Readings in Money and Banking Part 60

[175] The main reason lies in the numerous formalities which the law of April 30, 1906, has simplified but not suppressed, in the many expenses caused by the organisation, and also, it appears, in the inexperience of some of the officials. The clerks of the justices of the peace, intrusted with the delicate and novel functions of registrars of chattel mortgages, are, as a rule, little fitted to perform them.

[176] The model of these inst.i.tutions came to us from foreign countries; but the foreign differ from ours materially, because of the diversity of their origin. With our neighbors, the movement began slowly in the lowest levels of the rural population. With us, on the contrary, the system of agricultural a.s.sociations began at the top. Thus, these inst.i.tutions penetrate only with difficulty into the rural districts, where economic education has but just begun.

[177] Adapted from _Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy_.

Publications of the National Monetary Commission, Senate Doc.u.ment No.

405, 61st Congress, _2nd Session_, pp. 189-218.

[178] Adapted from _Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland and Italy_. Publications of the National Monetary Commission, Senate Doc.u.ment No. 405, 61st Congress, _2nd Session_, pp. 219-248.

[179] Adapted from _Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy_.

Publications of the National Monetary Commission, Senate Doc.u.ment No.

405, 61st Congress, _2nd Session_, pp. 249-267.

[180] Adapted from _Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy_.

Publications of the National Monetary Commission, Senate Doc.u.ment, No.

405, 61st Congress, _2nd Session_, pp. 268-276.

[181] Adapted from _Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy_, Publications of the National Monetary Commission, Senate Doc.u.ment, No.

405, 61st Congress, _2nd Session_, pp. 277-291.

[182] Adapted from _Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy_, Publications of the National Monetary Commission, Senate Doc.u.ment, No.

405, 61st Congress, _2nd Session_, pp. 296-308.

[183] Adapted from _Interviews on the Banking and Currency Systems of England, Scotland, France, Germany, Switzerland, and Italy_.

Publications of the National Monetary Commission, Senate Doc.u.ment, No.

405, 61st Congress, _2nd Session_, pp. 309-322.

CHAPTER XXV

THE GERMAN BANKING SYSTEM

BANKING ARRANGEMENTS IN GERMANY

[184]Various systems can be adopted in the banking profession for the transaction of business. The most lucrative method, at all events the one in which the power of large capital is most effectively turned to account, is that of the Rothschild firms, whose example was followed by many large private concerns at home and abroad. These firms avoid troublesome current business, maintain only a few connections, and concentrate their whole energies on isolated but important ventures and undertakings in which, owing to the large amount of means immediately required, no compet.i.tion worth mentioning existed before the growth of capable joint-stock banks. Up to the middle of last century these firms actually possessed a monopoly so far as the loan issues of most European States were concerned, and they earned enormous profits according to present-day ideas. In the course of the last decades, however, this monopoly has been done away with so far as European States are concerned and only prevails to a limited extent in some foreign countries. Since that time the Rothschilds have devoted themselves to several large industrial enterprises, such as the Russian naphtha industry, the Spanish copper and quicksilver mines, etc.

Another system consists in the division of work and specialisation, customary in England, but which has been frequently abandoned of late.

In England the issuing and syndicate business is carried on by special houses which, like Rothschild, do not call themselves bankers, but merchants. Brokers and jobbers carry on stock broking on the stock exchange and in the open market, the former (theoretically at least) on account of third persons and the latter on their own account. It is the exclusive business of other firms to place credit at the disposal of home and foreign firms by giving acceptance to bills. These firms, strange to say, are mostly of German origin (Fruhling & Goschen, Frederik Huth & Co., Kleinwort & Sons, etc.), and carry on business in such a reliable manner that they are allowed to enter into bill obligations amounting to more than five times their estimated means. The clearing and deposit banks manage moneys on account of third parties.

It must be noted that the division of labour and its operation are based on free business practice in England without any legal compulsion.

Consequently, no opposition is offered in that country to the different methods of carrying on business employed by the so-called foreign banks, _i. e._, the numerous branches of continental banks, including the branch offices of the Deutsche Bank, the Dresdner Bank, and the Disconto-Gesellschaft, despite the fact that their compet.i.tion is unpleasant for the English inst.i.tutions. In Germany, in consequence of business requirements and also of the small amount of capital in the country at the beginning of its modern economic development, the peculiar system has developed that credit banks combine all kinds of financial business (generally with the sole exception of mortgage-credit transactions), so that every customer can settle all his financial affairs in one spot on comparatively the cheapest terms possible.

Account-current transactions form the fundamental branch of business.

The bank undertakes all the financial business of its client in return for a moderate commission on the turnover calculated on that side of the account which happens to be the greater, makes and receives payments, collects bills, checks, and other doc.u.ments, and pays, or charges, interest on the balance, generally at 1 per cent. below the Reichsbank discount rate for credit balances and 1 per cent. above the Reichsbank discount rate for balances debited. The bank discounts the bills received by its customers, special arrangements being made as to the limit of the amount and terms, according to the quality of the bill, _i.

e._, according to the trustworthiness of the other persons figuring on it. Should a customer require foreign bills to settle his liabilities abroad, _i. e._, checks or bills payable in the country concerned, the bank provides them from its own stock or draws bills or checks to the amount desired on its agents or correspondents in the country in question.

Should the debit balance not be a merely temporary one, or one soon covered by fresh receipts, the granting of special credit is necessary, and arrangements have to be made as to the amount and conditions of the same. Such credit is either covered or uncovered credit. The cover consists princ.i.p.ally of current securities with a margin against fluctuations according to the nature of the security, and which is higher for shares than for securities bearing a fixed rate of interest.

Uncovered credit is only granted in exceptional cases to others than business men--as a rule only to first-cla.s.s mercantile firms of repute, whose affairs are in strict order.

Bankers and other firms with large cash transactions keep a so-called "cheque" account at their bank in addition to the chief account, in which no debit balances may occur; no interest is paid on the amount deposited, which is always kept in suitable proportion to the payments made, but, on the other hand, no turnover commission is charged.

Those customers are appreciated most who claim credit during their buying seasons, but who not only pay back the borrowed money during their selling season, but who have balances to their credit. This is the case with a great number of commercial firms and in many branches of industry, more especially in Berlin. The seasons in different branches occurring at different times of the year, it follows that a large bank, with branches and connections in all industrial parts of Germany, has the advantage of a suitable distribution of accounts among all branches of trade, etc., and the best possible adjustment of its debit and credit arrangements.

The debtors in a bank's balance sheet comprise not only those who have received advances of ready money but also those to whom the bank has granted credit by bill acceptance; the bill drawn by the debtor and accepted by the bank is discounted elsewhere. It is the duty of the drawer of the bill to cover it before it matures, and when the bill is accepted he is booked simultaneously as a debtor to the bank under _the date of maturity_.

Whether the general public will make an extensive use of checks is doubtful. In England the conditions necessary for check transactions exist, as every one has a banking account, and all payments to be made or received are effected through the banks. To Germans this seems very strange; a large part of the public cannot keep a banking account, and when it is in a position to do so either expects high rates of interest or keeps no permanent balances and pays no commissions. Under such circ.u.mstances there is no sense, from a business point of view, in the shoemaker, who has no banking account, accepting a check, which he has to cash, instead of ready money; for the shoemaker has to take an unprofitable walk, and the bank has to examine the check, pay and book it, and in some cases notify by letter the customer of its payment. The ingenuous idea prevails that by some cabalistic method of procedure the bank earns something by such transactions that in reality only cause irksome work.

The Reichsbank, with a creative and organising spirit, laid the foundations of the system of payments by means of transfers to, and deductions from accounts current that obtains in Germany, the so-called giro system.[185] It was in every way preordained for this creative work, for at the time of its foundation it was the only financial inst.i.tution whose activities extended over the whole Empire, while in the territorially restricted and immature banking systems of those days the conditions were lacking for the development either of a giro business or of a system of payments by means of checks. In the giro system, with its splendid organisation, the Reichsbank has created an inst.i.tution that has given the German system of payments its characteristic stamp, just as the apparatus of checks and clearing houses has imparted a typical character to the system of payments in other countries, like England and the United States. The giro business in Germany, however, is far from having attained the dimensions that the use of checks has in England and America.

The number of long-distance transfers is about double that of the locals. This is as it should be, as it is mainly in the matter of long-distance transfers that the giro system has the advantage over the method of payment by check. In the matter of local transfers, on the other hand, giro and check are probably about on a level with respect to the number of transactions.

To prevent themselves from being ruined by the compet.i.tion of the Reichsbank, the private banks of issue[186] have been obliged to offer various inducements to their customers in the matter of the giro business. They make no demands in regard to a minimum balance, pay interest on deposits, do not oblige their customers to domicile bills drawn on them at the bank, and exact no charge from persons having no account with them who desire to have sums placed to the account of depositors (to some extent also making cash payments free to third parties who are nondepositors for account of depositors). The private banks of issue sustained a severe blow in 1900 on the occasion of the renewal of the bank laws through the provision prohibiting them from discounting bills at a lower rate than the Reichsbank whenever its rate reaches or exceeds 4 per cent. and not allowing them to go more than one-fourth of 1 per cent. below the official rate and one-eighth of 1 per cent. below whatever private rate the Reichsbank may have whenever the bank rate is below 4 per cent. These trammels imposed upon the princ.i.p.al business of the banks was bound to affect their giro business injuriously in spite of the efforts made to counteract the mischief by the establishment (especially in Wurttemberg) of many new branches and agencies. These banks of issue have never had any great importance as regards the giro business, and even at the present day the volume of their transactions is relatively insignificant.

The post-check system supplements in a most effective manner the giro system of the Reichsbank in that it brings in connection with the five hundred establishments (more or less) of the Reichsbank about 39,000 post-offices and post agencies. As all the post stations are included in the post-check system, the Reichsbank's network of branches is spread out uniformly in a compact manner over the whole Empire.

The post-check system, inaugurated January 1, 1909, would more appropriately be termed the post giro system. For at bottom its purpose is to become a giro system, a system of monetary transfers by means of a.s.signments to, and deductions from accounts current. What it is aiming at is to make it unnecessary for German letter carriers to be lugging around millions in cash every day. The money sent through the German post-office in 1907 amounted to no less than 13-1/3 billion marks. The post-check system has this in common with the giro system of the Reichsbank that it extends over the whole length and breadth of the German Empire, while the activity of all other inst.i.tutions carrying on a system of giro, as well as check, payments, with the exception of the union of the Schulze-Delitzsch credit a.s.sociations, is territorially or locally restricted. The giro network and that of the post-check system are connected with each other by certain channels that render it possible for payments to travel unhindered from the one system over to the other without the intervention of cash.

GENERAL SKETCH OF BANK AND CREDIT ORGANISATION IN GERMANY

[187]Germany witnessed a tremendous economic expansion during the twenty-year period 1888-1907. There occurred a considerable increase and extensive circulation of capital. This movement of capital naturally pa.s.ses through the banks and is brought about by them. As collectors and distributors of capital, the banks are, so to speak, the focal points of economic life.

We are here concerned with three kinds of credit inst.i.tutions--the note banks (banks of issue), the credit banks, and the land credit inst.i.tutions (mortgage banks and land mortgage a.s.sociations).

BANKS OF ISSUE

The present organisation of the note-bank system is based on the bank act of March 14, 1875, and the supplement to this act of June 7, 1899.

Even previous to the founding of the German Empire the greater part of Germany had become united commercially through the formation of the Customs Union (Zollverein). Similar further movements toward union, however, had met with but little success in the domain of currency and with none whatever in that of banking. In the newly founded German Empire seven different monetary systems were in existence, and as all German States, with the exception of the free city of Bremen, were on a silver basis, there was above all a great want of a well regulated and adequate circulation of gold coin. The prevalence of paper circulation was felt in the most annoying manner.

Thirty-two banks had the right to issue notes, and in the absence of adequate legislation, it was found on many occasions that the notes issued were not sufficiently secured.

The first step which the Government took to improve these conditions was the act of December 4, 1871, concerning the coining of imperial gold pieces. The coinage act of July 9, 1873, which proclaimed the gold standard for the Empire, formally completed the organisation of the German currency system. It was recognised more and more that, in order to give effect to the gold standard, which for the time being existed merely on paper, and in order to regulate and supervise the entire currency circulation, the establishment of a central bank was an absolute necessity. This consideration finally led to the establishment of the German Reichsbank, which came into being on January 1, 1876, absorbing at the same time the Bank of Prussia (note bank).

The predominance of the Reichsbank over the private note banks was secured through its considerably larger capital, further through the volume of its tax-free note contingent, which exceeded considerably the amount of all the other contingents, and which subsequently was to increase still more through the accretion of the contingents of the note banks which might renounce their rights of issue.

COMMERCIAL BANKS AND THEIR RELATION TO INDUSTRY AND COMMERCE

The close relation of the so-called regular banking business to that of the floating of enterprises, the trading in and the issue of shares is typical of the organisation of the German credit-bank system. The development of the railroad system beginning about the middle of the last century, which caused a considerable demand for and circulation of capital, and the greater extension of state credit, induced the banks to turn to the flotation and issue business.

The period following the founding of the German Empire, as mentioned before, witnessed a vigorous development of German industry, especially of the mining and (beginning with the nineties) of the electrical industries, which required a continuous inflow of new capital. At the same time German foreign commerce, particularly with oversea countries, kept on steadily increasing. Under such conditions the economic policy of the banks of placing the funds entrusted to them at the service of the new development must be regarded as perfectly proper. The banks furthered this development by forming stock companies, granting long-term credit, a.s.suming shares and bonds, placing the new industrials on the stock market and selling them to the public. There is no doubt that but for their policy of furthering the industries, the economic development of Germany would have taken considerably longer than has been the case.

In order to obtain the means for granting industrial credit and to dispose of the enormous amounts of newly created industrial securities, it was and is necessary to attract in as large a measure as possible the surplus funds of the community available for capital investments. For this purpose the joint-stock banks spread a network of deposit branches, destined to serve as reservoirs for the inflow of available funds, and at the same time as distributors for the industrial securities created.

With the same end in view the large Berlin banks, either through the acquisition or exchange of stock (for permanent investment), entered into friendly alliances with the provincial banks.