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.
Source:
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
