsbank has never been operated otherwise than upon pure business principles. It gives bill credit as a rule only against merchandise bills whose value must be extant either in goods sold or in the proceeds of such sales, or against bankable credit bills— i. e., bills presented by bankers who make a business of furnishing credit on commission. It does not give credit against finance bills. In other words, the bill presented for discount must represent a real transaction, terminating at the maturity of the bill, a The French report containing the argument of the government bill expresses similar apprehensions, though only with reference to a pure state bank: " I t is not merely that a state administration would not possess the necessary suppleness required to estimate commercial solvency and to adopt the terms of credit to market conditions, but above all because it would be assailed by all sorts of demands and propositions, all tending to make it depart from the rules of prudence which a bank of issue ought to observe." 205 National Monetary Commission as was insisted on in the instructions to the branches of the Bank as late as 1906. For agriculturists, indeed, the Bank has always made considerable concessions at certain times. Thus, for example, the Bank allows them a single extension in view of the slow turnover of their circulating capitals In general, however, the extension of the bill credit granted, especially in case of a previous promise to that effect, has always been prohibited. It is possible that younger managers of the numerous subbranches may have erred at times in this respect, being misled either by an excess of business zeal or by a misconception of the true state of things. They surely have not done so with the view of increasing their commissions, for such commissions, in the shape of small shares in the profits, are allowed only to the managers of the so-called independent branches (about 80 in number), but not to the managers of the subbranches. Moreover, these allowances are merely credited and not paid in cash, and against them are charged, without recourse to legal action, all losses which may result during the tenure of the respective officials from obligations assumed by the branch. This practice has stood the test of time as a sufficient means of security and a satisfactory though not excessive stimulus of business activity. To abolish this practice would be not only unwise but even risky. Since the earliest period means of control have been used to prevent as much as possible extensions of loans of the above kind. It is true that the monthly reports of commercial credit granted do not always reveal loan extena Regulation of the year 1856; see Jubildumsdenkschrift, 206 p. 79. Renewal of Reichsbank Charter sions as such. A change in the amount and parties may easily cover up the transaction. On the other hand, however, a discounting of a bill oftentimes assumes the aspect of a mere loan extension, when as a matter of fact it is a bona fide short-term commercial credit transaction, in case, for instance, the seller of goods continuously draws in round sums on account of the buyer upon the latter's bank. This practice is quite frequent in case of bank acceptances. There may also be a gradual withdrawal of a deposit, representing the original proceeds of goods sold. Abuses arising from these incidents of business life are counteracted by the fairly frequent inspection tours of members of the central administration. But inasmuch as abuses have been discovered on such occasions, it would be well to insist that in case of larger bills all parties to the bill as well as its origin should be specified and clearly indicated. To demand more would be impracticable. Any headlong move in doing away with the objectionable credit bills would merely tend to increase similar engagements on the part of the large private banks. The rule that the Reichsbank shall not grant credit for a period longer than three months must be adhered to strictly. For only such short-time notes are sufficient legal security for the notes and guarantee their continuous redemption as well as the repayment of the girodeposits. With the view of facilitating the business opportunities of the less-favored classes the Reichsbank as early as 1878 reduced considerably the minimum amount of capital 207 National Monetary Commission required for direct discount operations with the Bank. In spite of this the business with the smaller tradesmen's class continued to be limited. In view of the obligation of the Bank to redeem daily many millions of bank notes presented to it, besides disbursing many millions on giroaccounts, no further favor could be shown to this class, all the more because the small trader as a rule is unable to present the requisite discount material. In most cases the bills originating from small dealings lack the proper second signature (Bank Act, par. 13; No. 2, par. 17), and are therefore unfit for discount. This industrial class must therefore make use of other banking agencies. Foremost among the latter are the cooperative societies. In view of the joint liability of their members a much larger share of the societies' property could be used all along as a basis for credit transactions. However, the law of May 1, 1889, having permitted also the operation of societies with limited liability, and the experience with these societies having been favorable, the limited liability principle has since 1896 been extended to all larger cooperative societies. Through these societies the small tradesmen in an indirect way may also obtain credit from the Reichsbank. Further facilities for the discount business are afforded by the continuous extension of the network of branches, especially that of suboffices,** and by the enlargement of the collection districts of the various Reichsbank offices. a In 1907 the number of branches, subbranches, etc., was 478. Of this total 4 suboffices were in t h a t year changed into Reichsbank offices, while 9 suboffices were opened. In 1906 the number of newly opened suboffices was 26. 208 Renewal of Reichshank Charter In this manner the Reichsbank continuously becomes possessed of large amounts of bills, in which the fluctuations of business conditions find their clear expression. The amounts of bills purchased show an almost uninterrupted increase. For the last two years the amounts represented by discounted bills were as follows: [In millions of marks.] 1906. Local bills Drafts on outside places 1907. 4.360 5.853 10,213 Total bills within Germany 4.997 6,885 11,882 The Reichsbank gathers among its holdings a very considerable portion of all the bills drawn and put in circulation in Germany. In the memorial volume describing its experience during the first twenty-five years of its existence, the Reichsbank was able to point out that the proportion which its average yearly domestic bill holdings bore to its total capital investments varied between 79.5 per cent for the year 1881 and 88.3 per cent in 1876.a Accordingly, the Bank purchased almost two-fifths of all German bills (in 1899, 39 per cent). The ratio of its average bill holdings to the total bill circulation is smaller because of the shorter time its bills run (between 11.3 per cent and 15.8 per cent). 6 Generally speaking, the Bank attracts a larger share of the bill circulation in times of business expansion than in times of business stagnation or depression. The fact that since its foundation its share of the entire bill circulation of the country has ina Jubildumsdenkschrift, 83703—10 14 p. 88. & Jubildumsdenkschrift, 209 ibid. National Monetary Commission creased rather than diminished is explained by the growing demand for credit and for instruments of payment due to the growing business activity of the country. The Bank was able to satisfy this demand by means of the giro (transfer) deposits, which have been flowing to it in large amounts, though not to the extent that might have been expected in view of the increase in the facilities and of the advantages of the giro business. The bill business is by far the leading asset business of the central bank of issue. The economic strength of the Bank rests primarily upon this class of business, especially upon the great liquidity of its bill holdings. The Bank is thus enabled to withstand successfully even severe crises. It can enlarge the circulation of its notes without hesitation, since it knows that the ensuing return current will bring back to it the means required for their redemptions The other class of the Bank's business—loans on collateral—are of much smaller relative importance, though far from insignificant when taken by themselves. Loans on merchandise have indeed gradually become less important as compared with loans on securities. Thus at the end of 1907, outstanding loans on hypothecated merchandise amounted to only 5,486,400 marks, while o During recent years there has been an increase in the amounts of foreign bills purchased by the Bank with the view of strengthening the gold reserves and preventing an outflow of gold from the country which might necessitate an increase in the discount rate. These purchases, it is needless to state, are much below the purchases of domestic bills. They averaged 44,461,000 marks in 1907, as against 43,244,000 in 1906, and amounted to 71 million marks under date of May 7, 1908. These totals do not include the deposits with foreign correspondents. 2IO Renewal of Reichsbank Charter the total loans on securities were 358,802,350 marks. In the western part of Germany this form of loans is not customary, nay, almost of ill repute, while in the eastern and northeastern provinces of Prussia, with their relatively sparse and mainly agricultural population, there is still a certain demand for loans on merchandise. a The total of loans on collateral has increased almost uninterruptedly, notwithstanding the limitations to be presently mentioned. Loans on collateral during the last four years were as follows: Total amount. Average amount outstanding during the year. Marks. Year. Marks. 1,957.411,820 2,093,427,625 2, 773, I 9 L 4 7 5 3-293,301,200 1904 1905 1906 1907 74,180,000 72,033,000 83,631,000 98,140,000 The law (Bank Act, par. 17) prohibits the use of collateral as security for note issues, and this fact of itself prevents the undue increase of the collateral loan business. There is good reason for the discrimination. " I n point of quick and safe realization," the jubilee memorial of the Reichsbank rightly remarks (p. 105), "the investments in loans on collateral are in no way to be compared a Certain facilities in the collateral loan business are accorded mainly for the benefit of agriculture. Thus, since 1887 the Bank has loaned on spirit in bond stored in private warehouses without specification, appraisement, taking possession, or revision; since 1895 on bonded sugar on similar terms; and since 1896 on grain stored on the estates without regard to the legal difficulties involved in this particular class of transactions. 211 National Monetary Commission with bill holdings, carefully selected in accord with banking principles/' For a loan on collateral is always far less transparent than a bill. As a rule, it affords no criterion to judge of the kind of credit sought. In many cases the loan is intended to supply the need of working capital, a fact which is more easily recognized in the case of bills offered. Granting even that a painstaking selection of the pledges may render the security beyond doubt, yet the quickness and even the possibility of realization remains dependent upon the absorbing power of the market. Experience has proved that in times of severe crises even the most solid securities can not be disposed of at all or only at great loss. The provision of a maximum limit of loans on collateral, to be determined after consultation with the central executive board (Banking Act, par. 32(f), had proved altogether ineffective long ago for technical reasons. The best means of keeping these loans within the necessary limits is the interest rate. Instead of other restrictions which might injuriously affect the borrower, the Reichsbank has for a long time kept the interest rate of loans on collateral uniformly higher than the discount rate, the difference for the recent period amounting, as is well known, to i per cent.® But for this policy, the temporary increases of this class of loans—especially at the end of the quarter—due to the ease with which money can be borrowed from the Bank for a few days—would a The administration of the Bank upon mature deliberation refused to follow the Reichsbank resolution of 1899, which recommended the lowering of the rate by one-half per cent (Report of committee, p. 31 and following, 56 and following; stenographic report, p. 1892). 212 Renewal of Reichsbank Charter have become even more noticeable than they now are. a In 1884, when money was relatively abundant, a preferential interest rate, exceeding the discount rate only by one-half per cent, was accorded exclusively on loans secured by Imperial and State bonds. The purpose of this measure was to raise these bonds to the position of standard securities for the well-to-do classes. This purpose was fully attained, though as a result the loans on collateral grew out of all proportions and far more rapidly than the bill holdings.6 The lower rate could not be maintained indefinitely and was abolished July 1, 1897. The liquid character of the Bank's assets, and hence its power of resistance, had been notably diminished. When next all classes of collateral securities were placed on the same level with regard to the interest rate, the situation was reversed immediately. The average amount of loans on collateral declined considerably, due mainly to the decline of loans on the favored bonds named, while the bill holdings showed an increases Whether the change a Compare weekly review, for example, page 67 of the report of 1907. Marks. September 7 69, 800,000 September 30 204, 100, 000 December 7 78, 500, 000 December 21 364, 300, 000 b The average for 1896 was 131.28 per cent higher than the average for 1883, constituting 14 per cent of the total investments of the Reichsbank, as against 11 per cent in the earlier year. c The annual averages were as follows: Loans on collateral. Bills held. Marks. Marks. 1896- 106,000,000 72,000,000 83,000,000 98,000,000 190519061907 - 213 646,000,000 908,000,000 989,000,000 1,060,000,000 National Monetary Commission affected the quotations of these bonds is very doubtful. As a matter of fact, immediately after the abolition of the preferential interest rate quotations rose slightly. In the course of time (though for different reasons) there was a decline in all security values. It was seen, however, that the old differences between the formerly preferred securities and other investment securities, as for instance, mortgage bonds—because of the wider market of the former—remained unchanged. The privileged treatment as collateral by the Bank did not prove sufficient to raise the quotation of the favored securities. An argument against the often suggested reintroduction of this preference is also derived from the fact that, so long as the preference lasted, demands were constantly made for its extension to other classes of securities, and that these demands ceased with the abolition of the preference." The Bank can not afford to grant these demands, since a reversal of its policy would result in an increase of loans on collateral even beyond the figures reached in 1906, with all the disadvantages attaching to excessive investments in this class of loans from the point of view of sound banking principles. Moreover, there would be a renewal of the old struggle on the one hand between the Bank administration and the advocates of a preferential rate of interest, and on the other between the Bank and the various interests which formerly clamored for the extension of the preferential rate, such as the cooperative land credit associations (Landschaften), mortgage banks, provinces, communes, dis0 Even the Reichstag passed without debate a resolution to this effect. 214 Renewal of Reichsbank Charter tricts, etc., as well as a renewal of the struggle among these various interests. a While these struggles were not the motive that led to the abolition of the preference, yet their cessation is an undoubted advantage, which may be lost with the renewal of the privilege. So much for the loans on collateral, which for that matter are limited by law to certain well-defined and specially secure objects of hypothecation. The purchase of domestic bonds—acceptable as collateral—constitutes another kind of credit (granted to the debtors on said bonds). Since this form of credit implies to a certain extent the tying up of operating capital, the Bank is permitted to grant it only under certain precautionary restrictions. (Bank Act, par. 13, No. 4; par. 32, sec. 2d.) The Bank is not permitted to grant credit in other forms, particularly blank credit. No credit can be granted for outside account without previous security. (Bank Act, par. 13, Nos. 5, 6; par. 40, No. 11; Reichsbank charter, par. 10.) a I n 1906 an extension of the privilege to mortgage bonds issued by the Landschaften was demanded by a deputy, who happens to be also an officer of a Landschaft. 215 V Concerning the Collateral Loan Business of the Reichsbank, Especially the Loaning on Imperial and State Securities By DR. R. KOCH Former President of the Reichsbank (From the Deutsche Revue, July, 1908) 217 V—CONCERNING THE COLLATERAL LOAN BUSINESS OF THE REICHSBANK, ESPECIALLY THE LOANING ON IMPERIAL AND STATE SECURITIES. Dr. R. KOCH, former president of the Reichsbank. [From the Deutsche Revue, July, 1908.] The credit of the Reichsbank is, as is known, frequently demanded not in the form of the discounting of bills, but in that of loans on collateral—that is, interest-bearing loans on negotiable securities of definite kinds. (Bank act, sec. 13, No. 3.) The rate of interest is to be publicly announced in the same way as the discount rate. (Sec. 15, ibid.) This rate, as well as changes in the principles on which and in the period for which credit is granted, is passed upon by the central committee, as is the case in the discount business. (Sec. 322, ibid.) There is, however, a comprehensive and important difference. Loans on securities are not adapted as reserve against notes. (Sec. 17, ibid.) This provision, which is incomparably more important than the more or less insignificant one which prescribes that the central committee is to decide concerning the maximum amount to which the funds of the bank may be invested in loans on securities (sec. 32^, ibid.), is very expressive of the fact that credit granted on collateral is not of the same value for the central bank of issue as credit allowed on the security of bills of exchange, but is subject to certain objections inherent to it in its relation to the general policy of the bank. Now, it may 219 National Monetary Commission appear strange on a superficial examination that the bank law should express such a lack of faith in resources represented by loans on collateral, which are (theoretically at least) of undoubted security. In this respect they are at times superior to bills, which rest purely on personal credit; and, as experience has shown, they have resulted in extremely small losses to the Reichsbank. a Yet there is a good reason for the restriction of their volume. For a bank of issue the aggregate of whose investments must always be on a level with that of its obligations, it is not merely a question of safety, but fundamentally of the liquidity of the investments. No person who has any acquaintance with such matters will believe that loans on securities can be compared with discounts represented by bills carefully chosen according to sound principles of banking—with respect to the possibility of quick realization. Loans on security are always lacking in the quality of transparency, it being often not easy to see what is behind them. They do not rest in all cases on a basis of substantial business dealings like commercial bills, and in particular bills drawn against the delivery of merchandise, which always presuppose the existence of the equivalent in commodities, or as the net proceeds of a sale. Often they serve rather for the creation of operating capital that has been lacking, without one's being able to judge clearly, as with many classes of bills, how far this is the case. In general, there are no indications as to how the credit sought is going to be used, while the probability of punctual repayment depends upon a Jubildumdenkschrift, p. 122. 220 Renewal of Reichsb ank Charter just this factor. It is thus possible that the bank may be compelled in time of crisis, when its own customers are falling into arrears, to proceed to realize on securities in great quantities, in order to protect its 2,000,000,000 marks and more of demand liabilities. Experience has taught that there is not at all times a ready market for pledged securities. There are times when it is impossible to realize on them, or at least not practicable without great losses. That such losses have not hitherto occurred is only explicable by the careful and conservative policy that has been pursued in the business of loaning on collateral. The lending of money on securities is only an incidental part of the business of a bank of issue. Since there is less of a periodical return current than in the discount business, this department of the bank's activity has not so much to do with the regulation of the monetary circulation. For this very reason it is much easier to limit operations in this sphere. On the other hand, the danger of immobilizing the capital invested in loans on securities exists even with the safest securities. Therefore the demand to enlarge the capital of the Reichsbauk in order to provide for the extension of its loan business should be opposed.a «Adolph Wagner (Zettelbankpolitik): " I t is easy to perceive t h a t this branch of the business (loans on securities) is rather to be entirely avoided." In another place: "Special care should therefore be exercised in granting loans on securities, and only a moderate extension should be given to this branch of the business in general." Michaelis (Volkswirtschaftliche Schriften): "Loans on securities are an unhealthy source and basis of note issues. They create new means of payment, while the function of notes, properly considered, is to take the place of instruments of payment previously created (commercial bills)." 221 National Monetary Commission Naturally the business could only be extended by lowering the rate of interest on such loans, since the bank does not now reject any legally permissible application for a loan, and an increase of such applications could only be called forth by cheaper rates. This rate of interest is always kept at i per cent higher than the rate of discount on bills as a matter of principle. Efforts have been repeatedly made to lower the rate of interest on loans and to bring it closer to the bill rate. The practice of some of the German private banks of issue seems to speak for this plan. They have made it their custom to evade the limitations in the matter of the discount rate imposed* by the supplementary bank act of the 7th of June, 1899, by loaning liberally on promissory notes. The practice of individual foreign banks which have made much of the loan business by reason of the small volume of bills brought to them for discount points in the same direction. But the Reichsbank, in its capacity as the regulator of the monetary conditions in the country, could not, in view of its own experiences, after repeated consideration of the course pursued by other institutions, be induced to yield in the face even of In the French bank investigation of 1865, which, as is known, was practically fruitless, only a few bankers (including Pereire) declared themselves in favor of a large extension of the loan business. The majority of the chambers of commerce desired that the bank limit these loans still further, if it did not altogether suppress them, since they favored speculation more than substantial business. In the German bank investigation of 1908, the subject of lending on securities is taken up only with respect to a secondary point in the question sheet: " Is an advance in the price of loans on securities a t the Reichsbank at the quarter days through the increase of the number of days for which interest is reckoned to be recommended?" 222 Renewal of Reichsbank Charter the desire of the Reichstag. a Other restrictions, such as were formerly practiced at times by the Prussian Bank, are more or less arbitrary and in any case deal harshly with the borrower. The efforts made in years of quiet banking to put life into the loan business by means of fixed loans for six weeks and three months at a moderate rate of interest were fruitless. An unfavorable aspect of this kind of business, which the bank could not help realizing is the circumstance that the volume of loans on collateral is subject to great fluctuations. It is sometimes quite large, notwithstanding the high rate of interest. 6 A variation from the discount rate of less than i per cent would undoubtedly increase it further and add to the disadvantages which a large investment in loans on securities brings with it. c The unfavorable experiences which the Reichsbank has had with the establishment of a reduced (preferential) rate of interest for certain securities are also to be cited. Not that this arrangement in itself was opposed in many circles—a lower rate is always welcome to those seeking o Report of the Reichstag Commission of 1899, pp. 31 ff., and 56 ff.; Stenographic Report, p. 1992. & In the year 1906 the maximum investment in such loans was 284,520,000 marks (31st of December); the minimum, 50,899,000 marks (22d of September); average, 83,631,000 marks. In the year 1907 the maximum was 364,297,000 marks (31st of December); the minimum, 54,090,000 marks (23d 6r January); average, 98,140,000 marks. c Adolph Wagner (Zettelbankpolitik): " T h e higher rate of interest for loans on collateral is wholly justified in banking. It maintains in the first place a higher insurance premium as compared with the discount rate, since the security is often inferior to that of bills; furthermore, as everyone knows, the ability to realize on the investment is better assured in the case of discounts by the strictness of the legal provisions regarding bills of exchange. 223 National Monetary Commission credit. It was the compass of the plan, the steadfast refusal of the Reichsbank management to extend it to other securities, which many desired, that brought violent attacks upon it; and even if these attacks were in no way decisive, they contributed to a removal of the differential. In 1884, when money was very cheap, the Reichsbank decided to lower the rate of interest by onehalf of one per cent on loans secured exclusively by bonds of the Empire or of the German states, particularly in order to favor investment in these securities (as so-called standard securities). This purpose was indeed attained, and the loan business showed immediately increased activity. The average volume of loans on securities increased from 45,800,000 marks in 1883 to 49,200,000 marks in 1884, in spite of an easier money market.^ But at the same time there was a serious displacement or shifting of the component of the bank's investments. While the bill portfolio increased-by 76.4 per cent from 1883 to 1896, the volume of loans on securities increased by 131.3 per cent, rising to an annual average of 106,000,000 marks, of which 71,800,000 marks was at the preferential rate. The loans on securities, which in 1883 had amounted to only 11 per cent of the average total investments, reached 14 per cent in 1896. The situation changed unfavorably relatively to the really normal investments, namely bills, which through their greater liquidity assure the stability of the bank in times of crisis. Such a development could not be permitted to go on. a Jubildumsdenkschrift, p. 117. 224 Renewal of Reichsbank Charter The preferential rate was suspended, therefore, after the ist of July, 1897, with the consent of the Imperial Chancellor. All securities on which loans could be made were thereby placed on a level as far as the rate of interest was concerned. The selection of securities on which a favorable rate might be allowed—a very dubious operation—was done away with. The desired effect was not lacking. The average investment in bills, which in 1896 had amounted to only 646,300,000 marks, rose in the year 1906 to 989,400,000 marks, and in 1907 to 1,104,500,000 marks. The average aggregate of loans on securities fell from 106,000,000 marks in 1896 to 83,600,000 marks in 1906. By the year 1900 it had gradually fallen to 80,000,000 marks—that is, in a time in which the economic development of the country occasioned large drafts on bank credit. A feature of this retrogression was that it involved mainly the imperial and state securities, and was scarcely felt at all in the case of the other securities. In 1896 there was an average of 71,800,000 marks invested in loans on the former, or 67.7 per cent of the total loans on securities, while the loans on other securities aggregated 27,900,000 marks, or 26 per cent of the total. By the 15th of August, 1907, the amount of loans made on the favored securities had fallen to 39,200,000 marks, which was only 49.3 per cent of the total loans on securities. The amount of loans on the securities not included among the favored obligations has not greatly changed.** a The Jubilaumsdenkschrift, p. 119, indicates the shifting of the risk in loans on securities which has thus been effected. All central note banks make it a point to adhere closely to a proper apportionment. 83703—10 15 225 National Monetary Commission I t was 22,800,000 marks on the 7th of September, 1900, or 32.7 per cent of the aggregate amount of loans on securities, and 25,800,000 marks on the 15th of August, 1907, or 32.5 per cent of the total. In view of these striking results, the reintroduction of the favorable rate for imperial and state paper, which is desired by some business men, especially bankers, can not be considered. The liquidity of the total investments would thereby be seriously influenced, and the ability of the Reichsbank to withstand all dangers would be materially weakened. The difference in the quality of securities is expressed in another manner by the practice of some banks of issue of making the percentage of the market value up to which they are willing to lend money smaller in the case of some kinds of securities than in the case of others.05 This would hardly be in accord with the bank act, which permits loaning on domestic securities in general only up to three-fourths, and on foreign securities only up to onehalf of the price quoted at the exchange. (Sec. 13, No. 3 b, c.) The former practice of the Reichsbank of placing the various kinds of securities in different classes— at times a very perplexing operation—did not work well and had to be given up many years ago. Only a uniform treatment of all securities capable of serving as collateral, enabling the bank to dispense with the necessity of a For example, the Bank of France makes loans on French rentes and treasury bills up to 80 per cent; on other securities up to 75 per cent. The Russian Bank loans on imperial securities and those guaranteed by the Government up to 90 per cent; on other securities up to 75 per cent or 80 per cent. 226 Renewal of Reichsbank Charter selection, is in accord with that broad and sound policy of maintaining a moderately large volume of loans on collateral and assuring the utmost liquidity of the securities pledged. The maximum limit set by the bank act, which has gradually been extended from 90,000,000 marks to 120,000,000, 150,000,000, and in the year 1890, to 180,000,000 marks, has long since proved impracticable. The volume of loans on securities is very fluctuating. The demand for credit at the end of the month is usually very large, as is indicated by the interrogatory relative to the quarter days in the question sheet submitted to the Bank Inquiry Commission of 1908. The banker obtains the means of supplying further credit at such times by getting loans on securities at the Reichsbank as the last source of credit in the country. The ability of the banker to help himself for a few days with the advances received is for the good of business in general, and is of special significance at the quarter days because of the strain in the money market. A few days before their advent the aggregate of loans on securities increases very rapidly, only to decrease as rapidly again in the ensuing periods This difference is revealed as well in the individual branch institutions. Some have lesser, others larger, temporary demands upon them. There is no telling in advance, especially in the case of loans on securities. The needs of individual industries and other branches of business change very rapidly. Just on this account such loans can not be limited for the individual a Jnbildumdenkschrift, 227 p. 117. National Monetary Commission branches of the Reichsbank (numbering 486 in June, 1908). The technical difficulties which such a course would encounter are insurmountable. The restriction has therefore been more and more in abeyance. There would have been no sense in trying to exact a penalty for each of the numerous transgressions. The rate of interest remains the only efficient instrument for keeping this business within limits consistent with liquidity. The constant decline in the prices of our government bonds, which are so splendidly secured, is certainly a lamentable phenomenon. Whether, however, the reintroduction of a preferential rate of interest would afford a means of effecting a change is very questionable. The previous experiences of the Reichsbank do not warrant it. In the year 1884 a gradual improvement in the quotations manifested itself, the indications of which had already been visible some time before. But in 1897, after the suppression of the preferential rate, no tendency toward a decline in the quotations showed itself. Throughout July there was rather a slight advance. From 1896 to 1900 there was indeed a great decline in these securities, traceable to general economic conditions, and in recent years the downward tendency has been even more marked.® a The following are the quotations for the first of February in the years 1906, 1907, and 1908: 1906. 3 per cent imperial loan 3 K per cent imperial loan 3 per cent Prussian consolidated loan. _ 3 K per cent Prussian consolidated loan 89. 20 101.10 89. 20 IOI.20 228 1908. 87- 30 98. 20 87.30 98.25 8 2 . 90 94- 00 82.80 94.5o Renewal of Reichsbank Charter The reasons for this hardly admit of dispute. Chief among them are the great and almost regular increase in the volume of imperial and Prussian loans and the opportunities afforded the public of obtaining larger returns from industrial investments. There has been a similar decline in the case of other German investment securities paying a fixed rate of interest. No tendency on the part of the favored securities to come down to the level of the unfavored has ever been noticeable. Where such a distinction exists and has always existed, the greater market for the former class of securities is to be regarded as the cause, and not the exceptional position accorded them in the matter of collateral. This plays hardly any role whatever for the simple reason that those who benefit by the preference get the profit—and that only a moderate one—for a short time only. It can no longer offer a special inducement for the continued creation of this class of securities. A better rating of these securities is to be expected from them as a permanent investment in which only the rate of interest is considered than from the former policy of increasing their availability as collateral. In view of all this, the expected advantage of the reintroduction of the practice of giving preference to certain securities for borrowing purposes is so questionable that it does not justify us in endangering an important principle of bank policy or of abandoning it altogether. To this is to be added, finally, the certainty that the old demands would immediately arise again to extend this advantage to other securities. Not only 229 National Monetary Commission would it have to be given to the bonds of all the federal states,® but likewise to the debentures of the Prussian agricultural credit associations a and those of the mortgage banks (which help to support municipal credit), to provincial and municipal bonds, fresh issues of which are continually burdening the market, as well as to other obligations. The struggle began immediately on the part of the agricultural interests when the Reichstag incidentally recommended the reintroduction of the preferential rate. 6 This apprehension is therefore surely not unfounded. If the Reichsbank should resist any such demands, as it can not help doing, the old attacks upon it would be renewed in a way that would seriously and unjustly injure its credit. a See Debates of the Reichstag, 2d of March, 24th of March, and 18th of June, 1896. & See Debates of the Reichstag, 28th of May, 1906. 230 VI Concerning the Renewal of the Reichsbank Privilege By PROF. W. LEXIS Of the University of Gottingen (Article from the Bank-Archzv, 231 1907, page 309) VI—CONCERNING THE RENEWAL OF THE REICHSBANK PRIVILEGE. PROF. W. LEXIS, OF THE UNIVERSITY OF GOTTINGEN. [Article from the Bank-Archiv, 1907, page 309.] The renewal of the Reichsbank privilege signifies, in the first place, that the Imperial Government thereby renounces the right reserved by it in section 41 of the law of the 14th of March, 1875. The suppression of the Reichsbank, permissible according to point (A)a of this paragraph, is practically considered; it is only a question of point (B), according to which the Imperial Government is authorized to acquire the total stock of the bank. In either case one-half of the available surplus would go to the shareholders. The question that has to be decided is as to whether the Reichsbank shall have its privilege renewed or become wholly a state institution. State ownership, as is well known, finds numerous advocates, whose contention is based on an argument which is undoubtedly very weighty. The shareholders received in the year 1906 a dividend of 8.22 per cent, or a total amount of 14,790,724 marks. A significantly higher share went to the Empire, namely, 25,472,181 marks, but this share would have been increased by about 8,000,000 marks if the Empire itself had owned the bank capital of 180,000,000 marks. This capital could have been acquired without difficulty by the issue of 2>% per cent bonds, even at the unfavorable rate of 93. The objection is frequently made against state ownership of the Reichsbank that in the very improbable °Cf.—German Imperial Banking Laws, p. 52. 233 National Monetary Commission event of a foreign invasion the metallic cash and other property of the bank—if these belonged to the State— would fall into the hands of the enemy. But undoubtedly an enemy invading Germany would not proceed otherwise than did the Germans in the invasion of France in 1870. The Bank of France does not stand in nearly so close a relation to the State as does the Reichsbank, for it is not wholly managed by state officials; only its governor and two subgovernors are appointed by the Government. Nevertheless, the cash in the branch offices which could not be removed to a place of safety in time—for example, several million francs in Strassburg—was seized by the advancing German troops, and the legal questions involved remained undecided until the end of the war. At that time consideration was undoubtedly taken of the fact that the notes of the bank had possessed forced circulation (Zwangkurs) since the n t h of August; but we should not delude ourselves into thinking that the Reichsbank notes would not also be invested with the quality of a forced currency in the unfortunate event of war. Other arguments, however, really speak in favor of the system of a central bank of issue, run by private capital, and in more or less close relations to the State. It is interesting to note that this system occurs in almost all of the large states of Europe—in England (the Government has no direct share in the management of the Bank of England, but its notes have legal tender power), in France, in Austria-Hungary, and in Italy. Russia alone has a pure state bank, with state-owned capital, but it can not be said that this example is especially worthy of imitation. 234 Renew aI of Reichsb ank Charter It is not well for a great bank of issue to be actually merged in the state financial system, even if it appears externally independent. It is likewise undesirable that it be subjected, as a pure state institution, to political and party influences. In Germany attempts to impose demands on the Reichsbank contrary to its purpose and its real duty have not been wanting. Its duty is, according to the law, " t o regulate the monetary circulation of the whole Empire; to facilitate payments; and to promote the utilization of available capital;" but not to create cheap credit which is not warranted by the conditions of the money market. It may not grant long-time credit, such as the agriculturists, who have to reckon upon an annual period of settlement, demand. This agricultural need for credit must be relieved in other ways. For reserves against bank-note circulation only short-time bills—or loans on collateral—can be used. These involve a quick, automatic return of the notes, which makes it possible for the bank to regulate their emission at any time in accordance with the needs of business and the requirements of public welfare. Therefore, when the bank discounts mercantile bills by preference, it does not do so because it desires especially to favor commerce and industry, but because it can not do otherwise, according to the nature of its task, inasmuch as it is only in these bills that it finds the proper covering for its notes. It is very important for the general interest that the bank does not exceed the limits to which it may grant credit, as the Russian Imperial Bank has done. These limits are conditioned by its nature as a bank of issue. The officials of a pure state bank have 235 National Monetary Commission merely to adapt themselves to the regulations coming to them from above; but a bank of issue with private capital, even when entirely managed by the State, has a sort of independence as regards the State—an independence which protects it against interference with the vital conditions of its existence. For the former, the interference of legislation is always needed; but the latter must always keep in mind the fact that a great private capital is in its charge. The central committee of the Reichsbank has undoubtedly only a very moderate authority, but its influence, nevertheless, is far greater than that of the advisory board of a state railroad company, because it represents the owners of the bank capital. If the Imperial Government should take over the bank, the shareholders would receive the capital and half of the surplus, a total of 212,400,000 marks; that is, their shares would be redeemed at the rate of 118, while they now stand at 154, and have generally fluctuated between 150 and 160. The shareholders could not complain of this, as the law provides for the possibility of the state ownership of the bank under these conditions, and this fact has exerted a certain constantly depressive influence upon the rate. Since the shareholders are generally bankers or other moneyed people, the opinion will prevail in many circles that they deserve no consideration whatever. Nevertheless, it should be recalled that they did not acquire the shares originally at par. At the foundation of the Reichsbank half the capital was created by taking shares of the Prussian Bank, which at that time stood at 155, in exchange for shares of the new bank. The other 236 Renew aI of Reichsb ank Charter half was obtained by subscription at the rate of 130. When the capital was increased on the basis of the law of the 7th of June, 1899, 30,000,000 marks were issued in 1900 at 135 and 30,000,000 marks in 1904 at 144. The latter emission would hardly have succeeded if the subscribers had considered it a serious possibility that they would be repaid at the end of 1910 at 118. They would then have lost 18 per cent in six years, or an average of 3 per cent of their capital yearly; and even if they had drawn during all this time an 8 per cent dividend on their nominal capital the real interest on their investment would have been only 2.6 per cent. The Imperial Government thus, by the high rate of the new shares, encouraged the subscribers in the idea that it did not contemplate state ownership of the Reichsbank; otherwise, the proper course would have been to issue the new shares at 118 and reserved them for the shareholders. Should state ownership take place, there would be no legal objection, but it would be a hardship which would not strike millionaires exclusively. Furthermore, a dividend of more than 8 per cent has been paid only once since the readjustment of the division of the profits of the Reichsbank, namely, in the year 1906, at the time when the overstrain of credit reached such a high point. On the average, during the years 1901-1906 the dividends amounted to only 6.55 per cent, and in 1902 to only 5.47 per cent. Since no shares were issued below 130, the average dividend amounts, even for the original subscribers, to only 5 per cent on their invested capital. Of the premium on the shares first issued, Prussia received 237 National Monetary Commission 15,000,000 marks in 1875 a s compensation for the transfer of the Prussian Bank, and the remainder was turned into the reserve fund; half of this, however, is to be considered as belonging to the Imperial Government. But if, as is to be expected, the privilege of the Reichsbank is actually renewed, then the further question arises whether on this occasion material change should be made in the legal provisions concerning the bank. Of first importance is the question whether the amount of notes not covered by coin or bullion shall be restricted in the hitherto-existing manner. In the last nine months, with the continually high discount rates, this arrangement has been frequently attacked and held responsible for these high rates. The bank, in endeavoring to fulfill properly the task of regulating the money circulation, would have found difficulty in maintaining a lower interest rate, even without the limitation of note issue and the note tax. The nature of its task is that it shall maintain the value of the monetary unit as stable as possible, in whatever form this is expressed. In times of economic prosperity the prices of goods rise, primarily as the result of the actual extension of national production, which brings an increase of the national income with it. At the same time, however, comes the tendency for prices to rise still further through the extended application of the purchasing power, resting on credit, but expressed in terms of monetary units. This kind of rise in prices, however, signifies nothing else than a corresponding depreciation of the monetary unit. If it is not checked, the whole system of prices rises higher and higher, until it finally collapses in a crisis, 238 Renewal of Reichsbank Charter perhaps at the slightest shock. The Reichsbank can, in any case, exert a very limited restraining influence upon this movement, for it surpasses the other great banks only in the volume of its discount business, the volume of its loan transactions being comparatively unimportant, whereas the five large Berlin private banks, at the end of 1906, reported an aggregate of 2,650,000,000 marks in loans on collateral and current credit advances. All the same, the advances of the discount rate of the Reichsbank act like brakes upon the wheels of business, preventing them from traveling too rapidly. It would not be arguing soundly to say that because the bank would not act otherwise even without the limitation of the note issue this limitation is therefore unnecessary. Rather assert that it is expedient that such a fixed norm should exist for the regulation of further note issues, according to which the bank is not only to guide itself, but the operation of which contributes to enlighten and warn the public concerning the situation. The arrangement by which the Reichsbank is permitted to issue notes up to a certain amount and can go beyond that amount only by the payment of a tax on excess circulation is a means of keeping the issue of notes within bounds. And even on this ground the limitation must be retained, for bank notes are still too significant in German monetary circulation in comparison with the conditions attained by more progressive countries. In England there have been no uncovered notes in circulation for more than ten years; the bullion stock of the Bank of England is, as a rule, several million pounds greater than 239 National Monetary Commission the sum of the circulating notes of the bank. On the 17th of July, 1907, for example, the bullion stock amounted to £35,900,000 and the volume of the outstanding notes to only £29,300,000, while there were £25,100,000 in the reserve of the banking department. At the same time the total stock of gold coin and bullion of the United Kingdom was estimated at only £120,000,000, while the gold stock of Germany is at least 3,700,000,000 marks. The average stock of gold (not the stock of cash) of the Reichsbank, however, amounted in the year 1906 to only 675,000,000 marks, with an average note circulation of 1,387,000,000 marks. From these figures a backwardness of the German payment and credit organization is evident, which would only be greatly increased by making the issue of uncovered notes easier. In Germany, too, the opinion is bound to gain ground that a lower interest rate is not conditioned upon a great quantity of effective circulating medium, whether gold or bank notes. In England the bank rate recently stood at 2 per cent and the private discount rate at seven-eighths of 1 per cent, but the stock of effective circulating medium was not greater than in the year in which the discount rate rose to 6 per cent. In the most highly developed modern states money plays only the r61e of a measure of value. It is of relatively small significance as regards the actual circulation of goods. The interest rate, however, depends upon the amount of free capital available for new investments at any time, which is measured in terms of money, but is invested in cash only for the smallest part. In the United Kingdom at present the sum of the deposits of the cus- 240 Renewal of Reichsb ank Charter tomers of all banks and banking houses amounts to about £900,000,000, and this gigantic sum includes the greater part of the circulating capital of the nation. Transfers are continually made from one account to another without the aggregate being noticeably changed. With this amount remaining the same, however, the quantity of free capital contained in it and exerting an influence on the interest rate, can vary greatly. If an account holder must transfer that sum which is credited to him to-day for the fulfillment of obligations falling due on the morrow, then he possesses no free capital, and the greater the number of bank customers who find themselves in such a position the smaller is the total sum of free capital. Free capital arises, in general, only from profits and surplus of incomes and from finally repaid investments of capital—for example, government bonds which have been repaid. No real free capital can be created by an increase of note issue having no substantial foundation. Such issues as those against loans on securities, or in connection with the discounting of finance bills, etc., only raise the nominal price of goods or securities, prolong an unsound condition, and make its evil consequences worse. We come, therefore, again to the fundamental principle that the issue of notes is not to be made easier, since thereby the attainment of a rational system of circulation is made more difficult. This rational system, as it exists in England, not only serves the purpose with the smallest possible gold stock, but it permits the most complete and rapid utilization of the free capital available at any time. It is therefore very desirable that the 83703—10 16 241 National Monetary Commission agitation recently inaugurated for the extension of the check system should be completely successful. It is a matter of course that indorsement and clearing must accompany this business, for a check which is paid in cash fails of it£ proper purpose. Whether this development could be greatly furthered by the acceptance of interest-paying deposits by the Reichsbank appears doubtful; for the first result would probably be that the volume of deposits of this kind flowing to the other banks would be correspondingly reduced. If, however, the general public were to get more into the habit of having an account at a bank, then the Reichsbank might receive its share of the increased business without lessening the deposit business of the private banks. The limitation of the acceptance of interest-paying deposits by section 13, No. 7, of the bank law, appears in any case practically superfluous. The Reichsbank ought to see its chief duty, however, in the development of the system of payments by transfers to, and deductions from, accounts current (Giroverkehr) and in the extension of the clearing system. If the limitation of the issue of uncovered notes is retained according" to the present regulations, then there is no reason for changing the basis upon which the profits of the Reichsbank are divided, as regulated by the law of the 7th of June, 1899. In general, the present condition of the Reichsbank should be maintained. The notes of 50 and 20 marks should be retired, for, as was to be expected, they have exerted no influence on the gold stock of the Bank, and have had a tendency to retard the extension of the method of payment by check and to counteract the efforts for the limitation of note circulation. 242 VII Concerning the Renewal of the Privilege of the Reichsbank, and of the Private Note Banks By DR. MORIZ STROELL Director of the Bayerische Notenbank (Article from the Bank-Archiv, 243 1907, page 311) VII.—CONCERNING THE RENEWAL OF THE PRIVILEGE OF THE REICHSBANK AND OF THE PRIVATE NOTE BANKS. Dr. MORIZ STROBU,, Director of the BAYERISCHS NOTENBANK. [Article from the Bank-Archiv, 1907, page 311.] The question of the renewal of the privilege of the German banks of issue has recently again come to the fore. I will endeavor, at the request of the editors of the "Bank-Archiv," to present briefly my views with regard to this matter. So far as the corner stone of the whole fabric of German banks of issue, the Reichsbank, is concerned, its continuance is understood as a matter of course. Without a central bank, regulating, by means of the issue of notes, the changing needs for means of payment, modern economic life is inconceivable. The organism and extraordinary expansion of the industrial life of Germany have for a generation been bound up with the Reichsbank. On this point there can be no difference of opinion. And even the differences of opinion concerning the form in which the privilege should be renewed are really fewer than is frequently believed. Into the discussion concerning this question, matters are frequently introduced which stand in little or no direct connection with the Reichsbank and its institutions. But to proceed at once to the main point. The institutions of the Reichsbank have stood the test in every way 245 National Monetary Commission for decades; and the wise do not willingly disturb tried and proven institutions. The Reichsbank has fulfilled its duty, from without and from within, and this both in normal and in critical times. From without, it has protected the German gold standard; within, it has drawn over the Empire a splendid network of institutions dispensing credit and performing monetary transfers. On the basis of a flexible note issue these institutions satisfy the need for credit at a rate of interest which is now higher, now lower, but which is always determined by the existing economic conditions, and is never fixed by considerations other than those pertaining to the public welfare. In the course of a generation a great nation experiences many critical and stormy days. The Reichsbank has always been the last resort and a thoroughly reliable support. I recollect the hard times of the summer of 1901, which were characterized by a crisis in which financial confidence was shaken in an exceptional manner; I recall the period of great world-wide strain and stress of capital and production which has just passed, with all the worrying concomitant phenomena in the sphere of credit. The Reichsbank and its far-seeing management were always at hand, now supporting and furthering, now wisely restraining, now helping and aiding, judging the whole German economic situation from the higher point of view, and always putting the common good before their own interests. We have had collapses of confidence and scarcity of money, but, thanks to the Reichsbank, we have not had a real money crisis for a generation; that is, a time in which circulating medium was not to 246 Renewal of Reichsbank Charter be had by pledging good bankable securities. Sad times were they, all the same, alike significant for the great list of failures, and the terrible economic suffering. More than once, I repeat, the Reichsbank has saved a precarious situation by its elastic and properly handled issue of notes. The Reichsbank with its present constitution is recognized and esteemed everywhere throughout the whole Empire as the leading credit institution. It has become the bank of banks; the central crowning stone of the whole economic structure. And does such an institution, which supplies so many needs and guards against so many failures, need special reform? Such a proposition is not altogether obvious. What do the reformers desire? Are the old, threshedout questions regarding the amount of capital, the division of profits, the private nature of the share holdings, and similar questions to be brought up once more for discussion? We have come to realize that the amount of the capital of the great banks of issue, which in their case is far more of a guarantee fund than active capital, plays no really important role. We likewise realize more and more that a state-owned Reichsbank, quite aside from important military and political considerations, would be drawn year by year into the struggle of the parliamentary and political parties. Finally, we know that a great share of the earnings of the Reichsbank already flow into the Imperial Treasury in various forms, and that this share has almost reached the maximum. Or is the P.eichsbank to be compelled to accept interest-paying deposits in the future, which are only a burden in normal times, and a 247 National Monetary Commission danger in unquiet times, and in any case, a hindrance to the bank? All this can not in my judgment be the serious object of the plans for reform. Another question appears more worthy of discussion— the question, namely, regarding the amount of tax-free notes necessary for the Reichsbank. The tax-free quota, as is well known, has been increased in the course of time by the quotas of private note banks which have renounced the right of note issue, as well as by means of the bank law of 1899. The latter increase was made with particular reference to the increased population. In less wellinformed circles the opinion is now impregnably intrenched that the interest rate of the Reichsbank at any time depends upon the quantity of tax-free notes. The disadvantage under which many a business man has labored by reason of the high interest rates of recent times, together with the above-mentioned belief, will perhaps lead to a demand for an increase of the tax-free circulation of the Reichsbank. But the interest rate is far less dependent upon the limitation of note issue than upon the conditions of the metal reserve, upon the international movements of gold, and upon general economic conditions. The Reichsbank is no automatic machine, but an independent and intelligently guided institution. Figures are dead until the spirit which comprehends the figures gives them life. The Reichsbank has discounted at times at a low rate in spite of the enormous demands laid upon it, as, for instance, in the summer of 1901. On the other hand, with only a moderate circulation it has not hesitated to raise its rate, even by fits and starts, when the preservation of the 248 Renewal of Reichsbank Charter German gold standard required it. It must, on the one hand, warn the public against speculative excesses by means of a rise in the discount rate; on the other hand, it may not keep the rate at an artificially low level in order to prevent the manifestations of unsound economic conditions from coming to a head. It must establish the interest rate after careful consideration of all pertinent conditions, and not according to the present quantity of tax-free notes. The desire for permanently lower interest rates, which is comprehensible from the point of view of the individual, can not always be fulfilled, owing to economic considerations. As Michaelis, one of the originators of the bank law, said: "The emergency reserve is always outside any tax-free limit of note issue, however the latter is measured/' On these grounds I consider altogether unnecessary a further increase of the quota of tax-free notes, a move which would indirectly injure the imperial finances. If, however, a law should be enacted for the purpose, the Reichsbank management might accept the grant with very cool thanks, without feeling itself really enriched thereby. It would be well—although it is more a matter of practice than of legislation—if in future the imperial financial management, in its dealings with the Reichsbank, would exercise a greater restraint with respect to the discounting of treasury bills. The status of the Reichsbank is hereby injured, and the interests of the business world are unfavorably affected. Every central bank of issue has the right to be independent of state finance, at least in normal times, and the Reichsbank ought to secure this right as far 249 National Monetary Commission as possible. As a matter of fact, the Reichsbank and the Imperial Government do not follow their- own interests in accepting and discounting treasury bills, but only the demands of necessity. It is to be hoped that after the completion of imperial financial reform, the practice of making such demands upon the Reichsbank, which have been generally regardfed as an injury to business, will be permanently discontinued. What the Reichsbank is especially in need of, a permanent and considerable increase in its metallic and particularly its gold stock, can not be created for it by legislation, at least not directly. It can be created indirectly, perhaps, but only gradually. The insufficient amount in troublous times of the gold stock of the bank is undoubtedly a weak point in our economic life. That this weakness is not rooted-in the constitution of the Reichsbank, but solely in prevailing conditions, does not change its seriousness. Some, of the recent bank statements could not be viewed without apprehension, because it was easily conceivable that with a sudden increase in note circulation and a coincident decrease of the metallic stock, the bank might be forced to the edge of insolvency by the necessity of providing covering for its notes. This w;ould have been all the more the case if one had proceeded to reckon the depreciated silver in the bank at its real gold value and to assign to the greatly increased stock of imperial treasury notes their negative value as a reserve against note circulation. The fear that the flexible and theoretically unlimited right to issue notes might become practically illusory some day for want of a satisfactory metallic re- 250 Renewal of Reichsb ank Charter serve is not altogether dispelled when one pauses to consider the matter somewhat seriously. Inasmuch as German business feels no lack of gold, and every day monetary transactions are richly, almost too richly, saturated with gold, all that is needed to remove the above-mentioned difficulty is to divert the gold from those channels in which it is too abundant and lead a part of the stream into the bank vaults, where the yellow metal has far greater functions to perform as the basis of the total money and credit circulation than it has in daily exchange. Just now, as is well known, a strong movement is on foot which plans to economize the circulating medium in various ways and lead it to the central bank for facilitating credit business. The efforts toward that end, made by the banking world and experts in the matter of coinage, have in general no direct connection with the constitution of the Reichsbank. Nevertheless, they are frequently mentioned in the same breath with it, perhaps because their operations are to result for the benefit of the central institution. Among such means of economizing gold are the following: The regulation and extension of the method of payment by check; the introduction of new clearing houses, mortgage-bank clearings, and the like. Of similar intent was the law passed more than a year ago, which authorized the Reichsbank to issue notes of 50 and 20 marks. The issue of an imperial treasury note of 10 marks as a partial substitute for the gold crown also belongs to these schemes. Thus, gold was to be brought gradually into the Reichsbank vaults. These means and measures have the common characteristic that they do not 251 National Monetary Commission work quickly, but only gradually, because of the opposing customs of business and of the people, and thus require a certain lapse of time for their development. It appears to many to-day to be a considerable sacrifice to give up, even to a certain degree, the use of money or of gold. To be told to do this appears to the metal fanatic a sin against the German gold standard. The check and the small paper note can be forced upon the German citizen who is accustomed to using gold only by dint of considerable effort. The Austrian, on the other hand, who has now become unaccustomed to using gold, has to be coaxed to use the brand-new gold pieces in daily business. As in other matters, so in those pertaining to the technique of currency, men "call custom their nurse.'' Now for the private banks of issue. The bank act of 1875 r e sts upon the mixed, federal bank system—that is, on the cooperation of the Reichsbank and the private note banks. This regulation of the German banking system was by no means conceived of as a transitory arrangement, as is sometimes asserted, but as a permanent organization, corresponding to the federal organization of the Empire. The legislative i n t e n t was to render possible a credit system for the whole Empire, as decentralized and intensive as possible, under the centralized direction of the Reichsbank. The bank act was careful to place the destiny of the private banks of issue, which represent the federal component in the banking system, exclusively in the hands of the Bundesrat (Federal Council)—that is, in the hands of that body in which, along with a conscientious regard for imperial needs, the especial interests 252 Renewal of Reichsbank Charter of the individual federal states are protected and represented. The note issue of the private banks represents part of the federal authority in matters of finance; and in more than one way the finances of the state are closely related to the state banks which continue to exist in the kingdoms of Bavaria, Saxony, and Wurttemberg, and the Grand Duchy of Baden. The federal idea, which had its share in the framing of the fundamental provisions of the bank act, demands the future maintenance of a type bank, which has stood the test for a generation, and has done yeoman service in developing the credit system in a large section of the German Empire. No one was in favor of a complete monopoly of the Reichsbank in the discussion of the renewal of its privilege in 1890 and 1900; and if the question were put to-day in those states of the Empire where the state banks are active in the full exercise of their privileges, whether the institution of a local bank of issue is to be sacrificed in favor of an imperial bank monopoly, it would undoubtedly, on political and economic grounds, be answered in the negative. The great private banks of issue have not acquired such an established position in business and such a hold on esteem without strenuous efforts on their part. They were certainly not borne aloft by the favoring hand of legislation, for on every occasion the law was altogether partial to the central institution. There was no lack of administrative limitations and difficulties of every kind. It is no wonder that under the pressure of these circumstances the small private note banks, and even those of intermediate rank, were gradually crushed out, and that 253 National Monetary Commission only the politically and economically important banks in the larger states, which could carry on their operations over an extended and assured territory, have survived. If these banks remain firmly entrenched in the domain of credit in their own special realm, they owe it to the valuable service which they have rendered and to a proper conception of the task imposed upon them by bank legislation. This task consists in supplementing the activity of the Reichsbank by providing for the requirements of local' credit in all its ramifications and giving the closest attention to individual needs. The extension and control of the machinery of credit in the smaller cities and business centers constitute the main business of the present system of German private banks of issue. Their numerous branches and agencies operate profitably and with facility here, and their activity lowers the interest rate. They are in close connection with the local credi banks; they discount their bills, and afford in this manner the advantages of note issue to the small business man. The cities in which they are represented have the advantage of being bank cities and of being thereby included in the great mesh of monetary intercourse. The numerous offices in small cities bring credit business into regulated channels, and operate for the regulation and safety of all business relations. They accustom the business communities of even the rural districts to the use of checks and the method of payment by means of transfers to, and deductions from, accounts current known as the " g i r o " (giroverkehr), and by adapting 254 Renewal of Reichsbank Charter themselves to local and individual conditions serve as the pioneers in spreading the knowledge and gradual use of modern monetary arrangements. An excellent illustration is afforded by the Bayerische Notenbank. This has eighty suboffices, and of these forty are in Bavarian cities in which neither the Reichsbank nor any other large credit institution does business; and these suboffices are provided with banking facilities, and carry on all kinds of business legally permitted to the bank. Similar conditions prevail through the activity of the private banks of issue in Saxony, Wurttemberg, and Baden. The private note banks are enabled to perform such important and diversified services because they work more cheaply than the central bank, and avoid the costly apparatus of the Reichsbank. Shall all of these lesser cities lose the important advantage of being bank cities by the monopoly of the Reichsbank? Or are we to believe that the Reichsbank, in its character as a monopoly, would, or could, provide all of these places with Reichsbank suboffices? The mere matter of expense would, in my judgment, put such a plan entirely out of the question. The activity of the private note banks in the smaller cities places the sound distribution of credit upon many shoulders, and thus constitutes an appreciable and, under certain circumstances, a very grateful relief for the Reichsbank. The stable level of the note circulation, which fluctuates comparatively little even in troublous times, is explained indeed by the utilization of the resources afforded by the private banks of issue in the smaller cities. The fluctuations and disturbed con- 255 National Monetary Commission ditions of business in the great financial and commercial centers, the elastic regulation of which naturally falls to the Reichsbank, are felt but little in the smaller cities. To regard the stability of the bank-note circulation as indicative of evil influences is therefore to misapprehend altogether the activity of the private banks of issue and their functions. The objection which was formerly heard at times that the private note banks neutralized the discount policy of the Reichsbank by underbidding the Reichsbank discount rate has ceased to have any force, because since 1901 the discount rates of the private banks have almost without exception been adapted to those of the central bank. If the private note banks, with the exception of the Bavarian Bank, have since 1901 loaned temporarily below the regular discount rate, these loans have not been made through the instrumentality of note issues, but mostly out of the superabundant original capital and the deposits. It is not, therefore, a question of the abuse of the note privilege. The influence of the private note banks on the interest rate has been generally overestimated. The private banks of issue, in my judgment, by their generally loyal and unobjectionable course, have honestly deserved to be treated and to be regarded by the Reichsbank, not as inconvenient rivals, but as estimable cooperators in the fulfillment of a common duty. The matter of the issue of notes by private banks has been considered by imperial legislation since 1875 a s a question of organic economic development. This statesmanlike conception, in which the principle of centralization has certainly not suffered, will 256 Renew aI of Reichsb ank Charter undoubtedly prevent the existing prosperous state banks from being cut off before their time by arbitrary legislative action. I therefore declare myself, on the ground of the foregoing considerations, in favor of the unconditioned maintenance of the present note-bank system. Not only the tried organs of the bank act, the Reichsbank and the private note banks, but the whole German business world interested in existing banking institutions, are, in my judgment, fully justified, and have long been justified, in demanding that the banking system, in its fundamental features, be constituted a definitive arrangement, and that the present periods of renewal be removed, or at least lengthened. This desire is justified, though it may be unattainable from parliamentary considerations. Finally, I would call attention to a point with regard to which the bank law does not seem to need a change, but does need a supplement of no little importance. This concerns the position of the Reichsbank and the private banks of issue in case of war. It follows from the position of the Reichsbank as the central bank of issue for Germany, that in case of war it must serve the Empire as a war bank, in addition to its manifold economic duties. In such a situation the metallic stock concentrated in the German note banks would be of the utmost importance, constituting, as it does, in critical times the main support of the whole monetary system. It would mean everything, not only during the continuance of the war, but still more so in the economic readjustment and financial reconstruction later on. Not only the metallic stock 83703—10 17 257 National Mon et.ary Commission of the Reichsbank, but also that of the private note banks, which consists almost exclusively of gold, should be considered in this connection. This national metallic stock ought not be scattered or uselessly squandered and dissipated in the channels of daily business. It should be kept intact for purposes of the public welfare and remain sequestered for those purposes. In Schmoller's Jahrbuch for 1899 I expressed the opinion in my article 4 * Concerning the German Monetary System in Case of W a r " that Germany, in case of a quick, decisive victory, would be able to dispense with compulsory monetary regulations. The enormously increased monetary demands for economic and military purposes in the last decade have caused me to change this opinion, because the requirements of war might exceed the normal demand far more than was formerly believed. It now seems to me that no continental state could carry on a great European war without a temporary forced currency, because it would need its gold treasure as an emergency reserve, and foresight urgently demands its concentration for all emergencies. The technical inferences drawn from this necessity need not be presented here in detail; it is sufficient to make this brief reference to eventual measures in case of war. The provisions of the bank law regarding bank statements, the redemption of notes, and loans upon securities would need, in my judgment, a temporary modification for all German banks of issue in case of war. It seems to me that it would be expedient to introduce a clause into the bank law investing the Bundesrat, or the Reichsbank, with the necessary authority to make these changes. 258 Renewal of Reichsb ank Charter If the representatives of the German banking world at the coming Hamburg convention should take up the imperial bank act of the 14th of March, 1875, in their discussions they may well pay homage to it and to its authors. It is largely to the bank act that Germany owes its prosperity and the assured security of its credit. The German financial world will have to admit, however, that the best legal institutions are vivified only through the intelligent cooperation, the efforts, and the self-restraint of the citizens. Protective institutions should be utilized in accordance with the dictates of reason. We must be careful not to abuse them by relying blindly on them or demanding the impossible from them. Human reason can not be replaced by any legal institution, however cleverly devised. 259 VIII Law of June 1, 1909, Amending the Bank Act 261 VIII. LAW OF JUNE i, 1909, CONCERNING CHANGES IN THE BANK ACT. We, William, by the grace of God, German Emperor, King of Prussia, etc., ordain, in the name of the Empire and with the consent of the Bundesrat and the Reichstag, the following: ARTICLE I . Section 24 of the Bank Act of the 14th of March, 1875, is changed to the following form by the repeal of article 2 of the law of June 7, 1899. The net annual profit of the Reichsbank is to be divided at the close of each year in the following manner: 1. In the first place, a regular dividend of $% percent of the capital is to be distributed among the shareholders. 2. After 10 per cent of the balance has been transferred to the reserve fund the new balance shall be distributed in the proportion of one-fourth to three-fourths among the shareholders and the imperial treasury, respectively. If the net earnings are less than $% P e r c e n t of the capital, the difference is to be made up from the reserve fund. The premium gained on the sale of Reichsbank shares is to be added to the reserve fund. Back dividends having a four-year standing after maturity are canceled in favor of the Bank. 263 National Monetary Commission ARTICLE 2. Article 5 of the law of June 7, 1899, is amended by the following provision: The total amount of tax-free uncovered notes to be apportioned to the Reichsbank, according to section 9 of the Bank Act, including the shares of the banks numbered 2 to 12, 15 to 17, and 20 to 33, which have accrued to the Reichsbank, is to be fixed at 550,000,000 marks, and the total note circulation for all the banks is to be raised to 618,000,000 marks. The amount of notes in circulation, according to the reports which are submitted at the end of March, June, September, and December of each year, for the purpose of determining the tax (section 10 of the Bank Act), raises the shares of the Reichsbank to 750,000,000 marks, and the aggregate circulation to 818,771,000 marks. ARTICLE 3. The notes of the Reichsbank are legal tender. In all other respects the provisions of section 2 of the Bank Act remains in force. ARTICLE 4. I. In section 18 of the Bank Act the words il German currency" are changed to "German gold coins." II. Section 19, paragraph 1, of the Bank Act is changed to the following form: The Reichsbank is required to accept at full face value the notes of those banks which are announced by the Imperial Chancellor, according to section 45 of this act, not only in its main office in Berlin, but also in its branch 264 Renewal of Reichsbank Charter offices either in cities of more than 80,000 inhabitants or in the city where the bank which has issued the notes is located, as long as the issuing bank punctually fulfills its duty of note redemption. Similarly, the Reichsbank is required to exchange to bearer its notes for the notes of each of the announced banks in its branch offices which are located in the same States where the issuing bank is operating, as far as the amount of the notes of these branch offices permit such exchanges. The notes accepted or exchanged, according to paragraphs 1 and 2, may be presented by the Reichsbank either for redemption or as payments to the same bank which issued them, as well as payments in the city where the latter has its principal office. ARTICLE 5. I. In section 8, paragraph 6 (C), of the Bank Act, the words "and checks" shall be inserted after "bills." II. The following words shall be inserted in section 132 of the Bank Act after "solvent:" "as well as checks which are indorsed by not less than two persons known to be solvent." III. The following words shall be inserted in section 17 of the Bank Act after " solvent:" " or in checks which are indorsed by not less than two persons known to be solvent." IV. In section 32, paragraph 1, of the Bank Act, after the phrase "the sale and purchase of gold and bills," the words "and checks" shall be inserted. 265 National -Monetary Commission V. The following provision shall be appended to section 47 of the Bank Act: SEC. 47 a. With regard to the reserve against the circulating notes of the private note banks which are exempt from the restrictions of section 42, the provisions of section 17 shall be applicable. ARTICLE 6. I. Article 6 of the law of June 7, 1899, is amended as follows: The following sentence is to be added to section 13 of the Bank Act, paragraph 3?—(C), after the words " of their exchange value." "To these are to be added the bonds of domestic quasi public agricultural credit institutions, which are issued to bearer, as well as the bonds of the above institutions and banks, which are payable to bearer and which are issued on the basis of loans granted to a domestic municipal corporation or which are guaranteed by such a corporation.'' II. The following provision is to be inserted under figure 9 in section 13 of the Bank Act: " 9 . To issue interest-bearing loans for not longer than three months on pledges of the right of claim of debts registered in the debit books of either the Empire or one of the German States, to the maximum amount of threefourths of the exchange value of the converted debt." III. Section 20 of the Bank Act is appended by the following provisions to be designated as sections 20a and 206. SEC. 20a. If the right of claim of debts registered in the debit books of either the Empire or one of the German 266 Renewal of Reichsbank Charter States (sec. 13, fig. 9) is pledged to the Reichsbank, the signatures of the persons, for which the Reichsbank is kept responsible according to section 38, are adequate for the recording of the pledge in the debit books in the name of the Reichsbank. Inasmuch as this latter provision requires the signatures of two members of the board of directors, the authentication of the application is valid when made by other officials of the Reichsbank named by the board of directors to the debt administration. The provisions of section 183 of the law concerning voluntary jurisdiction are applicable to the authentication. SEC. 206. If the pledge of the right of claim of debts has been registered in the name of the Reichsbank in the debit books (sec. 13, fig. 9), the Reichsbank retains the right to the pledge even when it has been transferred to a third party, unless the right of the latter has been recorded in the debit books before the entrance of the pledge of the right to the claim or if at* the time of registration the right of the third party has been either known or, save for gross negligence, could have been known to the Reichsbank. If the debtor does not meet his obligations guaranteed by the pledge of the right to the claim, the debt administration is authorized and required, upon the written request of the Reichsbank, to issue to the latter, without demanding any proof of the delay on the part of the pledger to meet his obligation, certificates of indebtedness to bearer for the whole or a corresponding part of the claim, unless such issue is prohibited by judicial order or when the right to request such issue or to make 267 National Monetary Commission other arrangements was recorded in favor of a third party prior to the pledge of the right to the Reichsbank. The pledge of the right of claims may also be used for the purpose of defraying the cost incurred in the issue of the certificates of indebtedness. The debt administration shall inform the Reichsbank, at the time of issuing certificates of indebtedness to the latter of the later transfers of the right to the claim. The provisions of section 20 stipulate for the compensation to be demanded by the Reichsbank out of the certificates of indebtedness to be issued by the debt administration. ARTICLE 7. Section 22 of the Bank Act is to be changed to the following provision: The Reichsbank is required to take charge of the business of the imperial treasury without compensation. The .Reichsbank is authorized to assume the obligation of administering the similar business of the federated States. ARTICLE 8. Articles 3, 4, 5, and 6 of this law shall go into effect on the 1st of January, 1910. The other provisions shall go into effect on the 1st of January, 1911. Issued over our imperial signature and seal. Given at the New Palace, the 1st of June, 1909. (Signed) WILLIAM, VON BETHMANN HOLLWEG. 268