Modern History Sourcebook:
Robert Franz:
German Banking, 1910
In much of Europe, industrial progress was not made in a free
market system, but in a a government influenced support system
which provided investment capital. In this article, Robert Franz
reported on the German banking system for the US Senate.
From Articles on German Banking
Technical and economic reasons were the cause which in the first
instance led to the amalgamation of coal and iron works, particularly
during the last years, and these same factors tend more and more
to bring about the establishment of great consolidated works combining
the production of the raw material with that of the half-finished
and manufactured articles. This development would not be possible
at all, or would meet with great difficulties, without a corresponding
organization of the money and credit markets, i.e., without strong
banks which are in a position to carry through the necessary financial
transactions.
Developments of industry and banking showed the same tendency
and mutually influenced each other to a large extent. It can not
be said that the banks created the industries, since the funds
which are gathered by the banks in increasing volume are mainly
the result of the increasing productivity of capital invested
in industrial undertakings. It is true however that the creative
power which in a comparatively short time placed German industry
in its present commanding position took its origin with the men
who put to practical use and in the interest of economic progress
of the nation the achievements and inventions of the domain of
science and technique.
It is the undisputed merit of the persons at the head of the banks
that they appreciated those endeavors and supported them by advancing
the requisite capital, oftentimes incurring great risks for the
banks. The entire development was, moreover, vigorously furthered
by a commercial and tariff policy favorable to industry, though
it must be said that this policy was abandoned to a certain extent
with the new customs tariff of 1902, the revision of the tariff
and the renewal of our commercial treaties having been undertaken
and carried out under the motto "Greater tariff protection
for agriculture."
It is almost self-evident that the banks, which in carrying out
their policy of furthering industry had often to assume considerable
risks, have tried to secure, and in a large measure have succeeded
in securing, a lasting and decisive control over industrial corporations.
This decisive influence of the banks on the industries reaches
further than the mere possession of shares of industrial undertakings
would warrant, as it is an easy matter for the banks to procure
for stock-holders' meetings proxies of the shares which their
customers have deposited with them. The result is that in many
cases, the banks appear to wield a controlling power over the
industrial corporations. The close relationship between the banks
and industries finds expression also in the filling of places
on the supervisory boards of directors.
As members of the boards of directors of industrial corporations
the bank directors are at all times in a position to guard the
interests of the banks, particularly by supervising the systematic
and rational employment of the credit granted by the bank to the
corporation.
On the other hand, in order to create and maintain friendly relations
between the banks and industrial corporations, the directors of
the latter are given places on the supervisory boards of the banks.
Such a condition of affairs may not reveal itself statistically
to outsiders, but there can be no doubt that the bond between
the bank and the industrial undertaking is thus made closer than
by the mere stock control of the bank, which in most cases is
not very large.
The progressive industrialization of Germany and the large increase
of its population caused on the one hand increasing imports of
industrial and auxiliary materials as well as of foodstuffs, and
on the other steadily growing exports of industrial products.
As a result Germany's share in the world's commerce shows a rapid
growth.
Until the seventies of the last century the financial regulation
of German foreign oversea trade had been almost exclusively in
the hands of London banks. The establishment in 1870 of the Deutsche
Bank at Berlin meant a turning point in this regard. The Bank
in its charter adopted the following program: "It is the
purpose of the corporation to do a general banking business, particularly
to further and facilitate commercial relations between Germany,
the other European countries, and oversea markets." The founders
of the Deutsche Bank had recognized that there existed in the
organization of the German banking and credit system a gap which
had to be filled in order to render German foreign trade independent
of the English intermediary, and to secure for German commerce
a firm position in the international market. It was rather difficult
to carry out this program during the early years, the more so,
because Germany at that time had no gold standard and bills of
exchange made out in various kinds of currency were neither known
nor liked in the international market. The introduction of the
gold standard in Germany in 1873 did away with these difficulties,
and by establishing branches at the central points of German oversea
trade (Bremen and Hamburg) and by opening an agency in London
the Deutsche Bank succeeded in vigorously furthering its program.
Very much later the other Berlin joint-stock banks, especially
the Disconto Gesellschaft and the Dresdner Bank, followed the
example of the Deutsche Bank, and during the last years particularly
the Berlin jointstock banks have shown great energy in extending
the sphere of their interests abroad.
As regards the organization of the oversea business, the only
foreign place where the banks have established agencies (apart
from the branches in the German export cities, Bremen and Hamburg)
is London. Agencies which the Deutsche Bank had established in
Shanghai and Yokohama in the early seventies had soon to be liquidated
by reason of considerable losses in exchange due to the depreciation
of silver. For the express purpose of promoting foreign trade,
the banks established subsidiary banks with the main offices in
Germany (Berlin and Hamburg); these banks in their turn established
agencies in oversea countries. The entire or almost the entire
capital stock of these subsidiary banks is in the possession of
the parent banks. The Berlin jointstock banks, moreover, have
become permanently interested in foreign banks and banking houses;
they have also founded transportation, mining, and industrial
enterprises whose sphere of activity is mostly abroad, and in
which they acquired a permanent interest by taking over part of
the capital stock.
The above account of the organization of the German credit-bank
system, though somewhat sketchy in character, demonstrates, however,
with sufficient clearness that the managers of the German credit
banks, and particularly of the leading Berlin banks, have made
constant and successful endeavors to place the banks in the service
of German trade and industry and to accommodate the organization
of the credit system to the variable and growing demands of national
economic development. There can be no doubt that they have had
a large share in raising German commerce and industry to its present
world-wide commanding position.
Robert Franz, "The Statistical History of the German Banking
System", Miscellaneous Articles on German Banking,
US Senate Document 508, (Washington DC: GPO, 1910, pp. 29-33
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(c)Paul Halsall Aug 1997
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